CBRE Group, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance sheet compared with December 31, 2014. CBRE provides commercial real estate services, investment management and development services. Management notes that revenue, earnings and operating cash flow are typically lowest in the first quarter and highest in the fourth.
Financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Revenue | $2.053 billion | $1.861 billion; up 10.3% |
| Operating income | $160.1 million; 7.8% margin | $112.5 million; 6.0% margin |
| Net income attributable to CBRE | $92.9 million; $0.28 diluted EPS | $67.7 million; $0.20 diluted EPS |
| EBITDA (non-GAAP) | $246.3 million; 12.0% of revenue | $197.2 million; 10.6% of revenue |
| Cash from operations | $(179.9) million | $(270.0) million |
| Cash and cash equivalents | $379.0 million | $740.9 million at year-end 2014 |
Cost of services was 62.9% of revenue versus 62.4% a year earlier; operating and administrative expenses were 25.9% versus 28.4%. The effective tax rate was 38.0%, up from 35.9%.
Material changes and segment performance
- Revenue growth reflected higher property, facilities and project management fees, sales and leasing activity, and Americas mortgage brokerage. Currency translation reduced reported revenue by $93.7 million.
- Americas revenue rose 20.2% to $1.228 billion; EBITDA increased to $187.3 million from $125.8 million.
- EMEA revenue fell 4.8% to $494.0 million, largely due to currency; excluding translation, revenue grew 6.5%. Operating results weakened to an $8.2 million loss from $5.1 million income; EBITDA fell to $7.6 million from $23.4 million.
- Asia Pacific revenue rose 6.5% to $208.4 million and EBITDA increased to $10.6 million from $8.2 million.
- Global Investment Management revenue declined 2.0% to $110.2 million, while EBITDA rose to $34.9 million from $28.3 million. Assets under management declined to $87.1 billion from $90.6 billion at year-end, reflecting net outflows and market depreciation.
- Development Services revenue was nearly flat at $12.3 million; EBITDA declined to $6.0 million from $11.6 million. The prior-year period included a $6.7 million real-estate disposition gain.
Comprehensive loss attributable to CBRE was $13.6 million, despite positive net income, chiefly because foreign-currency translation generated a $105.4 million loss.
Cash, debt and liquidity
- Operating cash use improved year over year to $179.9 million, mainly reflecting lower receivables and vendor payments and lower income taxes paid; bonus and commission payments partly offset the improvement. Investing cash use was $106.8 million, including $75.0 million for acquisitions. Financing used $60.4 million.
- At March 31, current assets were $3.594 billion and current liabilities $2.973 billion. These include $1.080 billion of warehouse receivables and $1.066 billion of related warehouse-line borrowings; cash was $379.0 million.
- Long-term debt was $1.714 billion, including $800 million of 5.00% senior notes, $426.8 million of 5.25% senior notes and $487.5 million of secured term loans. Revolving-credit borrowings were $110 million. Warehouse-line borrowings were $1.066 billion, substantially matched by mortgage warehouse receivables.
- In January, CBRE refinanced its credit agreement with a $2.6 billion revolving facility and $500 million term loan. The company reported investment-grade status as of March 10. Covenant leverage was 1.23x against a 4.25x maximum; interest coverage was 13.02x against a 2.00x minimum.
- Management expects operating cash flow and the revolving facility to cover anticipated needs for at least the next 12 months. Planned 2015 capital expenditures were up to approximately $180 million, net of tenant concessions.
Outlook, risks and notable items
- CBRE agreed to acquire Johnson Controls’ Global WorkPlace Solutions business for $1.475 billion in cash, subject to customary regulatory approvals and closing conditions. The company expected to fund the deal with cash and new debt and anticipated closing in late Q3 or early Q4 2015; timing and benefits were not assured.
- Management cited improving U.S. commercial property markets, modest improvement in Europe and mixed conditions in Asia Pacific. Results remain sensitive to economic activity, credit availability, real-estate demand, interest rates and transaction levels; no specific full-year earnings guidance is provided in the supplied filing text.
- Foreign-currency exposure is material: about 41% of business was transacted in foreign currencies. Currency translation reduced revenue, while foreign-exchange hedging generated $18.4 million of gains in Q1 2015. Results may remain volatile as exchange rates move.
- Other risks include acquisition integration and financing, leverage and refinancing, seasonality, pension funding, and client or market weakness. The company disclosed $43.3 million of letters of credit, $17.4 million of guarantees and development completion/budget guarantees. Under its Fannie Mae lending program, CBRE may share up to one-third of losses on loans with $10.6 billion of unpaid principal; it had accrued approximately $18.7 million for loan losses.
- Q1 included a $2.7 million write-off of financing costs related to the January refinancing. The company also reported derivative gains from foreign-currency forwards and mortgage-loan commitments. Management stated that pending litigation losses beyond amounts accrued were not expected to be significant, while acknowledging litigation uncertainty.
Important facts for investors to verify
- Whether the GWS acquisition closed on the expected timetable, its final funding mix and purchase-price adjustments, and realized integration costs and benefits.
- Whether EMEA operating performance improves and how much reported results continue to be affected by foreign exchange and hedging gains or losses.
- Cash-flow conversion through the year, given Q1 operating cash use and the seasonal concentration of activity in later quarters.
- Warehouse-line renewals and maturities, covenant compliance, and the effect of acquisition debt on leverage and interest expense.
- Potential loss exposure from Fannie Mae loan-sharing arrangements, development guarantees, co-investment commitments and pension obligations.