CBRE Group, Inc. — 2012 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet figures are as of September 30, 2012, compared with December 31, 2011. Unless stated otherwise, financial amounts below are in U.S. dollars. CBRE provides commercial real estate services, investment management and development services across five segments: Americas, EMEA, Asia Pacific, Global Investment Management and Development Services.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.557 billion | $1.534 billion | $4.508 billion | $4.142 billion |
| Operating income | $103.6 million | $143.0 million | $352.4 million | $346.3 million |
| Net income attributable to CBRE | $39.7 million | $63.8 million | $142.6 million | $159.4 million |
| Diluted EPS | $0.12 | $0.20 | $0.44 | $0.49 |
| EBITDA, as adjusted | $195.3 million | $194.8 million | $566.8 million | $487.7 million |
Revenue increased 1.5% in Q3 and 8.8% for the first nine months. Operating margin was 6.7% in Q3 versus 9.3% a year earlier; year-to-date margin was 7.8% versus 8.4%. Adjusted EBITDA is a non-GAAP measure; the filing cautions it is not a substitute for GAAP earnings or free cash flow. Consolidated net income was $42.7 million for Q3 and $148.3 million year to date; the figures in the table are attributable to CBRE shareholders.
- Cash flow: Operating activities used $119.9 million in the first nine months of 2012, versus $104.1 million provided in 2011. Investing activities used $153.5 million; financing activities used $47.8 million. Cash declined $316.9 million to $776.3 million.
- Liquidity: Current assets were $3.037 billion and current liabilities $2.144 billion, implying working capital of about $893 million. Cash plus restricted cash was $840.9 million. The $700 million revolving facility had $72.7 million drawn; $17.3 million of letters of credit also used facility capacity.
- Debt: Long-term debt was $2.372 billion, in addition to $71.1 million of current maturities and $72.7 million drawn on the revolver. Management reported approximately $2.5 billion of debt excluding real-estate notes and warehouse lines. Warehouse borrowings were $458.3 million, generally matched by warehouse receivables; real-estate notes payable totaled $365.6 million.
- Covenants: Trailing-twelve-month interest coverage was 10.19x against a 2.25x minimum; net leverage was 1.74x against a 3.75x maximum.
Material changes versus the comparable period
- Q3 revenue growth was modest, while attributable net income fell 37.8% and operating income fell 27.6%. Results included a $19.8 million non-cash impairment charge for discontinuing a U.K. trade name, as well as acquisition-related costs and severance expenses.
- For the first nine months, revenue growth was largely supported by the 2011 ING real estate investment management acquisitions and stronger commercial mortgage brokerage and outsourcing activity. Attributable net income declined 10.5%; interest expense rose 23.4%, depreciation and amortization increased, and equity income from unconsolidated subsidiaries declined.
- Americas revenue grew 4.4% in Q3 and 9.8% year to date. EMEA revenue fell 17.1% in Q3 and 9.1% year to date, with the segment recording operating losses in both periods. Asia Pacific revenue declined 3.9% in Q3 but rose 2.0% year to date. Global Investment Management revenue increased 47.6% in Q3 and 93.8% year to date, primarily from the acquisitions. Development Services revenue was lower year to date.
- Cash from operations shifted from positive to negative year over year, which management attributed mainly to higher bonus and tax payments, real estate investment activity and securities-related movements.
Outlook, risks and unusual items
- Management expected a 2012 effective tax rate of 35%–38% and up to approximately $150 million of 2012 net capital expenditures; $64.4 million of net capital expenditures had been incurred through September. Management believed operating cash flow and the revolver could meet expected requirements for at least the next 12 months.
- Management described the global recovery as slow and uneven: U.S. fiscal uncertainty weighed on activity, Europe remained affected by the sovereign-debt crisis, and Asia Pacific activity moderated. It cited weak employment growth, transaction volumes below 2006–07 levels, and foreign-exchange movements as important uncertainties.
- CBRE reported $90.4 billion of Global Investment Management assets under management, down 4% from year-end 2011. Development projects in process totaled $4.6 billion; its pipeline of deals was $1.9 billion.
- The company noted acquisition integration and related costs, with total REIM transaction, retention and integration costs expected to be approximately $150 million. A possible additional ING REIM Europe closing of about $80 million and up to $20 million of further co-investments remained possible.
- Other exposures include U.K. pension liabilities of $61.8 million, guarantees and development completion/budget obligations, and potential loss-sharing on $4.9 billion of Fannie Mae DUS loans. Management said it did not expect material losses under development guarantees, but litigation outcomes remain uncertain.
- Management warned that worsening economic or real-estate conditions could lead to further impairments. It also identified leverage, refinancing and credit-market access, currency fluctuations, client retention, and acquisition integration as risks. A 10% increase in interest rates on variable-rate corporate debt was estimated to reduce pre-tax income by $5.0 million for the nine-month period.
Most important facts for investors to verify
- Whether the negative operating cash flow is seasonal and temporary, and how working capital, bonus payments and taxes affect cash conversion.
- Whether EMEA performance stabilizes and whether the U.K. trade-name impairment signals further impairment risk.
- How much of revenue and earnings growth reflects acquired businesses versus organic activity, and whether REIM integration costs and returns meet expectations.
- Debt repayment and refinancing plans, covenant headroom, floating-rate exposure, and the availability and terms of warehouse funding.
- Actual 2012 tax rate and capital expenditures against management’s stated expectations, together with subsequent developments in co-investment commitments, pension funding and contingent exposures.