At the 2012 Invest for Kids conference, Jeff Ubben of ValueAct Capital gave a vote of confidence to the real estate services company CBRE Group Inc (NYSE:CBG). Ubben’s fascination with CBRE is a result of its positioning and stranglehold on the industry, where Ubben states that “between CB and JLL you have no other players that can enter, there have been number threes attempted that can’t get in, so you have a very big company [CBRE] that has a global presence.”
Ubben focuses on block investing and is currently finding interesting opportunities in the financial sector. Ubben founded ValueAct Capital in 2000. Prior to that, Ubben spent five years at Richard Blum’s Blum Capital Partners, working as a Managing Partner. ValueAct Capital has a long-term focus and usually makes only three to four new investments in per year. Ubben’s sweet spot is to hold about fifteen positions, with the average holding period for each position being about three years. Check out all of Ubben’s top picks.
Ubben believes that CBRE is in the “second-inning” of a nine-inning game, meaning they still have a lot of room to run. Ubben’s key CBRE thesis includes the fact that the real estate firm gets about two-thirds of its revenues from reoccurring business. CBRE should also capitalize on increased outsourcing and on a rise in leased commercial space. Sales and leases of commercial real estate should expand as the economy continues to recover and credit conditions become more accommodating.
CBRE is expected to see revenues up 10% in 2012 from 2011 on the back of increased demand for real estate outsourcing services. One potential headwind is continued European slowdown, which accounts for 15% of revenues. We see the array of services that CBRE offers and its global reach will limit its downside.
Other top real estate consulting companies include Jones Lang LaSalle (NYSE:JLL), Kennedy-Wilson Holdings, Inc. (NYSE:KW), Realogy Holdings Corp (NYSE:RLGY) and FirstService Corporation (NASDAQ:FSRV). Jones is an international real estate consulting firm with clients in the Americas, Europe, Middle East and Asia. Although Jones trades at 18x trailing earnings, the company trades at 12x forward earnings. For the first half of the year Jones saw both revenue and income up 13% from the same period last year. Driving the increase was a 20% revenue increase in the European segment.
Kennedy has one of the lower betas of the five real estate companies listed at only 0.8. For the first half of the year this real estate company has managed to increase revenues 50% from the same period last year, but they still posted a net loss of $6.3 million, an 84% increase from last year. Despite this fact, Kennedy is up 30% year to date through the end of October. More recently the company appears to be making good progress, narrowing its 3Q loss to $0.11, compared to $0.16 for 3Q 2011.
Realogy is a U.S.-focused real estate firm that trades at an incalculable P/E due to recent negative earnings. For the first half of 2012 revenues were up 9%, and its net loss was down 16%. The real estate firm recently completed its IPO in mid-October, and is up over 10% since then.
FirstService, the smallest real estate firm according to market cap, like many of the other real estate firms listed operated with a net loss for the first half of 2012. FirstService’s net loss increased 23% from the same period last year.
Blum Capital was CBRE’s second largest shareholder at the end of 2Q with 21 million shares, which was over 28% of the firm’s 2Q 13 portfolio. Blum Capital was selling off shares a couple of months ago. As of the end of June, CBRE represented ValueAct’s seventh largest 2Q 13F holding. ValueAct owned over 30 million shares, making up over 7% of their 13F.
CBRE does trade at 25x earnings, and Jones Land and FirstService trade at or below 18x, but CBRE’s forward P/E of 12x and five-year expected annual EPS growth of 17% does encourage us. We see CBRE as interesting investment opportunity, where there are only two major players in the industry, CBRE and Jones Lang. Other third-party players have tried to enter the market before, but have had no luck.