Q4 2023 CBRE Group Inc Earnings Call
Operator: Hello, and welcome to the CBRE Q4 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad.
Hello, and welcome to the CBRE Q4, 2023 earnings conference call and webcast.
And what should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. He may be placed in the question queue at any time by pressing star one on your telephone keypad.
Operator: A question and answer session will follow the formal presentation. You may be placed on the question queue at any time by pressing star 1 on your telephone. As a reminder, this conference is being recorded. It is now my pleasure to turn the call over to Brad Burke, Head of Investor Relations and Treasurer. Brad, please go ahead.
As a reminder, this conference is being recorded.
Now my pleasure to turn the call over to Brad Burke head of Investor Relations and Treasurer, Brian. Please go ahead.
Brad Burke: Good morning, everyone, and welcome to CBRE's fourth quarter 2023 earnings conference call. Earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks and an Excel file that contains additional supplemental material. Before we kick off today's call, I'll remind you that today's presentation contains forward-looking statements, including, without limitation, statements concerning our economic outlook, our business plans and capital allocation strategy, and our financial outlook. Forward-looking statements are predictions, projections, or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected. For a full discussion of the risks and other factors that may impact these forward-looking statements, please refer to this morning's earnings release and our SEC filing.
Brad Burke: Good morning, everyone and welcome to Cbre's fourth quarter 2023 earnings conference call earlier today, we posted a presentation deck on our website that you can use to follow along with our prepared remarks, and an excel file that contains additional supplemental materials.
Before we kick off today's call I'll remind you that today's presentation contains forward looking statements, including without limitation statements concerning our economic outlook, our business plans and capital allocation strategy and our financial outlook.
Brad Burke: Forward looking statements are predictions projections or other statements about future events. These statements involve risks and uncertainties that may cause actual results and trends to differ materially from those projected.
Brad Burke: For a full discussion of the risks and other factors that may impact. These forward looking statements. Please refer to this morning's earnings release and our SEC filings.
Brad Burke: We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures together with explanations of these measures in our presentation deck appendix. I'm joined on today's call by Bob Sulentic, our Chairman and CEO, and Emma Giomartino, our Chief Financial Officer. Now, please turn to slide 5 as I turn the call over to Bob.
Brad Burke: We have provided reconciliations of the non-GAAP financial measures discussed on our call to the most directly comparable GAAP measures together with explanations of these measures in our presentation deck appendix.
Bob's Olympics: I'm joined on today's call by Bob's Olympics, our chair and CEO and M. A G. R. Martino, our Chief Financial Officer now please turn to slide five as I turn the call over to Bob.
Robert E. Sulentic: Thank you, Brad, and good morning, everyone. CBRE ended 2023 on a high note, with fourth-order year-over-year operating profit growth across all three of our business segments. Even though 2023 was a difficult year for commercial real estate, we delivered the third highest full-year earnings in CBRE's history as our resilient businesses continued their strong growth. This partly offset market-driven revenue declines in businesses that are sensitive to interest rates and debt available
Bob: Thank you Brad and good morning, everyone.
CBRE ended 2023 on a high note with fourth quarter year over year operating profit growth across all three of our business segments.
Bob: Even though 2023 was a difficult year for commercial real estate.
Bob: We delivered the third highest full year earnings and Cbre's history, as our resilient businesses continued their strong growth.
Bob: It's partly offset market driven revenue declines in businesses that are sensitive to interest rates and debt availability.
Robert E. Sulentic: Emma will talk about our resilient businesses in greater detail at the beginning of her comment. We are committed to driving significant gains in all of our businesses with a particular focus on through-cycle resiliency and double-digit compound long-term earnings growth. Two recent wins highlight our progress.
Bob: Well, we'll talk about our resilient businesses in greater detail at the beginning of her comments.
Bob: We are committed to driving significant gains in all of our businesses with particular focus on through cycle resiliency and double digit compound long term earnings growth too.
Bob: Two recent wins highlight our progress.
Robert E. Sulentic: First, with the acquisition of J&J Worldwide Services in our GWS segment, we will increase our technical services capabilities for U.S. federal government clients and open a mostly untapped channel in a difficult to penetrate market. This is a large market characterized by steady growth and long-term contracts. Second, our strategic partnership to provide property management services for Brookfield Properties' 65 million square foot U.S. office portfolio is among the largest in the history of our sector.
Bob: First with the acquisition of J&J worldwide services in our Gws segment, we will increase our technical services capabilities for U S. Federal government clients and open a mostly untapped channel and it's difficult to penetrate market.
Bob: This is a large market characterized by steady growth in long term contracts second our strategic partnership to provide property management services for Brookfield properties 65 million square foot U S office portfolio is among the largest in the history of our sector.
Robert E. Sulentic: We believe there will be more opportunities of this nature, which we are well positioned to capture. We start 2024 with strong new business pipelines across our company. We also see attractive M&A and REI co-investment opportunities. Investor and lender sentiment has improved, and we anticipate this will lead to increased transaction volumes, starting in the second half of the year when short-term interest rates are expected to fall. Against this backdrop, we expect to achieve core EPS of $4.25 to $4.65 in 2024, implying mid-teens percentage growth at the midpoint of the range. This broad range reflects the difficulty in predicting the precise timing of a recovery.
Bob: We believe there will be more opportunities of this nature, which we are well positioned to capture.
Bob: We start 2024 with strong new business pipelines across our company.
Bob: We also see attractive M&A and Rei co investment opportunities.
Bob: Investor and lender sentiment has improved and we anticipate this will lead to increased transaction volumes.
Bob: Starting in the second half of the year when short term interest rates are expected to fall.
Bob: Against this backdrop, we expect to achieve core EPS of $4 25.
Bob: The $4 65 in 2024 and.
Bob: Implying mid teens percentage growth at the midpoint of the range.
This broad range reflects the difficulty in predicting the precise timing of a recovery.
Robert E. Sulentic: It is notable that any outcome in this range would still be well below the long-term earnings potential of CBRE. With that, Emma will walk you through our results and outlook in more detail. Thanks, Bob.
Bob: It is notable that any outcome in this range would still be well below the long term earnings potential of <unk>.
Bob: CBRE.
Bob: With that Emily will walk you through our results and outlook in more detail.
Thanks, Bob.
Emma Giomartino: Before turning to segment performance, please turn to page six as I provide more insight into our resilient businesses. We've used this term regularly in our earnings calls over the last several quarters, and it is now being used broadly in our sector. CBRE defines resilient businesses as those which hold up well in a down market cycle, either because of their non-cyclical characteristics or because they benefit from secular tailwinds. For CBRE, those businesses include the entire GWS segment, loan servicing, valuation, property management, and recurring asset management fees in our investment management business. When we use this term, this is the group of businesses we are referencing.
Emily: Before turning to segment performance. Please turn to page six as I provide more insight into our resilient businesses.
Emily: We've used this term regularly in our earnings calls over the last several quarters and it is now being used broadly in our sector.
Emily: CBRE defines resilient businesses as those that hold up well in a down market cycle.
Emily: Because of that non cyclical characteristics are because they benefit from secular tailwind.
