CB Richard Ellis Group, Inc. — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The company provides commercial real estate services globally and reports five segments: Americas, EMEA, Asia Pacific, Global Investment Management and Development Services. Financial amounts below are in U.S. dollars; balance-sheet comparisons are with December 31, 2009.
Financial performance and liquidity
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Revenue | $1,171.9 million | $955.7 million | $2,197.8 million | $1,846.1 million |
| Operating income | $97.2 million | $38.9 million | $142.9 million | $44.4 million |
| Net income (loss) attributable to CBRE | $54.8 million | $(6.6) million | $48.2 million | $(43.3) million |
| Diluted earnings (loss) per share | $0.17 | $(0.02) | $0.15 | $(0.16) |
| EBITDA, non-GAAP | $161.6 million | $68.4 million | $236.6 million | $106.8 million |
| Cash from operating activities | — | $101.0 million | $(82.7) million |
- Q2 operating margin was 8.3%, versus 4.1%; first-half operating margin was 6.5%, versus 2.4%. Cost of services fell to 57.9% of revenue in Q2 and 58.9% for the first half, from 59.3% and 60.7%, respectively.
- At June 30, cash and cash equivalents were $743.6 million; current assets were $2.053 billion and current liabilities $1.395 billion. Total liabilities were $4.110 billion and equity $820.6 million.
- Long-term debt was $1.972 billion, including $1.535 billion of senior secured term loans and $437.1 million of 11.625% senior subordinated notes. Management described total debt, excluding real estate notes and warehouse lines, as approximately $2.1 billion. Real estate notes payable totaled $718.5 million; warehouse lines outstanding were $259.0 million.
- Management reported covenant interest coverage of 5.51x versus a 2.00x minimum and net leverage of 1.69x versus a 4.25x maximum at June 30. The filing cautions that covenant EBITDA differs from reported EBITDA.
Changes versus the prior comparable period
- Q2 revenue grew 22.6%; first-half revenue grew 19.1%. Management attributed growth mainly to higher sales, leasing and outsourcing activity. Sales increased 61.2% in Q2 and 56.7% in the first half; leasing increased 29.4% and 26.2%, respectively.
- Profitability improved substantially, reflecting revenue growth, a higher share of transaction revenue and cost containment. Q2 equity income from unconsolidated subsidiaries was $14.2 million, compared with a $1.7 million loss a year earlier.
- First-half operating cash flow improved by $183.7 million year over year. Investing activities provided $4.0 million, compared with $63.6 million used in 2009; financing activities used $89.1 million, compared with $289.4 million provided in 2009, when the company raised equity and issued notes.
- Segment revenue increased year over year in Americas, EMEA, Asia Pacific and Global Investment Management; Development Services revenue declined. Asia Pacific cost of services rose faster than revenue, and its operating margin declined. Global Investment Management reported a first-half operating loss, while Development Services remained loss-making at the operating level.
Outlook, commentary, risks and unusual items
- Management said economic and credit conditions had improved and sales and leasing activity had rebounded from depressed 2009 levels. Property values appeared to be stabilizing, but occupancy and rents were still declining, at a slower pace. Management emphasized that sustained recovery depends on stronger economic and employment growth, continued credit-market improvement and restored confidence.
- The company expected its full-year 2010 effective tax rate to be approximately 36%–38%. It anticipated up to $60 million of net capital expenditures in 2010, of which $3.7 million had been funded by June 30. Management expected operating cash flow and revolving-credit availability to meet anticipated cash needs for at least the next 12 months. Revenue and cash flow are historically seasonal, with stronger results often in the second half; the filing gives no assurance this pattern will hold in 2010.
- On July 1, 2010, after quarter-end, CBRE prepaid $150 million of its term B loan. The filing says this lowered interest spreads on the remaining term B loans by 50 basis points and would provide interest savings.
- Effective January 1, 2010, adoption of ASU 2009-17 required consolidation of certain variable-interest entities holding eight commercial properties. At June 30, related real estate investments were $247.1 million and mortgage notes payable were $222.4 million; the entities’ creditors have no recourse to assets outside those entities. Their losses were attributable to non-controlling interests.
- Q2 discontinued operations generated $7.1 million of net income, mainly from a property sale. The related reported gain on disposition was $11.9 million. First-half impairment write-downs of investments in unconsolidated subsidiaries were $6.9 million; the company reported no material real estate write-downs in the first half of 2010.
- Key risks include cyclical commercial real estate demand, continued credit-market volatility, high leverage and refinancing needs, interest-rate and foreign-currency exposure, potential asset impairments, and reliance on warehouse funding. Development completion and budget guarantees, $11.5 million of guarantees of unconsolidated-subsidiary obligations, and Fannie Mae loan loss-sharing exposure are also disclosed. CBRE Capital Markets had $1.4 billion of DUS loans subject to loss sharing of up to one-third of losses in selected cases.
- Management said pending or threatened ordinary-course lawsuits were not expected to have a material effect; no material changes to previously disclosed legal proceedings or risk factors were reported. Disclosure controls were assessed as effective, with no material quarterly change to internal control over financial reporting.
Most important facts for investors to verify
- How much of the sharp earnings and EBITDA improvement reflects sustainable operating growth versus transaction mix, property-sale gains, discontinued operations and accounting changes from VIE consolidation.
- The timing and refinancing requirements of the term loans and revolving facility, including the $150 million post-quarter prepayment, and whether covenant headroom remains adequate as market conditions change.
- Whether operating cash flow remains positive after seasonal working-capital movements, planned capital spending, co-investment commitments of $27.5 million and Development Services funding commitments of $29.9 million.
- The quality and valuation of real estate and unconsolidated investments, including Global Investment Management assets under management of $33.7 billion, down 7% year over year, and any further impairment exposure.
- Potential cash exposure from Fannie Mae loss-sharing arrangements, development guarantees, pension funding and other disclosed contingencies.