UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2016
OR
For the Transition Period from to
Commission File Number 001 – 32205
CBRE GROUP, INC.
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
400 South Hope Street, 25th Floor
Los Angeles, California
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
The number of shares of Class A common stock outstanding at July 31, 2016 was 335,618,448.
June 30, 2016
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets at June 30, 2016 (Unaudited) and December 31, 2015
Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (Unaudited)
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 (Unaudited)
Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (Unaudited)
Consolidated Statement of Equity for the six months ended June 30, 2016 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
PART II—OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Item 6.
Exhibits
Signatures
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
Current Assets:
Cash and cash equivalents
Restricted cash
Receivables, less allowance for doubtful accounts of $45,685 and $46,606 at June 30, 2016 and December 31, 2015, respectively
Warehouse receivables
Income taxes receivable
Prepaid expenses
Other current assets
Total Current Assets
Property and equipment, net
Goodwill
Other intangible assets, net of accumulated amortization of $676,848 and $589,236 at June 30, 2016 and December 31, 2015, respectively
Investments in unconsolidated subsidiaries
Deferred tax assets, net
Other assets, net
Total Assets
Current Liabilities:
Accounts payable and accrued expenses
Compensation and employee benefits payable
Accrued bonus and profit sharing
Income taxes payable
Short-term borrowings:
Warehouse lines of credit (which fund loans that U.S. Government Sponsored Entities have committed to purchase)
Revolving credit facility
Other
Total short-term borrowings
Current maturities of long-term debt
Other current liabilities
Total Current Liabilities
Long-term debt, net of current maturities
Deferred tax liabilities, net
Non-current tax liabilities
Other liabilities
Total Liabilities
Commitments and contingencies
Equity:
CBRE Group, Inc. Stockholders’ Equity:
Class A common stock; $0.01 par value; 525,000,000 shares authorized; 335,575,365 and 334,230,496 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive loss
Total CBRE Group, Inc. Stockholders’ Equity
Non-controlling interests
Total Equity
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Revenue
Costs and expenses:
Cost of services
Operating, administrative and other
Depreciation and amortization
Total costs and expenses
Gain on disposition of real estate
Operating income
Equity income from unconsolidated subsidiaries
Other income (loss)
Interest income
Interest expense
Write-off of financing costs on extinguished debt
Income before provision for income taxes
Provision for income taxes
Net income
Less: Net income attributable to non- controlling interests
Net income attributable to CBRE Group, Inc.
Basic income per share:
Net income per share attributable to CBRE Group, Inc.
Weighted average shares outstanding for basic income per share
Diluted income per share:
Weighted average shares outstanding for diluted income per share
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive (loss) income:
Foreign currency translation (loss) gain
Amounts reclassified from accumulated other comprehensive loss to interest expense, net of tax
Unrealized (losses) gains on interest rate swaps, net of tax
Unrealized holding gains on available for sale securities, net of tax
Other, net
Total other comprehensive (loss) income
Comprehensive income
Less: Comprehensive income attributable to non-controlling interests
Comprehensive income attributable to CBRE Group, Inc.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash used in operating activities:
Amortization and write-off of financing costs on extinguished debt
Gain on sale of loans, servicing rights and other assets
Net realized and unrealized gain from investments
Provision for doubtful accounts
Compensation expense related to equity awards
Distribution of earnings from unconsolidated subsidiaries
Tenant concessions received
Purchase of trading securities
Proceeds from sale of trading securities
Decrease in receivables
Increase in prepaid expenses and other assets
Decrease in accounts payable and accrued expenses
Decrease in compensation and employee benefits payable and accrued bonus and profit sharing
Increase in income taxes receivable/payable
Increase (decrease) in other liabilities
Other operating activities, net
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
Acquisition of Global Workplace Solutions (GWS), including net assets acquired, intangibles and goodwill
Acquisition of businesses (other than GWS), including net assets acquired, intangibles and goodwill, net of cash acquired
Contributions to unconsolidated subsidiaries
Distributions from unconsolidated subsidiaries
Proceeds from the sale of servicing rights and other assets
Increase in restricted cash
Purchase of available for sale securities
Proceeds from the sale of available for sale securities
Other investing activities, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior term loans
Repayment of senior term loans
Proceeds from revolving credit facility
Repayment of revolving credit facility
Proceeds from notes payable on real estate held for sale and under development
Repayment of notes payable on real estate held for sale and under development
(Repayment of) proceeds from short-term borrowings and other loans, net
Shares repurchased for payment of taxes on equity awards
Proceeds from exercise of stock options
Non-controlling interest contributions
Non-controlling interest distributions
Payment of financing costs
Other financing activities, net
Net cash provided by (used in) financing activities
Effect of currency exchange rate changes on cash and cash equivalents
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS, AT END OF PERIOD
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
Income taxes, net
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CONSOLIDATED STATEMENT OF EQUITY
Balance at December 31, 2015
Restricted stock awards vesting (including tax benefit)
Compensation expense for equity awards
Unrealized losses on interest rate swaps, net of tax
Contributions from non-controlling interests
Distributions to non-controlling interests
Balance at June 30, 2016
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Readers of this Quarterly Report on Form 10-Q (Quarterly Report) should refer to the audited financial statements and notes to consolidated financial statements of CBRE Group, Inc., a Delaware corporation (which may be referred to in these financial statements as the “Company,” “we,” “us” and “our”), for the year ended December 31, 2015, which are included in our 2015 Annual Report on Form 10-K (2015 Annual Report), filed with the United States Securities and Exchange Commission (SEC) and also available on our website (www.cbre.com), since we have omitted from this Quarterly Report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to Note 2, Significant Accounting Policies, in the notes to consolidated financial statements in our 2015 Annual Report for further discussion of our significant accounting policies and estimates.
The accompanying consolidated financial statements have been prepared in accordance with the rules applicable to quarterly reports on Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (GAAP) for annual financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenue and expenses. Such estimates include the value of goodwill, intangibles and other long-lived assets, real estate assets, accounts receivable, investments in unconsolidated subsidiaries and assumptions used in the calculation of income taxes, retirement and other post-employment benefits, among others. These estimates and assumptions are based on our best judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including consideration of the current economic environment, and adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods. Certain reclassifications have been made to the 2015 financial statements to conform with the 2016 presentation.
The results of operations for the three and six months ended June 30, 2016 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2016.
Recent Accounting Pronouncements Pending Adoption
The Financial Accounting Standards Board (FASB) has recently issued four Accounting Standards Updates (ASUs) related to revenue recognition, all of which become effective for the Company on January 1, 2018. The ASUs issued are: (1) in May 2014, ASU 2014-09, “Revenue from Contracts with Customers (Topic 606);” (2) in March 2016, ASU 2016-08,“Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net);” (3) in April 2016, ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;” and (4) in May 2016, ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients.” ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and will replace most existing revenue recognition guidance under GAAP. This ASU permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
effect of this ASU on our ongoing financial reporting. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. We are evaluating the effect that ASU 2016-08 will have on our consolidated financial statements and related disclosures. ASU 2016-10 clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in ASU 2014-09. ASU 2016-12 clarifies guidance in certain narrow areas and adds some practical expedients. We do not believe the application of ASU 2016-10 and ASU 2016-12 will have a material impact on our consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU will significantly change the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities when the fair value option is elected. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is not permitted, except for the provisions related to the recognition of changes in fair value of financial liabilities when the fair value option is elected. We do not believe the adoption of ASU 2016-01 will have a material impact on our consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU requires lessees to recognize most leases on-balance sheet and mandates a modified retrospective transition method for all entities. This ASU is effective for annual periods in fiscal years beginning after December 15, 2018. We are evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-05, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” This ASU clarifies that a change in one of the parties to a derivative contract (through novation) that is part of a hedge accounting relationship does not, by itself, require designation of that relationship, as long as all other hedge accounting criteria continue to be met. This ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2016, with early adoption permitted. We do not believe the adoption of ASU 2016-05 will have a material impact on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-07, “Simplifying the Transition to the Equity Method of Accounting.” This ASU eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest (or degree of influence) in an investee triggers equity method accounting. ASU 2016-07 should be applied prospectively upon its effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. This ASU is effective for all entities for interim and annual periods in fiscal years beginning after December 15, 2016, with early application permitted. We do not believe the application of ASU 2016-07 will have a material impact on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2016-09 will have on our consolidated financial statements and related disclosures.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU is intended to improve financial reporting
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by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.
On September 1, 2015, CBRE, Inc., our wholly-owned subsidiary, pursuant to a Stock and Asset Purchase Agreement with Johnson Controls, Inc. (JCI), acquired JCI’s Global Workplace Solutions business (we refer to this transaction as the GWS Acquisition). The acquired GWS business is a market-leading provider of integrated facilities management solutions for major occupiers of commercial real estate and has significant operations around the world. The purchase price was $1.475 billion, paid in cash, with adjustments for working capital and other items.
