UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2015
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to
Commission File Number 001 32205
CBRE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 94-3391143 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
400 South Hope Street, 25th Floor Los Angeles, California |
90071 | |
(Address of principal executive offices) | (Zip Code) | |
(213) 613-3333 | Not applicable | |
(Registrants telephone number, including area code) | (Former name, former address and former fiscal year if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
The number of shares of Class A common stock outstanding at October 30, 2015 was 334,166,504.
FORM 10-Q
September 30, 2015
Page | ||||||
Item 1. |
Financial Statements | |||||
Consolidated Balance Sheets at September 30, 2015 (Unaudited) and December 31, 2014 |
1 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
Consolidated Statement of Equity for the nine months ended September 30, 2015 (Unaudited) |
7 | |||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
41 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 69 | ||||
Item 4. |
Controls and Procedures | 71 | ||||
Item 1. |
Legal Proceedings | 71 | ||||
Item 1A. |
Risk Factors | 71 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 72 | ||||
Item 6. |
Exhibits | 72 | ||||
76 |
(Dollars in thousands, except share data)
September 30, 2015 |
December 31, 2014 |
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(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 440,357 | $ | 740,884 | ||||
Restricted cash |
67,190 | 28,090 | ||||||
Receivables, less allowance for doubtful accounts of $42,413 and $41,831 at September 30, 2015 and December 31, 2014, respectively |
2,275,025 | 1,736,229 | ||||||
Warehouse receivables |
585,860 | 506,294 | ||||||
Trading securities |
62,609 | 62,804 | ||||||
Income taxes receivable |
22,930 | 12,709 | ||||||
Prepaid expenses |
163,038 | 142,719 | ||||||
Deferred tax assets, net |
213,398 | 205,866 | ||||||
Real estate and other assets held for sale |
| 3,845 | ||||||
Real estate under development |
2,796 | | ||||||
Available for sale securities |
1,276 | 663 | ||||||
Other current assets |
145,168 | 84,401 | ||||||
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Total Current Assets |
3,979,647 | 3,524,504 | ||||||
Property and equipment, net |
503,666 | 497,926 | ||||||
Goodwill |
2,997,042 | 2,333,821 | ||||||
Other intangible assets, net of accumulated amortization of $551,047 and $463,400 at September 30, 2015 and December 31, 2014, respectively |
1,527,123 | 802,360 | ||||||
Investments in unconsolidated subsidiaries |
231,905 | 218,280 | ||||||
Real estate under development |
20,501 | 4,630 | ||||||
Real estate held for investment |
20,299 | 37,129 | ||||||
Available for sale securities |
55,780 | 59,512 | ||||||
Other assets, net |
219,501 | 143,348 | ||||||
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Total Assets |
$ | 9,555,464 | $ | 7,621,510 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
1
CBRE GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except share data)
September 30, 2015 |
December 31, 2014 |
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(Unaudited) | ||||||||
LIABILITIES AND EQUITY | ||||||||
Current Liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 1,320,325 | $ | 827,530 | ||||
Compensation and employee benefits payable |
641,412 | 623,814 | ||||||
Accrued bonus and profit sharing |
542,530 | 788,858 | ||||||
Short-term borrowings: |
||||||||
Warehouse lines of credit |
578,445 | 501,185 | ||||||
Revolving credit facility |
400,500 | 4,840 | ||||||
Other |
18,543 | 25 | ||||||
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Total short-term borrowings |
997,488 | 506,050 | ||||||
Current maturities of long-term debt |
30,186 | 42,407 | ||||||
Notes payable on real estate |
3,444 | 23,229 | ||||||
Other current liabilities |
68,878 | 63,746 | ||||||
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Total Current Liabilities |
3,604,263 | 2,875,634 | ||||||
Long-Term Debt: |
||||||||
Senior term loans, net of unamortized debt issuance costs of $10,410 and $7,537 at September 30, 2015 and December 31, 2014, respectively |
854,590 | 598,426 | ||||||
5.00% senior notes, net of unamortized debt issuance costs of $11,161 and $12,053 at September 30, 2015 and December 31, 2014, respectively |
788,839 | 787,947 | ||||||
4.875% senior notes, net of unamortized debt issuance costs of $5,105 at September 30, 2015 |
590,380 | | ||||||
5.25% senior notes, net of unamortized debt issuance costs of $4,815 and $4,607 at September 30, 2015 and December 31, 2014, respectively |
421,913 | 422,206 | ||||||
Other long-term debt |
3 | 26 | ||||||
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Total Long-Term Debt |
2,655,725 | 1,808,605 | ||||||
Notes payable on real estate, net of unamortized debt issuance costs of $1,164 and $1,398 at September 30, 2015 and December 31, 2014, respectively |
27,993 | 18,216 | ||||||
Deferred tax liabilities, net |
204,031 | 149,233 | ||||||
Non-current tax liabilities |
50,516 | 46,003 | ||||||
Pension liability |
85,998 | 92,923 | ||||||
Other liabilities |
337,413 | 329,498 | ||||||
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Total Liabilities |
6,965,939 | 5,320,112 | ||||||
Commitments and contingencies |
| | ||||||
Equity: |
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CBRE Group, Inc. Stockholders Equity: |
||||||||
Class A common stock; $0.01 par value; 525,000,000 shares authorized; 334,166,504 and 332,991,031 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively |
3,342 | 3,330 | ||||||
Additional paid-in capital |
1,080,607 | 1,039,425 | ||||||
Accumulated earnings |
1,908,184 | 1,541,095 | ||||||
Accumulated other comprehensive loss |
(446,454 | ) | (324,020 | ) | ||||
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Total CBRE Group, Inc. Stockholders Equity |
2,545,679 | 2,259,830 | ||||||
Non-controlling interests |
43,846 | 41,568 | ||||||
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Total Equity |
2,589,525 | 2,301,398 | ||||||
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Total Liabilities and Equity |
$ | 9,555,464 | $ | 7,621,510 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
2
CBRE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue |
$ | 2,712,559 | $ | 2,275,076 | $ | 7,155,568 | $ | 6,262,724 | ||||||||
Costs and expenses: |
||||||||||||||||
Cost of services |
1,773,660 | 1,428,986 | 4,552,411 | 3,904,919 | ||||||||||||
Operating, administrative and other |
626,905 | 601,026 | 1,768,838 | 1,695,623 | ||||||||||||
Depreciation and amortization |
75,047 | 67,159 | 215,498 | 195,657 | ||||||||||||
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Total costs and expenses |
2,475,612 | 2,097,171 | 6,536,747 | 5,796,199 | ||||||||||||
Gain on disposition of real estate |
3,154 | 7,235 | 10,140 | 37,102 | ||||||||||||
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Operating income |
240,101 | 185,140 | 628,961 | 503,627 | ||||||||||||
Equity income from unconsolidated subsidiaries |
17,242 | 43,300 | 39,386 | 67,564 | ||||||||||||
Other (loss) income |
(4,945 | ) | (113 | ) | (4,927 | ) | 11,052 | |||||||||
Interest income |
1,158 | 1,598 | 4,857 | 4,321 | ||||||||||||
Interest expense |
30,699 | 27,841 | 83,067 | 84,326 | ||||||||||||
Write-off of financing costs |
| 23,087 | 2,685 | 23,087 | ||||||||||||
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Income before provision for income taxes |
222,857 | 178,997 | 582,525 | 479,151 | ||||||||||||
Provision for income taxes |
72,866 | 69,305 | 206,243 | 171,318 | ||||||||||||
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Net income |
149,991 | 109,692 | 376,282 | 307,833 | ||||||||||||
Less: Net income attributable to non-controlling interests |
868 | 2,593 | 9,193 | 27,607 | ||||||||||||
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Net income attributable to CBRE Group, Inc. |
$ | 149,123 | $ | 107,099 | $ | 367,089 | $ | 280,226 | ||||||||
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Basic income per share attributable to CBRE Group, Inc. |
$ | 0.45 | $ | 0.32 | $ | 1.10 | $ | 0.85 | ||||||||
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Weighted average shares outstanding for basic income per share |
332,684,487 | 330,419,006 | 332,223,036 | 330,197,240 | ||||||||||||
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Diluted income per share attributable to CBRE Group, Inc. |
$ | 0.44 | $ | 0.32 | $ | 1.09 | $ | 0.84 | ||||||||
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Weighted average shares outstanding for diluted income per share |
336,561,877 | 334,293,046 | 336,140,923 | 333,855,131 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
3
CBRE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net income |
$ | 149,991 | $ | 109,692 | $ | 376,282 | $ | 307,833 | ||||||||
Other comprehensive loss: |
||||||||||||||||
Foreign currency translation loss |
(69,728 | ) | (109,122 | ) | (117,640 | ) | (72,676 | ) | ||||||||
Fees associated with termination of interest rate swaps, net of tax |
(3,748 | ) | | (3,748 | ) | | ||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax |
1,873 | 1,844 | 5,477 | 5,470 | ||||||||||||
Unrealized (losses) gains on interest rate swaps and interest rate caps, net of tax |
(2,924 | ) | 854 | (5,435 | ) | (3,460 | ) | |||||||||
Unrealized holding (losses) gains on available for sale securities, net of tax |
(1,182 | ) | 186 | (1,111 | ) | (670 | ) | |||||||||
Other, net |
(18 | ) | 76 | | 211 | |||||||||||
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Total other comprehensive loss |
(75,727 | ) | (106,162 | ) | (122,457 | ) | (71,125 | ) | ||||||||
Comprehensive income |
74,264 | 3,530 | 253,825 | 236,708 | ||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
861 | 2,533 | 9,170 | 27,556 | ||||||||||||
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Comprehensive income attributable to CBRE Group, Inc. |
$ | 73,403 | $ | 997 | $ | 244,655 | $ | 209,152 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
4
CBRE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended September 30, |
||||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 376,282 | $ | 307,833 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
215,498 | 195,657 | ||||||
Amortization and write-off of financing costs |
9,703 | 11,172 | ||||||
Write-down of impaired assets |
| 8,615 | ||||||
Gain on sale of loans, servicing rights and other assets |
(105,178 | ) | (60,299 | ) | ||||
Net realized and unrealized losses (gains) from investments |
4,927 | (10,637 | ) | |||||
Gain on disposition of real estate held for investment |
(8,573 | ) | (28,005 | ) | ||||
Equity income from unconsolidated subsidiaries |
(39,386 | ) | (67,564 | ) | ||||
Provision for doubtful accounts |
7,039 | 6,425 | ||||||
Deferred income taxes |
(5,466 | ) | 6,304 | |||||
Compensation expense related to equity awards |
48,119 | 44,130 | ||||||
Incremental tax benefit from stock options exercised |
(2,270 | ) | (803 | ) | ||||
Distribution of earnings from unconsolidated subsidiaries |
22,900 | 18,556 | ||||||
Tenant concessions received |
6,770 | 15,356 | ||||||
Purchase of trading securities |
(64,442 | ) | (50,973 | ) | ||||
Proceeds from sale of trading securities |
57,901 | 47,830 | ||||||
Increase in receivables |
(3,022 | ) | (138,937 | ) | ||||
Increase in prepaid expenses and other assets |
(71,762 | ) | (25,761 | ) | ||||
(Increase) decrease in real estate held for sale and under development |
(11,542 | ) | 16,417 | |||||
Increase (decrease) in accounts payable and accrued expenses |
4,490 | (44,543 | ) | |||||
Decrease in compensation and employee benefits payable and accrued bonus and profit sharing |
(269,396 | ) | (74,914 | ) | ||||
Increase in income taxes receivable/payable |
(4,584 | ) | (99,872 | ) | ||||
(Decrease) increase in other liabilities |
(12,800 | ) | 421 | |||||
Other operating activities, net |
(12,798 | ) | (7,930 | ) | ||||
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Net cash provided by operating activities |
142,410 | 68,478 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
(85,324 | ) | (92,618 | ) | ||||
Acquisition of Global Workplace Solutions (GWS), including net assets acquired, intangibles and goodwill, net of cash acquired |
(1,421,663 | ) | | |||||
Acquisition of businesses (other than GWS), including net assets acquired, intangibles and goodwill, net of cash acquired |
(103,140 | ) | (132,541 | ) | ||||
Contributions to unconsolidated subsidiaries |
(45,792 | ) | (40,103 | ) | ||||
Distributions from unconsolidated subsidiaries |
42,738 | 62,978 | ||||||
Net proceeds from disposition of real estate held for investment |
3,584 | 77,278 | ||||||
Additions to real estate held for investment |
(1,773 | ) | (5,043 | ) | ||||
Proceeds from the sale of servicing rights and other assets |
21,434 | 18,169 | ||||||
(Increase) decrease in restricted cash |
(41,864 | ) | 4,431 | |||||
Purchase of available for sale securities |
(31,919 | ) | (68,984 | ) | ||||
Proceeds from the sale of available for sale securities |
33,063 | 61,357 | ||||||
Other investing activities, net |
(1,290 | ) | 570 | |||||
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Net cash used in investing activities |
(1,631,946 | ) | (114,506 | ) | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
5
CBRE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
(Dollars in thousands)
Nine Months Ended September 30, |
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2015 | 2014 | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from senior term loans |
$ | 900,000 | $ | | ||||
Repayment of senior term loans |
(651,863 | ) | (29,738 | ) | ||||
Proceeds from revolving credit facility |
2,107,500 | 1,688,568 | ||||||
Repayment of revolving credit facility |
(1,711,512 | ) | (1,672,359 | ) | ||||
Proceeds from issuance of 4.875% senior notes, net |
595,440 | | ||||||
Proceeds from issuance of 5.25% senior notes |
| 300,000 | ||||||
Proceeds from notes payable on real estate held for investment |
| 5,022 | ||||||
Repayment of notes payable on real estate held for investment |
(1,173 | ) | (27,241 | ) | ||||
Proceeds from notes payable on real estate held for sale and under development |
12,584 | 4,884 | ||||||
Repayment of notes payable on real estate held for sale and under development |
| (44,959 | ) | |||||
Proceeds from short-term borrowings, net |
15,862 | 4,545 | ||||||
Shares repurchased for payment of taxes on equity awards |
(24,517 | ) | (16,656 | ) | ||||
Proceeds from exercise of stock options |
6,755 | 4,466 | ||||||
Incremental tax benefit from stock options exercised |
2,270 | 803 | ||||||
Non-controlling interests contributions |
4,691 | 1,415 | ||||||
Non-controlling interests distributions |
(13,595 | ) | (31,998 | ) | ||||
Payment of financing costs |
(30,130 | ) | (3,149 | ) | ||||
Other financing activities, net |
(2,142 | ) | (1,446 | ) | ||||
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Net cash provided by financing activities |
1,210,170 | 182,157 | ||||||
Effect of currency exchange rate changes on cash and cash equivalents |
(21,161 | ) | (12,683 | ) | ||||
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NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(300,527 | ) | 123,446 | |||||
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD |
740,884 | 491,912 | ||||||
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CASH AND CASH EQUIVALENTS, AT END OF PERIOD |
$ | 440,357 | $ | 615,358 | ||||
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
$ | 80,822 | $ | 80,636 | ||||
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Income tax payments, net |
$ | 210,634 | $ | 266,210 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
6
CBRE GROUP, INC.
