10-Q 1 cbg-10q_20180630.htm 10-Q cbg-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2018

OR

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

For the Transition Period from _______________ to _______________

Commission File Number 001 – 32205

 

CBRE GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

94-3391143

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

400 South Hope Street, 25th Floor
Los Angeles, California

 

90071

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(213) 613-3333

 

Not applicable

(Registrant's telephone number, including area code)

 

(Former name, former address and
former fiscal year, if changed since last report)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  .

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

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

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

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

The number of shares of Class A common stock outstanding at July 31, 2018 was 339,798,242.

 

 

 


 

FORM 10-Q

June 30, 2018

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets at June 30, 2018 and December 31, 2017

 

1

 

 

 

 

 

 

 

Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017

 

2

 

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017

 

3

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017

 

4

 

 

 

 

 

 

 

Consolidated Statement of Equity for the six months ended June 30, 2018

 

5

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

6

 

 

 

 

 

Item 2.

 

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

 

38

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

59

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

60

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

60

 

 

 

 

 

Item 1A.

 

Risk Factors

 

60

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

60

 

 

 

 

 

Item 6.

 

Exhibits

 

61

 

 

 

 

 

Signatures

 

62

 

 

 

 


 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

CBRE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(As Adjusted)

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

531,481

 

 

$

751,774

 

Restricted cash

 

 

71,865

 

 

 

73,045

 

Receivables, less allowance for doubtful accounts of $55,753 and $46,789 at

   June 30, 2018 and December 31, 2017, respectively

 

 

3,324,522

 

 

 

3,112,289

 

Warehouse receivables

 

 

1,488,324

 

 

 

928,038

 

Prepaid expenses

 

 

268,226

 

 

 

215,336

 

Contract assets

 

 

109,272

 

 

 

273,053

 

Income taxes receivable

 

 

47,752

 

 

 

49,628

 

Other current assets

 

 

265,268

 

 

 

227,421

 

Total Current Assets

 

 

6,106,710

 

 

 

5,630,584

 

Property and equipment, net

 

 

705,469

 

 

 

617,739

 

Goodwill

 

 

3,407,169

 

 

 

3,254,740

 

Other intangible assets, net of accumulated amortization of $1,106,169 and $1,000,738 at

   June 30, 2018 and December 31, 2017, respectively

 

 

1,448,284

 

 

 

1,399,112

 

Investments in unconsolidated subsidiaries

 

 

233,889

 

 

 

238,001

 

Deferred tax assets, net

 

 

97,890

 

 

 

98,746

 

Other assets, net

 

 

536,046

 

 

 

479,474

 

Total Assets

 

$

12,535,457

 

 

$

11,718,396

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,642,030

 

 

$

1,573,672

 

Compensation and employee benefits payable

 

 

870,626

 

 

 

904,434

 

Accrued bonus and profit sharing

 

 

629,044

 

 

 

1,078,345

 

Contract liabilities

 

 

76,216

 

 

 

100,615

 

Income taxes payable

 

 

21,918

 

 

 

70,634

 

Short-term borrowings:

 

 

 

 

 

 

 

 

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

   Enterprises have committed to purchase)

 

 

1,471,591

 

 

 

910,766

 

Revolving credit facility

 

 

598,000

 

 

 

 

Other

 

 

16

 

 

 

16

 

Total short-term borrowings

 

 

2,069,607

 

 

 

910,782

 

Current maturities of long-term debt

 

 

1,466

 

 

 

8

 

Other current liabilities

 

 

70,228

 

 

 

74,454

 

Total Current Liabilities

 

 

5,381,135

 

 

 

4,712,944

 

Long-term debt, net of current maturities

 

 

1,762,885

 

 

 

1,999,603

 

Deferred tax liabilities, net

 

 

187,062

 

 

 

147,218

 

Non-current tax liabilities

 

 

140,050

 

 

 

140,792

 

Other liabilities

 

 

547,454

 

 

 

543,225

 

Total Liabilities

 

 

8,018,586

 

 

 

7,543,782

 

Commitments and contingencies

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

CBRE Group, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

 

Class A common stock; $0.01 par value; 525,000,000 shares authorized;

   339,793,072 and 339,459,138 shares issued and outstanding at June 30, 2018

   and December 31, 2017, respectively

 

 

3,398

 

 

 

3,395

 

Additional paid-in capital

 

 

1,278,251

 

 

 

