Los Angeles, CA – October 29, 2020 — CBRE Group, Inc. (NYSE:CBRE) today reported financial results for the third quarter ended September 30, 2020.
“Our third quarter performance highlights the progress CBRE has made in building a more resilient business since the last downturn occurred more than a decade ago,” said Bob Sulentic, president & chief executive officer of CBRE. “The resilient aspects of our business, coupled with our moves to quickly align expenses with reduced market demand, are helping us weather the sharp, Covid-driven fall in property leasing and sales.”
Commenting on the macro environment, Mr. Sulentic said: “At the present time, Covid is putting downward pressure on parts of our business and creating larger opportunities in other parts. We are continuing to take advantage of the strong secular growth trends that were driven by the last cycle, including occupier outsourcing, industrial and logistics space, institutional-quality multifamily assets and workplace experience services. We expect new secular opportunities to be created in the wake of Covid and are positioning our strategy and leadership focus and allocating our capital to make the most of them as this new cycle unfolds.”
Consolidated Financial Results Overview
The following table presents highlights of CBRE performance (dollars in millions, except per share data. Totals may not add due to rounding.):
Fee revenue (2)
GAAP net income
Adjusted EBITDA (3)
Adjusted net income (4)
Adjusted EPS (4)
Cash Flow Results
Cash flow from
Less: Capital expenditures
Free cash flow (5)
Results for the quarter were negatively impacted by the Covid-19 pandemic, with pronounced challenges continuing within the company’s sales and leasing businesses. Additionally, GAAP net income and EPS reflect about $55.4 million of costs related to transformation initiatives, which are expected to yield long-term benefits to the company’s cost structure. This reduced GAAP EPS by about $0.13. Despite the adverse Covid-19 impact, however, internal efforts to improve cash management resulted in markedly increased free cash flow.
Advisory Services Segment
The following table presents highlights of the Advisory Services segment performance (dollars in millions):
Adjusted EBITDA on revenue margin (6)
Adjusted EBITDA on fee revenue margin (6)
The severe economic effects of the Covid-19 pandemic continued to weigh heavily on the Advisory Services segment. In particular, continued weakness in higher-margin property lease and sales revenue drove a sharp decline in adjusted EBITDA for the quarter.
Large occupiers continued to put leasing decisions on hold, resulting in a 31% (same local currency) decline in advisory leasing revenue. Third quarter activity was weak across most of the world, with U.S. leasing revenue down 36%. Globally, industrial leasing revenue, fueled by e-commerce, rose 10%. Strong industrial leasing limited the U.K.’s overall leasing revenue decline to 6% (10% local currency) in the quarter.
Capital flows into commercial real estate also remained severely disrupted, resulting in significantly lower market activity worldwide. Advisory property sales revenue declined 34% (35% local currency), including a 39% decrease in the U.S. Despite the revenue decline, CBRE’s strong market position, people and platform enabled the company to improve its share of U.S. investment activity by 280 basis points as compared with the third quarter of 2019, according to Real Capital Analytics.Continental Europe was the best-performing region with sales revenue down 7% (11% local currency).
Covid-19’s effects were also evident in lower commercial mortgage origination revenue, which fell 21% (same local currency) from third-quarter 2019. The lending environment improved compared with second-quarter 2020, many capital sources came off the sidelines and lending activity with the Government-Sponsored Enterprises picked up as the quarter progressed. However, all lenders remained conservative in their underwriting standards. Refinancing activity continued to be a prime catalyst of loan originations.
The loan servicing portfolio increased 13% from a year ago to approximately $253 billion. Revenue from loan servicing, which is performed for lenders on a contractual basis, grew 2% (same local currency) in the quarter. The slower revenue growth reflected lower fees associated with the prepayment of loan balances. Excluding prepayment fees, servicing revenue continued to climb at a low double-digit clip.
Revenue from property management and advisory project management services slipped 2% (3% local currency), but edged up 2% (1% local currency) on a fee revenue basis. Valuation revenue declined 10% (11% local currency).
Global Workplace Solutions (GWS)Segment
The following table presents highlights of the GWS segment performance (dollars in millions):
Adjusted EBITDA on revenue margin
Adjusted EBITDA on fee revenue margin
CBRE’s GWS segment performed very well despite the ongoing challenges from Covid-19.
Facilities management, which accounted for 84% of the segment’s fee revenue and is largely contractual, rose 9% (8% local currency). Facilities management growth was notably strong in the U.S. and Continental Europe. Project management fee revenue also increased strongly, up 13% (12% local currency), as construction activity and capital projects resumed after second-quarter shutdowns, especially in Continental Europe and the U.K. The segment’s overall revenue growth was constrained by sharply lower lease and sales activity for GWS occupier clients.
Nevertheless, GWS achieved robust adjusted EBITDA growth in all regions globally. This was driven by greater revenue contributions from higher-margin project management activities and timely cost-control actions. The segment’s overall margin expansion of approximately 480 basis points was partially driven by expense management actions that yielded both temporary and long-term benefits as well as certain costs in last year’s third quarter that did not recur. About one-third of the margin expansion is related to structural changes to the cost base.
