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

Greetings. Welcome to the Q2 2026 CBRE Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Chandni Luthra, Global Head of FP&A and IR of CBRE. Thank you, Chandni. You may begin.

Good morning, everyone, and welcome to CBRE's Second Quarter 2026 Earnings Conference Call. Earlier, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and Excel that contains additional supplemental materials. Today's presentation contains forward-looking statements, including, without limitation, statements concerning our business outlook, business plan, capital allocation strategy as well as our earnings and free cash flow outlook. These statements involve risks and uncertainties that may cause actual results and trends to differ materially. For a full discussion of the risks and other factors that may impact these statements, please refer to this morning's earnings release and our other SEC filings. We provided reconciliations of our non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with the explanation of these measures in our presentation deck appendix. Throughout our remarks will be site financial performance relative to expectations, we are referring to actual results against the outlook we provided on our first quarter 2026 earnings call in April, unless otherwise noted. All the growth rates we size are in U.S. dollars, unless otherwise noted, and reflect an FX tailwind of 1% to 2%. Also, as a reminder, our resilient businesses include facilities management, critical infrastructure services, property management, project management, loan servicing other portfolio services and recurring investment management fee. Our transactional businesses are comprised of property sales, leasing, market origination, carried interest and incentive fee in the investment management business and development fees. I'm joined on today's call by Bob Sulentic, our Chair and CEO and Emma Giamartino, our Chief Financial Officer. Now please turn to Slide 3 as I turn the call over to Bob.

Thank you, Cody, and good morning, everyone. The momentum in CBRE's business continued in the second quarter with core EPS up 30% on a 16% revenue increase. Our strength was balanced across the company. Each of our segments, advisory, building operations and experience, project management and REI grew SOP by more than 25%. Our strategy is working the way we intended. Resources and investments are being productively directed into areas that drive current growth and position us for long-term growth. Directly related to this positioning, over the last several months, we've received many questions from investors about our infrastructure and data center services businesses. Those businesses are performing well, and they provide an excellent forward-looking opportunity. Infrastructure services revenue reached nearly $1.2 billion in the second quarter. increasing by more than 45%. Within Infrastructure Services, Data center services revenue surpassed $700 million, rising nearly 30%. This revenue is strictly from the provision of services and does not include any data center development land sales. The work we do includes the build-out of data centers as well as ongoing maintenance and operational oversight. During this period of significant AI investment, we expect our data center services revenue to remain elevated at about 25% annually for the next 5 years and then above 15% as the build cycle matures. [indiscernible] them in our entire business and specifically, our infrastructure business, we have increased our core EPS expectations for 2026. We now expect to earn in the range of $7.80 to $7.90, equating to 23% growth at the midpoint. Now Emma will discuss our outlook and results for the quarter in more detail. Emma?

