UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______________ to _______________
Commission File Number 001 – 32205
CBRE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware
94-3391143
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification Number)
400 South Hope Street, 25th FloorLos Angeles, California
90071
(Address of principal executive offices)
(Zip Code)
(213) 613-3333
Not applicable
(Registrant's telephone number, including area code)
(Former name, former address andformer 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 ☒ 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 ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
The number of shares of Class A common stock outstanding at October 31, 2017 was 339,459,138.
September 30, 2017
TABLE OF CONTENTS
Page
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
Consolidated Balance Sheets at September 30, 2017 (Unaudited) and December 31, 2016
1
Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
2
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and2016 (Unaudited)
4
Consolidated Statement of Equity for the nine months ended September 30, 2017 (Unaudited)
5
Notes to Consolidated Financial Statements (Unaudited)
6
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
34
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
57
Item 4.
Controls and Procedures
58
PART II – OTHER INFORMATION
Legal Proceedings
59
Item 1A.
Risk Factors
Item 6.
Exhibits
Signatures
62
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
September 30,
December 31,
2017
2016
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents
$
955,605
762,576
Restricted cash
84,794
68,836
Receivables, less allowance for doubtful accounts of $47,596 and $39,469 at September 30,
2017 and December 31, 2016, respectively
2,843,126
2,605,602
Warehouse receivables
1,434,910
1,276,047
Income taxes receivable
66,386
45,626
Prepaid expenses
218,049
184,107
Other current assets
201,864
179,656
Total Current Assets
5,804,734
5,122,450
Property and equipment, net
574,266
560,756
Goodwill
3,135,208
2,981,392
Other intangible assets, net of accumulated amortization of $943,587 and $771,673 at
September 30, 2017 and December 31, 2016, respectively
1,400,699
1,411,039
Investments in unconsolidated subsidiaries
233,634
232,238
Deferred tax assets, net
94,250
105,324
Other assets, net
409,223
366,388
Total Assets
11,652,014
10,779,587
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable and accrued expenses
1,505,860
1,446,438
Compensation and employee benefits payable
763,554
772,922
Accrued bonus and profit sharing
727,066
890,321
Income taxes payable
82,106
58,351
Short-term borrowings:
Warehouse lines of credit (which fund loans that U.S. Government Sponsored
Enterprises have committed to purchase)
1,416,253
1,254,653
Other
16
Total short-term borrowings
1,416,269
1,254,669
Current maturities of long-term debt
10
11
Other current liabilities
56,512
102,717
Total Current Liabilities
4,551,377
4,525,429
Long-term debt, net of current maturities
2,551,568
2,548,126
Deferred tax liabilities, net
125,782
70,719
Non-current tax liabilities
17,851
54,042
Other liabilities
553,600
524,026
Total Liabilities
7,800,178
7,722,342
Commitments and contingencies
—
Equity:
CBRE Group, Inc. Stockholders’ Equity:
Class A common stock; $0.01 par value; 525,000,000 shares authorized; 339,459,138
and 337,279,449 shares issued and outstanding at September 30, 2017 and
December 31, 2016, respectively
3,395
3,373
Additional paid-in capital
1,192,855
1,145,226
Accumulated earnings
3,179,985
2,656,906
Accumulated other comprehensive loss
(580,765
)
(791,018
Total CBRE Group, Inc. Stockholders’ Equity
3,795,470
3,014,487
Non-controlling interests
56,366
42,758
Total Equity
3,851,836
3,057,245
Total Liabilities and Equity
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATONS
Three Months Ended
Nine Months Ended
Revenue
3,549,977
3,193,487
9,873,396
9,247,758
Costs and expenses:
Cost of services
2,513,377
2,252,783
6,919,018
6,520,629
Operating, administrative and other
704,898
686,530
2,023,503
2,010,338
Depreciation and amortization
102,591
92,725
297,014
269,987
Total costs and expenses
3,320,866
3,032,038
9,239,535
8,800,954
Gain on disposition of real estate
6,180
11,043
18,863
15,862
Operating income
235,291
172,492
652,724
462,666
Equity income from unconsolidated
subsidiaries
67,834
24,672
158,236
116,902
Other income
1,768
1,356
9,069
8,453
Interest income
3,129
1,020
6,967
5,545
Interest expense
34,483
37,273
103,923
109,050
Income before provision for income
taxes
273,539
162,267
723,073
484,516
Provision for income taxes
76,178
51,414
195,813
165,578
Net income
197,361
110,853
527,260
318,938
Less: Net income attributable to non-
controlling interests
1,044
6,690
4,181
10,940
Net income attributable to CBRE Group,
Inc.
196,317
104,163
523,079
307,998
Basic income per share:
Net income per share attributable to
CBRE Group, Inc.
0.58
0.31
1.55
0.92
Weighted average shares outstanding
for basic income per share
337,948,324
335,770,122
337,280,914
334,949,606
Diluted income per share:
1.54
0.91
for diluted income per share
341,186,431
338,488,975
340,502,432
338,053,297
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Other comprehensive income (loss):
Foreign currency translation gain
(loss)
64,711
(15,940
204,147
(101,654
Amounts reclassified from
accumulated other comprehensive
loss to interest expense, net of tax
1,260
1,720
4,148
5,196
Unrealized gains (losses) on interest
rate swaps, net of tax
25
788
102
(3,327
Unrealized holding gains on available
for sale securities, net of tax
339
348
2,239
993
Other, net
(4
(20
(757
Total other comprehensive income
66,331
(13,082
210,616
(99,549
Comprehensive income
263,692
97,771
737,876
219,389
Less: Comprehensive income
attributable to non-controlling interests
1,227
6,768
4,544
11,057
Comprehensive income attributable to
262,465
91,003
733,332
208,332
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of financing costs
7,371
8,302
Gains related to mortgage servicing rights, premiums on loan sales and sales of other assets
(131,062
(134,775
Net realized and unrealized gains from investments
(9,069
(8,453
Gain on disposition of real estate held for investment
(9,901
Equity income from unconsolidated subsidiaries
(158,236
(116,902
Provision for doubtful accounts
7,442
6,805
Compensation expense for equity awards
68,975
43,346
Proceeds from sale of mortgage loans
11,316,041
10,075,850
Origination of mortgage loans
(11,441,884
(9,917,310
Increase (decrease) in warehouse lines of credit
161,600
(131,690
Distribution of earnings from unconsolidated subsidiaries
17,612
19,982
Tenant concessions received
14,739
7,667
Purchase of trading securities
(61,813
(76,136
Proceeds from sale of trading securities
53,251
84,234
(Increase) decrease in receivables
(90,526
46,289
Increase in prepaid expenses and other assets
(82,673
(101,916
Decrease in real estate held for sale and under development
10,784
2,870
Decrease in accounts payable and accrued expenses
(4,876
(125,471
Decrease in compensation and employee benefits payable and accrued bonus and profit sharing
(224,798
(210,670
Increase in income taxes receivable/payable
(10,631
(66,589
Increase in other liabilities
1,162
8,807
Other operating activities, net
(20,415
(46,453
Net cash provided by (used in) operating activities
247,268
(53,189
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures
(101,606
(134,357
Acquisition of businesses (other than Global Workplace Solutions (GWS)), including net assets
acquired, intangibles and goodwill, net of cash acquired
(59,394
(22,066
Acquisition of GWS, including net assets acquired, intangibles and goodwill
(10,477
Contributions to unconsolidated subsidiaries
(36,659
(57,295
Distributions from unconsolidated subsidiaries
177,506
119,539
Net proceeds from disposition of real estate held for investment
44,326
Increase in restricted cash
(11,020
(1,623
Purchase of available for sale securities
(29,408
(31,413
Proceeds from the sale of available for sale securities
25,618
29,560
Other investing activities, net
1,156
24,185
Net cash used in investing activities
(33,807
(39,621
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior term loans
(23,125
Proceeds from revolving credit facility
911,000
2,195,000
Repayment of revolving credit facility
(911,000
(2,112,000
Proceeds from notes payable on real estate held for investment
79
7,274
Repayment of notes payable on real estate held for investment
(1,324
(33,516
Proceeds from notes payable on real estate held for sale and under development
3,341
15,110
Repayment of notes payable on real estate held for sale and under development
(10,777
(4,102
Units repurchased for payment of taxes on equity awards
(29,549
(27,796
Non-controlling interest contributions
3,410
1,478
Non-controlling interest distributions
(6,643
(12,800
Payment of financing costs
(21
(5,601
Other financing activities, net
(2,673
(761
Net cash used in financing activities
(44,157
(839
Effect of currency exchange rate changes on cash and cash equivalents
23,725
(408
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
193,029
(94,057
CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD
540,403
CASH AND CASH EQUIVALENTS, AT END OF PERIOD
446,346
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest
111,826
118,272
Income taxes, net
204,228
225,129
CONSOLIDATED STATEMENT OF EQUITY
CBRE Group, Inc. Shareholders
Accumulated
Class A
Additional
other
Non-
common
paid-in
comprehensive
controlling
stock
capital
earnings
loss
interests
Total
Balance at December 31, 2016
Non-cash issuance of common
stock related to acquisition
7,586
7,591
Compensation expense for
equity awards
Units repurchased for
payment of taxes
on equity awards
203,784
363
accumulated other
comprehensive loss to
interest expense, net of tax
Unrealized gains on interest
Unrealized holding gains on
available for sale
securities, net of tax
Contributions from non-
Distributions to non-
Acquisition of non-
12,671
17
617
(374
240
Balance at September 30, 2017
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation
Readers of this Quarterly Report on Form 10-Q (Quarterly Report) should refer to the audited financial statements and notes to consolidated financial statements of CBRE Group, Inc., a Delaware corporation (which may be referred to in these financial statements as the “company,” “we,” “us” and “our”), for the year ended December 31, 2016, which are included in our 2016 Annual Report on Form 10-K (2016 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 2016 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 (U.S.), or 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 2016 financial statements to conform with the 2017 presentation.
The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2017.
2.
New Accounting Pronouncements
Recent Accounting Pronouncements Pending Adoption
The Financial Accounting Standards Board (FASB) has recently issued five Accounting Standards Updates (ASUs) related to revenue recognition (“new revenue recognition guidance”), all of which will 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;” (4) in May 2016, ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients;” and (5) in December 2016, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers.” 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. ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
certain narrow areas and adds some practical expedients. ASU 2016-20 also clarifies guidance in certain narrow areas and adds optional exemptions to certain disclosure requirements.
We plan to adopt the new revenue recognition guidance in the first quarter of 2018 using the retrospective transition method. We continue to evaluate the impact that adoption of these updates will have on our consolidated financial statements and related disclosures. Based on our assessment, the impact of the application of the new revenue recognition guidance will result in an acceleration of some revenues that are based, in part, on future contingent events. For example, some brokerage revenues from leasing commissions in various countries where we operate will get recognized earlier. Under current GAAP, a portion of these commissions are deferred until a future contingency is resolved (e.g., tenant move-in or payment of first month’s rent). Under the new revenue guidance, the company’s performance obligation will be typically satisfied at lease signing and therefore the portion of the commission that is contingent on a future event will likely be recognized earlier if deemed not subject to significant reversal. We have evaluated the impact of the updated principal versus agent guidance on our consolidated financial statements in relation to third-party costs which are billed to clients in association with facilities management and project management services. We determined a significant amount of additional contracts will be accounted for on a gross basis, resulting in a significant gross up of third-party costs as compared to our current presentation, with no impact on profitability. This is driven by a change in the indicators used to assess if we control these third-party service providers.
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 the balance sheet as liabilities, with corresponding right-of-use assets. For income statement recognition purposes, leases will be classified as either a finance or operating lease in a manner similar to the requirements under the current lease accounting literature, but without relying upon the bright-line tests. This ASU is effective for annual periods in fiscal years beginning after December 15, 2018 and mandates a modified retrospective transition method for all entities. We plan to adopt ASU 2016-02 in the first quarter of 2019 and are currently evaluating the magnitude of its impact on our consolidated financial statements by reviewing our existing lease contracts and service contracts that may include embedded leases.
