CBRE Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. CBRE provides commercial real estate services and investment management through Advisory Services, Global Workplace Solutions (GWS), and Real Estate Investments (REI). Results reflect the effects of the COVID-19 pandemic.
Key financial results
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Revenue | $5.38bn | $5.71bn | $11.27bn | $10.85bn |
| Operating income | $94.2m | $284.4m | $314.5m | $429.4m |
| Net income attributable to CBRE | $81.9m | $223.7m | $254.1m | $388.1m |
| Diluted EPS | $0.24 | $0.66 | $0.75 | $1.14 |
| Adjusted EBITDA | $267.3m | $468.5m | $697.7m | $918.5m |
- Q2 operating margin was 1.7%, versus 5.0% a year earlier; H1 was 2.8%, versus 4.0%. Cost of revenue rose to 81.8% of revenue in Q2 from 77.8%, and to 80.8% for H1 from 78.0%.
- Q2 revenue fell 5.8% year over year. Advisory Services declined 28.7%, while GWS rose 8.3% and REI rose 8.0%. For H1, revenue increased 3.9%, supported by GWS growth of 13.2% and REI growth of 31.0%, partly offset by a 13.2% decline in Advisory Services.
- Operating cash flow was $6.1m for H1, compared with cash used of $293.3m in H1 2019. Investing activities used $135.9m; financing activities provided $377.0m. Capital expenditures were $134.1m gross, or $110.8m net of tenant concessions.
- At June 30, cash and cash equivalents were $1.21bn, plus $99.5m restricted cash. Long-term debt, net of current maturities, was $1.76bn. Short-term borrowings totaled $1.21bn, including $451m drawn on the revolver and $754m on warehouse lines.
Material changes and unusual items
- COVID-19 sharply reduced Q2 Advisory sales revenue (down 49.3%) and leasing revenue (down 37.6%); commercial mortgage origination revenue fell 28.3%. Contract-based GWS facilities management provided partial offset.
- H1 included $75.2m of non-cash impairments: $50.2m in GWS and $25.0m of REI goodwill. The comparable 2019 period included $89.0m of REI intangible impairment.
- Q2 included $37.6m of workforce-optimization costs, primarily severance, excluded from adjusted EBITDA. Management also reduced travel, marketing, and other discretionary costs; higher bad-debt expense and charitable donations partly offset savings.
- Foreign-currency translation reduced revenue by 1.6% in Q2 and 1.2% in H1. H1 foreign-currency translation losses in other comprehensive income were $146.4m.
- H1 share repurchases were $50.0m, all in Q1; none occurred in Q2. $350m remained authorized under the repurchase program at June 30.
Liquidity, outlook, and risks
- Management said cash flow from operations and the revolving facility should meet anticipated requirements for at least the next 12 months. At June 30, $2.3bn was available under the revolver and approximately $1.1bn of cash and cash equivalents was available for general corporate use. CBRE repaid $200m of revolver borrowings in July.
- Reported covenant ratios were 22.98x interest coverage and 0.61x net leverage at June 30, against minimum coverage of 2.00x and maximum leverage of 4.25x.
- CBRE gave no quantified full-year earnings or capital-expenditure guidance. It expected COVID-19 to adversely affect 2020 results and cash flows, with lower sales and leasing activity expected to continue into the second half; recovery outside Asia remained uncertain. Net capital expenditures were expected to be meaningfully below the prior forecast, but no revised estimate was provided.
- Risks include prolonged or renewed pandemic disruption, weaker real estate transactions and property markets, foreign-exchange volatility, and uncertainty around client activity and investment returns. Mortgage-related exposures include Fannie Mae loss-sharing obligations, loan advances during forbearance, and repurchase or loss-reimbursement commitments.
- Disclosure controls were deemed ineffective at June 30 because of previously reported material weaknesses in internal control over financial reporting. Management stated the financial statements were fairly presented and that remediation efforts were underway; weaknesses will not be considered remediated until controls operate effectively for a sufficient period and are tested.
Important facts for investors to verify
- Whether transaction activity, particularly Advisory sales and leasing, recovers or remains weak in the second half of 2020.
- How operating cash flow, receivables, bad-debt provisions, and liquidity evolve as pandemic effects continue.
- The assumptions and potential further impairment exposure for goodwill and other assets tested under COVID-19 conditions.
- Progress and testing results for remediation of the disclosed material weaknesses in internal controls.
- Potential cash obligations from mortgage servicing, loan-loss guarantees, co-investment commitments, and acquisition-related deferred consideration.