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, 2016
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 31, 2016 was 337,279,372.
FORM 10-Q
September 30, 2016
TABLE OF CONTENTS
Page | ||||||
Item 1. |
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Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015 |
3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
Consolidated Statement of Equity for the nine months ended September 30, 2016 (Unaudited) |
7 | |||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
36 | ||||
Item 3. |
58 | |||||
Item 4. |
59 | |||||
Item 1. |
59 | |||||
Item 1A. |
60 | |||||
Item 6. |
60 | |||||
64 |
Item 1. | Financial Statements |
CBRE GROUP, INC.
(Dollars in thousands, except share data)
September 30, 2016 |
December 31, 2015 |
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(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: |
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Cash and cash equivalents |
$ | 446,346 | $ | 540,403 | ||||
Restricted cash |
70,755 | 72,764 | ||||||
Receivables, less allowance for doubtful accounts of $47,481 and $46,606 at September 30, 2016 and December 31, 2015, respectively |
2,399,161 | 2,471,740 | ||||||
Warehouse receivables |
1,642,394 | 1,767,107 | ||||||
Income taxes receivable |
88,560 | 59,331 | ||||||
Prepaid expenses |
195,179 | 172,922 | ||||||
Other current assets |
213,082 | 220,956 | ||||||
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Total Current Assets |
5,055,477 | 5,305,223 | ||||||
Property and equipment, net |
550,779 | 529,823 | ||||||
Goodwill |
3,045,084 | 3,085,997 | ||||||
Other intangible assets, net of accumulated amortization of $727,183 and $589,236 at September 30, 2016 and December 31, 2015, respectively |
1,414,831 | 1,450,469 | ||||||
Investments in unconsolidated subsidiaries |
249,883 | 217,943 | ||||||
Deferred tax assets, net |
106,349 | 135,252 | ||||||
Other assets, net |
354,367 | 293,236 | ||||||
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Total Assets |
$ | 10,776,770 | $ | 11,017,943 | ||||
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LIABILITIES AND EQUITY | ||||||||
Current Liabilities: |
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Accounts payable and accrued expenses |
$ | 1,365,528 | $ | 1,484,119 | ||||
Compensation and employee benefits payable |
741,194 | 705,070 | ||||||
Accrued bonus and profit sharing |
608,979 | 866,894 | ||||||
Income taxes payable |
46,866 | 82,194 | ||||||
Short-term borrowings: |
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Warehouse lines of credit (which fund loans that U.S. Government Sponsored Entities have committed to purchase) |
1,619,091 | 1,750,781 | ||||||
Revolving credit facility |
83,000 | | ||||||
Other |
16 | 16 | ||||||
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Total short-term borrowings |
1,702,107 | 1,750,797 | ||||||
Current maturities of long-term debt |
45,027 | 34,428 | ||||||
Other current liabilities |
57,163 | 70,655 | ||||||
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Total Current Liabilities |
4,566,864 | 4,994,157 | ||||||
Long-term debt, net of current maturities |
2,614,898 | 2,645,111 | ||||||
Deferred tax liabilities, net |
85,355 | 100,361 | ||||||
Non-current tax liabilities |
91,767 | 88,667 | ||||||
Other liabilities |
436,383 | 430,577 | ||||||
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Total Liabilities |
7,795,267 | 8,258,873 | ||||||
Commitments and contingencies |
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Equity: |
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CBRE Group, Inc. Stockholders Equity: |
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Class A common stock; $0.01 par value; 525,000,000 shares authorized; 337,279,372 and 334,230,496 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively |
3,373 | 3,342 | ||||||
Additional paid-in capital |
1,124,062 | 1,106,758 | ||||||
Accumulated earnings |
2,392,931 | 2,088,227 | ||||||
Accumulated other comprehensive loss |
(585,341 | ) | (485,675 | ) | ||||
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Total CBRE Group, Inc. Stockholders Equity |
2,935,025 | 2,712,652 | ||||||
Non-controlling interests |
46,478 | 46,418 | ||||||
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Total Equity |
2,981,503 | 2,759,070 | ||||||
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Total Liabilities and Equity |
$ | 10,776,770 | $ | 11,017,943 | ||||
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The accompanying notes are an integral part of these consolidated financial statements.
3
CBRE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except share data)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Revenue |
$ | 3,193,487 | $ | 2,712,559 | $ | 9,247,758 | $ | 7,155,568 | ||||||||
Costs and expenses: |
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Cost of services |
2,252,783 | 1,773,660 | 6,520,629 | 4,552,411 | ||||||||||||
Operating, administrative and other |
686,530 | 626,905 | 2,010,338 | 1,768,838 | ||||||||||||
Depreciation and amortization |
92,725 | 75,047 | 269,987 | 215,498 | ||||||||||||
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Total costs and expenses |
3,032,038 | 2,475,612 | 8,800,954 | 6,536,747 | ||||||||||||
Gain on disposition of real estate |
11,043 | 3,154 | 15,862 | 10,140 | ||||||||||||
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Operating income |
172,492 | 240,101 | 462,666 | 628,961 | ||||||||||||
Equity income from unconsolidated subsidiaries |
24,672 | 17,242 | 116,902 | 39,386 | ||||||||||||
Other income (loss) |
1,356 | (4,945 | ) | 8,453 | (4,927 | ) | ||||||||||
Interest income |
1,020 | 1,158 | 5,545 | 4,857 | ||||||||||||
Interest expense |
37,273 | 30,699 | 109,050 | 83,067 | ||||||||||||
Write-off of financing costs on extinguished debt |
| | | 2,685 | ||||||||||||
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Income before provision for income taxes |
162,267 | 222,857 | 484,516 | 582,525 | ||||||||||||
Provision for income taxes |
51,414 | 72,866 | 165,578 | 206,243 | ||||||||||||
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Net income |
110,853 | 149,991 | 318,938 | 376,282 | ||||||||||||
Less: Net income attributable to non-controlling interests |
6,690 | 868 | 10,940 | 9,193 | ||||||||||||
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Net income attributable to CBRE Group, Inc. |
$ | 104,163 | $ | 149,123 | $ | 307,998 | $ | 367,089 | ||||||||
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Basic income per share: |
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Net income per share attributable to CBRE Group, Inc. |
$ | 0.31 | $ | 0.45 | $ | 0.92 | $ | 1.10 | ||||||||
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Weighted average shares outstanding for basic income per share |
335,770,122 | 332,684,487 | 334,949,606 | 332,223,036 | ||||||||||||
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Diluted income per share: |
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Net income per share attributable to CBRE Group, Inc. |
$ | 0.31 | $ | 0.44 | $ | 0.91 | $ | 1.09 | ||||||||
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Weighted average shares outstanding for diluted income per share |
338,488,975 | 336,561,877 | 338,053,297 | 336,140,923 | ||||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
4
CBRE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income |
$ | 110,853 | $ | 149,991 | $ | 318,938 | $ | 376,282 | ||||||||
Other comprehensive loss: |
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Foreign currency translation loss |
(15,940 | ) | (69,728 | ) | (101,654 | ) | (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 |
1,720 | 1,873 | 5,196 | 5,477 | ||||||||||||
Unrealized gains (losses) on interest rate swaps, net of tax |
788 | (2,924 | ) | (3,327 | ) | (5,435 | ) | |||||||||
Unrealized holding gains (losses) on available for sale securities, net of tax |
348 | (1,182 | ) | 993 | (1,111 | ) | ||||||||||
Other, net |
2 | (18 | ) | (757 | ) | | ||||||||||
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Total other comprehensive loss |
(13,082 | ) | (75,727 | ) | (99,549 | ) | (122,457 | ) | ||||||||
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Comprehensive income |
97,771 | 74,264 | 219,389 | 253,825 | ||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
6,768 | 861 | 11,057 | 9,170 | ||||||||||||
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Comprehensive income attributable to CBRE Group, Inc. |
$ | 91,003 | $ | 73,403 | $ | 208,332 | $ | 244,655 | ||||||||
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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
(Unaudited)
(Dollars in thousands)
Nine Months Ended September 30, |
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2016 | 2015 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
$ | 318,938 | $ | 376,282 | ||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
269,987 | 215,498 | ||||||
Gain on sale of loans, servicing rights and other assets |
(134,775 | ) | (105,178 | ) | ||||
Amortization and write-off of financing costs on extinguished debt |
8,302 | 9,703 | ||||||
Net realized and unrealized (gains) losses from investments |
(8,453 | ) | 4,927 | |||||
Gain on disposition of real estate held for investment |
(9,901 | ) | (8,573 | ) | ||||
Equity income from unconsolidated subsidiaries |
(116,902 | ) | (39,386 | ) | ||||
Provision for doubtful accounts |
6,805 | 7,039 | ||||||
Compensation expense for equity awards |
43,346 | 48,119 | ||||||
Incremental tax benefit from stock options exercised |
| (2,270 | ) | |||||
Distribution of earnings from unconsolidated subsidiaries |
19,982 | 22,900 | ||||||
Tenant concessions received |
7,667 | 6,770 | ||||||
Purchase of trading securities |
(76,136 | ) | (64,442 | ) | ||||
Proceeds from sale of trading securities |
84,234 | 57,901 | ||||||
Decrease (increase) in receivables |
46,275 | (3,022 | ) | |||||
Increase in prepaid expenses and other assets |
(101,916 | ) | (71,762 | ) | ||||
Decrease (increase) in real estate held for sale and under development |
2,870 | (11,542 | ) | |||||
(Decrease) increase in accounts payable and accrued expenses |
(125,471 | ) | 4,490 | |||||
Decrease in compensation and employee benefits payable and accrued bonus and profit sharing |
(210,670 | ) | (269,396 | ) | ||||
Increase in income taxes receivable/payable |
(66,589 | ) | (4,584 | ) | ||||
Increase (decrease) in other liabilities |
8,807 | (12,800 | ) | |||||
Other operating activities, net |
(19,589 | ) | (18,264 | ) | ||||
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Net cash (used in) provided by operating activities |
(53,189 | ) | 142,410 | |||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures |
(134,357 | ) | (85,324 | ) | ||||
Acquisition of Global Workplace Solutions (GWS), including net assets acquired, intangibles and goodwill, net of cash acquired |
(10,477 | ) | (1,421,663 | ) | ||||
Acquisition of businesses (other than GWS), including net assets acquired, intangibles and goodwill, net of cash acquired |
(22,066 | ) | (103,140 | ) | ||||
Contributions to unconsolidated subsidiaries |
(57,295 | ) | (45,792 | ) | ||||
Distributions from unconsolidated subsidiaries |
119,539 | 42,738 | ||||||
