filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Overview
We are the world’s largest commercial real estate services and investment firm, based on 2018 revenue, with leading global market positions in our leasing, property sales, occupier outsourcing and valuation businesses. As of December 31, 2018, we operated in more than 480 offices worldwide with over 90,000 employees, excluding independent affiliates.
Our business is focused on providing services to both occupiers of and investors in real estate. For occupiers, we provide facilities management, project management, transaction (both property sales and tenant leasing) and consulting services, among others. For investors, we provide capital markets (property sales, commercial mortgage brokerage, loan origination and servicing), leasing, investment management, property management, valuation and development services, among others. 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 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. We generate revenue from both management fees (large multi-year portfolio and per-project contracts) and 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.
In 2018, we generated revenue from a highly diversified base of clients, including more than 90 of the Fortune 100 companies. We have been an S&P 500 company since 2006 and in 2018 we were ranked #207 on the Fortune 500. We have been voted the most recognized commercial real estate brand in the Lipsey Company survey for 18 years in a row (including 2019). We have also been rated a World’s Most Ethical Company by the Ethisphere Institute for six consecutive years.
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
To recognize revenue in a transaction with a customer, we evaluate the five steps of the Accounting Standards Codification Topic 606 revenue recognition framework: (1) identify the contract; (2) identify the performance obligations(s) in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligation(s) and (5) recognize revenue when (or as) the performance obligations are satisfied.
Our revenue recognition policies are consistent with this five step framework. Understanding the complex terms of agreements and determining the appropriate time, amount, and method to recognize revenue for each transaction requires significant judgement. These significant judgements include: (i) determining what point in time or what measure of progress depicts the transfer of control to the customer; (ii) applying the series guidance to certain performance obligations satisfied over time; (iii) estimating how and when contingencies, or other forms of variable consideration, will impact the timing and amount of recognition of revenue and (iv) determining whether we control third party services before they are transferred to the customer in order to appropriately recognize the associated fees on either a gross or net basis. The timing and amount of revenue recognition in a period could vary if different judgments were made. Our revenues subject to the most judgment are brokerage commission revenue, incentive-based management fees, development fees and third party fees associated with our occupier outsourcing and property management services. 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.
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, in accordance with the “Intangibles – Goodwill and Other” Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, (Topic 350). We have the option to perform a qualitative assessment with respect to any of our reporting units to determine whether a quantitative impairment test is needed. We are permitted to assess based on qualitative factors whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the quantitative goodwill impairment test. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we would conduct a quantitative goodwill impairment test. If not, we do not need to apply the quantitative test. The qualitative test is elective and we can go directly to the quantitative test rather than making a more-likely-than-not assessment based on an evaluation of qualitative factors. When performing a quantitative test, we use a discounted cash flow approach to estimate the fair value of our reporting units. Management’s 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. 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 9 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 FASB ASC (Topic 740). Deferred tax assets and liabilities are determined based on temporary 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, 2018 and 2017 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.
On December 22, 2017, the Tax Cuts and Jobs Act (the Tax Act) was signed into law making significant changes to the Internal Revenue Code, including, but not limited to:
| • | a U.S. corporate tax rate decrease from 35% to 21%, effective for tax years beginning after December 31, 2017; |
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| • | the transition of U.S. international taxation from a worldwide tax system to a territorial system; and |
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| • | a one-time transition tax (i.e. toll charge) on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 at an income tax rate of 15.5% to the extent such cumulative earnings were attributable to foreign cash and certain other net current assets, and 8% on the remainder. |
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In December 2017, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 118 (SAB 118), “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” which allowed 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.
Our provision for income taxes for 2017 included a net expense of $143.4 million attributable to the Tax Act, including a provisional amount representing our estimate of the U.S. federal and state tax impact of the transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. During 2018, we continued to analyze the impact of the Tax Act and interpreted the additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies. Our provision for income taxes for 2018 included a net expense true-up of $13.3 million associated with the Tax Act based upon our final analysis. As of December 31, 2018, we have completed our analysis and the final net expense associated with the Tax Act was $156.7 million.
Our future effective tax rate could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates, changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws, regulations, or accounting principles, as well as certain discrete items.
Our foreign subsidiaries have accumulated $2.1 billion of undistributed earnings for which we have not recorded a deferred tax liability. No additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax, in connection with the enactment of the Tax Act, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations. While federal and state current income tax expense has been recognized as a result of the Tax Act, we have not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income tax or foreign exchange gain or loss that would be due when cash is actually repatriated to the U.S. because those foreign earnings are considered permanently reinvested in the business or may be remitted substantially free of any additional local taxes. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings if eventually remitted is not practicable.
See Note 14 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 discussion within Note 3 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, you should consider that we have experienced, and continue to experience, several material trends and uncertainties that have affected our financial condition and results of operations that make it challenging to predict our future performance based on our historical results. We believe that the following material trends and uncertainties are crucial to an understanding of the variability in our historical earnings and cash flows and the potential for continued variability in the future.
Macroeconomic Conditions
Economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly. These include: overall economic activity and employment growth; interest rate levels and changes in interest rates; the cost and availability of credit; and the impact of tax and regulatory policies. Periods of economic weakness or recession, significantly rising interest rates, fiscal uncertainty, declining employment levels, decreasing demand for commercial real estate, falling real estate values, disruption to the global capital or credit markets, or the public perception that any of these events may occur, will negatively affect the performance of our business.
Compensation is our largest expense and our sales and leasing professionals generally are paid on a commission and/or bonus basis that correlates with their revenue production. As a result, the negative effect of difficult market conditions on our operating margins is partially mitigated by the inherent variability of our compensation cost structure. In addition, when negative economic conditions have been particularly severe, we have moved decisively to lower operating expenses to improve financial performance, and then have restored certain expenses as economic conditions improved. Nevertheless, adverse global and regional economic trends could pose significant risks to the performance of our operations and our financial condition.
Commercial real estate markets in the United States have generally been marked by increased demand for space, falling vacancies and higher rents since 2010. During this time, healthy U.S. property sales activity has been sustained by gradually improving market fundamentals, including higher occupancy rates and rents, broad, low-cost credit availability and increased institutional capital allocations to commercial real estate. Following years of strong growth, U.S. property sales volumes slowed in 2016 and 2017, but improved in 2018 as significant capital continues to target commercial real estate, and the availability of relatively low-cost financing remains plentiful. The market for commercial real estate leasing has also remained strong, reflecting healthy economic and employment growth.
European countries began to emerge from recession in 2013, with economic growth improving in 2017 and 2018. Sales and leasing activity have also generally improved across most of Europe in the past three years. While leasing demand has remained solid, sales market volumes were relatively flat in 2018. Since the United Kingdom’s June 2016 referendum to leave the European Union (EU), economic and property market performance has been solid, with lease volumes up in 2018, while investment volumes declined slightly. However, the continued absence of any legislation confirming the terms on which the UK will leave the EU as the March 2019 deadline draws closer has contributed to increased uncertainty and could adversely affect lease and sales volumes in 2019.
In Asia Pacific, real estate leasing and investment markets have been active since late 2016. While leasing activity continued to grow solidly in 2018, investment levels cooled in 2018 as investors became more cautious. However, Asia Pacific investors remain a significant source of real estate investment both in the region and across 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. Actively managed real estate equity strategies have been pressured by a shift in investor preferences from active to passive portfolio strategies and concerns about 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 and enhance service competencies around the world. For example, 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, which adopted the “Global Workplace Solutions” name.
Additionally, on June 12, 2018, CBRE Jason Acquisition LLC (Merger Sub), our wholly-owned subsidiary, and FacilitySource Holdings, LLC (FacilitySource), WP X Finance, LP and Warburg Pincus X Partners, LP (collectively, the Stockholders) entered into a stock purchase agreement and plan of merger (the Merger Agreement). As part of the Merger Agreement, (i) we purchased from the Stockholders all the outstanding shares of capital stock of FS WP Holdco, Inc (Blocker Corp), which owned 1,686,013 Class A units (the Blocker Units) and (ii) immediately following the acquisition of Blocker Corp, Merger Sub merged with FacilitySource, with FacilitySource continuing as the surviving company and our wholly-owned subsidiary within our Americas segment (the FacilitySource Acquisition), with the remaining Blocker Units not held by Blocker Corp. canceled and converted into the right to receive cash consideration as set forth in the Merger Agreement. The estimated net initial purchase price was approximately $266.5 million, with $263.0 million paid in cash. We financed the transaction with cash on hand and borrowings under our revolving credit facility. We completed the FacilitySource Acquisition to help us (i) build a tech-enabled supply chain capability for the occupier outsourcing industry and (ii) drive meaningfully differentiated outcomes for leading occupiers of real estate.
Strategic in-fill acquisitions have also played a key role in strengthening our service offerings. The companies we acquired have generally been regional or specialty firms that complement our existing platform, or independent affiliates in which, in some cases, we held a small equity interest. During 2018, we acquired a retail leasing and property management firm in Australia, two firms in Israel (our former affiliate and a majority interest in a local facilities management provider), a commercial real estate services provider in San Antonio, a provider of real estate and facilities consulting services to healthcare companies across the United States and the remaining 50% equity interest in our longstanding New England joint venture.
