10-K 1 d291832d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2016

 

Commission File Number 001 - 32205

 

CBRE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   94-3391143

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification Number)

400 South Hope Street, 25th Floor

Los Angeles, California

  90071
(Address of principal executive offices)   (Zip Code)

 

(213) 613-3333

(Registrant’s telephone number, including area code)

 

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

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Class A Common Stock, $0.01 par value   New York Stock Exchange

 

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

N.A.

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K.  ☒

 

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

 

Large accelerated filer ☒  Accelerated filer ☐  Non-accelerated filer ☐  Smaller reporting company ☐

 

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

 

As of June 30, 2016, the aggregate market value of Class A Common Stock held by non-affiliates of the registrant was $8.9 billion based upon the last sales price on June 30, 2016 on the New York Stock Exchange of $26.48 for the registrant’s Class A Common Stock.

 

As of February 13, 2017, the number of shares of Class A Common Stock outstanding was 337,829,292.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the proxy statement for the registrant’s 2017 Annual Meeting of Stockholders to be held May 19, 2017 are incorporated by reference in Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

CBRE GROUP, INC.

 

ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

         Page  

PART I

 

Item 1.

  Business      3  

Item 1A.    

  Risk Factors      9  

Item 1B.

  Unresolved Staff Comments      22  

Item 2.

  Properties      22  

Item 3.

  Legal Proceedings      22  

Item 4.

  Mine Safety Disclosures      22  

PART II

 

Item 5.

  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      23  

Item 6.

  Selected Financial Data      25  

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      29  

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk      53  

Item 8.

  Financial Statements and Supplementary Data      55  

Item 9.

  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure      120  

Item 9A.

  Controls and Procedures      120  

Item 9B.

  Other Information      121  

PART III

 

Item 10.

  Directors, Executive Officers and Corporate Governance      121  

Item 11.

  Executive Compensation      121  

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      121  

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      122  

Item 14.

  Principal Accountant Fees and Services      122  

PART IV

 

Item 15.

  Exhibits and Financial Statement Schedules      122  

Schedule II—Valuation and Qualifying Accounts

     123  

SIGNATURES

     124  

 

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PART I

 

Item 1. Business

 

Company 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. We serve clients with people in more than 100 countries.

 

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

 

In 2016, we generated revenue from a well-balanced, highly diversified base of clients, including more than 90 of the Fortune 100 companies. We have been included in the Fortune 500 since 2008 (ranking #259 in 2016) and among the Fortune Most Admired Companies in the real estate sector for five consecutive years, including in 2017. In 2016, we were ranked by Forbes as the 15th best employer in America, and the International Association of Outsourcing Professionals (IAOP) has ranked us among the top few outsourcing service providers across all industries for five consecutive years. Additionally, we were one of only two companies to be ranked in the top 12 in the Barron’s 500, which evaluates companies on growth and financial performance, in each of 2014, 2015 and 2016.

 

CBRE History

 

We marked our 111th year of continuous operations in 2017, tracing our origins to a company founded in San Francisco in the aftermath of the 1906 earthquake. Since then, we have grown into the largest global commercial real estate services and investment firm (in terms of 2016 revenue) through organic growth and a series of strategic acquisitions. Among these are the following acquisitions: Global Workplace Solutions (September 2015); Norland Managed Services Ltd (December 2013); ING Group N.V.’s Real Estate Investment Management (REIM) operations in Europe and Asia (October 2011) and its U.S.-based global real estate listed securities business (July 2011); and Trammell Crow Company (December 2006).

 

Our Regions of Operation and Principal Services

 

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

 

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We report our operations through the following segments: (1) Americas; (2) Europe, Middle East and Africa, or EMEA; (3) Asia Pacific; (4) Global Investment Management; and (5) Development Services.

 

Information regarding revenue and operating income or loss, attributable to each of our segments, is included in “Segment Operations” within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section and within Note 17 of our Notes to Consolidated Financial Statements, which are incorporated herein by reference. Information concerning the identifiable assets of each of our business segments is also set forth in Note 17 of our Notes to Consolidated Financial Statements, which is incorporated herein by reference.

 

The Americas

 

The Americas is our largest reporting segment, comprised of operations throughout the United States and Canada as well as key markets in Latin America. Our operations are largely wholly-owned, but also include independent affiliates to whom we license the “CBRE” name in their local markets in return for payments of annual or quarterly royalty fees to us and an agreement to cross-refer business between us and the affiliate.

 

Most of our operations are conducted through our indirect wholly-owned subsidiary CBRE, Inc. Our mortgage loan origination, sales and servicing operations are conducted exclusively through our indirect wholly-owned subsidiary operating under the name CBRE Capital Markets, Inc., or CBRE Capital Markets, and its subsidiaries. Our operations in Canada are conducted through our indirect wholly-owned subsidiary CBRE Limited and our operations in Latin America are operated through various indirect wholly-owned subsidiaries.

 

Our Americas segment accounted for 55.3% of our 2016 revenue, 57.0% of our 2015 revenue and 57.5% of our 2014 revenue. Within our Americas segment, we organize our services into several business lines, as further described below.

 

Leasing Services

 

Through our Advisory & Transaction Services business line, we provide strategic advice and execution to owners, investors and occupiers of real estate in connection with leasing. We generate significant repeat business from existing clients, which, for example, accounted for approximately 70% of our U.S. leasing activity in 2016, including referrals from other parts of our business. We believe we are a market leader for the provision of these services in most top U.S. metropolitan statistical areas (as defined by the U.S. Census Bureau), including Chicago, Dallas, Denver, Houston, Los Angeles, Miami, New York and Philadelphia.

 

Capital Markets

 

We offer clients fully integrated property sales and mortgage and structured financing services under the CBRE Capital Markets brand. The tight integration of these services helps to meet marketplace demand for comprehensive capital markets solutions. During 2016, we concluded approximately $127.8 billion of capital markets transactions in the Americas, including $89.8 billion of property sales transactions and $38.0 billion of mortgage originations and loan sales.

 

We are the leading property sales advisor in the United States, accounting for approximately 16.3% of investment sales transactions greater than $2.5 million across office, industrial, retail, multifamily and hotel properties in 2016, according to Real Capital Analytics. Our mortgage brokerage business brokers, originates and services commercial mortgage loans primarily through relationships established with investment banking firms, national and regional banks, credit companies, insurance companies, pension funds and government agencies. In the Americas, our mortgage loan origination volume in 2016 was $37.0 billion, including approximately $16.0 billion for U.S. Government Sponsored Enterprises (GSEs). Most of the GSE loans were financed

 

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through revolving warehouse credit lines through a CBRE subsidiary that is dedicated exclusively for this purpose and were substantially risk mitigated by either obtaining a contractual purchase commitment from the GSE or confirming a forward-trade commitment for the issuance and purchase of a mortgage-backed security that will be secured by the loan. We advised on the sale of approximately $1.1 billion of mortgages on behalf of financial institutions in 2016. We also oversee a loan servicing portfolio, which totaled approximately $119 billion in the Americas (approximately $145 billion globally) at year-end 2016.

 

Our real estate services professionals are compensated primarily through commissions, which are payable upon completion of an assignment. This mitigates the effect of compensation, our largest expense, on our operating margins during difficult market conditions. We strive to retain top professionals through an attractive compensation program tied to productivity as well as greater investments in support resources, including professional development and training, market research and information, technology, branding and marketing, than most other firms in our sector.

 

We further strengthen our relationships with our real estate services clients by offering proprietary research to them through CBRE Research and CBRE Econometric Advisors, our commercial real estate market information and forecasting groups.

 

Valuation

 

We provide valuation services that include market value appraisals, litigation support, discounted cash flow analyses, feasibility studies as well as consulting services such as property condition reports, hotel advisory and environmental consulting. Our valuation business has developed proprietary systems for data management, analysis and valuation report preparation, which we believe provide us with an advantage over our competitors. We believe that our valuation business is one of the largest in the commercial real estate industry. During 2016, we completed over 69,000 valuation, appraisal and advisory assignments in the Americas.

 

Occupier Outsourcing

 

Through our Global Workplace Solutions business line, we provide a broad suite of services to occupiers of real estate, including facilities management, project management, transaction management and strategic consulting. We report facilities and project management as well as strategic consulting activities in our occupier outsourcing revenue line and transaction management in our lease and sales revenue lines.

 

We believe the outsourcing of commercial real estate services is a long-term trend in our industry, with occupiers, such as corporations, public sector entities, health care providers and others, achieving better execution and improved efficiency by relying on the expertise of third-party real estate specialists.

 

We typically enter into multi-year, often multi-service outsourcing contracts with our clients, and also provide services on a one-off assignment or a short-term contract basis. Facilities management involves the day-to-day management of client-occupied space and includes headquarter buildings, regional offices, administrative offices, data centers and other critical facilities, manufacturing and laboratory facilities, distribution facilities and retail space. Contracts for facilities management services are often structured so we are reimbursed for client-dedicated personnel costs and subcontracted vendor costs as well as associated overhead expenses plus a monthly fee, and in some cases, annual incentives tied to agreed-upon performance targets, with any penalties typically capped. Project management services are typically provided on a portfolio-wide or programmatic basis. Revenues for project management generally include fixed management fees, variable fees, and incentive fees if certain agreed-upon performance targets are met. Revenues for project management may also include reimbursement of payroll and related costs for personnel providing the services.

 

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Property Management

 

Through our Asset Services business line, we provide property management services on a contractual basis for owners/investors in office, industrial and retail properties. These services include construction management, marketing, building engineering, accounting and financial services.

 

We typically receive monthly management fees for the property management services we provide based upon a specified percentage of the monthly rental income or rental receipts generated from the property under management, or in certain cases, the greater of such percentage fee or a minimum agreed-upon fee. We are also often reimbursed for our administrative and payroll costs, as well as certain out-of-pocket expenses, directly attributable to the properties under management. Our management agreements with our property management services clients may be terminated by either party with notice generally ranging between 30 to 90 days; however, we have developed long-term relationships with many of these clients and the typical contract continues for multiple years. We believe our contractual relationships with these clients put us in an advantageous position to provide other services to them, including leasing, refinancing, disposition and appraisal.

 

Europe, Middle East and Africa (EMEA)

 

Our Europe, Middle East and Africa, or EMEA, reporting segment serves clients in approximately 60 countries. The largest operations are located in France, Germany, Ireland, Italy, The Netherlands, Spain, Switzerland and the United Kingdom. Our operations in these countries generally provide a full range of services to the commercial property sector. Additionally, we provide some residential property services, focused on the prime and super-prime segments of the market, primarily in the United Kingdom. Within EMEA, our services are organized along similar lines as in the Americas, including leasing, property sales, valuation services, asset management services and occupier outsourcing, among others. Our EMEA segment accounted for 30.0% of our 2016 revenue, 27.7% of our 2015 revenue and 25.9% of our 2014 revenue.

 

In several countries in EMEA, we have contractual relationships with independent affiliates that provide commercial real estate services under our brand name. Our agreements with these independent affiliates include licenses by us to them to use the “CBRE” name in the relevant territory in return for payments of annual or quarterly royalty fees to us. In addition, these agreements typically provide for the cross-referral of business between us and our affiliates.

 

Asia Pacific

 

Our Asia Pacific reporting segment serves clients in 16 countries. Our largest operations in Asia are located in Greater China, India, Japan, Singapore and Thailand. The Pacific region includes Australia and New Zealand. Our operations in these countries provide a full range of real estate services to the commercial sector, similar to the services provided by our Americas and EMEA segments. We also provide services to the residential property sector predominantly in the Pacific region. In addition, we have contractual agreements with independent affiliates that generate royalty fees and support cross-referral arrangements similar to our EMEA segment. Our Asia Pacific segment accounted for 11.4% of our 2016 revenue, 10.5% of our 2015 revenue and 10.7% of our 2014 revenue.

 

Global Investment Management

 

Operations in our Global Investment Management reporting segment are conducted through our indirect wholly-owned subsidiary CBRE Global Investors, LLC and its global affiliates, which we also refer to as CBRE Global Investors. CBRE Global Investors provides investment management services to pension funds, insurance companies, sovereign wealth funds, foundations, endowments and other institutional investors seeking to generate returns and diversification through investment in real estate. It sponsors investment programs that span the risk/return spectrum in: North America, Europe, Asia and Australia. In some strategies, CBRE Global Investors and its investment teams co-invest with its limited partners.

 

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

 

Assets under management, or AUM, totaled $86.6 billion at December 31, 2016 as compared to $89.0 billion at December 31, 2015. In local currency, AUM for 2016 was up $2.1 billion, but down $2.4 billion when measured in U.S dollars. Our Global Investment Management segment accounted for 2.8% of our 2016 revenue, 4.2% of our 2015 revenue and 5.2% of our 2014 revenue.

 

Development Services

 

Operations in our Development Services reporting segment are conducted through our indirect wholly-owned subsidiary Trammell Crow Company, LLC, which we also refer to as Trammell Crow Company, and certain of its subsidiaries, providing development services primarily in the United States to users of and investors in commercial real estate, as well as for its own account. Trammell Crow Company pursues opportunistic, risk-mitigated development and investment in commercial real estate across a wide spectrum of property types, including: industrial, office and retail properties; healthcare facilities of all types (medical office buildings, hospitals and ambulatory surgery centers); and residential/mixed-use projects. Our Development Services segment accounted for 0.5% of our 2016 revenue, 0.6% of our 2015 revenue and 0.7% of our 2014 revenue.

 

Trammell Crow Company pursues development and investment activity on behalf of its clients on a fee basis (with no ownership interest in a property), in partnership with its clients (through co-investment – either on an individual project basis or through programs with certain strategic capital partners) or for its own account (100% ownership). Development activity in which Trammell Crow Company has an ownership interest is conducted through subsidiaries that are consolidated or unconsolidated for financial reporting purposes, depending primarily on the extent and nature of our ownership interest.

 

At December 31, 2016, Trammell Crow Company had $6.6 billion of development projects in process. Additionally, the inventory of pipeline deals (prospective projects we believe have a greater than 50% chance of closing or where land has been acquired and the projected construction start date is more than twelve months out) was $4.2 billion at December 31, 2016.

 

Competition

 

We compete across a variety of business lines within the commercial real estate industry, including commercial property, corporate facilities, project and transaction management, tenant/occupier and property/agency leasing, capital markets solutions (property sales, commercial mortgage origination, sales and servicing, and structured finance) real estate investment management, valuation, development services and proprietary research. Each business line is highly competitive on an international, national, regional and local level. Although we are the largest commercial real estate services firm in the world in terms of 2016 revenue, our relative competitive position varies significantly across geographic markets, property types and services. We face competition from other commercial real estate service providers that compete with us on a global, national, regional or local basis or within a market segment; outsourcing companies that traditionally competed in limited portions of our facilities management business and have expanded their offerings from time to time; in-house corporate real estate departments and property owners/developers that self-perform real estate services; investment banking firms, investment managers and developers that compete with us to raise and place investment capital; and accounting/consulting firms that advise on real estate strategies. Some of these firms may have greater financial resources than we do.