The preliminary purchase accounting adjustments related to the GWS Acquisition have been recorded in the accompanying consolidated financial statements. The excess purchase price over the estimated fair value of net assets acquired has been recorded to goodwill. The goodwill arising from the GWS Acquisition consists largely of the synergies and economies of scale expected from combining the operations acquired from GWS with our business. Of the $852 million of goodwill recorded in connection with the GWS Acquisition, approximately $445 million is deductible for tax purposes. Given the complexity of the transaction, the calculation of the fair value of certain assets and liabilities acquired, including intangible assets and income tax items, is still preliminary. As a result, the assignment of goodwill to our reporting units has not been completed. We expect to complete the purchase price allocation and the assignment of goodwill to our reporting units as soon as practicable, but no later than one year from the acquisition date.
Unaudited pro forma results, assuming the GWS Acquisition had occurred as of January 1, 2015 for purposes of the 2015 pro forma disclosures, are presented below. They include certain adjustments for the three and six months ended June 30, 2015, including $16.9 million and $33.8 million, respectively, of increased amortization expense as a result of intangible assets acquired in the GWS Acquisition, $9.0 million and $19.3 million, respectively, of additional interest expense as a result of debt incurred to finance the GWS Acquisition, the removal of $4.8 million and $8.0 million, respectively, of direct costs incurred by us related to the GWS Acquisition, net of the tax impact during the period of these pro forma adjustments. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the GWS Acquisition occurred on January 1, 2015 and may not be indicative of future operating results (dollars in thousands, except share data):
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We hold variable interests in certain variable interest entities (VIEs) in our Global Investment Management and Development Services segments which are not consolidated as it was determined that we are not the primary beneficiary. Our involvement with these entities is in the form of equity co-investments and fee arrangements.
As of June 30, 2016 and December 31, 2015, our maximum exposure to loss related to the VIEs which are not consolidated was as follows (dollars in thousands):
Other assets, current
Co-investment commitments
Maximum exposure to loss
The “Fair Value Measurements and Disclosures”topic (Topic 820) of the FASB Accounting Standards Codification (ASC) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
There were no significant transfers in or out of Level 1 and Level 2 during the three and six months ended June 30, 2016 and 2015. There have been no significant changes to the valuation techniques and inputs used to develop the recurring fair value measurements from those disclosed in our 2015 Annual Report.
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The following tables present the fair value of assets and liabilities measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015 (dollars in thousands):
Assets
Available for sale securities:
Debt securities:
U.S. treasury securities
Debt securities issued by U.S. federal agencies
Corporate debt securities
Asset-backed securities
Collateralized mortgage obligations
Total debt securities
Equity securities
Total available for sale securities
Trading securities
Foreign currency exchange forward contracts
Total assets at fair value
Liabilities
Interest rate swaps
Securities sold, not yet purchased
Total liabilities at fair value
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Loan commitments
The following table provides additional information about fair value measurements for the Level 3 assets for the six months ended June 30, 2016 (dollars in thousands):
Balance, December 31, 2015
Net gains included in earnings
Settlements
Transfers into (out of) Level 3
Balance, June 30, 2016
There were no significant non-recurring fair value measurements recorded during the three and six months ended June 30, 2016 and 2015.
FASB ASC Topic 825, “Financial Instruments” requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Our financial instruments are as follows:
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Investments in unconsolidated subsidiaries are accounted for under the equity method of accounting. Our investment ownership percentages in equity method investments vary, generally ranging up to 5.0% in our Global Investment Management segment, up to 10.0% in our Development Services segment, and up to 50% in our other business segments.
Combined condensed financial information for the entities actually accounted for using the equity method is as follows (dollars in thousands):
Global Investment Management
Operating income (loss)
Net income (loss)
Development Services
Total
Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
Senior term loans, with interest ranging from 1.39% to 2.06%, due quarterly through 2022
5.00% senior notes due in 2023
4.875% senior notes due in 2026, net of unamortized discount
5.25% senior notes due in 2025, net of unamortized premium
Total long-term debt
Less: current maturities of long-term debt
Less: unamortized debt issuance costs
Total long-term debt, net of current maturities
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On January 9, 2015, CBRE Services, Inc. (CBRE), our wholly-owned subsidiary, entered into an amended and restated credit agreement (the 2015 Credit Agreement) with a syndicate of banks jointly led by Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and Credit Suisse AG. On March 21, 2016, we executed an amendment to the 2015 Credit Agreement which, among other things, extended the maturity on our revolving credit facility to March 2021 and increased the borrowing capacity under our revolving credit facility by $200.0 million.
The 2015 Credit Agreement is an unsecured credit facility that is jointly and severally guaranteed by us and substantially all of our material domestic subsidiaries. As of June 30, 2016, the 2015 Credit Agreement provided for the following: (1) a $2.8 billion revolving credit facility, which includes the capacity to obtain letters of credit and swingline loans and matures on March 21, 2021; (2) a $500.0 million tranche A term loan facility requiring quarterly principal payments, which began on June 30, 2015 and continue through maturity on January 9, 2020; (3) a $270.0 million tranche B-1 term loan facility requiring quarterly principal payments, which began on December 31, 2015 and continue through maturity on September 3, 2020; and (4) a $130.0 million tranche B-2 term loan facility requiring quarterly principal payments, which began on December 31, 2015 and continue through maturity on September 3, 2022.
Our 2015 Credit Agreement and the indentures governing our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes contain restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, create or permit liens on assets, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. Our 2015 Credit Agreement also requires us to maintain a minimum coverage ratio of EBITDA (as defined in the 2015 Credit Agreement) to total interest expense of 2.00x and a maximum leverage ratio of total debt less available cash to EBITDA (as defined in the 2015 Credit Agreement) of 4.25x as of the end of each fiscal quarter. On this basis, our coverage ratio of EBITDA to total interest expense was 12.15x for the trailing twelve months ended June 30, 2016, and our leverage ratio of total debt less available cash to EBITDA was 1.61x as of June 30, 2016.
Short-Term Borrowings
Revolving Credit Facility
As of June 30, 2016, we had $156.0 million of revolving credit facility principal outstanding under the 2015 Credit Agreement with a weighted average annual interest rate of 2.2% and which was included in short-term borrowings in the accompanying consolidated balance sheets. As of June 30, 2016, letters of credit totaling $2.0 million were outstanding under the revolving credit facility. These letters of credit, which reduce the amount we may borrow under the revolving credit facility, were primarily issued in the ordinary course of business. As of December 31, 2015, no amounts were outstanding under our revolving credit facility other than letters of credit totaling $2.0 million.
Warehouse Lines of Credit
CBRE Capital Markets has warehouse lines of credit with third-party lenders for the purpose of funding mortgage loans that will be resold, and a funding arrangement with Federal National Mortgage Association (Fannie Mae) for the purpose of selling a percentage of certain closed multifamily loans to Fannie Mae. These warehouse lines are recourse only to CBRE Capital Markets and are secured by our related warehouse receivables.
During the six months ended June 30, 2016, we had a maximum of $1.9 billion of warehouse lines of credit principal outstanding. As of June 30, 2016 and December 31, 2015, we had $839.3 million and $1.8 billion, respectively, of warehouse lines of credit principal outstanding, which are included in short-term borrowings in
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the accompanying consolidated balance sheets. Additionally, we had $847.7 million and $1.8 billion of mortgage loans held for sale (warehouse receivables) as of June 30, 2016 and December 31, 2015, respectively, included in the accompanying consolidated balance sheets, which substantially represented mortgage loans funded through the lines of credit that were either under commitment to be purchased by Federal Home Loan Mortgage Corporation (Freddie Mac) or had confirmed forward trade commitments for the issuance and purchase of Fannie Mae or Government National Mortgage Association (Ginnie Mae) mortgage backed securities that will be secured by the underlying loans.
We are a party to a number of pending or threatened lawsuits arising out of, or incident to, our ordinary course of business. We believe that any losses in excess of the amounts accrued therefor as liabilities on our financial statements are unlikely to be significant, but litigation is inherently uncertain and there is the potential for a material adverse effect on our financial statements if one or more matters are resolved in a particular period in an amount materially in excess of what we anticipated.
In January 2008, CBRE Multifamily Capital, Inc. (CBRE MCI), a wholly-owned subsidiary of CBRE Capital Markets, entered into an agreement with Fannie Mae under Fannie Mae’s Delegated Underwriting and Servicing Lender Program (DUS Program), to provide financing for multifamily housing with five or more units. Under the DUS Program, CBRE MCI originates, underwrites, closes and services loans without prior approval by Fannie Mae, and in selected cases, is subject to sharing up to one-third of any losses on loans originated under the DUS Program. CBRE MCI has funded loans subject to such loss sharing arrangements with unpaid principal balances of $13.5 billion at June 30, 2016. CBRE MCI, under its agreement with Fannie Mae, must post cash reserves or other acceptable collateral under formulas established by Fannie Mae to provide for sufficient capital in the event losses occur. As of June 30, 2016 and December 31, 2015, CBRE MCI had a $42.0 million and $35.0 million, respectively, letter of credit under this reserve arrangement, and had provided approximately $23.4 million and $21.8 million, respectively, of loan loss accruals. Fannie Mae’s recourse under the DUS Program is limited to the assets of CBRE MCI, which assets totaled approximately $300.6 million (including $130.7 million of warehouse receivables, a substantial majority of which are pledged against warehouse lines of credit and are therefore not available to Fannie Mae) at June 30, 2016.
