CBRE GROUP, INC. quarterly report, Q2 FY2014

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CBRE Group, Inc. — Q2 2014 Form 10-Q

Business context and reporting period. CBRE provides commercial real estate services, investment management and development services. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are to the corresponding 2013 periods. Dollar amounts below are in millions unless noted.

Financial performance

  • Revenue: Q2 revenue was $2,126.8, up 22.1%; first-half revenue was $3,987.6, up 24.0%. Management attributed growth to Norland, acquired in December 2013, as well as organic gains in property and facilities management, leasing and sales.
  • Profit and margins: Q2 operating income was $206.0 versus $187.6; net income attributable to CBRE was $105.5 versus $69.9, and diluted EPS was $0.32 versus $0.21. First-half operating income was $318.5 versus $288.8; attributable net income was $173.1 versus $107.4, and diluted EPS was $0.52 versus $0.32. Operating margin was 9.7% in Q2 (10.8% in 2013) and 8.0% for the first half (9.0%); attributable net margin was 5.0% (4.0%) and 4.3% (3.3%), respectively.
  • EBITDA: Reported non-GAAP EBITDA was $260.2 in Q2, or 12.2% of revenue, versus $240.5, or 13.8%; first-half EBITDA was $457.4, or 11.5%, versus $400.2, or 12.4%. The filing cautions that EBITDA is not GAAP or free cash flow and may not be comparable across companies.
  • Cash flow: First-half operating cash flow was negative $224.0, compared with positive $84.7 in 2013. Investing cash flow was negative $2.0 versus positive $65.0; financing cash flow was positive $110.7 versus negative $740.0. Cash and cash equivalents declined $110.0 to $381.9. Management cited receivables growth, vendor payments, taxes and bonuses, alongside prior-year real estate-sale proceeds.
  • Liquidity and debt: At June 30, cash was $381.9 and restricted cash was $47.0. Short-term borrowings were $1,074.0, including $731.5 of warehouse lines and $336.0 drawn on the revolving facility; long-term debt was $1,777.2. Management described debt excluding warehouse lines and generally nonrecourse real estate notes as approximately $2.2 billion. The $1.2 billion revolver matures in 2018; approximately $852.6 remained available after borrowings and $11.4 of letters of credit. The debt covenant leverage ratio was 1.66x against a 4.25x maximum, and interest coverage was 11.61x against a 2.00x minimum.

Material changes and operating drivers

  • Norland materially expanded EMEA revenue and costs. EMEA Q2 revenue rose 89.1% to $511.0; excluding Norland, it increased 16.4%. EMEA operating margin was 2.3% versus 3.1%, reflecting acquisition-related cost mix; management reported improved underlying cost ratios excluding Norland.
  • Americas revenue grew 11.0% in Q2, while operating income declined to $127.7 from $132.0 and operating margin fell to 10.3% from 11.9%, partly reflecting revenue mix and higher costs. Asia Pacific revenue rose 3.5%, but operating income fell to $20.4 from $23.2. Global Investment Management revenue increased 9.7% in Q2 but declined 1.2% for the first half; Development Services first-half operating results weakened.
  • Cost of services rose faster than revenue, partly because of Norland and transaction-linked commissions. Consolidated cost of services increased to 61.8% of revenue in Q2 from 58.5%, and to 62.1% for the first half from 58.4%. Higher amortization, largely from Norland-related intangibles, also increased expenses.
  • Q2 real estate disposition gains were $23.2 versus $7.5. The filing says the year-over-year comparison was affected by adoption of a new discontinued-operations accounting standard; 2014 ordinary-course disposition gains are presented in operating results rather than discontinued operations.

Outlook, risks and unusual items

  • Management expects operating cash flow and the revolver to meet anticipated cash requirements for at least the next 12 months. It estimated 2014 net capital expenditures of up to approximately $185, of which $47.4 had been incurred in the first half, and a full-year effective tax rate of approximately 35%. No specific full-year revenue or earnings guidance is stated.
  • Management described improving U.S. commercial property conditions and stronger European investment sales, but noted soft European leasing and subdued Asia-Pacific leasing. Results are seasonal, historically weighted toward the second half, particularly Q4.
  • Key risks include economic and real estate market weakness, credit availability and interest rates, foreign exchange movements, acquisition integration and costs, client outsourcing and transaction activity, leverage and refinancing, and the ability to renew warehouse facilities. About 45% of first-half business was transacted in foreign currencies. New forward contracts generated $3.4 of losses in the first half.
  • Contingencies include ordinary-course litigation (management said excess losses were unlikely to be significant, while acknowledging uncertainty), $27.1 of letters of credit, $14.1 of guarantees, development completion and budget guarantees, and potential loss-sharing on $8.6 billion of Fannie Mae DUS loans. CBRE MCI had $15.0 of related loan-loss accruals and $22.1 of reserve cash. Additional committed investments included $24.3 to unconsolidated development subsidiaries and $22.9 of co-investments.
  • The Norland contingent consideration of approximately $40.0 was paid in July 2014; no further amount was due. The company early adopted ASU 2014-12 with no material impact and was evaluating the effect of revenue standard ASU 2014-09, effective in 2017.

Important facts for investors to verify

  • Whether organic growth and margins, particularly in EMEA after Norland, sustain as acquisition-related comparisons normalize.
  • Drivers of the negative first-half operating cash flow and whether receivables and working capital convert to cash in the second half.
  • Revolver availability, warehouse-line renewals, debt covenant headroom and the effect of variable rates and foreign exchange exposure.
  • Potential obligations or losses from DUS loan sharing, development guarantees, litigation, pensions and committed investments.
  • How much reported profit growth depends on real estate gains, investment-related income and non-GAAP adjustments, and the eventual impact of ASU 2014-09.