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

fireside chat with CBRE Group. It's my pleasure to introduce Bob Sulentic, who is Chair and CEO of CBRE Group. My name is Tony Paolone. I cover real estate stocks in research, and so we welcome you here for this event. Should I repeat myself for the webcast? Do you repeat myself? Okay. Yes. Sorry, Mike was off. So I'll repeat myself. Welcome, everybody, for the last session of the day with Bob Sulentic, who is Chair and CEO of CBRE Group. It's my pleasure to welcome him and you all for a discussion here for about 30 minutes. My name is Tony Paolone. I cover CBRE, among other real estate stocks in the equity research department. Let's get into things. I'll try to go for about 20 minutes or so and open it up for Q&A. But first, Bob, give us a quick description in a couple of minutes, what CBRE does.

Okay. Well, first of all, Tony, thanks for having us here, and it's good to be with everyone. CBRE is a global commercial real estate services and investment firm that's beginning to migrate into infrastructure. In addition to commercial real estate in a reasonably meaningful way. We're the largest firm in the world that does what we do. We describe ourselves as being diversified across 4 dimensions. So the first one being asset type. So we do extensive work in office buildings, distribution centers, multifamily, health care buildings increasingly data centers, almost any kind of commercial building, you could imagine we do work in. The second dimension is the client we work for all types of occupiers and investors in commercial real estate. And again, it would be hard to find occupiers or investors around the world that we don't do some work for. The third dimension is service type. So again, we do almost everything that you can do in commercial real estate. We do building management work, project management work, where we do capital improvements. We provide financing. We provide -- we're an intermediary on both the seller side and the buyer side for the sale of assets and the leasing of assets. And increasingly, we're doing technical services for assets, buildings like again, data centers. And then the fourth dimension is geography, and we operate in 100 countries around the world. What's notable as it relates to our position in the market and our opportunity is that we're not just spread across those 4 dimensions, but we're in most cases across those 4 dimensions, we're the market leader. And so it means we have significant breadth and depth to go along with that breadth. And a very central part of our strategy is that we are trying to drive resources, the time of our management team, the focus of our business, our capital, our balance sheet resources into areas that are either resilient because they're a cyclical or countercyclical or they're resilient because they're in areas of secular tailwinds. And data centers are a great example of that. We do a lot of project management work in support of infrastructure, et cetera. So being big across those 4 dimensions and deep across those 4 dimensions and then pursuing an expansion strategy into the areas that are resilient is characteristic of what we do. And what we like to say about our company is our opportunity is defined by the base of commercial real estate assets around the world, which is enormous, as you all know. And while we're very big for what we do, we have a very, very small percentage of the market in general across those 4 dimensions.

Yes. So maybe let's stay on this idea of resilient businesses because it's been such a big focus of yours for a number of years now. How would you characterize where CBRE is today? And should we expect the resilient businesses to continue to grow and things like the more traditional CBRE to be a bit smaller as a piece of the pie? Or are there opportunities across all of this?

Well, there's an important thing there that I want to hit before and then I am going to start with the resilient businesses. And we characterize our businesses as being in 1 of 2 types, either resilient because they are, as I said earlier, there counter cyclical or acyclical or resilient because they have these secular tailwinds. We do also have cyclical businesses, transactional businesses that we've been big in historically, and we're the market leader in. The move into the resilient businesses has been disproportionate to the transactional businesses and very steady over the last decade plus. If you went back in 2010, '11, around in that time frame, we would have been around 30% resilient with the balance being transactional or more cyclical. Today, we're 60-40 in the other direction, 60% resilient. And even in this part of the cycle where we're experiencing really strong growth in our transactional businesses, our cyclical is -- or excuse me, our resilient businesses are growing as rapidly as our transactional business. Of course, when the transactional business has slowed down, the Resilient business is growing even more rapidly. And in aggregate, throughout that entire period, we've grown on a compounded basis well into the double digits, top and bottom line. We would expect the trend for the relative balance between resilient businesses and transactional businesses keep moving in favor of the resilient businesses. The thing I wanted to come back to, though, is we're not trying -- we're not getting there by trying to get out of the transactional businesses. Those businesses are very good for several reasons. First of all, they generate a lot of profits and they have great cash conversion. The minute you make the money, you turn it into cash. They have great margins, and they provide a tremendous amount of market insight for us. So if you look at our -- we're the largest broker around the world, we have 10 brokers. Everything we do, we gain information from about the markets around the world through that base of brokers. We have a very large valuations business. We're the largest value in the world. We learned a lot that valuations business that we use in other parts of our business. But we are disproportionately growing those resilient businesses, and we expect that to continue.

