CBRE : Earnings Transcript Q2 2023

Corrected Transcript

27-Jul-2023

CBRE Group, Inc. (CBRE)

Q2 2023 Earnings Call

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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q2 2023 Earnings Call	27-Jul-2023

CORPORATE PARTICIPANTS

Brad Burke	Emma Giamartino
Senior Vice President-Investor Relations and Strategic Finance, CBRE	Chief Financial Officer, CBRE Group, Inc.
Group, Inc.
Robert E. Sulentic
President, Chief Executive Officer & Director, CBRE Group, Inc.

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OTHER PARTICIPANTS

Steve Sakwa	Stephen Sheldon
Analyst, Evercore ISI	Analyst, William Blair & Co. LLC
Anthony Paolone	Michael A. Griffin
Analyst, JPMorgan Securities LLC	Analyst, Citigroup Global Markets, Inc.
Jade Rahmani	Patrick Joseph O'Shaughnessy
Analyst, Keefe, Bruyette & Woods, Inc.	Analyst, Raymond James & Associates, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Greetings and welcome to the CBRE Q2 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Brad Burke. Please go ahead, sir.

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Brad Burke

Senior Vice President-Investor Relations and Strategic Finance, CBRE Group, Inc.

Good morning, everyone, and welcome to CBRE's second quarter 2023 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental materials.

Before we kick off today's call, I'll remind you that today's presentation contains forward-looking statements, including, without limitation, statements concerning our economic outlook, our business plans, and our financial outlook. Forward-looking statements are predictions, projections, or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our SEC filings. We have provided reconciliations of the non- GAAP financial measures discussed on our call to the most directly comparable GAAP measures, together with explanations of these measures in our presentation deck appendix.

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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q2 2023 Earnings Call	27-Jul-2023

I'm joined on today's call by Bob Sulentic, our President and CEO, and Emma Giamartino, our Chief Financial Officer.

Now, please turn to slide 5 as I turn the call over to Bob.

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Robert E. Sulentic

President, Chief Executive Officer & Director, CBRE Group, Inc.

Thank you, Brad. And good morning, everyone. Like last quarter, CBRE's results slightly exceeded our expectations, driven largely by better-than-expected growth in Global Workplace Solutions and aggregate growth in our resilient lines of business, which Emma will describe in detail, offset by weaker-than-expected property sales in Advisory Services.

It is notable when considering our performance that the prior-year comparison was especially difficult. We had our best quarter ever for core earnings per share in last year's second quarter, driven by exceptionally robust development earnings. To put this in perspective, our development earnings in last year's second quarter exceeded the level of development operating profit in any prior full year except 2021.

With this in mind, my remarks this morning will largely focus on how both CBRE and the macroenvironment performed relative to our expectations coming into the quarter, followed by some high-level comments on our outlook.

The economy performed better than we had anticipated going into the quarter in terms of both GDP and employment growth. However, the opposite was true with respect to interest rates, where increases in the last 90 days, coupled with expectations that rates will end the year higher than anticipated last quarter, pressured the elements of our business that are sensitive to commercial real estate capital flows, particularly our sales and financing businesses. We expect this pressure to continue for the remainder of the year.

At the same time, we are beginning to see signs in our own business that will eventually lead to improved performance, likely starting next year. For example, we capitalized 10 new development projects during the second quarter versus only 5 projects in the prior two quarters combined.

Our investment management team responsible for capital raising has noted a definitive change in investor sentiment in the last 90 days. Many of these investors remain cautious, but are now exploring how they can take advantage of the reset in pricing as they develop their 2024 commitment plans.

Looking ahead, we still anticipate a mild recession. However, we now expect the recession to occur at least one quarter later than we had previously thought, followed by a recovery beginning next year.

We realize that our investors are closely watching the US office market and bank exposure to commercial real estate loans. Our views regarding both are consistent with those we expressed at the end of the first quarter.

We now expect full-year 2023 core EPS to decline by 20% to 25% against last year's record level, with the majority of the decrease due to the delayed capital markets recovery. We continue to expect our resilient lines of business in aggregate to grow for the full year at a rate that is consistent with our expectations three months ago. Further, we believe there is a reasonable path to achieving a record level of core EPS in 2024, although reaching that goal now has become more difficult with the expected delay in the return of capital markets activity.

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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q2 2023 Earnings Call	27-Jul-2023

Emma will now take you through a more detailed look at our performance for the quarter and provide additional insights on our outlook. Emma?

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Emma Giamartino

Chief Financial Officer, CBRE Group, Inc.

Thanks, Bob. On a consolidated basis, growth of our resilient lines of business continued during the quarter. Together, these businesses, which consist of our entire Global Workplace Solutions business, loan servicing, property management, valuations and the asset management component of investment management, saw net revenue rise 10% in constant currency.