We had outstanding letters of credit totaling $48.0 million as of June 30, 2016, excluding letters of credit for which we have outstanding liabilities already accrued on our consolidated balance sheet related to our subsidiaries’ outstanding reserves for claims under certain insurance programs as well as letters of credit related to operating leases. CBRE MCI’s letter of credit totaling $42.0 million as of June 30, 2016 referred to in the preceding paragraph represented the majority of the $48.0 million outstanding letters of credit as of such date. The remaining letters of credit are primarily executed by us in the ordinary course of business and expire at varying dates through June 2017.
We had guarantees totaling $55.0 million as of June 30, 2016, excluding guarantees related to pension liabilities, consolidated indebtedness and other obligations for which we have outstanding liabilities already accrued on our consolidated balance sheet, and excluding guarantees related to operating leases. The $55.0 million primarily represents guarantees executed by us in the ordinary course of business, including various guarantees of management and vendor contracts in our operations overseas, which expire at the end of each of the respective agreements.
In addition, as of June 30, 2016, we had issued numerous non-recourse carveout, completion and budget guarantees relating to development projects for the benefit of third parties. These guarantees are commonplace in our industry and are made by us in the ordinary course of our Development Services business. Non-recourse
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carveout guarantees generally require that our project-entity borrower not commit specified improper acts, with us potentially liable for all or a portion of such entity’s indebtedness or other damages suffered by the lender if those acts occur. Completion and budget guarantees generally require us to complete construction of the relevant project within a specified timeframe and/or within a specified budget, with us potentially being liable for costs to complete in excess of such timeframe or budget. However, we generally use “guaranteed maximum price” contracts with reputable, bondable general contractors with respect to projects for which we provide these guarantees. These contracts are intended to pass the risk to such contractors. While there can be no assurance, we do not expect to incur any material losses under these guarantees.
An important part of the strategy for our Global Investment Management business involves investing our capital in certain real estate investments with our clients. These co-investments generally total up to 2.0% of the equity in a particular fund. As of June 30, 2016, we had aggregate commitments of $36.5 million to fund future co-investments.
Additionally, an important part of our Development Services business strategy is to invest in unconsolidated real estate subsidiaries as a principal (in most cases co-investing with our clients). As of June 30, 2016, we had committed to fund $28.6 million of additional capital to these unconsolidated subsidiaries.
The calculations of basic and diluted income per share attributable to CBRE Group, Inc. shareholders are as follows (dollars in thousands, except share data):
Basic Income Per Share
Net income attributable to CBRE Group, Inc. shareholders
Basic income per share attributable to CBRE Group, Inc. shareholders
Diluted Income Per Share
Dilutive effect of contingently issuable shares
Dilutive effect of stock options
Diluted income per share attributable to CBRE Group, Inc. shareholders
For the three and six months ended June 30, 2016, 1,536,189 and 1,553,158, respectively, of contingently issuable shares were excluded from the computation of diluted income per share because their inclusion would have had an anti-dilutive effect.
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For the three and six months ended June 30, 2015, 47,082 of contingently issuable shares were excluded from the computation of diluted income per share because their inclusion would have had an anti-dilutive effect.
We report our operations through the following segments: (1) Americas; (2) Europe, Middle East and Africa (EMEA); (3) Asia Pacific; (4) Global Investment Management; and (5) Development Services.
The Americas segment is our largest segment of operations and provides a comprehensive range of services throughout the U.S. and in the largest regions of Canada and key markets in Latin America. The primary services offered consist of the following: property sales, property leasing, mortgage services, appraisal and valuation, property management and occupier outsourcing services.
Our EMEA and Asia Pacific segments generally provide services similar to the Americas business segment. The EMEA segment has operations primarily in Europe, while the Asia Pacific segment has operations in Asia, Australia and New Zealand.
Our Global Investment Management business provides investment management services to clients seeking to generate returns and diversification through direct and indirect investments in real estate in North America, Europe and Asia Pacific.
Our Development Services business consists of real estate development and investment activities primarily in the U.S.
Summarized financial information by segment is as follows (dollars in thousands):
Americas
EMEA
Asia Pacific
Total revenue
EBITDA
Total EBITDA
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EBITDA represents earnings before net interest expense, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization. EBITDA is not a recognized measurement under GAAP and when analyzing our operating performance, investors should use EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies.
We generally use EBITDA to evaluate operating performance and for other discretionary purposes, and we believe that this measure provides a more complete understanding of ongoing operations and enhances comparability of current results to prior periods. We further believe that investors may find EBITDA useful in evaluating our operating performance compared to that of other companies in our industry because EBITDA calculations generally eliminate the effects of acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions, the effects of financings and income taxes and the accounting effects of capital spending. EBITDA may vary for different companies for reasons unrelated to overall operating performance.
EBITDA is not intended to be a measure of free cash flow for our discretionary use because it does not consider certain cash requirements such as tax and debt service payments. EBITDA may also differ from the amount calculated under similarly titled definitions in our debt instruments, which amounts are further adjusted to reflect certain other cash and non-cash charges and are used by us to determine compliance with financial covenants therein and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.
Net interest expense and write-off of financing costs on extinguished debt have been expensed in the segment where incurred. Provision for income taxes has been allocated among our segments by using applicable U.S. and foreign effective tax rates. EBITDA for our segments is calculated as follows (dollars in thousands):
Add:
Interest expense, net
Royalty and management service income
Net income (loss) attributable to CBRE Group, Inc.
Royalty and management service expense (income)
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Interest (income) expense, net
Royalty and management service expense
The following condensed consolidating financial information includes condensed consolidating balance sheets as of June 30, 2016 and December 31, 2015 and condensed consolidating statements of operations, condensed consolidating statements of comprehensive income (loss) and condensed consolidating statements of cash flows for the three and six months ended June 30, 2016 and 2015 of:
Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and intercompany balances and transactions.
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CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2016
Receivables, net
Warehouse receivables (1)
Other intangible assets, net
Investments in consolidated subsidiaries
Intercompany loan receivable
Warehouse lines of credit (which fund loans that U.S. Government Sponsored Entities have committed to purchase) (1)
Long-Term Debt, net:
Long-term debt, net
Intercompany loan payable
Total Long-Term Debt, net
CBRE Group, Inc. Stockholders’ Equity
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AS OF DECEMBER 31, 2015
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CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2016
Operating (loss) income
Royalty and management service (income) expense
Income from consolidated subsidiaries
Income before (benefit of) provision for income taxes
(Benefit of) provision for income taxes
Less: Net income attributable to non-controlling interests
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FOR THE THREE MONTHS ENDED JUNE 30, 2015
Equity income (loss) from unconsolidated subsidiaries
25
FOR THE SIX MONTHS ENDED JUNE 30, 2016
26
FOR THE SIX MONTHS ENDED JUNE 30, 2015
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CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss):
Foreign currency translation loss
Amounts reclassified from accumulated other comprehensive loss to interest expense, net
Unrealized losses on interest rate swaps, net
Unrealized holding gains (losses) on available for sale securities, net
Total other comprehensive income (loss)
Comprehensive income (loss)
Comprehensive income (loss) attributable to CBRE Group, Inc.
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CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
Other comprehensive income:
Foreign currency translation gain
Unrealized gains on interest rate swaps, net
Total other comprehensive income
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Other comprehensive loss:
Unrealized holding gains on available for sale securities, net
Total other comprehensive loss
30
Unrealized holding (losses) gains on available for sale securities, net
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Acquisition of GWS, including net assets acquired, intangibles and goodwill
Decrease (increase) in restricted cash
Net cash provided by (used in) investing activities
Repayment of short-term borrowings and other loans, net
(Increase) decrease in intercompany receivables, net
Net cash (used in) provided by financing activities
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Acquisition of businesses, including net assets acquired, intangibles and goodwill, net of cash acquired
Proceeds from short-term borrowings, net
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This Quarterly Report on Form 10-Q (Quarterly Report) for CBRE Group, Inc. for the three months ended June 30, 2016 represents an update to the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2015. Accordingly, you should read the following discussion in conjunction with the information included in our Annual Report on Form 10-K for the year ended December 31, 2015 as well as the unaudited financial statements included elsewhere in this Quarterly Report.
