CBRE Group, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports quarterly results; FY 2019 revenue and earnings were seasonally strongest in Q4. CBRE provides commercial real estate advisory, outsourcing, investment management and development services through Advisory Services, Global Workplace Solutions (GWS) and Real Estate Investments.
Financial performance
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue | $23.894 billion | $21.340 billion | +12.0% |
| Operating income | $1.260 billion | $1.088 billion | +15.8% |
| Net income attributable to CBRE | $1.282 billion | $1.063 billion | +20.6% |
| Diluted EPS | $3.77 | $3.10 | +21.6% |
| Operating cash flow | $1.223 billion | $1.131 billion | +8.1% |
| Adjusted EBITDA (non-GAAP) | $2.064 billion | $1.905 billion | +8.3% |
Operating margin was approximately 5.3%, versus 5.1% in 2018. Adjusted EBITDA margin declined to 8.6% from 8.9%, primarily because GWS, a lower-margin business with substantial reimbursed client costs, represented a larger share of revenue. Fee revenue, which excludes reimbursed costs, increased to $11.861 billion from $10.838 billion; pass-through costs accounted for $12.033 billion of reported revenue.
Q4 2019 revenue was $7.119 billion versus $6.294 billion in Q4 2018; operating income was $513.8 million versus $459.3 million; and diluted EPS was $1.87 versus $1.15. Q4 net income attributable to CBRE was $637.6 million, including the material tax benefit described below.
Segments and operating measures
- Advisory Services: Revenue of $9.069 billion, up 7.5%; adjusted EBITDA of $1.466 billion, up 12.5%. Growth reflected leasing, property sales, mortgage origination and project management.
- GWS: Revenue of $14.164 billion, up 14.5%; adjusted EBITDA of $424.0 million, up 22.7%. Revenue growth was driven by outsourcing demand; reported revenue includes substantial client-reimbursed expenses.
- Real Estate Investments: Revenue of $660.6 million, up 23.5%, principally reflecting the Telford Homes acquisition. Adjusted EBITDA fell to $174.0 million from $256.4 million, amid lower equity earnings from property-sale gains and an intangible impairment.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $971.8 million; operating cash flow was $1.223 billion. Investing activities used $721.0 million, including $293.5 million of capital expenditures and acquisition spending. Financing activities used $271.9 million.
- Long-term debt, net, was $1.761 billion. Short-term borrowings were $981.7 million, primarily warehouse lines used by CBRE Capital Markets to fund mortgage loans expected to be sold; these are secured by related receivables and are generally recourse only to that subsidiary. CBRE also had $2.8 billion available under its revolving credit facility.
- For covenant purposes, the company reported a 0.44x net leverage ratio and 22.62x interest coverage, against maximum leverage of 4.25x and minimum coverage of 2.00x.
- Adoption of lease accounting added $1.2 billion of lease liabilities at January 1, 2019. At year-end, operating and finance lease liabilities totaled approximately $1.321 billion.
Material changes and unusual items
- CBRE acquired London-based Telford Homes on October 1, 2019, for £267.1 million (approximately $328.5 million), funded with revolving-credit borrowings. Telford contributed $97.5 million of revenue in 2019; acquisition-related costs included $15.0 million of direct transaction and integration costs.
- A $277.2 million net tax benefit from a legal-entity restructuring contributed to the 2019 tax provision of $69.9 million and an effective tax rate of 5.1%, versus 22.7% in 2018. The filing says the benefit reflected tax-basis differences and capital losses expected to offset capital gains; it should not be assumed to recur.
- CBRE recorded a non-cash $89.8 million intangible-asset impairment in Real Estate Investments, related to its public securities business and the industry shift toward passive investment programs.
- Equity income from unconsolidated subsidiaries fell 50.4% to $160.9 million, largely because of lower property-sale gains. 2018 other income included a one-time $100.4 million gain from remeasuring an investment when CBRE acquired control.
- Assets under management grew to $112.9 billion from $105.5 billion. Development projects in process totaled $13.0 billion, with a $5.8 billion pipeline.
Outlook, risks and contingencies
The filing gives no specific earnings or revenue guidance. Management said operating cash flow and the revolving credit facility were expected to cover anticipated cash needs for at least the next 12 months. Expected 2020 capital expenditures were up to approximately $385 million; $46.3 million of committed co-investments was expected to be funded during 2020.
Management highlighted exposure to commercial real estate transaction volumes, economic and credit conditions, interest rates, foreign exchange, Brexit-related uncertainty and public-health events. The filing specifically noted uncertainty about the coronavirus outbreak reported in China in December 2019 and its potential broader economic effects. Litigation arises in the ordinary course; CBRE said losses beyond recorded accruals were not expected to be significant, while noting litigation remains uncertain. Development guarantees, co-investment commitments and tax positions are additional exposures.
Control and reporting concern: Management and KPMG concluded that internal control over financial reporting was ineffective at December 31, 2019 because of material weaknesses in GWS EMEA, including staffing and oversight gaps, financial-system IT controls, and controls over revenue, receivables, reconciliations and journal entries. No material misstatement was identified, and the financial statements received an unqualified audit opinion; KPMG issued an adverse opinion on internal control. CBRE said remediation had begun and would require additional resources and expense.
Most important facts for investors to verify
- How much of 2019 earnings growth remains after excluding the one-time $277.2 million tax benefit, and whether future capital gains support realization of the related tax assets.
- Progress, cost and effectiveness of GWS EMEA control remediation, including whether any restatement or additional reporting issue emerges.
- Underlying GWS profitability and cash conversion, given its low operating margin and large pass-through revenue and cost base.
- Whether the public securities impairment and outflows in that business signal further fee or asset-retention pressure; also monitor AUM and incentive-fee performance.
- Liquidity and refinancing needs, including warehouse-line renewals, lease obligations, acquisition commitments and co-investment funding.
- How Brexit, foreign-exchange movements and the coronavirus outbreak affected business after year-end; the filing does not provide quantified subsequent-period impacts.