CBRE GROUP, INC. quarterly report, Q1 FY2019

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CBRE Group, Inc. — Q1 2019 Form 10-Q

Business context and reporting period

CBRE provides commercial real estate advisory, occupier outsourcing and investment services. This unaudited filing covers the three months ended March 31, 2019, compared with Q1 2018. Results are seasonal: the company says revenue, earnings and operating cash flow are typically lowest in Q1 and highest in Q4. A new three-segment reporting structure took effect January 1, 2019; prior-year segment results were restated for comparison.

Financial performance and position

  • Revenue: $5.136 billion, up 9.9% year over year. Fee revenue was $2.429 billion; reimbursable pass-through revenue was $2.707 billion.
  • Profit: Operating income was $145.0 million, down from $213.6 million; operating margin fell to 2.8% from 4.6%. Net income was $170.8 million versus $150.1 million; net income attributable to CBRE was $164.4 million versus $150.3 million. Diluted EPS was $0.48 versus $0.44.
  • Adjusted performance: Adjusted EBITDA was $450.0 million versus $347.8 million. Adjusted EBITDA margin on fee revenue rose to 18.5% from 15.3%. These are non-GAAP measures.
  • Segment revenue / adjusted EBITDA: Advisory Services, $1.834 billion / $263.9 million; Global Workplace Solutions, $3.166 billion / $99.7 million; Real Estate Investments, $135.2 million / $86.5 million. Revenue increased 7.9% and 12.0% in the first two segments, respectively, and declined 8.0% in Real Estate Investments.
  • Cash flow: Operating activities used $401.9 million, compared with $250.0 million used in Q1 2018. Investing activities used $64.6 million; financing activities provided $300.0 million. Cash, cash equivalents and restricted cash ended at $687.7 million. The filing attributes the greater operating cash use primarily to an accounts-receivable increase.
  • Liquidity and debt: March 31 cash and cash equivalents were $605.0 million, excluding $82.7 million restricted cash. Long-term debt, net, was $1.760 billion; short-term borrowings were $1.897 billion, including $1.561 billion under warehouse lines and $336.0 million on the revolver. The company reported $2.5 billion available under its $2.8 billion revolving facility. Reported covenant leverage was 0.80x and interest coverage 22.74x.
  • Margins and balance sheet: Cost of services rose to 78.3% of revenue from 77.4%, while operating, administrative and other expenses were 15.4% versus 15.7%. Total assets were $14.693 billion and total liabilities $9.489 billion at quarter-end.

Material changes versus Q1 2018

  • Revenue growth was led by Global Workplace Solutions and higher advisory leasing and project management activity; foreign currency translation reduced revenue by $148.2 million.
  • Operating income declined despite higher revenue, principally reflecting an $89.0 million non-cash intangible impairment and higher costs. The impairment was in Real Estate Investments and related to reduced anticipated cash flows and lower assets under management in the public securities business, amid industry movement toward passive investment programs.
  • Equity income from unconsolidated subsidiaries increased to $72.7 million from $40.2 million, primarily due to gains on property sales. Other income was $20.9 million versus a $4.3 million loss.
  • Interest expense fell to $22.7 million from $28.9 million. Financing-cost write-offs were $2.6 million versus $28.0 million in Q1 2018, which included costs associated with early redemption of $800 million of 5.00% senior notes.
  • Operating cash use increased by $151.9 million year over year. Unrestricted cash declined from $777.2 million at December 31, 2018 to $605.0 million at March 31, 2019.

Outlook, commentary, risks and unusual items

  • Outlook: No specific earnings or revenue guidance is stated in the supplied filing text. Management expects internally generated cash flow and, as needed, revolver borrowings to meet anticipated requirements for at least the next 12 months. The company anticipated up to approximately $210 million of 2019 capital expenditures, net of tenant concessions.
  • Management’s market view: U.S. leasing remained strong, but U.S. property sales began 2019 slowly. European leasing demand was relatively solid while sales volumes weakened; uncertainty over the UK’s EU withdrawal weighed on activity. Asia-Pacific leasing and investment cooled amid economic and geopolitical uncertainty. Management also noted pressure on active real estate investment strategies from investor preference for passive products.
  • Other unusual items: CBRE adopted lease accounting in Q1, recognizing about $1.2 billion of additional lease liabilities and $1.0 billion of corresponding right-of-use assets at January 1; adoption did not materially affect the income statement. Quarter-end operating and finance lease liabilities totaled $1.214 billion. The company recorded $14.3 million of reorganization costs in operating expenses and $15.7 million of related adjustments in its Adjusted EBITDA reconciliation.
  • Capital and commitments: A new $300 million, three-year share repurchase authorization became effective March 11; $45.1 million of shares were repurchased in January under the prior program. At March 31, CBRE had $49.1 million of future co-investment commitments and $50.3 million of additional commitments to unconsolidated subsidiaries.
  • Key risks and contingencies: Risks include economic and commercial real estate downturns, interest rates and credit availability, client outsourcing and spending decisions, foreign exchange movements, UK/EU uncertainty, acquisition integration, investment performance and AUM declines, leverage and refinancing, warehouse-line renewals, litigation, guarantees, and cybersecurity and regulatory exposures. CBRE disclosed $24.7 billion of unpaid principal on loans subject to Fannie Mae DUS loss-sharing arrangements; its recorded guarantee liability was about $40.3 million. Management said excess litigation losses beyond accruals were unlikely to be significant, while noting litigation uncertainty. The filing reports no material changes to previously disclosed risk factors or legal proceedings.

Important facts for investors to verify

  • Whether operating cash flow improves after the Q1 working-capital outflow, especially the accounts-receivable increase and seasonal bonus payments.
  • How recurring operating performance compares with reported results after the $89.0 million impairment and reorganization costs, and how non-GAAP adjustments are defined.
  • Whether the Q1 revenue growth and improved adjusted EBITDA margin persist, particularly as Global Workplace Solutions carries a lower margin and Real Estate Investments revenue declined.
  • The performance and valuation assumptions behind the public securities business impairment, and subsequent changes in assets under management and carried interest.
  • Debt, revolver availability and covenant headroom, while distinguishing warehouse borrowings that fund committed mortgage loans from corporate borrowings.
  • Exposure from lease obligations, loan loss-sharing, co-investment and subsidiary funding commitments, guarantees, and deferred acquisition consideration.