CBRE Group, Inc. (CBRE) Earnings Call Transcript & Summary

Hello. I'm Michael Griffin with Citi Research, and we are pleased to have with us CBRE and CEO Bob Sulentic. This session is for Citi clients only. If media or other individuals are on the line, please disconnect now. Disclosures are available on the webcast. For those joining us here today, to ask management questions, simply type them into the question box during the screen, and they will come on directly to us. We will do our best to answer them during the session. Bob, I'm going to turn it over to you to introduce the company and any members of management that you're with today, and then we'll get into some Q&A.

Thank you, Michael, and it's good to be with everyone. Thanks for spending a little bit of time with us. The company, CBRE, many of you know. I know a good number of you have invested in our shares. We're a commercial real estate services and investment firm, the largest in the world. We operate broadly across 4 dimensions. Those 4 dimensions are product types. So for instance, office buildings, distribution buildings or logistic buildings, data centers, et cetera. The second dimension is services. We do brokerage, we do project management, investment management, development, financing, broad array of services, almost all the services you could do across commercial real estate. Third dimension is client types. So we serve almost any kind of company you could imagine, either an investor in real estate or an occupier of real estate. We serve some companies that have held up extraordinarily well during the COVID era. The big tech companies, we do work with most of them. We do a huge amount of work with some of them. We also serve companies that have been under some duress due to COVID and significant duress. And the fourth dimension is geography. We operate around the world in approximately 100 countries, all regions of the world. And by scale, in most markets, geographically in most product types and in most service types, we are the market leader by scale. And if you look at the various surveys regarding brand, client satisfaction and so forth, we are also situated at the top of the heap. So we're in a business that because of that breadth of operations across those 4 dimensions, we have been able to perform very, very well in the wake of all the challenges that COVID had produced. And we ended the year last year, in fact, with our strongest financial performance, our most profitable quarter in the history of the company, which we think gives evidence to the notion that we are -- we have, in fact, become a company that not only is a strong enduring grower, but also is a company that is not overly cyclical relative to the other broad base of companies outside the real estate sector.

Thanks. That's very helpful. We're starting off each session asking the first question. Coming out of the pandemic, if an investor were to choose only one real estate stock to own, what are 3 reasons why they should and choose to -- why they should choose to invest in CBRE?

Number one, we're a very strong growth company. Leading up to the COVID year, 2020, we had 10 consecutive years of double-digit growth. We were off by a little more than 10% last year. And we told the market when we announced earnings a couple of weeks ago that we expected for the next 5 years on an average basis to be a double-digit grower. So we are a significant grower. Secondly, as I just commented, because of this mix of business that we do across these 4 dimensions, and because of our prominence across each of those dimensions, we do have a company that can find its way to secular benefit in the things we do that not only helps us be a grower, but helps us be resilient and avoid cyclicality -- not to say there's no cyclicality in our business, but much, much different than the last cycle where our earnings went down 80% and took 9 years to recover to peak earnings. This time, they went down a little over 10%, and we have a chance to be back to peak earnings this year. The third thing about our company that should be very encouraging to investors that I think is different than other companies in our sector and different than many companies in general, we generate a lot of cash flow. We have a super strong balance sheet, and we have a very, very substantial track record for investing in both M&A and in real estate investment arenas to drive additional growth and profitability into our business. So we are a grower. We are well capitalized, and we have positioned ourselves to be resilient through cycle. And I still think we trade at a significant discount to where we ought to be.

Thanks for that. Just touching on the earnings decline, the GFC compared to the COVID pandemic. You mentioned the greater decline during the GFC as opposed to this time around. Why is your business model proven to be more resilient this time around?

Michael, it's the fact that we've become so much more prominent across a broad portion of those 4 dimensions I mentioned. Again, I want to spike them back out. The product types we serve. We do a huge amount with data centers, a huge amount with distribution centers. We are one of the biggest financers of multi-tenant residential. We do a lot of work across product types that have been secularly favored. Services, we do a lot of brokerage work, a lot of leasing, a lot of sales work. But we do a lot of leasing and sales work for asset types that are in real favor. And we do a bunch of services like Project Management, like Facilities Management, like our Investment Management business that have done extremely well in the downturn. So that's very different. Geographically, our business in Asia and in the second-tier U.S. cities and parts of Europe that held up well is much more pronounced than it was historically. Much more pronounced particularly in Asia and much more pronounced than many others in our sector. So that's been a big advantage for us in that regard. And the fact that we're spread around the world where we already commented on that. And again, the client base. We do a huge amount of work for these technology companies that have thrived in this environment. And all of that positions us very differently than we were positioned a dozen years ago when the financial crisis hit. Or more than a dozen years ago now, I guess.

