Earnings Call Transcript - CBRE Q4 2021

Operator, Operator

Greetings, and welcome to CBRE's Q4 2021 Earnings Conference Call. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Kristyn Farahmand, Senior Vice President of Investor Relations and Strategic Finance, CBRE. Ma'am, please go ahead.

Kristyn Farahmand, Senior Vice President, Investor Relations and Strategic Finance

Good morning, everyone, and welcome to CBRE's Fourth Quarter 2021 Earnings Conference Call. Earlier today, we issued a press release announcing our financial results, which is posted on the Investor Relations page of our website, cbre.com, along with a presentation slide deck that you can use to follow along with our prepared remarks as well as an Excel file that contains additional supplemental materials. Before we kick off today's call, I'll remind you that this presentation contains forward-looking statements that involve a number of risks and uncertainties. Examples of these statements include our expectations regarding CBRE's future growth prospects, including our 2022 qualitative outlook and multiyear growth framework, operations, market share, capital deployment strategy and share repurchases, M&A and investment activity, the performance of existing investments, financial performance, including cash flow, profitability, expenses, margins, adjusted EPS, core adjusted EPS and the effects of the COVID-19 pandemic, the integration and performance of acquisitions and other transactions and any other statements regarding matters that are not historical fact. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only, and certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements. 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 most recent annual and quarterly reports filed on Form 10-K and Form 10-Q, respectively. We have provided reconciliations of core adjusted EPS, adjusted EPS, adjusted EBITDA, net revenue and certain other non-GAAP financial measures included in our remarks to the most directly comparable GAAP measures, together with explanations of these measures in the appendix of the presentation slide deck. Our agenda for this morning's call will be as follows. First, I'll provide an overview of our new financial metrics. Next, Bob Sulentic, our President and CEO, will discuss initiatives that support our 4-dimension diversification strategy. Then Emma Giamartino, our Chief Financial and Investment Officer, will discuss the quarter in detail, our capital deployment strategy, our initial qualitative 2022 outlook and our updated multiyear growth framework, then we'll open up the call for questions. As you can see on Slide 5, the fourth quarter completed a strong and transformative year for CBRE. We made strategic investments in Turner & Townsend and Industrious and saw significant gains from strategic noncore investments made through our SPAC and in venture capital funds. Due to our controlling interest that results from our 60% ownership stake in Turner & Townsend, we fully consolidate Turner & Townsend's financials, including their balance sheet. We will focus our commentary on consolidated performance inclusive of noncontrolling interests, and we will use consolidated adjusted EBITDA for our net leverage calculations. To give more transparency to our investors, we are introducing a new earnings metric called core adjusted EPS this quarter. Core adjusted EPS excludes the impact of strategic noncore, noncontrolling investments that are not attributable to a business segment. These had an immaterial impact prior to 2021. These investments are a small part of our portfolio, but there is likely to be considerable volatility in their fair values, particularly for Altus Power, the largest of our investments now trading on the New York Stock Exchange. We believe this new metric will help investors better assess the underlying performance of our core business. Starting in Q1, we will also present strategic noncore investments in corporate overhead separately, which today are combined. We believe this incremental transparency will help investors assess the level of corporate overhead and the performance of these noncore investments. We've also enhanced our presentation today to help provide greater insight into our performance. As a result, the slides accompanying our remarks are different from previous quarters and focus on the most significant drivers to our consolidated results for revenue, adjusted EBITDA and earnings. The segment-specific slides we presented in previous quarters are included in the appendix, as are some slides from our research team detailing the long-term historical relationship between real estate and inflation that we believe investors will find topical. With that, please turn to Slide 7 as Bob provides insight into our strategy. Bob?

Robert Sulentic, President and Chief Executive Officer (CEO)