Net proceeds from disposition of real estate held for investment |
44,326 | 3,584 | ||||||
Proceeds from the sale of servicing rights and other assets |
27,159 | 21,434 | ||||||
Increase in restricted cash |
(1,623 | ) | (41,864 | ) | ||||
Purchase of available for sale securities |
(31,413 | ) | (31,919 | ) | ||||
Proceeds from the sale of available for sale securities |
29,560 | 33,063 | ||||||
Other investing activities, net |
(2,974 | ) | (3,063 | ) | ||||
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Net cash used in investing activities |
(39,621 | ) | (1,631,946 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from senior term loans |
| 900,000 | ||||||
Repayment of senior term loans |
(23,125 | ) | (651,863 | ) | ||||
Proceeds from revolving credit facility |
2,195,000 | 2,107,500 | ||||||
Repayment of revolving credit facility |
(2,112,000 | ) | (1,711,512 | ) | ||||
Proceeds from issuance of 4.875% senior notes, net |
| 595,440 | ||||||
Proceeds from notes payable on real estate held for investment |
7,274 | | ||||||
Repayment of notes payable on real estate held for investment |
(33,516 | ) | (1,173 | ) | ||||
Proceeds from notes payable on real estate held for sale and under development |
15,110 | 12,584 | ||||||
Repayment of notes payable on real estate held for sale and under development |
(4,102 | ) | | |||||
(Repayment of) proceeds from short-term borrowings and other loans, net |
(483 | ) | 15,862 | |||||
Shares repurchased for payment of taxes on equity awards |
(27,796 | ) | (24,517 | ) | ||||
Proceeds from exercise of stock options |
915 | 6,755 | ||||||
Incremental tax benefit from stock options exercised |
| 2,270 | ||||||
Non-controlling interest contributions |
1,478 | 4,691 | ||||||
Non-controlling interest distributions |
(12,800 | ) | (13,595 | ) | ||||
Payment of financing costs |
(5,601 | ) | (30,130 | ) | ||||
Other financing activities, net |
(1,193 | ) | (2,142 | ) | ||||
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Net cash (used in) provided by financing activities |
(839 | ) | 1,210,170 | |||||
Effect of currency exchange rate changes on cash and cash equivalents |
(408 | ) | (21,161 | ) | ||||
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
(94,057 | ) | (300,527 | ) | ||||
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD |
540,403 | 740,884 | ||||||
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CASH AND CASH EQUIVALENTS, AT END OF PERIOD |
$ | 446,346 | $ | 440,357 | ||||
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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 |
$ | 118,272 | $ | 80,822 | ||||
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Income taxes, net |
$ | 225,129 | $ | 210,634 | ||||
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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, 2015 |
$ | 3,342 | $ | 1,106,758 | $ | 2,088,227 | $ | (485,675 | ) | $ | 46,418 | $ | 2,759,070 | |||||||||||
Net income |
| | 307,998 | | 10,940 | 318,938 | ||||||||||||||||||
Adoption of Accounting Standards Update 2016-09, net of tax (see Note 2) |
| 4,975 | (3,294 | ) | | | 1,681 | |||||||||||||||||
Compensation expense for equity awards |
| 43,346 | | | | 43,346 | ||||||||||||||||||
Shares repurchased for payment of taxes on equity awards |
| (27,796 | ) | | | | (27,796 | ) | ||||||||||||||||
Foreign currency translation (loss) gain |
| | | (101,771 | ) | 117 | (101,654 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax |
| | | 5,196 | | 5,196 | ||||||||||||||||||
Unrealized losses on interest rate swaps, net of tax |
| | | (3,327 | ) | | (3,327 | ) | ||||||||||||||||
Unrealized holding gains on available for sale securities, net of tax |
| | | 993 | | 993 | ||||||||||||||||||
Contributions from non-controlling interests |
| | | | 1,478 | 1,478 | ||||||||||||||||||
Distributions to non-controlling interests |
| | | | (12,800 | ) | (12,800 | ) | ||||||||||||||||
Other |
31 | (3,221 | ) | | (757 | ) | 325 | (3,622 | ) | |||||||||||||||
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Balance at September 30, 2016 |
$ | 3,373 | $ | 1,124,062 | $ | 2,392,931 | $ | (585,341 | ) | $ | 46,478 | $ | 2,981,503 | |||||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | Basis of Presentation |
Readers of this Quarterly Report on Form 10-Q (Quarterly Report) should refer to the audited financial statements and notes to 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), for the year ended December 31, 2015, which are included in our 2015 Annual Report on Form 10-K (2015 Annual Report), filed with the United States Securities and Exchange Commission (SEC) and also available on our website (www.cbre.com), since we have omitted from this Quarterly Report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to Note 2, Significant Accounting Policies, in the notes to consolidated financial statements in our 2015 Annual Report for further discussion of our significant accounting policies and estimates.
The accompanying consolidated financial statements 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 2015 financial statements to conform with the 2016 presentation.
The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2016.
2. | New Accounting Pronouncements |
Recently Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU is intended to improve the accounting for share-based payment transactions as part of the FASBs simplification initiative. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. We elected to early adopt the provisions of ASU 2016-09 during the third quarter of 2016, which required us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The adoption of this ASU did not have a material impact on our consolidated financial statements.
ASU 2016-09 permits companies to make an accounting policy election to either estimate forfeitures on share-based payment awards, as previously required, or to recognize forfeitures as they occur. We elected to change our accounting policy to recognize forfeitures when they occur and the impact of this change in accounting policy has been recorded as a $3.3 million cumulative effect adjustment to accumulated earnings as
8
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of January 1, 2016. Additionally, this ASU requires the recognition of excess tax benefits and deficiencies as income tax benefits or expenses in the income statement rather than to additional paid-in capital, which has been applied on a prospective basis to settlements of share-based payment awards occurring on or after January 1, 2016. ASU 2016-09 also requires that excess tax benefits be presented as operating activities on the statement of cash flows, which we have elected to apply on a prospective basis. The remaining provisions of ASU 2016-09 did not have an impact on our consolidated financial statements.
Recent Accounting Pronouncements Pending Adoption
The FASB has recently issued four ASUs related to revenue recognition, all of which become effective for the Company on January 1, 2018. The ASUs issued are: (1) in May 2014, ASU 2014-09, Revenue from Contracts with Customers (Topic 606); (2) in March 2016, ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); (3) in April 2016, ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; and (4) in May 2016, ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients. ASU 2014-09 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 and will replace most existing revenue recognition guidance under GAAP. This ASU permits the use of either the retrospective or cumulative effect transition method. 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. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. We are evaluating the effect that ASU 2016-08 will have on our consolidated financial statements and related disclosures. ASU 2016-10 clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. ASU 2016-12 clarifies guidance in certain narrow areas and adds some practical expedients. We do not believe the application of ASU 2016-10 and ASU 2016-12 will have a material impact on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU will significantly change the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities when the fair value option is elected. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted, except for the provisions related to the recognition of changes in fair value of financial liabilities when the fair value option is elected. We do not believe the adoption of ASU 2016-01 will have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize most leases on-balance sheet and mandates a modified retrospective transition method for all entities. This ASU is effective for annual periods in fiscal years beginning after December 15, 2018. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. This ASU clarifies that a change in one of the parties to a derivative contract (through novation) that is part of a hedge accounting relationship does not, by itself, require designation of that relationship, as long as all other hedge accounting criteria continue to be met. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016, with early adoption permitted. We do not believe the adoption of ASU 2016-05 will have a material impact on our consolidated financial statements and related disclosures.
9
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
In March 2016, the FASB issued ASU 2016-07, InvestmentsEquity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This ASU eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. ASU 2016-07 should be applied prospectively upon its effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. This ASU is effective for all entities for interim and annual periods in fiscal years beginning after December 15, 2016, with early application permitted. We do not believe the application of ASU 2016-07 will have a material impact on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2016-15 will have on our consolidated financial statements and related disclosures.
3. | Acquisition of Global Workplace Solutions |
On September 1, 2015, CBRE, Inc., our wholly-owned subsidiary, pursuant to a Stock and Asset Purchase Agreement with Johnson Controls, Inc. (JCI), acquired JCIs Global Workplace Solutions business (we refer to this transaction as the GWS Acquisition). 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. The purchase price was $1.475 billion, paid in cash, plus adjustments totaling $46.5 million for working capital and other items.
The purchase accounting for the GWS Acquisition, including assignment of goodwill to our reporting units, has been finalized. There were no significant adjustments to the purchase price allocation recorded during the nine months ended September 30, 2016. The excess purchase price over the estimated fair value of net assets acquired of $858 million has been recorded to goodwill, with $406 million assigned to our Americas segment, $438 million assigned to our EMEA segment and $14 million assigned to our Asia Pacific segment. The goodwill arising from the GWS Acquisition consists largely of the synergies and economies of scale expected from combining the operations acquired from JCI with our business. Of the $858 million of goodwill recorded in connection with the GWS Acquisition, approximately $435 million is deductible for tax purposes.
