CBRE Group: Resilience To Real Estate Headwinds Makes It A Buy (Rating Downgrade)

MOZCO Mateusz Szymanski

The existent property is suffering aggregate headwinds, and that was reflected successful CBRE Group, Inc.'s (NYSE:CBRE) FY2022 results, and peculiarly successful nan results of its 4th quarter. In Q4, halfway EPS was $1.33 which represents a ~26% year-over-year decline. In fact, most of nan cardinal business indicators were down successful nan 4th quarter. Revenue was down ~4%, nett gross decreased ~11%, halfway EBITDA came successful ~30% lower, GAAP EPS suffered a ~88% decline, and halfway EPS was ~26% lower.

Still, fixed nan headwinds, things could person been overmuch worse. These headwinds see a weakening economy, rising liking rates, marketplace declines, and constrained in installments availability. Despite these headwinds, nan institution was capable to somewhat transcend expectations acknowledgment to spot successful nan Advisory and Global Workplace Solutions segments. Looking astatine nan full year, things are not arsenic bad, pinch afloat twelvemonth halfway EPS increasing ~7% to $5.69, nett gross up ~10%, and Core EBITDA somewhat higher. CBRE banal besides managed to present a ~75% free rate travel conversion.

CBRE Investor Presentation

One of nan cardinal things mentioned during nan company's earnings call was that nan cyclically resilient business conception performed peculiarly well. These businesses are mostly focused connected outsourcing services and see things for illustration task guidance and accommodation management. In position of plus classes, logistics performed very well. CBRE estimates that astir 45% of its halfway EBITDA comes from resilient business segments, which helped offset a larger-than-expected diminution successful transactional revenue.

Given nan size and scope of CBRE successful nan existent property industry, it is very absorbing to perceive from them really nan different spot types are performing. The institution shared that multi-family and business fundamentals stay strong, but pinch occupancy declining somewhat from highest levels and rent maturation moderating. On nan different hand, agency remains highly challenged, and nan CBRE believes occupancy will not travel adjacent to pre-pandemic levels anytime soon. This is different important headwind for CBRE, arsenic a small complete 50% of its leasing comes from nan agency sector, moreover if that is down from ~70% successful nan past. The institution expects much of its income watercourse successful nan leasing business to progressively travel from business comparative to office.

2025 Core EPS Target

The institution had antecedently shared pinch investors a 2025 financial target of delivering halfway EPS betwixt $8 and $9 by year-end 2025. The institution provided an update connected this target, saying that contempt nan headwinds it still believes it tin scope that level of earnings, but that it is apt to return it an other 12 to 18 months to present this level of earnings. That intends nan institution expects halfway net to scope ~$8.5 by astir FY26 aliases FY27.

It is simply a small spot disappointing to spot nan institution move nan target day to scope this net level, but it is understandable fixed nan authorities of nan existent property market. Our solid half-full return is that it is affirmative that astatine slightest nan institution is still aiming for double-digit compound halfway EPS growth.

Balance Sheet

One point that CBRE has going successful its favour is simply a very beardown balance sheet that should let it to prehend charismatic M&A opportunities if they coming themselves. The institution mentioned during nan convention telephone that it is consenting to spell up to 2 times leverage for a transformational deal, possibly moreover somewhat higher. Currently, CBRE is operating pinch very small leverage and has comparatively mini amounts of indebtedness maturing soon. Its full indebtedness is ~$1.7 billion, which is offset by ~$1.3 cardinal successful rate and short-term investments, resulting successful nett indebtedness of only ~$416 million. The resulting nett leverage is ~0.14x.

CBRE Investor Presentation

Guidance

Unsurprisingly, fixed nan authorities of nan existent property market, nan company's guidance for 2023 is that Core EBITDA is expected to diminution by a high-single-digit percentage, while Core EPS is expected to diminution by a low-to-mid double-digit percentage. While 2023 is expected to beryllium a reliable twelvemonth for nan company, we stay optimistic astir its net maturation imaginable erstwhile nan existent property marketplace recovers. While it is disappointing to spot net decline, it is reassuring to spot that CBRE Group, Inc. is proving resilient and is maintaining a bully grade of profitability done nan downturn.

Valuation

CBRE Group, Inc. shares person gone up ~15% since our erstwhile article, wherever we based on it was a awesome clip to bargain nan shares. This compares rather favorably to nan ~4% nan S&P 500 Index (SP500) has delivered since then. Despite nan headwinds, we proceed to judge shares are undervalued, moreover if they are somewhat much costly now. Given nan uptick successful nan valuation, we are adjusting our standing to "Buy" from "Strong Buy" previously, but we still judge shares are astatine an charismatic price.

As tin beryllium seen below, CBRE shares are still trading beneath nan ten-year mean EV/EBITDA aggregate and a comparatively debased worth for what we judge is simply a value business. Another measurement to deliberation astir nan valuation is that shares are trading astatine only ~10x its halfway EPS target of ~$8.50 that it expects to scope successful nan adjacent fewer years.

Data by YCharts

Risks

The biggest consequence we spot for CBRE Group, Inc. investors is that nan company's guidance assumes a mild recession arriving soon, but it could move retired to beryllium a terrible recession. The consequence is mitigated by nan company's diversification, resilient business segments, and beardown equilibrium sheet. That said, shares could still diminution importantly if a recession arrives aliases if nan existent property marketplace deteriorates further, moreover if nan diminution proves temporary.

Conclusion

The biggest takeaway from CBRE Group, Inc.'s caller net was that nan existent property assemblage is facing important headwinds, but that nan institution is proving resilient. It is being peculiarly helped by outsourcing services, specified arsenic task guidance and accommodation management, while transactional gross is being importantly impacted. The institution is besides seeing immoderate headwinds from nan agency plus class, which remains nether important unit owed to nan debased beingness occupancy resulting from nan work-from-home trend. Still, nan institution reaffirmed its committedness to scope a Core EPS of ~$8.5 successful nan adjacent fewer years, and CBRE Group, Inc. shares proceed to look attractively priced.

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