CBRE GROUP, INC. annual report, FY2013

CBRE Group, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013; filed March 3, 2014. The filing also provides unaudited quarterly results. CBRE is a global commercial real estate services and investment firm, with approximately 44,000 employees and 350 offices. Contractual, fee-for-service activities represented about 41% of 2013 revenue.

Financial performance

Metric	2013	2012
Revenue	$7.185 billion	$6.514 billion
Operating income / margin	$616.1 million / 8.6%	$585.1 million / 9.0%
Net income attributable to CBRE	$316.5 million	$315.6 million
Diluted EPS	$0.95	$0.97
Operating cash flow	$745.1 million	$291.1 million
EBITDA (non-GAAP)	$982.9 million	$861.6 million

• Revenue rose 10.3%, driven mainly by worldwide property sales, management services and leasing. Foreign currency translation reduced revenue by $73.4 million.
• Operating income increased 5.3%, but operating margin declined as cost of services rose faster than revenue. Cost of services was 58.3% of revenue versus 57.5% in 2012.
• Interest expense fell 22.8% to $135.1 million following refinancing. Results included a $56.3 million write-off of financing costs and a $98.1 million non-cash intangible impairment in Global Investment Management.
• Cash and equivalents were $491.9 million at year-end, down from $1.089 billion. Current assets were $2.880 billion and current liabilities $2.606 billion; the filing cautions that certain cash is restricted or unavailable for general corporate use.
• Year-end total debt, including warehouse and revolving borrowings but excluding real estate notes, was $2.358 billion; long-term debt including current maturities was $1.841 billion. Separately, real estate notes payable were $130.5 million. Credit-agreement leverage was 1.43x and interest coverage 8.97x, versus limits of 4.25x and 2.00x.

Comparative trends and business developments

• 2013 revenue grew 10.3%, matching the reported growth rate in 2012. Net income attributable to CBRE was nearly flat year over year, while diluted EPS decreased from $0.97 to $0.95.
• Quarterly results show the seasonality and uneven earnings pattern: fourth-quarter 2013 revenue was $2.234 billion versus $2.006 billion in fourth-quarter 2012, while operating income was $169.2 million versus $232.7 million and attributable net income was $114.6 million versus $173.0 million.
• Americas revenue increased 9.8%; EMEA increased 18.0%; Asia Pacific increased 6.8%; Global Investment Management increased 11.3%; Development Services revenue declined 32.5%. Americas remained the largest segment.
• Global Investment Management assets under management were $89.1 billion, down 3.2% from year-end 2012, primarily due to asset sales. Carried-interest revenue supported segment revenue, while open-end fund declines—primarily in Europe—led to the $98.1 million impairment.
• CBRE acquired Norland Managed Services for approximately $475 million in December 2013, funded with cash and revolver borrowings. Norland contributed no operating results in 2013, apart from $9.2 million of transaction and integration costs. CBRE also completed ten in-fill acquisitions.
• 2013 operating cash flow increased substantially, partly reflecting lower real estate held for sale and under development, higher bonus accruals, improved performance and collections. Investing cash use was $465.0 million, including acquisition spending; financing cash use was $866.3 million, largely reflecting debt refinancing and repayment.

Outlook, risks and unusual items

• Management said operating cash flow and the revolving facility should meet anticipated cash requirements for at least the next 12 months. Expected 2014 net capital expenditures were up to approximately $185 million. No numerical revenue or earnings guidance is provided in the supplied filing text.
• CBRE refinanced debt in 2013, issued $800 million of 5.00% senior notes due 2023, redeemed $450 million of 11.625% subordinated notes and amended its credit agreement. Management estimated these actions lowered annualized interest expense by approximately $50 million and extended maturities.
• Key risks include sensitivity to economic conditions and commercial property transaction volumes; credit and capital-market disruption; European weakness; currency fluctuations (about 39% of revenue was transacted in foreign currencies); reliance on key producers; acquisition integration; and possible further impairment of goodwill or intangible assets.
• Other exposures include variable-rate debt, refinancing and covenant constraints, GSE mortgage-lending activity, development completion and budget guarantees, client/counterparty defaults, litigation, tax audits, cybersecurity, and environmental liabilities. The UK defined-benefit pension plans were underfunded by $68.0 million; expected 2014 contributions were $6.2 million.
• Pending or threatened ordinary-course lawsuits were described as unlikely to result in losses beyond accrued amounts, although management noted litigation outcomes are inherently uncertain. The company reported no material environmental claim or known material noncompliance.
• CBRE paid no common-stock dividends and said it did not anticipate paying dividends in the foreseeable future, citing its intention to retain earnings for debt reduction and growth.

Important facts for investors to verify

• Reconcile the $316.5 million attributable net income and $0.95 diluted EPS with the $98.1 million impairment, $56.3 million financing-cost write-off, and $27.0 million discontinued-operations income, much of which accrued to non-controlling interests.
• Review the quality and durability of the $745.1 million operating cash flow, including working-capital movements and the seasonal concentration of earnings and cash flow in the second half.
• Assess debt maturities, warehouse-line renewals and usage, refinancing savings, covenant headroom, and the distinction between corporate debt and real-estate or warehouse borrowings.
• Track Norland integration, contingent consideration of up to £50 million, and whether the acquisition delivers expected operating benefits and synergies.
• Monitor the Global Investment Management AUM decline, European fund liquidations, future impairment exposure, and the recovery of transaction activity across regions.

Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting. The assessment excluded Norland’s controls, covering $680.2 million of acquired assets; management concluded CBRE’s controls were effective.