Thank you, Kristyn, and good morning, everyone. As you've seen, we had a strong finish to 2021 significantly outperforming both Q4 2020 and the pre-pandemic peak in Q4 2019. This capped an outstanding year for CBRE with all key financial benchmarks reaching new all-time highs for the company. We certainly benefited from a supportive macro environment in 2021. Beyond that, our strong financial performance is the product of our long-standing work to strengthen our balance sheet and improve the resiliency of our income statement as well as our successful efforts over the past several years to diversify our business across four dimensions: asset types, lines of business, clients and geographies. We have described our diversification efforts in detail in recent quarters, highlighting how it has positioned CBRE to benefit significantly from secular tailwinds. Prime examples of this are our investments in Turner & Townsend, a project manager that enhances our green energy and infrastructure capabilities; and Industrious, a leading asset-light player in the growing flex space market. In our Real Estate Investments segment, we are now executing a strategy to realize positive synergies between our development and Investment Management businesses with support from our strong balance sheet. So far, this effort has focused on industrial and logistics assets which are benefiting from long-term secular trends. Our research team projects that global e-commerce sales will rise to approximately $3.9 trillion by 2025, requiring an additional 1.5 billion square feet of distribution space. Specifically, we are placing development projects into investment programs run by CBRE Investment Management, essentially converting portions of our more than $18 billion in-process development portfolio into Investment Management AUM. This strategy also capitalizes on our industrial investment sales and property management expertise. At the same time, we are further building AUM in our industrial and logistics strategy by supporting CBRE Investment Management's acquisition of large portfolios of operating assets. The most recent example is the agreement to acquire a $4.9 billion portfolio of U.S. and European logistics assets from Hillwood. Our balance sheet provided a backstop for portions of this portfolio, which enabled our team to move quickly to secure a highly desirable set of assets. We plan to replicate this model for other secularly favored asset types, including multifamily and life sciences and expect our integrated investor, operator, developer model will generate material incremental recurring revenues and earnings for years to come. Reflecting our strong 2021 performance and the substantial opportunities we see in front of us, we are increasing our multiyear aspirational growth framework. For the period from 2020 to 2025, we now expect our average annual core adjusted EPS growth to exceed 20% barring an economic disruption from geopolitical or other events, which we are watching closely. This is up from the low double-digit growth expectation we set a year ago. The average annual growth rate is expected to be in the low double digits for the prospective period from 2021 to 2025. We believe there is potential upside to our expected growth rates for both periods through incremental capital deployment. Emma will walk you through this in detail after she reviews the quarter.

