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Was

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

☒

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

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 No.)

 

 

 

400 South Hope Street, 25th Floor

Los Angeles, California

 

90071

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(213) 613-3333

 

 

(Registrant's telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.01 par value per share

“CBRE”

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ☒    No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐    No ☒

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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒  No  ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☒

Accelerated filer  ☐

Non-accelerated filer  ☐

Smaller reporting company  ☐

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐ No ☒

As of June 28, 2019, the aggregate market value of Class A Common Stock held by non-affiliates of the registrant was $17.3 billion based upon the last sales price on June 28, 2019 on the New York Stock Exchange of $51.30 for the registrant’s Class A Common Stock.

As of February 14, 2020, the number of shares of Class A Common Stock outstanding was 334,790,842.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the registrant’s 2020 Annual Meeting of Stockholders to be held May 14, 2020 are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

 

 

 

CBRE GROUP, INC.

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

 

 

Page

PART I

 

Item 1.

Business

1

Item 1A.

Risk Factors

7

Item 1B.

Unresolved Staff Comments

22

Item 2.

Properties

23

Item 3.

Legal Proceedings

23

Item 4.

Mine Safety Disclosures

23

 

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

24

Item 6.

Selected Financial Data

27

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

49

Item 8.

Financial Statements and Supplementary Data

51

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

118

Item 9A.

Controls and Procedures

118

Item 9B.

Other Information

120

 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

121

Item 11.

Executive Compensation

121

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

121

Item 13.

Certain Relationships and Related Transactions, and Director Independence

121

Item 14.

Principal Accounting Fees and Services

121

 

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

121

Item 16.

Form 10-K Summary

121

 

 

 

Schedule II – Valuation and Qualifying Accounts

122

 

 

SIGNATURES

128

 

 

 

 

 

 

 

PART I

Item 1.

Business.

Company Overview

CBRE Group, Inc. is a Delaware corporation. References to “CBRE,” “the company,” “we,” “us” and “our” refer to CBRE Group, Inc. and include all of its consolidated subsidiaries, unless otherwise indicated or the context requires otherwise.

We are the world’s largest commercial real estate services and investment firm, based on 2019 revenue, with leading global market positions in our leasing, property sales, occupier outsourcing and valuation businesses. As of December 31, 2019, we operated in more than 530 offices worldwide and have more than 100,000 employees, excluding independent affiliates. We serve clients in more than 100 countries.

Our business is focused on providing services to real estate occupiers and investors. For occupiers, we provide facilities management, project management, transaction (both property sales and leasing) and consulting services, among others. For investors, we provide capital markets (property sales, mortgage origination, sales and servicing), leasing, investment management, property management, valuation and development services, among others. We provide services under the following brand names: “CBRE” (real estate advisory and outsourcing services); “CBRE Global Investors” (investment management); “Trammell Crow Company” (U.S. development); “Telford Homes” (U.K. development) and “Hana” (flexible-space solutions).

Our revenue mix has shifted in recent years toward more contractual revenue as occupiers and investors increasingly prefer to purchase integrated, account-based services from firms that meet the full spectrum of their needs nationally and globally. We believe we are well-positioned to capture a substantial share of this growing market opportunity. We generate revenue from both management fees (large multi-year portfolio and per-project contracts) and commissions on transactions. Our contractual, fee-for-services businesses generally involve occupier outsourcing (including facilities and project management), property management, investment management, appraisal/valuation and loan servicing. In addition, our leasing services business line is largely recurring in nature over time.

In 2019, we generated revenue from a highly diversified base of clients, including more than 90 of the Fortune 100 companies. We have been an S&P 500 company since 2006 and in 2019 we were ranked #146 on the Fortune 500. We have been voted the most recognized commercial real estate brand in the Lipsey Company survey for 19 years in a row (including 2020). We have also been rated a World’s Most Ethical Company by the Ethisphere Institute for seven consecutive years (including 2020), and are included in the Dow Jones World Sustainability Index and the Bloomberg Gender Equality Index.

CBRE History

We will mark our 114th year of continuous operations in 2020, tracing our origins to a company founded in San Francisco in the aftermath of the 1906 earthquake. Since then, we have grown into the largest global commercial real estate services and investment firm (in terms of 2019 revenue) through organic growth and strategic acquisitions, including our recent acquisition of Telford Homes Plc, which closed in October 2019.

Our Business Segments and Primary Services

CBRE Group, Inc. is a holding company that conducts all of its operations through its indirect subsidiaries. CBRE Group, Inc. does not have any independent operations or employees. CBRE Services, Inc., our direct wholly-owned subsidiary, is also a holding company and is the primary obligor or issuer with respect to most of our long-term indebtedness.

We report our operations through the following business segments: (1) Advisory Services, (2) Global Workplace Solutions and (3) Real Estate Investments.

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Advisory Services

Our Advisory Services segment provides a comprehensive range of services globally, including property leasing, capital markets (property sales and mortgage origination, sales and servicing), property management, project management services and valuation services. Most of our Advisory Services operations are conducted through our indirect wholly-owned subsidiary CBRE, Inc. Our mortgage loan origination, sales and servicing operations, the vast majority of which are in the U.S., are conducted exclusively through our indirect wholly-owned subsidiary operating under the name CBRE Capital Markets, Inc., or CBRE Capital Markets, and its affiliates.

The primary services within Advisory Services are further described below.

Leasing Services

We provide strategic advice and execution for owners/investors, and occupiers/tenants of real estate, primarily in connection with the leasing of office, industrial and retail space. In 2019, we negotiated leases valued at approximately $168.2 billion globally. While the majority of our leasing revenue is reported in the Advisory Services segment, we do earn leasing revenue for certain contractual occupier clients in the Global Workplace Solutions segment that arises as a direct result of a business relationship with that segment.

We generate significant business from account-based occupier clients, where we are retained to negotiate leases for all or a portion of their portfolio. This results in recurring revenue over time. We believe we are the market leader for leasing services in most leading U.S. metropolitan statistical areas (as defined by the U.S. Census Bureau), including Atlanta, Austin, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, Miami/South Florida, New York, Philadelphia, Phoenix, Portland and Seattle.

Capital Markets

We offer clients property sales and mortgage services. The tight integration of these services helps to meet marketplace demand for comprehensive capital markets solutions. During 2019, we closed approximately $322.6 billion of capital markets transactions globally, including $264.6 billion of property sales transactions and $58.0 billion of mortgage originations and loan sales.

We are the leading property sales advisor globally. In the United States, we accounted for approximately 17% of investment sales transactions greater than $2.5 million across all property types in 2019, according to Real Capital Analytics. Our mortgage brokerage professionals arrange, originate and service commercial mortgage loans through relationships established with investment banking firms, national and regional banks, credit companies, insurance companies, U.S. Government-Sponsored Enterprises, or GSEs, and pension funds.

Globally, our loan origination and sales volume in 2019 was $58.0 billion, including approximately $19.5 billion for U.S. GSEs. Most of the GSE loans were financed through revolving warehouse credit lines through a CBRE subsidiary that is dedicated exclusively for this purpose and were substantially risk mitigated by either obtaining a contractual purchase commitment from the GSE or confirming a forward-trade commitment for the issuance and purchase of a mortgage-backed security to be secured by the loan. We also oversee a loan servicing portfolio, which totaled approximately $230.1 billion globally at year-end 2019.

In many countries that we operate in (including the United States), our real estate services professionals (both leasing and capital markets) are compensated primarily through commissions, which are payable upon completion of an assignment. This mitigates the effect of compensation, our largest expense, on our operating margins during difficult market conditions. We strive to retain top professionals through an attractive compensation program tied to productivity as well as investments in support resources, including professional development and training, market research and data/information, technology, branding and marketing.

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Property and Project Management Services

We provide property management services on a contractual basis, primarily for owners of and investors in office, industrial and retail properties. These services include construction management, marketing, building engineering, accounting and financial services. As of December 31, 2019, we managed 2.6 billion square feet of properties globally for property owners/investors. We are compensated for our services through a monthly management fee earned based on either a specified percentage of the monthly rental income, rental receipts generated from the property under management or a fixed fee. We are also often reimbursed for our administrative and payroll costs directly attributable to the properties under management. Our management agreements with our property management services clients may be terminated by either party with notice generally ranging between 30 to 90 days; however, we have developed long-term relationships with many of these clients and the typical contract continues for multiple years. We believe our contractual relationships with these clients put us in an advantageous position to provide other services to them, including leasing, refinancing, disposition and appraisal.

Project management services are provided to owners, investors and occupiers of real estate in local markets. Revenues from project management services generally include fixed management fees, variable fees and incentive fees if certain agreed-upon performance targets are met. Revenues from project management may also include reimbursement of payroll and related costs for personnel providing the services and subcontracted vendor costs. While the majority of our project management revenue is reported in our Global Workplace Solutions segment, we also report one-off and non-contractual project management revenue in our Advisory Services segment. In 2019, project management revenue in our Advisory Services segment represented approximately 33% of total project management revenue for CBRE.

Valuation Services

We provide valuation services that include market-value appraisals, litigation support, discounted cash flow analyses, feasibility studies as well as consulting services such as property condition reports, hotel advisory and environmental consulting. Our valuation business has developed proprietary systems for data management, analysis and valuation report preparation, which we believe provide us with an advantage over our competitors. We believe that our valuation business is one of the largest in the commercial real estate industry. During 2019, we completed over 259,000 valuation, appraisal and advisory assignments, excluding residential valuations in Asia Pacific.

Global Workplace Solutions

Our Global Workplace Solutions segment provides a broad suite of integrated, contractually-based outsourcing services globally for occupiers of real estate, including facilities management, project management and transaction services (leasing and sales).

We believe the outsourcing of corporate real estate services is a long-term trend in our industry, with multi-national corporations, and other large occupiers of space utilizing global, full-service real estate firms to achieve better workplaces for their people, while attempting to lower their cost of occupancy. We typically enter into multi-year, often multi-service, outsourcing contracts with services delivered via dedicated account teams and/or an on-demand basis. The key outsourcing services offered through this business segment are described below.

Facilities Management Services

Facilities Management involves the day-to-day management of client-occupied space for traditional office space, such as headquarter buildings, regional offices and administrative offices, as well as facilities serving specialized industries, such as data centers, life science and medical facilities, distribution warehouses, government facilities and retail stores. Contracts for facilities management services are often structured so that we are reimbursed for client-dedicated personnel costs and subcontracted vendor costs as well as associated overhead expenses plus a monthly fee, and in some cases, annual incentives tied to agreed-upon performance targets, with any penalties typically capped. In addition, we have contracts for facilities management services based on fixed-fee unit prices or guaranteed maximum prices. Fixed-fee contracts are typically structured where an agreed-upon scope of work is delivered for a fixed price while guaranteed maximum price contracts are structured with an agreed upon scope of work that will be provided to the client for a not-to-exceed price. We furnish facilities management services

3

 

to clients with single or multiple-location assets as well as regional, national and global portfolios. As of December 31, 2019, we managed approximately 4.2 billion square feet of facilities on behalf of occupiers.

Project Management Services

Project management services are typically provided on a portfolio-wide or programmatic basis. Revenues from project management services generally include fixed management fees, variable fees, lump sum and incentive fees if certain agreed-upon performance targets are met. Revenues from project management may also include reimbursement of payroll and related costs for personnel providing the services and subcontracted vendor costs. In 2019, we were responsible for implementing project management contracts valued at approximately $124.3 billion. While the majority of our project management revenue is reported in our Global Workplace Solutions segment, as previously mentioned, we also report project management revenue in our Advisory Services segment. In 2019, project management revenue in our Global Workplace Solutions segment represented approximately 67% of total project management revenue for CBRE.

Transaction Services

We provide strategic advice and execution for occupiers of real estate in connection with the leasing, sale or acquisition of office, industrial and retail space. Within the Global Workplace Solutions business, transaction services are performed for account-based clients, often as a key part of an integrated suite of commercial real estate services (with leasing being the most meaningful revenue stream included in our Global Workplace Solutions revenue). In 2019, leasing revenue included in our Global Workplace Solutions revenue represented approximately 3% of global leasing revenue for CBRE.

Real Estate Investments

Our Real Estate Investments segment is comprised of investment management services provided globally, development services in the United States and United Kingdom and a service designed to help property occupiers and owners meet the growing demand for flexible office space solutions on a global basis.

Investment Management Services

Investment management services are conducted through our indirect wholly-owned subsidiary, CBRE Global Investors, LLC and its global affiliates. CBRE Global Investors provides investment management services to pension funds, insurance companies, sovereign wealth funds, foundations, endowments and other institutional investors seeking to generate returns and diversification through investment in real estate, infrastructure, master limited partnerships and other assets. We sponsor investment programs that span the risk/return spectrum in North America, Europe, Asia and Australia. In some strategies, CBRE Global Investors and its investment teams co-invest with its limited partners.

CBRE Global Investors’ offerings are organized into four primary categories: (1) direct real estate investments through sponsored funds; (2) direct real estate investments through separate accounts; (3) indirect real estate and infrastructure investments through listed securities; and (4) indirect real estate, infrastructure and private equity investments through multi-manager investment programs.

Assets under management, or AUM, totaled $112.9 billion at December 31, 2019 as compared to $105.5 billion at December 31, 2018, an increase of $7.4 billion ($7.3 billion in local currency).

Development Services

Development services are conducted through our indirect wholly-owned subsidiary Trammell Crow Company, LLC, which provides commercial real estate development services in the United States, and Telford Homes Plc, a developer of residential multi-family properties in the United Kingdom.

4

 

Trammell Crow Company pursues opportunistic, risk-mitigated development and investment strategies for users of and investors in commercial real estate, as well as for its own account. The company is active in industrial, office and retail properties; healthcare facilities of all types (medical office buildings, hospitals and ambulatory surgery centers); and residential multi-family/mixed-use projects. Trammell Crow Company is compensated by its clients on a fee basis with no, or limited, ownership interest in a property; in partnership with its clients through co-investment – either on an individual project basis or through programs with certain strategic capital partners or for its own account with 100% ownership. Development services activity in which Trammell Crow Company has an ownership interest is conducted through subsidiaries that are consolidated or unconsolidated for financial reporting purposes, depending primarily on the extent and nature of our ownership interest.

Telford Homes is a developer of residential-led, mixed-use sites in locations across London, where the need for homes exceeds supply. In recent years, Telford has undertaken a strategic shift to focus on the growing build-to-rent/multifamily market and is pursuing such opportunities with a number of third-party investors.

At December 31, 2019, we had $13.0 billion of development projects in process, and a development pipeline (prospective projects that we estimate have a greater than 50% chance of closing or where land has been acquired and the projected construction start date is more than one year out) totaled $5.8 billion at December 31, 2019.

Flexible-Space Solutions

Flexible-space solutions operations are conducted through our indirect wholly-owned subsidiary, CBRE Hana, LLC, which we also refer to as Hana. Hana develops and operates integrated, scalable, flexible workspaces, which contain office suites, conference rooms and event space and communal co-working space. Hana helps institutional property owners meet the rapidly growing demand from real estate occupiers for flexible office space solutions.

Competition

We face competition across all our lines of business on an international, national, regional and local level. Although we are the largest commercial real estate services firm in the world in terms of 2019 revenue, our relative competitive position varies significantly across geographic markets, property types and services. We face competition from other global, national, regional and local commercial real estate service providers; companies that traditionally competed in limited portions of our facilities management business and have expanded into other outsourcing offerings; in-house corporate real estate departments and property owners/developers that self-perform real estate services; investment banking firms, investment managers and developers that compete with us to raise and place investment capital; and accounting/consulting firms that advise on real estate strategies. Some of these firms may have greater financial resources than we do.

Despite recent consolidation, the commercial real estate services industry remains highly fragmented and competitive. Although many of our competitors are substantially smaller than we are, some of them are larger on a regional or local-market basis or have a stronger position in a specific market segment or service offering. Among our primary competitors are other large national and global firms, such as Jones Lang LaSalle Incorporated, or JLL, Cushman & Wakefield, Colliers International Group, Inc., Savills plc and Newmark Group, Inc.; market-segment specialists, such as Eastdil Secured, Marcus & Millichap, Inc. and Walker & Dunlop; and firms with business lines that compete with our occupier outsourcing business, such as ISS, and Sodexo. In addition, in recent years, providers of flexible office-space solutions, such as WeWork, IWG/Regus/Spaces, Industrious and Knotel, have offered services directly to occupiers, providing competition, particularly for smaller space requirements. These providers also compete directly with our flexible-space solutions subsidiary, CBRE Hana, LLC, which launched in 2019.

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.

5

 

Employees

At December 31, 2019, excluding our independent affiliates, we had more than 100,000 employees worldwide, approximately 47% of whose costs are fully reimbursed by clients and are mostly in our Global Workplace Solutions segment and our property management line of business within our Advisory Services segment. At December 31, 2019, approximately 12% of our employees worldwide were subject to collective bargaining agreements.

Intellectual Property

We regard our intellectual property as an important part of our business. We hold various trademarks and trade names worldwide, which include the “CBRE,” “Hana” and “Telford” marks. Although we believe our intellectual property plays a role in maintaining our competitive position in a number of the markets that we serve, we do not believe we would be materially, adversely affected by the expiration or termination of our trademarks or trade names or the loss of any of our other intellectual property rights other than the “CBRE” and “Trammell Crow Company” marks. We maintain trademark registrations for the “CBRE,” “Hana” and “Telford” service marks in jurisdictions where we conduct significant business.

We hold a license to use the “Trammell Crow Company” trade name pursuant to a license agreement with CF98, L.P., an affiliate of Crow Realty Investors, L.P., d/b/a Crow Holdings, which may be revoked if we fail to satisfy usage and quality control covenants under the license agreement.

In addition to trademarks and trade names, we have acquired and developed proprietary technologies for the provision of complex services and analysis. We have a number of pending patent applications relating to these proprietary technologies. We will continue to file additional patent applications on new inventions, as appropriate, demonstrating our commitment to technology and innovation. We also offer proprietary research to clients through our CBRE Research and CBRE Econometric Advisors commercial real estate market information and forecasting groups and we offer proprietary investment analysis and structures through our CBRE Global Investors business.

Environmental Matters

Federal, state and local laws and regulations in the countries in which we do business impose environmental liabilities, controls, disclosure rules and zoning restrictions that affect the ownership, management, development, use or sale of commercial real estate. Certain of these laws and regulations may impose liability on current or previous real property owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at a property, including contamination resulting from above-ground or underground storage tanks or the presence of asbestos or lead at a property. If contamination occurs or is present during our role as a property or facility manager or developer, we could be held liable for such costs as a current “operator” of a property, regardless of the legality of the acts or omissions that caused the contamination and without regard to whether we knew of, or were responsible for, the presence of such hazardous or toxic substances. The operator of a site also may be liable under common law to third parties for damages and injuries resulting from exposure to hazardous substances or environmental contamination at a site, including liabilities arising from exposure to asbestos-containing materials. Under certain laws and common law principles, any failure by us to disclose environmental contamination at a property could subject us to liability to a buyer or lessee of the property. Further, federal, state and local governments in the countries in which we do business have enacted various laws, regulations and treaties governing environmental and climate change, particularly for “greenhouse gases,” which seek to tax, penalize or limit their release. Such regulations could lead to increased operational or compliance costs over time.

While we are aware of the presence or the potential presence of regulated substances in the soil or groundwater at or near several properties owned, operated or managed by us that may have resulted from historical or ongoing activities on those properties, we are not aware of any material noncompliance with the environmental laws or regulations currently applicable to us, and we are not the subject of any material claim for liability with respect to contamination at any location. However, these laws and regulations may discourage sales and leasing activities and mortgage lending with respect to some properties, which may adversely affect both the commercial real estate services industry in general and us. Environmental contamination or other environmental liabilities may

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also negatively affect the value of commercial real estate assets held by entities that are managed by our investment management and development services businesses, which could adversely affect the results of operations of these business lines.

Available Information

Our website is www.cbre.com. On the Investor Relations section of our website (https://ir.cbre.com), we post the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission, or the SEC: our Annual Report on Form 10-K, or Annual Report, our Proxy Statement on Schedule 14A, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We also make available through our website other reports filed with or furnished to the SEC under the Exchange Act, including reports filed by our officers and directors under Section 16(a) of the Exchange Act. All of the information on our investor relations website is available to be viewed free of charge.

Investors and others should note that we routinely announce financial and other material information using our investor relations website, SEC filings, press releases, public conference calls and webcasts. We use these channels of distribution to communicate with our investors and members of the public about our company, our services and other items of interest. Information contained on our website is not part of this Annual Report or our other filings with the SEC. We assume no obligation to update or revise any forward-looking statements in this Annual Report whether as a result of new information, future events or otherwise, unless we are required to do so by law.

The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

Item 1A.

Risk Factors.

Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. Based on the information currently known to us, we believe that the matters discussed below identify the material risk factors affecting our business. However, the risks and uncertainties we face are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial (but that later become material) may also adversely affect our business.

Risks Related to our Business Environment

Our performance is significantly related to general economic, political and regulatory conditions and, accordingly, our business, operations and financial condition could be adversely affected by economic slowdowns, liquidity constraints, significant public health events, such as pandemics, fiscal or political uncertainty and possible subsequent downturns in commercial real estate asset values, property sales and leasing activities in the geographies or industry sectors that we or our clients serve.

Periods of economic weakness or recession, significantly rising interest rates, fiscal or political uncertainty, market volatility, declining employment levels, declining 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, may negatively affect the performance of some or all of our business lines.

Our business is significantly affected by generally prevailing economic conditions in the markets where we operate, which can result in a decline in real estate acquisition, disposition and leasing activity, as well as a general decline in the value of commercial real estate and in rents, which in turn reduces revenue from property management fees and commissions derived from property sales, leasing, valuation and financing, as well as revenues associated with development or investment management activities.

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Our businesses could also suffer from political or economic disruptions (or the perception that such disruptions may occur) that affect interest rates or liquidity or create financial, market or regulatory uncertainty. For example, in 2019, continued uncertainty throughout the year about the date and the terms on which the United Kingdom would leave the European Union led to lower lease and sales volumes. Following the United Kingdom’s exit from the European Union on January 31, 2020, ongoing uncertainty over the country’s long-term economic and trade relationship with the European Union may continue to cause market volatility and currency fluctuations and adversely impact business and consumer confidence or the economy in general, which may adversely affect business in the United Kingdom and other European businesses. These uncertainties and any perception of weakness in the British economy could not only impact the performance of commercial real estate assets located in the United Kingdom, but access to funds from investors located in the United Kingdom.

Adverse economic conditions or political or regulatory uncertainty or significant public health events, such as pandemics, could also lead to a decline in leasing volume, property sales prices, funds invested in commercial real estate assets or planned development activity, which in turn could reduce the commissions and fees we earn. During 2019, our Asia Pacific business experienced declines in leasing activity amid rising geopolitical and trade uncertainty and slowing regional economies. Furthermore, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, resulting in decreased economic activity in China and concerns about a potential pandemic, which would adversely affect the broader global economy. At this point, the extent to which this coronavirus may impact the global economy and our results is uncertain, but pandemics or other significant public health events, or the perception that such events may occur, could have a material adverse effect on our business.

We also make  co-investments alongside our investor clients in our development and investment management businesses. During an economic downturn, capital for our investment activities could be constrained and it may take longer for us to dispose of real estate investments or sale prices we achieve may be lower than originally anticipated. As a result, the value of our commercial real estate investments may be reduced, and we could realize losses or diminished profitability. In addition, economic downturns may reduce the volume of  loans our capital markets business originates and/or services. Fees within our property management business are generally based on a percentage of rent collections, making them sensitive to macro-economic conditions that negatively impact rent collections and the performance of the properties we manage.

Economic, political and regulatory uncertainty as well as significant changes and volatility in the financial markets and business environment, and in the global landscape, make it difficult for us to predict our financial performance into the future. As a result, any guidance or outlook that we provide on our performance is based on then-current conditions, and there is a risk that such guidance may turn out to be inaccurate.

Adverse developments in the credit markets may harm our business, results of operations and financial condition.

Our investment management, development services and capital markets (including property sales and mortgage and structured financing services) businesses are sensitive to credit cost and availability as well as financial liquidity. Additionally, the revenues in all of our businesses are dependent to some extent on the overall volume of activity (and pricing) in the commercial real estate markets.

Disruptions in the credit markets may adversely affect our business of providing advisory services to owners, investors and occupiers of real estate in connection with the leasing, disposition and acquisition of property. If our clients are unable to obtain credit on favorable terms, there may be fewer property leasing, disposition and acquisition transactions. In addition, under such conditions, our investment management and development services businesses may be unable to attract capital or achieve returns sufficient to earn incentive fees and we may also experience losses of co-invested equity capital if the disruption causes a prolonged decline in the value of investments made.

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Our operations are subject to social, political and economic risks in foreign countries as well as foreign currency volatility.

We conduct a significant portion of our business and employ a substantial number of people outside of the United States and as a result, we are subject to risks associated with doing business globally. During 2019, approximately 42% of our revenue was transacted in foreign currencies, the majority of which included the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, Czech koruna, Danish krone, euro, Hong Kong dollar, Indian rupee, Israeli shekel, Japanese yen, Korean won, Mexican peso, New Zealand dollar, Polish zloty, Singapore dollar, Swedish krona, Swiss franc and Thai baht. Fluctuations in foreign currency exchange rates may result in corresponding fluctuations in revenue and earnings as well as the assets under management for our investment management business. Over time, fluctuations in the value of the U.S. dollar relative to the other currencies in which we generate earnings could adversely affect our business, financial condition and operating results. 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, we are exposed to international economic trends, foreign governmental policy actions and  the following factors that may adversely affect the performance of our business:

 

•

difficulties and costs of staffing and managing international operations among diverse geographies, languages and cultures;

 

•

currency restrictions, transfer-pricing regulations and adverse tax consequences, which may affect our ability to transfer capital and profits;

 

•

adverse changes in regulatory or tax requirements and regimes or uncertainty about the application of or the future of such regulatory or tax requirements and regimes;

 

•

responsibility for complying with numerous, potentially conflicting and frequently complex and changing laws in multiple jurisdictions, e.g., with respect to data protection, privacy regulations, corrupt practices, embargoes, trade sanctions, employment and licensing;

 

•

the impact of regional or country-specific business cycles and economic instability, including those related to public health or safety events;

 

•

greater difficulty in collecting accounts receivable in some geographic regions, such as Asia;

 

•

a tendency for clients to delay payments in some European and Asian countries;

 

•

political and economic instability in certain countries;

 

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foreign ownership restrictions in certain countries, particularly in Asia Pacific and the Middle East, or the risk that such restrictions will be adopted in the future; and

 

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changes in laws or policies governing foreign trade or investment and use of foreign operations or workers, and any negative sentiments towards multinational companies as a result of any such changes to laws or policies or due to trends such as political populism and economic nationalism.

We maintain anti-corruption and anti-money-laundering compliance programs throughout the company as well as programs designed to enable us to comply with any potential government economic sanctions, embargoes or other import/export controls. However, coordinating our activities to deal with the broad range of complex legal and regulatory environments in which we operate presents significant challenges. We may not be successful in complying with regulations in all situations and violations may result in criminal or civil sanctions, including material monetary fines, penalties, equitable remedies (including disgorgement), and other costs against us or our employees, and may have a material adverse effect on our reputation and business.

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We have committed additional resources to expand our worldwide sales and marketing activities, to globalize our service offerings and products in select markets and to develop local sales and support channels. If we are unable to successfully implement these plans, maintain adequate long-term strategies that successfully manage the risks associated with our global business or adequately manage operational fluctuations, our business, financial condition or results of operations could be harmed. In addition, we have established operations and seek to grow our presence in  many emerging markets to further expand our global platform. However, we may not be successful in effectively evaluating and monitoring the key business, operational, legal and compliance risks specific to those markets. The political and cultural risks present in emerging countries could also harm our ability to successfully execute our operations or manage our businesses there.

Risks Related to Our Operations

We have numerous local, regional and global competitors across all of our business lines and the geographies that we serve, and further industry consolidation, fragmentation or innovation could lead to significant future competition.

We compete across a variety of business disciplines within the commercial real estate services and investment industry, including property management, facilities management, project and transaction management, tenant and landlord leasing, capital markets solutions (property sales, commercial mortgage origination and structured finance), flexible space solutions, real estate investment management, valuation, loan servicing, development services and proprietary research. Although we are the largest commercial real estate services firm in the world in terms of 2019 revenue, our relative competitive position varies significantly across geographies, property types and services and business lines.

Depending on the geography, property type or service or business line, we face competition from other commercial real estate services providers and investment firms, including outsourcing companies that traditionally competed in limited portions of our facilities management business and have expanded their offerings from time to time, in-house corporate real estate departments, developers, flexible space providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting and consulting firms. Some of these firms may have greater financial resources allocated to a particular geography, property type or service or business line than we have allocated to that geography, property type, service or business line. In addition, future changes in laws could lead to the entry of other new competitors, such as financial institutions.

Although many of our existing competitors are local or regional firms that are smaller than we are, some of these competitors are larger on a local or regional basis. We are further subject to competition from large national and multi-national firms that have similar service and investment competencies to ours, and it is possible that further industry consolidation could lead to much larger and more formidable competitors globally or in the particular geographies, property types, service or business lines that we serve. In addition, disruptive innovation by existing or new competitors could alter the competitive landscape in the future and require us to accurately identify and assess such changes and make timely and effective changes to our strategies and business model to compete effectively. Furthermore, we are substantially dependent on long-term client relationships and on revenue received for services under various service agreements. Many of these agreements may be canceled by the client for any reason with as little as 30 to 60 days’ notice, as is typical in the industry.

In this competitive market, if we are unable to maintain long-term client relationships or are otherwise unable to retain existing clients and develop new clients, our business, results of operations and/or financial condition may be materially adversely affected. There is no assurance that we will be able to compete effectively, to maintain current fee levels or margins, or maintain or increase our market share.

Our growth and financial performance have benefited significantly from acquisitions, which may not perform as expected and similar opportunities may not be available in the future.