During 2017, we completed 11 in-fill acquisitions, including two leading Software as a Service (SaaS) platforms – one that produces scalable interactive visualization technologies for commercial real estate and one that provides technology solutions for facilities management operations, a healthcare-focused project manager in Australia, a full-service brokerage and management boutique in South Florida, a technology-enabled national boutique commercial real estate finance and consulting firm in the United States, a retail consultancy in France, a majority interest in a Toronto-based investment management business specializing in private infrastructure and private equity investments, a San Francisco-based technology-focused boutique real estate brokerage firm, a project management and design engineering firm operating across the United States, a Washington, D.C.-based retail brokerage operation and a leading technical engineering services provider in Italy.
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, 2018, we have accrued deferred consideration totaling $136.3 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 the United Kingdom’s referendum to leave the European Union and the potential impact on our businesses in the United Kingdom and the rest of Europe, including, in particular, sales and leasing activity in the United Kingdom, as well as any associated currency volatility impact on our results of operations.
As we continue to increase our international operations through either acquisitions or organic growth, fluctuations in the value of the U.S. dollar relative to the other currencies in which we may generate earnings could adversely affect our business, financial condition and operating results. Our Global Investment Management business has a significant amount of euro-denominated assets under management, or AUM, as well as associated revenue and earnings in Europe. In addition, our Global Workplace Solutions business also has a significant amount of its revenue and earnings denominated in foreign currencies, such as the euro and the British pound sterling. 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, 2018, approximately 43% 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, Czech koruna, Danish krone, euro, Hong Kong dollar, Indian rupee, Israeli shekel, Japanese yen, Korean won, Mexican peso, New Zealand dollar, 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, | ||||||||||||||||||||||||
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| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||||||||||||||
| United States dollar | $ | 12,264,188 | 57.5 | % | $ | 10,954,608 | 58.8 | % | $ | 10,434,782 | 60.1 | % | ||||||||||||
| British pound sterling | 2,586,890 | 12.1 | % | 2,242,973 | 12.1 | % | 2,150,428 | 12.4 | % | |||||||||||||||
| euro | 2,329,832 | 10.9 | % | 1,740,764 | 9.3 | % | 1,612,521 | 9.3 | % | |||||||||||||||
| Canadian dollar | 717,692 | 3.3 | % | 617,923 | 3.3 | % | 532,203 | 3.1 | % | |||||||||||||||
| Australian dollar | 482,749 | 2.3 | % | 467,623 | 2.5 | % | 408,772 | 2.4 | % | |||||||||||||||
| Indian rupee | 418,390 | 2.0 | % | 370,705 | 2.0 | % | 285,459 | 1.6 | % | |||||||||||||||
| Chinese yuan | 303,600 | 1.4 | % | 244,717 | 1.3 | % | 218,999 | 1.2 | % | |||||||||||||||
| Japanese yen | 277,636 | 1.3 | % | 269,835 | 1.4 | % | 259,007 | 1.5 | % | |||||||||||||||
| Singapore dollar | 268,193 | 1.3 | % | 256,319 | 1.4 | % | 198,816 | 1.1 | % | |||||||||||||||
| Swiss franc | 182,641 | 0.9 | % | 153,078 | 0.8 | % | 154,463 | 0.9 | % | |||||||||||||||
| Brazilian real | 174,728 | 0.8 | % | 198,270 | 1.1 | % | 139,409 | 0.8 | % | |||||||||||||||
| Hong Kong dollar | 169,449 | 0.8 | % | 148,174 | 0.8 | % | 133,283 | 0.8 | % | |||||||||||||||
| Mexican peso | 135,187 | 0.6 | % | 115,812 | 0.6 | % | 99,723 | 0.6 | % | |||||||||||||||
| Polish zloty | 90,343 | 0.4 | % | 71,849 | 0.4 | % | 74,199 | 0.4 | % | |||||||||||||||
| Danish krone | 81,804 | 0.4 | % | 82,061 | 0.4 | % | 69,676 | 0.4 | % | |||||||||||||||
| Thai baht | 79,373 | 0.4 | % | 65,553 | 0.4 | % | 62,947 | 0.3 | % | |||||||||||||||
| Swedish krona | 70,471 | 0.3 | % | 71,849 | 0.4 | % | 74,199 | 0.4 | % | |||||||||||||||
| New Zealand dollar | 63,251 | 0.3 | % | 51,353 | 0.3 | % | 45,219 | 0.3 | % | |||||||||||||||
| Korean won | 59,912 | 0.3 | % | 48,475 | 0.3 | % | 44,520 | 0.3 | % | |||||||||||||||
| Israeli shekel | 57,779 | 0.3 | % | 22,628 | 0.1 | % | 27,648 | 0.2 | % | |||||||||||||||
| Czech koruna | 54,986 | 0.3 | % | 42,008 | 0.2 | % | 34,261 | 0.2 | % | |||||||||||||||
| Other currencies | 470,994 | 2.1 | % | 392,210 | 2.1 | % | 308,574 | 1.7 | % | |||||||||||||||
| Total revenue | $ | 21,340,088 | 100.0 | % | $ | 18,628,787 | 100.0 | % | $ | 17,369,108 | 100.0 | % |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
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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, 2018, the net impact would have been an increase in pre-tax income of $4.1 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the year ended December 31, 2018, the net impact would have been an increase in pre-tax income of $9.5 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.
From time to time, we have entered into derivative financial instruments to attempt to protect the value or fix the amount of certain obligations in terms of our reporting currency, the U.S. dollar. In March 2014, we began a foreign currency exchange forward hedging program 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. As of December 31, 2018 and 2017, we had no foreign currency exchange forward contracts outstanding as we made the decision to let our program expire at the end of 2016. Included in the consolidated statement of operations set forth in Item 8 of this Annual Report was a net gain of $7.7 million from foreign currency exchange forward contracts for the year ended December 31, 2016. We do not intend to hedge our foreign currency denominated EBITDA in 2019.
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, 2018, 2017 and 2016 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
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| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Fee revenue (1): | ||||||||||||||||||||||||
| Occupier outsourcing | $ | 3,040,949 | 14.2 | % | $ | 2,526,069 | 13.6 | % | $ | 2,279,963 | 13.1 | % | ||||||||||||
| Property management | 605,387 | 2.8 | % | 555,076 | 3.0 | % | 505,086 | 2.9 | % | |||||||||||||||
| Valuation | 560,815 | 2.6 | % | 527,638 | 2.8 | % | 504,370 | 2.9 | % | |||||||||||||||
| Loan servicing | 183,421 | 0.9 | % | 157,449 | 0.8 | % | 122,517 | 0.7 | % | |||||||||||||||
| Investment management | 434,405 | 2.0 | % | 377,644 | 2.0 | % | 369,800 | 2.1 | % | |||||||||||||||
| Leasing | 3,375,558 | 15.8 | % | 2,863,352 | 15.4 | % | 2,651,986 | 15.3 | % | |||||||||||||||
| Capital Markets: | ||||||||||||||||||||||||
| Sales | 1,919,140 | 9.0 | % | 1,806,313 | 9.7 | % | 1,700,503 | 9.8 | % | |||||||||||||||
| Commercial mortgage origination | 536,436 | 2.5 | % | 450,521 | 2.4 | % | 448,166 | 2.6 | % | |||||||||||||||
| Other: | ||||||||||||||||||||||||
| Development services | 86,320 | 0.4 | % | 60,513 | 0.3 | % | 55,638 | 0.3 | % | |||||||||||||||
| Other | 95,121 | 0.6 | % | 84,461 | 0.5 | % | 86,235 | 0.5 | % | |||||||||||||||
| Total fee revenue | 10,837,552 | 50.8 | % | 9,409,036 | 50.5 | % | 8,724,264 | 50.2 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 10,502,536 | 49.2 | % | 9,219,751 | 49.5 | % | 8,644,844 | 49.8 | % | |||||||||||||||
| Total revenue | 21,340,088 | 100.0 | % | 18,628,787 | 100.0 | % | 17,369,108 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of services | 16,449,212 | 77.1 | % | 14,305,099 | 76.8 | % | 13,420,911 | 77.3 | % | |||||||||||||||
| Operating, administrative and other | 3,365,773 | 15.8 | % | 2,858,720 | 15.3 | % | 2,780,301 | 16.0 | % | |||||||||||||||
| Depreciation and amortization | 451,988 | 2.1 | % | 406,114 | 2.2 | % | 366,927 | 2.1 | % | |||||||||||||||
| Total costs and expenses | 20,266,973 | 95.0 | % | 17,569,933 | 94.3 | % | 16,568,139 | 95.4 | % | |||||||||||||||
| Gain on disposition of real estate | 14,874 | 0.1 | % | 19,828 | 0.1 | % | 15,862 | 0.1 | % | |||||||||||||||
| Operating income | 1,087,989 | 5.1 | % | 1,078,682 | 5.8 | % | 816,831 | 4.7 | % | |||||||||||||||
| Equity income from unconsolidated subsidiaries | 324,664 | 1.5 | % | 210,207 | 1.0 | % | 197,351 | 1.2 | % | |||||||||||||||
| Other income | 93,020 | 0.4 | % | 9,405 | 0.1 | % | 4,688 | 0.0 | % | |||||||||||||||
| Interest income | 8,585 | 0.0 | % | 9,853 | 0.1 | % | 8,051 | 0.0 | % | |||||||||||||||
| Interest expense | 107,270 | 0.5 | % | 136,814 | 0.7 | % | 144,851 | 0.8 | % | |||||||||||||||
| Write-off of financing costs on extinguished debt | 27,982 | 0.0 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Income before provision for income taxes | 1,379,006 | 6.5 | % | 1,171,333 | 6.3 | % | 882,070 | 5.1 | % | |||||||||||||||
| Provision for income taxes | 313,058 | 1.5 | % | 467,757 | 2.5 | % | 296,900 | 1.7 | % | |||||||||||||||
| Net income | 1,065,948 | 5.0 | % | 703,576 | 3.8 | % | 585,170 | 3.4 | % | |||||||||||||||
| Less: Net income attributable to non-controlling interests | 2,729 | 0.0 | % | 6,467 | 0.1 | % | 12,091 | 0.1 | % | |||||||||||||||
| Net income attributable to CBRE Group, Inc. | $ | 1,063,219 | 5.0 | % | $ | 697,109 | 3.7 | % | $ | 573,079 | 3.3 | % | ||||||||||||
| EBITDA | $ | 1,954,932 | 9.2 | % | $ | 1,697,941 | 9.1 | % | $ | 1,373,706 | 7.9 | % | ||||||||||||
| Adjusted EBITDA | $ | 1,905,168 | 8.9 | % | $ | 1,716,774 | 9.2 | % | $ | 1,562,347 | 9.0 | % |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
|---|
Fee revenue, EBITDA and adjusted EBITDA are not recognized measurements under GAAP. When analyzing our operating performance, investors should use these measures in addition to, and not as an alternative for, their most directly comparable financial measure calculated and presented in accordance with GAAP. We generally use these non-GAAP financial measures to evaluate operating performance and for other discretionary purposes. We believe these measures provide a more complete understanding of ongoing operations, enhance comparability of current results to prior periods and may be useful for investors to analyze our financial performance because they eliminate the impact of selected charges that may obscure trends in the underlying performance of our business. Because not all companies use identical calculations, our presentation of fee revenue, EBITDA and adjusted EBITDA may not be comparable to similarly titled measures of other companies.
