CBRE : Transcript

Corrected Transcript

24-Feb-2022

CBRE Group, Inc. (CBRE)

Q4 2021 Earnings Call

	Total Pages: 18
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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q4 2021 Earnings Call	24-Feb-2022

CORPORATE PARTICIPANTS

Kristyn Farahmand	Emma Giamartino
Senior Vice President-Investor Relations & Strategic Finance, CBRE	Global Group President, Chief Financial Officer & Chief Investment
Group, Inc.	Officer, CBRE Group, Inc.
Robert E. Sulentic
President, Chief Executive Officer & Director, CBRE Group, Inc.

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OTHER PARTICIPANTS

Anthony Paolone	Jade Rahmani
Analyst, JPMorgan Securities LLC	Analyst, Keefe, Bruyette & Woods, Inc.
Alex Kramm	Steve Sakwa
Analyst, UBS Securities LLC	Analyst, Evercore Group LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Greetings and welcome to CBRE's Q4 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. Our question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn over the conference to your host, Kristyn Farahmand, Senior Vice President of Investor Relations and Strategic Finance, CBRE. Ma'am, please go ahead.

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Kristyn Farahmand

Senior Vice President-Investor Relations & Strategic Finance, CBRE Group, Inc.

Good morning, everyone, and welcome to CBRE's fourth quarter 2021 earnings conference call. Earlier today, we issued a press release announcing our financial results which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks as well as an Excel file that contains additional supplemental materials.

Before we kick off today's call, I'll remind you that this presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's future growth prospects including our 2022 qualitative outlook and multi-year growth framework, operations, market share, capital deployment strategy and share repurchases, M&A and investment activity, the performance of existing investments, financial performance including cash flow, profitability, expenses, margins, adjusted EPS, core adjusted EPS and the effects of the COVID-19 pandemic, the integration and performance of acquisitions and other transactions and any other statements regarding matters that are not historical fact. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. For a full discussion of the risks and

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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q4 2021 Earnings Call	24-Feb-2022

other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our most recent annual and quarterly reports filed on Form 10-K and Form 10-Q, respectively.

We have provided reconciliations of core adjusted EPS, adjusted EPS, adjusted EBITDA, net revenue, and certain other non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures together with explanations of these measures in the appendix of the presentation slide deck.

Our agenda for this morning's call will be as follows: first, I'll provide an overview of our new financial metrics. Next, Bob Sulentic, our President and CEO, will discuss initiatives that support our four dimension diversification strategy. Then Emma Giamartino, our Chief Financial and Investment Officer, will discuss the quarter in detail, our capital deployment strategy, our initial qualitative 2022 outlook, and our updated multiyear growth framework. Then we'll open up the call for questions.

As you can see on slide 5, the fourth quarter completed a strong and transformative year for CBRE. We made strategic investments in Turner & Townsend and Industrious, and saw significant gains from strategic noncore investments made through our SPAC and in venture capital funds. Due to our controlling interest that results from our 60% ownership stake in Turner & Townsend, we fully consolidate Turner & Townsend's financials including their balance sheet. We will focus our commentary on consolidated performance inclusive of non-controlling interests and we will use consolidated adjusted EBITDA for our net leverage calculations.

To give more transparency to our investors, we are introducing a new earnings metric called core adjusted EPS this quarter. Core adjusted EPS excludes the impact of strategic non-controlling investments that are not attributable to a business segment. These had an immaterial impact prior to 2021. These investments are a small part of our portfolio, but there is likely to be considerable volatility in their fair values, particularly for Altus Power, the largest of our investments, now trading on the New York Stock Exchange. We believe this new metric will help investors better assess the underlying performance of our core business.

Starting in Q1, we will also present strategic non-core investments and corporate overhead separately, which today are combined. We believe this incremental transparency will help investors assess the level of corporate overhead and the performance of these non-core investments. We've also enhanced our presentation today to help provide greater insight into our performance. As a result, the slides accompanying our remarks are different from previous quarters and focused on the most significant drivers to our consolidated results for revenue, adjusted EBITDA, and earnings.

The segment-specific slides we've presented in previous quarters are included in an Appendix as are some slides from our research team detailing the long term historical relationship between real estate and inflation that we believe investors will find topical.

With that, please turn to slide 7 as Bob provides insight into our strategy. Bob?

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Robert E. Sulentic

President, Chief Executive Officer & Director, CBRE Group, Inc.

Thank you, Kristyn, and good morning, everyone. As you've seen, we had a strong finish to 2021, significantly outperforming both Q4 2020 and the pre-pandemic peak in Q4 2019. This capped an outstanding year for CBRE with all key financial benchmarks reaching new all-time highs for the company.

We certainly benefited from a supportive macro environment in 2021. Beyond that, our strong financial performance is the product of our long-standing work to strengthen our balance sheet and improve the resiliency

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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q4 2021 Earnings Call	24-Feb-2022

of our income statement, as well as our successful efforts over the past several years to diversify our business across four dimensions, asset types, lines of business, clients, and geographies. We have described our diversification efforts in detail in recent quarters, highlighting how it has positioned CBRE to benefit significantly from secular tailwinds.

Prime examples of this are our investments in Turner & Townsend, a project manager that enhances our green energy and infrastructure capabilities, and Industrious, a leading asset-light player in the growing flex space market. In our Real Estate Investment segment, we are now executing a strategy to realize positive synergies between our development and investment management businesses with support from our strong balance sheet.

So far, this effort has focused on industrial and logistics assets, which are benefiting from long-term secular trends. Our research team projects that global e-commerce sales will rise to approximately $3.9 trillion by 2025, requiring an additional 1.5 billion square feet of distribution space. Specifically, we are placing development projects into investment programs run by CBRE Investment Management, essentially converting portions of our more than $18 billion in-process development portfolio into investment management AUM. This strategy also capitalizes on our industrial investment sales and property management expertise.

