The CBRE Q2 2023 Earnings Call has begun with the host, Brad Burke, introducing the conference and reminding participants of the risks and uncertainties associated with forward-looking statements. Bob Sulentic, President and CEO, and Emma Giamartino, Chief Financial Officer, are also present. The results for the quarter slightly exceeded expectations due to growth in Global Workplace Solutions and other resilient lines of business, offset by weaker than expected property sales and advisory services.

CBRE had its best quarter ever for core earnings per share in the last year's second quarter due to robust development earnings. The economy performed better than expected in terms of GDP and employment growth, but there was an increase in interest rates and this has caused some pressure on the sales and financing businesses. There are signs that performance will improve next year, such as the capitalization of 10 new development projects and a change in investor sentiment. CBRE now expects a mild recession to occur at least one quarter later than previously thought, followed by a recovery beginning next year.

Bob discussed the expected decrease in core EPS for 2023 and a reasonable path to achieving a record level of core EPS in 2024, despite the delayed capital markets recovery. Emma then went on to discuss the 10% growth in the resilient lines of business for the quarter, but the advisory services saw a 21% decrease in net revenue due to the weakness in capital markets, with the property sales and loan origination together seeing a 44% decrease.

Investor appetite for industrial assets is increasing, with CBRE having $18 billion of deals in the market. Sales revenue fell in EMEA and APAC, but grew in Japan. Leasing revenue declined in the Americas, but grew in APAC and EMEA. Loan servicing revenue declined due to significant prepayment fees in the prior year, but should diminish going forward. Valuation revenue declined in the U.S. due to investors pulling back from investment in commercial real estate. Property management net revenue increased in most geographies, and GWS net revenue increased 13% and SOP grew by 7%.

In the second quarter of 2022, there was strong growth in the local business in the UK and US, as well as project management services. This was accompanied by higher OpEx investments to support local businesses and integration of recent acquisitions, resulting in a decline in SOP margins. The US is expected to account for 15% of the local business's net revenue this year. In the REI segment, SOP was down significantly versus the prior year, and in Investment Management, there was a decline in operating profit due to lower incentive fees and modest co-investment losses. Development realized a modest operating loss.

In Q2, the company raised $1 billion of capital through a senior unsecured bond offering and an additional $350 million from refinancing and upsizing their euro term loan. They have a robust M&A pipeline and are evaluating multiple opportunities in the range of $1 billion. They have also repurchased $100 million of shares month-to-date. However, their free cash flow expectations for 2023 have decreased from $1 billion to $600 million to $800 million due to the decline in earnings.

Trammell Crow Company is expecting to invest more in land acquisitions and broker recruitment, and they have revised their outlook for 2023. They now expect core EPS to decline 20-25% from the previous year, with advisory SOP declining by 20%, GWS SOP reaching over $1 billion with a margin in line with 2022 levels, and REI SOP in the low $300 million range. Core EPS in the second half of the year is expected to be heavily weighted to the fourth quarter.

The company is focusing on M&A opportunities and capital allocation over the next year and a half, and is encouraged by the progress they have made on a number of deals. They are also balancing this with buybacks, and anticipate that the fourth quarter will represent nearly three quarters of second half core EPS.

Bob Sulentic explains that there are three things that need to happen to get the capital markets back on track: the level of rates, the availability of debt, and the mindset of buyers and sellers. Although the situation is better than expected, it is still worse than expected and people are starting to act, which is a good sign. Sulentic believes that the recovery will be delayed until 2024 and will be more back half weighted.

Bob Sulentic of CBRE Group Inc. discussed the company's plans for M&A and capital allocation. He noted that they are pursuing $1 billion deals and smaller infill deals, and that the process of agreeing to a deal and working out the details can be lengthy. He also expressed confidence that they will be able to move their business forward strategically with some of the deals they are working on.

Emma Giamartino explains that the company is balancing its capital allocation between buybacks and M&A, and they expect to complete $600 million of buybacks in the second half of the year. She also mentions that there are some drags in GWS due to investments they are making, mainly related to acquisitions and building out local business platforms, but these are expected to steadily alleviate throughout the rest of the year and the GWS margin should be in line with last year.

In 2013, CBRE acquired Norland and entered the local or regional facilities management market. This acquisition has been a great success, with EBITDA increasing from $40 million to $230 million and expected to grow another 20% this year. However, investments are still required to launch into new territories. Recruiting is expensive, especially in the brokerage business, but CBRE is still expecting one of its best years of recruiting yet.

CBRE is taking advantage of the current market situation by bringing on new people and investing in land and brokers that were previously unavailable. To facilitate this, CBRE has issued term loans and senior notes to pay down their revolver and lower their net interest rate. This should help CBRE continue to grow in the future.

Bob Sulentic and Emma Giamartino discuss cash flow performance in the second quarter. Giamartino says to focus on their free cash flow on a trailing 12-month basis, which is estimated to be in the range of $600 million to $800 million. Sulentic notes that there has been an uptick in office leasing in New York City, with companies looking for the best space to create the best environment for their tenants.

Emma Giamartino discusses the conversation she had with their senior brokers and the Vice Chairman in New York, who reported that this will be his best year ever in leasing. This is due to clients wanting to rent the best space at record rental rates in order to create an environment for their people. This will result in the best buildings doing well, and the buildings at the bottom struggling and needing to be repurposed in order to provide places for these companies to go. Giamartino also notes that this is encouraging for companies that provide services to office buildings. Finally, she mentions that they are consistently focused on cost.

Bob Sulentic outlines the company's balance between managing its base costs and investing in future growth. He notes that the company expects to monetize its Trammell Crow assets if cap rates perform well and there is capital availability for buyers. He also mentions that the company has $17 billion worth of projects in development and another $13 billion in the pipeline.

Bob Sulentic discussed the company's M&A opportunities, emphasizing that they are looking for opportunities that will advance their ability to serve clients and bring in well-run companies with leaders to run parts of the business. He cited the Norland acquisition as an example of a successful acquisition that was unexpected a few years ago.

Bob Sulentic states that the company is looking for M&A opportunities both domestically and internationally. He also notes that the process of acquiring companies that operate across multiple countries can take a long time. Additionally, the company expects the Americas to decline the most in the second half of the year, EMEA to decline to a lesser extent, and APAC to perform the best, declining by mid-single digits.

Bob Sulentic of CBRE discussed the company's investment in Artificial Intelligence (AI). He stated that they are not entering the AI business, but are instead looking for ways to use AI to make their operations more efficient and cost-effective. He also warned against the hubris around AI, and emphasized the need to be focused and patient when investing in it.

Bob Sulentic states that the in-process pipeline could either stay flat or grow, depending on if new projects are started. He then explains that Hana is now a net positive to operating income, but is fading away due to their investment in Industrious. Emma Giamartino adds that Industrious operates the properties from Hana. Bob Sulentic then ends the call by thanking everyone for joining and informing them that they will talk again at the end of the third quarter.

This summary was generated with AI and may contain some inaccuracies.