That's great. You mentioned your pent-up demand on the balance sheet capacity, ending the past year with a net cash position. How do you expect to deploy this capital? And how much would you feel comfortable putting it to work?

Well, there's 4 ways we deploy our capital, big ways, lots of smaller ways within those big ways. Number one, we have a big growing company. So we do what we call CapEx investments, investments in technology, investments in our own space, et cetera, to support the growth of the business. We invest in M&A. We invest in small deals across our business, infill M&A to support the addition of capabilities to serve our clients. And we do transformational M&A that changes the nature of our business. When we did the Norland acquisition a few years ago to get into local facilities management, kind of a mini transformational M&A deal 1.5 years ago when we got into multifamily development through the Telford acquisition, but we do transformational M&A. We invest in real estate assets or real estate funds a couple of ways. We have America's biggest development business and heavily, heavily skewed toward favored asset classes. We co-invest in those developments through Trammell Crow Company. We now do it internationally with Telford Homes, and we've just announced an industrial development capability in Europe. We also co-invest in our funds in our Real Estate Investment Management business, and we have generated great returns for both ourselves and our investors, our limited partners and partners in these development and investment activities. And then, of course, we buy back stock from time to time. And as a growth company, we think it is better for our shareholders generally that we invest in M&A or invest in our Real Estate Investment business because those investments both drive strategically well-positioned opportunities that allow us to grow into the future. But from time to time, the best investment for us is our own stock, and we've done that in recent years. And as Leah Stearns, our CFO, talked about on our recent earnings call, we just expanded our authorization to do buybacks. And we will do them at the appropriate time. Some of it more kind of systematic and some of it opportunistically.

Yes. I want to touch on that growth for a second. You mentioned 4 activities you expect to drive growth on your most recent earnings call: building, buying, partnering and sponsoring. Could you elaborate a bit on each of these avenues for investment?

Yes. So we build businesses, right? We organically build businesses, and we've done that forever with our brokerage business, with our management businesses, our outsourcing business. We've grown those businesses organically at a rapid rate. But we also, from time to time acquire businesses. I came to the company the better part of 15 years ago through the acquisition of Trammell Crow Company. That business we acquired, that's where most of the outsourcing business came from in the development business. We've done about 100 acquisitions over the last decade. So that's a big part of our growth profile. It's also a big part of how we get better at serving our clients. So we generally focus on buying things that give us a dimension in serving our clients we didn't have before. We partner with lots of companies to serve clients, companies in our supply chain that we go to market with where they bring something to the table that we think is helpful to our clients and us to them. And if you were to look inside that GWS business, there's a number of examples of that, where we partner with other companies. And then more recently, we concluded that we are well positioned to help sponsor other companies. And these are companies that we want to have an investment in but they're better off being independent, entrepreneurially oriented companies than they are being wholly owned by us and inside. So the most prominent example I can give is our recent investment in Industrious, the flex space operator, where we bought 40% -- or we bought 35% of that business with underway going to 40%. We think that is a great, well-run company with a great strategy in an arena that is going to grow significantly. And we want to help them grow, and we want to have them as a possibility for our clients. But we and they believe that they are better served by being an independent company with a very entrepreneurial culture that is able to go out and work in some cases with our competitors. And so we're thrilled to have a big operating agreement with them, a big investment in them, being effectively a sponsor of them but not owning them. And that's exactly the philosophy that underpinned the SPAC that we announced in December and took public in December, which is very different than most SPACs. We were one of the very first strategic sponsors of a SPAC as opposed to financial sponsors. Our ownership structure in that SPAC only gives us upside when we create value above the going-in price of an acquired company. And we intend to acquire into that SPAC or de-SPAC with a company that has the flavor that I just described with Industrious. A big investment from us is helpful. An operating alignment from us is helpful, helps that company grow. But that company is best positioned as an independent entrepreneurial company with its own brand. And so you should expect to see more sponsorship-type activity from CBRE going forward, and that's how you get to those build-buy sponsor and partner relationships.