Emily: For CBRE and this is including the entire Gws segment.
Emily: Loan servicing valuation property management, and recurring asset management fees, and our investment management business.
Emily: When we use this term this is the group of businesses they're referencing.
Emma Giomartino: These resilient businesses, in aggregate, generated nearly $1.6 billion of SOP in 2023 and are expected to generate $1.8 billion of SOP in 2024. This would represent a six-fold increase from 2011, the first full year of market recovery following the global financial crisis. We expect 2024 to be the beginning of a market recovery, albeit a more gradual one. For context, our resilient businesses have grown SOP over three times as fast as our transactional businesses since 2011, and they are expected to be nearly double the size of our entire business at a similar point in the last cycle. Please turn to page 7 as I review our results and outlook for 2024. Across the advisory segment, Net Revenue and SOP essentially match the prior year's Q4. Leasing saw a slight uptick in revenue for the quarter, driven mostly by EMEA and APAC. Globally, higher office leasing offsets slightly lower industrial activity. Within property sales, industrial and retail declined less than multifamily and office, supported by healthier fundamentals.
Emily: These resilient businesses in aggregate generated nearly $1 $6 billion of S. O P. In 2023 and are expected to generate $1 $8 billion of S. O P. In 2024.
Emily: It would represent a six fold increase.
Emily: 2011, the first full year of a market recovery following the global financial crisis.
Emily: We expect 2024 to be at the beginning of a market recovery, albeit a more gradual one.
Emily: For context, our resilient businesses have grown S O P over three times as fast as our transactional businesses.
Emily: 2011, and they are expected to be nearly double the size of our entire business at a similar point in the last cycle.
Emily: Please turn to page seven as I review, our results and outlook for 2024.
Emily: Across the advisory segment net revenue and S. O P essentially matched the prior year's Q4.
Emily: Leasing saw a slight uptick in revenue for the quarter, driven mostly by EMEA and APAC glue.
Emily: Globally higher office leasing offset slightly less industrial activity.
Emily: Within property sales industrial and retail declined less in multifamily and office supported by healthier fundamentals.
Emma Giomartino: Commercial mortgage origination revenue growth was attributable to interest earnings on escrow balances. The rest of our advisory business lines together achieved a 6% net revenue increase. Turning to page 8, GWS had another strong quarter.
Emily: Commercial mortgage origination revenue growth was attributable to interest earnings on escrow balances the rest of our advisory business lines together achieved a 6% net revenue increase.
Emily: Turning to page eight gws had another strong quarter net.
Emma Giomartino: Net revenue and SOP grew by double digits. Facilities management net revenue increased 14% for the quarter and 13% for the year. Most significantly, our sizable GWS local business has been increasing net revenue at or above a mid-team's clip and is well positioned to sustain this growth rate for the long term. Project management net revenue grew 11% for the quarter and 14% for the year. This was led by the large-scale program management work being done globally by Turner & Townsend.
Emily: Net revenue in S. O P grew by double digits facility.
Emily: Facilities management net revenue increased 14% for the quarter and 13% for the year.
Emily: Most significantly our sizable gws local business has been increasing that revenue at or above our mid teens clip and is well positioned to sustain this growth rate for the long term.
Emily: Project management net revenue grew 11% for the quarter and 14% for the year.
Emily: This was led by the large scale program management work being done globally by Turner and Townsend.
Emma Giomartino: Notably, we had record pipeline conversion to new GWS contracts during Q4 with a balanced mix of new clients and existing client expansions. Turning to page 9, SOP in our REI segment increased to $68 million in Q4, up from just $17 million in the prior year. Development exceeded expectations due to the earlier than anticipated monetization of several assets in the U.S. Investment management operating profit rose significantly in Q4, driven by higher incentive fees and recurring asset management fees. Investment Management AUM ended 2023 at $148 billion, up $3 billion for the quarter, largely driven by favorable currency movement and modest net capital inflows, which offset lower private asset values. For the year, AUM was down $2 billion.
Emily: Notably we had record pipeline conversion to new Gws contract during Q4 with a balanced mix of new clients and existing client expansion.
Emily: Turning to page nine S O P and our Rei segment increased to $68 million in Q4.
Emily: Just $17 million in the prior year Q4.
Emily: Development exceeded expectations due to the earlier than anticipated and monetization of several assets in the U S.
Emily: Investment management operating profit rose significantly in Q4, driven by higher incentive fees and recurring asset management fees.
Emily: Investment management, a U N ended 2023 at $148 billion of $3 billion for the quarter, largely driven by favorable currency movement, and modest net capital inflows, which offset lower private asset values.
Emily: For the year AUM was down $2 billion, while asset value declines appear to be slowing we anticipate values will remain under pressure in early 2024.
Emma Giomartino: While asset value declines appear to be slowing, we anticipate values will remain under pressure in early 2024. Before turning to our 2024 outlook, I'll comment on our capital allocation strategy on slide 10. We are on track to deploy more than $2 billion of capital for the 12 months ending Q1 2024. This deployment includes M&A, mostly in our resilient businesses, and a record level of co-investment commitments in REI. By thoughtfully using our balance sheet, we made targeted, opportunistic investments while other investors were largely on the sidelines.
Speaker Change: Before turning to our 2024 outlook I'll comment on our capital allocation strategy on slide 10.
Speaker Change: We are on track to deploy more than $2 billion of capital for the 12 months ending Q1 2024.
Speaker Change: This deployment includes M&A, mostly in our resilient businesses and a record level of co investment commitment and Rei.
Speaker Change: By thoughtfully using our balance sheet, we made targeted opportunistic investment while other investors have been largely on the sidelines.
Emma Giomartino: These investments have been underwritten at returns well above our cost of capital, and specifically, our REI co-investments are projected to generate notably high returns. We also repurchased nearly 8 million shares in 2023 at a time when we believe they've been attractively valued. Our 2024 capital deployment will be supported by improved free cash flow, which we expect to total at least $1 billion, as certain headwinds reverse this year. As we've previously discussed, we had several large cash expenses in 2023, mostly timing-related items such as cash variable compensation and cash income taxes tied to 2022's record results that did not flex down with last year's lower earnings. We estimate that the reversal of these items alone will drive a $500 million benefit to free cash flow compared with last year.
These investments have been underwritten net returns well above our cost of capital and.
Speaker Change: And specifically our Rei co investments are projected to generate notably high returns.
Speaker Change: We also repurchased nearly 8 million shares in 2023 at a time when we believe they've been attractively valued.
Speaker Change: Our 2020 for capital deployment will be supported by improved free cash flow, which we expect to total at least $1 billion of certain headwinds reversed this year.
Speaker Change: As we've previously discussed we had several large cash expenses in 2023, mostly timing related items, such as cash variable compensation and cash income taxes tied to 2020 two's record results that did not flex down with last year's lower earnings.
Speaker Change: We estimate that the reversal of these items alone will drive a $500 million benefit to free cash flow compared with last year.
