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A month has gone by since the last earnings report for CBRE Group (CBRE). Shares have lost about 3.9% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is CBRE due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
CBRE Group Beats on Q4 Earnings on Resilient Business
CBRE Group reported fourth-quarter 2020 adjusted earnings per share of $1.45, handily beating the Zacks Consensus Estimate of 96 cents. Moreover, the figure climbed 9.9% year on year.
The company generated revenues of $6.9 billion, handily outpacing the Zacks Consensus Estimate of $6.54 billion. The revenue figure, however, compares unfavorably with the year-ago quarter’s $7.1 billion. Moreover, fee revenues were down 7.1% (8.4% in local currency), year on year, to $3.4 billion.
Nevertheless, adjusted EBITDA climbed 9% (7.3% local currency) to $753 million.
Despite the pandemic’s adverse impact on property leasing and sales, quarterly results reflect the benefit from expanding its resilient business in recent years.
Bob Sulentic, president & chief executive officer of CBRE noted, “Our broad diversification across four key dimensions – property types, lines of business, geographic markets and clients – has served us well compared with prior downturns.”
Moreover, he pointed that “we still expect to achieve a minimum of low double-digit average annual adjusted earnings per share growth from this year through at least 2025, absent a recession, with meaningful upside potential from additional capital allocation.”
For full-year 2020, the company reported adjusted earnings per share of $3.27, down from the prior year’s $3.71. Revenues of $23.8 billion edged down 0.3% year on year.
Notably, on Feb 22, CBRE announced the acquisition of a 35% interest in Industrious, a provider of flexible workplace solutions in the United States. The company intends to raise its total stake to 40% in the coming weeks. In the second quarter, Hana will be combined with Industrious per the agreement.
Quarter in Detail
The company’s Advisory Services segment reported a year-over-year revenue decline of 12.6% (13.7% local currency) to $2.46 billion. Fee revenues decreased 13% (14% local currency) to $2.2 billion.
Results highlight the adverse impact of the pandemic on the higher-margin property lease and sales revenues, triggering a decline in adjusted EBITDA during the fourth quarter.
Advisory leasing revenues dipped 28% (29% in local currency) as large office occupiers continued keeping leasing decisions on hold. Leasing activity was soft in most parts of the world, with U.S. leasing revenues plunging 36%. However, globally industrial leasing revenues increased 20% on e-commerce and provided some support.
Global property sales revenues slid 15% (16% in local currency) though capital flows into commercial real estate improved from the earlier days in the year. Nevertheless, strong industrial and multifamily activity supported performance of the United States with sales revenue declining only 5%.
Encouragingly, commercial mortgage originations were impressive, highlighting a surge in government agency lending. Commercial mortgage revenues jumped 49% (same in local currency) year on year. Refinancing fueled lending activity and loan sales improved sharply. Valuation revenues increased 4% (2% in local currency), while revenues from property management and advisory project management services slipped 4% (6% in local currency).
However, the GWS segment registered an increase of 2.6% (1.5% in local currency) in revenues to $4.16 billion. Fee revenues climbed 3.3% (1.5% in local currency) to $906 million. Results underline solid gains in Continental Europe and North Asia as well as cost-control actions, aiding the adjusted EBITDA to grow 28.8% (26.6% in local currency) to $161 million.
The company noted that solid fee revenue growth was strained due to lower transaction activity for GWS occupier clients. Nonetheless, facilities management growth was particularly strong in Continental Europe. Increase in Project management fee revenues reflects decent growth in Continental Europe, North Asia and India/Southeast Asia/Middle East/Africa.
The Real Estate Investments segment recorded 17.2% (15.2% in local currency) increase in revenues to $289 million. Adjusted EBITDA climbed substantially to $110 million from the year-ago period’s $43 million on solid performance of both investment management and U.S. development activity. Investment management revenues climbed 34% (30% in local currency) to $150.2 million.
At year-end 2020, assets under management (AUM) reached a record high for the company and aggregated $122.7 billion, reflecting an increase of $8.2 billion ($4.9 billion local currency) from third-quarter 2020. This highlights higher asset valuations, net capital inflows and favorable foreign-currency movement.
Apart from this, in-process development portfolio reached a new record for the company at $14.9 billion, underscoring an increase of $0.1 billion from the September-end quarter. The pipeline increased by $0.2 billion from the prior quarter to $6.1 billion.
During the quarter, the company acquired a provider of facilities and technical maintenance services in Australia.
Balance Sheet Position
CBRE Group exited 2020 with cash and cash equivalents of $1.9 billion, up from $971.8 million as of Dec 31, 2019.
As of Dec 31, 2020, the company had $4.6 billion of total liquidity. This comprised $1.8 billion in cash, in addition to the ability to borrow a total of $2.8 billion under its revolving credit facilities, net of any outstanding letters of credit. The company’s net leverage ratio was 0.21x as of the same date. This is below the company’s primary debt covenant of 4.25x.
During the December-end quarter, the company did not repurchase any of its stock. Currently, it has $350 million of stock-repurchase capacity.
CBRE Group provided qualitative guidance for the year.
In the Advisory business, the company expects transaction revenue growth in mid-to-high single digit range and projects high-single digit growth across rest of Advisory on combined basis.
In the GWS segment, revenue is expected to rise in high-single digit range and projects growth to accelerate to low double-digits by year end. Further adjusted EBITDA growth is anticipated to slightly outpace revenue growth.
In the Real Estate Investments segment, the company projects investment management adjusted EBITDA to rise mid-to-high single digits. Also, the company anticipates mid-single digit adjusted EBITDA growth from US development business.
The company expects cost management generating more than $100 millionof incremental benefits in 2021 and it is expected to more than offset reversal of temporary measures.
Finally, the company anticipates 2021 adjusted EPS to likely approach 2019 pre-pandemic peak,excluding impact of discretionary capital allocation.
Moreover, the company expects to achieve a minimum of low double-digit average annual adjusted EPS growth through at least 2025, absent a recession.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 21.93% due to these changes.
Currently, CBRE has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. It comes with little surprise CBRE has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
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