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 by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. At this point in time, we do not believe the adoption of ASU 2016-15 will have a material impact on our consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This ASU requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. At this point in
7
time, we do not believe the adoption of ASU 2016-16 will have a material impact on our consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.” This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. At this point in time, we do not believe the adoption of ASU 2016-18 will have a material impact on our consolidated financial statements and related disclosures.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” This ASU eliminates Step 2 from the goodwill impairment test. This ASU also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. 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 2017-04 will have on our goodwill assessment process, but do not believe the adoption of ASU 2017-04 will have a material impact on our consolidated financial statements and related disclosures.
In February 2017, the FASB issued ASU 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets.” This ASU clarifies that a financial asset is within the scope of Subtopic 610-20 if it meets the definition of an in substance nonfinancial asset and also defines the term in substance nonfinancial asset. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years. At this point in time, we do not believe the adoption of ASU 2017-05 will have a material impact on our consolidated financial statements and related disclosures.
In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” This ASU requires the premium to be amortized to the earliest call date. This ASU does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2017-08 will have on our consolidated financial statements and related disclosures.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” This ASU refines and expands hedge accounting for both financial and commodity risks. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are evaluating the effect that ASU 2017-12 will have on our consolidated financial statements and related disclosures.
3.
Warehouse Receivables & Warehouse Lines of Credit
Our wholly-owned subsidiary CBRE Capital Markets, Inc. (CBRE Capital Markets) is a Federal Home Loan Mortgage Corporation (Freddie Mac) approved Multifamily Program Plus Seller/Servicer and an approved Federal National Mortgage Association (Fannie Mae) Aggregation and Negotiated Transaction Seller/Servicer. In addition, CBRE Capital Markets’ wholly-owned subsidiary CBRE Multifamily Capital, Inc. (CBRE MCI) is an approved Fannie Mae Delegated Underwriting and Servicing (DUS) Seller/Servicer and CBRE Capital Markets’ wholly-owned subsidiary CBRE HMF, Inc. (CBRE HMF) is a U.S. Department of Housing and Urban Development (HUD) approved Non-Supervised Federal Housing Authority (FHA) Title II Mortgagee, an approved Multifamily Accelerated Processing (MAP) lender and an approved Government National Mortgage Association (Ginnie Mae) issuer of mortgage-backed securities (MBS). Under these arrangements, before loans are originated through proceeds from warehouse lines of credit, we obtain either a contractual loan purchase commitment from either Freddie Mac or Fannie Mae or a confirmed forward trade commitment for the issuance and purchase of a Fannie
8
Mae or Ginnie Mae MBS that will be secured by the loans. Loans funded from the warehouse lines of credit are generally repaid within a one-month period, on average, when Freddie Mac or Fannie Mae buys the loans or upon settlement of the Fannie Mae or Ginnie Mae MBS, while we retain the servicing rights. Such loans are funded at the prevailing market rates. The warehouse lines of credit are recourse only to CBRE Capital Markets and are secured by our related warehouse receivables. We elect the fair value option for all warehouse receivables. At September 30, 2017 and December 31, 2016, all of the warehouse receivables included in the accompanying consolidated balance sheets were either under commitment to be purchased by Freddie Mac or had confirmed forward trade commitments for the issuance and purchase of Fannie Mae or Ginnie Mae mortgage-backed securities that will be secured by the underlying loans.
A rollforward of our warehouse receivables is as follows (dollars in thousands):
Beginning balance at January 1, 2017
11,441,884
Gains (premiums on loan sales)
32,711
Sale of mortgage loans
(11,283,330
Cash collections of premiums on loan sales
(32,711
(11,316,041
Net increase in mortgage servicing rights included
in warehouse receivables
309
Ending balance at September 30, 2017
9
The following table is a summary of our warehouse lines of credit in place as of September 30, 2017 and December 31, 2016 (dollars in thousands):
December 31, 2016
Maximum
Lender
Current
Maturity
Pricing
Facility
Size
Carrying
Value
JP Morgan Chase Bank, N.A.
(JP Morgan) (1)
2/28/2017
daily one-month LIBOR plus 1.45%
300,000
275,945
JP Morgan (2)
10/23/2017
800,000
704,908
700,000
daily one-month LIBOR plus 2.75%
25,000
1,487
3,768
Bank of America (BofA) (1)
1/30/2017
daily one-month LIBOR plus 1.60%
BofA
6/5/2018
daily one-month LIBOR plus 1.40%
225,000
155,744
200,000
18,555
Fannie Mae Multifamily As Soon
As Pooled Plus Agreement and
Multifamily As Soon As Pooled
Sale Agreement (ASAP) Program
(1)
1/17/2017
daily one-month LIBOR plus 1.35%, with a LIBOR floor of 0.35%
Fannie Mae ASAP Program
Cancelable
anytime
450,000
111,160
TD Bank, N.A. (TD Bank) (1)
daily one-month LIBOR plus 1.35%
375,000
154,032
TD Bank
6/30/2018
daily one-month LIBOR plus 1.25%
400,000
366,600
Capital One, N.A. (Capital One) (1)
1/23/2017
250,000
191,193
Capital One
7/27/2018
93,264
2,100,000
3,400,000
Temporary facility to accommodate year-end volume.
(2)
On October 23, 2017, this agreement was amended to extend the maturity date to October 22, 2018.
During the nine months ended September 30, 2017, we had a maximum of $1.4 billion of warehouse lines of credit principal outstanding.
4.
Variable Interest Entities (VIEs)
We hold variable interests in certain VIEs in our Global Investment Management and Development Services segments which are not consolidated as it was determined that we are not the primary beneficiary. Our involvement with these entities is in the form of equity co-investments and fee arrangements.
As of September 30, 2017 and December 31, 2016, our maximum exposure to loss related to the VIEs which are not consolidated was as follows (dollars in thousands):
32,003
31,041
Co-investment commitments
4,425
168
3,301
3,314
Maximum exposure to loss
39,729
34,523
5.
Fair Value Measurements
The “Fair Value Measurements and Disclosures” topic (Topic 820) of the FASB Accounting Standards Codification defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
•
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
There were no significant transfers in or out of Level 1 and Level 2 during the three and nine months ended September 30, 2017 and 2016. 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 2016 Annual Report.
The following tables present the fair value of assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 (dollars in thousands):
As of September 30, 2017
Fair Value Measured and Recorded Using
Level 1
Level 2
Level 3
Assets
Available for sale securities:
Debt securities:
U.S. treasury securities
2,349
Debt securities issued by U.S.
federal agencies
5,169
Corporate debt securities
22,134
Asset-backed securities
3,600
Collateralized mortgage
obligations
2,684
Total debt securities
33,587
35,936
Equity securities
27,693
Total available for sale
securities
30,042
63,629
Trading securities
68,744
Total assets at fair value
98,786
1,468,497
1,567,283
Liabilities
Interest rate swaps
6,601
Securities sold, not yet purchased
2,246
Foreign currency exchange forward
contracts
75
Total liabilities at fair value
6,676
8,922
12
As of December 31, 2016
8,485
5,046
17,094
2,695
1,010
25,845
34,330
22,744
31,229
57,074
52,629
1,471
83,858
1,303,363
1,387,221
13,162
3,591
16,753
There were no significant non-recurring fair value measurements recorded during the three and nine months ended September 30, 2017 and 2016.
FASB ASC Topic 825, “Financial Instruments” requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets. Our financial instruments are as follows:
Cash and Cash Equivalents and Restricted Cash – These balances include cash and cash equivalents as well as restricted cash with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.
Receivables, less Allowance for Doubtful Accounts – Due to their short-term nature, fair value approximates carrying value.
Warehouse Receivables – These balances are carried at fair value based on market prices at the balance sheet date.
Trading and Available for Sale Securities – These investments are carried at their fair value.
Foreign Currency Exchange Forward Contracts – These assets and liabilities are carried at their fair value as calculated by using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.
Securities Sold, not yet Purchased – These liabilities are carried at their fair value.
13
Short-Term Borrowings – The majority of this balance represents outstanding amounts under our warehouse lines of credit of our wholly-owned subsidiary, CBRE Capital Markets. Due to the short-term nature and variable interest rates of these instruments, fair value approximates carrying value (see Notes 3 and 7).
Senior Term Loans – Based upon information from third-party banks (which falls within Level 2 of the fair value hierarchy), the estimated fair value of our senior term loans was approximately $750.8 million at September 30, 2017 and $751.4 million at December 31, 2016. Their actual carrying value, net of unamortized debt issuance costs, totaled $746.0 million and $744.3 million at September 30, 2017 and December 31, 2016, respectively (see Note 7).
Interest Rate Swaps – These liabilities are carried at their fair value as calculated by using widely-accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative.
Senior Notes – Based on dealers’ quotes (which falls within Level 2 of the fair value hierarchy), the estimated fair values of our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes were $829.1 million, $646.6 million and $463.4 million, respectively, at September 30, 2017 and $827.6 million, $607.0 million and $439.3 million, respectively, at December 31, 2016. The actual carrying value of our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes, net of unamortized debt issuance costs, totaled $791.4 million, $591.8 million and $422.4 million, respectively, at September 30, 2017 and $790.4 million, $591.2 million and $422.2 million, respectively, at December 31, 2016.
6.
Investments in Unconsolidated Subsidiaries
Investments in unconsolidated subsidiaries are accounted for under the equity method of accounting. Our investment ownership percentages in equity method investments vary, generally ranging up to 5.0% in our Global Investment Management segment, up to 10.0% in our Development Services segment, and up to 50.0% in our other business segments.
Combined condensed financial information for the entities accounted for using the equity method is as follows (dollars in thousands):
Global Investment Management
308,221
418,028
813,279
902,932
Operating (loss) income
(59,677
93,491
32,211
155,869
36,937
52,477
101,334
118,348
Development Services
29,273
26,179
78,276
57,255
152,102
26,027
329,959
184,136
141,489
19,745
307,641
169,837
46,648
40,292
116,651
106,807
6,504
6,130
17,483
20,418
7,868
6,135
21,526
20,506
384,142
484,499
1,008,206
1,066,994
98,929
125,648
379,653
360,423
186,294
78,357
430,501
308,691
14
7.
Long-Term Debt and Short-Term Borrowings
Long-Term Debt
Long-term debt consists of the following (dollars in thousands):
Senior term loans, with interest ranging from
1.77% to 2.84%, due quarterly through 2022
751,876
751,875
5.00% senior notes due in 2023
4.875% senior notes due in 2026, net of
unamortized discount
596,181
595,912
5.25% senior notes due in 2025, net of
unamortized premium
426,363
426,500
Total long-term debt
2,574,430
2,574,301
Less: current maturities of long-term debt
(10
(11
Less: unamortized debt issuance costs
(22,852
(26,164
Total long-term debt, net of current
maturities
On January 9, 2015, CBRE Services, Inc. (CBRE Services), our wholly-owned subsidiary, entered into an amended and restated credit agreement (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 (CS). On March 21, 2016, CBRE Services executed an amendment to the 2015 Credit Agreement that, among other things, extended the maturity on the revolving credit facility to March 2021 and increased the borrowing capacity under the revolving credit facility by $200.0 million.
Our 2015 Credit Agreement is an unsecured credit facility that is jointly and severally guaranteed by us and substantially all of our material domestic subsidiaries. As of September 30, 2017, 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 contains 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 14.29x for the trailing twelve months ended September 30, 2017, and our leverage ratio of total debt less available cash to EBITDA was 0.97x as of September 30, 2017.
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 create or permit liens on assets securing indebtedness, entering into sale/leaseback transactions and entering into consolidations or mergers.
15
Short-Term Borrowings
Revolving Credit Facility
As of September 30, 2017, letters of credit totaling $2.0 million were outstanding under our revolving credit facility under our 2015 Credit Agreement. These letters of credit, which reduce the amount we may borrow under our revolving credit facility, were primarily issued in the ordinary course of business. As of September 30, 2017 and December 31, 2016, no amounts were outstanding under our revolving credit facility other than these 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 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. See Note 3 for additional information.