CONSOLIDATED STATEMENT OF EQUITY
(Unaudited)
(Dollars in thousands)
CBRE Group, Inc. Shareholders | ||||||||||||||||||||||||
Class A common stock |
Additional paid-in capital |
Accumulated earnings |
Accumulated other comprehensive loss |
Non-controlling interests |
Total | |||||||||||||||||||
Balance at December 31, 2014 |
$ | 3,330 | $ | 1,039,425 | $ | 1,541,095 | $ | (324,020 | ) | $ | 41,568 | $ | 2,301,398 | |||||||||||
Net income |
| | 367,089 | | 9,193 | 376,282 | ||||||||||||||||||
Stock options exercised (including tax benefit) |
5 | 9,020 | | | | 9,025 | ||||||||||||||||||
Restricted stock awards vesting (including tax benefit) |
9 | 7,778 | | | | 7,787 | ||||||||||||||||||
Compensation expense for equity awards |
| 48,119 | | | | 48,119 | ||||||||||||||||||
Shares repurchased for payment of taxes on equity awards |
(3 | ) | (24,514 | ) | | | | (24,517 | ) | |||||||||||||||
Foreign currency translation loss |
| | | (117,617 | ) | (23 | ) | (117,640 | ) | |||||||||||||||
Fees associated with termination of interest rate swaps, net of tax (see Note 6) |
| | | (3,748 | ) | | (3,748 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax |
| | | 5,477 | | 5,477 | ||||||||||||||||||
Unrealized losses on interest rate swaps, net of tax |
| | | (5,435 | ) | | (5,435 | ) | ||||||||||||||||
Unrealized holding losses on available for sale securities, net of tax |
| | | (1,111 | ) | | (1,111 | ) | ||||||||||||||||
Contributions from non-controlling interests |
| | | | 4,691 | 4,691 | ||||||||||||||||||
Distributions to non-controlling interests |
| | | | (13,595 | ) | (13,595 | ) | ||||||||||||||||
Other |
1 | 779 | | | 2,012 | 2,792 | ||||||||||||||||||
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Balance at September 30, 2015 |
$ | 3,342 | $ | 1,080,607 | $ | 1,908,184 | $ | (446,454 | ) | $ | 43,846 | $ | 2,589,525 | |||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
7
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
The accompanying consolidated financial statements of CBRE Group, Inc., a Delaware corporation (which may be referred to in these financial statements as the Company, we, us and our), have been prepared in accordance with the rules applicable to Quarterly Reports on Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (GAAP) for annual financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenue and expenses. Such estimates include the value of goodwill, intangibles and other long-lived assets, real estate assets, accounts receivable, investments in unconsolidated subsidiaries and assumptions used in the calculation of income taxes, retirement and other post-employment benefits, among others. These estimates and assumptions are based on our best judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including consideration of the current economic environment, and adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Certain reclassifications have been made to the 2014 financial statements to conform with the 2015 presentation.
The results of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2015. The unaudited interim consolidated financial statements and notes to consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2014.
2. | New Accounting Pronouncements |
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03) and in August 2015 issued ASU 2015-15, InterestImputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, and requires the use of the retrospective method. ASU 2015-15 permits classifying debt issuance costs associated with a line of credit arrangement as an asset, regardless of whether there are any outstanding borrowings on the arrangement. ASU 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. ASU 2015-15 is effective upon the adoption of ASU 2015-03.
8
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We elected to early adopt the provisions of ASU 2015-03 during the third quarter of 2015 and balance sheet amounts as of December 31, 2014 have been reclassified to conform to the current period presentation. As of December 31, 2014, $25.6 million of debt issuance costs were reclassified from other assets and netted against the related debt liabilities in the accompanying consolidated balance sheet as follows (dollars in thousands):
5.00% senior notes |
$ | 12,053 | ||
Senior term loans |
7,537 | |||
5.25% senior notes |
4,607 | |||
Notes payable on real estate |
1,398 | |||
|
|
|||
Total reclassified |
$ | 25,595 | ||
|
|
The adoption of ASU 2015-03 had no impact on our consolidated results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). This ASU eliminates the requirement to restate prior period financial statements for measurement period adjustments related to business combinations. The new guidance requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, be recognized in the reporting period in which the adjustment is identified. This ASU is effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. We elected to early adopt the provisions of ASU 2015-16 during the third quarter of 2015. The adoption of ASU 2015-16 had no impact on our consolidated financial position, results of operations or cash flows.
Recent Accounting Pronouncements Pending Adoption
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance under GAAP when it becomes effective on January 1, 2018. This ASU permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of this ASU on our ongoing financial reporting.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU provides consolidation guidance for legal entities such as limited partnerships, limited liability corporations and securitization structures. ASU 2015-02 offers updated consolidation evaluation criteria and may require additional disclosures. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. We do not believe the adoption of ASU 2015-02 will have a material impact on our consolidated financial position, results of operations or disclosure requirements of our consolidated financial statements.
3. | Acquisition of Global Workplace Solutions |
On March 31, 2015, CBRE, Inc., our wholly-owned subsidiary, entered into a Stock and Asset Purchase Agreement with Johnson Controls, Inc. (JCI) to acquire JCIs Global Workplace Solutions (GWS) business. The acquired GWS business is a market-leading provider of Integrated Facilities Management solutions for major occupiers of commercial real estate and has significant operations around the world. This acquisition (which we refer to as the GWS Acquisition) closed on September 1, 2015. The purchase price was $1.475 billion, payable in cash, with
9
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
adjustments for working capital and other items. We completed the GWS Acquisition in order to advance our strategy of delivering globally integrated services to major occupiers in our Americas, EMEA and Asia Pacific segments. GWS has been merged with our occupier outsourcing business line, and the new combined business has adopted the Global Workplace Solutions name.
We financed the transaction with: (i) a new issuance in August 2015 of $600.0 million in aggregate principal amount of 4.875% senior notes due March 1, 2026; (ii) borrowings in September 2015 of $400.0 million in aggregate principal amount of new tranche B-1 and tranche B-2 term loan facilities under our 2015 Credit Agreement; (iii) borrowings under our existing revolving credit facility under our 2015 Credit Agreement; and (iv) cash on hand. See Note 11 for more information on the abovementioned debt instruments.
The following represents a summary of the excess purchase price over the estimated fair value of net assets acquired (dollars in thousands):
Estimated purchase price |
$ | 1,511,010 | ||
Less estimated fair value of net assets acquired (see table below) |
(781,946 | ) | ||
|
|
|||
Excess purchase price over estimated fair value of net assets acquired |
$ | 729,064 | ||
|
|
The preliminary purchase accounting adjustments related to the GWS Acquisition have been recorded in the accompanying consolidated financial statements. The excess purchase price over the estimated fair value of net assets acquired has been recorded to goodwill. The goodwill arising from the GWS Acquisition consists largely of the synergies and economies of scale expected from combining the operations acquired from GWS with ours. Of the $729 million of goodwill recorded in connection with the GWS Acquisition, only approximately $423 million is deductible for tax purposes. The assignment of goodwill to our reporting units has not been completed. Given the complexity of the transaction, the calculation of the fair value of certain assets and liabilities acquired, including intangible assets and income tax items, is still preliminary. The purchase price allocation is expected to be completed as soon as practicable, but no later than one year from the acquisition date. The following table summarizes the aggregate estimated fair values of the assets acquired and the liabilities assumed in the GWS Acquisition (dollars in thousands):
Cash and cash equivalents |
$ | 89,347 | ||
Receivables, net |
601,299 | |||
Prepaid expenses |
7,825 | |||
Deferred tax assets, current |
5,154 | |||
Other current assets |
26,940 | |||
Property and equipment |
21,027 | |||
Other intangible assets |
736,250 | |||
Other assets |
40,677 | |||
|
|
|||
Total assets acquired |
1,528,519 | |||
|
|
|||
Accounts payable and accrued expenses |
567,604 | |||
Compensation and employee benefits payable |
53,901 | |||
Accrued bonus and profit sharing |
28,040 | |||
Income taxes payable |
2,425 | |||
Other current liabilities |
11,963 | |||
Deferred tax liabilities, long-term |
62,418 | |||
Other liabilities |
19,018 | |||
|
|
|||
Total liabilities assumed |
745,369 | |||
|
|
|||
Non-controlling interests acquired |
1,204 | |||
|
|
|||
Estimated fair value of net assets acquired |
$ | 781,946 | ||
|
|
10
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following is a summary of the preliminary estimate of the amortizable intangible assets acquired in connection with the GWS Acquisition (dollars in thousands):
Intangible Asset Class |
Weighted Average Amortization Period |
Amount Assigned At Acquisition Date |
||||||
Trademarks |
20 years | $ | 450,500 | |||||
Customer relationships |
10 years | 212,000 | ||||||
Non-compete agreements |
3 years | 73,750 | ||||||
|
|
|||||||
Total amortizable intangibles acquired |
15 years | $ | 736,250 | |||||
|
|
The consolidated statement of operations for the three and nine months ended September 30, 2015 includes revenue, operating income and net income attributable to CBRE Group, Inc. of $236.6 million, $13.1 million and $8.6 million, respectively, attributable to the GWS Acquisition. This does not include direct transaction and integration costs incurred during the three and nine months ended September 30, 2015 of $16.9 million and $24.9 million, respectively, in connection with the GWS Acquisition.
Pro forma results, assuming the GWS Acquisition had occurred as of January 1, 2014 for purposes of the 2015 and 2014 pro forma disclosures, are presented below. They include certain adjustments for the three and nine months ended September 30, 2015, including $17.1 million and $51.2 million, respectively, of increased amortization expense as a result of intangible assets acquired in the GWS Acquisition, $9.7 million and $30.6 million, respectively, of additional interest expense as a result of debt incurred to finance the GWS Acquisition, the removal of $16.9 million and $24.9 million, respectively, of direct costs incurred by us related to the GWS Acquisition, and the tax impact for the three and nine months ended September 30, 2015 of these pro forma adjustments. They also include certain adjustments for the three and nine months ended September 30, 2014, including $17.1 million and $51.2 million, respectively, of increased amortization expense as a result of intangible assets acquired in the GWS Acquisition, $10.5 million and $31.5 million, respectively, of additional interest expense as a result of debt incurred to finance the GWS Acquisition, and the tax impact for the three and nine months ended September 30, 2014 of these pro forma adjustments. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the GWS Acquisition occurred on January 1, 2014 and may not be indicative of future operating results (dollars in thousands, except share data):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue |
$ | 3,210,559 | $ | 3,135,826 | $ | 9,272,568 | $ | 8,844,974 | ||||||||
Operating income |
$ | 259,260 | $ | 171,562 | $ | 665,985 | $ | 462,896 | ||||||||
Net income attributable to CBRE Group, Inc. |
$ | 157,206 | $ | 91,396 | $ | 374,193 | $ | 233,013 | ||||||||
Basic income per share |
$ | 0.47 | $ | 0.28 | $ | 1.13 | $ | 0.71 | ||||||||
Weighted average shares outstanding for basic income per share |
332,684,487 | 330,419,006 | 332,223,036 | 330,197,240 | ||||||||||||
Diluted income per share |
$ | 0.47 | $ | 0.27 | $ | 1.11 | $ | 0.70 | ||||||||
Weighted average shares outstanding for diluted income per share |
336,561,877 | 334,293,046 | 336,140,923 | 333,855,131 |
11
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. | Variable Interest Entities (VIEs) |
A consolidated subsidiary (the Venture) in our Global Investment Management segment sponsored investments by third-party investors in certain commercial properties through the formation of tenant-in-common limited liability companies and Delaware Statutory Trusts (collectively referred to as the Entities) that were owned by the third-party investors. The Venture also formed and was a member of a limited liability company for each property that served as master tenant (Master Tenant). Each Master Tenant leased the property from the Entities through a master lease agreement. Pursuant to the master lease agreements, the Master Tenant had the power to direct the day-to-day asset management activities that most significantly impacted the economic performance of the Entities. As a result, the Entities were deemed to be VIEs since the third-party investors holding the equity investment at risk in the Entities did not direct the day-to-day activities that most significantly impacted the economic performance of the properties held by the Entities. The Venture made voluntary contributions to each of these properties to support their operations beyond the cash flow generated by the properties themselves and such financial support was significant enough that the Venture was deemed to be the primary beneficiary of each Entity. During the first half of 2014, the remaining two commercial properties were sold.
The Venture did not provide any financial support to the Entities during the nine months ended September 30, 2014. The assets of the Entities were the sole collateral for the mortgage notes payable and other liabilities of the Entities and, as such, the creditors and equity investors of these Entities had no recourse to our assets held outside of these Entities.
Operating results relating to the Entities for the nine months ended September 30, 2014 (none for the three months ended September 30, 2014) included the following (dollars in thousands):
Revenue |
$ | 3,561 | ||
Operating, administrative and other expenses |
$ | 2,588 | ||
Gain on disposition of real estate |
$ | 23,028 | ||
Net income attributable to non-controlling interests |
$ | 21,724 |
We also hold variable interests in certain VIEs in our Global Investment Management and Development Services segments which are not consolidated as it was determined that we are not the primary beneficiary. Our involvement with these entities is in the form of equity co-investments and fee arrangements.
As of September 30, 2015 and December 31, 2014, our maximum exposure to loss related to the VIEs which are not consolidated was as follows (dollars in thousands):
September 30, 2015 | December 31, 2014 | |||||||
Investments in unconsolidated subsidiaries |
$ | 22,189 | $ | 26,353 | ||||
Other assets, current |
3,621 | 3,337 | ||||||
Co-investment commitments |
180 | 200 | ||||||
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|
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Maximum exposure to loss |
$ | 25,990 | $ | 29,890 | ||||
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5. | Fair Value Measurements |
The Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification (ASC) (Topic 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a three-level fair
12
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
| Level 1Quoted prices in active markets for identical assets or liabilities. |
| Level 2Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. |
| Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. |
There were no significant transfers in or out of Level 1 and Level 2 during the three and nine months ended September 30, 2015 and 2014.
