CBRE Group, Inc. — Q1 2012 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. CBRE provides commercial real estate services, investment management and development services across the Americas, EMEA and Asia Pacific. The company notes that its business is seasonal, with historically lower revenue and cash flow in the first half of the year.
Key financial metrics
Amounts are in millions of dollars except per-share data and ratios.
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $1,350.0 | $1,185.1; up 13.9% |
| Operating income / margin | $76.1 / 5.7% | $73.1 / 6.2% |
| Income from continuing operations | $29.9 | $33.8 |
| Net income attributable to CBRE / diluted EPS | $27.0 / $0.08 | $34.4 / $0.11 |
| EBITDA, as adjusted (non-GAAP) / margin | $150.5 / 11.1% | $120.6 / 10.2% |
| Net cash used in operating activities | $(298.9) | $(113.9) |
| Cash and cash equivalents at period-end | $703.9 | $1,093.2 at Dec. 31, 2011 |
| Total current assets / current liabilities | $2,781.7 / $1,992.7 | $3,550.0 / $2,680.6 at Dec. 31, 2011 |
| Long-term debt; corporate debt including current maturities | $2,396.2; approximately $2.5 billion | Long-term debt was $2,404.8 at Dec. 31, 2011 |
| Interest expense | $44.0 | $33.7 |
Cash used in investing activities was $74.4 million, versus $65.3 million provided in Q1 2011; cash used in financing activities was $22.5 million, versus $39.2 million. Corporate debt excludes warehouse lines and real estate notes, which CBRE describes as generally nonrecourse. At March 31, warehouse lines were $410.3 million and real estate notes were $391.6 million.
Material changes and segment performance
- Revenue growth reflected the 2011 ING real estate investment management acquisitions (REIM), higher Americas mortgage brokerage activity, and increased worldwide sales and outsourcing. Foreign currency translation reduced revenue by $8.2 million.
- CBRE’s Americas segment grew revenue 12.7% and operating income to $80.8 million. Global Investment Management revenue rose to $125.2 million from $50.3 million, principally due to the REIM acquisitions; segment EBITDA was $34.6 million versus $6.0 million.
- EMEA revenue fell 3.7% and the segment reported an $11.3 million operating loss, amid weak European growth and the sovereign debt crisis. Asia Pacific revenue rose 4.2%, but operating income fell to a loss of $0.4 million from income of $11.3 million. Development Services revenue declined 22.5%, with operating loss widening to $4.4 million.
- Cost of services fell to 58.3% of revenue from 60.2%, reflecting revenue mix. Operating, administrative and other expenses increased to 32.6% of revenue from 31.8%, and depreciation and amortization approximately doubled, largely due to acquired REIM intangible assets.
- Interest expense increased 30.4%, primarily reflecting acquisition-related borrowing. Q1 2011 included $10.6 million of discontinued-operations income, all attributable to non-controlling interests; it did not contribute to CBRE shareholder earnings.
- Cash declined by $389.2 million during the quarter. Operating cash outflow reflected seasonal payments of bonuses, commissions and taxes, among other working-capital movements. Investing cash flow included a $73.2 million cash reduction from deconsolidating CBRE Clarion U.S., L.P.
Outlook, risks and unusual items
- CBRE expects its full-year 2012 effective tax rate to be slightly below 40%, compared with 48.5% in Q1; management says the quarter’s rate reflected earnings mix, discrete items and losses in jurisdictions where no tax benefit was available. The filing gives no specific full-year revenue or earnings guidance.
- Management expects up to $170 million of net capital expenditures in 2012. It expects cash flow from operations and the revolving credit facility to meet anticipated cash needs for at least the next 12 months, while noting uncertainty around future refinancing and credit-market conditions.
- REIM acquisition integration and related costs are expected to continue. CBRE reported $80.2 million of transaction and integration expenditures through March 31, 2012 and estimated total REIM transaction, retention and integration costs of approximately $150 million. A possible additional Europe acquisition closing of approximately $80 million and further co-investments were also described.
- CBRE reported a $95.9 billion Global Investment Management AUM balance and $4.8 billion of development projects in process. These measures are not equivalent to revenue or committed earnings.
- A Freddie Mac purchase commitment arrangement with Kemps Landing was scheduled to terminate effective June 30, 2012. CBRE had received non-binding replacement-facility quotes and aimed to have replacement financing in place before termination.
- Key risks include economic and property-market weakness, especially in Europe; interest-rate and foreign-exchange movements; acquisition integration; leverage and debt service; and availability of warehouse financing. Credit covenants required minimum interest coverage of 2.25x and maximum net leverage of 3.75x; reported ratios were 12.59x and 1.80x, respectively.
- Other exposures include up to one-third loss sharing on $3.8 billion of multifamily loans under the Fannie Mae DUS program, development completion and budget guarantees, $58.1 million of future Global Investment Management co-investment commitments, and $17.3 million of Development Services commitments. Management said it did not expect material losses on development guarantees or construction defects; it also noted litigation outcomes are inherently uncertain.
Important facts for investors to verify
- How much of the reported revenue and adjusted EBITDA growth reflects acquired REIM operations versus organic performance, and how integration costs evolve against the approximately $150 million estimate.
- Whether operating cash flow improves after seasonal Q1 bonus, commission and tax payments, and how cash balances develop over the year.
- Progress in replacing the Kemps Landing/Freddie Mac financing arrangement before its June 30, 2012 termination, including facility size, pricing and terms.
- Trends in EMEA and Asia Pacific profitability, and whether the expected full-year tax rate remains slightly below 40%.
- Debt repayment and refinancing plans, interest-rate exposure, and continued compliance with credit covenants.
- Funding needs and performance of acquisition-related investments, co-investment commitments, pension plans and Fannie Mae DUS loan-loss exposure.