Acquisitions have accounted for a significant component of our growth over time. Any future growth through acquisitions will depend in part upon the continued availability of suitable acquisition candidates at attractive prices, terms and conditions, as well as sufficient liquidity and credit to fund these acquisitions. We may incur significant additional debt from time to time to finance any such acquisitions, subject to the restrictions contained in the

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documents governing our then-existing indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service our then-existing debt, would increase. Acquisitions involve risks that business judgments made concerning the value, strengths and weaknesses of businesses acquired may prove to be incorrect. Future acquisitions and any necessary related financings also may involve significant transaction-related expenses, which could include severance, lease termination, transaction and deferred financing costs, among others.

We have had, and may continue to experience, challenges in integrating operations and information technology systems acquired from other companies. This could result in the diversion of management’s attention from other business concerns and the potential loss of our key employees or clients or those of the acquired operations. The integration process itself may adversely impact our business and the acquired company’s business as it requires coordination of geographically diverse organizations and implementation of new accounting and information technology systems. Acquisitions also frequently involve significant costs related to integrating information technology and accounting and management services.

We complete acquisitions with the expectation that they will result in various benefits, including enhanced or more stable revenues, a strengthened market position, cross-selling opportunities, cost synergies, tax benefits and accretion to our adjusted net income per share. Achieving the anticipated benefits of these acquisitions is subject to a number of uncertainties, including the realization of accretive benefits in the timeframe anticipated, whether we will experience greater-than-expected attrition from professionals licensed or associated with the acquired companies and whether we can successfully integrate the acquired business. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could in turn materially and adversely affect our overall business, financial condition and operating results.

Our success depends upon the retention of our senior management, as well as our ability to attract and retain qualified and experienced employees.

Our continued success is highly dependent upon the efforts of our executive officers and other key employees, including Robert E. Sulentic, our President and Chief Executive Officer. While certain of our executive officers and key employees are subject to long-term compensatory arrangements, which often include retention incentives and various restrictive covenants, there can be no assurance that we will be able to retain all key members of our senior management. We also are highly dependent upon the retention of our property sales and leasing professionals, who generate a significant amount of our revenues, as well as other revenue producing professionals. The departure of any of our key employees, or the loss of a significant number of key revenue producers, if we are unable to quickly hire and integrate qualified replacements, could cause our business, financial condition and results of operations to suffer. Competition for these personnel is significant and we may not be able to successfully recruit, integrate or retain sufficiently qualified personnel. In addition, the growth of our business is largely dependent upon our ability to attract and retain qualified personnel in all areas of our business. We and our competitors use equity incentives and sign-on and retention bonuses to help attract, retain and incentivize key personnel. As competition is significant for the services of such personnel, the expense of such incentives and bonuses may increase, which could negatively impact our profitability, or result in our inability to attract or retain such personnel to the same extent that we have in the past. Any significant decline in, or failure to grow, our stock price may result in an increased risk of loss of these key personnel. If we are unable to attract and retain these qualified personnel, our growth may be limited and our business and operating results could suffer.

If we are unable to manage the organizational challenges associated with our size, we might be unable to achieve our business objectives.

Our size and scale present significant management and organizational challenges. It might become increasingly difficult to maintain effective standards across a large enterprise and effectively institutionalize our knowledge. It might also become more difficult to maintain our culture, effectively manage and monitor our personnel and operations and effectively communicate our core values, policies and procedures, strategies and goals, particularly given our world-wide operations. The size and scope of our operations increase the possibility that we will have employees who engage in unlawful or fraudulent activity, or otherwise expose us to business and reputational risks. If we are not successful in continuing to develop and implement the processes and tools designed to manage our enterprise and instill our culture and core values into all of our employees, our reputation and ability

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to compete successfully and achieve our business objectives could be impaired. In addition, from time to time, we have made, and may continue to make, changes to our operating model, including how we are organized, as the needs and size of our business change. If we do not successfully implement any such changes, our business and results of operation may be negatively impacted.

Our brand and reputation are key assets of our company, and our business may be affected by how we are perceived in the marketplace.

Our brand and reputation are key assets, and we believe our continued success depends on our ability to preserve, grow and leverage the value of our brand. Our ability to attract and retain clients is highly dependent upon the external perceptions of our level of service, trustworthiness, business practices, management, workplace culture, financial condition, our response to unexpected events and other subjective qualities. Negative perceptions or publicity regarding these matters, even if related to seemingly isolated incidents and whether or not factually correct, could erode trust and confidence and damage our reputation among existing and potential clients, which could make it difficult for us to attract new clients and maintain existing ones. Negative public opinion could result from actual or alleged conduct in any number of activities or circumstances, including handling of complaints, regulatory compliance, such as compliance with government sanctions, the Foreign Corrupt Practices Act, or FCPA, the U.K. Bribery Act and other antibribery, anti-money laundering and corruption laws, the use and protection of client and other sensitive information and from actions taken by regulators or others in response to such conduct. Furthermore, as a company with headquarters and operations located in the United States, a negative perception of the United States arising from its political or other positions could harm the perception of our company and our brand abroad. Although we monitor developments for areas of potential risk to our reputation and brand, negative perceptions or publicity would materially and adversely affect our revenues and profitability. Social media channels can also cause rapid, widespread reputational harm to our brand. Our brand and reputation may also be harmed by the actions of third parties that are outside of our control, including vendors and joint venture partners.

The protection of our brand, including related trademarks, may require the expenditure of significant financial and operational resources. Moreover, the steps we take to protect our brand may not adequately protect our rights or prevent third parties from infringing or misappropriating our trademarks. Even when we detect infringement or misappropriation of our trademarks, we may not be able to enforce all such trademarks. Any unauthorized use by third parties of our brand may adversely affect our brand. Furthermore, as we continue to expand our business, especially internationally, there is a risk we may face claims of infringement or other alleged violations of third-party intellectual property rights, which may restrict us from leveraging our brand in a manner consistent with our business goals.

Our Real Estate Investments businesses, including our real estate investment programs and co-investment activities, subject us to performance and real estate investment risks which could cause fluctuations in our earnings and cash flow and impact our ability to raise capital for future investments.

The revenue, net income and cash flow generated by our investment management business line within our Real Estate Investments segment can be volatile primarily because the management, transaction and incentive fees can vary as a result of market movements. In the event that any of the investment programs that our investment management business manages were to perform poorly, our revenue, net income and cash flow could decline because the value of the assets we manage would decrease, which would result in a reduction in some of our management fees, and our investment returns would decrease, resulting in a reduction in the incentive compensation we earn. Moreover, we could experience losses on co-investments of our own capital in such programs as a result of poor performance. Investors and potential investors in our programs continually assess our performance, and our ability to raise capital for existing and future programs and maintaining our current fee structure will depend on our continued satisfactory performance.

An important part of the strategy for our investment management business involves co-investing our capital in certain real estate investments with our clients, and there is an inherent risk of loss of our investments. As of December 31, 2019, we had committed $72.1 million to fund future co-investments in our Real Estate Investments segment, approximately $46.3 million of which is expected to be funded during 2020. In addition to required future capital contributions, some of the co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets. The failure to provide these contributions could have adverse consequences to

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our interests in these investments, including damage to our reputation with our co-investment partners and clients, as well as the necessity of obtaining alternative funding from other sources that may be on disadvantageous terms for us and the other co-investors. Participating as a co-investor is an important part of our investment management line of business, which might suffer if we were unable to make these investments.

Selective investment in real estate projects is critical to our development services business strategy within our Real Estate Investments segment, and there is an inherent risk of loss of our investments. As of December 31, 2019, we had 16 real estate projects consolidated in our financial statements. In addition, as of December 31, 2019, we were involved as a principal (in most cases, co-investing with our clients) in approximately 70 unconsolidated real estate subsidiaries with invested equity of $176.5 million and had committed additional capital to these unconsolidated subsidiaries of $50.1 million. As of December 31, 2019, we also had guarantees of $21.8 million in our U.K. development business, which relate to our share of certain cost overrun guarantees of unconsolidated subsidiaries, as well as guaranteed outstanding notes payable of these unconsolidated subsidiaries in our U.S. development business with outstanding balances of $6.6 million.

During the ordinary course of business within our development services business line, we provide numerous completion and budget guarantees requiring us to complete 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. There can be no assurance that we will not have to perform under any such guarantees. If we are required to perform under a significant number of such guarantees, it could harm our business, results of operations and financial condition.

Because the disposition of a single significant investment can affect our financial performance in any period, our real estate investment activities could cause fluctuations in our net earnings and cash flow. In many cases, we have limited control over the timing of the disposition of these investments and the recognition of any related gain or loss, or incentive participation fee.

The success of our Global Workplace Solutions segment depends on our ability to enter into mutually beneficial contracts, deliver high quality levels of service and accurately assess working capital requirements.

Contracts for our Global Workplace Solutions clients often include complex terms regarding payment of fees, risk transfer, liability limitations, termination, due diligence and  transition timeframe. Further, the facilities management and project management businesses within our Global Workplace Solutions segment are often impacted by transition activities in the first year of a contract as well as the timing of starting operations on these large client contracts. If we are unable to negotiate contracts with our clients in a timely manner and on mutually beneficial terms, or there is a delay in becoming fully operational, our business and results of operation may be negatively impacted. Further, if we fail to deliver the high quality levels of service expected by our clients, it may result in reputational and financial damage, and could impact our ability to retain existing clients and attract new clients.

The success of our Global Workplace Solutions segment also requires us to accurately model the working capital needs of this business. Should we fail to accurately assess working capital requirements, the cash flow generated by this business may be adversely impacted. In addition, if we do not accurately assess the creditworthiness of a client or if a client’s creditworthiness changes during the term of the contract, we could potentially be unable to collect on any outstanding payments.

A significant portion of our loan origination and servicing business depends upon our relationships with U.S. Government Sponsored Enterprises.

A significant portion of our loan origination and servicing business depends upon our relationship with the Federal National Mortgage Association, or Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, collectively the Government Sponsored Enterprises, or GSEs. Numerous pieces of legislation seeking various types of changes designed to reform the GSEs and the U.S. housing finance system have been introduced in Congress including among other things, changes to the role the GSEs play in the U.S. housing finance system and the winding down or conservatorship of Fannie Mae and Freddie Mac over a period of years. Legislation which curtails the GSEs activities and/or alters the structure or existence of the GSEs, if enacted, may result in a significant

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decrease in our loan origination and servicing revenue and could have a significant impact on our loan origination and servicing business. Further, as an approved seller/servicer for the GSEs, we are required to comply with various eligibility criteria and are required to originate and service loans in accordance with their individual program requirements. Failure to comply with these requirements may result in termination or withdrawal of our approval to sell and service the GSEs loans. Our status as an approved seller/servicer may be terminated by the applicable GSE at any time for cause.

Our investments in our flexible workspace offering, Hana, may prove to be unsuccessful.

While we have taken a measured approach regarding our investment into our flexible workspace offering, Hana, there is a possibility that these investments will prove to be unsuccessful. Given our measured approach, we believe the impact to our overall business would not be material at this time, but we expect to continue opening new Hana locations during the course of 2020. As this product offering expands, the potential impact to our overall financial condition will increase. Should these locations be unsuccessful, we may not earn a positive return on the capital invested and we may incur future operating losses associated with the cost of operating leases required for this business.

We may be subject to actual or perceived conflicts of interest.

Similar to other global services companies with different business lines and a broad client base, we may be subject to potential actual or perceived conflicts of interests in the provision of our services. For example, conflicts may arise from our position as broker to both owners and tenants in commercial real estate lease transactions. In certain cases, we are also subject to fiduciary obligations to our clients. In such situations, our policies are designed to give full disclosure and transparency to all parties as well as implement appropriate barriers on information-sharing and other activities to ensure each party’s interests are protected; however, there can be no assurance that our policies will be successful in every case. If we fail, or appear to fail, to identify, disclose and appropriately address potential conflicts of interest or fiduciary obligations, there could be an adverse effect on our business or reputation regardless of whether any such claims have merit. In addition, it is possible that in some jurisdictions, regulations could be changed to limit our ability to act for certain parties where potential conflicts may exist even with informed consent, which could limit our market share in those markets. There can be no assurance that potential conflicts of interest will not adversely affect us.

Infrastructure disruptions may disrupt our ability to manage real estate for clients or may adversely affect the value of real estate investments we make on behalf of clients.

Our ability to conduct a global business may be adversely impacted by disruptions to the infrastructure that supports our businesses and the communities in which they are located. This may include disruptions as a result of political instability, public health crises, attacks on our information technology systems, terrorist attacks, interruptions or delays in services from third-party data center hosting facilities or cloud computing platform providers, employee errors or malfeasance, building defects, utility outages and natural disasters such as fires, earthquakes, floods and hurricanes. The infrastructure disruptions we may experience as a result of such disasters could also disrupt our ability to manage real estate for clients or may adversely affect the value of the real estate investments we make through our investment management and development services businesses.

The buildings we manage for clients, which include some of the world’s largest office properties and retail centers, are used by people daily. We also manage the critical facilities (including data centers) that our clients rely on to serve the public and their customers, where unplanned downtime could potentially disrupt other parts of their businesses or society. As a result, fires, earthquakes, floods, other natural disasters, building defects, terrorist attacks, mass shootings or infrastructure disruptions can result in significant loss of life or injury, and, to the extent we are held to have been negligent in connection with our management of the affected properties, we could incur significant financial liabilities and reputational harm.

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Our policies, procedures and programs to safeguard the health, safety and security of our employees and others may not be adequate.

We have more than 100,000 employees as well as independent contractors working in over 100 countries. We have undertaken to implement what we believe to be best practices to safeguard the health, safety and security of our employees, independent contractors, clients and others at our worksites. However, if these policies, procedures and programs are not adequate, or employees do not receive related adequate training or follow them for any reason, the consequences may be severe to us, including serious injury or loss of life, which could impair our operations and cause us to incur significant legal liability or fines as well as reputational damage. Our insurance may not cover, or may be insufficient to cover, any legal liability or fines that we incur for health, safety or security incidents.

Our joint venture activities and affiliate program involve risks that are often outside of our control and that, if realized, could harm our business.

We have utilized joint ventures for commercial investments, select local brokerage and other affiliations both in the United States and internationally, and we may acquire interests in other joint ventures in the future. Under our affiliate program, we enter into contractual relationships with local brokerage, property management or other operations pursuant to which we license to that operation our name and make available certain of our resources, in exchange for a royalty or economic participation in that operation’s revenue, profits or transactional activity. In many of these joint ventures and affiliations, we may not have the right or power to direct the management and policies of the joint ventures or affiliates, and other participants or operators of affiliates may take action contrary to our instructions or requests and against our policies and objectives. In addition, the other participants and operators may become bankrupt or have economic or other business interests or goals that are inconsistent with ours. If a joint venture participant or affiliate acts contrary to our interest, it could harm our brand, business, results of operations and financial condition.

A significant portion of our revenue is seasonal, which could cause our financial results to fluctuate significantly.

A significant portion of our revenue is seasonal. Historically, our revenue, operating income, net income and cash flow from operating activities tend to be lowest in the first calendar quarter, and highest in the fourth calendar quarter of each year. 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 calendar year-end. This variance among periods makes it difficult to compare our financial condition and results of operations on a quarter-by-quarter basis. In addition, as a result of the seasonal nature of our business, political, economic or other unforeseen disruptions occurring in the fourth quarter, particularly those that impact our ability to close large transactions, may have a proportionally larger effect on our financial condition and results of operations.

Risks Related to Our Indebtedness

Our debt instruments impose operating and financial restrictions on us, and in the event of a default, all of our borrowings would become immediately due and payable.

As of December 31, 2019, our total debt, excluding notes payable on real estate (which are generally nonrecourse to us) and warehouse lines of credit (which are recourse only to our wholly-owned subsidiary, CBRE Capital Markets, and are secured by our related warehouse receivables), was $1.8 billion. For the year ended December 31, 2019, our interest expense was $103.0 million.

Our debt instruments impose, and the terms of any future debt may impose, operating and other restrictions on us and many of our subsidiaries. These restrictions affect, and in many respects limit or prohibit, our ability to:

 

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plan for or react to market conditions;

 

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meet capital needs or otherwise restrict our activities or business plans; and

 

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finance ongoing operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest, including:

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incurring or guaranteeing additional indebtedness;

 

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entering into consolidations and mergers;

 

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creating liens; and

 

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entering into sale/leaseback transactions.

Our credit agreement requires us to maintain a minimum interest coverage ratio of consolidated EBITDA (as defined in the credit agreement) to consolidated interest expense (as defined in the credit agreement) of 2.00x and a maximum leverage ratio of total debt (as defined in the credit agreement) less available cash (as defined in the credit agreement) to consolidated EBITDA of 4.25x (and, in the case of the first four full fiscal quarters following the consummation of a qualified acquisition (as defined in the credit agreement), 4.75x) as of the end of each fiscal quarter. On this basis, our coverage ratio of consolidated EBITDA to consolidated interest expense was 22.62x for the year ended December 31, 2019, and our leverage ratio of total debt less available cash to consolidated EBITDA was 0.44x as of December 31, 2019. Our ability to meet these financial ratios can be affected by events beyond our control, and we cannot give assurance that we will be able to meet those ratios when required. We continue to monitor our projected compliance with these financial ratios and other terms of our credit agreement.

A breach of any of these restrictive covenants or the inability to comply with the required financial ratios could result in a default under our debt instruments. If any such default occurs, the lenders under our credit agreement may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable. The lenders under our credit agreement also have the right in these circumstances to terminate any commitments they have to provide further borrowings. In addition, a default under our credit agreement could trigger a cross default or cross acceleration under our other debt instruments.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee, or ARRC, has proposed that the Secured Overnight Financing Rate, or SOFR, is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR. Establishing a replacement rate for LIBOR in this manner may result in interest obligations which are more than or do not otherwise correlate over time with the payments that would have been made on our debt if LIBOR was available in its current form.

We have limited restrictions on the amount of additional recourse debt we are able to incur, which may intensify the risks associated with our leverage, including our ability to service our indebtedness. In addition, in the event of a credit-ratings downgrade, our ability to borrow and the costs of such borrowings could be adversely affected.

Subject to the maximum amounts of indebtedness permitted by our credit agreement covenants, we are not restricted in the amount of additional recourse debt we are able to incur, and so we may in the future incur such indebtedness in order to finance our operations and investments. In addition, Moody’s Investors Service, Inc. and Standard & Poor’s Ratings Services, rate our significant outstanding debt. These ratings, and any downgrades of them, may affect our ability to borrow as well as the costs of our current and future borrowings.

Risks Related to our Information Technology, Cybersecurity and Data Protection

Failure to maintain and execute information technology strategies and ensure that our employees adapt to changes in technology could materially and adversely affect our ability to remain competitive in the market.

Our business relies heavily on information technology, including solutions provided by third parties, to deliver services that meet the needs of our clients. If we are unable to effectively execute or maintain our information technology strategies or adopt new technologies and processes relevant to our service platform, our ability to deliver high-quality services may be materially impaired. In addition, we make significant investments in new systems and tools to achieve competitive advantages and efficiencies. Implementation of such investments in information technology could exceed estimated budgets and we may experience challenges that prevent new strategies or

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technologies from being realized according to anticipated schedules. If we are unable to maintain current information technology and processes or encounter delays, or fail to exploit new technologies, then the execution of our business plans may be disrupted. Similarly, our employees require effective tools and techniques to perform functions integral to our business. Failure to successfully provide such tools and systems, or ensure that employees have properly adopted them, could materially and adversely impact our ability to achieve positive business outcomes.

Failure to maintain the security of our information and technology networks, including personally identifiable and client information, intellectual property and proprietary business information could significantly adversely affect us.

Security breaches and other disruptions of our information and technology networks, as well as that of third-party vendors, could compromise our information and intellectual property and expose us to liability, reputational harm and significant remediation costs, which could cause material harm to our business and financial results. In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and intellectual property, and that of our clients and personally identifiable information of our employees, contractors and vendors, in our data centers and on our networks. The secure processing, maintenance and transmission of this information are critical to our operations. Although we and our vendors continue to implement new security measures and regularly conduct employee training, our information technology and infrastructure may nevertheless be vulnerable to cyberattacks by third parties or breached due to employee error, malfeasance or other disruptions. An increasing number of companies that rely on information and technology networks have disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their websites or infrastructure. The techniques used to obtain unauthorized access, disable, or degrade service, or sabotage systems, change frequently, may be difficult to detect, and often are not recognized until launched against a target. To date, we have not yet experienced any cybersecurity breaches that have been material, either individually or in the aggregate. However, there can be no assurance that we will be able to prevent any material events from occurring in the future.

We are subject to numerous laws and regulations designed to protect sensitive information, such as the European Union’s General Data Protection Regulation, China’s Cyber Security Law, various U.S. federal and state laws governing the protection of health or other personally identifiable information, including the California Consumer Privacy Act, and data privacy and cybersecurity laws in other regions. These laws and regulations are increasing in complexity and number, change frequently and increasingly conflict among the various countries in which we operate, which has resulted in greater compliance risk and cost for us.

A significant actual or potential theft, loss, corruption, exposure, fraudulent use or misuse of client, employee or other personally identifiable or proprietary business data, whether by third parties or as a result of employee malfeasance or otherwise, non-compliance with our contractual or other legal obligations regarding such data or intellectual property or a violation of our privacy and security policies with respect to such data could result in significant remediation and other costs, fines, litigation or regulatory actions against us. Such an event could additionally disrupt our operations and the services we provide to clients, harm our relationships with contractors and vendors, damage our reputation, result in the loss of a competitive advantage, impact our ability to provide timely and accurate financial data and cause a loss of confidence in our services and financial reporting, which could adversely affect our business, revenues, competitive position and investor confidence. Additionally, we rely on third parties to support our information and technology networks, including cloud storage solution providers, and as a result have less direct control over our data and information technology systems. Such third parties are also vulnerable to security breaches and compromised security systems, for which we may not be indemnified and which could materially adversely affect us and our reputation.

Interruption or failure of our information technology, communications systems or data services could impair our ability to provide our services effectively, which could damage our reputation and materially harm our operating results.

Our business requires the continued operation of information technology and communication systems and network infrastructure. Our ability to conduct our global business may be materially adversely affected by disruptions to these systems or our infrastructure. Our information technology and communications systems are

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vulnerable to damage or disruption from fire, power loss, telecommunications failure, system malfunctions, computer viruses, cyberattacks, natural disasters such as hurricanes, earthquakes and floods, acts of war or terrorism, employee errors or malfeasance, or other events which are beyond our control. With respect to cyberattacks and viruses, these pose growing threats to many companies, and we have been a target and may continue to be a target of such threats, which could expose us to liability, reputational harm and significant remediation costs and cause material harm to our business and financial results. In addition, the operation and maintenance of these systems and networks is in some cases dependent on third-party technologies, systems and service providers for which there is no certainty of uninterrupted availability. Any of these events could cause system interruption, delays and loss, corruption or exposure of critical data or intellectual property and may also disrupt our ability to provide services to or interact with our clients, contractors and vendors, and we may not be able to successfully implement contingency plans that depend on communication or travel. Furthermore, while we have certain business interruption insurance coverage and various contractual arrangements that can serve to mitigate costs, damages and liabilities, any such event could result in substantial recovery and remediation costs and liability to customers, business partners and other third parties. We have business continuity and disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, but our disaster recovery planning may not be sufficient and cannot account for all eventualities, and a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially adversely affected.

Our business relies heavily on the use of commercial real estate data. A portion of this data is purchased or licensed from third-party providers for which there is no certainty of uninterrupted availability. A disruption of our ability to provide data to our professionals and/or our clients or an inadvertent exposure of proprietary data could damage our reputation and competitive position, and our operating results could be adversely affected.

Legal and Regulatory Related Risks

We are subject to various litigation and regulatory risks and may face financial liabilities and/or damage to our reputation as a result of litigation or regulatory proceedings.

Our businesses are exposed to various litigation and regulatory risks, especially within our valuations business. Although we maintain insurance coverage for most of this risk, insurance coverage is unavailable at commercially reasonable pricing for certain types of exposures. Additionally, our insurance policies may not cover us in the event of grossly negligent or intentionally wrongful conduct. Accordingly, an adverse result in a litigation against us, or a lawsuit that results in a substantial legal liability for us (and particularly a lawsuit that is not insured), could have a disproportionate and material adverse effect on our business, financial condition and results of operations. Furthermore, an adverse result in regulatory proceedings, if applicable, could result in fines or other liabilities or adversely impact our operations. In addition, we depend on our business relationships and our reputation for high-caliber professional services to attract and retain clients. As a result, allegations against us, or the announcement of a regulatory investigation involving us, irrespective of the ultimate outcome of that allegation or investigation, may harm our professional reputation and as such materially damage our business and its prospects.

Our businesses, financial condition, results of operations and prospects could be adversely affected by new laws or regulations or by changes in existing laws or regulations or the application thereof. If we fail to comply with laws and regulations applicable to us, or make incorrect determinations in complex tax regimes, we may incur significant financial penalties.

We are subject to numerous federal, state, local and non-U.S. laws and regulations specific to the services we perform in our business. Brokerage of real estate sales and leasing transactions and the provision of property management and valuation services require us and our employees to maintain applicable licenses in each U.S. state and certain non-U.S. jurisdictions in which we perform these services. If we and our employees fail to maintain our licenses or conduct these activities without a license, or violate any of the regulations covering our licenses, we may be required to pay fines (including treble damages in certain states) or return commissions received or have our licenses suspended or revoked. A number of our services, including the services provided by our indirect wholly-owned subsidiaries, CBRE Capital Markets and CBRE Global Investors, are subject to regulation by the SEC, Financial Industry Regulatory Authority, or FINRA, or other self-regulatory organizations and state securities regulators and compliance failures or regulatory action could adversely affect our business. We could be subject to

18

 

disciplinary or other actions in the future due to claimed noncompliance with these regulations, which could have a material adverse effect on our operations and profitability.

We are also subject to laws of broader applicability, such as tax, securities, environmental, employment laws and anti-bribery, anti-money laundering and corruption laws, including the Fair Labor Standards Act, occupational health and safety regulations, U.S. state wage-and-hour laws, the U.S. FCPA and the U.K. Bribery Act. Failure to comply with these requirements could result in the imposition of significant fines by governmental authorities, awards of damages to private litigants and significant amounts paid in legal fees or settlements of these matters.

As the size and scope of our business has increased significantly, both the difficulty of ensuring compliance with numerous licensing and other regulatory requirements and the possible loss resulting from non-compliance have increased. The global economic crisis resulted in increased government and legislative activity and we expect that we will continue to see the introduction of new legislation and additional changes to rules and regulations in the future. New or revised legislation or regulations applicable to our business, both within and outside of the United States, as well as changes in administrations or enforcement priorities may have an adverse effect on our business, including increasing the costs of regulatory compliance or preventing us from providing certain types of services in certain jurisdictions or in connection with certain transactions or clients. We are unable to predict how any of these new laws, rules, regulations and proposals will be implemented or in what form, or whether any additional or similar changes to laws or regulations, including the interpretation or implementation thereof, will occur in the future. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our businesses, financial condition, results of operations and prospects.

We also operate in many jurisdictions with complex and varied tax regimes, and are subject to different forms of taxation resulting in a variable effective tax rate. In addition, from time to time we engage in transactions across different tax jurisdictions. Due to the different tax laws in the many jurisdictions where we operate, we are often required to make subjective determinations. The tax authorities in the various jurisdictions where we carry on business may not agree with the determinations that are made by us with respect to the application of tax law. Such disagreements could result in disputes and, ultimately, in the payment of additional funds to the government authorities in the jurisdictions where we carry on business, which could have an adverse effect on our results of operations. In addition, changes in tax rules or the outcome of tax assessments and audits could have an adverse effect on our results in any particular quarter.

We may be subject to environmental liability as a result of our role as a property or facility manager or developer of real estate.

Various laws and regulations impose liability on real property owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at a property. In our role as a property or facility manager or developer, we could be held liable as an operator for such costs. This liability may be imposed without regard to the legality of the original actions and without regard to whether we knew of, or were responsible for, the presence of the hazardous or toxic substances. If we fail to disclose environmental issues, we could also be liable to a buyer or lessee of a property. If we incur any such liability, our business could suffer significantly as it could be difficult for us to develop or sell such properties, or borrow funds using such properties as collateral. In the event of a substantial liability, our insurance coverage might be insufficient to pay the full damages, or the scope of available coverage may not cover certain of these liabilities. Additionally, liabilities incurred to comply with more stringent future environmental requirements could adversely affect any or all of our lines of business.

19

 

Risks Related to our Internal Controls and Accounting Policies

If we are unable to implement and maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and our results of operations and stock price could be adversely affected.

The accuracy of our financial reporting is dependent on the effectiveness of our internal controls. We are required to provide a report from management to our stockholders on our internal control over financial reporting that includes an assessment of the effectiveness of these controls. As disclosed in Part II, Item 9A, during the fourth quarter of 2019, management identified several material weaknesses in internal control related to our Global Workplace Solutions segment in the Europe, Middle East & Africa region, or GWS EMEA. Management concluded that during 2019, as GWS EMEA increased in complexity and grew in both size and scale, management did not prioritize an appropriate level of oversight, a sufficient number of capable resources or training for control preparers and reviewers to address internal controls over financial reporting. As a result, even though a material misstatement was not identified in the GWS EMEA financial statements, it was determined that there was a reasonable possibility that a material misstatement in the GWS EMEA financial statements would not have been prevented or detected on a timely basis and, therefore, management concluded that our internal control over financial reporting was not effective as of December 31, 2019. We are committed to remediating the GWS EMEA material weaknesses in a timely manner and have begun the process of executing remediation plans. These measures will result in additional administrative expenses related to enhanced training and hiring of additional personnel. Internal control over financial reporting has inherent limitations, including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions, and fraud. Because of these inherent limitations, internal control over financial reporting might not prevent or detect all misstatements or fraud. If we are unable to remediate the material weaknesses in a timely manner, or are otherwise unable to maintain and execute adequate internal control over financial reporting or implement required new or improved controls that provide reasonable assurance of the reliability of the financial reporting and preparation of our financial statements for external use, we could suffer harm to our reputation, incur incremental compliance costs, fail to meet our public reporting requirements on a timely basis, be unable to properly report on our business and our results of operations, or be required to restate our financial statements, and our results of operations, our stock price and our ability to obtain new business could be materially adversely affected.

