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Real estate services firm, CBRE Group Inc. (CBG - Analyst Report) reported second-quarter 2014 adjusted earnings of 36 cents per share, a penny ahead of the Zacks Consensus Estimate and up 16% year over year. Results were driven by solid growth in leasing, particularly in the U.S. On a GAAP basis, CBRE reported earnings of 32 cents per share, reflecting a 52% hike from 21 cents earned in the prior-year quarter.

Revenues came in at around $2.1 billion, slightly ahead of the Zacks Consensus Estimate and up 22% year over year. Adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) came in at $262.8 million, reflecting an increase of 8% from the prior-year quarter.

Considering business lines, property leasing revenue improved 14% while the company’s occupier outsourcing business – Global Corporate Services’ (GCS) revenue increased 58%.  Moreover, global property sales revenue climbed 5% during the quarter. However, the company experienced reduced mortgage origination activity with GSEs.

The company signed 47 outsourcing contracts during the second quarter and 110 contracts in the first half of 2014.
 

Quarter in Detail

Geographically, EMEA Region (primarily Europe) was a top performer with 89% year over year growth in revenue (82% in local currency), driven by solid contributions from the acquisition of Norland Managed Services Ltd. as well as higher property sales and occupier outsourcing activities.

CBRE’s largest business segment – Americas Region – also registered double-digit revenue growth (11% year over year). Sound results were prompted by higher leasing and occupier outsourcing activities.

Furthermore, helped by notable growth in Australia, the Asia Pacific Region reported 3% year over year growth in U.S. dollars (9% in local currency as foreign currency conversions muted the growth to some extent).  

Revenue increased 27% year over year at Development Services (real estate development and investment activities primarily in the U.S.) while revenue at Global Investment Management (investment management operations in the U.S., Europe and Asia) grew 10% year over year.
Following the Norland acquisition, the company’s contractual revenue increased to 53% of its total revenue, from 47% in the year-ago period. This shift in its business mix toward greater contractual revenue along with conservative financial management, resulted in upgrade of CBRE’s secured debt rating to Investment Grade by Standard & Poor’s in the quarter.

Liquidity

CBRE exited second-quarter 2014 with cash and cash equivalents of $381.9 million, down from $491.9 million at year-end 2013.

Outlook

Following a solid performance in the first half of this year, the company has raised its adjusted earnings per share expectation by 5 cents from the initial outlook. Particularly, CBRE now expects full year earnings in the range of $1.60–$1.65. The Zacks Consensus Estimate of $1.63 per share also lies within this range.

Our Viewpoint

Earnings beat, albeit by a cent, is encouraging and we believe that  improving leasing, property sales and outsourcing business augur well for the company going forward. Despite the reduced mortgage origination for the GSEs and unfavorable foreign currency movement, we believe that the strategic investments in people and platform hold long-term promise for this Zacks Rank #2 (Buy) stock and would help it to enhance its market share.  

Moreover, strategic buyouts have played a vital role in enhancing CBRE’s geographic coverage as well as broadening its service offerings. With market conditions continuing to improve, we believe that opportunistic acquisitions would serve as growth drivers, supplementing the company’s organic growth.

Investors interested in the real estate industry may consider stocks like CBS Outdoor Americas Inc. (CBSO - Snapshot Report), Alexander & Baldwin, Inc. (ALEX) and AV Homes, Inc. (AVHI). All these stocks carry a Zacks Rank #2 (Buy).
 

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