Emma Giamartino, Chief Financial and Investment Officer

Thanks, Bob. 2021 was an outstanding year for CBRE with strong growth across our key financial metrics and record free cash flow driven by operational discipline and our four-dimension diversification strategy. We're also well positioned for future growth, which I'll discuss shortly. Throughout my remarks today, I'll highlight how our results benefited from asset type diversification, and in future quarters, I will focus on the benefits of other diversification dimensions. Now please turn to Slide 9, so we can dive into our results for the quarter. Like Q3, I'll include compares with Q4 2019 for our transactional business lines to provide insight into our performance from peak levels. On a consolidated basis, revenue grew 24% compared to Q4 2020 and 20% over Q4 2019 led by rebounding sales and lease revenue. Advisory Services added nearly $1 billion in net revenue, growing 43% for Q4 2020 and 23% over Q4 2019 to over $3.3 billion, a record for our largest segment. We continued to benefit from a supportive property sales backdrop. Globally, sales revenue jumped over 73% from Q4 2020 and 45% from Q4 2019. The U.S. led the recovery among our major markets with 89% sales revenue growth compared to the prior year quarter. We had the highest market share across all major asset types in 2021, while our overall U.S. market share rose 100 basis points in the quarter according to Real Capital Analytics. Capital inflows into multifamily and industrial remained strong, allowing us to benefit from the very intentional work we have done to build leading sales platforms focused on these asset types. U.S. industrial sales revenue more than doubled from Q4 2019, while U.S. multifamily sales nearly doubled over the same period. Office continues to gradually improve back towards pre-pandemic levels. Our U.S. office sales revenue was around 14% shy of Q4 2019, an improvement from steeper declines in prior quarters. Global leasing revenue rose 14% compared to the fourth quarter of 2019 with all three regions ahead of 2019 levels for the second consecutive quarter. EMEA leasing revenue grew 25% versus Q4 2019, the Americas was up 13%, while APAC grew 7%. Industrial leasing surged around 60% compared to the fourth quarter of 2019 as occupier demand for distribution space remains strong. Like in sales, office leasing also continued to recover with global office leasing nearly flat versus Q4 2019. EMEA and APAC office leasing rose around 7% and 11%, respectively, compared to Q4 2019. U.S. office leasing revenue trends also continued to improve. While still below its 2019 level by around 4%, the year-over-year shortfall from prior peak levels has narrowed compared to previous quarters. Notably, while it's still early in the year, we are continuing to see strong momentum in both U.S. sales and leasing thus far in 2022, with revenue trending significantly above prior peak first quarter levels. Loan servicing was the primary growth driver within the rest of advisory, with revenue rising around 70% from Q4 2019 to nearly $93 million. Our loan servicing portfolio grew 23% versus the prior year and 10% sequentially to nearly $330 billion, primarily driven by private capital sources. Our multifamily portfolio, comprising nearly half of the total, grew about 14% versus Q4 2020. Our alternative asset type portfolio, which includes agriculture, health care, hotels and others, rose over 70% and now comprises approximately 19% of our total servicing portfolio. Growth was driven by a strong pace of third-party servicing wins, which is a key focus area for growth in this business. OMSR gains faced a tough compare and were down about $47 million. These gains were elevated in last year's fourth quarter as the government agencies were extremely active in providing liquidity to a multifamily market burdened by COVID impact. Turning to GWS. Net revenue grew 22%, increasing $330 million to nearly $1.9 billion. This includes about $175 million in net revenue from the Turner & Townsend transaction, which closed on November 1 and was in line with our previous expectations. We are extremely excited about the growth trajectory for this business. Project management is a fragmented market, estimated to be over $100 billion with strong secular growth tailwinds, particularly within infrastructure. This transaction helps to bolster the nascent infrastructure capabilities within our existing businesses. We believe broadening our infrastructure offerings will help to accelerate future growth and deepen diversification, especially by helping to further insulate our business from more cyclical trends. Our legacy GWS revenue grew nearly 8% led by project management, which rose about 17%, excluding contributions from Turner & Townsend. Strong growth in project management was driven by continued recovery from the pandemic-constrained environment. Facilities Management revenue increased nearly 6%, and net revenue rose over 10% supported by growth from local clients. We expect Facilities Management growth to benefit from continued progress in returning to a more normal business environment in 2022. Looking at REI, revenue increased $125 million or 43% to over $413 million. This was driven by increasing activity in our U.K. multifamily development business, which is continuing to recover from COVID-related challenges. Investment Management revenue was relatively flat versus Q4 2020 at about $150 million due to lower carried interest revenue, which can be volatile. Excluding carried interest revenue, Investment Management revenue grew 19%, driven by strong asset management fee growth. AUM rose to a new record of nearly $142 billion with more than 80% invested in assets other than office. Industrial comprises the largest component, in line with our strategic vision to position the company to benefit from this sector's strong secular tailwinds. Flipping to Slide 10. Consolidated adjusted EBITDA grew to over $1.1 billion. Excluding noncash gains related to OMSRs, our Altus Power investment through our SPAC and venture capital investments, adjusted EBITDA grew over 37% compared to Q4 2020. On this basis, our underlying adjusted EBITDA margin on net revenue rose 6 basis points versus Q4 2020 to 16.5%, which is 1.7% above our Q4 2019 level. Advisory Services segment operating profit marginally exceeded our expectations, increasing $219 million to over $740 million as sales and lease revenue rose more than expected. Advisory's net operating profit margin, excluding volatile noncash OMSR