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 2019 revenue, with leading global market positions in our leasing, property sales, occupier outsourcing and valuation businesses. As of December 31, 2019, we operated in more than 530 offices worldwide and have more than 100,000 employees, excluding independent affiliates.
Our business is focused on providing services to real estate occupiers and investors. For occupiers, we provide facilities management, project management, transaction (both property sales and leasing) and consulting services, among others. For investors, we provide capital markets (property sales, mortgage origination, sales and servicing), leasing, investment management, property management, valuation and development services, among others. We provide services under the following brand names: “CBRE” (real estate advisory and outsourcing services); “CBRE Global Investors” (investment management); “Trammell Crow Company” (U.S. development); “Telford Homes” (U.K. development) and “Hana” (flexible-space solutions).
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 substantial share of growing market opportunities. 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 2019, 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 2019 we were ranked #146 on the Fortune 500. We have been voted the most recognized commercial real estate brand in the Lipsey Company survey for 19 years in a row (including 2020). We have also been rated a World’s Most Ethical Company by the Ethisphere Institute for seven consecutive years (including 2020), and are included in the Dow Jones World Sustainability Index and the Bloomberg Gender Equality Index.
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, 2019 and 2018 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 a decrease to the U.S. corporate tax rate from 35% to 21% and a one-time transition tax (i.e. toll charge or, the Transition Tax) on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We are paying the federal tax liability for the Transition Tax in annual interest-free installments over a period of eight years through 2025 as allowed by the Tax Act.
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.
See Note 15 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 believe that general inflation has not 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. Additionally, our contractual revenues have continued to increase primarily as a result of growth in our outsourcing business, and we believe this contractual revenue should help offset the negative impacts that macroeconomic deterioration could have on other parts of our business. Nevertheless, adverse global and regional economic trends could pose significant risks to the performance of our consolidated operations and 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. In 2019, U.S. sales market activity improved from 2018 levels, as significant capital continued to be targeted at commercial real estate and relatively low-cost financing remained plentiful. The market for commercial real estate leasing was solid in 2019, though leasing market volumes weakened somewhat in the latter stages of the year.
In Europe, leasing activity was relatively stable in 2019; sales market volumes were soft for much of the year, but rebounded strongly in the fourth quarter. The United Kingdom’s economy and property market were generally solid from the June 2016 referendum to leave the European Union through 2018. However, in 2019, continued uncertainty throughout the year about the date and the terms on which the United Kingdom would leave the European Union led to lower lease and sales volumes. The December 2019 United Kingdom general election and exit from the European Union on January 31, 2020 brought some clarity and a return of investor confidence, but uncertainty remains over the United Kingdom’s long-term economic and trade relationship with the European Union.
In Asia Pacific, leasing activity declined significantly in 2019 amid rising geopolitical uncertainty and slowing regional economies. However, investment activity was more resilient, declining only modestly from 2018 levels. Asia Pacific investors continue to be a significant source of real estate investment capital in the region and globally.
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 public real estate equity funds and programs have been pressured by a shift in investor preferences from active to passive portfolio strategies.
The performance of our global real estate services and investment businesses depends on sustained economic growth and solid job creation; stable global credit markets; and 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. On October 1, 2019, we acquired Telford Homes Plc (Telford) to expand our real estate development business outside the United States (Telford Acquisition). A leading developer of multifamily residential properties in the London area, Telford is reported in our Real Estate Investments segment. Telford was acquired for £267.1 million, or $328.5 million along with the assumption of $110.7 million (£90.0 million) of debt and the acquisition of cash from Telford of $7.9 million (£6.4 million). The Telford Acquisition was funded with borrowings under our revolving credit facility.
On June 12, 2018, we acquired FacilitySource through a stock purchase and merger agreement with its stockholders, including FacilitySource Holdings, LLC, WP X Finance, LP and Warburg Pincus X Partners, LP (FacilitySource Acquisition). FacilitySource, which is reported in our Global Workplace Solutions segment, was acquired to help us build a tech-enabled supply chain capability for the occupier outsourcing industry, which would drive meaningfully differentiated outcomes for leading occupiers of real estate. The net purchase price was approximately $266.5 million in cash, with $263.0 million paid in 2018 and $3.5 million paid in 2019. We financed the transaction with a combination of cash on hand and borrowings under our revolving credit facility.
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. In early 2020, we acquired leading local facilities management firms in Spain and Italy and a U.S. firm that helps companies reduce telecommunications costs.