1,220,508

 

Accumulated earnings

 

 

3,820,420

 

 

 

3,443,007

 

Accumulated other comprehensive loss

 

 

(648,492

)

 

 

(552,414

)

Total CBRE Group, Inc. Stockholders’ Equity

 

 

4,453,577

 

 

 

4,114,496

 

Non-controlling interests

 

 

63,294

 

 

 

60,118

 

Total Equity

 

 

4,516,871

 

 

 

4,174,614

 

Total Liabilities and Equity

 

$

12,535,457

 

 

$

11,718,396

 

 

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

1


 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

(As Adjusted)

 

Revenue

 

$

5,111,434

 

 

$

4,439,571

 

 

$

9,785,386

 

 

$

8,490,537

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services

 

 

3,958,748

 

 

 

3,409,540

 

 

 

7,578,709

 

 

 

6,556,017

 

Operating, administrative and other

 

 

826,282

 

 

 

712,615

 

 

 

1,558,517

 

 

 

1,319,241

 

Depreciation and amortization

 

 

113,399

 

 

 

100,386

 

 

 

221,564

 

 

 

194,423

 

Total costs and expenses

 

 

4,898,429

 

 

 

4,222,541

 

 

 

9,358,790

 

 

 

8,069,681

 

Gain on disposition of real estate

 

 

12,311

 

 

 

11,298

 

 

 

12,329

 

 

 

12,683

 

Operating income

 

 

225,316

 

 

 

228,328

 

 

 

438,925

 

 

 

433,539

 

Equity income from unconsolidated subsidiaries

 

 

96,021

 

 

 

75,384

 

 

 

136,200

 

 

 

90,402

 

Other income (loss)

 

 

4,009

 

 

 

3,186

 

 

 

(271

)

 

 

7,301

 

Interest income

 

 

1,489

 

 

 

1,427

 

 

 

5,110

 

 

 

3,838

 

Interest expense

 

 

26,885

 

 

 

35,430

 

 

 

55,743

 

 

 

69,440

 

Write-off of financing costs on extinguished debt

 

 

 

 

 

 

 

 

27,982

 

 

 

 

Income before provision for income taxes

 

 

299,950

 

 

 

272,895

 

 

 

496,239

 

 

 

465,640

 

Provision for income taxes

 

 

70,319

 

 

 

69,887

 

 

 

116,483

 

 

 

123,706

 

Net income

 

 

229,631

 

 

 

203,008

 

 

 

379,756

 

 

 

341,934

 

Less:  Net income attributable to non-controlling interests

 

 

964

 

 

 

1,231

 

 

 

801

 

 

 

3,137

 

Net income attributable to CBRE Group, Inc.

 

$

228,667

 

 

$

201,777

 

 

$

378,955

 

 

$

338,797

 

Basic income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CBRE Group, Inc.

 

$

0.67

 

 

$

0.60

 

 

$

1.12

 

 

$

1.01

 

Weighted average shares outstanding for basic income per share

 

 

339,081,556

 

 

 

336,975,149

 

 

 

338,986,354

 

 

 

336,941,681

 

Diluted income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share attributable to CBRE Group, Inc.

 

$

0.67

 

 

$

0.59

 

 

$

1.10

 

 

$

1.00

 

Weighted average shares outstanding for diluted income per share

 

 

343,471,513

 

 

 

340,882,603

 

 

 

343,031,189

 

 

 

340,214,246

 

 

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

 


2


 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(As Adjusted)

 

 

 

 

 

 

(As Adjusted)

 

Net income

 

$

229,631

 

 

$

203,008

 

 

$

379,756

 

 

$

341,934

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation (loss) gain

 

 

(165,926

)

 

 

88,649

 

 

 

(99,894

)

 

 

139,837

 

Adoption of Accounting Standards Update 2016-01,

   net of tax

 

 

 

 

 

 

 

 

(3,964

)

 

 

 

Amounts reclassified from accumulated other comprehensive

   loss to interest expense, net of tax

 

 

628

 

 

 

1,380

 

 

 

1,383

 

 

 

2,888

 

Unrealized gains (losses) on interest rate swaps, net of tax

 

 

214

 

 

 

(217

)

 

 

817

 

 

 

77

 

Unrealized holding (losses) gains on available for sale debt

   securities, net of tax

 

 

(122

)

 

 

977

 

 

 

(627

)

 

 

1,900

 

Other, net

 

 

 

 

 

(10

)

 

 

5,528

 

 

 

(16

)

Total other comprehensive (loss) income

 

 

(165,206

)

 

 

90,779

 

 

 

(96,757

)

 

 

144,686

 

Comprehensive income

 

 

64,425

 

 

 

293,787

 

 

 

282,999

 

 

 

486,620

 

Less: Comprehensive income attributable to non-controlling

   interests

 

 

480

 

 

 

1,390

 

 

 

122

 

 

 

3,317

 

Comprehensive income attributable to CBRE Group, Inc.