gains, reached a new record of 21.5%, about 120 basis points better than Q4 2019. We achieved this despite record productivity pushing more producers into higher split tranches. In GWS, legacy segment operating profit reflected higher-than-expected medical expenses as we saw a ramp-up in year-end insurance claims compared with 2020's severely pandemic-constrained levels as well as a $3 million impact of noncash deferred purchase consideration expense for Turner & Townsend. Turner & Townsend profitability performed in line with our expectations, contributing just over $23 million of profit from November 1 through year-end. REI segment operating profit rose $39 million to $156 million and was roughly in line with expectations as outperformance in Investment Management offset a modest shortfall in development. Investment Management benefited from higher-than-expected net promotes and co-investment returns driving operating profit to $41 million. Development operating profit of $122 million was affected by a $29 million increase in the reserve we had previously taken on a U.K. construction project that faced challenges that were exacerbated by the pandemic. We believe we have fully reserved for this project and don't expect it to result in further adverse financial impacts. Putting aside this reserve increase, development operating profit would have been over $150 million for the quarter and about $380 million for the year, surpassing our previous expectations. This was driven by the conversion of our average in-process portfolio to operating profit at a rate of over 2.1% over the trailing 12-month period, a level well above our historical norm of between 1% and 2% with most years around the midpoint. We also saw increased corporate overhead in the quarter. This is largely driven by higher incentive compensation as performance materially exceeded initial 2021 expectations and our investments in key corporate functions to help support our larger business. We do not expect incentive compensation to fluctuate as much in 2022 as business volatility continues to normalize. Looking at Slide 11, adjusted earnings per share rose 51% to $2.19. This includes a benefit of $0.36 from a gain in our SPAC investment and another $0.03 from mark-to-market adjustments on our Altus Power and VC investments. Excluding these noncash gains, core adjusted EPS rose 24% to $1.80. Excluding only the SPAC deconsolidation gain, which is consistent with how we've reported our results in previous quarters, adjusted EPS rose over 26% to $1.83. Robust underlying earnings growth reflects the strong increase in adjusted EBITDA as well as lower net interest expense. These were partially offset by higher depreciation and amortization, mainly related to elevated prepayments of government agency-related loans, which triggered higher OMSR amortization. Our results also include noncash interest expense related to deferred purchase consideration for our remaining Turner & Townsend payments and an increase in our effective adjusted tax rate to 23.9%. The nonrecurring reserve increase in the U.K. multifamily development business lowered earnings by approximately $0.07. Going forward, as Kristyn noted earlier, we'll report both adjusted EPS and core adjusted EPS to give you transparency into how both our core operations and noncore investments are performing. Now we'll discuss our financial capacity on Slide 12. Due to our strong profitability, we generated nearly $1.1 billion of free cash flow in the quarter, bringing our annual free cash flow total to almost $2.2 billion, which is a new record for our company. We ended the year with a net cash position of 0.2 turn while deploying nearly $1.8 billion of capital, net of debt issuance proceeds during the year, primarily for investments in future growth. We also repurchased around $370 million of stock, providing our shareholders a repurchase yield of over 1%. We intend to continue this capital deployment strategy and believe there is ample opportunity to invest in future growth while also programmatically returning cash to our shareholders. In support of this, we commenced our fifth consecutive quarter of repurchases in Q1 2022. We intend to continue repurchases throughout this year, assuming the return remains attractive and we have capacity given our evolving M&A pipeline. Additionally, as we move forward, strong free cash flow conversion will remain a priority for us, and our senior executive team will be evaluated on this metric as part of their 2022 goals. Please turn to Slide 13. We expect another year of strong growth in 2022. Market conditions remain generally favorable, notwithstanding heightened geopolitical tensions, and tailwinds are likely to persist across the four dimensions of our business and areas where we are proactively investing to drive growth. Advisory Services is positioned for another year of strong revenue and segment operating profit growth, with leasing revenue expected to rise at a high teen to low 20% rate and sales revenue expected to rise at a low to mid-teens rate. We expect incremental benefit from offices' gradual recovery and that industrial leasing should decelerate modestly due to a potential near-term shortage of available properties. As Bob highlighted earlier, we believe long-term secular trends are bolstering demand for industrial space and expect strong performance for this asset class on a long-run basis. Outside of sales and leasing, we expect advisory revenue to rise at a high single-digit to low double-digit clip compared to 2021. We also expect advisory's operating margin to be roughly flat versus the prior year as the benefit of high-margin transactional revenue growth will be tempered by some operating expense investments designed to accelerate future growth. Advisory operating profit expectations also include increased strategic equity awards to help better align a broader leadership team with our enterprise strategy and shareholders. We expect strong long-run margin performance in advisory, partially driven by these investments. In GWS, we expect low to mid-double-digit organic top line growth and mid- to high single-digit organic segment operating profit growth. This is being driven by continued strong growth in project management and accelerated growth in enterprise facilities management, partially driven by a return to normal contract cycle times. We expect this growth to be more weighted to the second half of the year. GWS legacy segment operating profit expectations also include the impact of $17 million of noncash