Unaudited pro forma results, assuming the GWS Acquisition had occurred as of January 1, 2015 for purposes of the 2015 pro forma disclosures, are presented below. They include certain adjustments for the three and nine months ended September 30, 2015, including $17.9 million and $53.8 million, respectively, of increased amortization expense as a result of intangible assets acquired in the GWS Acquisition, $9.7 million and $30.8 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, net of the tax impact during the period of these pro forma adjustments. These pro forma results have
10
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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, 2015 and may not be indicative of future operating results (dollars in thousands, except share data):
Three Months Ended September 30, 2015 |
Nine Months Ended September 30, 2015 |
|||||||
Revenue |
$ | 3,210,559 | $ | 9,272,568 | ||||
Operating income |
$ | 258,417 | $ | 665,453 | ||||
Net income attributable to CBRE Group, Inc. |
$ | 156,597 | $ | 372,285 | ||||
Basic income per share: |
||||||||
Net income per share attributable to CBRE Group, Inc. |
$ | 0.47 | $ | 1.12 | ||||
Weighted average shares outstanding for basic income per share |
332,684,487 | 332,223,036 | ||||||
Diluted income per share: |
||||||||
Net income per share attributable to CBRE Group, Inc. |
$ | 0.47 | $ | 1.11 | ||||
Weighted average shares outstanding for diluted income per share |
336,561,877 | 336,140,923 |
4. | Variable Interest Entities (VIEs) |
We hold variable interests in certain variable interest entities (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, 2016 and December 31, 2015, our maximum exposure to loss related to the VIEs which are not consolidated was as follows (dollars in thousands):
September 30, 2016 | December 31, 2015 | |||||||
Investments in unconsolidated subsidiaries |
$ | 26,965 | $ | 21,457 | ||||
Other assets, current |
3,721 | 3,723 | ||||||
Co-investment commitments |
172 | 180 | ||||||
|
|
|
|
|||||
Maximum exposure to loss |
$ | 30,858 | $ | 25,360 | ||||
|
|
|
|
5. | Fair Value Measurements |
The Fair Value Measurements and Disclosures topic (Topic 820) of the FASB Accounting Standards Codification (ASC) 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 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. |
11
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| 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, 2016 and 2015. 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 2015 Annual Report.
The following tables present the fair value of assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 (dollars in thousands):
As of September 30, 2016 | ||||||||||||||||
Fair Value Measured and Recorded Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Available for sale securities: |
||||||||||||||||
Debt securities: |
||||||||||||||||
U.S. treasury securities |
$ | 8,381 | $ | | $ | | $ | 8,381 | ||||||||
Debt securities issued by U.S. federal agencies |
| 5,409 | | 5,409 | ||||||||||||
Corporate debt securities |
| 17,191 | | 17,191 | ||||||||||||
Asset-backed securities |
| 2,900 | | 2,900 | ||||||||||||
Collateralized mortgage obligations |
| 1,044 | | 1,044 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities |
8,381 | 26,544 | | 34,925 | ||||||||||||
Equity securities |
23,265 | | | 23,265 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale securities |
31,646 | 26,544 | | 58,190 | ||||||||||||
Trading securities |
66,707 | | | 66,707 | ||||||||||||
Warehouse receivables |
| 1,642,394 | | 1,642,394 | ||||||||||||
Foreign currency exchange forward contracts |
| 9,427 | | 9,427 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 98,353 | $ | 1,678,365 | $ | | $ | 1,776,718 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Interest rate swaps |
$ | | $ | 18,873 | $ | | $ | 18,873 | ||||||||
Securities sold, not yet purchased |
3,123 | | | 3,123 | ||||||||||||
Foreign currency exchange forward contracts |
| 4,841 | | 4,841 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities at fair value |
$ | 3,123 | $ | 23,714 | $ | | $ | 26,837 | ||||||||
|
|
|
|
|
|
|
|
12
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As of December 31, 2015 | ||||||||||||||||
Fair Value Measured and Recorded Using | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Available for sale securities: |
||||||||||||||||
Debt securities: |
||||||||||||||||
U.S. treasury securities |
$ | 7,350 | $ | | $ | | $ | 7,350 | ||||||||
Debt securities issued by U.S. federal agencies |
| 3,360 | | 3,360 | ||||||||||||
Corporate debt securities |
| 18,085 | | 18,085 | ||||||||||||
Asset-backed securities |
| 1,897 | | 1,897 | ||||||||||||
Collateralized mortgage obligations |
| 1,752 | | 1,752 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities |
7,350 | 25,094 | | 32,444 | ||||||||||||
Equity securities |
24,118 | | | 24,118 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale securities |
31,468 | 25,094 | | 56,562 | ||||||||||||
Trading securities |
64,124 | | | 64,124 | ||||||||||||
Warehouse receivables |
| 1,767,107 | | 1,767,107 | ||||||||||||
Loan commitments |
| | 1,680 | 1,680 | ||||||||||||
Foreign currency exchange forward contracts |
| 9,236 | | 9,236 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets at fair value |
$ | 95,592 | $ | 1,801,437 | $ | 1,680 | $ | 1,898,709 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Interest rate swaps |
$ | | $ | 21,502 | $ | | $ | 21,502 | ||||||||
Securities sold, not yet purchased |
4,436 | | | 4,436 | ||||||||||||
Foreign currency exchange forward contracts |
| 1,008 | | 1,008 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total liabilities at fair value |
$ | 4,436 | $ | 22,510 | $ | | $ | 26,946 | ||||||||
|
|
|
|
|
|
|
|
The following table provides additional information about fair value measurements for the Level 3 assets for the nine months ended September 30, 2016 (dollars in thousands):
Balance, December 31, 2015 |
$ | 1,680 | ||
Net gains included in earnings |
| |||
Settlements |
(1,680 | ) | ||
Transfers into (out of) Level 3 |
| |||
|
|
|||
Balance, September 30, 2016 |
$ | | ||
|
|
There were no significant non-recurring fair value measurements recorded during the three and nine months ended September 30, 2016 and 2015.
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 CashThese 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 AccountsDue to their short-term nature, fair value approximates carrying value. |
13
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
| Warehouse ReceivablesThese balances are carried at fair value based on market prices at the balance sheet date. |
| Trading and Available for Sale SecuritiesThese investments are carried at their fair value. |
| Foreign Currency Exchange Forward ContractsThese 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. |
| Securities Sold, not yet PurchasedThese liabilities are carried at their fair value. |
| Short-Term BorrowingsThe majority of this balance represents outstanding amounts under our warehouse lines of credit of our wholly-owned subsidiary, 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 (see Note 7). |
| Senior Term LoansBased 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 $855.8 million and $878.6 million at September 30, 2016 and December 31, 2015, respectively. Their actual carrying value, net of unamortized debt issuance costs, totaled $856.7 million and $877.9 million at September 30, 2016 and December 31, 2015, respectively (see Note 7). |
| Interest Rate SwapsThese 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. |
| Senior NotesBased on dealers quotes (which falls within Level 2 of the fair value hierarchy), the estimated fair values of our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes were $853.5 million, $638.0 million and $458.1 million, respectively, at September 30, 2016 and $802.6 million, $598.8 million and $430.4 million, respectively, at December 31, 2015. The actual carrying value of our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes, net of unamortized debt issuance costs as well as unamortized discount or premium, if applicable, totaled $790.1 million, $591.0 million and $422.1 million, respectively, at September 30, 2016 and $789.1 million, $590.5 million and $422.0 million, respectively, at December 31, 2015. |
14
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. | Investments in Unconsolidated Subsidiaries |
Investments in unconsolidated subsidiaries are accounted for under the equity method of accounting. Our investment ownership percentages in equity method investments vary, generally ranging up to 5.0% in our Global Investment Management segment, up to 10.0% in our Development Services segment, and up to 50% in our other business segments.
Combined condensed financial information for the entities actually accounted for using the equity method is as follows (dollars in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Global Investment Management |
||||||||||||||||
Revenue |
$ | 418,028 | $ | 221,245 | $ | 902,932 | $ | 728,144 | ||||||||
Operating income (loss) |
$ | 93,491 | $ | (26,625 | ) | $ | 155,869 | $ | (107,351 | ) | ||||||
Net income (loss) |
$ | 52,477 | $ | 56,182 | $ | 118,348 | $ | (175,014 | ) | |||||||
Development Services |
||||||||||||||||
Revenue |
$ | 26,179 | $ | 22,690 | $ | 57,255 | $ | 42,265 | ||||||||
Operating income |
$ | 26,027 | $ | 13,316 | $ | 184,136 | $ | 54,664 | ||||||||
Net income |
$ | 19,745 | $ | 9,812 | $ | 169,837 | $ | 47,299 | ||||||||
Other |
||||||||||||||||
Revenue |
$ | 40,292 | $ | 52,535 | $ | 106,807 | $ | 126,101 | ||||||||
Operating income |
$ | 6,130 | $ | 10,961 | $ | 20,418 | $ | 25,592 | ||||||||
Net income |
$ | 6,135 | $ | 11,126 | $ | 20,506 | $ | 26,027 | ||||||||
Total |
||||||||||||||||
Revenue |
$ | 484,499 | $ | 296,470 | $ | 1,066,994 | $ | 896,510 | ||||||||
Operating income (loss) |
$ | 125,648 | $ | (2,348 | ) | $ | 360,423 | $ | (27,095 | ) | ||||||
Net income (loss) |
$ | 78,357 | $ | 77,120 | $ | 308,691 | $ | (101,688 | ) |
7. | Long-Term Debt and Short-Term Borrowings |
Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
September 30, 2016 |
December 31, 2015 |
|||||||
Senior term loans, with interest ranging from 1.39% to 2.12%, due quarterly through 2022 |
$ | 865,000 | $ | 888,125 | ||||
5.00% senior notes due in 2023 |
800,000 | 800,000 | ||||||
4.875% senior notes due in 2026, net of unamortized discount |
595,824 | 595,568 | ||||||
5.25% senior notes due in 2025, net of unamortized premium |
426,545 | 426,682 | ||||||
Other |
36 | 63 | ||||||
|
|
|
|
|||||
Total long-term debt |
2,687,405 | 2,710,438 | ||||||
Less: current maturities of long-term debt |
(45,027 | ) | (34,428 | ) | ||||
Less: unamortized debt issuance costs |
(27,480 | ) | (30,899 | ) | ||||
|
|
|
|
|||||
Total long-term debt, net of current maturities |
$ | 2,614,898 | $ | 2,645,111 | ||||
|
|
|
|
15
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On January 9, 2015, CBRE Services, Inc. (CBRE), our wholly-owned subsidiary, 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 Credit Suisse AG. On March 21, 2016, we executed an amendment to the 2015 Credit Agreement which, among other things, extended the maturity on our revolving credit facility to March 2021 and increased the borrowing capacity under our revolving credit facility by $200.0 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, 2016, the 2015 Credit Agreement provided for the following: (1) a $2.8 billion revolving credit facility, which includes the capacity to obtain letters of credit and swingline loans and matures on March 21, 2021; (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 began 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 began on December 31, 2015 and continue through maturity on September 3, 2022.