Our goodwill and other intangible assets could become impaired, which may require us to take significant non-cash charges against earnings.

Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of our goodwill and other intangible assets has been impaired. Any impairment of goodwill or other intangible assets as a result of such analysis would result in a non-cash charge against earnings, and such charge could materially adversely affect our reported results of operations, stockholders’ equity and our stock price. A significant and sustained decline in our future cash flows, a significant adverse change in the economic environment, slower growth rates or if our stock price falls below our net book value per share for a sustained period, could result in the need to perform additional impairment analysis in future periods. If we were to conclude that a future write-down of goodwill or other intangible assets is necessary, then we would record such additional charges, which could materially adversely affect our results of operations.

Cautionary Note on Forward-Looking Statements

This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words “anticipate,” “believe,” “could,” “should,” “propose,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases are used in this Annual Report on Form 10-K to identify forward-looking statements. Except for historical information contained herein, the matters addressed in this Annual Report on Form 10-K are forward-looking statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies.

20

 

These forward-looking statements are made based on our management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These uncertainties and factors could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.

The following factors are among those, but are not only those, that may cause actual results to differ materially from the forward-looking statements:

 

•

disruptions in general economic, political and regulatory conditions, particularly in geographies or industry sectors where our business may be concentrated;

 

•

volatility or adverse developments in the securities, capital or credit markets, interest rate increases and conditions affecting the value of real estate assets, inside and outside the United States;

 

•

poor performance of real estate investments or other conditions that negatively impact clients’ willingness to make real estate or long-term contractual commitments and the cost and availability of capital for investment in real estate;

 

•

foreign currency fluctuations and changes in currency restrictions, trade sanctions and import-export and transfer pricing rules;

 

•

changes in U.S. and international law and regulatory environments (including relating to anti-corruption, anti-money laundering, trade sanctions, tariffs, currency controls and other trade control laws), particularly in Asia, Africa, Russia, Eastern Europe and the Middle East, due to the level of political instability in those regions;

 

•

our ability to compete globally, or in specific geographic markets or business segments that are material to us;

 

•

our ability to identify, acquire and integrate accretive businesses;

 

•

costs and potential future capital requirements relating to businesses we may acquire;

 

•

integration challenges arising out of companies we may acquire;

 

•

our ability to retain and incentivize key personnel;

 

•

our ability to manage organizational challenges associated with our size;

 

•

negative publicity or harm to our brand and reputation;

 

•

increases in unemployment and general slowdowns in commercial activity;

 

•

trends in pricing and risk assumption for commercial real estate services;

 

•

the effect of significant changes in capitalization rates across different property types;

 

•

a reduction by companies in their reliance on outsourcing for their commercial real estate needs, which would affect our revenues and operating performance;

 

•

client actions to restrain project spending and reduce outsourced staffing levels;

 

•

declines in lending activity of U.S. Government Sponsored Enterprises, regulatory oversight of such activity and our mortgage servicing revenue from the commercial real estate mortgage market;

 

•

our ability to further diversify our revenue model to offset cyclical economic trends in the commercial real estate industry;

 

•

our ability to attract new user and investor clients;

 

•

our ability to retain major clients and renew related contracts;

 

•

our ability to leverage our global services platform to maximize and sustain long-term cash flow;

21

 

 

•

our ability  to continue investing in our platform and client service offerings;

 

•

our ability to maintain expense discipline;

 

•

the emergence of disruptive business models and technologies;

 

•

the ability of our investment management business to maintain and grow assets under management and achieve desired investment returns for our investors, and any potential related litigation, liabilities or reputational harm possible if we fail to do so;

 

•

our ability to manage fluctuations in net earnings and cash flow, which could result from poor performance in our investment programs, including our participation as a principal in real estate investments;

 

•

our leverage under our debt instruments as well as the limited restrictions therein on our ability to incur additional debt, and the potential increased borrowing costs to us from a credit-ratings downgrade;

 

•

the ability of CBRE Capital Markets to periodically amend, or replace, on satisfactory terms, the agreements for its warehouse lines of credit;

 

•

variations in historically customary seasonal patterns that cause our business not to perform as expected;

 

•

litigation and its financial and reputational risks to us;

 

•

our exposure to liabilities in connection with real estate advisory and property management activities and our ability to procure sufficient insurance coverage on acceptable terms;

 

•

liabilities under guarantees, or for construction defects, that we incur in our development services business;

 

•

our and our employees’ ability to execute on, and adapt to, information technology strategies and trends;

 

•

cybersecurity threats or other threats to our information technology networks, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption;

 

•

our ability to comply with laws and regulations related to our global operations, including real estate licensure, tax, labor and employment laws and regulations, as well as the anti-corruption laws and trade sanctions of the U.S. and other countries;

 

•

changes in applicable tax or accounting requirements;

 

•

any inability for us to implement and maintain effective internal controls over financial reporting;

 

•

the effect of implementation of new accounting rules and standards or the impairment of our goodwill and intangible assets; and

 

•

the other factors described elsewhere in this Annual Report on Form 10-K, included under the headings “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies,” “Quantitative and Qualitative Disclosures About Market Risk” or as described in the other documents and reports we file with the SEC.

Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the SEC.

Item 1B.

Unresolved Staff Comments.

None.

22

 

Item 2.

Properties.

As of December 31, 2019, we occupied offices, excluding affiliates, in the following geographical regions:

 

 

 

Sales

Offices

 

 

Corporate

Offices

 

 

Total

 

Americas

 

 

255

 

 

 

3

 

 

 

258

 

Europe, Middle East and Africa (EMEA)

 

 

182

 

 

 

1

 

 

 

183

 

Asia Pacific

 

 

95

 

 

 

1

 

 

 

96

 

Total

 

 

532

 

 

 

5

 

 

 

537

 

 

Some of our offices house employees from more than one of our business segments (i.e. an office might house employees from all three of our business segments). As such, we have provided above office totals by geographic region rather than by business segment in order to avoid double counting or triple counting our offices.

In general, these leased offices are fully utilized. The most significant terms of the leasing arrangements for our offices are the length of the lease and the rent. Our leases have terms varying in duration. The rent payable under our office leases varies significantly from location to location as a result of differences in prevailing commercial real estate rates in different geographic locations. Our management believes that no single office lease is material to our business, results of operations or financial condition. In addition, we believe there is adequate alternative office space available at acceptable rental rates to meet our needs, although adverse movements in rental rates in some markets may negatively affect our profits in those markets when we enter into new leases.

We do not own any of these offices.

Item 3.

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 therefore 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.

Item 4.

Mine Safety Disclosures.

Not applicable.

23

 

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Stock Price Information

Our Class A common stock has traded on the New York Stock Exchange under the symbol “CBRE” since March 19, 2018. Prior to that, from June 10, 2004 to March 18, 2018, our Class A common stock traded on the New York Stock Exchange under the “CBG” symbol.

As of February 14, 2020, there were 52 stockholders of record of our Class A common stock.

Dividend Policy

We have not declared or paid any cash dividends on any class of our common stock since our inception on February 20, 2001, and we do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to finance future growth and possibly reduce debt or repurchase shares of our common stock. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend on our financial condition, acquisition or other opportunities to invest capital, results of operations, capital requirements and other factors that the board of directors deems relevant.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

Open market share repurchase activity during the three months ended December 31, 2019 was as follows (dollars in thousands, except per share amounts):

 

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number

of Shares

Purchased

as Part of

Publicly

Announced

Plans or

Programs

 

 

Approximate

Dollar Value

of Shares

That May

Yet Be

Purchased

Under the

Plans or

Programs (1)

 

October 1, 2019 - October 31, 2019

 

 

1,003,485

 

 

$

50.85

 

 

 

1,003,485

 

 

 

 

 

November 1, 2019 - November 30, 2019

 

 

—

 

 

$

—

 

 

 

—

 

 

 

 

 

December 1, 2019 - December 31, 2019

 

 

—

 

 

$

—

 

 

 

—

 

 

 

 

 

Total

 

 

1,003,485

 

 

$

50.85

 

 

 

1,003,485

 

 

$

400,000

 

 

(1)

In February 2019, our board of directors authorized a new program for the company to repurchase up to $300.0 million of our Class A common stock over three years, effective March 11, 2019. In both August and November 2019, our board of directors authorized an additional $100.0 million under our new program, bringing the total authorized amount under the new program to a total of $500.0 million. The remaining $400.0 million in the table represents the amount available to repurchase shares under the authorized repurchase program as of December 31, 2019.

Our repurchase programs do not obligate us to acquire any specific number of shares. Under these programs, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. The timing of any future repurchases and the actual amounts repurchased will depend on a variety of factors, including the market price of our common stock, general market and economic conditions and other factors.

24

 

Equity Compensation Plan Information

The following table summarizes information about our equity compensation plans as of December 31, 2019. All outstanding awards relate to our Class A common stock.

 

 

 

Number of

Securities to be

Issued upon

Exercise of

Outstanding

Options, Warrants

and Rights

 

 

Weighted-average

Exercise Price of

Outstanding

Options, Warrants

and Rights

 

 

Number of

Securities

Remaining Available  for

Future Issuance under

Equity Compensation

Plans (Excluding

Securities Reflected

in Column ( a ))

 

 

 

( a )

 

 

( b )

 

 

( c )

 

Equity compensation plans approved by

   security holders (1)

 

 

10,309,128

 

 

$

—

 

 

 

7,538,712

 

Equity compensation plans not approved

   by security holders

 

 

—

 

 

 

—

 

 

 

—

 

Total

 

 

10,309,128

 

 

$

—

 

 

 

7,538,712

 

 

(1)

Consists of restricted stock units, or RSUs, issued under our 2019 Equity Incentive Plan, or the 2019 Plan, our 2017 Equity Incentive Plan, or the 2017 Plan, and our 2012 Equity Incentive Plan, or the 2012 Plan. Our 2012 Plan terminated in May 2017 in connection with the adoption of the 2017 Plan. Our 2017 Plan terminated in May 2019 in connection with the adoption of the 2019 Plan. We cannot issue any further awards under both the 2017 Plan and the 2012 Plan.

In addition:

 

•

The figures in the foregoing table include:

 

o

6,209,669 RSUs that are performance vesting in nature, with the figures in the table reflecting the maximum number of RSUs that may be issued if all performance-based targets are satisfied and

 

o

4,099,459 RSUs that are time vesting in nature.

Stock Performance Graph

The following graph shows our cumulative total stockholder return for the period beginning December 31, 2014 and ending on December 31, 2019. The graph also shows the cumulative total returns of the Standard & Poor’s 500 Stock Index, or S&P 500 Index, in which we are included, and two industry peer groups.

The comparison below assumes $100 was invested on December 31, 2014 in our Class A common stock and in each of the indices shown and assumes that all dividends were reinvested. Our stock price performance shown in the following graph is not necessarily indicative of future stock price performance. The 2019 industry peer group is comprised of JLL, a global commercial real estate services company publicly traded in the United States, as well as the following companies that have significant commercial real estate or real estate capital markets businesses within the United States or globally, that in each case are publicly traded in the United States or abroad: Colliers International Group Inc. (CIGI), Cushman & Wakefield, Inc. (CWK) , ISS A/S (ISS), Marcus & Millichap, Inc. (MMI), Newmark Group Inc. (NMRK), Savills plc (SVS.L, traded on the London Stock Exchange), Sodexo S.A. (SW.PA) and Walker & Dunlop, Inc. (WD). These companies are or include divisions with business lines reasonably comparable to some or all of ours, and which represent our current primary competitors. In 2019, we elected to remove HFF, L.P. from our peer group (given JLL acquired them) and replaced it with SW.PA.

 

 

25

 

 

 

12/31/14

 

12/15

 

12/16

 

12/17

 

12/18

 

12/19

 

CBRE Group, Inc.

 

100.00

 

 

100.96

 

 

91.94

 

 

126.45

 

 

116.91

 

 

178.95

 

S&P 500

 

100.00

 

 

101.38

 

 

113.51

 

 

138.29

 

 

132.23

 

 

173.86

 

2018 Peer Group

 

100.00

 

 

120.09

 

 

97.31

 

 

133.11

 

 

105.56

 

 

137.39

 

2019 Peer Group

 

100.00

 

 

111.30

 

 

109.75

 

 

140.04

 

 

110.26

 

 

138.59

 

 

(1)

$100 invested on 12/31/13 in stock or index-including reinvestment of dividends.

Fiscal year ending December 31.

(2)

Copyright© 2020 Standard & Poor’s, a division of S&P Global. All rights reserved.

This graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent that we specifically incorporate this information by reference therein, and shall not otherwise be deemed filed under the Securities Act or under the Exchange Act.

26

 

Item 6.

Selected Financial Data.

The following table sets forth our selected historical consolidated financial information for each of the five years in the period ended December 31, 2019. The statement of operations data, the statement of cash flows data and the other data for the years ended December 31, 2019, 2018 and 2017 and the balance sheet data as of December 31, 2019 and 2018 were derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K (Annual Report). The statement of operations data, the statement of cash flows data and the other data for the years ended December 31, 2016 and 2015, and the balance sheet data as of December 31, 2017, 2016 and 2015 were derived from our audited consolidated financial statements that are not included in this Annual Report.

The selected financial data presented below is not necessarily indicative of results of future operations and should be read in conjunction with our consolidated financial statements and the information included under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report (dollars in thousands, except share data).

 

 

 

Year Ended December 31,

 

 

 

2019 (1)

 

 

 

2018

 

 

 

2017

 

 

 

2016

 

 

2015 (2)

 

STATEMENTS OF OPERATIONS DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

23,894,091

 

 

$

21,340,088

 

 

$

18,628,787

 

 

$

17,369,108

 

 

$

10,855,810

 

Operating income

 

 

1,259,875

 

 

 

1,087,989

 

 

 

1,078,682

 

 

 

816,831

 

 

 

835,944

 

Interest expense, net of interest income

 

 

85,754

 

 

 

98,685

 

 

 

126,961

 

 

 

136,800

 

 

 

112,569

 

Write-off of financing costs on extinguished debt

 

 

2,608

 

 

 

27,982

 

 

 

—

 

 

 

—

 

 

 

2,685

 

Net income

 

 

1,291,450

 

 

 

1,065,948

 

 

 

703,576

 

 

 

585,170

 

 

 

558,877

 

Net income attributable to non-controlling interests

 

 

9,093

 

 

 

2,729

 

 

 

6,467

 

 

 

12,091

 

 

 

11,745

 

Net income attributable to CBRE Group, Inc.

 

 

1,282,357

 

 

 

1,063,219

 

 

 

697,109

 

 

 

573,079

 

 

 

547,132

 

Income per share attributable to CBRE Group, Inc. (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

3.82

 

 

$

3.13

 

 

$

2.06

 

 

$

1.71

 

 

$

1.64

 

Diluted income per share

 

 

3.77

 

 

 

3.10

 

 

 

2.05

 

 

 

1.69

 

 

 

1.63

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

335,795,654

 

 

 

339,321,056

 

 

 

337,658,017

 

 

 

335,414,831

 

 

 

332,616,301

 

Diluted

 

 

340,522,871

 

 

 

343,122,741

 

 

 

340,783,556

 

 

 

338,424,563

 

 

 

336,414,856

 

 

 

STATEMENTS OF CASH FLOWS DATA (4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

1,223,380

 

 

$

1,131,249

 

 

$

894,411

 

 

$

616,985

 

 

$

651,897

 

Net cash used in investing activities

 

 

(721,024

)

 

 

(560,684

)

 

 

(302,600

)

 

 

(150,524

)

 

 

(1,618,959

)

Net cash (used in) provided by financing activities

 

 

(271,949

)

 

 

(506,600

)

 

 

(627,742

)

 

 

(220,677

)

 

 

789,548

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA (5)

 

$

2,063,783

 

 

$

1,905,168

 

 

$

1,716,774

 

 

$

1,562,347

 

 

$

1,412,724

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

971,781

 

 

$

777,219

 

 

$

751,774

 

 

$

762,576

 

 

$

540,403

 

Total assets

 

 

16,197,196

 

 

 

13,456,793

 

 

 

11,718,396

 

 

 

10,994,338

 

 

 

11,017,943

 

Long-term debt, including current portion, net

 

 

1,763,059

 

 

 

1,770,406

 

 

 

1,999,611

 

 

 

2,548,137

 

 

 

2,679,539

 

Total liabilities

 

 

9,924,084

 

 

 

8,446,891

 

 

 

7,543,782

 

 

 

7,848,438

 

 

 

8,258,873

 

Total CBRE Group, Inc. stockholders’ equity

 

 

6,232,693

 

 

 

4,938,797

 

 

 

4,114,496

 

 

 

3,103,142

 

 

 

2,712,652

 

 

Note:  We have not declared any cash dividends on common stock for the periods shown.

(1)

We adopted new lease accounting guidance in the first quarter of 2019 using the optional transitional method. Accordingly, no adjustments were made to the financial statements presented for prior periods. As a result of the adoption of the leasing guidance, the consolidated balance sheet as of January 1, 2019 reflected $1.2 billion of additional lease liabilities, along with corresponding right-of-use assets of $1.0 billion, reflecting adjustments for items such as prepaid and deferred rent, unamortized initial direct costs, and unamortized lease incentive balances. The adoption of the leasing guidance did not have a material impact on our consolidated statement of operations. See Note 3 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

(2)

On September 1, 2015, CBRE, Inc., our wholly-owned subsidiary, closed on a Stock and Asset Purchase Agreement with Johnson Controls, Inc. (JCI) to acquire JCI’s Global Workplace Solutions (JCI-GWS) business (which we refer to as the GWS Acquisition). The results for the year ended December 31, 2015 include the operations of JCI-GWS from September 1, 2015, the date such business was acquired.

We also adopted new revenue recognition guidance in 2018 and restated 2017 and 2016 financial statements to conform with the new guidance. Amounts for the year ended December 31, 2015 have not been restated. See our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information.

27

 

(3)

See Income Per Share information in Note 17 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

(4)

In the first quarter of 2018, we adopted Accounting Standards Updated (ASU) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” Certain reclassifications were made to the 2017 and 2016 statements of cash flows to conform with the  2018 presentation. Amounts for the year ended December 31, 2015 have not been reclassified.

(5)

Adjusted EBITDA is not a recognized measurement under accounting principles generally accepted in the United States, or GAAP. When analyzing our operating performance, investors should use this measure in addition to, and not as an alternative for, the most directly comparable financial measure calculated and presented in accordance with GAAP. We generally use this non-GAAP financial measure to evaluate operating performance and for other discretionary purposes. We believe this measure provides a more complete understanding of ongoing operations, enhances comparability of current results to prior periods and may be useful for investors to analyze our financial performance because it eliminates the impact of selected charges that may obscure trends in the underlying performance of our business. Because not all companies use identical calculations, our presentation of adjusted EBITDA may not be comparable to similarly titled measures of other companies.

EBITDA represents earnings before net interest expense, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization and intangible asset impairments. Amounts shown for adjusted EBITDA further remove (from EBITDA) the impact of certain cash and non-cash items related to acquisitions, certain carried interest incentive compensation (reversal) expense to align with the timing of associated revenue, costs associated with our reorganization, including cost-savings initiatives, cost-elimination expenses and other non-recurring costs. We 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.

Adjusted 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. This measure may also differ from amounts calculated under similarly titled definitions in our debt instruments, which 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.

Adjusted EBITDA is calculated as follows (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

 

 

2016

 

 

2015 (2)

 

Net income attributable to CBRE Group, Inc.

 

$

1,282,357

 

 

$

1,063,219

 

 

$

697,109

 

 

$

573,079

 

 

$

547,132

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

439,224

 

 

 

451,988

 

 

 

406,114

 

 

 

366,927

 

 

 

314,096

 

Intangible asset impairment

 

 

89,787

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Interest expense, net of interest income

 

 

85,754

 

 

 

98,685

 

 

 

126,961

 

 

 

136,800

 

 

 

112,569

 

Write-off of financing costs on extinguished debt

 

 

2,608

 

 

 

27,982

 

 

 

—

 

 

 

—

 

 

 

2,685

 

Provision for income taxes

 

 

69,895

 

 

 

313,058

 

 

 

467,757

 

 

 

296,900

 

 

 

320,853

 

EBITDA

 

 

1,969,625

 

 

 

1,954,932

 

 

 

1,697,941

 

 

 

1,373,706

 

 

 

1,297,335

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs associated with our reorganization, including

   cost-savings initiatives (i)

 

 

49,565

 

 

 

37,925

 

 

 

—

 

 

 

—

 

 

 

—

 

Integration and other costs related to acquisitions

 

 

15,292

 

 

 

9,124

 

 

 

27,351

 

 

 

125,743

 

 

 

48,865

 

Carried interest incentive compensation expense (reversal)

   to align with the timing of associated revenue

 

 

13,101

 

 

 

(5,261

)

 

 

(8,518

)

 

 

(15,558

)

 

 

26,085

 

Impact of fair value adjustments to real estate assets acquired

   in the Telford Acquisition (purchase accounting) that were

   sold in period

 

 

9,301

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Costs incurred related to legal entity restructuring

 

 

6,899

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Costs incurred in connection with litigation settlement

 

 

—

 

 

 

8,868

 

 

 

—

 

 

 

—

 

 

 

—

 

One-time gain associated with remeasuring an investment in

   an unconsolidated subsidiary to fair value as of the date the

   remaining controlling interest was acquired

 

 

—

 

 

 

(100,420

)

 

 

—

 

 

 

—

 

 

 

—

 

Cost-elimination expenses

 

 

—

 

 

 

—

 

 

 

—

 

 

 

78,456

 

 

 

40,439

 

Adjusted EBITDA

 

$

2,063,783

 

 

$

1,905,168

 

 

$

1,716,774

 

 

$

1,562,347

 

 

$

1,412,724

 

 

(i)

Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective January 1, 2019.

28

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

We are the world’s largest commercial real estate services and investment firm, based on 2019 revenue, with leading global market positions in our leasing, property sales, occupier outsourcing and valuation businesses. As of December 31, 2019, we operated in more than 530 offices worldwide and have more than 100,000 employees, excluding independent affiliates.

Our business is focused on providing services to real estate occupiers and investors. For occupiers, we provide facilities management, project management, transaction (both property sales and leasing) and consulting services, among others. For investors, we provide capital markets (property sales, mortgage origination, sales and servicing), leasing, investment management, property management, valuation and development services, among others. We provide services under the following brand names: “CBRE” (real estate advisory and outsourcing services); “CBRE Global Investors” (investment management); “Trammell Crow Company” (U.S. development); “Telford Homes” (U.K. development) and “Hana” (flexible-space solutions).

Our revenue mix has shifted in recent years toward more contractual revenue as occupiers and investors increasingly prefer to purchase integrated, account-based services from firms that meet the full spectrum of their needs nationally and globally. We believe we are well-positioned to capture a substantial share of growing market opportunities. We generate revenue from both management fees (large multi-year portfolio and per-project contracts) and commissions on transactions. Our contractual, fee-for-services businesses generally involve occupier outsourcing (including facilities and project management), property management, investment management, appraisal/valuation and loan servicing. In addition, our leasing services business line is largely recurring in nature over time.

In 2019, we generated revenue from a highly diversified base of clients, including more than 90 of the Fortune 100 companies. We have been an S&P 500 company since 2006 and in 2019 we were ranked #146 on the Fortune 500. We have been voted the most recognized commercial real estate brand in the Lipsey Company survey for 19 years in a row (including 2020). We have also been rated a World’s Most Ethical Company by the Ethisphere Institute for seven consecutive years (including 2020), and are included in the Dow Jones World Sustainability Index and the Bloomberg Gender Equality Index.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, 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. We believe that the following critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements.

Revenue Recognition

To recognize revenue in a transaction with a customer, we evaluate the five steps of the Accounting Standards Codification Topic 606 revenue recognition framework: (1) identify the contract; (2) identify the performance obligations(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) and (5) recognize revenue when (or as) the performance obligations are satisfied.

Our revenue recognition policies are consistent with this five step framework. Understanding the complex terms of agreements and determining the appropriate time, amount, and method to recognize revenue for each transaction requires significant judgement. These significant judgements include: (i) determining what point in time or what measure of progress depicts the transfer of control to the customer; (ii) applying the series guidance to certain performance obligations satisfied over time; (iii) estimating how and when contingencies, or other forms of variable consideration, will impact the timing and amount of recognition of revenue and (iv) determining whether we control third party services before they are transferred to the customer in order to appropriately recognize the

29

 

associated fees on either a gross or net basis. The timing and amount of revenue recognition in a period could vary if different judgments were made. Our revenues subject to the most judgment are brokerage commission revenue, incentive-based management fees, development fees and third party fees associated with our occupier outsourcing and property management services. For a detailed discussion of our revenue recognition policies, see the Revenue Recognition section within Note 2 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K, or this Annual Report.

Goodwill and Other Intangible Assets

Our acquisitions require the application of purchase accounting, which results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. In determining the fair values of assets and liabilities acquired in a business combination, we use a variety of valuation methods including present value, depreciated replacement cost, market values (where available) and selling prices less costs to dispose. We are responsible for determining the valuation of assets and liabilities and for the allocation of purchase price to assets acquired and liabilities assumed.

Assumptions must often be made in determining fair values, particularly where observable market values do not exist. Assumptions may include discount rates, growth rates, cost of capital, royalty rates, tax rates and remaining useful lives. These assumptions can have a significant impact on the value of identifiable assets and accordingly can impact the value of goodwill recorded. Different assumptions could result in different values being attributed to assets and liabilities. Since these values impact the amount of annual depreciation and amortization expense, different assumptions could also impact our statement of operations and could impact the results of future asset impairment reviews.

We are required to test goodwill and other intangible assets deemed to have indefinite useful lives for impairment at least annually, or more often if circumstances or events indicate a change in the impairment status, in accordance with the “Intangibles – Goodwill and Other” Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, (Topic 350). We have the option to perform a qualitative assessment with respect to any of our reporting units to determine whether a quantitative impairment test is needed. We are permitted to assess based on qualitative factors whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would conduct a quantitative goodwill impairment test. If not, we do not need to apply the quantitative test. The qualitative test is elective and we can go directly to the quantitative test rather than making a more-likely-than-not assessment based on an evaluation of qualitative factors. When performing a quantitative test, we use a discounted cash flow approach to estimate the fair value of our reporting units. Management’s judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margin percentages, discount rates, etc. Due to the many variables inherent in the estimation of a business’s fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis.

For additional information on goodwill and intangible asset impairment testing, see Notes 2 and 9 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

Income Taxes  

Income taxes are accounted for under the asset and liability method in accordance with the “Accounting for Income Taxes,” Topic of the FASB ASC (Topic 740). Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured by applying enacted tax rates and laws and are released in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

30

 

Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carryforwards, for which the benefits have already been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe will be realized in future periods. While we believe the resulting tax balances as of December 31, 2019 and 2018 are appropriately accounted for in accordance with Topic 740, as applicable, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material.

On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law making significant changes to the Internal Revenue Code, including a decrease to the U.S. corporate tax rate from 35% to 21% and a one-time transition tax (i.e. toll charge or, the Transition Tax) on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We are paying the federal tax liability for the Transition Tax in annual interest-free installments over a period of eight years through 2025 as allowed by the Tax Act.

Our future effective tax rate could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.

See Note 15 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for further information regarding income taxes.

New Accounting Pronouncements

See New Accounting Pronouncements discussion within Note 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

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 believe that general inflation has not had a material impact upon our operations.

Items Affecting Comparability

When you read our financial statements and the information included in this Annual 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.

31

 

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 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 our sales and leasing professionals 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. Additionally, our contractual revenues have continued to increase primarily as a result of growth in our outsourcing business, and we believe this contractual revenue should help offset the negative impacts that macroeconomic deterioration could have on other parts of our business. Nevertheless, adverse global and regional economic trends could pose significant risks to the performance of our consolidated operations and financial condition.

Commercial real estate markets in the United States have generally been marked by increased demand for space, falling vacancies and higher rents since 2010. During this time, healthy U.S. property sales activity has been sustained by gradually improving market fundamentals, including higher occupancy rates and rents, broad, low-cost credit availability and increased institutional capital allocations to commercial real estate. In 2019, U.S. sales market activity improved from 2018 levels, as significant capital continued to be targeted at commercial real estate and relatively low-cost financing remained plentiful. The market for commercial real estate leasing was solid in 2019, though leasing market volumes weakened somewhat in the latter stages of the year.

In Europe, leasing activity was relatively stable in 2019; sales market volumes were soft for much of the year, but rebounded strongly in the fourth quarter. The United Kingdom’s economy and property market were generally solid from the June 2016 referendum to leave the European Union through 2018. However, in 2019, continued uncertainty throughout the year about the date and the terms on which the United Kingdom would leave the European Union led to lower lease and sales volumes. The December 2019 United Kingdom general election and exit from the European Union on January 31, 2020 brought some clarity and a return of investor confidence, but uncertainty remains over the United Kingdom’s long-term economic and trade relationship with the European Union.

In Asia Pacific, leasing activity declined significantly in 2019 amid rising geopolitical uncertainty and slowing regional economies. However, investment activity was more resilient, declining only modestly from 2018 levels. Asia Pacific investors continue to be a significant source of real estate investment capital in the region and globally.

Real estate investment management and property development markets have been generally favorable with abundant debt and equity capital flows into commercial real estate. Actively managed public real estate equity funds and programs have been pressured by a shift in investor preferences from active to passive portfolio strategies.

