CBRE Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. CBRE provides commercial real estate services and investment management globally, across the Americas, EMEA, Asia Pacific, Global Investment Management and Development Services.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017, as adjusted |
|---|---|---|
| Revenue | $4.674 billion | $4.051 billion |
| Operating income / margin | $213.6 million / 4.6% | $205.2 million / 5.1% |
| Net income attributable to CBRE | $150.3 million | $137.0 million |
| Diluted EPS | $0.44 | $0.40 |
| Adjusted EBITDA / margin | $347.8 million / 7.4% | $313.2 million / 7.7% |
| Cash used in operating activities | $250.0 million | $321.4 million |
- Revenue increased 15.4%; management attributed growth to stronger outsourcing, property management, sales, leasing, mortgage origination and investment management, as well as $170.8 million of favorable foreign-currency translation. Revenue growth also reflects the adoption of new revenue-recognition rules, including gross presentation of certain client-reimbursed costs.
- Fee revenue was $2.277 billion, up from $1.934 billion. Cost of services was 77.4% of revenue versus 77.7%; operating, administrative and other costs rose to 15.7% from 15.0%, contributing to lower operating and adjusted EBITDA margins.
- Cash and cash equivalents were $642.9 million; restricted cash was $79.0 million. Cash and restricted cash together declined $103.0 million from year-end. Investing activities used $64.2 million, including $46.7 million of capital expenditures.
- Long-term debt, net, was $1.758 billion. Short-term borrowings included $463.0 million drawn on the revolving facility and $1.148 billion of warehouse lines, which fund mortgage loans committed for purchase by government-sponsored enterprises. The warehouse borrowings are supported by related receivables.
- The company reported $2.3 billion available under its $2.8 billion revolving credit facility. Covenant leverage was 0.91x and interest coverage was 15.71x at quarter-end, compared with limits of 4.25x maximum leverage and 2.00x minimum coverage.
Material changes versus the prior comparable period
- Net income attributable to CBRE rose about 9.7%, while diluted EPS increased from $0.40 to $0.44. Operating income rose about 4.1%; operating margin declined from 5.1% to 4.6%.
- Adjusted EBITDA increased about 11.1%, but its margin declined from 7.7% to 7.4%. Higher payroll-related costs, carried-interest expense and occupancy costs contributed to the increase in operating expenses.
- Equity income from unconsolidated subsidiaries increased to $40.2 million from $15.0 million, primarily due to property-sale gains in Development Services. Segment adjusted EBITDA increased in Asia Pacific, Global Investment Management and Development Services; Americas was nearly flat and EMEA increased modestly.
- Q1 2017 comparative figures were restated under the full-retrospective adoption of ASC 606. The new standard accelerated recognition of certain leasing commissions and presented certain third-party costs and reimbursements gross. It increased Q1 2017 reported revenue by about $1.070 billion and net income by $7.4 million versus the previously reported amounts; comparisons should therefore use the adjusted figures shown here.
Outlook, management commentary, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management expects operating cash flow and the revolving facility to meet anticipated cash needs for at least the next 12 months, absent extraordinary events or a large strategic acquisition. Expected 2018 capital expenditures were up to approximately $180 million, net of tenant concessions.
- Management described commercial real estate conditions as generally favorable in the United States, Europe and Asia Pacific, while noting uncertainty related to Brexit, possible higher interest rates and pressure on actively managed real estate investment strategies.
- CBRE redeemed $800 million of 5.00% senior notes in March, funded with term-loan and revolving-credit borrowings. The redemption generated a $28.0 million charge: a $20.0 million premium and an $8.0 million write-off of deferred financing costs. Q1 interest expense nevertheless declined to $28.9 million from $34.0 million.
- Cash flow from operations was negative, consistent with the company’s stated seasonal pattern: first-quarter revenue, earnings and operating cash flow historically tend to be lowest, with activity often strongest in the fourth quarter.
- Key risks include economic or real estate-market deterioration, interest-rate and credit-market changes, foreign-exchange exposure (about 43% of Q1 business was transacted in non-U.S. currencies), client outsourcing and spending decisions, debt and refinancing needs, litigation, cybersecurity, acquisition integration and development guarantees. CBRE reported $20.4 billion of unpaid principal on loans under Fannie Mae’s DUS loss-sharing arrangement, generally exposing it to up to one-third of losses; the related recorded liability was approximately $32.1 million.
- Ordinary-course litigation was not expected by management to produce losses materially above accruals, though outcomes are uncertain. Management reported disclosure controls were effective and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate organic revenue growth and foreign-exchange effects from the impact of ASC 606’s gross presentation and accelerated recognition; compare fee revenue and margins as well as reported revenue.
- Track whether higher operating expenses and lower operating and adjusted EBITDA margins persist, and whether adjusted EBITDA growth converts into operating cash flow.
- Assess the cash-flow seasonality, working-capital movements and use of revolving borrowings; distinguish warehouse financing from corporate debt and consider the March note redemption’s refinancing effects.
- Monitor development-project pipeline and equity-method gains, which contributed materially to Development Services’ results, along with carried-interest revenue and expense volatility in Global Investment Management.
- Review exposure to foreign currencies, the DUS loan-loss-sharing portfolio and development guarantees, and the effect of future interest rates or refinancing conditions.
- Note that 2017 comparatives were restated under the new revenue standard and that the filing does not provide clear forward earnings guidance.