CBRE GROUP, INC. quarterly report, Q3 FY2014

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CBRE Group, Inc. — Q3 2014 Form 10-Q

Reporting period: Three and nine months ended September 30, 2014; comparisons are with the same 2013 periods unless noted. CBRE provides commercial real estate services, investment management and development services. Amounts below are in U.S. dollars.

Financial performance

  • Third quarter: Revenue was $2.275 billion, up 31.2%; net income attributable to CBRE was $107.1 million, up 13.4%. Basic and diluted EPS were $0.32, versus $0.29 and $0.28, respectively.
  • First nine months: Revenue was $6.263 billion, up 26.5%; net income attributable to CBRE was $280.2 million, up 38.8%. Basic EPS was $0.85 versus $0.62; diluted EPS was $0.84 versus $0.61.
  • Margins: Operating margin was 8.1% in Q3 (9.1% prior year) and 8.0% for nine months (9.0%). Net income attributable to CBRE was 4.7% of Q3 revenue (5.4%) and 4.5% for nine months (4.1%). Cost of services rose to 62.8% of revenue in Q3 and 62.4% for nine months, largely reflecting Norland; excluding Norland, management reported 60.2% and 59.6%, respectively.
  • EBITDA: The company’s non-GAAP measure was $292.9 million in Q3, with a 12.9% margin, and $750.3 million for nine months, with a 12.0% margin. Adjusted EBITDA was $292.2 million and $753.7 million, respectively. These measures are not substitutes for GAAP earnings or cash flow.
  • Cash flow: Nine-month operating cash flow was $68.5 million, down from $234.6 million. Investing used $114.5 million versus providing $26.3 million; financing provided $182.2 million versus using $839.6 million. Cash and cash equivalents were $615.4 million at quarter-end.
  • Balance sheet and liquidity: Total assets were $7.530 billion and total liabilities $5.347 billion. Current assets were $3.461 billion against current liabilities of $2.677 billion. The $1.2 billion revolving facility had $149.2 million drawn; $7.4 million of letters of credit reduced availability. Short-term borrowings, including warehouse lines, totaled $785.4 million.
  • Debt: Long-term debt was $2.067 billion, including $800 million of 5.00% notes, $615.9 million of senior secured term loans, $350 million of 6.625% notes and newly issued $300 million of 5.25% notes. Separately, real-estate notes payable totaled $75.0 million. Management cited approximately $2.3 billion of debt excluding warehouse lines and generally nonrecourse real-estate notes.

Changes and business drivers

  • Growth reflected the December 2013 Norland acquisition, organic expansion in property, facilities and project management, and higher sales and leasing activity. Excluding Norland, worldwide management fees rose 18.7% in Q3 and 15.6% for nine months; sales increased 31.9% and 21.2%, and leasing increased 14.1% and 12.9%.
  • EMEA revenue more than doubled in both comparisons, substantially reflecting Norland. Americas revenue rose 19.9% in Q3 and 13.9% for nine months; Asia Pacific rose 25.2% and 11.9%. Global Investment Management revenue declined 17.5% in Q3 and 6.9% for nine months, primarily due to lower carried interest and asset-management fees.
  • Equity income from unconsolidated subsidiaries increased to $43.3 million in Q3 and $67.6 million for nine months, driven partly by property-sale gains and a gain on a Canadian equity investment. Real-estate disposition gains were $7.2 million and $37.1 million, respectively.
  • Global Investment Management assets under management were $88.6 billion at September 30, down about 1% from year-end 2013. Development projects in process totaled $5.1 billion; the pipeline was $2.9 billion, up 93% from year-end.

Outlook, risks and unusual items

  • Management said operating cash flow and the revolving facility were expected to meet anticipated cash needs for at least the next 12 months. It expected 2014 net capital expenditures of up to approximately $155 million; $77.3 million had been incurred through September. Management anticipated a full-year effective tax rate of approximately 36% and pension contributions of $6.3 million for 2014.
  • CBRE issued $300 million of 5.25% senior notes due 2025 in September and redeemed its $350 million 6.625% notes on October 27, 2014. The redemption resulted in a $23.1 million Q3 charge, including a $17.4 million premium and $5.7 million financing-cost write-off; management expected the refinancing to lower annual interest expense by about $5 million.
  • A noncash $8.6 million impairment followed the decision to abandon a U.S. property database platform. Foreign-currency translation produced a $109.1 million Q3 comprehensive-income loss; nine-month translation loss was $72.7 million.
  • Credit covenants required at least 2.00x interest coverage and no more than 4.25x net leverage. Reported ratios were 12.29x and 1.45x, respectively. Debt agreements also restrict additional borrowing, distributions, investments and certain other actions.
  • Risks include sensitivity to economic and commercial property markets, interest rates and credit availability; currency movements; acquisition integration and contingent payments; leverage and refinancing; client and transaction activity; development guarantees; and pension funding. Management noted that revenue, earnings and operating cash flow are typically lower in the first half and higher in the third and fourth quarters, often peaking in Q4.
  • Contingencies include $22.9 million of letters of credit and $16.7 million of guarantees (excluding specified already-accrued obligations), development completion and budget guarantees, and Fannie Mae DUS loan loss-sharing exposure on loans with $9.2 billion of unpaid principal. Management said excess litigation losses were unlikely to be significant, while acknowledging litigation uncertainty. The company reported no material changes to previously disclosed legal proceedings or risk factors.

Important facts for investors to verify

  • How much of reported revenue and profit growth was organic versus acquired, particularly Norland’s contribution and associated margin effects.
  • Whether the weak nine-month operating cash flow reflects timing and working-capital movements or persists; receivables increased and cash taxes, bonuses and commissions paid were higher.
  • The extent to which Q3 and nine-month earnings benefited from property-sale gains, equity income, currency effects and other nonrecurring items.
  • Post-redemption debt balances, interest savings and liquidity after the October 2014 repayment, including remaining revolver availability and covenant headroom.
  • Performance of Global Investment Management, including carried interest, fee trends and AUM flows, and progress converting the Development Services pipeline into revenue and cash.
  • Potential exposure from DUS loan loss sharing, development guarantees, pension funding and the $45.8 million of disclosed future co-investment and Development Services capital commitments.