In today's tumultuous business climate, punctuated by volatility on Wall Street, are commercial real estate brokerages a good match for the public markets?As a rule, “no,” says Brett White, president of Los Angeles-based CB Richard Ellis, formerly a public company that last year completed an $800 million merger with BLUM CB Corp. to take the firm private. White believes that the combined market capitalization of the leading publicly tradedservice companies — such as Trammell Crow Co., Jones Lang LaSalle, Insginia/ESG and Grubb & Ellis — equals that of only a small, mid-cap company, widely defined as $2 billion or higher.
“At its current size, the industry cannot get the attention of Wall Street,” emphasizes White. That attention is vital, he says, because it helps increase the number of tradable shares (the float), which in turn attracts more and bigger investors. “If it can't get the float, it's not efficient.”
Public: Highs and Lows
The notorious boom and bust cycles of commercial real estate hamstring publicly traded brokerage firms that are highly dependent on transactions to drive revenues. To be certain, all brokerages have suffered in this downturn, but the companies whose transaction business accounts for 90% of revenues have been hit hardest, emphasizes White. “The more diversified a services company is, the better it has fared.” He cites Jones Lang LaSalle as one of the most well-diversified public companies.
For the first half of this year, 62% of CB's revenues were tied to transactions. The remaining 38% came from a variety of related businesses, including CB Richard Ellis Investors, a pension fund advisory business, and L.J. Melody & Co., a mortgage banking subsidiary. That's in addition to the consulting business, the facilities and property management operations, the research division, etc. Through June, CB's revenues totaled $509 million, down by 9% over the same period last year, but total EBITDA (earnings before interest, taxes, depreciation and amortization) was up 29% in the same period.
CB is hardly unique in its efforts to diversify — Jones Lang LaSalle, Insignia and Cushman & Wakefield all have a global presence across many disciplines — but it's clear that the sluggish business environment has been tough for even the most well-positioned companies (please see related story on page 10). Further consolidation is inevitable. “We're getting into the second wave right now like we saw five or six years ago when a lot of us went public. We saw a lot of mid-size companies seek liquidity by being acquired,” recalls White. “I've never seen more regional and boutique firms contact us as a potential suitor than I have in the last six months.”
As a public company, CB spent nearly $500 million between 1997 and 2001 to establish a global presence and diversify its business lines. The stock was launched at about $20 a share before climbing to more than $40 a share about a year later. But by the time the company went private in 2001, the stock was barely trading above $10 a share, says White. “Any company that sees its stock decline that steeply when in fact its EBITDA is going up or holding its own has got to ask itself, ‘Is it worth it? Do we need to stay public, or can we figure out a way to take this company private and wait for a better day?’”
CB chose the latter option and is enjoying the large war chest its investors are providing to grow the company. There's an added bonus. The significant amount of disclosure required of publicly traded companies today gives CB a competitive advantage, White says. “What we do here is listen to our competitors' [quarterly] calls. We're very interested.”