CBRE Group, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. CBRE is a global commercial real estate services and investment firm; its 2018 reporting segments were Americas, EMEA, Asia Pacific, Global Investment Management and Development Services. A new three-segment reporting structure took effect January 1, 2019.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $21.34 billion | $18.63 billion |
| Operating income | $1.088 billion | $1.079 billion |
| Operating margin | 5.1% | 5.8% |
| Net income attributable to CBRE | $1.063 billion | $697.1 million |
| Diluted earnings per share | $3.10 | $2.05 |
| Adjusted EBITDA (non-GAAP) | $1.905 billion | $1.717 billion |
| Cash from operating activities | $1.131 billion | $894.4 million |
| Cash and cash equivalents at year-end | $777.2 million | $751.8 million |
| Long-term debt, net of current maturities | $1.767 billion | $2.000 billion |
Revenue increased 14.6%, while operating income was nearly flat and operating margin declined. Growth was broad-based: occupier outsourcing revenue rose 15.2%, leasing 17.8%, commercial mortgage origination 19.1%, and Global Investment Management revenue 15.0% (management’s segment comparison; consolidated disclosure describes it as 12.6%). EMEA revenue grew 24.3%, including favorable currency translation; Americas and Asia Pacific revenue increased 11.4% and 11.3%, respectively.
2018 net income included a $100.4 million one-time gain from remeasuring CBRE’s existing investment when it acquired the remaining interest in its New England joint venture. It also included a $28.0 million debt-extinguishment charge related to redeeming $800 million of 5.00% senior notes. The lower tax provision versus 2017 largely reflected the reduced U.S. corporate tax rate and the prior-year Tax Act charge. 2018 adjusted EBITDA excludes the one-time gain and adds back specified reorganization, acquisition and litigation costs; it is a non-GAAP measure.
Investing activities used $560.7 million, chiefly reflecting acquisitions and capital expenditures; financing activities used $506.6 million. Capital expenditures were $227.8 million. CBRE reported $2.8 billion available under its revolving credit facility at year-end. Total debt excluding generally nonrecourse real estate notes and subsidiary-recourse warehouse lines was approximately $1.8 billion; warehouse-line borrowings were $1.329 billion and are matched to mortgage loans held for resale. Credit agreement covenant ratios were well within stated limits: interest coverage of 20.61x versus a 2.00x minimum and net leverage of 0.61x versus a 4.25x maximum.
Fourth quarter: Revenue was $6.294 billion, operating income $459.3 million, net income attributable to CBRE $393.8 million, and diluted EPS $1.15. Results reflect the company’s seasonality, with transaction activity and earnings typically highest in the fourth quarter.
Changes, outlook, risks and unusual items
- Revenue growth reflected organic expansion and the June 2018 FacilitySource acquisition, completed for an estimated net initial purchase price of approximately $266.5 million. FacilitySource contributed $121.6 million of revenue and a $2.9 million net loss in 2018, before specified transaction, integration and acquired-asset depreciation and amortization costs.
- Higher occupier-outsourcing mix weighed on margins because it generally carries lower margins than sales and leasing. Operating and administrative expenses also increased, including reorganization costs and a litigation-settlement cost.
- Development Services equity income from unconsolidated subsidiaries increased substantially, primarily from property-sale gains. Global Investment Management assets under management rose to $105.5 billion from $103.2 billion, though currency reduced the local-currency increase.
- Management said it believed operating cash flow and the revolving credit facility would meet anticipated requirements for at least the next 12 months. It forecast up to approximately $210 million of 2019 capital expenditures, net of tenant concessions; the filing provides no specific earnings or revenue guidance.
- Management characterized U.S. property sales and leasing markets as generally healthy, while noting more cautious investment activity in Asia Pacific and uncertainty around the U.K.’s planned departure from the EU. Approximately 43% of 2018 revenue was transacted in foreign currencies; CBRE did not plan to hedge foreign-currency EBITDA in 2019.
- Risks include economic and credit-market downturns, transaction and property-market cyclicality, currency movements, competition and disruption, talent retention, acquisition integration, cybersecurity and data privacy, litigation, environmental exposure, investment and development guarantees, and reliance on investment performance and client contracts. Litigation losses above accrued amounts were described as unlikely to be significant, but outcomes remain uncertain.
- CBRE expected adoption of lease accounting guidance in 2019 to add $1.2–$1.4 billion of lease liabilities to its balance sheet, with corresponding right-of-use assets expected to be lower; it did not expect a material income-statement impact. The independent auditor gave unqualified opinions on the financial statements and internal control; FacilitySource was excluded from the year-end internal-control assessment.
Key facts for investors to verify
- How much of the 2018 earnings increase came from the one-time joint-venture remeasurement gain, tax changes and development property-sale gains, versus recurring operations.
- Whether margin pressure from outsourcing mix and higher operating costs persists, and how the new segment reporting affects comparability.
- FacilitySource integration, profitability and realization of expected strategic benefits.
- Cash conversion, acquisition and capital-expenditure requirements, and the composition and renewal terms of warehouse-line funding.
- Development project guarantees, co-investment commitments, litigation and tax exposures, and the expected balance-sheet effects of lease adoption.
- Whether the 2019 market outlook, especially U.K./Europe activity, interest rates and foreign-exchange conditions, supports continued growth.