8.
Commitments and Contingencies
We are a party to a number of pending or threatened lawsuits arising out of, or incident to, our ordinary course of business. We believe that any losses in excess of the amounts accrued therefor as liabilities on our financial statements are unlikely to be significant, but litigation is inherently uncertain and there is the potential for a material adverse effect on our financial statements if one or more matters are resolved in a particular period in an amount materially in excess of what we anticipated.
In January 2008, CBRE 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 $18.5 billion at September 30, 2017. CBRE MCI, under its agreement with Fannie Mae, must post cash reserves or other acceptable collateral under formulas established by Fannie Mae to provide for sufficient capital in the event losses occur. As of September 30, 2017 and December 31, 2016, CBRE MCI had a $53.0 million and a $45.0 million, respectively, letter of credit under this reserve arrangement, and had provided approximately $31.1 million and $28.2 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 $668.4 million (including $431.3 million of warehouse receivables, a substantial majority of which are pledged against warehouse lines of credit and are therefore not available to Fannie Mae) at September 30, 2017.
CBRE Capital Markets participates in Freddie Mac’s Multifamily Small Balance Loan (SBL) Program. Under the SBL program, CBRE Capital Markets has certain repurchase and loss reimbursement obligations. These obligations are for the period from origination of the loan to the securitization date. CBRE Capital Markets must post a cash reserve or other acceptable collateral to provide for sufficient capital in the event the obligations are triggered. As of September 30, 2017, CBRE Capital Markets had posted a $5.0 million letter of credit under this reserve arrangement.
We had outstanding letters of credit totaling $64.5 million as of September 30, 2017, 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 Capital Markets letters of credit totaling $58.0 million as of September 30, 2017 referred to in the preceding paragraphs represented the majority of the $64.5 million outstanding letters of credit as of such date. The remaining letters of credit are primarily executed by us in the ordinary course of business and expire at varying dates through September 2018.
We had guarantees totaling $62.3 million as of September 30, 2017, 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 $62.3 million primarily represents guarantees executed by us in the ordinary course of business, including various guarantees of management and vendor contracts in our operations overseas, which expire at the end of each of the respective agreements.
In addition, as of September 30, 2017, we had issued numerous non-recourse carveout, completion and budget guarantees relating to development projects for the benefit of third parties. These guarantees are commonplace in our industry and are made by us in the ordinary course of our Development Services business. Non-recourse carveout guarantees generally require that our project-entity borrower not commit specified improper acts, with us potentially liable for all or a portion of such 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 September 30, 2017, we had aggregate commitments of $33.5 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 September 30, 2017, we had committed to fund $20.4 million of additional capital to these unconsolidated subsidiaries.
9.
Income Per Share Information
The calculations of basic and diluted income per share attributable to CBRE Group, Inc. shareholders are as follows (dollars in thousands, except share data):
Basic Income Per Share
Net income attributable to CBRE Group, Inc.
shareholders
Weighted average shares outstanding for basic
income per share
Basic income per share attributable to CBRE
Group, Inc. shareholders
Diluted Income Per Share
Dilutive effect of contingently issuable
shares
3,236,525
2,707,401
3,217,594
3,070,134
Dilutive effect of stock options
1,582
11,452
3,924
33,557
Weighted average shares outstanding for
diluted income per share
Diluted income per share attributable to
CBRE Group, Inc. shareholders
For the three and nine months ended September 30, 2017, 384,775 and 1,141,522, respectively, of contingently issuable shares were excluded from the computation of diluted income per share because their inclusion would have had an anti-dilutive effect.
For the three and nine months ended September 30, 2016, 1,972,360 and 1,704,848, respectively, of contingently issuable shares were excluded from the computation of diluted income per share because their inclusion would have had an anti-dilutive effect.
10.
Segments
We report our operations through the following segments: (1) Americas; (2) Europe, Middle East and Africa (EMEA); (3) Asia Pacific; (4) Global Investment Management; and (5) Development Services.
The Americas segment is our largest segment of operations and provides a comprehensive range of services throughout the U.S. and in the largest regions of Canada and key markets in Latin America. The primary services offered consist of the following: property sales, property leasing, mortgage services, appraisal and valuation, property management and occupier outsourcing services.
Our EMEA and Asia Pacific segments generally provide services similar to the Americas business segment. The EMEA segment has operations primarily in Europe, while the Asia Pacific segment has operations in Asia, Australia and New Zealand.
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.
18
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):
2016 (1)
Americas
1,969,430
1,775,326
5,518,963
5,143,590
EMEA
1,033,042
948,053
2,831,964
2,742,318
Asia Pacific
440,933
361,802
1,202,706
1,032,763
92,122
91,807
274,451
277,924
14,450
16,499
45,312
51,163
Total revenue
Adjusted EBITDA
238,259
222,043
689,068
636,668
71,169
61,177
173,610
148,842
43,081
31,467
106,562
72,570
23,202
18,988
72,971
68,329
35,863
15,709
85,120
66,109
Total Adjusted EBITDA
411,574
349,384
1,127,331
992,518
In 2017, we changed the presentation of the operating results of one of our emerging businesses among our regional services reporting segments. Prior year amounts have been reclassified to conform with the current-year presentation. This change had no impact on our consolidated results.
Adjusted EBITDA is the measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to each segment and assessing performance of each segment. EBITDA represents earnings before net interest expense, 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 and certain carried interest incentive compensation expense (reversal) to align with the timing of associated revenue.
19
Adjusted EBITDA is calculated as follows (dollars in thousands):
Add:
Less:
EBITDA
406,440
284,555
1,112,862
847,068
Adjustments:
Cost-elimination expenses (2)
38,877
78,456
Integration and other costs related to
acquisitions
28,596
27,351
73,520
Carried interest incentive compensation
expense (reversal) to align with the timing of
associated revenue
5,134
(2,644
(12,882
(6,526
Represents cost-elimination expenses relating to a program initiated in the fourth quarter of 2015 and completed in the third quarter of 2016 (our cost-elimination project) to reduce the company’s global cost structure after several years of significant revenue and related cost growth. Cost-elimination expenses incurred during the three and nine months ended September 30, 2016 consisted of $36.7 million and $73.6 million, respectively, of severance costs related to headcount reductions in connection with the program and $2.2 million and $4.9 million, respectively, of third-party contract termination costs.
11.
Guarantor and Nonguarantor Financial Statements
The following condensed consolidating financial information includes condensed consolidating balance sheets as of September 30, 2017 and December 31, 2016, condensed consolidating statements of operations and condensed consolidating statements of comprehensive income for the three and nine months ended September 30, 2017 and 2016 and condensed consolidating statements of cash flows for the nine months ended September 30, 2017 and 2016 of:
CBRE Group, Inc., as the parent; CBRE Services, as the subsidiary issuer; the guarantor subsidiaries; the nonguarantor subsidiaries;
Elimination entries necessary to consolidate CBRE Group, Inc., as the parent, with CBRE Services and its guarantor and nonguarantor subsidiaries; and
CBRE Group, Inc., on a consolidated basis.
Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and intercompany balances and transactions.
20
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2017
CBRE
Guarantor
Nonguarantor
Consolidated
Parent
Services
Subsidiaries
Eliminations
7,721
446,123
501,754
2,048
82,746
Receivables, net
1,069,509
1,773,617
Warehouse receivables (1)
1,002,000
432,910
587
4,399
61,425
(25
77,336
140,713
60,622
141,242
594
12,120
2,657,638
3,134,407
400,273
173,993
1,684,808
1,450,400
Other intangible assets, net
753,706
646,993
188,353
45,281
Investments in consolidated subsidiaries
5,143,175
4,988,534
2,807,898
(12,939,607
Intercompany loan receivable
2,690,873
(3,390,873
30,673
(30,673
18,306
275,452
115,465
5,143,769
7,709,833
9,498,801
5,660,789
(16,361,178
7,788
482,449
1,015,623
Compensation and employee benefits
payable
626
412,761
350,167
413,826
313,240
34,581
47,550
Warehouse lines of credit (which
fund loans that U.S. Government
Sponsored Enterprises have
committed to purchase) (1)
999,172
417,081
999,188
84
40,500
15,928
8,498
2,383,305
2,159,599
Long-Term Debt, net:
Long-term debt, net
Intercompany loan payable
1,348,299
1,826,325
216,249
Total Long-Term Debt, net
156,455
16,037
1,814
6,592
284,600
262,408
2,566,658
4,510,267
2,796,525
(3,421,571
CBRE Group, Inc. Stockholders’ Equity
2,864,264
Although CBRE Capital Markets is included among our domestic subsidiaries that jointly and severally guarantee our 5.00% senior notes, 4.875% senior notes, 5.25% senior notes and our 2015 Credit Agreement, a substantial majority of warehouse receivables funded under JP Morgan, TD Bank, BofA, Fannie Mae ASAP and Capital One lines of credit are pledged to JP Morgan, TD Bank, BofA, Fannie Mae and Capital One.
21
AS OF DECEMBER 31, 2016
16,889
264,121
481,559
61,869
943,028
1,662,574
687,454
588,593
1,915
17,364
8,170
37,456
(19,279
78,296
105,811
1,421
64,576
113,659
1,922
35,674
2,052,612
3,051,521
395,749
165,007
1,669,683
1,311,709
793,525
617,514
189,455
42,783
4,226,629
4,076,265
2,314,549
(10,617,443
2,684,421
(3,384,421
72,325
90,334
(57,335
22,229
240,707
103,452
4,228,551
6,818,589
8,428,605
5,382,320
(14,078,478
30,049
409,470
1,006,919
402,719
369,577
506,715
383,606
40,946
36,684
680,473
574,180
680,489
81,590
21,127
30,675
2,121,929
2,392,104
2,548,123
1,214,064
1,916,675
253,682
253,685
128,054
53,422
620
260,314
250,550
2,591,960
4,352,340
3,025,013
(3,461,035
2,357,307
Although CBRE Capital Markets is included among our domestic subsidiaries that jointly and severally guarantee our 5.00% senior notes, 4.875% senior notes, 5.25% senior notes and our 2015 Credit Agreement, a substantial majority of warehouse receivables funded under BofA, Fannie Mae ASAP, JP Morgan, Capital One and TD Bank lines of credit are pledged to BofA, Fannie Mae, JP Morgan, Capital One and TD Bank.
