CBRE Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. CBRE provides commercial real estate advisory, outsourcing, investment management and development services. The statements are unaudited; amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $5.645B | $5.925B | $16.916B | $16.775B |
| Operating income | $211.4M | $316.6M | $525.9M | $746.0M |
| Net income attributable to CBRE | $184.1M | $256.6M | $438.2M | $644.7M |
| Diluted EPS | $0.55 | $0.75 | $1.30 | $1.89 |
| Adjusted EBITDA | $441.8M | $454.6M | $1.139B | $1.373B |
- Operating margin was 3.7% in Q3 versus 5.3% a year earlier; for the nine-month period it was 3.1% versus 4.4%. Net margin attributable to CBRE was 3.3% versus 4.3% in Q3 and 2.6% versus 3.8% year to date.
- Q3 revenue declined 4.7% year over year, while nine-month revenue rose 0.8%. Q3 segment revenue: Advisory Services $1.754B, down 21.7%; Global Workplace Solutions (GWS) $3.721B, up 4.7%; Real Estate Investments (REI) $169.6M, up 31.3%. The REI increase largely reflected the Telford acquisition.
- For the first nine months, Advisory Services revenue fell 16.2%, while GWS rose 10.2% and REI rose 31.1%. GWS growth was led by contractual facilities management; Advisory Services was pressured by weaker property sales, leasing and mortgage origination.
- Q3 cost of revenue was 80.9% of revenue versus 79.1% in 2019; the company attributed the increase mainly to revenue mix, including a larger share from lower-margin GWS. For nine months, the ratio was 80.9% versus 78.4%.
Cash flow, balance sheet and debt
- Operating cash flow for the first nine months was $860.6M, compared with $174.7M in 2019. Management attributed the improvement principally to working-capital effects, including lower receivables and lower income-tax payments; lower net income partly offset this.
- Investing cash outflow was $206.5M, versus $271.7M; financing cash outflow was $111.3M, versus $52.0M. Cash and restricted cash increased by $552.8M to $1.647B, including $1.482B of cash and cash equivalents.
- At September 30, long-term debt, net of current maturities, was $1.783B; short-term borrowings were $1.197B, primarily warehouse-line borrowings that fund mortgage loans committed for purchase or securitization. The revolving credit facility had no borrowings outstanding and $2.8B of capacity available.
- CBRE reported covenant leverage of 0.25x and interest coverage of 23.68x, against maximum leverage of 4.25x and minimum coverage of 2.00x. These are credit-agreement-defined measures.
- Current assets were $7.771B and current liabilities $6.152B. Operating lease liabilities totaled $1.315B, including current and non-current amounts.
- Net capital expenditures, after tenant concessions, were $161.9M for the nine months, including $71.7M for technology. The company expected 2020 net capital expenditures to be meaningfully below its initial forecast.
Material changes and unusual items
- COVID-19 sharply reduced Q3 Advisory Services sales revenue (down 34.1%) and leasing revenue (down 31.4%); mortgage origination also weakened. Industrial leasing, project management and contractual facilities management were comparatively resilient.
- CBRE recorded $75.2M of non-cash impairments in the first nine months: $50.2M in GWS and $25.0M of goodwill in REI, citing lower expected cash flows and increased forecast risk related to COVID-19. The comparable 2019 period included $89.0M of intangible-asset impairment.
- Q3 included $55.4M of transformation costs, primarily cash employee-separation, lease-termination and professional costs. These were excluded from Adjusted EBITDA; the company said the initiatives are intended to reduce costs, streamline operations and support growth.
- Q3 included a $52.8M gain on real estate dispositions, compared with a negligible gain in Q3 2019. Nine-month disposition gains were $75.1M versus $19.3M.
- CBRE repurchased $50.0M of stock in March 2020 and made no repurchases in Q2 or Q3. $350.0M remained under the authorization at September 30.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected COVID-19 to adversely affect 2020 financial position, results and cash flows; recovery in global real estate markets remained uncertain as of October 2020, with risks from continued transaction delays and renewed outbreaks.
- Management stated that cash flow from operations and the revolving credit facility were expected to meet anticipated cash needs for at least the next 12 months, absent extraordinary events or a large strategic acquisition.
- CBRE’s disclosure controls and procedures were deemed ineffective at September 30, 2020 because of previously disclosed material weaknesses in internal control over financial reporting. Remediation was underway but was not yet considered complete. Management nevertheless concluded the interim financial statements fairly presented results in all material respects.
- Mortgage-related obligations include Fannie Mae DUS loss sharing on loans with $26.2B of unpaid principal, a recorded $56.5M loan-loss guarantee liability, and $5.2M of COVID-related principal and interest advances as of September 30. The filing also describes Freddie Mac small-loan repurchase and loss-reimbursement obligations.
- Other exposures include $104.4M of outstanding letters of credit (excluding specified categories), $72.4M of guarantees, and committed future real estate co-investments and subsidiary funding. Management did not expect material losses under development guarantees, but outcomes remain uncertain.
- Key risks include economic and commercial property-market weakness, foreign-exchange movements, interest rates, client spending and outsourcing decisions, debt and warehouse-line availability, litigation, acquisition integration, and internal-control remediation. The filing reported no material changes to previously disclosed legal proceedings or risk factors.
Investor verification points
- Track recovery in Advisory Services transaction volumes and the durability and margins of GWS contractual growth.
- Assess whether transformation and workforce actions produce recurring savings relative to their costs, and review Adjusted EBITDA adjustments alongside GAAP results.
- Monitor COVID-19-driven impairment assumptions, receivable allowances, and mortgage forbearance advances and guarantee exposure.
- Confirm progress and testing results for remediation of the material weaknesses and restoration of effective disclosure controls.
- Review warehouse-line renewals and utilization, available liquidity, covenant calculations, and the timing of debt and other committed funding needs.