Yes. I just wanted to touch real quick, one more thing on Industrious. How do they differ from what some may consider conventional co-working providers?

Well, if you go back a few years to when all the noise existed out there around WeWork and IWG and others, they weren't totally membership models, but they were heavily membership models, where an individual like you or I, Michael, we'll go in and buy a membership and work in a lot of common area. We decided 2.5, 3 years ago that our enterprise clients were looking for something different. They were looking for a higher quality point, much more data security individual identity within the space where their culture and their brand could be promoted. And we launched the Hana concept in response to that. And landlords wanted that. They like that profile. We also, over time, talked a lot about moving the Hana concept from a -- where we were an intermediary principal where we would take a lease and then lease pieces on a shorter-term basis, where essentially the building owners own the space, and we were a service provider to them. When you look at all that, we think that COVID has moved the model that will be successful more in that direction. And we came to the conclusion that the very best operator in that regard wasn't our Hana business, but it was, in fact, Industrious. Industrious was bigger. We had great client satisfaction scores with Hana. They had the industry's best client satisfaction scores. They had moved the furthest in the direction of being an operator, not an intermediary operator, kind of like a hotel company is to hotel owners. They had a footprint of over 100 units. We had 10, and we decided that the best thing for us to do is to make our bet with them. We've merged -- or combined Hana into Industrious. We have seats on their Board. We have a big operating relationship with them. And we think they have a very, very great strategy, great leadership team and great operations. And that is going to be an investment that is very quickly, financially accretive to us and grows significantly over time. And it's going to put a smile on the face of a lot of our clients who want that type of capability.

Well, that's great. That's great. Just want to switch gears here for a second. Your multiyear return framework contemplates a headwind from lower office use. Can you quantify this for us? What does this mean for your business and for the broader commercial real estate sector?

Well, what we've said is that office buildings are a big business for us, and they're going to continue to be a big business. But we think there's going to be significant downward pressure on office buildings for some time. We've tried our best by talking to huge number of companies around the world that we serve. Where is space usage going to settle out? We've said 85% of on a weighted average basis. That's a guess. We don't know how people are going to feel when they're truly done with COVID. But that's 85% of the headcount, but the headcount is going to take more space than it took before per person. And the space is going to be more intensively managed. So things like sanitizing the space and managing ingress and egress and how you handle the common areas, the lobbies and the elevators and how you handle reconfiguration of the space. All of that, in our view, is going to create significant work for us, project management work, advisory work, management work. And so while we think there's going to be downward pressure to a degree on the amount of leasing we do in the short run, maybe the square footage that's out there, there's going to also be other tailwinds in the office building space. And I'll tell you, a big one is going to be with our outsourcing clients, who as much as ever are feeling the pressure to save money in the operation of their facilities, and they know when they work with us to do outsourcing that we save them money. So all of that is baked into our plan, the downward pressure on some of the trading and leasing around office buildings, but the tailwinds we see in other parts of the business. And we put forth a 5-year view of the world for CBRE that had double-digit growth. That included and assumed that downward pressure on office buildings, but also assumed some other real secular benefit in other parts of our business.

It's very interesting. Just transitioning here. CBRE is now one of the largest constituents of the real estate sector in the S&P 500 and also the only non-REIT, which many of our attending investors are focused on. Given that you're the only non-dividend payer, would you consider one day paying a dividend?

We openly considered the choices available to us for returning capital to our shareholders. And we're seriously interested, as you might expect, in growing the value of our shares for our shareholders. So that will be on the table if we think it's going to be helpful in that regard. We certainly have a lot of cash flow. We certainly have a very strong balance sheet. But we're also a growth company with a lot of opportunities to invest.

And can you just remind investors how that compares to your peer set in terms of not having a dividend?

We think -- well, we know JLL has a dividend. Most people in our sector don't because they're positioned as growth companies. And we're -- let me say this, we're in a unique position in terms of profitability and cash flow generation.

That's great. It might be interesting of note, many of the companies attending this conference are important clients for CBRE. What do you think makes CBRE an attractive partner for your landlord clients? What sets CBRE apart from its other commercial real estate services peers?