22
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017
1,774,112
1,775,865
1,256,664
1,256,713
770
756
374,966
328,406
60,610
41,981
1,692,240
1,627,100
5,315
865
(770
(756
87,187
149,630
65,439
2,395
455
1,313
30,651
1,352
1,777
(30,651
33,577
22,660
8,897
Royalty and management service (income)
expense
(4,389
4,389
Income from consolidated subsidiaries
196,791
199,062
99,222
(495,075
Income before (benefit of) provision for
income taxes
196,021
195,380
235,384
141,829
(Benefit of) provision for income taxes
(296
(1,411
36,322
41,563
100,266
Less: Net income attributable to
non-controlling interests
23
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
1,611,836
1,581,651
1,149,943
1,102,840
1,165
(158
353,420
332,103
54,423
38,302
1,557,786
1,473,245
(1,165
158
54,050
119,449
24,287
385
278
1,078
33,550
592
428
(33,550
34,809
24,921
11,093
(2,972
2,972
104,881
105,560
65,474
(275,915
103,716
104,459
122,732
107,275
(447
(422
17,172
35,111
72,164
24
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
5,046,641
4,826,755
3,504,306
3,414,712
1,532
1,643
1,078,709
941,619
176,035
120,979
4,759,050
4,477,310
5,543
13,320
(1,532
(1,643
293,134
362,765
154,769
3,467
1,481
7,587
91,250
3,891
3,076
(91,250
101,087
67,276
26,810
(11,088
11,088
524,024
531,104
227,120
(1,282,248
522,492
519,625
624,207
338,997
(587
(4,399
93,103
107,696
231,301
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
4,751,526
4,496,232
3,304,291
3,216,338
3,358
(1,584
1,061,778
946,786
165,087
104,900
4,531,156
4,268,024
3,659
12,203
(3,358
1,584
224,029
240,411
114,504
2,398
Other income (loss)
(203
8,655
99,119
2,163
3,382
(99,119
103,425
74,331
30,413
(26,740
26,740
310,069
311,747
107,849
(729,665
306,711
309,026
400,751
197,693
(1,287
(1,043
89,004
78,904
118,789
26
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
Other comprehensive income:
Amounts reclassified from accumulated
other comprehensive loss to interest
expense, net
Unrealized gains on interest rate swaps,
net
for sale securities, net
331
1,285
327
64,719
198,076
199,389
164,985
Less: Comprehensive income attributable to
163,758
27
Foreign currency translation loss
Total other comprehensive income (loss)
2,508
(15,938
107,389
105,908
56,226
49,458
28
Other comprehensive (loss) income:
2,056
183
(2
(18
Total other comprehensive (loss) income
4,250
2,038
204,330
523,077
528,274
533,142
435,631
431,087
29
Unrealized losses on interest rate swaps,
862
131
(759
1,869
103
(101,521
311,938
311,850
17,268
6,211
30
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
CASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES:
69,358
(7,513
129,361
56,062
(68,566
(33,040
Acquisition of businesses (other than GWS), including net
assets acquired, intangibles and goodwill, net of cash acquired
(39,937
(19,457
(33,582
(3,077
172,868
4,638
Decrease (increase) in restricted cash
4,919
(15,939
892
264
Net cash provided by (used in) investing activities
32,804
(66,611
Proceeds from notes payable on real estate held for sale and
under development
Repayment of notes payable on real estate held for sale and
(Increase) decrease in intercompany receivables, net
(40,288
(1,655
22,982
18,961
479
(3,145
(7
Net cash (used in) provided by financing activities
(69,358
19,837
7,019
Effect of currency exchange rate changes on cash and cash
equivalents
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS
(9,168
182,002
20,195
CASH AND CASH EQUIVALENTS, AT BEGINNING OF
PERIOD
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
111,795
31
80,156
124,072
65,900
(9,453
(80,074
(29,562
(81,359
(52,998
(1,249
(20,817
Acquisition of GWS, including net assets acquired, intangibles
and goodwill
3,256
(13,733
(36,693
(20,602
116,072
(545
(1,078
10,677
13,508
8,306
(47,927
Shares repurchased for payment of taxes on equity awards
(5,460
(141
(39,019
(40,954
(50,454
130,427
915
(1,173
(503
(65,900
13,461
(51,627
103,227
NET INCREASE (DECREASE) IN CASH AND CASH
4,008
(123,395
25,330
8,479
147,410
384,509
12,487
24,015
409,839
115,698
2,574
123,231
101,898
32
12.Subsequent Event
On October 31, 2017, CBRE Services, our wholly-owned subsidiary, entered into a new Credit Agreement (the 2017 Credit Agreement), which refinanced and replaced the 2015 Credit Agreement (see Note 7).
The 2017 Credit Agreement is a senior unsecured credit facility that is jointly and severally guaranteed by us and certain of our subsidiaries. The 2017 Credit Agreement provides for the following credit facilities:
a $750.0 million delayed draw tranche A term loan facility; and
a revolving credit facility of up to $2.8 billion (including an allowance for borrowings outside of the U.S.), which includes the capacity to obtain letters of credit and swingline loans and matures on October 31, 2022.
Borrowings under the tranche A term loan facility bear interest, based at our option, on either (1) the applicable fixed rate plus 0.875% to 1.25% or (2) the daily rate plus 0.0% to 0.25%, in each case as determined by reference to our Credit Rating (as defined in the 2017 Credit Agreement). Borrowings under the tranche A term loan facility require quarterly payments, which begin on March 5, 2018 and continue through maturity on October 31, 2022, provided that in the event that our leverage ratio (as defined in the 2017 Credit Agreement) is less than or equal to 2.50 to 1.00 on the last day of the fiscal quarter immediately preceding any such payment date, no such quarterly principal payment shall be required on such date.
The revolving credit facility allows for borrowings outside of the U.S., with a $200.0 million sub-facility available to one of our Canadian subsidiaries, one of our Australian subsidiaries and one of our New Zealand subsidiaries and a $300.0 million sub-facility available to one of our U.K. subsidiaries. Borrowings under the revolving credit facility bear interest at varying rates, based at our option, on either (1) the applicable fixed rate plus 0.775% to 1.075% or (2) the daily rate plus 0.0% to 0.075%, in each case as determined by reference to our Credit Rating (as defined in the 2017 Credit Agreement). The 2017 Credit Agreement requires us to pay a fee based on the total amount of the revolving credit facility commitment (whether used or unused) and a ticking fee to the lenders under the tranche A term loan facility (commencing on January 30, 2018 and ending on July 31, 2018 (or such earlier date as the tranche A term loan facility is terminated or drawn in its entirety)).
On October 31, 2017, CBRE Services made an initial borrowing of (1) $200.0 million under the tranche A term loan facility (with the remaining $550.0 million available to be drawn under the tranche A term loan facility on one additional occasion on any date on or prior to July 31, 2018) and (2) $83.0 million under the revolving credit facility. These proceeds, in addition to cash on hand, were used to repay all amounts outstanding under the 2015 Credit Agreement.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q (Quarterly Report) for CBRE Group, Inc. for the three months ended September 30, 2017 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, 2016. 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, 2016 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
CBRE Group, Inc. is a Delaware corporation. References to “the company,” “we,” “us” and “our” refer to CBRE Group, Inc. and include all of its consolidated subsidiaries, unless otherwise indicated or the context requires otherwise.
We are the world’s largest commercial real estate services and investment firm, based on 2016 revenue, with leading full-service operations in major metropolitan areas throughout the world. We provide services in the office, retail, industrial, multifamily and hotel sectors of commercial real estate. As of December 31, 2016, we operated in approximately 450 offices worldwide with more than 75,000 employees, excluding independent affiliates, 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 commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage brokerage, loan origination and servicing), 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 commissions on transactions. We have been included in the Fortune 500 since 2008 (ranking #214 in 2017) and among the Fortune Most Admired Companies in the real estate sector for five consecutive years, including 2017. Additionally, the International Association of Outsourcing Professionals (IAOP) has ranked us among the top few outsourcing service providers across all industries for six consecutive years, including 2017. In 2016, we were ranked by Forbes as the 15th best employer in America, and we were one of two companies to be ranked in the top 12 in the Barron’s 500 in each of 2014, 2015 and 2016.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, which require us to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that we believe to be reasonable. Actual results may differ from those estimates. 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, 2016. There have been no material changes to these policies as of September 30, 2017.
See Note 2 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report.
Seasonality
A significant portion of our revenue is seasonal, which an investor should keep in mind when comparing our financial condition and results of operations on a quarter-by-quarter basis. Historically, our revenue, operating income, net income and cash flow from operating activities tend to be lowest in the first quarter, and highest in the fourth quarter of each year. Revenue, earnings and cash flow have generally been concentrated in the fourth calendar quarter due to the focus on completing sales, financing and leasing transactions prior to year-end.
Inflation
Our commissions and other variable costs related to revenue are primarily affected by commercial real estate market supply and demand, which may be affected by inflation. However, to date, we 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 and regulatory policies. Periods of economic weakness or recession, significantly rising interest rates, fiscal uncertainty, declining employment levels, decreasing demand for commercial real estate, falling real estate values, disruption to the global capital or credit markets, or the public perception that any of these events may occur, will negatively affect the performance of our business.
Compensation is our largest expense and our sales and leasing professionals generally are paid on a commission and/or bonus basis that correlates with their revenue production. As a result, the negative effect of difficult market conditions on our operating margins is partially mitigated by the inherent variability of our compensation cost structure. In addition, when negative economic conditions have been particularly severe, we have moved decisively to lower operating expenses to improve financial performance, and then have restored certain expenses as economic conditions improved. 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, most particularly in the United States, have generally been marked by increased demand for space, falling vacancies and higher rents since 2010. During this time, healthy U.S. property sales activity has been sustained by gradually improving market fundamentals, including low-cost credit availability and increased acceptance of commercial real estate as an institutional asset class. Following years of strong growth, property sales volumes have slowed since early 2016, but the market has remained active. Commercial mortgage markets also have remained active, driven by low interest rates and a favorable lending environment. The U.S. Government Sponsored Enterprises continue to be a significant source of debt capital for multi-family properties.
European economies began to emerge from recession in 2013, with most countries returning to positive, albeit modest, economic growth. Sales and leasing activity has improved steadily across most of continental Europe for more than two years and this trend has continued in 2017. In the United Kingdom, sentiment has continued to improve since the June 2016 referendum to leave the European Union (EU), leading to higher property leasing and sales volumes. However, there continues to be uncertainty about both the withdrawal process and the United Kingdom’s future relationship with the EU.
35
In Asia Pacific, real estate leasing and investment market activity has strengthened broadly since late 2016. Even as activity within the region has picked up, Asia Pacific investors remain a significant source of capital investing in real estate in 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 have been pressured by a shift in investor preferences from active to passive portfolio strategies and concerns about potentially higher interest rates.
The performance of our global real estate services and real estate investment businesses depends on sustained economic growth and job creation; stable, healthy global credit markets; and continued positive business and investor sentiment.
Effects of Acquisitions
We historically have made significant use of strategic acquisitions to add new service competencies, to increase our scale within existing competencies and to expand our presence in various geographic regions around the world. On September 1, 2015, CBRE, Inc., our wholly-owned subsidiary, pursuant to a Stock and Asset Purchase Agreement with Johnson Controls, Inc. (JCI), acquired JCI’s Global Workplace Solutions (JCI-GWS) business (which we refer to as the GWS Acquisition). The acquired JCI-GWS business was a market-leading provider of integrated facilities management solutions for major occupiers of commercial real estate and had significant operations around the world. The purchase price was $1.475 billion, paid in cash, plus adjustments totaling $46.5 million for working capital and other items. We completed the GWS Acquisition in order to advance our strategy of delivering globally integrated services to major occupiers in our Americas, EMEA and Asia Pacific segments. We merged the acquired JCI-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 2016, we acquired our independent affiliate in Norway, a London-based retail property advisor specializing in the luxury goods retail sector and a leading provider of retail project management, shopping center development and tenant coordination services in the United States. We also made an equity investment in a property services firm in Malaysia, acquiring a 49% interest. During the nine months ended September 30, 2017, we acquired a leading Software as a Service (SaaS) platform that produces scalable interactive visualization technologies for commercial real estate, a technology company that provides mobile and SaaS technology solutions for facilities management operations, a healthcare-focused project manager in Australia, a full-service brokerage and management boutique in South Florida, a technology-enabled national boutique commercial real estate finance and consulting firm in the United States, a retail consultancy in France and a majority interest in a Toronto-based investment management business specializing in private infrastructure and private equity investments. In addition, in October 2017, we acquired a San Francisco-based technology-focused boutique real estate brokerage firm and a project management and design engineering firm operating across the United States.
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, however, most acquisitions will initially have an adverse impact on our operating and net income as a result of transaction-related expenditures. These 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.
Our acquisition structures often include deferred and/or contingent purchase price payments in future periods that are subject to the passage of time or achievement of certain performance metrics and other conditions. As of September 30, 2017, we have accrued deferred consideration totaling $73.2 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.
36
International Operations
We are monitoring the economic and political developments related to the United Kingdom’s referendum to leave the European Union and the potential impact on our businesses in the United Kingdom and the rest of Europe, including, in particular, sales and leasing activity in the United Kingdom, as well as any associated currency volatility impact on our results of operations.
As we continue to increase our international operations through either acquisitions or organic growth, fluctuations in the value of the U.S. dollar relative to the other currencies in which we may generate earnings could adversely affect our business, financial condition and operating results. Our 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. In addition, our Global Workplace Solutions business also has a significant amount of its revenue and earnings denominated in foreign currencies, such as the euro and the British pound sterling, which has significantly declined in value as compared to the U.S. dollar and other currencies as a result of the United Kingdom’s referendum to leave the European Union. Fluctuations in foreign currency exchange rates have resulted and may continue to result in corresponding fluctuations in our AUM, revenue and earnings.
