CBRE Group, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. CBRE provides commercial real estate services, investment management and development services across approximately 450 offices and more than 100 countries.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $13.07 billion | $10.86 billion | +20.4% |
| Operating income | $815.5 million | $835.9 million | -2.4% |
| Operating margin | 6.2% | 7.7% | -1.5 percentage points |
| Net income attributable to CBRE | $572.0 million | $547.1 million | +4.5% |
| Diluted EPS | $1.69 | $1.63 | +3.7% |
| Adjusted EBITDA (non-GAAP) | $1.56 billion | $1.41 billion | +10.5% |
| Cash from operating activities | $450.3 million | $651.9 million | -30.9% |
Net margin was 4.4%, versus 5.0% in 2015. Fee revenue was $8.72 billion, or 66.7% of total revenue; client pass-through costs recorded as revenue were $4.35 billion, or 33.3%. The company cautions that fee revenue, EBITDA and adjusted EBITDA are non-GAAP measures.
Fourth-quarter revenue was $3.82 billion versus $3.70 billion in Q4 2015; operating income was $352.8 million versus $207.0 million, net income attributable to CBRE was $264.0 million versus $180.0 million, and diluted EPS was $0.78 versus $0.53. Results are seasonal, with revenue, earnings and cash flow historically highest in Q4.
Segments and material changes
- Americas: Revenue of $7.23 billion, up 16.7%; operating income of $584.0 million, down from $599.8 million. It represented 55.3% of company revenue.
- EMEA: Revenue of $3.92 billion, up 30.4%; operating income of $132.1 million, up from $112.3 million. Foreign exchange, particularly sterling weakness, reduced reported revenue.
- Asia Pacific: Revenue of $1.49 billion, up 30.9%; operating income of $107.0 million, up from $83.5 million.
- Global Investment Management: Revenue fell 19.7% to $369.8 million and operating income fell to $46.7 million from $83.7 million, mainly due to lower carried interest and fees. Assets under management were $86.6 billion, down from $89.0 billion in U.S. dollars.
- Development Services: Revenue rose 8.8% to $71.4 million, while operating loss widened to $54.4 million. Projects in process were $6.6 billion; the pipeline was $4.2 billion.
The 2015 Global Workplace Solutions acquisition contributed approximately $1.8 billion of 2016 revenue, reflecting a full year compared with four months in 2015. Excluding the acquired business, occupier outsourcing revenue rose 14.0%; leasing rose 6.7%, mortgage brokerage 19.1%, and property sales 1.4%. Foreign-currency translation reduced total revenue by $277.8 million. Cost of services rose to 69.8% of revenue from 65.2%, substantially reflecting the acquisition and service mix; reported operating margin declined despite revenue growth.
Operating cash flow fell mainly because of higher payments to vendors and income taxes. Investing cash use was only $7.4 million, compared with $1.62 billion in 2015, when the GWS acquisition drove spending. Financing activities used $199.6 million in 2016, following $789.5 million provided in 2015.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $762.6 million; total assets were $10.78 billion and total liabilities were $7.72 billion.
- Long-term debt, net, was $2.55 billion. Short-term borrowings of $1.25 billion were principally mortgage warehouse lines, supported by related receivables and generally used to fund loans committed for purchase or securitization.
- The $2.8 billion revolving credit facility had no borrowings outstanding at year-end, apart from $2.0 million of letters of credit; CBRE reported $2.8 billion available.
- Credit-agreement covenant ratios were 12.73x EBITDA-to-interest coverage and 1.18x net leverage, against minimum coverage of 2.00x and maximum leverage of 4.25x.
- The board authorized up to $250 million of share repurchases over three years. No shares were repurchased under this authorization during 2016. CBRE reported no cash dividends and did not anticipate paying them in the foreseeable future.
Outlook, risks and unusual items
Management said operating cash flow and the revolving facility were expected to meet anticipated cash needs for at least the next 12 months, absent extraordinary events or a large strategic acquisition. Expected 2017 capital expenditures were up to approximately $170 million, net of tenant concessions. No quantified earnings or revenue guidance is provided in the supplied filing text.
- Management described U.S. property markets as generally healthy, while noting that property sales volumes slowed in 2016 after several strong years. European activity improved broadly, but Brexit uncertainty constrained London activity; Asia-Pacific markets varied, with activity picking up in Q4.
- Key exposures include economic and commercial real estate cycles, credit and interest-rate conditions, foreign currency movements, Brexit-related uncertainty, acquisition integration, competition, talent retention, cybersecurity and IT disruption, regulation and taxes, litigation, environmental liabilities, and investment and development guarantees.
- 2016 included $78.5 million of cost-elimination expenses, principally severance, and $125.7 million of acquisition integration and other costs, which are added back in adjusted EBITDA. The cost-elimination program ended in Q3 2016.
- The company recorded $80.7 million of net mortgage-servicing-rights contribution to operating income, including $154.0 million of gains at loan origination and sale less $73.3 million of amortization.
- Foreign-currency translation loss in other comprehensive income was $235.3 million. The foreign-exchange forward hedging program expired in December 2016; the company said it did not intend to hedge foreign-currency EBITDA in 2017.
- Pending or threatened ordinary-course lawsuits were disclosed; management believed losses above recorded accruals were unlikely to be significant, while acknowledging litigation uncertainty. Development guarantees and commitments include $31.6 million for investment-management co-investments and $23.0 million for development subsidiaries.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The filing states that no unresolved SEC staff comments were outstanding.
Important facts for investors to verify
- How much of reported revenue growth and the margin change reflects GWS acquisition activity, client-reimbursed pass-through costs, and organic fee growth?
- Whether operating cash flow recovers and how working capital, taxes, and capital expenditures affect cash conversion.
- Global Investment Management fee and carried-interest trends, and the drivers of the decrease in AUM.
- Debt maturity and refinancing exposure, including warehouse-line renewals, covenant headroom, and the distinction between corporate debt and mortgage warehouse borrowings.
- Potential outcomes and cash requirements from tax positions, litigation, pension underfunding, development guarantees, and co-investment commitments.
- Implementation effects of new revenue-recognition guidance, which CBRE expected could accelerate some contingent-event revenue and was still evaluating for third-party costs billed to clients.