Fee revenue is gross revenue less both client reimbursed costs largely associated with employees that are dedicated to client facilities and subcontracted vendor work performed for clients. We believe that investors may find this measure useful to analyze the company’s overall financial performance because it excludes costs reimbursable by clients, and as such provides greater visibility into the underlying performance of our business.
EBITDA represents earnings before net interest expense, 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 items related to acquisitions, costs associated with our reorganization, including cost-savings initiatives, certain carried interest incentive compensation reversal to align with the timing of associated revenue and other non-recurring costs. 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, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||
| Net income attributable to CBRE Group, Inc. | $ | 1,063,219 | $ | 697,109 | $ | 573,079 | ||||||
| Add: | ||||||||||||
| Depreciation and amortization | 451,988 | 406,114 | 366,927 | |||||||||
| Interest expense | 107,270 | 136,814 | 144,851 | |||||||||
| Write-off of financing costs on extinguished debt | 27,982 | — | — | |||||||||
| Provision for income taxes | 313,058 | 467,757 | 296,900 | |||||||||
| Less: | ||||||||||||
| Interest income | 8,585 | 9,853 | 8,051 | |||||||||
| EBITDA | 1,954,932 | 1,697,941 | 1,373,706 | |||||||||
| Adjustments: | ||||||||||||
| Costs associated with our reorganization, including cost-savings initiatives (2) | 37,925 | — | — | |||||||||
| Integration and other costs related to acquisitions | 9,124 | 27,351 | 125,743 | |||||||||
| Costs incurred in connection with litigation settlement | 8,868 | — | — | |||||||||
| Carried interest incentive compensation reversal to align with the timing of associated revenue | (5,261 | ) | (8,518 | ) | (15,558 | ) | ||||||
| One-time gain associated with remeasuring an investment in an unconsolidated subsidiary to fair value as of the date the remaining controlling interest was acquired | (100,420 | ) | — | — | ||||||||
| Cost-elimination expenses (3) | — | — | 78,456 | |||||||||
| Adjusted EBITDA | $ | 1,905,168 | $ | 1,716,774 | $ | 1,562,347 |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
|---|
| (2) | Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective January 1, 2019. |
|---|
| (3) | Represents cost-elimination expenses relating to a program initiated in the fourth quarter of 2015 and completed in the third quarter of 2016 (our cost-elimination project) to reduce the company’s global cost structure after several years of significant revenue and related cost growth. Cost-elimination expenses incurred during the 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. The total amount for each period does have a cash impact. |
|---|
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
We reported consolidated net income of $1.1 billion for the year ended December 31, 2018 on revenue of $21.3 billion as compared to consolidated net income of $697.1 million on revenue of $18.6 billion for the year ended December 31, 2017.
Our revenue on a consolidated basis for the year ended December 31, 2018 increased by $2.7 billion, or 14.6%, as compared to the year ended December 30, 2017. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing revenue (up 15.2%) and property management revenue (up 7.1%), increased leasing (up 17.8%), sales (up 6.1%) and commercial mortgage origination activity (up 19.1%) and higher revenue from our Global Investment Management segment (up 12.6%). In addition, foreign currency translation had an $88.5 million positive impact on total revenue during the year ended December 31, 2018, primarily driven by strength in the British pound sterling and euro, partially offset by weakness in the Argentine peso and Brazilian real.
Our cost of services on a consolidated basis increased by $2.1 billion, or 15.0%, during the year ended December 31, 2018 as compared to the same period in 2017. This increase was primarily due to higher costs associated with our occupier outsourcing business. 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. Lastly, foreign currency translation had a $65.0 million negative impact on total cost of services during the year ended December 31, 2018. Cost of services as a percentage of revenue increased from 76.8% for the year ended December 31, 2017 to 77.1% for the year ended December 31, 2018, primarily driven by our revenue mix, with occupier outsourcing revenue, which has a lower margin than sales and lease revenue, comprising a higher percentage of revenue than in the prior year.
Our operating, administrative and other expenses on a consolidated basis increased by $507.1 million, or 17.7%, during the year ended December 31, 2018 as compared to the same period in 2017. The increase was mostly driven by higher payroll-related costs (including increases in bonus and stock compensation expense), higher carried interest expense and increases in consulting, marketing and occupancy costs. During 2018, we also incurred $35.2 million of costs incurred in connection with our reorganization (including cost-savings initiatives) and $8.9 million of costs as a result of a litigation settlement, the impact of which was partly offset by lower integration and other costs associated with acquisitions. Foreign currency translation also had a $23.5 million negative impact on total operating expenses during the year ended December 31, 2018. Operating expenses as a percentage of revenue increased from 15.3% for the year ended December 31, 2017 to 15.8% for the year ended December 31, 2018, partially driven by higher bonus expense in our Development Services segment with no corresponding increase in revenue (as bonus expense was attributable to an increase in equity income from unconsolidated subsidiaries) as well as due to the costs incurred in connection with our reorganization.
Our depreciation and amortization expense on a consolidated basis increased by $45.9 million, or 11.3%, during the year ended December 31, 2018 as compared to the same period in 2017. This increase was primarily attributable to a rise in depreciation expense of $25.9 million during the year ended December 31, 2018 driven by technology-related capital expenditures. Higher amortization expense associated with mortgage servicing rights and intangibles acquired in acquisitions also contributed to the increase.
Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $114.5 million, or 54.5%, during the year ended December 31, 2018 as compared to the same period in 2017, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.
Our other income on a consolidated basis was $93.0 million for the year ended December 31, 2018 as compared to $9.4 million for the same period in 2017. Included in other income for the year ended December 31, 2018 was a one-time gain of $100.4 million associated with remeasuring our investment in a previously unconsolidated subsidiary in New England to fair value as of the date we acquired the remaining controlling interest.
Our consolidated interest expense decreased by $29.5 million, or 21.6%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This decrease was primarily driven by the early redemption, in full, of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes in the first quarter of 2018.
Our write-off of financing costs on extinguished debt on a consolidated basis was $28.0 million for the year ended December 31, 2018. These costs included a $20.0 million premium paid and the write-off of $8.0 million of unamortized deferred financing costs in connection with the early redemption, in full, of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes.
Our provision for income taxes on a consolidated basis was $313.1 million for the year ended December 31, 2018 as compared to $467.8 million for the same period in 2017. Our provision for income taxes for 2018 included a net expense true-up of $13.3 million resulting from completion of accounting for the Tax Act. Our provision for income taxes for 2017 included a net expense of $143.4 million for the provisional charge related to the Tax Act. These net expenses were primarily comprised of a transition tax on accumulated foreign earnings, net of a tax benefit from the re-measurement of certain deferred tax assets and liabilities using the lower U.S. corporate income tax rate and the release of valuation allowances on foreign tax credits that will decrease the liability related to the transition tax. Excluding these net charges associated with the Tax Act, our effective tax rate, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, would have been 21.8% for the year ended December 31, 2018 compared to 27.8% for the year ended December 31, 2017. We benefited from a lower U.S. corporate tax rate, with such rate being 35% in 2017 versus 21% in 2018. The effect of the decrease in the U.S. corporate tax rate was partially offset by discrete tax benefits for the year ended December 31, 2017 from the re-measurement of income tax exposures relating to prior periods and release of valuation allowances on foreign income tax credits that were expected to be utilized with no similar items for the year ended December 31, 2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
We reported consolidated net income of $697.1 million for the year ended December 31, 2017 on revenue of $18.6 billion as compared to consolidated net income of $573.1 million on revenue of $17.4 billion for the year ended December 31, 2016.