The performance of our global real estate services and investment businesses depends on sustained economic growth and solid job creation; stable global credit markets; and positive business and investor sentiment.

Effects of Acquisitions

We historically have made significant use of strategic acquisitions to add and enhance service competencies around the world. On October 1, 2019, we acquired Telford Homes Plc (Telford) to expand our real estate development business outside the United States (Telford Acquisition). A leading developer of multifamily residential properties in the London area, Telford is reported in our Real Estate Investments segment. Telford was acquired for £267.1 million, or $328.5 million along with the assumption of $110.7 million (£90.0 million) of debt and the acquisition of cash from Telford of $7.9 million (£6.4 million). The Telford Acquisition was funded with borrowings under our revolving credit facility.

32

 

On June 12, 2018, we acquired FacilitySource through a stock purchase and merger agreement with its stockholders, including FacilitySource Holdings, LLC, WP X Finance, LP and Warburg Pincus X Partners, LP (FacilitySource Acquisition). FacilitySource, which is reported in our Global Workplace Solutions segment, was acquired to help us build a tech-enabled supply chain capability for the occupier outsourcing industry, which would drive meaningfully differentiated outcomes for leading occupiers of real estate. The net purchase price was approximately $266.5 million in cash, with $263.0 million paid in 2018 and $3.5 million paid in 2019. We financed the transaction with a combination of cash on hand and borrowings under our revolving credit facility.

Strategic in-fill acquisitions have also played a key role in 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. In early 2020, we acquired leading local facilities management firms in Spain and Italy and a U.S. firm that helps companies reduce telecommunications costs.

During 2019, we completed eight in-fill acquisitions: a leading advanced analytics software company based in the United Kingdom, a commercial and residential real estate appraisal firm headquartered in Florida, our former affiliate in Omaha, a project management firm in Australia, a valuation and consulting business in Switzerland, a leading project management firm in Israel, a full-service real estate firm in San Antonio with a focus on retail, office, medical office and land, and a debt-focused real estate investment management business in the United Kingdom. During 2018, we completed six in-fill acquisitions, the largest of which was the purchase of the remaining 50% equity interest in our longstanding New England joint venture. We also acquired a retail leasing and property management firm in Australia, two firms in Israel (our former affiliate and a majority interest in a local facilities management provider), a commercial real estate services provider in San Antonio, and a provider of real estate and facilities consulting services to healthcare companies across the United States.

We believe strategic acquisitions can significantly decrease the cost, time and resources necessary to attain a meaningful competitive position – or expand our capabilities – within targeted markets or business lines. In general, however, most acquisitions will initially have an adverse impact on our operating income and net income as a result of transaction-related expenditures, including severance, lease termination, transaction and deferred financing costs, as well as costs and charges associated with integrating the acquired business and integrating its financial and accounting systems into our own.

Our acquisition agreements often require us to pay deferred and/or contingent purchase price payments, subject to the acquired company achieving certain performance metrics, and/or the passage of time as well as other conditions. As of December 31, 2019, we have accrued deferred consideration totaling $111.7 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 8 of this Annual Report.

International Operations

We continue to monitor developments related to the United Kingdom’s withdrawal from the European Union and the uncertainty of the long-term economic and trade relationship between the United Kingdom and European Union. The continued uncertainty has the potential to impact our businesses in the United Kingdom and the rest of Europe, particularly sales and leasing activity in the United Kingdom. In addition, any associated currency volatility could impact our results of operations. We are also monitoring the impact of a coronavirus that emerged in Wuhan, China in December 2019 on business conditions and operations in China and other regions in which we operate.

As we continue to 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 Real Estate Investments business has a significant amount of euro-denominated assets under management, or AUM, as well as associated revenue and earnings in Europe. In addition, our Global Workplace Solutions business also has a significant amount of its revenue and earnings denominated in foreign currencies, such as the euro and the British pound sterling. Fluctuations in foreign currency exchange rates have resulted and may continue to result in corresponding fluctuations in our AUM, revenue and earnings.

33

 

During the year ended December 31, 2019, approximately 42% 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, Czech koruna, Danish krone, euro, Hong Kong dollar, Indian rupee, Israeli shekel, Japanese yen, Korean won, Mexican peso, New Zealand dollar, Polish zloty, Singapore dollar, Swedish krona, Swiss franc and Thai baht. The following table sets forth our revenue derived from our most significant currencies (U.S. dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

United States dollar

 

$

13,852,018

 

 

 

58.0

%

 

$

12,264,188

 

 

 

57.5

%

 

$

10,954,608

 

 

 

58.8

%

British pound sterling

 

 

2,972,704

 

 

 

12.5

%

 

 

2,586,890

 

 

 

12.1

%

 

 

2,242,973

 

 

 

12.1

%

euro

 

 

2,492,952

 

 

 

10.4

%

 

 

2,329,832

 

 

 

10.9

%

 

 

1,740,764

 

 

 

9.3

%

Canadian dollar

 

 

774,825

 

 

 

3.2

%

 

 

717,692

 

 

 

3.3

%

 

 

617,923

 

 

 

3.3

%

Indian rupee

 

 

503,630

 

 

 

2.1

%

 

 

418,390

 

 

 

2.0

%

 

 

370,705

 

 

 

2.0

%

Australian dollar

 

 

453,847

 

 

 

1.9

%

 

 

482,749

 

 

 

2.3

%

 

 

467,623

 

 

 

2.5

%

Chinese yuan

 

 

349,762

 

 

 

1.5

%

 

 

303,600

 

 

 

1.4

%

 

 

244,717

 

 

 

1.3

%

Japanese yen

 

 

325,558

 

 

 

1.4

%

 

 

277,636

 

 

 

1.3

%

 

 

269,835

 

 

 

1.4

%

Singapore dollar

 

 

300,116

 

 

 

1.3

%

 

 

268,193

 

 

 

1.3

%

 

 

256,319

 

 

 

1.4

%

Brazilian real

 

 

197,981

 

 

 

0.8

%

 

 

174,728

 

 

 

0.8

%

 

 

198,270

 

 

 

1.1

%

Swiss franc

 

 

194,354

 

 

 

0.8

%

 

 

182,641

 

 

 

0.9

%

 

 

153,078

 

 

 

0.8

%

Hong Kong dollar

 

 

167,463

 

 

 

0.7

%

 

 

169,449

 

 

 

0.8

%

 

 

148,174

 

 

 

0.8

%

Mexican peso

 

 

135,279

 

 

 

0.6

%

 

 

135,187

 

 

 

0.6

%

 

 

115,812

 

 

 

0.6

%

Israeli shekel

 

 

125,402

 

 

 

0.5

%

 

 

57,779

 

 

 

0.3

%

 

 

22,628

 

 

 

0.1

%

Polish zloty

 

 

117,697

 

 

 

0.5

%

 

 

90,343

 

 

 

0.4

%

 

 

71,849

 

 

 

0.4

%

Thai baht

 

 

82,252

 

 

 

0.3

%

 

 

79,373

 

 

 

0.4

%

 

 

65,553

 

 

 

0.4

%

Danish krone

 

 

80,026

 

 

 

0.3

%

 

 

81,804

 

 

 

0.4

%

 

 

82,061

 

 

 

0.4

%

New Zealand dollar

 

 

71,192

 

 

 

0.3

%

 

 

63,251

 

 

 

0.3

%

 

 

51,353

 

 

 

0.3

%

Swedish krona

 

 

70,101

 

 

 

0.3

%

 

 

70,471

 

 

 

0.3

%

 

 

71,849

 

 

 

0.4

%

Korean won

 

 

62,572

 

 

 

0.3

%

 

 

59,912

 

 

 

0.3

%

 

 

48,475

 

 

 

0.3

%

Czech koruna

 

 

55,984

 

 

 

0.2

%

 

 

54,986

 

 

 

0.3

%

 

 

42,008

 

 

 

0.2

%

Other currencies

 

 

508,376

 

 

 

2.1

%

 

 

470,994

 

 

 

2.1

%

 

 

392,210

 

 

 

2.1

%

Total revenue

 

$

23,894,091

 

 

 

100.0

%

 

$

21,340,088

 

 

 

100.0

%

 

$

18,628,787

 

 

 

100.0

%

 

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 year ended December 31, 2019, the net impact would have been an increase in pre-tax income of $3.6 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the year ended December 31, 2019, the net impact would have been an increase in pre-tax income of $9.5 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.

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 affect 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.

34

 

Results of Operations

The following table sets forth items derived from our consolidated statements of operations for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global workplace solutions

 

$

3,126,931

 

 

 

13.1

%

 

$

2,739,107

 

 

 

12.8

%

 

$

2,317,693

 

 

 

12.4

%

Property and advisory project management

 

 

1,259,222

 

 

 

5.3

%

 

 

1,181,152

 

 

 

5.5

%

 

 

1,003,113

 

 

 

5.4

%

Valuation

 

 

630,399

 

 

 

2.6

%

 

 

598,806

 

 

 

2.8

%

 

 

556,008

 

 

 

3.0

%

Loan servicing

 

 

206,736

 

 

 

0.9

%

 

 

183,366

 

 

 

0.9

%

 

 

157,449

 

 

 

0.8

%

Advisory leasing

 

 

3,269,993

 

 

 

13.7

%

 

 

3,080,117

 

 

 

14.4

%

 

 

2,592,203

 

 

 

13.9

%

Capital markets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory sales

 

 

2,130,979

 

 

 

8.9

%

 

 

1,980,932

 

 

 

9.3

%

 

 

1,869,872

 

 

 

10.0

%

Commercial mortgage origination

 

 

575,963

 

 

 

2.4

%

 

 

539,348

 

 

 

2.5

%

 

 

455,599

 

 

 

2.4

%

Investment management

 

 

424,882

 

 

 

1.8

%

 

 

434,405

 

 

 

2.0

%

 

 

377,644

 

 

 

2.0

%

Development services

 

 

235,740

 

 

 

0.9

%

 

 

100,319

 

 

 

0.6

%

 

 

79,455

 

 

 

0.6

%

Total fee revenue

 

 

11,860,845

 

 

 

49.6

%

 

 

10,837,552

 

 

 

50.8

%

 

 

9,409,036

 

 

 

50.5

%

Pass through costs also recognized as revenue

 

 

12,033,246

 

 

 

50.4

%

 

 

10,502,536

 

 

 

49.2

%

 

 

9,219,751

 

 

 

49.5

%

Total revenue

 

 

23,894,091

 

 

 

100.0

%

 

 

21,340,088

 

 

 

100.0

%

 

 

18,628,787

 

 

 

100.0

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

18,689,013

 

 

 

78.2

%

 

 

16,449,212

 

 

 

77.1

%

 

 

14,305,099

 

 

 

76.8

%

Operating, administrative and other

 

 

3,436,009

 

 

 

14.4

%

 

 

3,365,773

 

 

 

15.8

%

 

 

2,858,720

 

 

 

15.3

%

Depreciation and amortization

 

 

439,224

 

 

 

1.8

%

 

 

451,988

 

 

 

2.1

%

 

 

406,114

 

 

 

2.2

%

Intangible asset impairment

 

 

89,787

 

 

 

0.4

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Total costs and expenses

 

 

22,654,033

 

 

 

94.8

%

 

 

20,266,973

 

 

 

95.0

%

 

 

17,569,933

 

 

 

94.3

%

Gain on disposition of real estate

 

 

19,817

 

 

 

0.1

%

 

 

14,874

 

 

 

0.1

%

 

 

19,828

 

 

 

0.1

%

Operating income

 

 

1,259,875

 

 

 

5.3

%

 

 

1,087,989

 

 

 

5.1

%

 

 

1,078,682

 

 

 

5.8

%

Equity income from unconsolidated subsidiaries

 

 

160,925

 

 

 

0.7

%

 

 

324,664

 

 

 

1.5

%

 

 

210,207

 

 

 

1.0

%

Other income

 

 

28,907

 

 

 

0.1

%

 

 

93,020

 

 

 

0.4

%

 

 

9,405

 

 

 

0.1

%

Interest expense, net of interest income

 

 

85,754

 

 

 

0.4

%

 

 

98,685

 

 

 

0.4

%

 

 

126,961

 

 

 

0.6

%

Write-off of financing costs on extinguished debt

 

 

2,608

 

 

 

0.0

%

 

 

27,982

 

 

 

0.1

%

 

 

—

 

 

 

0.0

%

Income before provision for income taxes

 

 

1,361,345

 

 

 

5.7

%

 

 

1,379,006

 

 

 

6.5

%

 

 

1,171,333

 

 

 

6.3

%

Provision for income taxes

 

 

69,895

 

 

 

0.3

%

 

 

313,058

 

 

 

1.5

%

 

 

467,757

 

 

 

2.5

%

Net income

 

 

1,291,450

 

 

 

5.4

%

 

 

1,065,948

 

 

 

5.0

%

 

 

703,576

 

 

 

3.8

%

Less:  Net income attributable to non-controlling

   interests

 

 

9,093

 

 

 

0.0

%

 

 

2,729

 

 

 

0.0

%

 

 

6,467

 

 

 

0.1

%

Net income attributable to CBRE Group, Inc.

 

$

1,282,357

 

 

 

5.4

%

 

$

1,063,219

 

 

 

5.0

%

 

$

697,109

 

 

 

3.7

%

Adjusted EBITDA

 

$

2,063,783

 

 

 

8.6

%

 

$

1,905,168

 

 

 

8.9

%

 

$

1,716,774

 

 

 

9.2

%

 

Fee revenue and adjusted EBITDA are not recognized measurements under GAAP. When analyzing our operating performance, investors should use these measures in addition to, and not as an alternative for, their most directly comparable financial measure calculated and presented in accordance with GAAP. We generally use these non-GAAP financial measures to evaluate operating performance and for other discretionary purposes. We believe 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 our financial performance because they eliminate the impact of selected charges that may obscure trends in the underlying performance of our business. Because not all companies use identical calculations, our presentation of fee revenue and adjusted EBITDA may not be comparable to similarly titled measures of other companies.

Fee revenue is gross revenue less both client reimbursed costs largely associated with employees that are dedicated to client facilities and subcontracted vendor work performed for clients. We believe that investors may find this measure useful to analyze the company’s overall financial performance because it excludes costs reimbursable by clients, and as such provides greater visibility into the underlying performance of our business.

35

 

EBITDA represents earnings before net interest expense, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization and intangible asset impairments. Amounts shown for adjusted EBITDA further remove (from EBITDA) the impact of certain cash and non-cash items related to acquisitions, certain carried interest incentive compensation expense (reversal) to align with the timing of associated revenue, costs associated with our reorganization, including cost-savings initiatives, and other non-recurring costs. We 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.

Adjusted 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. This measure may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which 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.

Adjusted EBITDA is calculated as follows (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

Net income attributable to CBRE Group, Inc.

 

$

1,282,357

 

 

$

1,063,219

 

 

$

697,109

 

Add:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

439,224

 

 

 

451,988

 

 

 

406,114

 

Intangible asset impairment

 

 

89,787

 

 

 

—

 

 

 

—

 

Interest expense, net of interest income

 

 

85,754

 

 

 

98,685

 

 

 

126,961

 

Write-off of financing costs on extinguished debt

 

 

2,608

 

 

 

27,982

 

 

 

—

 

Provision for income taxes

 

 

69,895

 

 

 

313,058

 

 

 

467,757

 

EBITDA

 

 

1,969,625

 

 

 

1,954,932

 

 

 

1,697,941

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

Costs associated with our reorganization, including

   cost-savings initiatives (1)

 

 

49,565

 

 

 

37,925

 

 

 

—

 

Integration and other costs related to acquisitions

 

 

15,292

 

 

 

9,124

 

 

 

27,351

 

Carried interest incentive compensation expense (reversal) to

   align with the timing of associated revenue

 

 

13,101

 

 

 

(5,261

)

 

 

(8,518

)

Impact of fair value adjustments to real estate assets acquired

   in the Telford Acquisition (purchase accounting) that were

   sold in period

 

 

9,301

 

 

 

—

 

 

 

—

 

Costs incurred related to legal entity restructuring

 

 

6,899

 

 

 

—

 

 

 

—

 

Costs incurred in connection with litigation settlement

 

 

—

 

 

 

8,868

 

 

 

—

 

One-time gain associated with remeasuring an investment

   in an unconsolidated subsidiary to fair value as of the date

   the remaining controlling interest was acquired

 

 

—

 

 

 

(100,420

)

 

 

—

 

Adjusted EBITDA

 

$

2,063,783

 

 

$

1,905,168

 

 

$

1,716,774

 

 

(1)

Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective January 1, 2019.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

We reported consolidated net income of $1.3 billion for the year ended December 31, 2019 on revenue of $23.9 billion as compared to consolidated net income of $1.1 billion on revenue of $21.3 billion for the year ended December 31, 2018.

Our revenue on a consolidated basis for the year ended December 31, 2019 increased by $2.6 billion, or 12.0%, as compared to the year ended December 31, 2018. The revenue increase reflects strong organic growth fueled by higher revenue in our Global Workplace Solutions segment (up 14.5%) and improved revenue in our Advisory Services segment due to property and advisory project management revenue (up 9.6%) as well as

36

 

increased advisory leasing (up 6.2%), advisory sales (up 7.6%) and commercial mortgage origination activity (up 12.7%). Higher revenue in our Real Estate Investments segment (up 23.5%) driven by the Telford Acquisition also contributed to the increase. Foreign currency translation had a 2.1% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the Argentine peso, Australian dollar, Brazilian real, British pound sterling, Canadian dollar, euro and Indian rupee.

Our cost of revenue on a consolidated basis increased by $2.2 billion, or 13.6%, during the year ended December 31, 2019 as compared to the same period in 2018. This increase was primarily due to higher costs associated with our Global Workplace Solutions segment. In addition, our sales professionals generally are paid on a commission basis, which substantially correlates with our transaction revenue performance. Accordingly, the increase in advisory leasing and sales transaction revenue led to a corresponding increase in commission expense. Higher costs in our property and advisory project management business as well as higher costs in our Real Estate Investments segment (due to the Telford Acquisition) also contributed to the increase. These items were partially offset by the impact of foreign currency translation, which had a 2.2% positive impact on total cost of revenue during the year ended December 31, 2019. Cost of revenue as a percentage of revenue increased from 77.1% for the year ended December 31, 2018 to 78.2% for the year ended December 31, 2019, primarily driven by our mix of revenue, with revenue from our Global Workplace Solutions segment, which has a lower margin than our other revenue streams, comprising a higher percentage of revenue than in the prior period.

Our operating, administrative and other expenses on a consolidated basis increased by $70.2 million, or 2.1%, during the year ended December 31, 2019 as compared to the same period in 2018. During the year ended December 31, 2019, we incurred $47.0 million of costs in connection with our reorganization (including cost-savings initiatives) as compared to $35.2 million of such costs incurred in the prior year. Additionally, in the current year, we incurred higher payroll-related costs, higher integration and other costs associated with acquisitions (primarily due to the Telford Acquisition), costs related to a legal entity restructuring and increased occupancy costs. These items were partially offset by the impact of foreign currency translation, which had a 2.2% positive impact on total operating expenses during the year ended December 31, 2019, as well as lower bonuses in our Real Estate Investment segment (driven by lower property sales during 2019 as compared to the same period in the prior year, which were reflected in equity income from unconsolidated subsidiaries). During the year ended December 31, 2018, we also incurred $8.9 million of costs as a result of a litigation settlement, which did not recur during the year ended December 31, 2019. Operating expenses as a percentage of revenue decreased from 15.8% for the year ended December 31, 2018 to 14.4% for the year ended December 31, 2019, reflecting the operating leverage inherent in our business.

Our depreciation and amortization expense on a consolidated basis decreased by $12.8 million, or 2.8%, during the year ended December 31, 2019 as compared to the same period in 2018. This decrease was primarily attributable to $27.4 million of lower amortization expense largely associated with intangibles from prior acquisitions. The decrease in amortization expense was partially offset by a rise in depreciation expense of $14.6 million during the year ended December 31, 2019 driven by technology-related capital expenditures.

During the year ended December 31, 2019, we recorded an intangible asset impairment of $89.8 million in our Real Estate Investments segment. This non-cash write-off resulted from a review of the anticipated cash flows and the decrease in assets under management in our public securities business driven in part by continued industry-wide shift in investor preference for passive investment programs.

Our gain on disposition of real estate on a consolidated basis increased by $4.9 million, or 33.2%, during the year ended December 31, 2019 as compared to the same period in 2018. These gains resulted from property sales within our Real Estate Investments segment.

Our equity income from unconsolidated subsidiaries on a consolidated basis decreased by $163.7 million, or 50.4%, during the year ended December 31, 2019 as compared to the same period in 2018, primarily driven by lower equity earnings associated with gains on property sales reported in our Real Estate Investments segment.

37

 

Our other income on a consolidated basis was $28.9 million for the year ended December 31, 2019 versus $93.0 million for the same period in the prior year. The income during the year ended December 31, 2019 was primarily driven by net realized and unrealized gains related to co-investments in our real estate securities business within our Real Estate Investments segment. The income in the prior year included a one-time gain of $100.4 million associated with remeasuring our investment in a previously unconsolidated subsidiary in New England in our Advisory Services segment to fair value as of the date we acquired the remaining controlling interest.

Our consolidated interest expense, net of interest income, decreased by $12.9 million, or 13.1%, for the year ended December 31, 2019 as compared to the same period in 2018. This decrease was primarily driven by the early redemption, in full, of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes in the first quarter of 2018. Lower interest expense associated with the term loans under our credit agreement (driven by more favorable interest rates stemming from our amendment to our credit agreement in 2019) also contributed to the decrease.

Our write-off of financing costs on extinguished debt on a consolidated basis was $2.6 million for the year ended December 31, 2019 as compared to $28.0 million for the year ended December 31, 2018. The costs for the year ended December 31, 2019 were incurred in connection with the refinancing of our credit agreement. The costs for the year ended December 31, 2018 included a $20.0 million premium paid and the write-off of $8.0 million of unamortized deferred financing costs in connection with the early redemption, in full, of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes.

Our provision for income taxes on a consolidated basis was $69.9 million for the year ended December 31, 2019 as compared to $313.1 million for the same period in 2018. Our effective tax rate decreased from 22.7% for the year ended December 31, 2018 to 5.1% for the year ended December 31, 2019. The lower tax rate for year ended December 31, 2019 was primarily driven by a $277.2 million net tax benefit recorded in 2019 attributable to outside basis differences recognized as a result of a legal entity restructuring.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

We reported consolidated net income of $1.1 billion for the year ended December 31, 2018 on revenue of $21.3 billion as compared to consolidated net income of $697.1 million on revenue of $18.6 billion for the year ended December 31, 2017.

Our revenue on a consolidated basis for the year ended December 31, 2018 increased by $2.7 billion, or 14.6%, as compared to the year ended December 30, 2017. The revenue increase reflects strong organic growth fueled by higher revenue in our Global Workplace Solutions segment (up 14.6%) and improved revenue in our Advisory Services segment due to property and advisory project management revenue (up 17.7%), increased advisory leasing (up 18.8%), advisory sales (up 5.9%) and commercial mortgage origination activity (up 18.4%). Higher revenue in our Real Estate Investments segment (up 17.0%) also contributed to the increase. In addition, foreign currency translation had a 0.5% positive impact on total revenue during the year ended December 31, 2018, primarily driven by strength in the British pound sterling and euro, partially offset by weakness in the Argentine peso and Brazilian real.

Our cost of revenue on a consolidated basis increased by $2.1 billion, or 15.0%, during the year ended December 31, 2018 as compared to the same period in 2017. This increase was primarily due to higher costs associated with our Global Workplace Solutions segment. In addition, as previously mentioned, our sales professionals generally are paid on a commission basis, which substantially correlates with our transaction revenue performance. Accordingly, the increase in advisory leasing and sales transaction revenue led to a corresponding increase in commission expense. Higher costs in our property and advisory project management business also contributed to the increase. Lastly, foreign currency translation had a 0.5% negative impact on total cost of revenue during the year ended December 31, 2018. Cost of revenue as a percentage of revenue increased from 76.8% for the year ended December 31, 2017 to 77.1% for the year ended December 31, 2018, primarily driven by our revenue mix, with revenue from our Global Workplace Solutions segment, which has a lower margin than our other revenue streams, comprising a higher percentage of revenue in 2018 than in 2017.

38

 

Our operating, administrative and other expenses on a consolidated basis increased by $507.1 million, or 17.7%, during the year ended December 31, 2018 as compared to the same period in 2017. The increase was mostly driven by higher payroll-related costs (including increases in bonus and stock compensation expense), higher carried interest expense and increases in consulting, marketing and occupancy costs. During 2018, we also incurred $35.2 million of costs incurred in connection with our reorganization (including cost-savings initiatives) and $8.9 million of costs as a result of a litigation settlement, the impact of which was partly offset by lower integration and other costs associated with acquisitions. Foreign currency translation also had a 0.8% negative impact on total operating expenses during the year ended December 31, 2018. Operating expenses as a percentage of revenue increased from 15.3% for the year ended December 31, 2017 to 15.8% for the year ended December 31, 2018, partially driven by higher bonus expense in our Real Estate Investments segment with no corresponding increase in revenue (as bonus expense was attributable to an increase in equity income from unconsolidated subsidiaries) as well as due to the costs incurred in connection with our reorganization.

Our depreciation and amortization expense on a consolidated basis increased by $45.9 million, or 11.3%, during the year ended December 31, 2018 as compared to the same period in 2017. This increase was primarily attributable to a rise in depreciation expense of $25.9 million during the year ended December 31, 2018 driven by technology-related capital expenditures. Higher amortization expense of $20.0 million associated with mortgage servicing rights and intangibles acquired in acquisitions also contributed to the increase.

Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $114.5 million, or 54.5%, during the year ended December 31, 2018 as compared to the same period in 2017, primarily driven by higher equity earnings associated with gains on property sales reported in our Real Estate Investments segment.

Our other income on a consolidated basis was $93.0 million for the year ended December 31, 2018 as compared to $9.4 million for the same period in 2017. Included in other income for the year ended December 31, 2018 was a one-time gain of $100.4 million associated with remeasuring our investment in a previously unconsolidated subsidiary in New England to fair value as of the date we acquired the remaining controlling interest.

Our consolidated interest expense, net of interest income, decreased by $28.3 million, or 22.3%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This decrease was primarily driven by the early redemption, in full, of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes in the first quarter of 2018.

Our write-off of financing costs on extinguished debt on a consolidated basis was $28.0 million for the year ended December 31, 2018. These costs included a $20.0 million premium paid and the write-off of $8.0 million of unamortized deferred financing costs in connection with the early redemption, in full, of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes.

Our provision for income taxes on a consolidated basis was $313.1 million for the year ended December 31, 2018 as compared to $467.8 million for the same period in 2017. Our provision for income taxes for 2018 included a net expense true-up of $13.3 million resulting from completion of accounting for the Tax Act. Our provision for income taxes for 2017 included net expense of $143.4 million for the provisional charge related to the Tax Act. These net expenses were primarily comprised of a transition tax on accumulated foreign earnings, net of a tax benefit from the re-measurement of certain deferred tax assets and liabilities using the lower U.S. corporate income tax rate and the release of valuation allowances on foreign tax credits that will decrease the liability related to the transition tax. Excluding these net charges associated with the Tax Act, our effective tax rate, would have been 21.7% for the year ended December 31, 2018 compared to 27.7% for the year ended December 31, 2017. We benefited from a lower U.S. corporate tax rate, with such rate being 35% in 2017 versus 21% in 2018. The effect of the decrease in the U.S. corporate tax rate was partially offset by discrete tax benefits for the year ended December 31, 2017 from the re-measurement of income tax exposures relating to prior periods and release of valuation allowances on foreign income tax credits that were expected to be utilized with no similar items for the year ended December 31, 2018.

