On August 31, 2016, S&P Dow Jones Indices and MSCI moved stock exchange-listed Equity REITs and other listed real estate companies from the Financials Sector of its Global Industry Classification Standard (or GICS) to a new Real Estate Sector.
GICS is the industry classification methodology that both companies rely on for their proprietary stock market indices, and it serves as one of the primary classification systems for equities for investors around the world. The Real Estate Sector is the first new headline sector added since GICS was created in 1999.
The change reflected the growth in size and importance of real estate, primarily Equity REITs, in the economy. Over the past 25 years, the total equity market capitalization of listed U.S. Equity REITs has grown from $9 billion to more than $1 trillion.
The Real Estate Sector represents nearly 4% of the equity market capitalization of the S&P 1500. Equity REITs make up about 98% of the equity market capitalization of the sector, and real estate management and brokerage companies make up the remainder.
As a REIT analyst, I research over 100 Equity and a few Mortgage REITs (mostly commercial mREITs), and I have decided to add coverage to the real estate brokerage companies, including CBRE Group (CBG), Jones Lang LaSalle (NYSE:JLL) and Marcus & Millichap (NYSE:MMI).
Today. I have decided to commence coverage on CBRE Group.
A Global Real Estate Powerhouse
CBRE is the world's leading commercial real estate services and investment company serving investors and occupiers in more than 100 countries around the world. The company's key services include occupier outsourcing, property management, property leasing and sales, mortgage services, appraisal/valuation, investment management and development services.
It has more than 75,000 employees (excluding affiliate companies) and produced revenue of $13.1 billion in 2016. CBRE has been included in the Fortune 500 since 2008, ranking #259 in 2016. It was also named America's 15th Best Employer by Forbes in 2016, and has been one of Fortune's "Most Admired Companies" in the real estate sector four years in a row.
As the largest commercial real estate services firm, CBRE enjoys an advantaged position in mergers & acquisitions. As illustrated below, the company has pursued and won 5 of the 12 mergers noted below:
Just a few days ago, CBRE announced it had acquired Capstone Financial Solutions, a national boutique commercial real estate finance and consulting firm in the U.S. The acquisition enhances CBRE's debt and structured finance service offering nationally. while providing client service advantages in the Midwest.
Also, last month the company recently acquired Floored, a leading software service platform that produces scalable interactive 3D visualization technologies for commercial real estate. CBRE continues to invest in internal data and technology initiatives that will help people deliver value for clients.
The Balance Sheet
CBRE's balance sheet remains highly flexible, with no required debt repayments until 2019. The company ended 2016 with more than $3.5 billion of available liquidity, including nearly $700 million of cash and $2.8 billion of undrawn capacity on the revolver credit facility. At year end, its net debt was 1.2x adjusted EBITDA.
The Latest Earnings
CBRE achieved double-digit adjusted EBITDA growth in 2016 for the company overall and for each of the regional services businesses. Its 17.9% margin of adjusted EBITDA on fee revenue exceeded the 17% target established at the beginning of the year. As illustrated below, CBRE 2016 achieved a 17.8% return on invested capital in 2016.
In 2016, revenue rose 20% to $13.1 billion. Fee revenue increased 13% to $8.7 billion. Organic fee revenue growth was 5% in local currency excluding contributions from all acquisitions. Adjusted EBITDA rose 10% to $1.6 billion or 13% excluding the impact of currency movement and hedging. Adjusted EPS was up 12% to $2.30 a share or up 15% excluding the impact of currency movement and hedging.
As illustrated below, occupier outsourcing revenue rose 55% in local currency to $6.1 billion, while fee revenue increased 62% in local currency to $2.3 billion. The growth rate was 14% for both revenue and fee revenue without contributions from the acquired Global Workplace Solutions business.
