CBRE Group, Inc. (NYSE:CBRE) today reported financial results for the fourth quarter and year ended December 31, 2020.

“We ended 2020 on a high note with adjusted earnings per share for the quarter reaching an all-time high and adjusted EBITDA growing by 9%,” said Bob Sulentic, CBRE’s president and chief executive officer. “This capped a year of significant challenges stemming from Covid-19, but also one that brought to the forefront CBRE’s competitive advantages, our ability to capitalize on often-overlooked industry opportunities, and the resiliency we’ve built into the business over the past decade.”

“Our broad diversification across four key dimensions – property types, lines of business, geographic markets and clients – has served us well compared with prior downturns,” he continued. “Now we are exiting the worst of the Covid-19 crisis in great shape, with a leaner operating structure, significant financial capacity and a strategy squarely aimed at the many opportunities unfolding in our industry, including those with secular tailwinds. We’ve built our long-term plan on the assumption that office demand remains under pressure. Nevertheless, we still expect to achieve a minimum of low double-digit average annual adjusted earnings per share growth from this year through at least 2025, absent a recession, with meaningful upside potential from additional capital allocation.”

Consolidated Financial Results Overview

The following table presents highlights of CBRE performance (dollars in millions, except per share data):

Results for the quarter were negatively impacted by the Covid-19 pandemic, which continued to constrain sales and leasing activity. Additionally, GAAP net income and earnings per share reflect about $120 million of costs related to transformation initiatives, which reduced GAAP earnings per share by about $0.28 per diluted share. Adjusted earnings per share and adjusted EBITDA, which exclude these transitory costs, increased markedly from fourth-quarter 2019.

Advisory Services Segment

The following table presents highlights of the Advisory Services segment performance (dollars in millions):

In Advisory Services, the severe economic effects of the Covid-19 pandemic continued to constrain higher-margin lease and sales revenue, leading to lower adjusted EBITDA in the fourth quarter.

Large office occupiers continued to defer leasing decisions, resulting in a 28% (29% local currency) decline in advisory leasing revenue. Fourth quarter activity was soft across most of the world, with U.S. leasing revenue down 36%. Industrial leasing revenue, fueled by e-commerce, rose 20% globally and 24% in the Americas. Robust growth in industrial leasing limited the U.K.’s overall leasing revenue decline to 6% (8% local currency) in the quarter.

Capital flows into commercial real estate improved from earlier in the year, but global market activity remained well below 2019 levels. Global property sales revenue declined 15% (16% local currency). However, the U.S. performed much better with sales revenue down only 5%, driven by strong industrial and multifamily activity and an overall market share gain of 90 basis points for the quarter, according to Real Capital Analytics. In North Asia, sales revenue was flat (down 5% local currency) as strength in China offset weakness elsewhere.

By contrast, commercial mortgage originations were robust, reflecting a surge in government agency lending. Commercial mortgage revenue rose 49% (same local currency) from fourth-quarter 2019. Refinancing continued to drive lending activity and loan sales increased sharply. The recent rise in Treasury yields has been partially offset by tighter spreads as more lenders compete to place capital.

Revenue from loan servicing, which is performed for lenders on a contractual basis, jumped 25% (24% local currency) for the quarter. The loan servicing portfolio ended 2020 at approximately $269 billion, up 17% for the year.

Valuation also performed well with revenue up 4% (2% local currency), reflecting increased assignments from investor clients, particularly in Continental Europe, North Asia and Pacific. Property management and advisory project management services fee revenue fell 4% (6% local currency).

Global Workplace Solutions (GWS) Segment

The following table presents highlights of the GWS segment performance (dollars in millions):

Despite the ongoing challenges from Covid-19, CBRE’s GWS segment achieved robust global adjusted EBITDA growth, driven by strong gains in Continental Europe and North Asia as well as cost-control actions.

Solid fee revenue growth was constrained by sharply lower transaction activity for GWS occupier clients. Facilities management, which accounted for 84% of the segment’s fee revenue and is largely contractual, rose 7% (5% local currency). Facilities management growth was especially strong in Continental Europe. Project management fee revenue also rose notably, up 7% (5% local currency), with strong growth in Continental Europe, North Asia and India/Southeast Asia/Middle East/Africa.

The segment’s overall margin expansion of approximately 350 basis points reflected the benefit of lower discretionary spending and structural changes to the cost base.

Real Estate Investments (REI) Segment

The following table presents highlights of the REI segment performance (dollars in millions):

The sharp increase in this segment’s adjusted EBITDA was driven by robust performance from both investment management and U.S. development activity.

