CBRE Group, Inc. — Q3 2017 Form 10-Q
Business context and period: CBRE is a global commercial real estate services and investment firm, with operations in the Americas, EMEA, Asia Pacific, Global Investment Management and Development Services. This unaudited filing covers the quarter and nine months ended September 30, 2017; amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $3.550 billion | $3.193 billion | $9.873 billion | $9.248 billion |
| Operating income | $235.3 million | $172.5 million | $652.7 million | $462.7 million |
| Net income attributable to CBRE | $196.3 million | $104.2 million | $523.1 million | $308.0 million |
| Diluted EPS | $0.58 | $0.31 | $1.54 | $0.91 |
| Adjusted EBITDA | $411.6 million | $349.4 million | $1.127 billion | $992.5 million |
- Revenue increased 11.2% in Q3 and 6.8% for the nine-month period. Operating income rose 36.4% and 41.1%, respectively; net income attributable to CBRE rose 88.4% and 69.8%.
- Operating margin was 6.6% in Q3 2017 versus 5.4% a year earlier, and 6.6% for nine months versus 5.0%. Adjusted EBITDA margin was 11.6% and 11.4%, respectively, compared with 10.9% and 10.7%.
- Q3 growth reflected higher occupier outsourcing, property management, leasing, sales and loan servicing revenue. Commercial mortgage origination revenue declined 12.0% in Q3. For the nine months, foreign currency translation reduced revenue by $125.9 million, primarily due to sterling weakness.
- By segment, Q3 revenue grew 10.9% in Americas, 9.0% in EMEA and 21.9% in Asia Pacific; Global Investment Management revenue was broadly flat, while Development Services revenue declined 12.4%. Nine-month segment Adjusted EBITDA was strongest in Americas at $689.1 million; Development Services Adjusted EBITDA increased to $85.1 million from $66.1 million, with property-sale-related equity income contributing to results.
Cash flow, balance sheet and liquidity
- Operating cash flow for the nine months was $247.3 million, versus cash used of $53.2 million in 2016. Management attributed the improvement mainly to stronger operating results, lower net vendor payments and lower net income taxes paid, partly offset by higher receivables.
- Investing cash flow was negative $33.8 million and financing cash flow negative $44.2 million. Capital expenditures were $101.6 million before $14.7 million of tenant concessions received; management expected 2017 capital expenditures, net of tenant concessions, of up to approximately $160 million.
- At September 30, cash and cash equivalents were $955.6 million, total assets $11.652 billion, total liabilities $7.800 billion and equity $3.852 billion. Long-term debt, net, was $2.552 billion. Warehouse borrowings of $1.416 billion primarily fund mortgage loans committed for purchase or securitization; related warehouse receivables were $1.435 billion.
- The company reported no outstanding borrowings under its $2.8 billion revolving credit facility at quarter-end, apart from $2.0 million of letters of credit, and stated that $2.8 billion was available. Covenant ratios were 14.29x interest coverage versus a 2.00x minimum and 0.97x net leverage versus a 4.25x maximum.
- Management said internally generated cash flow and the revolver should meet anticipated cash needs for the foreseeable future and at least the next 12 months. It also had $33.5 million of future Global Investment Management co-investment commitments and $20.4 million of Development Services funding commitments.
Changes, outlook and material items
- Q3 and nine-month results benefited from higher equity income from unconsolidated subsidiaries, primarily gains on property sales in Development Services, and from lower prior-year acquisition integration and cost-elimination expenses. The nine-month effective tax rate fell to 27.2% from 35.0%, reflecting geographic income mix and favorable discrete tax items, including tax-audit resolutions and remeasurement of prior-period tax exposures. Management cautioned that quarterly tax rates can vary.
- CBRE noted generally improving commercial real estate activity across major regions, while U.S. property sales volumes had slowed since early 2016 but remained active. It cited continued uncertainty concerning the U.K.’s EU withdrawal, foreign currency movements, interest rates, credit availability and broader economic conditions. No specific full-year earnings or revenue guidance is provided in the filing.
- Results are seasonal: revenue, earnings and operating cash flow historically tend to be lowest in Q1 and highest in Q4. The company cautioned that nine-month results are not necessarily indicative of full-year results.
- On October 31, 2017, CBRE refinanced and replaced its 2015 credit agreement with a new facility featuring a $2.8 billion revolving credit facility maturing in 2022 and a $750 million delayed-draw term loan. It initially borrowed $200 million under the term loan and $83 million under the revolver, using those proceeds and cash to repay amounts outstanding under the prior agreement.
- CBRE planned to adopt the new revenue recognition guidance in Q1 2018 using retrospective transition. It expected earlier recognition of some contingent leasing commissions and a significant gross-up of certain third-party costs billed to clients, with no expected profitability impact from the gross-versus-net presentation change. The impact was still under evaluation.
Risks and contingencies
- Key exposures include economic and commercial property market downturns, interest-rate and credit-market changes, reduced outsourcing or client spending, currency volatility and uncertainty related to Brexit. Approximately 47% of nine-month business was transacted in non-U.S. dollar currencies; the company had no foreign-currency forward contracts outstanding at quarter-end and did not intend to hedge foreign-currency EBITDA in 2017.
- CBRE cited leverage and debt-service risks, reliance on warehouse-line renewals, acquisition integration and financing risks, and risks from investment performance, litigation, insurance coverage and development guarantees. It reported pending or threatened ordinary-course lawsuits and said it did not expect material losses under its development guarantees, while noting outcomes cannot be assured.
- Under Fannie Mae’s DUS program, CBRE MCI had funded loans with $18.5 billion unpaid principal balance subject to loss-sharing arrangements; its related loan-loss accrual was approximately $31.1 million and its reserve letter of credit was $53.0 million. CBRE disclosed $64.5 million of other outstanding letters of credit and $62.3 million of guarantees, subject to the exclusions described in the filing.
Important facts for investors to verify
- Whether operating and Adjusted EBITDA growth is sustained, and how much reflects recurring business versus equity-method property-sale gains, tax benefits and prior-year cost reductions.
- Cash conversion and working-capital trends, particularly receivables, accrued compensation and bonus payments, and the drivers of the operating cash-flow improvement.
- Availability and terms of warehouse funding, the matching and collectability of warehouse receivables, and exposure under DUS and Freddie Mac programs.
- Foreign-exchange sensitivity and the effect of the U.K.’s EU withdrawal, interest rates and property transaction volumes on revenue, margins and investment performance.
- The final financial-statement effects of revenue-recognition adoption and the execution, costs and covenant terms of the October 2017 refinancing.