The leveraged buyout epidemic currently spreading throughout the retail industry shows no signs of retreating anytime soon. There continue to be mega-deals and rumors of even more deals. As our cover story shows, private equity pools have snared some 134 U.S.-based retailers for $68.2 billion since 2002, with $60 billion of that volume occurring over the last three years.
The conventional wisdom today is that given a choice, most companies would prefer to operate privately in order to avoid having to report quarterly earnings and answer to Wall Street analysts, or comply with some of the more onerous provisions of Sarbanes-Oxley.
Apparently someone forgot to deliver that memo to CB Richard Ellis and Jones Lang LaSalle, both of which are flourishing as publicly traded real estate services firms with global platforms. As of late April, the stock price of JLL had risen 42% over the last 12 months and 138% over the last 18 months. Though it did fluctuate greatly this year, CBRE's current stock price of $35 per share is targeted by analysts to rise to about $46 per share by January 2008, bolstered by strong investment sales.
In an April research report, “Two for the Show: CB Richard Ellis and Jones Lang LaSalle Thriving,” analyst Will Marks of JMP Securities explained why he is so bullish on these two brokerage behemoths. He cited strong global and multi-service platforms that are leading to market share gains for both firms.
In Europe and Asia Pacific, for example, revenues jumped by an average of 50% and 35% respectively for the two firms during the fourth quarter of 2006, according to JMP. Growth was enhanced by currency exchange rates.
CB Richard Ellis has 200 offices worldwide compared to 150 for Jones Lang LaSalle. In addition to a big global presence, their investment management divisions have provided a source of revenue growth. Jones Lang LaSalle's investment management business posted fourth-quarter revenue gains of 18%.
With fourth-quarter 2006 revenues of $1.4 billion, CB Richard Ellis enjoyed a 36.5% increase over the same period a year earlier. Jones Lang LaSalle reported revenue of $704 million in the fourth quarter of 2006, a 41% increase over the fourth quarter of 2005.
“While we would never argue that the commercial real estate services business is not cyclical, we are comfortable saying that these companies are much better situated with larger multi-service and multi-market platforms on both a national and an international basis,” wrote Marks. “It is impossible to argue against JLL and CB being the best global commercial real estate services platforms, with Cushman & Wakefield a distant third.”
While Morgan Stanley downgraded Jones Lang LaSalle's stock from overweight to equal weight in April, it did so as more of a precautionary measure. “Valuation is bumping up against historical highs, and we believe the stock is fully valued, trading at a significant premium to its peers,” wrote researchers.
Granted, we're in an up cycle right now with rents rising and buildings filling up, but it's hard to ignore the success these two firms have had at proving the critics wrong. A well-diversified brokerage company can hit a home run on Wall Street. I'm sure the private equity vultures have taken note.