Investment management revenue rose 34% (30% local currency) to $150.2 million, reflecting strong carried interest revenue contributions and higher asset management, incentive and acquisition fees. Carried interest of $31.5 million – compared with $9.7 million in fourth-quarter 2019 – included strong gains on the disposition of a retail property portfolio in South Korea. Adjusted EBITDA surged 228% (217% local currency), as asset management growth and strong investment gains, including co-investment returns, were complemented by prudent cost management.

Assets under management at year-end 2020 totaled $122.7 billion, a record high for the company and an increase of $8.2 billion ($4.9 billion local currency) from third-quarter 2020. The increase reflected higher asset valuations, net capital inflows and favorable foreign currency movement.

U.S. real estate development contributed $58.3 million of adjusted EBITDA in the fourth quarter, more than double the $24.0 million achieved in the year-earlier fourth quarter. These results benefited from elevated industrial asset sales during the quarter. The U.K. multifamily development business (Telford Homes) produced $9.2 million of adjusted EBITDA, down from $10.9 million in fourth-quarter 2019.

The in-process development portfolio ended 2020 at $14.9 billion, up $0.1 billion from third-quarter 2020 – a record level for the company. Three asset types that remain in strong demand, multifamily, industrial and health care, plus office buildings that are at least 90% leased, comprise more than 80% of this portfolio. In addition, more than half of the in-process portfolio is attributable to fee-development and built-to-suit projects. The pipeline increased by $0.2 billion from third-quarter 2020 to $6.1 billion.

Investment in the startup of the company’s flexible workspace business, Hana, contributed a loss of $10.4 million, up from a loss of $8.4 million in fourth-quarter 2019. Hana operates 10 existing units in the U.S. and U.K., totaling nearly 500,000 sq. ft.

On February 22, 2021, CBRE announced the acquisition of a 35% interest in Industrious, a leading provider of premium flexible workplace solutions in the U.S., with the expectation to increase its total stake to 40% in the coming weeks. Under the agreement, Hana will be combined with Industrious in the second quarter.

Adjustments to GAAP Net Income and Earnings Per Share

Adjustments to GAAP net income totaled $177.0 million on a net basis. This included approximately $223.8 million of positive pre-tax adjustments, including $120.5 million of costs associated with transformation initiatives; $75.6 million of write-offs of financing costs on extinguished debt; $18.7 million of non-cash acquisition-related depreciation and amortization; $13.5 million of asset impairments; $11.4 million of investment management carried interest incentive compensation reversal to align with the timing of associated carried interest revenue; $4.4 million of costs incurred related to legal entity restructuring; $2.3 million of fair value adjustments to real estate assets acquired in the Telford Homes acquisition that were sold in the fourth quarter; $0.2 million of integration and other costs related to acquisitions; and a $46.8 million net tax adjustment associated with the aforementioned pre-tax adjustments.

GAAP net income decreased 51% (52% local currency) to $314 million and earnings per share decreased 51% (same local currency) to $0.93 per diluted share, compared with the prior-year period. Adjusted net income increased 9% (8% local currency) to $491 million and adjusted earnings per share increased 10% (8% local currency) to $1.45 per diluted share, compared with the prior-year period. The decrease in GAAP earnings per share largely reflected costs associated with transformation initiatives, which have been excluded from adjusted earnings per share. Certain of these costs were being contemplated prior to the onset of the Covid-19 pandemic and reflect the outcome of an in-depth strategic review. These initiatives are expected to drive significant cost structure benefits going forward.

Capital Allocation Overview

• Free Cash Flow – During the fourth quarter of 2020, free cash flow decreased 9% to approximately $864 million. This reflected cash flow from operating activities of $940 million, less total capital expenditures of $76 million. Net capital expenditures (of which a considerable portion during the period was discretionary) totaled $56.6 million.(9)
• Stock Repurchase Program – The company did not repurchase any of its stock during the fourth quarter of 2020, and has $350 million of capacity remaining under its repurchase program.
• Acquisitions – During the fourth quarter of 2020, the company acquired a provider of facilities and technical maintenance services in Australia.

Leverage and Financing Overview

• Leverage – The company’s net leverage ratio (net cash(10) to full year adjusted EBITDA) was (0.21x) as of December 31, 2020, which is substantially below the company’s primary debt covenant of 4.25x. The net leverage ratio is computed as follows (dollars in millions):

• Liquidity – As of December 31, 2020, the company had approximately $4.6 billion of total liquidity, consisting of approximately $1.8 billion in cash(11) plus the ability to borrow an aggregate of approximately $2.8 billion under its revolving credit facilities, net of any outstanding letters of credit.