 

$

63,945

 

 

$

292,397

 

 

$

282,877

 

 

$

483,303

 

 

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

 


3


 

CBRE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(As Adjusted)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income

 

$

379,756

 

 

$

341,934

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

221,564

 

 

 

194,423

 

Amortization and write-off of financing costs on extinguished debt

 

 

31,646

 

 

 

4,912

 

Gains related to mortgage servicing rights, premiums on loan sales and sales of other assets

 

 

(98,707

)

 

 

(80,893

)

Gains on disposition of real estate held for investment

 

 

(3,197

)

 

 

 

Net realized and unrealized losses (gains) from investments

 

 

271

 

 

 

(7,301

)

Equity income from unconsolidated subsidiaries

 

 

(136,200

)

 

 

(90,402

)

Provision for doubtful accounts

 

 

11,809

 

 

 

5,578

 

Compensation expense for equity awards

 

 

61,675

 

 

 

48,283

 

Proceeds from sale of mortgage loans

 

 

7,019,614

 

 

 

7,071,928

 

Origination of mortgage loans

 

 

(7,552,229

)

 

 

(6,848,102

)

Increase (decrease) in warehouse lines of credit

 

 

560,825

 

 

 

(199,683

)

Distribution of earnings from unconsolidated subsidiaries

 

 

131,395

 

 

 

85,952

 

Tenant concessions received

 

 

16,130

 

 

 

7,436

 

Purchase of equity securities

 

 

(41,389

)

 

 

(43,525

)

Proceeds from sale of equity securities

 

 

37,715

 

 

 

34,476

 

(Increase) decrease in receivables, prepaid expenses and other assets (including contract assets)

 

 

(198,469

)

 

 

15,995

 

Decrease in real estate held for sale and under development

 

 

701

 

 

 

9,787

 

Increase (decrease) in accounts payable and accrued expenses and other liabilities (including contract

   liabilities)

 

 

9,543

 

 

 

(115,288

)

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

 

 

(496,292

)

 

 

(494,205

)

Increase in net income taxes receivable/payable

 

 

(41,830

)

 

 

(47,384

)

Other operating activities, net

 

 

(6,393

)

 

 

(11,358

)

Net cash used in operating activities

 

 

(92,062

)

 

 

(117,437

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(107,482

)

 

 

(59,863

)

Acquisition of businesses, including net assets acquired, intangibles and goodwill, net of cash acquired

 

 

(264,702

)

 

 

(25,326

)

Contributions to unconsolidated subsidiaries

 

 

(21,042

)

 

 

(32,660

)

Distributions from unconsolidated subsidiaries

 

 

28,235

 

 

 

23,970

 

Net proceeds from disposition of real estate held for investment

 

 

14,174

 

 

 

 

Purchase of equity securities

 

 

(13,718

)

 

 

(9,280

)

Proceeds from sale of equity securities

 

 

8,889

 

 

 

9,428

 

Purchase of available for sale debt securities

 

 

(18,723

)

 

 

(10,454

)

Proceeds from the sale of available for sale debt securities

 

 

4,121

 

 

 

7,849

 

Other investing activities, net

 

 

(6,384

)

 

 

2,279

 

Net cash used in investing activities

 

 

(376,632

)

 

 

(94,057

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Proceeds from senior term loans

 

 

550,000

 

 

 

 

Proceeds from revolving credit facility

 

 

2,000,000

 

 

 

911,000

 

Repayment of revolving credit facility

 

 

(1,402,000

)

 

 

(911,000

)

Repayment of 5.00% senior notes (including premium)

 

 

(820,000

)

 

 

 

Proceeds from notes payable on real estate held for investment

 

 

52

 

 

 

 

Repayment of notes payable on real estate held for investment

 

 

(13,028

)

 

 

 

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

 

 

1,101

 

 

 