Our revenue on a consolidated basis for the year ended December 31, 2017 increased by $1.3 billion, or 7.3%, as compared to the year ended December 31, 2016. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing revenue (up 8.0%) and property management revenue (up 9.3%), increased sales (up 5.8%) and leasing activity (up 7.5%), and higher loan servicing revenue (up 28.9%). These increases were partially offset by foreign currency translation, which had a $34.7 million negative impact on total revenue during the year ended December 31, 2017, primarily driven by weakness in the British pound sterling, partially offset by strength in the euro.
Our cost of services on a consolidated basis increased by $884.2 million, or 6.6%, during the year ended December 31, 2017 as compared to same period in 2016. This increase was primarily due to higher costs associated with our occupier outsourcing business as well as higher professional bonuses (particularly in the United States and United Kingdom). 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. These increases were partially offset by foreign currency translation, which had a $37.9 million positive impact on cost of services during the year ended December 31, 2017. In addition, we incurred $37.1 million of costs in 2016 in connection with our cost-elimination project that did not recur in 2017, which partially contributed to cost of services as a percentage of revenue decreasing from 77.3% for the year ended December 31, 2016 to 76.8% for the year ended December 31, 2017.
Our operating, administrative and other expenses on a consolidated basis increased by $78.4 million, or 2.8%, during the year ended December 31, 2017 as compared to the same period in 2016. The increase was mostly driven by higher payroll-related costs (including increases in bonus and stock compensation expense driven by improved operating performance). This increase was partially offset by a decrease of $96.7 million in integration and other costs related to the GWS Acquisition incurred during the year ended December 31, 2017 as well as the impact of $41.4 million of costs incurred during the year ended December 31, 2016 as part of our cost-elimination project, which did not recur during the year ended December 31, 2017. Foreign currency also had a $1.7 million positive impact on total operating expenses during the year ended December 31, 2017, including a $0.1 million positive impact from foreign currency translation and $1.6 million of favorable foreign currency transaction activity over the year ended December 31, 2016 (part of which related to net hedging activity during 2016, which did not recur in the 2017 given that we discontinued our hedging program at the end of 2016). Operating expenses as a percentage of revenue decreased from 16.0% for the year ended December 31, 2016 to 15.3% for the year ended December 31, 2017, primarily driven by the aforementioned decline in integration and other costs related to the GWS Acquisition as well as the costs associated with our cost-elimination project in 2016.
Our depreciation and amortization expense on a consolidated basis increased by $39.2 million, or 10.7%, during the year ended December 31, 2017 as compared to the same period in 2016. This increase was primarily attributable to higher amortization expense associated with mortgage servicing rights. A rise in depreciation expense of $14.5 million during the year ended December 31, 2017 driven by technology-related capital expenditures also contributed to the increase.
Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $12.9 million, or 6.5%, during the year ended December 31, 2017 as compared to the same period in 2016, primarily driven by higher equity earnings associated with gains on property sales reported in our Development Services segment.
Our consolidated interest expense decreased by $8.0 million, or 5.5%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. This decrease was primarily driven by lower interest expense due to lower net borrowings under our credit agreement and a decrease in notes payable on real estate during 2017.
Our provision for income taxes on a consolidated basis was $467.8 million for the year ended December 31, 2017 as compared to $296.9 million for the same period in 2016. Our provision for income taxes for 2017 included a provisional net charge of $143.4 million attributable to the Tax Act. This net charge was primarily comprised of a transition tax on accumulated foreign earnings, net of a tax benefit from the re-measurement of certain deferred tax assets and liabilities using the lower U.S. corporate income tax rate and the release of valuation allowances on foreign tax credits that will decrease the liability related to the transition tax. Excluding this net charge, our effective tax rate for 2017, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, would have been 27.8% compared to 34.1% for the year ended December 31, 2016. We benefited from a more favorable geographic mix of income, the re-measurement of income tax exposures relating to prior periods and release of valuation allowances. The release of valuation allowances during the year ended December 31, 2017 primarily related to valuation allowances on foreign income tax credits that are expected to be utilized as well as on net operating losses that have been utilized through current year operations. The re-measurement of income tax exposures, primarily due to the resolution of certain tax audits during the year ended December 31, 2017, contributed to the lower effective tax rate for 2017 as compared to 2016. In addition, the contribution of income from lower taxed jurisdictions to our total consolidated income for the year ended December 31, 2017, provided a more favorable geographic mix of income, resulting in a decrease to the overall effective tax rate.
Segment Operations
On August 17, 2018, we announced a new organization structure that became effective on January 1, 2019. Under the new structure, we will organize our operations around, and publicly report our financial results on, three global business segments: (1) Advisory Services, (2) Global Workplace Solutions and (3) Real Estate Investments. For 2018, we are reporting our financial results under our business segments as they existed throughout the year.
Through the year ended December 31, 2018, we reported our operations through the following segments: (1) Americas, (2) EMEA, (3) Asia Pacific, (4) Global Investment Management and (5) Development Services. The Americas consisted of operations located in the United States, Canada and key markets in Latin America. EMEA mainly consisted of operations in Europe, while Asia Pacific included operations in Asia, Australia and New Zealand. The Global Investment Management business consisted of investment management operations in North America, Europe and Asia Pacific. The Development Services business consisted of real estate development and investment activities in the United States.
Americas
The following table summarizes our results of operations for our Americas operating segment for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Fee revenue: | ||||||||||||||||||||||||
| Occupier outsourcing | $ | 1,282,605 | 9.8 | % | $ | 1,111,187 | 9.4 | % | $ | 949,666 | 8.6 | % | ||||||||||||
| Property management | 319,538 | 2.4 | % | 286,288 | 2.4 | % | 272,000 | 2.5 | % | |||||||||||||||
| Valuation | 261,559 | 2.0 | % | 245,179 | 2.1 | % | 245,389 | 2.2 | % | |||||||||||||||
| Loan servicing | 172,096 | 1.3 | % | 146,460 | 1.2 | % | 111,373 | 1.0 | % | |||||||||||||||
| Leasing | 2,423,248 | 18.5 | % | 2,054,872 | 17.4 | % | 1,924,361 | 17.4 | % | |||||||||||||||
| Capital Markets: | ||||||||||||||||||||||||
| Sales | 1,189,368 | 9.1 | % | 1,103,862 | 9.4 | % | 1,103,452 | 10.0 | % | |||||||||||||||
| Commercial mortgage origination | 528,338 | 4.0 | % | 442,955 | 3.8 | % | 443,149 | 4.0 | % | |||||||||||||||
| Other | 50,342 | 0.3 | % | 48,242 | 0.4 | % | 50,230 | 0.4 | % | |||||||||||||||
| Total fee revenue | 6,227,094 | 47.4 | % | 5,439,045 | 46.1 | % | 5,099,620 | 46.1 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 6,904,812 | 52.6 | % | 6,352,332 | 53.9 | % | 5,970,345 | 53.9 | % | |||||||||||||||
| Total revenue | 13,131,906 | 100.0 | % | 11,791,377 | 100.0 | % | 11,069,965 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of services | 10,468,110 | 79.7 | % | 9,410,147 | 79.8 | % | 8,873,405 | 80.2 | % | |||||||||||||||
| Operating, administrative and other | 1,616,216 | 12.3 | % | 1,405,552 | 11.9 | % | 1,357,438 | 12.3 | % | |||||||||||||||
| Depreciation and amortization | 327,556 | 2.5 | % | 289,338 | 2.5 | % | 254,118 | 2.2 | % | |||||||||||||||
| Operating income | 720,024 | 5.5 | % | 686,340 | 5.8 | % | 585,004 | 5.3 | % | |||||||||||||||
| Equity income from unconsolidated subsidiaries | 14,177 | 0.1 | % | 18,789 | 0.1 | % | 17,892 | 0.2 | % | |||||||||||||||
| Other income (loss) | 103,689 | 0.8 | % | 37 | 0.0 | % | (90 | ) | 0.0 | % | ||||||||||||||
| Add-back: Depreciation and amortization | 327,556 | 2.5 | % | 289,338 | 2.5 | % | 254,118 | 2.2 | % | |||||||||||||||
| EBITDA | $ | 1,165,446 | 8.9 | % | $ | 994,504 | 8.4 | % | $ | 856,924 | 7.7 | % | ||||||||||||
| Adjusted EBITDA | $ | 1,111,014 | 8.5 | % | $ | 1,011,643 | 8.6 | % | $ | 950,573 | 8.6 | % |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue increased by $1.3 billion, or 11.4%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing and property management revenue as well as improved sales, leasing and commercial mortgage origination activity. Foreign currency translation had a $56.4 million negative impact on total revenue during the year ended December 31, 2018, primarily driven by weakness in the Argentine peso and Brazilian real.
