CBRE Group, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. CBRE provides commercial real estate services, investment management and development services across the Americas, EMEA, Asia Pacific, Global Investment Management and Development Services. Unless stated otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change/comment |
|---|---|---|---|
| Revenue | $1.861 billion | $1.475 billion | Up 26.2% |
| Operating income | $112.5 million | $101.2 million | Up 11.2%; operating margin declined to 6.0% from 6.9% |
| Net income attributable to CBRE | $67.7 million | $37.5 million | Up 80.2%; diluted EPS was $0.20 versus $0.11 |
| EBITDA, non-GAAP | $197.2 million | $159.8 million | Margin was 10.6% versus 10.8% |
| Cash from operating activities | $(270.0) million | $(79.9) million | Greater cash use, principally reflecting vendor, tax and bonus payments |
| Cash and cash equivalents | $428.2 million at March 31 | $491.9 million at December 31 | Quarter-end cash declined by $63.7 million |
Cost of services rose to 62.4% of revenue from 58.4%, primarily reflecting Norland’s lower-margin managed-services activity; excluding Norland, the ratio was 59.3%. Operating, administrative and other expenses declined to 28.4% of revenue from 31.8%. Interest expense fell to $28.0 million from $42.4 million, while the prior-year quarter included a $13.6 million financing-cost write-off. Q1 2013 also included $21.2 million of discontinued-operations income, largely attributable to non-controlling interests.
Balance sheet, debt and liquidity
- Total assets were $6.84 billion and total liabilities were $4.82 billion at March 31, 2014. Equity totaled $2.03 billion.
- Long-term debt was $1.79 billion; short-term borrowings were $666.1 million, including $359.5 million drawn on the revolving facility and $306.6 million of warehouse lines. Current maturities of long-term debt were $42.3 million. Real-estate notes payable totaled $131.9 million and were generally nonrecourse.
- CBRE reported approximately $2.2 billion of debt excluding real-estate notes and warehouse lines. Its $1.2 billion revolving facility had $359.5 million outstanding and $11.5 million of letters of credit at quarter-end.
- Credit-agreement covenant ratios were 10.43x interest coverage against a 2.00x minimum and 1.65x net leverage against a 4.25x maximum. These were within the stated thresholds.
- Management said internally generated cash flow and the revolving facility should meet anticipated cash needs for at least the next 12 months. The company expected up to approximately $185 million of net capital expenditures in 2014; $12.4 million had been incurred in Q1.
Material changes and operating drivers
- The December 2013 Norland acquisition contributed significantly to EMEA growth. EMEA revenue more than doubled to $518.7 million; excluding Norland, revenue grew 32.0%. Norland’s purchase price was approximately $475 million, including contingent consideration subject to performance criteria, and purchase accounting remained preliminary.
- Management cited organic growth in property, facilities and project management fees (up 11.5%, excluding Norland), sales activity (up 27.0%) and leasing activity (up 9.8%) as contributors to consolidated revenue growth.
- Americas revenue grew 10.3% to $1.02 billion and EBITDA increased to $125.8 million. Asia Pacific revenue rose 7.8% to $195.6 million, with currency weakness limiting reported growth.
- Global Investment Management revenue declined 11.2% to $112.5 million, primarily due to asset sales and internalization of a private REIT’s management. AUM was $90.2 billion, up 1.2% from year-end; management described a shift from harvesting gains toward capital deployment.
- Development Services revenue was essentially flat at $12.4 million. Projects in process totaled $5.0 billion and the pipeline of deals totaled $1.8 billion at quarter-end.
- Foreign currency translation reduced consolidated revenue by $14.4 million. Approximately 47% of business was transacted in foreign currencies.
Outlook, risks and contingencies
- Management estimated a full-year 2014 effective tax rate of approximately 35%. The filing provides no numerical revenue or earnings guidance.
- Management cautioned that results are seasonal: revenue, profits and operating cash flow have historically tended to be lower in the first half and higher in the second half, particularly Q4. Q1 results are not necessarily indicative of full-year results.
- Key risks include the durability of commercial real estate sales and leasing recovery; economic, credit and interest-rate conditions; currency movements; cost control and retention of producers; acquisition integration; client demand for outsourcing; and leverage and refinancing needs.
- CBRE reported $21.7 million of letters of credit and $12.9 million of guarantees, excluding specified categories already accrued or otherwise identified. Development projects also involve completion and budget guarantees; management did not expect material losses but provided no assurance.
- Under Fannie Mae’s DUS program, loans subject to loss sharing had $8.0 billion of unpaid principal balance. CBRE MCI had $14.1 million of loan-loss accruals and $20.6 million in required cash reserves. Litigation was described as ordinary-course; management considered losses beyond accrued amounts remote, while noting litigation uncertainty.
- UK defined-benefit pension liability was $67.7 million. CBRE expected to contribute $6.2 million to the plans in 2014, including $1.6 million contributed through Q1.
Most important facts for investors to verify
- How much reported growth and EMEA profitability reflect Norland versus sustainable organic growth, and how integration and contingent consideration develop.
- Whether operating cash flow improves after Q1’s substantial seasonal and working-capital outflows.
- Whether service-cost mix and margins recover, especially in EMEA, and whether Global Investment Management revenue stabilizes as capital deployment resumes.
- Revolver availability, debt maturities and covenant headroom, including the refinancing needs and terms of warehouse facilities.
- Potential exposure from DUS loan loss sharing, development guarantees, co-investment commitments and pension funding.
- The company’s reported financial results should be distinguished from non-GAAP EBITDA; the filing cautions that EBITDA is not a substitute for GAAP net income or free cash flow.