 

Despite recent consolidation, the commercial real estate services industry remains highly fragmented and competitive. Although many of our competitors are substantially smaller than we are, some of them are larger on a regional or local basis or have a stronger position in a specific market segment or service offering. Among our

 

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primary competitors are other large national and global firms, such as Cushman & Wakefield, JLL (formerly Jones Lang LaSalle Incorporated), Colliers International Group Inc. , Savills plc and BGC Partners (which is the publicly traded parent of Newmark Grubb Knight Frank); market-segment specialists, such as Eastdil Secured, HFF, L.P., Marcus & Millichap, Inc. and Walker & Dunlop, Inc.; and firms with business lines that compete with our occupier outsourcing business.

 

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.

 

Employees

 

At December 31, 2016, excluding our independent affiliates, we had more than 75,000 employees worldwide, approximately 37% of whose costs are fully reimbursed by clients and are mostly in our Global Workplace Solutions and Asset Services lines of business. At December 31, 2016, approximately 1,800 of our employees were subject to collective bargaining agreements, most of whom work in properties we manage in California, Illinois, New Jersey and New York.

 

Intellectual Property

 

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

 

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

 

In addition to trademarks and trade names, we have acquired and developed proprietary technologies for the provision of complex services and analysis. We also offer proprietary research to clients through CBRE Economic Advisors and we offer proprietary investment analysis and structures through CBRE Global Investors. While we have not generally registered these items of intellectual property in any jurisdiction, we may seek to secure our rights under applicable intellectual property protection laws in these and any other proprietary assets that we use in our business.

 

Environmental Matters

 

Federal, state and local laws and regulations in the countries in which we do business impose environmental liabilities, controls, disclosure rules and zoning restrictions that affect the ownership, management, development, use or sale of commercial real estate. Certain of these laws and regulations may impose liability on current or previous real property owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at a property, including contamination resulting from above-ground or underground storage tanks or the presence of asbestos or lead at a property. If contamination occurs or is present during our role as a property or facility manager or developer, we could be held liable for such costs as a current “operator” of a property, regardless of the legality of the acts or omissions that caused the contamination and

 

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without regard to whether we knew of, or were responsible for, the presence of such hazardous or toxic substances. The operator of a site also may be liable under common law to third parties for damages and injuries resulting from exposure to hazardous substances or environmental contamination at a site, including liabilities arising from exposure to asbestos-containing materials. Under certain laws and common law principles, any failure by us to disclose environmental contamination at a property could subject us to liability to a buyer or lessee of the property. Further, federal, state and local governments in the countries in which we do business have enacted various laws, regulations and treaties governing environmental and climate change, particularly for “greenhouse gases,” which seek to tax, penalize or limit their release. Such regulations could lead to increased operational or compliance costs over time.

 

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

 

Available Information

 

Our internet address is www.cbre.com. We use our website as a channel of distribution for company information, and financial and other material information regarding us is routinely posted and accessible on our website.

 

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

 

All of the information on our Investor Relations web page is available to be viewed free of charge. Information contained on our website is not part of this Annual Report on Form 10-K or our other filings with the SEC. We assume no obligation to update or revise any forward-looking statements in this Annual Report on Form 10-K, whether as a result of new information, future events or otherwise, unless we are required to do so by law.

 

A copy of this Annual Report on Form 10-K is available without charge upon written request to: Investor Relations, CBRE Group, Inc., 200 Park Avenue, New York, New York 10166. The SEC also maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

 

Item 1A. Risk Factors

 

Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make. Based on the information currently known to us, we believe that the matters discussed below identify the material risk factors affecting our

 

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business. However, the risks and uncertainties we face are not limited to those described below. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial (but that later become material) may also adversely affect our business.

 

The success of our business is significantly related to general economic conditions and, accordingly, our business, operations and financial condition could be adversely affected by economic slowdowns, liquidity crises, fiscal or political uncertainty and possible subsequent downturns in commercial real estate asset values, property sales and leasing activities in one or more of the geographies or industry sectors that we or our clients serve.

 

Periods of economic weakness or recession, significantly rising interest rates, fiscal or political uncertainty, market volatility, declining employment levels, declining demand for commercial real estate, falling real estate values, disruption to the global capital or credit markets or the public perception that any of these events may occur, may negatively affect the performance of some or all of our business lines.

 

Our business is significantly affected by generally prevailing economic conditions in the markets where we principally operate, which can result in a general decline in real estate acquisition, disposition and leasing activity, as well as a general decline in the value of commercial real estate and in rents, which in turn reduces revenue from asset services fees and commissions derived from property sales, leasing, valuation and financing, as well as revenues associated with development or investment management activities. Our businesses could also suffer from political or economic disruptions that affect interest rates or liquidity or create financial, market or regulatory uncertainty. For example, the U.K.’s vote to withdraw from the European Union, commonly known as “Brexit,” and speculation about the terms and consequences of this exit or that of other European Union members has caused and may continue to cause market volatility and currency fluctuations and adversely impact our clients’ confidence, which may result in a deterioration in our U.K. and other European businesses as leasing and investing activity slow down.

 

Adverse economic conditions or political or regulatory uncertainty could also lead to a decline in property sales prices as well as a decline in funds invested in existing commercial real estate assets and properties planned for development, which in turn could reduce the commissions and fees that we earn. In addition, our development and investment strategy often entails making co-investments alongside our investor clients. During an economic downturn, capital for our investment activities is usually constrained and it may take longer for us to dispose of real estate investments or selling prices may be lower than originally anticipated. As a result, the value of our commercial real estate investments may be reduced, and we could realize losses or diminished profitability. In addition, economic downturns may reduce the amount of loan originations and related servicing by our Capital Markets business.

 

The performance of our asset services line of business depends upon how well the properties we manage perform. This is because our fees are generally based on a percentage of rent collections from these properties. Rent collections may be affected by many factors, including: (i) real estate and financial market conditions prevailing generally and locally; (ii) our ability to attract and retain creditworthy tenants, particularly during economic downturns; and (iii) the magnitude of defaults by tenants under their respective leases, which may increase during distressed economic conditions.

 

In continental Europe and Asia Pacific, the economies in certain countries can be fragile, which may adversely affect our financial performance.

 

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

 

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

 

Our Global Investment Management, Development Services and Capital Markets (including property sales and mortgage and structured financing services) businesses are sensitive to credit cost and availability as well as marketplace liquidity. Additionally, the revenues in all of our businesses are dependent to some extent on the overall volume of activity (and pricing) in the commercial real estate market.

 

Disruptions in the credit markets may adversely affect our business of providing advisory services to owners, investors and occupiers of real estate in connection with the leasing, disposition and acquisition of property. If our clients are unable to procure credit on favorable terms, there may be fewer completed leasing transactions, dispositions and acquisitions of property. In addition, if purchasers of commercial real estate are not able to procure favorable financing resulting in the lack of disposition opportunities for our funds and projects, our Global Investment Management and Development Services businesses may be unable to generate incentive fees, and we may also experience losses of co-invested equity capital if the disruption causes a permanent decline in the value of investments made.

 

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

 

We conduct a significant portion of our business and employ a substantial number of people outside of the United States and as a result, we are subject to risks associated with doing business globally. During 2016, approximately 47% of our revenue was transacted in foreign currencies, the majority of which included the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, Danish krone, euro, Hong Kong dollar, Indian rupee, Japanese yen, Mexican peso, Polish zloty, Singapore dollar, Swedish krona, Swiss franc and Thai baht. Fluctuations in foreign currency exchange rates may result in corresponding fluctuations in our assets under management for our Global Investment Management business, revenue and earnings. Over time, 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. 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. For example, Brexit caused a significant decline in the value of the British pound sterling against the U.S. dollar during 2016 and negotiations with respect to the terms of the U.K.’s withdrawal or other changes to the membership or policies of the European Union, or speculation about such events, may cause additional volatility in international currency markets. 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.

 

Additional circumstances and developments related to international operations that could negatively affect our business, financial condition or results of operations include, but are not limited to, the following factors:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the impact of regional or country-specific business cycles and economic instability;

 

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greater difficulty in collecting accounts receivable in some geographic regions such as Asia, where many countries have underdeveloped insolvency laws;

 

   

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

 

   

political and economic instability in certain countries;

 

   

foreign ownership restrictions with respect to operations in certain countries, particularly in Asia Pacific, or the risk that such restrictions will be adopted in the future; and

 

   

changes in U.S. laws or policies governing foreign trade or investment and use of foreign operations or workers, and any negative sentiments towards the United States as a result of any such changes to laws or policies.

 

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

 

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

 

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

 

Our continued success is highly dependent upon the efforts of our executive officers and other key employees, including Robert E. Sulentic, our President and Chief Executive Officer. Mr. Sulentic and certain other key employees are not parties to employment agreements with us. We also are highly dependent upon the retention of our property sales and leasing professionals, who generate a significant amount of our revenues, as well as other revenue producing professionals. The departure of any of our key employees, or the loss of a significant number of key revenue producers, if we are unable to quickly hire and integrate qualified replacements, could cause our business, financial condition and results of operations to suffer. Competition for these personnel is significant and we may not be able to successfully recruit, integrate or retain sufficiently qualified personnel. In addition, the growth of our business is largely dependent upon our ability to attract and retain qualified support personnel in all areas of our business. We and our competitors use equity incentives and sign-on and retention bonuses to help attract, retain and incentivize key personnel. As competition is significant for the services of such personnel, the expense of such incentives and bonuses may increase and we may be unable to attract or retain such personnel to the same extent that we have in the past. Any significant decline in, or failure to grow, our stock price may result in an increased risk of loss of these key personnel. Furthermore, shareholder influence on our compensation practices, including our ability to issue equity compensation, may decrease our ability to offer attractive compensation to key personnel and make recruiting, retaining and incentivizing such personnel more difficult. If we are unable to attract and retain these qualified personnel, our growth may be limited and our business and operating results could suffer.

 

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

 

We compete across a variety of business disciplines within the commercial real estate services and investment industry, including 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. Although we are the largest commercial real estate services firm in the world in terms of 2016 revenue, our relative competitive position varies significantly across geographies, property types and services and business lines. Depending on the geography, property type or service or business line, we face competition from other commercial real estate service providers and investment firms, including outsourcing companies that traditionally competed in limited portions of our facilities management business and have expanded their offerings from time to time, in-house corporate real estate departments, developers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting and consulting firms. Some of these firms may have greater financial resources allocated to a particular geography, property type or service or business line than we have allocated to that geography, property type, service or business line. In addition, future changes in laws could lead to the entry of other new competitors, such as financial institutions. Although many of our existing competitors are local or regional firms that are smaller than we are, some of these competitors are larger on a local or regional basis. We are further subject to competition from large national and multi-national firms that have similar service and investment competencies to ours, and it is possible that further industry consolidation could lead to much larger and more formidable competitors globally or in the particular geographies, property types, service or business lines that we serve. There is no assurance that we will be able to compete effectively, to maintain current fee levels or margins, or maintain or increase our market share.

 

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

 

A significant component of our growth over time has been generated by acquisitions. Any future growth through acquisitions will depend in part upon the continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions, which may not be available to us, as well as sufficient liquidity and credit to fund these acquisitions. We may incur significant additional debt from time to time to finance any such acquisitions, subject to the restrictions contained in the documents governing our then-existing indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service our then-existing debt, would increase. Acquisitions involve risks that business judgments concerning the value, strengths and weaknesses of businesses acquired may prove incorrect. Future acquisitions and any necessary related financings also may involve significant transaction-related expenses, which include severance, lease termination, transaction and deferred financing costs, among others.

 

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

 

We complete acquisitions with the expectation that they will result in various benefits, including enhanced or more stable revenues, a strengthened market position, cross-selling opportunities, cost synergies, tax benefits and accretion to our adjusted income per share. Achieving the anticipated benefits of these acquisitions is subject to a number of uncertainties, including the realization of accretive benefits in the timeframe anticipated and whether we can successfully integrate the acquired business. Failure to achieve these anticipated benefits could

 

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result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy, which could in turn materially and adversely affect our overall business, financial condition and operating results.

 

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

 

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

 

Our real estate investment and co-investment activities in our Global Investment Management as well as Development Services businesses subject us to real estate investment risks which could cause fluctuations in earnings and cash flow.

 

An important part of the strategy for our Global Investment Management business involves co-investing our capital in certain real estate investments with our clients, and there is an inherent risk of loss of our investments. As of December 31, 2016, we had committed $31.6 million to fund future co-investments in our Global Investment Management business, $25.5 million of which is expected to be funded during 2017. In addition to required future capital contributions, some of the co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets. However, our debt instruments contain restrictions that may limit our ability to provide capital to the entities holding direct or indirect interests in co-investments. The failure to provide these contributions could have adverse consequences to our interests in these investments, including damage to our reputation with our co-investment partners and clients, as well as the necessity of obtaining alternative funding from other sources that may be on disadvantageous terms for us and the other co-investors. Participating as a co-investor is an important part of our Global Investment Management business, which might suffer if we were unable to make these investments.

 

Selective investment in real estate projects is an important part of our Development Services business strategy, and there is an inherent risk of loss of our investments. As of December 31, 2016, we had nine real estate projects consolidated in our financial statements. In addition, at December 31, 2016, we were involved as a principal (in most cases, co-investing with our clients) in approximately 60 unconsolidated real estate subsidiaries with invested equity of $121.9 million and had committed additional capital to these unconsolidated subsidiaries of $23.0 million. As of December 31, 2016, we also guaranteed outstanding notes payable of these unconsolidated subsidiaries with outstanding balances of $15.7 million.

 

During the ordinary course of our Development Services business, we provide numerous completion and budget guarantees requiring us to complete the relevant project within a specified timeframe and/or within a specified budget, with us potentially being liable for costs to complete in excess of such timeframe or budget. While we generally have “guaranteed maximum price” contracts with reputable general contractors with respect to projects for which we provide these guarantees (which are intended to pass most of the risk to such contractors), there can be no assurance that we will not have to perform under any such guarantees. If we are required to perform under a significant number of such guarantees, it could harm our business, results of operations and financial condition.

 

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

 

Poor performance of the investment programs that our Global Investment Management business manages would cause a decline in our revenue, net income and cash flow and could adversely affect our ability to raise capital for future programs.

 

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

 

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

 

We have debt and related debt service obligations. As of December 31, 2016, our total debt, excluding notes payable on real estate (which are generally nonrecourse to us) and warehouse lines of credit (which are recourse only to our wholly-owned subsidiary, CBRE Capital Markets, and are secured by our related warehouse receivables), was approximately $2.6 billion. For the year ended December 31, 2016, our interest expense was approximately $144.9 million.

 

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

 

   

plan for or react to market conditions;

 

   

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

 

   

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

 

   

incurring or guaranteeing additional indebtedness;

 

   

paying dividends or making distributions on or repurchases of capital stock;

 

   

repurchasing equity interests or debt;

 

   

the payment of dividends or other amounts to us;

 

   

making investments;

 

   

transferring or selling assets, including the stock of subsidiaries;

 

   

engaging in transactions with affiliates;

 

   

issuing subsidiary equity or entering into consolidations and mergers;

 

   

creating liens; and

 

   

entering into sale/leaseback transactions.

