CBRE GROUP, INC. 2026 Q3 Earnings Call

Good morning, everyone, and welcome to CBRE's third quarter 2026 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. Today's presentation contains forward-looking statements, including, without limitation, statements concerning our business outlook, business plans, capital allocation strategy, as well as our earnings, net leverage, and free cash flow outlook. These statements involve risks and uncertainties that may cause actual results and trends to differ materially. For a full discussion of the risks and other factors that may impact these statements, please refer to this morning's earnings release and our other SEC filings. We've 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.

Throughout our remarks, when we cite financial performance relative to expectations, we are referring to actual results against the outlook we provided on our second quarter 2026 earnings call in July, unless otherwise noted. All growth rates we cite are in USD, unless otherwise noted. Also, as a reminder, our resilient businesses include facilities management, critical infrastructure services, property management, project management, loan servicing, valuations, other portfolio services, and recurring investment management fees. Our transactional businesses are comprised of property sales, leasing, mortgage origination, carried interest and incentive fee in the investment management business, and development fees. 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 three as I turn the call over to Bob.

Thank you, Shandi, and good morning, everyone. CBRE produced another quarter of strong financial results and continued to make strategic gains in targeted areas of our business. Financially, core EPS improved 28% on a 13% revenue increase, with both resilient and transactional businesses growing by double digits. Strategically, we continued to advance both our critical infrastructure services business line, which operates as part of the BOE segment, as well as the broader infrastructure services work we perform across the company. As a reminder, our critical infrastructure services business line primarily entails network infrastructure services, MEP projects, and facilities management for data centers. Our acquisition of Onnec, which we announced on Tuesday, fits within this line of business. We expect critical infrastructure services to generate nearly $4.5 billion of revenue in 2027.

Outside of the critical infrastructure services business line, our infrastructure services work consists primarily of overseeing the construction of transportation and energy assets, along with data centers within project management, and arranging the sales, leasing, and financing of data centers and advisory services. Taking this work into account, we expect our total infrastructure services revenue to reach nearly $7 billion in 2027, growing more than 40% from this year. Any data center land sales in our development business would be in addition to this revenue. Looking ahead, two significant competing dynamics are impacting our business and are offsetting each other. First, we should see continued outsized growth and investment in our infrastructure services businesses. Second, given the interest rate environment, we are expecting downward pressure in our businesses that are driven by the real estate capital markets. Now I'll turn the call over to Emma.

Thank you, Bob, and good morning, everyone. I will begin by providing detail on our segment results. Overall advisory services revenue rose 11%. Global leasing revenue grew 6%, with mixed results across regions. EMEA led leasing revenue with 21% growth, where the U.K. was the standout. APAC grew 2%, with strength in India and the Pacific offset by softness in North Asia. In the U.S., leasing revenue rose 4%, supported by industrial up 16%, while office leasing dipped 2%. We have strong pipelines and expect global leasing revenue to grow at a low double-digit rate in the fourth quarter. Global property sales revenue increased 28%, led by the U.S. up 37%, driven by accelerated growth in industrial and retail. Outside the U.S., sales revenue grew 8% in EMEA, with particularly strong growth in the U.K., up 33%, and 10% in Asia Pacific, led by solid growth in Japan.

Mortgage origination revenue rose 1%, as a double-digit increase from private capital sources was offset by a decline in government agency lending. Private capital activity was driven by debt funds and insurance companies, as borrowers preferred floating rate structures in a rising rate environment. The agencies have a hard time competing in a market environment with higher long-term rates. Advisory SOP grew 16%. Turning to Building Operations & Experience, revenue increased 17%. Growth continues to be led by critical infrastructure services, where revenue increased 80%. The drivers were strong hyperscaler demand for our data center services solutions, as well as contributions from last November's Pearce acquisition. As Bob mentioned, we've agreed to acquire Onnec and expect to close the acquisition around the end of the year. If Onnec were included, the critical infrastructure services business line would have generated approximately $3 billion of revenue over the past 12 months.

Facilities management revenue grew 13%. Enterprise facilities management growth was led by technology, financial services, and energy clients, while local facilities management was paced by more than 25% growth in the Americas, as well as continued strength in Asia Pacific and Western Europe. BOE SOP grew 21%. In project management, revenue grew 3%, while pass-through costs declined 4%. We saw a slowdown in real estate capital spending by corporates. This was significantly offset by strong growth in infrastructure revenue. Project management SOP grew 9%, despite a one-time cost in APAC related to a client default, which lowered the growth rate by six percentage points. In Real Estate Investments, segment operating profit rose to $166 million from $73 million in the prior year quarter. The improved performance was driven by data center land sales as well as the monetization of other assets.

We believe the embedded gains in our development portfolio now total about $800 million, adjusting the value for the recent increase in interest rates. Any data center land sales would generate additional profits over and above the $800 million. In investment management, operating profit declined 12% as higher recurring asset management fees were offset by lower co-investment returns. We ended the quarter with more than $155 billion of AUM and raised approximately $2 billion of new capital, up from $1.6 billion in the second quarter. Now I'll turn to free cash flow and capital allocation. Free cash flow totaled $1.8 billion on a trailing 12-month basis. For the full year, we remain on track to achieve free cash flow conversion within our target range of 75%-85% and expect to end the year with slightly above one turn of net leverage.

We continue to prioritize M&A in areas benefiting from secular tailwinds, with a particular focus on data centers and infrastructure. You've seen this in the Onnec acquisition. Turning to our outlook, we are maintaining our previously stated 2026 core EPS guidance in the range of $7.80-$7.90, reflecting 23% growth at the midpoint. As Bob indicated, we are seeing competing dynamics in our business. We expect to see continued outsized growth in our infrastructure businesses. This will be somewhat offset by lower growth in our real estate capital markets-driven businesses. As a result, we continue to see a path to 15% core EPS growth in 2027. With that, operator, we will open the line for questions.

Yeah. Thanks, Tony. As both Bob and I mentioned in our remarks, we are seeing competing dynamics across our business. Of course, we are seeing pressure on our real estate capital markets business, but that is being offset in a big way by outsized growth in our resilient businesses, notably infrastructure services and data centers. I want to reiterate a number that we put in our press release around Onnec. Next year, in 2027, we are expecting our critical infrastructure services revenue to reach $4.5 billion and our infrastructure revenue to reach $7 billion. So there is a tremendous amount of growth there. Walking high level through the segments, starting with the easy segments, BOE and project management, we expect them to grow consistently with how they have grown historically.

Advisory will moderate somewhat more than what we expected 90 days ago, as you would expect with slowing capital markets, but it will grow next year. Then within REI, our investment management business will be roughly flat, and we expect to monetize development assets, including data center land sales, but there is a wide range of outcomes there. We will also likely have more M&A. We have a strong pipeline, particularly in the data center space, and we expect to do more in 2027. So if you put that all together, we are confident in our path to 15%. I do want to say this is a great example of how our business model is working the way we have intended it and the way we have shaped it. Even in an environment where our capital markets business are slowing, our resilient businesses are able to offset that and deliver double-digit growth.