CBRE Group, Inc. — FY 2015 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2015, filed February 29, 2016. CBRE provides commercial real estate services, investment management and development services globally. Its five segments are Americas, EMEA, Asia Pacific, Global Investment Management and Development Services. The September 1, 2015 acquisition of Johnson Controls’ Global Workplace Solutions (GWS) business materially expanded its facilities-management operations.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $10.856 billion | $9.050 billion | +20.0% |
| Operating income | $835.9 million | $792.3 million | +5.5% |
| Operating margin | 7.7% | 8.8% | Down 1.1 percentage points |
| Net income attributable to CBRE | $547.1 million | $484.5 million | +12.9% |
| Diluted EPS | $1.63 | $1.45 | +12.4% |
| EBITDA (non-GAAP) | $1.297 billion | $1.142 billion | +13.6% |
| Adjusted EBITDA (non-GAAP) | $1.413 billion | $1.166 billion | +21.1% |
| Cash from operating activities | $651.9 million | $661.8 million | Down $9.9 million |
Annual revenue growth reflected GWS, organic gains in management fees, and higher transaction activity: sales rose 17.9%, leasing 11.5%, appraisal 18.6%, and Americas commercial mortgage brokerage activity 28.5%. Excluding acquired GWS, worldwide property, facilities and project-management fees rose 15.9%. Foreign currency translation reduced reported revenue by $536.4 million.
Cost of services rose 26.2% to $7.083 billion; its share of revenue increased to 65.2% from 62.0%, largely due to GWS’s lower-margin service mix. Operating, administrative and other expenses increased 8.0% to $2.634 billion, declining as a share of revenue to 24.3% from 27.0%. Reported operating margin nevertheless contracted. Management cited $40.4 million of cost-containment expenses and $48.9 million of acquisition integration and other costs among FY 2015 adjustments to adjusted EBITDA.
Quarterly results were mixed: Q4 2015 revenue was $3.700 billion versus $2.787 billion in Q4 2014, while operating income was $207.0 million versus $288.6 million and net income attributable to CBRE was $180.0 million versus $204.3 million. Diluted EPS was $0.53 versus $0.61. The filing notes that results are seasonal, with activity typically strongest in Q4; investors should assess the quarter’s earnings decline alongside acquisition effects and other period-specific items.
At year-end, cash and cash equivalents were $540.4 million, down from $740.9 million. Total assets were $11.018 billion and total liabilities $8.259 billion. Long-term debt, including current maturities and net of financing costs, was $2.680 billion; the company separately reported $1.751 billion of short-term warehouse borrowings, largely matched by warehouse receivables and recourse only to CBRE Capital Markets. Interest expense was $118.9 million. The $2.6 billion revolving facility had no principal outstanding, apart from $2.0 million in letters of credit. Covenant ratios were 11.81x interest coverage and 1.45x net leverage, against minimum and maximum limits of 2.00x and 4.25x, respectively.
Material changes and unusual items
- CBRE acquired GWS for a stated cash purchase price of $1.475 billion, with final purchase-price adjustments. GWS contributed $982.0 million in revenue, $27.7 million in operating income and $18.8 million in net income from acquisition through year-end; these figures exclude $48.9 million of direct transaction and integration costs and $24.2 million of acquired-intangible amortization.
- The acquisition was funded through $600 million of 4.875% senior notes due 2026, $400 million of new term loans, revolving-credit borrowings and cash. Year-end long-term debt increased from $1.851 billion to $2.680 billion. Investing cash outflow rose to $1.619 billion, principally due to GWS.
- Americas revenue rose 19.0% and EMEA revenue 28.2%, both including GWS contributions. Asia Pacific revenue rose 17.3%, while Global Investment Management revenue fell 1.8%; Development Services revenue was broadly flat.
- Equity income from unconsolidated subsidiaries increased to $162.8 million from $101.7 million, primarily on property-sale gains in Development Services. Gains on real-estate dispositions decreased to $10.8 million from $57.7 million. Currency-forward contracts generated $24.2 million of net gains in 2015.
- Global Investment Management assets under management ended the year at $89.0 billion, down from $90.6 billion, as outflows exceeded inflows despite modest market appreciation.
Outlook, risks and contingencies
Management provided no specific numerical earnings or revenue guidance in the supplied filing text. It expected operating cash flow and its revolving facility to cover anticipated needs for at least the next 12 months, and estimated 2016 capital expenditures of up to approximately $195 million, net of tenant concessions. It also cited $29.6 million of Development Services capital commitments and $12.8 million of Global Investment Management co-investment commitments, of which $8.8 million was expected to be funded in 2016.
Management described improving U.S. commercial real estate conditions and stronger 2015 activity in Europe, while noting a slow, fragile European recovery and uneven Asia-Pacific markets amid slowing growth. Key risks include economic and property-market cyclicality, credit availability and interest rates, foreign-exchange movements (about 45% of revenue was transacted in non-U.S. currencies), acquisition integration, client and talent retention, competition, cyber and technology disruption, regulation, litigation, environmental liabilities, and risks from investments and development guarantees.
Contractual obligations included $1.182 billion of operating leases, $79.7 million of deferred acquisition consideration, and $40.6 million of guarantees, apart from specified exclusions. Development Services had $6.7 billion of projects in process and $3.6 billion of pipeline deals. The company reported no material litigation losses expected beyond accrued amounts, while acknowledging that outcomes remain uncertain. Management and the auditor reported effective internal control over financial reporting; the GWS business, representing $2.3 billion of assets and $982.0 million of revenue, was excluded from the company’s year-end control assessment.
Most important facts for investors to verify
- How much of revenue and adjusted EBITDA growth came from GWS versus organic growth, and whether GWS margins improve as integration proceeds.
- Why Q4 operating income, net income and diluted EPS declined year over year despite substantially higher revenue.
- Whether operating cash generation can support acquisition-related debt service, capital spending and investment commitments; assess warehouse borrowings separately from corporate debt.
- How foreign-exchange exposure, Global Investment Management AUM outflows, and market-sensitive incentive and transaction fees affect future earnings.
- The final GWS purchase-price allocation and amortization burden, and the potential cash exposure under development guarantees, tax matters and other commitments.
EBITDA and adjusted EBITDA are non-GAAP measures and should be considered alongside, not instead of, GAAP results. The filing reports no cash dividends declared or paid and says none are anticipated for the foreseeable future.