CBRE Group, Inc. reports strong financial results for second-quarter 2016

CBRE Group, Inc. (NYSE:CBG) today reported strong financial results for the second quarter ended June 30, 2016.

Second-Quarter 2016 Results*

• Revenue for the second quarter totaled $3.2 billion, an increase of 34% (35% local currency¹).  Fee revenue² increased 19% (20% local currency) to $2.1 billion.  The second quarter of 2016 included approximately $690 million of revenue from the acquired Global Workplace Solutions business.  Excluding the acquired Global Workplace Solutions business, revenue was up 5% (6% local currency) and fee revenue was up 3% (4% local currency).
• On a GAAP basis, net income and earnings per diluted share decreased to $121.7 million and $0.36 per share, respectively.  GAAP net income for the second quarter of 2016 was reduced by $27.8 million (pre-tax) of integration costs associated with the Global Workplace Solutions acquisition; $27.2 million (pre-tax) incurred in the previously announced cost-elimination program; and $26.6 million (pre-tax) of acquisition-related non-cash amortization. These costs were partially offset by an associated tax benefit of $23.9 million.
• Adjusted net income³ rose 25% to $174.9 million, while adjusted earnings per share³ improved 24% to $0.52 per share.
• Foreign currency movement, primarily the impact of marking-to-market of currency hedges, increased current-quarter earnings per share by approximately $0.01 per share.  For the second quarter of 2015 this impact reduced earnings per share by approximately $0.03.
• EBITDA⁴ rose 4% to $309.9 million and adjusted EBITDA⁴ increased 19% to $360.5 million.  EBITDA and adjusted EBITDA were both positively impacted by $4.1 million of currency movement, primarily the marking-to-market of currency hedges in the second quarter of 2016. EBITDA and adjusted EBITDA were both negatively impacted by $13.9 million of currency movement, primarily the marking-to-market of currency hedges in the second quarter of 2015.
• Adjusted EBITDA margin on fee revenue was 17.0%.

Management Commentary

“CBRE posted another quarter of strong growth,” said Bob Sulentic, the company’s president and chief executive officer.  “This growth came amid uncertainty in the macro environment, making the diversity of CBRE’s service offering especially important.  Our performance for the quarter was supported by strong growth in occupier outsourcing and mortgage services, with leasing also up nicely in the Americas and Asia Pacific.  In addition, our investment management and development services businesses also produced solid earnings gains.”

The Americas, the company’s largest business segment, saw revenue increase 24%.  In EMEA (Europe, the Middle East & Africa), revenue rose by 64% (66% local currency), and in Asia Pacific (APAC) revenue increased 36% (38% local currency). Without the contributions from the Global Workplace Solutions business, which CBRE acquired in September 2015, revenue increased 7% in the Americas, 3% (6% local currency) in EMEA and 3% (5% local currency) in APAC.

Occupier outsourcing continued to exhibit strong growth.  Global revenue was up 105% (107% local currency), aided by contributions from the Global Workplace Solutions acquisition.  Without the contributions from this acquisition, revenue rose 13% (15% local currency). Occupier outsourcing fee revenue without the Global Workplace Solutions acquisition rose 8% (10% local currency). Globally, the company signed 96 total contracts, including 37 with new clients.

Commercial mortgage services showed very good growth with revenue up 14%, driven by strong activity with private lenders, particularly banks, and continued growth with Government Sponsored Enterprises.

Leasing achieved good growth in the Americas, up 8%, and APAC, up 6% (7% local currency), as the company continued to benefit from producers choosing to join CBRE through its recruitment initiative.  In the Americas, Canada, Mexico and the U.S. all turned in healthy performances while APAC was led by Greater China, India and New Zealand. EMEA leasing revenue fell 11% for the quarter.

Global property sales revenue fell 6% (5% local currency). Americas sales revenue rose 1% (2% local currency), while EMEA declined 17% (16% local currency) and APAC decreased 18% (16% local currency).  This compared with a robust second quarter of 2015, when year-on-year growth rates were 23% (25% local currency) in the Americas; 37% (62% local currency) in EMEA and 8% (24% local currency) in APAC.

Revenue from property management services increased 3% (4% local currency), while Valuation revenue dipped 2% (1% local currency).

The global investment management and development services businesses performed well during the quarter, contributing more than $26 million and $18 million of adjusted EBITDA, respectively.      Global investment assets under management (AUM) totaled $88.6 billion at the end of the second quarter of 2016, up $3.9 billion in local currency from the second quarter of 2015. However, foreign currency movement over the past year limited the increase in U.S. dollars to $0.2 billion. Development projects in process totaled $7.1 billion, up $1.1 billion from the second quarter of 2015.

For the entire company, CBRE’s business mix continued to shift toward greater contractual fee revenue⁵.  For the company as a whole, contractual fee revenue was 44% of fee revenue, up from 34% in second-quarter 2015 and 19% in the second quarter of 2006.