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. On this basis, our coverage ratio of EBITDA to total interest expense was 12.09x for the trailing twelve months ended September 30, 2016, and our leverage ratio of total debt less available cash to EBITDA was 1.57x as of September 30, 2016.
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 made on March 1, 2016. The amount of the 4.875% senior notes, net of unamortized discount and unamortized debt issuance costs, included in the accompanying consolidated balance sheets was $591.0 million and $590.5 million at September 30, 2016 and December 31, 2015, respectively.
Short-Term Borrowings
Revolving Credit Facility
As of September 30, 2016, we had $83.0 million of revolving credit facility principal outstanding under the 2015 Credit Agreement with a weighted average annual interest rate of 3.5% and which was included in short-term borrowings in the accompanying consolidated balance sheets. As of September 30, 2016, 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, 2015, no amounts were outstanding under our revolving credit facility other than letters of credit totaling $2.0 million.
16
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Warehouse Lines of Credit
CBRE Capital Markets has warehouse lines of credit with third-party lenders for the purpose of funding mortgage loans that will be resold, and a funding arrangement with Federal National Mortgage Association (Fannie Mae) for the purpose of selling a percentage of certain closed multifamily loans to Fannie Mae. These warehouse lines are recourse only to CBRE Capital Markets and are secured by our related warehouse receivables.
During the nine months ended September 30, 2016, we had a maximum of $1.9 billion of warehouse lines of credit principal outstanding. As of September 30, 2016 and December 31, 2015, we had $1.6 billion and $1.8 billion, respectively, of warehouse lines of credit principal outstanding, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, we had $1.6 billion and $1.8 billion of mortgage loans held for sale (warehouse receivables) as of September 30, 2016 and December 31, 2015, respectively, included in the accompanying consolidated balance sheets, which substantially represented mortgage loans funded through the lines of credit that were either under commitment to be purchased by Federal Home Loan Mortgage Corporation (Freddie Mac) or had confirmed forward trade commitments for the issuance and purchase of Fannie Mae or Government National Mortgage Association (Ginnie Mae) mortgage backed securities that will be secured by the underlying loans.
8. | 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 Fannie Mae under Fannie Maes Delegated Underwriting and Servicing Lender Program (DUS Program), to provide financing for 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 selected 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 $15.0 billion at September 30, 2016. 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, 2016 and December 31, 2015, CBRE MCI had a $42.0 million and $35.0 million, respectively, letter of credit under this reserve arrangement, and had provided approximately $25.7 million and $21.8 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 $847.2 million (including $652.2 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, 2016.
We had outstanding letters of credit totaling $48.0 million as of September 30, 2016, 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 $42.0 million as of September 30, 2016 referred to in the preceding paragraph represented the majority of the $48.0 million outstanding letters of credit as of such date. The remaining letters of credit are primarily executed by us in the ordinary course of business and expire at varying dates through September 2017.
17
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
We had guarantees totaling $56.9 million as of September 30, 2016, 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 $56.9 million primarily represents guarantees executed by us in the ordinary course of business, including 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, 2016, 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 generally total up to 2.0% of the equity in a particular fund. As of September 30, 2016, we had aggregate commitments of $28.9 million to fund future co-investments.
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, 2016, we had committed to fund $24.2 million of additional capital to these unconsolidated subsidiaries.
18
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. | Income Per Share Information |
The calculations of basic and diluted income per share attributable to CBRE Group, Inc. shareholders are as follows (dollars in thousands, except share data):
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Basic Income Per Share |
||||||||||||||||
Net income attributable to CBRE Group, Inc. shareholders |
$ | 104,163 | $ | 149,123 | $ | 307,998 | $ | 367,089 | ||||||||
Weighted average shares outstanding for basic income per share |
335,770,122 | 332,684,487 | 334,949,606 | 332,223,036 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic income per share attributable to CBRE Group, Inc. shareholders |
$ | 0.31 | $ | 0.45 | $ | 0.92 | $ | 1.10 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted Income Per Share |
||||||||||||||||
Net income attributable to CBRE Group, Inc. shareholders |
$ | 104,163 | $ | 149,123 | $ | 307,998 | $ | 367,089 | ||||||||
Weighted average shares outstanding for basic income per share |
335,770,122 | 332,684,487 | 334,949,606 | 332,223,036 | ||||||||||||
Dilutive effect of contingently issuable shares |
2,707,401 | 3,747,524 | 3,070,134 | 3,701,801 | ||||||||||||
Dilutive effect of stock options |
11,452 | 129,866 | 33,557 | 216,086 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average shares outstanding for diluted income per share |
338,488,975 | 336,561,877 | 338,053,297 | 336,140,923 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Diluted income per share attributable to CBRE Group, Inc. shareholders |
$ | 0.31 | $ | 0.44 | $ | 0.91 | $ | 1.09 | ||||||||
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2016, 1,972,360 and 1,704,848, respectively, of contingently issuable shares were excluded from the computation of diluted income per share because their inclusion would have had an anti-dilutive effect.
For the three and nine months ended September 30, 2015, 743,638 of contingently issuable shares were excluded from the computation of diluted income per share because their inclusion would have had an anti-dilutive effect.
10. | Segments |
We report our operations through the following segments: (1) Americas; (2) Europe, Middle East and Africa (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: property sales, property leasing, mortgage services, appraisal and valuation, property management and occupier outsourcing services.
Our EMEA and Asia Pacific segments generally 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.
19
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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, |
|||||||||||||||
2016 | 2015 (1) | 2016 | 2015 (1) | |||||||||||||
Revenue |
||||||||||||||||
Americas |
$ | 1,770,369 | $ | 1,556,648 | $ | 5,129,684 | $ | 4,218,753 | ||||||||
EMEA |
956,492 | 737,863 | 2,765,825 | 1,817,601 | ||||||||||||
Asia Pacific |
358,320 | 285,337 | 1,023,162 | 755,531 | ||||||||||||
Global Investment Management |
91,807 | 114,094 | 277,924 | 318,371 | ||||||||||||
Development Services |
16,499 | 18,617 | 51,163 | 45,312 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 3,193,487 | $ | 2,712,559 | $ | 9,247,758 | $ | 7,155,568 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
||||||||||||||||
Americas |
$ | 186,274 | $ | 197,379 | $ | 568,019 | $ | 581,397 | ||||||||
EMEA |
49,774 | 56,666 | 101,690 | 114,328 | ||||||||||||
Asia Pacific |
26,744 | 33,252 | 57,673 | 77,438 | ||||||||||||
Global Investment Management |
6,054 | 29,397 | 53,577 | 80,390 | ||||||||||||
Development Services |
15,709 | 9,883 | 66,109 | 16,172 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total EBITDA |
$ | 284,555 | $ | 326,577 | $ | 847,068 | $ | 869,725 | ||||||||
|
|
|
|
|
|
|
|
(1) | During 2016, we changed our methodology for allocating certain costs to our reporting segments, including stock compensation, currency hedging and certain intercompany transactions. Prior year amounts have been reclassified to conform with the current year presentation. Such changes had no impact on our consolidated results. |
EBITDA represents earnings before net interest expense, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization. EBITDA is not a recognized measurement under 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 and enhances comparability of current results to prior periods. 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.
20
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 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 on extinguished debt have been expensed in the segment where 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, |
|||||||||||||||
2016 | 2015 (1) | 2016 | 2015 (1) | |||||||||||||
Americas |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 69,176 | $ | 92,008 | $ | 231,158 | $ | 286,796 | ||||||||
Add: |
||||||||||||||||
Depreciation and amortization |
62,545 | 47,209 | 186,342 | 134,750 | ||||||||||||
Interest expense, net |
21,492 | 9,692 | 64,583 | 17,485 | ||||||||||||
Write-off of financing costs on extinguished debt |
| | | 2,685 | ||||||||||||
Royalty and management service income |
(3,138 | ) | (2,703 | ) | (23,295 | ) | (9,668 | ) | ||||||||
Provision for income taxes |
36,199 | 51,173 | 109,231 | 149,349 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 186,274 | $ | 197,379 | $ | 568,019 | $ | 581,397 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
EMEA |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 23,524 | $ | 24,535 | $ | 19,278 | $ | 24,921 | ||||||||
Add: |
||||||||||||||||
Depreciation and amortization |
19,385 | 15,175 | 50,647 | 44,574 | ||||||||||||
Interest expense, net |
4,078 | 10,834 | 11,916 | 33,656 | ||||||||||||
Royalty and management service (income) expense |
(2,992 | ) | (1,452 | ) | 685 | (4,313 | ) | |||||||||
Provision for income taxes |
5,779 | 7,574 | 19,164 | 15,490 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 49,774 | $ | 56,666 | $ | 101,690 | $ | 114,328 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Asia Pacific |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 11,576 | $ | 16,665 | $ | 14,068 | $ | 29,643 | ||||||||
Add: |
||||||||||||||||
Depreciation and amortization |
4,479 | 3,728 | 12,957 | 11,357 | ||||||||||||
Interest expense, net |
1,250 | 800 | 1,292 | 2,689 | ||||||||||||
Royalty and management service expense |
5,277 | 3,581 | 19,629 | 11,342 | ||||||||||||
Provision for income taxes |
4,162 | 8,478 | 9,727 | 22,407 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 26,744 | $ | 33,252 | $ | 57,673 | $ | 77,438 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Global Investment Management |
||||||||||||||||
Net (loss) income attributable to CBRE Group, Inc. |
$ | (7,830 | ) | $ | 10,717 | $ | 7,635 | $ | 18,546 | |||||||
Add: |
||||||||||||||||
Depreciation and amortization |
5,673 | 8,423 | 18,110 | 23,095 | ||||||||||||
Interest expense, net |
7,611 | 8,060 | 23,124 | 23,562 | ||||||||||||
Royalty and management service expense |
853 | 574 | 2,981 | 2,639 | ||||||||||||
(Benefit of) provision for income taxes |
(253 | ) | 1,623 | 1,727 | 12,548 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 6,054 | $ | 29,397 | $ | 53,577 | $ | 80,390 | ||||||||
|
|
|
|
|
|
|
|
21
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2016 | 2015 (1) | 2016 | 2015 (1) | |||||||||||||
Development Services |
||||||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 7,717 | $ | 5,198 | $ | 35,859 | $ | 7,183 | ||||||||
Add: |
||||||||||||||||
Depreciation and amortization |
643 | 512 | 1,931 | 1,722 | ||||||||||||
Interest expense, net |
1,822 | 155 | 2,590 | 818 | ||||||||||||
Provision for income taxes |
5,527 | 4,018 | 25,729 | 6,449 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
EBITDA |
$ | 15,709 | $ | 9,883 | $ | 66,109 | $ | 16,172 | ||||||||
|
|
|
|
|
|
|
|
(1) | During 2016, we changed our methodology for allocating certain costs to our reporting segments, including stock compensation, currency hedging and certain intercompany transactions. Prior year amounts have been reclassified to conform with the current year presentation. Such changes had no impact on our consolidated results. |
11. | Guarantor and Nonguarantor Financial Statements |
The following condensed consolidating financial information includes condensed consolidating balance sheets as of September 30, 2016 and December 31, 2015, condensed consolidating statements of operations and condensed consolidating statements of comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015 and condensed consolidating statements of cash flows for the nine months ended September 30, 2016 and 2015 of:
| CBRE Group, Inc., as the parent; CBRE, as the subsidiary issuer; the guarantor subsidiaries; the nonguarantor subsidiaries; |
| Elimination entries necessary to consolidate CBRE Group, Inc., as the parent, with CBRE and its guarantor and nonguarantor subsidiaries; and |
| CBRE Group, Inc., on a consolidated basis. |
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.