2,137

 

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

 

 

(2,991

)

 

 

(9,189

)

Acquisition of businesses (cash paid for acquisitions more than three months after purchase date)

 

 

(11,183

)

 

 

(15,126

)

Repayment of debt assumed in acquisition of FacilitySource

 

 

(26,295

)

 

 

 

Units repurchased for payment of taxes on equity awards

 

 

(4,630

)

 

 

(1,900

)

Non-controlling interest contributions

 

 

2,744

 

 

 

1,941

 

Non-controlling interest distributions

 

 

(7,652

)

 

 

(3,904

)

Other financing activities, net

 

 

(76

)

 

 

(3,666

)

Net cash provided by (used in) financing activities

 

 

266,042

 

 

 

(29,707

)

Effect of currency exchange rate changes on cash and cash equivalents and restricted cash

 

 

(18,821

)

 

 

20,190

 

NET DECREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

 

 

(221,473

)

 

 

(221,011

)

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, AT BEGINNING OF PERIOD

 

 

824,819

 

 

 

831,412

 

CASH AND CASH EQUIVALENTS AND RESTRICTED CASH, AT END OF PERIOD

 

$

603,346

 

 

$

610,401

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

59,337

 

 

$

59,490

 

Income taxes, net

 

$

159,833

 

 

$

163,885

 

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

4


 

CBRE GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(Dollars in thousands)

 

 

 

CBRE Group, Inc. Shareholders

 

 

 

 

 

 

 

 

 

 

 

Class A

common

stock

 

 

Additional

paid-in

capital

 

 

Accumulated

earnings

 

 

Accumulated other comprehensive loss

 

 

Non-

controlling

interests

 

 

Total

 

Balance at December 31, 2017 (As Adjusted)

 

$

3,395

 

 

$

1,220,508

 

 

$

3,443,007

 

 

$

(552,414

)

 

$

60,118

 

 

$

4,174,614

 

Net income

 

 

 

 

 

 

 

 

378,955

 

 

 

 

 

 

801

 

 

 

379,756

 

Adoption of Accounting Standards Update 2016-01,

   net of tax (see Note 3)

 

 

 

 

 

 

 

 

3,964

 

 

 

(3,964

)

 

 

 

 

 

 

Compensation expense for equity awards

 

 

 

 

 

61,675

 

 

 

 

 

 

 

 

 

 

 

 

61,675

 

Units repurchased for payment of taxes on equity awards

 

 

 

 

 

(4,630

)

 

 

 

 

 

 

 

 

 

 

 

(4,630

)

Foreign currency translation loss

 

 

 

 

 

 

 

 

 

 

 

(99,215

)

 

 

(679

)

 

 

(99,894

)

Amounts reclassified from accumulated other

   comprehensive loss to interest expense, net of tax

 

 

 

 

 

 

 

 

 

 

 

1,383

 

 

 

 

 

 

1,383

 

Unrealized gains on interest rate swaps, net of tax

 

 

 

 

 

 

 

 

 

 

 

817

 

 

 

 

 

 

817

 

Unrealized holding losses on available for sale debt

   securities, net of tax

 

 

 

 

 

 

 

 

 

 

 

(627

)

 

 

 

 

 

(627

)

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,744

 

 

 

2,744

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,652

)

 

 

(7,652

)

Other

 

 

3

 

 

 

698

 

 

 

(5,506

)

 

 

5,528

 

 

 

7,962

 

 

 

8,685

 

Balance at June 30, 2018

 

$

3,398

 

 

$

1,278,251

 

 

$

3,820,420

 

 

$

(648,492

)

 

$

63,294

 

 

$

4,516,871

 

 

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

 

 

 

5


CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Basis of Presentation

Readers of this Quarterly Report on Form 10-Q (Quarterly Report) should refer to the audited financial statements and notes to consolidated financial statements of CBRE Group, Inc., a Delaware corporation (which may be referred to in these financial statements as “the company,” “we,” “us” and “our”), for the year ended December 31, 2017, which are included in our 2017 Annual Report on Form 10-K (2017 Annual Report), filed with the United States Securities and Exchange Commission (SEC) and also available on our website (www.cbre.com), since we have omitted from this Quarterly Report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to Note 2, Significant Accounting Policies, in the notes to consolidated financial statements in our 2017 Annual Report for further discussion of our significant accounting policies and estimates.