Cost of services increased by $1.1 billion, or 11.2%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily due to higher costs associated with our occupier outsourcing business. Also contributing to the variance was higher commission expense resulting from improved sales and lease transaction revenue. Foreign currency translation had a $48.2 million positive impact on total cost of services during the year ended December 31, 2018. Cost of services as a percentage of revenue was consistent at 79.7% for the year ended December 31, 2018 versus 79.8% for the same period in 2017.
Operating, administrative and other expenses increased by $210.7 million, or 15.0%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The increase was partly driven by higher payroll-related costs (including increases in bonus and stock compensation expense) as well as increases in consulting, marketing and occupancy costs. During 2018, we also incurred $27.4 million of severance costs in connection with our reorganization, including cost-savings initiatives, and $8.9 million of costs as a result of a litigation settlement, the impact of which was partly offset by lower integration and other costs associated with acquisitions. Foreign currency translation had a $6.5 million positive impact on total operating expenses during the year ended December 31, 2018.
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. Upon origination of a mortgage loan held for sale, the fair value of the mortgage servicing rights to be retained is included in the forecasted proceeds from the anticipated loan sale and results in a net gain (which is reflected in revenue). Subsequent to the initial recording, MSRs are amortized (within amortization expense) and carried at the lower of amortized cost or fair value in other intangible assets in the accompanying consolidated balance sheets. They are amortized in proportion to and over the estimated period that the servicing income is expected to be received. For the year ended December 31, 2018, MSRs contributed to operating income $173.7 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $115.7 million of amortization of related intangible assets. For the year ended December 31, 2017, MSRs contributed to operating income $145.1 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $98.6 million of amortization of related intangible assets
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue increased by $721.4 million, or 6.5%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The revenue increase reflects strong organic growth fueled by higher occupier outsourcing and property management revenue, improved leasing activity and higher loan servicing revenue. Foreign currency translation had a $3.7 million negative impact on revenue during the year ended December 31, 2017, primarily driven by weakness in the Venezuelan bolivar, largely offset by strength in the Brazilian real and the Canadian dollar.
Cost of services increased by $536.7 million, or 6.0%, for the year ended December 31, 2017 as compared to the same period in 2016, primarily due to higher costs associated with our occupier outsourcing business and higher professional bonuses in the United States. Also contributing to the variance was higher commission expense resulting from improved lease transaction revenue. These items were partially offset by the impact of $11.9 million of costs incurred during the year ended December 31, 2016 in connection with our cost-elimination project that did not recur during the year ended December 31, 2017. Foreign currency translation had a $3.7 million positive impact on cost of services during the year ended December 31, 2017. Cost of services as a percentage of revenue decreased from 80.2% for the year ended December 31, 2016 to 79.8% for the year ended December 31, 2017, partly due to cost-elimination expenses incurred in 2016 that did not recur in 2017.
Operating, administrative and other expenses increased by $48.1 million, or 3.5%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The increase was partly driven by higher payroll-related costs (including increases in bonus and stock compensation expense due to improved operating performance). Foreign currency also had a $9.0 million negative impact on total operating expenses during the year ended December 31, 2017, which included a negative impact from foreign currency translation of $2.4 million and $6.6 million of unfavorable foreign currency transaction activity over the year ended December 31, 2016 (part of which related to net hedging activity in 2016, which did not recur in 2017). These increases were partially offset by a decrease of $52.6 million in integration and other costs related to the GWS Acquisition incurred during the year ended December 31, 2017 as well as the impact of $10.4 million of costs incurred during the year ended December 31, 2016 as part of our cost-elimination project, which did not recur during the year ended December 31, 2017.
For the year ended December 31, 2017, MSRs contributed to operating income $145.1 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $98.6 million of amortization of related intangible assets. For the year ended December 31, 2016, MSRs contributed to operating income $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.
EMEA
The following table summarizes our results of operations for our EMEA operating segment for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Fee revenue: | ||||||||||||||||||||||||
| Occupier outsourcing | $ | 1,466,525 | 26.8 | % | $ | 1,167,364 | 26.6 | % | $ | 1,116,257 | 27.0 | % | ||||||||||||
| Property management | 185,260 | 3.4 | % | 168,710 | 3.8 | % | 148,982 | 3.6 | % | |||||||||||||||
| Valuation | 187,515 | 3.4 | % | 165,082 | 3.8 | % | 148,856 | 3.6 | % | |||||||||||||||
| Loan servicing | 10,755 | 0.2 | % | 10,989 | 0.2 | % | 11,144 | 0.3 | % | |||||||||||||||
| Leasing | 526,372 | 9.6 | % | 446,446 | 10.2 | % | 411,005 | 10.0 | % | |||||||||||||||
| Capital Markets: | ||||||||||||||||||||||||
| Sales | 428,810 | 7.8 | % | 397,130 | 9.0 | % | 334,398 | 8.1 | % | |||||||||||||||
| Commercial mortgage origination | 5,768 | 0.1 | % | 5,447 | 0.1 | % | 2,881 | 0.1 | % | |||||||||||||||
| Other | 32,076 | 0.7 | % | 26,583 | 0.6 | % | 23,612 | 0.5 | % | |||||||||||||||
| Total fee revenue | 2,843,081 | 52.0 | % | 2,387,751 | 54.3 | % | 2,197,135 | 53.2 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 2,622,842 | 48.0 | % | 2,009,074 | 45.7 | % | 1,931,771 | 46.8 | % | |||||||||||||||
| Total revenue | 5,465,923 | 100.0 | % | 4,396,825 | 100.0 | % | 4,128,906 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of services | 4,328,821 | 79.2 | % | 3,409,908 | 77.6 | % | 3,245,455 | 78.6 | % | |||||||||||||||
| Operating, administrative and other | 817,224 | 15.0 | % | 688,900 | 15.7 | % | 685,412 | 16.6 | % | |||||||||||||||
| Depreciation and amortization | 80,290 | 1.5 | % | 72,322 | 1.6 | % | 66,619 | 1.5 | % | |||||||||||||||
| Operating income | 239,588 | 4.3 | % | 225,695 | 5.1 | % | 131,420 | 3.3 | % | |||||||||||||||
| Equity income from unconsolidated subsidiaries | 1,523 | 0.1 | % | 1,553 | 0.1 | % | 1,817 | 0.0 | % | |||||||||||||||
| Other income (loss) | 171 | 0.0 | % | (67 | ) | 0.0 | % | 22 | 0.0 | % | ||||||||||||||
| Less: Net income attributable to non-controlling interests | 243 | 0.0 | % | 64 | 0.0 | % | 476 | 0.0 | % | |||||||||||||||
| Add-back: Depreciation and amortization | 80,290 | 1.5 | % | 72,322 | 1.6 | % | 66,619 | 1.5 | % | |||||||||||||||
| EBITDA | $ | 321,329 | 5.9 | % | $ | 299,439 | 6.8 | % | $ | 199,402 | 4.8 | % | ||||||||||||
| Adjusted EBITDA | $ | 329,522 | 6.0 | % | $ | 309,233 | 7.0 | % | $ | 272,894 | 6.6 | % |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
|---|
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue increased by $1.1 billion, or 24.3%, for the year ended December 31, 2018 as compared to the same period in 2017. We achieved strong organic growth fueled by higher occupier outsourcing revenue as well as higher sales and leasing activity. Foreign currency translation also had a $145.8 million positive impact on total revenue during the year ended December 31, 2018, primarily driven by strength in the British pound sterling and euro.
Cost of services increased by $918.9 million, or 26.9%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily due to higher costs associated with our occupier outsourcing business. In addition, foreign currency translation had a $120.0 million negative impact on total cost of services during the year ended December 31, 2018. Cost of services as a percentage of revenue increased from 77.6% for the year ended December 31, 2017 to 79.2% for the year ended December 31, 2018, primarily driven by our revenue mix, with occupier outsourcing revenue, which has a lower margin than sales and lease revenue, comprising a higher percentage of revenue than in the prior year.
Operating, administrative and other expenses increased by $128.3 million, or 18.6%, for the year ended December 31, 2018 as compared to the same period in 2017. This increase was primarily driven by higher payroll-related costs (including increased bonus expense) and increases in marketing and occupancy costs. Foreign currency translation also had a $23.8 million negative impact on total operating expenses during the year ended December 31, 2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue increased by $267.9 million, or 6.5%, for the year ended December 31, 2017 as compared to the same period in 2016. We achieved strong organic growth fueled by higher occupier outsourcing and property management revenue, as well as higher sales and leasing activity. Such growth was partially offset by foreign currency translation, which had a $42.6 million negative impact on total revenue during the year ended December 31, 2017, primarily driven by weakness in the British pound sterling, partially offset by strength in the euro.
Cost of services increased by $164.5 million, or 5.1%, for the year ended December 31, 2017 as compared to the same period in 2016, primarily due to higher costs associated with our occupier outsourcing business and higher professional bonuses, particularly in the United Kingdom resulting from improved operating performance. These items were partly offset by foreign currency translation, which had a $44.1 million positive impact on cost of services. In addition, we incurred $18.8 million of costs during the year ended December 31, 2016 in connection with our cost-elimination project that did not recur during the year ended December 31, 2017. The absence of such costs contributed to cost of services as a percentage of revenue decreasing from 78.6% for the year ended December 31, 2016 to 77.6% for the year ended December 31, 2017.
