CBRE Group, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2017, compared with the same period in 2016. CBRE provides commercial real estate services and investment management globally; results are seasonal, with revenue, earnings and operating cash flow historically lowest in the first quarter and highest in the fourth.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $2,981.2 million | $2,846.7 million | +4.7% |
| Operating income | $195.2 million | $107.6 million | +81.4% |
| Operating margin | 6.5% | 3.8% | +2.7 percentage points |
| Net income attributable to CBRE | $129.6 million | $82.2 million | +57.7% |
| Diluted EPS | $0.38 | $0.24 | Up from $0.24 |
| Adjusted EBITDA (non-GAAP) | $303.2 million | $282.7 million | +7.3% |
| Cash from operating activities | $(342.0) million | $(328.6) million | Greater cash use |
Cost of services was 70.0% of revenue versus 70.7%; operating, administrative and other expenses were 20.3% versus 22.6%. The effective tax rate, adjusted for non-controlling interests as described by the company, declined to 28.3% from 37.9%, helped by resolution of certain tax audits and lower losses in jurisdictions where no tax benefit was available.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $533.3 million; total assets were $9.93 billion and total equity was $3.26 billion.
- Long-term debt, net, was $2.55 billion. Short-term borrowings were $791.5 million, including $671.5 million of warehouse-line borrowings and $120.0 million outstanding on the revolving facility. Warehouse borrowings fund mortgage loans held for sale, which were $685.1 million and generally subject to government-sponsored entity purchase commitments or confirmed forward trades.
- CBRE reported $2.7 billion available under its $2.8 billion revolving facility. Its covenant leverage ratio was 1.35x against a 4.25x maximum; interest coverage was 13.08x against a 2.00x minimum.
- Operating cash outflow reflected the seasonal working-capital pattern, including payments of bonuses and to vendors. Cash declined by $229.3 million during the quarter to $533.3 million.
Material changes versus the prior comparable period
- Revenue growth reflected higher occupier outsourcing revenue (+8.2%), leasing (+4.2%), property sales (+6.3%) and commercial mortgage brokerage (+13.6%). Foreign currency translation reduced reported revenue by $67.3 million, primarily due to sterling weakness.
- Operating income improved substantially as operating and administrative costs declined, including lower net carried-interest expense, lower GWS integration costs and the absence of certain 2016 cost-elimination expenses. Cost of services also declined as a share of revenue.
- Equity income from unconsolidated subsidiaries fell to $15.0 million from $57.3 million, principally because prior-year Development Services earnings included greater gains on property sales. This weighed on the comparison despite higher consolidated operating income.
- By segment, revenue increased 6.6% in Americas, 0.5% in EMEA, and 9.6% in Asia Pacific; it declined 0.9% in Global Investment Management and 18.6% in Development Services. EMEA’s reported growth was significantly affected by currency translation, which reduced its revenue by $68.1 million.
- Development Services adjusted EBITDA was $2.8 million versus $31.9 million, reflecting lower development fees and the prior-year contribution from property sales. Global Investment Management adjusted EBITDA increased to $25.9 million from $22.9 million.
Outlook, commentary and risks
- The filing gives no specific full-year earnings or revenue guidance. Management stated that cash from operations and the revolving facility were expected to cover anticipated 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; first-quarter spending was $20.0 million net of concessions received. The company also had $24.2 million of future Global Investment Management co-investment commitments and $23.4 million of commitments to Development Services unconsolidated subsidiaries.
- Management described U.S. property sales activity as slower in 2016 and early 2017 after several years of strong growth, though the market remained active; mortgage services remained strong. The filing highlights economic and credit-market conditions, interest rates, Brexit and currency movements, outsourcing demand, client spending, competition, acquisition integration and leverage as risks.
- Approximately 46% of quarterly business was transacted in non-U.S. dollar currencies. CBRE had no foreign-currency forward contracts outstanding at March 31, 2017 and did not intend to hedge foreign-currency-denominated EBITDA in 2017.
- Potential contingencies include ordinary-course litigation; Fannie Mae multifamily loan loss-sharing exposure on loans with $17.4 billion unpaid principal balance, with approximately $29.6 million of loan-loss accruals; $59.0 million of outstanding letters of credit; and $56.2 million of guarantees. The company said it did not expect material losses under development guarantees, while noting uncertainty inherent in litigation and contingent obligations.
- CBRE planned to adopt the new revenue recognition standard in Q1 2018 and was assessing the impact. Its initial assessment indicated some leasing commission revenue may be recognized earlier; the effect of principal-versus-agent treatment for certain facilities-management costs was still being evaluated.
Important facts for investors to verify
- Reconcile the improvement in GAAP operating income and net income with non-GAAP adjusted EBITDA and the effects of tax-audit resolutions, carried interest and prior-year Development Services property-sale gains.
- Assess whether revenue growth and operating margins persist after considering the $67.3 million adverse currency translation impact and quarter-to-quarter seasonality.
- Monitor operating cash use, working-capital movements and cash conversion; first-quarter operating cash outflow increased year over year.
- Review debt and liquidity alongside warehouse-line funding and related mortgage receivables, covenant headroom, and future debt maturities.
- Track contingent exposures, including Fannie Mae loss-sharing, letters of credit, guarantees, co-investment commitments and litigation.
- Confirm the eventual financial-statement effects and transition method for the forthcoming revenue recognition standard.