CBRE Group, Inc. — Q3 2015 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2015; filed November 9, 2015. CBRE provides commercial real estate services and investment management globally. The filing compares the three- and nine-month periods ended September 30, 2015 with the same 2014 periods. Financial statements are unaudited. The September 1 acquisition of Johnson Controls’ Global Workplace Solutions (GWS) business materially affects comparability.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2,712.6 million | $2,275.1 million | $7,155.6 million | $6,262.7 million |
| Operating income | $240.1 million | $185.1 million | $629.0 million | $503.6 million |
| Net income attributable to CBRE | $149.1 million | $107.1 million | $367.1 million | $280.2 million |
| Diluted earnings per share | $0.44 | $0.32 | $1.09 | $0.84 |
| EBITDA, as adjusted (non-GAAP) | $344.6 million | $292.2 million | $895.1 million | $753.7 million |
Revenue increased 19.2% in Q3 and 14.3% year to date; operating income increased 29.7% and 24.9%, respectively. Net income attributable to CBRE rose 39.2% in Q3 and 31.0% year to date. GAAP operating margin was 8.8% in Q3 2015 versus 8.1% in Q3 2014, and 8.8% year to date versus 8.0%. Attributable net margin was 5.5% versus 4.7% in Q3 and 5.1% versus 4.5% year to date.
For the first nine months, operating cash flow was $142.4 million, compared with $68.5 million in 2014. Capital expenditures were $85.3 million; after $6.8 million of tenant concessions received, net capital expenditures were $78.6 million. Cash and cash equivalents were $440.4 million at September 30, down from $740.9 million at year-end 2014. Investing activities used $1.632 billion, principally reflecting the GWS acquisition; financing activities provided $1.210 billion.
At September 30, current assets were $3.980 billion and current liabilities $3.604 billion (current ratio approximately 1.10). Short-term borrowings totaled $997.5 million, including $578.4 million on warehouse lines and $400.5 million under the revolving facility. Long-term debt was $2.656 billion; real estate notes payable totaled $31.4 million. The credit agreement’s trailing-twelve-month interest coverage ratio was 11.01x against a 2.00x minimum, and net leverage was 1.88x against a 4.25x maximum.
Material changes versus prior comparable periods
- GWS contributed $236.6 million of Q3 revenue, $13.1 million of operating income and $8.6 million of income attributable to CBRE. Direct acquisition and integration costs were $16.9 million in Q3 and $24.9 million for the nine months.
- Excluding GWS, management reported organic growth in property, facilities and project management fees of 14.0% in Q3 and 15.9% year to date. Sales activity rose 18.8% and 23.7%, respectively; leasing rose 12.0% and 13.2%.
- Reported cost of services as a share of revenue increased to 65.4% from 62.8% in Q3 and to 63.6% from 62.4% year to date, largely reflecting GWS’s cost profile. Excluding GWS, the comparable ratios were 63.0% and 62.7% for 2015.
- Foreign-currency translation reduced revenue by $153.9 million in Q3 and $397.1 million year to date. Year-to-date foreign-currency translation loss in other comprehensive income was $117.6 million.
- Global Investment Management revenue declined 7.4% year to date, while its Q3 revenue rose 8.6%, including $19.1 million of carried-interest revenue versus $0.7 million a year earlier. Development Services EBITDA fell to $17.6 million year to date from $37.1 million.
- CBRE issued $600 million of 4.875% senior notes due 2026 and added $400 million of term-loan facilities to help finance GWS. The 2014 comparison included a $23.1 million financing-cost write-off related primarily to redeeming 6.625% notes; the 2015 nine-month write-off was $2.7 million.
Outlook, commentary, risks and contingencies
Management stated it expected operating cash flow and the revolving credit facility to meet anticipated cash requirements for the foreseeable future, and at least the next 12 months. Expected 2015 capital expenditures were up to approximately $150 million, net of tenant concessions; $78.6 million had been incurred net through September. The filing does not provide a specific revenue or earnings forecast.
Management described improving U.S. commercial real estate conditions, modest improvement in European leasing and stronger European property sales, while Asia-Pacific markets varied by country. It cautioned that results are exposed to economic and credit conditions, interest rates, property-market cycles, client outsourcing and spending decisions, seasonality, foreign exchange, and acquisition integration. GWS integration, client retention, synergies and expected benefits are specifically identified as risks. Approximately 43% of business was transacted in non-U.S.-dollar currencies.
CBRE reported pending or threatened ordinary-course litigation and said excess losses over accrued amounts were not expected to be significant, while noting outcomes are inherently uncertain. Under the Fannie Mae DUS program, CBRE Multifamily Capital had loans with $11.4 billion of unpaid principal subject to potential loss sharing of up to one-third in selected cases; it had accrued approximately $20.1 million for loan losses and posted a $35.0 million letter of credit. Other exposures included $44.1 million of letters of credit, $41.0 million of guarantees and committed future investments of $23.6 million in co-investments and $23.0 million in Development Services subsidiaries. Management did not expect material losses under development guarantees.
Important facts for investors to verify
- Whether GWS integration, client retention, costs and synergies track management’s expectations; purchase-price allocation remained preliminary.
- How much of revenue and earnings growth is organic versus acquisition-driven, and how GWS affects service margins as integration proceeds.
- Cash conversion, working-capital requirements and the continuing effect of acquisition spending on cash and debt.
- Debt maturities, variable-rate exposure and covenant headroom; a 100-basis-point rate increase was estimated to reduce nine-month pre-tax income and operating cash flow by $6.8 million on variable-rate debt, excluding real estate notes.
- Foreign-exchange effects and Global Investment Management AUM, which declined from $90.6 billion at year-end 2014 to $86.0 billion at September 30, 2015.
- Potential losses or collateral demands associated with DUS loan loss sharing, guarantees, pension funding and committed investments.