Emma Giomartino: Taking all of this into consideration, we expect to end 2024 with net leverage around one turn. Now we'll review our 2024 outlook on slide 11. In the advisory segment, we expect net revenue to increase by mid to high single digits with mid-teens SOP growth. The expected margin improvement reflects fixed cost leverage and the benefit of ongoing cost reduction initiatives. Advisory accounts for about two-thirds of the $150 million run rate cost savings initiative announced last quarter, with half of the benefit being realized in 2024. The savings offset cost growth elsewhere in Advisory this year, notably from higher expected discretionary compensation tied to improved financial performance.
Speaker Change: Taking all of this into consideration we expect to end 2024 with net leverage around one turn.
Speaker Change: Now I'll review, our 2020 for outlook on slide 11.
And the advisory segment, we expect net revenue to increase by mid to high single digits with mid teens S. O P growth.
Speaker Change: The expected margin improvement reflects fixed cost leverage and the benefit of ongoing cost reduction initiatives.
Speaker Change: Advisory accounts for about two thirds, the $150 million run rate cost savings initiatives announced last quarter with.
Speaker Change: With half of the benefit being realized in 2024.
Speaker Change: These savings offset cost growth elsewhere, and advisory this year, notably from higher expected discretionary compensation tied to improved financial performance.
Emma Giomartino: We anticipate that capital markets revenue will grow by mid-single digits. Investor sentiment has improved in the last 90 days, reflecting a better interest rate outlook. Real estate allocations are approaching target levels, and this reflects an easing of the denominator effect, as public equity markets have rebounded while private real estate values are being written down. We expect leasing to grow modestly in 2024. We are cautiously optimistic that the worst is over for office leasing, particularly for Class A properties, where we generate approximately two-thirds of our leasing revenue. Leading indicators from our data partner, BTS, indicate U.S. office demand has been gradually rising over the last six months. The growing consensus about an economic soft landing coupled with the apparent stabilization of office utilization rates may make more employers confident enough to commit to office leases. Additionally, leasing demand should remain relatively strong for industrial deals, particularly for properties under 500,000 square feet.
Speaker Change: We anticipate the capital markets revenue will grow by mid single digit investor sentiment has improved in the last 90 days, reflecting a better interest rate outlook real estate allocations are approaching target levels and that reflects an easing of the denominator effect of public equity markets have rebounded well private real estate values are being written down.
Speaker Change: We expect leasing to grow modestly in 2024.
Speaker Change: We are cautiously optimistic that the worst is over for office leasing, particularly for class a properties, where we generate approximately two thirds of our leasing revenue.
Speaker Change: Leading indicators from our data partner VTS indicate U S office demand has been gradually turning up over the last six months.
Speaker Change: The growing consensus about an economic soft landing coupled with the apparent stabilization of office utilization rates may make more employers confident enough to commit to office leases.
Speaker Change: Additionally, leasing demand should remain relatively strong for industrial deals, particularly for properties under 500000 square feet.
Emma Giomartino: Our remaining advisory business lines together are expected to achieve low double-digit net revenue growth. In the GWS segment, we expect mid-teens SOP growth, including the expected partial year contribution from the J&J acquisitions. Continued strong organic growth will be driven by broad demand across client sectors and geographies. The local business will lead growth in GWS, expected to generate more than $200 million of operating profit as we benefit further from our investments in this business. Our enterprise business is also seeing strong demand from both mature sectors like financial services as well as newer adopters of outsourcing such as industrial, healthcare, and life sciences companies. Within project management, significant growth will be led by Turner & Townsend, which is in the early stages of penetrating the U.S. market.
Speaker Change: Our remaining advisory business lines together are expected to achieve low double digit net revenue growth.
Speaker Change: And the Gws segment, we expect mid teen S O P growth, including the expected partial year contribution from the J&J acquisition.
Speaker Change: Continued strong organic growth will be driven by broad demand across client sectors and geographies.
Speaker Change: The local business will lead growth in gws expected to generate more than $200 million of operating profit.
Speaker Change: We benefit further from our investments in this business.
Speaker Change: Our enterprise business is also seeing strong strong demand from both mature sectors like financial services as well as newer adopters of outdoor things such as industrial health care and life Sciences companies.
Speaker Change: We then project management significant growth will be led by Turner and Townsend, which is in the early stages of penetrating the U S market.
Emma Giomartino: We anticipate seeing most of the revenue impact from our sizable Q4 wins in the second half of 2024 as new clients are onboarded. And even with a record level of conversions in Q4, our GWS pipeline ended in 2023 10% higher than the prior year. Shifting to REI, we expect SOP in 2024 to be slightly below 2023's level. Note that last year's SOP included a single development portfolio sale which generated more than $100 million of profit in Q1.
Speaker Change: We anticipate seeing most of the revenue impact from our sizeable Q4 wins in the second half of 2024 as new clients are onboard it.
Speaker Change: And even with a record level of conversions in Q4, our gws pipeline ended 2023, 10% higher than the prior year.
Speaker Change: Okay.
Speaker Change: Shifting to Rei, we expect <unk> in 2024 to be slightly below 2023 level.
Speaker Change: Note. The last year's <unk> included a single development portfolio sale, which generated more than $100 million of profit in Q1.
Emma Giomartino: In investment management, we expect operating profit to increase modestly from 2023 as stabilizing market conditions drive higher promotion fees and improved co-investment returns. We expect development operating profit to be subdued this year as the projects we expect to monetize will be sold at higher cap rates than we underwrote at the peak of the prior market cycle. At current market cap rates, we have hundreds of millions of dollars of operating profit embedded in our in-process portfolio and a pipeline of new opportunities with an attractive spread between our cost of development and current market values. On balance, we are cautiously optimistic about 2024. Our expectation of achieving core EPS of $4.25 to $4.65 is contingent on long-term interest rates remaining around current levels, the Fed proceeding with the anticipated short-term risk cuts, and the U.S. economy avoiding a recession. Additionally, this year's earnings are likely to be more heavily weighted than usual to the second half.
Speaker Change: In investment management, we expect operating profit to increase modestly from 2023, a stabilizing market conditions drive higher promote fees and improved co investment return.
Speaker Change: We expect development operating profit will be subdued this year as the projects, we expect to monetize will be sold at higher cap rates than we underwrote at the peak of the prior market cycles.
Speaker Change: At current market cap rates, we have hundreds of millions of dollars of operating profit embedded in our in process portfolio and our pipeline of new opportunities with an attractive spread between our cost of development and current market value.
Speaker Change: On balance we're cautiously optimistic about 2024.
Speaker Change: Our expectation of achieving core EPS of $4 25 to $4 65.
Speaker Change: Is contingent on long term interest rates remaining around current levels. The fed proceeding with the anticipated short term rate cuts in the U S economy, avoiding a recession.
Speaker Change: This year's earnings are likely to be more heavily weighted than usual for the second half of the third and fourth quarters are expected to account for approximately two thirds of core EPS, while the first quarter will contribute a mid teens percentage of the annual total this distribution is similar to what we experienced in 2021. When we also had a second half recovery.