Leasing revenue reached $2.7 billion, up 7% in local currency. CBRE's capital markets business, property sales and mortgage services totaled $2.3 billion in revenue, reflecting 5% growth in local currency. The overall business mix continued to shift towards more recurring revenue, with contractual fee revenue comprising approximately 42% of total fee revenue for the company, up from 37% in 2015.
As seen below, fee revenue in Q4 increased 6% to $2.7 billion. Organic growth in fee revenue was 5%, comprising the vast majority of growth for the quarter. Adjusted EBITDA for the quarter rose 10% to $568 million or 13% without the impact of all currency movements. This increase is notable coming on top of 26% growth in Q4 2015.
Adjusted EBITDA margin of 21.4% on fee revenue improved 110 basis points from Q4 2015. Adjusted earnings per share in U.S. dollars increased 15% to $0.93 for the quarter on top of 19% growth in Q4 2015.
Occupier outsourcing continued to produce strong growth. Fee revenue - including from the acquisition of Global Workplace Solutions, which is now included in both the current and the prior quarter year - increased 10% globally. Global property sales revenue increased 8%. Asia-Pacific sales revenue rose 35%, reflecting strength in Australia, Greater China and Singapore as well as in the especially large transaction in Japan.
Sales revenue also rose solidly in EMEA, paced by robust growth in France as well as in Belgium and Germany. This more than offset a modest decline in the United Kingdom as investors continue to adjust to the post-Brexit environment. U.S. property sales revenue was largely unchanged compared with Q4 2015. CBRE outperformed the market in U.S. investment sales, with a 140 basis point increase in market share in Q4, according to Real Capital Analytics.
The commercial mortgage services business continued to perform very well, with revenue rising 32%. This growth was driven by strong gains from mortgage servicing rights as well as increased loan originations with U.S. government-sponsored enterprises and life insurance companies.
THe company's loan servicing portfolio stood at $145 billion at year end, up $10 billion from 2015. Global leasing revenue increased 6%. Asia-Pacific posted double-digit growth, with revenue gains in nearly all countries, most notably, Greater China, Japan and Singapore. EMEA saw solid growth of 6%, led by Germany, Italy and Poland. U.S. leasing revenue rose 4%. Valuation revenue increased 6% for the fourth quarter, paced by EMEA. Both revenue and fee revenue from property management services were up 4%.
Fee revenue for this business was up 14% in 2016, excluding the direct contributions from the acquired Global Workplace Solutions business. Q4 2016 was the first full quarter where both acquired and existing outsourcing businesses were included in both current and prior-year results.
As illustrated below, in Q4, CBRE signed 47 new outsourcing contracts and 40 expansions.
It also reported strong returns in the Investment Management business. Adjusted EBITDA for this business totaled $15 million for Q4 2016, down from a particularly strong prior-year Q4. Assets under management ended the year at $86.6 billion.
CBRE's Development Services had a record year in 2016 and another strong quarter in Q4, though earnings declined, as expected, from a particularly strong Q4 2015. For Q4 2016, this business produced $48 million of EBITDA. Development projects in process totaled $6.6 billion, down $100 million from year-end 2015. The pipeline totaled $4.2 billion, up $600 million from a year ago
The company set new records in 2016, with more than $13 billion of revenue and nearly $1.6 billion of adjusted EBITDA. It expects to achieve earnings per share for 2017 in the range of $2.35-2.45.
How Does CBRE Stack Up?
First let's look at CBRE's earnings history, and as you can imagine, the company took a hit because of the Great Recession.
It does not pay a dividend, and based on the P/E multiple (of 15.3x), CBRE is trading below normalized levels, suggesting there is some margin of safety.
However, given CBRE's reliance on fee revenue, I am recommending an ENTRY price closer to $30.00. When I buy a stock with no dividend, I want to make sure I am getting the best deal as possible, since the only way that I am going to generate Total Return is via share price appreciation. Also, I don't have the same barometer that I do with a REIT, since REITs must pay out at least 90% of taxable income in the form of dividends. In conclusion, I am initiating a $30.00 price on CBRE stock.
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Author Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.
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