During 2019, we completed eight in-fill acquisitions: a leading advanced analytics software company based in the United Kingdom, a commercial and residential real estate appraisal firm headquartered in Florida, our former affiliate in Omaha, a project management firm in Australia, a valuation and consulting business in Switzerland, a leading project management firm in Israel, a full-service real estate firm in San Antonio with a focus on retail, office, medical office and land, and a debt-focused real estate investment management business in the United Kingdom. During 2018, we completed six in-fill acquisitions, the largest of which was the purchase of the remaining 50% equity interest in our longstanding New England joint venture. We also 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, and a provider of real estate and facilities consulting services to healthcare companies across the United States.
We believe strategic acquisitions can significantly decrease the cost, time and resources necessary to attain a meaningful competitive position – or expand our capabilities – within targeted markets or business lines. In general, however, most acquisitions will initially have an adverse impact on our operating income and net income as a result of transaction-related expenditures, including severance, lease termination, transaction and deferred financing costs, as well as costs and charges associated with integrating the acquired business and integrating its financial and accounting systems into our own.
Our acquisition agreements often require us to pay deferred and/or contingent purchase price payments, subject to the acquired company achieving certain performance metrics, and/or the passage of time as well as other conditions. As of December 31, 2019, we have accrued deferred consideration totaling $111.7 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 continue to monitor developments related to the United Kingdom’s withdrawal from the European Union and the uncertainty of the long-term economic and trade relationship between the United Kingdom and European Union. The continued uncertainty has the potential to impact our businesses in the United Kingdom and the rest of Europe, particularly sales and leasing activity in the United Kingdom. In addition, any associated currency volatility could impact our results of operations. We are also monitoring the impact of a coronavirus that emerged in Wuhan, China in December 2019 on business conditions and operations in China and other regions in which we operate.
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 Real Estate Investments 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, 2019, approximately 42% 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, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| United States dollar | $ | 13,852,018 | 58.0 | % | $ | 12,264,188 | 57.5 | % | $ | 10,954,608 | 58.8 | % | ||||||||||||
| British pound sterling | 2,972,704 | 12.5 | % | 2,586,890 | 12.1 | % | 2,242,973 | 12.1 | % | |||||||||||||||
| euro | 2,492,952 | 10.4 | % | 2,329,832 | 10.9 | % | 1,740,764 | 9.3 | % | |||||||||||||||
| Canadian dollar | 774,825 | 3.2 | % | 717,692 | 3.3 | % | 617,923 | 3.3 | % | |||||||||||||||
| Indian rupee | 503,630 | 2.1 | % | 418,390 | 2.0 | % | 370,705 | 2.0 | % | |||||||||||||||
| Australian dollar | 453,847 | 1.9 | % | 482,749 | 2.3 | % | 467,623 | 2.5 | % | |||||||||||||||
| Chinese yuan | 349,762 | 1.5 | % | 303,600 | 1.4 | % | 244,717 | 1.3 | % | |||||||||||||||
| Japanese yen | 325,558 | 1.4 | % | 277,636 | 1.3 | % | 269,835 | 1.4 | % | |||||||||||||||
| Singapore dollar | 300,116 | 1.3 | % | 268,193 | 1.3 | % | 256,319 | 1.4 | % | |||||||||||||||
| Brazilian real | 197,981 | 0.8 | % | 174,728 | 0.8 | % | 198,270 | 1.1 | % | |||||||||||||||
| Swiss franc | 194,354 | 0.8 | % | 182,641 | 0.9 | % | 153,078 | 0.8 | % | |||||||||||||||
| Hong Kong dollar | 167,463 | 0.7 | % | 169,449 | 0.8 | % | 148,174 | 0.8 | % | |||||||||||||||
| Mexican peso | 135,279 | 0.6 | % | 135,187 | 0.6 | % | 115,812 | 0.6 | % | |||||||||||||||
| Israeli shekel | 125,402 | 0.5 | % | 57,779 | 0.3 | % | 22,628 | 0.1 | % | |||||||||||||||
| Polish zloty | 117,697 | 0.5 | % | 90,343 | 0.4 | % | 71,849 | 0.4 | % | |||||||||||||||
| Thai baht | 82,252 | 0.3 | % | 79,373 | 0.4 | % | 65,553 | 0.4 | % | |||||||||||||||
| Danish krone | 80,026 | 0.3 | % | 81,804 | 0.4 | % | 82,061 | 0.4 | % | |||||||||||||||
| New Zealand dollar | 71,192 | 0.3 | % | 63,251 | 0.3 | % | 51,353 | 0.3 | % | |||||||||||||||
| Swedish krona | 70,101 | 0.3 | % | 70,471 | 0.3 | % | 71,849 | 0.4 | % | |||||||||||||||
| Korean won | 62,572 | 0.3 | % | 59,912 | 0.3 | % | 48,475 | 0.3 | % | |||||||||||||||
| Czech koruna | 55,984 | 0.2 | % | 54,986 | 0.3 | % | 42,008 | 0.2 | % | |||||||||||||||
| Other currencies | 508,376 | 2.1 | % | 470,994 | 2.1 | % | 392,210 | 2.1 | % | |||||||||||||||
| Total revenue | $ | 23,894,091 | 100.0 | % | $ | 21,340,088 | 100.0 | % | $ | 18,628,787 | 100.0 | % |
Although we operate globally, we report our results in U.S. dollars. As a result, the strengthening or weakening of the U.S. dollar may positively or negatively impact our reported results. For example, we estimate that had the British pound sterling-to-U.S. dollar exchange rates been 10% higher during the year ended December 31, 2019, the net impact would have been an increase in pre-tax income of $3.6 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the year ended December 31, 2019, 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.