 

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Our credit agreement currently requires us to maintain a minimum coverage ratio of EBITDA (as defined in the 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 credit agreement) of 4.25x as of the end of each fiscal quarter. Our coverage ratio of EBITDA to total interest expense was 12.73x for the year ended December 31, 2016, and our leverage ratio of total debt less available cash to EBITDA was 1.18x as of December 31, 2016. Our ability to meet these financial ratios can be affected by events beyond our control, and we cannot give assurance that we will be able to meet those ratios when required. We continue to monitor our projected compliance with these financial ratios and other terms of our credit agreement.

 

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

 

Our credit agreement is jointly and severally guaranteed by us and substantially all of our material domestic subsidiaries.

 

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

 

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

 

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

 

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

 

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

 

Our businesses are exposed to various litigation risks. In addition, although we maintain insurance coverage for most of this risk, insurance coverage is unavailable at commercially reasonable pricing for certain types of exposures. Accordingly, an adverse result in a litigation against us, or a lawsuit that results in a substantial legal liability for us (and particularly a lawsuit that is not insured), could have a disproportionate and material adverse effect on our business, financial condition and results of operations. In addition, we depend on our business relationships and our reputation for high-caliber professional services to attract and retain clients. As a result, allegations against us, irrespective of the ultimate outcome of that allegation, may harm our professional reputation and as such materially damage our business and its prospects.

 

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A failure to appropriately deal with actual or perceived conflicts of interest could adversely affect our businesses.

 

Our company has a global platform with different business lines and a broad client base and is therefore subject to numerous potential, actual or perceived conflicts of interests in the provision of services to our existing and potential clients. For example, conflicts may arise from our position as broker to both owners and tenants in commercial real estate lease transactions. We have adopted various policies, controls and procedures to address or limit actual or perceived conflicts, but these policies and procedures may not be adequate and may not be adhered to by our employees. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged and cause us to lose existing clients or fail to gain new clients if we fail, or appear to fail, to identify, disclose and manage potential conflicts of interest, which could have an adverse effect on our business, financial condition and results of operations. In addition, it is possible that in some jurisdictions regulations could be changed to limit our ability to act for parties where conflicts exist even with informed consent, which could limit our market share in those markets. There can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

 

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

 

Our business relies heavily on information technology to deliver services that meet the needs of our clients. If we are unable to effectively execute our information technology strategies or adopt new technologies and processes relevant to our service platform, our ability to deliver high-quality services may be materially impaired. In addition, we make significant investments in new systems and tools to achieve competitive advantages and efficiencies. Implementation of such investments in information technology could exceed estimated budgets and we may experience challenges that prevent new strategies or technologies from being realized according to anticipated schedules. If we are unable to maintain current information technology and processes or encounter delays, or fail to exploit new technologies, then the execution of our business plans may be disrupted. Similarly, our employees require effective tools and techniques to perform functions integral to our business. Failure to successfully provide such tools and systems, or ensure that employees have properly adopted them, could materially and adversely impact our ability to achieve positive business outcomes.

 

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

 

Security breaches and other disruptions of our information and technology networks could compromise our information and intellectual property and expose us to liability, reputational harm and significant remediation costs, which could cause material harm to our business and financial results. In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and intellectual property, and that of our clients and personally identifiable information of our employees and contractors, in our data centers and on our networks. The secure processing, maintenance and transmission of this information are critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by third parties or breached due to employee error, malfeasance or other disruptions. A significant actual or potential theft, loss, corruption, exposure, fraudulent use or misuse of client, employee or other personally identifiable or proprietary business data, whether by third parties or as a result of employee malfeasance or otherwise, non-compliance with our contractual or other legal obligations regarding such data or intellectual property or a violation of our privacy and security policies with respect to such data could result in significant remediation and other costs, fines, litigation or regulatory actions against us. Such an event could additionally disrupt our operations and the services we provide to clients, damage our reputation, result in the loss of a competitive advantage, impact our ability to provide timely and accurate financial data and cause a loss of confidence in our services and financial reporting, which could adversely affect our business, revenues, competitive position and investor confidence. Additionally, we increasingly rely on third-party data storage

 

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providers, including cloud storage solution providers, resulting in less direct control over our data. Such third parties are also vulnerable to security breaches and compromised security systems, for which we may not be indemnified and which could materially adversely affect us and our reputation.

 

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

 

Our business requires the continued operation of information technology and communication systems and network infrastructure. Our ability to conduct our global business may be materially adversely affected by disruptions to these systems or infrastructure. Our information technology and communications systems are vulnerable to damage or disruption from fire, power loss, telecommunications failure, system malfunctions, computer viruses, cyber-attacks, natural disasters such as hurricanes, earthquakes and floods, acts of war or terrorism, employee errors or malfeasance, or other events which are beyond our control. In addition, the operation and maintenance of these systems and networks is in some cases dependent on third-party technologies, systems and service providers for which there is no certainty of uninterrupted availability. Any of these events could cause system interruption, delays and loss, corruption or exposure of critical data or intellectual property and may also disrupt our ability to provide services to or interact with our clients, and we may not be able to successfully implement contingency plans that depend on communication or travel. Furthermore, any such event could result in substantial recovery and remediation costs and liability to customers, business partners and other third parties. We have disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, but our disaster recovery planning may not be sufficient and cannot account for all eventualities, and a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations, and as a result, our future operating results could be materially adversely affected.

 

The infrastructure disruptions we describe above may also disrupt our ability to manage real estate for clients or may adversely affect the value of real estate investments we make on behalf of clients. The buildings we manage for clients, which include some of the world’s largest office properties and retail centers, are used by numerous people daily. As a result, fires, earthquakes, floods, other natural disasters, defects and terrorist attacks can result in significant loss of life, and, to the extent we are held to have been negligent in connection with our management of the affected properties, we could incur significant financial liabilities and reputational harm.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Various laws and regulations impose liability on real property owners or operators for the cost of investigating, cleaning up or removing contamination caused by hazardous or toxic substances at a property. In

 

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

 

Cautionary Note on Forward-Looking Statements

 

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

 

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;

 

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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;

 

   

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 rising 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

 

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

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

We occupied the following offices, excluding affiliates, as of December 31, 2016:

 

      Sales Offices      Corporate Offices      Total  

Americas

     198        3        201  

Europe, Middle East and Africa (EMEA)

     162        1        163  

Asia Pacific

     83        1        84  
  

 

 

    

 

 

    

 

 

 

Total

     443        5        448  
  

 

 

    

 

 

    

 

 

 

 

Some of our offices house employees from our Global Investment Management and Development Services segments as well as employees from our other business segments. We have provided above office totals by geographic region rather than by business segment in order to avoid double counting our Global Investment Management and Development Services offices.

 

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

 

We do not own any of these offices.

 

Item 3. Legal Proceedings

 

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.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Stock Price Information

 

Our Class A common stock has traded on the New York Stock Exchange under the symbol “CBG” since June 10, 2004. The applicable high and low prices of our Class A common stock for the last two fiscal years, as reported by the New York Stock Exchange, are set forth below for the periods indicated.

 

     Price Range  

Fiscal Year 2016

   High      Low  

Quarter ending March 31, 2016

   $ 34.46      $ 22.74  

Quarter ending June 30, 2016

   $ 31.31      $ 24.49  

Quarter ending September 30, 2016

   $ 30.39      $ 24.11  

Quarter ending December 31, 2016

   $ 33.21      $ 25.40  

Fiscal Year 2015

             

Quarter ending March 31, 2015

   $ 38.99      $ 31.75  

Quarter ending June 30, 2015

   $ 39.77      $ 36.36  

Quarter ending September 30, 2015

   $ 38.76      $ 30.85  

Quarter ending December 31, 2015

   $ 38.49      $ 31.14  

 

The closing share price for our Class A common stock on December 31, 2016, as reported by the New York Stock Exchange, was $31.49. As of February 13, 2017, there were 69 stockholders of record of our Class A common stock.

 

Dividend Policy

 

We have not declared or paid any cash dividends on any class of our common stock since our inception on February 20, 2001, and we do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain any future earnings to finance future growth and possibly reduce debt or repurchase common stock. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend on our financial condition, acquisition or other opportunities to invest capital, results of operations, capital requirements and other factors that the board of directors deems relevant. In addition, our ability to declare and pay cash dividends is restricted by the credit agreement governing our revolving credit facility and senior term loan facilities.

 

Recent Sales of Unregistered Securities

 

None.

 

Issuer Purchases of Equity Securities

 

None.

 

Stock Performance Graph

 

The following graph shows our cumulative total stockholder return for the period beginning December 31, 2011 and ending on December 31, 2016. The graph also shows the cumulative total returns of the Standard & Poor’s 500 Stock Index, or S&P 500 Index, in which we are included, and two industry peer groups.

 

The comparison below assumes $100 was invested on December 31, 2011 in our Class A common stock and in each of the indices shown and assumes that all dividends were reinvested. Our stock price performance shown in the following graph is not necessarily indicative of future stock price performance.

 

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The new industry peer group is comprised of JLL (formerly Jones Lang LaSalle Incorporated), a global commercial real estate services company publicly traded in the United States, as well as the following companies that have significant commercial real estate or real estate capital markets businesses within the United States or globally, that in each case are publicly traded in the United States or abroad: BGC Partners (BGCP), which is the publicly traded parent of Newmark Grubb Knight Frank; Colliers International Group Inc. (CIGI); HFF, L.P. (HF); Marcus & Millichap, Inc. (MMI); Savills plc (SVS.L, traded on the London Stock Exchange) and Walker & Dunlop, Inc. (WD). These companies are or include divisions with business lines reasonably comparable to some or all of ours, and which represent our current primary competitors. Our old peer group did not include WD, which was added to our peer group in 2016.

 

LOGO

 

(1) *$100 invested on 12/31/11 in stock or index-including reinvestment o f dividends. Fiscal year ending December 31.
(2)

Copyright© 2017 Standard & Poor’s, a division o f S&P Global. A ll rights reserved.

(3) Old peer group contains companies with the following ticker symbols: BGCP, CIGI, HF, JLL, MMI, and SVS.L (London).
(4) New Peer group contains companies with the following ticker symbols: BGCP, CIGI, HF, JLL, MMI, SVS.L (London), and WD.

 

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

 

Item 6. Selected Financial Data

 

The following table sets forth our selected historical consolidated financial information for each of the five years in the period ended December 31, 2016. The statement of operations data, the statement of cash flows data and the other data for the years ended December 31, 2016, 2015 and 2014 and the balance sheet data as of December 31, 2016 and 2015 were derived from our audited consolidated financial statements included elsewhere in this Form 10-K. The statement of operations data, the statement of cash flows data and the other data for the years ended December 31, 2013 and 2012, and the balance sheet data as of December 31, 2014, 2013 and 2012 were derived from our audited consolidated financial statements that are not included in this Form 10-K.

 

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The selected financial data presented below is not necessarily indicative of results of future operations and should be read in conjunction with our consolidated financial statements and the information included under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

 

     Year Ended December 31,  
     2016     2015 (1)     2014     2013     2012  
     (Dollars in thousands, except share data)  

STATEMENTS OF OPERATIONS DATA:

          

Revenue

   $ 13,071,589     $ 10,855,810     $ 9,049,918     $ 7,184,794     $ 6,514,099  

Operating income

     815,487       835,944       792,254       616,128       585,081  

Interest income

     8,051       6,311       6,233       6,289       7,643  

Interest expense

     144,851       118,880       112,035       135,082       175,068  

Write-off of financing costs on extinguished debt

     —         2,685       23,087       56,295       —    

Income from continuing operations

     584,064       558,877       513,503       321,798       304,156  

Income from discontinued operations, net of income taxes

     —         —         —         26,997       631  

Net income

     584,064       558,877       513,503       348,795       304,787  

Net income (loss) attributable to non-controlling interests

     12,091       11,745       29,000       32,257       (10,768

Net income attributable to CBRE Group, Inc.

     571,973       547,132       484,503       316,538       315,555  

Income Per Share (2):

          

Basic income per share attributable to CBRE Group, Inc. shareholders

          

Income from continuing operations attributable to CBRE Group, Inc.

   $ 1.71     $ 1.64     $ 1.47     $ 0.95     $ 0.97  

Income from discontinued operations attributable to CBRE Group, Inc.

     —         —         —         0.01       0.01  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CBRE Group, Inc.

   $ 1.71     $ 1.64     $ 1.47     $ 0.96     $ 0.98  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income per share attributable to CBRE Group, Inc. shareholders

          

Income from continuing operations attributable to CBRE Group, Inc.

   $ 1.69     $ 1.63     $ 1.45     $ 0.94     $ 0.96  

Income from discontinued operations attributable to CBRE Group, Inc.

     —         —         —         0.01       0.01  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CBRE Group, Inc.

   $ 1.69     $ 1.63     $ 1.45     $ 0.95     $ 0.97  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares:

          

Basic

     335,414,831       332,616,301       330,620,206       328,110,004       322,315,576  

Diluted

     338,424,563       336,414,856       334,171,509       331,762,854       327,044,145  

STATEMENTS OF CASH FLOWS DATA:

          

Net cash provided by operating activities

   $ 450,315     $ 651,897     $ 661,780     $ 745,108     $ 291,081  

Net cash used in investing activities

     (7,439     (1,618,959     (151,556     (464,994     (197,671

Net cash (used in) provided by financing activities

     (199,643     789,548       (232,069     (866,281     (100,689

OTHER DATA:

          

EBITDA (3)

   $ 1,372,362     $ 1,297,335     $ 1,142,252     $ 982,883     $ 861,621  

Adjusted EBITDA (3)

   $ 1,561,003     $ 1,412,724     $ 1,166,125     $ 1,022,255     $ 918,439  

 

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     As of December 31,  
     2016      2015      2014      2013      2012  
     (Dollars in thousands)  

BALANCE SHEET DATA:

              

Cash and cash equivalents

   $ 762,576      $ 540,403      $ 740,884      $ 491,912      $ 1,089,297  

Total assets (4)

     10,779,587        11,017,943        7,568,010        6,998,414        7,809,542  

Long-term debt, including current portion, net (4)

     2,548,137        2,679,539        1,851,012        1,840,680        2,427,605  

Notes payable on real estate, net (4)

     25,969        38,258        41,445        130,472        326,012  

Total liabilities (4)

     7,722,342        8,258,873        5,266,612        5,062,408        6,127,730  

Total CBRE Group, Inc. stockholders’ equity

     3,014,487        2,712,652        2,259,830        1,895,785        1,539,211  

 

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

 

(1) On September 1, 2015, CBRE, Inc., our wholly-owned subsidiary, closed on a Stock and Asset Purchase Agreement with Johnson Controls, Inc. (JCI) to acquire JCI’s Global Workplace Solutions (JCI-GWS) business (which we refer to as the GWS Acquisition). The results for the year ended December 31, 2015 include the operations of JCI-GWS from September 1, 2015, the date such business was acquired.
(2) See Income Per Share information in Note 15 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(3) Includes EBITDA related to discontinued operations of $7.9 million and $5.6 million for the years ended December 31, 2013 and 2012, respectively.

