CBRE Group, Inc. — Q1 2020 Form 10-Q
Business context and reporting period
CBRE provides commercial real estate services and investments through Advisory Services, Global Workplace Solutions (GWS), and Real Estate Investments. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019; balance-sheet figures are compared with December 31, 2019. Results reflect the initial disruption from COVID-19, which began affecting many markets late in the quarter.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Revenue | $5.889 billion | $5.136 billion; up 14.7% |
| Operating income | $220.3 million; 3.7% margin | $145.0 million; 2.8% margin |
| Net income attributable to CBRE | $172.2 million; diluted EPS $0.51 | $164.4 million; diluted EPS $0.48 |
| Adjusted EBITDA (non-GAAP) | $430.4 million; 7.3% of revenue | $450.0 million; 8.8% of revenue |
| Cash from operating activities | $(136.3) million | $(392.6) million |
| Cash and cash equivalents | $628.5 million | $971.8 million at Dec. 31, 2019 |
| Long-term debt, net | $1.755 billion | $1.761 billion at Dec. 31, 2019 |
Restricted cash was $104.2 million. Short-term borrowings totaled $1.264 billion, primarily warehouse financing backed by mortgage loans; these warehouse lines fund loans expected to be purchased or securitized. CBRE reported $2.8 billion available under its revolving credit facility and no revolving-facility borrowings outstanding, other than $2.0 million of letters of credit. Credit-agreement leverage was 0.60x and interest coverage was 22.47x, versus maximum and minimum covenant thresholds of 4.25x and 2.00x, respectively.
Material changes versus Q1 2019
- Revenue grew across all three segments: Advisory Services to $1.932 billion (up 5.3%), GWS to $3.746 billion (up 18.3%), and Real Estate Investments to $211.5 million (up 56.4%, primarily reflecting the Telford acquisition).
- Operating income improved, but consolidated adjusted EBITDA fell 4.4%. Management cited a higher share of lower-margin GWS revenue; cost of revenue rose to 80.0% of revenue from 78.3%.
- Advisory Services adjusted EBITDA increased to $292.7 million from $263.9 million. GWS adjusted EBITDA was $99.3 million, roughly flat year over year. Real Estate Investments adjusted EBITDA fell to $38.4 million from $86.5 million, including lower equity earnings on property-sale gains.
- Equity income from unconsolidated subsidiaries declined to $20.6 million from $72.7 million. Operating cash use improved by $256.3 million year over year, which management attributed mainly to a smaller working-capital increase.
Outlook, risks and unusual items
- Management expects COVID-19 to adversely affect 2020 financial position, results and cash flows. It said the effect would continue into Q2; U.S. sales and leasing revenue was down around 40% in April. No full-year earnings guidance was provided, and the company did not estimate 2020 net capital expenditures while reassessing spending; it expected net capex to be meaningfully below its earlier plan.
- COVID-related triggering events led to $75.2 million in non-cash impairments: $50.2 million in GWS and $25.0 million of goodwill in Real Estate Investments. The charges reflected reduced expected cash flows and greater forecast risk.
- CARES Act mortgage forbearance may require CBRE’s Fannie Mae servicer to advance scheduled principal and interest payments, reimbursable after 120 days. The company also has loan loss-sharing and certain Freddie Mac repurchase or reimbursement exposures. It reported a $57.3 million liability for the Fannie Mae loan-loss guarantee obligation.
- CBRE repurchased $50.0 million of shares in March, leaving $350.0 million authorized capacity. It had $82.5 million of future co-investment commitments and $42.7 million of additional commitments to unconsolidated subsidiaries.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2020 because of previously reported material weaknesses in internal control over financial reporting. Management stated the financial statements nevertheless fairly present the company’s position and results; remediation was underway but not yet complete.
- Other key uncertainties include commercial real estate transaction declines, client payment and demand risk, foreign-currency movements, GSE program obligations, credit-market access, and the possible impact of remote work on cybersecurity and operations.
Important facts for investors to verify
- How subsequent-quarter transaction volumes, especially sales and leasing, compare with the April decline cited by management.
- Whether operating cash flow, cash balances, warehouse funding, and credit-facility availability remain adequate as mortgage advances and working-capital needs evolve.
- Whether further impairment charges, loan-loss provisions, or GSE forbearance and repurchase obligations arise.
- How segment margins and adjusted EBITDA develop, particularly in GWS and Real Estate Investments; adjusted EBITDA is a non-GAAP measure.
- Progress in remediating the disclosed internal-control material weaknesses and whether controls become effective after testing.