Conference Call Details

The company’s fourth quarter earnings webcast and conference call will be held today (Tuesday, February 23, 2021) at 8:30 a.m. Eastern time. Investors are encouraged to access the webcast via this link or they can click this link beginning at 8:15 a.m. Eastern time for automated access to the conference call.

Alternatively, investors may dial into the conference call using these operator-assisted phone numbers: 877.407.8037 (U.S.) or 201.689.8037 (International). A replay of the call will be available starting at 1:00 p.m. Eastern time on February 23, 2021. The replay is accessible by dialing 877.660.6853 (U.S.) or 201.612.7415 (International) and using the access code 13715077#. A transcript of the call will be available on the company’s Investor Relations website at https://ir.cbre.com.

About CBRE Group, Inc.

CBRE Group, Inc. (NYSE: CBRE), a Fortune 500 and S&P 500 company headquartered in Dallas, is the world’s largest commercial real estate services and investment firm (based on 2020 revenue). The company has more than 100,000 employees serving clients in more than 100 countries. CBRE serves a diverse range of clients with an integrated suite of services, including facilities, transaction and project management; property management; investment management; appraisal and valuation; property leasing; strategic consulting; property sales; mortgage services and development services. Please visit our website at www.cbre.com. We routinely post important information on our website, including corporate and investor presentations and financial information. We intend to use our website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included in the Investor Relations section of our website at https://ir.cbre.com. Accordingly, investors should monitor such portion of our website, in addition to following our press releases, Securities and Exchange filings and public conference calls and webcasts.

Safe Harbor and Footnotes

This press release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding the company’s future growth momentum, operations, market share, business outlook, capital deployment and financial performance. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the company’s actual results and performance in future periods to be materially different from any future results or performance suggested in forward-looking statements in this press release. Any forward-looking statements speak only as of the date of this press release and, except to the extent required by applicable securities laws, the company expressly disclaims any obligation to update or revise any of them to reflect actual results, any changes in expectations or any change in events. If the company does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements. Factors that could cause results to differ materially include, but are not limited to: disruptions in general economic, political and regulatory conditions and significant public health events, particularly in geographies or industry sectors where our business may be concentrated; volatility or adverse developments in the securities, capital or credit markets, interest rate increases and conditions affecting the value of real estate assets, inside and outside the United States; poor performance of real estate investments or other conditions that negatively impact clients’ willingness to make real estate or long-term contractual commitments and the cost and availability of capital for investment in real estate; foreign currency fluctuations and changes in currency restrictions, trade sanctions and import/export and transfer pricing rules; disruptions to business, market and operational conditions related to the Covid-19 pandemic and the impact of government rules and regulations intended to mitigate the effects of this pandemic, including, without limitation, rules and regulations that impact us as a loan originator and servicer for U.S. Government Sponsored Enterprises (GSEs); 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 accretive businesses; costs and potential future capital requirements relating to businesses we may acquire; integration challenges arising out of companies we may acquire; increases in unemployment and general slowdowns in commercial activity; trends in pricing and risk assumption for commercial real estate services; the effect of significant changes in capitalization 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; our ability to further diversify our revenue model to offset cyclical economic trends in the commercial real estate industry; our ability to attract new user and investor clients; our ability to retain major clients and renew related contracts; our ability to leverage our global services platform to maximize and sustain long-term cash flow; our ability to continue investing in our platform and client service offerings; our ability to maintain expense discipline; the emergence of disruptive business models and technologies; negative publicity or harm to our brand and reputation; the failure by third parties to comply with service level agreements or regulatory or legal requirements; the ability of our 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; the ability of our indirect subsidiary, CBRE Capital Markets, Inc., to periodically amend, or replace, on satisfactory terms, the agreements for its warehouse lines of credit; declines in lending activity of U.S. GSEs, regulatory oversight of such activity and our mortgage servicing revenue from the commercial real estate mortgage market; changes in U.S. and international law and regulatory environments (including relating to anti-corruption, anti-money laundering, trade sanctions, tariffs, currency controls and other trade control laws), particularly in Asia, Africa, Russia, Eastern Europe and the Middle East, due to the level of political instability in those regions; 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; our ability to retain and incentivize key personnel; our ability to manage organizational challenges associated with our size; liabilities under guarantees, or for construction defects, that we incur in our development services business; variations in historically customary seasonal patterns that cause our business not to perform as expected; 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; our and our employees’ ability to execute on, and adapt to, information technology strategies and trends; cybersecurity threats or other threats to our information technology networks, including the potential misappropriation of assets or sensitive information, corruption of data or operational disruption; 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; changes in applicable tax or accounting requirements; and any inability for us to implement and maintain effective internal controls over financial reporting.

