CBRE Group, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012; balance-sheet figures are as of March 31, 2013 versus December 31, 2012. CBRE provides commercial real estate services, investment management and development services globally. Results are seasonal, with revenue and profits historically lower in the first half and stronger in the second half.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $1,475.1 million | $1,350.0 million; up 9.3% |
| Operating income / margin | $101.2 million / 6.9% | $76.1 million / 5.7% |
| Income from continuing operations | $40.7 million | $29.9 million |
| Net income attributable to CBRE | $37.5 million; diluted EPS $0.11 | $27.0 million; diluted EPS $0.08 |
| Net cash used in operating activities | $79.9 million | $298.9 million used |
| Cash and cash equivalents at period end | $518.7 million | $1,089.3 million at year-end 2012 |
| Total assets / total liabilities | $6,887.6 million / $5,181.9 million | $7,809.5 million / $6,127.7 million at year-end 2012 |
- EBITDA, a non-GAAP measure, was $159.8 million versus $140.5 million. Adjusted EBITDA was $161.3 million versus $150.5 million; adjusted EBITDA margin was 10.9% versus 11.1%.
- Cost of services was 58.4% of revenue, essentially flat year over year; operating, administrative and other expenses declined to 31.8% of revenue from 32.6%. Higher operating income reflected revenue growth and lower acquisition integration costs.
- Cash used in operations improved by $219.1 million year over year, but remained negative, reflecting working-capital movements including seasonal reductions in compensation and bonus payables. Investing activities provided $13.6 million; financing activities used $496.7 million. Cash fell by $570.6 million during the quarter, largely in connection with refinancing and debt repayment.
- At March 31, current assets were $3,232.8 million and current liabilities $2,453.5 million. These include substantial mortgage warehouse receivables and related borrowings, which are tied to mortgage-loan funding and should not be treated as freely available liquidity.
- Corporate debt excluding real estate notes and warehouse lines was approximately $2.1 billion, per management. The balance sheet reported $1,971.8 million of long-term debt, $42.2 million of current long-term maturities, and $108.4 million drawn on the revolver. Warehouse lines were $837.0 million, substantially matched by $850.6 million of warehouse receivables. Real estate notes payable totaled $242.6 million, mostly nonrecourse.
- The new credit agreement sets a minimum interest coverage covenant of 2.00x and maximum net leverage of 4.25x; reported coverage was 6.74x and net leverage 1.75x.
Material changes versus the prior comparable period
- Revenue growth was driven by worldwide sales activity, up 21.0%, outsourcing, up 11.3%, valuation, up 12.0%, and Americas commercial mortgage brokerage, up 15.7%. Foreign currency translation reduced revenue by $10.1 million.
- Americas revenue rose 9.5%, while operating income fell to $74.6 million from $80.8 million amid higher payroll, headcount and depreciation. EMEA revenue rose 15.8%; its operating loss narrowed to $6.2 million from $11.3 million. Asia Pacific revenue rose 8.5% and returned to operating income of $2.9 million. Global Investment Management operating income increased to $30.1 million from $11.4 million. Development Services revenue declined 16.8% to $12.4 million.
- Income from discontinued operations was $21.2 million, versus none in Q1 2012, and largely reflected property-sale gains. Only $1.5 million of that income was attributable to CBRE shareholders; most was attributable to non-controlling interests.
- Non-controlling interests’ share of net income increased to $24.3 million from $3.0 million, largely reflecting investment and development activities. Foreign currency translation produced a $22.8 million other comprehensive loss, compared with a gain of $18.5 million in Q1 2012.
Outlook, risks and unusual items
- In March, CBRE issued $800 million of 5.00% senior notes due 2023 and refinanced its credit agreement, including a $1.2 billion revolver and term-loan facilities. The quarter included a $13.6 million financing-cost write-off ($10.4 million of deferred costs and $3.2 million of new fees).
- Management expected, subject to market and other conditions, to redeem all $450 million of 11.625% subordinated notes in June 2013, at an expected $26.2 million premium, and to draw the remaining $300 million delayed-draw term loan. It projected the refinancing actions would lower corporate debt by nearly $500 million and reduce annual interest expense by about $50 million on a 2012 pro forma basis. These were forward-looking expectations, not completed transactions as of the quarter-end.
- Management expected a full-year 2013 effective tax rate of approximately 35%, capital expenditures of up to approximately $160 million, and said operating cash flow plus the revolver should meet anticipated needs for at least the next 12 months. Q1 net capital expenditures were $3.4 million.
- Key exposures include slow or uneven commercial property-market recovery, European sovereign-debt and economic weakness, interest-rate and currency movements, client spending and contract-renewal trends, acquisition integration, leverage and refinancing access, and seasonal earnings and cash flow. About 40% of Q1 business was transacted in foreign currencies.
- Commitments included $30.8 million for future Global Investment Management co-investments, of which $27.0 million was expected to be funded in 2013, and $14.7 million for Development Services investments. CBRE also disclosed $18.6 million of letters of credit, $25.8 million of specified guarantees, and development completion and budget guarantees; management did not expect material losses on the latter.
- Under Fannie Mae’s DUS program, CBRE shared up to one-third of losses on certain loans with $6.2 billion of unpaid principal outstanding; loan-loss accruals were approximately $11.2 million. Management considers excess litigation losses remote, while acknowledging litigation uncertainty. No material changes to previously disclosed legal proceedings or risk factors were reported.
Important facts for investors to verify
- Whether the planned June 2013 redemption and delayed-draw borrowing occurred, and whether the projected debt reduction and interest savings were achieved.
- How much of the quarter’s earnings improvement was recurring operating performance versus property-sale gains and discontinued operations, including the portion attributable to non-controlling interests.
- Whether operating cash flow improves through the seasonally weaker first half and how much cash is available after considering warehouse funding and other restrictions.
- Current covenant headroom, debt maturities and refinancing terms, including the status of the warehouse credit facilities.
- Progress toward the stated 2013 tax-rate and capital-expenditure expectations, and developments in market, currency, pension, DUS loan-loss and development-guarantee exposures.