The accompanying consolidated financial statements have been prepared in accordance with the rules applicable to quarterly reports on Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (U.S.), or GAAP, for annual financial statements. In our opinion, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenue and expenses. Such estimates include the value of goodwill, intangibles and other long-lived assets, real estate assets, accounts receivable, contract assets, investments in unconsolidated subsidiaries and assumptions used in the calculation of income taxes, retirement and other post-employment benefits, among others. These estimates and assumptions are based on our best judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including consideration of the current economic environment, and adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Certain restatements have been made to the 2017 financial statements to conform with the 2018 presentation in connection with our adoption of new revenue recognition guidance (as further described in notes 2, 3 and 12). In addition, certain reclassifications have been made to the 2017 financial statements to conform with the 2018 presentation. Such reclassifications primarily relate to the adoption of Accounting Standards Update (ASU) 2016‑01, ASU 2016-15 and ASU 2016-18 as further described in Note 3.

The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2018.

 

2.

Significant Accounting Policies Update

Revenue Recognition

We account for revenue in accordance with Accounting Standards Codification (ASC) Topic 606, “Revenue from Contracts with Customers.” Topic 606 also includes Subtopic 340-40, “Other Assets and Deferred Costs – Contracts with Customers,” which requires deferral of incremental costs to obtain and fulfill a contract with a customer. We adopted new revenue recognition guidance on January 1, 2018, using the full retrospective method (see Note 3). Revenue is recognized when or as control of the promised services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

The following is a description of principal activities – separated by reportable segments – from which we generate revenue. For more detailed information about our reportable segments, see Notes 12 and 13.

6


CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The Americas, Europe, Middle East and Africa (EMEA), and Asia Pacific

The Americas segment is our largest segment of operations and provides a comprehensive range of services throughout the United States (U.S.), in the largest regions of Canada and in key markets in Latin America. The primary services offered consist of the following: property leasing, property sales, mortgage services, appraisal and valuation, occupier outsourcing and property management services.

Our EMEA and Asia Pacific segments generally provide services similar to the Americas business segment. The EMEA segment has operations primarily in Europe, while the Asia Pacific segment has operations in Asia, Australia and New Zealand.

Property Leasing and Property Sales

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

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

Mortgage Originations and Loan Sales

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

We also earn fees from the origination and sale of commercial mortgage loans for which the company retains the servicing rights. These fees are governed by the “Fair Value Measurements and Disclosures” topic (Topic 820) and “Transfers and Servicing” topic (Topic 860) of the FASB ASC. Upon origination of a mortgage loan held for sale, the fair value of the mortgage servicing rights (MSR) to be retained is included in the forecasted proceeds from the anticipated loan sale and results in a net gain (which is reflected in revenue). Upon sale, we record a servicing asset or liability based on the fair value of the retained MSR associated with the transferred loan. Subsequent to the initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value in other intangible assets in the accompanying consolidated balance sheets. They are amortized in proportion to and over the estimated period that the servicing income is expected to be received.

7


CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

Appraisal and 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. We are compensated for valuation services in the form of a fee, which is payable on the occurrence of certain events (e.g., a portion on the delivery of a draft report with the remaining on the delivery of the final report). For consulting services, we may be paid based on the occurrence of time or event-based milestones (such as the delivery of draft reports). We typically satisfy our performance obligation as services are rendered over time.

Occupier Outsourcing Services

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.

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. Facilities management services represent a series of distinct daily services rendered over time.

Project management services are often provided on a portfolio wide or programmatic basis. Revenues from project management services generally includes fixed management fees, variable fees, and incentive fees if certain agreed-upon performance targets are met. Revenues from project management may also include reimbursement of payroll and related costs for personnel providing the services and subcontracted vendor costs. Project management services represent a series of distinct daily services rendered over time.

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

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

Property Management

We provide property management services on a contractual basis for owners of and investors in office, industrial and retail properties. These services include construction management, marketing, building engineering, accounting and financial services. We are compensated for our services through a monthly management fee earned based on either a specified percentage of the monthly rental income, rental receipts generated from the property under management or a fixed fee. We are also often reimbursed for our administrative and payroll costs directly attributable to the properties under management. Property management services represent a series of distinct daily

8


CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

services rendered over time. The amount of revenue recognized is presented gross for any services provided by our employees, as we control them. We generally do not control third-party services delivered to property management clients. As such, we report revenues net of third-party reimbursements.