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 affect 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, 2019, 2018 and 2017 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Fee revenue: | ||||||||||||||||||||||||
| Global workplace solutions | $ | 3,126,931 | 13.1 | % | $ | 2,739,107 | 12.8 | % | $ | 2,317,693 | 12.4 | % | ||||||||||||
| Property and advisory project management | 1,259,222 | 5.3 | % | 1,181,152 | 5.5 | % | 1,003,113 | 5.4 | % | |||||||||||||||
| Valuation | 630,399 | 2.6 | % | 598,806 | 2.8 | % | 556,008 | 3.0 | % | |||||||||||||||
| Loan servicing | 206,736 | 0.9 | % | 183,366 | 0.9 | % | 157,449 | 0.8 | % | |||||||||||||||
| Advisory leasing | 3,269,993 | 13.7 | % | 3,080,117 | 14.4 | % | 2,592,203 | 13.9 | % | |||||||||||||||
| Capital markets: | ||||||||||||||||||||||||
| Advisory sales | 2,130,979 | 8.9 | % | 1,980,932 | 9.3 | % | 1,869,872 | 10.0 | % | |||||||||||||||
| Commercial mortgage origination | 575,963 | 2.4 | % | 539,348 | 2.5 | % | 455,599 | 2.4 | % | |||||||||||||||
| Investment management | 424,882 | 1.8 | % | 434,405 | 2.0 | % | 377,644 | 2.0 | % | |||||||||||||||
| Development services | 235,740 | 0.9 | % | 100,319 | 0.6 | % | 79,455 | 0.6 | % | |||||||||||||||
| Total fee revenue | 11,860,845 | 49.6 | % | 10,837,552 | 50.8 | % | 9,409,036 | 50.5 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 12,033,246 | 50.4 | % | 10,502,536 | 49.2 | % | 9,219,751 | 49.5 | % | |||||||||||||||
| Total revenue | 23,894,091 | 100.0 | % | 21,340,088 | 100.0 | % | 18,628,787 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of revenue | 18,689,013 | 78.2 | % | 16,449,212 | 77.1 | % | 14,305,099 | 76.8 | % | |||||||||||||||
| Operating, administrative and other | 3,436,009 | 14.4 | % | 3,365,773 | 15.8 | % | 2,858,720 | 15.3 | % | |||||||||||||||
| Depreciation and amortization | 439,224 | 1.8 | % | 451,988 | 2.1 | % | 406,114 | 2.2 | % | |||||||||||||||
| Intangible asset impairment | 89,787 | 0.4 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Total costs and expenses | 22,654,033 | 94.8 | % | 20,266,973 | 95.0 | % | 17,569,933 | 94.3 | % | |||||||||||||||
| Gain on disposition of real estate | 19,817 | 0.1 | % | 14,874 | 0.1 | % | 19,828 | 0.1 | % | |||||||||||||||
| Operating income | 1,259,875 | 5.3 | % | 1,087,989 | 5.1 | % | 1,078,682 | 5.8 | % | |||||||||||||||
| Equity income from unconsolidated subsidiaries | 160,925 | 0.7 | % | 324,664 | 1.5 | % | 210,207 | 1.0 | % | |||||||||||||||
| Other income | 28,907 | 0.1 | % | 93,020 | 0.4 | % | 9,405 | 0.1 | % | |||||||||||||||
| Interest expense, net of interest income | 85,754 | 0.4 | % | 98,685 | 0.4 | % | 126,961 | 0.6 | % | |||||||||||||||
| Write-off of financing costs on extinguished debt | 2,608 | 0.0 | % | 27,982 | 0.1 | % | — | 0.0 | % | |||||||||||||||
| Income before provision for income taxes | 1,361,345 | 5.7 | % | 1,379,006 | 6.5 | % | 1,171,333 | 6.3 | % | |||||||||||||||
| Provision for income taxes | 69,895 | 0.3 | % | 313,058 | 1.5 | % | 467,757 | 2.5 | % | |||||||||||||||
| Net income | 1,291,450 | 5.4 | % | 1,065,948 | 5.0 | % | 703,576 | 3.8 | % | |||||||||||||||
| Less: Net income attributable to non-controlling interests | 9,093 | 0.0 | % | 2,729 | 0.0 | % | 6,467 | 0.1 | % | |||||||||||||||
| Net income attributable to CBRE Group, Inc. | $ | 1,282,357 | 5.4 | % | $ | 1,063,219 | 5.0 | % | $ | 697,109 | 3.7 | % | ||||||||||||
| Adjusted EBITDA | $ | 2,063,783 | 8.6 | % | $ | 1,905,168 | 8.9 | % | $ | 1,716,774 | 9.2 | % |
Fee revenue 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 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 and intangible asset impairments. Amounts shown for adjusted EBITDA further remove (from EBITDA) the impact of certain cash and non-cash items related to acquisitions, certain carried interest incentive compensation expense (reversal) to align with the timing of associated revenue, costs associated with our reorganization, including cost-savings initiatives, 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.