Does the customer base crossover? Is there an opportunity, because when you talk about these resilient businesses, a lot of them are just sheer additions of capabilities you have, but what is the customer crossover like? And do you have the opportunity to sell or all CBRE to these folks?

For much of what we do, the customer base is overlapping. So if you look at some of our biggest clients around the world are large, what we call, occupiers. So the biggest tech companies in the world, the biggest financial institutions in the world, big manufacturers, hospital systems, et cetera. Those systems need to have their buildings managed. They need to have projects on capital projects done. They also buy and sell and finance assets, and we provide those services to them. So the clients are common. What's gone on with us in the last several years, Tony, is really accelerating now is we're working for another set of clients, sometimes within the same company and that is clients that do critical infrastructure and data centers. So if you went to the biggest tech companies in the world, the first group of services I talked about building management, project management, mortgage origination and so forth. Those -- that's all handled by their real estate people. But the data center work is handled by a completely separate buyer within those organizations, a separate customer. And so we have built a client team that's separate to interface with that group of clients often within the same company.

I understand. Well, maybe let's stay on the data center piece because it is very topical these days. You all have given pretty specific numbers, call it, plus or minus 10% of the business effectively of CBRE is data centers. Can you maybe talk a little bit about, first, some perspective, where was that, say, 5 years ago maybe? Or how rapidly has that grown? And should we expect that to continue at that sort of pace?

Well, I say this only slightly tongue in cheek. If you go 5 years or before that, it wasn't a big enough deal that we kept track of it separately. So it's now a very big deal for us. We think last year, it was around 10% of our earnings. We think it's likely to go up this year and continue to go up in the future. And we do work for data centers across all 4 of our reportable segments. So I want to walk you through what those segments are. So 1 is what we -- that thing we're historically most known for, that we've done the longest is Advisory Services. So that's brokerage work, valuations and so forth. We do -- we are a very large seller, lessor and mortgage origination provider of data center assets. Next is project management. That's our Turner and Townsend business. That's where you actually oversee the creation of assets or the improvement of assets physically, the construction of assets. In that area of our business, we are doing work, either program management or project management or cost consultancy on around 150 hyperscale type data centers. So that's a very significant part of that business. We're also doing internal work internal projects, smaller project work in what we call the white space. The third area of our business is building operations and experience. That's where we manage the ongoing management of buildings. That's a very, very large business for us. And we manage around 800 data centers around the world. We physically manage the buildings of those data centers. And then the last area of business for us. Our fourth there is what we call real estate investments. And we have an investment management business there, and we have a development business there. In our development business, we do a lot of land acquisition and development work, and we're developing and selling a considerable amount of data center land again into these large users. And then we have an infrastructure sleeve of assets that we manage within our investment management business, and we do some data center investment there. Data center investment as owners is not a big part of our business, but all the other parts are very large.

Right. I mean on that note, you recently -- it's not all data center related, but you've made a couple of acquisitions with the most recent being [ pierce, ] which you just closed on $1.2 billion. Can you maybe tell us a little bit about that and how it fits into both -- it sounds like digital infrastructure more broadly?