39

 

Segment Operations

On August 17, 2018, we announced a new organizational structure that became effective on January 1, 2019. Under the new structure, we organize our operations around, and publicly report our financial results on, three global business segments: (1) Advisory Services; (2) Global Workplace Solutions; and (3) Real Estate Investments. For additional information on our segments, see Note 19 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

Advisory Services

The following table summarizes our results of operations for our Advisory Services operating segment for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and advisory project management

 

$

1,259,222

 

 

 

13.9

%

 

$

1,181,152

 

 

 

14.0

%

 

$

1,003,113

 

 

 

13.6

%

Valuation

 

 

630,399

 

 

 

6.9

%

 

 

598,806

 

 

 

7.1

%

 

 

556,008

 

 

 

7.5

%

Loan servicing

 

 

206,736

 

 

 

2.3

%

 

 

183,366

 

 

 

2.1

%

 

 

157,449

 

 

 

2.1

%

Advisory leasing

 

 

3,269,993

 

 

 

36.0

%

 

 

3,080,117

 

 

 

36.5

%

 

 

2,592,203

 

 

 

35.1

%

Capital markets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advisory sales

 

 

2,130,979

 

 

 

23.5

%

 

 

1,980,932

 

 

 

23.5

%

 

 

1,869,872

 

 

 

25.4

%

Commercial mortgage origination

 

 

575,963

 

 

 

6.4

%

 

 

539,348

 

 

 

6.4

%

 

 

455,599

 

 

 

6.2

%

Total fee revenue

 

 

8,073,292

 

 

 

89.0

%

 

 

7,563,721

 

 

 

89.6

%

 

 

6,634,244

 

 

 

89.9

%

Pass through costs also recognized as revenue

 

 

996,176

 

 

 

11.0

%

 

 

876,281

 

 

 

10.4

%

 

 

745,481

 

 

 

10.1

%

Total revenue

 

 

9,069,468

 

 

 

100.0

%

 

 

8,440,002

 

 

 

100.0

%

 

 

7,379,725

 

 

 

100.0

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

5,465,391

 

 

 

60.3

%

 

 

5,043,807

 

 

 

59.8

%

 

 

4,358,248

 

 

 

59.1

%

Operating, administrative and other

 

 

2,169,980

 

 

 

23.9

%

 

 

2,160,957

 

 

 

25.6

%

 

 

1,894,133

 

 

 

25.7

%

Depreciation and amortization

 

 

304,766

 

 

 

3.4

%

 

 

280,921

 

 

 

3.3

%

 

 

243,791

 

 

 

3.3

%

Operating income

 

 

1,129,331

 

 

 

12.4

%

 

 

954,317

 

 

 

11.3

%

 

 

883,553

 

 

 

11.9

%

Equity income from unconsolidated subsidiaries

 

 

6,894

 

 

 

0.1

%

 

 

16,017

 

 

 

0.3

%

 

 

20,740

 

 

 

0.3

%

Other income (loss)

 

 

7,532

 

 

 

0.1

%

 

 

103,808

 

 

 

1.2

%

 

 

(31

)

 

 

0.0

%

Less: Net income attributable to non-controlling interests

 

 

1,021

 

 

 

0.0

%

 

 

55

 

 

 

0.0

%

 

 

461

 

 

 

0.0

%

Add-back: Depreciation and amortization

 

 

304,766

 

 

 

3.4

%

 

 

280,921

 

 

 

3.3

%

 

 

243,791

 

 

 

3.3

%

EBITDA

 

 

1,447,502

 

 

 

16.0

%

 

 

1,355,008

 

 

 

16.1

%

 

 

1,147,592

 

 

 

15.5

%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs associated with our reorganization, including

   cost-savings initiatives (1)

 

 

11,088

 

 

 

0.1

%

 

 

37,219

 

 

 

0.4

%

 

 

—

 

 

 

0.0

%

Costs incurred in connection with litigation

   settlement

 

 

—

 

 

 

0.0

%

 

 

8,868

 

 

 

0.1

%

 

 

—

 

 

 

0.0

%

Costs incurred related to legal entity restructuring

 

 

6,899

 

 

 

0.1

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Integration and other costs related to acquisitions

 

 

303

 

 

 

0.0

%

 

 

2,576

 

 

 

0.0

%

 

 

27,351

 

 

 

0.4

%

One-time gain associated with remeasuring an

   investment in an unconsolidated subsidiary to

   fair value as of the date the remaining controlling

   interest was acquired

 

 

—

 

 

 

0.0

%

 

 

(100,420

)

 

 

(1.2

%)

 

 

—

 

 

 

0.0

%

Adjusted EBITDA and Adjusted EBITDA on revenue

   margin

 

$

1,465,792

 

 

 

16.2

%

 

$

1,303,251

 

 

 

15.4

%

 

$

1,174,943

 

 

 

15.9

%

Adjusted EBITDA on fee revenue margin

 

 

 

 

 

 

18.2

%

 

 

 

 

 

 

17.2

%

 

 

 

 

 

 

17.7

%

 

(1)

Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective on January 1, 2019.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenue increased by $629.5 million, or 7.5%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The revenue increase reflects strong organic growth fueled by higher leasing, sales and commercial mortgage origination activity as well as improved property and project management revenue. Foreign currency translation had a 1.7% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, euro and Indian rupee.

40

 

Cost of revenue increased by $421.6 million, or 8.4%, for the year ended December 31, 2019 as compared to the same period in 2018, primarily due to higher commission expense resulting from improved leasing and sales transaction revenue. Higher costs in our property and project management business also contributed to the increase. Foreign currency translation had a 1.7% positive impact on total cost of revenue during the year ended December 31, 2019. Cost of revenue as a percentage of revenue was relatively consistent at 60.3% for the year ended December 31, 2019 versus 59.8% for the same period in 2018.

Operating, administrative and other expenses increased by $9.0 million, or 0.4%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The increase was largely driven by higher payroll-related costs (partially driven by increased headcount) and higher occupancy costs. Additionally, in the current year, we incurred $6.9 million of costs related to a legal entity restructuring. These items were partially offset by the impact of foreign currency translation, which had a 2.1% positive impact on total operating expenses during the year ended December 31, 2019. During the year ended December 31, 2019, we also incurred $10.5 million of costs in connection with our reorganization (including cost-savings initiatives) as compared to $34.5 million of such costs incurred in the prior year. Lastly, during the year ended December 31, 2018, we incurred $8.9 million of costs as a result of a litigation settlement, which did not recur in 2019.

In connection with the origination and sale of mortgage loans for which the company retains servicing rights, we record servicing assets or liabilities based on the fair value of the retained mortgage servicing rights (MSRs) on the date the loans are sold. Upon origination of a mortgage loan held for sale, the fair value of the mortgage servicing rights to be retained is included in the forecasted proceeds from the anticipated loan sale and results in a net gain (which is reflected in revenue). Subsequent to the initial recording, MSRs are amortized (within amortization expense) and carried at the lower of amortized cost or fair value in other intangible assets in the accompanying consolidated balance sheets. They are amortized in proportion to and over the estimated period that the servicing income is expected to be received. For the year ended December 31, 2019, MSRs contributed to operating income $182.4 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $123.0 million of amortization of related intangible assets. For the year ended December 31, 2018, MSRs contributed to operating income $173.7 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $115.7 million of amortization of related intangible assets.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenue increased by $1.1 billion, or 14.4%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The revenue increase reflects strong organic growth fueled by higher leasing, sales and commercial mortgage origination activity as well as improved property and project revenue. Foreign currency translation had a 0.3% positive impact on total revenue during the year ended December 31, 2018, primarily driven by the strength in the British pound sterling and euro, partially offset by weakness in the Australian dollar and Brazilian real.

Cost of revenue increased by $685.6 million, or 15.7%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily due to higher commission expense resulting from improved leasing and sales transaction revenue. Higher costs in our property and project management business also contributed to the increase. Foreign currency translation had a 0.4% negative impact on total cost of revenue during the year ended December 31, 2018. Cost of revenue as a percentage of revenue was relatively consistent at 59.8% for the year ended December 31, 2018 versus 59.1% for the same period in 2017.

Operating, administrative and other expenses increased by $266.8 million, or 14.1%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The increase was largely driven by higher payroll-related costs (partially driven by increased headcount) and higher occupancy costs. During the year ended December 31, 2018, we also incurred $34.5 million of severance costs in connection with our reorganization, including cost-savings initiatives, as well as $8.9 million of costs as a result of a litigation settlement. Foreign currency translation had a 0.7% negative impact on total operating expenses during the year ended December 31, 2018.

41

 

For the year ended December 31, 2018, MSRs contributed to operating income $173.7 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $115.7 million of amortization of related intangible assets. For the year ended December 31, 2017, MSRs contributed to operating income $145.1 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $98.6 million of amortization of related intangible assets.

Global Workplace Solutions

The following table summarizes our results of operations for our Global Workplace Solutions operating segment for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Global workplace solutions

 

$

3,126,931

 

 

 

22.1

%

 

$

2,739,107

 

 

 

22.2

%

 

$

2,317,693

 

 

 

21.5

%

Total fee revenue

 

 

3,126,931

 

 

 

22.1

%

 

 

2,739,107

 

 

 

22.2

%

 

 

2,317,693

 

 

 

21.5

%

Pass through costs also recognized as revenue

 

 

11,037,070

 

 

 

77.9

%

 

 

9,626,255

 

 

 

77.8

%

 

 

8,474,270

 

 

 

78.5

%

Total revenue

 

 

14,164,001

 

 

 

100.0

%

 

 

12,365,362

 

 

 

100.0

%

 

 

10,791,963

 

 

 

100.0

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

13,138,627

 

 

 

92.8

%

 

 

11,405,405

 

 

 

92.2

%

 

 

9,946,851

 

 

 

92.2

%

Operating, administrative and other

 

 

637,282

 

 

 

4.5

%

 

 

620,924

 

 

 

5.0

%

 

 

511,133

 

 

 

4.7

%

Depreciation and amortization

 

 

120,975

 

 

 

0.9

%

 

 

147,222

 

 

 

1.2

%

 

 

136,127

 

 

 

1.3

%

Operating income

 

 

267,117

 

 

 

1.8

%

 

 

191,811

 

 

 

1.6

%

 

 

197,852

 

 

 

1.8

%

Equity (loss) income from unconsolidated subsidiaries

 

 

(1,423

)

 

 

0.0

%

 

 

115

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Other (loss) income

 

 

(1,170

)

 

 

0.0

%

 

 

52

 

 

 

0.0

%

 

 

1

 

 

 

0.0

%

Less: Net (loss) income attributable to non-controlling

   interests

 

 

(271

)

 

 

0.0

%

 

 

188

 

 

 

0.1

%

 

 

(397

)

 

 

0.0

%

Add-back: Depreciation and amortization

 

 

120,975

 

 

 

0.9

%

 

 

147,222

 

 

 

1.2

%

 

 

136,127

 

 

 

1.3

%

EBITDA

 

 

385,770

 

 

 

2.7

%

 

 

339,012

 

 

 

2.7

%

 

 

334,377

 

 

 

3.1

%

Costs associated with our reorganization, including

   cost-savings initiatives (1)

 

 

38,256

 

 

 

0.3

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Integration and other costs related to acquisitions

 

 

—

 

 

 

0.0

%

 

 

6,548

 

 

 

0.1

%

 

 

—

 

 

 

0.0

%

Adjusted EBITDA and Adjusted EBITDA on revenue

   margin

 

$

424,026

 

 

 

3.0

%

 

$

345,560

 

 

 

2.8

%

 

$

334,377

 

 

 

3.1

%

Adjusted EBITDA on fee revenue margin

 

 

 

 

 

 

13.6

%

 

 

 

 

 

 

12.6

%

 

 

 

 

 

 

14.4

%

 

(1)

Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective on January 1, 2019.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenue increased by $1.8 billion, or 14.5%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The revenue increase was fueled by growth in the market for real estate outsourcing services. Foreign currency translation had a 2.4% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the Argentine peso, Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, euro, and Indian rupee.

Cost of revenue increased by $1.7 billion, or 15.2%, for the year ended December 31, 2019 as compared to the same period in 2018, driven by the higher revenue. Foreign currency translation had a 2.4% positive impact on total cost of revenue during the year ended December 31, 2019. Cost of revenue as a percentage of revenue was relatively consistent at 92.8% for the year ended December 31, 2019 versus 92.2% for the same period in 2018.

Operating, administrative and other expenses increased by $16.4 million, or 2.6%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. During the year ended December 31, 2019, we incurred $36.3 million of severance costs in connection with our reorganization, including cost-savings initiatives, as well as higher overall costs attributable to the FacilitySource acquisition (acquired in June 2018). These costs were partially offset by the impact of foreign currency translation, which had a 2.7% positive impact on total operating expenses during the year ended December 31, 2019.

42

 

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenue increased by $1.6 billion, or 14.6%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The revenue increase was fueled by growth in the market for real estate outsourcing services. Foreign currency translation had a 0.5% positive impact on total revenue during the year ended December 31, 2018, primarily driven by strength in the British pound sterling and euro, partially offset by weakness in the Argentine peso, Brazilian real and Indian rupee.

Cost of revenue increased by $1.5 billion, or 14.7%, for the year ended December 31, 2018 as compared to the same period in 2017, driven by the higher revenue. Foreign currency translation had a 0.5% negative impact on total cost of revenue during the year ended December 31, 2018. Cost of revenue as a percentage of revenue was constant at 92.2% for both the year ended December 31, 2018 and 2017.

Operating, administrative and other expenses increased by $109.8 million, or 21.5%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This increase was primarily driven by higher payroll-related costs. Additionally, during the year ended December 31, 2018, we incurred $6.5 million of integration costs associated primarily with the FacilitySource acquisition (acquired in June 2018). These costs were also impacted by foreign currency translation, which had a 0.7% negative impact on total operating expenses during the year ended December 31, 2018.

Real Estate Investments

The following table summarizes our results of operations for our Real Estate Investments operating segment for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment management

 

$

424,882

 

 

 

64.3

%

 

$

434,405

 

 

 

81.2

%

 

$

377,644

 

 

 

82.6

%

Development services

 

 

235,740

 

 

 

35.7

%

 

 

100,319

 

 

 

18.8

%

 

 

79,455

 

 

 

17.4

%

Total revenue

 

 

660,622

 

 

 

100.0

%

 

 

534,724

 

 

 

100.0

%

 

 

457,099

 

 

 

100.0

%

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

84,995

 

 

 

12.9

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Operating, administrative and other

 

 

628,747

 

 

 

95.2

%

 

 

583,892

 

 

 

109.2

%

 

 

453,454

 

 

 

99.2

%

Depreciation and amortization

 

 

13,483

 

 

 

2.0

%

 

 

23,845

 

 

 

4.5

%

 

 

26,196

 

 

 

5.7

%

Intangible asset impairment

 

 

89,787

 

 

 

13.6

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Gain on disposition of real estate

 

 

19,817

 

 

 

3.0

%

 

 

14,874

 

 

 

2.8

%

 

 

19,828

 

 

 

4.3

%

Operating loss

 

 

(136,573

)

 

 

(20.7

%)

 

 

(58,139

)

 

 

(10.9

%)

 

 

(2,723

)

 

 

(0.6

%)

Equity income from unconsolidated subsidiaries

 

 

155,454

 

 

 

23.5

%

 

 

308,532

 

 

 

57.7

%

 

 

189,467

 

 

 

41.4

%

Other income (loss)

 

 

22,545

 

 

 

3.4

%

 

 

(10,840

)

 

 

(2.0

%)

 

 

9,435

 

 

 

2.2

%

Less: Net income attributable to non-controlling interests

 

 

8,343

 

 

 

1.2

%

 

 

2,486

 

 

 

0.5

%

 

 

6,403

 

 

 

1.4

%

Add-back: Depreciation and amortization

 

 

13,483

 

 

 

2.0

%

 

 

23,845

 

 

 

4.5

%

 

 

26,196

 

 

 

5.7

%

Add-back: Intangible asset impairment

 

 

89,787

 

 

 

13.6

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

EBITDA

 

 

136,353

 

 

 

20.6

%

 

 

260,912

 

 

 

48.8

%

 

 

215,972

 

 

 

47.3

%

Integration and other costs related to acquisitions

 

 

14,989

 

 

 

2.3

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Carried interest incentive compensation expense

   (reversal) to align with the timing of associated

   revenue

 

 

13,101

 

 

 

2.0

%

 

 

(5,261

)

 

 

(1.0

%)

 

 

(8,518

)

 

 

(1.9

%)

Impact of fair value adjustments to real estate assets

   acquired in the Telford Acquisition (purchase

   accounting) that were sold in period

 

 

9,301

 

 

 

1.4

%

 

 

—

 

 

 

0.0

%

 

 

—

 

 

 

0.0

%

Costs associated with our reorganization, including

   cost-savings initiatives (1)

 

 

221

 

 

 

0.0

%

 

 

706

 

 

 

0.1

%

 

 

—

 

 

 

0.0

%

Adjusted EBITDA

 

$

173,965

 

 

 

26.3

%

 

$

256,357

 

 

 

47.9

%

 

$

207,454

 

 

 

45.4

%

 

(1)

Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective on January 1, 2019.

43

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Revenue increased by $125.9 million, or 23.5%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily driven by the Telford Acquisition in our development services line of business. Foreign currency translation had a 2.6% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the British pound sterling and euro.

Cost of revenue was $85.0 million for the year ended December 31, 2019 and was attributable to Telford, which we acquired on October 1, 2019.

Operating, administrative and other expenses increased by $44.9 million, or 7.7%, for the year ended December 31, 2019 as compared to the same period in 2018, primarily driven by costs incurred in connection with the Telford Acquisition as well as higher carried interest expense. Higher costs (primarily payroll-related and occupancy) attributable to investments in our new flexible space offering also contributed to the increase. These items were partially offset by lower bonuses in our development services line of business (driven by lower property sales in 2019 as compared to 2018, which were reflected in equity income from unconsolidated subsidiaries). Foreign currency translation also had a 1.8% positive impact on total operating expenses during the year ended December 31, 2019.

A roll forward of our AUM by product type for the year ended December 31, 2019 is as follows (dollars in billions):

 

 

 

Funds

 

 

Separate Accounts

 

 

Securities

 

 

Total

 

Balance at January 1, 2019

 

$

35.0

 

 

$

60.2

 

 

$

10.3

 

 

$

105.5

 

Inflows

 

 

5.0

 

 

 

10.1

 

 

 

0.7

 

 

 

15.8

 

Outflows

 

 

(2.0

)

 

 

(6.6

)

 

 

(5.3

)

 

 

(13.9

)

Market appreciation

 

 

2.1

 

 

 

1.2

 

 

 

2.2

 

 

 

5.5

 

Balance at December 31, 2019

 

$

40.1

 

 

$

64.9

 

 

$

7.9

 

 

$

112.9

 

 

AUM generally refers to the properties and other assets with respect to which we provide (or participate in) oversight, investment management services and other advice, and which generally consist of real estate properties or loans, securities portfolios and investments in operating companies and joint ventures. Our AUM is intended principally to reflect the extent of our presence in the real estate market, not the basis for determining our management fees. Our assets under management consist of:

 

•

the total fair market value of the real estate properties and other assets either wholly-owned or held by joint ventures and other entities in which our sponsored funds or investment vehicles and client accounts have invested or to which they have provided financing. Committed (but unfunded) capital from investors in our sponsored funds is not included in this component of our AUM. The value of development properties is included at estimated completion cost. In the case of real estate operating companies, the total value of real properties controlled by the companies, generally through joint ventures, is included in AUM; and

 

•

the net asset value of our managed securities portfolios, including investments (which may be comprised of committed but uncalled capital) in private real estate funds under our fund of funds investments.

Our calculation of AUM may differ from the calculations of other asset managers, and as a result, this measure may not be comparable to similar measures presented by other asset managers.

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

Revenue increased by $77.6 million, or 17.0%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017, primarily driven by higher asset management and incentive fees as well as carried interest revenue in our global investment management line of business and higher incentive and development fees in our development services line of business. Foreign currency translation also had a 2.0% positive impact on total revenue during the year ended December 31, 2018, primarily driven by the strength of the British pound sterling and euro.

44

 

Operating, administrative and other expenses increased by $130.4 million, or 28.8%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily driven by higher payroll-related costs (including bonuses) and higher carried interest expense. Foreign currency translation had a 1.5% negative impact on total operating expenses during the year ended December 31, 2018.

A roll forward of our AUM by product type for the year ended December 31, 2018 is as follows (dollars in billions):

 

 

 

Funds

 

 

Separate Accounts

 

 

Securities

 

 

Total

 

Balance at January 1, 2018

 

$

31.7

 

 

$

56.7

 

 

$

14.8

 

 

$

103.2

 

Inflows

 

 

7.1

 

 

 

7.6

 

 

 

1.6

 

 

 

16.3

 

Outflows

 

 

(5.4

)

 

 

(4.0

)

 

 

(4.5

)

 

 

(13.9

)

Market appreciation (depreciation)

 

 

1.6

 

 

 

(0.1

)

 

 

(1.6

)

 

 

(0.1

)

Balance at December 31, 2018

 

$

35.0

 

 

$

60.2

 

 

$

10.3

 

 

$

105.5

 

 

We describe above how we calculate AUM. Also, as noted above, our calculation of AUM may differ from the calculations of other asset managers, and as a result, this measure may not be comparable to similar measures presented by other asset managers.

Liquidity and Capital Resources

We believe that we can satisfy our working capital and funding requirements with internally generated cash flow and, as necessary, borrowings under our revolving credit facility. Our expected capital requirements for 2020 include up to approximately $385 million of anticipated capital expenditures, net of tenant concessions. As of December 31, 2019, we had aggregate commitments of $72.1 million to fund future co-investments in our Real Estate Investments business, $46.3 million of which is expected to be funded in 2020. Additionally, as of December 31, 2019, we are committed to fund $50.1 million of additional capital to unconsolidated subsidiaries within our Real Estate Investments business, which we may be required to fund at any time. As of December 31, 2019, we had $2.8 billion of borrowings available under our revolving credit facility.

We have historically relied on our internally generated cash flow and our revolving credit facility to fund our working capital, capital expenditure and general investment requirements (including strategic in-fill acquisitions) and have not sought other external sources of financing to help fund these requirements. In the absence of extraordinary events or a large strategic acquisition, we anticipate that our cash flow from operations and our revolving credit facility would be sufficient to meet our anticipated cash requirements for the foreseeable future, and at a minimum for the next 12 months. We may seek to take advantage of market opportunities to refinance existing debt instruments, as we have done in the past, with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time in our sole discretion, purchase, redeem, or retire our existing senior notes, through tender offers, in privately negotiated or open market transactions, or otherwise.

As noted above, we believe that any future significant acquisitions that we may make could require us to obtain additional debt or equity financing. In the past, we have been able to obtain such financing for material transactions on terms that we believed to be reasonable. However, it is possible that we may not be able to obtain acquisition financing on favorable terms, or at all, in the future if we decide to make any further significant acquisitions.

Our long-term liquidity needs, other than those related to ordinary course obligations and commitments such as operating leases, are generally comprised of three elements. The first is the repayment of the outstanding and anticipated principal amounts of our long-term indebtedness. If our cash flow is insufficient to repay our long-term debt when it comes due, then we expect that we would need to refinance such indebtedness or otherwise amend its terms to extend the maturity dates. We cannot make any assurances that such refinancing or amendments would be available on attractive terms, if at all.

45

 

The second long-term liquidity need is the payment of obligations related to acquisitions. Our acquisition structures often include deferred and/or contingent purchase price payments in future periods that are subject to the passage of time or achievement of certain performance metrics and other conditions. As of December 31, 2019 and 2018, we had accrued $111.7 million ($41.6 million of which was a current liability) and $136.3 million ($41.7 million of which was a current liability), respectively, of deferred purchase consideration, which was included in accounts payable and accrued expenses and in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 8 of this Annual Report.

Lastly, in October 2016, we announced that our board of directors had authorized the company to repurchase up to an aggregate of $250.0 million of our Class A common stock over three years. As of December 31, 2018, we spent $161.0 million to repurchase 3,980,656 shares of our Class A common stock with an average price paid per share of $40.43. During the month of January 2019, under the October 2016 program, we spent $45.1 million to repurchase an additional 1,144,449 shares of our Class A common stock with an average price paid per share of $39.38. In February 2019, our board of directors authorized a new program for the company to repurchase up to $300.0 million of our Class A common stock over three years, effective March 11, 2019. The previous program terminated upon the effectiveness of the new program. In both August 2019 and November 2019, our board of directors authorized an additional $100.0 million under our new program, bringing the total authorized amount under the new program to a total of $500.0 million as of March 2, 2020.

During the year ended December 31, 2019, under the March 2019 program, we spent $100.0 million to repurchase 1,936,458 shares of our Class A common stock with an average price paid per share of $51.64. As of March 2, 2020, we had $400.0 million of capacity remaining under our current stock repurchase program. Our stock repurchases have been funded with cash on hand and we intend to continue funding future stock repurchases with existing cash. The timing of future repurchases, and the actual amounts repurchased, will depend on a variety of factors, including the market price of our common stock, general market and economic conditions and other factors.

Historical Cash Flows

Operating Activities

Net cash provided by operating activities totaled $1.2 billion for the year ended December 31, 2019, an increase of $92.1 million as compared to the year ended December 31, 2018. The increase in net cash provided by operating activities was primarily due to improved operating performance, partially offset by lower distribution of earnings from unconsolidated subsidiaries during the year ended December 31, 2019.

Net cash provided by operating activities totaled $1.1 billion for the year ended December 31, 2018, an increase of $236.8 million as compared to the year ended December 31, 2017. The increase in net cash provided by operating activities was primarily due to improved operating performance as well as a higher distribution of earnings from unconsolidated subsidiaries during the year ended December 31, 2018.

Investing Activities

Net cash used in investing activities totaled $721.0 million for the year ended December 31, 2019, an increase of $160.3 million as compared to the year ended December 31, 2018. This increase was largely driven by an increase of $65.7 million in capital expenditures and higher amounts paid for acquisitions (driven by the Telford Acquisition) during the year ended December 31, 2019. Additionally, higher contributions to unconsolidated subsidiaries and lower distributions received from unconsolidated subsidiaries during the year ended December 31, 2019 contributed to the higher net use of cash in investing activities.

Net cash used in investing activities totaled $560.7 million for the year ended December 31, 2018, an increase of $258.1 million as compared to the year ended December 31, 2017. The increase in cash used in investing activities was primarily driven by $204.1 million more incurred for acquisitions (driven by the FacilitySource Acquisition) and an increase of $49.8 million in capital expenditures during the year ended December 31, 2018.

46

 

Financing Activities

Net cash used in financing activities totaled $271.9 million for the year ended December 31, 2019, a decrease of $234.7 million as compared to the year ended December 31, 2018. This decrease was primarily due to the impact of the full redemption of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes (including $20.0 million premium) during the year ended December 31, 2018. This was partially offset by the impact of higher net borrowings of $552.7 million from our senior term loans during the year ended December 31, 2018 and the repayment of debt assumed in the Telford Acquisition of $110.7 million during the year ended December 31, 2019.

Net cash used in financing activities totaled $506.6 million for the year ended December 31, 2018, a decrease of $121.1 million as compared to the year ended December 31, 2017. This decrease was primarily due to $1.1 billion of higher net borrowings from our senior term loans during the year ended December 31, 2018, largely offset by the full redemption of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes (including $20.0 million premium) as well as the $161.0 million repurchase of our common stock during the year ended December 31, 2018.

Summary of Contractual Obligations and Other Commitments

The following is a summary of our various contractual obligations and other commitments as of December 31, 2019 (dollars in thousands):

 

 

 

Payments Due by Period

 

Contractual Obligations

 

Total

 

 

Less than

1 year

 

 

1 - 3 years

 

 

3 - 5 years

 

 

More than

5 years

 

Total gross long-term debt (1)

 

$

1,775,392

 

 

$

1,814

 

 

$

47

 

 

$

748,531

 

 

$

1,025,000

 

Short-term borrowings (2)

 

 

981,709

 

 

 

981,709

 

 

 

—

 

 

 

—

 

 

 

—

 

Operating leases (3)

 

 

1,432,656

 

 

 

175,958

 

 

 

378,357

 

 

 

308,981

 

 

 

569,360

 

Financing leases (3)

 

 

99,041

 

 

 

35,532

 

 

 

46,578

 

 

 

16,931

 

 

 

—

 

Defined benefit pension liability (4)

 

 

107,996

 

 

 

107,996

 

 

 

—

 

 

 

—

 

 

 

—

 

Total gross notes payable on real estate (5)

 

 

13,271

 

 

 

6,773

 

 

 

6,498

 

 

 

—

 

 

 

—

 

Deferred purchase consideration (6)

 

 

111,664

 

 

 

41,569

 

 

 

25,211

 

 

 

40,100

 

 

 

4,784

 

Total Contractual Obligations

 

$

4,521,729

 

 

$

1,351,351

 

 

$

456,691

 

 

$

1,114,543

 

 

$

1,599,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Other Commitments Expiration

 

Other Commitments

 

Total

 

 

Less than

1 year

 

 

1 - 3 years

 

 

3 - 5 years

 

 

More than

5 years

 

Self-insurance reserves (7)

 

$

125,837

 

 

$

125,837

 

 

$

—

 

 

$

—

 

 

$

—

 

Tax liabilities (8)

 

 

108,301

 

 

 

14,654

 

 

 

38,198

 

 

 

55,449

 

 

 

—

 

Co-investments (9) (10)

 

 

122,270

 

 

 

96,487

 

 

 

14,939

 

 

 

4,567

 

 

 

6,277

 

Letters of credit (9)

 

 

91,766

 

 

 

91,766

 

 

 

—

 

 

 

—

 

 

 

—

 

Guarantees (9) (11)

 

 

80,143

 

 

 

80,143

 

 

 

—

 

 

 

—

 

 

 

—

 

Total Other Commitments

 

$

528,317

 

 

$

408,887

 

 

$

53,137

 

 

$

60,016

 

 

$

6,277

 

 

(1)

Reflects gross outstanding long-term debt balances as of December 31, 2019, assumed to be paid at maturity, excluding unamortized discount, premium and deferred financing costs. See Note 11 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report. Figures do not include scheduled interest payments. Assuming each debt obligation is held until maturity, we estimate that we will make the following interest payments (dollars in thousands):  2020 – $63,000; 2021 to 2022 – $126,000; 2023 to 2024 – $115,874 and thereafter – $38,582.

(2)

The majority of this balance represents our warehouse lines of credit, which are recourse only to our wholly-owned subsidiary CBRE Capital Markets, Inc. (CBRE Capital Markets) and are secured by our related warehouse receivables. See Notes 5 and 11 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.

(3)

See Note 12 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.

(4)

See Note 14 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report. These obligations are related, either wholly or partially, to the future retirement of our employees and such retirement dates are not predictable. An undeterminable portion of this amount will be paid in years one through five.

(5)

Reflects gross outstanding notes payable on real estate as of December 31, 2019 (only $0.6 million of which is recourse to us, beyond being recourse to the single-purpose entity that held the real estate asset and was the primary obligor on the note payable), assumed to be paid at maturity, excluding unamortized deferred financing costs. Amounts do not include scheduled interest payments. The notes have either fixed or variable interest rates, ranging from 4.29% to 4.75% at December 31, 2019.

47

 

(6)

Represents deferred obligations related to previous acquisitions, which are included in accounts payable and accrued expenses and other long-term liabilities in the consolidated balance sheets at December 31, 2019 set forth in Item 8 of this Annual Report.

(7)

Represents outstanding reserves for claims under certain insurance programs, which are included in other current and other long-term liabilities in the consolidated balance sheets at December 31, 2019 set forth in Item 8 of this Annual Report. Due to the nature of this item, payments could be due at any time upon the occurrence of certain events. Accordingly, the entire balance has been reflected as expiring in less than one year.

(8)

As of December 31, 2019, we have a remaining federal tax liability of $107.8 million (of which $14.2 million is due in less than one year) associated with the Transition Tax on mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We are paying the federal tax liability for the Transition Tax in annual interest-free installments over a period of eight years through 2025 as allowed by the Tax Act.