In addition, the statements and assumptions in this Quarterly Report that are not statements of historical fact are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the next quarter and beyond. For important information regarding these forward-looking statements, please see the discussion below under the caption “Cautionary Note on Forward-Looking Statements.”
Overview
We are the world’s largest commercial real estate services and investment firm, based on 2015 revenue, with leading full-service operations in major metropolitan areas throughout the world. We offer a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multifamily and other types of commercial real estate. As of December 31, 2015, excluding independent affiliates, we operated in more than 400 offices worldwide with more than 70,000 employees providing commercial real estate services under the “CBRE” brand name, investment management services under the “CBRE Global Investors” brand name and development services under the “Trammell Crow Company” brand name. Our business is focused on several competencies, including commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage origination, sales and servicing, and structured finance) real estate investment management, valuation, development services and proprietary research. We generate revenue from both management fees (large multi-year portfolio and per-project contracts) and from commissions on transactions. We have been included in the Fortune 500 since 2008 (ranking #259 in 2016) and among the Fortune Most Admired Companies in the real estate sector for four consecutive years. In 2016, we were ranked by Forbesas the 15th best employer in America, and the International Association of Outsourcing Professionals (IAOP) has ranked us among the top outsourcing service providers across all industries for five consecutive years, including in 2016. Additionally, we were one of only two companies to be ranked in the top 12 in the Barron’s 500, which evaluates companies on growth and financial performance, in each of the past three years, including 2016.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that we believe to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, goodwill and other intangible assets, and income taxes can be found in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no material changes to these policies as of June 30, 2016.
New Accounting Pronouncements
See Note 2 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report.
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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 real estate market supply and demand, which may be affected by inflation. However, to date, we do not believe that general inflation has had a material impact upon our operations.
Items Affecting Comparability
When you read our financial statements and the information included in this Quarterly Report, you should consider that we have experienced, and continue to experience, several material trends and uncertainties that have affected our financial condition and results of operations that make it challenging to predict our future performance based on our historical results. We believe that the following material trends and uncertainties are crucial to an understanding of the variability in our historical earnings and cash flows and the potential for continued variability in the future.
Macroeconomic Conditions
Economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly. These include: overall economic activity and employment growth; interest rate levels and changes in interest rates; the cost and availability of credit; and the impact of tax, government and regulatory policies. Periods of economic weakness or recession, significantly rising interest rates, fiscal uncertainty, declining employment levels, decreasing demand for commercial real estate, falling real estate values, disruption to the global capital or credit markets, or the public perception that any of these events may occur, will negatively affect the performance of our business.
Compensation is our largest expense and the sales and leasing professionals in our advisory services business generally are paid on a commission and/or bonus basis that correlates with their revenue production. As a result, the negative effect of difficult market conditions on our operating margins is partially mitigated by the inherent variability of our compensation cost structure. In addition, when negative economic conditions have been particularly severe, we have moved decisively to lower operating expenses to improve financial performance, and then have restored certain expenses as economic conditions improved. Nevertheless, adverse global and regional economic trends could pose significant risks to the performance of our operations and our financial condition.
Commercial real estate markets have recovered over the past several years, along with the steady improvement in global economic activity, most particularly in the United States. Since 2010, U.S. leasing markets have been marked by increased demand for space, falling vacancies and higher rents. During this time, healthy U.S. property sales activity has been sustained by gradually improving market fundamentals, low-cost credit availability and increased global and domestic capital flows. Property sales volumes slowed in the first half of 2016 following several years of strong growth; however, the market remained active.
European economies began to emerge from recession in 2013, with most countries returning to positive, albeit modest, economic growth. Reflecting the macroeconomic environment, leasing markets in Europe were slow to recover, but have improved in many markets in 2015 and 2016. An exception is London where
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uncertainty in advance of and immediately after the United Kingdom’s referendum to leave the European Union, commonly referred to as “Brexit,” constrained occupier activity in the first half of 2016. Buoyed by low-cost credit and continued capital flows, Europe saw increased property sales activity in 2015. However, market activity slowed in 2016, primarily due to sharply lower volumes in the United Kingdom, reflecting uncertainty prior to and after the European Union referendum.
In Asia Pacific, the performance of real estate leasing and investment markets has varied from country to country amid slowing economic growth. In 2016, leasing markets have been mixed with notable strength in India, reflecting improved economic growth, while investment market activity has generally waned across the region. However, local capital from the Asia-Pacific region continues to migrate to other parts of the world.
Real estate investment management and property development markets have been generally favorable with abundant debt and equity capital flows into commercial real estate. Real estate equity securities markets have rebounded in 2016, after weakening in 2015 amid concerns about potentially higher interest rates.
The performance of our global sales, leasing, investment management and development services operations depends on sustained economic growth and job creation; stable, healthy global credit markets; and continued positive business and investor sentiment.
Effects of Acquisitions
We historically have made significant use of strategic acquisitions to add new service competencies, to increase our scale within existing competencies and to expand our presence in various geographic regions around the world. On September 1, 2015, CBRE, Inc., our wholly-owned subsidiary, pursuant to a Stock and Asset Purchase Agreement (the Purchase Agreement) with Johnson Controls, Inc. (JCI), acquired JCI’s Global Workplace Solutions (GWS) business (we refer to this transaction as the GWS Acquisition). The acquired GWS business is a market-leading provider of integrated facilities management solutions for major occupiers of commercial real estate and has significant operations around the world. The purchase price was $1.475 billion, paid in cash, with adjustments for working capital and other items. We completed the GWS Acquisition in order to advance our strategy of delivering globally integrated services to major occupiers in our Americas, EMEA and Asia Pacific segments. We merged the acquired GWS business with our existing occupier outsourcing business line, and the new combined business adopted the “Global Workplace Solutions” name.
Strategic in-fill acquisitions have also played a key role in expanding our geographic coverage and broadening and strengthening our service offerings. The companies we acquired have generally been regional or specialty firms that complement our existing platform, or independent affiliates in which, in some cases, we held a small equity interest. During 2015, we completed eight in-fill acquisitions, including a Seattle-based leader in capital markets services for affordable housing, a Texas-based commercial real estate firm specializing in retail services, an energy management specialist based in Brookfield, Wisconsin, a Chicago-based location data analytics firm, one of the leading retail real estate services firms in the midwestern United States, an advisory, consulting and research firm specializing in the Canadian hospitality and tourism industries and our former independent affiliate companies in Columbia, South Carolina, and Memphis, Tennessee. During the six months ended June 30, 2016, we completed two in-fill acquisitions, including the acquisition of our independent affiliate in Norway and a London-based retail property advisor specializing in the luxury goods retail sector.
Although we believe that strategic acquisitions can significantly decrease the cost, time and commitment of management resources necessary to attain a meaningful competitive position within targeted markets or to expand our presence within our current markets, in general, most acquisitions will initially have an adverse impact on our operating and net income. The adverse impact is a result of transaction-related expenditures, which include severance, lease termination, transaction and deferred financing costs, among others, and the charges and costs of integrating the acquired business and its financial and accounting systems into our own. In addition, our acquisition structures often include deferred and/or contingent purchase price payments in future periods that are
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subject to the passage of time or achievement of certain performance metrics and other conditions. As of June 30, 2016, we have accrued deferred consideration totaling $74.1 million, which is included in accounts payable and accrued expenses and in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 1 of this Quarterly Report.
International Operations
We are monitoring the economic and political developments related to Brexit and the potential impact on our businesses in the United Kingdom and the rest of Europe, including, in particular, sales and leasing activity in this uncertain market environment, as well as any associated currency volatility impact on our results of operations.
As we increase our international operations through either acquisitions or organic growth, fluctuations in the value of the U.S. dollar relative to the other currencies in which we may generate earnings could adversely affect our business, financial condition and operating results. Our Global Investment Management business has a significant amount of euro-denominated assets under management, or AUM, as well as associated revenue and earnings in Europe, which has recently seen more pronounced (and adverse) movement in the value of the euro against the U.S. dollar. Similarly, the GWS business also has a significant amount of its revenue and earnings denominated in foreign currencies, such as the euro and the British pound sterling, which has significantly declined in value as compared to the U.S. dollar and other currencies as a result of Brexit. Fluctuations in foreign currency exchange rates have resulted and may continue to result in corresponding fluctuations in our AUM, revenue and earnings.
During the six months ended June 30, 2016, approximately 47% of our business was transacted in non-U.S. dollar currencies, the majority of which included the Australian dollar, British pound sterling, Canadian dollar, Chinese yuan, euro, Hong Kong dollar, Indian rupee, Japanese yen, Mexican peso, Singapore dollar and Swiss franc. The following table sets forth our revenue derived from our most significant currencies (dollars in thousands):
United States dollar
British pound sterling
euro
Australian dollar
Canadian dollar
Indian rupee
Chinese yuan
Singapore dollar
Japanese yen
Swiss franc
Hong Kong dollar
Mexican peso
Other currencies
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 six months ended June 30, 2016, the net impact would have been an increase in pre-tax income of $1.6 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the six months ended June 30, 2016, the net impact would
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have been negligible on pre-tax income. These hypothetical calculations estimate the impact of translating results into U.S. dollars and do not include an estimate of the impact that a 10% change in the U.S. dollar against other currencies would have had on our foreign operations.