At the same time, we are further building AUM in our industrial and logistics strategy by supporting CBRE Investment Management's acquisition of large portfolios of operating assets. The most recent example is the agreement to acquire a $4.9 billion portfolio of US and European logistics assets from Hillwood. Our balance sheet provided a backstop for proportions of this portfolio, which enabled our team to move quickly to secure a highly desirable set of assets. We plan to replicate this model for other secularly favored asset types, including multifamily and life sciences. And expect our integrated investor operator developer model will generate material, incremental recurring revenues and earnings for years to come.

Reflecting our strong 2021 performance, and the substantial opportunities we see in front of us, we are increasing our multiyear aspirational growth framework. For the period from 2020 to 2025, we now expect our average annual core adjusted EPS growth to exceed 20%, barring an economic disruption from geopolitical or other events, which we are watching closely. This is up from the low double-digit growth expectation we set a year ago. The average annual growth rate is expected to be in the low double digits for the prospective period from 2021 to 2025. We believe there is potential upside to our expected growth rates for both periods through incremental capital deployment.

Emma will walk you through this in detail after she reviews the quarter. Emma?

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Emma Giamartino

Global Group President, Chief Financial Officer & Chief Investment Officer, CBRE Group, Inc.

Thanks, Bob, 2021 was an outstanding year for CBRE with strong growth across our key financial metrics and record free cash flow driven by operational discipline and our four dimension diversification strategy. We're also well-positioned for future growth, which I'll discuss shortly. Throughout my remarks today, I'll highlight how our results benefited from asset type diversification, and in future quarters, I will focus on the benefits of other diversification dimensions.

Now, please turn to slide 9 so we can dive into our results for the quarter. Like Q3, I'll include compares with Q4 2019 for the transactional business lines to provide insight into our performance from peak levels. On a consolidated basis, revenue grew 24% compared to Q4 2020 and 20% over Q4 2019, led by rebounding sales and lease revenue. Advisory Services added nearly $1 billion in net revenue, growing 43% over Q4 2020 and 23% over Q4 2019 to over $3.3 billion, a record for our largest segment. We continued to benefit from a

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CBRE Group, Inc. (CBRE)	Corrected Transcript
Q4 2021 Earnings Call	24-Feb-2022

supportive property sales backdrop. Globally, sales revenue jumped over 73% from Q4 2020 and 45% from Q4 2019. The US led the recovery among our major markets with 89% sales revenue growth compared to the prior year quarter.

We had the highest market share across all major asset types in 2021 while our overall US market share rose 100 basis points in the quarter according to independent data provider, Real Capital Analytics. Capital inflows into multifamily and industrial remain strong, allowing us to benefit from the very intentional work we have done to build leading sales platforms focused on these asset types.

US industrial sales revenue more than doubled from Q4 2019 while US multifamily sales nearly doubled over the same period. Office continues to gradually improve back toward pre-pandemic levels and our US office sales revenue was around 14% shy of Q4 2019, an improvement from steeper declines in the prior quarters.

Global leasing revenue rose 14% compared to the fourth quarter of 2019 with all three regions ahead of 2019 levels for the second consecutive quarter. EMEA leasing revenue grew 25% on Q4 2019 and the Americas was up 13% while APAC grew 7%.

Industrial leasing surged around 60% compared to the fourth quarter of 2019 as occupier demand for distribution space remained strong. Like in sales, office leasing also continued to recover with global office leasing nearly flat versus Q4 2019. EMEA and APAC office leasing rose around 7% and 11% respectively compared to Q4 2019.

US office leasing revenue trends also continue to improve. While still below its 2019 level by around 4%, the year- over-year shortfall from prior peak levels has narrowed compared to previous quarters. Notably, while it's still early in the year, we are continuing to see strong momentum in both US sales and leasing thus far in 2022 with revenue trending significantly above prior peak first quarter levels.

Loan servicing was the primary growth driver within the rest of Advisory with revenue rising around 70% from Q4 2019 to nearly $93 million. Our loan servicing portfolio grew 23% versus the prior year and 10% sequentially to nearly $330 billion, primarily driven by private capital sources. Our multifamily portfolio comprising nearly half of the total grew about 14% versus Q4 2020. Our alternative asset-type portfolio, which includes agriculture, health care, hotels and others rose over 70% and now comprises approximately 19% of our total servicing portfolio. Growth was driven by a strong pace of third party servicing wins, which is a key focus area for growth in this business. OMSR gains faced a tough compare and were down about $47 million. These gains were elevated in last year's fourth quarter as the government agencies were extremely active in providing liquidities to a multifamily market burdened by COVID impact.

Turning to GWS. Net revenue grew 22%, increasing $330 million to nearly $1.9 billion. This includes about $175 million in net revenue from the Turner & Townsend transaction, which closed on November 1 and was in line with our previous expectation. We are extremely excited about the growth trajectory for this business. Project management is a fragmented market estimated to be over $100 billion with strong, secular growth tailwinds particularly within infrastructure. This transaction helps to bolster the nascent infrastructure capabilities within our existing businesses. We believe broadening our infrastructure offerings will help to accelerate future growth and deepen diversification, especially by helping to further insulate our business for more cyclical trends.

Our legacy GWS revenue grew nearly 8%, led by project management, which rose about 17%, excluding contributions from Turner & Townsend. Strong growth in project management was driven by continued recovery from the pandemic constrained environment. Facilities management revenue increased nearly 6%, and net revenue rose over 10%, supported by growth from local clients. We expect facilities management growth to benefit from continued progress in returning to a more normal business environment in 2022.

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