 

EBITDA and adjusted EBITDA are not recognized measurements under accounting principles generally accepted in the United States, or 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 these measures may not be comparable to similarly titled measures of other companies.

 

EBITDA represents earnings before net interest expense, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization. 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 (reversal) expense 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.

 

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EBITDA and adjusted EBITDA are calculated as follows (dollars in thousands):

 

     Year Ended December 31,  
     2016     2015      2014      2013      2012  

Net income attributable to CBRE Group, Inc.

   $ 571,973     $ 547,132      $ 484,503      $ 316,538      $ 315,555  

Add:

        

Depreciation and amortization (i)

     366,927       314,096        265,101        191,270        170,905  

Non-amortizable intangible asset impairment

     —         —          —          98,129        19,826  

Interest expense (ii)

     144,851       118,880        112,035        138,379        176,649  

Write-off of financing costs on extinguished debt

     —         2,685        23,087        56,295        —    

Provision for income taxes (iii)

     296,662       320,853        263,759        188,561        186,333  

Less:

        

Interest income

     8,051       6,311        6,233        6,289        7,647  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA (iv)

     1,372,362       1,297,335        1,142,252        982,883        861,621  

Adjustments:

        

Integration and other costs related to acquisitions

     125,743       48,865        —          12,591        39,240  

Cost-elimination expenses

     78,456       40,439        —          17,621        17,578  

Carried interest incentive compensation (reversal) expense to align with the timing of associated revenue

     (15,558     26,085        23,873        9,160        —    
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (iv)

   $ 1,561,003     $ 1,412,724      $ 1,166,125      $ 1,022,255      $ 918,439  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

  (i) Includes depreciation and amortization related to discontinued operations of $0.9 million and $1.3 million for the years ended December 31, 2013 and 2012, respectively.
  (ii) Includes interest expense related to discontinued operations of $3.3 million and $1.6 million for the years ended December 31, 2013 and 2012, respectively.
  (iii) Includes provision for income taxes related to discontinued operations of $1.3 million and $1.0 million for the years ended December 31, 2013 and 2012, respectively.
  (iv) Includes EBITDA related to discontinued operations of $7.9 million and $5.6 million for the years ended December 31, 2013 and 2012, respectively.
(4) In the third quarter of 2015, we elected to early adopt the provisions of Accounting Standards Update (ASU) 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This ASU required that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability instead of separately being recorded in other assets. As of December 31, 2014, deferred financing costs totaling $25.6 million were reclassified from other assets and netted against the related debt liabilities to conform with the 2015 presentation. See Deferred Financing Costs discussion within Note 2 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report. Amounts for 2012 and 2013 have not been reclassified to conform with the presentation in 2014, 2015 and 2016.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are the world’s largest commercial real estate services and investment firm, based on 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 from commissions on transactions. We have been included in the Fortune 500 since 2008 (ranking #259 in 2016) and among the Fortune Most Admired Companies in the real estate sector for five consecutive years, including 2017. In 2016, we were ranked by Forbes as the 15th best employer in America, and the International Association of Outsourcing Professionals (IAOP) has ranked us among the top few outsourcing service providers across all industries for five consecutive years. Additionally, we were one of only two companies to be ranked in the top 12 in the Barron’s 500, which evaluates companies on growth and financial performance, in each of 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. We believe that the following critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

In order for us to recognize revenue, four basic criteria must be met:

 

   

existence of persuasive evidence that an arrangement exists;

 

   

delivery has occurred or services have been rendered;

 

   

the seller’s price to the buyer is fixed and determinable; and

 

   

collectability is reasonably assured.

 

Our revenue recognition policies are consistent with these criteria. The judgments involved in revenue recognition include understanding the complex terms of agreements and determining the appropriate time and method to recognize revenue for each transaction based on such terms. Each transaction is evaluated to determine: (i) at what point in time or over what period of time revenue is earned; (ii) whether contingencies exist that impact the timing of recognition of revenue; and (iii) how and when such contingencies will be resolved. The timing of revenue recognition could vary if different judgments were made. Our revenues subject to the most judgment are brokerage commission revenue and incentive-based management and development fees. For a detailed discussion of our revenue recognition policies, see the Revenue Recognition section within Note 2 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K, or this Annual Report.

 

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In establishing the appropriate provisions for trade receivables, we make assumptions with respect to future collectability. Our assumptions are based on an assessment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivables balances. In addition to these assessments, in general, outstanding trade accounts receivable amounts that are more than 180 days overdue are evaluated for collectability and fully provided for if deemed uncollectible. Historically, our credit losses have generally been insignificant. However, estimating losses requires significant judgment, and conditions may change or new information may become known after any periodic evaluation. As a result, actual credit losses may differ from our estimates.

 

Goodwill and Other Intangible Assets

 

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

 

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

 

We are required to test goodwill and other intangible assets deemed to have indefinite useful lives for impairment at least annually or more often if circumstances or events indicate a change in the impairment status. The goodwill impairment analysis is a two-step process. The first step used to identify potential impairment involves comparing each reporting unit’s estimated fair value to its carrying value, including goodwill. We use a discounted cash flow approach to estimate the fair value of our reporting units. Management judgment is required in developing the assumptions for the discounted cash flow model. These assumptions include revenue growth rates, profit margin percentages, discount rates, etc. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated impairment. The implied fair value of goodwill is determined by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. Due to the many variables inherent in the estimation of a business’s fair value and the relative size of our goodwill, if different assumptions and estimates were used, it could have an adverse effect on our impairment analysis.

 

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

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method in accordance with the “Accounting for Income Taxes,” Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, (Topic 740). Deferred tax assets and liabilities are determined based on temporary

 

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differences between the financial reporting and tax basis of assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured by applying enacted tax rates and laws and are released in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carryforwards, for which the benefits have already been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe will be realized in future periods. While we believe the resulting tax balances as of December 31, 2016 and 2015 are appropriately accounted for in accordance with Topic 740, as applicable, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material.

 

Our foreign subsidiaries have accumulated $1.9 billion of undistributed earnings for which we have not recorded a deferred tax liability. Although tax liabilities might result from dividends being paid out of these earnings, or as a result of a sale or liquidation of non-U.S. subsidiaries, these earnings are permanently reinvested outside of the United States and we do not have any plans to repatriate them or to sell or liquidate any of our non-U.S. subsidiaries. To the extent that we are able to repatriate earnings in a tax efficient manner, we would be required to accrue and pay U.S. taxes to repatriate these funds, net of foreign tax credits. Determining our tax liability upon repatriation is not practicable. Cash and cash equivalents owned by non-U.S. subsidiaries totaled $408.9 million at December 31, 2016.

 

See Note 13 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for further information regarding income taxes.

 

New Accounting Pronouncements

 

See New Accounting Pronouncements section within Note 2 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.

 

Seasonality

 

A significant portion of our revenue is seasonal, which an investor should keep in mind when comparing our financial condition and results of operations on a quarter-by-quarter basis. Historically, our revenue, operating income, net income and cash flow from operating activities tend to be lowest in the first quarter, and highest in the fourth quarter of each year. Revenue, earnings and cash flow have generally been concentrated in the fourth calendar quarter due to the focus on completing sales, financing and leasing transactions prior to year-end.

 

Inflation

 

Our commissions and other variable costs related to revenue are primarily affected by commercial real estate market supply and demand, which may be affected by inflation. However, to date, we 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 Annual Report on Form 10-K, 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.

 

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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 the sales and leasing professionals in our advisory services business generally are paid on a commission and/or bonus basis that correlates with their revenue production. As a result, the negative effect of difficult market conditions on our operating margins is partially mitigated by the inherent variability of our compensation cost structure. In addition, when negative economic conditions have been particularly severe, we have moved decisively to lower operating expenses to improve financial performance, and then have restored certain expenses as economic conditions improved. Nevertheless, adverse global and regional economic trends could pose significant risks to the performance of our operations and our financial condition.

 

Commercial real estate markets have recovered over the past several years, along with the steady improvement in global economic activity, most particularly in the United States. Since 2010, U.S. leasing markets have been marked by increased demand for space, falling vacancies and higher rents. During this time, healthy U.S. property sales activity has been sustained by gradually improving market fundamentals, low-cost credit availability and increased global and domestic capital flows. Property sales volumes slowed in 2016 following several years of strong growth; however, the market remained active. Commercial mortgage services activity rose in 2016 driven by lower interest rates and a favorable lending environment. Lending for multi-family properties in the United States was particularly robust, reflecting strong activity with U.S. Government Sponsored Enterprises (GSEs) as well as a long-term trend of increased renting versus home ownership in the United States.

 

European economies began to emerge from recession in 2013, with most countries returning to positive, albeit modest, economic growth. Sales and leasing activity in Europe has improved across most of Europe for much of the past two years. An exception is London, where uncertainty in advance of and following the United Kingdom’s referendum to leave the European Union, commonly referred to as “Brexit,” constrained occupier and investor activity in 2016.

 

In Asia Pacific, the performance of real estate leasing and investment markets has varied from country to country amid slowing economic growth. Leasing and investment market activity was generally soft for much of 2016, but picked up noticeably in the fourth quarter. However, local capital from the Asia-Pacific region continues to migrate to other parts of the world.

 

Real estate investment management and property development markets have been generally favorable with abundant debt and equity capital flows into commercial real estate. Real estate equity securities markets weakened in the fourth quarter of 2016 amid 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

 

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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. In early 2017, we acquired a leading Software as a Service (SaaS) platform that produces scalable interactive visualization technologies for commercial real estate and a national boutique commercial real estate finance and consulting firm in the United States. 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 2015, we completed eight in-fill acquisitions, including a Seattle-based leader in capital markets services for affordable housing, a Texas-based commercial real estate firm specializing in retail services, an energy management specialist based in Brookfield, Wisconsin, a Chicago-based location data analytics firm, one of the leading retail real estate services firms in the Midwestern United States, an advisory, consulting and research firm specializing in the Canadian hospitality and tourism industries and our former independent affiliate companies in Columbia, South Carolina, and Memphis, Tennessee.

 

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 December 31, 2016, we have accrued deferred consideration totaling $91.0 million, which is included in accounts payable and accrued expenses and in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 8 of this Annual Report.

 

International Operations

 

We are monitoring the economic and political developments related to Brexit and the potential impact on our businesses in the United Kingdom and the rest of Europe, including, in particular, sales and leasing activity in the United Kingdom, as well as any associated currency volatility impact on our results of operations.

 

As we 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

 

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result of Brexit. Fluctuations in foreign currency exchange rates have resulted and may continue to result in corresponding fluctuations in our AUM, revenue and earnings.

 

During the year ended December 31, 2016, approximately 47% of our business was transacted in non-U.S. dollar currencies, the majority of which included the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, 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):

 

     Year Ended December 31,  
      2016     2015     2014  

United States dollar

   $ 6,917,221        52.9   $ 5,991,826        55.2   $ 5,027,479        55.6

British pound sterling

     2,008,776        15.4     1,861,199        17.1     1,632,127        18.0

euro

     1,541,461        11.8     1,071,666        9.9     773,753        8.5

Australian dollar

     367,578        2.8     360,284        3.3     359,660        4.0

Canadian dollar

     310,062        2.4     291,273        2.7     319,670        3.5

Indian rupee

     244,087        1.9     171,678        1.6     135,139        1.5

Japanese yen

     212,854        1.6     155,842        1.4     168,574        1.9

Chinese yuan

     207,773        1.6     152,771        1.4     101,790        1.1

Singapore dollar

     173,967        1.3     105,336        1.0     89,343        1.0

Swiss franc

     145,000        1.2     70,415        0.7     22,494        0.2

Hong Kong dollar

     106,869        0.8     85,052        0.8     60,186        0.7

Mexican peso

     84,688        0.6     68,429        0.6     39,371        0.4

Brazilian real

     83,738        0.6     65,844        0.6     77,305        0.9

Polish zloty

     69,949        0.5     49,998        0.5     28,936        0.3

Danish krone

     68,639        0.5     25,673        0.2     11,076        0.1

Swedish krona

     59,603        0.5     32,414        0.3     21,692        0.2

Thai baht

     46,844        0.4     35,456        0.3     13,442        0.1

Other currencies

     422,480        3.2     260,654        2.4     167,881        2.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

   $ 13,071,589        100.0   $ 10,855,810        100.0   $ 9,049,918        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

Although we operate globally, we report our results in U.S. dollars. As a result, the strengthening or weakening of the U.S. dollar may positively or negatively impact our reported results. For example, we estimate that had the British pound sterling-to-U.S. dollar exchange rates been 10% higher during the year ended December 31, 2016, the net impact would have been an increase in pre-tax income of $4.9 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the year ended December 31, 2016, the net impact would have been an increase in pre-tax income of $3.7 million. These hypothetical calculations estimate the impact of translating results into U.S. dollars and do not include an estimate of the impact that a 10% change in the U.S. dollar against other currencies would have had on our foreign operations.

 

We enter into derivative financial instruments to attempt to protect the value or fix the amount of certain obligations in terms of our reporting currency, the U.S. dollar. In March 2014, we began a foreign currency exchange forward hedging program (which expired in December 2016) by entering into foreign currency exchange forward contracts, including agreements to buy U.S. dollars and sell Australian dollars, British pound sterling, Canadian dollars, euros and Japanese yen. The purpose of these forward contracts was to attempt to mitigate the risk of fluctuations in foreign currency exchange rates that would adversely impact some of our foreign currency denominated EBITDA. Hedge accounting was not elected for any of these contracts. As such, changes in the fair values of these contracts were recorded directly in earnings. Included in the consolidated statement of operations set forth in Item 8 of this Annual Report were net gains of $7.7 million , $24.2 million and $5.3 million from foreign currency exchange forward contracts for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016, we had no foreign currency exchange forward contracts outstanding as the program has been terminated. We do not intend to hedge our foreign currency denominated EBITDA in 2017.

 

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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.

 

Results of Operations

 

The following table sets forth items derived from our consolidated statements of operations for the years ended December 31, 2016, 2015 and 2014 (dollars in thousands):

 

     Year Ended December 31,  
     2016     2015     2014  

Revenue:

           

Fee revenue

   $ 8,717,126        66.7   $ 7,730,337       71.2   $ 6,791,292        75.0

Pass through costs also recognized as revenue

     4,354,463        33.3     3,125,473       28.8     2,258,626        25.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total revenue

     13,071,589        100.0     10,855,810       100.0     9,049,918        100.0
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Costs and expenses:

           

Cost of services

     9,123,727        69.8     7,082,932       65.2     5,611,262        62.0

Operating, administrative and other

     2,781,310        21.3     2,633,609       24.3     2,438,960        27.0

Depreciation and amortization

     366,927        2.8     314,096       2.9     265,101        2.9
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total costs and expenses

     12,271,964        93.9     10,030,637       92.4     8,315,323        91.9

Gain on disposition of real estate

     15,862        0.1     10,771       0.1     57,659        0.7
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating income

     815,487        6.2     835,944       7.7     792,254        8.8

Equity income from unconsolidated subsidiaries

     197,351        1.5     162,849       1.5     101,714        1.1

Other income (loss)

     4,688        —         (3,809     —         12,183        0.1

Interest income

     8,051        0.1     6,311       —         6,233        0.1

Interest expense

     144,851        1.1     118,880       1.1     112,035        1.2

Write-off of financing costs on extinguished debt

     —          —         2,685       —         23,087        0.3
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before provision for income taxes

     880,726        6.7     879,730       8.1     777,262        8.6

Provision for income taxes

     296,662        2.2     320,853       3.0     263,759        2.9
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     584,064        4.5     558,877       5.1     513,503        5.7

Less: Net income attributable to non-controlling interests

     12,091        0.1     11,745       0.1     29,000        0.3
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to CBRE Group, Inc.