Operator: The third and fourth quarters are expected to account for approximately two-thirds of core EPS, while the first quarter will contribute a mid-teens percentage of the annual total. This distribution is similar to what we experienced in 2021, when we also had a second half recovery. We continue to see a path to returning to our prior core EPS peak in 2025. That path is supported by continued double-digit growth in our resilient businesses and a gradual recovery in our transactional businesses. Importantly, CBRE can reach prior record earnings without our transactional businesses SOP rebounding to 2019 levels. With that, operator, please open the line for questions. Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone key. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question.
Speaker Change: We continue to see a path to returning to our prior core EPS peak in 2025.
Speaker Change: That path is supported by continued double digit growth in our resilient businesses and a gradual recovery in our transactional businesses.
Speaker Change: Accordingly, CBRE can reach prior record earnings without our transactional businesses S. O P rebounding in 2019 levels.
Speaker Change: With that operator, please open the line for questions.
Speaker Change: Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Speaker Change: You May press star two if you'd like to remove your question from the queue.
Operator: One moment, please, while we pull for questions. Our first question is coming from Anthony Paolone from JP Morgan. Your line is now live. Okay, thank you. Good morning. I guess my first question is, you know, when I look at the guide posts for the various business lines, they seem pretty good from our vantage point, but just wondering if you could talk about things like the corporate segment, taxes, interest expense, depreciation, all that sort of other stuff and any year over year drags or ability to quantify any notable drags from those items as we think about going down DPS. Yeah, Tony.
Speaker Change: One moment, please while we poll for questions. Our first question is coming from Anthony <unk> from Jpmorgan. Your line is now live.
Anthony: Okay. Thank you and good morning.
Anthony: I guess my first question is.
Anthony: Look at the guideposts for the various business lines.
Anthony: <unk> got a pretty good from our vantage point, but just wondering if you could talk about things like the corporate segment taxes interest expense depreciation and all that sort of other stuff in any year over year drags or ability to quantify any notable drags from those items as we think about going down to EPS.
Speaker Change: Yeah Tony.
Emma Giomartino: So first, step back on our Outlook and just give context around the range, which I think will help get to the corporate and below-the-line items. If you look at our segment level guidance, I think what you're seeing is that you likely get to an EPS that's slightly above the midpoint of our range, and what we've baked into the midpoint of our EPS guidance is some level of conservatism, given that rates have continued to be volatile, especially in the past few weeks. It's safe to assume at the corporate cost level, the corporate segment level, that that is going to uptick slightly, but not as much as the numbers that you're looking at might imply. And the reason corporate earnings will uptick slightly is primarily because our bonuses and discretionary compensation will reset to levels that are in line with improved financial stability.
Speaker Change: So first step back on our outlook and just to give context around the range, which I think will help get to the corporate and below the line item.
Speaker Change: If you look at our segment level guidance I think what you're seeing is that you likely get to an EPS, that's slightly above the midpoint of our range and what we baked into the midpoint of our EPS guidance is some level of conservatism given that rates have continued to be volatile, especially.
Speaker Change: In the past few weeks.
Speaker Change: Do you assume on the corporate cost level. The carpet segment level that that is going to uptick slightly but not as much as your the numbers that youre looking at might imply in the reason carpet will uptick slightly it's because primarily because our bonuses discretionary compensation will reset to levels that are in line with improved financial performance.
Emma Giomartino: And then I'll comment on the range of our outlook. The pieces that we have a high level of conviction around are our growth and our resilient SOP. We talked about that growing from 1.6 billion this year to 1.8 billion next year, or in 2024. And that's consistent across the range. And then our transactional business lines are clearly the ones that will move us towards the bottom end or the high end of the range, depending on when the recovery happens. Okay, thanks. That's helpful.
Speaker Change: And then I'll comment on the range of our outlook.
Speaker Change: The pieces that we have a high level of conviction around our growth and our resilience as we talked about that growing from $1 6 billion. This year to $1 8 billion next year or in 2024.
And that's consistent across the range and then our transactional business plans are clearly the ones that will move us towards the bottom end.
Speaker Change: The high end of the range, depending on when the recovery begins.
Speaker Change: Okay. Thanks, that's helpful. And then just in terms of you talked about ending the year with a turn of leverage and it sounds like incremental investment into Rei and so forth and then obviously J&J, but just like how much of the benefit from all of the capital investments do you think youll see in 'twenty four.
Emma Giomartino: And then just in terms of you talked about, you know, ending the year with a turn of leverage, and sounds like incremental investment into REI, and so forth, and then obviously, J&J, but just like, how much of the benefit from all of the capital investments do you think you'll see in 24 versus, you know, 25 or in future periods? I'll primarily speak to J&J. We are expecting to get likely three-quarters of the benefit of that acquisition in a year, and we talked about what the EBITDA we're expecting for J&J in our press release, about $65 million for the year, so it's safe to assume we'll get three-quarters of that in a year. The remainder of the co-investments in REI will be weighted more towards 2025 and beyond as those funds get launched, and our development gets monitored. Okay, thank you.
Speaker Change: <unk> versus <unk>.
Speaker Change: 25 or in future periods.
Speaker Change: I'll I'll, primarily speak to J&J, we are expecting to get likely three quarters of the benefit of that acquisition in the air and we talked about what the the EBITDA, we're expecting for J&J in a press release about $65 million for the year, So safe to assume we will get three quarters.
Speaker Change: Without any error.
Speaker Change: The remainder of the co investments and Rei will be weighted more towards 2025 and beyond as those funds.
Speaker Change: Funds get launched and.
Speaker Change: And our developments get monetize.
Speaker Change: Okay. Thank you.
Emma Giomartino: Your next question is coming from Steve Sakwa from Evercore ISI. Your line is now: Great, thanks. And my guess just on capital deployment, you know, I realize with the stock maybe shooting up a lot in the fourth quarter, that temperature enthusiasm for share buybacks, you only did about $20 million in the quarter. Just, you know, where do share buybacks sort of fit in on the capital deployment in 24, or at least within your guidance? So what we've always talked about is a balance of M&A, our investments, our co-investments in REI, and share buybacks. And we'll do buybacks to balance out the other two when we view our share price to be attractive. What we really saw in Q4 was that we were anticipating the announcement of our acquisition of J&J. That deal is delivering a return well above our cost of capital. It's more accretive than buybacks, in our analysis.
Speaker Change: Thank you. Your next question is coming from Steve Sochua from Evercore ISI. Your line is now live.
Steve Sochua: Great. Thanks.
Steve Sochua: Just on capital deployment, you know I realize what the stock maybe shooting up a lot in the fourth quarter that tempered your enthusiasm for for share buybacks you only did about $20 million in the quarter, just you know where to share buybacks sort of fit in on the capital deployment in 'twenty four or at least within your guidance.
Steve Sochua: So what we've always talked about is a balance of M&A or investments or co investments and Rei and share buyback and we'll do buyback is to balance out the other two when when we view our share price to be attractive, but you really saw in Q4 is that we were anticipating are.
Steve Sochua: The announcement of our acquisition of J&J.
Steve Sochua: That deal is delivering a return well above our cost of capital, it's more accretive than buybacks in our analysis.
Emma Giomartino: And so you're seeing a weighting more towards M&A, and I expect that to continue this year. Our M&A pipeline is building. We're seeing a greater ability to transact. And sellers are more willing to meet our value expectations.
