CB Richard Ellis Group, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are to the same periods in 2010. Amounts are U.S. dollars. The filing describes a global commercial real estate services business spanning the Americas, EMEA, Asia Pacific, Global Investment Management, and Development Services.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Revenue | $1,422.2m | $1,171.9m | $2,607.3m | $2,197.8m |
| Operating income | $130.2m | $97.2m | $203.3m | $142.9m |
| Net income attributable to CBRE | $61.2m | $54.8m | $95.6m | $48.2m |
| Diluted EPS | $0.19 | $0.17 | $0.30 | $0.15 |
| EBITDA, as adjusted (non-GAAP) | $172.4m | $165.2m | $292.9m | $252.7m |
- Q2 revenue increased 21.4%; management attributed growth primarily to worldwide sales (+44.0%), leasing (+21.8%) and outsourcing (+13.1%). First-half revenue rose 18.6%.
- Q2 operating margin was 9.2%, versus 8.3%; first-half margin was 7.8%, versus 6.5%. Cost of services rose to 59.1% of revenue in Q2 from 57.9%, reflecting higher commissions and restored compensation levels. Operating and administrative expense declined as a share of revenue.
- Q2 net income attributable to CBRE rose about 12%; first-half attributable net income nearly doubled. Consolidated net income, including non-controlling interests, was $74.9m for Q2 and $119.4m for the first half.
- Interest expense fell to $34.2m from $50.3m in Q2 and to $67.9m from $100.1m for the first half, primarily due to prior debt repayment and refinancing; the benefit was partly offset by interest on 6.625% senior notes issued in October 2010.
- Segment results were mixed: Americas revenue increased 24.3% in Q2 and operating income increased to $98.2m; Asia Pacific revenue rose 18.8% and operating income to $16.0m. EMEA revenue rose 15.8%, but operating margin declined to 7.3% from 8.0%. Global Investment Management reported a $3.6m Q2 operating loss, and Development Services operating income was $0.7m.
Cash flow, liquidity, and debt
- First-half operating cash flow was negative $156.4m, versus positive $101.0m in 2010. Management cited higher bonus, commission, and tax payments. Investing activities provided $47.7m; financing activities provided $339.6m, including acquisition-related term-loan borrowing.
- Cash and cash equivalents were $752.1m at June 30, 2011, compared with $506.6m at year-end 2010. Current assets were $2,379.1m and current liabilities $1,630.8m.
- Management reported approximately $1.9bn of debt excluding warehouse lines and real estate notes, including the $400m term-loan draw for the CRES acquisition. Separately, warehouse borrowings were $302.5m and real estate notes payable totaled $520.0m. The corresponding warehouse receivables were $308.2m.
- The credit agreement includes a $700m revolving facility; $111.2m was drawn at quarter-end. Covenant thresholds were 2.25x minimum interest coverage and 3.75x maximum net leverage; reported ratios were 13.58x and 1.25x, respectively. The company also reported $350m of 6.625% senior notes and $438.3m carrying value of 11.625% senior subordinated notes.
- CBRE entered into $400m of interest-rate swaps, effective October 2011, to hedge variable-rate term debt; their June 30 fair value was an $11.5m liability. Management estimated that a 10% increase in rates on variable-rate debt excluding real estate notes would reduce first-half pretax income by $2.7m.
Material changes, outlook, and risks
- CBRE agreed to acquire most of ING’s real estate investment management business for approximately $940m in cash. The CRES business and related co-investments were acquired on July 1, 2011, after the reporting period, for $323.9m and $58.6m, respectively. The Europe and Asia operations were expected to close in the second half of 2011, subject to approvals. CBRE expected to fund them primarily with the remaining $400m delayed-draw term loan and cash on hand.
- Expected total pre-tax transaction, financing, retention, and integration costs for the REIM acquisitions were approximately $150m; $15.8m had been incurred through June 30. Management cited acquired ING REIM assets under management of approximately $59.8bn at December 31, 2010; CBRE’s existing Global Investment Management AUM was $37.6bn at that date.
- Management said commercial real estate activity was recovering, with improving sales, leasing, credit availability, and occupancy trends, but activity remained below 2006–2007 levels. It noted slower European growth and sovereign-debt concerns; Asia Pacific activity was stronger. No specific revenue or earnings guidance was provided. Management expected a full-year 2011 effective tax rate of approximately 40% and anticipated up to $100m of net capital expenditures for 2011.
- Management believed operating cash flow and the revolving facility would meet anticipated cash requirements for at least the next 12 months. First-half net capital expenditures were $35.3m. Additional funding commitments at June 30 included $18.0m for Global Investment Management co-investments and $21.4m for Development Services investments.
- Key risks include a reversal or slowdown in the economic and property-market recovery; acquisition closing, integration, and costs; leverage and refinancing needs; foreign-currency and interest-rate changes; client spending and outsourcing trends; and development guarantees, construction defects, and mortgage-loan loss exposure. The company reported $13.3m of letters of credit and $13.7m of guarantees, apart from specified excluded obligations. Certain Fannie Mae DUS loans with $2.5bn of unpaid principal were subject to loss-sharing arrangements, with CBRE MCI’s exposure limited to its assets.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed legal proceedings or risk factors.
Important facts for investors to verify
- Whether the ING REIM Europe and Asia acquisitions closed on schedule, their final purchase consideration and financing, and realized integration costs versus the approximately $150m estimate.
- Whether revenue growth and margins persisted after Q2, particularly as compensation and headcount costs increased and transaction markets remained below pre-crisis levels.
- Drivers of negative first-half operating cash flow and whether working-capital demands normalize in subsequent quarters.
- Debt and liquidity after acquisition funding, including covenant headroom, variable-rate exposure, and the refinancing profile.
- Potential cash calls or losses associated with investment commitments, DUS loan loss sharing, development guarantees, and other contingencies.