During the nine months ended September 30, 2017, approximately 47% of our business was transacted in non-U.S. dollar currencies, the majority of which included the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, Danish krone, euro, Hong Kong dollar, Indian rupee, Japanese yen, Mexican peso, Polish zloty, Singapore dollar, Swedish krona, Swiss franc and Thai baht. The following table sets forth our revenue derived from our most significant currencies (U.S. dollars in thousands):
Three Months Ended September 30,
Nine Months Ended September 30,
United States dollar
1,831,597
51.6
%
1,687,692
52.8
5,212,192
4,927,214
53.3
British pound sterling
528,462
14.9
486,195
15.2
1,447,535
14.7
1,453,854
15.7
euro
414,918
11.7
377,930
11.8
1,136,860
11.5
1,073,762
11.6
Australian dollar
104,704
2.9
91,138
281,368
2.8
250,323
2.7
Canadian dollar
100,844
80,822
2.5
253,813
2.6
220,833
2.4
Indian rupee
78,281
2.2
61,001
1.9
226,669
2.3
171,475
Chinese yuan
61,761
1.7
49,945
1.6
164,320
146,898
Japanese yen
59,365
51,641
153,731
140,412
1.5
Singapore dollar
53,787
44,266
1.4
162,600
122,422
1.3
Swiss franc
36,421
1.0
39,195
1.2
104,592
1.1
102,383
Hong Kong dollar
33,339
0.9
24,656
0.8
85,266
71,186
Brazilian real
32,067
23,580
0.7
70,215
54,536
0.6
Mexican peso
29,153
21,228
75,562
58,815
Polish zloty
19,227
0.5
15,861
43,995
0.4
46,203
Danish krone
18,531
18,061
53,435
48,501
Thai baht
14,568
9,612
0.3
36,738
28,164
Swedish krona
13,056
12,905
41,123
41,234
Other currencies
119,896
3.6
97,759
3.1
323,382
3.2
289,543
100.0
Although we operate globally, we report our results in U.S. dollars. As a result, the strengthening or weakening of the U.S. dollar may positively or negatively impact our reported results. For example, we estimate that had the British pound sterling-to-U.S. dollar exchange rates been 10% higher during the nine months ended September 30, 2017, the net impact would have been an increase in pre-tax income of $2.3 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the nine months ended September 30, 2017, the net impact would have been an increase in pre-tax income of $7.6 million. These hypothetical calculations estimate the impact of translating results into U.S. dollars and do not include an estimate of the impact that a 10% change in the U.S. dollar against other currencies would have had on our foreign operations.
37
For the past several years, we have entered 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. As of September 30, 2017, we had no foreign currency exchange forward contracts outstanding as we made the decision to let our program expire at the end of 2016. Included in the consolidated statement of operations set forth in Item 1 of this Quarterly Report were net gains of $0.2 million and $1.2 million, respectively, from foreign currency exchange forward contracts, which hedged foreign currency denominated EBITDA for the three and nine months ended September 30, 2016. We do not intend to hedge our foreign currency denominated EBITDA in 2017.
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.
38
Results of Operations
The following table sets forth items derived from our consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):
Revenue:
Fee revenue (1):
Occupier outsourcing
628,348
17.7
553,197
17.3
1,794,046
18.2
1,664,687
18.0
Property management
137,618
3.9
123,501
393,714
4.0
370,158
Valuation
126,986
120,356
3.8
373,209
355,139
Loan servicing (2)
38,347
30,866
114,618
89,834
Investment management
3.0
Leasing
700,330
19.7
619,709
19.4
1,856,436
18.8
1,771,810
19.2
Capital Markets:
Sales
455,022
12.8
415,593
13.0
1,233,959
12.5
1,134,969
12.3
Commercial mortgage
origination (2)
108,408
123,096
297,643
303,006
3.3
Other:
Development services
11,263
13,010
35,545
42,313
22,890
22,771
61,142
60,690
Total fee revenue
2,321,334
65.4
2,113,906
66.2
6,434,763
65.2
6,070,530
65.6
Pass through costs also recognized
as revenue
1,228,643
34.6
1,079,581
33.8
3,438,633
34.8
3,177,228
34.4
70.8
70.5
70.1
Operating, administrative
and other
19.9
21.5
20.5
21.7
93.5
94.9
93.6
95.2
0.1
0.2
6.6
5.4
5.0
0.0
Income before provision for
7.7
5.1
7.3
5.2
2.1
2.0
1.8
5.6
3.5
5.3
3.4
Net income attributable to CBRE
Group, Inc.
5.5
11.4
8.9
11.3
9.2
10.9
10.7
Certain adjustments have been made to 2016 fee revenue to conform with current-year presentation.
Prior disclosure of fee revenue included loan servicing and commercial mortgage origination in one line item entitled “Commercial mortgage services”. Beginning in Q3 2017, we began to disclose recurring revenue from our loan servicing portfolio and revenue from commercial mortgage origination on separate lines.
39
Fee revenue, EBITDA and adjusted EBITDA are not recognized measurements under GAAP. When analyzing our operating performance, investors should use these measures in addition to, and not as an alternative for, their most directly comparable financial measure calculated and presented in accordance with GAAP. We generally use these non-GAAP financial measures to evaluate operating performance and for other discretionary purposes. We believe these measures provide a more complete understanding of ongoing operations, enhance comparability of current results to prior periods and may be useful for investors to analyze our financial performance because they eliminate the impact of selected charges that may obscure trends in the underlying performance of our business. Because not all companies use identical calculations, our presentation of fee revenue, EBITDA and adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Fee revenue is gross revenue less both client reimbursed costs largely associated with employees that are dedicated to client facilities and subcontracted vendor work performed for clients. We believe that investors may find this measure useful to analyze the company’s overall financial performance because it excludes costs reimbursable by clients, and as such provides greater visibility into the underlying performance of our business.
EBITDA represents earnings before net interest expense, 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 and certain carried interest incentive compensation expense (reversal) to align with the timing of associated revenue. We believe that investors may find these measures useful in evaluating our operating performance compared to that of other companies in our industry because their calculations generally eliminate the effects of acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions, the effects of financings and income taxes and the accounting effects of capital spending.
EBITDA and adjusted EBITDA 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):
Cost-elimination expenses (1)
Integration and other costs related
to acquisitions
Carried interest incentive
compensation expense (reversal)
to align with the timing of
Represents cost-elimination expenses relating to a program initiated in the fourth quarter of 2015 and completed in the third quarter of 2016 (our cost-elimination project) to reduce the company’s global cost
40
structure after several years of significant revenue and related cost growth. Cost-elimination expenses incurred during the three and nine months ended September 30, 2016 consisted of $36.7 million and $73.6 million, respectively, of severance costs related to headcount reductions in connection with the program and $2.2 million and $4.9 million, respectively, of third-party contract termination costs.
Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016
We reported consolidated net income of $196.3 million for the three months ended September 30, 2017 on revenue of $3.5 billion as compared to consolidated net income of $104.2 million on revenue of $3.2 billion for the three months ended September 30, 2016.
Our revenue on a consolidated basis for the three months ended September 30, 2017 increased by $356.5 million, or 11.2%, as compared to the three months ended September 30, 2016. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing revenue (up 13.5%) and property management revenue (up 7.8%), increased leasing activity (up 12.4%) and sales activity (up 8.6%) as well as higher loan servicing revenue (up 24.3%). Foreign currency translation had a $26.3 million positive impact on total revenue during the three months ended September 30, 2017, primarily driven by strength in the euro. These increases were partially offset by lower revenue from commercial mortgage origination (down 12.0%).
Our cost of services on a consolidated basis increased by $260.6 million, or 11.6%, during the three months ended September 30, 2017 as compared to same period in 2016. This increase was primarily due to higher costs associated with our occupier outsourcing business and higher professional bonuses (particularly in the United States and United Kingdom) resulting from improved operating performance. 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. Foreign currency translation also had an $18.5 million negative impact on cost of services during the three months ended September 30, 2017. These items were partially offset by the impact of $14.7 million of costs incurred in the prior-year quarter in connection with our cost-elimination project that did not recur in the current year. Cost of services as a percentage of revenue was consistent at 70.5% for the three months ended September 30, 2016 and 70.8% for the three months ended September 30, 2017.
Our operating, administrative and other expenses on a consolidated basis increased by $18.4 million, or 2.7%, during the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. The increase was mostly driven by higher payroll-related costs (including an increase in bonus and stock compensation expense driven by improved operating performance) and an increase in net carried interest expense incurred in the current year. Foreign currency also had a net $3.6 million negative impact on total operating expenses during the three months ended September 30, 2017, including a $5.7 million negative impact from foreign currency translation, partially offset by $2.1 million of favorable foreign currency transaction activity over the same period in the prior year (part of which related to hedging activity in the prior year, which did not recur in the current year given that we discontinued our hedging program at the end of 2016). These items were partially offset by the impact of costs incurred in the third quarter of 2016 which did not recur in the current-year quarter, including $28.3 million of integration and other costs associated with the GWS Acquisition and $24.2 million in connection with our cost-elimination project. Such costs were the primary driver of operating expenses as a percentage of revenue decreasing from 21.5% for the three months ended September 30, 2016 to 19.9% for the three months ended September 30, 2017.
Our depreciation and amortization expense on a consolidated basis increased by $9.9 million, or 10.6%, during the three months ended September 30, 2017 as compared to the same period in 2016. This increase was primarily attributable to higher amortization expense associated with mortgage servicing rights. A rise in depreciation expense of $4.3 million during the three months ended September 30, 2017 driven by technology-related capital expenditures also contributed to the increase.
Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $43.2 million, or 174.9%, for the three months ended September 30, 2017 as compared to the same period in 2016, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.
41
Our consolidated interest expense decreased by $2.8 million, or 7.5%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. This decrease was primarily driven by lower interest expense due to lower net borrowings under our revolving credit facility and a decrease in notes payable on real estate during the third quarter of 2017.
Our provision for income taxes on a consolidated basis was $76.2 million for the three months ended September 30, 2017 as compared to $51.4 million for the same period in 2016. Our effective tax rate, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, decreased to 28.0% for the three months ended September 30, 2017 compared to 33.0% for the three months ended September 30, 2016. We benefited from a more favorable geographic mix of income, a re-measurement of income tax exposures relating to prior periods and excess tax benefits on share-based awards. A more favorable geographic mix of income contributed to the decrease in effective tax rate as greater income was generated from lower taxed jurisdictions. The tax rate can vary from quarter to quarter due to the timing of discrete items, such as the settlement of income tax audits and changes in tax laws.
Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
We reported consolidated net income of $523.1 million for the nine months ended September 30, 2017 on revenue of $9.9 billion as compared to consolidated net income of $308.0 million on revenue of $9.2 billion for the nine months ended September 30, 2016.
Our revenue on a consolidated basis for the nine months ended September 30, 2017 increased by $625.6 million, or 6.8%, as compared to the nine months ended September 30, 2016. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing revenue (up 10.3%) and property management revenue (up 7.8%), and increased sales activity (up 9.3%) and leasing activity (up 5.0%) as well as higher loan servicing revenue (up 28.4%). These increases were partially offset by foreign currency translation, which had a $125.9 million negative impact on total revenue during the nine months ended September 30, 2017, primarily driven by weakness in the British pound sterling.
Our cost of services on a consolidated basis increased by $398.4 million, or 6.1%, during the nine months ended September 30, 2017 as compared to same period in 2016. This increase was primarily due to higher costs associated with our occupier outsourcing business as well as higher professional bonuses (particularly in the United Kingdom) resulting from improved operating performance. As previously mentioned, our sales professionals generally are paid on a commission basis, which substantially correlates with our transaction revenue performance. Accordingly, the increase in sales and lease transaction revenue led to a corresponding increase in commission expense. These increases were partially offset by foreign currency translation, which had a $99.2 million positive impact on cost of services during the nine months ended September 30, 2017. In addition, we incurred $37.1 million of costs in the prior-year period in connection with our cost-elimination project that did not recur in the current year. The absence of such costs was the primary driver of cost of services as a percentage of revenue decreasing from 70.5% for the nine months ended September 30, 2016 to 70.1% for the nine months ended September 30, 2017. Higher transaction revenue in certain countries that have a fixed compensation structure also contributed to the decrease in cost of services as a percentage of revenue for the nine months ended September 30, 2017.
