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

All right. So thanks, everyone, for joining our meeting with CBRE here at the UBS Financials Conference. Just to remind everyone, I'm Alex Kramm, Senior Research Analyst at UBS, covering the U.S. Exchanges, Rating Agencies, Information Services and the Commercial Real Estate. I was going to say brokers, but I was reminded the other day that this is a Commercial Real Estate Services Industry now, as these companies have certainly expanded broadly, and CBRE is certainly one of them and the leader in this space. So increasingly to think about the services, not just the brokerage component. But we'll get to that in a minute. Quick housekeeping items here, there should be a Q&A function on your screen. So if you have any questions that you want me to ask and work into the conversation, please do so and utilize that functionality. With that, let's get started. So thank you very much. We have here with us here from CBRE, Bob Sulentic, the CEO, who was here last year as well. Obviously, we've come hopefully a long -- not a long way, but somewhere since then. It's good to see everybody back in their office. But in order to get started, since everybody is clearly looking -- coming to this from a different perspective, maybe we can just zoom out before we get into the detail here and just talk about the industry for a minute. Forget COVID and all these other uncertainties, which we're just talking about before we got started here.

But when we look over the medium and long term, why do you think the CRE services business will continue to floor structurally? And then, of course, how does CBRE fit into the long-term outlook? And if there are any medium or long-term financial targets that you have, again, for the interest of the audience would be great to just kind of reiterate and remind us. Thank you. And thanks for being here.

Thank you, Alex. Let me hit that. First of all, why is this an attractive industry to be in? There are 3 big trends that are creating real long-term opportunity for ourselves and other -- and the other large companies in the sector: Number one, more and more institutional capital is flowing into commercial real estate as it becomes a more sophisticated, transparent sector where institutional capital views, commercial real estate as an alternative to debt and equity and private equity, that trend has been going on for years. Much more research. The counter-parties that investors deal with are much more sophisticated, and as a result, we think that trend will continue. Secondly, the outsourcing of services by especially occupiers. That is a huge arena. It's grown rapidly over the last couple of decades, but it's lightly penetrated. And we expect that the outsourcing of commercial real estate services by occupiers primarily will continue indefinitely into the future, and allow that business to grow at a healthy double-digit clip for us. Number three, with both investors, institutional investors and occupiers of commercial real estate, they are looking for opportunities to consolidate the number of service providers they work with. When they do that, they tend to go with the larger companies that have track records, demonstrably providing superior services et cetera. CBRE being the largest and with a very good reputation brand, et cetera, is a big beneficiary. That's all 3 of those trends benefit our sector and our company in particular. There's another thing that's going on that really needs to be paid attention to if you're looking for opportunities to invest capital and you're thinking about this sector. We operate across 4 big dimensions. The asset types we serve. So for instance, industrial assets versus office assets versus data centers versus institutional quality multifamily. That's one dimension. The second dimension is lines of business. So investment sales versus development versus property or project management versus investment management, et cetera, lots of different service lines. Number three, geographies. We operate in New York City, and we operate in Shanghai and everywhere in between, we operate in 100 markets around the world -- 100 countries around the world, far more hundreds of local markets. And then finally, client type. We're a massive provider of services to some companies that have been under pressure due to COVID. And we're a massive supplier of services to the biggest technology companies in the world that have enjoyed great benefit from what's gone on in the last couple of years, and the e-commerce companies that have joined, great benefits. So when you look across those 4 dimensions and you look at our company in particular, because we're already well diversified across those 4 dimensions, and because we've built a very strong management team that's agile and because we have a very strong balance sheet, we can, at any given point in time, focus our energies into growing into the aspects of those 4 dimensions that are particularly benefited at that particular time. So we're doing a lot of industrial work now. We're doing a lot of work for 10 companies now. We are disproportionately growing our business in Asia now. And when you look at those 3 kind of fundamental advantages that I mentioned that cut across the whole sector, Alex, and then you look at those 4 dimensions that we do business in, and look at the position of our company with our existing footprint and our balance sheet, that's what's given us confidence to talk to the market about a double-digit growth scenario for -- through 2025, which is about as far as you want to look out into the future reliably, which we can add to through capital investment. And the thing that I would like to comment on in addition to just saying that's what we said is anybody that looks at our company should look at our track record for performing in a manner that's consistent with the guidance we've given. We've got a very strong track record of doing that. So we wouldn't give that kind of guidance, that kind of long-term guidance, if we weren't quite confident in our ability to get it done.

