From Stansberry Research:
If you've ever been to Paris, you've likely strolled the banks of the River Seine from the Eiffel Tower to Notre Dame. It's what most Americans picture when they think of the city.
But off in the distance is the real Paris – a downtown cluster of tall buildings called La Défense. It's where everyday Parisians work, making the city a center of trade and finance.
Towering over La Défense is Tour First ("First Tower")...
It's the tallest functional building in France. Only the Eiffel Tower reaches higher. Originally built by architect Pierre Dufau in the 1970s, the skyscraper looks like three towers that wrap around a central core and rise to a peak 758 feet above the street.
These days, La Défense is a hot area for commercial real estate investment. And Tour First is a premier property in the region. It's a perfect example of what we call "trophy assets"...
Simply put, trophy assets are prized properties that are extremely difficult – or impossible – to replicate. (Think the Las Vegas Strip.) As a result, these properties often maintain their values through booms and busts.
However, owning an asset – even one as rare and valuable as Tour First – always comes with some level of risk. If the Parisian commercial real estate market were to dip, building owners would likely suffer losses. But you can significantly cut down the risk involved...
You see, one company has been generating tons of income off of Tour First – and will continue to do so for years to come... no matter how coveted an address it is.
We're talking about $15 billion real estate services company CBRE Group (NYSE: CBRE)...
CBRE provides a wide suite of services to those that own and transact in commercial real estate. It doesn't own the real estate... It just provides services to companies that do. CBRE deals with tenants, collects rent, makes repairs, and performs any other needed housekeeping duties.
So long as it keeps the management contract, CBRE gets paid out of rental revenues. That may not be as romantic as owning a first-rate skyscraper, but it's a lot less risky.
It's a perfect example of "capital efficiency" in action...
CBRE began as a division of Coldwell Banker – a national real estate firm founded by Colbert Coldwell in the wake of the 1906 San Francisco earthquake. In 1989, Coldwell Banker spun off its commercial real estate group. Over the years, it evolved into the present-day CBRE.
Today, CBRE Group is the largest property manager in the world by revenue...
The company controls 5.5 billion square feet of commercial real estate – the equivalent of almost 850 Pentagons. It manages properties for thousands of property owners, so no single tenant counts for too much of CBRE's income – a plus in any business venture.
CBRE is by far the biggest provider of these property-management services. That gives it a big advantage in its other business lines. You see, property management isn't all it does. It's simply one of eight different asset-light divisions that CBRE owns...
Each of these groups earns its living by taking fees for work or a percentage of transactions. The Investment Management division doesn't own properties for itself... It manages funds for other investors and takes a percentage in fees – just like a mutual fund. In 2017, it managed about $104 billion in investments and earned $2.6 billion in revenue for doing so.
The Capital Markets (property sales and commercial mortgage services) division facilitated about $130 billion in deals in the Americas alone in 2017. That money came from renters and flowed on to owners. For its work in the process, CBRE collected $2.2 billion in fees.
Across all these services, CBRE is the biggest and the best. This creates immense value because the use of all of these services overlaps dramatically...
A property owner can use CBRE's Development Services to build a building, its Leasing Services to fill it, and its Asset Services to manage it. Later on, CBRE's Valuation and Advisory division can price the building, and its Property Sales division will sell it.
All of CBRE's businesses work extremely well together, and the size of the company makes it more profitable and boosts its growth.
Picture buying an office building that houses 20 tenants. Managing that yourself sounds miserable. You've got to work out contracts, hire a maintenance staff and parking-lot attendants, process payments, chase down deadbeats, and who knows what else.
Wouldn't you pay 10% of your rental income to CBRE to handle all that for you? And since CBRE knows how to do this, it can easily add your 20 tenants to the thousands it already handles. This is the direction in which real estate investing is headed.
As more and more properties are owned by investment funds and other corporate structures, the tendency to outsource services to a company like CBRE will grow.
In its most recent quarter, CBRE's revenue rose 13% year-over-year... And its earnings per share jumped 22%. Even better, the company's revenue is becoming more predictable... CBRE's contractual revenue and leasing, which largely recur over time, now represent 75% of the company's overall revenue. That's up from 71% of its revenue two years ago.
While there may be a slowing economy in some parts of the world, the wind is at CBRE's back today. It's pushing more and more customers into its rapidly growing businesses.
In the last six months of last year, CBRE's stock dipped about 25% – from an all-time high of nearly $50 per share in mid-July to less than $38 per share in late December. But shares have rallied alongside the broad market in recent weeks... The stock currently trades at roughly $46 per share, up more than 20% from its recent bottom.
CBRE is scheduled to announce its fourth-quarter and full-year 2018 results later this week. We'll be looking for another strong report from this leading real estate services company.
Sometimes investing is simple.