Well, one of the things that helps our landlord clients is -- are very deep, deep and very broad knowledge of the occupier client base out there. We work for -- if you looked across the Fortune 500 or the Global 1000, we worked for vastly -- or virtually all of those companies. We know what occupiers want. And we're working with occupiers to take space around the world, so we're able to advise landlords that we work with. This is one of the things that was very helpful to us in setting our flex space strategy. We have a network of the industry's best and best trained professionals around the world on the agency brokerage side to help those landlords fill their buildings. And we're connected around the world to bring opportunities to those landlords. Their brands are well-known, our brand is well-known. Their brands and the reach that we work with that are your clients in this conference have spectacularly well-known brands globally that help them attract clients and tenants into their buildings -- or clients who are tenants into their building, we help them do that too with our brand. And so all -- and by the way, our project management capabilities take care of their buildings and our property management capabilities, there is an awful lot that we are uniquely positioned to do better than others in the market to help those clients of ours, your clients, fill those buildings in a way that adds value to their buildings.

Well, that's great. I know you mentioned markets earlier. Just had a quick question on where you see maybe wanting to allocate more resources, maybe seeing less of a footprint. Is there one? Is it Europe? Is it Asia? You highlighted that. Is there one that seems more attractive than the other? And on the other side, is there any area where you might want to kind of lighten your exposure?

And just to make sure I understand the question, Michael, is this a geographic question of where we would go?

Yes. Yes.

Yes. So for the time being, it's a well-documented circumstance that Asia is responding better to -- as it relates to the office building product type, Asia is responding better to COVID than Europe, and Europe is responding better than the U.S. so far. And in the U.S., second-tier markets are responding better than the gateway markets. We don't know that that's going to be an enduring trend, but that's a very real trend in the short run. And we've got to watch and see what happens longer term. But we know that industrial is just white hot all around the world. And we have just announced that we have put together a team of very seasoned industrial developers in Europe. And the amount of inflow, by the way, that we've got on demand for capital investment into that development team has been kind of startling, honestly. There's a lot of people who want to invest in that product type across Europe. So industrial is strong everywhere. Data centers, a lot of interest in data centers, and we expect that to continue. I will say that my personal belief is that the gateway markets will come back, and they'll come back strong. I think the long term -- this isn't the first pandemic. It's not the worst pandemic that society has ever been through. And every time over the years that's happened, there's been concern about the density of big cities, and people have returned in a big way to big cities. Young people want to be there, that's where there's jobs. That's where there's education. That's where there's the arts. By the way, that's where there's the best per person impact on the environment is when people live in big cities. So -- and with all this concern about being careful about the environment, attention will turn back to that when we get to the other side of COVID. So I don't think you've seen the death of the big cities around the world, and I think they're going to continue to be very prominent and growing prominence over time. But we got to get through this thing that we're dealing with.

Hey, I live in a big city, and I walk to work. So I'm doing my part for the green environment. Just wanted to segue on to the ESG topics that you mentioned. This is a question we're also asking every management team. What are your top 3 priorities to improve your ESG score next year?

Yes. I want to start by saying that ESG is not new to CBRE. We have been focused on this for years. And I'll just note that, for instance, we were the only commercial real estate services firm to be on the Dow Jones Sustainability World Index. We have again, been on the Bloomberg Gender-Equality Index and on the Human Rights Campaign Corporate Equality Index. This is stuff that we've been around for years. It's been important to us for years. All that being said, in the last few earnings releases we've done, I've closed by talking about ESG because we're a company that's very aware that we serve constituents. We serve all of our shareholders who are involved in watching this conference. We serve our clients. We serve our own clients and we serve our communities, and they are riveted today on ESG. So we're going to be even more riveted on it. So what are the things we're doing? We have doubled down on our diverse hiring and promotion initiative. We've named Tim Dismond, our new Chief Diversity and Inclusion Officer and now expanded that to be our Chief Responsibility Officer. And we've got an aggressive hiring, promotion and training program, particularly in the brokerage business, where we have not had much diversity historically. We've announced a campaign. We are a huge buyer of product, managing 7-plus billion square feet of space around the world. We're in the fortunate position of being able to impact the environment through that space we manage. And another thing we're in a position to do because of the space we manage is we're in a position to buy a lot of product. We've said that by 2029, we're going to be buying $3 billion annually from women-owned and minority firms and $1 billion imminently, growing to $3 billion. So that's #2. And then #3, we've committed that by the year 2035, we will cut 2/3 of our -- we will reduce by 2/3 our carbon emissions. And we're going to start doing that not only in our own space, but as I said in this portfolio of 7 billion square feet we manage, we're going to try to work with our owner-clients to get them to that place also. There's -- so we're positioned to do a lot, and we plan to do a lot. And we think that's continuous with what we've done historically.