In addition, as of December 31, 2019, our current and non-current tax liabilities (including interest and penalties) for uncertain tax positions, totaled $141.1 million. Of this amount, we can reasonably estimate that $0.5 million will require cash settlement in less than one year. We are unable to reasonably estimate the timing of the effective settlement of tax positions for the remaining $140.6 million. See Note 15 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

(9)

See Note 13 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.

(10)

Includes $72.1 million to fund future co-investments in our Real Estate Investments segment, $46.3 million of which is expected to be funded in 2020, and $50.1 million committed to invest in unconsolidated real estate subsidiaries as a principal, which is callable at any time.

(11)

Due to the nature of guarantees, payments could be due at any time upon the occurrence of certain triggering events, including default. Accordingly, all guarantees are reflected as expiring in less than one year.

Indebtedness

Our level of indebtedness increases the possibility that we may be unable to pay the principal amount of our indebtedness and other obligations when due. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents governing our indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase.

Long-Term Debt

We maintain credit facilities with third-party lenders, which we use for a variety of purposes. On October 31, 2017, CBRE Services, Inc. (CBRE Services), our wholly-owned subsidiary, entered into a Credit Agreement (the 2017 Credit Agreement), which refinanced and replaced our prior credit agreement (the 2015 Credit Agreement). We used $200.0 million of borrowings from the tranche A term loan facility and $83.0 million of revolving credit facility borrowings under the 2017 Credit Agreement, in addition to cash on hand, to repay all amounts outstanding under the 2015 Credit Agreement. On December 20, 2018, CBRE Global Acquisition Company, a wholly-owned subsidiary of CBRE Services, entered into an incremental term loan assumption agreement with a syndicate of banks jointly led by Wells Fargo Bank and National Westminster Bank plc to establish a euro term loan facility under the 2017 Credit Agreement in an aggregate principal amount of €400.0 million. The proceeds from the euro term loan facility were used to repay a portion of the U.S. dollar denominated term loans outstanding under the 2017 Credit Agreement. On March 4, 2019, CBRE Services entered into an additional incremental assumption agreement with respect to the 2017 Credit Agreement (the 2017 Agreement as amended by such incremental assumption agreement, the 2019 Credit Agreement), which (i) extended the maturity of the U.S. dollar tranche A term loans under the 2017 Credit Agreement, (ii) extended the termination date of the revolving credit commitments available under the 2017 Credit Agreement and (iii) made certain changes to the interest rates and fees applicable to such tranche A term loans and revolving credit commitments. The proceeds from the new tranche A term loan facility under the 2019 Credit Agreement were used to repay the $300.0 million of tranche A term loans outstanding under the 2017 Credit Agreement.

The 2019 Credit Agreement is a senior unsecured credit facility that is jointly and severally guaranteed by us and certain of our subsidiaries. As of December 31, 2019, the 2019 Credit Agreement provided for the following: (1) a $2.8 billion incremental revolving credit facility, which includes the capacity to obtain letters of credit and swingline loans and terminates on March 4, 2024; (2) a $300.0 million incremental tranche A term loan facility maturing on March 4, 2024, requiring quarterly principal payments unless our leverage ratio (as defined in the 2019 Credit Agreement) is less than or equal to 2.50 to 1.00 on the last day of the fiscal quarter immediately preceding any such payment date and (3) a €400.0 million term loan facility due and payable in full at maturity on December 20, 2023.

48

 

On August 13, 2015, CBRE Services 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 Services, 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 Services that guarantees our 2019 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.

On September 26, 2014, CBRE Services issued $300.0 million in aggregate principal amount of 5.25% senior notes due March 15, 2025. On December 12, 2014, CBRE Services issued an additional $125.0 million in aggregate principal amount of 5.25% senior notes due March 15, 2025 at a price equal to 101.5% of their face value, plus interest deemed to have accrued from September 26, 2014. The 5.25% senior notes are unsecured obligations of CBRE Services, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current and future secured indebtedness. The 5.25% senior notes are jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guarantees our 2019 Credit Agreement. Interest accrues at a rate of 5.25% per year and is payable semi-annually in arrears on March 15 and September 15.

On March 14, 2013, CBRE Services issued $800.0 million in aggregate principal amount of 5.00% senior notes due March 15, 2023. The 5.00% senior notes were unsecured obligations of CBRE Services, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current and future secured indebtedness. The 5.00% senior notes were jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guaranteed our 2017 Credit Agreement. Interest accrued at a rate of 5.00% per year and was payable semi-annually in arrears on March 15 and September 15. The 5.00% senior notes were redeemable at our option, in whole or in part, on March 15, 2018 at a redemption price of 102.5% of the principal amount on that date. We redeemed these notes in full on March 15, 2018 and incurred charges of $28.0 million, including a premium of $20.0 million and the write-off of $8.0 million of unamortized deferred financing costs. We funded this redemption with $550.0 million of borrowings from our tranche A term loan facility and $270.0 million of borrowings from our revolving credit facility under our 2017 Credit Agreement.

The indentures governing our 4.875% senior notes and 5.25% senior notes contain restrictive covenants that, among other things, limit our ability to create or permit liens on assets securing indebtedness, enter into sale/leaseback transactions and enter into consolidations or mergers.

For additional information on all of our long-term debt, see Note 11 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

Short-Term Borrowings

Our wholly-owned subsidiary, CBRE Capital Markets, has the following warehouse lines of credit: i) credit agreements with JP Morgan Chase Bank, N.A., Bank of America, N.A., TD Bank, N.A., Capital One, N.A. and MUFG Union Bank, N.A. for the purpose of funding mortgage loans that will be resold; and ii) a funding arrangement with Federal National Mortgage Association, or Fannie Mae, for the purpose of selling a percentage of certain closed multifamily loans to Fannie Mae. For more information on these warehouse lines, see Notes 5 and 11 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk primarily consists of foreign currency exchange rate fluctuations related to our international operations and changes in interest rates on debt obligations. We manage such risk primarily by managing the amount, sources, and duration of our debt funding and by using derivative financial instruments. We apply the “Derivatives and Hedging” Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) (Topic 815) when accounting for derivative financial instruments. In all cases, we view derivative financial instruments as a risk management tool and, accordingly, do not use derivatives for trading or speculative purposes.

49

 

Exchange Rates

Our foreign operations expose us to fluctuations in foreign exchange rates. These fluctuations may impact the value of our cash receipts and payments in terms of our functional (reporting) currency, which is U.S. dollars. See the discussion of international operations, which is included in Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the caption “International Operations” and is incorporated by reference herein.

Interest Rates

We manage our interest expense by using a combination of fixed and variable rate debt. Historically, we have entered into interest rate swap agreements to attempt to hedge the variability of future interest payments due to changes in interest rates. As of December 31, 2019, we do not have any outstanding interest rate swap agreements.

The estimated fair value of our senior term loans was approximately $745.5 million at December 31, 2019. Based on dealers’ quotes, the estimated fair values of our 4.875% senior notes and 5.25% senior notes were $670.7 million and $478.3 million, respectively, at December 31, 2019.

We utilize sensitivity analyses to assess the potential effect on our variable rate debt. If interest rates were to increase 100 basis points on our outstanding variable rate debt at December 31, 2019, the net impact of the additional interest cost would be a decrease of $7.5 million on pre-tax income and a decrease of $7.5 million in cash provided by operating activities for the year ended December 31, 2019.

50

 

Item 8.

Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

52

 

 

Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting

54

 

 

Consolidated Balance Sheets at December 31, 2019 and 2018

56

 

 

Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017

57

 

 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

58

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

59

 

 

Consolidated Statements of Equity for the years ended December 31, 2019, 2018 and 2017

61

 

 

Notes to Consolidated Financial Statements

63

 

 

Quarterly Results of Operations (Unaudited)

117

 

 

 

 

FINANCIAL STATEMENT SCHEDULES:

 

 

 

Schedule II -Valuation and Qualifying Accounts

122

 

All other schedules are omitted because they are either not applicable, not required or the information required is included in the Consolidated Financial Statements, including the notes thereto.

 

51

 

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

CBRE Group, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of CBRE Group, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the years in the three‑year period ended December 31, 2019, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2020 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

52

 

Assessment of Gross Unrecognized Tax Benefits

As discussed in Notes 2 and 15 to the consolidated financial statements, the Company has recorded gross unrecognized tax benefits of $141.2 million as of December 31, 2019. The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates there is more than a 50% likelihood that the position will be sustained upon examination, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.

We identified the assessment of the gross unrecognized tax benefits as a critical audit matter. Complex auditor judgment was required in evaluating the Company’s interpretation of tax law and its estimate of the resolution of the tax positions underlying the unrecognized tax benefits.

The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s unrecognized tax benefits process, including the interpretation of tax law and the estimate of the unrecognized tax benefits. Since tax law is complex and often subject to interpretations, we involved tax and valuation professionals with specialized skills and knowledge, who assisted in:

 

•

Evaluating the Company’s interpretation of tax law and the potential impact on the Company’s tax positions,

 

•

Assessing transfer pricing policies for compliance with applicable laws and regulations,

 

•

Inspecting settlement documents with applicable taxing authorities, and assessing the expiration of statutes of limitations, and

 

•

Performing an independent assessment of certain of the Company’s tax positions and comparing the results to the Company’s assessment.

/s/ KPMG LLP

We have served as the Company’s auditor since 2008.

Los Angeles, California

March 2, 2020

53

 

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

CBRE Group, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited CBRE Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated March 2, 2020 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired Telford Homes Plc during 2019 and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 Telford Homes Plc’s internal control over financial reporting associated with total assets of $525.4 million and total revenues of $97.5 million included in the consolidated financial statements of the Company as of and for the year ended December 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Telford Homes Plc.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:

 

•

The Global Workplace Solutions segment in the Company’s EMEA region (GWS EMEA) did not have sufficient resources with the appropriate reporting lines, roles and responsibilities, authority, training and skill sets to design and operate financial activities, including controls, in an appropriate and timely manner.

 

•

GWS EMEA did not effectively assess and address the risks posed by changes in the business and the related effect on the GWS EMEA system of internal controls. In relation to this, specific to the rollout of GWS EMEA’s primary financial system, GWS EMEA did not effectively operate general information technology controls related to financial data migrations, user access, system changes and financial data processing. Because of the deficiencies in general information technology controls, the business process controls (automated and manual) that are dependent on this system were also deemed ineffective because they could have been adversely impacted.

 

•

GWS EMEA did not design or execute control activities that sufficiently mitigated the financial reporting risks related to GWS EMEA.

 

•

GWS EMEA did not have an effective information and communication process to identify, capture and process relevant information necessary for financial accounting and reporting.

 

•

The Company did not monitor the presentation and effectiveness of components of internal control through evaluation and remediation in an appropriate manner within GWS EMEA and GWS EMEA was not sufficiently integrated with the corporate oversight function.

54

 

Consequently, there were control failures for GWS EMEA in the areas of revenue and receivables, balance sheet account reconciliations, journal entries and general information technology controls. The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Los Angeles, California

March 2, 2020

55

 

CBRE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

 

 

December 31,

 

 

 

 

2019

 

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

971,781

 

 

$

777,219

 

Restricted cash

 

 

121,964

 

 

 

86,725

 

Receivables, less allowance for doubtful accounts of $72,725 and $60,348 at

   December 31, 2019 and 2018, respectively

 

 

4,466,674

 

 

 

3,668,591

 

Warehouse receivables

 

 

993,058

 

 

 

1,342,468

 

Contract assets

 

 

328,012

 

 

 

307,020

 

Prepaid expenses

 

 

282,741

 

 

 

254,892

 

Income taxes receivable

 

 

93,915

 

 

 

71,684

 

Other current assets

 

 

276,319

 

 

 

245,611

 

Total Current Assets

 

 

7,534,464

 

 

 

6,754,210

 

Property and equipment, net

 

 

836,206

 

 

 

721,692

 

Goodwill

 

 

3,753,493

 

 

 

3,652,309

 

Other intangible assets, net of accumulated amortization of $1,358,528 and $1,180,393 at

   December 31, 2019 and 2018, respectively

 

 

1,379,546

 

 

 

1,441,308

 

Operating lease assets

 

 

997,966

 

 

 

—

 

Investments in unconsolidated subsidiaries

 

 

426,711

 

 

 

216,174

 

Non-current contract assets

 

 

201,760

 

 

 

74,762

 

Real estate under development

 

 

185,508

 

 

 

4,586

 

Non-current income taxes receivable

 

 

139,136

 

 

 

—

 

Deferred tax assets, net

 

 

73,864

 

 

 

51,703

 

Other assets, net

 

 

668,542

 

 

 

540,049

 

Total Assets

 

$

16,197,196

 

 

$

13,456,793

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,436,084

 

 

$

1,919,827

 

Compensation and employee benefits payable

 

 

1,324,990

 

 

 

1,121,179

 

Accrued bonus and profit sharing

 

 

1,261,974

 

 

 

1,189,395

 

Operating lease liabilities

 

 

168,663

 

 

 

—

 

Contract liabilities

 

 

108,671

 

 

 

82,227

 

Income taxes payable

 

 

30,207

 

 

 

68,100

 

Short-term borrowings:

 

 

 

 

 

 

 

 

Warehouse lines of credit (which fund loans that U.S. Government Sponsored

   Enterprises have committed to purchase)

 

 

977,175

 

 

 

1,328,761

 

Other

 

 

4,534

 

 

 

—

 

Total short-term borrowings

 

 

981,709

 

 

 

1,328,761

 

Current maturities of long-term debt

 

 

1,814

 

 

 

3,146

 

Other current liabilities

 

 

122,339

 

 

 

90,745

 

Total Current Liabilities

 

 

6,436,451

 

 

 

5,803,380

 

Long-term debt, net of current maturities

 

 

1,761,245

 

 

 

1,767,260

 

Non-current operating lease liabilities

 

 

1,057,758

 

 

 

—

 

Non-current income taxes payable

 

 

93,647

 

 

 

—

 

Non-current tax liabilities

 

 

85,966

 

 

 

172,626

 

Deferred tax liabilities, net

 

 

34,593

 

 

 

107,425

 

Other liabilities

 

 

454,424

 

 

 

596,200

 

Total Liabilities

 

 

9,924,084

 

 

 

8,446,891

 

Commitments and contingencies

 

 

—

 

 

 

—

 

Equity:

 

 

 

 

 

 

 

 

CBRE Group, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

 

Class A common stock; $0.01 par value; 525,000,000 shares authorized; 334,752,283 and

   336,912,783 shares issued and outstanding at December 31, 2019 and 2018, respectively

 

 

3,348

 

 

 

3,369

 

Additional paid-in capital

 

 

1,115,944

 

 

 

1,149,013

 

Accumulated earnings

 

 

5,793,149

 

 

 

4,504,684

 

Accumulated other comprehensive loss

 

 

(679,748

)

 

 

(718,269

)

Total CBRE Group, Inc. Stockholders’ Equity

 

 

6,232,693

 

 

 

4,938,797

 

Non-controlling interests

 

 

40,419

 

 

 

71,105

 

Total Equity

 

 

6,273,112

 

 

 

5,009,902

 

Total Liabilities and Equity

 

$

16,197,196

 

 

$

13,456,793

 

 

The accompanying notes are an integral part of these consolidated financial statements.

56

 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share data)

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

Revenue

 

$

23,894,091

 

 

$

21,340,088

 

 

$

18,628,787

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

18,689,013

 

 

 

16,449,212

 

 

 

14,305,099

 

Operating, administrative and other

 

 

3,436,009

 

 

 

3,365,773

 

 

 

2,858,720

 

Depreciation and amortization

 

 

439,224

 

 

 

451,988

 

 

 

406,114

 

Intangible asset impairment

 

 

89,787

 

 

 

—

 

 

 

—

 

Total costs and expenses

 

 

22,654,033

 

 

 

20,266,973

 

 

 

17,569,933

 

Gain on disposition of real estate

 

 

19,817

 

 

 

14,874

 

 

 

19,828

 

Operating income

 

 

1,259,875

 

 

 

1,087,989

 

 

 

1,078,682

 

Equity income from unconsolidated subsidiaries

 

 

160,925

 

 

 

324,664

 

 

 

210,207

 

Other income

 

 

28,907

 

 

 

93,020

 

 

 

9,405

 

Interest expense, net of interest income

 

 

85,754

 

 

 

98,685

 

 

 

126,961

 

Write-off of financing costs on extinguished debt

 

 

2,608

 

 

 

27,982

 

 

 

—

 

Income before provision for income taxes

 

 

1,361,345

 

 

 

1,379,006

 

 

 

1,171,333

 

Provision for income taxes

 

 

69,895

 

 

 

313,058

 

 

 

467,757

 

Net income

 

 

1,291,450

 

 

 

1,065,948

 

 

 

703,576

 

Less:  Net income attributable to non-controlling interests

 

 

9,093

 

 

 

2,729

 

 

 

6,467

 

Net income attributable to CBRE Group, Inc.

 

$

1,282,357

 

 

$

1,063,219

 

 

$

697,109

 

Basic income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CBRE Group, Inc.

 

$

3.82

 

 

$

3.13

 

 

$

2.06

 

Weighted average shares outstanding for basic income per

   share

 

 

335,795,654

 

 

 

339,321,056

 

 

 

337,658,017

 

Diluted income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CBRE Group, Inc.

 

$

3.77

 

 

$

3.10

 

 

$

2.05

 

Weighted average shares outstanding for diluted income per

   share

 

 

340,522,871

 

 

 

343,122,741

 

 

 

340,783,556

 

 

The accompanying notes are an integral part of these consolidated financial statements.

57

 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

Net income

 

$

1,291,450

 

 

$

1,065,948

 

 

$

703,576

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(14,092

)

 

 

(161,384

)

 

 

218,001

 

Adoption of Accounting Standards Update 2016-01, net of $2,141 income tax

   benefit for the year ended December 31, 2018

 

 

—

 

 

 

(3,964

)

 

 

—

 

Amounts reclassified from accumulated other comprehensive loss to interest

   expense, net of $471, $876 and $3,066 income tax expense for the years

   ended December 31, 2019, 2018 and 2017, respectively

 

 

1,320

 

 

 

2,439

 

 

 

4,964

 

Unrealized gains on interest rate swaps, net of $254 and $362 income tax

   expense for the years ended December 31, 2018 and 2017, respectively

 

 

—

 

 

 

708

 

 

 

585

 

Unrealized holding gains (losses) on available for sale debt securities, net of

   $559 income tax expense, $349 income tax benefit and $1,685 income tax

   expense for the years ended December 31, 2019, 2018 and 2017, respectively

 

 

2,101

 

 

 

(971

)

 

 

2,737

 

Pension liability adjustments, net of $194, $269 and $2,601 income tax expense

   for the years ended December 31, 2019, 2018 and 2017, respectively

 

 

944

 

 

 

1,315

 

 

 

12,701

 

Legal entity restructuring, net of $17,694 income tax expense for the year

   ended December 31, 2019

 

 

63,149

 

 

 

—

 

 

 

—

 

Other, net of $3,795 and $3,550 income tax benefit and $342 income tax

   expense for the years ended December 31, 2019, 2018 and 2017, respectively

 

 

(14,946

)

 

 

(5,070

)

 

 

364

 

Total other comprehensive income (loss)

 

 

38,476

 

 

 

(166,927

)

 

 

239,352

 

Comprehensive income

 

 

1,329,926

 

 

 

899,021

 

 

 

942,928

 

Less: Comprehensive income attributable to non-controlling interests

 

 

9,048

 

 

 

1,657

 

 

 

6,879

 

Comprehensive income attributable to CBRE Group, Inc.

 

$

1,320,878

 

 

$

897,364

 

 

$

936,049

 

 

The accompanying notes are an integral part of these consolidated financial statements.

58

 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,291,450

 

 

$

1,065,948

 

 

$

703,576

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

439,224

 

 

 

451,988

 

 

 

406,114

 

Amortization and write-off of financing costs on extinguished debt

 

 

8,662

 

 

 

35,175

 

 

 

10,783

 

Gains related to mortgage servicing rights, premiums on loan sales

   and sales of other assets

 

 

(246,690

)

 

 

(229,376

)

 

 

(200,386

)

Intangible asset impairment

 

 

89,787

 

 

 

—

 

 

 

—

 

Gain associated with remeasuring our investment in a joint venture

   entity to fair value at the date we acquired the remaining interest

 

 

—

 

 

 

(100,420

)

 

 

—

 

Net realized and unrealized (gains) losses from investments

 

 

(28,907

)

 

 

7,400

 

 

 

(9,405

)

Provision for doubtful accounts

 

 

20,373

 

 

 

19,760

 

 

 

8,044

 

Compensation expense for equity awards

 

 

127,738

 

 

 

128,171

 

 

 

93,087

 

Equity income from unconsolidated subsidiaries

 

 

(160,925

)

 

 

(324,664

)

 

 

(210,207

)

Distribution of earnings from unconsolidated subsidiaries

 

 

199,011

 

 

 

336,925

 

 

 

211,855

 

Proceeds from sale of mortgage loans

 

 

19,805,060

 

 

 

20,230,676

 

 

 

18,052,756

 

Origination of mortgage loans

 

 

(19,389,979

)

 

 

(20,591,602

)

 

 

(17,655,104

)

(Decrease) increase in warehouse lines of credit

 

 

(351,586

)

 

 

417,995

 

 

 

(343,887

)

Tenant concessions received

 

 

21,249

 

 

 

38,400

 

 

 

19,337

 

Purchase of equity securities

 

 

(83,001

)

 

 

(99,789

)

 

 

(110,570

)

Proceeds from sale of equity securities

 

 

46,949

 

 

 

75,120

 

 

 

68,547

 

Decrease (increase) in real estate under development

 

 

34,776

 

 

 

(4,586

)

 

 

2,472

 

Increase in receivables, prepaid expenses and other assets (including

   contract and lease assets)

 

 

(824,490

)

 

 

(773,361

)

 

 

(534,190

)

Increase in accounts payable and accrued expenses and other liabilities

   (including contract and lease liabilities)

 

 

306,677

 

 

 

273,782

 

 

 

159,145

 

Increase in compensation and employee benefits payable and accrued

   bonus and profit sharing

 

 

244,895

 

 

 

270,371

 

 

 

148,714

 

(Increase) decrease in net income taxes receivable/payable

 

 

(274,436

)

 

 

(47,074

)

 

 

108,151

 

Other operating activities, net

 

 

(52,457

)

 

 

(49,590

)

 

 

(34,421

)

Net cash provided by operating activities

 

 

1,223,380

 

 

 

1,131,249

 

 

 

894,411

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(293,514

)

 

 

(227,803

)

 

 

(178,042

)

Acquisition of businesses, including net assets acquired, intangibles and

   goodwill, net of cash acquired

 

 

(355,926

)

 

 

(322,573

)

 

 

(118,427

)

Contributions to unconsolidated subsidiaries

 

 

(105,947

)

 

 

(62,802

)

 

 

(68,700

)

Distributions from unconsolidated subsidiaries

 

 

33,289

 

 

 

61,709

 

 

 

63,664

 

Purchase of equity securities

 

 

(12,017

)

 

 

(21,402

)

 

 

(15,584

)

Proceeds from sale of equity securities

 

 

15,623

 

 

 

16,314

 

 

 

15,587

 

Purchase of available for sale debt securities

 

 

(8,853

)

 

 

(23,360

)

 

 

(19,280

)

Proceeds from the sale of available for sale debt securities

 

 

4,671

 

 

 

5,792

 

 

 

15,790

 

Other investing activities, net

 

 

1,650

 

 

 

13,441

 

 

 

2,392

 

Net cash used in investing activities

 

 

(721,024

)

 

 

(560,684

)

 

 

(302,600

)

 

The accompanying notes are an integral part of these consolidated financial statements.

59

 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from senior term loans

 

 

300,000

 

 

 

1,002,745

 

 

 

200,000

 

Repayment of senior term loans

 

 

(300,000

)

 

 

(450,000

)

 

 

(751,876

)

Proceeds from revolving credit facility

 

 

3,609,000

 

 

 

3,258,000

 

 

 

1,521,000

 

Repayment of revolving credit facility

 

 

(3,609,000

)

 

 

(3,258,000

)

 

 

(1,521,000

)

Repayment of 5.00% senior notes (including premium)

 

 

—

 

 

 

(820,000

)

 

 

—

 

Repayment of debt assumed in acquisition of Telford Homes

 

 

(110,687

)

 

 

—

 

 

 

—

 

Repayment of debt assumed in acquisition of FacilitySource

 

 

—

 

 

 

(26,295

)

 

 

—

 

Repurchase of common stock

 

 

(145,137

)

 

 

(161,034

)

 

 

—

 

Acquisition of businesses (cash paid for acquisitions more than

   three months after purchase date)

 

 

(42,147

)

 

 

(18,660

)

 

 

(24,006

)

Units repurchased for payment of taxes on equity awards

 

 

(18,426

)

 

 

(29,386

)

 

 

(29,549

)

Non-controlling interest contributions

 

 

46,612

 

 

 

25,355

 

 

 

5,301

 

Non-controlling interest distributions

 

 

(3,957

)

 

 

(13,413

)

 

 

(8,715

)

Other financing activities, net

 

 

1,793

 

 

 

(15,912

)

 

 

(18,897

)

Net cash used in financing activities

 

 

(271,949

)

 

 

(506,600

)

 

 

(627,742

)

Effect of currency exchange rate changes on cash and cash

   equivalents and restricted cash

 

 

(606

)

 

 

(24,840

)

 

 

29,338

 

NET INCREASE (DECREASE) IN CASH AND CASH

   EQUIVALENTS AND RESTRICTED CASH

 

 

229,801

 

 

 

39,125

 

 

 

(6,593

)

CASH AND CASH EQUIVALENTS AND RESTRICTED

   CASH, AT BEGINNING OF PERIOD

 

 

863,944

 

 

 

824,819

 

 

 

831,412

 

CASH AND CASH EQUIVALENTS AND RESTRICTED

   CASH, AT END OF PERIOD

 

$

1,093,745

 

 

$

863,944

 

 

$

824,819

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW

   INFORMATION:

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

$

86,666

 

 

$

104,165

 

 

$

117,164

 

Income taxes, net

 

$

365,065

 

 

$

375,849

 

 

$

356,997

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

60

 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

 

 

 

CBRE Group, Inc. Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other

comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Class A

common stock

 

 

Additional

paid-in

capital

 

 

Accumulated

earnings

 

 

Minimum

pension

liability

 

 

Foreign currency

translation and

other

 

 

Non-

controlling

interests

 

 

Total

 

Balance at December 31, 2016

 

 

337,279,449

 

 

$

3,373

 

 

$

1,145,226

 

 

$

2,745,897

 

 

$

(165,670

)

 

$

(625,684

)

 

$

42,758

 

 

$

3,145,900

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

697,109

 

 

 

—

 

 

 

—

 

 

 

6,467

 

 

 

703,576

 

Pension liability adjustments, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

12,701

 

 

 

—

 

 

 

—

 

 

 

12,701

 

Non-cash issuance of common stock related to

   acquisition

 

 

495,828

 

 

 

5

 

 

 

11,688

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

11,693

 

Restricted stock awards vesting

 

 

1,660,269

 

 

 

17

 

 

 

(17

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Compensation expense for equity awards

 

 

—

 

 

 

—

 

 

 

93,087

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

93,087

 

Units repurchased for payment of taxes on equity

   awards

 

 

—

 

 

 

—

 

 

 

(29,549

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(29,549

)

Amounts reclassified from accumulated other

   comprehensive loss to interest expense, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

4,964

 

 

 

—

 

 

 

4,964

 

Unrealized gains on interest rate swaps, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

585

 

 

 

—

 

 

 

585

 

Unrealized holding gains on available for sale debt

   securities, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,737

 

 

 

—

 

 

 

2,737

 

Foreign currency translation gain

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

217,589

 

 

 

412

 

 

 

218,001

 

Contributions from non-controlling interests

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

5,301

 

 

 

5,301

 

Distributions to non-controlling interests

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(8,715

)

 

 

(8,715

)

Acquisition of non-controlling interests

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

12,671

 

 

 

12,671

 

Other

 

 

23,592

 

 

 

—

 

 

 

73

 

 

 

1

 

 

 

—

 

 

 

364

 

 

 

1,224

 

 

 

1,662

 

Balance at December 31, 2017

 

 

339,459,138

 

 

 

3,395

 

 

 

1,220,508

 

 

 

3,443,007

 

 

 

(152,969

)

 

 

(399,445

)

 

 

60,118

 

 

 

4,174,614

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,063,219

 

 

 

—

 

 

 

—

 

 

 

2,729

 

 

 

1,065,948

 

Adoption of Accounting Standards Update 2016-01,

   net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

3,964

 

 

 

—

 

 

 

(3,964

)

 

 

—

 

 

 

—

 

Pension liability adjustments, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,315

 

 

 

—

 

 

 

—

 

 

 

1,315

 

Restricted stock awards vesting

 

 

1,424,462

 

 

 

14

 

 

 

(14

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Compensation expense for equity awards

 

 

—

 

 

 

—

 

 

 

128,171

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

128,171

 

Reclassification of stock incentive plan award from

   an equity award to a liability award

 

 

—

 

 

 

—

 

 

 

(9,074

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(9,074

)

Units repurchased for payment of taxes on equity

   awards

 

 

—

 

 

 

—

 

 

 

(29,386

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(29,386

)

 

The accompanying notes are an integral part of these consolidated financial statements.

