CBRE Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparative period is Q1 2010. CBRE provides commercial real estate services, investment management, mortgage services and development services across five reportable segments. Results are unaudited, and the company cautions that first-quarter performance is seasonal and not necessarily indicative of the full year.
Financial results
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Revenue | $1,185.1 million | $1,025.9 million | Up 15.5%; higher sales, leasing and outsourcing activity |
| Operating income | $73.1 million | $45.7 million | Operating margin 6.2%, versus 4.5% |
| Continuing-operations income (loss), attributable to CBRE | $34.4 million | $(6.6) million | Basic and diluted EPS: $0.11 versus $(0.02) |
| Consolidated net income (loss) | $44.5 million | $(16.2) million | Includes $10.6 million of discontinued-operations income, all attributable to non-controlling interests |
| EBITDA | $113.0 million | $75.0 million | Non-GAAP; adjusted EBITDA was $120.6 million versus $87.5 million |
| Cash from operating activities | $(113.9) million | $7.1 million | Use of cash reflects bonus, commission and tax payments |
| Cash from investing activities | $65.3 million | $(4.8) million | Benefited from real estate sale proceeds |
| Cash from financing activities | $(39.2) million | $(54.2) million | Included revolver activity and real estate debt repayments |
- Margins and costs: Cost of services was 60.2% of revenue, broadly in line with 60.0% a year earlier. Operating, administrative and other costs fell to 31.8% of revenue from 33.0%, supporting operating-margin improvement. Compensation, hiring, marketing and travel costs increased with business activity and restored pay and bonus levels.
- Segment performance: Revenue increased in all segments. Americas revenue rose 16.2% and operating margin improved to 8.3%; Asia Pacific revenue rose 19.4% and operating margin to 7.0%. EMEA revenue grew 8.9%, but operating income declined to $0.7 million. Global Investment Management revenue grew 27.7% and returned to $1.3 million operating income from a $4.4 million loss. Development Services revenue rose 5.1%, but the segment reported a $2.6 million operating loss.
- Balance sheet and liquidity, March 31: Cash and cash equivalents were $427.6 million, down from $506.6 million at year-end 2010. Current assets were $1.97 billion and current liabilities $1.58 billion. Total assets were $4.79 billion; total liabilities $3.64 billion; total equity $1.15 billion.
- Debt: Long-term debt was $1.38 billion, with $338.4 million of short-term borrowings and $38.1 million of current maturities. The company separately reported approximately $1.5 billion of debt excluding real estate notes and warehouse lines. Real estate notes totaled $571.4 million and were mostly nonrecourse; warehouse borrowings of $277.7 million were substantially matched by $285.7 million of warehouse receivables. The revolving facility had a $700 million commitment, with $60.7 million drawn and $20.0 million of letters of credit outstanding.
- Covenants: At quarter-end, the reported leverage ratio was 1.07x against a maximum of 3.75x; interest coverage was 10.1x against a minimum of 2.25x.
Material changes and management commentary
- Management described commercial real estate conditions as improving into early 2011, with stronger transaction activity, broader credit availability and stabilizing fundamentals, but activity remained below 2006–2007 levels. Recovery was uneven: Europe remained subdued, while Asia Pacific activity strengthened.
- Revenue growth was driven by worldwide sales (up 34.5%), leasing (up 7.9%) and outsourcing (up 13.7%). Foreign currency translation added $18.5 million to revenue.
- Operating improvement also reflected lower depreciation and interest expense. Interest expense declined 32.3% to $33.7 million, primarily following prior debt repayments, partly offset by interest on the $350 million 6.625% senior notes issued in October 2010.
- CBRE agreed to acquire most of ING’s real estate investment management business, including European and Asian operations and Clarion Real Estate Securities, for approximately $940 million in cash; it also expects to acquire about $55 million of co-investments. Closing was expected in the second half of 2011, subject to stakeholder and regulatory approvals. Estimated pre-tax transaction, financing, retention and integration costs were approximately $150 million; $10.9 million had been incurred through March 31.
- CBRE secured two delayed-draw term loan facilities totaling $800 million, intended to help fund the acquisition along with cash on hand. Neither facility was drawn at March 31. Five interest-rate swaps with $400 million total notional value were entered into to hedge variable-rate term-loan exposure, with effectiveness beginning in October 2011.
- Management expected 2011 net capital expenditures of up to $100 million and a full-year effective tax rate slightly below Q1’s 40.5%. It stated that operating cash flow and the revolver were expected to cover anticipated cash needs for at least the next 12 months, excluding the acquisition financing plan.
Risks, contingencies and unusual items
- Key risks include a reversal or slowing of the commercial real estate recovery, weak employment and transaction activity, credit-market or interest-rate changes, foreign-exchange movements, client spending cuts, acquisition closing and integration risks, and CBRE’s leverage and debt restrictions.
- Operating cash outflow was substantial in Q1, and cash fell by $78.9 million. Cash generation is seasonal and historically stronger in the second half, particularly Q4.
- Potential obligations include $19.7 million of letters of credit, $10.8 million of guarantees, development completion and budget guarantees, and possible losses under Fannie Mae’s multifamily loan program. CBRE reported $2.3 billion of loans subject to loss-sharing arrangements, with loss sharing of up to one-third in selected cases; loan-loss accruals were approximately $4.4 million.
- CBRE had $11.7 million of future co-investment commitments and $22.2 million of additional capital commitments to unconsolidated development subsidiaries. The UK pension liability was $40.6 million; expected 2011 pension contributions were $3.7 million.
- Management said pending or threatened ordinary-course lawsuits were not expected to have a material effect and reported no material changes to previously disclosed legal proceedings or risk factors. Disclosure controls were deemed effective; no material internal-control changes were reported.
Most important facts for investors to verify
- Whether the ING REIM acquisition closes as expected, its final funding mix and purchase economics, and whether total costs remain near the stated $150 million estimate.
- Whether operating cash flow improves after seasonal Q1 outflows and whether the company can fund ordinary needs and acquisition commitments without materially increasing leverage.
- Whether transaction growth and margin improvement persist across segments, especially EMEA and Development Services.
- Debt covenant headroom, future borrowing costs and maturities, including the high-coupon 11.625% subordinated notes and the status of the $800 million delayed-draw facilities.
- Exposure and reserves relating to real estate guarantees, Fannie Mae loss-sharing loans, co-investments and development commitments.