[ Pierce ] is digital infrastructure, critical facilities, projects and management companies. So they do work for things like telecenters cell towers -- sorry, to heat those words backwards. -- wind turbines, backup power generation systems, et cetera. They operate across the U.S. with and then off-site in addition in India with about 4,000 technicians, very technical work. It operates at a higher margin than the rest of our building operations and experience business. It's an absolute, as we like to say, bull's-eye for our strategy. It's technical services, it's infrastructure, it's secularly benefited. It meets our definition of resilient. It's had a strong growth profile, and we think there's significant opportunities to synergize it with other things we do most notably our data center work.

Got it. And tell us about -- you also purchased, I think it's about a year or so ago, Direct Line.

Yes. Direct Line has been along with Turner & Towns and 2 of the -- 2 of the biggest success stories we've ever had in terms of acquisition. What Direct Line does is project work inside what they call the white space in data center halls. So where the computer and data storage equipment resides, they do project work in there. So the wiring, cabling, racking. They do some HVAC work and electrical work and importantly, their client base is, we're not allowed to name the client base, but you would find it very familiar. It's the most important hyperscale companies in the world.

Got it. If we step back, I mean, it was great to hear about the data center and digital infrastructure initiatives in these deals and how it's across all of these functions. How about the rest of it when we think of just BOE and project management. You've talked about those businesses growing double digits and perhaps even maybe a bit more. But how do you get there? Like what are some of the sectors underlying? Because it sounds like the digital infrastructure piece, I think we can all get, but the growth across those businesses has been pretty strong and your outlook seems pretty strong.

Well, I want to highlight this, I want to talk about project management. So the industry that we kind of have been in forever. We and our competitors have always done project management. But the way we've done it is it's what we call an attach business. So if we're leasing on behalf of tenants and we signed a big lease, there's project work that needs to build out of the space for them or if we're representing a building as a landlord, same thing. There's leasing. There's fit out work that needs to be done when we represent corporates in handling their real estate. They have a lot of project work that needs to be done in conjunction with the ongoing management of facilities. Those businesses were typically attached to those parts of the business as it wasn't managed centrally. Several years ago, we started building a relationship with this company, Turner & Townsend, their approach to project management was very, very different. It was an integrated enterprise. They have global leadership. They operate in 60 countries. They did big complex projects for the same client base often. So for corporates. They would do the big work that we and our direct competitors weren't able to do. But beyond that, they did energy-related work infrastructure work. So for instance, Turner & Townsend, is doing big program management at 40 international airports around the world. I mentioned already that they do a lot of these hyperscale data centers. They're doing a nuclear power plant in the U.K. So they're doing work in areas that go beyond what we were doing. So they do 1 of the things that we're so interested in doing when we do M&A, they expanded our total addressable market. They moved up the technical game, which we want to do. The work they're doing is very much in secularly favored areas. So we've ended up with this business. When we bought Turner & Townsend, they had grown our CFO here and Head of M&A is Emma. Their growth rate for the 5 or so years before we bought them, was 15% and sense it's been 20%. So we've been able to take Turner & Townsend, bring them into the CBRE family and give them access to clients that we had. They can do things for those clients. We couldn't do, and their growth rate was already very strong. It's kind of 20%. That's now -- that project program and cost consultancy business is now a $3.5 billion business with 22,000 employees, Completely unfamiliar to anything that was going on in our sector before we bought them.

Wow. Interesting. I mean I think it's a great example about just your ability to kind of bring something on to the CBRE system and drive more revenue and production out of the people. How should we think about the white space that you see for CBRE, whether it's geographic, other capabilities we're not thinking of that you may or may not want to tell us about that you'd like.

There's 3 Things I wouldn't talk about, but...

Okay. what would you?