   $ 571,973        4.4   $ 547,132       5.0   $ 484,503        5.4
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

EBITDA

   $ 1,372,362        10.5   $ 1,297,335       12.0   $ 1,142,252        12.6
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ 1,561,003        11.9   $ 1,412,724       13.0   $ 1,166,125        12.9
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

 

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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, write-off of financing costs on extinguished debt, income taxes, depreciation and amortization. Amounts shown for adjusted EBITDA further remove (from EBITDA) the impact of certain cash and non-cash charges related to acquisitions, cost-elimination expenses and certain carried interest incentive compensation (reversal) expense 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):

 

     Year Ended December 31,  
     2016      2015      2014  

Net income attributable to CBRE Group, Inc.

   $ 571,973      $ 547,132      $ 484,503  

Add:

        

Depreciation and amortization

     366,927        314,096        265,101  

Interest expense

     144,851        118,880        112,035  

Write-off of financing costs on extinguished debt

     —          2,685        23,087  

Provision for income taxes

     296,662        320,853        263,759  

Less:

        

Interest income

     8,051        6,311        6,233  
  

 

 

    

 

 

    

 

 

 

EBITDA

     1,372,362        1,297,335        1,142,252  

Adjustments:

        

Integration and other costs related to acquisitions

     125,743        48,865        —    

Cost-elimination expenses (1)

     78,456        40,439        —    

Carried interest incentive compensation (reversal) expense to align with the timing of associated revenue

     (15,558      26,085        23,873  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 1,561,003      $ 1,412,724      $ 1,166,125  
  

 

 

    

 

 

    

 

 

 

 

  (1)

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

 

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cost structure after several years of significant revenue and related cost growth. Cost-elimination expenses incurred during the year ended December 31, 2016 consisted of $73.6 million of severance costs related to headcount reductions in connection with the program and $4.9 million of third-party contract termination costs. Cost-elimination expenses incurred during the year ended December 31, 2015 consisted of $32.6 million of severance costs related to headcount reductions in connection with the program and $7.8 million of third-party contract termination costs. The total amount for each period does have a cash impact.

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

We reported consolidated net income of $572.0 million for the year ended December 31, 2016 on revenue of $13.1 billion as compared to consolidated net income of $547.1 million on revenue of $10.9 billion for the year ended December 31, 2015.

 

Our revenue on a consolidated basis for the year ended December 31, 2016 increased by $2.2 billion, or 20.4%, as compared to the year ended December 31, 2015. This increase was largely due to contributions from the GWS Acquisition, which added $1.8 billion of revenue, with a full year of activity reflected in the current year versus only four months of activity in 2015. Additionally, the revenue increase reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition, up 14.0%), as well as increased leasing (up 6.7%), commercial mortgage brokerage (up 19.1%) and sales (up 1.4%) activity. These increases were partially offset by lower carried interest revenue in the current year as well as foreign currency translation, which had a $277.8 million negative impact on total revenue during the year ended December 31, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling.

 

Our cost of services on a consolidated basis increased by $2.0 billion, or 28.8%, during the year ended December 31, 2016 as compared to same period in 2015. This increase was primarily due to higher costs associated with our occupier outsourcing business, particularly due to the GWS Acquisition. In addition, our sales professionals generally are paid on a commission basis, which substantially correlates with our transaction revenue performance. Accordingly, the increase in sales and lease transaction revenue led to a corresponding increase in commission expense. We also incurred $18.9 million of additional costs in 2016 versus 2015 in connection with our cost-elimination project that began in the fourth quarter of 2015 and ended in the third quarter of 2016 to enhance margins and reduce our global cost structure going forward (the expenses of which primarily consisted of severance costs related to headcount reductions and third-party contract termination costs). These increases were partially offset by foreign currency translation, which had a $205.5 million positive impact on cost of services during the year ended December 31, 2016. Cost of services as a percentage of revenue increased from 65.2% for the year ended December 31, 2015 to 69.8% for the year ended December 31, 2016, largely due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 62.5% for the year ended December 31, 2015, compared to 64.0% for the year ended December 31, 2016. This increase was partly driven by the aforementioned increase in costs incurred in connection with our cost-elimination project in 2016 and lower non-commissionable revenue in the current year. In addition, outsourcing revenue (excluding the impact of the GWS Acquisition), which has a lower margin than sales and lease transaction revenue, was a lower percentage of revenue in 2015 than in 2016.

 

Our operating, administrative and other expenses on a consolidated basis increased by $147.7 million, or 5.6%, during the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase was mostly driven by costs associated with the GWS Acquisition. Also contributing to the variance were higher worldwide payroll-related costs (particularly bonuses largely attributable to improved results, most notably in our Development Services segment). Lastly, we incurred an additional $19.1 million of costs in 2016 versus 2015 in connection with our cost-elimination project. These items were partly offset by lower carried interest expense as well as foreign currency, which had a net $46.2 million positive impact on total operating expenses during the year ended December 31, 2016, including $10.9 million of unfavorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, that was more than offset by a $57.1 million positive impact from foreign currency translation. Operating expenses as a percentage of revenue

 

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decreased from 24.3% for the year ended December 31, 2015 to 21.3% for the year ended December 31, 2016, primarily due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, operating expenses as a percentage of revenue was 25.7% for the year ended December 31, 2015 as compared to 24.7% for the same period in 2016, partly driven by the lower carried interest expense in the current year.

 

Our depreciation and amortization expense on a consolidated basis increased by $52.8 million, or 16.8%, during the year ended December 31, 2016 as compared to the same period in 2015. This increase was primarily attributable to higher amortization expense related to intangibles acquired in the GWS Acquisition, with a full year of amortization reflected in the current year versus only four months of amortization in 2015. A rise in depreciation expense during the year ended December 31, 2016 driven by technology-related capital expenditures also contributed to the increase.

 

Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $34.5 million, or 21.2%, for the year ended December 31, 2016 as compared to the same period in 2015, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.

 

Our consolidated interest expense increased by $26.0 million, or 21.8%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was primarily driven by interest expense in the current year associated with $600.0 million of 4.875% senior notes issued in August 2015 as well as higher interest expense associated with borrowings under our amended and restated credit agreement dated January 9, 2015 (2015 Credit Agreement) due to an increase in interest rates.

 

Our write-off of financing costs on extinguished debt on a consolidated basis was $2.7 million for the year ended December 31, 2015. These costs included the write-off of $1.7 million of unamortized deferred financing costs associated with our prior credit agreement dated March 28, 2013, as amended (2013 Credit Agreement), and $1.0 million of fees incurred in connection with our 2015 Credit Agreement.

 

Our provision for income taxes on a consolidated basis was $296.7 million for the year ended December 31, 2016 as compared to $320.9 million for the same period in 2015. Our effective tax rate, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, decreased to 34.1% for the year ended December 31, 2016 compared to 37.0% for the year ended December 31, 2015. We experienced a favorable change in earnings mix in the current year, with 60% of our earnings, after removing the portion attributable to non-controlling interests, from the United States for 2016 versus 68% for 2015. In addition, we realized certain discrete tax benefits in the current year that were not applicable in 2015. These items were offset, in part, by higher losses sustained in the current year in jurisdictions where no tax benefit could be provided.

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

We reported consolidated net income of $547.1 million for the year ended December 31, 2015 on revenue of $10.9 billion as compared to consolidated net income of $484.5 million on revenue of $9.0 billion for the year ended December 31, 2014.

 

Our revenue on a consolidated basis for the year ended December 31, 2015 increased by $1.8 billion, or 20.0%, as compared to the year ended December 31, 2014. This increase was in part due to contributions from the GWS Acquisition from September 1, 2015 through December 31, 2015. Additionally, the revenue increase also reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition, up 15.4%) and property management fees (up 17.5%), as well as increased sales (up 17.9%) and leasing (up 11.5%) activity. An increase in global appraisal revenue (up 18.6%) and commercial mortgage brokerage activity in our Americas segment (up 28.5%) also contributed to the positive variance. Foreign currency translation had a $536.4 million negative impact on total revenue during the year ended December 31, 2015, primarily driven by weakness in the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, euro and Japanese yen during the year ended December 31, 2015 versus the year ended December 31, 2014.

 

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Our cost of services on a consolidated basis increased by $1.5 billion, or 26.2%, during the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to higher costs associated with our occupier outsourcing and property management businesses, particularly due to the GWS Acquisition. In addition, as previously mentioned, our sales professionals generally are paid on a commission basis, which substantially correlates with our transaction revenue performance. Accordingly, the increase in sales and lease transaction revenue led to a corresponding increase in commission expense. Lastly, we incurred $18.3 million of costs in connection with our cost-elimination project. These increases were partially offset by foreign currency translation, which had a $318.4 million positive impact on cost of services during the year ended December 31, 2015. Cost of services as a percentage of revenue increased from 62.0% for the year ended December 31, 2014 to 65.2% for the year ended December 31, 2015, largely due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 62.0% for the year ended December 31, 2014, compared to 62.5% for the year ended December 31, 2015.

 

Our operating, administrative and other expenses on a consolidated basis increased by $194.6 million, or 8.0%, during the year ended December 31, 2015 as compared to the year ended December 31, 2014. The increase was partly driven by costs associated with the GWS Acquisition. Also contributing to the variance were higher worldwide payroll-related costs (including bonuses) attributable to increased headcount and improved results as well as higher consulting, marketing and travel costs. Lastly, we incurred $22.1 million of costs in connection with our cost-elimination project. These increases were partially mitigated by an $8.6 million asset impairment charge incurred in our Americas segment during the year ended December 31, 2014, which did not recur during the year ended December 31, 2015, and foreign currency movement. Foreign currency translation had a $162.3 million positive impact on total operating expenses during the year ended December 31, 2015 and there was an improvement of $20.7 million in foreign currency transaction activity over the year ended December 31, 2014, much of which related to hedging activities. Operating expenses as a percentage of revenue decreased from 27.0% for the year ended December 31, 2014 to 24.3% for the year ended December 31, 2015, partially due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, operating expenses as a percentage of revenue was 27.0% for the year ended December 31, 2014 as compared to 25.7% for the year ended December 31, 2015.

 

Our depreciation and amortization expense on a consolidated basis increased by $49.0 million, or 18.5%, during the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily attributable to higher amortization expense relative to intangibles acquired in the GWS Acquisition as well as increased amortization expense associated with mortgage servicing rights. A rise in depreciation expense during the year ended December 31, 2015 driven by technology-related capital expenditures also contributed to the increase.

 

Our gain on disposition of real estate on a consolidated basis was $10.8 million for the year ended December 31, 2015 compared to $57.7 million for the year ended December 31, 2014. These gains resulted from activity within our Global Investment Management and Development Services segments.

 

Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $61.1 million, or 60.1%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.

 

Our consolidated interest expense increased by $6.8 million, or 6.1%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily driven by higher interest expense during the year ended December 31, 2015 associated with $600.0 million of 4.875% senior notes issued in August 2015 as well as the 5.25% senior notes issued in September 2014 and December 2014 of $300.0 million and $125.0 million, respectively. These increases were partially offset by lower interest expense associated with $350.0 million of 6.625% senior notes, which were redeemed in full in October 2014, as well as lower interest expense due to a decrease in notes payable on real estate during the year ended December 31, 2015.

 

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Our write-off of financing costs on extinguished debt on a consolidated basis was $2.7 million for the year ended December 31, 2015 compared to $23.1 million for the year ended December 31, 2014. The costs incurred during the year ended December 31, 2015 included the write-off of $1.7 million of unamortized deferred financing costs associated with our 2013 Credit Agreement, and $1.0 million of fees incurred in connection with our 2015 Credit Agreement. The costs incurred during the year ended December 31, 2014 primarily related to costs associated with the redemption in full of our 6.625% senior notes, including a $17.4 million early extinguishment premium and the write-off of $5.7 million of previously deferred financing costs. See Note 10 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information on such credit agreements.

 

Our provision for income taxes on a consolidated basis was $320.9 million for the year ended December 31, 2015 compared to $263.8 million for the year ended December 31, 2014. This increase was driven by the significant growth in pre-tax income during the year ended December 31, 2015. Our effective tax rate, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, increased to 37.0% for the year ended December 31, 2015 compared to 35.3% for the year ended December 31, 2014. This increase was largely due to the reversal of accrued taxes, interest and penalties related to settled positions, which had a favorable impact on the 2014 effective tax rate and did not recur in 2015.

 

Segment Operations

 

We report our operations through the following segments: (1) Americas, (2) 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 years ended December 31, 2016, 2015 and 2014 (dollars in thousands):

 

     Year Ended December 31,  
     2016     2015 (1)     2014 (1)  

Americas

            

Revenue:

            

Fee revenue

   $ 5,093,531       70.5   $ 4,499,127       72.7   $ 3,830,475       73.6

Pass through costs also recognized as revenue

     2,132,935       29.5     1,690,786       27.3     1,373,291       26.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     7,226,466       100.0     6,189,913       100.0     5,203,766       100.0

Costs and expenses:

            

Cost of services

     5,034,497       69.7     4,116,257       66.5     3,398,443       65.3

Operating, administrative and other

     1,353,830       18.7     1,274,948       20.6     1,119,118       21.5

Depreciation and amortization

     254,105       3.5     198,908       3.2     149,214       2.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 584,034       8.1   $ 599,800       9.7   $ 536,991       10.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 855,941       11.8   $ 818,732       13.2   $ 717,532       13.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 949,590       13.1   $ 859,478       13.9   $ 717,532       13.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EMEA

            

Revenue:

            

Fee revenue

   $ 2,190,734       55.9   $ 1,878,726       62.5   $ 1,645,768       70.2

Pass through costs also recognized as revenue

     1,727,205       44.1     1,125,758       37.5     698,484       29.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     3,917,939       100.0     3,004,484       100.0     2,344,252       100.0

Costs and expenses:

            

Cost of services

     3,027,351       77.3     2,205,550       73.4     1,605,859       68.5

Operating, administrative and other

     691,878       17.7     618,271       20.6     578,070       24.7

Depreciation and amortization

     66,639       1.6     68,370       2.3     64,628       2.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 132,071       3.4   $ 112,293       3.7   $ 95,695       4.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 200,073       5.1   $ 182,974       6.1   $ 162,536       6.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 273,565       7.0   $ 211,856       7.1   $ 162,536       6.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Asia Pacific

            

Revenue:

            

Fee revenue

   $ 991,647       66.7   $ 826,141       72.8   $ 780,926       80.7

Pass through costs also recognized as revenue

     494,323       33.3     308,929       27.2     186,851       19.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     1,485,970       100.0     1,135,070       100.0     967,777       100.0

Costs and expenses:

            

Cost of services

     1,061,879       71.5     761,125       67.1     606,960       62.7

Operating, administrative and other

     299,249       20.1     274,836       24.2     266,285       27.5

Depreciation and amortization

     17,803       1.2     15,580       1.3     14,661       1.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 107,039       7.2   $ 83,529       7.4   $ 79,871       8.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 124,980       8.4   $ 98,929       8.7   $ 94,532       9.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 140,760       9.5   $ 117,084       10.3   $ 94,532       9.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Global Investment Management

            

Revenue

   $ 369,800       100.0   $ 460,700       100.0   $ 468,941       100.0

Costs and expenses:

            

Operating, administrative and other

     297,194       80.4     347,974       75.5     374,972       80.0

Depreciation and amortization

     25,911       7.0     29,020       6.3     32,802       6.9

Gain on disposition of real estate

     —         —         —         —         23,028       4.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

   $ 46,695       12.6   $ 83,706       18.2   $ 84,195       18.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 77,431       20.9   $ 106,634       23.1   $ 95,267       20.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 83,151       22.5   $ 134,240       29.1   $ 119,140       25.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Development Services

            

Revenue

   $ 71,414       100.0   $ 65,643       100.0   $ 65,182       100.0

Costs and expenses:

            

Operating, administrative and other

     139,159       194.9     117,580       179.1     100,515       154.2

Depreciation and amortization

     2,469       3.4     2,218       3.4     3,796       5.8

Gain on disposition of real estate

     15,862       22.2     10,771       16.4     34,631       53.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

   $ (54,352     (76.1 %)    $ (43,384     (66.1 %)    $ (4,498     (6.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA and Adjusted EBITDA

   $ 113,937       159.5   $ 90,066       137.2   $ 72,385       111.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) During 2016, we changed our methodology for allocating certain costs to our reporting segments, including stock compensation, currency hedging and certain intercompany transactions. Prior year amounts have been reclassified to conform with the current year presentation. Such changes had no impact on our consolidated results.

