Hello, and welcome to the CBRE Q4 2023 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this is being recorded. It's now my pleasure to turn the call over to Brad Burke, Head of Investor Relations and Treasurer. Brad, please go ahead.

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. 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 filings. 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 appendix. I'm joined on today's call by Bob Sulentic, our Chair and CEO; and Emma Giamartino, our Chief Financial Officer. Now, please turn to slide 5, as I turn the call over to 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. 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 availability. Emma will talk about our resilient businesses in greater detail at the beginning of her comments. 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. First, with the acquisition of J&J Worldwide Services and our GWS segment, we will increase our technical services capabilities for US 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 US office portfolio is among the largest in the history of our sector. 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. 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. Before turning to segment performance, please turn to Page 6, 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 noncyclical 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. 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 sixfold 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 3x 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 matched 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 offset slightly less industrial activity. Within property sales, industrial and retail declined less than multifamily and office, supported by healthy fundamentals. Commercial mortgage origination revenue growth was attributable to interest earnings on escrow balances. The rest of our advisory business lines…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Anthony Paolone from JPMorgan. Your line is now live.

Okay. Thank you. Good morning. I guess, my first question is I look at the guideposts for the various business lines. They seem kind of pretty good from our vantage point. But just wondering if you could talk about things like the corporate segment taxes, interest expense creation 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 to EPS.

Yes, Tony. So, first to step back on our outlook 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 baked into the midpoint of our EPS guidance is some level of conservatism, given that rates have continued to bubble especially in the past few weeks. So it's safe to assume on the corporate cost level the corporate segment level that is going uptick slightly, but not as much as your -- the number that you're looking at might imply. And the reason corporate will uptick slightly is because primarily, because our bonuses discretionary compensation will reset to levels that are in line with improved financial performance. And then I'll comment on the range of our outlook. The pieces that we have a high level of conviction around is our growth in our resilient SOP. We talked about that growing from $1.6 billion this year to $1.8 billion next year or 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 begins.

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 you'll see in 2024 versus 2025 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 year and we talked about what the EBITDA we're expecting for J&J in our press release about $65 million for the year. It is safe to assume we'll get three quarters of that in the year. The remainder of the co-investments in REI will be weighted more towards 2025 and beyond those funds. Funds get launched and our developments get monetized.

Okay. Thank you.

Thank you. Your next question is coming from Steve Sakwa from Evercore ISI. Your line is now live.

Great. Thanks. And I guess just on capital deployment, I realize with the stock may be shooting up a lot in the fourth quarter that temperature enthusiasm for share buybacks. You only did about $20 million in the quarter. Just with share buybacks sort of fit in on the capital deployment in 2024 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. We really saw in Q4 is that we were anticipating our -- 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. And so you're seeing a weight 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 to meet our value expectations. So where we sit right now expect the balance to be towards M&A this year. But of course, if that changes we'll look to repurchase shares.

Okay. And I know you provided a bunch of guidepost certainly on the revenue side. I just want to make sure from a margin perspective, I just kind of understand, 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 business. In GWS, our margins should hover around NIM 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 step function change in our margin over time, it will gradually increase as we continue to differentiate that business.

Great. Thanks. That’s it for me.

[Operator Instructions] Our next question is coming from Jade Rahmani from KBW. Your line is now live.

Thank you, very much. 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 Crow, 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.

I'll comment on the -- Jade on the Trammell Crow Company circumstance and then Emma can comment on the volumes, 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's really doesn't show up in any of our headlines that makes us excited about future profitability. It is true that there is some pressure 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 that yields those deals were developed at. We think that is going to be self-correcting over the next couple of years. New development volume is going to come down. We're still at barely above historic levels of vacancy. 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 circumstance in the single-family home market with the cost of mortgages is going to drive people towards renting. And so, we are quite bullish after we get through a little tough window here in the multifamily business on 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 from the Walker & Dunlop call, there will be a window 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, you want to add to that?

And then on the GSEs, we have embedded in our forecast pretty much OMSR being flat to slightly up this year. Sentiment that we're seeing from the agencies is that they will get closer to their cash this year. But we are being conservative in terms of what we're projecting for the year. So, slightly more positive than what you heard on the Walker & Dunlop.

On the office leasing side, you mentioned 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 takes you confidence around that? I do know you put out monthly and quarterly reports from research showing such as tenants in market or requirements.