22
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2016
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current Assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 5 | $ | 12,487 | $ | 24,015 | $ | 409,839 | $ | | $ | 446,346 | ||||||||||||
Restricted cash |
| | 6,966 | 63,789 | | 70,755 | ||||||||||||||||||
Receivables, net |
| | 932,035 | 1,467,126 | | 2,399,161 | ||||||||||||||||||
Warehouse receivables (1) |
| | 976,721 | 665,673 | | 1,642,394 | ||||||||||||||||||
Income taxes receivable |
1,287 | 1,043 | 21,373 | 64,857 | | 88,560 | ||||||||||||||||||
Prepaid expenses |
| | 76,532 | 118,647 | | 195,179 | ||||||||||||||||||
Other current assets |
| 9,377 | 62,490 | 141,215 | | 213,082 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Assets |
1,292 | 22,907 | 2,100,132 | 2,931,146 | | 5,055,477 | ||||||||||||||||||
Property and equipment, net |
| | 388,208 | 162,571 | | 550,779 | ||||||||||||||||||
Goodwill |
| | 1,647,160 | 1,397,924 | | 3,045,084 | ||||||||||||||||||
Other intangible assets, net |
| | 797,362 | 617,469 | | 1,414,831 | ||||||||||||||||||
Investments in unconsolidated subsidiaries |
| | 199,721 | 50,162 | | 249,883 | ||||||||||||||||||
Investments in consolidated subsidiaries |
4,104,563 | 4,103,473 | 2,428,313 | | (10,636,349 | ) | | |||||||||||||||||
Intercompany loan receivable |
| 2,729,242 | 700,000 | | (3,429,242 | ) | | |||||||||||||||||
Deferred tax assets, net |
| | 61,372 | 84,450 | (39,473 | ) | 106,349 | |||||||||||||||||
Other assets, net |
| 23,521 | 229,904 | 100,942 | | 354,367 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Assets |
$ | 4,105,855 | $ | 6,879,143 | $ | 8,552,172 | $ | 5,344,664 | $ | (14,105,064 | ) | $ | 10,776,770 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||||||
Accounts payable and accrued expenses |
$ | | $ | 7,351 | $ | 396,882 | $ | 961,295 | $ | | $ | 1,365,528 | ||||||||||||
Compensation and employee benefits payable |
| 626 | 397,483 | 343,085 | | 741,194 | ||||||||||||||||||
Accrued bonus and profit sharing |
| | 361,649 | 247,330 | | 608,979 | ||||||||||||||||||
Income taxes payable |
| | | 46,866 | | 46,866 | ||||||||||||||||||
Short-term borrowings: |
||||||||||||||||||||||||
Warehouse lines of credit (which fund loans that U.S. Government Sponsored Entities have committed to purchase) (1) |
| | 969,180 | 649,911 | | 1,619,091 | ||||||||||||||||||
Revolving credit facility |
| 83,000 | | | | 83,000 | ||||||||||||||||||
Other |
| | 16 | | | 16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total short-term borrowings |
| 83,000 | 969,196 | 649,911 | | 1,702,107 | ||||||||||||||||||
Current maturities of long-term debt |
| 45,000 | | 27 | | 45,027 | ||||||||||||||||||
Other current liabilities |
| 4,841 | 40,047 | 12,275 | | 57,163 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Liabilities |
| 140,818 | 2,165,257 | 2,260,789 | | 4,566,864 | ||||||||||||||||||
Long-Term Debt, net: |
||||||||||||||||||||||||
Long-term debt, net |
| 2,614,889 | | 9 | | 2,614,898 | ||||||||||||||||||
Intercompany loan payable |
1,170,830 | | 1,949,876 | 308,536 | (3,429,242 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Long-Term Debt, net |
1,170,830 | 2,614,889 | 1,949,876 | 308,545 | (3,429,242 | ) | 2,614,898 | |||||||||||||||||
Deferred tax liabilities, net |
| | | 124,828 | (39,473 | ) | 85,355 | |||||||||||||||||
Non-current tax liabilities |
| | 91,350 | 417 | | 91,767 | ||||||||||||||||||
Other liabilities |
| 18,873 | 242,216 | 175,294 | | 436,383 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities |
1,170,830 | 2,774,580 | 4,448,699 | 2,869,873 | (3,468,715 | ) | 7,795,267 | |||||||||||||||||
Commitments and contingencies |
| | | | | | ||||||||||||||||||
Equity: |
||||||||||||||||||||||||
CBRE Group, Inc. Stockholders Equity |
2,935,025 | 4,104,563 | 4,103,473 | 2,428,313 | (10,636,349 | ) | 2,935,025 | |||||||||||||||||
Non-controlling interests |
| | | 46,478 | | 46,478 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Equity |
2,935,025 | 4,104,563 | 4,103,473 | 2,474,791 | (10,636,349 | ) | 2,981,503 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities and Equity |
$ | 4,105,855 | $ | 6,879,143 | $ | 8,552,172 | $ | 5,344,664 | $ | (14,105,064 | ) | $ | 10,776,770 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | 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 TD Bank, N.A. (TD Bank), JP Morgan Chase Bank, N.A. (JP Morgan), Fannie Mae ASAP, Bank of America (BofA) and Capital One, N.A. (Capital One) lines of credit are pledged to TD Bank, JP Morgan, Fannie Mae, BofA and Capital One, and accordingly, are not included as collateral for these notes or our other outstanding debt. |
23
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2015
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Current Assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 5 | $ | 8,479 | $ | 147,410 | $ | 384,509 | $ | | $ | 540,403 | ||||||||||||
Restricted cash |
| | 6,421 | 66,343 | | 72,764 | ||||||||||||||||||
Receivables, net |
| | 860,776 | 1,610,964 | | 2,471,740 | ||||||||||||||||||
Warehouse receivables (1) |
| | 1,397,094 | 370,013 | | 1,767,107 | ||||||||||||||||||
Income taxes receivable |
25,912 | 6,365 | 10,552 | 48,779 | (32,277 | ) | 59,331 | |||||||||||||||||
Prepaid expenses |
| | 77,109 | 95,813 | | 172,922 | ||||||||||||||||||
Other current assets |
| 9,236 | 62,386 | 149,334 | | 220,956 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Assets |
25,917 | 24,080 | 2,561,748 | 2,725,755 | (32,277 | ) | 5,305,223 | |||||||||||||||||
Property and equipment, net |
| | 382,897 | 146,926 | | 529,823 | ||||||||||||||||||
Goodwill |
| | 1,626,618 | 1,459,379 | | 3,085,997 | ||||||||||||||||||
Other intangible assets, net |
| | 844,611 | 605,858 | | 1,450,469 | ||||||||||||||||||
Investments in unconsolidated subsidiaries |
| | 184,508 | 33,435 | | 217,943 | ||||||||||||||||||
Investments in consolidated subsidiaries |
3,699,642 | 3,796,841 | 2,360,544 | | (9,857,027 | ) | | |||||||||||||||||
Intercompany loan receivable |
| 2,590,949 | 700,000 | | (3,290,949 | ) | | |||||||||||||||||
Deferred tax assets, net |
| | 68,971 | 105,754 | (39,473 | ) | 135,252 | |||||||||||||||||
Other assets, net |
| 22,055 | 176,835 | 94,346 | | 293,236 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Assets |
$ | 3,725,559 | $ | 6,433,925 | $ | 8,906,732 | $ | 5,171,453 | $ | (13,219,726 | ) | $ | 11,017,943 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
LIABILITIES AND EQUITY | ||||||||||||||||||||||||
Current Liabilities: |
||||||||||||||||||||||||
Accounts payable and accrued expenses |
$ | | $ | 31,616 | $ | 395,509 | $ | 1,056,994 | $ | | $ | 1,484,119 | ||||||||||||
Compensation and employee benefits payable |
| 626 | 388,251 | 316,193 | | 705,070 | ||||||||||||||||||
Accrued bonus and profit sharing |
| | 479,106 | 387,788 | | 866,894 | ||||||||||||||||||
Income taxes payable |
| | 69,121 | 45,350 | (32,277 | ) | 82,194 | |||||||||||||||||
Short-term borrowings: |
||||||||||||||||||||||||
Warehouse lines of credit (which fund loans that U.S. Government Sponsored Entities have committed to purchase) (1) |
| | 1,388,033 | 362,748 | | 1,750,781 | ||||||||||||||||||
Other |
| | 16 | | | 16 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total short-term borrowings |
| | 1,388,049 | 362,748 | | 1,750,797 | ||||||||||||||||||
Current maturities of long-term debt |
| 34,375 | | 53 | | 34,428 | ||||||||||||||||||
Other current liabilities |
| 1,063 | 31,474 | 38,118 | | 70,655 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Current Liabilities |
| 67,680 | 2,751,510 | 2,207,244 | (32,277 | ) | 4,994,157 | |||||||||||||||||
Long-Term Debt, net: |
||||||||||||||||||||||||
Long-term debt, net |
| 2,645,101 | | 10 | | 2,645,111 | ||||||||||||||||||
Intercompany loan payable |
1,012,907 | | 2,043,433 | 234,609 | (3,290,949 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Long-Term Debt, net |
1,012,907 | 2,645,101 | 2,043,433 | 234,619 | (3,290,949 | ) | 2,645,111 | |||||||||||||||||
Deferred tax liabilities, net |
| | | 139,834 | (39,473 | ) | 100,361 | |||||||||||||||||
Non-current tax liabilities |
| | 87,483 | 1,184 | | 88,667 | ||||||||||||||||||
Other liabilities |
| 21,502 | 227,465 | 181,610 | | 430,577 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities |
1,012,907 | 2,734,283 | 5,109,891 | 2,764,491 | (3,362,699 | ) | 8,258,873 | |||||||||||||||||
Commitments and contingencies |
| | | | | | ||||||||||||||||||
Equity: |
||||||||||||||||||||||||
CBRE Group, Inc. Stockholders Equity |
2,712,652 | 3,699,642 | 3,796,841 | 2,360,544 | (9,857,027 | ) | 2,712,652 | |||||||||||||||||
Non-controlling interests |
| | | 46,418 | | 46,418 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Equity |
2,712,652 | 3,699,642 | 3,796,841 | 2,406,962 | (9,857,027 | ) | 2,759,070 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Liabilities and Equity |
$ | 3,725,559 | $ | 6,433,925 | $ | 8,906,732 | $ | 5,171,453 | $ | (13,219,726 | ) | $ | 11,017,943 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | 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 TD Bank, Capital One, BofA, JP Morgan and Fannie Mae ASAP lines of credit are pledged to TD Bank, Capital One, BofA, JP Morgan and Fannie Mae, and accordingly, are not included as collateral for these notes or our other outstanding debt. |
24
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||||||||||
Revenue |
$ | | $ | | $ | 1,611,836 | $ | 1,581,651 | $ | | $ | 3,193,487 | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services |
| | 1,149,943 | 1,102,840 | | 2,252,783 | ||||||||||||||||||
Operating, administrative and other |
1,165 | (158 | ) | 353,420 | 332,103 | | 686,530 | |||||||||||||||||
Depreciation and amortization |
| | 54,423 | 38,302 | | 92,725 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses |
1,165 | (158 | ) | 1,557,786 | 1,473,245 | | 3,032,038 | |||||||||||||||||
Gain on disposition of real estate |
| | | 11,043 | | 11,043 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(1,165 | ) | 158 | 54,050 | 119,449 | | 172,492 | |||||||||||||||||
Equity income from unconsolidated subsidiaries |
