CBRE Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. CBRE provides commercial real estate services and investment management globally. Comparative 2017 figures were adjusted following retrospective adoption of new revenue-recognition guidance, which accelerated recognition of some commissions and changed certain reimbursed service revenue from net to gross presentation.
Financial performance and liquidity
- Q3 revenue: $5.261 billion, up 13.4% year over year. Net income attributable to CBRE was $290.5 million versus $199.1 million; diluted EPS was $0.85 versus $0.58.
- First nine months: Revenue was $15.046 billion, up 14.6%; net income attributable to CBRE was $669.4 million versus $537.9 million. Diluted EPS was $1.95 versus $1.58.
- Operating profitability: Operating income fell to $189.7 million from $239.0 million in Q3 and to $628.6 million from $672.5 million year to date. Operating margin was 3.6% versus 5.2% in Q3 and 4.2% versus 5.1% for the nine months. Adjusted EBITDA, a non-GAAP measure, was $463.4 million in Q3 and $1.251 billion year to date, compared with $415.2 million and $1.147 billion, respectively.
- Revenue drivers: Management cited organic growth in occupier outsourcing, leasing, property management and commercial mortgage origination. Nine-month growth also benefited from foreign currency translation; currency translation reduced Q3 revenue by $51.4 million.
- Cash flow: Operating cash flow was $502.3 million for the nine months, up from $385.6 million. Investing cash outflow was $454.1 million, including $313.6 million for acquisitions; financing cash outflow was $213.5 million. Cash and restricted cash totaled $627.9 million at period-end, down $196.9 million since year-end 2017.
- Debt and liquidity: Long-term debt was $1.777 billion before unamortized costs and current maturities; the balance-sheet carrying amount, net of current maturities, was $1.760 billion. The company also had $141 million drawn on its revolving facility and $1.580 billion of warehouse borrowings that fund mortgage loans committed for purchase or securitization. Of the $2.8 billion revolver, $2.7 billion was available. Covenant leverage was 0.79x and interest coverage 18.62x, versus maximum leverage of 4.25x and minimum coverage of 2.00x.
- Balance sheet: Total assets were $12.977 billion and total equity $4.772 billion at September 30, 2018. Cash and cash equivalents alone were $550.5 million.
Material changes and unusual items
- Q3 other income included a one-time $92.6 million gain from remeasuring CBRE’s existing 50% New England investment when it acquired the remaining interest. This materially supported reported net income; adjusted EBITDA excludes the gain.
- Equity income from unconsolidated subsidiaries rose to $126.8 million in Q3 and $263.0 million year to date, primarily reflecting property-sale gains reported in Development Services.
- In March 2018, CBRE redeemed its $800 million 5.00% senior notes, funded with term-loan and revolver borrowings. The redemption generated $28.0 million of charges, including a $20.0 million premium and $8.0 million financing-cost write-off. Interest expense was lower year over year.
- CBRE acquired FacilitySource for an estimated initial purchase price of $265.5 million. Its reported results included Q3 revenue of $54.9 million and an operating loss of $2.2 million; purchase accounting remained preliminary. Goodwill rose to $3.643 billion from $3.255 billion at year-end.
- Q3 included $12.8 million of severance costs for a planned reorganization and $8.9 million related to a litigation settlement. A new organization structure, reporting three global segments, was scheduled to take effect January 1, 2019.
- The company adopted revenue-recognition guidance retrospectively, recording a $94.6 million cumulative increase to opening accumulated earnings and restating comparative presentation. It expected to adopt lease-accounting guidance in Q1 2019 and said the balance-sheet impact would be material.
Outlook, commentary and risks
- No specific earnings or revenue guidance is provided in the filing. Management expected 2018 capital expenditures of up to approximately $180 million, net of tenant concessions; $129.0 million had been incurred on that basis through September.
- Management said operating cash flow and the revolver should meet anticipated cash requirements for at least the next 12 months, absent extraordinary events or a large strategic acquisition. It also noted future acquisitions could require additional financing and that favorable financing may not be available.
- Management described U.S. leasing conditions as strong and property sales activity as modestly improved in 2018. It noted continued leasing demand in Europe, relatively flat European sales volumes, uncertainty surrounding the UK’s planned departure from the EU, and more cautious investment activity in Asia Pacific.
- Results are seasonal: revenue, earnings and operating cash flow have historically been lowest in Q1 and highest in Q4. Key risks include economic and commercial real estate downturns, interest rates and credit availability, currency movements, outsourcing demand, client retention, acquisition integration, litigation, guarantees, cybersecurity and regulatory or tax changes.
- Contingencies include ordinary-course litigation, loan-loss sharing under the Fannie Mae DUS program, letters of credit and development-related guarantees. CBRE said excess litigation losses were unlikely to be significant, while acknowledging outcomes are uncertain; it did not expect material losses under development guarantees.
Important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $92.6 million remeasurement gain and elevated equity income from property sales.
- Underlying fee-revenue and margin trends, accounting for gross pass-through revenue and the retrospective revenue-recognition changes.
- FacilitySource integration, operating performance, preliminary purchase-price allocation and acquisition-related costs.
- Cash conversion and working-capital needs, including warehouse receivables and matching warehouse borrowings, as well as planned capital spending and committed investments.
- Exposure to foreign exchange, UK/EU developments, commercial real estate market conditions, loan guarantees, litigation and the expected material balance-sheet effect of lease accounting.