CBRE Group: Diversification Is Key To Its Success

Summary

• CBRE has navigated through FY12/2020 by generating record-high free cash flow and maintained flat revenues YoY.
• The company's diversification over property types, lines of business, and clients has demonstrated its resilience, and it is now positioned for a robust recovery profile into FY12/2021.
• The shares are trading on a current free cash flow yield of 4.0% which is attractive. We are buyers of the shares.

Investment thesis

Trading on a current free cash flow yield of 4.0%, we believe CBRE's (NYSE:CBRE) shares are attractive. We expect softness to remain in the office market YoY, but the company's diversified business exposure should result in a robust recovery overall.

Quick primer

With historic ties going back to 1906, CBRE is the largest global commercial real estate services and investment firm in terms of revenues. Around 40% of revenues is derived overseas.

Our objectives

CBRE reported stronger than expected Q4 FY12/2020 results. In this we want to assess the following:

• How the company was able to navigate through the pandemic effectively.
• The outlook for a sustained recovery into FY12/2021.

We will take each one in turn.

Diversification is the key

We will start with the conclusion here first. CBRE was able to book flat revenues YoY for FY12/2020 and adjusted EPS declining 12% YoY, primarily as a result of a diversified business spanning property types, lines of business and clients.

Segment revenue and adjusted EBITDA

Source: Company, created by author

Out of the three core business segments, the most at-risk was the most profitable Advisory Services due to its prevalent non-recurring and deal-driven nature. Here FY12/2020 sales declined 15.1% YoY despite a visible drop in office sales and leases, offset by exposure to industrial and multi-family property.

Q4 FY12/2020 Advisory sales revenue by property type

Source: Company, created by author

Q4 FY12/2020 Advisory leasing revenue by property type

Source: Company, created by author

Global Workplace Solutions ("GWS") saw revenues and adjusted EBITDA increase YoY, as demand for facilities management grew combined with cost reductions. Again we see the diversification of property types that have allowed this to happen.

FY2020 GWS revenue by industry

Source: Company, created by author

Real Estate Investments ("REI") saw double-digit growth as the pandemic drove demand for CBRE's asset management expertise and developments for high-quality assets. Assets under management reached a record high of $122.7 billion, growing 9% YoY.

From the evidence we see that CBRE's exposure to multiple end markets, property types and lines of business allowed the business to perform above market expectations during FY12/2020.

We now look at the outlook for FY12/2021 and beyond.

Scope for growth

Ending the year in a net cash position of $406 million, CBRE is in a position of strength to continue its recovery profile YoY. This came about from a historical high in free cash flow generation with splendid cash management. Consensus forecasts a normalization YoY into FY12/2021, but still maintains a growth curve compared to pre-FY12/2020 levels.

Annual free cash flow trend

Source: Company, Refinitiv, created by author

We expect to see transaction volumes regain a firm positive YoY footing from Q2 FY12/2021 for Advisory services, given the low hurdle as well as firm demand from industrial. Although we expect softness to continue in office demand, other end markets should stabilize YoY on a FY basis.

GWE looks set to grow adjusted EBITDA again at double-digits YoY in FY12/2021, given a strong pipeline from logistics, technology and life sciences/healthcare. The recurring nature of facilities management contracts and increasing adoption of outsourcing as businesses become more asset-light should continue to be tailwinds for the business.

REI is off to a good start already with record levels of AUM. Although the flexible office space solutions business Hana had negative EBITDA in FY12/2021, there should be scope to turn this around given changing working practices YoY.

From a cost perspective there will be a return to normalized operating expenditure YoY, but management are lining up $100m of cumulative cost reduction in order to counter this. Net-net, there should be potential for margin expansion.

From the above we feel that the outlook from revenues recovering YoY, as well as scope for margin enhancement.

Valuation

On consensus forecasts which we believe to be conservative, the shares are trading on a current free cash flow yield of 4.0% and 5.1% for FY12/2022. We believe these are attractive valuations for a business that has shown its resilience in a downturn and is positioned well to capitalize on opportunities YoY.

Risks

If transaction volumes weaken for the Advisory business from an all-sector encompassing economic slowdown, this will be detrimental to the company's earnings visibility. If interest rates were to rise significantly, financing costs would become more prohibitive slowing activity in commercial real estate. Property prices may also be negatively affected, placing risk on the REI business.

Conclusion

Whilst some concerns still remain over how the office market will re-emerge from the pandemic, CBRE has demonstrated in FY12/2020 that its diversification strategy has allowed it to absorb such negative developments. Although the outlook is not plain sailing, we do anticipate strong capital flows into commercial real estate in areas such as industrial, logistics, technology and life sciences/healthcare. As CBRE benefits from these trends, its free cash flow generation should allow for an attractive yield. We are buyers of the shares.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.