| | 24,287 | 385 | | 24,672 | ||||||||||||||||||
Other income |
| | 278 | 1,078 | | 1,356 | ||||||||||||||||||
Interest income |
| 33,550 | 592 | 428 | (33,550 | ) | 1,020 | |||||||||||||||||
Interest expense |
| 34,809 | 24,921 | 11,093 | (33,550 | ) | 37,273 | |||||||||||||||||
Royalty and management service (income) expense |
| | (2,972 | ) | 2,972 | | | |||||||||||||||||
Income from consolidated subsidiaries |
104,881 | 105,560 | 65,474 | | (275,915 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before (benefit of) provision for income taxes |
103,716 | 104,459 | 122,732 | 107,275 | (275,915 | ) | 162,267 | |||||||||||||||||
(Benefit of) provision for income taxes |
(447 | ) | (422 | ) | 17,172 | 35,111 | | 51,414 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
104,163 | 104,881 | 105,560 | 72,164 | (275,915 | ) | 110,853 | |||||||||||||||||
Less: Net income attributable to non-controlling interests |
| | | 6,690 | | 6,690 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 104,163 | $ | 104,881 | $ | 105,560 | $ | 65,474 | $ | (275,915 | ) | $ | 104,163 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
25
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 |
Eliminations | 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 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
26
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||||||||||
Revenue |
$ | | $ | | $ | 4,751,526 | $ | 4,496,232 | $ | | $ | 9,247,758 | ||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Cost of services |
| | 3,304,291 | 3,216,338 | | 6,520,629 | ||||||||||||||||||
Operating, administrative and other |
3,358 | (1,584 | ) | 1,061,778 | 946,786 | | 2,010,338 | |||||||||||||||||
Depreciation and amortization |
| | 165,087 | 104,900 | | 269,987 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total costs and expenses |
3,358 | (1,584 | ) | 4,531,156 | 4,268,024 | | 8,800,954 | |||||||||||||||||
Gain on disposition of real estate |
| | 3,659 | 12,203 | | 15,862 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Operating (loss) income |
(3,358 | ) | 1,584 | 224,029 | 240,411 | | 462,666 | |||||||||||||||||
Equity income from unconsolidated subsidiaries |
| | 114,504 | 2,398 | | 116,902 | ||||||||||||||||||
Other income (loss) |
| 1 | (203 | ) | 8,655 | | 8,453 | |||||||||||||||||
Interest income |
| 99,119 | 2,163 | 3,382 | (99,119 | ) | 5,545 | |||||||||||||||||
Interest expense |
| 103,425 | 74,331 | 30,413 | (99,119 | ) | 109,050 | |||||||||||||||||
Royalty and management service (income) expense |
| | (26,740 | ) | 26,740 | | | |||||||||||||||||
Income from consolidated subsidiaries |
310,069 | 311,747 | 107,849 | | (729,665 | ) | | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Income before (benefit of) provision for income taxes |
306,711 | 309,026 | 400,751 | 197,693 | (729,665 | ) | 484,516 | |||||||||||||||||
(Benefit of) provision for income taxes |
(1,287 | ) | (1,043 | ) | 89,004 | 78,904 | | 165,578 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
307,998 | 310,069 | 311,747 | 118,789 | (729,665 | ) | 318,938 | |||||||||||||||||
Less: Net income attributable to non-controlling interests |
| | | 10,940 | | 10,940 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 307,998 | $ | 310,069 | $ | 311,747 | $ | 107,849 | $ | (729,665 | ) | $ | 307,998 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
27
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 |
Eliminations | 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 on extinguished debt |
| 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 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
28
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||||||||||
Net income |
$ | 104,163 | $ | 104,881 | $ | 105,560 | $ | 72,164 | $ | (275,915 | ) | $ | 110,853 | |||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation loss |
| | | (15,940 | ) | | (15,940 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net |
| 1,720 | | | | 1,720 | ||||||||||||||||||
Unrealized gains on interest rate swaps, net |
| 788 | | | | 788 | ||||||||||||||||||
Unrealized holding gains on available for sale securities, net |
| | 348 | | | 348 | ||||||||||||||||||
Other, net |
| | | 2 | | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive income (loss) |
| 2,508 | 348 | (15,938 | ) | | (13,082 | ) | ||||||||||||||||
Comprehensive income |
104,163 | 107,389 | 105,908 | 56,226 | (275,915 | ) | 97,771 | |||||||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
| | | 6,768 | | 6,768 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income attributable to CBRE Group, Inc. |
$ | 104,163 | $ | 107,389 | $ | 105,908 | $ | 49,458 | $ | (275,915 | ) | $ | 91,003 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
29
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 |
Eliminations | 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 |
| (3,748 | ) | | | | (3,748 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net |
| 1,873 | | | | 1,873 | ||||||||||||||||||
Unrealized losses on interest rate swaps, net |
| (2,924 | ) | | | | (2,924 | ) | ||||||||||||||||
Unrealized holding losses on available for sale securities, net |
| | (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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
30
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Eliminations | Consolidated Total |
|||||||||||||||||||
Net income |
$ | 307,998 | $ | 310,069 | $ | 311,747 | $ | 118,789 | $ | (729,665 | ) | $ | 318,938 | |||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||
Foreign currency translation loss |
| | | (101,654 | ) | | (101,654 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net |
| 5,196 | | | | 5,196 | ||||||||||||||||||
Unrealized losses on interest rate swaps, net |
| (3,327 | ) | | | | (3,327 | ) | ||||||||||||||||
Unrealized holding gains on available for sale securities, net |
| | 862 | 131 | | 993 | ||||||||||||||||||
Other, net |
| | (759 | ) | 2 | | (757 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total other comprehensive income (loss) |
| 1,869 | 103 | (101,521 | ) | | (99,549 | ) | ||||||||||||||||
Comprehensive income |
307,998 | 311,938 | 311,850 | 17,268 | (729,665 | ) | 219,389 | |||||||||||||||||
Less: Comprehensive income attributable to non-controlling interests |
| | | 11,057 | | 11,057 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Comprehensive income attributable to CBRE Group, Inc. |
$ | 307,998 | $ | 311,938 | $ | 311,850 | $ | 6,211 | $ | (729,665 | ) | $ | 208,332 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
31
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 |
Eliminations | 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 |
| (3,748 | ) | | | | (3,748 | ) | ||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss to interest expense, net |
| 5,477 | | | | 5,477 | ||||||||||||||||||
Unrealized losses on interest rate swaps, net |
| (5,435 | ) | | | | (5,435 | ) | ||||||||||||||||
Unrealized holding losses on available for sale securities, net |
| | (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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
32
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(Dollars in thousands)
Parent | CBRE | Guarantor Subsidiaries |
Nonguarantor Subsidiaries |
Consolidated Total |
||||||||||||||||
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: |
$ | 65,900 | $ | (9,453 | ) | $ | (80,074 | ) | $ | (29,562 | ) | $ | (53,189 | ) | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||||||
Capital expenditures |
| | (81,359 | ) | (52,998 | ) | (134,357 | ) | ||||||||||||
Acquisition of GWS, including net assets acquired, intangibles and goodwill |
| | 3,256 | (13,733 | ) | (10,477 | ) | |||||||||||||
Acquisition of businesses (other than GWS), including net assets acquired, intangibles and goodwill, net of cash acquired |
| | (1,249 | ) | (20,817 | ) | (22,066 | ) | ||||||||||||
Contributions to unconsolidated subsidiaries |
| | (36,693 | ) | (20,602 | ) | (57,295 | ) | ||||||||||||
Distributions from unconsolidated subsidiaries |
| | 116,072 | 3,467 | 119,539 | |||||||||||||||
Net proceeds from disposition of real estate held for investment |
| | | 44,326 | 44,326 | |||||||||||||||
Proceeds from the sale of servicing rights and other assets |
| | 11,982 | 15,177 | 27,159 | |||||||||||||||
Increase in restricted cash |
| | (545 | ) | (1,078 | ) | (1,623 | ) | ||||||||||||
Purchase of available for sale securities |
| | (31,413 | ) | | (31,413 | ) | |||||||||||||
Proceeds from the sale of available for sale securities |
| | 29,560 | | 29,560 | |||||||||||||||
Other investing activities, net |
| | (1,305 | ) | (1,669 | ) | (2,974 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash used in investing activities |
| | 8,306 | (47,927 | ) | (39,621 | ) | |||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||||||
Repayment of senior term loans |
| (23,125 | ) | | | (23,125 | ) | |||||||||||||
Proceeds from revolving credit facility |
| 2,195,000 | | | 2,195,000 | |||||||||||||||
Repayment of revolving credit facility |
| (2,112,000 | ) | | | (2,112,000 | ) | |||||||||||||
Proceeds from notes payable on real estate held for investment |
| | | 7,274 | 7,274 | |||||||||||||||
Repayment of notes payable on real estate held for investment |
| | | (33,516 | ) | (33,516 | ) | |||||||||||||
Proceeds from notes payable on real estate held for sale and under development |
| | | 15,110 | 15,110 | |||||||||||||||
Repayment of notes payable on real estate held for sale and under development |
| | | (4,102 | ) | (4,102 | ) | |||||||||||||
Repayment of short-term borrowings and other loans, net |
| | | (483 | ) | (483 | ) | |||||||||||||
Shares repurchased for payment of taxes on equity awards |
(27,796 | ) | | | | (27,796 | ) | |||||||||||||
Proceeds from exercise of stock options |
915 | | | | 915 | |||||||||||||||
Non-controlling interest contributions |
| | | 1,478 | 1,478 | |||||||||||||||
Non-controlling interest distributions |
| | | (12,800 | ) | (12,800 | ) | |||||||||||||
Payment of financing costs |
| (5,460 | ) | | (141 | ) | (5,601 | ) | ||||||||||||