Well, it is the case that we think it has bottomed out. It obviously is below -- meaningfully below where it was 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, some stubbornness people coming back to the office. That's 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 anecdotal evidence in this area is not just evidence it's an avalanche of evidence. 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 building 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, make their employees more efficient, more engaged. Class A buildings that create that opportunity are seeing in a number of markets record rents. 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. We think it will 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. 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 circumstance 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, it seems. 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 if that's a strategic target perhaps an area for M&A or co-investment on the Trammell Crow side?

We're -- well, Jade, you're talking about the blurred lines between real estate and infrastructure and some regard. And in those areas data centers and so forth we do have meaningful exposure. The places where we have kind of traditionally defined infrastructure exposure or with the Turner & Townsend business where they provide a lot of program and project and cost consulting 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 in Trammell Crow Company, we do a variety of development. 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. Next question today is coming from Stephen Sheldon from William Blair. Your line is now live.

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, I just wanted to ask kind of what your appetite is for pursuing other large acquisitions? I know you guys are kind of looking 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 acquisitions.

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 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 because we have more of a right to win but it is fundamental and if you look across our business, our people are in the market identifying opportunities at all times. We have 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 sectors -- are outside our sector. We have a strong balance sheet and willingness to use that balance sheet to do M&A. So, you should expect us to continue to build the business through M&A. We aren't going to do deals that we aren't -- that we don't think are smart either financially or because they're hard to integrate or too hard to integrate. And 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 where 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 into areas with secular tailwind, in the 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.

Got it. Thanks. And then just in capital markets just kind of just as we think about the last few months how did activity progress through the fourth quarter into early January. I'm just curious whether you've seen fits and starts of activity based upon what's happening with interest rates? And just generally, how dependent do you think any capital is improvement in 2024 and I guess into 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, you're looking at 40% decline up to that point. And then in the fourth quarter, we were down to below 20% decline. And what was notable about Q4 was that we actually saw a significant deceleration in December. So October, November had greater declines than December, which was in the single-digit decline in territory. So 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 a significant uplift.

Great. Thank you.

Thank you. Your next question is coming from Michael Griffin from Citi. Your line is now live.

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 quantify give us a sense of if there are any cost savings initiatives factored into your outlook? I want to get a sense of how much of this growth is organic versus cost cutting?

So there are cost savings embedded in our outlook, and where you will see the majority of it is within our advisory business, which I talked about earlier about 100 basis points of margin expansion 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. We have identified opportunities to reduce $150 million of run rate cost. You'll see about half of that in year and most of that will be in the advisory segment. A piece to note about that is those cost savings are largely offsetting our bonuses resetting and our discretionary compensation in our profit shares resetting to levels that are in line with our positive financial performance for the year, but it isn't embedded in numbers that you're seeing.

Got you. 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 IRR is 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. We had challenges, everybody that was a developer in the United States and around the world had challenges with cost the last few years. Now that was all typically rescued by accelerating rental rates and declining cap rates, and we think all of that has stabilized. 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 over the last year we've secured good volume of development sites, 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, 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 out in the future, we think we're well positioned for that business. And in Emma's comments, you might have noticed that she said, we've got hundreds of millions of dollars of profits captured in that in-process and pipeline portfolio development deals. We're quite excited about that.

Great. Thats it for me. Thanks for the time.

Thank you. Next question is coming from Alex Kramm from UBS. Your line is now live.

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 achieving records. Now I think you're just hoping to get back to peak. So not sure if, it's the environment has changed or adjusting your I guess outlook incorporates a more conservative recovery in general. So maybe just compare and contrast, how we should be thinking about 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 quarter -- is at least equal to and potentially slightly above especially, if we achieve our expectations for 2024. And I can simply break down the components of how we'll get there between our Resilient SOP and our transactional SOP. Within our resilience line of business, like I said before, we expect $1.8 billion of SOP 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 do not need our transactional SOPs to return anywhere near to peak levels of earnings 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 would get delayed this year and it would make that hurdle on the transactional side slightly higher next year.

All right. Fair enough. And then just maybe a quick follow-up on the cost base. I mean, it looks -- I mean obviously, you guys cost program in place. 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 and break it out maybe between capital markets and leasing, as we had potentially a 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 in EPS.

Make sense. Thanks.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments.

Thanks very much, everyone, and we look forward to connecting with you again in 90 days.

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.