Please turn to slide 6 as I discuss our Advisory Services results. Weakness in capital markets had a pronounced effect on the Advisory business. Advisory net revenue fell 21% against a challenging prior year comparison, when net revenue grew by more than 20% versus Q2 2021. Our capital markets businesses, property sales and loan origination together saw revenue [ph] fell (00:06:46) 44% versus a 13% increase in the prior-year second quarter. In the Americas, property sales revenue fell 49%, more than expected, reflecting limited credit availability and the gap between buyer and seller expectations.

We are beginning to see an uptick in investor appetite for industrial assets where buyers will accept modest negative leverage due to the significant embedded rent gains over the past several years. In US multifamily, CBRE currently has $18 billion of deals in the market, more than double our volumes sold in the first half of the year.

Sales revenue fell 43% in EMEA and 11% in APAC, both in local currency. We are increasingly well-positioned in APAC. Notably, revenue in Japan has increased by 16% in local currency year-to-date, and this has become our most profitable advisory market outside the US.

In contrast with capital markets, leasing performed in line with our expectations, with revenue down 16% versus 40% growth in the prior-year second quarter. The leasing decline was driven by the Americas.

Leasing revenue grew in overseas markets as combined APAC and EMEA increased 6% in local currency. Among property types in the US, office was the weakest, with revenue down 30%, while industrial was down only 10% against the challenging prior year comparison.

Loan servicing revenues declined 6% due to significant prepayment fees in the prior year. Excluding prepayments, loan servicing revenue increased by 6%. Prepayment fees fell significantly beginning in the third quarter of last year, but the prepayment headwind should diminish going forward.

The valuation revenue declined 6% in the quarter in local currency, largely driven by our US business. In the US, we perform a significant volume of work for financial institutions. This business has slowed down this year as investors pulled back from investment into commercial real estate.

Property management net revenue rose 5% in local currency, increasing across most geographies, with notable strength in Continental Europe and Southeast Asia.

Turning to our GWS business on slide 7, net revenue increased 13% and SOP grew by 7% in the quarter, slightly exceeding our expectations. Growth was driven by the continued strength of our local business in the UK and expansion into the US and at enterprise FM clients where we increased both the scope and geographic reach of

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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q2 2023 Earnings Call	27-Jul-2023

our services. Demand for project management services also remained strong, led by our Turner & Townsend business.

SOP margins declined from the prior year second quarter due to higher OpEx investments to support our local businesses, continued geographic expansion, as well as costs associated with integrating recent acquisitions. Even though we expect these investments to continue through the balance of the year, full year SOP should be slightly better than we expected, with the margin in line with last year's level.

Our local business represents a tremendous growth opportunity, particularly in the US, which is expected to account for just 15% of this business line's net revenue this year. This business began with the Norland acquisition in late 2013. It has grown significantly from its original UK focus, and net revenue is expected to grow by over 20% this year.

Our pipeline remain elevated, more than 20% above the Q2 2022 level. The pipeline growth is driven by large first generation outsourcers that are focused on lowering the real estate costs.

Turning to our REI segment on slide 8. As expected, SOP was down significantly versus the prior year when we generated a record SOP from this segment. Looking at the investment management business, nearly all of the operating profit decline was driven by lower incentive fees and modest co-investment losses versus co- investment gains in last year's second quarter.

Assets under management fell by 1%, driven by lower market valuations. The foundation of our IM business, which earned base fees on core and core plus assets, remains healthy, and we expect co-investment gains and incentive fees to return when broader commercial real estate market conditions improve.

Turning to development, we realized a modest operating loss. As we have discussed before, it's important to look at this business over the long term versus any particular quarter. Our highly flexible financing structure allows us to hold on to completed assets if we believe they can yield better returns in the future, and we continually evaluate our portfolio with that in mind.

On a trailing 12-month basis, we generated $92 million in development operating profit compared to $544 million in the prior 12 months, a period of record performance. Due to anticipated asset monetizations in Q4 of this year, we expect higher operating profits for the full year than we realized over the trailing 12-month period. As Bob mentioned, investors have begun to selectively deploy capital into development, favoring well-located industrial and residential projects. Our pipeline increased slightly during the quarter, positioning us well for a market recovery.

Please turn to slide 9 for a discussion of capital management and our balance sheet. During the quarter, we raised $1 billion of capital through a senior unsecured bond offering, and shortly after quarter end, we raised an additional $350 million from refinancing and upsizing our euro term loan. We now have even more capacity to invest while maintaining an investment grade balance sheet.

We have a robust M&A pipeline and are evaluating multiple opportunities in the range of $1 billion. We expect these investments, if completed, will drive meaningful shareholder value. We did not repurchase any shares in Q2, but have repurchased $100 million of shares month-to-date.

Looking at free cash flow, we originally expected to generate just over $1 billion in 2023. We now expect this figure to be closer to $600 million to $800 million for two main reasons. First, as noted, our expectation for

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