CBRE Group, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed February 29, 2012. Although the request references Q4, this is an annual filing. Dollar amounts below are U.S. dollars.
Business context
CBRE provides commercial real estate brokerage, property and facilities management, mortgage and capital markets services, investment management, valuation and development services. It operated in more than 300 offices with approximately 34,000 employees. Contractual fee-for-service businesses represented about 39% of 2011 revenue; the balance was more transaction- and project-sensitive.
In 2011, CBRE acquired ING’s real estate investment management businesses in Europe and Asia and Clarion Real Estate Securities. The acquisitions expanded Global Investment Management and raised year-end assets under management to $94.1 billion. Reported 2011 results include acquired businesses only from their respective closing dates.
Financial results and liquidity
| Metric | 2011 | 2010 | Change or context |
|---|---|---|---|
| Revenue | $5.905 billion | $5.115 billion | Up 15.4%; sales, leasing and outsourcing improved, with $84.6 million from the acquired businesses and a $143.8 million favorable currency translation impact. |
| Operating income / margin | $462.9 million / 7.8% | $446.4 million / 8.7% | Income rose modestly, but margin declined amid acquisition and integration costs, severance and higher service costs. |
| Net income attributable to CBRE / diluted EPS | $239.2 million / $0.74 | $200.3 million / $0.63 | Improved year over year. Consolidated net income was $290.3 million, including $49.9 million from discontinued operations; $51.2 million was attributable to non-controlling interests. |
| EBITDA / adjusted EBITDA | $693.3 million / $802.6 million | $647.5 million / $681.3 million | Non-GAAP measures; adjusted EBITDA excludes specified acquisition, cost-containment and asset-impairment items. |
| Cash from operating activities | $361.2 million | $616.6 million | Down $255.4 million, mainly due to higher bonus, commission and income-tax payments. |
| Cash from investing activities | $(480.3) million | $(62.5) million | Use of cash increased, principally due to the ING/Clarion acquisitions and higher capital expenditures. |
| Cash from financing activities | $711.3 million | $(784.2) million | Net borrowing funded acquisitions, compared with substantial debt repayments in 2010. |
| Cash and cash equivalents | $1.093 billion | $506.6 million | Includes $208.1 million held by consolidated funds and other entities and unavailable for general corporate use. |
| Long-term debt, including current portion | $2.473 billion | $1.428 billion | Excludes warehouse lines and real estate notes; the increase principally reflects acquisition financing. |
Cost of services increased to 58.5% of revenue from 57.9%; operating, administrative and other expenses rose to 31.9% from 31.4%. The current ratio, calculated from reported totals, was approximately 1.32 at year-end (current assets $3.550 billion; current liabilities $2.681 billion); it includes substantial warehouse receivables and corresponding short-term borrowing.
Total debt in the contractual-obligations table was $3.231 billion, including $713.4 million of warehouse lines and current maturities. Real estate notes payable were a further $372.9 million, mostly nonrecourse; approximately $13.6 million was recourse. Management reported $2.5 billion of debt excluding real estate notes and warehouse lines. Credit-agreement covenant measures were within limits: interest coverage was 15.0x versus a 2.25x minimum, and net leverage was 1.53x versus a 3.75x maximum.
Material changes versus comparable periods
- Revenue increased 15.4%, following 22.8% growth in 2010. Worldwide sales rose 24.2%, leasing 9.5% and outsourcing 15.0% in 2011.
- Operating income increased 3.7%, but operating margin fell by about 0.9 percentage points. The filing cites higher commission tranches, severance, payroll costs and $66.7 million of REIM acquisition transaction and integration costs.
- Interest expense declined 21.4% to $150.2 million, as lower borrowing costs and prior debt repayments more than offset new acquisition-related debt.
- Equity income from unconsolidated subsidiaries rose to $104.8 million from $26.6 million, largely reflecting property-sale gains in Development Services and lower investment impairments.
- Global Investment Management reported an operating loss of $44.0 million, versus operating income of $24.0 million in 2010, as acquisition-related expenses outpaced the acquired businesses’ partial-year revenue contribution.
- Americas revenue grew 14.2%; EMEA grew 14.9%; Asia Pacific grew 17.7%. Development Services revenue was broadly flat. Q4 revenue was $1.764 billion versus $1.651 billion in Q4 2010, while operating income fell to $116.6 million from $172.9 million and attributable net income to $79.8 million from $95.1 million.
Outlook, risks and unusual items
- Management expected Global Investment Management’s share of revenue to increase notably in 2012 because the acquisitions would contribute for a full year. It also anticipated significant REIM integration expenses in 2012 and beyond; expected total pretax transaction, retention and integration costs were approximately $150 million.
- Management expected up to $170 million of net capital expenditures in 2012, $59.4 million of Global Investment Management co-investments to be funded in 2012, and a $5.2 million pension contribution. It said operating cash flow and the revolving facility were expected to meet anticipated cash needs for at least the next 12 months.
- Commercial real estate markets improved gradually in 2010–2011, but activity remained below 2006–2007 levels. Management highlighted the European sovereign-debt crisis, uncertain credit availability, slow economic growth and the possibility of renewed downturns as key uncertainties. No specific earnings or revenue guidance was provided.
- Other material risks include transaction-sensitive revenue and seasonality, foreign exchange exposure (about 41% of revenue transacted in foreign currencies), leverage and floating-rate debt, acquisition integration, investment and development losses, client defaults, litigation, tax assessments and the underfunded U.K. pension plans. The pension deficit increased to $60.9 million from $40.0 million.
- REIM acquisitions generated $84.6 million of 2011 revenue and $15.7 million of operating income before $66.7 million of direct transaction and integration costs. Purchase-price allocation remained preliminary. Potential further ING REIM Europe closing consideration of about $80 million and co-investments of up to $68 million were noted.
- Annual goodwill impairment testing found no impairment in 2009–2011; goodwill was $1.828 billion at year-end. The filing notes that adverse market or cash-flow changes could require future impairment charges. The 2011 acquisition added substantial goodwill and intangible assets.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded the acquired ING businesses, representing $1.4 billion of assets and $84.6 million of revenue, from the 2011 internal-control assessment.
Most important facts for investors to verify
- Whether full-year contribution from the ING/Clarion acquisitions improves Global Investment Management profitability enough to offset integration costs.
- How much of reported cash is freely available, and how warehouse receivables and warehouse borrowing affect liquidity and refinancing exposure.
- Whether operating margins recover as transaction activity grows, given 2011 revenue growth but lower operating margin and weaker Q4 operating income.
- The maturity, interest-rate and covenant profile of debt, including the high-coupon 11.625% notes and short-term warehouse facilities.
- Potential cash requirements from co-investment commitments, development guarantees, pension funding, tax audits and litigation.
- The recurring versus transaction-driven composition of earnings, including discontinued-operation property-sale gains and non-GAAP adjusted EBITDA adjustments.