deferred purchase consideration expense for Turner & Townsend. This expense will continue through 2025 when we've made the last of our required payments. We will also record about $10 million in noncash interest expense associated with our deferred payments. Like in advisory, GWS operating profit expectations also include an impact from increased use of strategic equity awards. This is reducing expected legacy segment operating profit growth by around 1%. We expect Turner & Townsend to grow net revenue at a mid-teens rate, in line with its historical average over the approximately $974 million it generated in calendar year 2021. Strong organic growth is expected to more than offset a small foreign exchange headwind at today's spot rate. Turner & Townsend net operating profit margin is projected to tick up around 0.5% from the 13.4% generated in the fourth quarter. This reflects strong top line growth, the restoration of certain expenses cut during COVID and about $10 million of noncash expense for retention bonuses. REI revenue is expected to grow around 20%, and segment operating profit is expected to roughly match the elevated operating profit of $520 million generated in 2021, excluding the $24 million accounting change-driven gain that we recorded in last year's first quarter. Revenue growth is being driven by continued recovery of our U.K. development business. Our REI expectations also contemplate elevated hiring in investment management for new product development, a key strategic focus as well as more moderate appreciation in asset values. Finally, we expect our development in-process portfolio will convert to operating profit at a rate of under 2%, in line with historical performance. Our in-process portfolio is well positioned for the current environment with nearly 80% of the portfolio comprised of industrial, multifamily, health care and life sciences assets. As you can see, we are consciously orienting the portfolio towards assets with strong long-term performance potential. Setting aside any effects of our strategic noncore investments, we expect corporate overhead to decline nearly 5% from 2021. We anticipate investments in further scaling key corporate functions to be more than offset by more favorable incentive compensation impact. Going forward, core adjusted earnings, which excludes the impact of our small portfolio of strategic noncore investments, will be the basis of our financial forecast. We are making these investments for their strategic value rather than near-term financial gains. However, there will likely be sharp volatility in their investment valuation, especially for our largest noncore investment in publicly traded Altus Power. Altus is poised to benefit from the transition to a low-carbon economy while enhancing capabilities to help our clients meet their clean energy and sustainability goals. As always, for investments of this nature, short-term bouts of market volatility can cause the value of our investment to swing sharply on a quarter-to-quarter basis. For example, the majority of the noncash gain we recognized in the fourth quarter would be reversed in the first quarter at Altus' share price as of February 15. Now looking at depreciation and amortization. We expect this to rise about 4%, and we project our effective adjusted tax rate to be in line with the 23.9% rate we saw in Q4 2021. We are also highly focused on monitoring how inflation could impact our business. Real estate provides a natural inflation hedge when held on a long-term basis, which somewhat cushions our transactional businesses. In fact, sales could potentially even benefit if inflation concerns draw more capital to real estate. On the expense side, clients reimburse us for the salary and benefits of nearly half of our employee base who work primarily in the GWS and property management businesses, and inflation provisions are typically embedded in our multiyear GWS contracts. In light of this, we believe we are well positioned to succeed in a higher inflation environment. It is also prudent to highlight that while the current operating environment remains favorable, there is heightened uncertainty given this higher inflationary environment, tighter monetary policy and rising geopolitical tensions. Please turn to Slide 14 for an update of our multiyear growth framework. As Bob noted, we've raised our base case annual core adjusted EPS growth expectations to more than 20% for the 2020 to 2025 period and to low double digits for the next four years. There is upside to both growth rates from additional capital deployment. We envision solid organic revenue and earnings growth across our three business segments. Our overall margin is expected to gradually increase over this period even with considerable growth from our lower-margin GWS segment. The GWS margin itself should also improve over time as higher-margin project management accounts for a larger share of our GWS revenue base. We will continue to manage our balance sheet prudently. We are comfortable with increasing net leverage to around 1 turn as we deploy capital into M&A to accelerate growth. We can even go as high as 2 turns for a highly compelling strategic opportunity. We expect to focus our capital deployment strategy on secularly favored areas that will further diversify our business. We see significant opportunity to expand our investor, operator, developer model into multifamily, life sciences and infrastructure. Importantly, this model plays to our competitive advantages, including cross-functional collaboration, business line diversification and balance sheet strength, giving us the opportunity to further differentiate CBRE. Given our sizable financial capacity, we expect shareholder capital returns will continue to figure prominently within our capital allocation plans over this multiyear horizon. Ending with Slide 15. Since 2016, core adjusted EPS has achieved average annual growth of 21%, while revenue and free cash flow have also grown at double-digit annual rates over this period. This strong growth has been supported by the strategic steps we've taken to bolster our balance sheet while pursuing a disciplined capital allocation program and increasingly diversifying our business. We expect our multiyear growth framework will extend the successful track record of performance across our key financial metrics. We are extremely optimistic about our trajectory as we head into 2022 and look forward to delivering another year of strong performance. And with that, operator, we'll open the line for questions.

