Business context and reporting period
CBRE Group, Inc. filed this Form 10-K for the fiscal year ended December 31, 2012. It is a global commercial real estate services and investment firm, earning transaction commissions and contractual or project-based fees across brokerage, outsourcing, mortgage services, investment management and development. Contractual fee-for-service businesses represented approximately 41% of 2012 revenue. The filing also reports fourth-quarter results; the company notes that earnings and cash flow are typically weighted toward the second half, particularly Q4.
Financial performance and liquidity
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $6.514 billion | $5.905 billion | +10.3% |
| Operating income | $585.1 million | $462.9 million | +26.4% |
| Net income attributable to CBRE | $315.6 million | $239.2 million | +32.0% |
| Diluted EPS | $0.97 | $0.74 | +$0.23 |
| Operating margin | 9.0% | 7.8% | +1.2 percentage points |
| EBITDA (non-GAAP) | $861.6 million | $693.3 million | +24.3% |
| Adjusted EBITDA (non-GAAP) | $918.4 million | $802.6 million | +14.4% |
Net cash from operating activities was $291.1 million, down from $361.2 million in 2011, primarily reflecting higher bonus, commission and tax payments and working-capital movements. Investing activities used $197.7 million; financing activities used $100.7 million. Cash and cash equivalents were $1.089 billion at year-end, essentially unchanged from 2011; $94.6 million was held in consolidated funds and other entities and was not available for general corporate use.
At year-end, long-term debt including current maturities was $2.428 billion. Total consolidated debt, including warehouse borrowings but excluding real-estate notes payable, was $3.527 billion; warehouse borrowings were largely matched by mortgage loans held for sale. The company separately reported approximately $2.5 billion of debt excluding warehouse lines and real-estate notes. Credit-agreement covenant headroom was substantial: the reported interest coverage ratio was 10.45x against a 2.25x minimum, and net leverage was 1.38x against a 3.75x maximum. The $700 million revolving facility matures in 2015; the filing identifies several warehouse facilities with 2013 maturities.
Current assets were $4.085 billion and current liabilities $2.972 billion. These totals include substantial warehouse receivables and related short-term borrowings, so they should not be read as conventional operating liquidity alone. The company expected 2013 capital expenditures of up to approximately $160 million and pension contributions of $5.5 million.
Material changes versus prior comparable periods
- Revenue growth reflected the full-year contribution of the 2011 ING/Clarion real estate investment management acquisitions, as well as higher sales, mortgage brokerage and outsourcing activity. Worldwide sales transaction revenue rose 10.9%, mortgage brokerage activity 31.3% and outsourcing activity 10.1%; leasing revenue was essentially flat. Foreign currency translation reduced revenue by $108.2 million.
- Cost of services declined to 57.5% of revenue from 58.5%, and operating, administrative and other expenses declined to 30.7% from 31.9%, supporting operating-margin expansion. Depreciation and amortization rose 46.6%, primarily due to acquired intangible assets.
- Interest expense increased 16.5% to $175.1 million, mainly due to borrowings used to finance the acquisitions. The effective tax rate from continuing operations, adjusted for non-controlling interests, declined to 37.1% from 44.8%; acquisition costs and tax credits contributed to the comparison.
- Operating cash flow fell despite higher earnings. Equity income from unconsolidated subsidiaries decreased to $60.7 million from $104.8 million, largely because of prior-year property-sale gains. Income from discontinued operations fell to $0.6 million from $49.9 million.
- By segment, Americas revenue increased 11.7% and operating margin improved to 11.8%. EMEA revenue declined 4.2% and operating income fell to $14.6 million from $76.0 million, including a $19.8 million non-cash trade-name impairment. Asia Pacific revenue rose 3.6%, while operating income declined to $70.2 million from $73.7 million. Global Investment Management revenue rose 66.4%, primarily from the acquisitions; operating income was $43.7 million versus a $44.0 million loss. Its AUM was $92.0 billion, down 2.2% from year-end 2011. Development Services revenue rose 3.3%; its operating loss narrowed to $27.2 million from $29.7 million.
Outlook, commentary, risks and unusual items
The filing gives no quantified company earnings or revenue guidance. Management said it expected working-capital and investment needs to be met through internally generated cash and, as needed, the revolving facility. It cited continued gradual market recovery but emphasized uncertainty around U.S. fiscal and tax policy, European sovereign debt, slower global growth and credit-market conditions. Management said U.S. fiscal and tax uncertainty had delayed or canceled some client transactions and could continue to affect 2013 activity.
- Results remain exposed to commercial property transaction volumes, leasing demand, asset values, financing availability and property development cycles. Revenue and cash flow are seasonal, with Q4 historically strongest.
- Approximately 40% of 2012 revenue was generated outside the United States; foreign-currency translation reduced 2012 revenue by $108.2 million. Currency movements, especially in Europe, can affect reported revenue, earnings and AUM.
- Leverage, floating-rate debt, refinancing needs and short-dated warehouse facilities are material considerations. A 10% increase in rates on variable-rate debt excluding real-estate notes was estimated to reduce pretax income and operating cash flow by $7.9 million.
- Development and investment exposures include $31.7 million of future Global Investment Management co-investment commitments, $14.3 million of Development Services commitments, and project completion and budget guarantees. The company reported $4.2 billion of development projects in process and a $2.1 billion pipeline.
- Other disclosed exposures include a $63.5 million underfunded U.K. defined-benefit pension liability; $94.3 million of current and non-current tax liabilities; ongoing tax audits and uncertain tax positions; and ordinary-course litigation. Management said losses above litigation accruals were believed remote, while acknowledging litigation uncertainty and potential material impact from an adverse resolution.
- Unusual 2012 items included $19.8 million of non-cash trade-name impairment, $26.5 million of real-estate impairment and a $5.8 million software-related property-and-equipment impairment. The company also recognized a $28.8 million tax benefit associated with planned repatriation of $191 million in foreign earnings.
Most important facts for investors to verify
- Separate organic growth from acquisition-related growth, particularly in Global Investment Management, and confirm the continuing contribution and integration costs of the ING/Clarion acquisitions.
- Review the drivers and sustainability of the margin improvement, while distinguishing reported EBITDA and adjusted EBITDA from GAAP earnings and cash flow.
- Assess operating cash conversion and working-capital needs, including the timing and availability of cash held in consolidated funds and non-U.S. subsidiaries.
- Reconcile debt measures and maturities, especially warehouse borrowings and their corresponding receivables, near-term facility renewals, interest-rate exposure and covenant definitions.
- Track EMEA profitability, AUM trends, impairment assumptions, real-estate commitments and guarantees, and resolution of tax and litigation contingencies.