Thank you, Bob, and good morning, everyone. CBRE's strong second quarter saw revenue increase by 16% and as both Brazilian and transactional businesses delivered double-digit growth. Results exceeded our expectations with core EBITDA up 34% and core EPS up 30%. This is the fifth consecutive quarter that we achieved at least 18% core EPS growth. In Advisory Services, revenue rose 18% and exceeded our expectations driven by accelerated growth in leasing and continued strength in sales. Global leasing revenue grew 24%, with strength across office and industrial. In the U.S., leasing also grew 24%, led by office up 29% and industrial up 17%. We generated our highest U.S. offer leasing revenue for any second quarter driven by large deals in gateway markets. We've seen notable strength across the legal and financial services sectors as tenants are upgrading and expanding their space. U.S. industrial leasing growth was led by Los Angeles, San Francisco, Washington, D.C. and Chicago, reflecting increased demand from 3PL providers and companies engaged in advanced manufacturing. Outside the U.S., leasing grew 27% in EMEA done by France, Germany and Spain, and 19% in APAC with notable strength in Australia and India. Global property sales revenue grew 20% led by the U.S., which grew 24% with double-digit increases across most major property types. Outside the U.S., sales grew 8% in EMEA and 6% in APAC. Mortgage origination revenue grew 8%, with strong volumes from private capital sources, partly offset by lower agency lending activity. Advisory SOP grew 29%, reflecting strong operating leverage. We delivered strong double-digit revenue growth in our Building Operations and Experience segment. Growth was led by critical infrastructure services, where revenue increased 68%. Our Data Center Solutions business grew nearly 30%, benefiting from both significant hyperscaler demand and the depth and breadth of our capabilities. Contributions from the peer services business we acquired last November enhanced the growth rate. Our Local Facilities Management business once again delivered strong high-teens revenue growth across all regions, particularly in the Americas, up almost 35%. Enterprise Facility Management revenue growth was led by the technology, media and telecom sectors. BOE SOP grew 25%. In our Project Management segment, revenue grew 19% underpinned by solid infrastructure activity, which increased 30%, while real estate-related services grew 13%. Infrastructure saw strength across transportation and utility projects in the U.K., Europe and the Middle East. Real estate saw greater than 20% growth in North America and strong double-digit growth in Asia. Across all regions, hyperscaler and technology clients drove significant activity. SOP grew 28% and with notable operating leverage, which we expect to moderate in the back half of the year given the timing of costs. Turning to the Real Estate Investments segment. Development operating profit exceeded the prior year in line with our expectations and without the benefit of any data center land sales. We continue to have embedded gains of approximately $900 million in our development portfolio. In Investment Management, operating profit was up modestly, and we ended the quarter with approximately $155 billion of AUM. We raised $1.6 billion of new capital in the quarter. up from $1.3 billion in the first quarter, but the lower expectations. Some investors, particularly capital from the Middle East, remain cautious given the volatile global backdrop. Now I'll turn to free cash flow and capital allocation. Free cash flow totaled nearly $1.7 billion on a trailing 12-month basis. For the full year, we remain on track to achieve near the high end of our free cash flow conversion range of 75% to 85%. Since the end of the first quarter, we have bought back more than $450 million worth of shares bringing our year-to-date total to nearly $1 billion. This level of buyback activity underscores our conviction that our stock rates meaningfully undervalues the enduring long-term growth we see ahead for the business. As Bob indicated, we now expect full year core EPS of $7.80 to $7.90, up from $7.60 to $7.80 previously. The increase is driven by our outperformance in the second quarter and improved expectations for the balance of the year. We now foresee more than 20% core EPS growth in the third quarter with the fourth quarter likely to be comparable to last year when we also realized significant profits from our data center land program. Assuming no material changes to the macroeconomic or interest rate environment, we remain confident in delivering at least a 15% increase in core EPS in 2027. With that, operator, we will open the line for questions.

[Operator Instructions] Our first question is from Anthony Paolone from JPMorgan.

My first question relates to just capital priorities in the second half of the year and what's in guidance just given the heavy cash flow production later in the year, kind of what do you have baked in for buybacks or other activities?

So our capital allocation priorities remain unchanged from where we've been for the past number of years. We continue to prioritize M&A. And as we've talked about, we have a really strong pipeline across the areas where we know we want to invest, but it is difficult to predict which M&A targets will be able to convert and then we'll fill in with buybacks if we don't deploy that level of free cash flow that we generate through M&A. In terms of the back half of the year, there is not significant incremental capital allocation included in our guidance.

Okay. Got it. And then just on BOE. Can you maybe update us on your thinking as it relates to margins in that business for the year? Because I think you started the year out pointing to being rate, but it seems like it's improved quite a bit here in the second quarter?

Yes. So did make a change to how we classify amortization related to our fleet in that segment. And so without that change, the margin for the year will improve by 20 basis points or so. But the rest of that margin improvement is related to that reclass. .

Our next question is from Stephen Sheldon of William Blair.

On the leasing side, another very strong quarter there in that now been true for the last 2-plus years. So do you think activity -- leasing activity there has effectively normalized now after the pandemic, where leasing growth would be more in line with an average scene throughout the macro cycle? Or is there still room for above cycle growth just as pent-up demand on the leasing side continues to come through? I guess, just how are you thinking about it over the next couple of years?

Stephen, I think there has been a return to the norm. I think COVID is so far in the rearview mirror now or that people -- you see it in office buildings, you see it in restaurants, you see it and everything. There is a real return to the norm. Secondly, people really are focused on what office space can do for their businesses, for the productivity of their businesses, exciting their employees about being part of the company, getting their young people educated and brought into the business. That's a very real thing. It's a real thing for us, we have a lot of office space around the world, and we think about that a lot. And we know our big occupier clients are thinking about that a lot. And they're competing with each other to try to have the kind of space that allows them to get those things done. So I think it's going to be somewhere between a return to the norm and maybe more than that. I'll give you one anecdote. With all the talk about the various parts of our economy that might get disintermediated by AI. One of the areas is the legal profession law firms. We're having tremendous leasing success with law firms now kind of unlike we ever had before. And it is because they recognize the importance of office space to their business. And it also is because they're using AI for certain things and then doing other things with their talent that's causing their headcount, not to go down the way some people think it might.