Operating, administrative and other expenses increased by $3.5 million, or 0.5%, for the year ended December 31, 2017 as compared to the same period in 2016. This increase was primarily driven by higher payroll-related costs, including increased bonus and stock compensation expense due to improved operating performance during the year ended December 31, 2017. These items were largely offset by a decrease of $38.1 million in integration and other costs related to the GWS Acquisition incurred during the year ended December 31, 2017 as well as the impact of $6.8 million of costs incurred during the year ended December 31, 2016 as part of our cost-elimination project, which did not recur during the year ended December 31, 2017. Foreign currency also had a $1.3 million net positive impact on total operating expenses during the year ended December 31, 2017, including a $3.6 million positive impact from foreign currency translation, partially offset by $2.3 million of unfavorable foreign currency transaction activity over the year ended December 31, 2016 (part of which related to net hedging activity in 2016, which did not recur in 2017).
Asia Pacific
The following table summarizes our results of operations for our Asia Pacific operating segment for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Fee revenue: | ||||||||||||||||||||||||
| Occupier outsourcing | $ | 291,819 | 13.2 | % | $ | 247,518 | 12.5 | % | $ | 214,040 | 12.4 | % | ||||||||||||
| Property management | 91,923 | 4.2 | % | 86,164 | 4.3 | % | 74,602 | 4.3 | % | |||||||||||||||
| Valuation | 111,741 | 5.1 | % | 117,377 | 5.9 | % | 110,125 | 6.4 | % | |||||||||||||||
| Loan servicing | 570 | 0.0 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Leasing | 421,255 | 19.1 | % | 357,983 | 18.0 | % | 312,184 | 18.1 | % | |||||||||||||||
| Capital Markets: | ||||||||||||||||||||||||
| Sales | 300,312 | 13.6 | % | 304,344 | 15.3 | % | 261,320 | 15.1 | % | |||||||||||||||
| Commercial mortgage origination | 2,330 | 0.1 | % | 2,119 | 0.1 | % | 2,136 | 0.1 | % | |||||||||||||||
| Other | 12,703 | 0.5 | % | 9,636 | 0.6 | % | 12,393 | 0.7 | % | |||||||||||||||
| Total fee revenue | 1,232,653 | 55.8 | % | 1,125,141 | 56.7 | % | 986,800 | 57.1 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 974,882 | 44.2 | % | 858,345 | 43.3 | % | 742,728 | 42.9 | % | |||||||||||||||
| Total revenue | 2,207,535 | 100.0 | % | 1,983,486 | 100.0 | % | 1,729,528 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of services | 1,652,281 | 74.8 | % | 1,485,044 | 74.9 | % | 1,302,050 | 75.3 | % | |||||||||||||||
| Operating, administrative and other | 359,033 | 16.3 | % | 319,214 | 16.1 | % | 301,097 | 17.4 | % | |||||||||||||||
| Depreciation and amortization | 20,297 | 0.9 | % | 18,258 | 0.9 | % | 17,810 | 1.0 | % | |||||||||||||||
| Operating income | 175,924 | 8.0 | % | 160,970 | 8.1 | % | 108,571 | 6.3 | % | |||||||||||||||
| Equity income from unconsolidated subsidiaries | 433 | 0.0 | % | 397 | 0.0 | % | 223 | 0.0 | % | |||||||||||||||
| Less: Net income attributable to non-controlling interests | — | 0.0 | % | — | 0.0 | % | 85 | 0.0 | % | |||||||||||||||
| Add-back: Depreciation and amortization | 20,297 | 0.9 | % | 18,258 | 0.9 | % | 17,810 | 1.0 | % | |||||||||||||||
| EBITDA | $ | 196,654 | 8.9 | % | $ | 179,625 | 9.0 | % | $ | 126,519 | 7.3 | % | ||||||||||||
| Adjusted EBITDA | $ | 197,684 | 9.0 | % | $ | 180,043 | 9.1 | % | $ | 142,299 | 8.2 | % |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue increased by $224.0 million, or 11.3%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The revenue increase reflects strong organic growth, fueled by higher occupier outsourcing and property management revenue as well as improved leasing activity. In addition, foreign currency translation had a $10.0 million negative impact on total revenue during the year ended December 31, 2018, primarily driven by weakness in the Australian dollar and Indian rupee, partially offset by strength in the Chinese yuan, Japanese yen, Singapore dollar and Thai baht.
Cost of services increased by $167.2 million, or 11.3%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily driven by higher costs associated with our occupier outsourcing and property management businesses. In addition, foreign currency translation had a $6.8 million positive impact on total cost of services during the year ended December 31, 2018. Cost of services as a percentage of revenue was consistent at 74.8% for the year ended December 31, 2018 as compared to 74.9% for the year ended December 31, 2017.
Operating, administrative and other expenses increased by $39.8 million, or 12.5%, for the year ended December 31, 2018 as compared to the same period in 2017. We incurred higher payroll-related costs (including increased bonus expense) as well as increases in marketing, occupancy and travel costs during the year ended December 31, 2018. Foreign currency activity also had an overall net negative impact of $6.9 million for the year ended December 31, 2018, due to unfavorable foreign currency transaction activity of $7.8 million, partially offset by a $0.9 million positive impact from foreign currency translation.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue increased by $254.0 million, or 14.7%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The revenue increase reflects strong organic growth, fueled by higher occupier outsourcing and property management revenue as well as improved sales and leasing activity. In addition, foreign currency translation had a $13.2 million positive impact on total revenue during the year ended December 31, 2017, primarily driven by strength in the Australian dollar and Indian rupee, partially offset by weakness in the Chinese yuan and Japanese yen.
Cost of services increased by $183.0 million, or 14.1%, for the year ended December 31, 2017 as compared to the same period in 2016, driven by higher costs associated with our occupier outsourcing business. Also contributing to the variance was higher commission expense resulting from improved sales and lease transaction revenue. In addition, foreign currency translation had a $9.9 million negative impact on cost of services during the year ended December 31, 2017. These items were partially offset by the impact of $6.4 million of costs incurred during the year ended December 31, 2016 in connection with our cost-elimination project that did not recur during the year ended December 31, 2017. The absence of such costs contributed to cost of services as a percentage of revenue decreasing from 75.3% for the year ended December 31, 2016 to 74.9% for the year ended December 31, 2017.
Operating, administrative and other expenses increased by $18.1 million, or 6.0%, for the year ended December 31, 2017 as compared to the same period in 2016. We incurred higher payroll-related costs (including increased stock compensation and bonus expense due to improved operating performance) during the year ended December 31, 2017. This was partially offset by a decrease of $6.0 million in integration and other costs related to the GWS Acquisition incurred during the year ended December 31, 2017 as well as the impact of $2.9 million of costs incurred during the year ended December 31, 2016 as part of our cost-elimination project, which did not recur during the year ended December 31, 2017. Foreign currency activity also had an overall net positive impact of $9.3 million for the year ended December 31, 2017, due to $11.1 million of favorable foreign currency transaction activity over the year ended December 31, 2016 (part of which related to net hedging activity in 2016, which did not recur in 2017), partially offset by a $1.8 million negative impact from foreign currency translation.
Global Investment Management
The following table summarizes our results of operations for our Global Investment Management operating segment for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||||||||||||||
| Revenue | $ | 434,405 | 100.0 | % | $ | 377,644 | 100.0 | % | $ | 369,800 | 100.0 | % | ||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Operating, administrative and other | 344,312 | 79.3 | % | 285,831 | 75.7 | % | 297,194 | 80.4 | % | |||||||||||||||
| Depreciation and amortization | 23,017 | 5.3 | % | 24,123 | 6.4 | % | 25,911 | 7.0 | % | |||||||||||||||
| Operating income | $ | 67,076 | 15.4 | % | $ | 67,690 | 17.9 | % | $ | 46,695 | 12.6 | % | ||||||||||||
| Equity income from unconsolidated subsidiaries | 6,131 | 1.4 | % | 7,923 | 2.1 | % | 7,243 | 1.9 | % | |||||||||||||||
| Other (loss) income | (10,840 | ) | (2.5 | %) | 9,435 | 2.5 | % | 4,756 | 1.3 | % | ||||||||||||||
| Less: Net income attributable to non-controlling Interests | 2,360 | 0.5 | % | 6,280 | 1.7 | % | 7,174 | 1.9 | % | |||||||||||||||
| Add-back: Depreciation and amortization | 23,017 | 5.3 | % | 24,123 | 6.4 | % | 25,911 | 7.0 | % | |||||||||||||||
| EBITDA | $ | 83,024 | 19.1 | % | $ | 102,891 | 27.2 | % | $ | 77,431 | 20.9 | % | ||||||||||||
| Adjusted EBITDA | $ | 78,469 | 18.1 | % | $ | 94,373 | 25.0 | % | $ | 83,150 | 22.5 | % |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue increased by $56.8 million, or 15.0%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017, primarily driven by higher asset management and incentive fees as well as higher carried interest revenue. Foreign currency translation also had a $9.1 million positive impact on total revenue during the year ended December 31, 2018, primarily driven by strength in the British pound sterling and euro. These items were partially offset by lower acquisition fees in the current year.
