CBRE Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. CBRE provides commercial real estate services, investment management and development services worldwide. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $3,342 million | $3,208 million | $6,323 million | $6,054 million |
| Operating income | $222 million | $183 million | $417 million | $290 million |
| Net income attributable to CBRE | $197 million | $122 million | $327 million | $204 million |
| Diluted EPS | $0.58 | $0.36 | $0.96 | $0.60 |
| Adjusted EBITDA (non-GAAP) | $413 million | $360 million | $716 million | $643 million |
- Q2 revenue grew 4.2%; operating margin increased to 6.6% from 5.7%, and net income attributable to CBRE rose 62%. For the first half, revenue grew 4.4%, operating margin rose to 6.6% from 4.8%, and attributable net income increased 60%.
- Q2 growth was led by occupier outsourcing (+9.2%), sales (+12.7%) and commercial mortgage brokerage (+9.9%); leasing was slightly lower. First-half growth also included leasing (+1.1%).
- First-half operating cash flow was a use of $191 million, versus a use of $210 million a year earlier. Investing cash use was $39 million; financing cash use was $15 million. Cash and cash equivalents fell to $536 million from $763 million at year-end.
- At June 30, total assets were $10.61 billion, total liabilities $7.02 billion and equity $3.58 billion. Long-term debt, net, was $2.55 billion. Warehouse borrowings of $1.05 billion fund mortgage loans committed for purchase or securitization and are secured by related receivables.
Material changes and operating drivers
- Asia Pacific revenue grew 17% in Q2 and 13.5% in the first half; EMEA revenue was essentially flat, while Americas revenue grew 4.3% and 5.4%, respectively. Foreign currency translation reduced consolidated revenue by $85 million in Q2 and $152 million in the first half, mainly due to sterling and euro weakness.
- Q2 equity income from unconsolidated subsidiaries more than doubled to $75 million, primarily reflecting property-sale gains in Development Services. For the first half, equity income was broadly stable at $90 million.
- The effective tax rate, adjusted for non-controlling interests, was 25.7% in Q2 and 26.8% for the first half, versus 34.5% and 35.9%. Management cited favorable income mix, prior-period tax remeasurements and discrete tax benefits, including tax-audit resolutions.
- Global Investment Management assets under management increased to $91.7 billion from $86.6 billion at year-end, including $6.9 billion of market appreciation; outflows exceeded inflows over the six-month period.
Liquidity, outlook and risks
- CBRE reported $2.8 billion available under its $2.8 billion revolving facility, with no revolver borrowings outstanding at quarter-end apart from $2 million of letters of credit. Credit-agreement covenant ratios were 13.70x interest coverage and 1.24x net leverage, against minimum coverage of 2.00x and maximum leverage of 4.25x.
- Management expects operating cash flow and the revolver to meet anticipated needs for at least the next 12 months, absent extraordinary events or a large acquisition. Expected 2017 capital expenditures were up to approximately $170 million net of tenant concessions; $52.4 million had been incurred in the first half on that basis. The filing provides no earnings or revenue guidance.
- Risks include commercial real estate and credit-market cycles, interest rates, foreign exchange, Brexit-related uncertainty, client outsourcing and spending decisions, acquisitions and integration, and leverage. Approximately 47% of first-half business was transacted in non-U.S. dollar currencies; CBRE had no foreign-currency forward contracts outstanding and did not intend to hedge foreign-currency EBITDA in 2017.
- Contingencies include Fannie Mae DUS loss-sharing exposure on loans with $17.9 billion unpaid principal, supported by a $53 million letter of credit and approximately $30 million in loan-loss accruals. The company also disclosed litigation, development-related guarantees and future co-investment commitments; management did not expect material losses under development guarantees.
- CBRE expects to adopt new revenue-recognition rules in 2018 using retrospective transition. It anticipates earlier recognition of some contingent leasing commissions and a significant gross-up of certain third-party costs and revenue, with no expected profitability impact from the latter presentation change. Acquisition integration costs were $15 million in Q2 and $27 million in the first half; prior-year cost-elimination expenses did not recur.
Important facts for investors to verify
- Whether revenue and margin growth persists after considering currency effects, pass-through costs and acquisition-related expenses.
- How the favorable tax items affect the sustainable effective tax rate and earnings comparisons.
- Cash conversion, working-capital seasonality and the drivers of negative first-half operating cash flow.
- Warehouse-line renewals, mortgage servicing-rights economics, and the scale of Fannie Mae and development guarantee exposures.
- The eventual financial-statement effects of revenue-recognition adoption and the performance of recent acquisitions.