Steve Sochua: And so youre seeing a wait more towards M&A and I expect that to continue this year, we our M&A pipeline is building, we're seeing a greater ability to transact sellers are more willing.
Steve Sochua: To meet our value expectations, so where we sit right now.
Emma Giomartino: So where we sit right now, I expect the balance to be towards M&A this year. But, of course, if that changes, we'll look to re-purchase. Okay, and I know you provided a bunch of, you know, guideposts, certainly on the revenue side.
Balance to be towards M&A. This year, but of course, if that changes we'll look.
Steve Sochua: Look to repurchase shares.
Speaker Change: Okay, and I know you you provided a bunch of guideposts certainly on the revenue side I just wanted to make sure from a margin perspective, I just kind of understand how are you thinking about the S. O P margin and advisory and is there any sort of baked in improvement to margin in the <unk>.
Emma Giomartino: I just want to make sure, from a margin perspective, I just kind of understand, you know, how are you thinking about the SOP margin in advisory? And is there any sort of baked-in improvement to margin in the GWS business? So on the advisory side, you should see improvement in our overall advisory margin in 2024, probably about 100 basis points. That's because of our cost reduction plans and, obviously, a recovery in our transactions and GWF. Our margins should hover around the same level and increase slightly. The J&J acquisition is slightly aggressive for our margins, but this is a business, as you know, that we don't expect to see a step function change in our margin over time. It will gradually increase. Differentiate. Great, thanks. That's it for me.
Speaker Change: U S business.
Speaker Change: So on the advisory side, you should see improvement.
Speaker Change: In our overall advisory margin in 2024.
Speaker Change: Probably about 100 basis points.
Speaker Change: That's because of our cost reduction plans and obviously a recovery in our transactions business.
Speaker Change: Gws.
Speaker Change: Our margins should hover around the same level and increased slightly the J&J acquisition is slightly accretive to our margins, but this is a business as you know that we don't expect to see a.
Speaker Change: Step function change in our margin over time, it will gradually increase as we continue to differentiate that business.
Speaker Change: Great. Thanks, that's it for me.
Operator: Thank you. As a reminder, that's star number one to be placed into question. Our next question is coming from Jade Rahmani from KBW; your line is not live. Thank you very much.
Speaker Change: Thank you as a reminder, Thats star one to be placed in the question queue. Our next question is coming from Jade Rahmani from <unk>. Your line is now live.
Speaker Change: Yes.
Jade Rahmani: Thank you very much.
Robert E. Sulentic: There's considerable uncertainty in the multifamily market. Walker & Dunlop just said on its earnings call that the GSEs, Fannie and Freddie, expect flat volumes for 2024, which is surprising given how low volumes were in 2023. In addition, we are seeing pockets of credit issues in floating rate loans and then significant supply. So I wanted to ask if you could comment on your overall volume expectations within that sector and also as it relates to Trammell Crowe. I think that around 30% of that business's projects are multifamily. Do you expect any issues bringing those to fruition and generating target returns? Yeah, I'll comment on that. Jay, on the Trammell Crow Company circumstance, and then Emma can comment on the volumes.
Jade Rahmani: There is considerable uncertainty in the multifamily market Walker and Dunlop just said on its earnings call that the GSE is Fannie and Freddie expect flat volumes for 2024, which is surprising given how low volumes were in 2023. In addition, we are seeing pockets.
Jade Rahmani: Of credit issues in floating rate loans, and then significant supply. So I wanted to ask if you could comment on your overall volume expectations within that sector and also as it relates to Trammell Crow I think that around 30% of that businesses projects.
Jade Rahmani: Our multifamily do.
Jade Rahmani: Any issues, bringing those to fruition and generating.
Jade Rahmani: Target returns.
Speaker Change: Yeah I'll comment on that.
Speaker Change: Jay on the.
Speaker Change: Trammell Crow company circumstances, and Emma can comment on the volumes.
Robert E. Sulentic: The financing volumes. We are taking on a steady stream of new land sites in Trammell Crow Company that we're underwriting at returns that we think, based on current cap rates, will be consistent with our historical returns in that business. This is one of the things that really doesn't show up in any of our headlines that makes us excited about future profitability. It is true that there's some pressure in the multifamily markets based on the development that's happened over the last couple years and the cost of leverage versus where those deals were developed. We think that is going to be self-correcting over the next couple years, and new development volume is going to come down. We're still barely above historic levels of vacancy.
Speaker Change: Financing volumes.
Emma: We are taking on a steady stream of new land sites and Trammell Crow company that we're underwriting at returns.
Emma: But we think based on current cap rates will be consistent with our historical returns in that business. This is one of the things that's really doesn't show up in any of our headlines that makes us excited about <unk> future profitability.
Emma: It is true that there is some pressure.
Emma: In the multifamily markets based on the development that's happened over the last couple of years and the cost of leverage versus where those deals with the yields those deals were developed that we think that is going to be self correcting over the next couple of years, New development volume is going to come down.
Emma: We're still barely above historic levels of vacancy I think maybe 50 basis points above historic levels of about 550 basis points of vacancy versus 5%. Historically, we think that is going to correct you.
Robert E. Sulentic: I think maybe 50 basis points above historic levels, about 550 basis points of vacancy versus 5% historically. We think that is going to correct. We think the situation in the single-family home market with the cost of mortgages is going to drive people toward renting.
Emma: We think the circumstance.
Emma: Single family home market with the cost of <unk>.
Emma: Mortgages is going to drive people toward renting and so we are quite bullish after we get through a little tough window here.
Robert E. Sulentic: And so we are quite bullish after we get through a little tough window here in the multifamily business about where that's going to go. We're bullish about what it means for Trammell Crow Company. We're bullish about what it means for our investment management business, and we think that the volumes in our services business will be good over time. But we are going to go through, as you commented on the Walker and Dunlop call; there will be a window here where it's a little more difficult. That's fully contemplated, by the way, in the numbers that Emma gave you about our expectations for 2024. Emma, do you want to add anything to that?
Emma: And the multifamily business of where that's going to go we're bullish about what it means for Trammell Crow company, we're bullish about what it means for our investment management business and we think that the volumes in our services business will be good over time, but we are going to go through as you as you commented.
Emma: The Walker and Dunlop call, there will be a window here, where it's a little more difficult that's fully contemplated by the way and the numbers that I gave you.
Emma: About our expectations for 2024, and I know you want to add to that and then on the on the GSE is we have embedded in our forecast pretty much on the card thing.
Emma: Flat to slightly up this year the sentiment that we're seeing from the agencies is that they will get closer to their cost. This year, but we are being conservative in terms of what we're projecting for the year, so likely slightly more positive than what you heard on the Walker and Dunlop.
Robert E. Sulentic: And then on the GSEs, we have embedded in our forecast pretty much our own being, and The Financial Times. On the office leasing side, you mentioned that you think that the worst is over there and that 65% of the business is Class A. Can you give any more color around maybe some anecdotal evidence or perhaps survey evidence that gives you confidence? Around that, I do know you put out monthly and quarterly reports from your research showing such things as, you know, tenants in the market or requirements. Well,
Emma: Yeah.