There have been no significant changes to the valuation techniques and inputs used to develop the recurring fair value measurements from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014. The following tables present the fair value of assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (dollars in thousands):
As of September 30, 2015 | ||||||||||||||||
Fair Value Measured and Recorded Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Available for sale securities: |
||||||||||||||||
U.S. treasury securities |
$ | 6,236 | $ | | $ | | $ | 6,236 | ||||||||
Debt securities issued by U.S. federal agencies |
| 4,351 | | 4,351 | ||||||||||||
Corporate debt securities |
| 18,682 | | 18,682 | ||||||||||||
Asset-backed securities |
| 2,552 | | 2,552 | ||||||||||||
Collateralized mortgage obligations |
| 1,814 | | 1,814 | ||||||||||||
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|
|
|
|
|
|
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Total debt securities |
6,236 | 27,399 | | 33,635 | ||||||||||||
Equity securities |
23,421 | | | 23,421 | ||||||||||||
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|
|
|
|
|
|
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Total available for sale securities |
29,657 | 27,399 | | 57,056 | ||||||||||||
Trading securities |
62,609 | | | 62,609 | ||||||||||||
Warehouse receivables |
| 585,860 | | 585,860 | ||||||||||||
Loan commitments |
| | 9,445 | 9,445 | ||||||||||||
Foreign currency exchange forward contracts |
| 10,846 | | 10,846 | ||||||||||||
|
|
|
|
|
|
|
|
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Total assets at fair value |
$ | 92,266 | $ | 624,105 | $ | 9,445 | $ | 725,816 | ||||||||
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|
|
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Liabilities |
||||||||||||||||
Interest rate swaps |
$ | | $ | 26,919 | $ | | $ | 26,919 | ||||||||
Securities sold, not yet purchased |
4,640 | | | 4,640 | ||||||||||||
Foreign currency exchange forward contracts |
| 1,260 | | 1,260 | ||||||||||||
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|
|
|
|
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|
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Total liabilities at fair value |
$ | 4,640 | $ | 28,179 | $ | | $ | 32,819 | ||||||||
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|
|
|
|
|
|
|
13
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of December 31, 2014 | ||||||||||||||||
Fair Value Measured and Recorded Using |
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Available for sale securities: |
||||||||||||||||
U.S. treasury securities |
$ | 4,813 | $ | | $ | | $ | 4,813 | ||||||||
Debt securities issued by U.S. federal agencies |
| 6,690 | | 6,690 | ||||||||||||
Corporate debt securities |
| 16,664 | | 16,664 | ||||||||||||
Asset-backed securities |
| 3,755 | | 3,755 | ||||||||||||
Collateralized mortgage obligations |
| 1,959 | | 1,959 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities |
4,813 | 29,068 | | 33,881 | ||||||||||||
Equity securities |
26,294 | | | 26,294 | ||||||||||||
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|
|
|
|
|
|
|
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Total available for sale securities |
31,107 | 29,068 | | 60,175 | ||||||||||||
Trading securities |
62,804 | | | 62,804 | ||||||||||||
Warehouse receivables |
| 506,294 | | 506,294 | ||||||||||||
Loan commitments |
| | 2,372 | 2,372 | ||||||||||||
Foreign currency exchange forward contracts |
| 1,235 | | 1,235 | ||||||||||||
|
|
|
|
|
|
|
|
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Total assets at fair value |
$ | 93,911 | $ | 536,597 | $ | 2,372 | $ | 632,880 | ||||||||
|
|
|
|
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|
|
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Liabilities |
||||||||||||||||
Interest rate swaps |
$ | | $ | 26,895 | $ | | $ | 26,895 | ||||||||
Securities sold, not yet purchased |
1,830 | | | 1,830 | ||||||||||||
Foreign currency exchange forward contracts |
| 1,397 | | 1,397 | ||||||||||||
|
|
|
|
|
|
|
|
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Total liabilities at fair value |
$ | 1,830 | $ | 28,292 | $ | | $ | 30,122 | ||||||||
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|
|
|
|
|
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|
The following table provides additional information about fair value measurements for the Level 3 assets for the nine months ended September 30, 2015 (dollars in thousands):
Balance at January 1, 2015 |
$ | 2,372 | ||
Net gains included in earnings |
20,029 | |||
Settlements |
(12,956 | ) | ||
Transfers into (out of) Level 3 |
| |||
|
|
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Ending balance at September 30, 2015 |
$ | 9,445 | ||
|
|
There were no significant non-recurring fair value measurements recorded during the three and nine months ended September 30, 2015. The following non-recurring fair value measurements were recorded during the three and nine months ended September 30, 2014 (dollars in thousands):
Net Carrying Value as of September 30, 2014 |
Fair Value Measured and Recorded Using |
Total Impairment Charges for the Three and Nine Months Ended September 30, 2014 |
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Level 1 | Level 2 | Level 3 | ||||||||||||||||||
Property and equipment |
$ | | $ | | $ | | $ | | $ | 8,615 | ||||||||||
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14
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Property and Equipment
During the three and nine months ended September 30, 2014, we recorded an asset impairment of $8.6 million in our Americas segment. This non-cash write-off resulted from the decision (due to a change in strategy) to abandon a property database platform that was being developed in the U.S. This impairment charge was included within operating, administrative and other expenses in the accompanying consolidated statements of operations.
FASB ASC Topic 825, Financial Instruments requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Our financial instruments are as follows:
Cash and Cash Equivalents and Restricted Cash: These balances include cash and cash equivalents as well as restricted cash with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.
Receivables, less Allowance for Doubtful Accounts: Due to their short-term nature, fair value approximates carrying value.
Warehouse Receivables: These balances are carried at fair value based on market prices at the balance sheet date.
Trading and Available for Sale Securities: These investments are carried at their fair value.
Foreign Currency Exchange Forward Contracts and Loan Commitments: These assets and liabilities are carried at their fair value as calculated by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative (see Note 6).
Securities Sold, not yet Purchased: These liabilities are carried at their fair value.
Short-Term Borrowings: The majority of this balance represents outstanding amounts under our warehouse lines of credit for CBRE Capital Markets, Inc. (CBRE Capital Markets) and our revolving credit facility. Due to the short-term nature and variable interest rates of these instruments, fair value approximates carrying value.
Senior Term Loans: Based upon information from third-party banks (which falls within Level 2 of the fair value hierarchy), the estimated fair value of our senior term loans was approximately $893.8 million and $645.1 million at September 30, 2015 and December 31, 2014, respectively. Their actual carrying value, net of unamortized debt issuance costs, totaled $883.3 million and $638.1 million at September 30, 2015 and December 31, 2014, respectively (see Note 11).
Interest Rate Swaps: These liabilities are carried at their fair value as calculated by using widely-accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative (see Note 6).
5.00% Senior Notes: Based on dealers quotes (which falls within Level 2 of the fair value hierarchy), the estimated fair value of our 5.00% senior notes was $805.5 million and $818.0 million at September 30, 2015 and December 31, 2014, respectively. Their actual carrying value, net of unamortized debt issuance costs, totaled $788.8 million and $787.9 million at September 30, 2015 and December 31, 2014, respectively.
15
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4.875% Senior Notes: On August 13, 2015, CBRE Services, Inc. (CBRE), our wholly-owned subsidiary, issued $600.0 million in aggregate principal amount of 4.875% senior notes due March 1, 2026 (see Note 11). Based on dealers quotes (which falls within Level 2 of the fair value hierarchy), the estimated fair value of our 4.875% senior notes was $596.4 million at September 30, 2015. Their actual carrying value, net of unamortized debt issuance costs, totaled $590.4 million at September 30, 2015.
5.25% Senior Notes: Based on dealers quotes (which falls within Level 2 of the fair value hierarchy), the estimated fair value of our 5.25% senior notes was $430.5 million and $439.7 million at September 30, 2015 and December 31, 2014, respectively. Their actual carrying value, net of unamortized debt issuance costs, totaled $421.9 million and $422.2 million at September 30, 2015 and December 31, 2014, respectively.
Notes Payable on Real Estate: As of September 30, 2015 and December 31, 2014, the carrying value of our notes payable on real estate, net of unamortized debt issuance costs, was $31.4 million and $41.4 million, respectively (see Note 10). These notes payable were not recourse to CBRE Group, Inc., except for being recourse to the single-purpose entities that held the real estate assets and were the primary obligors on the notes payable. These borrowings have either fixed interest rates or floating interest rates at spreads added to a market index. Although it is possible that certain portions of our notes payable on real estate may have fair values that differ from their carrying values, based on the terms of such loans as compared to current market conditions, or other factors specific to the borrower entity, we do not believe that the fair value of our notes payable is significantly different than their carrying value.
6. | Derivative Financial Instruments |
We are exposed to certain risks arising from both our business operations and economic conditions. We manage economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of our debt funding and by using derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known but uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash payments principally related to our borrowings. We do not net derivatives on our balance sheet. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy.
In July 2015, we entered into three interest rate swap agreements with an aggregate notional amount of $300.0 million, all with effective dates in August 2015, and designated them as cash flow hedges in accordance with FASB ASC Topic 815, Derivatives and Hedging. We structured these swap agreements to attempt to hedge the variability of future interest payments due to changes in interest rates prior to us issuing the 4.875% senior notes (see Note 11). There was no hedge ineffectiveness for the three and nine months ended September 30, 2015. In August 2015, we elected to terminate these agreements and paid a $6.2 million cash settlement, which has been recorded to accumulated other comprehensive loss in the accompanying consolidated balance sheets and is being amortized to interest expense throughout the remaining term of the terminated hedge transaction until August 2025. We reclassified $0.1 million for the three and nine months ended September 30, 2015 from accumulated other comprehensive loss to interest expense. During the next twelve months, we estimate that $0.6 million will be reclassified from accumulated other comprehensive loss to interest expense.
In March 2011, we entered into five interest rate swap agreements, all with effective dates in October 2011, and immediately designated them as cash flow hedges in accordance with FASB ASC Topic 815. The purpose of these interest rate swap agreements is to attempt to hedge potential changes to our cash flows due to the variable
16
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
interest nature of our senior term loan facilities. The total notional amount of these interest rate swap agreements is $400.0 million, with $200.0 million expiring in October 2017 and $200.0 million expiring in September 2019. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. There was no significant hedge ineffectiveness for the three and nine months ended September 30, 2015 and 2014. The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive loss on the balance sheet and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. We reclassified $3.0 million and $8.9 million for the three and nine months ended September 30, 2015, respectively, and $3.0 million and $9.0 million for the three and nine months ended September 30, 2014, respectively, from accumulated other comprehensive loss to interest expense. During the next twelve months, we estimate that $11.0 million will be reclassified from accumulated other comprehensive loss to interest expense. In addition, we recorded net losses of $4.8 million and $8.9 million for the three and nine months ended September 30, 2015, respectively, and a net gain of $1.4 million and a net loss of $5.8 million for the three and nine months ended September 30, 2014, respectively, to other comprehensive income/loss in relation to such interest rate swap agreements. As of both September 30, 2015 and December 31, 2014, the fair values of such interest rate swap agreements were reflected as a $26.9 million liability, and were included in other long-term liabilities in the accompanying consolidated balance sheets.
Additionally, our foreign operations expose us to fluctuations in foreign exchange rates. These fluctuations may impact the value of our cash receipts and payments in terms of our functional (reporting) currency, which is U.S. dollars. We enter into derivative financial instruments to attempt to protect the value or fix the amount of certain obligations in terms of our reporting currency, the U.S. dollar. In March 2014, we began a foreign currency exchange forward hedging program by entering into 38 foreign currency exchange forward contracts, including agreements to buy U.S. dollars and sell Australian dollars, British pound sterling, Canadian dollars, euros and Japanese yen, covering an initial notional amount of $209.7 million. The purpose of these forward contracts is to attempt to mitigate the risk of fluctuations in foreign currency exchange rates that would adversely impact some of our foreign currency denominated EBITDA. Hedge accounting was not elected for any of these contracts. As such, changes in the fair values of these contracts are recorded directly in earnings. Included in the consolidated statement of operations were net gains of $9.3 million and $16.6 million from foreign currency exchange forward contracts for the three and nine months ended September 30, 2015, respectively, and net gains of $7.7 million and $4.5 million from foreign currency exchange forward contracts for the three and nine months ended September 30, 2014. As of September 30, 2015, we had 59 foreign currency exchange forward contracts outstanding covering a notional amount of $299.9 million. As of September 30, 2015, the fair value of forward contracts with seven counterparties aggregated to a $10.7 million asset position, which was included in other current assets in the accompanying consolidated balance sheets. As of September 30, 2015, the fair value of forward contracts with four counterparties aggregated to a $1.1 million liability position, which was included in other current liabilities in the accompanying consolidated balance sheets. As of December 31, 2014, the fair value of forward contracts with two counterparties aggregated to a $0.5 million asset position, which was included in other current assets in the accompanying consolidated balance sheets. As of December 31, 2014, the fair value of forward contracts with four counterparties aggregated to a $1.3 million liability position, which was included in other current liabilities in the accompanying consolidated balance sheets.
We also routinely monitor our exposure to currency exchange rate changes in connection with certain transactions and sometimes enter into foreign currency exchange option and forward contracts to limit our exposure to such transactions, as appropriate. In the ordinary course of business, we also sometimes utilize derivative financial instruments in the form of foreign currency exchange contracts to attempt to mitigate foreign currency exchange exposure resulting from intercompany loans. Included in the consolidated statements of operations were net gains of $0.4 million and $0.2 million for the three and nine months ended September 30,
17
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2015, respectively, and net gains of $3.1 million and $2.9 million for the three and nine months ended September 30, 2014, respectively, resulting from net losses/gains on these foreign currency exchange option and forward contracts. As of September 30, 2015, we had four foreign currency exchange option and forward contracts outstanding covering a notional amount of $33.1 million. As of September 30, 2015, the fair value of forward contracts with one counterparty aggregated to a $0.1 million asset position, which was included in other current assets in the accompanying consolidated balance sheets. In addition, as of September 30, 2015, the fair value of forward contracts with one counterparty aggregated to a $0.2 million liability position, which was included in other current liabilities in the accompanying consolidated balance sheets. As of December 31, 2014, the fair value of forward contracts with one counterparty aggregated to a $0.8 million asset position, which was included in other current assets in the accompanying consolidated balance sheets. As of December 31, 2014, the fair value of forward contracts with one counterparty aggregated to a $0.1 million liability position, which was included in other current liabilities in the accompanying consolidated balance sheets.
We also enter into loan commitments that relate to the origination of commercial mortgage loans that will be held for resale. FASB ASC Topic 815 requires that these commitments be recorded at their fair values as derivatives. Included in the consolidated statements of operations were net gains of $9.4 million and $20.0 million for the three and nine months ended September 30, 2015, respectively, resulting from these loan commitments. The net impact on earnings resulting from gains and/or losses associated with these loan commitments during the three and nine months ended September 30, 2014 was not significant. As of September 30, 2015, the fair value of such contracts with three counterparties aggregated to a $9.4 million asset position, which was included in other current assets in the accompanying consolidated balance sheets. As of December 31, 2014, the fair value of such contracts with three counterparties aggregated to a $2.4 million asset position, which was included in other current assets in the accompanying consolidated balance sheets.
7. | Investments in Unconsolidated Subsidiaries |
Investments in unconsolidated subsidiaries are accounted for under the equity method of accounting. Combined condensed financial information for these entities is as follows (dollars in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Global Investment Management: |
||||||||||||||||
Revenue |
$ | 221,245 | $ | 211,357 | $ | 728,144 | $ | 637,605 | ||||||||
Operating (loss) income |
$ | (26,625 | ) | $ | 93,731 | $ | (107,351 | ) | $ | (228,168 | ) | |||||
Net income (loss) |
$ | 56,182 | $ | 18,413 | $ | (175,014 | ) | $ | (235,559 | ) | ||||||
Development Services: |
||||||||||||||||
Revenue |
$ | 22,690 | $ | 11,248 | $ | 42,265 | $ | 34,083 | ||||||||
Operating income |
$ | 13,316 | $ | 11,736 | $ | 54,664 | $ | 30,143 | ||||||||
Net income |
$ | 9,812 | $ | 8,855 | $ | 47,299 | $ | 24,066 | ||||||||
Other: |
||||||||||||||||
Revenue |
$ | 52,535 | $ | 42,106 | $ | 126,101 | $ | 113,688 | ||||||||
Operating income |
$ | 10,961 | $ | 5,856 | $ | 25,592 | $ | 19,200 | ||||||||
Net income |
$ | 11,126 | $ | 6,025 | $ | 26,027 | $ | 19,411 | ||||||||
Total: |
||||||||||||||||
Revenue |
$ | 296,470 | $ | 264,711 | $ | 896,510 | $ | 785,376 | ||||||||
Operating (loss) income |
$ | (2,348 | ) | $ | 111,323 | $ | (27,095 | ) | $ | (178,825 | ) | |||||
Net income (loss) |
$ | 77,120 | $ | 33,293 | $ | (101,688 | ) | $ | (192,082 | ) |
18
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Our Global Investment Management segment invests our own capital in certain real estate investments with clients. We have provided investment management, property management, brokerage and other professional services in connection with these real estate investments on an arms length basis and earned revenues from these unconsolidated subsidiaries. We have also provided development, property management and brokerage services to certain of our unconsolidated subsidiaries in our Development Services segment on an arms length basis and earned revenues from these unconsolidated subsidiaries.
