CBRE Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparative figures are for the same periods in 2018. CBRE is a global commercial real estate services and investment firm, reporting through Advisory Services, Global Workplace Solutions and Real Estate Investments. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $5.925 billion | $5.261 billion | $16.775 billion | $15.046 billion |
| Operating income | $316.6 million | $189.7 million | $746.0 million | $628.6 million |
| Operating margin | 5.3% | 3.6% | 4.4% | 4.2% |
| Net income attributable to CBRE | $256.6 million | $290.5 million | $644.7 million | $669.4 million |
| Diluted earnings per share | $0.75 | $0.85 | $1.89 | $1.95 |
| Adjusted EBITDA (non-GAAP) | $454.6 million | $463.4 million | $1.373 billion | $1.251 billion |
- Growth and mix: Q3 revenue rose 12.6% and nine-month revenue rose 11.5%. Global Workplace Solutions (GWS) revenue grew 15.3% in Q3 and 13.0% year to date; Advisory Services revenue increased 8.8% and 9.4%, respectively.
- Margins: Cost of services rose to 79.1% of revenue in Q3 and 78.4% year to date, from 77.9% and 77.6%. Management attributed the pressure mainly to a larger GWS revenue mix, which carries lower margins. Operating and administrative expenses declined as a share of revenue, to 13.7% from 16.3% in Q3 and to 14.8% from 16.1% year to date.
- Segment performance: Q3 adjusted EBITDA was $345.5 million for Advisory Services, $95.2 million for GWS and $13.9 million for Real Estate Investments, versus $295.9 million, $82.8 million and $84.7 million, respectively, in Q3 2018. Real Estate Investments was affected by lower equity earnings from property-sale gains at unconsolidated subsidiaries.
- Cash flow: Operating activities provided $139.3 million in the first nine months, down from $502.3 million. Investing used $236.3 million, versus $454.1 million; financing used $52.0 million, versus $213.5 million. Management said weaker operating cash flow primarily reflected a greater increase in receivables and contract assets.
- Liquidity: September 30 cash and cash equivalents were $577.5 million, with restricted cash of $124.8 million. Current assets were $7.059 billion and current liabilities $6.028 billion. CBRE reported $2.7 billion available under its $2.8 billion revolving credit facility.
- Debt and covenants: Long-term debt, net of current maturities, was $1.748 billion; revolving-credit borrowings were $52.0 million. Warehouse-line borrowings were $1.349 billion and principally fund mortgage loans committed for purchase or securitization. The company reported a 22.21x interest-coverage ratio and 0.65x net leverage ratio against covenant minimum coverage of 2.00x and maximum leverage of 4.25x.
Material changes and unusual items
- Q3 net income declined despite revenue growth, in part because Q3 2018 included a $92.6 million one-time gain from remeasuring a New England investment when CBRE acquired the remaining controlling interest. The prior-year quarter also included $12.8 million of reorganization costs and $8.9 million for a litigation settlement, neither recurring in Q3 2019.
- For the nine months, CBRE recorded an $89.0 million non-cash intangible-asset impairment in Real Estate Investments. It followed lower anticipated cash flows and reduced assets under management in public securities, amid industry movement toward passive investment strategies.
- Q3 and nine-month effective tax rates fell to 19.7% and 20.7%, respectively, from 24.6% and 23.9%. The principal cited factor was a $22.1 million tax benefit related to tax-over-book basis in a foreign subsidiary, expected to reverse in the foreseeable future.
- Foreign-currency translation reduced revenue by $98.1 million in Q3 and $398.8 million year to date. Approximately 41% of year-to-date business was transacted in non-U.S.-dollar currencies.
- CBRE adopted the new lease accounting standard in Q1 2019. Adoption added approximately $1.2 billion of lease liabilities and $1.0 billion of right-of-use assets at January 1, 2019, without a material impact on the income statement. At September 30, total lease liabilities were $1.283 billion.
- CBRE repurchased $94.1 million of common stock during the first nine months. The board authorized a $400 million repurchase program; $300 million remained as of November 6, 2019.
Outlook, commentary and risks
- No specific revenue, earnings or EPS guidance is provided in the filing. Management expected operating cash flow and the revolving credit facility to meet anticipated cash requirements for the foreseeable future and at least the next 12 months. Expected 2019 capital expenditures were up to approximately $215 million, net of tenant concessions; $142.2 million had been incurred through September.
- Management described U.S. sales activity as modestly improved and leasing as solid in 2019. It cited stable European leasing but softer sales, UK market uncertainty related to Brexit, and weaker Asia-Pacific leasing amid geopolitical uncertainty and slower regional economies.
- On October 1, 2019, after quarter-end, CBRE completed its acquisition of Telford Homes for approximately $329 million, funded with cash and revolving borrowings. It also assumed $110.9 million of debt, which it repaid shortly after closing. In October, it repurchased a further $51.0 million of stock.
- Key risks highlighted include economic or real estate market weakness, interest-rate and credit-market shifts, client spending or outsourcing reductions, Brexit-related uncertainty, currency fluctuations, competition and technology disruption, acquisition integration, litigation, cybersecurity, regulatory and tax changes, and exposure to guarantees and mortgage-related obligations. CBRE said it did not expect material losses under development guarantees, but noted litigation outcomes are inherently uncertain.
- Under Fannie Mae’s DUS program, CBRE MCI shared potential loan losses on loans with $27.2 billion of unpaid principal balance; the recorded loan-loss guarantee liability was approximately $43.7 million. Litigation losses beyond accrued amounts were considered unlikely to be significant, though a materially adverse outcome remains possible.
Most important facts for investors to verify
- Whether revenue growth converts into stronger operating cash flow, given the year-to-date decline and increased receivables and contract assets.
- Whether margin trends stabilize as GWS expands, and how much adjusted EBITDA growth depends on non-GAAP adjustments.
- The persistence and potential reversal of the $22.1 million tax benefit, and the performance of Real Estate Investments after the impairment and weaker property-sale-related equity income.
- The funding, integration and returns of Telford Homes, and the effect of ongoing buybacks on liquidity and share count.
- Changes in currency exposure, Brexit and Asia-Pacific conditions, warehouse funding access, and potential losses from DUS loan sharing, guarantees or litigation.