Well, so first of all, I want to go back to something I said at the outset. We define our opportunity by the base of commercial real estate assets around the world. And you hear that and you say, okay, I know what commercial real estate is. But this is what I always tell our people when I go around to our offices and ask, "Well, what do you think the opportunity for CBRE is? So step back and just think for a minute, you're in this city or any other big city in the United States around the world, and you look out the window and you see all these office buildings, way more office buildings than any 1 company comes close to managing. What you don't see is you don't see any distribution centers. You don't see any data centers sitting here. You don't see any hospitals sitting here. You do see multifamily institutional quality multifamily. You don't see manufacturing facilities. We do work for all those things. And we don't just do it in this city, we do it all around the world. There is so much that we can do that we haven't yet gotten to because that base of assets is so big, and we're expanding it now. Data centers weren't in the discussion before. Certain geographies weren't in the discussion. When I first came to CBRE through the acquisition of Trammel Crow Company 2006. Japan was kind of an afterthought for us. It's our second most profitable country operation in the world right now. We have a very large business there. that was white space. So 1 of the things CBRE has done quite well is across those 4 dimensions, client type, geography, service type and asset type, we've expanded the envelope that we're working in, expanded the total addressable market and moved into that total addressable market pretty aggressively as we did with the acquisition of Turner & Townsend, as we did with the acquisition of Direct Line giving us in the -- another kind of white space, the data center-wide space. So that's very central to our strategy. And we have a massive amount of -- I can tell you I've been in the business for 41 years. Between Trammell Crow Company and CBRE, I've been fortunate to be a CEO for 21 years. And I've never felt so confident in our ability to grow the business as I feel about CBRE going into 2026.

That's very good to hear. In terms of that growth, maybe shift this over to capital allocation because you do produce a lot of cash. And so you're excited about the business. You see great prospects. You've already made a big acquisition pretty recently, but what do you do with all your cash as you look ahead?

We have -- and again, I mentioned Emma earlier, she runs that for us. It's -- and we really invest our capital in the following ways. Number one, we have CapEx. So computers, equipment we use to run our business, that's pretty standard. Everybody does that. M&A. We are a consistent M&A company. That's core to our strategy. We build our business through M&A. We grow our TAM through M&A. We have a very defined set of places strategically that we're looking for to grow our PAUSE business through M&A. We -- I would tell you the Pierce acquisition couldn't have been more on target for what we want to do. The Direct Line acquisition could not have been more on target for what we want to do. And we have a handful of other things we're looking at that. Beyond the CapEx, that's the #1 place that we try to aim our capital. We have a sizable real estate investment business that generates really good opportunities for us to invest either in funds that we manage, co-invest or directly into real estate assets through our real estate development business, and we're constantly looking for opportunities to invest there. Particularly when we see opportunities as we have the last couple of years that others in the market are on the sidelines and not investing in and that's played out very well for us over the last 10, 12 years, and we continue to be excited about that. And then as you know, when we don't have opportunities in those areas, we will buy back our stock if we believe it's trading below its intrinsic value. And we believe it is now and it has been for the last several years, and we've invested several billions of dollars in buying back our stock.

Great. Before I open it up for some questions, I would like to just hit on the transactional business. Leasing, capital markets, you guys had a very strong leasing quarter in 3Q. I think we all got a little surprise on the upside with strong industrial trends. How do things feel in both of those segments as we start to look ahead?

