CBRE Group, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. CBRE provides commercial real estate services, investment management and development services. Comparisons are materially affected by the September 2015 acquisition of Global Workplace Solutions (GWS): 2016 includes a full quarter or nine months of GWS activity, while the 2015 comparable periods included only one month.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $3,193.5m | $2,712.6m | $9,247.8m | $7,155.6m |
| Operating income | $172.5m | $240.1m | $462.7m | $629.0m |
| Operating margin | 5.4% | 8.8% | 5.0% | 8.8% |
| Net income attributable to CBRE | $104.2m | $149.1m | $308.0m | $367.1m |
| Diluted EPS | $0.31 | $0.44 | $0.91 | $1.09 |
| EBITDA (non-GAAP) | $284.6m | $326.6m | $847.1m | $869.7m |
| Adjusted EBITDA (non-GAAP) | $349.4m | $344.6m | $992.5m | $895.1m |
Q3 revenue rose 17.7%, substantially reflecting $429.1m of GWS contribution; management also cited organic growth in property, facilities and project management, mortgage brokerage and leasing. Sales activity fell 6.6%. Nine-month revenue grew 29.2%, including $1.8bn from GWS; excluding GWS, property/facilities/project management fees increased 12.0%, leasing 7.2%, and mortgage brokerage 14.3%, while sales activity declined 1.7%.
Reported profitability weakened despite revenue growth. Cost of services rose to 70.5% of revenue in both the quarter and nine-month period, from 65.4% and 63.6%, respectively, largely because GWS has a different, lower-margin revenue mix. Excluding GWS, cost-of-services ratios also increased year over year. Q3 included $38.9m of cost-elimination expenses and $28.6m of acquisition integration and other costs; adjusted EBITDA is a non-GAAP measure that excludes specified items.
Equity income from unconsolidated subsidiaries was $24.7m in Q3 and $116.9m for nine months, up from $17.2m and $39.4m, respectively, mainly reflecting property-sale gains in Development Services. Interest expense increased to $37.3m in Q3 and $109.1m for nine months, partly due to the 4.875% senior notes issued in 2015 and higher borrowing rates.
Cash flow, balance sheet and debt
- Operating cash flow: Cash used was $53.2m in the first nine months of 2016, versus $142.4m provided in 2015. Management attributed the change mainly to vendor and tax payments and lower operating performance, including cost-elimination and GWS integration costs.
- Investing and financing cash flow: Investing used $39.6m, compared with $1.632bn in 2015, when the GWS purchase was funded. Financing used $0.8m, versus $1.210bn provided in 2015.
- Cash and liquidity: Cash and cash equivalents were $446.3m at September 30, down from $540.4m at year-end 2015. The $2.8bn revolving facility had $83m outstanding and $2.7bn available, after outstanding letters of credit. Management said operating cash flow and the revolver should meet anticipated needs for at least the next 12 months.
- Debt: Long-term debt was $2.687bn before current maturities and debt issuance costs; the balance sheet reported $2.615bn of long-term debt net of current maturities and costs, plus $45.0m current maturities. Short-term borrowings included $1.619bn under warehouse lines, substantially matched by $1.642bn of warehouse receivables, and $83m under the revolver. The warehouse financing supports mortgage loans committed for purchase or securitization.
- Covenants: Trailing-12-month interest coverage was 12.09x against a 2.00x minimum; leverage was 1.57x against a 4.25x maximum. Subsequent to quarter-end, CBRE prepaid $101.9m of scheduled 2017–2018 term-loan amortization.
Changes, outlook and risks
- Segment revenue increased across Americas, EMEA and Asia Pacific, largely with GWS included for a fuller period; reported segment EBITDA declined in each of those segments. Global Investment Management revenue and EBITDA fell, while Development Services EBITDA rose. Segment results are affected by property-sale gains and allocation changes; management reclassified prior segment data to conform with its 2016 cost-allocation method.
- Management said U.S. commercial real estate markets remained active, although property-sales volumes slowed in the first nine months. Mortgage-services activity benefited from GSE lending conditions, and management expected strong mortgage-services activity for the remainder of 2016. Europe was generally improving, but London activity was constrained by Brexit uncertainty; Asia Pacific markets were mixed. No specific full-year earnings or revenue guidance is provided in the filing text.
- Management expected 2016 capital expenditures of up to approximately $180m, net of tenant concessions; $126.7m had been incurred through September. A $250m Class A share repurchase authorization over three years was announced October 27, 2016.
- Foreign currency is a significant exposure: approximately 47% of nine-month business was transacted in non-U.S. dollar currencies. Currency translation reduced revenue by $72.4m in Q3 and $168.8m for nine months versus 2015, primarily due to sterling weakness. CBRE cited Brexit, economic and credit-market conditions, interest rates, property-market activity, client demand, acquisition integration, and foreign-exchange changes among key uncertainties. Its seasonal pattern generally produces the lowest revenue and cash flow in Q1 and the highest in Q4.
- Contingencies include ordinary-course litigation, which management said is not expected to produce significant losses above accrued amounts, while acknowledging uncertainty. Under the Fannie Mae DUS program, loans subject to loss-sharing arrangements had $15.0bn unpaid principal; CBRE had recorded $25.7m of related loan-loss accruals and posted a $42.0m letter of credit. The filing also describes development-project guarantees and future co-investment commitments.
- CBRE early adopted stock-compensation guidance in Q3; the impact was not material. The company was evaluating the effects and transition method for the revenue-recognition standard effective in 2018. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification priorities
- Separate GWS acquisition effects, organic growth, currency translation and changes in transaction volumes when assessing revenue trends.
- Reconcile reported operating-profit and margin declines with GWS mix, cost-elimination charges, integration expenses, and the non-GAAP adjustments underlying Adjusted EBITDA.
- Assess the persistence of negative operating cash flow and working-capital requirements, including the mortgage warehouse business and seasonal cash patterns.
- Review debt maturities, revolver availability, covenant headroom, and the exposure and collateral structure of warehouse borrowings.
- Track Brexit and foreign-exchange effects, segment-level trends, DUS loss-sharing exposure, development guarantees, and the execution and funding of the announced buyback and term-loan prepayment.