Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue, profitability, and cash flow exceeded expectations for the second quarter.
- Each business segment outperformed expectations for both net revenue and segment operating profits.
- Significant capital investments were made, including a $250 million commitment to development projects.
- The acquisition of Direct Line Global enhances capabilities in the rapidly growing data center management market.
- Increased full-year core EPS outlook to a range of $4.70 to $4.90, up from $4.25 to $4.65 previously.
Negative Points
- Global property sales revenue declined by 2% on a local currency basis and 3% in US dollar terms.
- Industrial leasing activity declined despite overall leasing revenue growth.
- Segment operating profit for REI was significantly lower than the prior year due to the absence of meaningful development project sales.
- AUM in Investment Management was offset by lower asset values and adverse FX movements.
- The sales activity in the US market is still relatively flat, with only a slight uptick in acquisitions.
Q & A Highlights
Q: Just starting with the GWS business. You talked about sort of the full year margin improvement being above last year, but all the cost sort of impact is going to take place in the second half, presumably second half is also going to be much higher than the first half. So how do we think about sort of annualizing the second half margin? Is that sort of a good run rate going forward for the business?
A: So Ronald, what you saw in Q2 is that we took a lot of cost actions in our margin within Q2 and at 10.1% was above what we are expecting and above what we achieved in Q1. And it's obviously not near the run rate that we expect to target. For the full year, we're expecting the overall margin to be above that 11.3% that we delivered last year. So you're going to see higher margins in the second half. And then going into next year, that run rate will be even higher than where we get to for the full year. But we're not going to get to the second half margins on a run rate basis.
Q: Maybe can you just talk about what you're seeing on the ground? What are you seeing in the pipeline? Obviously, maybe a better rate backdrop but what sort of gives you confidence and conviction that you're seeing these green shoots given that we have had fits and starts in the past?
A: Ronald, first of all, thanks for picking up coverage on us. We're thrilled to have Morgan Stanley following us. The first part of the answer to your question is very anecdotal. We had the quarter, we had in leasing and mortgage originations in the second quarter. And the positive activity has continued into the first part of the third quarter. There are some other things that are giving us confidence. For instance, we get insight from the fact that we do a lot of different things. We're not only are we an intermediary, but we're a principal. In our development business now, we are seeing demand for projects that we didn't expect and it's going to happen in the fourth quarter of this year that gives us confidence that other parts of the capital markets are acting that way. Obviously, there's a sentiment out there that there's going to be a couple of rate cuts or at least one rate cut this year. The bid-ask spreads are narrower than they were before, except maybe in office. Our investment sales brokers and mortgage brokers are more active and have stronger pipelines than they did before. Our work with office tenants, where we measure through all kinds of different mechanisms and surveys sentiment has gotten better. So we have this anecdotal evidence from the second quarter starting and then the third quarter. And then we have more technical evidence that causes us to think that we may well have gone through an inflection point on transactions that's going to impact leasing. It's going to impact sales. It's going to impact mortgage brokerage, and it's going to have a really nice impact in the fourth quarter on the profitability of our development business.
Q: Bob, you talked about the distinction between Turner & Townsend and just the more traditional commercial real estate businesses. I mean is that something that you would consider spinning off at some point? I mean, you kind of talked quite a bit about those differences and making this disclosure change. So it seemed like maybe you do think of this as being a bit different than the rest of what CBRE does?
A: Tony, it's different. But there's a lot of synergy between what Turner & Townsend does and what we do, and it's two-way synergy they operate in 60 countries around the world, and they're more substantial in parts of the world than we are. We've been able to introduce them to our client base in a number of places very successfully. Turner & Townsend grew over Vince Clancy's tenure 13% for many, many years on a compounded basis, more than a decade. Since they've been part of us, they've grown at 20%. Anecdotally, there are a couple of major corporate manufacturing plants that Trammell Crow Company and Turner & Townsend, are cooperating on to deliver the development services work and the program management work billion-plus dollar plant. We believe at Trammell Crow Company, and we believe that Turner & Townsend, and Vince and his team believe that those projects wouldn't have been landed by us, had we not had the ability for those two businesses to cooperate. Turner & Townsend would be a great public company, make no mistake about it. There's a lot of enthusiasm for companies like them in the public markets today. They're very unique even relative to other large program and project management firms and large engineering firms. But they fit really, really nicely with us. And we think there's going to be a great story long term there. We've put Vince on our board because we think there's so much synergy between what he and his business do and what the rest of our company does. So I hope they're a very long-term part of CBRE.
Q: On capital market side, could you characterize the tone and tenor from participants in the quarter. Property sales were still down year-on-year, but commercial mortgage surged. Could you please provide some color on what you're seeing?
A: So on the commercial mortgage side, we saw a strong uptick in loan origination, and that was primarily for refinancing. So there is a big uptick in loan source from debt funds. Volumes from debt funds increased by over 70% in the quarter. And that was all refinancing. They're offering very short-term bridge loans to bridge providers until the banks and the agencies pick up. We actually saw a decline in originations from banks and the agencies as well. So we expect that to pick up in the second half of the year as rates come down.
Q: On the leasing side, many office tenants continue to shrink on average, somewhere around 10%, 12%. But activity was so substituted the past two years, you are seeing an uptick. Could you talk about that and also comment on retail?
A: So on the office side, we are, we think we've stabilized in terms of size of transactions, and we're really seeing an uptick in volume, and we're seeing our uptick in terms of regionally we talked about it, you're seeing most of that increase in New York as occupiers are transacting across larger deals. We aren't seeing big movements in terms of square footage per transaction in terms of, obviously, rent per transaction, all of those metrics seem to have stabilized.
Q: Can you say whether the increase in guidance or the uptick in REI in the fourth quarter is predominantly due to the data center sales. I have in my coverage team homebuilders, for example, sell land parcels, they intended for residential to data center developers and they've generated huge gains, but those really are not as sustainable as their regular business.
A: So the uptick in the fourth quarter is large -- in REI, is largely related to the data center asset
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