Well, that was clearly a great start. And in terms of the 4 dimensions, I'm sure we'll unpack some of those in the discussions. Since this was just a very long-term view, why don't we shift gears a little bit to the operating environment at the moment, which obviously has been very fluid over the last 1.5 years or so. Now it does seem like the business has recovered quickly to almost pre-pandemic levels in some business lines. So can you talk about how much of this current environment is perhaps a little bit of pent-up demand? Or how much do you really think this is a -- almost like a full recovery to a more normalized expansion phase again that we're on now?

Well, it's a combination of factors. And first of all, I want to note that we have gone well through recovering the peak year of 2019 levels of performance. Our second quarter was well beyond 2019. And many of our lines of business were dramatically beyond 2019. Anything we're doing in the industrial arena has performed spectacularly. On -- conversely, office leasing in the U.S. is still below what it was in 2019. By the way, office leasing in other parts of the world in Asia, for instance, has gone beyond 2019. So there's a little bit of pent-up demand, but I think what's really happening is, if you look over time, what's doing well at any point in time is going to flex across those 4 dimensions across asset type, product or line of business, geography and client type. And I think -- what you're to see is exactly what we said because we're so well positioned, so well spread across those 4 dimensions, and because we have capital to invest and because we have built -- invested in and built a strong leadership team that can organically and inorganically drive the direction of our business. We're going to be an enduring double-digit grower from where we are today. And where we are today has gone well back through where we were in [ 2019 ].

Yes. Absolutely. Fair enough. And maybe this is now -- maybe you answered some of this question already. But can you talk about a little bit more about the different end markets as you've seem right now? So what regions are showing the most demand? What industries are performing better than us? You mentioned, industrials, for example. And then if you think about the remainder of this year and maybe even already into 2022, any particular expectations you would point out along those lines that you're more or less excited about across, again, those 4 dimensions? And sorry, if I repeat if it's...

I mean, let me hit them dimension by dimension. So let's start with asset type, product type. Anything related to distribution space, industrial space is growing exceptionally well driven by e-commerce. Data centers are growing well. Institutional quality multifamily, which we finance, sell, develop is growing exceptionally well. Anything related to green energy, an infrastructure, it tends to have secular tailwinds right now. And of course, our big investment in Turner & Townsend in place to that. If you go to lines of business, right now, we're enjoying a very, very strong market for the financing work we do, the mortgage brokerage work we do. We're enjoying a strong market for the development work we do. Project management is growing at a very healthy clip. Facilities management is growing at a very healthy clip. We're enjoying a wonderful stretch as it relates to our valuations business. So several of those lines of business are growing quite well. And again, I want to reference that Turner & Townsend investment, they have a cost advisory business that we really weren't in, in any significant way that's doing quite well now. Let's go to client type. In general, a lot of retailers are struggling. Some manufacturers are struggling. But the technology companies, and we serve many of the biggest technology companies around the world are doing extraordinarily well, as an example. Health care businesses are doing quite well. And so there's certain types of clients that are doing really well now that we're serving in a big way. And I want to again point to Turner & Townsend and say that they give us exposure to governments. And as you know, governments are getting very active around the world with their investment in sustainable energy with their investment in infrastructure. So in that dimension, we're seeing some real advantage. And then, of course, we operate in 100 countries around the world. Things are growing really nicely in parts of Asia, in some of the smaller countries in Europe. And the second tier markets here in the U.S., when you go to markets like Austin, Texas or Nashville or Tampa, Florida, even South Florida now, surprisingly, maybe some -- that you wouldn't think of Pittsburgh. They're enjoying some real benefit in some of those markets. We operate in a significant way in all of those markets. And our Turner & Townsend investment has given us incremental access to Asia that we didn't have before, and it's given us incremental access to certain markets in the Middle East. So there are good things going on today in all 4 of those dimensions. I think some of those very things will sustain for years and years. And then there'll be a shift and we'll see things that aren't going quite so well, maybe come back to the forefront over time.

I can tell you, you want to talk about the recent acquisition. We'll get there, I promise. I want to hear more, too. Just quickly to finish the question. Any -- I mean, you mentioned these things can shift, but any things that you're already excited about as you look to 2022 that may be different than today? I know we don't have a crystal ball. But when it comes to some of those 4 dimensions, I mean, I got to believe you think about how to position yourself already for the next year and then thereafter. So any other items you would point to?