Operating, administrative and other expenses increased by $58.5 million, or 20.5%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily driven by higher carried interest expense as well as higher payroll-related costs (including bonuses). Additionally, foreign currency translation had a $7.1 million negative impact on total operating expenses during the year ended December 31, 2018.
A roll forward of our AUM by product type for the year ended December 31, 2018 is as follows (dollars in billions):
| Funds | Separate Accounts | Securities | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2018 | $ | 31.7 | $ | 56.7 | $ | 14.8 | $ | 103.2 | ||||||||
| Inflows | 7.1 | 7.6 | 1.6 | 16.3 | ||||||||||||
| Outflows | (5.4 | ) | (4.0 | ) | (4.5 | ) | (13.9 | ) | ||||||||
| Market appreciation (depreciation) | 1.6 | (0.1 | ) | (1.6 | ) | (0.1 | ) | |||||||||
| Balance at December 31, 2018 | $ | 35.0 | $ | 60.2 | $ | 10.3 | $ | 105.5 |
AUM generally refers to the properties and other assets with respect to which we provide (or participate in) oversight, investment management services and other advice, and which generally consist of real estate properties or loans, securities portfolios and investments in operating companies and joint ventures. Our AUM is intended principally to reflect the extent of our presence in the real estate market, not the basis for determining our management fees. Our assets under management consist of:
| • | the total fair market value of the real estate properties and other assets either wholly-owned or held by joint ventures and other entities in which our sponsored funds or investment vehicles and client accounts have invested or to which they have provided financing. Committed (but unfunded) capital from investors in our sponsored funds is not included in this component of our AUM. The value of development properties is included at estimated completion cost. In the case of real estate operating companies, the total value of real properties controlled by the companies, generally through joint ventures, is included in AUM; and |
|---|
| • | the net asset value of our managed securities portfolios, including investments (which may be comprised of committed but uncalled capital) in private real estate funds under our fund of funds investments. |
|---|
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.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue increased by $7.8 million, or 2.1%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016, primarily driven by higher carried interest revenue. Foreign currency translation had a $1.6 million negative impact on total revenue during the year ended December 31, 2017, primarily driven by weakness in the British pound sterling, partially offset by strength in the euro.
Operating, administrative and other expenses decreased by $11.4 million, or 3.8%, for the year ended December 31, 2017 as compared to the same period in 2016, primarily driven by the impact of $21.3 million of costs incurred during the year ended December 31, 2016 in connection with our cost-elimination project that did not recur during the year ended December 31, 2017. This was partly offset by higher carried interest expense incurred in 2017. Foreign currency had a $0.1 million net positive impact on total operating expenses during the year ended December 31, 2017, which included a $0.7 million positive impact from foreign currency translation, most offset by $0.6 million of unfavorable foreign currency transaction activity over the year ended December 31, 2016 (part of which related to net hedging activity in 2016, which did not recur in 2017).
A roll forward of our AUM by product type for the year ended December 31, 2017 is as follows (dollars in billions):
| Funds | Separate Accounts | Securities | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2017 | $ | 31.6 | $ | 37.5 | $ | 17.5 | $ | 86.6 | ||||||||
| Inflows | 5.8 | 17.5 | 1.9 | 25.2 | ||||||||||||
| Outflows | (5.9 | ) | (4.9 | ) | (6.0 | ) | (16.8 | ) | ||||||||
| Market appreciation (depreciation) | 0.2 | 6.6 | 1.4 | 8.2 | ||||||||||||
| Balance at December 31, 2017 | $ | 31.7 | $ | 56.7 | $ | 14.8 | $ | 103.2 |
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
The following table summarizes our results of operations for our Development Services operating segment for the years ended December 31, 2018, 2017 and 2016 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2018 | 2017 | 2016 | ||||||||||||||||||||||
| (As Adjusted) (1) | (As Adjusted) (1) | |||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Property management | $ | 8,666 | 8.6 | % | $ | 13,914 | 17.5 | % | $ | 9,502 | 13.4 | % | ||||||||||||
| Leasing | 4,683 | 4.7 | % | 4,051 | 5.1 | % | 4,436 | 6.2 | % | |||||||||||||||
| Capital Markets: | ||||||||||||||||||||||||
| Sales | 650 | 0.6 | % | 977 | 1.2 | % | 1,333 | 1.9 | % | |||||||||||||||
| Other: | ||||||||||||||||||||||||
| Development services | 86,320 | 86.1 | % | 60,513 | 76.2 | % | 55,638 | 78.5 | % | |||||||||||||||
| Total revenue | 100,319 | 100.0 | % | 79,455 | 100.0 | % | 70,909 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Operating, administrative and other | 228,988 | 228.3 | % | 159,223 | 200.4 | % | 139,160 | 196.3 | % | |||||||||||||||
| Depreciation and amortization | 828 | 0.8 | % | 2,073 | 2.6 | % | 2,469 | 3.5 | % | |||||||||||||||
| Gain on disposition of real estate | 14,874 | 14.8 | % | 19,828 | 25.0 | % | 15,862 | 22.4 | % | |||||||||||||||
| Operating loss | (114,623 | ) | (114.3 | %) | (62,013 | ) | (78.0 | %) | (54,858 | ) | (77.4 | %) | ||||||||||||
| Equity income from unconsolidated subsidiaries | 302,400 | 301.5 | % | 181,545 | 228.5 | % | 170,176 | 240.0 | % | |||||||||||||||
| Less: Net income attributable to non-controlling interests | 126 | 0.1 | % | 123 | 0.2 | % | 4,356 | 6.1 | % | |||||||||||||||
| Add-back: Depreciation and amortization | 828 | 0.8 | % | 2,073 | 2.6 | % | 2,469 | 3.5 | % | |||||||||||||||
| EBITDA and Adjusted EBITDA | $ | 188,479 | 187.9 | % | $ | 121,482 | 152.9 | % | $ | 113,431 | 160.0 | % |
| (1) | We adopted new revenue recognition guidance in the first quarter of 2018. Certain restatements have been made to the 2017 and 2016 financial statements to conform with the 2018 presentation. See Notes 2 and 3 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report for more information. |
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Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue increased by $20.9 million, or 26.3%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017, primarily driven by higher development and incentive fees during the year ended December 31, 2018.
Operating, administrative and other expenses increased by $69.8 million, or 43.8%, for the year ended December 31, 2018 as compared to the same period in 2017. This increase was primarily driven by higher payroll-related costs, particularly increased bonus expense during the year ended December 31, 2018 due to improved performance (property sales reflected in equity income from unconsolidated subsidiaries were significantly higher during the year ended December 31, 2018).
As of December 31, 2018, development projects in process totaled $9.0 billion, up $0.2 billion from third-quarter 2018. The pipeline increased by $0.1 billion during the fourth quarter to $3.7 billion.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue increased by $8.5 million, or 12.1%, for the year ended December 31, 2017 as compared to the year ended December 31, 2016, primarily driven by higher management and development fees during the year ended December 31, 2017.
Operating, administrative and other expenses increased by $20.1 million, or 14.4%, for the year ended December 31, 2017 as compared to the same period in 2016. This increase was primarily driven by higher payroll-related costs, including increased bonus expense during the year ended December 31, 2017 due to improved operating performance (property sales reflected in equity income from unconsolidated subsidiaries and gain on disposition of real estate were significantly higher during the year ended December 31, 2017).
As of December 31, 2017, development projects in process totaled $6.8 billion, up $0.2 billion from year-end 2016. The new projects pipeline totaled $3.8 billion at December 31, 2017, down $0.4 billion from year-end 2016.
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 2019 include up to approximately $210 million of anticipated capital expenditures, net of tenant concessions. As of December 31, 2018, we had aggregate commitments of $53.7 million to fund future co-investments in our Global Investment Management business, $24.3 million of which is expected to be funded in 2019. Additionally, as of December 31, 2018, we are committed to fund $34.7 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, 2018, we had $2.8 billion of borrowings available under our $2.8 billion revolving credit facility.
We have historically relied on our internally generated cash flow and our revolving credit facility to fund our working capital, capital expenditure and general investment requirements (including strategic in-fill acquisitions) and have not sought other external sources of financing to help fund these requirements. In the absence of extraordinary events or a large strategic acquisition, we anticipate that our cash flow from operations and our revolving credit facility would be sufficient to meet our anticipated cash requirements for the foreseeable future, and at a minimum for the next 12 months. We may seek to take advantage of market opportunities to refinance existing debt instruments, as we have done in the past, with new debt instruments at interest rates, maturities and terms we deem attractive. We may also, from time to time in our sole discretion, purchase, redeem, or retire our existing senior notes, through tender offers, in privately negotiated or open market transactions, or otherwise.
In March 2018, we redeemed the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes in full. We funded this redemption with $550.0 million of borrowings from our tranche A term loan facility and borrowings from our revolving credit facility under our credit agreement.
