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Elevator Pitch
My investment rating for CBRE Group, Inc. (NYSE:CBRE) stock is a Buy.
With my earlier November 22, 2021, write-up, my focus was on CBRE's capital investment and capital return. My attention turns to CBRE's downside protection and upside potential in this latest update. I have decided to upgrade my investment rating for CBRE from a Hold in the past to a Buy now, after considering its defensive business mix and inorganic growth potential.
Diversified And Defensive Business Mix Offers Downside Protection
It is natural that certain investors are worried about the underperformance of CBRE during the current downturn in the commercial property services market. In my opinion, such concerns are overdone to a large extent, as CBRE has a much more diversified and a more defensive business mix which will limit downside risks for its financial performance in difficult times.
Firstly, CBRE has a presence in a larger number of markets now as compared to the past. In its June 2023 corporate presentation slides, CBRE revealed that the company currently has business operations in more than 100 countries. In comparison, CBRE only had a presence in 60 countries back in 2010. CBRE also cited the example of Japan growing to become the "second largest country behind the U.S. by EBITDA" for its advisory business segment at Morgan Stanley (MS) 2023 U.S. Financials, Payments & CRE Conference on June 14, 2023. Therefore, CBRE is currently more geographically diversified.
Secondly, CBRE's relationships with its customers are "stickier" than what they used to be 10 years ago, so it will be relatively easier for CBRE to retain clients. In 2012, less than a quarter of CBRE's 100 largest clients utilized four or more of the company's services. Today, about four in five of CBRE's 100 biggest customers are paying to use four or more of its services as indicated in its corporate presentation.
Thirdly, CBRE generates a greater percentage of its sales from its top customers as compared to what it did previously. The major clients which account for a more sizeable portion of CBRE's top line tend to be larger enterprises with strong financial positions as opposed to small and mid-sized enterprises (SMEs) which have a higher risk of going out of business. Specifically, CBRE indicated in the company's corporate presentation that the revenue contribution of its 50 largest customers increased from the mid-twenties percentage level for 2012 to almost 40% in 2022.
Lastly, CBRE's current business mix is defensive in terms of both service and property type. At MS' June 14, 2023, investor conference, CBRE disclosed that the EBITDA contribution from its "resilient lines of businesses" (e.g. facilities management) grew from approximately 20% in 2007 to above 50% in 2022. Separately, the relatively more economically-sensitive office property segment represents a relatively lower 15% of CBRE's property sales now, versus more than a third in 2007.
Upside Potential Driven By Financial Capacity To Invest
Investors want to invest in companies who can deliver decent results in an industry downcycle and have the ability to invest for future growth in anticipation of the eventual industry upcycle, and CBRE fits the bill. In the preceding section, I touched on CBRE's defensiveness; in this section, I assess CBRE's financial capacity and its M&A pipeline.
CBRE had a net debt-to-EBITDA or net leverage metric of just 0.6 times as of the end of Q1 2023 as highlighted in its June 2023 corporate presentation. The company also has an investment grade or BBB+ rating from S&P Global. In that respect, CBRE has lots of room to either leverage up or secure other forms of hybrid (e.g. quasi-debt, quasi-equity) financing to fund its proposed acquisitions. Specifically, CBRE mentioned at the Morgan Stanley U.S. Financials, Payments & CRE Conference that it could have acquisition firepower amounting to as much as $5 billion, assuming that it gets to a net leverage ratio of 2 times.
Between the beginning of 2019 and end-Q1 2023, CBRE had allocated close to $3 billion to M&As. Looking forward, CBRE highlighted at the MS June 2023 investor event that it has "multiple acquisition opportunities exceeding $1 billion that we hope to convert over the next 12 months."
There is significant upside potential that CBRE can realize with future acquisitions, considering two key factors.
One factor is pricing. CBRE emphasized that "the bid-ask spreads (for potential M&A transactions) are starting to close", implying that valuations for acquisition targets are becoming more attractive. This means that CBRE has a great opportunity to execute on value-accretive acquisitions.
The other factor is the chance for CBRE to gain a greater foothold in the property investment management space. CBRE acknowledged at the Morgan Stanley investor conference in June that it is "not leading in the real estate investment management space", unlike "all of our other lines of businesses" where the company is the market leader." As such, M&As could allow CBRE to leapfrog its other competitors in terms of market share for the property investment management sector.
Closing Thoughts
I view CBRE's shares as deserving of a Buy rating. CBRE's downside is protected by its defensive and diversified business mix; while the company has the chance to realize significant upside by executing on value-accretive M&A deals.
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