I'm going to comment on it in 2 ways, Tony. So first of all, we -- our leasing business is a really, really important business. So as I mentioned earlier, it's excellent cash flow generator. It has great cash conversion. It's got great margins. It provides tremendous strategic insight for us in terms of what's going on with occupiers and investors in real estate around the world and we've really focused on the growth of that business. So we've upgraded our talent. We've upgraded our lease management platform. We have taken -- very hard to figure out if you're in the brokerage business over a year or 2 if you're taking market share because it ebbs and flows. But it's so clear what's happened in that leasing business the last couple of years. We have definitively taken market share. And so that's part of the leasing story that I wanted to mention. The other part of the leasing story is what's going on in the market is good. I'm going to start with office buildings. We went through this COVID and then post-COVID [ era ] where we kept saying our return to the office, return to the office. I think we're beyond return to the office. I think where we've gotten to now PAUSE is it's more of a return to the mean. People are starting to think about office space the way they thought about office space historically. But I'm going to add 1 component to that. Just like if you look at distribution centers and see how much more integral they are to these e-commerce companies than warehouses used to be when I started office buildings and your company is Exhibit A, by the way, office buildings have become incredibly important to companies in terms of creating an experience for their employees. Making their employees productive, making their employees excited about coming to work. The base of chief executives across the United States and around the world have been beating the come back to the office drum for a few years now. And what we've all figured out is none of those mandates work nearly as well as having an attractive place for people to come to. And that attractive place is partly about the physical plant, but it's partly about the experience you operate. And in that regard, we went out and bought a company called [ Industrious. ] That's another company we bought in the last couple of years, which is an office building experienced company and flex company. And we now have that offering to give our clients that others don't have. But the office building trajectory for leasing is good. We've been through a little bit of a soft market after years of a great market on industrial or logistics leasing, that's coming back. We had a great third quarter, but everybody had a great third quarter. If you look at [ Prologis, ] the biggest industrial REIT, they had a very strong quarter. And what's happening is some of the big users, some of the big names that were out of the market are coming back. They burned through their inventory and they're coming back into the market. We're expecting that by midyear next year, the low point in the kind of somewhat down cycle we've been through will have been met and we'll be coming back up. So we're pretty bullish about industrial now, too. And we don't even need to talk about data center leasing

Right. That So let's get some questions here. We start there.

Can you talk a little bit about this commercial real estate cycle, what inning are we in? Where did it start? How long Will it last or...

Yes. We used to get that question and we used to think it was 1 thing, right? We know now it's not. We know now that the capital markets don't move in sync necessarily with the leasing markets and the office leasing market doesn't move in sync with the industrial market, et cetera. What I would say is the leasing markets are back pretty strong. We think they're going to continue to be strong. But they've probably come back closer to peak than the capital markets side of things. Capital markets is getting stronger, but we anticipate a slower, more steady recovery coming out of most downturns, you have lower interest rates and -- or you have interest rates that you can bring down, higher interest rates that you can bring down to push the market forward. That's really not seeming to be the case in a big way this time around. So we think the market is going to recover more slowly. Credits coming back into the market. There is a huge amount of pent-up sell demand and buy demand, lots of capital on the sidelines. You hear that phrase to [ wallet ] capital. It's true. We're in the investment management business. We've got billions of dollars of capital we'd like to deploy. We're in the development business. We've got many assets that we hold that are great assets that we're going to sell at the right time. But that's all the gap between buying and selling prices or they ask by ask bid by [ sellbid ] is closed. So we think it's going to be more of a long, steady come back. We expect next year to be better than this year was, but it will be slow. Does that answer it?

Not exactly.

Give me a follow-on question.

Well, so do you think you'll grow organically total company faster next year than this year?

I don't know that we'll grow faster. I think we'll grow organically next year. And we'll be very happy if we grow as fast organically next year as we did this year..

Can you do add that.

We haven't finalized our thinking on that yet.

Just focus back on the hyperscale, the spending so much money and you look like you're going to that business just tell us do you turkey same centers? Or is that contemplated with the acquisitions? As well. Can you tell us how real estate and power seems to be so important that goes in, you have a relation, but if you're looking at that business, can you tell us about backlogs and margins or some brands you consider near.

So that was a lot of questions. So when you say turnkey, I don't know we're not an owner of data centers. We manage them. We help them be built. We project manage the building of them. We do project work inside the data centers, inside the white space where the technical equipment is, but we don't own it. We can do turnkey. So we can do everything from buy the land to build the building to finish out the -- not the equipment in the building, but the connect the equipment in the building and put the HVAC and electrical infrastructure, power infrastructure into the building, we can do all of that, and we do all of that. But we generally don't own them. And what was your other question? PAUSE.

Relationships with any power real estate [indiscernible].

Well, we have a land development business, and we have developed acquired and developed a good number of data center sites. And there's been a radical change over the last couple of years in the ability to get power for those sites, not surprisingly, that's the big bottleneck now. And we do work with the utility authorities, and we do have, we think, some unique capabilities in that area and some unique relationships. And we also have some relationships with the hyperscalers that allow us to be more productive because it's like so many things in life. If -- in State x or CTX, if you go to the power authority and say when to build a spec data center, they're like there are a lot of those out there now. PAUSE if you go and say we are coming with this user that you want in your state or in your municipality, you have a very different profile, and we've learned to work that circumstance effectively.