We enter into derivative financial instruments to attempt to protect the value or fix the amount of certain obligations in terms of our reporting currency, the U.S. dollar. In March 2014, we began a foreign currency exchange forward hedging program by entering into foreign currency exchange forward contracts, including agreements to buy U.S. dollars and sell Australian dollars, British pound sterling, Canadian dollars, euros and Japanese yen. The purpose of these forward contracts is to attempt to mitigate the risk of fluctuations in foreign currency exchange rates that would adversely impact some of our foreign currency denominated EBITDA. Hedge accounting was not elected for any of these contracts. As such, changes in the fair values of these contracts are recorded directly in earnings. Included in the consolidated statement of operations set forth in Item 1 of this Quarterly Report were net gains (losses) of $8.5 million and $1.0 million from foreign currency exchange forward contracts for the three and six months ended June 30, 2016, respectively, and ($11.1) million and $7.3 million from foreign currency exchange forward contracts for the three and six months ended June 30, 2015, respectively. As of June 30, 2016, we had 37 foreign currency exchange forward contracts outstanding covering a notional amount of $260.1 million.
Due to the constantly changing currency exposures to which we are subject and the volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results. In addition, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations. Our international operations also are subject to, among other things, political instability and changing regulatory environments, which affects the currency markets and which as a result may adversely affect our future financial condition and results of operations. We routinely monitor these risks and related costs and evaluate the appropriate amount of oversight to allocate towards business activities in foreign countries where such risks and costs are particularly significant.
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Results of Operations
The following table sets forth items derived from our consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):
Adjusted EBITDA
EBITDA represents earnings before net interest expense, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization. Amounts shown for Adjusted EBITDA further remove (from EBITDA) the impact of certain cash and non-cash charges related to acquisitions, cost-elimination expenses as well as certain carried interest incentive compensation expense. Neither EBITDA nor Adjusted EBITDA is a recognized measurement under United States generally accepted accounting principles, or GAAP, and when analyzing our operating performance, investors should use them in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of these measures may not be comparable to similarly titled measures of other companies.
We generally use these non-GAAP financial measures to evaluate operating performance and for other discretionary purposes, and we believe that these measures provide a more complete understanding of ongoing operations, enhance comparability of current results to prior periods and may be useful for investors to analyze
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our financial performance because they eliminate the impact of selected charges that may obscure trends in the underlying performance of our business. We further believe that investors may find these measures useful in evaluating our operating performance compared to that of other companies in our industry because their calculations generally eliminate the effects of acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions, the effects of financings and income taxes and the accounting effects of capital spending. EBITDA and Adjusted EBITDA may vary for different companies for reasons unrelated to overall operating performance.
These measures are not intended to be measures of free cash flow for our discretionary use because they do not consider certain cash requirements such as tax and debt service payments. These measures may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which amounts are further adjusted to reflect certain other cash and non-cash charges and are used by us to determine compliance with financial covenants therein and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments. We also use Adjusted EBITDA as a significant component when measuring our operating performance under our employee incentive compensation programs.
EBITDA and Adjusted EBITDA are calculated as follows (dollars in thousands):
Less:
Adjustments:
Integration and other acquisition related costs
Cost-elimination expenses
Carried interest incentive compensation (reversal) expense to align with the timing of associated revenue
Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015
We reported consolidated net income of $121.7 million for the three months ended June 30, 2016 on revenue of $3.2 billion as compared to consolidated net income of $125.0 million on revenue of $2.4 billion for the three months ended June 30, 2015.
Our revenue on a consolidated basis for the three months ended June 30, 2016 increased by $817.0 million, or 34.2%, as compared to the three months ended June 30, 2015. This increase was largely due to contributions from the GWS Acquisition, which added $690.3 million of revenue to the current-year quarter. Additionally, the revenue increase reflects strong organic growth, fueled by higher worldwide property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 11.9%), as well as increased commercial mortgage brokerage (up 14.1%) and leasing (up 5.2%) activity. These increases were partially offset by sales activity, which was down 4.7% in the second quarter, as well as foreign currency translation, which had a $28.1
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million negative impact on total revenue during the three months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling.
Our cost of services on a consolidated basis increased by $766.3 million, or 51.5%, during the three months ended June 30, 2016 as compared to the same period in 2015. This increase was primarily due to higher costs associated with our global property and facilities management businesses, particularly due to the GWS Acquisition. We also incurred $17.8 million of costs in connection with a cost-elimination project that began in the fourth quarter of 2015 to enhance margins going forward. These increases were partially offset by foreign currency translation, which had a $20.6 million positive impact on cost of services during the three months ended June 30, 2016. Cost of services as a percentage of revenue increased from 62.2% for the three months ended June 30, 2015 to 70.3% for the three months ended June 30, 2016, largely due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 64.5% for the three months ended June 30, 2016, compared to 62.2% for the three months ended June 30, 2015, partly driven by the aforementioned costs associated with our cost-elimination project.
Our operating, administrative and other expenses on a consolidated basis increased by $70.3 million, or 11.5%, during the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The increase was partly driven by costs associated with the GWS Acquisition. Additionally, we incurred $9.4 million of costs in connection with a project to eliminate costs to enhance margins going forward. Also contributing to the variance were higher bonuses primarily attributable to improved results in our Development Services segment. Foreign currency had a $25.5 million positive impact on total operating expenses during the three months ended June 30, 2016, which included $21.2 million in favorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, and $4.3 million from foreign currency translation. Operating expenses as a percentage of revenue decreased from 25.5% for the three months ended June 30, 2015 to 21.2% for the three months ended June 30, 2016, primarily due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, operating expenses as a percentage of revenue was 24.6% for the three months ended June 30, 2016 as compared to 25.3% for the same period in 2015, mainly driven by the aforementioned positive impact of foreign currency activity in the current year, partially offset by the impact of increased bonus expense in the current year associated with gains on property sales in our Development Services segment reflected outside of revenue (in equity income from unconsolidated subsidiaries) and the aforementioned costs associated with our cost-elimination project.
Our depreciation and amortization expense on a consolidated basis increased by $19.7 million, or 27.8%, during the three months ended June 30, 2016 as compared to the same period in 2015. This increase was primarily attributable to higher amortization expense relative to intangibles acquired in the GWS Acquisition.
Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $28.2 million, or 421.9%, for the three months ended June 30, 2016 as compared to the same period in 2015, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.
Our consolidated interest expense increased by $10.8 million, or 41.4%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. This increase was primarily driven by interest expense in the current year associated with $600.0 million of 4.875% senior notes issued in August 2015.
Our provision for income taxes on a consolidated basis was $64.0 million for the three months ended June 30, 2016 as compared to $76.5 million for the same period in 2015. This decrease was driven by the decline in pre-tax income during the three months ended June 30, 2016. Our effective tax rate, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, decreased to 34.5% for the three months ended June 30, 2016 compared to 38.0% for the three months ended June 30, 2015. We experienced a favorable change in earnings mix, with 61% of our earnings, after removing the portion attributable to non-controlling interests, forecasted from the United States for 2016 as of June 30, 2016 as compared to 68% forecasted for 2015 as of June 30, 2015, largely due to the impact of the GWS Acquisition. This benefit is offset, in part, by higher
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losses sustained in the current year in jurisdictions where no tax benefit could be provided. A favorable impact from discrete items recorded in the current-year quarter also contributed to the lower effective tax rate for the three months ended June 30, 2016.
Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015
We reported consolidated net income of $203.8 million for the six months ended June 30, 2016 on revenue of $6.1 billion as compared to consolidated net income of $218.0 million on revenue of $4.4 billion for the six months ended June 30, 2015.
Our revenue on a consolidated basis for the six months ended June 30, 2016 increased by $1.6 billion, or 36.3%, as compared to the six months ended June 30, 2015. This increase was largely due to contributions from the GWS Acquisition, which added $1.3 billion of revenue to the current-year period. Additionally, the revenue increase reflects strong organic growth, fueled by higher worldwide property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 11.4%), as well as increased leasing (up 10.4%), commercial mortgage brokerage (up 8.9%) and sales (up 1.3%) activity. Foreign currency translation had a $96.4 million negative impact on total revenue during the six months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the Australian dollar, British pound sterling and Canadian dollar.
