CBRE Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. CBRE provides commercial real estate services, investment management and development services globally. Results reflect the September 2015 acquisition of Johnson Controls’ Global Workplace Solutions (GWS) business, which materially affects year-over-year comparisons.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $3.208 billion | $2.391 billion | $6.054 billion | $4.443 billion |
| Operating income | $182.6 million | $228.8 million | $290.2 million | $388.9 million |
| Net income attributable to CBRE | $121.7 million | $125.0 million | $203.8 million | $218.0 million |
| Diluted EPS | $0.36 | $0.37 | $0.60 | $0.65 |
| EBITDA (non-GAAP) | $309.9 million | $296.9 million | $562.5 million | $543.1 million |
| Adjusted EBITDA (non-GAAP) | $360.5 million | $303.8 million | $643.1 million | $550.5 million |
- Revenue increased 34.2% in Q2 and 36.3% in the first half, largely from GWS, which contributed $690.3 million and $1.3 billion, respectively. Excluding GWS, property/facilities/project management fees grew 11.9% in Q2 and 11.4% in the first half.
- Despite higher revenue, operating income and attributable net income declined. Operating margin fell to 5.7% from 9.6% in Q2 and to 4.8% from 8.8% in the first half. Attributable net margin was 3.8% versus 5.2% in Q2 and 3.4% versus 4.9% for the first half.
- Reported cost of services rose to 70.3% of revenue in Q2 and 70.5% for the first half, partly reflecting GWS’s lower-margin facilities-management mix. Excluding GWS, the ratios were 64.5% for both periods, compared with 62.2% and 62.5% a year earlier. Cost-elimination project charges also weighed on margins.
- Adjusted EBITDA increased 18.7% in Q2 and 16.8% in the first half; reported EBITDA margins were 9.7% and 9.3%, versus 12.4% and 12.2%. Adjusted EBITDA adds back acquisition/integration and cost-elimination expenses and is not a GAAP measure.
- Equity income from unconsolidated subsidiaries rose to $34.9 million in Q2 and $92.2 million in the first half, primarily due to property-sale gains in Development Services. Development Services first-half EBITDA was $50.4 million versus $6.3 million.
Cash flow, liquidity and debt
- First-half operating cash flow was a use of $210.0 million, versus a use of $42.2 million in 2015, attributed mainly to higher vendor and income-tax payments, receivables movements and stronger prior-year operating performance. Investing cash use was $39.5 million, improved from $170.8 million; financing provided $141.5 million, versus a $180.5 million use in 2015.
- Cash and cash equivalents were $431.8 million at June 30, down from $540.4 million at year-end. Current assets were $4.246 billion and current liabilities $3.743 billion; these include substantial mortgage warehouse receivables and related short-term borrowings.
- Long-term debt was $2.696 billion before current maturities and issuance costs; short-term borrowings were $995.3 million, including $839.3 million of warehouse lines and $156.0 million drawn on the revolver. Warehouse borrowing is substantially matched by mortgage loans held for sale. CBRE reported $2.6 billion available on its $2.8 billion revolving facility.
- In March 2016, the revolver was extended to March 2021 and capacity increased by $200 million. Covenant ratios were 12.15x interest coverage and 1.61x net leverage, against minimum and maximum thresholds of 2.00x and 4.25x.
Changes, outlook and risks
- Organic leasing and mortgage brokerage activity improved in Q2; property sales activity was down 4.7% in the quarter, although first-half sales rose 1.3%. Management reported that property-sales volumes slowed in the first half after several years of strong growth.
- Foreign currency translation reduced revenue by $28.1 million in Q2 and $96.4 million in the first half. Brexit-related uncertainty constrained London activity; management cited potential further effects on European business and currency volatility. Approximately 47% of first-half business was transacted in non-U.S. dollar currencies.
- Management described the cost-elimination initiative as intended to improve margins, but reported $27.2 million of related Q2 costs and $39.6 million in the first half. GWS integration and acquired intangible amortization also increased costs.
- No numerical earnings guidance is provided in the supplied filing text. Management expected up to approximately $195 million of 2016 capital expenditures, net of tenant concessions, and said operating cash flow and the revolver should meet anticipated cash needs for at least the next 12 months, absent extraordinary events or a large acquisition. First-half net capital expenditures were $76.7 million.
- CBRE noted that results are seasonal, typically weakest in Q1 and strongest in Q4. Development projects in process totaled $7.1 billion; the pipeline was $3.0 billion. Global Investment Management assets under management were $88.6 billion at June 30, down from $89.0 billion at year-end.
- Risks include economic and real estate market weakness, interest-rate and credit-market changes, foreign exchange, Brexit, acquisition integration, client outsourcing/spending decisions, leverage and refinancing, and litigation. The company said ordinary-course litigation losses beyond accrued amounts were unlikely to be significant, while acknowledging outcomes could be materially adverse. Under Fannie Mae’s DUS program, CBRE MCI shared potential losses on loans with $13.5 billion unpaid principal; it had $23.4 million in loan-loss accruals and a $42.0 million letter of credit. CBRE also disclosed $55.0 million of guarantees and development-project guarantees, which it did not expect to result in material losses.
Investor verification points
- Separate GWS’s revenue contribution and lower-margin service mix from underlying organic growth; assess whether reported margin pressure persists after integration and cost-elimination charges.
- Review the causes and seasonal pattern of negative operating cash flow, working-capital movements, and expected cash conversion in the second half.
- Confirm debt and liquidity calculations distinguish warehouse financing backed by mortgage receivables from corporate borrowings; monitor revolver usage and covenant headroom.
- Track Brexit-related activity and currency effects, particularly sterling exposure, alongside the results of CBRE’s hedging program.
- Assess the sustainability of Development Services property-sale gains, associated equity income and bonuses, and the conversion of development pipeline into projects in process.
- Review the final GWS purchase-price allocation, acquisition-related obligations, Fannie Mae loss-sharing exposure, guarantees and any material litigation developments.