Emma: On the office leasing side.
Emma: You mentioned do you think that the worst is over.
Emma: There.
Emma: That 65% of the business is class a.
Emma: Can you give any more color around maybe some anecdotal evidence or perhaps survey evidence that gives you confidence.
Emma: Around that I do know.
Emma: You put out.
Emma: Monthly and quarterly reports from research showing such things as tenants in market or or requirements.
Emma: Well.
Robert E. Sulentic: It is the case that we think it is bottomed out. It obviously is below where, meaningfully below where, occupancy is. Square footage per person is below where it was. Per employee is below where it was in 2019. There is all kinds of anecdotal evidence around that issue.
Emma: It is the case that we think it has bottomed out obviously is below were meaningfully below where it was occupancy.
Emma: Is the square footage per person is below where it was per employee is below where it was in 2019.
Emma: There is all kinds of anecdotal evidence around that issue. Some some stubbornness about people coming back to the office that's super clear.
Robert E. Sulentic: Some stubbornness about people coming back to the office is super clear. The other thing is there's just a clear amount of pressure from companies to get their people back into the office for all kinds of reasons. What we do know, and I would say the anecdotal evidence in this area is not just evidence; it's an avalanche of evidence.
Emma: Sure thing is theres, just a clear amount of pressure from companies to get their people back into the office for all kinds of reasons.
Emma: What we do know and I would say the yen and the anecdotal evidence in this area is not just the evidence it's an avalanche of evidence.
Robert E. Sulentic: Every company that you talk to, you can't talk to a corporate that would tell you that office building occupancy, either in buildings they own or buildings they lease, is not important to their business. It's important to all of them. It's important to us in our business. And so what you're seeing is that people are redoing their space, trying to make it a better environment for their employees, making their employees more efficient, and more engaged. Class A buildings that create that opportunity or are seeing record rents in a number of markets, buildings that aren't good are struggling, and they're going to continue to struggle. So we look at that circumstance, and we say there's pressure on both sides, but we think it's kind of stabilized.
Emma: Every company that you talk to you can't talk to a corporate that would tell you that office building occupancy either in buildings they own or buildings. They lease is not important to their business. It's important to all of them, it's important to us in our business.
And so what Youre seeing is that people are redoing their space trying to make it a better environment for their employees make their employees more efficient more engaged.
Emma: Class a buildings that create that opportunity or you're seeing a number of markets record rents.
Emma: Buildings that arent, good struggling and theyre going to continue to struggle. So we look at that circumstance and we say there is pressure on both sides, but we think it's kind of stabilized we think it'll be a very big asset class going forward is bigger than the headlines might suggest because.
Robert E. Sulentic: We think it'll be a very big asset class going forward, bigger than the headlines might suggest, because people tend to like negative news. And in the real estate services business, as opposed to the real estate owning businesses, and we're in both of them, it's going to be a very large opportunity for CBRE. And you saw that with the Brookfield situation that we announced.
Emma: Tend to like negative news and in the real estate services business as opposed to the real estate owning businesses and we're in both of them, it's going to be a very large opportunity for CBRE and you saw that with the Brookfield sit.
Emma: Situation that we announced.
Robert E. Sulentic: You see that with the growth in our outsourcing business. You're seeing it come through in our leasing numbers. So I think that you're going to see the future be better than the current situation has been for a variety of reasons. I wanted to also, if I may ask about infrastructure, the J&J acquisition deepens relationships with the Department of Defense, in particular.
Emma: You see that with the growth in our outsourcing business youre seeing it come through in our leasing numbers.
Emma: So I think that youre going to youre going to see the future be better than the current circumstance has been for a variety of reasons.
Emma: Okay.
Speaker Change: Wanted to also if I may ask about infrastructure.
Speaker Change: The J&J acquisition deepens relationships with you know this.
Speaker Change: The department of Defense in particular, it seems and also we are seeing robust capital flows across the infrastructure space, particularly in digital data centers wanted to ask if you could comment if that's a strategic target, perhaps an area for M&A or co investments on the Trammell Crow side.
Robert E. Sulentic: And also, we are seeing robust capital flows across the infrastructure space, particularly in digital data centers. I wanted to ask if you could comment on whether that's a strategic target, perhaps an area for M&A or co-investment on the Trammell-Crowe side. We're doing well, Jay, you're talking about the blurred lines between real estate and infrastructure in some regard. And in those areas, data centers and so forth, we do have some meaningful exposure. The places where we have kind of traditionally defined infrastructure exposure or with the Turner and Townsend business where they provide a lot of program and project and cost consultancy services to infrastructure-type projects, and they are really well positioned for the future in that regard. We have an infrastructure investment management business that we would like to scale over time. And then, at Trammell Crow Company, we do a variety of development.
Speaker Change: We're well.
Speaker Change: Youre talking about the blurred lines between real estate and infrastructure in some regard and in those areas data centers and so forth we do have.
Speaker Change: Some meaningful exposure.
Speaker Change: The places where we have.
Speaker Change: Kind of traditionally defined infrastructure exposure or with the Turner and Townsend business, where they they provide a lot of program and project and cost consultancy services to infrastructure type projects and they are really well positioned for the future in that regard.
Speaker Change: We have an infrastructure investment management business that we would like to scale over time.
Speaker Change: And then in Trammell Crow company, we do.
Speaker Change: A variety of development there are some things we're working on that are quite large between trammell Crow company and Turner and Townsend that would be in the infrastructure category. So we believe over time will evolve to a place where we will do more work and invest more in infrastructure.
Robert E. Sulentic: There are some things we're working on that are quite large between Trammell Crow Company and Turner & Townsend that would be in the infrastructure category. So we believe over time we'll evolve to a place where we will do more work and invest more in infrastructure, but real estate is our core business for the time being. Thank you. Sheldon, from William Blair, your line is now live.
Speaker Change: But real estate is our core business for the time being.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question today is coming from Stephen Sheldon from William Blair. Your line is now live.
Speaker Change: Yes.
Robert E. Sulentic: Hey, thank you. Really nice job here and congrats on the J&J deal. With J&J likely to close here in the coming months, just wanted to ask kind of what your appetite is for pursuing other large acquisitions. I know you guys are kind of looking at, at least a few larger deals. So just curious, if you have any commentary on what your appetite is, if you're still pursuing or looking at some larger deals. M&A work is a fundamental, foundational element of what CBRE is about. We are committed across all of our lines of business to be a grower. We have built within our market-facing businesses the capability to identify M&A opportunities in all of our businesses. We clearly have some places we're more interested in at any given point in time, typically because they're secularly favored or because we have more of a right to win, but it is fundamental.
Stephen Hardy Sheldon: Hey, Thank you really nice job here and congrats on the J&J deal with with J&J likely to close here in the coming months I just wanted to ask kind of what your appetite is for pursuing other large acquisitions I know.
Stephen Hardy Sheldon: You guys are kind of looking at it.
Speaker Change: Well see at least a few larger deals. So just curious if you have.
Speaker Change: Any commentary on what your appetite is if youre still pursuing or looking at some some larger acquisitions.