Additional information concerning factors that may influence the company’s financial information is discussed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk” and “Cautionary Note on Forward-Looking Statements” in our most recent Annual Report on Form 10-K, as well as in the company’s press releases and other periodic filings with the Securities and Exchange Commission (SEC). Such filings are available publicly and may be obtained on the company’s website at www.cbre.com or upon written request from CBRE’s Investor Relations Department at investorrelations@cbre.com.

The terms “fee revenue,” “adjusted revenue,” “adjusted net income,” “adjusted earnings per share” (or adjusted EPS), “adjusted EBITDA,” “adjusted EBITDA on revenue margin,” “adjusted EBITDA on fee revenue margin,” “free cash flow” and “net cash” all of which CBRE uses in this press release, are non-GAAP financial measures under SEC guidelines, and you should refer to the footnotes below as well as the “Non-GAAP Financial Measures” section in this press release for a further explanation of these measures. We have also included in that section reconciliations of these measures in specific periods to their most directly comparable financial measure calculated and presented in accordance with GAAP for those periods.

Totals may not sum in tables in millions included in this release due to rounding.

Note – CBRE has not reconciled the (non-GAAP) adjusted earnings per share forward-looking guidance included in this press release to the most directly comparable GAAP measure because this cannot be done without unreasonable effort due to the variability and low visibility with respect to costs related to acquisitions, carried interest incentive compensation and financing costs, which are potential adjustments to future earnings. We expect the variability of these items to have a potentially unpredictable, and a potentially significant, impact on our future GAAP financial results.

Non-GAAP Financial Measures

The following measures are considered “non-GAAP financial measures” under SEC guidelines:

These measures are not recognized measurements under United States generally accepted accounting principles (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. Because not all companies use identical calculations, our presentation of these measures may not be comparable to similarly titled measures of other companies.

Our management generally uses these non-GAAP financial measures to evaluate operating performance and for other discretionary purposes. The company believes 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. The company further uses certain of these measures, and believes that they are useful to investors, for purposes described below.

With respect to fee revenue: the company believes that investors may find this measure useful to analyze the financial performance of our Global Workplace Solutions and Property and Advisory Project Management business lines and our business in general. Fee revenue excludes costs reimbursable by clients, and as such provides greater visibility into the underlying performance of our business.

With respect to adjusted revenue: the company believes that investors may find this measure useful to analyze the financial performance of our Real Estate Investments segment because it is more reflective of this segment’s total operations.

With respect to adjusted net income, adjusted EPS, adjusted EBITDA and adjusted EBITDA on revenue and fee revenue margins: the company believes 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 accounting effects of acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions—and in the case of adjusted EBITDA and adjusted EBITDA on revenue and fee revenue margins—the effects of financings and income tax and the accounting effects of capital spending. All of these measures and adjusted revenue may vary for different companies for reasons unrelated to overall operating performance. In the case of adjusted EBITDA, this measure is not intended to be a measure of free cash flow for our management’s discretionary use because it does not consider cash requirements such as tax and debt service payments. The adjusted EBITDA measure calculated herein may also differ from the amounts calculated under similarly titled definitions in our credit facilities and 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. The company also uses adjusted EBITDA and adjusted EPS as significant components when measuring our operating performance under our employee incentive compensation programs.

With respect to free cash flow, the company believes that investors may find this measure useful to analyze the cash flow generated from operations after accounting for cash outflows to support operations and capital expenditures. With respect to net cash, the company believes that investors use this measure when calculating the company’s net leverage ratio.

Net income attributable to CBRE Group, Inc. stockholders, as adjusted (or adjusted net income), and diluted income per share attributable to CBRE Group, Inc. stockholders, as adjusted (or adjusted EPS), are calculated as follows (dollars in thousands, except share and per share data):

Adjusted EBITDA is calculated as follows (dollars in thousands):

Revenue includes client reimbursed pass through costs largely associated with employees that are dedicated to client facilities and subcontracted vendor work performed for clients, both of which are excluded from fee revenue. Reconciliations are shown below (dollars in thousands):

Real Estate Investments adjusted revenue is computed as follows (dollars in thousands):

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