Well, this may be a little surprising when I say it, but we have built a plan that assumes that relative to our history that there will be downward pressure on our office building business. And we participate in the office building business in multiple ways. We build it, we finance it, we sell it, we manage it. And we've assumed in that plan that we gave to the marketplace, that double-digit growth plan that there will be downward pressure on that. But here's something that everybody that thinks about our sector should have a high level of confidence in. It simply isn't going to stay as depressed as it is today. Alex, we were talking offline about your offices on Sixth Avenue. They may not be, when back to what they were in 2019 or 2018, but they're not going to stay where they were in 2020 and where they've been in 2021 so far. So there is going to be substantial upside relative to where we are today in the office building business. Another thing that people miss when they think about the office building business is, when companies do come back, there's going to be a lot of work to do, to reconfigure office space. There -- some of the most profitable deals we've done on the development side have been when big tech companies have fully occupied extremely good office building. So relative today, there's going to be some upside in the office building business. That's -- and some of these consider super white hot. We think industrial has a really, really long-term run ahead of it and fueled by e-commerce. Will it stay as hot as it is in 2021? It's pretty darn hot right now. That's probably not going to go on forever. But it's going to be a very good business for a long time.

That's great. And yes, hopefully, that the office will come back to some degree. Just -- sorry to do a little bit of a history lesson here for everyone. But I think when you look at last year, the resiliency of the business model certainly surprised a lot of investors in -- probably including myself. Can you talk a little bit more what the most important moves that the company made were? And then again, what were the biggest lessons that you've learned? What are the some of the permanent changes that were made? And in what areas have you reversed maybe course already? And then maybe lastly, why is the company better positioned now for the future relative to pre-pandemic? I know it's a long list, but hopefully, you got the gist of it.

Yes. Well, the things that we did that allowed us to form the way we did last year, we didn't do all of them last year, right? One thing we definitely did last year, and we started at pre-pandemic was, we had done a bunch of strategy work and looked at our company in great detail in many different ways. And we have concluded that we had some real opportunities for efficiency, elimination of bureaucracy, et cetera. And so we did some cost work that was not the cost work that so famously occurred to all companies because of COVID, right? We all stopped traveling. We all stopped having conferences, et cetera. That's not what I'm talking about. We did structural cost work that benefited us last year, is benefiting us this year and will benefit us into the future. The other thing we did last year is, we did very aggressively focused on investing in certain areas of the business that have come to fruition as of late last year or this year. So for instance, we invested more in our industrial development business. We've -- not just with the Turner & Townsend acquisition, but with some other smaller acquisitions we made, we doubled down to a degree in the project management business. So you saw that. But even before that, if you go back over the last several years, we said we were going to do a few things that we thought would benefit the company for the long term, and we were really focused on that. And we looked at our income statement and we looked at our balance sheet and we looked at our operations in the way we interfaced with our clients. And we committed to having a low leverage balance sheet that would be useful to us in investing when great opportunities came up. And we built a stronger engine to invest, both in terms of our corporate development team, which Emma Giamartino runs. She's now also our CFO. And our network of businesses around the world, we insisted that they get better and better at investing. We very aggressively, not just last year, but going into last year, wanted to diversify our income stream across more resilient lines of business and more diversified lines of business which aren't necessarily the same thing, right? There are some very resilient lines of business like property management that have been around forever. And then there were some more diversified lines of business that we decided to get bigger in and some geographies and so forth. The third thing we did, which we learned in the last cycle really helps you when things get tough is, we built our capability to serve large clients. Large clients are the ones that are more likely to show up in tough times. They themselves have stronger income statements and stronger balance sheets, intend to do business in tough markets, and we did that. So in addition to the things we did last year, we did several things over an extended period of time that positioned us to get the outcome we got last year. And it's not just that we performed different last year than we did in the prior cycle. The difference was radical. Our peak to trough earnings last year were about 12%. In the prior cycle, I think they were 70-plus maybe approaching 80%. It took several years, 7 or 8 years, I think, for us to get back to peak earnings. As you saw from the first and second quarter this year, we've returned to peak earnings a year into COVID. And we've already talked about on this call, we've got this company positioned from today through 2025, and that's not where it ends, but that's as far out in the future as we're talking about to grow double digit from what has now returned to peak earnings. And so a very different picture. We outgrew the broader market, not just the real estate services market. We outgrew the broader market, pre-COVID. We were more resilient during COVID, and we're positioned to be a really strong relative grower post-COVID.