61

 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

 

 

 

CBRE Group, Inc. Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other

comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Class A

common stock

 

 

Additional

paid-in

capital

 

 

Accumulated

earnings

 

 

Minimum

pension

liability

 

 

Foreign currency

translation and

other

 

 

Non-

controlling

interests

 

 

Total

 

Repurchase of common stock

 

 

(3,980,656

)

 

 

(40

)

 

 

(160,994

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(161,034

)

Foreign currency translation loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(160,312

)

 

 

(1,072

)

 

 

(161,384

)

Amounts reclassified from accumulated other

   comprehensive loss to interest expense, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,439

 

 

 

—

 

 

 

2,439

 

Unrealized gains on interest rate swaps, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

708

 

 

 

—

 

 

 

708

 

Unrealized holding losses on available for sale debt

   securities, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(971

)

 

 

—

 

 

 

(971

)

Contributions from non-controlling interests

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

25,355

 

 

 

25,355

 

Distributions to non-controlling interests

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(13,413

)

 

 

(13,413

)

Other

 

 

9,839

 

 

 

—

 

 

 

(198

)

 

 

(5,506

)

 

 

3,747

 

 

 

(8,817

)

 

 

(2,612

)

 

 

(13,386

)

Balance at December 31, 2018

 

 

336,912,783

 

 

 

3,369

 

 

 

1,149,013

 

 

 

4,504,684

 

 

 

(147,907

)

 

 

(570,362

)

 

 

71,105

 

 

 

5,009,902

 

Net income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,282,357

 

 

 

—

 

 

 

—

 

 

 

9,093

 

 

 

1,291,450

 

Pension liability adjustments, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

944

 

 

 

—

 

 

 

—

 

 

 

944

 

Restricted stock awards vesting

 

 

920,407

 

 

 

9

 

 

 

(9

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

Compensation expense for equity awards

 

 

—

 

 

 

—

 

 

 

127,738

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

127,738

 

Units repurchased for payment of taxes on equity

   awards

 

 

—

 

 

 

—

 

 

 

(18,426

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(18,426

)

Repurchase of common stock

 

 

(3,080,907

)

 

 

(31

)

 

 

(145,106

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(145,137

)

Foreign currency translation loss

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(14,047

)

 

 

(45

)

 

 

(14,092

)

Amounts reclassified from accumulated other

   comprehensive loss to interest expense, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

1,320

 

 

 

—

 

 

 

1,320

 

Unrealized holding gains on available for sale debt

   securities, net of tax

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

2,101

 

 

 

—

 

 

 

2,101

 

Contributions from non-controlling interests

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

46,612

 

 

 

46,612

 

Distributions to non-controlling interests

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(3,957

)

 

 

(3,957

)

Deconsolidation of investments

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(76,349

)

 

 

(76,349

)

Legal entity restructuring, net

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

63,149

 

 

 

—

 

 

 

63,149

 

Other

 

 

—

 

 

 

1

 

 

 

2,734

 

 

 

6,108

 

 

 

—

 

 

 

(14,946

)

 

 

(6,040

)

 

 

(12,143

)

Balance at December 31, 2019

 

 

334,752,283

 

 

$

3,348

 

 

$

1,115,944

 

 

$

5,793,149

 

 

$

(146,963

)

 

$

(532,785

)

 

$

40,419

 

 

$

6,273,112

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

62

 

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Nature of Operations

CBRE Group, Inc., a Delaware corporation (which may be referred to in these financial statements as “the company,” “we,” “us” and “our”), was incorporated on February 20, 2001. We are the world’s largest commercial real estate services and investment firm, based on 2019 revenue, with leading global market positions in our leasing, property sales, occupier outsourcing and valuation businesses. Our business is focused on providing services to real estate occupiers and investors. For occupiers, we provide facilities management, project management, transaction (both property sales and leasing) and consulting services, among others. For investors, we provide capital markets (property sales, mortgage origination, sales and servicing), leasing, investment management, property management, valuation and development services, among others. We generate revenue from both management fees (large multi-year portfolio and per-project contracts) and commissions on transactions. As of December 31, 2019, we operated in more than 530 offices worldwide with more than 100,000 employees, excluding independent affiliates, providing services under the following brand names: “CBRE” (real estate advisory and outsourcing services); “CBRE Global Investors” (investment management); “Trammell Crow Company” (U.S. development); “Telford Homes” (U.K. development) and “Hana” (flexible-space solutions).

2.

Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include our accounts and those of our consolidated subsidiaries, which are comprised of variable interest entities in which we are the primary beneficiary and voting interest entities, in which we determined we have a controlling financial interest, under the “Consolidations” Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) (Topic 810). The equity attributable to non-controlling interests in subsidiaries is shown separately in the accompanying consolidated balance sheets. All significant intercompany accounts and transactions have been eliminated in consolidation.

Variable Interest Entities (VIEs)

We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. Our determination of whether an entity in which we hold a direct or indirect variable interest is a VIE is based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.

We analyze any investments in VIEs to determine if we are the primary beneficiary. In evaluating whether we are the primary beneficiary, we evaluate our direct and indirect economic interests in the entity. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in the VIE. Determining which reporting entity, if any, has a controlling financial interest in a VIE is primarily a qualitative approach focused on identifying which reporting entity has both: (i) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment.

We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. In addition, we consider the rights of other investors to participate in those decisions, to replace the manager and to sell or liquidate the entity. We determine whether we are the primary beneficiary of a VIE at the time we become involved with a variable interest entity and reconsider that conclusion continually.

63

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

We consolidate any VIE of which we are the primary beneficiary and disclose significant VIEs of which we are not the primary beneficiary, if any, as well as disclose our maximum exposure to loss related to VIEs that are not consolidated (see Note 6).

Voting Interest Entities (VOEs)

For VOEs, we consolidate the entity if we have a controlling financial interest. We have a controlling financial interest in a VOE if: (i) for legal entities other than limited partnerships, we own a majority voting interest in the VOE or, for limited partnerships and similar entities, we own a majority of the entity’s kick-out rights through voting limited partnership interests; and (ii) non-controlling shareholders or partners do not hold substantive participating rights and no other conditions exist that would indicate that we do not control the entity.

Other Investments

Our investments in unconsolidated subsidiaries in which we have the ability to exercise significant influence over operating and financial policies, but do not control, or entities which are variable interest entities in which we are not the primary beneficiary are accounted for under the equity method. We eliminate transactions with such equity method subsidiaries to the extent of our ownership in such subsidiaries. Accordingly, our share of the earnings from these equity-method basis companies is included in consolidated net income. All other investments held on a long-term basis are valued at cost less any impairment in value.

Marketable Securities

Debt securities are classified as held to maturity when we have the positive intent and ability to hold the securities to maturity. Marketable debt securities not classified as held to maturity are classified as available for sale. Available for sale debt securities are carried at their fair value and any difference between cost and fair value is recorded as an unrealized gain or loss, net of income taxes, and is reported as accumulated other comprehensive income (loss) in the consolidated statement of equity. Premiums and discounts are recognized in interest using the effective interest method. Realized gains and losses and declines in value expected to be other-than-temporary on available for sale debt securities have not been significant. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in interest income.

All equity securities that do not result in consolidation and are not accounted for under the equity method are measured at fair value with changes therein reflected in net income. Equity instruments that do not have readily determinable fair values and do not qualify for using the net asset value per share practical expedient in the “Fair Value Measurements and Disclosures” topic (Topic 820) of the FASB ASC are measured at cost, less any impairment.

Impairment Evaluation

Impairment losses are recognized upon evidence of other-than-temporary losses of value. When testing for impairment on investments that are not actively traded on a public market, we generally use a discounted cash flow approach to estimate the fair value of our investments and/or look to comparable activities in the marketplace. Management’s judgment is required in developing the assumptions for the discounted cash flow approach. These assumptions include net asset values, internal rates of return, discount and capitalization rates, interest rates and financing terms, rental rates, timing of leasing activity, estimates of lease terms and related concessions, etc. When determining if impairment is other-than-temporary, we also look to the length of time and the extent to which fair value has been less than cost as well as the financial condition and near-term prospects of each investment. Based on our review, we did not record any significant other-than-temporary impairment losses during the years ending December 31, 2019, 2018 and 2017.

64

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Use of Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S.), or GAAP, which require management to make estimates and assumptions about future events. These estimates and assumptions affect the amounts of assets, liabilities, revenue and expenses we report. Such estimates include the value of goodwill, intangibles and other long-lived 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 management’s best judgment, and are evaluated on an ongoing basis and adjusted, as needed, using historical experience and other factors, including consideration of the macroeconomic environment. As future events and their effects cannot be forecast with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Cash and Cash Equivalents

Cash and cash equivalents generally consist of cash and highly liquid investments with an original maturity of three months or less. Included in the accompanying consolidated balance sheets as of December 31, 2019 and 2018 is cash and cash equivalents of $70.5 million and $155.2 million, respectively, from consolidated funds and other entities, which are not available for general corporate use. We also manage certain cash and cash equivalents as an agent for our investment and property and facilities management clients. These amounts are not included in the accompanying consolidated balance sheets (see Fiduciary Funds discussion below).

Restricted Cash

Included in the accompanying consolidated balance sheets as of December 31, 2019 and 2018 is restricted cash of $122.0 million and $86.7 million, respectively. The balances primarily include restricted cash set aside to cover funding obligations as required by contracts executed by us in the ordinary course of business.

Fiduciary Funds

The accompanying consolidated balance sheets do not include the net assets of escrow, agency and fiduciary funds, which are held by us on behalf of clients and which amounted to $6.1 billion and $5.9 billion at December 31, 2019 and 2018, respectively.

Concentration of Credit Risk

Financial instruments that potentially subject us to credit risk consist principally of trade receivables and interest-bearing investments. Users of real estate services account for a substantial portion of trade receivables and collateral is generally not required. The risk associated with this concentration is limited due to the large number of users and their geographic dispersion.

We place substantially all of our interest-bearing investments with several major financial institutions to limit the amount of credit exposure with any one financial institution.

Property and Equipment

Property and equipment, which includes leasehold improvements, is stated at cost, net of accumulated depreciation. Depreciation and amortization of property and equipment is computed primarily using the straight-line method over estimated useful lives ranging up to 10 years. Leasehold improvements are amortized over the term of their associated leases, excluding options to renew, since such leases generally do not carry prohibitive penalties for non-renewal. We capitalize expenditures that significantly increase the life of our assets and expense the costs of maintenance and repairs.

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We review property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If this review indicates that such assets are considered to be impaired, the impairment is recognized in the period the changes occur and represents the amount by which the carrying value exceeds the fair value of the asset.

Certain costs related to the development or purchase of internal-use software are capitalized. Internal-use software costs that are incurred in the preliminary project stage are expensed as incurred. Significant direct consulting costs and certain payroll and related costs, which are incurred during the development stage of a project are generally capitalized and amortized over a three-year period (except for enterprise software development platforms, which range from three to seven years) when placed into production.

Real Estate

Classification and Impairment Evaluation

We classify real estate in accordance with the criteria of the “Property, Plant and Equipment” Topic of the FASB ASC (Topic 360) as follows: (i) real estate held for sale, which includes completed assets or land for sale in its present condition that meet all of Topic 360’s “held for sale” criteria; (ii) real estate under development (current), which includes real estate that we are in the process of developing that is expected to be completed and disposed of within one year of the balance sheet date; (iii) real estate under development (non-current), which includes real estate that we are in the process of developing that is expected to be completed and disposed of more than one year from the balance sheet date; or (iv) real estate held for investment, which consists of land on which development activities have not yet commenced and completed assets or land held for disposition that do not meet the “held for sale” criteria. Any asset reclassified from real estate held for sale to real estate under development (current or non-current) or real estate held for investment is recorded individually at the lower of its fair value at the date of the reclassification or its carrying amount before it was classified as “held for sale,” adjusted (in the case of real estate held for investment) for any depreciation that would have been recognized had the asset been continuously classified as real estate held for investment.

Real estate held for sale is recorded at the lower of cost or fair value less cost to sell. If an asset’s fair value less cost to sell, based on discounted future cash flows, management estimates or market comparisons, is less than its carrying amount, an allowance is recorded against the asset. Real estate under development and real estate held for investment are carried at cost less depreciation, as applicable. Buildings and improvements included in real estate held for investment are depreciated using the straight-line method over estimated useful lives, generally up to 39 years. Tenant improvements included in real estate held for investment are amortized using the straight-line method over the shorter of their estimated useful lives or terms of the respective leases. Land improvements included in real estate held for investment are depreciated over their estimated useful lives, up to 15 years.

A summary of our real estate assets is as follows (dollars in thousands):

 

 

 

December 31,

 

 

 

 

2019

 

 

 

2018

 

Real estate under development, current (included in other current assets)

 

$

14,757

 

 

$

—

 

Real estate and other assets held for sale (included in other current assets)

 

 

5,066

 

 

 

24

 

Real estate under development

 

 

185,508

 

 

 

4,586

 

Real estate held for investment (included in other assets, net)

 

 

8,101

 

 

 

9,923

 

Total real estate

 

$

213,432

 

 

$

14,533

 

 

Real estate under development and real estate held for investment are evaluated for impairment and losses are recorded when undiscounted cash flows estimated to be generated by an asset are less than the asset’s carrying amount. The amount of the impairment loss, if any, is calculated as the excess of the asset’s carrying value over its fair value, which is determined using a discounted cash flow analysis, management estimates or market comparisons.

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Cost Capitalization and Allocation

When acquiring, developing and constructing real estate assets, we capitalize recoverable costs. Capitalization begins when the activities related to development have begun and ceases when activities are substantially complete and the asset is available for occupancy. Recoverable costs capitalized include pursuit costs, or pre-acquisition/pre-construction costs, taxes and insurance, interest, development and construction costs and costs of incidental operations. We do not capitalize any internal costs when acquiring, developing and constructing real estate assets. We expense transaction costs for acquisitions that qualify as a business in accordance with the “Business Combinations” Topic of the FASB ASC (Topic 805). Pursuit costs capitalized in connection with a potential development project that we have determined not to pursue are written off in the period that determination is made.

At times, we purchase bulk land that we intend to sell or develop in phases. The land basis allocated to each phase is based on the relative estimated fair value of the phases before construction. We allocate construction costs incurred relating to more than one phase between the various phases; if the costs cannot be specifically attributed to a certain phase or the improvements benefit more than one phase, we allocate the costs between the phases based on their relative estimated sales values, where practicable, or other value methods as appropriate under the circumstances. Relative allocations of the costs are revised as the sales value estimates are revised.

When acquiring real estate with existing buildings, we allocate the purchase price between land, land improvements, building and intangibles related to in-place leases, if any, based on their relative fair values. The fair values of acquired land and buildings are determined based on an estimated discounted future cash flow model with lease-up assumptions as if the building was vacant upon acquisition. The fair value of in-place leases includes the value of lease intangibles for above or below-market rents and tenant origination costs, determined on a lease by lease basis. The capitalized values for both lease intangibles and tenant origination costs are amortized over the term of the underlying leases. Amortization related to lease intangibles is recorded as either an increase to or a reduction of rental income and amortization for tenant origination costs is recorded to amortization expense.

Disposition of Real Estate

We account for gains and losses on the sale of real estate and other nonfinancial assets or in substance nonfinancial assets to noncustomers that are not a output of our ordinary activities and are not a business in accordance with Topic 610-20, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets” Where we do not have a controlling financial interest in the entity that holds the transferred assets after the transaction, we derecognize the assets or in substance nonfinancial assets and recognize a gain or loss when control of the underlying assets transfer to the counterparty.

We may also dispose of real estate through the transfer of a long-term leasehold representing a major part of the remaining economic life of the property. We account for these transfers as sales-type leases in accordance with the “Leases” Topic of the FASB ASC (Topic 842) by derecognizing the carrying amount of the underlying asset, recognizing any net investment in the lease and recognizing selling profit or loss in net income.

Goodwill and Other Intangible Assets

Our acquisitions require the application of purchase accounting, which results in tangible and identifiable intangible assets and liabilities of the acquired entity being recorded at fair value. The difference between the purchase price and the fair value of net assets acquired is recorded as goodwill. The majority of our goodwill balance has resulted from our acquisition of CBRE Services, Inc. (CBRE Services) in 2001 (the 2001 Acquisition), our acquisition of Insignia Financial Group, Inc. (Insignia) in 2003 (the Insignia Acquisition), our acquisition of the Trammell Crow Company in 2006 (the Trammell Crow Company Acquisition), our acquisition of substantially all of the ING Group N.V. (ING) Real Estate Investment Management (REIM) operations in Europe and Asia, as well as substantially all of Clarion Real Estate Securities (CRES) in 2011 (collectively referred to as the REIM Acquisitions), our acquisition of Norland Managed Services Ltd (Norland) in 2013 (the Norland Acquisition), our acquisition of Johnson Controls, Inc. (JCI)’s Global Workplace Solutions (JCI-GWS) business in 2015, our acquisition of FacilitySource Holdings, LLC (FacilitySource) in 2018 and our acquisition of Telford Homes Plc (Telford) on October 1, 2019. Other intangible assets that have indefinite estimated useful lives that are not being

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amortized include certain management contracts identified in the REIM Acquisitions, a trademark, which was separately identified as a result of the 2001 Acquisition, as well as a trade name separately identified as a result of the REIM Acquisitions. The remaining other intangible assets primarily include customer relationships, mortgage servicing rights and trade names/trademarks, which are all being amortized over estimated useful lives ranging up to 20 years.

We are required to test goodwill and other intangible assets deemed to have indefinite useful lives for impairment at least annually, or more often if circumstances or events indicate a change in the impairment status, in accordance with FASB ASC Topic 350, “Intangibles – Goodwill and Other” (Topic 350). ASC paragraphs 350-20-35-3 through 35-3B permit, but do not require an entity to perform a qualitative assessment with respect to any of its reporting units to determine whether a quantitative impairment test is needed. Entities are permitted to assess based on qualitative factors whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the entity conducts the quantitative goodwill impairment test. If not, the entity does not need to apply the quantitative test. The qualitative test is elective and an entity can go directly to the quantitative test rather than making a more-likely-than-not assessment based on an evaluation of qualitative factors. When performing a quantitative test, we use a discounted cash flow approach to estimate the fair value of our reporting units. Management’s judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margin percentages, discount rates, etc.

Deferred Financing Costs

Costs incurred in connection with financing activities are generally deferred and amortized over the terms of the related debt agreements ranging up to ten years. Debt issuance costs related to a recognized debt liability are presented in the accompanying consolidated balance sheets as a direct deduction from the carrying amount of that debt liability. Amortization of these costs is charged to interest expense in the accompanying consolidated statements of operations. Accounting Standards Update (ASU) 2015-15, “Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” permits classifying debt issuance costs associated with a line of credit arrangement as an asset, regardless of whether there are any outstanding borrowings on the arrangement. Total deferred financing costs, net of accumulated amortization, related to our revolving line of credit have been included in other assets in the accompanying consolidated balance sheets and were $17.0 million and $18.3 million as of December 31, 2019 and 2018, respectively.

During 2019, we entered into an additional incremental assumption agreement with respect to our credit agreement which: (i) extended the maturity of the U.S. dollar tranche A term loans, (ii) extended the termination date of the revolving credit commitments available and (iii) made certain changes to the interest rates and fees applicable to such tranche A term loans and revolving credit commitments. During the year ended December 31, 2019, we incurred approximately $5.8 million of financing costs, of which $2.6 million were included in write-off of financing costs on extinguished debt in the accompanying consolidated statements of operations.

During 2018, we redeemed in full our $800.0 million aggregate outstanding principal amount of 5.00% senior notes. In connection with this early redemption, we incurred costs, including a $20.0 million premium paid and the write-off of $8.0 million of unamortized deferred financing costs, both of which were included in write-off of financing costs on extinguished debt in the accompanying consolidated statements of operations. Additionally, during 2018, we entered into an incremental term loan assumption agreement with respect to our credit agreement in connection with which we incurred approximately $1.6 million of financing costs.

During 2017, we entered into a credit agreement in connection with which we incurred approximately $8.0 million of financing costs.

See Note 11 for additional information on activities associated with our debt.

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Revenue Recognition

We account for revenue with customers in accordance with FASB ASC Topic, “Revenue from Contracts with Customers” (Topic 606). Topic 606 also includes Subtopic 340-40, “Other Assets and Deferred Costs – Contracts with Customers,” which requires deferral of incremental costs to obtain and fulfill a contract with a customer. We adopted the new revenue recognition guidance on January 1, 2018, using the full retrospective method. Revenue is recognized when or as control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

The following is a description of principal activities – separated by reportable segments – from which we generate revenue. For more detailed information about our reportable segments, see Notes 18 and 19.

Advisory Services

Our Advisory Services segment provides a comprehensive range of services globally, including property leasing, property sales, mortgage services, property management, project management services and valuation services.

Property Leasing and Property Sales

We provide strategic advice and execution for owners, investors, and occupiers of real estate in connection with the leasing of office, industrial and retail space. We also offer clients fully integrated property sales services under the CBRE Capital Markets brand. We are compensated for our services in the form of a commission and, in some instances may earn various forms of variable incentive consideration. Our commission is paid upon the occurrence of certain contractual event(s) which may be contingent. For example, a portion of our leasing commission may be paid upon signing of the lease by the tenant, with the remaining paid upon occurrence of another future contingent event (e.g. payment of first month’s rent or tenant move-in). For leases, we typically satisfy our performance obligation at a point in time when control is transferred; generally, at the time of the first contractual event where there is a present right to payment. We look to history, experience with a customer, and deal specific considerations as part of the most likely outcome estimation approach to support our judgement that the second contingency (if applicable) will be met. Therefore, we typically accelerate the recognition of the revenue associated with the second contingent event. For sales, our commission is typically paid at the closing of the sale, which represents transfer of control for services to the customer.

In addition to our commission, we may recognize other forms of variable consideration which can include, but are not limited to, commissions subject to concession or claw back and volume based discounts or rebates. We assess variable consideration on a contract by contract basis, and when appropriate, recognize revenue based on our assessment of the outcome (using the most likely outcome approach or weighted probability) and historical results, if comparable and representative. We recognize variable consideration if it is deemed probable that there will not be significant reversal in the future.

Mortgage Originations and Loan Sales

We offer clients commercial mortgage and structured financing services. Fees from services within our mortgage brokerage business that are in the scope of Topic 606 include fees earned for the brokering of commercial mortgage loans primarily through relationships established with investment banking firms, national and regional banks, credit companies, insurance companies and pension funds. We are compensated for our brokerage services via a fee paid upon successful placement of a commercial mortgage borrower with a lender who will provide financing. The fee earned is contingent upon the funding of the loan, which represents the transfer of control for services to the customer. Therefore, we typically satisfy our performance obligation at the point in time of the funding of the loan.

We also earn fees from the origination and sale of commercial mortgage loans for which the company retains the servicing rights. These fees are governed by the “Fair Value Measurements and Disclosures” topic (Topic 820) and “Transfers and Servicing” topic (Topic 860) of the FASB ASC. Upon origination of a mortgage loan held for

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sale, the fair value of the mortgage servicing rights (MSR) to be retained is included in the forecasted proceeds from the anticipated loan sale and results in a net gain (which is reflected in revenue). Upon sale, we record a servicing asset or liability based on the fair value of the retained MSR associated with the transferred loan. Subsequent to the initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value in other intangible assets in the accompanying consolidated balance sheets. They are amortized in proportion to and over the estimated period that the servicing income is expected to be received.

Property Management and Project Management Services

We provide property management services on a contractual basis for owners of and investors in office, industrial and retail properties. These services include construction management, marketing, building engineering, accounting and financial services. We are compensated for our services through a monthly management fee earned based on either a specified percentage of the monthly rental income, rental receipts generated from the property under management or a fixed fee. We are also often reimbursed for our administrative and payroll costs directly attributable to the properties under management. Property management services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is recognized at the end of each period for the fees associated with the services performed. The amount of revenue recognized is presented gross for any services provided by our employees, as we control them. We generally do not control third-party services delivered to property management clients. As such, we report revenues net of third-party reimbursements.

Project management services are often provided on a portfolio wide or programmatic basis. Revenues from project management services generally include fixed management fees, variable fees, and incentive fees if certain agreed-upon performance targets are met. Revenues from project management may also include reimbursement of payroll and related costs for personnel providing the services and subcontracted vendor costs. Project management services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is typically recognized at the end of each period for the fees associated with the services performed.

The amount of revenue recognized is presented gross for any services provided by our employees, as we control them. This is evidenced by our obligation for their performance and our ability to direct and redirect their work, as well as negotiate the value of such services. The amount of revenue recognized related to certain project management arrangements is presented gross (with offsetting expense recorded in cost of revenue) for reimbursements of costs of third-party services because we control those services that are delivered to the client. In the instances where we do not control third-party services delivered to the client, we report revenues net of the third-party reimbursements.

In addition to our management fee, we receive various types of variable consideration which can include, but is not limited to; key performance indicator bonuses or penalties which may be linked to subcontractor performance, gross maximum price, glidepaths, savings guarantees, shared savings, or fixed fee structures. We assess variable consideration on a contract by contract basis, and when appropriate, recognize revenue based on our assessment of the outcome (using the most likely outcome approach or weighted probability) and historical results, if comparable and representative. Using management assessment, historical results and statistics, we recognize revenue if it is deemed probable there will not be significant reversal in the future.

Valuation Services

We provide valuation services that include market-value appraisals, litigation support, discounted cash flow analyses, feasibility studies as well as consulting services such as property condition reports, hotel advisory and environmental consulting. We are compensated for valuation services in the form of a fee, which is payable on the occurrence of certain events (e.g., a portion on the delivery of a draft report with the remaining on the delivery of the final report). For consulting services, we may be paid based on the occurrence of time or event-based milestones (such as the delivery of draft reports). We typically satisfy our performance obligation for valuation services as services are rendered over time.

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Global Workplace Solutions

Our Global Workplace Solutions segment provides a broad suite of integrated, contractually-based outsourcing services globally for occupiers of real estate, including facilities management, project management and transaction services.

Facilities Management and Project Management Services

Facilities management involves the day-to-day management of client-occupied space and includes headquarter buildings, regional offices, administrative offices, data centers and other critical facilities, manufacturing and laboratory facilities, distribution facilities and retail space. Contracts for facilities management services are often structured so we are reimbursed for client-dedicated personnel costs and subcontracted vendor costs as well as associated overhead expenses plus a monthly fee, and, in some cases, annual incentives tied to agreed-upon performance targets, with any penalties typically capped. In addition, we have contracts for facilities management services based on fixed fees or guaranteed maximum prices. Fixed fee contracts are typically structured where an agreed upon scope of work is delivered for a fixed price while guaranteed maximum price contracts are structured with an agreed upon scope of work that will be provided to the client for a not to exceed price. Facilities management services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is typically recognized at the end of each period for the fees associated with the services performed.

Project management services are often provided on a portfolio wide or programmatic basis. Revenues from project management services generally includes fixed management fees, variable fees, and incentive fees if certain agreed-upon performance targets are met. Revenues from project management may also include reimbursement of payroll and related costs for personnel providing the services and subcontracted vendor costs. Project management services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is typically recognized at the end of each period for the fees associated with the services performed.

The amount of revenue recognized is presented gross for any services provided by our employees, as we control them. This is evidenced by our obligation for their performance and our ability to direct and redirect their work, as well as negotiate the value of such services. The amount of revenue recognized related to the majority of facilities management contracts and certain project management arrangements is presented gross (with offsetting expense recorded in cost of revenue) for reimbursements of costs of third-party services because we control those services that are delivered to the client. In the instances when we do not control third-party services delivered to the client, we report revenues net of the third-party reimbursements.

In addition to our management fee, we receive various types of variable consideration which can include, but is not limited to; key performance indicator bonuses or penalties which may be linked to subcontractor performance, gross maximum price, glidepaths, savings guarantees, shared savings, or fixed fee structures. We assess variable consideration on a contract by contract basis, and when appropriate, recognize revenue based on our assessment of the outcome (using the most likely outcome approach or weighted probability) and historical results, if comparable and representative. Using management assessment, historical results and statistics, we recognize revenue if it is deemed probable there will not be significant reversal in the future.

Transaction Services

We provide strategic advice and execution for occupiers of real estate in connection with the leasing, sale or acquisition of office, industrial and retail space. Within the Global Workplace Solutions business, transaction services are performed for account-based clients, often as a key part of an integrated suite of commercial real estate services (with leasing being the most meaningful revenue stream included in our Global Workplace Solutions revenue). Similar to the transaction services (leasing sale or acquisition of space) we perform in our Advisory Services segment, we are compensated for our services in the form of a commission whereby a portion of our leasing commission may be paid upon signing of the lease by the client, with the remaining paid upon occurrence of another future contingent event. We typically satisfy our performance obligation at a point in time when control is

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transferred; generally, at the time of the first contractual event where there is a present right to payment. We look to history, experience with a customer, and deal specific considerations as part of the most likely outcome estimation approach to support our judgement that the second contingency (if applicable) will be met. Therefore, we typically accelerate the recognition of the revenue associated with the second contingent event.

Real Estate Investments

Our Real Estate Investments segment is comprised of investment management services provided globally; development services in the U.S. and United Kingdom (U.K.) and a service designed to help property occupiers and owners meet the growing demand for flexible office space solutions on a global basis.

Investment Management Services

Our investment management services are provided to pension funds, insurance companies, sovereign wealth funds, foundations, endowments and other institutional investors seeking to generate returns and diversification through investment in real assets. We sponsor investment programs that span the risk/return spectrum in: North America, Europe, Asia and Australia. We are typically compensated in the form of a base management fee, disposition fees, acquisition fees and incentive fees in the form of performance fees or carried interest based on fund type (open or closed ended, respectively). For the base management fee, we typically satisfy the performance obligation as service is rendered over time pursuant to the series guidance. Consistent with the transfer of control for distinct, daily services to the customer, revenue is recognized at the end of each period for the fees associated with the services performed. For acquisition and disposition services, we typically satisfy the performance obligation at a point in time (at acquisition or upon disposition). For contracts with contingent fees, including performance fees, incentive fees and carried interest, we assess variable consideration on a contract by contract basis, and when appropriate, recognize revenue based on our assessment of the outcome (using the most likely outcome approach or weighted probability) and historical results, if comparable and representative. Revenue associated with performance fees and carried interest are typically constrained due to volatility in the real estate market, a broad range of possible outcomes, and other factors in the market that are outside of our control.

Development Services

Our development services consist of real estate development and investment activities in the United States to users of and investors in commercial real estate, as well as for our own account. In addition, with our recent acquisition of Telford Homes, we also develop residential-led, mixed-use sites in locations across London.

