CBRE Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited results compared with the same 2018 periods unless otherwise noted. Amounts below are in U.S. dollars; financial statement figures are rounded to millions.
Business context
CBRE provides commercial real estate advisory, occupier outsourcing, investment management and development services. It reports three segments: Advisory Services, Global Workplace Solutions (GWS) and Real Estate Investments. Results are seasonal, with revenue, earnings and operating cash flow historically strongest in the fourth quarter.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $5,714m (+11.8%) | $5,111m | $10,850m (+10.9%) | $9,785m |
| Operating income | $284m | $225m | $429m | $439m |
| Operating margin | 5.0% | 4.4% | 4.0% | 4.5% |
| Net income attributable to CBRE | $224m | $229m | $388m | $379m |
| Diluted EPS | $0.66 | $0.67 | $1.14 | $1.10 |
| Adjusted EBITDA | $468m | $439m | $919m | $787m |
| Adjusted EBITDA margin on revenue | 8.2% | 8.6% | 8.5% | 8.0% |
Q2 revenue growth reflected higher GWS revenue (+11.5%) and Advisory Services activity, particularly leasing (+19.0%). Operating income increased, but net income attributable to CBRE and diluted EPS edged down year over year. For the first half, net income and adjusted EBITDA rose, while reported operating margin declined, including the effect of a $89m intangible asset impairment.
Adjusted EBITDA is a non-GAAP measure. It excludes selected items, including reorganization and acquisition-related costs; it should not be treated as operating cash flow or free cash flow.
Cash flow, debt and liquidity
- Cash flow: Operating activities used $317m in the first half, versus $92m used in 2018. Management attributed the larger outflow mainly to a greater increase in receivables and contract assets. Investing activities used $125m; financing activities provided $186m.
- Cash: Cash and cash equivalents were $536m at June 30, 2019; cash plus restricted cash totaled $613m, down from $864m at year-end 2018.
- Debt: Long-term debt, net of current maturities, was $1.767bn. CBRE also had $230m drawn on its revolving credit facility and $1.350bn outstanding on warehouse lines used to fund mortgage loans committed for purchase or securitization.
- Liquidity and covenants: The $2.8bn revolving facility had $2.6bn of borrowings available. Management reported a 0.78x debt-less-cash-to-EBITDA leverage ratio and 21.78x EBITDA-to-interest coverage, against covenant limits of 4.25x maximum leverage and 2.00x minimum coverage.
- Capital needs: Expected 2019 capital expenditures were up to approximately $210m, net of tenant concessions. At quarter-end, the company also had $73m of future co-investment commitments and $48.5m of additional capital commitments to unconsolidated subsidiaries.
Material changes and unusual items
- First-half revenue growth was partly offset in reported results by unfavorable foreign currency translation, which reduced revenue by $301m; the Q2 impact was $153m.
- The $89m non-cash intangible impairment was recorded in Real Estate Investments following lower anticipated cash flows and reduced assets under management in the public securities business, amid a shift toward passive investment strategies. First-half equity income from unconsolidated subsidiaries also declined, primarily due to lower property-sale gains.
- Q2 adjusted EBITDA increased overall, but Real Estate Investments adjusted EBITDA fell to $31m from $70m; Advisory Services and GWS adjusted EBITDA increased. GWS results included substantial reorganization severance costs, which were excluded from adjusted EBITDA.
- CBRE adopted the new lease accounting standard in January 2019. Adoption added $1.2bn of lease liabilities and $1.0bn of right-of-use assets at transition; the filing says it did not materially affect the income statement.
- CBRE completed a $45m share repurchase in January under its prior authorization. A new $300m three-year authorization became effective in March and remained unused at June 30.
Outlook, commentary and risks
The filing provides no numerical earnings or revenue guidance. Management said it expected operating cash flow and the revolving facility to cover anticipated cash requirements for the foreseeable future and at least the next 12 months, absent extraordinary events or a large strategic acquisition.
Management described U.S. commercial property sales as broadly consistent with 2018 and leasing as solid. European leasing demand remained relatively sound, but UK sales and leasing activity faced Brexit-related uncertainty; Asia Pacific activity had cooled amid geopolitical uncertainty and slower regional economies. The company highlighted sensitivity to economic conditions, real estate transaction and credit markets, interest rates, outsourcing demand, foreign exchange, client retention, acquisitions, investment performance and cybersecurity, among other risks.
After quarter-end, Telford Homes shareholders approved CBRE’s planned acquisition of the London residential developer, valued at approximately $337m. CBRE planned to fund it with cash and revolver borrowings and expected to close later in 2019; it was not completed as of the filing.
Contingencies include ordinary-course litigation, which CBRE said was not expected to result in significant losses beyond amounts accrued, while noting litigation is uncertain. Under Fannie Mae’s DUS program, CBRE MCI shared potential losses on loans with $25.9bn of unpaid principal; its recorded guarantee liability was approximately $41.8m. CBRE also disclosed $78.3m of letters of credit, $58.4m of guarantees and real estate co-investment and funding commitments.
Important facts for investors to verify
- Whether operating cash flow improves as receivables and contract assets are collected, given the $317m first-half operating cash outflow.
- Whether the $89m public-securities intangible impairment signals further pressure on Real Estate Investments assets under management, fees or earnings.
- How segment trends develop, particularly the contrast between stronger Advisory Services and GWS performance and weaker Real Estate Investments adjusted EBITDA and equity income.
- Whether the Telford acquisition closes on the anticipated timetable and how its funding affects debt and liquidity.
- Exposure to foreign currency, market conditions and contingent obligations, including mortgage loss-sharing arrangements and co-investment commitments.