Global Investment Management

Our Global Investment Management business segment 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. We sponsor investment programs that span the risk/return spectrum in: North America, Europe, Asia and Australia. We are typically compensated in the form of a base management fee, disposition fees, acquisition fees and incentive fees in the form of performance fees or carried interest based on fund type (open or closed ended, respectively). For the base management fee, we typically satisfy the performance obligation as service is rendered over time pursuant to the series guidance. For acquisition and disposition services, we typically satisfy the performance obligation at a point in time (at acquisition or upon disposition). For contracts with contingent fees, including performance fees, incentive fees and carried interest, we assess variable consideration on a contract by contract basis, and when appropriate, recognize revenue based on our assessment of the outcome (using the most likely outcome approach or weighted probability) and historical results, if comparable and representative. Revenue associated with performance fees and carried interest are typically constrained due to volatility in the real estate market, a broad range of possible outcomes, and other factors in the market that are outside of our control.

Development Services

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

Accounts Receivable and Allowance for Doubtful Accounts

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

Remaining Performance Obligations

Remaining performance obligations represent the aggregate transaction prices for contracts where our performance obligations have not yet been satisfied. As of June 30, 2018, the aggregate amount of transaction price

9


CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

allocated to remaining performance obligations in our property leasing business was not significant. We apply the practical expedient related to remaining performance obligations that are part of a contract that has an original expected duration of one year or less and the practical expedient related to variable consideration from remaining performance obligations pursuant to the series guidance. All of our remaining performance obligations apply to one of these practical expedients.

Contract Assets and Contract Liabilities

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

When we receive consideration, or such consideration is unconditionally due, from a customer prior to transferring services to the customer under the terms of the services contract, we record deferred revenue, which represents a contract liability. Such deferred revenue typically results from milestone payments pertaining to future services not yet rendered. We recognize the contract liability as revenue once we have transferred control of service to the customer and all revenue recognition criteria are met.

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

Contract Costs

Contract costs primarily consist of upfront costs incurred to obtain or to fulfill a contract. These costs are typically found within our Occupier Outsourcing business line. Such costs relate to transition costs to fulfill contracts prior to services being rendered and are included within other intangible assets in the accompanying consolidated balance sheets. Capitalized transition costs are amortized based on the transfer of services to which the assets relate which can vary on a contract by contract basis, and are included in cost of services in the accompanying consolidated statement of operations. For contract costs that are recognized as assets, we periodically review for impairment.

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

Income Taxes

On December 22, 2017, the Tax Cuts and Jobs Act (Tax Act) was signed into law making significant changes to the Internal Revenue Code, including, but not limited to: (i) a U.S. corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017; (ii) the transition of U.S. international taxation from a worldwide tax system to a territorial system; and (iii) a one-time transition tax (i.e. toll charge) on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118), “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. In March 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118,” which added SEC guidance related to SAB 118. On August 1st, 2018, the Treasury Department released proposed regulations regarding the one-time transition tax on the pre-2018 earnings of certain non-U.S. subsidiaries. We are evaluating the impact of the proposed regulations as part of our overall analysis of the impacts of the Tax Act pursuant to SAB 118.

10


CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

Our provision for income taxes for 2017 included a provisional amount related to our estimate of the U.S. federal and state tax impact of the transition tax and other components of the Tax Act. In the first quarter of 2018, we obtained additional information affecting the provisional amount initially recorded for the transition tax. As a result, we recorded an immaterial adjustment to the transition tax in the tax provision for the six months ended June 30, 2018. Provisional amounts that have been recorded are based upon our best estimate of the impact of the Tax Act in accordance with our understanding of the Tax Act and the related guidance available. Additional work is necessary on the provisional amount related to the transition tax, which includes performing a more detailed analysis of historic foreign earnings and tax pools and potential corresponding adjustments.

See Note 2 of the Notes to Consolidated Financial Statements set forth in Item 8 included in our Annual Report on Form 10-K for the year ended December 31, 2017 for a summary of our other significant accounting policies.