Got it. That's helpful. It makes sense. And then just as a follow-up, Bob, really encouraging commentary on the data center revenue growth outlook. As you think about CBRE's opportunity to continuing to support the data center build out. Where do you see the biggest opportunities by business line, I guess, to drive the 25% annual revenue growth that you talked about expecting over the next 5 years? I mean is there -- are there certain business lines where there's a huge opportunity, you're not doing much yet. There's a big opportunity for equity to pick up and just maybe where you're seeing those opportunities.

Well, first of all, it's become big for us. So infrastructure was $1.2 billion of revenue in the quarter, $700 million of that was data centers. We think by the year 2030, we could have a $10 billion business with over $1 billion of EBITDA related to infrastructure, the disproportionate share of that would be in data center, certainly not exclusively in data centers. where we're really seeing it, the opportunity and the current activity is in 2 places. It's in our project management and program management business with Turner & Townsend. By the way, they've been growing their data center-related business at over 30% for a decade now. And then the second place we're seeing is building operations and experience. We're helping create data centers in support of the boom that AI is generating. But over half of our data center revenue is from downstream work, managing them, refitting them, doing project work in data centers. So we expect to see a lot of growth in both those areas of our business in the BOE area and in the projects business.

Our next question is from Julien Blouin at Goldman Sachs.

Yes. Thank you for the question, and congratulations on a strong quarter. I wanted to maybe dig into project management a little bit more, a very impressive quarter. both top line and bottom line, it sounds like maybe that will flow with expenses a little bit in the back half. But I guess, could you talk about how we should think about the sort of the projects that go into that? It sounds like it's a lot of infrastructure projects. I think of those as sort of longer-dated Turner & Townsend projects. And so is it right to think that much of this strength could carry into sort of the future quarters?

We're very, very excited about the future for Turner & Townsend, and the project management and program management business that they participate in. First of all, one thing to realize about them is they were really dominant in Europe, Middle East significant in Asia, significant in Australia. By combining with us, they've been able to significantly escalate their activity in Japan and India and especially in the U.S. So just the geographic positioning of that business has improved dramatically. And I've commented on this over and over. We've been able -- the leadership team of Turner & Townsend, is in the and the tools and capabilities they bring to the table just hasn't existed in our sector before. But where do we think the real opportunity will be with them? It will be in big infrastructure projects, big energy projects. It will be in doing more of that, in particular, in the U.S. And Emalells the M&A story every quarter. We have specific areas of our business -- we want to grow with M&A. We've got some ideas around Turner and Townsend that we want to make happen there if we can find the right deals. So we think that you should expect lots of growth in the U.S. and in infrastructure and in energy, et cetera, from Turner & Townsend, but they also do a tremendous amount of corporate work. And with Turner & Townsend, as part of our business, now we're doing big complicated projects for corporates that we weren't able to do before. So that will be another area of growth.

That's very helpful. And then on the land side sales, I mean it sounds like you have a number of these earmarked to be sold in the third quarter. Just wondering beyond the ones that are sort of earmarked here, how many will you have left in your land bank for potential future monetization?

We still have about 30 sites across the U.S. in our land bank. There are varying sizes and it's very difficult to time when they'll potentially monetize, but we still have 30 sites.

Our next question is from Jade Rahmani at KBW.

Thank you very much. In terms of the 2027 commentary for EPS growth of at least 15%, is it reasonable to expect double-digit revenue growth? And are there any key areas of operating leverage you'd like to highlight?

So if you go through our segments, just simply, it's -- we're looking at low double-digit SOP growth across both BOE and project management, and that does include some operating leverage, but revenue growth is going to be in line with the low double-digit growth. And then advisory, as you'd expect, we'll moderate somewhat from this year. but it's not going to be anywhere near mid-cycle growth levels. And then what we're expecting for REI is that it will be roughly flat to what we're expecting through this year's SOP, which we're expecting to be very strong. So some operating leverage across our segments, but not a tremendous amount.