Yes. Thanks for that. And clearly, investors have noticed, I got to come back to the office because I can't have a call or a chat like this to not talk about the structural change in the office. We touched upon it a little bit earlier, but yes, what are the potential -- what's the potential impact? It is an important part of your sales and leasings business. So what is your -- what is the latest crystal ball telling you where we're going to be in the office? And what are you seeing right now? I assume you have many conversations with many leaders in the space.

We talked. There's two things that go on with us. It's a big business for us, and we have 50 -- almost 50,000, 45,000 actually office employees around the world. So we've got to figure it out for ourselves. And we're like everybody else, and that is, we're not sure, right? I mean we're trying to come to grips with what technology -- things like this, this conference, right, we're doing it via Zoom, and it's working well. So what is going to be around in the future that can help us all a lot in terms of efficiency, cost effectiveness, better communication. What parts of what we've been doing during COVID are suboptimal. Culture probably has suffered a little, problem-solving, creativity, Onboarding new people have all suffered some. And so there is a sweet spot in the middle of where we were before and what we've learned new that we're all going to try to find and migrate toward. What we've said, and we're not super confident in, but what we've said is, we think we're maybe going to settle in at 88% to 85% of being back to where we were before. But that's the amount of time spent in the office. That's -- doesn't speak to things like there's going to be more space between people in the office, high-quality buildings with great HVAC systems, great elevator systems, great circulation, et cetera, are going to do better and some buildings are going to become antiquated. The underlying economy is going to continue to grow and take more space. So we're going to settle in, and we've assumed we're going to settle in at something less than we were pre-COVID. Our plan contemplates that. But office buildings, and I talked to many CEOs, I know all of you that are on this call talk to many other companies and their senior leadership teams. And they're all thinking about it the way we're thinking about it. They're trying to find that sweet spot. They're trying to optimize. They're trying to be in the office in a way that really helps them and trying to use technology in a way that really helps them. And so it will be -- it continue to be a very sizable part of our business. But we've built lots of other things around it, that ensure that we can grow the whole company the way we talked about even in light of some of this downward pressure that we're inevitably going to see. By the way, we've made a sizable investment in flex space, Industrious. And we think one of the -- we're very confident that one of the implications of what we've learned in COVID is going to be that flex space is going to become a bigger part of the portfolio of space for a high percentage of corporates.

Yes. I guess, we shall see. I think there's debate around that, too, but we'll see. It's fluid. Shifting away, my question before was more about brokerage and -- or sales and leasing, obviously, moving to the GWS side a little bit. Again, similar question, how has the outsourcing trend maybe structurally changed due to the pandemic? And then, of course, again, we're talking about 2025 and longer term here, what are your latest sort of TAM in that business? And where are you relative to the opportunity, which I think in the past, you said there's a lot of white space. So obviously, defining that a little bit more is always helpful.

So I don't think there's been a major structural change in the outsourcing opportunity as a result of COVID. If you were trying to guess that one thing that may play out from COVID is broadly, companies became more focused on cost. And one of the big drivers of outsourcing for 2 decades has been cost savings. So you may argue that companies that haven't yet outsourced will be more inclined to outsource in the future because they believe that they can save money. And it's pretty empirically demonstrable that they can't save money by going to outsourcing. But I think we've studied it every way you can study it. We brought in a lot of very smart outside help to study it. And the bottom line is, we think that it's a huge sector that's reasonably thinly exploited up to this point. And we think that growth opportunity is going to be around for a long time. And we think that the boundaries of that opportunity are growing. As we and others, but in particular, as we do things that allow us to serve clients in ways that we couldn't serve them before.

Moving on. And actually before I move on, just a reminder, if you have any questions, feel free to continue to use or please continue to use the function on the webcast. Shifting over to the cost side, and I know this is not really your department, well, it is to some degree, but -- I'd rather talk about which -- I'd rather talk to you about growth and about margins, but let's talk about margins. And clearly, relative to your peers that we follow, you certainly stand out with industry-leading margins. But what drives the incremental expansion from here over the next few years? How much of a focus is margin expansion? Because you obviously want to grow the franchise and not just cut costs. And yes, what are the incremental things that you are thinking of? It sounds like you've been doing a lot ahead of COVID already. But what else is there to do -- from here coming out of this pandemic?