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, 2018 and 2017, we had accrued $136.3 million ($41.7 million of which was a current liability) and $83.6 million ($23.2 million of which was a current liability), respectively, of deferred purchase consideration, which was included in accounts payable and accrued expenses and in other long-term liabilities in the accompanying consolidated balance sheets set forth in Item 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 $250.0 million of our Class A common stock over three years. As of December 31, 2018, we have spent $161.0 million to repurchase 3,980,656 shares of our Class A common stock with an average price paid per share of $40.43. During the month of January 2019, we spent $45.1 million to repurchase an additional 1,144,449 shares of our Class A common stock with an average price paid per share of $39.38. Additionally, on February 28, 2019, our board of directors authorized a new program for the company to repurchase up to $300.0 million of our Class A common stock over three years, effective March 11, 2019. The existing program will terminate upon the effectiveness of the new program. Our stock repurchases have been funded with cash on hand. The timing of future repurchases and the actual amounts repurchased will depend on a variety of factors, including the market price of our common stock, general market and economic conditions and other factors.
Historical Cash Flows
Operating Activities
Net cash provided by operating activities totaled $1.1 billion for the year ended December 31, 2018, an increase of $236.8 million as compared to the year ended December 31, 2017. The increase in net cash provided by operating activities was primarily due to improved operating performance as well as a higher distribution of earnings from unconsolidated subsidiaries during the year ended December 31, 2018.
Net cash provided by operating activities totaled $894.4 million for the year ended December 31, 2017, an increase of $277.4 million as compared to the year ended December 31, 2016. The increase in net cash provided by operating activities was primarily due to improved operating performance.
Investing Activities
Net cash used in investing activities totaled $560.7 million for the year ended December 31, 2018, an increase of $258.1 million as compared to the year ended December 31, 2017. The increase in cash used in investing activities was primarily driven by $204.1 million more incurred for acquisitions (driven by the FacilitySource Acquisition) and an increase of $49.8 million in capital expenditures during the year ended December 31, 2018.
Net cash used in investing activities totaled $302.6 million for the year ended December 31, 2017, an increase of $152.1 million as compared to the year ended December 31, 2016. The increase in net cash used in investing activities was primarily driven by $97.4 million more invested in in-fill acquisitions during the year ended December 31, 2017 as well as the impact of $44.3 million of net proceeds from disposition of real estate held for investment in 2016 that did not recur in the current year.
Financing Activities
Net cash used in financing activities totaled $506.6 million for the year ended December 31, 2018, a decrease of $121.1 million as compared to the year ended December 31, 2017. This decrease was primarily due to $1.1 billion of higher net borrowings from our senior term loans during the year ended December 31, 2018, largely offset by the full redemption of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes (including $20.0 million premium) as well as the $161.0 million repurchase of our common stock during the year ended December 31, 2018.
Net cash used in financing activities totaled $627.7 million for the year ended December 31, 2017, an increase of $407.1 million as compared to the year ended December 31, 2016. The increase was primarily due to $415.6 million of higher net repayments of senior term loans during the year ended December 31, 2017.
Summary of Contractual Obligations and Other Commitments
The following is a summary of our various contractual obligations and other commitments as of December 31, 2018 (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) | $ | 1,787,134 | $ | 3,146 | $ | 536 | $ | 758,452 | $ | 1,025,000 | ||||||||||
| Short-term borrowings (2) | 1,328,761 | 1,328,761 | — | — | — | |||||||||||||||
| Operating leases (3) | 1,489,223 | 238,954 | 421,556 | 317,972 | 510,741 | |||||||||||||||
| Defined benefit pension liability (4) | 112,990 | — | — | — | 112,990 | |||||||||||||||
| Total gross notes payable on real estate | ||||||||||||||||||||
| (non-recourse) (5) | 6,576 | 3,096 | 3,480 | — | — | |||||||||||||||
| Deferred purchase consideration (6) | 136,349 | 41,716 | 53,711 | 40,922 | — | |||||||||||||||
| Total Contractual Obligations | $ | 4,861,033 | $ | 1,615,673 | $ | 479,283 | $ | 1,117,346 | $ | 1,648,731 | ||||||||||
| Amount of Other Commitments Expiration | ||||||||||||||||||||
| Other Commitments | Total | Less than 1 year | 1 - 3 years | 3 - 5 years | More than 5 years | |||||||||||||||
| Self-insurance reserves (7) | $ | 112,977 | $ | 112,977 | $ | — | $ | — | $ | — | ||||||||||
| Tax liabilities (8) | 99,927 | 8,199 | 24,743 | 38,879 | 28,106 | |||||||||||||||
| Co-investments (3) (9) | 88,466 | 59,045 | 27,477 | 495 | 1,449 | |||||||||||||||
| Letters of credit (3) | 74,949 | 74,949 | — | — | — | |||||||||||||||
| Guarantees (3) (10) | 56,287 | 56,287 | — | — | — | |||||||||||||||
| Total Other Commitments | $ | 432,606 | $ | 311,457 | $ | 52,220 | $ | 39,374 | $ | 29,555 |
| (1) | Reflects gross outstanding long-term debt balances as of December 31, 2018, assumed to be paid at maturity, excluding unamortized discount, premium and deferred financing costs. See Note 11 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): 2019 – $65,083; 2020 to 2021 – $130,166; 2022 to 2023 – $118,296 and thereafter – $90,145. |
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| (2) | 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 Notes 5 and 11 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report. |
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| (3) | See Note 12 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report. |
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| (4) | See Note 13 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. |
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| (5) | Amounts do not include scheduled interest payments. The notes have either fixed or variable interest rates, ranging from 4.25% to 5.25% at December 31, 2018. |
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| (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, 2018 set forth in Item 8 of this Annual Report. |
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| (7) | 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, 2018 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. |
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| (8) | As of December 31, 2018, our current and non-current tax liabilities, including interest and penalties, totaled $81.7 million. Of this amount, we can reasonably estimate that $0.8 million will require cash settlement in less than one year. We are unable to reasonably estimate the timing of the effective settlement of tax positions for the remaining $80.9 million. |
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In addition, in connection with the Tax Act, as of December 31, 2018, we have a remaining federal tax liability of $99.1 million (of which $7.4 million is due in less than one year) associated with the transition tax on mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. The federal tax liability for the transition tax can be paid in annual interest-free installments over a period of eight years through 2025, which we have elected to do. See Note 14 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
| (9) | Includes $53.7 million related to our Global Investment Management segment, $24.3 million of which is expected to be funded in 2019, and $34.7 million related to our Development Services segment (callable at any time). |
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| (10) | 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. |
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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 January 9, 2015, CBRE Services, Inc. (CBRE Services), our wholly-owned subsidiary, 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 Credit Suisse AG (CS). On March 21, 2016, CBRE Services executed an amendment to the 2015 Credit Agreement that, among other things, extended the maturity on the revolving credit facility to March 2021 and increased the borrowing capacity under the revolving credit facility by $200.0 million. On October 31, 2017, we entered into a new Credit Agreement (the 2017 Credit Agreement), which refinanced and replaced the 2015 Credit Agreement. We used $200.0 million of borrowings from the tranche A term loan facility and $83.0 million of revolving credit facility borrowings under the 2017 Credit Agreement, in addition to cash on hand, to repay all amounts outstanding under the 2015 Credit Agreement. On December 20, 2018, CBRE Global Acquisition Company, a wholly-owned subsidiary of CBRE Services, entered into an incremental term loan assumption agreement with a syndicate of banks jointly led by Wells Fargo Bank and National Westminster Bank plc to establish a new euro term loan facility under the 2017 Credit Agreement in an aggregate principal amount of 400.0 million euros. The proceeds of the new euro term loan facility were used to repay a portion of the U.S. dollar denominated term loans outstanding under the 2017 Credit Agreement.
The 2017 Credit Agreement is a senior unsecured credit facility that is jointly and severally guaranteed by us and certain of our subsidiaries. The 2017 Credit Agreement 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 October 31, 2022, (2) a $750.0 million delayed draw tranche A term loan facility, requiring quarterly principal payments, which begin on March 5, 2018 and continue through maturity on October 31, 2022, provided that in the event that our leverage ratio (as defined in the 2017 Credit Agreement) is less than or equal to 2.50 to 1.00 on the last day of the fiscal quarter immediately preceding any such payment date, no such quarterly principal payment shall be required on such date and (3) a 400.0 million euro term loan facility due and payable in full at maturity on December 20, 2023.
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 severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guarantees our 2017 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 2017 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 were 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 were jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guaranteed our 2017 Credit Agreement. Interest accrued at a rate of 5.00% per year and was payable semi-annually in arrears on March 15 and September 15. The 5.00% senior notes were redeemable at our option, in whole or in part, on March 15, 2018 at a redemption price of 102.5% of the principal amount on that date. We redeemed these notes in full on March 15, 2018 and incurred charges of $28.0 million, including a premium of $20.0 million and the write-off of $8.0 million of unamortized deferred financing costs. We funded this redemption with $550.0 million of borrowings from our tranche A term loan facility and borrowings from our revolving credit facility under our 2017 Credit Agreement.
The indentures governing our 4.875% senior notes and 5.25% senior notes contain restrictive covenants that, among other things, limit our ability to create or permit liens on assets securing indebtedness, enter into sale/leaseback transactions and enter into consolidations or mergers.
For additional information on all of our long-term debt, see Note 11 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 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 Notes 5 and 11 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
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