CRE Firms Enter Important Second Half of 2012 Facing Lingering Questions About Global Sovereign Debt, Job Growth And Economy's Potential Impact On Property Markets
CEOs of the major publicly traded real estate services firms hit on several of the same themes this week in outlining their mid-year financial results, presenting a portrait of busier transaction activity and improving property fundamentals in a still tentative real estate recovery, hindered by uncertainty over the U.S. elections -- and especially, slower-than-expected job growth and other setbacks in the ongoing saga of the U.S., global and European economic recoveries.
Common themes in conference calls for second-quarter and six-month financial reports by executives for CBRE Group, Jones Lang LaSalle, HFF Inc. and FirstService Corp., parent of Colliers International -- companies at the center of real estate activity and market conditions -- included solid growth in investments sales activity, especially in the Americas; and weaker leasing revenues as landlords and tenants put off making decisions.
Other themes sounded by CEOs and their teams included:
- Growth in outsourcing business by the industry's two largest players, CBRE and JLL, as global companies strive to become more efficient in light of the global economic slowdown.
- Increasing operational expenses from investments in higher sales headcounts, and acquisition and integration costs which cut into several firms' margins.
- Year-over-year growth in commercial mortgage brokerage business driven by continued capital availability, generally low interest rates, competitive spreads and investors continued search for yield.
Unprecedented quantitative easing by the U.S. Federal Reserve and other global central banks has led to improvement in most sectors of the U.S. CRE capital markets, especially in the public markets, said John H. Pelusi, Jr., chief executive officer of HFF Inc.
"Although there have been minor temporary pullbacks along the way, these improved conditions, coupled with a slowly improving economy, continue to benefit certain sectors of the private debt and equity markets for select CRE transactions, especially core and core plus properties in the major tier-one markets, and distressed assets in select major markets."
Even so, Pelusi said, "there remain numerous headwinds which have the potential to negatively impact these improving conditions in the global economy and in the U.S. capital and commercial real estate
markets," including global concerns such as the euro zone sovereign debt crisis and European bank capital issues, Middle East unrest, the U.S. debt and budget issues combined with continuing high unemployment levels -- all of which "have the potential to derail the slowly-improving economic and capital market conditions in the U.S.," Pelusi said.
In light of these macroeconomic challenges, and difficult comparisons with last year's especially strong sales and leasing activity, the publicly traded CRE firms enjoyed generally strong second-quarter and half-year financial results -- albeit with caveats that the road ahead may be difficult.
"We recorded steady results in a cautious market environment," said JLL President and CEO Colin Dyer. "Prospects for growth in the global economy weakened during the second quarter as U.S.-earned problems in particular continued to weigh."
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Dyer noted that the global economy is now expected to grow 2.4% in 2012, marginally below earlier estimates. As deleveraging continues, growth in the world's advanced economies is expected to be 1.3% for the year.
The investment market rebounded in the second quarter following a relatively quiet first three months, and office leasing activity also improved seasonally compared with the first quarter, Dyer said.
"Both, however, are being affected by caution driven by economic concerns, so the tone of the market is less confident than six months ago," Dyer said.
For example, while JLL's Investment Sales Clock showed that global sales volumes reached $108 billion for the second quarter -- up 24% from $87 billion in the first quarter, and all regions seeing a seasonal rise -- second quarter volumes were down 9% in the Americas and 7% in Europe on a year-over-year basis.
Accordingly, office leasing activity improved in all regions in the second quarter compared with the first quarter, but second-quarter volumes were down 11% in the U.S. year over year and down 14% in Europe.
JLL anticipates continued caution amongst investors and corporate tenants in the second half, but Dyer noted some bright spots. The firm projects year-end 2012 volumes to exceed $400 billion, broadly matching 2011 levels.
"Even if investor sentiment has seesawed in the first six months of the year, we continued to see serious interest in quality real estate assets globally, with prime yields still looking attractive compared to many other assets, and our pipelines worldwide are generally robust," Dyer said.
And as noted in recent Costar quarterly market reviews and investment trends measured by the CoStar Commercial Repeat Sales Indices, the recovery is rippling out slowly to secondary and even third-tier U.S. markets.
While acknowledging there is "still a concentrated focus on core markets and core real estate," CBRE President Bob Sulentic, who will take over the CEO role from Brett White next year, noted "there has been an awful lot of money raised in the past 24 months with a value-add type hurdle to it, and those returns are only available in the secondary and tertiary markets, and we are seeing a decent amount of activity in those markets."
On the leasing side, while relocations and consolidations continued to support leasing activity, cautious corporate occupiers and weak job growth are expected to contribute to reduced leasing volumes for the year -- around 10% below 2011 levels, JLL said. U.S. demand, driven by the technology and energy sectors in the western and southern U.S., is being offset by weakness in the financial and government sectors in the east.
