The CBRE Q4 2023 Earnings Conference Call and Webcast began with a welcome from the operator, followed by a presentation by Brad Burke, Head of Investor Relations and Treasurer. The presentation contained forward-looking statements and a discussion of risks and uncertainties. The call was then turned over to Bob Sulentic, CBRE's Chair and CEO, who highlighted the company's strong performance in the fourth quarter of 2023 and throughout the year despite challenges in the commercial real estate market.

The article discusses how CBRE has been able to offset market-driven revenue declines through its resilient businesses. This includes recent wins such as the acquisition of J&J Worldwide Services and a strategic partnership with Brookfield Properties. The company expects to see increased transaction volumes and achieve mid-teens percentage growth in core EPS in 2024. Emma Giamartino will provide more details on segment performance and the company's outlook.

CBRE has been using the term "resilient businesses" to refer to those that perform well in a down market cycle, and this includes their GWS segment, loan servicing, valuation, property management, and recurring asset management fees. These businesses have seen significant growth since the global financial crisis and are expected to continue growing in the coming years. In the fourth quarter of 2023, net revenue and SOP in the advisory segment remained stable, with slight increases in leasing and commercial mortgage origination. GWS had a strong quarter with double-digit growth in net revenue and SOP, driven by a 14% increase in facilities management net revenue.

The GWS local business has been experiencing significant growth in net revenue, driven by large-scale program management work. The REI segment also saw an increase in SOP, driven by the earlier than expected monetization of assets. Investment management AUM increased in the fourth quarter, but decreased for the year due to lower private asset values. The company plans to deploy over $2 billion in capital for the next 12 months, including M&A and co-investment commitments. The company also repurchased 8 million shares in 2023 at an attractive value.

In 2024, the company expects to have improved free cash flow of at least $1 billion, driven by the reversal of certain expenses from the previous year. They also anticipate ending the year with net leverage around one turn. In terms of their outlook for 2024, the advisory segment is expected to see mid- to high single-digit growth in net revenue and mid-teens growth in SOP. This is due to fixed cost leverage and cost reduction initiatives. Capital markets revenue is expected to grow by mid-single digits, reflecting improved investor sentiment and real estate allocations. Leasing is also expected to grow modestly, with indications that office demand is gradually increasing.

The company expects to see growth in their advisory business lines, particularly in the GWS segment and local business. They also anticipate strong demand in their enterprise business, with significant growth in project management led by Turner & Townsend. However, they expect SOP to be slightly lower in REI due to last year's single development portfolio sale. In Investment Management, they expect a modest increase in operating profit, but development operating profit will be lower due to selling projects at higher cap rates.

The company is optimistic about its current market cap rates and sees potential for significant operating profit in its in-process portfolio and pipeline. However, their EPS forecast for 2024 is contingent on certain factors, including interest rates and the US economy. They expect a heavier weighting of earnings in the second half of the year and anticipate a return to prior record earnings in 2025. There may be some drags on EPS from corporate segment taxes and interest expense.

The speaker is discussing the company's outlook and how it relates to their segment level guidance. They mention that their EPS will likely be slightly above the midpoint of their range, but they have built in some conservatism due to rising rates. The corporate segment will see a slight uptick due to improved financial performance and bonuses. The speaker also mentions that their growth in SOP and transactional business lines will impact their outlook. They expect to see benefits from their capital investments, particularly the acquisition of J&J, in the next year. They anticipate getting three quarters of the expected EBITDA from J&J in the year.

The remainder of REI co-investments will be weighted towards 2025 and beyond. The company plans to balance capital deployment between M&A, co-investments, and share buybacks. In the fourth quarter, there was more emphasis on M&A due to the J&J acquisition. The company expects to see an improvement in overall advisory margin of about 100 basis points in 2024.

The speaker discusses the company's cost reduction plans and the expected recovery in their transactions business, which should lead to increased margins. They also mention the recent acquisition of J&J and its impact on margins. However, they do not anticipate a significant change in margins over time, but rather a gradual increase. The next question is about the company's volume expectations in the multifamily market, given the current uncertainty and credit issues. The speaker mentions that the Trammell Crow Company, which has a significant portion of its projects in multifamily, is taking on new land sites and underwriting them at expected returns. They also note that there is pressure in the multifamily market due to recent development and cost of leverage.

The speaker believes that the high vacancy rate in the multifamily market will self-correct over the next few years due to a decrease in new developments and an increase in demand for rental properties. They are optimistic about the future of Trammell Crow Company and their investment management business. They expect the GSEs to remain flat or slightly increase this year. They also believe that the office leasing market has bottomed out and that 65% of their business is in Class A properties. They base this belief on research and anecdotal evidence.

The occupancy and square footage per person in offices has decreased compared to 2019, with many companies pressuring employees to return to the office. However, there is evidence that companies are investing in creating better office environments, leading to record rents for Class A buildings. CBRE sees this as a large opportunity and has recently announced a partnership with Brookfield. The future of the office real estate market is expected to be better than the current situation, with potential growth in outsourcing and leasing. The topic of infrastructure is also mentioned.

The J&J acquisition has strengthened CBRE's relationship with the Department of Defense and has led to increased investment in infrastructure, particularly in digital data centers. The company is also looking to expand its infrastructure investment management business and is currently working on large projects in this area. However, real estate remains the company's core business for now. CBRE has a strong appetite for pursuing large acquisitions and views M&A as a key component of its strategy.

The company is committed to growing through mergers and acquisitions in all of its businesses. They have a strong capability to identify opportunities and a unique corporate development team. They have a strong balance sheet and are willing to use it for M&A, but will only pursue deals that make financial sense and are easy to integrate. There has been recent activity in the capital markets, with potential fluctuations based on interest rates.

The speaker discusses the decline in capital markets activity in 2023 and the expectation for a mid single-digit growth rate in 2024. They also mention the potential for upside if the recovery is faster than expected or if rates decrease. The speaker also mentions that cost savings initiatives have been factored into their outlook, with a focus on reducing costs in their advisory business and identifying opportunities for $150 million in cost savings.

The company expects to see cost savings in the advisory segment in the coming year, which will largely offset bonuses and compensation. In the REI segment, development costs have come under control and the company has secured a good number of development opportunities with favorable spreads between current cap rates and yields. The company is well positioned for future profitability in this business.

Emma Giamartino clarifies that the company still has strong visibility into returning to peak levels of EPS in 2025, with a high level of confidence in delivering $1.8 billion of SOP this year. The main risk to achieving this outcome is a potential delay in the recovery this year, which would make the hurdle for transactional SOP slightly higher next year.

During a recent conference call, Alex Kramm asked about the company's cost base and incremental margins for their transactional business. Emma Giamartino responded that their incremental margins are in the low to mid-30s for both capital markets and leasing, with a 5% change resulting in a 3% delta in EPS for leasing and a 2% change for sales. CEO Bob Sulentic thanked everyone and said they look forward to connecting again in 90 days.

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