Operator, Operator

We will now open the call for questions. We have a first question from the line of Anthony Paolone with JPMorgan.

Anthony Paolone, Analyst, JPMorgan

Great. My first question is to understand: if the new EPS metric is going to be core adjusted, what is the EBITDA that ties to that metric? Because it doesn't seem like it's the $1.124 billion.

Kristyn Farahmand, Senior Vice President, Investor Relations and Strategic Finance

So we haven't changed the adjusted EBITDA metric, but there are going to be two different segment operating profit metrics going forward for each segment. We will be reporting consolidated segment operating profit for each segment as well as operating profit attributable to CBRE common stockholders. For the purposes of consolidated adjusted EBITDA, we feel like that's the best measure for the company in terms of the EBITDA metric because we are fully consolidating all of Turner & Townsend's financials into our own. That keeps the margins logical.

Emma Giamartino, Chief Financial and Investment Officer

And Anthony, I'll just add on core adjusted EPS: we're not reporting a comparable core adjusted EBITDA. So our adjusted EBITDA will include the gains from the SPAC and our venture capital gains.

Anthony Paolone, Analyst, JPMorgan

Yes, I think so.

Operator, Operator

We have the next question from the line of Alex Kramm with UBS.

Alexander Kramm, Analyst, UBS

Yes. You made those comments on inflation, and I didn't look at the slides that you had from your research group. But on balance, you think inflation is positive. Does that include rate hikes as they're obviously forecasted now to happen? Maybe you can specifically talk about rates. You have a very diversified business, so it's hard to think through where rate increases may hit you. So a little more detail on that would be helpful.

Emma Giamartino, Chief Financial and Investment Officer

Yes. We've based our outlook on what our in-house economist believes will happen in terms of inflation and rate hikes over the next year. His view is that inflation will moderate through 2022 and 2023, and the Federal Reserve will do a similar number of hikes as the market is projecting to manage that inflation. We've incorporated that outlook into our guidance. As we said, we know we have a number of inflation hedges throughout our business, but there are areas where inflation will impact us. There are two main areas we've incorporated. For the half of our global employee base that is not reimbursed by clients, we have factored in wage inflation. And for our relevant business lines that may be impacted by cap rates, we've assumed some moderation in cap rates throughout the year, which may be a conservative assumption going forward. I also want to say that our outlook does not contemplate the uncertainty and impacts from the rising geopolitical tensions.

Alexander Kramm, Analyst, UBS

Okay. And then maybe shifting to margin quickly. Can you flesh out the margin comments a little more? On the advisory side, what's the right base to use for that margin comment given that you present your margins sometimes with or without gains? And on the GWS side, it sounds like there's a 1% impact from certain items. But on the core underlying GWS business organically, is that seeing benefits from operating leverage? Or are there also other investments that are countering that in 2022?

Emma Giamartino, Chief Financial and Investment Officer

Throughout our businesses, we are investing more to drive incremental growth in future periods. Across all three lines of business, we're investing about $300 million in operating expense, and those investments are for areas like increasing our capabilities to serve clients in GWS—for example, expanding into smart buildings; in advisory, expanding our consulting group to drive future growth; and in REI, launching new products in life sciences and infrastructure, which requires investment in 2022. Regarding the 1%, our margin expectations for this year also include strategic equity grants to help align a broader set of our leadership team across advisory and GWS, which is about a $22 million operating profit impact across those two segments.

Alexander Kramm, Analyst, UBS

Okay. And on the advisory side, what's the right base to use for the 'flat margin' comment? Sorry, I may have missed that.

Emma Giamartino, Chief Financial and Investment Officer

Excluding OMSRs.

Operator, Operator

We have the next question from the line of Jade Rahmani with KBW.

Jade Rahmani, Analyst, KBW

On a recent markets call hosted by CBRE, your team mentioned the company intermediated around $400 billion of transactions in 2021, of which around $80 billion was debt placement. In the debt brokerage space, how big a priority is growing that business? Do you see that as meaningful? I would have expected the mix between debt and equity to be closer to equal, so that $80 billion baseline seems like there's big potential to grow.

Robert Sulentic, President and Chief Executive Officer (CEO)

Yes, Jade. We have significant efforts underway to grow all of our lines of business in all three segments of the company. The debt business has grown nicely over the last several years. We expect it to continue to grow. Obviously, the sales numbers you heard for 2021 and specifically the fourth quarter were the subject of our taking market share in a market that was very strong, and that's what you're seeing in those big numbers.

Jade Rahmani, Analyst, KBW

In a normal market environment, leaving aside current geopolitical uncertainty, do you anticipate that the debt business would be closer to perhaps 30% to 40% of the total?

Robert Sulentic, President and Chief Executive Officer (CEO)

I don't think we've put those specific numbers out there.