8. | Real Estate and Other Assets Held for Sale and Related Liabilities |
Real estate and other assets held for sale include completed real estate projects or land for sale in their present condition that have met all of the held for sale criteria of the Property, Plant and Equipment Topic of the FASB ASC (Topic 360) and other assets directly related to such projects. Liabilities related to real estate and other assets held for sale have been included within other current liabilities in the accompanying consolidated balance sheets.
We did not hold any real estate and other assets for sale at September 30, 2015. Real estate and other assets held for sale and related liabilities at December 31, 2014 were as follows (dollars in thousands):
Assets: |
||||
Real estate held for sale (see Note 9) |
$ | 3,840 | ||
Other current assets |
5 | |||
|
|
|||
Total real estate and other assets held for sale |
3,845 | |||
|
|
|||
Liabilities: |
||||
Accounts payable and accrued expenses |
61 | |||
|
|
|||
Total liabilities related to real estate and other assets held for sale |
61 | |||
|
|
|||
Net real estate and other assets held for sale |
$ | 3,784 | ||
|
|
9. | Real Estate |
We provide build-to-suit services for our clients and also develop or purchase certain projects which we intend to sell to institutional investors upon project completion or redevelopment. Therefore, we have ownership of real estate until such projects are sold or otherwise disposed. Certain real estate assets secure the outstanding balances of underlying mortgage or construction loans. Our real estate is reported in our Development Services segment and consisted of the following (dollars in thousands):
September 30, 2015 | December 31, 2014 | |||||||
Real estate included in assets held for sale (see Note 8) |
$ | | $ | 3,840 | ||||
Real estate under development (current) |
2,796 | | ||||||
Real estate under development (non-current) |
20,501 | 4,630 | ||||||
Real estate held for investment (1) |
20,299 | 37,129 | ||||||
|
|
|
|
|||||
Total real estate (2) |
$ | 43,596 | $ | 45,599 | ||||
|
|
|
|
(1) | Net of accumulated depreciation of $10.5 million and $12.3 million at September 30, 2015 and December 31, 2014, respectively. |
(2) | Includes balances for lease intangibles of $0.1 million and $3.6 million at September 30, 2015 and December 31, 2014, respectively. We record lease intangibles upon acquiring real estate projects with in-place leases. The balances are shown net of amortization, which is recorded as an increase to, or a reduction of, rental income. |
19
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. | Notes Payable on Real Estate |
We had loans secured by real estate, which consisted of the following (dollars in thousands):
September 30, 2015 | December 31, 2014 | |||||||
Current portion of notes payable on real estate |
$ | 3,444 | $ | 23,229 | ||||
Notes payable on real estate, non-current portion |
27,993 | 18,216 | ||||||
|
|
|
|
|||||
Total notes payable on real estate |
$ | 31,437 | $ | 41,445 | ||||
|
|
|
|
At both September 30, 2015 and December 31, 2014, none of our notes payable on real estate were recourse to CBRE Group, Inc., except for being recourse to the single-purpose entities that held the real estate assets and were the primary obligors on the notes payable.
11. | Debt |
We maintain credit facilities with third-party lenders, which we use for a variety of purposes. On March 28, 2013, we entered into a credit agreement (the 2013 Credit Agreement) with a syndicate of banks led by Credit Suisse AG (CS) as administrative and collateral agent, to completely refinance a previous credit agreement. On January 9, 2015, we entered into an amended and restated credit agreement (the 2015 Credit Agreement) with a syndicate of banks jointly led by Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and CS. In January 2015, we used the proceeds from the tranche A term loan facility under the 2015 Credit Agreement and from the December 2014 issuance of $125.0 million of 5.25% senior notes due 2025, along with cash on hand, to pay off the prior tranche A and tranche B term loans and the balance on our revolving credit facility under the 2013 Credit Agreement. On September 3, 2015, we entered into an incremental assumption agreement with a syndicate of banks jointly led by Wells Fargo Securities, LLC and CS to establish new tranche B-1 and tranche B-2 term loan facilities under the 2015 Credit Agreement in an aggregate principal amount of $400.0 million.
The 2015 Credit Agreement is an unsecured credit facility that is jointly and severally guaranteed by us and substantially all of our material domestic subsidiaries. As of September 30, 2015, the 2015 Credit Agreement provides for the following: (1) a $2.6 billion revolving credit facility, which includes the capacity to obtain letters of credit and swingline loans and matures on January 9, 2020; (2) a $500.0 million tranche A term loan facility requiring quarterly principal payments, which began on June 30, 2015 and continue through maturity on January 9, 2020; (3) a $270.0 million tranche B-1 term loan facility requiring quarterly principal payments, which begin on December 31, 2015 and continue through maturity on September 3, 2020; and (4) a $130.0 million tranche B-2 term loan facility requiring quarterly principal payments, which begin on December 31, 2015 and continue through maturity on September 3, 2022.
The revolving credit facility under the 2015 Credit Agreement allows for borrowings outside of the United States (U.S.), with a $75.0 million sub-facility available to one of our Canadian subsidiaries, a $100.0 million sub-facility available to one of our Australian subsidiaries and one of our New Zealand subsidiaries and a $300.0 million sub-facility available to one of our U.K. subsidiaries. Additionally, outstanding borrowings under these sub-facilities may be up to 5.0% higher as allowed under the currency fluctuation provision in the 2015 Credit Agreement. Borrowings under the revolving credit facility bear interest at varying rates, based at our option, on either (1) the applicable fixed rate plus 0.85% to 1.00% or (2) the daily rate, in each case as determined by reference to our Credit Rating (as defined in the 2015 Credit Agreement). The 2015 Credit Agreement requires us to pay a fee based on the total amount of the revolving credit facility commitment (whether used or unused). As of September 30, 2015, we had $400.5 million of revolving credit facility principal outstanding under the 2015 Credit Agreement with a related weighted average annual interest rate of 1.3%, which was included in
20
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
short-term borrowings in the accompanying consolidated balance sheets. As of September 30, 2015, letters of credit totaling $2.0 million were outstanding under the revolving credit facility. These letters of credit, which reduce the amount we may borrow under the revolving credit facility, were primarily issued in the ordinary course of business. As of December 31, 2014, we had $4.8 million of revolving credit facility principal outstanding under the 2013 Credit Agreement with a related weighted average annual interest rate of 1.4%, which was included in short-term borrowings in the accompanying consolidated balance sheets.
Borrowings under the term loan facilities under the 2015 Credit Agreement as of September 30, 2015 bear interest, based at our option, on the following: for the tranche A term loan facility, on either (1) the applicable fixed rate plus 0.95% to 1.25% or (2) the daily rate plus 0.0% to 0.25%, in each case as determined by reference to our Credit Rating (as defined in the 2015 Credit Agreement); for the tranche B-1 term loan facility, on either (1) the applicable fixed rate plus 0.95% to 1.25% or (2) the daily rate plus 0.0% to 0.25%, in each case as determined by reference to our Credit Rating (as defined in the 2015 Credit Agreement); and for the tranche B-2 term loan facility, on either (1) the applicable fixed rate plus 1.40% to 1.70% or (2) the daily rate plus 0.40% to 0.75%, in each case as determined by reference to our Credit Rating (as defined in the 2015 Credit Agreement). As of September 30, 2015, we had $883.3 million of term loan borrowings outstanding, net of unamortized debt issuance costs, under the 2015 Credit Agreement (consisting of $486.7 million of tranche A term loan facility, $267.7 million of tranche B-1 term loan facility and $128.9 million of tranche B-2 term loan facility), which was included in the accompanying consolidated balance sheets. As of December 31, 2014, we had $638.1 million of term loan borrowings outstanding, net of unamortized debt issuance costs, under the 2013 Credit Agreement (consisting of $429.7 million of tranche A term loan facility and $208.4 million of tranche B term loan facility), which are also included in the accompanying consolidated balance sheets.
On August 13, 2015, CBRE issued $600.0 million in aggregate principal amount of 4.875% senior notes due March 1, 2026 at a price equal to 99.24% of their face value. The 4.875% senior notes are unsecured obligations of CBRE, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current and future secured indebtedness. The 4.875% senior notes are jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE that guarantees our 2015 Credit Agreement. Interest accrues at a rate of 4.875% per year and is payable semi-annually in arrears on March 1 and September 1, with the first interest payment to be made on March 1, 2016. The 4.875% senior notes are redeemable at our option, in whole or in part, prior to December 1, 2025 at a redemption price equal to the greater of (1) 100% of the principal amount of the 4.875% senior notes to be redeemed and (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon to December 1, 2025 (not including any portions of payments of interest accrued as of the date of redemption) discounted to the date of redemption on a semi-annual basis at the Adjusted Treasury Rate (as defined in the indenture governing these notes). In addition, at any time on or after December 1, 2025, the 4.875% senior notes may be redeemed by us, in whole or in part, at a redemption price equal to 100.0% of the principal amount, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. If a change of control triggering event (as defined in the indenture governing these notes) occurs, we are obligated to make an offer to purchase the then outstanding 4.875% senior notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The amount of the 4.875% senior notes, net of unamortized debt issuance costs, included in the accompanying consolidated balance sheets was $590.4 million at September 30, 2015.
On September 26, 2014, CBRE issued $300.0 million in aggregate principal amount of 5.25% senior notes due March 15, 2025. On December 12, 2014, CBRE issued an additional $125.0 million in aggregate principal amount of 5.25% senior notes due March 15, 2025 at a price equal to 101.5% of their face value, plus interest deemed to have accrued from September 26, 2014. The 5.25% senior notes are unsecured obligations of CBRE, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current
21
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
and future secured indebtedness. The 5.25% senior notes are jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE that guarantees our 2015 Credit Agreement. Interest accrues at a rate of 5.25% per year and is payable semi-annually in arrears on March 15 and September 15, beginning on March 15, 2015. The 5.25% senior notes are redeemable at our option, in whole or in part, prior to December 15, 2024 at a redemption price equal to the greater of (1) 100% of the principal amount of the 5.25% senior notes to be redeemed and (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon to December 15, 2024 (not including any portions of payments of interest accrued as of the date of redemption) discounted to the date of redemption on a semi-annual basis at the Adjusted Treasury Rate (as defined in the indentures governing these notes). In addition, at any time on or after December 15, 2024, the 5.25% senior notes may be redeemed by us, in whole or in part, at a redemption price equal to 100.0% of the principal amount, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. If a change of control triggering event (as defined in the indenture governing these notes) occurs, we are obligated to make an offer to purchase the then outstanding 5.25% senior notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. The amount of the 5.25% senior notes, net of unamortized debt issuance costs, included in the accompanying consolidated balance sheets was $421.9 million and $422.2 million at September 30, 2015 and December 31, 2014, respectively.
Our 2015 Credit Agreement and the indentures governing our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes contain restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, create or permit liens on assets, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. Our 2015 Credit Agreement also requires us to maintain a minimum coverage ratio of EBITDA (as defined in the 2015 Credit Agreement) to total interest expense of 2.00x and a maximum leverage ratio of total debt less available cash to EBITDA (as defined in the 2015 Credit Agreement) of 4.25x as of the end of each fiscal quarter. Our coverage ratio of EBITDA to total interest expense was 11.01x for the trailing twelve months ended September 30, 2015, and our leverage ratio of total debt less available cash to EBITDA was 1.88x as of September 30, 2015.
On October 8, 2010, CBRE issued $350.0 million in aggregate principal amount of 6.625% senior notes due October 15, 2020. On September 26, 2014, we gave the 30-day notice required under the indenture of our intent to redeem all of the 6.625% senior notes. We redeemed these notes in full on October 27, 2014 in accordance with the provisions of the notes and associated indenture. In connection with this early redemption, we incurred charges of $23.1 million, including a premium of $17.4 million and the write-off of $5.7 million of unamortized deferred financing costs. Such charges were included in the write-off of financing costs for the three and nine months ended September 30, 2014 in the accompanying consolidated statements of operations.
12. | Commitments and Contingencies |
We are a party to a number of pending or threatened lawsuits arising out of, or incident to, our ordinary course of business. We believe that any losses in excess of the amounts accrued therefor as liabilities on our financial statements are unlikely to be significant, but litigation is inherently uncertain and there is the potential for a material adverse effect on our financial statements if one or more matters are resolved in a particular period in an amount materially in excess of what we anticipated.
In January 2008, CBRE Multifamily Capital, Inc. (CBRE MCI), a wholly-owned subsidiary of CBRE Capital Markets, entered into an agreement with Federal National Mortgage Association (Fannie Mae), under Fannie Maes Delegated Underwriting and Servicing Lender Program (DUS Program), to provide financing for
22
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
multifamily housing with five or more units. Under the DUS Program, CBRE MCI originates, underwrites, closes and services loans without prior approval by Fannie Mae, and in select cases, is subject to sharing up to one-third of any losses on loans originated under the DUS Program. CBRE MCI has funded loans subject to such loss sharing arrangements with unpaid principal balances of $11.4 billion at September 30, 2015. Additionally, CBRE MCI has funded loans under the DUS Program that are not subject to loss sharing arrangements with unpaid principal balances of approximately $32.0 million at September 30, 2015. CBRE MCI, under its agreement with Fannie Mae, must post cash reserves or other acceptable collateral under formulas established by Fannie Mae to provide for sufficient capital in the event losses occur. As of September 30, 2015 and December 31, 2014, CBRE MCI had a $35.0 million and a $29.0 million, respectively, letter of credit under this reserve arrangement, and had provided approximately $20.1 million and $16.8 million, respectively, of loan loss accruals. Fannie Maes recourse under the DUS Program is limited to the assets of CBRE MCI, which assets totaled approximately $279.6 million (including $119.8 million of warehouse receivables, a substantial majority of which are pledged against warehouse lines of credit and are therefore not available to Fannie Mae) at September 30, 2015.
We had outstanding letters of credit totaling $44.1 million as of September 30, 2015, excluding letters of credit for which we have outstanding liabilities already accrued on our consolidated balance sheet related to our subsidiaries outstanding reserves for claims under certain insurance programs as well as letters of credit related to operating leases. CBRE MCIs letter of credit totaling $35.0 million referred to in the preceding paragraph represented the majority of the $44.1 million outstanding letters of credit. The remaining letters of credit are primarily executed by us in the ordinary course of business and expire at varying dates through September 2016.
We had guarantees totaling $41.0 million as of September 30, 2015, excluding guarantees related to pension liabilities, consolidated indebtedness and other obligations for which we have outstanding liabilities already accrued on our consolidated balance sheet, and excluding guarantees related to operating leases. The $41.0 million primarily represents guarantees of obligations of unconsolidated subsidiaries, which expire at varying dates through July 2019, as well as various guarantees of management and vendor contracts in our operations overseas, which expire at the end of each of the respective agreements.