Speaker Change: Yeah.
Speaker Change: M&A work is a fundamental.
Speaker Change: Foundational element of what CBRE is about we are committed across all of our lines of business to be a growth.
Speaker Change: We have built within our market facing businesses capability to identify M&A opportunities in all of our businesses. We clearly have some places we're more interested in at any given point in time typically because they are secular really favored.
Speaker Change: Or because we have more of a right to win but it is fundamental and so if you look across our business. Our people are in the market identifying opportunities at all times.
Robert E. Sulentic: And so if you look across our business, our people are in the market identifying opportunities at all times, and we've built up our M&A capability in the center, our corporate development capability to the point where we think it's quite unique within our sector and is relatively strong against the broader base of companies out there outside our sector. We have a strong balance sheet and a willingness to use that balance sheet to do M&A, so you should expect us We aren't going to do deals that we don't think are smart, either financially or because they're hard to integrate or too hard to integrate. It wasn't hard to watch us in the past year and say that, maybe, listening from quarter to quarter, there was more going on than you were seeing.
Speaker Change: We have built up our M&A capability in the center of our corporate development capability to the point, where we think it is quite unique within our sector and is.
Speaker Change: Relatively strong against.
Speaker Change: The broader base of companies out there outside our sectors are outside our sector. We have a strong balance sheet and a willingness to use that balance sheet to do M&A. So you should expect us to continue to build the business through M&A.
Speaker Change: We arent going to do deals that we arent, but we don't think are smart either financially or because they are hard to integrate or too hard to integrate and it wasn't hard to watch us in the past year and say that may be listening from quarter to quarter. There was more going on than you were seeing where you saw the J&J deal at the end there will be other things, but we werent.
Robert E. Sulentic: While you saw the J&J deal at the end, there will be other things, but we won't force M&A. We'll do M&A where we think we can grow our business the way we want to grow it, in areas with secular tailwinds, in areas where we have the right to win, and as Emma has said, it will likely be, over the long term, our number one use of capital.
Speaker Change: We won't force M&A, we will do M&A, where we think we can grow our business the way we want to grow it.
Speaker Change: And the areas with secular tailwind into areas, where we have the right to win.
Speaker Change: And as Emma has said it will likely be.
Speaker Change: Over the long term our number one use of capital.
Speaker Change: Got it thanks.
Emma Giomartino: And then just in capital markets, just kind of as you think about the last few months, how did activity progress through the fourth quarter and into early January? I'm just curious whether you see fits and starts with activity based upon what's happening with interest rates and just generally how dependent do you think it is?
And then just in capital markets and just kind of just as we think about the last few months how did activity progress.
Through the fourth quarter or into early January I'm, just curious whether you've seen fit.
Speaker Change: Fits and starts of activity based upon what's happening with interest rates and just generally how dependent do you think.
Emma Giomartino: Any capital markets improvement in 2024 and, I guess, in 2025 will be on the overall trend in interest rates. So, let's start with what we've been seeing over the past through 2023 and through the end of the year, and we did see a significant deceleration in the decline, especially getting into Q4. So, through the third quarter, we were looking at 40% declines up to that point, and then in the fourth quarter, we were down to below 20%. And what was notable about Q4 was that we actually saw a significant deceleration in December. So October and November had greater declines than December, which was in single-digit decline territory.
Speaker Change: Any capital markets improvement in 2024, and I guess into 2025 will be on the overall trend in interest rates.
Speaker Change: So let's start with what we've been seeing over the past through 2023 and through the end of the year and we did see a significant deceleration in the decline, especially getting into Q4.
Speaker Change: So through the third quarter, we're looking at 40% decline up to that point and then in the fourth quarter.
Down to below 20% decline and what was notable about Q4 was that that we actually signed.
Speaker Change: A significant we actually saw a significant deceleration in December So October November a greater decline than December which was in the single digit decline territory. So.
Emma Giomartino: Pulling that into 2024, we are not expecting a material uplift in capital markets activity, but we do expect it to grow at a mid single-digit rate globally. If the recovery picks up faster than we're expecting, if rates come down further than the market is expecting, then there could be upside from there, but our base case scenario is that there won't be as much. Great, thank you.
Speaker Change: Pulling that into 2024.
Speaker Change: Not expecting a material uplift and capital markets activity, but we do expect it to grow at a mid single digit rate.
Speaker Change: Globally.
Speaker Change: If the recovery picks up faster than we're expecting if rates come down further than the market is expecting then there could be upside from there but are our base case scenario is that there won't be a significant uplift.
Speaker Change: Great. Thank you.
Emma Giomartino: Thank you, the next question is coming from Michael Griffin from City. Your line is now: Great, thanks. Just maybe going back to the guidance for a minute, and I appreciate you guys including it this year. I'm just curious if you can kind of quantify, you know, give us a sense of if there are any cost savings initiatives factored into your outlook. You know, just to kind of get a sense of how much of this kind of growth is organic versus, versus cost cuts. So where you, there are cost savings embedded in our outlook, and where you will see the majority of them is within our advisory business, which I talked about earlier, We talked about $150 million of run rate cost savings on our Q3 call that we're gonna go after this year. We have identified an opportunity to reduce $150 million of run rate costs.
Speaker Change: Thank you. Your next question is coming from Michael <unk> from Citi. Your line is now live.
Michael: Great. Thanks, just maybe going back to the guidance for a minute I appreciate you guys, including I'm sure I'm.
Michael: I'm just curious if you can kind of quantify give us a sense of if there are any cost savings initiatives factored into your outlook.
Michael: I want to kind of get a sense of how much of this kind of growth is organic versus versus cost cutting.
Michael: So where are you. There is there are cost savings embedded in our outlook and where you will see the majority of it is within our advisory business I talked about earlier about 100 basis points of margin expansion.
Michael: In advisory, we talked about $150 million of run rate cost savings in on our Q3 call that we're going to go after this year and we have identified opportunities to reduce the $150 million of run rate cost, you'll see about half of that in year and.
Emma Giomartino: You'll see about half of that in the year, and most of that will be in the advisory segment. A piece of note about that is those cost savings are largely offsetting our bonuses reset, and our discretionary compensation, and our profit share is resetting to levels that are in line with our positive financial performance for the year. But it isn't embedded in the numbers.
Michael: Or that will be in the advisory segment.
Michael: A piece to note about that is those cost savings are largely offsetting.
Michael: Our bonuses resetting in our discretionary compensation in our profit shares resetting added to levels that are in line with.
Michael: Our positive financial performance for the year, but.
Michael: But it isn't embedded in the numbers that you're seeing.
Emma Giomartino: Gotcha. That's helpful. Then maybe on the REI segment, I was curious if you could give us some insights into how development costs have been trending and where return hurdles and IRRs are currently in the space. What would get you more interested in starting projects? Well, I'm going to start with cost. That is starting to come under control. You know, we had challenges.
Speaker Change: Gotcha. That's helpful. And then maybe on on the Rei segment I was curious if you could give us some insights into how <unk> costs have been trending and where return hurdles and IRR is currently in the space would get you more interested in starting projects.