That's great. We actually had a question coming through the live QA function. You recently talked on CNBC about around 20% less people in the office post pandemic. How do you see that impacting occupancy and rents?

Well, I think I said 15% to 20%. We've kind of settled in on, as I said earlier, 15%, but we don't know what it's going to be. And that's headcount. We also know that the amount of space per person is going to grow. We don't know what it's going to grow, but it's going to grow enough to make a nice dent in whatever reduced occupancy there is. We also know that over time, there are certain -- there's a certain portion of the office stock that becomes obsolete. And so what we think you're going to see is some downward pressure on rents for some period of time. But you're going to -- we also think you're going to fairly quickly see when we get to the other side of COVID that the best buildings, that the well-managed buildings, that the buildings with good systems that are well located are going to be in real demand because those are the buildings that clients are going to use to deal with COVID and their fears about downstream things like COVID. And so yes, there'll be a period of a year or 2 where there'll be downward pressure on rents, then we think things will stabilize. The other thing is the world is growing. The business community around the world is continuing to grow. So some of that demand will be backfilled through the global growth in GDP and all that goes with that in terms of employment. And we think that after you get to the back half of next year, you could see -- you could definitely see that trend going in the other direction with office buildings. Of course, hotels are going to be under pressure until we get to the other side of COVID, then things are going to come back there, including the value of hotels and the occupancy. Retail is going to be a little bit longer, tougher story. But the really good news for retail property owners is there's simply very little new retail space coming on. And there's obsolete space that's being taken off the market. And when we get to the other side of COVID, there -- and I know there are investors on this video conference that know this. There are people that are starting to look at retail because they think values will come back when we get to the other side of COVID, and people are going to want places to go and the bricks-and-mortar retailers. And some, by the way, some of the e-commerce retailers are going to start to focus on the benefit of that footprint more than they have in the last year.

Very nice. As you talked about throughout today's presentation, CBRE is a very different company, more resilient company than it was a decade ago. We're sitting here a decade from now, how do you expect CBRE will have evolved from today?

Well, again, I'm going to talk about those 4 dimensions that we operate across. So the types of product, type of building, office buildings versus industrial, et cetera; the types of services, brokerage versus project management versus investment management; the types of clients, technology companies versus manufacturers or financial companies; and then, of course, the geographies. I believe that because of the management team we've built that will allow us to drive into the opportunities with secular benefit and because of the strong balance sheet that we have, that we've become quite good at investing, that you will see over the next decade that we will find our way to those areas of those 4 dimensions that offer resiliency and growth. So yes, we're going to be disproportionately bigger in Asia. And we're going to be disproportionately bigger in project management and investment management. And in terms of the type of space, I think it's too early to make a call. I think a lot is going to change. For sure, distribution space and e-commerce growth is going to grow. We've got to watch and see what happens with office buildings and how strong they come back over the next couple of years. We built to downturn in office into our plan, but we think there might be some upside there. We got to see what happens with retail. I just commented on that. People want somewhere to go. They're desperate to have a place to go, and there's going to be food and beverage coming back. And there's going to be entertainment and experience-type retail coming back. So don't think that the end of retail is here, and there may be more opportunity. And we've built a retail capability that we believe might show up better than people think. But you should expect to see us be a significantly bigger company over the next decade that's invested a lot of capital into areas that have grown on a secular basis and much more cycle resilient than we are and have been in the past, and that showed up. The fourth quarter of 2020 was the most profitable quarter in the history of our company because we were able to adjust quickly, and we're going to keep doing that going forward.

That's great. I realized...

We're already planning for the next 5 years for you.

Thank you. I realize we're running tight of time. So I got one more here and then my rapid fire. What is the most exciting growth opportunity for CBRE moving forward? And is there a specific business line or property type that has piqued your interest?

