CBRE Group: Short-Term Pain, Long-Term Gain (NYSE:CBRE)

Commercial real estate has seen its fair share of challenges since the beginning of the pandemic this year. In this article, I’m focused on CBRE Group (CBRE), which is a worldwide leader in real estate services. Since the start of the year, its shares have widely underperformed the market, with a -24% return on a YTD basis. I evaluate what makes CBRE an attractive investment at the current valuation; so let’s get started.

A Look Into CBRE Group

CBRE is a leading global real estate services company with deep insights into macro and local real estate markets. It operates with three primary lines of business. Its Advisory Services segment participates in real estate transactions, property management, and valuation services. Global Workplace Solutions helps clients with strategy, consulting, and facilities management. Lastly, its Real Estate Investments segment helps clients with project development and also acts as an investment manager. Last year, the firm generated $23.9B in total revenue.

COVID-19 has presented the company with a challenging operating environment. As seen below, revenue and adjusted EPS fell by 4% and 56%, respectively, on a constant currency basis. The larger drop in adjusted EPS was due to weak results in its Advisory Services segment, higher COVID-related costs, and a $16M donation into the company’s COVID Relief Fund.

(Source: Company Earnings Presentation)

Advisory Services posted the weakest results of the three segments, with a 31% drop in fee revenue and a 60% drop in adjusted EBITDA, due in part to the aforementioned COVID-related costs and the donation. On the bright side, Global Workplace Solutions showed resilience with 11% YoY growth in adjusted EBITDA to $116M. I see this segment as being a good stabilizer for the overall business, as CBRE’s clients count on it to run its essential operations during both good times and bad.

In addition, I see the Investment Management side as being a good complementary business, as it also generates recurring revenue. This is supported by the moat-worthy reputation of CBRE, as it continues to attract new capital and grew its adjusted EBTIDA by an impressive 62% YoY during the last quarter.

Looking forward, I see steady continued recovery for CBRE’s core businesses, as its clients emerge from the most difficult times of the pandemic. This is supported by the qualitative guidance that management provided below, which shows a strong resumption of transactional activity in the recent months, with the industrial and multi-family sectors leading the way.

(Source: Company Earnings Presentation)

While remote work will prove challenging for office real estate, Morningstar sees these challenges as being offset by an increase in client demand for rearranging their workplaces to accommodate social distancing measures. In addition, it sees a boost from clients outsourcing their facilities management activities to CBRE, as noted below in its latest research report:

“To the extent that the increased prevalence of remote work stymies demand for office real estate, we can expect a commensurate reduction in brokerage activity. However, the flurry of activity coming from clients re-arranging their workplace set-up to accommodate the new paradigm will provide an offset, as will the more stable occupier outsourcing business.”

Meanwhile, CBRE maintains a strong balance sheet. It currently maintains a low leverage profile, with a net debt to trailing 12-months’ EBITDA of 0.6x, and has increased its liquidity to $3.5B, which is up from $3.0B during the same period last year.

(Source: Company Earnings Presentation)

Valuation

Based on the analyst estimates below, EPS is expected to have a down year in 2020, but is expected to solidly rebound in the following years.

With this in mind, I wanted to calculate what the PEG ratio is, with the following inputs:

  • Price: $46.32
  • EPS: $2.41 (2020 EPS Estimate)
  • EPS Growth Rate: 23.7 (based on average of 2021-2022 growth rates)

https://static.seekingalpha.com/uploads/2020/8/10/49839830-15971076850157316.png

With the inputs above, I arrive at a PEG ratio of 0.81. Using a PEG ratio of 1 as a standard for fair value, the shares appear to be undervalued with a potential 23% upside (1/.81 -1). Analysts seem to share a favorable opinion of the stock, an average Buy rating (score of 4.0 out of 5) and an average price target of $53.

Investor Takeaway

CBRE is a leading global real estate services company with deep insights into macro and local real estate markets. While it has been pressured by the effects of COVID-19 on commercial real estate, I see encouraging signs of a rebound. In addition, its Global Workplace Services and Investment Management businesses have shown resilience, with growing recurring revenues.

The office space sector will remain pressured, but increased client demand for workplace rearrangements and facilities outsourcing may provide a strong offset. In the meantime, CBRE maintains a solid balance sheet with strong liquidity.

Based on the valuation exercise, I see the shares as being currently undervalued, with a potential 23% upside from the current valuation. While the current shareholders have seen short-term pain this year, I see long-term gains for those who are willing to be patient.

(Source: F.A.S.T. Graphs)

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform their own due diligence prior to making any investment decisions.

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