"The recovery continues to progress, but at a historically slow pace and with a high degree of inconsistency and uncertainty across global markets and business lines," CBRE's White said.
"Nevertheless ... We are cautiously optimistic about our business, and remain comfortable with our ability to deliver on the full-year earnings per share outlook we announced early this year."
The following is a summary of the CRE services firm earnings reported over the last few days:
Jones Lang LaSalle (NYSE: JLL)
JLL’s revenue rose 9% to $921.3 million in the second quarter from the same time last year and the company reported net income, excluding acquisition-related costs, of $51 million, compared to $50 million a year earlier. U.S. GAAP profit was $37.1, down by 15% partly due to costs related to the company’s May acquisition of UK-based real estate services firm King Sturge.
"We continue to take market share and maintain tight cost discipline as we enter the important second half of the year," Dyer said.
CBRE Group, Inc. (NYSE: CGB)
"Despite tepid economic growth around the world, we once again produced double-digit revenue gains, with notably strong performance in the Americas, solid growth in Asia Pacific, and increased contributions from our global investment management operations," said CEO Brett White.
Global revenue rose during the quarter in every business line, and CBRE’s capital markets businesses performed very well, particularly in the Americas. Global property sales revenue increased 16%, with all regions showing improvement, and the Americas setting the pace with a 23% rise in property sales revenue. Mortgage brokerage, predominantly an Americas business, saw revenue climb 36%, reflecting continued improvement in the U.S. debt financing market.
Global investment management operations continued to make significant contributions to the CBRE's performance, bolstered by the ING REIM acquisitions in the second half of 2011. Revenue from this business line more than doubled compared with a year earlier.
Outsourcing revenue rose by double digits for the seventh consecutive quarter, with a 10% increase globally and a company record 24 new contracts signed during the period. Among these new clients are three each in the health care and government sectors, markets that the company has targeted for growth opportunities - as well as major corporate wins with Monsanto, Samsung and SONY. All told, CBRE signed 54 outsourcing contracts - renewals, new clients and expansions of existing relationships - during the second quarter.
Leasing revenue increased slightly globally, reflecting generally soft market conditions in many parts of the world. Despite these challenges, the Americas and Asia Pacific produced moderate leasing revenue growth.
HFF Inc. (NYSE: HF)
HFF, Inc., one of the largest full-service financial intermediaries in the U.S. providing commercial property and capital markets services, reported revenues of $66.8 million for the second quarter of 2012, a decrease of $6.1 million, or 8.4% compared to second-quarter 2011 revenues of $72.9 million. The company generated operating income of $13.5 million compared to $16.8 million for the second quarter of 2011, representing a decrease of $3.3 million, or 19.6%, from second-quarter 2011.
HFF attributed the decline in operating income to the decrease in revenues and increases in the company’s compensation-related costs and expenses associated with growth in headcount of 80 net new associates over the past 12 months, and increased operating, administrative and other costs.
HFF reported revenues of $118.6 million for the six months ended June 30, 2012, an increase of $3.8 million, or 3.3%, compared to revenues of $114.8 million during the same period in 2011. Operating income for the six months ended June 30, 2012 was $16.2 million compared to $21.1 million for the six months ended June 30, 2011, representing a decrease of $4.8 million or 23.0%.
Loan production volumes for the second quarter totaled about $9.6 billion on 333 transactions, representing a decrease in production volumes of about 2.5%, and an increase of 2.5% in the number of transactions when compared to second quarter of 2011 production of $9.9 billion on 325 transactions.
The average transaction size for the second quarter of 2012 was $29 million, about 4.9% lower than the comparable figure of $30.5 million for the second quarter of 2011.
Debt placement production volume was $5.9 billion in the second quarter, down 9.1% from second quarter of 2011 volume of about $6.5 billion. Investment sales production volume was approximately $2.8 billion in the second quarter, a 5.2% increase over second quarter 2011 volume.
FirstService Corp. (FRV)
FirstService Corp. reported an 18% decline in second-quarter adjusted profit due to weakness in the U.S. foreclosure services sector. However, FirstService's revenue from its Colliers International commercial real estate business, which operates in 37 countries around the world, rose 19% to $291.6 million.
The Canadian firm reported that its second-quarter net earnings attributable to common shareholders were $8.36 million or $0.28 per share, up from $3.36 million or $0.11 per share in the same quarter last year. Adjusted earnings per share were $0.45, versus $0.54 reported in the prior year quarter. Revenues for the quarter rose to $593.19 million from $565.47 million in the prior year quarter. However, revenue from its property services segment, which includes foreclosure services, fell 29% to $87.5 million.
"Second quarter results reflect very strong year over year gains in revenues and Adjusted EBITDA at Colliers International and another quarter of solid year over year growth at FirstService Residential. As expected, results in Property Services were down relative to the prior year as a result of continued weakness in foreclosure services," said Jay Hennick, founder and CEO of FirstService.