CBRE Group: High Quality Company at a Fair Price (NYSE: CBRE)

MOZCO Mateusz Szymanski/iStock Editorial via Getty Images

Investment thesis

CBRE Group (NYSE: CBRE) is a high-quality company that occupies a unique position in the commercial real estate sector by acting as a game of picks and shovels in the industry; it basically functions as a royalty on the growth of others. It also operates relatively under the radar and has consistently increased its revenue, earnings, and free cash flow over the years.

The stock has fallen more than around 33% from its December 2021 high, but the underlying business continues to grow, giving investors a good opportunity to buy shares in a wonderful company. at a fair price.

Background

Founded in 1906, CBRE Group is the world’s largest commercial real estate services and investment company (based on 2021 revenue). It functions as a holding company and operates through the following segments:

  • Global Workplace Solutions: provides a suite of integrated and contract outsourcing services to property occupiers (eg facilities management and project management); typically multi-year, multi-service outsourcing contracts (~62% of revenue).

  • Advisory services: provides a full range of services globally, such as leasing services (property rental), capital markets (property sales and mortgage services), property management and appraisal services (~34% of income).

  • Real estate investments: includes investment services provided globally, development services in the US, UK and continental Europe, and legacy office space solutions (~4% of revenue ).

CBRE generates both stable and recurring sources (large multi-year portfolio and contracts per project) and more cyclical and non-recurring sources (commissions on transactions). Their revenue mix has become more heavily skewed towards stable revenue streams (~62% of revenue) and its reliance on cyclical real estate sales and rental transaction revenue has decreased. In 2021, the company generated revenue from a diverse customer base, including more than 93 of the Fortune 100 companies.

The company’s main competitors include Jones LaSalle (JLL), Cushman & Wakefield (CWK), Colliers International Group (CIGI) and Newmark Group (NMRK), among others. CBRE has more than 105,000 employees and operates in more than 100 countries.

Evaluation

With 332 million shares outstanding and a current price of around $72, the market capitalization is around $24 billion.

QuickFS (CBRE Group)

QuickFS (CBRE Group)

CBRE has steadily increased its revenue, earnings and FCF over the past decade. CAGR over 10 years:

  • Revenue: 16.7%

  • FCF: 26%

  • PES: 22%

It looks like the company will earn between $4 and $5/share, so it is currently trading between 14 and 18 x PE. For a company that has consistently demonstrated growth on every metric and is earning returns on equity >20%, I would say CBRE is a high quality company and is trading at an attractive valuation.

  • PER: $4-5 per share, which puts the P/E at ~14-18x

  • P/P: 2.5x (not very relevant because CBRE is a real estate services company and has profitable operations, so it should not be valued on a liquidation basis)

  • EV/FCF: ~12x

  • P/S: 0.8x

  • Yield: no dividend

  • Leverage: low leverage, debt/equity of 0.9x

Since CBRE is a higher quality company, it makes sense to also assess it based on its return on equity and consider more “qualitative” factors, such as economic moat and underdeveloped business model. underlying (think Buffett’s See candy). CBRE has always been in the ~21% ROE range (keep in mind the average ROE is probably ~10-12%). If you assume that an asset’s return will approximate ROE, then CBRE is clearly a high-quality company to keep for the long term (even if you pay for it).

Underlying business model

The majority of its business involves providing contract outsourcing services to property occupiers (Global Workplace Solutions segment) and generating commissions from providing services to real estate investors (Advisory Services segment). It’s harder to imagine a better business in the entire real estate ecosystem; in times of inflation, CBRE will be able to raise prices accordingly, all without having to worry about the higher interest rates that plague the typical real estate investor. In short, CBRE’s business operates quietly behind the scenes and is strategically placed in the industry.

For a similar company in the healthcare industry, check out my recent article on Charles River Laboratories: A High-Quality Company at a Fair Price.

Catalysts

  • Share buybacks: CBRE repurchased shares, ~$185 million in total in November/December 2021; a quick glance at number of historical shares shows that it has been very static over the past 12 years, growing at a CAGR of 0.13% (which is good because shareholders are not diluted)

  • Continuous execution: Commercial real estate is an industry that will likely never go away and will continue to grow as populations around the world continue to grow and demand more space to live, work, store/transport goods, etc. ; thus, CBRE is perfectly positioned to benefit from this long-term trend.

Risks

  • Low insider ownership: insiders own less than 1%, but the CEO owns about $44 million in stock, which is quite high compared to his total compensation of about $14 million (or a salary of about $1 million dollars); normally I would like to see a higher percentage, but I think the quality of the business model outweighs the low insider ownership.

Carry

The best business is a royalty on the growth of others, requiring little capital itself. -Warren Buffett (1997 Email exchange on Microsoft)

CBRE is uniquely positioned to benefit from the growth of the commercial real estate industry. In other words, the company enjoys a royalty on the growth of others (as the industry grows, CBRE will grow alongside it without taking too much risk) and meets Buffett’s criteria for a ” best company”; in this case, the growth of real estate, the growing need to outsource associated services, as well as the need for relevant consulting services.

The business operates quietly in the background with little need for publicity and is an integral part of the entire real estate ecosystem. These are the high quality businesses that one should aspire to own.

Based on the analysis above, I recommend a long position in CBRE with a holding period of a few years (maybe even forever). I have no idea what the stock price will do in the short term, but I would look to add more if it continues to decline as I see the company has the ability to dial for many years to come.

About Joel Simmons

Check Also

Ribbit LEAP, Ltd. will buy back public shares

PALO ALTO, Calif.–(BUSINESS WIRE)–Ribbit LEAP, Ltd. (the “Company”) (NYSE: LEAP.U, LEAP, LEAP.WS), a special purpose …