(Increase) decrease in intercompany receivables, net |
(39,019 | ) | (40,954 | ) | (50,454 | ) | 130,427 | | ||||||||||||
Other financing activities, net |
| | (1,173 | ) | (20 | ) | (1,193 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net cash (used in) provided by financing activities |
(65,900 | ) | 13,461 | (51,627 | ) | 103,227 | (839 | ) | ||||||||||||
Effect of currency exchange rate changes on cash and cash equivalents |
| | | (408 | ) | (408 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 4,008 | (123,395 | ) | 25,330 | (94,057 | ) | |||||||||||||
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD |
5 | 8,479 | 147,410 | 384,509 | 540,403 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
CASH AND CASH EQUIVALENTS, AT END OF PERIOD |
$ | 5 | $ | 12,487 | $ | 24,015 | $ | 409,839 | $ | 446,346 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||||||||||
Cash paid during the period for: |
||||||||||||||||||||
Interest |
$ | | $ | 115,698 | $ | | $ | 2,574 | $ | 118,272 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income taxes, net |
$ | | $ | | $ | 123,231 | $ | 101,898 | $ | 225,129 | ||||||||||
|
|
|
|
|
|
|
|
|
|
33
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 | |||||||||||||||
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 | ) | (1,773 | ) | (3,063 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
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 and other loans, 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 interest contributions |
| | | 4,691 | 4,691 | |||||||||||||||
Non-controlling interest 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 taxes, net |
$ | | $ | | $ | 126,421 | $ | 84,213 | $ | 210,634 | ||||||||||
|
|
|
|
|
|
|
|
|
|
34
CBRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
12. | Subsequent Events |
On October 27, 2016, we announced that our board of directors has authorized the company to repurchase up to an aggregate of $250 million of its Class A common stock over three years.
On November 1, 2016, we prepaid a total of $101.9 million of the 2017 and 2018 required amortization on our senior term loans under our 2015 Credit Agreement, which included $59.4 million for the tranche A term loan facility, $28.7 million for the tranche B-1 term loan facility and $13.8 million for the tranche B-2 term loan facility.
35
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Quarterly Report on Form 10-Q (Quarterly Report) for CBRE Group, Inc. for the three months ended September 30, 2016 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, 2015. Accordingly, you should read the following discussion in conjunction with the information included in our Annual Report on Form 10-K for the year ended December 31, 2015 as well as the unaudited financial statements included elsewhere in 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 2015 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 and industrial properties as well as sales and financing services to owners of multifamily and hotel properties. As of December 31, 2015, excluding independent affiliates, we operated 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 Company brand name. Our business is focused on several competencies, including commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage origination, sales and servicing, and structured finance) real estate investment management, valuation, development services and proprietary research. We generate revenue from both management fees (large multi-year portfolio and per-project contracts) and from commissions on transactions. We have been included in the Fortune 500 since 2008 (ranking #259 in 2016) and among the Fortune Most Admired Companies in the real estate sector for four consecutive years. In 2016, we were ranked by Forbes as the 15th best employer in America, and the International Association of Outsourcing Professionals (IAOP) has ranked us among the top outsourcing service providers across all industries for five consecutive years, including in 2016. Additionally, we were one of only two companies to be ranked in the top 12 in the Barrons 500, which evaluates companies on growth and financial performance, in each of the past three years, including 2016.
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, goodwill and other intangible assets, and income taxes can be found in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no material changes to these policies as of September 30, 2016.
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report.
36
Seasonality
A significant portion of our revenue is seasonal, which an investor should keep in mind when comparing our financial condition and results of operations on a quarter-by-quarter basis. Historically, our revenue, operating income, net income and cash flow from operating activities tend to be lowest in the first quarter, and highest in the fourth quarter of each year. Revenue, earnings and cash flow have generally been concentrated in the fourth calendar quarter due to the focus on completing sales, financing and leasing transactions prior to year-end.
Inflation
Our commissions and other variable costs related to revenue are primarily affected by commercial real estate market supply and demand, which may be affected by inflation. However, to date, we do not believe that general inflation has had a material impact upon our operations.
Items Affecting Comparability
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 and changes in interest rates; the cost and availability of credit; and the impact of tax, government 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 our business.
Compensation is our largest expense and the sales and leasing professionals in our advisory services business generally are paid on a commission and/or bonus basis that correlates with their revenue production. As a 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 pose significant risks to the performance of our operations and our financial condition.
Commercial real estate markets have recovered over the past several years, along with the steady improvement in global economic activity, most particularly in the United States. Since 2010, U.S. leasing markets have been marked by increased demand for space, falling vacancies and higher rents. During this time, healthy U.S. property sales activity has been sustained by gradually improving market fundamentals, low-cost credit availability and increased global and domestic capital flows. Property sales volumes slowed in the first nine months of 2016 following several years of strong growth; however, the market remained active. Commercial mortgage services activity rose in the first nine months of 2016 driven by a favorable lending environment (including regulatory support) for the U.S. Government Sponsored Enterprises (GSEs) as well as a long-term trend of increased renting versus home ownership. Strong mortgage services activity is expected for the remainder of 2016.
37
European economies began to emerge from recession in 2013, with most countries returning to positive, albeit modest, economic growth. Sales and leasing activity in Europe has improved across most of Europe for much of the past two years. An exception is London, where uncertainty in advance of and following the United Kingdoms referendum to leave the European Union, commonly referred to as Brexit, has constrained occupier and investor activity in 2016.
In Asia Pacific, the performance of real estate leasing and investment markets has varied from country to country amid slowing economic growth. In 2016, leasing markets have been mixed, while investment market activity has waned across most of the region. However, local capital from the Asia-Pacific region continues to migrate to other parts of the world.
Real estate investment management and property development markets have been generally favorable with abundant debt and equity capital flows into commercial real estate. Real estate equity securities markets rebounded through the first nine months of 2016, but weakened in the late third quarter and the early fourth quarter amid concerns about potentially higher interest rates.
The performance of our global services and real estate investment businesses depends on sustained economic growth and job creation; stable, healthy global credit markets; and continued positive business and investor sentiment.
Effects of Acquisitions
We historically have 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 September 1, 2015, CBRE, Inc., our wholly-owned subsidiary, pursuant to a Stock and Asset Purchase Agreement (the Purchase Agreement) with Johnson Controls, Inc. (JCI), acquired JCIs Global Workplace Solutions (GWS) business (we refer to this transaction as the GWS Acquisition). 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. The purchase price was $1.475 billion, paid in cash, plus adjustments totaling $46.5 million 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. We merged the acquired GWS business with our existing occupier outsourcing business line, and the new combined business 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 regional or specialty firms that complement our existing platform, or independent affiliates in which, in some cases, we held a small equity interest. During 2015, we completed eight in-fill acquisitions, including a Seattle-based leader in capital markets services for affordable housing, a Texas-based commercial real estate firm specializing in retail services, an energy management specialist based in Brookfield, Wisconsin, a Chicago-based location data analytics firm, one of the leading retail real estate services firms in the midwestern United States, an advisory, consulting and research firm specializing in the Canadian hospitality and tourism industries and our former independent affiliate companies in Columbia, South Carolina, and Memphis, Tennessee. During the nine months ended September 30, 2016, we completed two in-fill acquisitions, including the acquisition of our independent affiliate in Norway and a London-based retail property advisor specializing in the luxury goods retail sector.
