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Global Issues Peg Back CBG Results

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CBRE Group Inc. (CBG - Analyst Report), the world’s largest commercial real estate services firm in terms of 2011 revenue, reported relatively unimpressive results in the third quarter of 2012 as sovereign debt crisis in Europe and a slow growth trajectory in Asia pegged back its momentum. Total revenues in the reported quarter were $1.56 billion compared with $1.53 billion in the year-earlier quarter, reflecting a year-over-year increase of a paltry 1%.

The company reported a net income of $39.7 million or 12 cents per share during the quarter, compared with $63.8 million or 20 cents in the year-ago period. Excluding non-recurring items, CBRE Group reported a net income of $83.6 million or 26 cents per share during the reported quarter, compared with $77.7 million or 24 cents in the year-earlier quarter. Recurring earnings spiked 7.6% year over year, while recurring EPS rose 8.3% compared to the third quarter of 2011. However, recurring earnings in the reported quarter missed the Zacks Consensus Estimate by 7 cents.

Third quarter 2012 EBITDA (earnings before interest, tax, depreciation and amortization) excluding selected charges increased marginally to $195.3 million, compared to $194.8 million in the year-ago quarter. The company undertook diligent steps to trim down its operating expenses and aligned the cost base with reduced business volumes in tune with the relentless macroeconomic challenges.   

Despite the headwinds, CBRE Group signed 67 long-term real estate outsourcing contracts during the quarter as property owners hired third-party service providers to manage their properties to reduce operating costs. The company was able to strengthen its footprint in the Asia Pacific region by acquiring its affiliate company in Vietnam for an undisclosed amount. The transaction enabled CBRE Group to offer seamless integrated services to cater to the increasing demands of South-East Asia.

The acquiree, CB Richard Ellis (Vietnam) Co. Ltd., provides a host of services in the region: property sales, office and retail leasing, occupier advisory services, residential project marketing, property and facilities management, project management, consulting, research and valuation. With such a diverse product portfolio, the affiliate company was a leading real estate service provider in Vietnam and had a significant market share.

Geographically, revenue in the Americas (U.S., Canada and Latin America) increased 4% in third quarter 2012 to $996.4 million. In the Asia-Pacific region, revenue dipped 4% due to slower economic growth, which resulted in lower sales and leasing activities. Revenues for the EMEA region (Europe, Middle East and Africa) declined 17% to $228.7 million during the reported quarter due to the continued weak economic growth in Europe.

The Global Investment Management segment, comprising investment management operations in the U.S., Europe and Asia, reported revenues of $114.3 million during the reported quarter compared with $77.4 million in the year-earlier quarter. The strong revenue growth was attributable to the ING Real Estate Investment Management business that was acquired by CBRE Group in the second half of 2011, and was fully integrated with its existing investment management business by the first quarter of 2012. Assets under management totaled $90.4 billion at quarter-end, down 4% from year-end 2011.

During the reported quarter, the Development Services segment which includes real estate development and investment activities primarily in the U.S., reported revenues of $17.8 million compared with $18.8 million in the year-ago quarter. The development pipeline of the company totaled $4.6 billion at quarter-end.

The gradual revival of the domestic economy, albeit at a tepid and inconsistent pace, has somewhat helped the company to tide over the negative effects faced by the adversaries in Europe and Asia. Management further expects to improve its operating efficiency with a diverse operating platform, premier brand, and a strong workforce.

At quarter-end, CBRE Group had cash and cash equivalents of $776.3 million compared to $1.1 billion at year-end 2011. Total net debt at the end of the quarter was $1.8 billion, up $117 million from year-end 2011. For full year 2012, the company expects recurring earnings in the range of $1.15 to $1.20 per share.

We maintain our Neutral recommendation for the stock, which currently has a Zacks #3 Rank that translates into a short-term Hold rating. We also have a Neutral recommendation and a Zacks #4 Rank (short-term Sell rating) for Jones Lang LaSalle Inc. (JLL - Analyst Report), one of the competitors of CBRE Group.

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