The onset of winter has brought cold comfort for the world’s two largest commercial property services companies. Shares in CB Richard Ellis (CBRE) and Jones Lang LaSalle (JLL) have taken a beating because of weak third-quarter results and fears that the real estate market might deteriorate further.
At the beginning of December, the price of CBRE shares fell to a little over $3, compared with a 52-week high of $24.50. Investors have been alarmed by the mountain of debt that the company has accumulated as a result of the rapid growth that made it the biggest player in the sector, fearing that if poor market conditions further reduce earnings, the firm might be at risk of breaching its banking covenants.
CBRE has been making efforts in recent months to reduce its debt burden, which totals about $2.66 billion. In mid-November, the company raised $207.1 million through the sale of 57.5 million shares at $3.77 each. The public offering followed the abandonment of a private placing of shares, which had been intended to raise $300 million to $400 million.
"We believe the bulk of the capital raised in the recent equity issuance will be used to pay down debt," says JMP Securities analyst Will Marks in a research note. "[It] should help alleviate concerns about the company’s near-term leverage levels as they relate to loan covenants. We believe it is not likely that CBRE will be in violation of its debt covenants by year-end. However, given the potential for a deep and prolonged recession and its impact on CBRE, we remain cautious."
The capital-raising exercise did not prevent Standard & Poor’s from putting CBRE on credit watch to negative at the end of November. Credit analyst Robert Hoban said: "We took this action to reflect modest weakening in CBRE’s financial profile and our concern about potential further deterioration as the result of the mounting cyclical downturn in global commercial real estate."
The firm’s third-quarter results beat Wall Street estimates but still showed a considerable deterioration from 2007. CBRE’s net income over the period was $56.1 million, compared with $130.2 million over the same three months of last year. The Europe, Middle East and Africa division fared particularly badly as revenue dropped from $320.2 million last year to $271.7 million and net profit fell by 95% from $52.3 million to $2.5 million. The Americas division suffered a 28% drop in net profit to $30.2 million, Asia-Pacific made a loss of $3.9 million, and the investment management division’s net profit fell by 44% to $6.9 million.
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| "Our third-quarter results reflected the extremely challenging market conditions, which continued to deteriorate globally"
Brett White, CB Richard Ellis |
Chief executive and president Brett White says: "Our third-quarter results reflected the extremely challenging market conditions, which continued to deteriorate globally." He adds that management had been working to cut costs, with $190 million of permanent expenses eliminated in the first nine months of 2008. In October, the firm announced that it would cut up to 70 of 1,200 London staff. JLL has also suffered, but lacks CBRE’s huge debt burden and has consequently retained more of its popularity with investors. At the beginning of December JLL usurped CBRE as the biggest global commercial real estate services company by market capitalization as shares in the latter slumped, reducing its stock market value to a little over $630 million. JLL’s share price has also fallen sharply over recent months but only to about $20, giving the company a market capitalization of just over $700 million. At its peak in July 2007, CBRE was valued at $8 billion, twice as much as JLL.
However, while CBRE’s third-quarter results exceeded expectations, JLL’s figures for the same period disappointed Wall Street. The firm’s net income fell to $15 million, compared with $47 million in the same quarter last year, equating to a net profit of $0.66 a share, well below analysts’ estimates of $0.81. On a year-to-date basis, net profits for the first nine months were $42 million, compared with $152 million in 2007. JLL also cut its semi-annual dividend by 50% to $0.25 a share in order to preserve cash.
The Americas region posted comparatively strong figures, with revenues up 35% to $354 million – suggesting that the company is increasing its market share – and earnings before interest, tax, depreciation and amortization of $34 million. Europe fared less well, however – revenues fell by 7% to $209 million and ebitda was $14 million.
Revenue increased by 8% on 2007, driven by the recent acquisition of US tenant services firm Staubach. However, fees from the capital markets division were lower than expected and the company admitted that comparatively healthy figures for fees from leasing activities were likely to come under pressure in 2009.
JLL’s debt increased to $543 million from $441 million at the end of the second quarter as a result of acquisitions, which also included German retail specialist Kempers, but the firm emphasized that it was not close to breaching any loan covenants.
Severance costs of $8 million were incurred across the business but chiefly in Europe, where the firm has cut jobs in response to the slowdown in activity. JLL announced in October that it would make up to 80 of its 1,400 UK employees redundant and the following month announced that a further 30 to 40 positions would be axed.