Speaker Change: Well I'm going to start with cost that is starting to come under control. You know we had challenges everybody that was a developer here in the United States and around the world had challenges with cost. The last few years now that was all.
Robert E. Sulentic: Everybody that was a developer here in the United States and around the world had challenges with costs the last few years. Now that was all..., typically rescued by accelerating rental rates and declining cap rates. And we think all of that is stabilized, you know, cap rates have gone up, rental rate growth has slowed, but cost growth has also come under control. So that's all come back into balance. We are underwriting projects now at spreads between current cap rates and yields on projects that should deliver profitability consistent with what has been delivered in that business historically, and I mentioned this earlier and I'll mention it again, within that business.
Speaker Change: Typically rescued by accelerating rental rates and declining cap rates.
Speaker Change:
Speaker Change: And we think all of that is stabilized cap.
Speaker Change: Cap rates have gone up rental rate growth has slowed but cost growth has also come under control. So that's all come back into balance we are underwriting projects now.
Speaker Change: At spreads between current cap rates and yields on projects.
Speaker Change: That shouldn't deliver.
Speaker Change: Profitability consistent with what has been delivered in that business historically and I mentioned this earlier and I'll mention it again within that business over the last year we've secured.
Robert E. Sulentic: Over the last year, we've secured a good volume of development sites that are not at steel prices, but what's happened is sites that were otherwise not available have become available, and because many, many people are on the sidelines, many developers are on the sidelines, and we have the CBRE parent company balance sheet available to us. We've been able to secure a good number of development opportunities with really good spreads between current cap rates and yields on the projects so that, in the future, we think we're well positioned for that business. Emma's comments: you might have noticed that she said we've got hundreds of millions of dollars of profit captured in that in-process and pipeline portfolio development deals. We're quite excited about that. Great, that's it for me. Thanks for your time.
Speaker Change: But a good volume of development sites not not.
Speaker Change: Steel prices, but whats happened is sites that were otherwise not available have become available and because many many people are on the sidelines. Many developers are on the sidelines and we have the CBRE parent company balance sheet available to us we've been able to secure.
Speaker Change: A good number of development opportunities.
Speaker Change: With really good spreads between current cap rates and yields on the projects so that out in the future. We think we're well positioned for that business and then Emma's comments you might have noticed she said we've got hundreds of millions of dollars of profits captured in that in process and pipeline.
Speaker Change: Portfolio development deals, we're quite excited about that.
Speaker Change: Great. That's it for me thanks for the time.
Emma Giomartino: Thank you. The next question is coming from Alex Cram from UBS. Your line is now live. Yes, hey, good morning, everyone.
Speaker Change: Thank you. Your next question is coming from Alex Kramm from UBS. Your line is now live.
Alex Kramm: Yes, Hey, good morning, everyone and maybe nitpicky here, a little bit but can you just talk about your 2025 commentary from this morning, I think a quarter ago. You were still talking about you know achieving records now I think you were just hoping to get back to peak so not sure if it's the environment.
Emma Giomartino: I may be nitpicky a little bit, but can you just talk about your 2025 commentary from this morning? I think a quarter ago, you were still talking about, you know, achieving records. Now, I think you're just hoping to get back to the top.
Emma Giomartino: So not sure if it's the environment that's changed, or if you just think your, I guess, outlook incorporates a more conservative recovery in general. So maybe just compare and contrast how we should be thinking about, you know, your long-term outlook as you go into 2025. So, I want to be clear that we see a, we have strong visibility into returning to our peak level of EPS in 2025, and that confidence has not declined since last fall. It's at least equal to, and potentially slightly above, especially if we achieve our expectations for 2024.
Alex Kramm: Has it changed or if you're adjusting your your I guess outlook incorporates a more conservative recovery in general So maybe just compare and contrast, how we should be thinking about you know your long term.
Alex Kramm: Our outlook as we go into 2025.
Alex Kramm: So I wanted to be clear that we see a we have strong visibility into returning to our peak level of EPS in 2025.
Alex Kramm: And.
Alex Kramm: That confidence has not declined since last quarter.
Alex Kramm: At least equal to and potentially even slightly above, especially if we achieve our expectations for 2024 and I can simply breakdown the components of how we will get there between our resilient and.
Emma Giomartino: And I can simply break down the components of how we'll get there between our resilient SOP and our transactional SOP. Within our resilient line of business, lines of business, like I said before, we expect 1.8 billion in SOP this year. That should continue to grow at at least a 10% rate next year.
Alex Kramm: And our transactional S O P within a resilient line of business lines.
Alex Kramm: All lines of business.
Alex Kramm: I said before we expect $1 8 billion of S. O P. This year that should continue to grow at least a 10% rate next year and we have a high level of confidence in delivering that outcome and then on the transactional side we.
Emma Giomartino: And we have a high level of confidence in delivering that outcome. And then, on the transactional side, We do not need our transactional SOP to return anywhere near to peak levels of burning like we did in 2022, and they don't even need to return to our level of transactional SOP in 2019. So hopefully, that puts some perspective on our ability to achieve that outcome. The main risk is that the recovery will get delayed this year, and that would make the hurdle on the transactional side slightly higher. Alright, fair enough. And then, just maybe, a quick follow-up on the cost base. I mean, looks, I mean, obviously, you got a cost program in place.
Alex Kramm: We do not need our transactional S. L. P to return anywhere near to peak levels of of earnings like we did in 2022.
Alex Kramm: And they don't even need to return to our level of transactional E in 2019.
Alex Kramm: So hopefully that put some perspective.
Alex Kramm: Our perspective on our ability to achieve that outcome. The main risk is that the recovery would get delayed this year and it would make that hurdle on the transactional side slightly higher next year.
Speaker Change: Alright fair enough and then just maybe a quick follow up on the cost base I mean looks I mean, obviously you guys cost program in place.
Emma Giomartino: Since you've done a lot over the last few years, can you maybe just remind us where you think incrementals are on the transactional side now and break it out maybe between capital markets and leasing as we head to potentially net recovery here? So overall, on our transactional business, our incremental margins are in the low to mid-30s. This is both across capital markets and leasing. And to put some more context around that, a 5% change in leasing results in a 3% delta in EPS. And on the sales side, a 5% change in sales would be a 2% change.
Speaker Change: Since you've done a lot over the last few years can you, maybe just remind us where you're seeing incrementals on the transactional side now and break it out maybe between capital markets and leasing as we as we had to potentially in a recovery here.
Speaker Change: So overall on our transactional business.
Speaker Change: <unk> <unk>.
Speaker Change: Incremental margins.
Speaker Change: In the low to mid 30.
Speaker Change: <unk> this.
Speaker Change: This is both capital markets and leasing and to put some more context around a 5% change in leasing.
Speaker Change: It resulted in a 3% delta in EPS and on the sales side, 5% change in sales would be at two per cent change in EPS.
Operator: Excellent. Thanks. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further... Thanks very much, everyone, and we look forward to connecting with you again in 90 days. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your...
Speaker Change: Excellent. Thanks.
Speaker Change: Thank you we reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Speaker Change: Thanks, very much everyone and we look forward to connecting with you again in 90 days.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Speaker Change: Yeah.