Our cost of services on a consolidated basis increased by $1.5 billion, or 53.6%, during the six months ended June 30, 2016 as compared to same period in 2015. This increase was primarily due to higher costs associated with our global property and facilities management businesses, particularly due to the GWS Acquisition. In addition, our sales professionals generally are paid on a commission basis, which substantially correlates with our transaction revenue performance. Accordingly, the increase in sales and lease transaction revenue led to a corresponding increase in commission expense. Lastly, we incurred $22.4 million of costs in the current-year period in connection with our cost-elimination project. These increases were partially offset by foreign currency translation, which had a $67.4 million positive impact on cost of services during the six months ended June 30, 2016. Cost of services as a percentage of revenue increased from 62.5% for the six months ended June 30, 2015 to 70.5% for the six months ended June 30, 2016, largely due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 64.5% for the six months ended June 30, 2016, compared to 62.5% for the six months ended June 30, 2015, partly driven by the aforementioned costs incurred in connection with our cost-elimination project in the current-year period as well as by our mix of revenue, with a higher composition of revenue being non-commissionable in the prior-year period.
Our operating, administrative and other expenses on a consolidated basis increased by $181.9 million, or 15.9%, during the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was partly driven by costs associated with the GWS Acquisition. Also contributing to the variance were higher worldwide payroll-related costs (particularly bonuses largely attributable to improved results, most notably in our Development Services segment). Lastly, we incurred $17.2 million of costs in connection with our cost-elimination project. Foreign currency had a $25.9 million positive impact on total operating expenses during the six months ended June 30, 2016, which included $23.7 million of foreign currency translation and $2.2 million of favorable foreign currency transaction activity over the same period last year, much of which related to hedging activities. Operating expenses as a percentage of revenue decreased from 25.7% for the six months ended June 30, 2015 to 21.9% for the six months ended June 30, 2016, primarily due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, operating expenses as a percentage of revenue was 25.6% for the six months ended June 30, 2016 as compared to 25.5% for the same period in 2015, mainly driven by increased bonus expense in the current year associated with gains on property sales in our Development Services segment reflected outside of revenue (in equity income from unconsolidated subsidiaries) and the aforementioned costs associated with our cost-elimination project, partially offset by the positive impact of foreign currency in the current-year period.
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Our depreciation and amortization expense on a consolidated basis increased by $36.8 million, or 26.2%, during the six months ended June 30, 2016 as compared to the same period in 2015. This increase was primarily attributable to higher amortization expense relative to intangibles acquired in the GWS Acquisition.
Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $70.1 million, or 316.5%, for the six months ended June 30, 2016 as compared to the same period in 2015, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.
Our consolidated interest expense increased by $19.4 million, or 37.1%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. This increase was primarily driven by interest expense in the current year associated with $600.0 million of 4.875% senior notes issued in August 2015.
Our write-off of financing costs on extinguished debt on a consolidated basis was $2.7 million for the six months ended June 30, 2015. These costs included the write-off of $1.7 million of unamortized deferred financing costs associated with our prior credit agreement dated March 28, 2013, as amended, and $1.0 million of fees incurred in connection with our amended and restated credit agreement dated January 9, 2015, as amended (our 2015 Credit Agreement).
Our provision for income taxes on a consolidated basis was $114.2 million for the six months ended June 30, 2016 as compared to $133.4 million for the same period in 2015. This decrease was driven by the decline in pre-tax income during the six months ended June 30, 2016. Our effective tax rate, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, decreased to 35.9% for the six months ended June 30, 2016 compared to 38.0% for the six months ended June 30, 2015. We experienced a favorable change in earnings mix, with 61% of our earnings, after removing the portion attributable to non-controlling interests, forecasted from the United States for 2016 as of June 30, 2016 as compared to 68% forecasted for 2015 as of the same period in the prior year, largely due to the impact of the GWS Acquisition. This benefit is offset, in part, by higher losses sustained in the current year in jurisdictions where no tax benefit could be provided. A decrease in unfavorable discrete items recorded in the current-year period also contributed to the lower effective tax rate for the six months ended June 30, 2016.
Segment Operations
We report our operations through the following segments: (1) Americas; (2) Europe, Middle East and Africa (EMEA); (3) Asia Pacific; (4) Global Investment Management; and (5) Development Services. The Americas consists of operations located in the United States, Canada and key markets in Latin America. EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand. The Global Investment Management business consists of investment management operations in North America, Europe and Asia Pacific. The Development Services business consists of real estate development and investment activities primarily in the United States.
The following table summarizes our revenue, costs and expenses and operating income (loss) by our Americas, EMEA, Asia Pacific, Global Investment Management and Development Services operating segments for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):
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EBITDA (2)
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Revenue increased by $341.3 million, or 23.8%, for the three months ended June 30, 2016 compared to the three months ended June 30, 2015. This increase was in part due to contributions from the GWS Acquisition, which added $246.0 million of revenue to the current-year quarter. Additionally, the revenue increase reflects strong organic growth, fueled by higher property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 8.7%), as well as improved commercial mortgage brokerage and leasing activity. Foreign currency translation had a $9.4 million negative impact on revenue during the three months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the Brazilian real and Canadian dollar.
Cost of services increased by $307.1 million, or 33.2%, for the three months ended June 30, 2016 as compared to the same period in 2015, primarily due to higher costs associated with our global property and facilities management businesses, particularly due to the GWS Acquisition. This increase was also due to higher commission expense resulting from improved lease transaction revenue. Foreign currency translation had a $6.1 million positive impact on cost of services during the three months ended June 30, 2016. Cost of services as a percentage of revenue increased to 69.4% for the three months ended June 30, 2016 compared to 64.4% for the same period in 2015, largely due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 65.8% for the three months ended June 30, 2016, compared to 64.4% for the three months ended June 30, 2015.
Operating, administrative and other expenses increased by $37.8 million, or 12.5%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. The increase was largely driven by costs associated with the GWS Acquisition. Foreign currency had a $3.7 million positive impact on total operating expenses during the three months ended June 30, 2016, which included foreign currency translation of $2.1 million and favorable foreign currency transaction activity, mostly hedging related, of $1.6 million.
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Revenue increased by $376.1 million, or 64.2%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. This increase was largely due to contributions from the GWS Acquisition, which added $356.6 million of revenue to the current-year quarter. In addition, the revenue increase also reflects strong organic growth, fueled by higher property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 15.4%). This increase in revenue was partially offset by lower sales and leasing activity as well as foreign currency translation, which had a $12.8 million negative impact on total revenue during the three months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling, partially mitigated by strength in the euro.
Cost of services increased by $362.8 million, or 90.5%, for the three months ended June 30, 2016 as compared to the same period in 2015. This increase was primarily due to higher costs associated with our global property and facilities management businesses, particularly due to the GWS Acquisition. We also incurred $14.3 million of costs in the current year in connection with our cost-elimination project. These increases were partially reduced by foreign currency translation, which had a $10.2 million positive impact on cost of services during the three months ended June 30, 2016. Cost of services as a percentage of revenue increased to 79.4% for the three months ended June 30, 2016 from 68.5% for the three months ended June 30, 2015, largely due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 72.3% for the three months ended June 30, 2016, compared to 68.5% for the three months ended June 30, 2015, primarily driven by the aforementioned costs incurred in connection with our cost-elimination project.
Operating, administrative and other expenses increased by $16.2 million, or 11.1%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, primarily driven by higher costs associated with the GWS Acquisition. We also incurred $2.3 million of costs in the current-year quarter in connection with our cost-elimination project. These increases were partially mitigated by foreign currency, which had a $15.8 million positive impact on total operating expenses during the three months ended June 30, 2016, including $14.2 million in favorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, and $1.6 million from foreign currency translation.
Revenue increased by $94.5 million, or 36.1%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. Contributions from the GWS Acquisition, which added $87.8 million of revenue to the current-year quarter, drove the increase. The revenue increase also reflects strong organic growth, fueled by higher property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 16.4%) as well as improved leasing activity. This increase was partially offset by lower sales activity as well as by foreign currency translation, which had a $5.7 million negative impact on total revenue during the three months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the Australian dollar, Chinese yuan and Indian rupee, partly mitigated by strength in the Japanese yen.
Cost of services increased by $96.3 million, or 59.3%, for the three months ended June 30, 2016 as compared to the same period in 2015, mainly driven by higher costs associated with our property and facilities management businesses, particularly due to the GWS Acquisition. We also incurred $3.3 million of costs in the current year in connection with our cost-elimination project. These increases were partially offset by foreign currency translation, which had a $4.3 million positive impact on cost of services during the three months ended June 30, 2016. Cost of services as a percentage of revenue increased to 72.6% for the three months ended June 30, 2016 as compared to 62.1% for the same period in 2015, primarily due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 66.8% for the three months ended June 30, 2016, compared to 62.1% for the same period in 2015, primarily driven by the aforementioned costs incurred in connection with our cost-elimination project as well as due to our revenue mix,
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with outsourcing revenue, which has a lower margin than sales and lease revenue, being a higher percentage of revenue than in the prior year period.
Operating, administrative and other expenses increased by $7.5 million, or 10.8%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, primarily driven by costs associated with the GWS Acquisition. These costs were partially mitigated by foreign currency activity, which had a $1.8 million positive impact on total operating expenses during the three months ended June 30, 2016, including $1.1 million in favorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, and $0.7 million from foreign currency translation.