United Kingdom Operations

A high degree of uncertainty affected the United Kingdom (UK) real estate market leading up to the country’s referendum on its European Union membership on June 23, 2016.  This can be seen in a nearly 40% drop in the UK market-wide property sales volumes, according to CBRE Research. The effect on CBRE’s UK revenue during the second quarter was materially less pronounced. 

Overall, without the contributions of the acquired Global Workplace Solutions business, total UK revenue slipped only 2% (up 3% local currency) compared with a very strong second quarter of 2015. UK fee revenue was 9% (5% local currency) below the year-earlier pace, when fee revenue rose 19% (32% local currency) versus the second quarter of 2014.

Including contributions of the acquired Global Workplace Solutions business, CBRE’s total UK revenue increased 26% (30% local currency), and its UK fee revenue increased 8% (12% local currency).

This performance highlights how significantly CBRE’s UK business has evolved in recent years.  During the first half of 2016, occupier outsourcing and property management—which is sticky, recurring revenue—accounted for 69% of UK fee revenue versus just 19% of UK fee revenue for the first half of 2013. This shift in UK revenue mix has been driven by the company’s acquisitions of Norland Managed Services in December 2013 and Global Workplace Solutions in September 2015. 

Second-Quarter 2016 Segment Results

The following tables present highlights of CBRE segment performance during the second quarter of 2016 (dollars in thousands):

Second-quarter 2016 results were impacted by select items including acquisition-related integration expenses and charges associated with cost elimination actions.  The company does not adjust for currency movements, including gains or losses from currency hedging.  Accordingly, EBITDA and adjusted EBITDA were both impacted by foreign currency movements, including the marking-to-market of currency hedging.  This increased the current-quarter adjusted EBITDA by $4.1 million with the breakdown by segment as follows: Americas $0.7 million; EMEA $4.5 million; and Global Investment Management $1.0 million.  Asia Pacific was negatively impacted by $2.1 million. Second-quarter 2015 adjusted EBITDA was negatively impacted by $13.9 million with the breakdown by segment as follows: Americas $0.2 million; EMEA $8.3 million; Asia Pacific $2.5 million; and Global Investment Management $2.9 million.

Six-Month Results

• Revenue for the six months ended June 30, 2016 totaled $6.1 billion, an increase of 36% (38% local currency).  Fee revenue increased 22% (24% local currency) to $3.9 billion.  The first six months of 2016 included approximately $1.3 billion of revenue from the acquired Global Workplace Solutions business.  Excluding the acquired Global Workplace Solutions business, revenue was up 6% (8% local currency) and fee revenue was up 5% (7% local currency).
• On a GAAP basis, net income and earnings per diluted share decreased to $203.8 million and $0.60 per share, respectively.  GAAP net income for the first six months of 2016 was reduced by $51.5 million (pre-tax) of acquisition-related non-cash amortization; $44.9 million (pre-tax) of integration costs associated with the Global Workplace Solutions acquisition; and $39.6 million (pre-tax) incurred in the cost-elimination program. These costs were partially offset by an associated tax benefit of $40.1 million.
• Adjusted net income rose 20% to $295.8 million, while adjusted earnings per share improved 21% to $0.88 per share.
• EBITDA rose 4% to $562.5 million and adjusted EBITDA increased 17% to $643.1 million. 
• Adjusted EBITDA margin on fee revenue was 16.3%.
• Foreign currency movement, including the effect of hedging, negatively impacted adjusted EBITDA for the first six months of 2016 by $3.2 million and positively impacted the first six months of 2015 by $0.9 million.

Business Outlook

“Our business has performed very well in the first half of 2016, even with a decline in market-wide property sales volumes compared to a year ago,” Mr. Sulentic said.  “It is important to note that market fundamentals in commercial real estate remain in good shape – with the impact of Brexit largely limited to property transaction activity in the UK – and we anticipate solid earnings growth for the year. Looking ahead, we are adjusting our outlook for the remainder of the year. This is due principally to the impact of Brexit on UK property transaction volumes, and less visibility around the timing of the realization of certain incentives in our global investment management and development services businesses.”

These factors have caused CBRE to reduce its guidance by 3% at the top end of the range and by 5% at the bottom end. This results in expected adjusted earnings-per-share for the calendar year of $2.15 to $2.30, which represents solid growth of approximately 9% at the mid-point of the range.

Mr. Sulentic concluded: “As the clear market leader, CBRE is well positioned to further extend our competitive advantage in the marketplace. Our ongoing talent and technology initiatives, collaborative culture, market-leading service offering and financial strength uniquely position us to satisfy clients’ growing demand for our services.”

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ABOUT CBRE GROUP, INC.

CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2015 revenue). The Company has more than 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.