 

3.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

The FASB previously issued five ASUs related to revenue recognition (“new revenue recognition guidance”). The ASUs issued were: (1) in May 2014, ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606);” (2) in March 2016, ASU 2016‑08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net);” (3) in April 2016, ASU 2016‑10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing;” (4) in May 2016, ASU 2016‑12, Revenue from Contracts with Customers (Topic 606): Narrow-scope Improvements and Practical Expedients;” and (5) in December 2016, ASU 2016‑20, “Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers.” As mentioned in Note 2, we adopted the new revenue recognition guidance in the first quarter of 2018 using the full retrospective transition method. This resulted in a cumulative adjustment of $94.6 million to the accumulated earnings balance reflected in the accompanying consolidated balance sheets at December 31, 2017, including an $87.9 million impact of adoption effective January 1, 2016 as well as the impact from restatements of full year statements of operations for the years ended December 31, 2017 and 2016 resulting in adjustments of $5.6 million and $1.1 million, respectively. The impact of the application of the new revenue recognition guidance resulted in an acceleration of revenues that were based, in part, on future contingent events. For example, some leasing commission revenues in various countries where we operate were recognized earlier. Under former GAAP, a portion of these lease commission revenues was deferred until a future contingency was resolved (e.g., tenant move-in or payment of first month’s rent). Under the new revenue guidance, our performance obligation will be typically satisfied at lease signing and therefore the portion of the commission that is contingent on a future event has been recognized earlier if deemed probable that there will not be significant reversal in the future. The acceleration of the timing of revenue recognition also resulted in the acceleration of expense recognition relating to direct commissions payable to brokers. In addition, the acceleration of these revenues and expenses resulted in an increase in total assets and liabilities to reflect contract assets and accrued commissions payable.

We evaluated the impact of the updated principal versus agent guidance on our consolidated financial statements. Under former GAAP, certain third-party costs associated with our facilities and project management contracts were accounted for on a net basis because the contracts include provisions such as “pay when paid” that mitigate payment risk with respect to services provided by third parties to our clients. Under the new revenue recognition guidance, control of the services before transfer to the client is the primary factor in determining principal versus agent assessments. Payment risk is no longer a determining factor under Topic 606. We have determined that we control the services provided by third parties on behalf of certain of our facilities and project management clients. Accordingly, under the new guidance, we are accounting for the cost of services provided by third parties and the related reimbursement revenue on a gross basis.

11


CBRE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

The following table presents the effects of the adoption of the new revenue recognition guidance on our consolidated balance sheet as of December 31, 2017 (dollars in thousands):

 

 

 

As Reported

 

 

Adoption of New Revenue Recognition Guidance

 

 

As Adjusted

 

Receivables

 

$

3,207,285

 

 

$

(94,996

)

 

$

3,112,289

 

Contract assets

 

 

 

 

 

273,053

 

 

 

273,053

 

Total current assets

 

 

5,452,527

 

 

 

178,057

 

 

 

5,630,584

 

Other assets, net

 

 

422,965

 

 

 

56,509

 

 

 

479,474

 

Total assets

 

 

11,483,830

 

 

 

234,566

 

 

 

11,718,396

 

Accounts payable and accrued expenses

 

 

1,674,287

 

 

 

(100,615

)

 

 

1,573,672

 

Compensation and employee benefits payable

 

 

803,504

 

 

 

100,930

 

 

 

904,434

 

Accrued bonus and profit sharing

 

 

1,072,976

 

 

 

5,369

 

 

 

1,078,345

 

Contract liabilities

 

 

 

 

 

100,615

 

 

 

100,615

 

Total current liabilities

 

 

4,606,645

 

 

 

106,299

 

 

 

4,712,944

 

Deferred tax liabilities, net

 

 

114,017

 

 

 

33,201

 

 

 

147,218

 

Total liabilities

 

 

7,404,282

 

 

 

139,500

 

 

 

7,543,782

 

Accumulated earnings

 

 

3,348,385

 

 

 

94,622

 

 

 

3,443,007

 

Accumulated other comprehensive loss

 

 

(552,858

)

 

 

444

 

 

 

(552,414

)

Total CBRE Group, Inc. stockholders' equity

 

 

4,019,430

 

 

 

95,066

 

 

 

4,114,496

 

Total liabilities and equity

 

 

11,483,830

 

 

 

234,566

 

 

 

11,718,396

 

 

The following tables present the effects of the adoption of the new revenue recognition guidance on our consolidated statements of operations for the three and six months ended June 30, 2017 (dollars in thousands, except share amounts):

 

 

 

Three Months Ended June 30, 2017

 

 

 

As Reported

 

 

Adoption of New Revenue Recognition Guidance

 

 

As Adjusted

 

Revenue

 

$

3,342,215