New contract activity for the quarter was strong, with growth accelerating from the second quarter, reflecting some improvement in macro conditions. While the pipeline of new business opportunities continued to be strong, the pandemic’s continuing effects are causing some occupiers to extend their decision-making timelines or place some decisions temporarily on hold.
Real Estate Investments (REI) Segment
The following table presents highlights of the REI segment performance (dollars in millions):
Adjusted revenue (7)
Adjusted EBITDA (8)
The sharp increase in this segment’s adjusted EBITDA was driven by an exceptionally large contribution from U.S. development asset sales, compared with muted activity in last year’s third quarter. In addition, investment management achieved solid adjusted EBITDA growth for the period.
U.S. real estate development contributed $46.5 million of adjusted EBITDA in the third quarter, compared with just $2.7 million in the year-earlier third quarter. Several large assets were sold at substantial gains during the quarter. The U.K. multifamily development business (Telford Homes), acquired in October 2019, added $3.2 million of adjusted EBITDA during the quarter.
The in-process development portfolio reached a new record for the company at $14.8 billion, an increase of $1.1 billion from second-quarter 2020. More than 80% of this portfolio consists of multifamily, industrial and health care assets as well as office buildings that are at least 90% leased. The pipeline decreased by $0.2 billion from second-quarter 2020 to $5.9 billion, reflecting the conversion of potential projects to in-process activity. The U.K. development business contributed $1.2 billion to the in-process total and $1.9 billion to the pipeline total at the end of the third quarter. More than half of the in-process development portfolio is attributable to fee-development and built-to-suit projects.
Investment management revenue declined 5% (7% local currency) for the quarter to $100.0 million, largely reflecting an absence of carried interest revenue during the current period. Nevertheless, adjusted EBITDA rose 12% (11% local currency), driven primarily by increased asset management fees, most of which are recurring, and prudent cost-management actions. Assets under management totaled $114.5 billion, a record high for the company and an increase of $4.9 billion ($2.2 billion local currency) from second-quarter 2020. The increase reflected net capital inflows and favorable foreign currency movement.
Investment in the startup of the company’s flexible workspace business, Hana, contributed a loss of $9.6 million, in line with expectations. Hana has 10 units, totaling nearly 500,000 sq. ft., including five that are open and five that are expected to be open by early next year. These units are primarily private workspaces designed to meet the needs of large enterprises.
Adjustments to GAAP Net Income and Earnings Per Share
Adjustments to GAAP net income totaled $60.9 million on a net basis. This included approximately $81.8 million of positive pre-tax adjustments, including $55.4 million of costs associated with transformation initiatives; $18.8 million of non-cash acquisition-related depreciation and amortization; $3.8 million of investment management carried interest incentive compensation expense to align with the timing of associated carried interest revenue; $2.3 million of fair value adjustments to real estate assets acquired in the Telford Homes acquisition that were sold in the third quarter; $1.1 million of costs incurred related to legal entity restructuring; $0.5 million of integration and other costs related to acquisitions; and a $20.9 million net tax adjustment associated with the aforementioned pre-tax adjustments.
GAAP net income decreased 28% (31% local currency) to $184 million and earnings per share decreased 28% (30% local currency) to $0.55, compared with the prior-year period. Adjusted net income and adjusted earnings per share decreased 9% (13% local currency) and 8% (12% local currency), respectively, to $245.1 million and $0.73, compared with the prior-year period. The decrease in GAAP EPS largely reflected costs associated with transformation initiatives, which have been excluded from adjusted EPS, and the negative impacts of the Covid-19 pandemic. The majority of the costs incurred in the third quarter were related to transformation initiatives that were being contemplated prior to the onset of the Covid-19 pandemic and reflect the outcome of an in-depth strategic review. These initiatives are expected to drive material cost structure benefits going forward.
Capital Allocation Overview
Free Cash Flow – During the third quarter of 2020, free cash flow increased 101% to approximately $798 million. This reflected cash flow from operating activities of $855 million, less total capital expenditures of $56 million. Net capital expenditures (of which a considerable portion during the period was discretionary) totaled $51.2 million.(9)
Stock Repurchase Program – The company did not repurchase any of its stock during the third quarter of 2020.It has $350.0 million of stock repurchase capacity under its authorized repurchase program available as of today.
Acquisitions – During the third quarter of 2020, the company acquired a small valuation service provider in South Korea.
Leverage and Financing Overview
Leverage –The company’s net leverage ratio (net debt(10)to trailing twelve-month adjusted EBITDA) was 0.22x as of September 30, 2020, which is 4.03x below the company’s primary debt covenant of 4.25x. The net leverage ratio is computed as follows (dollars in millions. Totals may not add due to rounding.):
September 30, 2020
Less: Cash (11)
Divided by: Trailing twelve month adjusted EBITDA
Net leverage ratio
Liquidity–As of September 30, 2020, the company had approximately $4.2 billion of total liquidity, consisting of approximately $1.4 billion in cash(11)plus the ability to borrow an aggregate of approximately $2.8 billion under its revolving credit facilities, net of any outstanding letters of credit.