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. The adverse impact is 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
38
subject to the passage of time or achievement of certain performance metrics and other conditions. As of September 30, 2016, we have accrued deferred consideration totaling $73.6 million, which is 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
We are monitoring the economic and political developments related to Brexit and the potential impact on our businesses in the United Kingdom and the rest of Europe, including, in particular, sales and leasing activity in the United Kingdom, as well as any associated currency volatility impact on our results of 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 also has a significant amount of its revenue and earnings denominated in foreign currencies, such as the euro and the British pound sterling, which has significantly declined in value as compared to the U.S. dollar and other currencies as a result of Brexit. Fluctuations in foreign currency exchange rates have resulted and may continue to result in corresponding fluctuations in our AUM, revenue and earnings.
During the nine months ended September 30, 2016, approximately 47% 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, Mexican peso, Singapore dollar and Swiss franc. 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, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
United States dollar |
$ | 1,687,692 | 52.8 | % | $ | 1,505,432 | 55.5 | % | $ | 4,927,214 | 53.3 | % | $ | 4,091,685 | 57.2 | % | ||||||||||||||||
British pound sterling |
486,195 | 15.2 | % | 471,516 | 17.4 | % | 1,453,854 | 15.7 | % | 1,229,779 | 17.2 | % | ||||||||||||||||||||
euro |
377,930 | 11.8 | % | 256,964 | 9.5 | % | 1,073,762 | 11.6 | % | 600,303 | 8.4 | % | ||||||||||||||||||||
Australian dollar |
91,138 | 2.9 | % | 97,102 | 3.6 | % | 250,323 | 2.7 | % | 261,316 | 3.7 | % | ||||||||||||||||||||
Canadian dollar |
80,822 | 2.5 | % | 73,176 | 2.7 | % | 220,833 | 2.4 | % | 205,346 | 2.9 | % | ||||||||||||||||||||
Indian rupee |
61,001 | 1.9 | % | 39,668 | 1.5 | % | 171,475 | 1.9 | % | 115,788 | 1.6 | % | ||||||||||||||||||||
Japanese yen |
51,641 | 1.6 | % | 36,575 | 1.3 | % | 140,412 | 1.5 | % | 101,180 | 1.4 | % | ||||||||||||||||||||
Chinese yuan |
49,945 | 1.6 | % | 36,125 | 1.3 | % | 146,898 | 1.6 | % | 98,694 | 1.4 | % | ||||||||||||||||||||
Singapore dollar |
44,266 | 1.4 | % | 25,536 | 0.9 | % | 122,422 | 1.3 | % | 65,656 | 0.9 | % | ||||||||||||||||||||
Swiss franc |
39,195 | 1.2 | % | 16,448 | 0.6 | % | 102,383 | 1.1 | % | 30,699 | 0.4 | % | ||||||||||||||||||||
Hong Kong dollar |
24,656 | 0.8 | % | 23,329 | 0.9 | % | 71,186 | 0.8 | % | 58,045 | 0.8 | % | ||||||||||||||||||||
Brazilian real |
23,580 | 0.8 | % | 16,790 | 0.6 | % | 54,536 | 0.6 | % | 44,057 | 0.6 | % | ||||||||||||||||||||
Mexican peso |
21,228 | 0.7 | % | 14,871 | 0.5 | % | 58,815 | 0.6 | % | 39,938 | 0.5 | % | ||||||||||||||||||||
Other currencies |
154,198 | 4.8 | % | 99,027 | 3.7 | % | 453,645 | 4.9 | % | 213,082 | 3.0 | % | ||||||||||||||||||||
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Total revenue |
$ | 3,193,487 | 100.0 | % | $ | 2,712,559 | 100.0 | % | $ | 9,247,758 | 100.0 | % | $ | 7,155,568 | 100.0 | % | ||||||||||||||||
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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. For example, we estimate that had the British pound sterling-to-U.S. dollar exchange rates been 10% higher during the nine months ended September 30, 2016, the net impact would have been an increase in pre-tax income of $3.9 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the nine months ended September 30, 2016, the net
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impact would have been an increase in pre-tax income of $0.7 million. These hypothetical calculations estimate the impact of translating results into U.S. dollars and do not include an estimate of the impact that a 10% change in the U.S. dollar against other currencies would have had on our foreign operations.
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 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. 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 set forth in Item 1 of this Quarterly Report were net gains of $0.2 million and $1.2 million from foreign currency exchange forward contracts for the three and nine months ended September 30, 2016, respectively, and $9.3 million and $16.6 million from foreign currency exchange forward contracts for the three and nine months ended September 30, 2015, respectively. As of September 30, 2016, we had 15 foreign currency exchange forward contracts outstanding covering a notional amount of $168.8 million.
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.
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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, 2016 and 2015 (dollars in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
Revenue |
$ | 3,193,487 | 100.0 | % | $ | 2,712,559 | 100.0 | % | $ | 9,247,758 | 100.0 | % | $ | 7,155,568 | 100.0 | % | ||||||||||||||||
Costs and expenses: |
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Cost of services |
2,252,783 | 70.5 | % | 1,773,660 | 65.4 | % | 6,520,629 | 70.5 | % | 4,552,411 | 63.6 | % | ||||||||||||||||||||
Operating, administrative and other |
686,530 | 21.5 | % | 626,905 | 23.1 | % | 2,010,338 | 21.7 | % | 1,768,838 | 24.7 | % | ||||||||||||||||||||
Depreciation and amortization |
92,725 | 2.9 | % | 75,047 | 2.8 | % | 269,987 | 3.0 | % | 215,498 | 3.0 | % | ||||||||||||||||||||
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Total costs and expenses |
3,032,038 | 94.9 | % | 2,475,612 | 91.3 | % | 8,800,954 | 95.2 | % | 6,536,747 | 91.3 | % | ||||||||||||||||||||
Gain on disposition of real estate |
11,043 | 0.3 | % | 3,154 | 0.1 | % | 15,862 | 0.2 | % | 10,140 | 0.1 | % | ||||||||||||||||||||
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Operating income |
172,492 | 5.4 | % | 240,101 | 8.8 | % | 462,666 | 5.0 | % | 628,961 | 8.8 | % | ||||||||||||||||||||
Equity income from unconsolidated subsidiaries |
24,672 | 0.8 | % | 17,242 | 0.6 | % | 116,902 | 1.3 | % | 39,386 | 0.5 | % | ||||||||||||||||||||
Other income (loss) |
1,356 | | (4,945 | ) | (0.2 | %) | 8,453 | 0.1 | % | (4,927 | ) | (0.1 | %) | |||||||||||||||||||
Interest income |
1,020 | | 1,158 | 0.1 | % | 5,545 | 0.1 | % | 4,857 | 0.1 | % | |||||||||||||||||||||
Interest expense |
37,273 | 1.1 | % | 30,699 | 1.1 | % | 109,050 | 1.3 | % | 83,067 | 1.2 | % | ||||||||||||||||||||
Write-off of financing costs on extinguished debt |
| | | | | | 2,685 | | ||||||||||||||||||||||||
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Income before provision for income taxes |
162,267 | 5.1 | % | 222,857 | 8.2 | % | 484,516 | 5.2 | % | 582,525 | 8.1 | % | ||||||||||||||||||||
Provision for income taxes |
51,414 | 1.6 | % | 72,866 | 2.7 | % | 165,578 | 1.8 | % | 206,243 | 2.9 | % | ||||||||||||||||||||
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Net income |
110,853 | 3.5 | % | 149,991 | 5.5 | % | 318,938 | 3.4 | % | 376,282 | 5.2 | % | ||||||||||||||||||||
Less: Net income attributable to non-controlling interests |
6,690 | 0.2 | % | 868 | | 10,940 | 0.1 | % | 9,193 | 0.1 | % | |||||||||||||||||||||
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Net income attributable to CBRE Group, Inc. |
$ | 104,163 | 3.3 | % | $ | 149,123 | 5.5 | % | $ | 307,998 | 3.3 | % | $ | 367,089 | 5.1 | % | ||||||||||||||||
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EBITDA |
$ | 284,555 | 8.9 | % | $ | 326,577 | 12.0 | % | $ | 847,068 | 9.2 | % | $ | 869,725 | 12.2 | % | ||||||||||||||||
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Adjusted EBITDA |
$ | 349,384 | 10.9 | % | $ | 344,631 | 12.7 | % | $ | 992,518 | 10.7 | % | $ | 895,140 | 12.5 | % | ||||||||||||||||
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EBITDA represents earnings before net interest expense, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization. Amounts shown for Adjusted EBITDA further remove (from EBITDA) the impact of certain cash and non-cash charges related to acquisitions, cost-elimination expenses as well as certain carried interest incentive compensation expense. Neither EBITDA nor Adjusted EBITDA is a recognized measurement under United States generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use them 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 these measures may not be comparable to similarly titled measures of other companies.
We generally use these non-GAAP financial measures to evaluate operating performance and for other discretionary purposes, and we believe that these measures provide a more complete understanding of ongoing operations, enhance comparability of current results to prior periods and may be useful for investors to analyze
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our financial performance because they eliminate the impact of selected charges that may obscure trends in the underlying performance of our business. We further believe that investors may find these measures useful in evaluating our operating performance compared to that of other companies in our industry because their 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 and Adjusted EBITDA may vary for different companies for reasons unrelated to overall operating performance.
These measures are not intended to be measures of free cash flow for our discretionary use because they do not consider certain cash requirements such as tax and debt service payments. These measures may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which amounts are further adjusted to 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. We also use Adjusted EBITDA as a significant component when measuring our operating performance under our employee incentive compensation programs.
EBITDA and Adjusted EBITDA are calculated as follows (dollars in thousands):
Three Months Ended September 30, |
Nine Months Ended September 30, |
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2016 | 2015 | 2016 | 2015 | |||||||||||||
Net income attributable to CBRE Group, Inc. |
$ | 104,163 | $ | 149,123 | $ | 307,998 | $ | 367,089 | ||||||||
Add: |
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Depreciation and amortization |
92,725 | 75,047 | 269,987 | 215,498 | ||||||||||||
Interest expense |
37,273 | 30,699 | 109,050 | 83,067 | ||||||||||||
Write-off of financing costs on extinguished debt |
| | | 2,685 | ||||||||||||
Provision for income taxes |
51,414 | 72,866 | 165,578 | 206,243 | ||||||||||||
Less: |
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Interest income |
1,020 | 1,158 |