 

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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

Americas

 

Revenue increased by $1.0 billion, or 16.7%, for the year ended December 31, 2016 compared to the year ended December 31, 2015. This increase was in part due to contributions from the GWS Acquisition, which added $641.6 million of revenue, with a full year of activity reflected in the current year versus only four months of activity in 2015. Additionally, the revenue increase reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition, up 10.4%), as well as improved leasing and commercial mortgage brokerage activity. Foreign currency translation had a $30.6 million negative impact on revenue during the year ended December 31, 2016 versus the same period in 2015, primarily driven by weakness in the Canadian dollar and Mexican peso.

 

Cost of services increased by $918.2 million, or 22.3%, for the year ended December 31, 2016 as compared to the same period in 2015, primarily due to higher costs associated with our occupier outsourcing business, particularly due to the GWS Acquisition. Also contributing to the variance was higher commission expense resulting from improved lease transaction revenue. We also incurred $10.3 million of additional costs in 2016 versus 2015 in connection with our cost-elimination project. Foreign currency translation had a $21.8 million positive impact on cost of services during the year ended December 31, 2016. Cost of services as a percentage of revenue increased to 69.7% for the year ended December 31, 2016 compared to 66.5% for the same period in 2015, largely due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 66.2% for the year ended December 31, 2016, compared to 65.2% for the year ended December 31, 2015, partly driven by the aforementioned costs associated with our cost-elimination project.

 

Operating, administrative and other expenses increased by $78.9 million, or 6.2%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The increase was partly driven by costs associated with the GWS Acquisition as well as higher payroll-related costs, including an increase in 401(k) contributions in the United States. Higher software license and maintenance contract costs also contributed to the increase. Foreign currency had a net $4.5 million positive impact on total operating expenses during the year ended December 31, 2016, which included a positive impact from foreign currency translation of $6.2 million, partially offset by unfavorable foreign currency transaction activity, mostly hedging related, of $1.7 million.

 

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. Gains from mortgage servicing rights are initially recorded at fair value within 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. In any given period, the net of gains from MSRs less related amortization equals the net non-cash impact to operating income from such activity (Net MSRs). For the year ended December 31, 2016, Net MSRs increased $29.6 million over the same period in the prior year. For the year ended December 31, 2016, Net MSRs contributed $80.7 million to operating income, consisting of $154.0 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $73.3 million of amortization of related intangible assets. For the year ended December 31, 2015, Net MSRs contributed $51.1 million to operating income, consisting of $110.4 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $59.3 million of amortization of related intangible assets.

 

EMEA

 

Revenue increased by $913.5 million, or 30.4%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was largely due to contributions from the GWS Acquisition, which

 

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added $924.9 million of revenue, with a full year of activity reflected in the current year versus only four months of activity in 2015. In addition, the revenue increase also reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition, up 15.8%). Leasing activity was up slightly and sales activity was flat versus the prior year. Foreign currency translation had a $232.6 million negative impact on total revenue during the year ended December 31, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling.

 

Cost of services increased by $821.8 million, or 37.3%, for the year ended December 31, 2016 as compared to the same period in 2015. This increase was primarily due to higher costs associated with our occupier outsourcing business, particularly due to the GWS Acquisition. We also incurred $9.3 million of additional costs in 2016 versus 2015 in connection with our cost-elimination project. These increases were partially reduced by foreign currency translation, which had a $177.8 million positive impact on cost of services during the year ended December 31, 2016. Cost of services as a percentage of revenue increased to 77.3% for the year ended December 31, 2016 from 73.4% for the year ended December 31, 2015, largely due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 69.0% for both the year ended December 31, 2016 and 2015.

 

Operating, administrative and other expenses increased by $73.6 million, or 11.9%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily driven by higher costs associated with the GWS Acquisition. Higher payroll-related costs (including bonuses) in the current year also contributed to the variance. These increases were partially mitigated by foreign currency, which had a $44.2 million positive impact on total operating expenses during the year ended December 31, 2016, including $1.0 million in favorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, and a $43.2 million positive impact from foreign currency translation.

 

Asia Pacific

 

Revenue increased by $350.9 million, or 30.9%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This increase was largely due to contributions from the GWS Acquisition, which added $229.4 million of revenue, with a full year of activity reflected in the current year versus only four months of activity in 2015. The revenue increase also reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition, up 33.4%) as well as improved sales and leasing activity. This increase was partially offset by foreign currency translation, which had a $2.8 million negative impact on total revenue during the year ended December 31, 2016 versus the same period in 2015, primarily driven by weakness in the Chinese yuan and Indian rupee, largely mitigated by strength in the Japanese yen.

 

Cost of services increased by $300.8 million, or 39.5%, for the year ended December 31, 2016 as compared to the same period in 2015, driven by higher costs associated with our occupier outsourcing businesses, including the acquired GWS business. This was partially offset by foreign currency translation, which had a $5.9 million positive impact on cost of services during the year ended December 31, 2016. Cost of services as a percentage of revenue increased to 71.5% for the year ended December 31, 2016 as compared to 67.1% for the same period in 2015, primarily due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 65.6% for the year ended December 31, 2016, compared to 64.1% for the same period in 2015, primarily driven by our revenue mix, with outsourcing revenue, which has a lower margin than sales and lease revenue, being a higher percentage of revenue than in the prior year.

 

Operating, administrative and other expenses increased by $24.4 million, or 8.9%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, mainly driven by costs associated with the GWS Acquisition. Additionally, foreign currency activity had an overall negative impact of $7.5 million for the year ended December 31, 2016, due to unfavorable foreign currency transaction activity, mostly related to hedging.

 

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Global Investment Management

 

Revenue decreased by $90.9 million, or 19.7%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015. This decrease was primarily driven by lower carried interest revenue as well as lower acquisition, asset management and incentive fees in the current year. Foreign currency translation had an $11.8 million negative impact on total revenue during the year ended December 31, 2016 versus the same period in 2015, primarily driven by weakness in the British pound sterling.

 

Operating, administrative and other expenses decreased by $50.8 million, or 14.6%, for the year ended December 31, 2016 as compared to the same period in 2015, primarily driven by lower carried interest expense incurred in the current year. Additionally, foreign currency had a net $5.0 million positive impact on total operating expenses during the year ended December 31, 2016, which included $2.7 million of unfavorable foreign currency transaction activity over the same period last year, much of which related to hedging activities, that was more than offset by a $7.7 million positive impact from foreign currency translation. These decreases were partially offset by $19.8 million of additional costs in 2016 versus 2015 in connection with our cost-elimination project.

 

A roll forward of our AUM by product type for the year ended December 31, 2016 is as follows (dollars in billions):

 

     Funds     Separate
Accounts
    Securities     Total  

Balance at January 1, 2016

   $ 28.3     $ 39.9     $ 20.8     $ 89.0  

Inflows

     5.4       5.7       2.7       13.8  

Outflows

     (4.7     (6.1     (6.3     (17.1

Market appreciation (depreciation)

     2.6       (2.0     0.3       0.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2016

   $ 31.6     $ 37.5     $ 17.5     $ 86.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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 program.

 

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.

 

Development Services

 

Revenue increased by $5.8 million, or 8.8%, for the year ended December 31, 2016 as compared to the year ended December 31, 2015, primarily driven by higher development fees in the current year.

 

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Operating, administrative and other expenses increased by $21.6 million, or 18.3%, for the year ended December 31, 2016 as compared to the same period in 2015. This increase was primarily driven by higher bonuses in the current year as a result of significantly improved operating performance due to property sales (reflected in equity income from unconsolidated subsidiaries and gain on disposition of real estate).

 

As of December 31, 2016, development projects in process totaled $6.6 billion, down $100 million from year-end 2015. The new projects pipeline totaled $4.2 billion, up $600 million from a year ago.

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

Americas

 

Revenue increased by $986.1 million, or 19.0%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was in part due to contributions from the GWS Acquisition. Additionally, the revenue increase also reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition, up 10.8%) and property management fees (up 14.7%), as well as improved sales, leasing, commercial mortgage brokerage and appraisal activity. Foreign currency translation had an $85.6 million negative impact on total revenue during the year ended December 31, 2015, primarily driven by weakness in the Brazilian real and Canadian dollar when converting to U.S. dollars during the year ended December 31, 2015 versus the year ended December 31, 2014.

 

Cost of services increased by $717.8 million, or 21.1%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily due to higher costs associated with our property management and occupier outsourcing businesses, particularly due to the GWS Acquisition. This increase was also due to higher commission expense resulting from improved sales and lease transaction revenue. Additionally, higher salaries and related costs due to increased headcount (in part due to in-fill acquisitions) also contributed to the increase. Foreign currency translation had a $52.8 million positive impact on cost of services during the year ended December 31, 2015. Cost of services as a percentage of revenue increased to 66.5% for the year ended December 31, 2015 compared to 65.3% for the year ended December 31, 2014, largely due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 65.2% for the year ended December 31, 2015, compared to 65.3% for the year ended December 31, 2014.

 

Operating, administrative and other expenses increased by $155.8 million, or 13.9%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. The increase was partly driven by costs associated with the GWS Acquisition. Also contributing to the variance were higher payroll-related costs (including bonuses) attributable to increased headcount and improved results as well as higher consulting, marketing and travel costs. These increases were partially mitigated by an $8.6 million asset impairment charge incurred in our Americas segment during the year ended December 31, 2014, which did not recur during the year ended December 31, 2015, and foreign currency movement. Foreign currency translation had a $24.5 million positive impact on total operating expenses during the year ended December 31, 2015 and there was an improvement of $19.1 million in foreign currency transaction activity over the year ended December 31, 2014, some of which related to hedging activities.

 

For the year ended December 31, 2015, Net MSRs increased $26.1 million over the same period in 2014. For the year ended December 31, 2015, Net MSRs contributed $51.1 million to operating income, consisting of $110.4 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $59.3 million of amortization of related intangible assets. For the year ended December 31, 2014, Net MSRs contributed $25.0 million to operating income, consisting of $73.9 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $48.9 million of amortization of related intangible assets.

 

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EMEA

 

Revenue increased by $660.2 million, or 28.2%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was largely due to contributions from the GWS Acquisition. In addition, the revenue increase also reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition up 19.4%) and property management fees (up 25.9%), as well as improved sales, leasing and appraisal activity. The increase in revenue was partially offset by foreign currency translation, which had a $291.6 million negative impact on total revenue during the year ended December 31, 2015, primarily driven by weakness in the British pound sterling and euro when converting to U.S. dollars during the year ended December 31, 2015 versus the year ended December 31, 2014.

 

Cost of services increased by $599.7 million, or 37.3%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily due to higher costs associated with our property management and occupier outsourcing businesses, particularly due to the GWS Acquisition. Additionally, we incurred $9.7 million of costs in connection with our cost-elimination project. These increases were partially reduced by foreign currency translation, which had a $192.9 million positive impact on cost of services during the year ended December 31, 2015. Cost of services as a percentage of revenue increased to 73.4% for the year ended December 31, 2015 from 68.5% for the year ended December 31, 2014, largely due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 69.0% for the year ended December 31, 2015, compared to 68.5% for the year ended December 31, 2014.

 

Operating, administrative and other expenses increased by $40.2 million, or 7.0%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily driven by higher payroll-related costs (including bonuses) during the year ended December 31, 2015 as well as costs associated with the GWS Acquisition. Additionally, we incurred $10.3 million of costs in connection with our cost-elimination project. These items were partially offset by foreign currency translation, which had a $78.2 million positive impact on total operating expenses during the year ended December 31, 2015.

 

Asia Pacific

 

Revenue increased by $167.3 million, or 17.3%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. Contributions from the GWS Acquisition during the year ended December 31, 2015 as well as our acquisition of our former affiliate in Thailand in June 2014 drove the increase for the year ended December 31, 2015. The revenue increase also reflects strong organic growth, fueled by higher occupier outsourcing revenue (excluding the impact of the GWS Acquisition, up 30.1%) and property management fees (up 21.3%), as well as improved sales, leasing and appraisal activity. The overall increase was largely muted by foreign currency translation, which had a $120.7 million negative impact on total revenue during the year ended December 31, 2015, primarily driven by weakness in the Australian dollar and Japanese yen when converting to U.S. dollars during the year ended December 31, 2015 versus the year ended December 31, 2014.

 

Cost of services increased by $154.2 million, or 25.4%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, driven by higher costs associated with our property management and occupier outsourcing businesses, including the GWS Acquisition. Also contributing to the variance was increased commission expense resulting from higher transaction revenue as well as $7.0 million of costs incurred during the year ended December 31, 2015 in connection with our cost-elimination project. These increases were partially offset by foreign currency translation, which had a $72.7 million positive impact on cost of services during the year ended December 31, 2015. Cost of services as a percentage of revenue increased to 67.1% for the year ended December 31, 2015 as compared to 62.7% for the year ended December 31, 2014, primarily due to the GWS Acquisition. Excluding activity associated with the acquired JCI-GWS business, cost of services as a percentage of revenue was 64.1% for the year ended December 31, 2015, compared to 62.7% for the year ended December 31, 2014, primarily driven by our revenue mix, with outsourcing revenue, which has a lower margin, being a higher percentage of revenue than in the year ended December 31, 2014.

