CBRE Group, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 2, 2015. This is an annual report, not a standalone fourth-quarter filing. CBRE is a global commercial real estate services and investment firm. Approximately 46% of 2014 revenue came from contractual fee-for-services businesses.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Revenue | $9.050 billion | $7.185 billion |
| Operating income | $792.3 million | $616.1 million |
| Net income attributable to CBRE | $484.5 million | $316.5 million |
| Diluted EPS attributable to CBRE | $1.45 | $0.95 |
| Operating cash flow | $661.8 million | $745.1 million |
| EBITDA, company-defined non-GAAP | $1.142 billion | $982.9 million |
| Cash and cash equivalents at year-end | $740.9 million | $491.9 million |
| Total assets at year-end | $7.647 billion | $6.998 billion |
| Long-term debt, including current portion | $1.875 billion | $1.841 billion |
- Revenue grew 26.0%; operating income grew 28.6%; and net income attributable to CBRE grew 53.1% year over year.
- Operating margin was 8.8% versus 8.6%; net margin attributable to CBRE was 5.4% versus 4.4%. EBITDA margin was 12.6% versus 13.7%; adjusted EBITDA margin was 12.9% versus 14.2%. EBITDA and adjusted EBITDA are non-GAAP measures.
- Operating cash flow declined 11.2%, mainly reflecting higher receivables, bonuses, taxes and commissions paid, partly offset by improved operating performance and higher bonus accruals. Investing activities used $151.6 million; financing activities used $232.1 million.
- At year-end, total consolidated debt and short-term borrowings were $2.381 billion, including warehouse lines and real estate debt. Separately, management cited approximately $1.9 billion of debt excluding generally nonrecourse real-estate notes and subsidiary-only warehouse lines.
- Debt covenant ratios were reported at 12.34x EBITDA-to-interest and 1.02x net debt-to-EBITDA, against minimum and maximum thresholds of 2.00x and 4.25x, respectively.
Material changes and operating trends
- Growth reflected higher worldwide property, facilities and project management fees, sales activity up 19.7%, and leasing activity up 16.2%. Management reported management-fee growth of 15.8% excluding Norland.
- The 2013 Norland acquisition drove a substantial portion of EMEA expansion. EMEA revenue rose 92.6% to $2.344 billion; excluding Norland, it increased 21.2%.
- Americas revenue increased 15.5% to $5.204 billion. Asia Pacific revenue increased 10.9% to $967.8 million, despite a $43.7 million foreign-currency translation headwind.
- Global Investment Management revenue fell 12.7% to $468.9 million, principally because carried-interest revenue and some asset-management fees declined. Assets under management nevertheless rose to $90.6 billion from $89.1 billion.
- Development Services revenue increased 22.4% to $65.2 million; operating loss narrowed to $2.7 million from $10.9 million. Projects in process totaled $5.4 billion and the pipeline was $4.0 billion at year-end.
- Fourth-quarter results reflect seasonality: 2014 Q4 revenue was $2.787 billion, operating income $288.6 million, CBRE-attributable net income $204.3 million and diluted EPS $0.61. The filing says revenue, earnings and operating cash flow are historically lowest in Q1 and highest in Q4.
Outlook, risks and unusual items
- Outlook: Management said operating cash flow and the revolving facility were expected to meet anticipated cash needs for at least the next 12 months. It anticipated up to approximately $180 million of net capital expenditures in 2015 and $6.1 million of pension contributions. No specific earnings or revenue guidance is provided in the supplied filing text.
- On January 9, 2015, CBRE entered a new credit agreement with a $2.6 billion revolving facility and a $500 million term loan facility, replacing prior term loans and revolving borrowings. The new agreement matures in 2020 and includes restrictive covenants and pledged subsidiary stock.
- 2014 included $23.1 million of financing-cost write-offs, including a $17.4 million premium, associated with redeeming $350 million of 6.625% senior notes. CBRE issued $425 million of 5.25% notes due 2025. Interest expense declined to $112.0 million from $135.1 million.
- Real-estate disposition gains increased to $57.7 million from $13.6 million; equity income from unconsolidated subsidiaries rose to $101.7 million, partly due to property-sale gains and a Canadian investment sale. An $8.6 million non-cash impairment related to abandoning a U.S. property database platform.
- Foreign-currency translation reduced 2014 revenue by $53.5 million and increased reported costs and expenses by $49.5 million. About 44% of revenue was transacted in foreign currencies. Management also cited economic, credit-market, real-estate transaction, acquisition-integration, competition, cybersecurity, litigation, regulatory and tax risks.
- The U.K. defined-benefit pension deficit increased to $92.9 million from $68.0 million. The company reported ordinary-course litigation; management believed losses beyond accrued amounts were unlikely to be significant, while noting outcomes are uncertain.
- CBRE adopted revised discontinued-operations accounting in 2014; ordinary-course real-estate disposal results are therefore presented differently than in prior periods. It declared no cash dividends and did not anticipate paying them in the foreseeable future.
Most important facts for investors to verify
- How much of reported growth and profitability is organic versus attributable to Norland and other acquisitions, and how acquisition-related costs affect comparable margins.
- Whether operating cash flow recovers as receivables and working-capital needs change; compare cash conversion with reported net income.
- The composition and refinancing needs of total debt, including warehouse borrowings, and the post-January 2015 facility’s interest costs, covenants and collateral.
- Whether Global Investment Management can sustain AUM and fee income despite lower carried interest, and whether development pipeline projects convert to revenue and cash.
- The effect of currency movements, pension funding requirements, tax audits and unrecognized tax benefits, and development guarantees or other contingencies.
- Reconcile GAAP results with company-defined EBITDA and adjusted EBITDA; these measures are not GAAP and are not measures of free cash flow.