CBRE Group, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet figures are as of March 31, 2016. CBRE provides commercial real estate services, investment management and development services. The company notes that results and cash flow are typically lowest in the first quarter and highest in the fourth.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $2.847 billion | $2.053 billion |
| Operating income (margin) | $107.6 million (3.8%) | $160.1 million (7.8%) |
| Net income attributable to CBRE | $82.2 million | $92.9 million |
| Diluted earnings per share | $0.24 | $0.28 |
| EBITDA (non-GAAP) | $252.6 million (8.9% of revenue) | $246.3 million (12.0%) |
| Adjusted EBITDA (non-GAAP) | $282.7 million (9.9%) | $246.7 million (12.0%) |
| Operating cash flow | $(328.6) million | $(179.9) million |
Cost of services was 70.7% of revenue, up from 62.9%; excluding acquired Global Workplace Solutions (GWS), it was 64.5%. Interest expense was $34.8 million, versus $26.2 million. Cash and cash equivalents were $489.2 million; total current assets were $4.087 billion and current liabilities $3.696 billion.
At quarter-end, reported long-term debt was $2.705 billion before current maturities and unamortized issuance costs; short-term borrowings were $994.4 million, including $714.4 million of warehouse-line borrowing. Warehouse borrowings principally fund corresponding mortgage receivables. CBRE had $2.5 billion available on its $2.8 billion revolving credit facility. Its covenant leverage ratio was 1.66x against a 4.25x maximum; interest coverage was 11.98x against a 2.00x minimum.
Material changes versus Q1 2015
- Revenue rose 38.7%, largely due to GWS, which contributed $654.1 million of current-quarter revenue. Excluding GWS, property, facilities and project management fees increased 10.8%; sales activity rose 9.5% and leasing activity 17.5%.
- Despite higher revenue, operating income fell 32.8% and CBRE-attributable net income declined 11.6%. The acquired business increased the share of lower-margin cost-of-services revenue; higher amortization and interest expense also weighed on results.
- Equity income from unconsolidated subsidiaries increased to $57.3 million from $15.5 million, primarily reflecting property-sale gains in Development Services. Development Services EBITDA increased to $31.9 million from $5.5 million.
- Operating cash use increased by $148.8 million, mainly due to higher bonus and tax payments and net payments to vendors. Financing cash flow was positive $272.3 million, primarily reflecting net revolving-credit borrowings. Cash declined $51.2 million during the quarter.
- Foreign-currency translation reduced revenue by $68.3 million. Approximately 46% of business was transacted in non-U.S.-dollar currencies.
Outlook, management commentary and risks
- No specific earnings or revenue guidance is provided. Management said it expects operating cash flow and the revolver to meet anticipated cash requirements for at least the next 12 months, absent extraordinary events or a large strategic acquisition.
- Expected 2016 capital expenditures were up to approximately $195 million, net of tenant concessions; $31.7 million was incurred in Q1. Management cited $30.1 million of Development Services investment commitments and $13.5 million of Global Investment Management co-investment commitments.
- Management described U.S. commercial real estate conditions as generally healthy and European activity as improved, while noting varied Asia-Pacific markets and some weakening in property sales activity in certain European markets early in 2016. Results remain sensitive to economic growth, credit availability, real estate activity and client outsourcing demand.
- Key risks include foreign-exchange movements, interest rates, acquisition integration and costs, client retention and contract renewals, cyclicality and seasonality, leverage, litigation, warehouse-line availability, and guarantees or liabilities related to development projects.
- CBRE reported pending or threatened ordinary-course lawsuits; it believes excess losses beyond accrued amounts are unlikely to be significant, but notes litigation outcomes are uncertain. Under Fannie Mae’s DUS program, CBRE MCI shared potential losses on loans with $12.8 billion unpaid principal balance; loan-loss accruals were approximately $22.4 million and a $38.0 million letter of credit supported the reserve arrangement.
- Unusual or notable items include $17.2 million of acquisition-related costs and $12.4 million of cost-containment expenses included as adjustments in adjusted EBITDA. A $4.8 million real-estate disposition gain and elevated equity-method income also affected results. The 2015 GWS acquisition purchase-price allocation remained preliminary.
Important facts for investors to verify
- How much of revenue growth and future earnings contribution is attributable to GWS versus organic activity, and whether margins improve as integration progresses.
- Whether cash conversion improves after the seasonal first-quarter outflow, and how bonus, tax and vendor-payment timing affects operating cash flow.
- The composition and refinancing needs of debt, including warehouse-line balances and their matching receivables, plus remaining revolver capacity and covenant headroom.
- The durability of Development Services property-sale gains and equity-method income, and the trajectory of Global Investment Management fees and carried interest.
- Foreign-exchange exposure, development guarantees, Fannie Mae loss-sharing exposure, litigation developments, and completion of the GWS purchase-price allocation.