 

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Operating, administrative and other expenses increased by $8.6 million, or 3.2%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily driven by higher payroll-related costs (including bonuses) as well as $4.4 million of costs incurred during the year ended December 31, 2015 in connection with our cost-elimination project. The increase was also partly driven by costs associated with the GWS Acquisition. These increases were largely offset by foreign currency translation, which had a $28.8 million positive impact on total operating expenses during the year ended December 31, 2015.

 

Global Investment Management

 

Revenue decreased by $8.2 million, or 1.8%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily driven by foreign currency translation, which had a $38.5 million negative impact on total revenue during the year ended December 31, 2015, primarily driven by weakness in the British pound sterling and euro when converting to U.S. dollars during the year ended December 31, 2015 versus the year ended December 31, 2014. Higher carried interest revenue was more than offset by lower asset management, disposition and acquisition fees during the year ended December 31, 2015.

 

Operating, administrative and other expenses decreased by $27.0 million, or 7.2%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014, primarily driven by foreign currency translation, which had a $26.3 million positive impact on total operating expenses during the year ended December 31, 2015.

 

A rollforward of our AUM by product type for the year ended December 31, 2015 is as follows (dollars in billions):

 

     Funds     Separate
Accounts
    Securities     Total  

Balance at January 1, 2015

   $ 28.8     $ 37.0     $ 24.8     $ 90.6  

Inflows

     5.7       6.3       3.6       15.6  

Outflows

     (6.2     (4.7     (7.3     (18.2

Market appreciation (depreciation)

     —         1.3       (0.3     1.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2015

   $ 28.3     $ 39.9     $ 20.8     $ 89.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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.

 

Development Services

 

Revenue was relatively consistent at $65.6 million for the year ended December 31, 2015 as compared to $65.2 million for the year ended December 31, 2014.

 

Operating, administrative and other expenses increased by $17.1 million, or 17.0%, for the year ended December 31, 2015 as compared to the year ended December 31, 2014. This increase was primarily driven by higher bonuses during the year ended December 31, 2015 as a result of significantly improved operating performance due to property sales.

 

As of December 31, 2015, development projects in process totaled $6.7 billion, up $1.3 billion from the end of 2014, and the inventory of pipeline deals totaled $3.6 billion, down $0.4 billion from year-end 2014.

 

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

 

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2017 include up to approximately $170 million of anticipated capital expenditures, net of tenant concessions. As of December 31, 2016, we had aggregate commitments of $31.6 million to fund future co-investments in our Global Investment Management business, $25.5 million of which is expected to be funded in 2017. Additionally, as of December 31, 2016, we are committed to fund $23.0 million of additional capital to unconsolidated subsidiaries within our Development Services business, which we may be required to fund at any time. As of December 31, 2016, 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.

 

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 December 31, 2016 and 2015, we had accrued $91.0 million and $79.7 million, respectively, of deferred purchase consideration, which was included in accounts payable and accrued expenses and in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 8 of this Annual 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 its shares of 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 the company’s 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.

 

Historical Cash Flows

 

Operating Activities

 

Net cash provided by operating activities totaled $450.3 million for the year ended December 31, 2016, a decrease of $201.6 million as compared to the year ended December 31, 2015. The decrease in net cash provided by operating activities was primarily due to higher net payments to vendors and income taxes paid during the year ended December 31, 2016. These items were partially offset by higher commissions paid during the year ended December 31, 2015.

 

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Net cash provided by operating activities totaled $651.9 million for the year ended December 31, 2015, a decrease of $9.9 million as compared to the year ended December 31, 2014. The decrease in cash provided by operating activities was primarily due to higher bonuses and commissions paid during the year ended December 31, 2015 as well as an increase in real estate held for development during the year ended December 31, 2015. These items were partially offset by lower net payments to vendors and lower income taxes paid during the year ended December 31, 2015 as well as improved collections of receivables and operating performance during the year ended December 31, 2015.

 

Investing Activities

 

Net cash used in investing activities totaled $7.4 million for the year ended December 31, 2016, a decrease of $1.6 billion as compared to the year ended December 31, 2015. This variance was primarily driven by a greater amount invested in acquisitions during the year ended December 31, 2015, particularly the GWS Acquisition.

 

Net cash used in investing activities totaled $1.6 billion for the year ended December 31, 2015, an increase of $1.5 billion as compared to the year ended December 31, 2014. This variance was primarily driven by amounts paid for the acquisition of the Global Workplace Solutions business during the year ended December 31, 2015.

 

Financing Activities

 

Net cash used in financing activities totaled $199.6 million for the year ended December 31, 2016, as compared to net cash provided by financing activities of $789.5 million for the year ended December 31, 2015. This variance was primarily due to proceeds received from the issuance of $600.0 million of 4.875% senior notes in August 2015 as well as $378.8 million of higher net borrowings of term loans under our 2015 Credit Agreement during the year ended December 31, 2015. These collective borrowings during the year ended December 31, 2015, as well as cash on hand, were used to fund the GWS Acquisition, which closed on September 1, 2015.

 

Net cash provided by financing activities totaled $789.5 million for the year ended December 31, 2015, as compared to net cash used in financing activities of $232.1 million for the year ended December 31, 2014. This variance was primarily due to proceeds received from the issuance of $600.0 million of 4.875% senior notes in August 2015 and lower net repayments under our revolving credit facility during the year ended December 31, 2015. Also contributing to the increase was the establishment of $900.0 million of new senior term loan facilities under our 2015 Credit Agreement, partially offset by repayment of $645.6 million of senior term loans under our 2013 Credit Agreement, both of which occurred during the year ended December 31, 2015. The net proceeds from the issuance of 5.25% senior notes and the redemption of $350.0 million of 6.625% senior notes during the year ended December 31, 2014 partially reduced the overall cash used in financing activities during 2014.

 

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Summary of Contractual Obligations and Other Commitments

 

The following is a summary of our various contractual obligations and other commitments as of December 31, 2016 (dollars in thousands):

 

     Payments Due by Period  

Contractual Obligations

   Total      Less than 1
year
     1 – 3 years      3 – 5 years      More than 5
years
 

Total gross long-term debt (1)

   $ 2,576,889      $ 11      $ 139,123      $ 554,255      $ 1,883,500  

Short-term borrowings (2)

     1,254,669        1,254,669        —          —          —    

Operating leases (3)

     1,249,418        216,370        347,303        279,464        406,281  

Defined benefit pension liability (4)

     130,306        —          —          —          130,306  

Total gross notes payable on real estate (non recourse) (5)

     26,261        4,516        12,611        4,394        4,740  

Deferred purchase consideration (6)

     91,031        29,270        44,937        16,824        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 5,328,574      $ 1,504,836      $ 543,974      $ 854,937      $ 2,424,827  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Amount of Other Commitments Expiration  

Other Commitments

   Total      Less than 1
year
     1 – 3 years      3 – 5 years      More than 5
years
 

Letters of credit (3)

   $ 50,902      $ 50,902      $ —        $ —        $ —    

Guarantees (3) (7)

     56,616        56,616        —          —          —    

Co-investments (3) (8)

     54,553        48,434        5,262        —          857  

Tax liabilities (9)

     38,773        34,890        3,883        —          —    

Other (10)

     80,582        80,582        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Other Commitments

   $ 281,426      $ 271,424      $ 9,145      $ —        $ 857  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Reflects gross outstanding long-term debt balances expected to be paid at maturity, excluding unamortized discount, premium and deferred financing costs. See Note 10 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report. Figures do not include scheduled interest payments. Assuming each debt obligation is held until maturity, we estimate that we will make the following interest payments (dollars in thousands): 2017 – $105,347; 2018 to 2019 – $210,694; 2020 to 2021 – $189,385 and thereafter – $242,255.
(2) Primarily represents our warehouse lines of credit, which are recourse only to our wholly-owned subsidiary CBRE Capital Markets, Inc. (CBRE Capital Markets) and are secured by our related warehouse receivables. See Note 10 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(3) See Note 11 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(4) See Note 12 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report. These obligations are related, either wholly or partially, to the future retirement of our employees and such retirement dates are not predictable. An undeterminable portion of this amount will be paid in years one through five.
(5) Figures do not include scheduled interest payments. The notes have either fixed or variable interest rates, ranging from 3.13% to 6.04% at December 31, 2016.
(6) Represents deferred obligations related to previous acquisitions, which are included in accounts payable and accrued expenses and other long-term liabilities in the consolidated balance sheets at December 31, 2016 set forth in Item 8 of this Annual Report.
(7) Due to the nature of guarantees, payments could be due at any time upon the occurrence of certain triggering events, including default. Accordingly, all guarantees are reflected as expiring in less than one year.
(8) Includes $31.6 million related to our Global Investment Management segment, $25.5 million of which is expected to be funded in 2017 and $23.0 million related to our Development Services segment (callable at any time).

 

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(9) As of December 31, 2016, our current and non-current tax liabilities, including interest and penalties, totaled $88.9 million. Of this amount, we can reasonably estimate that $34.9 million will require cash settlement in less than one year and $3.9 million will require cash settlement in one to three years. We are unable to reasonably estimate the timing of the effective settlement of tax positions for the remaining $50.1 million.
(10) Represents outstanding reserves for claims under certain insurance programs, which are included in other current and other long-term liabilities in the consolidated balance sheets at December 31, 2016 set forth in Item 8 of this Annual Report. Due to the nature of this item, payments could be due at any time upon the occurrence of certain events. Accordingly, the entire balance has been reflected as expiring in less than one year.

 

Indebtedness

 

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

 

Long-Term Debt

 

We maintain credit facilities with third-party lenders, which we use for a variety of purposes. On March 28, 2013, CBRE Services, Inc. (CBRE Services), our wholly-owned subsidiary, entered into the 2013 Credit Agreement with a syndicate of banks led by Credit Suisse AG, or CS, as administrative and collateral agent, to completely refinance a previous credit agreement. On January 9, 2015, CBRE Services entered into the 2015 Credit Agreement with a syndicate of banks jointly led by Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC and CS. In January 2015, we used the proceeds from the tranche A term loan facility under the 2015 Credit Agreement and from the December 2014 issuance of $125.0 million of 5.25% senior notes due 2025, along with cash on hand, to pay off the prior tranche A and tranche B term loans and the balance on our revolving credit facility under the 2013 Credit Agreement. On September 3, 2015, CBRE Services entered into an incremental assumption agreement with a syndicate of banks jointly led by Wells Fargo Securities, LLC and CS to establish new tranche B-1 and tranche B-2 term loan facilities under the 2015 Credit Agreement in an aggregate principal amount of $400.0 million. 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.

 

The 2015 Credit Agreement is an unsecured credit facility that is jointly and severally guaranteed by us and substantially all of our material domestic subsidiaries. The 2015 Credit Agreement currently provides for the following: (1) a $2.8 billion revolving credit facility, which includes the capacity to obtain letters of credit and swingline loans and matures on March 21, 2021; (2) a $500.0 million tranche A term loan facility requiring quarterly principal payments, which began on June 30, 2015 and continue through maturity on January 9, 2020; (3) a $270.0 million tranche B-1 term loan facility requiring quarterly principal payments, which began on December 31, 2015 and continue through maturity on September 3, 2020; and (4) a $130.0 million tranche B-2 term loan facility requiring quarterly principal payments, which began on December 31, 2015 and continue through maturity on September 3, 2022. On November 1, 2016, we prepaid a total of $101.9 million of the 2017 and 2018 required amortization on our senior term loans under our 2015 Credit Agreement, which included $59.4 million for the tranche A term loan facility, $28.7 million for the tranche B-1 term loan facility and $13.8 million for the tranche B-2 term loan facility.

 

On August 13, 2015, CBRE Services issued $600.0 million in aggregate principal amount of 4.875% senior notes due March 1, 2026 at a price equal to 99.24% of their face value. The 4.875% senior notes are unsecured obligations of CBRE Services, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current and future secured indebtedness. The 4.875% senior notes are jointly and

 

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severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guarantees our 2015 Credit Agreement. Interest accrues at a rate of 4.875% per year and is payable semi-annually in arrears on March 1 and September 1.

 

On September 26, 2014, CBRE Services issued $300.0 million in aggregate principal amount of 5.25% senior notes due March 15, 2025. On December 12, 2014, CBRE Services issued an additional $125.0 million in aggregate principal amount of 5.25% senior notes due March 15, 2025 at a price equal to 101.5% of their face value, plus interest deemed to have accrued from September 26, 2014. The 5.25% senior notes are unsecured obligations of CBRE Services, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current and future secured indebtedness. The 5.25% senior notes are jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guarantees our 2015 Credit Agreement. Interest accrues at a rate of 5.25% per year and is payable semi-annually in arrears on March 15 and September 15.

 

On March 14, 2013, CBRE Services issued $800.0 million in aggregate principal amount of 5.00% senior notes due March 15, 2023. The 5.00% senior notes are unsecured obligations of CBRE Services, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current and future secured indebtedness. The 5.00% senior notes are jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guarantees our 2015 Credit Agreement. Interest accrues at a rate of 5.00% per year and is payable semi-annually in arrears on March 15 and September 15.

 

Our 2015 Credit Agreement and the indentures governing our 4.875% senior notes, 5.25% senior notes and 5.00% senior notes contain restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, create or permit liens on assets, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. Our 2015 Credit Agreement also requires us to maintain a minimum coverage ratio of EBITDA (as defined in the 2015 Credit Agreement) to total interest expense of 2.00x and a maximum leverage ratio of total debt less available cash to EBITDA (as defined in the 2015 Credit Agreement) of 4.25x as of the end of each fiscal quarter. Our coverage ratio of EBITDA to total interest expense was 12.73x for the year ended December 31, 2016, and our leverage ratio of total debt less available cash to EBITDA was 1.18x as of December 31, 2016. We may from time to time, in our sole discretion, explore opportunities to refinance or reduce our outstanding debt under our 2015 Credit Agreement and under our 4.875% senior notes, 5.00% senior notes and 5.25% senior notes, including in the case of our senior notes, by purchasing, redeeming or retiring such senior notes through tender offers, in privately negotiated or open market transactions or otherwise.

 

On October 8, 2010, CBRE Services issued $350.0 million in aggregate principal amount of 6.625% senior notes due October 15, 2020. We redeemed these notes in full on October 27, 2014 in accordance with the provisions of the notes and associated indenture. In connection with this early redemption, we incurred charges of $23.1 million, including a premium of $17.4 million and the write-off of $5.7 million of unamortized deferred financing costs. Such charges were included in the write-off of financing costs on extinguished debt for the year ended December 31, 2014 in the accompanying consolidated statements of operations set forth in Item 8 of this Annual Report.

 

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 of this Annual Report.

