2023-12-05 18:13:14 ET
Summary
- CBRE Group, Inc. posted better than expected Q3 results in late October, even if the company saw declining performance and profitability across key metrics.
- CBRE Group Q3 numbers and declining interest rates has triggered a 20%-plus rally in the stock in recent weeks.
- However, CBRE Group faces mounting headwinds in the commercial real estate sector and the stock might have gotten ahead of itself.
- An analysis around CBRE Group follows in the paragraphs below.
The only man who sticks closer to you in adversity than a friend is a creditor ." - Unknown.
Today, we take a look at CBRE Group, Inc. ( CBRE ) for the first time. Despite an increasingly challenging environment for commercial real estate, or CRE, the company posted better-than-expected Q3 results six weeks ago. The shares have rallied over 20% since those quarterly numbers were posted even as management offered up a reduced outlook for core earnings. The rise seems primarily due to the 75bps drop in the 10-Year Treasury yield (US10Y) in November, which substantially boosted the entire real estate space. However, is the rally justified? An analysis follows below.
Company Overview:
This global commercial real estate services and investment company in headquartered in Dallas, Texas, and broken down into three separate business divisions: Advisory Services, Global Workplace Solutions or GWS, and Real Estate Investments. The stock trades just above eighty bucks a share and sports an approximate market capitalization of just south of $24.5 billion.
Third Quarter Results:
October Company Presentation
CBRE Group posted its third quarter numbers on October 27th. The firm delivered non-GAAP earnings per share of 72 cents, a nickel better than expected. Revenues rose 4.5% on year-over-year basis to $7.87 billion, $450 million above the consensus.
Let's start with the good news. Revenue from CBRE's GWS unit grew 14% on a year-over-year basis to $2.231 billion, driven by Facilities & Project Management revenues.
October Company Presentation
Performance was anemic for the rest of the company's core businesses. Advisory Services sales fell 17% from the same period a year ago, driven by a deep decline (38%) from property sales.
October Company Presentation
In addition, both operating profits and revenues dropped in CBRE's Real Estate Investments division as some sales got moved back to 2024, incentive fees fell, and developmental sales cooled.
October Company Presentation
All in all, performance and profitability declined significantly across several key metrics from 3Q2022.
October Company Presentation
During the company's Q3 earnings call , management now sees 2023 core EPS retreating by mid-30%, compared with the 20%-25% decline expected in their previous guidance. However, leadership also believes 2023 will be the trough for CBRE earnings.
October Company Presentation
Analyst Commentary & Balance Sheet:
Since third quarter earnings were posted, KBW assigned a new Hold rating on CBRE with a $78 price target, while UBS ($85 price target) maintained its own Hold rating on the stock.
Only one out of every 40 shares of the outstanding float are currently held short. Since late May, several insiders have sold just over $1.2 million worth of equity collectively. That is the only insider activity in the shares so far in 2023. CBRE Group ended the third quarter with cash and marketable securities of just over $1.2 billion against just over $3.4 billion of long-term debt. Management is focused to keep its leverage ratio under 2 and has no significant long-term debt coming due until 2026.
October Company Presentation
The company repurchased $516 million worth of stock during the quarter and still has $1.5 billion left on an existing stock buyback authorization. Third quarter free cash flow came in at $306 million after subtracting $76 million worth of capital expenditures from $382 million of operating free cash flow.
Verdict:
CBRE Group, Inc. made $5.69 a share in profit in FY2022 on just under $31 billion in revenues. The current analyst firm consensus has earnings falling to $3.73 a share in FY2023. They do see earnings rebounding to $4.47 a share in FY2024 on sales growth of eight percent.
CBRE Group, Inc. stock is hardly cheap at nearly 22 times FY2023's projected earnings. Hopes for a rebound in FY2024 also seem premature. Based on Q3's run rate, CBRE has a free cash flow yield of approximately five percent, in line with the yield from a one-year T-bill. In my opinion, CBRE also would be better served in utilizing its cash flow in paying down debt than buying back stock at these valuation levels as well. On CBRE's Q3 earnings press release , the company's CEO had this to say about the third quarter.
Commercial real estate capital markets remained under significant pressure in the third quarter. As a result, we experienced a sustained slowdown in property sales and debt financing activity, which drove the decline in core earnings-per-share. This decline was exacerbated by delays in harvesting development assets which we will sell when market conditions improve ."
Trepp, Morgan Stanley Research
Given how much CRE debt ($540 billion in 2024 alone) needs to be rolled over and refinanced at much higher interest rates in the coming years as well as increasing delinquency rates across most CRE categories, it is hard to see the CRE space getting better before it gets much worse. Therefore, CBRE is an Avoid despite management's belief that 2023 will market the low-water mark for the company earnings. I also wouldn't be surprised if the stock gives up most of recent gains in the coming weeks and months.
November Delinquency Rate By CRE Type (Trepp)
I'm living so far beyond my income that we may almost be said to be living apart .”? Saki, The Unbearable Bassington.
For further details see:
CBRE Group: Navigating Through The CRE Storm