In addition, as of September 30, 2015, we had issued numerous non-recourse carveout, completion and budget guarantees relating to development projects for the benefit of third parties. These guarantees are commonplace in our industry and are made by us in the ordinary course of our Development Services business. Non-recourse carveout guarantees generally require that our project-entity borrower not commit specified improper acts, with us potentially liable for all or a portion of such entitys indebtedness or other damages suffered by the lender if those acts occur. Completion and budget guarantees generally require us to complete construction of the relevant project within a specified timeframe and/or within a specified budget, with us potentially being liable for costs to complete in excess of such timeframe or budget. However, we generally use guaranteed maximum price contracts with reputable, bondable general contractors with respect to projects for which we provide these guarantees. These contracts are intended to pass the risk to such contractors. While there can be no assurance, we do not expect to incur any material losses under these guarantees.
An important part of the strategy for our Global Investment Management business involves investing our capital in certain real estate investments with our clients. These co-investments typically range from 2.0% to 5.0% of the equity in a particular fund. As of September 30, 2015, we had aggregate commitments of $23.6 million to fund future co-investments.
23
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Additionally, an important part of our Development Services business strategy is to invest in unconsolidated real estate subsidiaries as a principal (in most cases co-investing with our clients). As of September 30, 2015, we had committed to fund $23.0 million of additional capital to these unconsolidated subsidiaries.
13. | Income Per Share Information |
The following is a calculation of income per share (dollars in thousands, except share data):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Computation of basic income per share attributable to CBRE Group, Inc. shareholders: |
||||||||||||||||
Net income attributable to CBRE Group, Inc. shareholders |
$ | 149,123 | $ | 107,099 | $ | 367,089 | $ | 280,226 | ||||||||
Weighted average shares outstanding for basic income per share |
332,684,487 | 330,419,006 | 332,223,036 | 330,197,240 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic income per share attributable to CBRE Group, Inc. shareholders |
$ | 0.45 | $ | 0.32 | $ | 1.10 | $ | 0.85 | ||||||||
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Computation of diluted income per share attributable to CBRE Group, Inc. shareholders: |
||||||||||||||||
Net income attributable to CBRE Group, Inc. shareholders |
$ | 149,123 | $ | 107,099 | $ | 367,089 | $ | 280,226 | ||||||||
Weighted average shares outstanding for basic income per share |
332,684,487 | 330,419,006 | 332,223,036 | 330,197,240 | ||||||||||||
Dilutive effect of contingently issuable shares |
3,747,524 | 3,478,244 | 3,701,801 | 3,239,528 | ||||||||||||
Dilutive effect of stock options |
129,866 | 395,796 | 216,086 | 418,363 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding for diluted income per share |
336,561,877 | 334,293,046 | 336,140,923 | 333,855,131 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted income per share attributable to CBRE Group, Inc. shareholders |
$ | 0.44 | $ | 0.32 | $ | 1.09 | $ | 0.84 | ||||||||
|
|
|
|
|
|
|
|
For both the three and nine months ended September 30, 2015, 743,638 of contingently issuable shares were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect. For both the three and nine months ended September 30, 2014, 47,639 of contingently issuable shares were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.
24
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For both the three and nine months ended September 30, 2014, options to purchase 582 shares of common stock were excluded from the computation of diluted earnings per share. These options were excluded because their inclusion would have had an anti-dilutive effect given that the options exercise prices were greater than the average market price of our common stock for such period.
14. | Pensions |
We have two contributory defined benefit pension plans in the United Kingdom (U.K.), which we acquired in connection with previous acquisitions. Our subsidiaries based in the U.K. maintain the plans to provide retirement benefits to existing and former employees participating in these plans. During 2007, we reached agreements with the active members of these plans to freeze future pension plan benefits. In return, the active members became eligible to enroll in the CBRE Group Personal Pension Plan, a defined contribution plan in the U.K.
Net periodic pension cost (benefit) consisted of the following (dollars in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest cost |
$ | 3,792 | $ | 4,503 | $ | 11,219 | $ | 13,411 | ||||||||
Expected return on plan assets |
(4,684 | ) | (5,812 | ) | (13,843 | ) | (17,465 | ) | ||||||||
Amortization of unrecognized net loss |
1,044 | 673 | 3,091 | 2,003 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic pension cost (benefit) |
$ | 152 | $ | (636 | ) | $ | 467 | $ | (2,051 | ) | ||||||
|
|
|
|
|
|
|
|
With respect to these pension plans, our historical policy has been to contribute annually to the plans, an amount to fund pension liabilities as actuarially determined and as required by applicable laws and regulations. Our contributions to these plans are invested by the plan trustee and, if these investments do not perform well in the future, we may be required to provide additional contributions to cover any pension underfunding. We contributed $2.0 million and $5.4 million to fund our pension plans during the three and nine months ended September 30, 2015, respectively. We expect to contribute a total of $7.5 million to fund our pension plans for the year ending December 31, 2015.
15. | Segments |
We report our operations through the following segments: (1) Americas, (2) EMEA, (3) Asia Pacific, (4) Global Investment Management and (5) Development Services.
The Americas segment is our largest segment of operations and provides a comprehensive range of services throughout the U.S. and in the largest regions of Canada and key markets in Latin America. The primary services offered consist of the following: real estate services, mortgage loan origination and servicing, valuation services, asset services and occupier outsourcing services.
Our EMEA and Asia Pacific segments provide services similar to the Americas business segment. The EMEA segment has operations primarily in Europe, while the Asia Pacific segment has operations in Asia, Australia and New Zealand.
Our Global Investment Management business provides investment management services to clients seeking to generate returns and diversification through direct and indirect investments in real estate in North America, Europe and Asia Pacific.
25
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Our Development Services business consists of real estate development and investment activities primarily in the U.S.
Summarized financial information by segment is as follows (dollars in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Revenue |
||||||||||||||||
Americas |
$ | 1,556,648 | $ | 1,325,875 | $ | 4,218,753 | $ | 3,583,276 | ||||||||
EMEA |
737,863 | 574,493 | 1,817,601 | 1,604,159 | ||||||||||||
Asia Pacific |
285,337 | 253,742 | 755,531 | 690,599 | ||||||||||||
Global Investment Management |
114,094 | 105,012 | 318,371 | 343,789 | ||||||||||||
Development Services |
18,617 | 15,954 | 45,312 | 40,901 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 2,712,559 | $ | 2,275,076 | $ | 7,155,568 | $ | 6,262,724 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
EBITDA |
||||||||||||||||
Americas |
$ | 203,598 | $ | 187,476 | $ | 594,330 | $ | 482,642 | ||||||||
EMEA |
55,758 | 37,485 | 111,146 | 88,219 | ||||||||||||
Asia Pacific |
27,699 | 22,767 | 66,403 | 54,773 | ||||||||||||
Global Investment Management |
29,014 | 21,146 | 80,198 | 87,538 | ||||||||||||
Development Services |
10,508 | 24,019 | 17,648 | 37,121 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 326,577 | $ | 292,893 | $ | 869,725 | $ | 750,293 | |||||||||
|
|
|
|
|
|
|
|
EBITDA represents earnings before net interest expense, write-off of financing costs, income taxes, depreciation and amortization. EBITDA is not a recognized measurement under U.S. generally accepted accounting principles (GAAP) and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.
We generally use EBITDA to evaluate operating performance and for other discretionary purposes, and we believe that this measure provides a more complete understanding of ongoing operations, enhances comparability of current results to prior periods and may be useful for investors to analyze our financial performance because EBITDA eliminates the impact of selected charges that may obscure trends in the underlying performance of our business. We further believe that investors may find EBITDA useful in evaluating our operating performance compared to that of other companies in our industry because EBITDA calculations generally eliminate the effects of acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions, the effects of financings and income taxes and the accounting effects of capital spending. EBITDA may vary for different companies for reasons unrelated to overall operating performance.
EBITDA is not intended to be a measure of free cash flow for our discretionary use because it does not consider certain cash requirements such as tax and debt service payments. EBITDA may also differ from the amount calculated under similarly titled definitions in our debt instruments, which amounts are further adjusted to
26
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
reflect certain other cash and non-cash charges and are used by us to determine compliance with financial covenants therein and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.
Net interest expense and write-off of financing costs have been expensed in the segment incurred. Provision for income taxes has been allocated among our segments by using applicable U.S. and foreign effective tax rates. EBITDA for our segments is calculated as follows (dollars in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Americas |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 93,880 | $ | 86,098 | $ | 285,939 | $ | 248,868 | ||||||||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
47,209 | 38,451 | 134,750 | 107,796 | ||||||||||||
Interest expense, net |
9,692 | 3,361 | 17,485 | 12,321 | ||||||||||||
Write-off of financing costs |
| 23,087 | 2,685 | 23,087 | ||||||||||||
Royalty and management service expense (income) |
1,644 | (14,949 | ) | 4,122 | (18,656 | ) | ||||||||||
Provision for income taxes |
51,173 | 51,428 | 149,349 | 109,226 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 203,598 | $ | 187,476 | $ | 594,330 | $ | 482,642 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
EMEA |
||||||||||||||||
Net income (loss) attributable to CBRE Group, Inc. |
$ | 23,627 | $ | (748 | ) | $ | 25,070 | $ | (14,705 | ) | ||||||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
15,175 | 16,080 | 44,574 | 48,862 | ||||||||||||
Interest expense, net |
10,834 | 13,145 | 33,656 | 37,488 | ||||||||||||
Royalty and management service (income) expense |
(1,452 | ) | 8,249 | (7,644 | ) | 1,294 | ||||||||||
Provision for income taxes |
7,574 | 759 | 15,490 | 15,280 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 55,758 | $ | 37,485 | $ | 111,146 | $ | 88,219 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Asia Pacific |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 15,459 | $ | 5,398 | $ | 29,067 | $ | 9,400 | ||||||||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
3,728 | 4,178 | 11,357 | 10,617 | ||||||||||||
Interest expense, net |
800 | 474 | 2,689 | 1,577 | ||||||||||||
Royalty and management service (income) expense |
(766 | ) | 5,636 | 883 | 13,898 | |||||||||||
Provision for income taxes |
8,478 | 7,081 | 22,407 | 19,281 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 27,699 | $ | 22,767 | $ | 66,403 | $ | 54,773 | ||||||||
|
|
|
|
|
|
|
|
27
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Global Investment Management |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 10,334 | $ | 3,075 | $ | 18,354 | $ | 18,137 | ||||||||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
8,423 | 7,485 | 23,095 | 25,303 | ||||||||||||
Interest expense, net |
8,060 | 8,331 | 23,562 | 25,917 | ||||||||||||
Royalty and management service expense |
574 | 1,064 | 2,639 | 3,464 | ||||||||||||
Provision for income taxes |
1,623 | 1,191 | 12,548 | 14,717 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 29,014 | $ | 21,146 | $ | 80,198 | $ | 87,538 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Development Services |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 5,823 | $ | 13,276 | $ | 8,659 | $ | 18,526 | ||||||||
Adjustments: |
||||||||||||||||
Depreciation and amortization |
512 | 965 | 1,722 | 3,079 | ||||||||||||
Interest expense, net |
155 | 932 | 818 | 2,702 | ||||||||||||
Provision for income taxes |
4,018 | 8,846 | 6,449 | 12,814 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 10,508 | $ | 24,019 | $ | 17,648 | $ | 37,121 | ||||||||
|
|
|
|
|
|
|
|
16. | Guarantor and Nonguarantor Financial Statements |
The following condensed consolidating financial information includes:
(1) Condensed consolidating balance sheets as of September 30, 2015 and December 31, 2014; condensed consolidating statements of operations for the three and nine months ended September 30, 2015 and 2014; condensed consolidating statements of comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014; and condensed consolidating statements of cash flows for the nine months ended September 30, 2015 and 2014 of (a) CBRE Group, Inc., as the parent, (b) CBRE, as the subsidiary issuer, (c) the guarantor subsidiaries, (d) the nonguarantor subsidiaries and (e) CBRE Group, Inc. on a consolidated basis; and
(2) Elimination entries necessary to consolidate CBRE Group, Inc. as the parent with CBRE and its guarantor and nonguarantor subsidiaries.
Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and intercompany balances and transactions.
