November 20, 2020
As one measure of the strength of the recovery in the broader economy—and therefore, that of the commercial real estate sector—consider the performance of the publicly traded services firms. Judging by a Keefe, Bruyette & Woods report following third-quarter results from CBRE, JLL and the Newmark Group, things are looking up.
The investment bank and broker-dealer says it’s raising its estimates for the three firms by a collective 5% to 9% in 2021-2022 and by 40% in Q4 of this year. The improvement, says KBW, reflects the firms’ higher revenues and a marginally smaller-than-estimated decline in leasing velocity during Q3. Another factor was cost reduction initiatives that have led to a better outlook on margins.
“Despite our increased estimates, we continue to view commercial real estate as a slow sector to recover, particularly around office trends that will take time to unfold (given lease durations and uncertain occupancy),” write KBW analysts Jade J. Rahmani and Ryan Tomasello. Conversely, though, “we believe COVID-19 may eventually accelerate institutionalization/outsourcing in real estate services, ultimately benefiting the major CRE brokers.”
Although not covered by KBW analysts, other major publicly traded brokerages had some good news in their latest Q3 results. Colliers International’s earnings came in at $1.08 per share, beating the Zacks consensus estimate by nearly 46%. Marcus & Millichap similarly beat estimates on both EPS and revenues, as did Walker & Dunlop.
Given the risk of a prolonged recovery, Rahmani and Tomasello are maintaining a “Market Perform” stance toward the CRE brokers followed by KBW, while noting “some caution following recent strength in the shares.” Valuation is dispersed at 13-18.5x 2021-2022 earnings per share and 9-11.5x EBITDA. That’s compared to a historical 14-15x and 8.5-9.5x, respectively.
Another publicly traded CRE firm, office REIT Paramount Group, recently noted a bump in its stock pricing on the favorable announcements from Pfizer regarding a possible vaccine against COVID. Similarly, KBW’s analysts are increasing their price targets for CBRE, JLL and Newmark by a collective 20% “as a result of our higher estimates and the improving vaccine outlook. Our revised price targets are $57 (from $49) for CBRE, $156 (from $125) for JLL, and $6.25 (from $5.00) for NMRK.”
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