Jade Rahmani, Analyst, KBW

As it relates to uncertainty prior to Ukraine, there was growing uncertainty with respect to the interest rate outlook and inflation. Are you seeing or noticing any changes in sentiment or tone from customers? You mentioned the very strong first quarter results so far in leasing. I just want to hear what you're hearing from clients—if they're getting more cautious or if there's any change in appetite to transact.

Robert Sulentic, President and Chief Executive Officer (CEO)

The biggest news related to Russia and Ukraine has unfolded over the last 24 hours, and everybody is watching that and concerned about the potential economic impact. When I say everybody, I mean across our sector and beyond. That said, what shouldn't be lost is that we've built a business that is very well diversified across those four dimensions: asset type, client type, service type and geography. There is a massive amount of commercial real estate around the world that will be used in various places and various asset types and services. Because we have a broad footprint across all those dimensions, we're able to allocate our resources, management time, M&A focus and capital into the areas that we think benefit secularly at any given point in time. That has shown up in our results over the last couple of years and clearly in 2021. Irrespective of geopolitical developments or macroeconomic changes, we are much better positioned than historically and relatively well positioned compared to other companies in our sector. You saw how CBRE performed relative to the S&P 500 in the wake of COVID-19. There is real geopolitical risk, but we believe we're well positioned to withstand whatever the economy brings our way.

Jade Rahmani, Analyst, KBW

When you think about infrastructure as an opportunity for the company, can you put any further dimension around that? Do you see it as core within real estate but expanding the services you're offering, or really moving beyond core real estate to areas such as chemicals, manufacturing, aviation, energy, government? Are you talking about expanding CBRE's offering into those core infrastructure sectors?

Robert Sulentic, President and Chief Executive Officer (CEO)

Infrastructure is relevant to us today in two big areas. First, Turner & Townsend does a lot of infrastructure work in a variety of industries and for governments around the world, and we expect that to grow over time. Turner & Townsend is growing very nicely in that area. Second, we have a relatively small but growing infrastructure Investment Management business. As that business grows, either organically or through acquisitions, we expect it will touch client sources and investment opportunities beyond commercial real estate. Infrastructure is a separate real asset class from commercial real estate and the projected growth for it over the next decade is enormous.

Jade Rahmani, Analyst, KBW

So you envision CBRE eventually having infrastructure beyond core commercial real estate as a key product offering or business line?

Robert Sulentic, President and Chief Executive Officer (CEO)

We have that today with Turner & Townsend and Investment Management, and we expect it to grow significantly. So yes.

Jade Rahmani, Analyst, KBW

Lastly within Turner & Townsend, what percentage of their business relates to climate, building resiliency and energy-related projects?

Emma Giamartino, Chief Financial and Investment Officer

Energy-related work is about 10% of the revenue historically.

Robert Sulentic, President and Chief Executive Officer (CEO)

Energy and sustainability work is growing. Also, our sustainability capabilities are embedded across our business—not just in discrete sustainability projects. They appear in our development business through building design, in property management, in project management and in Facilities Management. That cross-functional integration creates advantages for clients and growth momentum for us.

Operator, Operator

We have the next question from the line of Steve Sakwa with Evercore ISI.

Stephen Sakwa, Analyst, Evercore ISI

Emma, I'm trying to piece together the numbers and the slide deck. You talked about low double-digit earnings growth from 2021 to 2025. If you take that at face value, that suggests you'd be up in the high $5 range, maybe approaching $6 a share. I realize you didn't give exact EPS guidance, but you also talked about the $300 million additional investment you're making. Is that $300 million embedded in the low double-digit growth? Effectively, are you saying you'd have a lot more earnings power if you weren't making these investments? Or is that drag included now and you hockey-stick more in 2023, 2024 and 2025?

Emma Giamartino, Chief Financial and Investment Officer

No, it's the former. That $300 million of investments is embedded in our outlook for this year. Without that investment, our EPS growth would be significantly higher, but we believe those investments are important to drive future growth.

Stephen Sakwa, Analyst, Evercore ISI

Great. As a follow-up, should we view those investments as ongoing, maybe not at the same level, and expect margin improvement in 2023 and beyond? Or are they more of a permanent incremental expense?

Emma Giamartino, Chief Financial and Investment Officer

Those are ongoing investments that we continue to execute to drive incremental growth with new capabilities across our lines of business. In 2021, we invested based on anticipated revenue early in the year; had we known revenue would accelerate as it did in the latter half of 2021, we would have invested more in OpEx in 2021. You're seeing some margin expansion in 2021 as a result of that. So these investments are intended to drive future growth and are managed dynamically.

