CBRE Group, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless noted. CBRE provides commercial real estate services, investment management and development services. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $2.391 billion | $2.127 billion | $4.443 billion | $3.988 billion |
| Operating income / margin | $228.8 million / 9.6% | $206.0 million / 9.7% | $388.9 million / 8.8% | $318.5 million / 8.0% |
| Net income attributable to CBRE | $125.0 million | $105.5 million | $218.0 million | $173.1 million |
| Diluted EPS | $0.37 | $0.32 | $0.65 | $0.52 |
| EBITDA, as adjusted (non-GAAP) | $303.8 million | $262.8 million | $550.5 million | $461.5 million |
- Q2 revenue increased 12.4%; CBRE-attributable net income rose 18.5%. First-half revenue increased 11.4% and attributable net income rose 25.9%.
- For the first half, cost of services rose to 62.5% of revenue from 62.1%; operating, administrative and other expenses declined to 25.7% from 27.4%. The Q2 operating margin was slightly lower year over year, despite higher operating income.
- Q2 growth reflected higher property, facilities and project management fees, sales, leasing, appraisals and Americas mortgage brokerage. Foreign currency translation reduced reported revenue by $149.6 million in Q2 and $243.2 million in the first half.
- Americas revenue increased 16.1% in Q2 and 17.9% in the first half; EMEA rose 14.6% and 4.9%; Asia Pacific rose 8.5% and 7.6%. Global Investment Management revenue declined 25.5% in Q2 and 14.4% in the first half, including lower fees and carried interest. Development Services revenue grew, but first-half EBITDA declined.
- Q2 diluted EPS increased from $0.32 to $0.37. For the first half, the effective tax rate, adjusted for non-controlling interests, was 38.0%, versus 37.1% a year earlier.
Cash flow, balance sheet and debt
- First-half operating cash flow was negative $42.2 million, improving from negative $224.0 million in 2014. Investing cash flow was negative $170.8 million; financing cash flow was negative $180.5 million. Cash decreased $404.5 million to $336.4 million.
- At June 30, total assets were $7.460 billion, total liabilities $4.957 billion and equity $2.504 billion. Current assets were $3.343 billion against current liabilities of $2.595 billion. Restricted cash was $66.0 million.
- Long-term debt was $1.711 billion; short-term borrowings were $744.5 million, primarily warehouse financing for mortgage loans, against $750.8 million of warehouse receivables. Real estate notes payable were $24.8 million and described as non-recourse to CBRE. The revolving facility had no borrowings outstanding other than $2.0 million of letters of credit.
- The January 2015 amended credit agreement provides a $2.6 billion revolving facility maturing in 2020 and a $500 million term loan; term-loan principal outstanding was $496.9 million at quarter-end. Covenant leverage was 1.15x against a 4.25x maximum, and interest coverage was 13.74x against a 2.00x minimum.
- First-half capital expenditures, net of tenant concessions, were $44.1 million. Management expected 2015 capital expenditures of up to approximately $180 million and said operating cash flow and the revolver should meet anticipated needs for at least the next 12 months.
Outlook, material events and risks
- CBRE had agreed to acquire Johnson Controls’ Global WorkPlace Solutions business for $1.475 billion in cash, subject to customary approvals and closing conditions. At filing, closing was expected in late Q3 or early Q4 2015, funded with cash and new debt. The filing cautions that integration, financing and timing could affect results.
- After quarter-end, CBRE entered an underwriting agreement for $600 million of 4.875% senior notes due 2026, expected to issue August 13, 2015. It also entered $300 million of interest-rate swaps intended to hedge interest costs ahead of fixed-rate debt issuance.
- Management described improving U.S. commercial real estate conditions, modest improvement in European leasing, stronger European property sales, and mixed Asia-Pacific markets. It noted risks from economic and credit-market conditions, interest rates, foreign exchange, client spending, competition, acquisition integration, leverage and real estate transaction cycles. Results are seasonal, historically weakest in Q1 and strongest in Q4.
- Foreign currencies represented approximately 42% of first-half business. Currency translation affected reported revenue and expenses; the company uses currency and interest-rate derivatives for risk management, not speculation.
- Fannie Mae loss-sharing arrangements covered loans with $11.3 billion of unpaid principal; CBRE’s subsidiary had a $32.0 million letter of credit and approximately $19.9 million of loan-loss accruals. The company also disclosed $41.4 million of letters of credit, $19.9 million of specified guarantees, and future investment commitments of $20.7 million for co-investments and $20.6 million to unconsolidated development subsidiaries. Management said material losses under development guarantees were not expected, but litigation outcomes remain uncertain.
- UK pension liability was $91.0 million; expected 2015 pension contributions were $6.3 million, of which $3.4 million had been contributed by June 30. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether and when the GWS acquisition closed, its final purchase price and financing, and subsequent integration costs and results.
- How much of short-term borrowing represents warehouse funding and the related receivables, and the availability and renewal terms of warehouse lines.
- Whether operating cash flow remains seasonally negative and how cash, debt and covenant headroom evolve after the acquisition and note issuance.
- Whether Global Investment Management fee and carried-interest performance improves, and whether segment trends persist across regions.
- Potential exposure from Fannie Mae loan loss sharing, guarantees, co-investment commitments, pension funding and pending litigation.
- Foreign-exchange effects and hedge results, including the impact of currency movements on reported growth and earnings.