Our operating, administrative and other expenses on a consolidated basis increased by $13.2 million, or 0.7%, during the nine months ended September 30, 2017 as compared to same period in 2016. The increase was mostly driven by higher payroll-related costs (including an increase in bonus and stock compensation expense driven by improved operating performance). This increase was partially offset by a decrease of $46.6 million in integration and other costs related to the GWS Acquisition incurred during the nine months ended September 30, 2017 as well as the impact of $41.4 million of costs incurred during the nine months ended September 30, 2016 as part of our cost-elimination project, which did not recur in the current year. Foreign currency also had a $21.4 million positive impact on total operating expenses during the nine months ended September 30, 2017, including a $20.9 million positive impact from foreign currency translation and $0.5 million of favorable foreign currency transaction activity over the same period in the prior year (part of which related to net hedging activity in the prior year, which did not recur in the current year given that we discontinued our hedging program at the end of 2016). Operating expenses as a percentage of revenue decreased from 21.7% for the nine months ended September 30, 2016 to 20.5% for the nine months ended September 30, 2017, primarily driven by the aforementioned decline in integration and other costs related to the GWS Acquisition as well as the costs associated with our cost-elimination project in 2016.
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Our depreciation and amortization expense on a consolidated basis increased by $27.0 million, or 10.0%, during the nine months ended September 30, 2017 as compared to the same period in 2016. This increase was primarily attributable to higher amortization expense associated with mortgage servicing rights. A rise in depreciation expense of $9.0 million during the nine months ended September 30, 2017 driven by technology-related capital expenditures also contributed to the increase.
Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $41.3 million, or 35.4%, during the nine months ended September 30, 2017 as compared to the same period in 2016, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.
Our consolidated interest expense decreased by $5.1 million, or 4.7%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. This decrease was primarily driven by lower interest expense due to lower net borrowings under our revolving credit facility and a decrease in notes payable on real estate during the first nine months of 2017.
Our provision for income taxes on a consolidated basis was $195.8 million for the nine months ended September 30, 2017 as compared to $165.6 million for the same period in 2016. Our effective tax rate, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, decreased to 27.2% for the nine months ended September 30, 2017 compared to 35.0% for the nine months ended September 30, 2016. We benefited from a more favorable geographic mix of income, a re-measurement of income tax exposures relating to prior periods and certain one-time benefits. The favorable impact from discrete items recorded in the current-year period, primarily driven by the positive impact from the resolution of certain tax audits and the re-measurement of income tax exposures relating to prior periods, contributed to the lower effective tax rate for the nine months ended September 30, 2017. In addition, a more favorable geographic mix of income contributed to the decrease in effective tax rate as greater income was generated from lower taxed jurisdictions.
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.
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The following table summarizes our results of operations by our Americas, EMEA, Asia Pacific, Global Investment Management and Development Services operating segments for the three and nine months ended September 30, 2017 and 2016 (dollars in thousands):
Fee revenue:
272,130
13.8
234,518
13.2
784,996
14.2
691,229
13.4
70,186
66,191
3.7
207,635
202,832
59,009
62,212
177,789
178,446
36,032
28,345
106,746
81,313
505,918
25.7
445,092
25.1
1,356,426
24.6
1,315,003
25.6
290,657
14.8
271,273
15.3
787,057
14.3
758,880
107,096
121,333
6.8
291,081
299,141
5.8
14,187
11,789
38,271
35,609
1,355,215
68.8
1,240,753
69.9
3,750,001
67.9
3,562,453
69.3
614,215
31.2
534,573
30.1
1,768,962
32.1
1,581,137
30.7
1,394,731
1,256,268
3,848,207
69.7
3,594,638
340,190
335,839
18.9
1,013,478
18.4
994,439
19.3
73,768
62,549
214,061
186,352
160,741
8.2
120,670
443,217
8.0
368,161
7.2
3,295
3,056
13,157
13,879
277
1,494
(204
Add-back: Depreciation and
amortization
12.1
186,551
10.5
671,929
12.2
568,188
11.0
12.4
44
292,794
28.3
264,758
27.9
829,764
29.3
815,773
29.7
43,003
4.2
36,338
116,949
4.1
106,980
39,462
31,071
109,200
96,954
2,315
2,521
7,872
8,521
105,256
10.2
98,406
10.4
267,834
9.5
251,911
83,937
8.1
83,673
8.8
245,292
8.7
217,120
7.9
777
883
4,583
2,201
6,817
16,383
16,286
574,312
55.6
524,467
55.3
1,597,877
56.4
1,515,746
458,730
44.4
423,586
44.7
1,234,087
43.6
1,226,572
803,293
77.8
734,343
77.5
2,202,793
2,169,669
79.1
158,829
15.4
164,552
17.4
466,606
16.5
473,442
17,539
19,379
51,954
50,631
53,381
29,779
110,611
48,576
399
483
1,218
1,226
Other (loss) income
(95
(72
Less: Net income (loss) attributable
to non-controlling interests
55
431
(105
(358
6.9
49,210
163,816
100,801
61,777
6.5
6.1
45
63,424
14.4
53,921
179,286
157,685
22,092
18,337
61,785
53,743
28,515
27,073
7.5
86,220
79,739
88,576
20.1
75,906
21.0
230,719
203,742
80,158
60,098
16.6
200,645
16.7
157,876
535
880
1,989
1,664
1,935
4,165
6,478
8,795
285,235
64.7
240,380
66.4
767,122
63.8
663,244
64.2
155,698
35.3
121,422
33.6
435,584
36.2
369,519
35.8
315,353
71.5
262,172
72.5
868,018
72.2
756,322
73.2
82,610
18.7
72,656
228,705
19.0
217,982
21.1
4,657
4,481
13,360
12,963
38,313
22,493
6.2
92,623
45,496
4.4
111
161
142
208
9.8
27,031
106,144
58,393
5.7
7.0
76,347
82.9
86,493
94.2
199,178
72.6
232,460
83.6
6,082
5,673
16,006
18,110
Operating income (loss)
9,693
(359
(0.4
%)
59,267
21.6
27,354
1,895
1,519
7,187
6,273
1,408
1,079
7,647
8,647
1,858
4,254
6,807
18,068
19.6
6,054
85,853
31.3
53,577
25.2
20.7
26.6
46
2,337
16.2
2,635
16.0
7,345
6,603
12.9
580
305
1,457
1,154
270
549
965
1,093
77.9
78.9
78.5
82.7
46,922
324.7
26,990
163.6
115,536
255.0
92,015
179.8
545
643
1,633
1,931
42.8
66.9
41.6
31.0
Operating loss
(26,837
(185.7
(91
(0.6
(52,994
(117.0
(26,921
(52.6
62,134
430.0
19,512
118.3
136,513
301.4
95,382
186.4
Less: Net (loss) income attributable
(0.1
4,355
26.4
4,283
8.4
EBITDA and Adjusted EBITDA
248.2
187.9
129.2
In 2017, we changed the presentation of the operating results of one of our emerging businesses among our regional services reporting segments. Prior year amounts have been reclassified to conform with the current-year presentation. This change had no impact on our consolidated results. Additionally, certain adjustments have been made to 2016 fee revenue to conform with current-year presentation.
Revenue increased by $194.1 million, or 10.9%, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing and property management revenue and improved sales and leasing activity as well as higher loan servicing revenue. Foreign currency translation also had a $4.2 million positive impact on revenue during the three months ended September 30, 2017, primarily driven by strength in the Canadian dollar and Mexican peso. These increases were partially offset by lower revenue from commercial mortgage origination.
Cost of services increased by $138.5 million, or 11.0%, for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to higher costs associated with our occupier outsourcing business and higher professional bonuses in the United States resulting from improved operating performance. Also contributing to the variance was higher commission expense resulting from improved sales and lease transaction revenue. Foreign currency translation had a $2.8 million negative impact on cost of services during the three months ended September 30, 2017. These items were partially offset by the impact of $11.1 million of costs incurred in the prior-year quarter in connection with our cost-elimination project that did not recur in the current year. Cost of services as a percentage of revenue was consistent at 70.8% for both the three months ended September 30, 2017 and 2016, with the impact of higher professional bonuses incurred in the current year offset by the impact of cost-elimination project costs that were only incurred in the prior year.
Operating, administrative and other expenses increased by $4.4 million, or 1.3%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. The increase was partly driven by higher payroll-related costs (including an increase in bonus and stock compensation expense due to improved operating performance). Foreign currency also had a $1.9 million negative impact on total operating expenses during the three months ended September 30, 2017, which included unfavorable foreign currency transaction activity, mostly hedging related, of $1.0 million and a negative impact from foreign currency translation of $0.9
47
million. These increases were partially offset by the impact of $17.2 million in integration and other costs related to the GWS Acquisition and $6.9 million associated with our cost-elimination project, both of which were incurred during the three months ended September 30, 2016 and did not recur in the third quarter of 2017.
In connection with the origination and sale of mortgage loans for which the company retains servicing rights, we record servicing assets or liabilities based on the fair value of the retained mortgage servicing rights (MSRs) on the date the loans are sold. We also assume or purchase certain servicing assets. Upon origination of a mortgage loan held for sale, the fair value of the mortgage servicing rights to be retained is included in the forecasted proceeds from the anticipated loan sale and results in a net gain (which is reflected in revenue). Subsequent to the initial recording, MSRs are amortized (within amortization expense) and carried at the lower of amortized cost or fair value in other intangible assets in the accompanying consolidated balance sheets. They are amortized in proportion to and over the estimated period that the servicing income is expected to be received. For the three months ended September 30, 2017, MSRs contributed to operating income $35.4 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $25.8 million of amortization of related intangible assets. For the three months ended September 30, 2016, MSRs contributed to operating income $48.9 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $18.0 million of amortization of related intangible assets.
Revenue increased by $85.0 million, or 9.0%, for the three months ended September 30, 2017 as compared to the same period in 2016. We achieved strong organic growth fueled by higher occupier outsourcing and property management revenue, as well as increased sales and leasing activity. Foreign currency translation also had an $18.5 million positive impact on total revenue during the three months ended September 30, 2017, primarily driven by strength in the euro, partially offset by weakness in the British pound sterling.
Cost of services increased by $68.9 million, or 9.4%, for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to higher costs associated with our occupier outsourcing business as well as higher professional bonuses (particularly in the United Kingdom) resulting from improved operating performance. In addition, foreign currency translation had a $13.4 million negative impact on cost of services during the third quarter of 2017. Cost of services as a percentage of revenue was relatively consistent at 77.5% for the three months ended September 30, 2016 and 77.8% for the three months ended September 30, 2017.
Operating, administrative and other expenses decreased by $5.7 million, or 3.5%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. This decrease was primarily driven by the impact of $10.1 million of integration and other costs related to the GWS Acquisition incurred during the third quarter of 2016 that did not recur in the current-year quarter. This was partially offset by foreign currency, which had a net $2.6 million negative impact on total operating expenses during the three months ended September 30, 2017, including a $3.5 million negative impact from foreign currency translation, partially offset by $0.9 million of favorable foreign currency transaction activity, part of which related to hedging activities.
Revenue increased by $79.1 million, or 21.9%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. The revenue increase reflects strong organic growth, fueled by higher occupier outsourcing and property management revenue as well as improved sales and leasing activity. Foreign currency translation also had a $2.5 million positive impact on total revenue during the three months ended September 30, 2017, primarily driven by strength in the Australian dollar and Indian rupee, partially offset by weakness in the Japanese yen.