Revenue increased by $1.7 million, or 1.8%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015. This increase was primarily driven by higher acquisition fees in the current year. Foreign currency translation had a $0.2 million negative impact on total revenue during the three months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling.
Operating, administrative and other expenses decreased by $4.1 million, or 5.3%, for the three months ended June 30, 2016 as compared to the same period in 2015, primarily driven by lower carried interest expense incurred in the current-year quarter. Additionally, foreign currency had a $4.1 million positive impact on total operating expenses during the three months ended June 30, 2016, which included $4.2 million of favorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, partially offset by a $0.1 million negative impact of foreign currency translation. These declines in operating expenses in the current year were partially offset by the impact of $4.8 million of costs incurred in the current-year quarter in connection with our cost-elimination project.
A rollforward of our AUM by product type for the three months ended June 30, 2016 is as follows (dollars in billions):
Balance at April 1, 2016
Inflows
Outflows
Market (depreciation) appreciation
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:
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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.
Revenue increased by $3.5 million, or 24.1%, for the three months ended June 30, 2016 as compared to the three months ended June 30, 2015, primarily driven by higher development fees in the current year.
Operating, administrative and other expenses increased by $12.9 million, or 86.0%, for the three months ended June 30, 2016 as compared to the same period in 2015. This increase was primarily driven by higher bonuses in the current year as a result of significantly improved operating performance due to property sales (reflected in equity income from unconsolidated subsidiaries).
As of June 30, 2016, development projects in process totaled $7.1 billion, up $1.1 billion from the second quarter of 2015. The pipeline inventory totaled $3.0 billion, down $0.7 billion from a year ago, as development projects converted from pipeline to in-process.
Revenue increased by $697.2 million, or 26.2%, for the six months ended June 30, 2016 compared to the six months ended June 30, 2015. This increase was in part due to contributions from the GWS Acquisition, which added $487.6 million of revenue to the current-year period. Additionally, the revenue increase reflects strong organic growth, fueled by higher property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 7.9%), as well as improved leasing, sales and commercial mortgage brokerage activity. Foreign currency translation had a $24.2 million negative impact on revenue during the six months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the Brazilian real and Canadian dollar.
Cost of services increased by $619.4 million, or 36.2%, for the six months ended June 30, 2016 as compared to the same period in 2015, primarily due to higher costs associated with our global property and facilities management businesses, particularly due to the GWS Acquisition. This increase was also due to higher commission expense resulting from improved sales and lease transaction revenue. Foreign currency translation had a $16.1 million positive impact on cost of services during the six months ended June 30, 2016. Cost of services as a percentage of revenue increased to 69.4% for the six months ended June 30, 2016 compared to 64.3% for the same period in 2015, largely due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 65.7% for the six months ended June 30, 2016, compared to 64.3% for the six months ended June 30, 2015, partly driven by our mix of revenue, with a higher composition of revenue being non-commissionable in the prior year.
Operating, administrative and other expenses increased by $79.5 million, or 13.8%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. The increase was partly driven by costs associated with the GWS Acquisition as well as higher payroll-related costs, including an increase in 401(k) contributions in the United States, and expenses associated with our cost-elimination project. Higher software license and maintenance contract costs also contributed to the increase. Foreign currency had a $6.6 million positive impact on total operating expenses during the six months ended June 30, 2016, which included foreign currency translation of $6.5 million.
Revenue increased by $729.6 million, or 67.6%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. This increase was largely due to contributions from the GWS Acquisition,
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which added $684.1 million of revenue to the current-year period. In addition, the revenue increase also reflects strong organic growth, fueled by higher property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 15.0%). This increase in revenue was partially offset by lower sales activity as well as foreign currency translation, which had a $49.4 million negative impact on total revenue during the six months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling.
Cost of services increased by $684.0 million, or 89.6%, for the six months ended June 30, 2016 as compared to the same period in 2015. This increase was primarily due to higher costs associated with our global property and facilities management businesses, particularly due to the GWS Acquisition. We also incurred $18.0 million of costs in the current year in connection with our cost-elimination project. These increases were partially reduced by foreign currency translation, which had a $37.1 million positive impact on cost of services during the six months ended June 30, 2016. Cost of services as a percentage of revenue increased to 80.0% for the six months ended June 30, 2016 from 70.7% for the six months ended June 30, 2015, largely due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 72.8% for the six months ended June 30, 2016, compared to 70.7% for the six months ended June 30, 2015, primarily driven by the aforementioned costs incurred in connection with our cost-elimination project.
Operating, administrative and other expenses increased by $51.3 million, or 19.7%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015, primarily driven by higher costs associated with the GWS Acquisition. Higher payroll-related costs (including bonuses) in the current year also contributed to the variance. Lastly, we incurred $5.6 million of costs in the current-year period in connection with our previously mentioned cost-elimination project. These increases were partially mitigated by foreign currency, which had a $20.8 million positive impact on total operating expenses during the six months ended June 30, 2016, including $10.8 million in favorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, and $10.0 million from foreign currency translation.
Revenue increased by $194.6 million, or 41.4%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. Contributions from the GWS Acquisition, which added $172.8 million of revenue to the current-year period, drove the increase. The revenue increase also reflects strong organic growth, fueled by higher property, facilities and project management fees (excluding the impact of the GWS Acquisition, up 17.5%) as well as improved leasing activity. This increase was partially offset by lower sales activity as well as by foreign currency translation, which had a $19.0 million negative impact on total revenue during the six months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the Australian dollar and Indian rupee.
Cost of services increased by $185.7 million, or 61.1%, for the six months ended June 30, 2016 as compared to the same period in 2015, driven by higher costs associated with our property and facilities management businesses, including the acquired GWS business. We also incurred $3.6 million of costs in the current year in connection with our cost-elimination project. These increases were partially offset by foreign currency translation, which had a $14.2 million positive impact on cost of services during the six months ended June 30, 2016. Cost of services as a percentage of revenue increased to 73.6% for the six months ended June 30, 2016 as compared to 64.6% for the same period in 2015, primarily due to the GWS Acquisition. Excluding activity associated with the acquired GWS business, cost of services as a percentage of revenue was 67.8% for the six months ended June 30, 2016, compared to 64.6% for the same period in 2015, primarily driven by the aforementioned costs incurred in connection with our cost-elimination project as well as due to our revenue mix, with outsourcing revenue, which has a lower margin than sales and lease revenue, being a higher percentage of revenue than in the prior year period.
Operating, administrative and other expenses increased by $22.1 million, or 18.0%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015, mainly driven by costs associated with
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the GWS Acquisition. Additionally, foreign currency activity had an overall negative impact of $2.1 million for the six months ended June 30, 2016, including unfavorable foreign currency transaction activity, mostly hedging related, of $6.5 million, partially offset by foreign currency translation, which had a $4.4 million positive impact on total operating expenses.
Revenue decreased by $18.2 million, or 8.9%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015. This decrease was primarily driven by lower carried interest revenue as well as lower asset management and acquisition fees in the current year. Foreign currency translation had a $3.8 million negative impact on total revenue during the six months ended June 30, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling.
Operating, administrative and other expenses increased by $2.5 million, or 1.7%, for the six months ended June 30, 2016 as compared to the same period in 2015, primarily driven by higher payroll-related costs as well as $5.7 million of charges incurred in the current year in connection with our cost-elimination project. These increases were mostly offset by lower carried interest expense incurred in the current-year period. Additionally, foreign currency had a $3.0 million positive impact on total operating expenses during the six months ended June 30, 2016, which included a $2.8 million favorable impact of foreign currency translation.
A rollforward of our AUM by product type for the six months ended June 30, 2016 is as follows (dollars in billions):
Market appreciation (depreciation)
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.
Revenue increased by $8.0 million, or 29.9%, for the six months ended June 30, 2016 as compared to the six months ended June 30, 2015, primarily driven by higher development fees in the current year.
Operating, administrative and other expenses increased by $31.5 million, or 93.9%, for the six months ended June 30, 2016 as compared to the same period in 2015. This increase was primarily driven by higher bonuses in the current year as a result of significantly improved operating performance due to property sales (reflected in equity income from unconsolidated subsidiaries).
Liquidity and Capital Resources
We believe that we can satisfy our working capital requirements and funding of investments with internally generated cash flow and, as necessary, borrowings under our revolving credit facility. Our expected capital requirements for 2016 include up to approximately $195 million of anticipated capital expenditures, net of tenant concessions. During the six months ended June 30, 2016, we incurred $76.7 million of capital expenditures, net
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of tenant concessions received. As of June 30, 2016, we had aggregate commitments of $36.5 million to fund future co-investments in our Global Investment Management business, $30.9 million of which is expected to be funded in 2016. Additionally, as of June 30, 2016, we are committed to fund $28.6 million of additional capital to unconsolidated subsidiaries within our Development Services business, which we may be required to fund at any time. As of June 30, 2016, we had $2.6 billion of borrowings available under our $2.8 billion 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 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.