28
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2015
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Current Assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1 | $ | 5,827 | $ | 51,040 | $ | 383,489 | $ | | $ | 440,357 | ||||||||||||
Restricted cash |
| | 6,959 | 60,231 | | 67,190 | ||||||||||||||||||
Receivables, net |
| | 849,574 | 1,425,451 | | 2,275,025 | ||||||||||||||||||
Warehouse receivables (a) |
| | 465,734 | 120,126 | | 585,860 | ||||||||||||||||||
Trading securities |
| | 94 | 62,515 | | 62,609 | ||||||||||||||||||
Income taxes receivable |
17,241 | | 10,265 | | (4,576 | ) | 22,930 | |||||||||||||||||
Prepaid expenses |
| | 58,120 | 104,918 | | 163,038 | ||||||||||||||||||
Deferred tax assets, net |
| | 140,745 | 72,653 | | 213,398 | ||||||||||||||||||
Real estate under development |
| | | 2,796 | | 2,796 | ||||||||||||||||||
Available for sale securities |
| | 1,276 | | | 1,276 | ||||||||||||||||||
Other current assets |
| 10,846 | 70,007 | 64,315 | | 145,168 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Assets |
17,242 | 16,673 | 1,653,814 | 2,296,494 | (4,576 | ) | 3,979,647 | |||||||||||||||||
Property and equipment, net |
| | 364,141 | 139,525 | | 503,666 | ||||||||||||||||||
Goodwill |
| | 1,576,158 | 1,420,884 | | 2,997,042 | ||||||||||||||||||
Other intangible assets, net |
| | 836,362 | 690,761 | | 1,527,123 | ||||||||||||||||||
Investments in unconsolidated subsidiaries |
| | 197,626 | 34,279 | | 231,905 | ||||||||||||||||||
Investments in consolidated subsidiaries |
3,492,015 | 3,820,028 | 1,499,288 | | (8,811,331 | ) | | |||||||||||||||||
Intercompany loan receivable |
| 2,754,386 | 700,000 | | (3,454,386 | ) | | |||||||||||||||||
Real estate under development |
| | | 20,501 | | 20,501 | ||||||||||||||||||
Real estate held for investment |
| | 4,281 | 16,018 | | 20,299 | ||||||||||||||||||
Available for sale securities |
| | 54,213 | 1,567 | | 55,780 | ||||||||||||||||||
Other assets, net |
| 23,426 | 114,144 | 81,931 | | 219,501 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Assets |
$ | 3,509,257 | $ | 6,614,513 | $ | 7,000,027 | $ | 4,701,960 | $ | (12,270,293 | ) | $ | 9,555,464 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Current Liabilities: |
||||||||||||||||||||||||
Accounts payable and accrued expenses |
$ | | $ | 8,896 | $ | 394,754 | $ | 916,675 | $ | | $ | 1,320,325 | ||||||||||||
Compensation and employee benefits payable |
| 626 | 352,557 | 288,229 | | 641,412 | ||||||||||||||||||
Accrued bonus and profit sharing |
| | 287,301 | 255,229 | | 542,530 | ||||||||||||||||||
Income taxes payable |
| | | 4,576 | (4,576 | ) | | |||||||||||||||||
Short-term borrowings: |
||||||||||||||||||||||||
Warehouse lines of credit (a) |
| | 461,450 | 116,995 | | 578,445 | ||||||||||||||||||
Revolving credit facility |
| 400,500 | | | | 400,500 | ||||||||||||||||||
Other |
| | 16 | 18,527 | | 18,543 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total short-term borrowings |
| 400,500 | 461,466 | 135,522 | | 997,488 | ||||||||||||||||||
Current maturities of long-term debt |
| 28,750 | 1,408 | 28 | | 30,186 | ||||||||||||||||||
Notes payable on real estate |
| | | 3,444 | | 3,444 | ||||||||||||||||||
Other current liabilities |
| 1,085 | 59,520 | 8,273 | | 68,878 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Liabilities |
| 439,857 | 1,557,006 | 1,611,976 | (4,576 | ) | 3,604,263 | |||||||||||||||||
Long-Term Debt: |
||||||||||||||||||||||||
Senior term loans, net |
| 854,590 | | | | 854,590 | ||||||||||||||||||
5.00% senior notes, net |
| 788,839 | | | | 788,839 | ||||||||||||||||||
4.875% senior notes, net |
| 590,380 | | | | 590,380 | ||||||||||||||||||
5.25% senior notes, net |
| 421,913 | | | | 421,913 | ||||||||||||||||||
Other long-term debt |
| | | 3 | | 3 | ||||||||||||||||||
Intercompany loan payable |
963,578 | | 1,276,088 | 1,214,720 | (3,454,386 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Long-Term Debt |
963,578 | 2,655,722 | 1,276,088 | 1,214,723 | (3,454,386 | ) | 2,655,725 | |||||||||||||||||
Notes payable on real estate, net |
| | | 27,993 | | 27,993 | ||||||||||||||||||
Deferred tax liabilities, net |
| | 76,642 | 127,389 | | 204,031 | ||||||||||||||||||
Non-current tax liabilities |
| | 50,516 | | | 50,516 | ||||||||||||||||||
Pension liability |
| | | 85,998 | | 85,998 | ||||||||||||||||||
Other liabilities |
| 26,919 | 219,747 | 90,747 | | 337,413 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities |
963,578 | 3,122,498 | 3,179,999 | 3,158,826 | (3,458,962 | ) | 6,965,939 | |||||||||||||||||
Commitments and contingencies |
| | | | | | ||||||||||||||||||
Equity: |
||||||||||||||||||||||||
CBRE Group, Inc. Stockholders Equity |
2,545,679 | 3,492,015 | 3,820,028 | 1,499,288 | (8,811,331 | ) | 2,545,679 | |||||||||||||||||
Non-controlling interests |
| | | 43,846 | | 43,846 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Equity |
2,545,679 | 3,492,015 | 3,820,028 | 1,543,134 | (8,811,331 | ) | 2,589,525 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities and Equity |
$ | 3,509,257 | $ | 6,614,513 | $ | 7,000,027 | $ | 4,701,960 | $ | (12,270,293 | ) | $ | 9,555,464 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Although CBRE Capital Markets is included among our domestic subsidiaries that jointly and severally guarantee our 5.00% senior notes, 4.875% senior notes, 5.25% senior notes and our 2015 Credit Agreement, a substantial majority of warehouse receivables funded under Capital One, N.A. (Capital One), TD Bank, N.A. (TD Bank), Bank of America (BofA), JP Morgan Chase Bank, N.A. (JP Morgan) and Fannie Mae ASAP lines of credit are pledged to Capital One, TD Bank, BofA, JP Morgan and Fannie Mae, and accordingly, are not included as collateral for these notes or our other outstanding debt. |
29
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2014
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Current Assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 5 | $ | 18,262 | $ | 374,103 | $ | 348,514 | $ | | $ | 740,884 | ||||||||||||
Restricted cash |
| | 630 | 27,460 | | 28,090 | ||||||||||||||||||
Receivables, net |
| | 605,044 | 1,131,185 | | 1,736,229 | ||||||||||||||||||
Warehouse receivables (a) |
| | 339,921 | 166,373 | | 506,294 | ||||||||||||||||||
Trading securities |
| | 115 | 62,689 | | 62,804 | ||||||||||||||||||
Income taxes receivable |
19,443 | | | 10,603 | (17,337 | ) | 12,709 | |||||||||||||||||
Prepaid expenses |
| | 62,902 | 79,817 | | 142,719 | ||||||||||||||||||
Deferred tax assets, net |
| | 140,761 | 65,105 | | 205,866 | ||||||||||||||||||
Real estate and other assets held for sale |
| | | 3,845 | | 3,845 | ||||||||||||||||||
Available for sale securities |
| | 663 | | | 663 | ||||||||||||||||||
Other current assets |
| 1,185 | 50,429 | 32,787 | | 84,401 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Assets |
19,448 | 19,447 | 1,574,568 | 1,928,378 | (17,337 | ) | 3,524,504 | |||||||||||||||||
Property and equipment, net |
| | 361,899 | 136,027 | | 497,926 | ||||||||||||||||||
Goodwill |
| | 1,196,418 | 1,137,403 | | 2,333,821 | ||||||||||||||||||
Other intangible assets, net |
| | 493,058 | 309,302 | | 802,360 | ||||||||||||||||||
Investments in unconsolidated subsidiaries |
| | 173,738 | 44,542 | | 218,280 | ||||||||||||||||||
Investments in consolidated subsidiaries |
3,019,410 | 2,433,913 | 914,895 | | (6,368,218 | ) | | |||||||||||||||||
Intercompany loan receivable |
| 2,453,215 | 700,000 | | (3,153,215 | ) | | |||||||||||||||||
Real estate under development |
| | 828 | 3,802 | | 4,630 | ||||||||||||||||||
Real estate held for investment |
| | 6,814 | 30,315 | | 37,129 | ||||||||||||||||||
Available for sale securities |
| | 57,714 | 1,798 | | 59,512 | ||||||||||||||||||
Other assets, net |
| 9,384 | 98,139 | 35,825 | | 143,348 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Assets |
$ | 3,038,858 | $ | 4,915,959 | $ | 5,578,071 | $ | 3,627,392 | $ | (9,538,770 | ) | $ | 7,621,510 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Current Liabilities: |
||||||||||||||||||||||||
Accounts payable and accrued expenses |
$ | | $ | 19,541 | $ | 257,591 | $ | 550,398 | $ | | $ | 827,530 | ||||||||||||
Compensation and employee benefits payable |
| 626 | 346,663 | 276,525 | | 623,814 | ||||||||||||||||||
Accrued bonus and profit sharing |
| | 425,329 | 363,529 | | 788,858 | ||||||||||||||||||
Income taxes payable |
| | 17,337 | | (17,337 | ) | | |||||||||||||||||
Short-term borrowings: |
||||||||||||||||||||||||
Warehouse lines of credit (a) |
| | 337,184 | 164,001 | | 501,185 | ||||||||||||||||||
Revolving credit facility |
| | | 4,840 | | 4,840 | ||||||||||||||||||
Other |
| | 16 | 9 | | 25 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total short-term borrowings |
| | 337,200 | 168,850 | | 506,050 | ||||||||||||||||||
Current maturities of long-term debt |
| 39,650 | 2,734 | 23 | | 42,407 | ||||||||||||||||||
Notes payable on real estate |
| | | 23,229 | | 23,229 | ||||||||||||||||||
Other current liabilities |
| 1,258 | 58,357 | 4,131 | | 63,746 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Liabilities |
| 61,075 | 1,445,211 | 1,386,685 | (17,337 | ) | 2,875,634 | |||||||||||||||||
Long-Term Debt: |
||||||||||||||||||||||||
5.00% senior notes, net |
| 787,947 | | | | 787,947 | ||||||||||||||||||
Senior term loans, net |
| 598,426 | | | | 598,426 | ||||||||||||||||||
5.25% senior notes, net |
| 422,206 | | | | 422,206 | ||||||||||||||||||
Other long-term debt |
| | | 26 | | 26 | ||||||||||||||||||
Intercompany loan payable |
779,028 | | 1,350,424 | 1,023,763 | (3,153,215 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Long-Term Debt |
779,028 | 1,808,579 | 1,350,424 | 1,023,789 | (3,153,215 | ) | 1,808,605 | |||||||||||||||||
Notes payable on real estate, net |
| | | 18,216 | | 18,216 | ||||||||||||||||||
Deferred tax liabilities, net |
| | 87,486 | 61,747 | | 149,233 | ||||||||||||||||||
Non-current tax liabilities |
| | 45,936 | 67 | | 46,003 | ||||||||||||||||||
Pension liability |
| | | 92,923 | | 92,923 | ||||||||||||||||||
Other liabilities |
| 26,895 | 215,101 | 87,502 | | 329,498 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities |
779,028 | 1,896,549 | 3,144,158 | 2,670,929 | (3,170,552 | ) | 5,320,112 | |||||||||||||||||
Commitments and contingencies |
| | | | | | ||||||||||||||||||
Equity: |
||||||||||||||||||||||||
CBRE Group, Inc. Stockholders Equity |
2,259,830 | 3,019,410 | 2,433,913 | 914,895 | (6,368,218 | ) | 2,259,830 | |||||||||||||||||
Non-controlling interests |
| | | 41,568 | | 41,568 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Equity |
2,259,830 | 3,019,410 | 2,433,913 | 956,463 | (6,368,218 | ) | 2,301,398 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities and Equity |
$ | 3,038,858 | $ | 4,915,959 | $ | 5,578,071 | $ | 3,627,392 | $ | (9,538,770 | ) | $ | 7,621,510 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Although CBRE Capital Markets is included among our domestic subsidiaries that jointly and severally guarantee our 5.00% senior notes, 5.25% senior notes and our 2013 Credit Agreement, a substantial majority of warehouse receivables funded under BofA, JP Morgan, Capital One and Fannie Mae ASAP lines of credit are pledged to BofA, JP Morgan, Capital One and Fannie Mae, and accordingly, are not included as collateral for these notes or our other outstanding debt. |
30
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Revenue |
$ | | $ | | $ | 1,467,392 | $ | 1,245,167 | $ | | $ | 2,712,559 | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services |
| | 965,317 | 808,343 | | 1,773,660 | ||||||||||||||||||
Operating, administrative and other |
19,466 | (9,499 | ) | 322,593 | 294,345 | | 626,905 | |||||||||||||||||
Depreciation and amortization |
| | 40,737 | 34,310 | | 75,047 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses |
19,466 | (9,499 | ) | 1,328,647 | 1,136,998 | | 2,475,612 | |||||||||||||||||
Gain on disposition of real estate |
| | 3,087 | 67 | | 3,154 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(19,466 | ) | 9,499 | 141,832 | 108,236 | | 240,101 | |||||||||||||||||
Equity income from unconsolidated subsidiaries |
| | 16,346 | 896 | | 17,242 | ||||||||||||||||||
Other income (loss) |
| | 77 | (5,022 | ) | | (4,945 | ) | ||||||||||||||||
Interest income |
| 43,535 | 577 | 581 | (43,535 | ) | 1,158 | |||||||||||||||||
Interest expense |
| 29,857 | 28,456 | 15,921 | (43,535 | ) | 30,699 | |||||||||||||||||
Royalty and management service (income) expense |
| | (400 | ) | 400 | | | |||||||||||||||||
Income from consolidated subsidiaries |
160,973 | 146,587 | 62,936 | | (370,496 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before (benefit of) provision for income taxes |
141,507 | 169,764 | 193,712 | 88,370 | (370,496 | ) | 222,857 | |||||||||||||||||
(Benefit of) provision for income taxes |
(7,616 | ) | 8,791 | 47,125 | 24,566 | | 72,866 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
149,123 | 160,973 | 146,587 | 63,804 | (370,496 | ) | 149,991 | |||||||||||||||||
Less: Net income attributable to non-controlling interests |
| | | 868 | | 868 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 149,123 | $ | 160,973 | $ | 146,587 | $ | 62,936 | $ | (370,496 | ) | $ | 149,123 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
31
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Revenue |
$ | | $ | | $ | 1,231,633 | $ | 1,043,443 | $ | | $ | 2,275,076 | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services |
| | 789,931 | 639,055 | | 1,428,986 | ||||||||||||||||||
Operating, administrative and other |
18,934 | (6,683 | ) | 291,206 | 297,569 | | 601,026 | |||||||||||||||||
Depreciation and amortization |
| | 33,120 | 34,039 | | 67,159 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses |
18,934 | (6,683 | ) | 1,114,257 | 970,663 | | 2,097,171 | |||||||||||||||||
Gain on disposition of real estate |
| | 35 | 7,200 | | 7,235 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(18,934 | ) | 6,683 | 117,411 | 79,980 | | 185,140 | |||||||||||||||||
Equity income from unconsolidated subsidiaries |
| | 35,177 | 8,123 | | 43,300 | ||||||||||||||||||
Other income (loss) |
| | 894 | (1,007 | ) | | (113 | ) | ||||||||||||||||
Interest income |
| 49,971 | 448 | 1,150 | (49,971 | ) | 1,598 | |||||||||||||||||
Interest expense |
| 25,739 | 32,957 | 19,116 | (49,971 | ) | 27,841 | |||||||||||||||||
Write-off of financing costs |
| 23,087 | | | | 23,087 | ||||||||||||||||||
Royalty and management service (income) expense |
| | (20,336 | ) | 20,336 | | | |||||||||||||||||
Income from consolidated subsidiaries |
118,981 | 114,063 | 28,313 | | (261,357 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before (benefit of) provision for income taxes |
100,047 | 121,891 | 169,622 | 48,794 | (261,357 | ) | 178,997 | |||||||||||||||||
(Benefit of) provision for income taxes |
(7,052 | ) | 2,910 | 55,559 | 17,888 | | 69,305 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
107,099 | 118,981 | 114,063 | 30,906 | (261,357 | ) | 109,692 | |||||||||||||||||
Less: Net income attributable to non-controlling interests |
| | | 2,593 | | 2,593 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 107,099 | $ | 118,981 | $ | 114,063 | $ | 28,313 | $ | (261,357 | ) | $ | 107,099 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
32
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Revenue |
$ | | $ | | $ | 3,966,854 | $ | 3,188,714 | $ | | $ | 7,155,568 | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services |
| | 2,532,091 | 2,020,320 | | 4,552,411 | ||||||||||||||||||
Operating, administrative and other |
44,972 | (16,421 | ) | 908,592 | 831,695 | | 1,768,838 | |||||||||||||||||
Depreciation and amortization |
| | 116,546 | 98,952 | | 215,498 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses |
44,972 | (16,421 | ) | 3,557,229 | 2,950,967 | | 6,536,747 | |||||||||||||||||
Gain on disposition of real estate |
| | 3,228 | 6,912 | | 10,140 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(44,972 | ) | 16,421 | 412,853 | 244,659 | | 628,961 | |||||||||||||||||
Equity income (loss) from unconsolidated subsidiaries |
| | 40,258 | (872 | ) | | 39,386 | |||||||||||||||||
Other income (loss) |
| 1 | 1,336 | (6,264 | ) | | (4,927 | ) | ||||||||||||||||
Interest income |
| 151,263 | 79,450 | 3,194 | (229,050 | ) | 4,857 | |||||||||||||||||
Interest expense |
| 157,559 | 104,231 | 50,327 | (229,050 | ) | 83,067 | |||||||||||||||||
Write-off of financing costs |
| 2,685 | | | | 2,685 | ||||||||||||||||||
Royalty and management service (income) expense |
| | (4,266 | ) | 4,266 | | | |||||||||||||||||