Cost of services increased by $53.2 million, or 20.3%, for the three months ended September 30, 2017 as compared to the same period in 2016, driven by higher costs associated with our occupier outsourcing business. Also contributing to the variance was higher commission expense resulting from improved sales and lease transaction revenue. In addition, foreign currency translation had a $2.3 million negative impact on cost of services during the three months ended September 30, 2017. Cost of services as a percentage of revenue decreased from
48
72.5% for the three months ended September 30, 2016 to 71.5% for the three months ended September 30, 2017, partly due to higher transaction revenue in certain countries that have a fixed compensation structure.
Operating, administrative and other expenses increased by $10.0 million, or 13.7%, for the three months ended September 30, 2017 as compared to the same period in 2016. We incurred higher payroll-related costs (including increased stock compensation and bonus expense due to improved operating performance) in the current year quarter. This was partially offset by foreign currency activity, which had an overall net positive impact of $1.2 million for the three months ended September 30, 2017, due to favorable foreign currency transaction activity of $1.6 million, mostly related to hedging, partly offset by a $0.4 million negative impact from foreign currency translation.
Revenue was consistent at $92.1 million for the three months ended September 30, 2017 and $91.8 million for the three months ended September 30, 2016. Foreign currency translation had a $1.1 million positive impact on total revenue during the three months ended September 30, 2017, primarily driven by strength in the euro.
Operating, administrative and other expenses decreased by $10.1 million, or 11.7%, for the three months ended September 30, 2017 as compared to the same period in 2016, primarily driven by the impact of $15.6 million of costs incurred in the third quarter of 2016 in connection with our cost-elimination project that did not recur in the current year. Foreign currency had a net $0.3 million negative impact on total operating expenses during the three months ended September 30, 2017, which included a $0.9 million negative impact from foreign currency translation, partially offset by $0.6 million of favorable foreign currency transaction activity over the same period in the prior year, part of which related to hedging activities. These items were partially offset by higher carried interest expense incurred during the three months ended September 30, 2017.
A roll forward of our AUM by product type for the three months ended September 30, 2017 is as follows (dollars in billions):
Separate
Funds
Accounts
Securities
Balance at July 1, 2017
33.4
42.2
16.1
91.7
Inflows
Outflows
(0.7
(0.8
(1.6
(3.1
Market (depreciation) appreciation
(2.6
31.6
51.7
15.0
98.3
AUM generally refers to the properties and other assets with respect to which we provide (or participate in) oversight, investment management services and other advice, and which generally consist of real estate properties or loans, securities portfolios and investments in operating companies and joint ventures. Our AUM is intended principally to reflect the extent of our presence in the real estate market, not the basis for determining our management fees. Our assets under management consist of:
the total fair market value of the real estate properties and other assets either wholly-owned or held by joint ventures and other entities in which our sponsored funds or investment vehicles and client accounts have invested or to which they have provided financing. Committed (but unfunded) capital from investors in our sponsored funds is not included in this component of our AUM. The value of development properties is included at estimated completion cost. In the case of real estate operating companies, the total value of real properties controlled by the companies, generally through joint ventures, is included in AUM; and
the net asset value of our managed securities portfolios, including investments (which may be comprised of committed but uncalled capital) in private real estate funds under our fund of funds investments.
49
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 decreased by $2.0 million, or 12.4%, for the three months ended September 30, 2017 as compared to the same period in 2016, primarily driven by lower rental revenue and development fees.
Operating, administrative and other expenses increased by $19.9 million, or 73.9%, for the three months ended September 30, 2017 as compared to the same period in 2016. This increase was primarily driven by higher bonuses in the current three months due to improved operating performance (property sales reflected in equity income from unconsolidated subsidiaries were significantly higher in the current-year quarter).
As of September 30, 2017, development projects in process totaled $5.9 billion, down $1.2 billion from the third quarter of 2016. The development pipeline totaled $5.4 billion, up $1.7 billion over the third quarter of 2016.
Revenue increased by $375.4 million, or 7.3%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing and property management revenue and improved sales and leasing activity as well as higher loan servicing revenue. Foreign currency translation had a $2.1 million positive impact on revenue during the nine months ended September 30, 2017, primarily driven by strength in the Brazilian real and the Canadian dollar, partially offset by weakness in the Mexican peso and Venezuelan bolivar.
Cost of services increased by $253.6 million, or 7.1%, for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to higher costs associated with our occupier outsourcing business and higher professional bonuses in the United States. Also contributing to the variance was higher commission expense resulting from improved sales and lease transaction revenue. Foreign currency translation had a $0.1 million negative impact on cost of services during the nine months ended September 30, 2017. These items were partially offset by the impact of $11.9 million of costs incurred in the prior-year period in connection with our cost-elimination project that did not recur in the current year. Cost of services as a percentage of revenue was relatively consistent at 69.9% for the nine months ended September 30, 2016 and 69.7% for the nine months ended September 30, 2017, with the impact of higher professional bonuses in the current year offset by the impact of cost-elimination project costs that were only incurred in the prior year.
Operating, administrative and other expenses increased by $19.0 million, or 1.9%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The increase was partly driven by higher payroll-related costs (including an increase in bonus and stock compensation expense due to improved operating performance). Foreign currency also had a $6.9 million negative impact on total operating expenses during the nine months ended September 30, 2017, which included a negative impact from foreign currency translation of $2.0 million and unfavorable foreign currency transaction activity, mostly hedging related, of $4.9 million. These increases were partially offset by a decrease of $29.5 million in integration and other costs related to the GWS Acquisition incurred during the nine months ended September 30, 2017 as well as the impact of $10.4 million of costs incurred during the nine months ended September 30, 2016 as part of our cost-elimination project, which did not recur in the current year.
For the nine months ended September 30, 2017, MSRs contributed to operating income $96.0 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $72.5 million of amortization of related intangible assets. For the nine months ended September 30, 2016, MSRs contributed to operating income $104.0 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $52.8 million of amortization of related intangible assets.
50
Revenue increased by $89.6 million, or 3.3%, for the nine months ended September 30, 2017 as compared to the same period in 2016. We achieved strong organic growth fueled by higher occupier outsourcing and property management revenue, as well as higher sales and leasing activity. Such growth was partially offset by foreign currency translation, which had a $125.5 million negative impact on total revenue during the nine months ended September 30, 2017, primarily driven by weakness in the British pound sterling.
Cost of services increased by $33.1 million, or 1.5%, for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily due to higher costs associated with our occupier outsourcing business and higher professional bonuses, particularly in the United Kingdom resulting from improved operating performance. These items were partly offset by foreign currency translation, which had a $101.4 million positive impact on cost of services. In addition, we incurred $18.8 million of costs in the prior-year period in connection with our cost-elimination project that did not recur in the current year. The absence of such costs contributed to cost of services as a percentage of revenue decreasing from 79.1% for the nine months ended September 30, 2016 to 77.8% for the nine months ended September 30, 2017. In addition, higher transaction revenue in certain countries that have a fixed compensation structure also contributed to the decline in cost of services as a percentage of revenue.
Operating, administrative and other expenses decreased by $6.8 million, or 1.4%, for the nine months ended September 30, 2017 as compared to the same period in 2016. This decrease was primarily driven by a decrease of $12.7 million in integration and other costs related to the GWS Acquisition incurred during the nine months ended September 30, 2017 as well as the impact of $6.8 million of costs incurred during the nine months ended September 30, 2016 as part of our cost-elimination project, which did not recur in the current year. Foreign currency also had a $16.0 million net positive impact on total operating expenses during the nine months ended September 30, 2017, including a $19.7 million positive impact from foreign currency translation, partially offset by $3.7 million of unfavorable foreign currency transaction activity, part of which related to hedging activities. These favorable items were partially offset by higher payroll-related costs, including increased bonus and stock compensation expense due to improved operating performance during the nine months ended September 30, 2017.
Revenue increased by $169.9 million, or 16.5%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The revenue increase reflects strong organic growth, fueled by higher occupier outsourcing and property management revenue as well as improved sales and leasing activity. In addition, foreign currency translation had a $3.5 million positive impact on total revenue during the nine months ended September 30, 2017, primarily driven by strength in the Australian dollar and Indian rupee, largely offset by weakness in the Chinese yuan and Japanese yen.
Cost of services increased by $111.7 million, or 14.8%, for the nine months ended September 30, 2017 as compared to the same period in 2016, driven by higher costs associated with our occupier outsourcing business. Also contributing to the variance was higher commission expense resulting from improved sales and lease transaction revenue. In addition, foreign currency translation had a $2.1 million negative impact on cost of services during the nine months ended September 30, 2017. These items were partially offset by the impact of $6.4 million of costs incurred during the nine months ended September 30, 2016 in connection with our cost-elimination project that did not recur in the current year. The absence of such costs contributed to cost of services as a percentage of revenue decreasing from 73.2% for the nine months ended September 30, 2016 to 72.2% for the nine months ended September 30, 2017.
Operating, administrative and other expenses increased by $10.7 million, or 4.9%, for the nine months ended September 30, 2017 as compared to the same period in 2016. We incurred higher payroll-related costs (including increased stock compensation and bonus expense due to improved operating performance) during the nine months ended September 30, 2017. This was partially offset by a decrease of $4.4 million in integration and other costs related to the GWS Acquisition incurred during the nine months ended September 30, 2017 as well as the impact of $2.9 million of costs incurred during the nine months ended September 30, 2016 as part of our cost-elimination project, which did not recur in the current year. Foreign currency activity also had an overall net positive impact of $8.0 million for the nine months ended September 30, 2017, due to favorable foreign currency transaction activity of
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$8.7 million, mostly related to hedging, partially offset by a $0.7 million negative impact from foreign currency translation.
Revenue decreased by $3.5 million, or 1.3%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. Foreign currency translation had a $6.0 million negative impact on total revenue during the nine months ended September 30, 2017, primarily driven by weakness in the British pound sterling. This, coupled with lower asset management fees, was mostly offset by higher carried interest revenue in the current nine months.
Operating, administrative and other expenses decreased by $33.3 million, or 14.3%, for the nine months ended September 30, 2017 as compared to the same period in 2016, primarily driven by the impact of $21.3 million of costs incurred in the nine months ended September 30, 2016 in connection with our cost-elimination project that did not recur in the current year. In addition, lower carried interest expense as well as lower payroll-related costs (including bonuses) contributed to the variance. Lastly, foreign currency had a $4.3 million positive impact on total operating expenses during the nine months ended September 30, 2017, which included a $3.9 million positive impact from foreign currency translation and $0.4 million of favorable foreign currency transaction activity over the same period in the prior year, part of which related to hedging activities.
A roll forward of our AUM by product type for the nine months ended September 30, 2017 is as follows (dollars in billions):
37.5
17.5
86.6
13.7
(4.7
(3.3
(4.6
(12.6
Market appreciation
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 decreased by $5.9 million, or 11.4%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily driven by lower incentive and development fees in the current nine months.
Operating, administrative and other expenses increased by $23.5 million, or 25.6%, for the nine months ended September 30, 2017 as compared to the same period in 2016. This increase was primarily driven by higher payroll-related costs, including increased bonus expense in the current nine months due to improved operating performance (property sales reflected in equity income from unconsolidated subsidiaries were significantly higher in the current-year period).
Liquidity and Capital Resources
We believe that we can satisfy our working capital and funding requirements with internally generated cash flow and, as necessary, borrowings under our revolving credit facility. Our expected capital requirements for 2017 include up to approximately $160 million of anticipated capital expenditures, net of tenant concessions. During the nine months ended September 30, 2017, we incurred $86.9 million of capital expenditures, net of tenant concessions received. As of September 30, 2017, we had aggregate commitments of $33.5 million to fund future co-investments in our Global Investment Management business, $6.9 million of which is expected to be funded in 2017.
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Additionally, as of September 30, 2017, we are committed to fund $20.4 million of additional capital to unconsolidated subsidiaries within our Development Services business, which we may be required to fund at any time. As of September 30, 2017, we had $2.8 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 general investment requirements (including strategic in-fill acquisitions) and have not sought other external sources of financing to help fund these requirements. In the absence of extraordinary events or a large strategic acquisition, we anticipate that our cash flow from operations and our revolving credit facility would be sufficient to meet our anticipated cash requirements for the foreseeable future, and at a minimum for the next 12 months. We may seek to take advantage of market opportunities to refinance existing debt instruments, as we have done in the past, with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time in our sole discretion, purchase, redeem, or retire our existing senior notes, through tender offers, in privately negotiated or open market transactions, or otherwise.