We pursue opportunistic, risk-mitigated development and investment in commercial real estate across a wide spectrum of property types, including: industrial, office and retail properties; healthcare facilities of all types (medical office buildings, hospitals and ambulatory surgery centers); and residential/mixed-use projects. We pursue development and investment activity on behalf of our clients on a fee basis with no, or limited, ownership interest in a property, in partnership with our clients through co-investment – either on an individual project basis or through programs with certain strategic capital partners or for our own account with 100% ownership. Development services represent a series of distinct daily services rendered over time. Consistent with the transfer of control for distinct, daily services to the customer, revenue is recognized at the end of each period for the fees associated with the services performed. Fees are typically payable monthly over the service term or upon contractual defined events, like project milestones. In addition to development fee revenue, we receive various types of variable consideration which can include, but is not limited to, contingent lease-up bonuses, cost saving incentives, profit sharing on sales and at-risk fees. We assess variable consideration on a contract by contract basis, and when appropriate, recognize revenue based on our assessment of the outcome (using the most likely outcome approach or weighted probability) and historical results, if comparable and representative. We accelerate revenue if it is deemed probable there will not be significant reversal in the future. Sales of real estate to customers which are considered an output of ordinary activities are recognized as revenue when or as control of the assets are transferred to the customer.

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Flexible-Space Solutions

Flexible-space solutions operations are conducted through our indirect wholly-owned subsidiary, CBRE Hana, LLC, which we also refer to as Hana. Hana develops and operates integrated, scalable, flexible workspaces, which contain office suites, conference rooms and event space and communal co-working space. Hana helps institutional property owners meet the rapidly growing demand from real estate occupiers for flexible office space solutions. Member services represent a series of distinct daily services rendered over time. Revenue is recognized at the end of each period for the fees associated with the services performed.

Accounts Receivable and Allowance for Doubtful Accounts

We record accounts receivable for our unconditional rights to consideration arising from our performance under contracts with customers. The carrying value of such receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. We estimate our allowance for doubtful accounts for specific accounts receivable balances based on historical collection trends, the age of outstanding accounts receivables and existing economic conditions associated with the receivables. Past-due accounts receivable balances are written off when our internal collection efforts have been unsuccessful. As a practical expedient, we do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised service to a customer and when the customer pays for that service will be one year or less. We do not typically include extended payment terms in our contracts with customers.

Remaining Performance Obligations

Remaining performance obligations represent the aggregate transaction prices for contracts where our performance obligations have not yet been satisfied. As of December 31, 2019, the aggregate amount of transaction price allocated to remaining performance obligations in our property leasing business was not significant. We apply the practical expedient related to remaining performance obligations that are part of a contract that has an original expected duration of one year or less and the practical expedient related to variable consideration from remaining performance obligations pursuant to the series guidance. All of our remaining performance obligations apply to one of these practical expedients.

Contract Assets and Contract Liabilities

Contract assets represent assets for revenue that has been recognized in advance of billing the customer and for which the right to bill is contingent upon something other than the passage of time. This is common for contingent portions of commissions in brokerage, development and construction revenue in development services and incentive fees present in various businesses. Billing requirements vary by contract but are generally structured around fixed monthly fees, reimbursement of employee and other third-party costs, and the achievement or completion of certain contingent events.

When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring services to the customer under the terms of the services contract, we record deferred revenue, which represents a contract liability. We recognize the contract liability as revenue once we have transferred control of service to the customer and all revenue recognition criteria are met.

Contract assets and contract liabilities are determined for each contract on a net basis. For contract assets, we classify the short-term portion as a separate line item within current assets and the long-term portion within other assets, long-term in the accompanying consolidated balance sheets. For contract liabilities, we classify the short-term portion as a separate line item within current liabilities and the long-term portion within other liabilities, long-term in the accompanying consolidated balance sheets.

Contract Costs

Contract costs primarily consist of upfront costs incurred to obtain or to fulfill a contract. These costs are typically found within our Global Workplace Solutions segment. Such costs relate to transition costs to fulfill

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contracts prior to services being rendered and are included within other intangible assets in the accompanying consolidated balance sheets. Capitalized transition costs are amortized based on the transfer of services to which the assets relate which can vary on a contract by contract basis, and are included in cost of revenue in the accompanying consolidated statement of operations. For contract costs that are recognized as assets, we periodically review for impairment.

Applying the contract cost practical expedient, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.

Business Promotion and Advertising Costs

The costs of business promotion and advertising are expensed as incurred. Business promotion and advertising costs of $76.1 million, $74.8 million and $63.1 million were included in operating, administrative and other expenses for the years ended December 31, 2019, 2018 and 2017, respectively.

Foreign Currencies

The financial statements of subsidiaries located outside the U.S. are generally measured using the local currency as the functional currency. The assets and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date, and income and expenses are translated at the average monthly rate. The resulting translation adjustments are included in the accumulated other comprehensive loss component of equity. Gains and losses resulting from foreign currency transactions are included in the results of operations.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive (loss) income. In the accompanying consolidated balance sheets, accumulated other comprehensive loss primarily consists of foreign currency translation adjustments, fees associated with the termination of interest rate swaps, unrealized gains (losses) on interest rate swaps, unrealized holding (losses) gains on available for sale debt securities and pension liability adjustments. Foreign currency translation adjustments exclude any income tax effect given that earnings of non-U.S. subsidiaries are deemed to be reinvested for an indefinite period of time (see Note 15).

Warehouse Receivables

Our wholly-owned subsidiary CBRE Capital Markets, Inc. (CBRE Capital Markets) is a Federal Home Loan Mortgage Corporation (Freddie Mac) approved Multifamily Program Plus Seller/Servicer and an approved Federal National Mortgage Association (Fannie Mae) Aggregation and Negotiated Transaction Seller/Servicer. In addition, CBRE Capital Markets’ wholly-owned subsidiary CBRE Multifamily Capital, Inc. (CBRE MCI) is an approved Fannie Mae Delegated Underwriting and Servicing (DUS) Seller/Servicer and CBRE Capital Markets’ wholly-owned subsidiary CBRE HMF, Inc. (CBRE HMF) is a U.S. Department of Housing and Urban Development (HUD) approved Non-Supervised Federal Housing Authority (FHA) Title II Mortgagee, an approved Multifamily Accelerated Processing (MAP) lender and an approved Government National Mortgage Association (Ginnie Mae) issuer of mortgage-backed securities (MBS). Under these arrangements, before loans are originated through proceeds from warehouse lines of credit, we obtain either a contractual loan purchase commitment from either Freddie Mac or Fannie Mae or a confirmed forward trade commitment for the issuance and purchase of a Fannie Mae or Ginnie Mae MBS that will be secured by the loans. The warehouse lines of credit are generally repaid within a one-month period when Freddie Mac or Fannie Mae buys the loans or upon settlement of the Fannie Mae or Ginnie Mae MBS, while we retain the servicing rights. Loans are funded at the prevailing market rates. We elect the fair value option for all warehouse receivables. At December 31, 2019 and 2018, all of the warehouse receivables included in the accompanying consolidated balance sheets were either under commitment to be purchased by Freddie Mac or had confirmed forward trade commitments for the issuance and purchase of Fannie Mae or Ginnie Mae mortgage-backed securities that will be secured by the underlying loans.

74

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Mortgage Servicing Rights (MSRs)

In connection with the origination and sale of mortgage loans with servicing rights retained, we record servicing assets or liabilities based on the fair value of the mortgage servicing rights on the date the loans are sold. Our MSRs are initially recorded at fair value. Subsequent to the initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value in other intangible assets in the accompanying consolidated balance sheets. They are amortized in proportion to and over the estimated period that net servicing income is expected to be received based on projections and timing of estimated future net cash flows.

Our initial recording of MSRs at their fair value resulted in net gains, as the fair value of servicing contracts that result in MSR assets exceeded the fair value of servicing contracts that result in MSR liabilities. The net assets and net gains are presented in the accompanying consolidated financial statements. The amount of MSRs recognized during the years ended December 31, 2019 and 2018 was as follows (dollars in thousands):

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

Beginning balance, mortgage servicing rights

 

$

424,470

 

 

$

373,131

 

Mortgage servicing rights recognized

 

 

182,443

 

 

 

173,737

 

Mortgage servicing rights sold

 

 

—

 

 

 

—

 

Amortization expense

 

 

(123,008

)

 

 

(115,743

)

Other

 

 

(413

)

 

 

(6,655

)

Ending balance, mortgage servicing rights

 

$

483,492

 

 

$

424,470

 

 

MSRs do not actively trade in an open market with readily available observable prices; therefore, fair value is determined based on certain assumptions and judgments, including the estimation of the present value of future cash flows realized from servicing the underlying mortgage loans. Management’s assumptions include the benefits of servicing (servicing fee income and interest on escrow deposits), inflation, the cost of servicing, prepayment rates, delinquencies, discount rates and the estimated life of servicing cash flows. The assumptions used are subject to change based on management’s judgments and estimates of changes in future cash flows and interest rates, among other things. The key assumptions used during the years ended December 31, 2019, 2018 and 2017 in measuring fair value were as follows:

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

 

 

2017

 

Discount rate

 

 

10.12

%

 

 

10.00

%

 

 

10.06

%

Conditional prepayment rate

 

 

10.34

%

 

 

8.89

%

 

 

8.88

%

 

The estimated fair value of our MSRs was $579.8 million and $554.2 million as of December 31, 2019 and 2018, respectively. Impairment is evaluated through a comparison of the carrying amount and fair value of the MSRs, and recognized with the establishment of a valuation allowance. We did not incur any impairment charges related to our MSRs during the years ended December 31, 2019, 2018 or 2017. No valuation allowance was created previously and we did not record a valuation allowance for MSRs in 2019 or 2018.

Included in revenue in the accompanying consolidated statements of operations are contractually specified servicing fees from loans serviced for others of $191.8 million, $167.5 million and $144.2 million for the years ended December 31, 2019, 2018 and 2017, respectively, and prepayment fees/late fees/ancillary income earned from loans serviced for others of $14.9 million, $15.9 million and $13.2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Accounting for Broker Draws

As part of our recruitment efforts relative to new U.S. brokers, we offer a transitional broker draw arrangement. Our broker draw arrangements generally last until such time as a broker’s pipeline of business is sufficient to allow him or her to earn sustainable commissions. This program is intended to provide the broker with a minimal amount of cash flow to allow adequate time for his or her training as well as time for him or her to develop business relationships. Similar to traditional salaries, the broker draws are paid irrespective of the actual revenues

75

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

generated by the broker. Often these broker draws represent the only form of compensation received by the broker. Furthermore, it is not our general policy to pursue collection of unearned broker draws paid under this arrangement. As a result, we have concluded that broker draws are economically equivalent to salaries paid and accordingly charge them to compensation expense as incurred. The broker is also entitled to earn a commission on completed revenue transactions. This amount is calculated as the commission that would have been payable under our full commission program, less any amounts previously paid to the broker in the form of a draw.

Stock-Based Compensation

We account for all employee awards under the fair value recognition provisions of the “Compensation – Stock Compensation” Topic of the FASB ASC (Topic 718). Topic 718 requires the measurement of compensation cost at the grant date, based upon the estimated fair value of the award, and requires amortization of the related expense over the employee’s requisite service period. We do not estimate forfeitures, but instead recognize forfeitures when they occur.

See Note 14 for additional information on our stock-based compensation plans.

Income Per Share

Basic income per share attributable to CBRE Group, Inc. is computed by dividing net income attributable to CBRE Group, Inc. shareholders by the weighted average number of common shares outstanding during each period. The computation of diluted income per share attributable to CBRE Group, Inc. generally further assumes the dilutive effect of potential common shares, which include stock options and certain contingently issuable shares. Contingently issuable shares consist of non-vested stock awards.

Income Taxes

Income taxes are accounted for under the asset and liability method in accordance with the “Accounting for Income Taxes” Topic of the FASB ASC (Topic 740). Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax basis of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured by applying enacted tax rates and laws and are released in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

We utilize a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates there is more than a 50% likelihood that the position will be sustained upon examination, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement.

The Tax Cuts and Jobs Act (the Tax Act) includes provisions for Global Intangible Low-Taxed Income (GILTI) wherein taxes on foreign earnings are imposed for more than a deemed return on tangible assets of foreign corporations. An accounting policy election allows to either: (i) account for GILTI as a component of tax expense in the period in which we are subject to the rules (the “period cost method”) or (ii) account for GILTI in our measurement of deferred taxes (the “deferred method”). During 2018, as a result of completing our analysis of the Tax Act, we made an accounting policy election to account for GILTI using the period cost method.

See Note 15 for additional information on income taxes.

76

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Self-Insurance

Our wholly-owned captive insurance company, which is subject to applicable insurance rules and regulations, insures our exposure related to workers’ compensation insurance, general liability insurance and automotive insurance for our U.S. operations risk on a primary basis and we purchase excess coverage from unrelated insurance carriers. The captive insurance company also insures primary risk relating to professional indemnity claims globally. Given the nature of these types of claims, it may take several years for resolution and determination of the cost of these claims. We are required to estimate the cost of these claims in our financial statements.

The estimates that we utilize to record our potential losses on claims are inherently subjective, and actual claims could differ from amounts recorded, which could result in increased or decreased expense in future periods. As of December 31, 2019 and 2018, our reserves for claims under these insurance programs were $125.8 million and $113.0 million, respectively, of which $1.8 million and $2.7 million, respectively, represented our estimated current liabilities.

Reclassifications

Certain reclassifications have been made to the 2018 and 2017 financial statements to conform with the 2019 presentation.

3.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

The FASB previously issued six ASUs related to leases. The ASUs issued were: (1) in February 2016, ASU 2016-02, “Leases (Topic 842)”, (2) in January 2018, ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842”, (3) in July 2018, ASU 2018-10, “Codification Improvements to Topic 842, Leases”, (4) in July 2018, ASU 2018-11, “Targeted Improvements”, (5) in December 2018, ASU 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors” and (6) in March 2019, ASU 2019-01, “Leases (Topic 842): Codification Improvements.” ASU 2016-02 requires lessees to recognize most leases on the balance sheet as liabilities, with corresponding right-of-use assets. For income statement recognition purposes, leases will be classified as either a finance or operating lease in a manner similar to the requirements under the previous lease accounting literature, but without relying upon the bright-line tests. The amendments in ASU 2018-01 specify how land easements are within the scope of Accounting Standards Codification (ASC) 842 and permit a practical expedient to not assess whether expired or existing land easements that were not previously accounted for as leases are leases under ASC 842. The amendments in ASU 2018-10 affect narrow aspects of the guidance issued in the amendments in ASU 2016-02. The amendments in ASU 2018-11 provide an optional method for adopting the new leasing guidance and provide lessors with a practical expedient to combine lease and associated non-lease components by class of underlying asset in contracts that meet certain criteria. The amendments in ASU 2018-20 provide an accounting policy election permitting lessors to treat certain sales and other similar taxes incurred as lessee costs, guidance on the treatment of certain lessor costs and guidance on recognizing variable payments for contracts with a lease and non-lease component. The amendments in ASU 2019-01 affect narrow aspects of the guidance issued in the amendments in ASU 2016-02. These ASUs are effective for annual periods in fiscal years beginning after December 15, 2018.

We adopted these ASUs in the first quarter of 2019 by using the optional transitional method associated with no adjustment to comparative period financial statements presented for prior periods. We elected certain practical expedients, including the package of transition practical expedients and the practical expedient to forego separating lease and non-lease components in our lessee contracts. We also made an accounting policy election to exempt short-term leases of 12 months or less from balance sheet recognition requirements associated with the new standard; fixed rental payments for short-term leases will be recognized as a straight-line expense over the lease term.

As a result of the adoption of the leasing guidance, the consolidated balance sheet as of January 1, 2019 reflected $1.2 billion of additional lease liabilities, along with corresponding right-of-use assets of $1.0 billion, reflecting adjustments for items such as prepaid and deferred rent, unamortized initial direct costs, and unamortized

77

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

lease incentive balances. The adoption of the leasing guidance did not have a material impact on our consolidated statements of operations.

As of January 1, 2019, we account for leases in accordance with Topic 842. The present value of lease payments, which are either fixed payments, in-substance fixed payments, or variable payments tied to an index or rate are recognized on the balance sheet with corresponding lease liabilities and right-of-use assets upon the commencement of the lease. These lease costs are expensed over the respective lease term in accordance with the classification of the lease (i.e. operating versus finance classification). Variable lease payments not tied to an index or rate are expensed as incurred and not subject to capitalization.

Recent Accounting Pronouncements Pending Adoption

The FASB issued four ASUs related to financial instruments – credit losses. The ASUs issued were: (1) in June 2016, ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):  Measurement of Credit Losses on Financial Instruments”, (2) in November 2018, ASU 2018-19 “Codification Improvements to Topic 326, Financial Instruments—Credit Losses”, (3) in May 2019, ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief” and (4) in November 2019, ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses.” ASU 2016-13 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. Additionally, ASU 2019-04, discussed further below, also includes amendments to ASU 2016-13. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leasing standard. ASU 2019-05 provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall. ASU 2019-11 clarifies guidance around how to report expected recoveries and reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities, among other narrow scope and technical improvements. These ASUs are effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We have completed our evaluation of ASU 2016-13, ASU 2018-19, ASU 2019-05 and ASU 2019-11 and concluded they will not have a material impact on our consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018‑14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This ASU is effective for fiscal years ending after December 15, 2020, with early adoption permitted. As ASU 2018-14 only revises disclosure requirements, it will not have any impact on our consolidated financial statements. We are evaluating the effect, if any, that ASU 2018‑14 will have on our disclosures, but do not expect it to have a material impact.

In November 2018, the FASB issued ASU 2018‑18, “Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606.” This ASU provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard and provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We have completed our evaluation of ASU 2018‑18 and concluded it will not have a material impact on our consolidated financial statements and related disclosures.

In April 2019, the FASB issued ASU 2019‑04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” The amendments in ASU 2019-04 clarify and improve areas of guidance related to the recently issued standards on financial instruments – credit losses, derivatives and hedging, and financial instruments. The amendments in this ASU that are related to financial instruments – credit losses are effective at the same time as the effective date of ASU 2016-13. We elected to early adopt the amendments in this ASU that are related to derivatives and hedging and financial instruments in the second quarter of 2019 and the adoption of these amendments did not have any impact

78

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

on our consolidated financial statements and related disclosures. We have completed our evaluation of the amendments in this ASU that are related to financial instruments – credit losses and concluded they will not have a material impact on our consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019‑12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” This ASU removes specific exceptions to the general principles in Topic 740 and improves and simplifies financial statement preparers’ application of income tax-related guidance. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2019‑12 will have on our consolidated financial statements and related disclosures, but do not expect it to have a material impact.

In January 2020, the FASB issued ASU 2020‑01, “Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint  Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” This ASU, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323 and clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2020‑01 will have on our consolidated financial statements and related disclosures.

4.

Telford Acquisition

On October 1, 2019, we acquired Telford to expand our real estate development business outside of the U.S. (Telford Acquisition). A leading developer of multifamily residential properties in the London area, Telford is reported in our Real Estate Investments segment. Telford shareholders received £3.50 per share in cash, valuing Telford at £267.1 million, or $328.5 million as of the acquisition date. The Telford Acquisition was funded with borrowings under our revolving credit facility.

The following represents a summary of the excess purchase price over the estimated fair value of net assets acquired (dollars in thousands):

 

Estimated purchase price

 

$

328,502

 

Less: Estimated fair value of net assets acquired (see table below)

 

 

297,669

 

Excess purchase price over estimated fair value of net assets

   acquired

 

$

30,833

 

 

The preliminary purchase accounting related to the Telford Acquisition has been recorded in the accompanying consolidated financial statements. The excess purchase price over the estimated fair value of net assets acquired has been recorded to goodwill. The goodwill arising from the Telford Acquisition consists largely of the synergies and economies of scale expected from combining the operations acquired from Telford with ours. We are currently assessing if any portion of the goodwill recorded in connection with the Telford Acquisition will be deductible for tax purposes, but do not expect any tax deductible goodwill to be significant. Given the complexity of the transaction, the calculation of the fair value of certain assets and liabilities acquired, primarily intangibles, real estate assets and income tax items, is still preliminary. The purchase price allocation is expected to be completed as soon as practicable, but no later than one year from the acquisition date. The following table summarizes the aggregate estimated fair values of the assets acquired and the liabilities assumed in the Telford Acquisition (dollars in thousands):

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CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

Assets Acquired:

 

 

 

 

Cash and cash equivalents

 

$

7,896

 

Receivables

 

 

6,993

 

Contract assets, current

 

 

31,850

 

Prepaid expenses

 

 

2,704

 

Property and equipment

 

 

2,637

 

Other intangible assets

 

 

26,749

 

Operating lease assets

 

 

6,488

 

Investments in unconsolidated subsidiaries

 

 

79,667

 

Non-current contract assets

 

 

8,015

 

Real estate under development

 

 

208,402

 

Deferred tax assets, net

 

 

2,857

 

Other assets (current and non-current)

 

 

99,429

 

Total assets acquired

 

 

483,687

 

Liabilities Assumed:

 

 

 

 

Accounts payable and accrued expenses

 

 

47,552

 

Compensation and employee benefits payable

 

 

1,580

 

Accrued bonus

 

 

3,274

 

Operating lease liabilities

 

 

941

 

Contract liabilities, current

 

 

1,949

 

Income taxes payable

 

 

1,813

 

Line of credit

 

 

110,687

 

Non-current operating lease liabilities

 

 

5,547

 

Other liabilities (current and non-current)

 

 

12,675

 

Total liabilities assumed

 

 

186,018

 

Estimated Fair Value of Net Assets Acquired

 

$

297,669

 

 

In connection with the Telford Acquisition, below is a summary of the preliminary estimate of the trademark acquired (dollars in thousands):

 

 

 

 

 

 

 

 

 

As of December 31, 2019

 

Asset Class

 

Amortization

Period

 

Amount

Assigned at

Acquisition

Date

 

 

Accumulated

Amortization and Foreign Currency Translation

 

 

Net Carrying

Value

 

Trademark

 

20 years

 

$

26,749

 

 

$

1,725

 

 

$

28,474

 

 

Upon close of the Telford Acquisition, we immediately repaid the line of credit assumed from Telford.

The accompanying consolidated statement of operations for the year ended December 31, 2019 includes revenue, operating income and operational net income of $97.5 million, $1.0 million and $1.4 million, respectively, attributable to the Telford Acquisition. This does not include direct transaction and integration costs of $15.0 million and amortization expense of $0.4 million related to the trademark acquired, all of which were incurred during the year ended December 31, 2019 in connection with the Telford Acquisition.

Unaudited pro forma results, assuming the Telford Acquisition had occurred as of January 1, 2018 for purposes of the pro forma disclosures for the years ended December 31, 2019 and 2018 are presented below. They include certain adjustments for increased amortization expense related to the trademark acquired (approximately $1.0 million and $1.5 million in 2019 and 2018, respectively) as well as increased interest expense (approximately $4.1 million in 2018) associated with borrowings under our revolving credit facility used to fund the acquisition.

Pro forma adjustments also include the removal of $15.0 million of direct costs incurred by us during the year ended December 31, 2019 as well as the tax impact of all pro forma adjustments for all periods presented. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the Telford Acquisition occurred on January 1, 2018 and may not be indicative of future operating results (dollars in thousands, except share data):

80

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

 

 

Year Ended December 31,

 

 

 

 

2019

 

 

 

2018

 

Revenue

 

$

24,158,427

 

 

$

21,803,506

 

Operating income

 

 

1,294,480

 

 

 

1,157,051

 

Net income attributable to CBRE Group, Inc.

 

 

1,321,097

 

 

 

1,121,469

 

Basic income per share:

 

 

 

 

 

 

 

 

Net income per share attributable to CBRE Group, Inc.

 

$

3.93

 

 

$

3.31

 

Weighted average shares outstanding for basic income per share

 

 

335,795,654

 

 

 

339,321,056

 

Diluted income per share:

 

 

 

 

 

 

 

 

Net income per share attributable to CBRE Group, Inc.

 

$

3.88

 

 

$

3.27

 

Weighted average shares outstanding for diluted income per share

 

 

340,522,871

 

 

 

343,122,741

 

 

5.

Warehouse Receivables & Warehouse Lines of Credit

A rollforward of our warehouse receivables is as follows (dollars in thousands):

 

Beginning balance at December 31, 2018

 

$

1,342,468

 

Origination of mortgage loans

 

 

19,389,979

 

Gains (premiums on loan sales)

 

 

64,002

 

Proceeds from sale of mortgage loans:

 

 

 

 

Sale of mortgage loans

 

 

(19,741,058

)

Cash collections of premiums on loan sales

 

 

(64,002

)

Proceeds from sale of mortgage loans

 

 

(19,805,060

)

Net increase in mortgage servicing rights included in warehouse

   receivables

 

 

1,669

 

Ending balance at December 31, 2019

 

$

993,058

 

 

The following table is a summary of our warehouse lines of credit in place as of December 31, 2019 and 2018 (dollars in thousands):

 

 

 

 

 

 

 

December 31, 2019

 

 

December 31, 2018

 

Lender

 

Current

Maturity

 

Pricing

 

Maximum

Facility

Size

 

 

Carrying

Value

 

 

Maximum

Facility

Size

 

 

Carrying

Value

 

JP Morgan Chase Bank, N.A. (JP Morgan) (1)

 

10/19/2020

 

daily one-month LIBOR plus 1.30%

 

$

985,000

 

 

$

267,075

 

 

$

985,000

 

 

$

871,680

 

JP Morgan (1)

 

10/19/2020

 

daily one-month LIBOR plus 2.75%

 

 

15,000

 

 

 

—

 

 

 

15,000

 

 

 

—

 

Capital One, N.A. (Capital One)

 

7/27/2020

 

daily one-month LIBOR plus 1.25%

 

 

200,000

 

 

$

39,538

 

 

 

325,000

 

 

 

120,195

 

Fannie Mae Multifamily As Soon As

   Pooled Plus Agreement and Multifamily

   As Soon As Pooled Sale Agreement

   (ASAP) Program (2)

 

Cancelable

anytime

 

daily one-month LIBOR plus 1.35%, with a

LIBOR floor of 0.35%

 

 

450,000

 

 

 

360,784

 

 

 

450,000

 

 

 

149,089

 

TD Bank, N.A. (TD Bank) (3)

 

6/30/2020

 

daily one-month LIBOR plus 1.15%

 

 

800,000

 

 

 

92,266

 

 

 

400,000

 

 

 

165,945

 

Bank of America, N.A. (BofA)

 

5/27/2020

 

daily one-month LIBOR plus 1.20%

 

 

350,000

 

 

 

189,465

 

 

 

—

 

 

 

—

 

BofA

 

5/27/2020

 

daily one-month LIBOR plus 1.15%

 

 

250,000

 

 

 

17,457

 

 

 

200,000

 

 

 

—

 

BofA

 

6/4/2019

 

daily one-month LIBOR plus 1.30%

 

 

—

 

 

 

—

 

 

 

225,000

 

 

 

21,852

 

MUFG Union Bank, N.A. (Union Bank) (4)

 

6/28/2020

 

daily one-month LIBOR plus 1.20%

 

 

350,000

 

 

 

10,590

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

$

3,400,000

 

 

$

977,175

 

 

$

2,600,000

 

 

$

1,328,761

 

 

(1)

Effective October 21, 2019, we amended this facility which extended the maturity date until October 19, 2020.

(2)

Effective February 6, 2020, the maximum facility size was temporarily increased from $450.0 million to $600.0 million, and will revert back to $450.0 million on March 1, 2020.

81

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

(3)

Effective July 1, 2019, this facility was amended with a revised interest rate of daily one-month LIBOR plus 1.15% and a maturity date of June 30, 2020. Effective August 1, 2019, this facility contained an accordion feature which provided for a temporary increase to $800.0 million, if needed, and expired on February 1, 2020. The temporary increase was never requested.

(4)

On June 28, 2019, we added a new warehouse facility for $200.0 million with Union Bank. This facility contains an accordion feature which allows for temporary increases not to exceed an additional $150.0 million. If utilized, the additional borrowings must be in predefined multiples and are not to occur more than three times within twelve consecutive months. Since inception, no short-term temporary increases have been requested. 

During the year ended December 31, 2019, we had a maximum of $2.5 billion of warehouse lines of credit principal outstanding.

6.

Variable Interest Entities (VIEs)

We hold variable interests in certain VIEs in our Real Estate Investments segment 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 December 31, 2019 and 2018, our maximum exposure to loss related to the VIEs which are not consolidated was as follows (dollars in thousands):

 

 

 

December 31,

 

 

 

 

2019

 

 

 

2018

 

Investments in unconsolidated subsidiaries

 

$

30,484

 

 

$

23,266

 

Other current assets

 

 

4,307

 

 

 

3,827

 

Co-investment commitments

 

 

29,696

 

 

 

22,363

 

Maximum exposure to loss

 

$

64,487

 

 

$

49,456

 

 

7.

Fair Value Measurements

Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a three-level fair 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 1 – Quoted prices in active markets for identical assets or liabilities.

 

•

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

•

Level 3 – Unobservable 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.

82

CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following tables present the fair value of assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018 (dollars in thousands):

 

 

 

As of December 31, 2019

 

 

 

Fair Value Measured and Recorded Using

 

 

 

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities

 

$

6,998

 

 

$

—

 

 

$

—

 

 

$

6,998

 

Debt securities issued by U.S. federal agencies

 

 

—

 

 

 

10,639

 

 

 

—

 

 

 

10,639

 

Corporate debt securities

 

 

—

 

 

 

29,098

 

 

 

—

 

 

 

29,098

 

Asset-backed securities

 

 

—

 

 

 

5,152

 

 

 

—

 

 

 

5,152

 

Collateralized mortgage obligations

 

 

—

 

 

 

2,222