Income from consolidated subsidiaries |
394,820 | 390,232 | 106,841 | | (891,893 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before (benefit of) provision for income taxes |
349,848 | 397,673 | 540,773 | 186,124 | (891,893 | ) | 582,525 | |||||||||||||||||
(Benefit of) provision for income taxes |
(17,241 | ) | 2,853 | 150,541 | 70,090 | | 206,243 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
367,089 | 394,820 | 390,232 | 116,034 | (891,893 | ) | 376,282 | |||||||||||||||||
Less: Net income attributable to non-controlling interests |
| | | 9,193 | | 9,193 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 367,089 | $ | 394,820 | $ | 390,232 | $ | 106,841 | $ | (891,893 | ) | $ | 367,089 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
33
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Revenue |
$ | | $ | | $ | 3,356,815 | $ | 2,905,909 | $ | | $ | 6,262,724 | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services |
| | 2,113,013 | 1,791,906 | | 3,904,919 | ||||||||||||||||||
Operating, administrative and other |
39,290 | (1,031 | ) | 815,828 | 841,536 | | 1,695,623 | |||||||||||||||||
Depreciation and amortization |
| | 96,292 | 99,365 | | 195,657 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses |
39,290 | (1,031 | ) | 3,025,133 | 2,732,807 | | 5,796,199 | |||||||||||||||||
Gain on disposition of real estate |
| | 6,732 | 30,370 | | 37,102 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(39,290 | ) | 1,031 | 338,414 | 203,472 | | 503,627 | |||||||||||||||||
Equity income from unconsolidated subsidiaries |
| | 61,181 | 6,383 | | 67,564 | ||||||||||||||||||
Other income |
| 1 | 2,493 | 8,558 | | 11,052 | ||||||||||||||||||
Interest income |
| 146,356 | 1,579 | 2,737 | (146,351 | ) | 4,321 | |||||||||||||||||
Interest expense |
| 76,509 | 97,671 | 56,497 | (146,351 | ) | 84,326 | |||||||||||||||||
Write-off of financing costs |
| 23,087 | | | | 23,087 | ||||||||||||||||||
Royalty and management service (income) expense |
| | (26,973 | ) | 26,973 | | | |||||||||||||||||
Income from consolidated subsidiaries |
304,873 | 274,893 | 42,016 | | (621,782 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before (benefit of) provision for income taxes |
265,583 | 322,685 | 374,985 | 137,680 | (621,782 | ) | 479,151 | |||||||||||||||||
(Benefit of) provision for income taxes |
(14,643 | ) | 17,812 | 100,092 | 68,057 | | 171,318 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
280,226 | 304,873 | 274,893 | 69,623 | (621,782 | ) | 307,833 | |||||||||||||||||
Less: Net income attributable to non-controlling interests |
| | | 27,607 | | 27,607 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 280,226 | $ | 304,873 | $ | 274,893 | $ | 42,016 | $ | (621,782 | ) | $ | 280,226 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
34
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Net income |
$ | 149,123 | $ | 160,973 | $ | 146,587 | $ | 63,804 | $ | (370,496 | ) | $ | 149,991 | |||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||
Foreign currency translation loss |
| | | (69,728 | ) | | (69,728 | ) | ||||||||||||||||
Fees associated with termination of interest rate swaps, net of tax |
| (3,748 | ) | | | | (3,748 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax |
| 1,873 | | | | 1,873 | ||||||||||||||||||
Unrealized losses on interest rate swaps, net of tax |
| (2,924 | ) | | | | (2,924 | ) | ||||||||||||||||
Unrealized holding losses on available for sale securities, net of tax |
| | (1,024 | ) | (158 | ) | | (1,182 | ) | |||||||||||||||
Other, net |
| | (18 | ) | | | (18 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive loss |
| (4,799 | ) | (1,042 | ) | (69,886 | ) | | (75,727 | ) | ||||||||||||||
Comprehensive income (loss) |
149,123 | 156,174 | 145,545 | (6,082 | ) | (370,496 | ) | 74,264 | ||||||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
| | | 861 | | 861 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) attributable to CBRE Group, Inc. |
$ | 149,123 | $ | 156,174 | $ | 145,545 | $ | (6,943 | ) | $ | (370,496 | ) | $ | 73,403 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
35
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Net income |
$ | 107,099 | $ | 118,981 | $ | 114,063 | $ | 30,906 | $ | (261,357 | ) | $ | 109,692 | |||||||||||
Other comprehensive income (loss) : |
||||||||||||||||||||||||
Foreign currency translation loss |
| | | (109,122 | ) | | (109,122 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax |
| 1,844 | | | | 1,844 | ||||||||||||||||||
Unrealized gains on interest rate swaps and interest rate caps, net of tax |
| 854 | | | | 854 | ||||||||||||||||||
Unrealized holding gains (losses) on available for sale securities, net of tax |
| | 345 | (159 | ) | | 186 | |||||||||||||||||
Other, net |
| | 76 | | | 76 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive income (loss) |
| 2,698 | 421 | (109,281 | ) | | (106,162 | ) | ||||||||||||||||
Comprehensive income (loss) |
107,099 | 121,679 | 114,484 | (78,375 | ) | (261,357 | ) | 3,530 | ||||||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
| | | 2,533 | | 2,533 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) attributable to CBRE Group, Inc. |
$ | 107,099 | $ | 121,679 | $ | 114,484 | $ | (80,908 | ) | $ | (261,357 | ) | $ | 997 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
36
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Net income |
$ | 367,089 | $ | 394,820 | $ | 390,232 | $ | 116,034 | $ | (891,893 | ) | $ | 376,282 | |||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||
Foreign currency translation loss |
| | | (117,640 | ) | | (117,640 | ) | ||||||||||||||||
Fees associated with termination of interest rate swaps, net of tax |
| (3,748 | ) | | | | (3,748 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax |
| 5,477 | | | | 5,477 | ||||||||||||||||||
Unrealized losses on interest rate swaps, net of tax |
| (5,435 | ) | | | | (5,435 | ) | ||||||||||||||||
Unrealized holding losses on available for sale securities, net of tax |
| | (1,053 | ) | (58 | ) | | (1,111 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive loss |
| (3,706 | ) | (1,053 | ) | (117,698 | ) | | (122,457 | ) | ||||||||||||||
Comprehensive income (loss) |
367,089 | 391,114 | 389,179 | (1,664 | ) | (891,893 | ) | 253,825 | ||||||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
| | | 9,170 | | 9,170 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) attributable to CBRE Group, Inc. |
$ | 367,089 | $ | 391,114 | $ | 389,179 | $ | (10,834 | ) | $ | (891,893 | ) | $ | 244,655 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
37
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Elimination | Consolidated Total |
|||||||||||||||||||
Net income |
$ | 280,226 | $ | 304,873 | $ | 274,893 | $ | 69,623 | $ | (621,782 | ) | $ | 307,833 | |||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation loss |
| | | (72,676 | ) | | (72,676 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax |
| 5,470 | | | | 5,470 | ||||||||||||||||||
Unrealized (losses) gains on interest rate swaps and interest rate caps, net of tax |
| (3,521 | ) | | 61 | | (3,460 | ) | ||||||||||||||||
Unrealized holding losses on available for sale securities, net of tax |
| | (495 | ) | (175 | ) | | (670 | ) | |||||||||||||||
Other, net |
| | 211 | | | 211 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive income (loss) |
| 1,949 | (284 | ) | (72,790 | ) | | (71,125 | ) | |||||||||||||||
Comprehensive income (loss) |
280,226 | 306,822 | 274,609 | (3,167 | ) | (621,782 | ) | 236,708 | ||||||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
| | | 27,556 | | 27,556 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income (loss) attributable to CBRE Group, Inc. |
$ | 280,226 | $ | 306,822 | $ | 274,609 | $ | (30,723 | ) | $ | (621,782 | ) | $ | 209,152 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
38
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Consolidated Total |
||||||||||||||||
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: |
$ | 31,155 | $ | (13,282 | ) | $ | 106,066 | $ | 18,471 | $ | 142,410 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||||||
Capital expenditures |
| | (45,646 | ) | (39,678 | ) | (85,324 | ) | ||||||||||||
Acquisition of GWS, including net assets acquired, intangibles and goodwill, net of cash acquired |
| | (730,307 | ) | (691,356 | ) | (1,421,663 | ) | ||||||||||||
Acquisition of businesses (other than GWS), including net assets acquired, intangibles and goodwill, net of cash acquired |
| | (94,498 | ) | (8,642 | ) | (103,140 | ) | ||||||||||||
Contributions to unconsolidated subsidiaries |
| | (44,279 | ) | (1,513 | ) | (45,792 | ) | ||||||||||||
Distributions from unconsolidated subsidiaries |
| | 37,876 | 4,862 | 42,738 | |||||||||||||||
Net proceeds from disposition of real estate held for investment |
| | | 3,584 | 3,584 | |||||||||||||||
Additions to real estate held for investment |
| | | (1,773 | ) | (1,773 | ) | |||||||||||||
Proceeds from the sale of servicing rights and other assets |
| | 9,512 | 11,922 | 21,434 | |||||||||||||||
Increase in restricted cash |
| | (6,329 | ) | (35,535 | ) | (41,864 | ) | ||||||||||||
Purchase of available for sale securities |
| | (31,919 | ) | | (31,919 | ) | |||||||||||||
Proceeds from the sale of available for sale securities |
| | 33,063 | | 33,063 | |||||||||||||||
Other investing activities, net |
| | (1,290 | ) | | (1,290 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash used in investing activities |
| | (873,817 | ) | (758,129 | ) | (1,631,946 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||||||
Proceeds from senior term loans |
| 900,000 | | | 900,000 | |||||||||||||||
Repayment of senior term loans |
| (651,863 | ) | | | (651,863 | ) | |||||||||||||
Proceeds from revolving credit facility |
| 2,107,500 | | | 2,107,500 | |||||||||||||||
Repayment of revolving credit facility |
| (1,707,000 | ) | | (4,512 | ) | (1,711,512 | ) | ||||||||||||
Proceeds from issuance of 4.875% senior notes, net |
| 595,440 | | | 595,440 | |||||||||||||||
Repayment of notes payable on real estate held for investment |
| | | (1,173 | ) | (1,173 | ) | |||||||||||||
Proceeds from notes payable on real estate held for sale and under development |
| | | 12,584 | 12,584 | |||||||||||||||
Proceeds from short-term borrowings, net |
| | | 15,862 | 15,862 | |||||||||||||||
Shares repurchased for payment of taxes on equity awards |
(24,517 | ) | | | | (24,517 | ) | |||||||||||||
Proceeds from exercise of stock options |
6,755 | | | | 6,755 | |||||||||||||||
Incremental tax benefit from stock options exercised |
2,270 | | | | 2,270 | |||||||||||||||
Non-controlling interests contributions |
| | | 4,691 | 4,691 | |||||||||||||||
Non-controlling interests distributions |
| | | (13,595 | ) | (13,595 | ) | |||||||||||||
Payment of financing costs |
| (30,046 | ) | | (84 | ) | (30,130 | ) | ||||||||||||
(Increase) decrease in intercompany receivables, net |
(15,667 | ) | (1,213,184 | ) | 446,801 | 782,050 | | |||||||||||||
Other financing activities, net |
| | (2,113 | ) | (29 | ) | (2,142 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by financing activities |
(31,159 | ) | 847 | 444,688 | 795,794 | 1,210,170 | ||||||||||||||
Effect of currency exchange rate changes on cash and cash equivalents |
| | | (21,161 | ) | (21,161 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(4 | ) | (12,435 | ) | (323,063 | ) | 34,975 | (300,527 | ) | |||||||||||
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD |
5 | 18,262 | 374,103 | 348,514 | 740,884 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH AND CASH EQUIVALENTS, AT END OF PERIOD |
$ | 1 | $ | 5,827 | $ | 51,040 | $ | 383,489 | $ | 440,357 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||||||||||
Cash paid during the period for: |
||||||||||||||||||||
Interest |
$ | | $ | 79,527 | $ | 83 | $ | 1,212 | $ | 80,822 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income tax payments, net |
$ | | $ | | $ | 126,421 | $ | 84,213 | $ | 210,634 | ||||||||||
|
|
|
|
|
|
|
|
|
|
39
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Consolidated Total |
||||||||||||||||
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: |
$ | 20,732 | $ | 83,198 | $ | (9,694 | ) | $ | (25,758 | ) | $ | 68,478 | ||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||||||
Capital expenditures |
| | (63,544 | ) | (29,074 | ) | (92,618 | ) | ||||||||||||
Acquisition of businesses, including net assets acquired, intangibles and goodwill, net of cash acquired |
| | (51,989 | ) | (80,552 | ) | (132,541 | ) | ||||||||||||
Contributions to unconsolidated subsidiaries |
| | (37,674 | ) | (2,429 | ) | (40,103 | ) | ||||||||||||
Distributions from unconsolidated subsidiaries |
| | 49,152 | 13,826 | 62,978 | |||||||||||||||
Net proceeds from disposition of real estate held for investment |
| | | 77,278 | 77,278 | |||||||||||||||
Additions to real estate held for investment |
| | | (5,043 | ) | (5,043 | ) | |||||||||||||
Proceeds from the sale of servicing rights and other assets |
| | 7,514 | 10,655 | 18,169 | |||||||||||||||
Decrease (increase) in restricted cash |
| 6,871 | 464 | (2,904 | ) | 4,431 | ||||||||||||||
Purchase of available for sale securities |
| | (68,984 | ) | | (68,984 | ) | |||||||||||||
Proceeds from the sale of available for sale securities |
| | 61,357 | | 61,357 | |||||||||||||||
Other investing activities, net |
| | 570 | | 570 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash provided by (used in) investing activities |
| 6,871 | (103,134 | ) | (18,243 | ) | (114,506 | ) | ||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||||||
Repayment of senior secured term loans |
| (29,738 | ) | | | (29,738 | ) | |||||||||||||
Proceeds from revolving credit facility |
| 1,622,000 | | 66,568 | 1,688,568 | |||||||||||||||
Repayment of revolving credit facility |
| (1,630,928 | ) | | (41,431 | ) | (1,672,359 | ) | ||||||||||||
Proceeds from issuance of 5.25% senior notes |
| 300,000 | | | 300,000 | |||||||||||||||
Proceeds from notes payable on real estate held for investment |
| | | 5,022 | 5,022 | |||||||||||||||
Repayment of notes payable on real estate held for investment |
| | | (27,241 | ) | (27,241 | ) | |||||||||||||
Proceeds from notes payable on real estate held for sale and under development |
| | | 4,884 | 4,884 | |||||||||||||||
Repayment of notes payable on real estate held for sale and under development |
| | | (44,959 | ) | (44,959 | ) | |||||||||||||
Proceeds from short-term borrowings, net |
| | | 4,545 | 4,545 | |||||||||||||||
Shares repurchased for payment of taxes on equity awards |
(16,656 | ) | | | | (16,656 | ) | |||||||||||||
Proceeds from exercise of stock options |
4,466 | | | | 4,466 | |||||||||||||||
Incremental tax benefit from stock options exercised |
803 | | | | 803 | |||||||||||||||
Non-controlling interests contributions |
| | | 1,415 | 1,415 | |||||||||||||||
Non-controlling interests distributions |
| | | (31,998 | ) | (31,998 | ) | |||||||||||||
Payment of financing costs |
| (3,045 | ) | | (104 | ) | (3,149 | ) | ||||||||||||
(Increase) decrease in intercompany receivables, net |
(9,345 | ) | (297,717 | ) | 243,097 | 63,965 | | |||||||||||||
Other financing activities, net |
| | (1,437 | ) | (9 | ) | (1,446 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by financing activities |
(20,732 | ) | (39,428 | ) | 241,660 | 657 | 182,157 | |||||||||||||
Effect of currency exchange rate changes on cash and cash equivalents |
| | | (12,683 | ) | (12,683 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 50,641 | 128,832 | (56,027 | ) | 123,446 | ||||||||||||||
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD |
5 | 11,585 | 91,244 | 389,078 | 491,912 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH AND CASH EQUIVALENTS, AT END OF PERIOD |
$ | 5 | $ | 62,226 | $ | 220,076 | $ | 333,051 | $ | 615,358 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||||||||||
Cash paid during the period for: |
||||||||||||||||||||
Interest |
$ | | $ | 76,519 | $ | 355 | $ | 3,762 | $ | 80,636 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income tax payments, net |
$ | | $ | | $ | 177,792 | $ | 88,418 | $ | 266,210 | ||||||||||
|
|
|
|
|
|
|
|
|
|
40
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q for CBRE Group, Inc. for the three months ended September 30, 2015 represents an update to the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2014. Accordingly, you should read the following discussion in conjunction with the information included in our Annual Report on Form 10-K as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q (this Quarterly Report).
