CBRE Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. CBRE provides commercial real estate services and investment management across the Americas, EMEA, Asia Pacific, Global Investment Management and Development Services. Comparative 2017 figures were adjusted following retrospective adoption of new revenue recognition guidance.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $5.11bn | $4.44bn | $9.79bn | $8.49bn |
| Operating income | $225.3m | $228.3m | $438.9m | $433.5m |
| Net income attributable to CBRE | $228.7m | $201.8m | $379.0m | $338.8m |
| Diluted EPS | $0.67 | $0.59 | $1.10 | $1.00 |
| Adjusted EBITDA | $439.3m | $418.7m | $787.1m | $731.9m |
| Operating cash flow | Not presented quarterly | $(92.1)m | $(117.4)m |
- Q2 revenue rose 15.1% and six-month revenue rose 15.3%. Growth reflected organic gains in occupier outsourcing, leasing and mortgage origination, plus favorable currency translation of $110.4m in Q2 and $281.2m in the first half. Revenue includes substantial client-reimbursed pass-through costs.
- Q2 operating margin declined to 4.4% from 5.1%; six-month margin was 4.5% versus 5.1%. Management cited a greater mix of lower-margin outsourcing revenue and higher operating expenses. Net income attributable to CBRE nevertheless increased 13.3% in Q2 and 11.9% in the first half.
- Six-month investing cash use was $376.6m, mainly reflecting acquisitions, versus $94.1m in 2017. Financing provided $266.0m, compared with $29.7m used in the prior-year period.
- At June 30, cash and cash equivalents were $531.5m; restricted cash was $71.9m. Current assets were $6.11bn and current liabilities $5.38bn. Short-term borrowings totaled $2.07bn, including $1.47bn of warehouse lines and $598m drawn on the revolver. Long-term debt, net, was $1.76bn.
- CBRE reported $2.2bn available under its $2.8bn revolving credit facility. Covenant leverage was 1.05x and interest coverage 16.97x, against maximum leverage of 4.25x and minimum coverage of 2.00x.
Material changes and notable items
- On June 12, CBRE acquired FacilitySource for an estimated initial purchase price of $265.5m, funded with cash and revolving-credit borrowings. The acquisition added approximately $195.7m of preliminary goodwill. FacilitySource contributed $12.6m of revenue and a $0.2m operating and net loss during the period.
- CBRE redeemed $800m of 5.00% senior notes in March, using term-loan and revolver borrowings. The redemption generated $28.0m of charges, including a $20.0m premium and $8.0m write-off of financing costs. Six-month interest expense decreased to $55.7m from $69.4m.
- Revenue recognition adoption accelerated certain commission revenue and related expenses and changed presentation of some client reimbursements to gross. The adoption increased opening accumulated earnings by $94.6m; adjusted 2017 comparisons should be used.
- Segment results were mixed: Americas and Asia Pacific Adjusted EBITDA increased for the first half; EMEA Adjusted EBITDA declined to $103.5m from $105.7m; Global Investment Management declined to $45.6m from $49.8m. Development Services Adjusted EBITDA increased to $77.1m from $49.6m, supported by equity earnings from property-sale gains.
- Foreign currency translation loss reduced Q2 comprehensive income; the six-month translation loss was $99.9m. Approximately 43% of first-half business was transacted in non-U.S. dollar currencies.
Outlook, risks and contingencies
- Management said internally generated cash and the revolver should meet anticipated cash requirements for at least the next 12 months, absent extraordinary events or a large strategic acquisition. Expected 2018 capital expenditures were up to approximately $190m, net of tenant concessions; $91.4m had been incurred on that basis by June 30. No specific earnings guidance was provided.
- Management described U.S. commercial real estate sales activity as edging up in the first half of 2018, with active mortgage markets; European activity dipped slightly, and uncertainty around the UK’s relationship with the EU remained. Adverse economic conditions, interest rates, credit availability, real estate demand and foreign exchange movements could affect results.
- On August 3, 2018, after quarter-end, CBRE reached a tentative $100m settlement in a Florida property-management class action, subject to definitive documentation and court approval. The company expects insurance to fund the payment principally.
- CBRE disclosed ordinary-course litigation, guarantees and development commitments. Under the Fannie Mae DUS program, loans subject to loss sharing had $21.3bn of unpaid principal; CBRE had recorded a $33.9m guarantee liability and maintained a $60m letter of credit.
- The company was still evaluating the Tax Act’s transition-tax effects. It planned to adopt lease accounting guidance in Q1 2019 and anticipated a balance-sheet gross-up, while stating preliminary findings indicated embedded leases in service contracts were not material.
Investor verification priorities
- Reconcile reported revenue growth with the gross presentation of client reimbursements under the new revenue standard; review fee revenue and organic growth alongside reported totals.
- Assess whether operating-margin pressure and negative operating cash flow persist, including working-capital and bonus-payment effects.
- Monitor FacilitySource integration, purchase-price allocation, goodwill, and whether expected strategic benefits translate into earnings and cash flow.
- Confirm the Florida settlement’s final terms, court approval and actual insurance recovery.
- Review borrowing levels and revolver capacity, warehouse-line renewals, covenant headroom and exposure to interest-rate and currency changes.