Whether you think CBRE Group (CBRE: NYSE) is a buy depends a good bit on whether you buy the notion that there's a real recovery underway in commercial real estate. That's because the Los Angeles-based firm lays claim to being the world's largest CRE services company, employing more than 100,000 people in facilities and project management, transaction and consulting services, capital markets, brokerage services (loan origination and servicing), leasing and property management, and more.
That pretty much runs the gamut, and it also shows why CBRE got hammered by the pandemic, with revenue falling 5.8% year over year to $5.4 billion in the second quarter. That's almost a highlight. Adjusted net income fell 57.5% to $118 million and adjusted earnings per share fell 57.1% to $0.35 from the second quarter of 2019.
Building for opportunities like this
CBRE stock ended July at $43.81 per share, a nice bounce off the $29.17 for a 52-week low it posted in late March right after the pandemic slammed the doors on the U.S. economy. That leaves some room to run to reach the 52-week high of $64.75 just a month before that, in late February.
So, if you buy at around where it is now and sell when, and if, it hits that 52-week high again, you'd post a gain of about 48%. That's pretty good, especially if we're talking a relatively short time frame of, say, six months to a year, perhaps a bit longer.
But is this a realistic outlook for a commercial real estate stock? The top brass would say so.
"The pandemic has elevated the importance of workplace strategy on corporate agendas. Now, more than ever, clients will need the strategic insight, thoughtful advice, and reliable execution that CBRE and our people are best positioned to provide," says Bob Sulentic, president and CEO. "We have built the company for opportunities like this and intend to capitalize on it."
Diversity among industries and countries
Sulentic says that while CBRE felt the effects of the pandemic in every part of its business, the diverse mix of that business cushioned the blow, as did sustained growth of contractual business over the past decade, early moves to reduce expenses when COVID-19 struck, and a strong financial position and ability to sustain cash flow.
The company also says that industrial and multifamily deals were leading its recovery in June and that it sees a shift to e-commerce continuing to boost its industrial transactions, and all this is occurring while CBRE works to replenish its pipeline for future leasing and sales performance.
CBRE's diversity is not just across business activities but across the globe, including in Germany, China, and Mexico, which the company said saw notable increases in advisory leasing during the quarter. CBRE says it also saw strong investment sales performance in China, Korea, Mexico, and Switzerland.
A domestic downside offset by moderate global growth
Those international gains were offset by domestic losses, and this primarily is a U.S. company. Let's look at where those losses occurred. The company said in its quarterly report that results were adversely impacted by $25 million of incremental COVID-19 related costs and a $16 million donation to its COVID-19 relief fund. Together, that reduced earnings per share by $0.10 on their own, accounting for nearly 20% of that hit.
Property sales were off 50% year over year in the U.S., and advisory leasing fell 38%. Commercial mortgage origination revenue also was down, by 28% from the second quarter of 2019, and temporary shutdowns of most construction activity hit property management and advisory project management revenue.
But, again, "modest growth" was achieved in European, Middle Eastern, African and Asia Pacific markets, the company says. And its Global Workplace Solutions segment saw double-digit growth in the second quarter of 2020, which the company points to as an indication that its occupier clients will rely on CBRE during good times and bad.
Cash to borrow and buy as the economic future reveals itself
Free cash flow actually increased 120% to $70 million in the second quarter, and the company says it has a $245 billion loan servicing portfolio that continues to generate income and about $3.5 billion in total liquidity and still has $350 million of stock repurchase capacity under its authorized repurchase program, and this was after not buying back any of its own equities in the second quarter. That could always change if the company sees its own stock as a buying opportunity.
Sulentic, in the company's earning call, reflected that optimism. For instance, he says that its U.S. development business is expected to earn twice as much this year and next as it did at the peak of the last business cycle.
The company, in its earnings presentation, also notes that it will continue to prioritize preserving liquidity over pursuing large, discretionary capital outlays as it seeks "more visibility on the timing and strength of the economic recovery." The resources this firm has to put toward gaining that visibility are definitely a plus when considering investing in its stock.
Price discovery as a new office-use reality emerges
Of course, CBRE depends mightily on the use of office space among its clients and in all its markets. Sulentic says in the earnings call that investors have begun the process of price discovery over committing capital, causing a "precipitous decline" in leasing and sales activity.
"Occupiers are hesitant to make long-term decisions amid the uncertainty, preferring short-term lease renewals where possible," he adds.
But he also points out insight gleaned from major occupier clients on how office space will be used going forward, primarily by keeping office space available but spreading out the people in it and allowing more flexibility between working at home or in-house.
Looks like a strong consideration for a "buy"
CBRE seems well-positioned to respond to that trend with its worldwide advisory services. Its large stake in residential servicing for Fannie Mae and Freddie Mac only adds to that diverse income stream, and that, too, looks reliable.
That, together with its long history that speaks to resiliency and agility, I think adds up to CBRE showing signs of being a good buy among real estate stocks, especially at today's depressed price.