CBRE Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. CBRE provides commercial real estate advisory, outsourcing, investment management and development services through Advisory Services, Global Workplace Solutions (GWS) and Real Estate Investments (REI).
Financial performance
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Revenue | $7.530 billion | $6.798 billion | +10.8% |
| Operating income | $374.4 million | $409.7 million | -8.6% |
| Net income attributable to CBRE | $446.6 million | $435.7 million | +2.5% |
| Diluted EPS | $1.38 | $1.28 | +7.8% |
| Operating margin | 5.0% | 6.0% | Down 1.0 percentage point |
Q3 consolidated adjusted EBITDA was $787.9 million versus $736.9 million; Core EBITDA was $605.8 million versus $732.4 million, reflecting a large positive fair-value adjustment in non-core investments in Q3 2022 that is excluded from Core EBITDA.
For the first nine months, revenue was $22.634 billion (+17.9%), operating income $1.268 billion (+21.3%), net income attributable to CBRE $1.326 billion (+15.9%) and diluted EPS $4.01 versus $3.37. Adjusted EBITDA was $2.249 billion versus $1.950 billion, and Core EBITDA was $2.256 billion versus $1.908 billion. Nine-month effective tax rate fell to 16.3% from 23.0%, principally due to a discrete tax benefit related to legal-entity restructuring.
Segment trends and material changes
- GWS: Q3 revenue rose 16.2% to $4.844 billion, including $325.2 million from Turner & Townsend, acquired in November 2021. Segment operating profit increased to $219.4 million from $187.3 million.
- Advisory Services: Q3 revenue was nearly flat at $2.434 billion. Leasing growth was offset by lower sales and commercial mortgage origination. Segment operating profit fell to $423.8 million from $521.7 million, with weaker high-margin capital markets mix and higher commissions among the factors.
- REI: Q3 revenue increased 15.1% to $257.7 million, but segment operating profit declined to $59.5 million from $146.8 million. Equity income from unconsolidated subsidiaries and real estate disposition gains were lower than in the prior-year quarter.
Revenue growth was partly offset in reported results by foreign currency translation, which reduced Q3 revenue by 5.1%. In the first nine months, the impact was negative 3.7%. A stronger U.S. dollar also reduced reported international results.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $814.8 million, down from $1.200 billion. Management attributed the decline mainly to a larger working-capital outflow, including producer loans, receivables and contract assets, bonus payments and real estate under development.
- Investing cash outflow was $603.7 million, including a $100.4 million investment in VTS. Financing cash outflow was $1.213 billion, primarily reflecting $1.404 billion of share repurchases.
- Cash and cash equivalents were $1.125 billion at September 30, 2022, compared with $2.431 billion at December 31, 2021. Management reported $1.1 billion available for general corporate use and $3.3 billion available under revolving credit facilities.
- Long-term debt, net of current maturities, was $1.477 billion. Short-term borrowings totaled $1.498 billion, including $1.177 billion under warehouse lines primarily funding mortgage loans for resale. CBRE reported covenant ratios of 45.56x interest coverage and 0.33x net leverage at quarter-end.
- The company entered a new $3.5 billion, five-year unsecured revolving credit agreement maturing in August 2027; $283 million was drawn at September 30. The €400 million term loan matures in December 2023.
CBRE stated that operating cash flow and revolver availability should meet anticipated requirements for at least the next 12 months, absent extraordinary events or a large strategic acquisition. The filing does not provide quantitative earnings guidance.
Outlook, risks and unusual items
- Management cited sharply higher interest rates, tighter credit, inflation and geopolitical uncertainty as pressures on property sales, mortgage origination, acquisitions and development proceeds. It also noted continuing uncertainty around office leasing and post-pandemic utilization.
- CBRE launched cost and operational efficiency initiatives in Q3, including workforce and management simplification, reducing its occupancy footprint and cutting third-party spending. Q3 costs were about $19.3 million; management said initiatives would likely continue over the following months.
- Telford Homes recorded a $47.0 million nine-month non-cash provision related to the U.K. government’s non-binding fire-safety pledge, including $9.5 million in Q3. CBRE said potential additional costs cannot be reasonably estimated and could be material.
- Nine-month asset impairments totaled $36.8 million: $10.4 million related primarily to exiting most Advisory Services operations in Russia and $26.4 million for Telford Homes goodwill amid higher construction costs and reduced project profitability.
- CBRE repurchased $1.3 billion of shares in the first nine months and had $2.6 billion of stated remaining program capacity at September 30. The filing reports inconsistent authorization totals: most sections state $4.0 billion, while one repurchase footnote says $4.5 billion.
- Disclosure controls and procedures were deemed ineffective at September 30 due to previously reported material weaknesses in GWS EMEA financial reporting controls. Remediation continued; management said the weaknesses were not yet fully remediated. Management nevertheless concluded the financial statements fairly present the company’s financial position and results.
- Other risks include foreign exchange volatility, further impairment, litigation and contingencies, and mortgage-loan loss-sharing obligations. CBRE MCI had $37.4 billion of Fannie Mae DUS loans outstanding, $33.5 billion subject to loss sharing; its recorded guarantee liability was about $62.4 million.
Key facts for investors to verify
- Whether transaction-sensitive Advisory Services activity, particularly sales and mortgage origination, weakened further as financing costs rose.
- Whether GWS growth and Turner & Townsend integration translate into sustained operating profit and margins.
- Cash conversion and working-capital trends, including producer loans, receivables and incentive compensation payments.
- The eventual scope, agreements and financial exposure associated with Telford fire-safety remediation.
- Progress in remediating GWS EMEA control weaknesses and the company’s resolution of the inconsistent share-repurchase authorization figure.
- Exposure to currency movements, rising rates and refinancing needs, including the December 2023 term-loan maturity.