Stephen Sakwa, Analyst, Evercore ISI

On buybacks, you were programmatic and repurchased around $370 million in 2021. Will that program stay in place, and is the $400 million level embedded in your guidance? Or would buyback benefits be additive to the low double-digit earnings growth rate?

Emma Giamartino, Chief Financial and Investment Officer

We have a modest level of repurchases embedded in our outlook, but not the entirety of our repurchase capacity. Our programmatic repurchase program is used as a lever to optimize shareholder return. If we see a strong M&A pipeline, which we do, and execute larger deals, we'll pull back on repurchases. The outlook includes a small level of repurchases and a low level of M&A; any additional use of capital for repurchases or M&A would be incremental to our outlook.

Stephen Sakwa, Analyst, Evercore ISI

Lastly, on the M&A pipeline, could you talk about the types of businesses where you're seeing the most activity and where you're most interested?

Robert Sulentic, President and Chief Executive Officer (CEO)

We look across all three segments for acquisition opportunities to expand our client offering and grow the business. Strategically, we have particular focus areas, but we don't discuss targets publicly until we complete deals. We have a rigorous program run between segment leadership and our corporate development team identifying specific areas in each segment suited to growth through M&A. Some acquisitions are infill, some are transformational. We also have sponsorship opportunities similar to Turner & Townsend or Industrious where we might buy a portion of a company and leverage our platform to accelerate growth. Expect to see significant use of capital to grow the business through M&A.

Operator, Operator

We have the next question from the line of Matthew Filek with William Blair.

Matthew Filek, Analyst, William Blair

This is Matt Filek on for Stephen Sheldon. Can you provide additional commentary on leasing? Specifically, how much of the strong leasing guidance is driven by a recovery in office versus continued strength in areas like industrial? And have you seen any changes in lease duration?

Emma Giamartino, Chief Financial and Investment Officer

Throughout this year, we're expecting recovery across all asset types. Industrial specifically is expected to slow somewhat as supply has become constrained. Office is expected to continue the recovery similar to the latter half of 2021. Regarding lease durations, terms have picked up slightly and continuously throughout 2021. New lease terms are up about 1% and renewals are up about 4%, but they haven't materially moved. New lease terms are roughly six years, and renewal terms are about four years.

Matthew Filek, Analyst, William Blair

Great. That's helpful. One additional follow-up: can you talk about performance between small and large leasing deals? Previously you mentioned large leasing deals were still below pre-pandemic levels last quarter. Any changes there?

Robert Sulentic, President and Chief Executive Officer (CEO)

Large leasing deals on the office side have picked up, but we're not back to pre-pandemic levels. On the industrial side, large leasing deals have been unprecedented, and absent supply constraints we'd expect large leases in industrial to continue.

Operator, Operator

We have a follow-up question from the line of Alex Kramm with UBS.

Alexander Kramm, Analyst, UBS

On your medium-term outlook, I think you previously had caveated it did not include a full return to office. Is office embedded in the updated guidance now? Any color would be helpful.

Robert Sulentic, President and Chief Executive Officer (CEO)

We've embedded assumptions about return to the office in our guidance, and those assumptions are slightly more conservative than in prior quarters. There's a lot of uncertainty with companies and employees figuring out the degree to which they'll return to the office. We think return to office will be slightly less than we might have thought 90 or 180 days ago, and that's embedded in our numbers. We also see other opportunities arising from changing office usage—significant project management demand, opportunity in flex space where we've invested with Industrious—and our large clients are telling us the same. All of these assumptions are reflected in our modeling.

Alexander Kramm, Analyst, UBS

You mentioned producers entering higher split tranches as a result of higher volume. Can you clarify: was there a change to splits, or did producers simply move into higher tranches? And what has the reception been from the brokerage force?

Emma Giamartino, Chief Financial and Investment Officer

To clarify, there was no change to split structures. As producers did more volume, more producers entered into higher split tranches. So it's not a change to the tranches or splits themselves; it reflects higher producer volume in the quarter.

Operator, Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now turn the call back to Robert Sulentic for closing remarks.

Robert Sulentic, President and Chief Executive Officer (CEO)

Thanks, everyone, for joining us. We'll speak with you again at the end of the first quarter when we report results for that period.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.