Well, we believe in all our lines of business, and we expect them all to grow, and we expect every one of our lines of business to grow now and forward. Nobody gets passed on that. And part of that is whether the market grows or not, we take market share. And we invest to take that market share, and we acquire companies to grow the business. But look, if you had to look across our business and say which ones of our lines of business in the short run are more likely to grow, with all that's going on coming out of COVID and all the reconfiguration that's going to take place, project management is likely to be a really good grower. Industrial development is likely to be a really good grower. There's not a ton of insight in that comment, by the way. I think most people know that. Asia is going to be a grower from a geographic perspective. I already commented on that. So there are some things that we do that -- data centers. We're the biggest third-party manager of data centers in the world. We just -- I don't think anybody doubts that's going to be a real grower for us. Outsourcing, where clients in this world that we live in today want to save money. They know we can save them a lot of money, managing their office buildings, their manufacturing buildings, their data center buildings. So we think there's a lot of growth tailwinds behind that. We got a number of things we're doing that are going to grow pretty significantly.

That's great. Real quick here on the rapid fire. When we are sitting physically together in Florida a year from today, what will be the one thing that will have surprised people the most about CBRE's business over the prior 12 months?

Well, the big surprise is already out in the open, Michael. And that came at the end of the fourth quarter when we announced our fourth quarter earnings, and not only had we held up, but we had grown. And it's been a subject of a lot of what I commented on here. A year from now, people are going to be only more sure than they have been historically that we're experiencing a lot of areas of our business that are growth-oriented and that we've taken advantage of that in a way that they didn't quite think we might. And I think they will conclude that we've made some pretty interesting investments over the course of that year as well.

What do you think your corporate travel budget will be next year as a rough percentage of what you spend in 2019?

Well, I hope we travel less, right? We've certainly learned that we need to be together a considerable amount to optimize our business. But we've also learned that we can do things like this pretty darn effectively. And so I'll personalize it for you. I was traveling for years, 40 to 45 weeks a year somewhere. Sometimes it was a round-trip to Chicago and home, and sometimes it was a 2-week trip to Asia. But 40 to 45 weeks a year, I'd like to cut 1/3 of that out based on what I've learned I can do through the use of technology and things like this. And I'd like to have our whole company do that. But I also want to be back in the office with the people I work with, and I want to be in front of clients, and I want to be in front of our people around the world. So there'll be a significant diminution, but it's not going to look like 2020 for much longer once we get the vaccine up and running.

What do you think same-store growth for the brokerage sector will be overall in 2022?

In 2022?

Yes.

Growth in 2022 over '21. We think it's going to be significant. Let me put it that way. We think that everything is going to get sorted out in '21 with COVID. We don't know if it will be in the end of the second quarter and the third quarter when we all finally see the vaccine has worked well enough that we can -- whatever our future is going to be, we can be back to that future. And once everybody gets uncertainty out of the picture -- let me not talk about the leasing business for a second. Let me just talk about the sales business. No matter what you're buying and selling now, with all the uncertainty that's imposed on the marketplace by COVID, buyers and sellers have kind of gone to the sideline. The seller says, "Gosh, I think it's going to be a lot more valuable at some point in the future or it might be." And buyers be worried about, "Well, how long is COVID going to go in and what does that mean?" We know there is a wall of capital out there that wants to be in commercial real estate from all over the world, including here in the United States, and it's waiting for the picture to clear. And once that picture clears, there's going to be a lot of transactions to get done. And I think 2022 is going to likely be that year. And then, of course, you'll have a similar version of that going in the leasing side. So it could be a really nice growth year in the transaction business.

And then last one, what will the 10-year treasury yield be 1 year from today? For reference, it's about 150 bps.

Well, we think that by the end of this year, it's going to be something like 1.8%. And by the way, this is our Global Chief Economist, this is not me. And he thinks by the end of next year, by the end of 2022, that it's going to be about 2.2%. And he's done a pretty good job of thinking through these things, so I'm going to stand behind them on that.

All right. We'll go with that. Bob, thank you so much for taking the time today. Enjoy the rest of the conference, and we look forward to seeing you in person in Florida next year.

I look forward as well, Michael. Thank you for having me.

All right. Take care.