CBRE Group, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. CBRE provides commercial real estate services and investment management through Americas, EMEA, Asia Pacific, Global Investment Management, and Development Services segments. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1.734B | $1.557B | $4.951B | $4.508B |
| Operating income | $158.1M | $103.6M | $446.9M | $352.4M |
| Net income attributable to CBRE | $94.4M | $39.7M | $201.9M | $142.6M |
| Diluted EPS | $0.28 | $0.12 | $0.61 | $0.44 |
| EBITDA, as adjusted (non-GAAP) | $225.2M | $195.3M | $629.6M | $566.8M |
- Revenue grew 11.3% in Q3 and 9.8% for the first nine months. Management cited stronger sales, leasing, and property, facilities, and project management activity; carried interest also contributed. Foreign currency translation reduced revenue by $25.3M in Q3 and $49.1M year to date.
- Operating margin was 9.1% versus 6.7% in Q3 and 9.0% versus 7.8% year to date. Cost of services rose to 59.5% of revenue in Q3 and 58.8% year to date, partly reflecting commissions and recruitment costs. Operating and administrative expense ratios improved, helped by operating leverage and lower prior-year acquisition integration and cost-containment charges.
- Interest expense declined to $27.8M from $43.7M in Q3 and to $107.7M from $132.0M year to date, reflecting refinancing. The nine-month results also include a $56.3M financing-cost write-off. Discontinued operations added $24.3M to nine-month net income, largely from property-sale gains; $2.1M was attributable to CBRE.
Cash flow, balance sheet, and debt
- Operating cash flow was $234.6M for the first nine months, versus cash used of $119.9M in 2012. Investing activities provided $26.3M, versus $153.5M used; financing activities used $839.6M, mainly reflecting debt refinancing and repayments.
- Cash and cash equivalents were $502.6M at September 30, down from $1.089B at December 31, 2012. Current assets were $2.559B and current liabilities $1.843B.
- Balance-sheet long-term debt was $1.810B and short-term borrowings were $319.2M; real-estate notes payable were $151.0M. Management describes total debt excluding real-estate notes and warehouse lines as approximately $1.9B. Warehouse borrowings fell to $224.4M from $1.026B as related warehouse receivables declined to $227.6M from $1.048B.
- CBRE issued $800M of 5.00% senior notes due 2023, entered a new credit agreement with a $1.2B revolving facility and $715M of term loans, and redeemed $450M of 11.625% subordinated notes. Management estimated the transactions lowered annual interest expense by approximately $50M versus the pre-refinancing run rate and extended maturities.
- At September 30, covenant leverage was 1.46x against a 4.25x maximum; interest coverage was 7.86x against a 2.00x minimum. Management said operating cash flow and the revolver should meet anticipated needs for at least the next 12 months.
Segments and notable changes
- Americas: Q3 revenue rose 11.0%, but operating income declined to $96.4M from $105.4M; year-to-date revenue rose 10.1% and operating income fell to $303.0M from $314.0M. Higher commissions, salaries, and strategic investment weighed on margins.
- EMEA: Q3 revenue increased 24.8%, with broad-based growth; the segment returned to operating income of $12.6M from a $31.7M loss. Year-to-date operating income was $14.7M versus a $30.4M loss, including the effect of a prior-year $19.8M UK trade-name impairment.
- Asia Pacific: Q3 revenue increased 1.4%, while operating income fell to $10.3M from $13.9M. Year-to-date revenue rose 8.6% and operating income was $36.4M versus $34.2M. Currency translation significantly obscured regional growth.
- Global Investment Management: Q3 operating income rose to $42.5M from $12.1M, helped by carried interest and lower prior-year integration costs. Assets under management were $87.6B, down 5.0% from year-end 2012, primarily due to asset sales and internalization of a non-traded REIT.
- Development Services: Q3 revenue declined 29.3% year over year, primarily due to property dispositions, and the segment recorded a $3.7M operating loss. Projects in process totaled $5.2B, up 24% from year-end; pipeline deals totaled $1.6B, down 22%.
Outlook, risks, and contingencies
- Management estimated a 2013 effective tax rate of approximately 35% or slightly higher and anticipated up to approximately $150M of net capital expenditures for 2013; $68.1M had been incurred through September.
- CBRE noted historical seasonality, with revenue and profitability generally stronger in the third and fourth quarters, especially Q4. Interim results are not necessarily indicative of full-year results. The filing provides no specific full-year revenue or earnings guidance.
- Key risks include weakening economic or commercial real estate markets, interest-rate and credit-market changes, foreign exchange movements, competition and talent retention, client spending and outsourcing decisions, acquisition integration, leverage and refinancing, and GSE lending activity affecting mortgage servicing.
- Contingencies include ordinary-course litigation, development completion and budget guarantees, and potential Fannie Mae loan-loss sharing. Under the DUS program, loans subject to loss sharing had $7.1B of unpaid principal; CBRE had $12.5M of related loan-loss accruals. The filing states management did not expect material losses under development guarantees, but outcomes remain uncertain.
- CBRE reported $30.3M of future Global Investment Management co-investment commitments and $13.4M of commitments to Development Services unconsolidated subsidiaries. The U.K. pension liability was $60.8M; expected 2013 contributions were $5.2M.
Important facts for investors to verify
- Whether transaction and leasing growth, margin performance, and the improvement in EMEA are sustained, and how currency effects alter reported growth.
- How much future Global Investment Management earnings depend on carried interest, and whether AUM stabilizes after portfolio dispositions and REIT internalization.
- The realized interest savings and ongoing costs from refinancing, compliance with debt covenants, and availability under the revolving facility.
- The quality and cash conversion of reported earnings, including the effects of property-sale gains, discontinued operations, and non-GAAP EBITDA adjustments.
- Potential exposure from DUS loan-loss sharing, development guarantees, co-investment commitments, litigation, and pension funding.