CBRE Group, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Financial statements are unaudited; dollar figures below are in millions unless stated otherwise. CBRE provides commercial real estate services and investment and development management across the Americas, EMEA, Asia Pacific, Global Investment Management and Development Services.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $1,742.0 | $1,601.1 | $3,217.1 | $2,951.1 |
| Operating income | $187.6 | $172.7 | $288.8 | $248.8 |
| Net income attributable to CBRE | $69.9 | $75.9 | $107.4 | $102.8 |
| Diluted earnings per share | $0.21 | $0.23 | $0.32 | $0.32 |
| EBITDA, as adjusted (non-GAAP) | $243.1 | $220.9 | $404.4 | $371.4 |
- Revenue rose 8.8% in Q2 and 9.0% in the first half. Operating margin was 10.8% in Q2 in both years; first-half operating margin increased to 9.0% from 8.4%. Adjusted EBITDA margin was 14.0% versus 13.8% in Q2 and 12.6% in both first-half periods.
- Q2 net income attributable to CBRE declined despite revenue growth, primarily reflecting financing-cost write-offs. First-half net income attributable to CBRE increased modestly. Q2 and first-half results also included discontinued-operation income of $3.1 million and $24.3 million, respectively; most of the first-half discontinued-operation income was attributable to non-controlling interests.
- Operating cash flow was $84.7 million for the first half, compared with cash used of $201.7 million in 2012. Investing activities provided $65.0 million, while financing activities used $740.0 million. Cash declined $603.8 million to $485.5 million from year-end 2012.
- At June 30, total assets were $6.35 billion and total liabilities were $4.64 billion. Short-term borrowings were $680.8 million and long-term debt was $1.82 billion; real-estate notes payable totaled $148.8 million. Management separately reported approximately $2.0 billion of total debt excluding warehouse lines and real-estate notes.
- CBRE reported a $1.2 billion revolving credit facility, with $140.3 million drawn, and $705.1 million of term-loan principal outstanding. Covenant ratios were 6.99x interest coverage and 1.65x net leverage, versus minimum coverage of 2.00x and maximum leverage of 4.25x.
Changes versus the prior comparable period
- Growth was led by worldwide property sales, property/facilities/project management and leasing; mortgage brokerage and appraisal activity also increased. Foreign-exchange translation reduced revenue by $13.7 million in Q2 and $23.8 million in the first half.
- Q2 Americas revenue increased 9.8%, EMEA 8.9% and Asia Pacific 15.8%; Global Investment Management revenue declined 3.8% and Development Services revenue declined 44.3%. First-half revenue increased across the Americas, EMEA and Asia Pacific, while Global Investment Management and Development Services decreased.
- Cost of services as a share of revenue rose to 58.5% from 56.7% in Q2 and to 58.4% from 57.5% for the first half. Management cited higher compensation and commissions, and weaker transaction revenue in some largely fixed-cost markets. Operating, administrative and other expense ratios improved, partly reflecting lower acquisition integration costs.
- First-half operating cash flow improved from the prior-year outflow, with the filing citing lower real estate held for sale and under development, higher bonus accruals and improved operating performance. Investing cash flow also improved, notably due to real-estate sale proceeds.
Outlook, risks and unusual items
- Management expects a 2013 effective tax rate of approximately 35% and up to approximately $160 million of net capital expenditures for the year; $30.1 million had been incurred in the first half. It stated that operating cash flow and the revolving facility should meet anticipated cash needs for at least the next 12 months. The filing provides no clear quantified revenue or earnings forecast.
- CBRE issued $800 million of 5.00% senior notes due 2023 and redeemed $450 million of 11.625% senior subordinated notes in June. Management estimated the refinancing actions would lower annual interest expense by approximately $50 million compared with the pre-refinancing annualized level. Q2 included $42.7 million of financing-cost write-offs; first-half write-offs totaled $56.3 million, including a $26.2 million early-redemption premium and previously deferred costs and discount.
- Management described commercial real estate markets as gradually improving but uneven: U.S. activity remained below 2006–07 levels, Europe remained weak, and Asia Pacific activity was moderate. Risks include economic and credit-market deterioration, interest rates, foreign exchange, seasonality, client demand, acquisitions and integration, and investment performance. The business is historically more profitable later in the year.
- Contingencies include litigation, development completion and budget guarantees, and Fannie Mae loan-loss sharing. CBRE MCI’s loans subject to loss sharing had $6.9 billion of unpaid principal; the filing describes recourse as limited to CBRE MCI assets. CBRE also had $27.8 million of future Global Investment Management co-investment commitments and $15.8 million committed to Development Services unconsolidated subsidiaries.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed legal proceedings or risk factors were reported.
Most important facts for investors to verify
- Whether revenue growth converts to stronger attributable earnings, given Q2’s lower net income and the higher cost-of-services ratio.
- Whether the refinancing delivers the expected interest savings and how future financing expenses compare with the exceptional 2013 write-offs.
- Cash-flow sustainability after the first-half improvement, including the effects of seasonal working capital, real-estate dispositions and bonus payments.
- Compliance with debt covenants and the availability of revolving and warehouse facilities as markets and borrowing terms change.
- Exposure and potential cash calls from Fannie Mae loss sharing, development guarantees, pension funding and investment commitments.