CBRE Group, Inc. — Second-Quarter 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. CBRE provides commercial real estate services, investment management and development services. Results are unaudited; amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $1,601.1 | $1,422.2 | $2,951.1 | $2,607.3 |
| Operating income | $172.7 | $130.2 | $248.8 | $203.3 |
| Operating margin | 10.8% | 9.2% | 8.4% | 7.8% |
| Net income attributable to CBRE | $75.9 | $61.2 | $102.8 | $95.6 |
| Diluted earnings per share | $0.23 | $0.19 | $0.32 | $0.30 |
| Net cash used in operating activities | — | $(201.7) | $(156.4) |
- Q2 revenue rose 12.6%, operating income 32.7% and CBRE-attributable net income 23.9%. First-half revenue increased 13.2%, operating income 22.4% and attributable net income 7.6%.
- Consolidated net income, before attribution to non-controlling interests, was $75.6 million in Q2 2012 versus $74.9 million in Q2 2011, and $105.5 million for the first half versus $119.4 million. The prior-year first half included $16.9 million of discontinued-operations income, attributable to non-controlling interests.
- Non-GAAP EBITDA was $211.8 million in Q2 and $352.3 million for the first half, versus $166.1 million and $279.1 million, respectively, in 2011. Adjusted EBITDA was $220.9 million and $371.4 million; the filing excludes acquisition integration and other costs in this measure.
- At June 30, cash and cash equivalents were $731.2 million, down from $1,093.2 million at year-end 2011. Current assets were $2,828.7 million and current liabilities $1,978.5 million. Operating cash use increased year over year, mainly reflecting bonus and tax payments and investment in real estate.
- Long-term debt was $2,374.6 million; short-term borrowings were $474.8 million, including $417.2 million of warehouse-line borrowings. Real estate notes payable totaled $389.5 million and are generally nonrecourse, with $13.6 million recourse to CBRE. Management reports approximately $2.5 billion of total debt excluding warehouse lines and real estate notes.
- The $700 million revolving credit facility had $52.8 million outstanding and $17.2 million of letters of credit at quarter-end. Covenant ratios were 11.13x interest coverage versus a 2.25x minimum, and 1.76x net leverage versus a 3.75x maximum.
Material changes and operating trends
- Revenue growth reflected the ING/Clarion real estate investment management acquisitions completed in the second half of 2011, stronger Americas mortgage brokerage and higher worldwide sales and outsourcing activity. Foreign currency translation reduced revenue by $46.2 million in Q2 and $54.5 million in the first half.
- Global Investment Management revenue more than doubled in Q2, largely due to the acquisitions; Americas revenue rose 13.0%. EMEA revenue fell 4.9% in Q2 amid weak leasing and currency effects. Asia Pacific revenue grew 6.7% in Q2, while Development Services revenue was broadly flat.
- Cost of services fell as a share of revenue to 56.7% in Q2 and 57.5% for the first half, partly because acquired investment-management revenue had a higher non-commissionable mix. Depreciation and amortization increased substantially, chiefly from acquired intangibles; interest expense rose 29.8% in Q2 and 30.1% in the first half, principally due to acquisition financing.
- CBRE deconsolidated the CBRE Clarion U.S. fund after it became a variable interest entity for which CBRE was not the primary beneficiary. The change reduced cash by $73.2 million and non-controlling interests by $91.6 million; no gain or loss was recorded.
Outlook, commentary and risks
- Management expected the full-year 2012 effective tax rate to be slightly below 40%. It cited internally generated cash flow and the revolving facility as sufficient for anticipated needs for at least the next 12 months, while noting that commercial real estate activity and results remain sensitive to economic conditions.
- Expected 2012 net capital expenditures were up to $170 million; $30.3 million had been incurred in the first half. Management expected the usual seasonal pattern, with revenue, profit and operating cash flow historically stronger in the second half, particularly Q4.
- CBRE reported $91.2 billion of Global Investment Management assets under management at June 30, 2012, 3% below year-end 2011 and 133% above Q2 2011, largely reflecting the acquisitions. Management said total REIM acquisition transaction, retention and integration costs were expected to reach approximately $150 million; $89.3 million had been incurred through June 30, 2012. A further European closing of about $80 million and up to $20 million of related co-investments remained possible.
- Risks highlighted include the European sovereign-debt crisis and slowing global activity, foreign-exchange movements, acquisition integration and costs, leverage and refinancing access, interest rates, client spending and retention, and volatility in investment and development results. Management said commercial real estate markets remained below 2006–2007 levels and European activity had weakened.
- Contingencies include $4.3 billion of unpaid principal on multifamily loans subject to Fannie Mae DUS loss sharing, under which CBRE may bear up to one-third of certain losses; development completion and budget guarantees; and co-investment commitments of $30.3 million plus $15.5 million committed to Development Services ventures. Management did not expect material losses under development guarantees. The filing reported no material changes to previously disclosed legal proceedings or risk factors.
Important facts for investors to verify
- Whether revenue and margin gains persist after separating acquisition contributions, currency effects and acquisition-related costs.
- Why first-half operating cash use increased despite higher revenue and EBITDA, and the expected timing of cash conversion in the second half.
- The level and terms of debt, refinancing needs and covenant headroom, including the high-coupon 11.625% subordinated notes and warehouse-funding arrangements.
- Integration progress and realized returns from the ING/Clarion acquisitions, including the possible additional closing and remaining costs and co-investments.
- Exposure to European market weakness, currency movements, Fannie Mae loan loss-sharing obligations, development guarantees and unfunded investment commitments.