In addition, the statements and assumptions in this Quarterly Report that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond. For important information regarding these forward-looking statements, please see the discussion below under the caption Cautionary Note on Forward-Looking Statements.
Overview
We are the worlds largest commercial real estate services and investment firm, based on 2014 revenue, with leading full-service operations in major metropolitan areas throughout the world. We offer a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multifamily and other types of commercial real estate. Excluding independent affiliates, we operate in more than 400 offices worldwide, with more than 70,000 employees providing commercial real estate services under the CBRE brand name, investment management services under the CBRE Global Investors brand name and development services under the Trammell Crow brand name. Our business is focused on several competencies, including commercial property and corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage origination and servicing, and debt/structured finance), real estate investment management, valuation, development services and proprietary research. We generate revenue from management fees on a contractual and per-project basis, and from commissions on transactions. CBRE has been included in the S&P 500 since 2006 and the Fortune 500 since 2008 and was ranked #321 in 2015. Fortune has ranked us among the Most Admired Companies in the real estate sector for three consecutive years, including in 2015, and the International Association of Outsourcing Professionals has included us among the top 100 global outsourcing companies across all industries for nine consecutive years, including in 2015.
When you read our financial statements and the information included in this Quarterly Report, you should consider that we have experienced, and continue to experience, several material trends and uncertainties that have affected our financial condition and results of operations that make it challenging to predict our future performance based on our historical results. We believe that the following material trends and uncertainties are crucial to an understanding of the variability in our historical earnings and cash flows and the potential for continued variability in the future:
Macroeconomic Conditions
Economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly. These include: overall economic activity and employment growth, interest rate levels, the cost and availability of credit and the impact of tax and regulatory policies. Periods of economic weakness or recession, significantly rising interest rates, fiscal uncertainty, declining employment levels, decreasing demand for commercial real estate, falling real estate values, disruption to the global capital or credit markets, or the public perception that any of these events may occur, will negatively affect the performance of some of our business lines.
Compensation is our largest expense and the sales and leasing professionals in our advisory services business generally are paid on a commission and bonus basis that correlates with their revenue production. As a
41
result, the negative effect of difficult market conditions on our operating margins is partially mitigated by the inherent variability of our compensation cost structure. In addition, when negative economic conditions have been particularly severe, we have moved decisively to lower operating expenses to improve financial performance, and then have restored certain expenses as economic conditions improved. Nevertheless, adverse global and regional economic trends could be significant risks to the performance of our operations and our financial condition.
Commercial real estate markets have recovered over the past several years in step with the steady improvement in global economic activity, most particularly in the United States. Since 2010, increased U.S. property sales activity has been sustained by gradually improving occupancy, market conditions and increased demand for space as well as the availability of low-cost credit and increased capital flows into commercial real estate. During this time, U.S. leasing markets have been marked by falling vacancies, higher rents and increased occupancy.
European economies began to emerge from recession in 2013, with most countries returning to positive, albeit very modest, economic growth. Reflecting the macro environment, leasing markets in most of Europe have been slow to recover, but have shown some modest improvement over the past year. On the other hand, property sales have increased significantly, with higher volumes occurring across much of Europe in 2014 and 2015, with notable strength in certain gateway markets, including London. As in the United States, European property sales have been buoyed by the availability of low-cost credit and increased capital flows into commercial real estate.
In Asia Pacific, the performance of real estate leasing and investment markets has varied from country to country amid slowing economic growth. In addition, increasingly, local capital has been migrating to other parts of the world.
Real estate investment management and property development markets remain generally favorable as debt and equity capital flows into commercial real estate have been abundant. However, real estate securities markets have been adversely affected for much of 2015 by investor concerns about rising interest rates.
The performance of our global sales, leasing, investment management and development services operations depends on sustained economic growth and strong job creation; stable, healthy global credit markets; and continued positive business and investor sentiment.
Effects of Acquisitions
The Company historically has made significant use of strategic acquisitions to add new service competencies, to increase our scale within existing competencies and to expand our presence in various geographic regions around the world. On March 31, 2015, CBRE, Inc., our wholly-owned subsidiary, entered into a Stock and Asset Purchase Agreement (the Purchase Agreement) with Johnson Controls, Inc. (JCI) to acquire JCIs Global Workplace Solutions (GWS) business. The acquired GWS business is a market-leading provider of Integrated Facilities Management solutions for major occupiers of commercial real estate and has significant operations around the world. This acquisition (which we refer to as the GWS Acquisition) closed on September 1, 2015. The purchase price was $1.475 billion, payable in cash, with adjustments for working capital and other items. We completed the GWS Acquisition in order to advance our strategy of delivering globally integrated services to major occupiers in our Americas, EMEA and Asia Pacific segments. GWS has been merged with our occupier outsourcing business line, and the new combined business has adopted the Global Workplace Solutions name.
Strategic in-fill acquisitions have also played a key role in expanding our geographic coverage and broadening and strengthening our service offerings. The companies we acquired have generally been quality regional or specialty firms that complement our existing platform within a region, or independent affiliates in which, in some cases, we held a small equity interest. During 2014, we completed 11 in-fill acquisitions, including our former independent affiliate companies in Thailand, Greenville, South Carolina, Louisville,
42
Kentucky and Oklahoma City and Tulsa, Oklahoma, a commercial real estate service provider in Chicago, a New York-based valuation and advisory business, a technical real estate consulting firm based in Germany, a consulting and advisory firm in the U.S. hotels sector, a shopping center management, leasing and consulting company in Switzerland and project management companies in Germany and Australia. During the nine months ended September 30, 2015, we completed four in-fill acquisitions, including a Texas-based commercial real estate firm specializing in retail services, an energy management specialist based in Brookfield, Wisconsin, our former independent affiliate company in Columbia, South Carolina, and an advisory, consulting and research firm in Canada specializing in the Canadian hospitality and tourism industries. In addition, on November 2, 2015, we acquired one of the leading real estate services firms in the Midwestern United States.
Although we believe that strategic acquisitions can significantly decrease the cost, time and commitment of management resources necessary to attain a meaningful competitive position within targeted markets or to expand our presence within our current markets, in general, most acquisitions will initially have an adverse impact on our operating and net income, both as a result of transaction-related expenditures, which include severance, lease termination, transaction and deferred financing costs, among others, and the charges and costs of integrating the acquired business and its financial and accounting systems into our own. In addition, our acquisition structures often include deferred and/or contingent purchase price payments in future periods that are subject to the passage of time or achievement of certain performance metrics and other conditions. As of September 30, 2015, we have accrued deferred consideration totaling $67.7 million, which was included in accounts payable and accrued expenses and in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 1 of this Quarterly Report.
International Operations
As we increase our international operations through either acquisitions or organic growth, fluctuations in the value of the U.S. dollar relative to the other currencies in which we may generate earnings could adversely affect our business, financial condition and operating results. Our Global Investment Management business has a significant amount of euro-denominated assets under management, or AUM, as well as associated revenue and earnings in Europe, which has recently seen more pronounced (and adverse) movement in the value of the euro against the U.S. dollar. Similarly, the GWS business will also have a significant amount of its revenue and earnings denominated in foreign currencies, such as the British pound sterling and euro. Fluctuations in foreign currency exchange rates have resulted and may continue to result in corresponding fluctuations in our AUM, revenue and earnings.
We generally seek to mitigate our exposure by balancing assets and liabilities that are denominated in the same currency. Fluctuations in foreign currency exchange rates affect reported amounts of our total assets and liabilities, which are reflected in our financial statements as translated into U.S. dollars for each financial reporting period at the exchange rate in effect on the respective balance sheet dates, and our total revenue and expenses, which are reflected in our financial statements as translated into U.S. dollars for each financial reporting period at the monthly average exchange rate. During the nine months ended September 30, 2015, foreign currency translation had a $397.1 million negative impact on our total revenue and a $357.3 million positive impact on our total cost of services and operating, administrative and other expenses. In addition, from time to time we enter into foreign currency exchange contracts to attempt to mitigate some of our exposure to exchange rate changes related to particular transactions and to hedge risks associated with the translation of certain foreign currencies into U.S. dollars.
43
During the nine months ended September 30, 2015, approximately 43% of our business was transacted in non-U.S. dollar currencies, the majority of which included the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, euro, Hong Kong dollar, Indian rupee, Japanese yen, Singapore dollar and Swiss franc. Although we operate globally, we report our results in U.S. dollars. As a result, the strengthening or weakening of the U.S. dollar may positively or negatively impact our reported results. The following table sets forth our revenue derived from our most significant currencies (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||
United States dollar |
$ | 1,505,432 | 55.5 | % | $ | 1,267,982 | 55.7 | % | $ | 4,091,685 | 57.2 | % | $ | 3,455,655 | 55.2 | % | ||||||||||||||||
British pound sterling |
471,516 | 17.4 | 411,864 | 18.1 | 1,229,779 | 17.2 | 1,137,292 | 18.1 | ||||||||||||||||||||||||
euro |
256,964 | 9.5 | 184,213 | 8.1 | 600,303 | 8.4 | 530,340 | 8.5 | ||||||||||||||||||||||||
Australian dollar |
97,102 | 3.6 | 91,843 | 4.0 | 261,316 | 3.7 | 254,491 | 4.1 | ||||||||||||||||||||||||
Canadian dollar |
73,176 | 2.7 | 81,029 | 3.6 | 205,346 | 2.9 | 231,336 | 3.7 | ||||||||||||||||||||||||
Indian rupee |
39,668 | 1.5 | 33,263 | 1.5 | 115,788 | 1.6 | 95,206 | 1.5 | ||||||||||||||||||||||||
Japanese yen |
36,575 | 1.3 | 49,912 | 2.2 | 101,180 | 1.4 | 122,361 | 1.9 | ||||||||||||||||||||||||
Chinese yuan |
36,125 | 1.3 | 25,400 | 1.1 | 98,694 | 1.4 | 77,561 | 1.2 | ||||||||||||||||||||||||
Singapore dollar |
25,536 | 0.9 | 21,815 | 1.0 | 65,656 | 0.9 | 65,886 | 1.1 | ||||||||||||||||||||||||
Hong Kong dollar |
23,329 | 0.9 | 13,202 | 0.6 | 58,045 | 0.8 | 42,739 | 0.7 | ||||||||||||||||||||||||
Swiss franc |
16,448 | 0.6 | 3,115 | 0.1 | 30,699 | 0.4 | 15,710 | 0.2 | ||||||||||||||||||||||||
Brazilian real |
16,790 | 0.6 | 19,878 | 0.9 | 44,057 | 0.6 | 47,955 | 0.8 | ||||||||||||||||||||||||
Other currencies |
113,898 | 4.2 | 71,560 | 3.1 | 253,020 | 3.5 | 186,192 | 3.0 | ||||||||||||||||||||||||
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Total revenue |
$ | 2,712,559 | 100.0 | % | $ | 2,275,076 | 100.0 | % | $ | 7,155,568 | 100.0 | % | $ | 6,262,724 | 100.0 | % | ||||||||||||||||
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We estimate that had the British pound sterling-to-U.S. dollar exchange rates been 10% higher during the nine months ended September 30, 2015, the net impact would have been an increase in pre-tax income of $5.2 million. This hypothetical calculation estimates the impact of translating results into U.S. dollars, without giving effect to our hedging activities, and does not include an estimate of the impact a 10% change in the U.S. dollar against other currencies would have had on our foreign operations.
Due to the constantly changing currency exposures to which we are subject and the volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results. In addition, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. Our international operations also are subject to, among other things, political instability and changing regulatory environments, which affects the currency markets and which as a result may adversely affect our future financial condition and results of operations. We routinely monitor these risks and related costs and evaluate the appropriate amount of oversight to allocate towards business activities in foreign countries where such risks and costs are particularly significant.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that we believe to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, our consolidation policy, goodwill and other intangible assets, real estate and income taxes can be found in our Annual Report on Form 10-K for the year ended December 31, 2014. There have been no material changes to these policies as of September 30, 2015.
44
Results of Operations
The following table sets forth items derived from our consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014, presented in dollars and as a percentage of revenue (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||||||||||||||||
Revenue |
$ | 2,712,559 | 100.0 | % | $ | 2,275,076 | 100.0 | % | $ | 7,155,568 | 100.0 | % | $ | 6,262,724 | 100.0 | % | ||||||||||||||||
Costs and expenses: |
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Cost of services |
1,773,660 | 65.4 | 1,428,986 | 62.8 | 4,552,411 | 63.6 | 3,904,919 | 62.4 | ||||||||||||||||||||||||
Operating, administrative and other |
626,905 | 23.1 | 601,026 | 26.4 | 1,768,838 | 24.7 | 1,695,623 | 27.1 | ||||||||||||||||||||||||
Depreciation and amortization |
75,047 | 2.8 | 67,159 | 3.0 | 215,498 | 3.0 | 195,657 | 3.1 | ||||||||||||||||||||||||
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Total costs and expenses |
2,475,612 | 91.3 | 2,097,171 | 92.2 | 6,536,747 | 91.3 | 5,796,199 | 92.6 | ||||||||||||||||||||||||
Gain on disposition of real estate |
3,154 | 0.1 | 7,235 | 0.3 | 10,140 | 0.1 | 37,102 | 0.6 | ||||||||||||||||||||||||
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Operating income |
240,101 | 8.8 | 185,140 | 8.1 | 628,961 | 8.8 | 503,627 | 8.0 | ||||||||||||||||||||||||
Equity income from unconsolidated subsidiaries |
17,242 | 0.6 | 43,300 | 1.9 | 39,386 | 0.5 | 67,564 | 1.1 | ||||||||||||||||||||||||