CBRE Group, Inc. — Q3 2011 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended September 30, 2011, with comparisons to 2010. CBRE provides commercial real estate services, investment management and development services. The company changed its name from CB Richard Ellis Group, Inc. on October 3, 2011. Unless stated otherwise, amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $1,534.5 | $1,266.2 | $4,141.8 | $3,464.0 |
| Operating income | $143.0 | $130.6 | $346.3 | $273.4 |
| Income from continuing operations | $60.0 | $47.9 | $162.5 | $69.3 |
| Net income attributable to CBRE | $63.8 | $57.0 | $159.4 | $105.2 |
| Diluted EPS attributable to CBRE | $0.20 | $0.18 | $0.49 | $0.33 |
| Operating margin | 9.3% | 10.3% | 8.4% | 7.9% |
| EBITDA, as adjusted (non-GAAP) | $194.8 | $175.5 | $487.7 | $428.2 |
- Q3 revenue rose 21.2%; management cited increased sales, leasing and outsourcing activity, and the CRES acquisition. Foreign currency translation added $65.1 million to Q3 revenue.
- For the first nine months, revenue increased 19.6%; management cited higher worldwide sales, leasing and outsourcing. Foreign currency translation added $137.1 million.
- Q3 operating margin narrowed as operating expenses grew faster than revenue; the nine-month operating margin improved year over year. Q3 operating income included a $3.6 million real estate disposition gain.
- Q3 net income attributable to CBRE exceeded consolidated net income of $60.0 million because non-controlling interests recorded a net loss. Nine-month results included $16.9 million of discontinued-operations income, all attributable to non-controlling interests.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $104.1 million, down from $324.9 million. Management attributed the decline mainly to higher bonuses, commissions and income taxes paid.
- Investing cash outflow was $546.5 million, including the CRES acquisition, $95.4 million of capital expenditures and a $328.3 million increase in restricted cash. Financing cash inflow was $599.5 million, including $800 million of new term-loan proceeds.
- At September 30, cash and cash equivalents were $662.6 million and restricted cash was $388.1 million. Restricted cash included acquisition financing held in escrow and was not generally available for corporate use.
- Long-term debt was $2.153 billion; short-term borrowings were $718.1 million, including $676.8 million of warehouse lines and $41.3 million drawn on the revolving facility. Real-estate-secured notes payable totaled $499.3 million and were generally nonrecourse, though $13.6 million was recourse to CBRE.
- Credit-agreement leverage was 1.55x against a maximum of 3.75x; interest coverage was 16.36x against a minimum of 2.25x. The company reported $700 million of revolving capacity, subject to letters of credit and other terms.
Material changes, outlook and risks
- CBRE acquired CRES on July 1 for $323.9 million and acquired $58.6 million of CRES co-investments. The ING REIM Asia and Europe acquisitions closed after quarter-end, on October 3 and October 31, respectively. The Europe purchase price was up to $540 million, of which $442.5 million had been paid by the filing date. The broader REIM transaction was initially announced at approximately $940 million, with additional co-investments and costs.
- Management expected approximately $150 million of pretax REIM transaction, financing, retention and integration costs. It reported $25.1 million of such costs through September 30; the nine-month income statement included $21.7 million.
- Management expected a full-year 2011 effective tax rate of approximately 40% and anticipated up to $100 million of net capital expenditures in 2011; $56.7 million had been incurred through September. No specific revenue or earnings guidance is provided in the filing.
- Management described the commercial real estate recovery as continuing but uneven: U.S. activity was improving but below 2006–2007 levels; European growth and leasing remained subdued amid sovereign-debt concerns; Asia-Pacific transaction markets were generally active. The filing cautions that quarterly results are seasonal, with earnings and cash flow historically concentrated in the fourth quarter.
- Key risks include a renewed economic or credit-market downturn, real estate valuation declines, acquisition integration and costs, foreign-currency movements, interest-rate exposure, client spending and retention, and the company’s substantial debt and refinancing needs. CBRE recorded a $39.1 million liability for interest-rate swaps; it also reported $6.2 million of impairment charges in 2011, including investment and real estate write-downs.
- Other exposures include $12.6 million of letters of credit, $24.9 million of guarantees, development completion and budget guarantees, and potential Fannie Mae loss-sharing on loans with $2.9 billion of unpaid principal. Management did not expect material losses from the cited guarantees or ordinary-course litigation.
Investor facts to verify
- How much of revenue and earnings growth reflects underlying activity and currency translation versus acquisitions, and how CRES and the later ING REIM closings affect future comparisons.
- The final purchase accounting, total acquisition consideration and integration costs for ING REIM, including remaining co-investment commitments.
- Whether operating cash flow improves after the acquisition-related escrow use and elevated compensation and tax payments.
- Debt, revolving-facility availability, covenant headroom, refinancing plans and exposure to variable interest rates, including the announced sterling term-loan facility.
- Performance of Global Investment Management and Development Services, including carried-interest accruals, project pipeline conversion and potential further impairments.