Question here?

Can you elaborate on cross-sell opportunities to a little bit on the last call, so the TNT, whether the as to Pro build-to-suit industrious like PAUSE how long take to set yourselves up more initially execute on the cell? And then how big of a needle.

Yes. It's a huge needle mover but not in the way people think it is. So we typically wouldn't expect our facilities management people to go in and say I'm going to sell you a package of facilities management services. And while I'm doing that, I'm going to sell turning towns into you. What would happen is you'd have a big corporate. Now sometimes we do sell them in a packaged way. And we've got quite a bit of business like that. But what would typically happen and what we've learned is particularly powerful in what our clients want is -- and their consumers like we are. They think the way we think. So if we do facilities management work for them, and we've done building the leasing work for them or tenant rep work for them. And maybe they've hired us to do valuations work. And they've seen us do a bunch of great work for them. And these are typically big complex buys, right? And then they need project management work they immediately think of us, right? That's where the cross-sell comes in. And that's been a very powerful thing for us. That's why when we acquired Direct Line and we did our due diligence on Direct Line. And we went to the hyperscalers they work for. They encouraged us to buy Direct Line because they thought having direct line on the CBRE platform provide things for them, for one thing, capital, the ability to expand the ability to invest in the business. When Vince Clancy, the CEO of Turner & Townsend, goes in and he has access to a lot of the senior most corporate real estate people in the world. And he says, we're now at CBRE and we can do all this stuff for you that we do in project management. But by the way, I can tell you after they are this other stuff. That builds awareness and increases the odds. But Vince won't usually walk out the door with a contract to sell his product and to sell facilities management, if that makes sense. Sometimes you will...

All right. Anything else here before I throw one last one out for...

Is that some of the technology that you gave the example curious what other areas to either internal applications and packaging.

The biggest one I'd point to is data market we all like to throw around the term data, but what it really is, is knowledge of what's going on in the base of commercial real estate assets around the world. So we are by far the biggest broker in the world. We have 12,000 brokers doing transactions at every type you can imagine, every type of building you can and we have massive amounts of that data. We're the biggest value in the world. We have massive amounts of information about the value of buildings around the world. We have an investment management business with about $155 billion of assets under management. We have huge amount of information about that. Here in the U.S., we have the biggest development company in the world, Trammel Crow Company. We do an enormous amount of research in underwriting every project we do. We manage literally 8 billion square feet of real estate around the world. That's the property and facilities management. We know what's going on in those buildings, whether it's multi-tenant or individual user. All of that knowledge is available to us, and we are increasingly working very, very hard to use that knowledge to support our business as we go to market but also to support our clients.

One thing I'll wrap up here is, I think, from basically out of time. But anything misperception wise related to the stock or the company that you think stands out to you that you want to highlight that we're just not focused enough on.

I think this scale across 4 dimensions and the ability that gives us to push resources into secularly benefited areas. I think that's known a little bit, not the degree to which it should be known. I think there's a lack of appreciation for how much we've expanded our total addressable market. That's a very, very big part of our strategy and how we've been able to push into areas that we weren't in before significantly through M&A. I think another thing is people -- you often hear people and you'll see when the journalists write about us, they'll say, such and such brokerage as such, et cetera. Well, we are a big brokerage company now. But we -- as I said, we manage 8 billion square feet of space. We have 22,000 people in our project management business around the world. We manage 800 data centers around the world. We're moving into critical infrastructure. So we do far more than just those transactions. And it's not just that we do far more the scale of what we do. The financial magnitude of what we do is significantly greater, I think, than the general awareness would suggest it is.

Great. Well, we appreciate that. Thanks, Bob, for doing this. And thanks, everybody, for joining.

Thank you.