As noted above, we believe that any future significant acquisitions that we may make could require us to obtain additional debt or equity financing. In the past, we have been able to obtain such financing for material transactions on terms that we believed to be reasonable. However, it is possible that we may not be able to obtain acquisition financing on favorable terms, or at all, in the future if we decide to make any further significant acquisitions.
Our long-term liquidity needs, other than those related to ordinary course obligations and commitments such as operating leases, are generally comprised of 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 September 30, 2017 and December 31, 2016, we had accrued $73.2 million ($20.8 million of which was a current liability) and $91.0 million ($29.3 million of which was a current liability), respectively, of deferred purchase consideration, which was included in accounts payable and accrued expenses and in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 1 of this Quarterly Report.
In addition, on October 27, 2016, we announced that our board of directors had authorized the company to repurchase up to an aggregate of $250 million of our Class A common stock over three years. The timing of the repurchase and the actual amount repurchased will depend on a variety of factors, including the market price of our common stock, general market and economic conditions and other factors. We intend to fund the repurchases, if any, with cash on hand or borrowings under our revolving credit facility. As of September 30, 2017, the authorization remains unused.
Historical Cash Flows
Operating Activities
Net cash provided by operating activities totaled $247.3 million for the nine months ended September 30, 2017, as compared to net cash used in operating activities of $53.2 million for the nine months ended September 30, 2016. The increase in net cash provided by operating activities was primarily due to improved operating performance, lower net payments to vendors and lower net income taxes paid during the nine months ended September 30, 2017. These items were partially offset by higher net receivables recorded in the current year.
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Investing Activities
Net cash used in investing activities was comparable at $33.8 million for the nine months ended September 30, 2017 versus $39.6 million for the nine months ended September 30, 2016.
Financing Activities
Net cash used in financing activities totaled $44.2 million for the nine months ended September 30, 2017, an increase of $43.3 million as compared to the nine months ended September 30, 2016. The increase was primarily due to lower net borrowings under our revolving credit facility during the nine months ended September 30, 2017, partially offset by the impact of repayments of senior term loans, which did not recur in the current 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, CBRE Services entered into our 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, CBRE Services 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 the revolving credit facility by $200.0 million.
Our 2015 Credit Agreement was an unsecured credit facility that was jointly and severally guaranteed by us and substantially all of our material domestic subsidiaries. Our 2015 Credit Agreement provided for the following: (1) a $2.8 billion revolving credit facility, which included the capacity to obtain letters of credit and swingline loans and had a maturity date of March 21, 2021; (2) a $500.0 million tranche A term loan facility requiring quarterly principal payments, which began on June 30, 2015 and would have continued 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 would have continued 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 would have continued through maturity on September 3, 2022. On November 1, 2016, we prepaid a total of $101.9 million of the 2017 and 2018 required amortization on our senior term loans, which included $59.4 million for the tranche A term loan facility, $28.7 million for the tranche B-1 term loan facility and $13.8 million for the tranche B-2 term loan facility.
On October 31, 2017, CBRE Services entered into a new Credit Agreement (2017 Credit Agreement), which refinanced and replaced our 2015 Credit Agreement.
Our 2017 Credit Agreement is a senior unsecured credit facility that is jointly and severally guaranteed by us and certain of our subsidiaries. Our 2017 Credit Agreement provides for the following credit facilities:
On October 31, 2017, CBRE Services made an initial borrowing of (1) $200.0 million under the tranche A term loan facility (with the remaining $550.0 million available to be drawn under the tranche A term loan facility on one additional occasion on any date on or prior to July 31, 2018) and (2) $83.0 million under the revolving credit
54
facility. These proceeds, in addition to cash on hand, were used to repay all amounts outstanding under our 2015 Credit Agreement. For additional information on our 2017 Credit Agreement, see Note 12 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report.
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, 2016 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 2017 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, 2016 and Notes 3, 7 and 12 of the Notes to Consolidated Financial Statements (Unaudited) set forth in Item 1 of this Quarterly Report.
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 Board (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 at September 30, 2017 was $400.0 million, with $200.0 million having expired on October 2, 2017 and $200.0 million expiring in September 2019. As of September 30, 2017 and December 31, 2016, the fair values of such interest rate swap agreements were reflected as a $6.6 million liability and a $13.2 million liability, respectively, and were included in other current and 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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The words “anticipate,” “believe,” “could,” “should,” “propose,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases are used in this 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:
disruptions in general economic and business conditions, particularly in geographies where our business may be concentrated;
volatility and disruption of the securities, capital and credit markets, interest rate increases, the cost and availability of capital for investment in real estate, clients’ willingness to make real estate or long-term contractual commitments and other factors affecting the value of real estate assets, inside and outside the United States;
increases in unemployment and general slowdowns in commercial activity;
trends in pricing and risk assumption for commercial real estate services;
the effect of significant movements in average cap rates across different property types;
a reduction by companies in their reliance on outsourcing for their commercial real estate needs, which would affect our revenues and operating performance;
client actions to restrain project spending and reduce outsourced staffing levels;
declines in lending activity of U.S. Government Sponsored Enterprises, regulatory oversight of such activity and our mortgage servicing revenue from the commercial real estate mortgage market;
our ability to diversify our revenue model to offset cyclical economic trends in the commercial real estate industry;
our ability to attract new user and investor clients;
our ability to retain major clients and renew related contracts;
our ability to leverage our global services platform to maximize and sustain long-term cash flow;
our ability to maintain EBITDA and adjusted EBITDA margins that enable us to continue investing in our platform and client service offerings;
our ability to control costs relative to revenue growth;
economic volatility and market uncertainty globally related to uncertainty surrounding the implementation and effect of the United Kingdom’s referendum to leave the European Union, including uncertainty in relation to the legal and regulatory framework that would apply to the United Kingdom and its relationship with the remaining members of the European Union;
foreign currency fluctuations;
our ability to retain and incentivize key personnel;
our ability to compete globally, or in specific geographic markets or business segments that are material to us;
our ability to identify, acquire and integrate synergistic and accretive businesses;
costs and potential future capital requirements relating to businesses we may acquire;
integration challenges arising out of companies we may acquire;
56
the ability of our Global Investment Management business to maintain and grow assets under management and achieve desired investment returns for our investors, and any potential related litigation, liabilities or reputational harm possible if we fail to do so;
our ability to manage fluctuations in net earnings and cash flow, which could result from poor performance in our investment programs, including our participation as a principal in real estate investments;
our leverage under our debt instruments as well as the limited restrictions therein on our ability to incur additional debt, and the potential increased borrowing costs to us from a credit-ratings downgrade;
the ability of CBRE Capital Markets to periodically amend, or replace, on satisfactory terms, the agreements for its warehouse lines of credit;
variations in historically customary seasonal patterns that cause our business not to perform as expected;
litigation and its financial and reputational risks to us;
our exposure to liabilities in connection with real estate advisory and property management activities and our ability to procure sufficient insurance coverage on acceptable terms;
liabilities under guarantees, or for construction defects, that we incur in our Development Services business;
our and our employees’ ability to execute on, and adapt to, information technology strategies and trends;
changes in domestic and international law and regulatory environments (including relating to anti-corruption, anti-money laundering, trade sanctions, currency controls and other trade control laws), particularly in Russia, Eastern Europe and the Middle East, due to the level of political instability in those regions;
our ability to comply with laws and regulations related to our global operations, including real estate licensure, tax, labor and employment laws and regulations, as well as the anti-corruption laws and trade sanctions of the U.S. and other countries;
our ability to maintain our effective tax rate at or below current levels;
changes in applicable tax or accounting requirements, including potential tax reform under the current U.S. administration;
the effect of implementation of new accounting rules and standards; and
the other factors described elsewhere in this Quarterly Report, included under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies,” “Quantitative and Qualitative Disclosures About Market Risk” and Part II, Item 1A, “Risk Factors” or as described in our Annual Report on Form 10-K for the year ended December 31, 2016, in particular in Part II, Item 1A “Risk Factors”, or as described in the other documents and reports we file with the Securities and Exchange Commission.
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, 2016.
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 is 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.
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 $750.8 million at September 30, 2017. Based on dealers’ quotes, the estimated fair values of our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes were $829.1 million, $646.6 million and $463.4 million, respectively, at September 30, 2017.
We utilize sensitivity analyses to assess the potential effect of our variable rate debt. If interest rates were to increase 100 basis points on our outstanding variable rate debt at September 30, 2017, excluding notes payable on real estate, the net impact of the additional interest cost would be a decrease of $2.6 million on pre-tax income and a decrease of $2.6 million in cash provided by operating activities for the nine months ended September 30, 2017.
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 Assurance and Advisory, 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 September 30, 2017 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 September 30, 2017 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, 2016.
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, 2016.
Incorporated by Reference
ExhibitNo.
Exhibit Description
Form
SEC File No.
Exhibit
Filing Date
FiledHerewith
Amended and Restated Certificate of Incorporation of CBRE Group, Inc.
8-K
001-32205
05/19/2016
Amended and Restated By-Laws of CBRE Group, Inc.
10-Q
05/10/2017
Form of Class A common stock certificate of CBRE Group, Inc.
08/08/2017
4.2(a)
Indenture, dated as of March 14, 2013, among CBRE Group, Inc., CBRE Services, Inc., certain subsidiaries of CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee
4.4(a)
05/10/2013
4.2(b)
First Supplemental Indenture, dated as of March 14, 2013, between CBRE Services, Inc., CBRE Group, Inc., certain subsidiaries of CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, for the 5.00% Senior Notes Due 2023, including the Form of 5.00% Senior Notes due 2023
4.4(b)
4.2(c)
Form of Supplemental Indenture among certain subsidiary guarantors of CBRE Services, Inc., CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, for the 5.00% Senior Notes due 2023
4.3
04/16/2013
4.2(d)
Second Supplemental Indenture, dated as of April 10, 2013, between CBRE/LJM- Nevada, Inc., CBRE Consulting, Inc., CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, for the 5.00% Senior Notes due 2023
S-3ASR
333-201126
4.3(c)
12/19/2014
4.2(e)
Second Supplemental Indenture, dated as of September 26, 2014, between CBRE Services, Inc., CBRE Group, Inc., certain subsidiaries of CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, for the 5.25% Senior Notes due 2025, including the Form of 5.25% Senior Notes due 2025
09/26/2014
4.2(f)
Third Supplemental Indenture, dated as of December 12, 2014, between CBRE Services, Inc., CBRE Group, Inc., certain subsidiaries of CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, for the additional issuance of 5.25% Senior Notes due 2025
12/12/2014
4.2(g)
Form of Supplemental Indenture among certain subsidiary guarantors of CBRE Services, Inc., CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, for the 5.25% Senior Notes due 2025
4.3(h)
4.2(h)
Fourth Supplemental Indenture, dated as of August 13, 2015, between CBRE Services, Inc., CBRE Group, Inc., certain subsidiaries of CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, for the issuance of 4.875% Senior Notes due 2026, including the Form of 4.875% Senior Notes due 2026
08/13/2015
4.2(i)
Fifth Supplemental Indenture, dated as of September 25, 2015, between CBRE GWS LLC, CBRE Services, Inc. and Wells Fargo Bank, National Association, as trustee, relating to the 5.00% Senior Notes due 2023, the 5.25% Senior Notes due 2025 and the 4.875% Senior Notes due 2026
09/25/2015
Statement concerning Computation of Per Share Earnings (filed as Note 9 of the Consolidated Financial Statements)
X
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002
60
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
61
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.
Date: November 9, 2017
/s/ James R. Groch
James R. Groch
Chief Financial Officer (principal financial officer)
/s/ Gil Borok
Gil Borok
Chief Accounting Officer (principal accounting officer)