 

Short-Term Borrowings

 

Our wholly-owned subsidiary, CBRE Capital Markets, has the following warehouse lines of credit: i) credit agreements with JP Morgan Chase Bank, N.A., Bank of America, TD Bank, N.A. and Capital One, N.A. for the purpose of funding mortgage loans that will be resold; and ii) a funding arrangement with Federal National

 

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Mortgage Association, or Fannie Mae, for the purpose of selling a percentage of certain closed multifamily loans to Fannie Mae. For more information on these warehouse lines, see Note 10 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual 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 the “Derivatives and Hedging” Topic of the FASB ASC (Topic 815). The purpose of these interest rate swap agreements is to attempt to hedge potential changes to our cash flows due to the variable interest nature of our senior term loan facilities. The total notional amount of these interest rate swap agreements is $400.0 million, with $200.0 million expiring in October 2017 and $200.0 million expiring in September 2019. As of December 31, 2016 and 2015, the fair values of such interest rate swap agreements were reflected as a $13.2 million liability and a $21.5 million liability, respectively, and were included in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 8 of this Annual 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 8 of this Annual Report. This settlement fee is being amortized to interest expense throughout the remaining term of the terminated hedge transaction until August 2025.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Exchange Rates

 

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

 

Interest Rates

 

We manage our interest expense by using a combination of fixed and variable rate debt. 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 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Indebtedness-Interest Rate Swap Agreements” and is incorporated by reference herein.

 

The estimated fair value of our senior term loans was approximately $751.4 million at December 31, 2016. Based on dealers’ quotes, the estimated fair values of our 5.00% senior notes, 4.875% senior notes and 5.25% senior notes were $827.6 million, $607.0 million and $439.3 million, respectively, at December 31, 2016.

 

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We utilize sensitivity analyses to assess the potential effect on our variable rate debt. If interest rates were to increase 100 basis points on our outstanding variable rate debt at December 31, 2016, excluding notes payable on real estate, the net impact of the additional interest cost would be a decrease of $3.5 million on pre-tax income and a decrease of $3.5 million in cash provided by operating activities for the year ended December 31, 2016.

 

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Item 8. Financial Statements and Supplementary Data

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULES

 

     Page  

Report of Independent Registered Public Accounting Firm

     56  

Consolidated Balance Sheets at December 31, 2016 and 2015

     58  

Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014

     59  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

     60  

Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

     61  

Consolidated Statements of Equity for the years ended December 31, 2016, 2015 and 2014

     62  

Notes to Consolidated Financial Statements

     63  

Quarterly Results of Operations (Unaudited)

     119  

FINANCIAL STATEMENT SCHEDULES:

  

Schedule II—Valuation and Qualifying Accounts

     123  

 

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

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

CBRE Group, Inc.:

 

We have audited the accompanying consolidated balance sheets of CBRE Group, Inc. (the Company) and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, cash flows and equity for each of the years in the three-year period ended December 31, 2016. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule. We also have audited the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

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

 

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

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CBRE Group, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,

 

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presents fairly, in all material respects, the information set forth therein. Also in our opinion, CBRE Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

/s/ KPMG LLP

 

Los Angeles, California

March 1, 2017

 

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CBRE GROUP, INC.

 

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

     December 31,  
     2016     2015  
ASSETS     

Current Assets:

    

Cash and cash equivalents

   $ 762,576     $ 540,403  

Restricted cash

     68,836       72,764  

Receivables, less allowance for doubtful accounts of $39,469 and $46,606 at December 31, 2016 and 2015, respectively

     2,605,602       2,471,740  

Warehouse receivables

     1,276,047       1,767,107  

Income taxes receivable

     45,626       59,331  

Prepaid expenses

     184,107       172,922  

Other current assets

     179,656       220,956  
  

 

 

   

 

 

 

Total Current Assets

     5,122,450       5,305,223  

Property and equipment, net

     560,756       529,823  

Goodwill

     2,981,392       3,085,997  

Other intangible assets, net of accumulated amortization of $771,673 and $589,236 at December 31, 2016 and 2015, respectively

     1,411,039       1,450,469  

Investments in unconsolidated subsidiaries

     232,238       217,943  

Deferred tax assets, net

     105,324       135,252  

Other assets, net

     366,388       293,236  
  

 

 

   

 

 

 

Total Assets

   $ 10,779,587     $ 11,017,943  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current Liabilities:

    

Accounts payable and accrued expenses

   $ 1,446,438     $ 1,484,119  

Compensation and employee benefits payable

     772,922       705,070  

Accrued bonus and profit sharing

     890,321       866,894  

Income taxes payable

     58,351       82,194  

Short-term borrowings:

    

Warehouse lines of credit (which fund loans that U.S. Government Sponsored Entities have committed to purchase)

     1,254,653       1,750,781  

Other

     16       16  
  

 

 

   

 

 

 

Total short-term borrowings

     1,254,669       1,750,797  

Current maturities of long-term debt

     11       34,428  

Other current liabilities

     102,717       70,655  
  

 

 

   

 

 

 

Total Current Liabilities

     4,525,429       4,994,157  

Long-term debt, net of current maturities

     2,548,126       2,645,111  

Deferred tax liabilities, net

     70,719       100,361  

Non-current tax liabilities

     54,042       88,667  

Other liabilities

     524,026       430,577  
  

 

 

   

 

 

 

Total Liabilities

     7,722,342       8,258,873  

Commitments and contingencies

     —         —    

Equity:

    

CBRE Group, Inc. Stockholders’ Equity:

    

Class A common stock; $0.01 par value; 525,000,000 shares authorized; 337,279,449 and 334,230,496 shares issued and outstanding at December 31, 2016 and 2015, respectively

     3,373       3,342  

Additional paid-in capital

     1,145,226       1,106,758  

Accumulated earnings

     2,656,906       2,088,227  

Accumulated other comprehensive loss

     (791,018     (485,675
  

 

 

   

 

 

 

Total CBRE Group, Inc. Stockholders’ Equity

     3,014,487       2,712,652  

Non-controlling interests

     42,758       46,418  
  

 

 

   

 

 

 

Total Equity

     3,057,245       2,759,070  
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 10,779,587     $ 11,017,943  
  

 

 

   

 

 

 

 

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

 

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CBRE GROUP, INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

     Year Ended December 31,  
     2016      2015     2014  

Revenue

   $ 13,071,589      $ 10,855,810     $ 9,049,918  

Costs and expenses:

       

Cost of services

     9,123,727        7,082,932       5,611,262  

Operating, administrative and other

     2,781,310        2,633,609       2,438,960  

Depreciation and amortization

     366,927        314,096       265,101  
  

 

 

    

 

 

   

 

 

 

Total costs and expenses

     12,271,964        10,030,637       8,315,323  

Gain on disposition of real estate

     15,862        10,771       57,659  
  

 

 

    

 

 

   

 

 

 

Operating income

     815,487        835,944       792,254  

Equity income from unconsolidated subsidiaries

     197,351        162,849       101,714  

Other income (loss)

     4,688        (3,809     12,183  

Interest income

     8,051        6,311       6,233  

Interest expense

     144,851        118,880       112,035  

Write-off of financing costs on extinguished debt

     —          2,685       23,087  
  

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     880,726        879,730       777,262  

Provision for income taxes

     296,662        320,853       263,759  
  

 

 

    

 

 

   

 

 

 

Net income

     584,064        558,877       513,503  

Less: Net income attributable to non-controllling interests

     12,091        11,745       29,000  
  

 

 

    

 

 

   

 

 

 

Net income attributable to CBRE Group, Inc.

   $ 571,973      $ 547,132     $ 484,503  
  

 

 

    

 

 

   

 

 

 

Basic income per share:

       

Net income per share attributable to CBRE Group, Inc.

   $ 1.71      $ 1.64     $ 1.47  
  

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding for basic income per share

     335,414,831        332,616,301       330,620,206  
  

 

 

    

 

 

   

 

 

 

Diluted income per share:

  

Net income per share attributable to CBRE Group, Inc.

   $ 1.69      $ 1.63     $ 1.45  
  

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding for diluted income per share

     338,424,563        336,414,856       334,171,509  
  

 

 

    

 

 

   

 

 

 

 

 

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

 

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CBRE GROUP, INC.

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

     Year Ended December 31,  
     2016     2015     2014  

Net income

   $ 584,064     $ 558,877     $ 513,503  

Other comprehensive loss:

      

Foreign currency translation loss

     (235,278     (164,350     (148,589

Fees associated with termination of interest rate swaps, net of $2,244 income tax benefit for the year ended December 31, 2015

     —         (3,908     —    

Amounts reclassified from accumulated other comprehensive loss to interest expense, net of $4,443, $4,411 and $4,710 income tax expense for the years ended December 31, 2016, 2015 and 2014, respectively

     6,839       7,680       7,279  

Unrealized losses on interest rate swaps and interest rate caps, net of $929, $2,358 and $3,825 income tax benefit for the years ended December 31, 2016, 2015 and 2014, respectively

     (1,431     (4,107     (5,927

Unrealized holding gains (losses) on available for sale securities, net of $250 income tax expense, $405 and $614 income tax benefit for the years ended December 31, 2016, 2015 and 2014, respectively

     384       (705     (941

Pension liability adjustments, net of $13,057 income tax benefit, $773 income tax expense and $7,589 income tax benefit for the years ended December 31, 2016, 2015 and 2014, respectively

     (63,749     3,741       (30,355

Other, net of $3,705 income tax benefit for the year ended December 31, 2016

     (12,091     3       549  
  

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

     (305,326     (161,646     (177,984
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     278,738       397,231       335,519  

Less: Comprehensive income attributable to non-controlling interests

     12,108       11,754       28,913  
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to CBRE Group, Inc.

   $ 266,630     $ 385,477     $ 306,606  
  

 

 

   

 

 

   

 

 

 

 

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

 

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CBRE GROUP, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Year Ended December 31,  
     2016     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 584,064     $ 558,877     $ 513,503  

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     366,927       314,096       265,101  

Amortization and write-off of financing costs on extinguished debt

     10,935       12,311       13,155  

Write-down of impaired assets

     —         —         8,615  

Gain on sale of loans, servicing rights and other assets

     (201,362     (140,828     (95,636

Net realized and unrealized (gains) losses from investments

     (4,688     3,809       (11,237

Gain on disposition of real estate held for investment

     (9,901     (8,573     (28,005

Equity income from unconsolidated subsidiaries

     (197,351     (162,849     (101,714

Provision for doubtful accounts

     4,711       10,211       8,165  

Deferred income taxes

     (9,642     (14,935     (28,469

Compensation expense for equity awards

     63,484       74,709       59,757  

Incremental tax benefit from stock options exercised

     —         (2,277     (1,218

Distribution of earnings from unconsolidated subsidiaries

     29,031       36,630       27,903  

Tenant concessions received

     22,547       7,861       18,343  

Purchase of trading securities

     (87,765     (85,707     (71,021

Proceeds from sale of trading securities

     105,866       78,798       74,237  

Proceeds from securities sold, not yet purchased

     17,932       16,014       2,271  

Securities purchased to cover short sales

     (19,017     (13,147     (453

Increase in receivables

     (236,923     (231,979     (307,979

Increase in prepaid expenses and other assets

     (93,192     (84,997     (47,015

(Increase) decrease in real estate held for sale and under development

     (2,245     (16,003     47,276  

Increase in accounts payable and accrued expenses

     2,235       177,567       31,526  

Increase in compensation and employee benefits payable and accrued bonus and profit sharing

     132,947       115,805       344,987  

(Increase) decrease in income taxes receivable/payable

     (6,334     43,085       (43,194

(Decrease) increase in other liabilities

     (3,231     (15,543     589  

Other operating activities, net

     (18,713     (21,038     (17,707
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     450,315       651,897       661,780  
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Capital expenditures

     (191,205     (139,464     (171,242

Acquisition of Global Workplace Solutions (GWS), including net assets acquired, intangibles and goodwill, net of cash acquired

     (10,477     (1,421,663     —    

Acquisition of businesses (other than GWS), including net assets acquired, intangibles and goodwill, net of cash acquired

     (31,634     (161,106     (147,057

Contributions to unconsolidated subsidiaries

     (66,816     (71,208     (59,177

Distributions from unconsolidated subsidiaries

     213,446       187,577       104,267  

Net proceeds from disposition of real estate held for investment

     44,326       3,584       77,278  

Additions to real estate held for investment

     (3,203     (2,053     (10,961

Proceeds from the sale of servicing rights and other assets

     43,531       30,432       25,541  

(Increase) decrease in restricted cash

     (2,552     (49,012     30,889  

Purchase of available for sale securities

     (37,661     (40,287     (89,885

Proceeds from the sale of available for sale securities

     35,051       42,572       88,214  

Other investing activities, net

     (245     1,669       577  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (7,439     (1,618,959     (151,556
  

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from senior term loans

     —         900,000       —    

Repayment of senior term loans

     (136,250     (657,488     (39,650

Proceeds from revolving credit facility

     2,909,000       2,643,500       1,873,568  

Repayment of revolving credit facility

     (2,909,000     (2,648,012     (1,999,422

Proceeds from issuance of 4.875% senior notes, net

     —         595,440       —    

Proceeds from issuance of 5.25% senior notes

     —         —         426,875  

Repayment of 6.625% senior notes

     —         —         (350,000

Proceeds from notes payable on real estate held for investment

     7,274       —         5,022  

Repayment of notes payable on real estate held for investment

     (33,944     (1,576     (27,563

Proceeds from notes payable on real estate held for sale and under development

     17,727       20,879       8,274  

Repayment of notes payable on real estate held for sale and under development

     (4,102     (1,186     (80,218

Shares and units repurchased for payment of taxes on equity awards

     (27,426     (24,523     (16,685

Proceeds from exercise of stock options

     915       7,525       6,203  

Incremental tax benefit from stock options exercised

     —         2,277       1,218  

Non-controlling interest contributions

     2,272       5,909       2,938  

Non-controlling interest distributions

     (19,133     (16,582     (33,971

Payment of financing costs

     (5,618     (30,664     (5,947

Other financing activities, net

     (1,358     (5,951     (2,711
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (199,643     789,548       (232,069

Effect of currency exchange rate changes on cash and cash equivalents

     (21,060     (22,967     (29,183
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     222,173       (200,481     248,972  

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

     540,403       740,884       491,912  
  

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

   $ 762,576     $ 540,403     $ 740,884  
  

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

      

Cash paid during the period for:

      

Interest

   $ 125,800     $ 88,078     $ 118,749  
  

 

 

   

 

 

   

 

 

 

Income taxes, net

   $ 294,848     $ 285,730     $ 331,257  
  

 

 

   

 

 

   

 

 

 

 

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

 

61


Table of Contents

CBRE GROUP, INC.

 

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited)

(Dollars in thousands)

 

    CBRE Group, Inc. Shareholders              
                            Accumulated other
comprehensive loss
             
    Shares     Class A
common
stock
    Additional
paid-in
capital
    Accumulated
earnings
    Minimum
pension
liability
    Foreign
currency
translation
and other
    Non-controlling
interests
    Total  

Balance at December 31, 2013

    331,927,166     $ 3,319     $ 981,997     $ 1,056,592     $ (75,307   $ (70,816   $ 40,221     $ 1,936,006  

Net income

    —         —         —         484,503       —         —         29,000       513,503  

Pension liability adjustments, net of tax

    —         —         —         —         (30,355     —         —         (30,355

Stock options exercised (including tax benefit)

    458,505