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 two elements. The first is the repayment of the outstanding and anticipated principal amounts of our long-term indebtedness. We are unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. If our cash flow is insufficient, 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.
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 June 30, 2016 and December 31, 2015, we had accrued $74.1 million and $79.7 million, 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 1 of this Quarterly Report.
Historical Cash Flows
Operating Activities
Net cash used in operating activities totaled $210.0 million for the six months ended June 30, 2016, an increase of $167.8 million as compared to the six months ended June 30, 2015. The increase in cash used in operating activities was primarily due to higher net payments to vendors and income taxes paid in the current year. An increase in receivables recorded in the current year and higher operating performance in the prior year also contributed to the variance. These items were partially offset by higher commissions accrued in the current year.
Investing Activities
Net cash used in investing activities totaled $39.5 million for the six months ended June 30, 2016, a decrease of $131.3 million as compared to the six months ended June 30, 2015. This variance was primarily
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driven by a greater amount paid for in-fill acquisitions in the prior year, higher distributions received from investments in unconsolidated subsidiaries in the current year and a lower increase in restricted cash in the first six months of 2016 versus the first half of 2015. These items were partially offset by an increase in capital expenditures in the current year.
Financing Activities
Net cash provided by financing activities totaled $141.5 million for the six months ended June 30, 2016, as compared to net cash used in financing activities of $180.5 million for the same period in 2015. This variance was primarily due to greater net borrowings under our revolving credit facility in the current year as well as higher net repayments of term loans under our credit agreement in the prior 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.
We maintain credit facilities with third-party lenders, which we use for a variety of purposes. On January 9, 2015, we entered into an amended and restated credit agreement (the 2015 Credit Agreement) with a syndicate of banks jointly led by Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and Credit Suisse AG. On March 21, 2016, we executed an amendment to our 2015 Credit Agreement that, among other things, extended the maturity on our revolving credit facility to March 2021 and increased the borrowing capacity under our revolving credit facility by $200.0 million.
The 2015 Credit Agreement is an unsecured credit facility that is jointly and severally guaranteed by us and substantially all of our material domestic subsidiaries. The 2015 Credit Agreement currently provides for the following: (1) a $2.8 billion revolving credit facility, which includes the capacity to obtain letters of credit and swingline loans and matures on March 21, 2021; (2) a $500.0 million tranche A term loan facility requiring quarterly principal payments, which began on June 30, 2015 and continue through maturity on January 9, 2020; (3) a $270.0 million tranche B-1 term loan facility requiring quarterly principal payments, which began on December 31, 2015 and continue through maturity on September 3, 2020; and (4) a $130.0 million tranche B-2 term loan facility requiring quarterly principal payments, which began on December 31, 2015 and continue through maturity on September 3, 2022. In prior years, we also issued 5.00%, 4.875% and 5.25% senior notes that are due in 2023, 2026 and 2025, respectively. For additional information on all of our long-term debt, see Note 10 of the Notes to Consolidated Financial Statements set forth in Item 8 included in our Annual Report on Form 10-K for the year ended December 31, 2015 and Note 7 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report.
We maintain a $2.8 billion revolving credit facility under our 2015 Credit Agreement and warehouse lines of credit with certain third-party lenders. For additional information on all of our short-term borrowings, see Note 10 of the Notes to Consolidated Financial Statements set forth in Item 8 included in our Annual Report on Form 10-K for the year ended December 31, 2015 and Note 7 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report.
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Interest Rate Swap Agreements
In March 2011, we entered into five interest rate swap agreements, all with effective dates in October 2011, and immediately designated them as cash flow hedges in accordance with Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) Topic 815, “Derivatives and Hedging.” The purpose of these interest rate swap agreements is to attempt to hedge potential changes to our cash flows due to the variable interest nature of our senior term loan facilities. The total notional amount of these interest rate swap agreements is $400.0 million, with $200.0 million expiring in October 2017 and $200.0 million expiring in September 2019. As of June 30, 2016 and December 31, 2015, the fair values of such interest rate swap agreements were reflected as a $22.8 million liability and $21.5 million liability, respectively, and were included in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 1 of this Quarterly Report.
In July 2015, we entered into three interest rate swap agreements with an aggregate notional amount of $300.0 million, all with effective dates in August 2015, and designated them as cash flow hedges in accordance with FASB ASC Topic 815. In August 2015, we elected to terminate these agreements and paid a $6.2 million cash settlement, which has been recorded to accumulated other comprehensive loss in the accompanying consolidated balance sheets set forth in Item 1 of this Quarterly Report. This settlement fee is being amortized to interest expense throughout the remaining term of the terminated hedge transaction until August 2025.
Off –Balance Sheet Arrangements
Our off-balance sheet arrangements are described in Note 8 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report and are incorporated by reference herein.
Cautionary Note on Forward-Looking Statements
This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 Quarterly Report to identify forward-looking statements. Except for historical information contained herein, the matters addressed in this Quarterly Report 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.
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:
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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 Securities and Exchange Commission.
The information in this section should be read in connection with the information on market risk related to changes in interest rates and non-U.S. currency exchange rates in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2015.
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 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815, “Derivatives and Hedging,” 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.
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 are U.S. dollars. See the discussion of international operations, which is included in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Items Affecting Comparability—International Operations” and is incorporated by reference herein.
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Interest Rates
We manage our interest expense by using a combination of fixed and variable rate debt. We enter into interest rate swap agreements to attempt to hedge the variability of future interest payments due to changes in interest rates. See discussion of our interest rate swap agreements, which is included in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Liquidity and Capital Resources—Indebtedness—Interest Rate Swap Agreements” and is incorporated by reference herein.
The estimated fair value of our senior term loans was approximately $864.4 million at June 30, 2016. Based on dealers’ quotes, the estimated fair values of our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes were $832.0 million, $620.5 million and $453.7 million, respectively, at June 30, 2016.
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 June 30, 2016, excluding notes payable on real estate, the net impact of the additional interest cost would be a decrease of $3.1 million on pre-tax income and an increase of $3.1 million in cash used in operating activities for the six months ended June 30, 2016.
Disclosure Controls and Procedures
Rule 13a-15 of the Securities and Exchange Act of 1934, as amended, requires that we conduct an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report, and we have a disclosure policy in furtherance of the same. This evaluation is designed to ensure that all corporate disclosure is complete and accurate in all material respects. The evaluation is further designed to ensure that all information required to be disclosed in our SEC reports is accumulated and communicated to management to allow timely decisions regarding required disclosures and recorded, processed, summarized and reported within the time periods and in the manner specified in the SEC’s rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Our Chief Executive Officer and Chief Financial Officer supervise and participate in this evaluation, and they are assisted by our Deputy Chief Financial Officer and Chief Accounting Officer and other members of our Disclosure Committee. In addition to our Deputy Chief Financial Officer and Chief Accounting Officer, our Disclosure Committee consists of our General Counsel, our chief communication officer, our corporate controller, our head of Global Internal Audit, our senior officers of significant business lines and other select employees.
We conducted the required evaluation, and our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined by Securities Exchange Act Rule 13a-15(e)) were effective as of the end of the period covered by this Quarterly Report to accomplish their objectives at the reasonable assurance level.
Changes in Internal Controls Over Financial Reporting
No changes in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There have been no material changes to our legal proceedings as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
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With the exception of the following, there have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.
The United Kingdom (U.K.) vote to exit from the European Union could significantly adversely impact our U.K. and other European businesses and our results of operations.
On June 23, 2016, U.K. citizens voted in a referendum to leave the European Union, commonly referred to as “Brexit.” The consequences of this vote, and the expected exit of the United Kingdom together with what may be protracted negotiations around the terms of such exit, could significantly impact the business environment in the United Kingdom and the rest of Europe and introduce significant new uncertainties in the markets in which we operate. The U.K. vote to leave the European Union has generated market volatility, with a significant decline in the value of British pound sterling against the U.S. dollar also occurring. Additional market and/or currency volatility may adversely impact our clients’ confidence and may result in a deterioration in our U.K. and other European businesses as leasing and investing activity slow down. A decline in business activity in the United Kingdom and the other European countries in which we operate as a result of the uncertain consequences of the U.K. vote, together with the volatility of the British pound sterling, could have a significant adverse effect on our U.K. and other European businesses and our results of operations.
Incorporated by Reference
ExhibitNo.
Exhibit Description
Form
SEC File No.
Exhibit
Filing Date
FiledHerewith
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58
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In the foregoing Exhibit Index, (1) references to CB Richard Ellis Group, Inc. are now to CBRE Group, Inc., (2) references to CB Richard Ellis Services, Inc. are now to CBRE Services, Inc., and (3) references to CB Richard Ellis, Inc. are now to CBRE, Inc.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ JAMES R. GROCH
/s/ GIL BOROK
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