Adjusted EBITDA is not intended to be a measure of free cash flow for our discretionary use because it does not consider certain cash requirements such as tax and debt service payments. This measure may also differ from the amounts calculated under similarly titled definitions in our debt instruments, which 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.
Adjusted EBITDA is calculated as follows (dollars in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||
| Net income attributable to CBRE Group, Inc. | $ | 1,282,357 | $ | 1,063,219 | $ | 697,109 | ||||||
| Add: | ||||||||||||
| Depreciation and amortization | 439,224 | 451,988 | 406,114 | |||||||||
| Intangible asset impairment | 89,787 | — | — | |||||||||
| Interest expense, net of interest income | 85,754 | 98,685 | 126,961 | |||||||||
| Write-off of financing costs on extinguished debt | 2,608 | 27,982 | — | |||||||||
| Provision for income taxes | 69,895 | 313,058 | 467,757 | |||||||||
| EBITDA | 1,969,625 | 1,954,932 | 1,697,941 | |||||||||
| Adjustments: | ||||||||||||
| Costs associated with our reorganization, including cost-savings initiatives (1) | 49,565 | 37,925 | — | |||||||||
| Integration and other costs related to acquisitions | 15,292 | 9,124 | 27,351 | |||||||||
| Carried interest incentive compensation expense (reversal) to align with the timing of associated revenue | 13,101 | (5,261 | ) | (8,518 | ) | |||||||
| Impact of fair value adjustments to real estate assets acquired in the Telford Acquisition (purchase accounting) that were sold in period | 9,301 | — | — | |||||||||
| Costs incurred related to legal entity restructuring | 6,899 | — | — | |||||||||
| Costs incurred in connection with litigation settlement | — | 8,868 | — | |||||||||
| 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 | ) | — | ||||||||
| Adjusted EBITDA | $ | 2,063,783 | $ | 1,905,168 | $ | 1,716,774 |
| (1) | 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. |
|---|
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
We reported consolidated net income of $1.3 billion for the year ended December 31, 2019 on revenue of $23.9 billion as compared to consolidated net income of $1.1 billion on revenue of $21.3 billion for the year ended December 31, 2018.
Our revenue on a consolidated basis for the year ended December 31, 2019 increased by $2.6 billion, or 12.0%, as compared to the year ended December 31, 2018. The revenue increase reflects strong organic growth fueled by higher revenue in our Global Workplace Solutions segment (up 14.5%) and improved revenue in our Advisory Services segment due to property and advisory project management revenue (up 9.6%) as well as
increased advisory leasing (up 6.2%), advisory sales (up 7.6%) and commercial mortgage origination activity (up 12.7%). Higher revenue in our Real Estate Investments segment (up 23.5%) driven by the Telford Acquisition also contributed to the increase. Foreign currency translation had a 2.1% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the Argentine peso, Australian dollar, Brazilian real, British pound sterling, Canadian dollar, euro and Indian rupee.
Our cost of revenue on a consolidated basis increased by $2.2 billion, or 13.6%, during the year ended December 31, 2019 as compared to the same period in 2018. This increase was primarily due to higher costs associated with our Global Workplace Solutions segment. In addition, our sales professionals generally are paid on a commission basis, which substantially correlates with our transaction revenue performance. Accordingly, the increase in advisory leasing and sales transaction revenue led to a corresponding increase in commission expense. Higher costs in our property and advisory project management business as well as higher costs in our Real Estate Investments segment (due to the Telford Acquisition) also contributed to the increase. These items were partially offset by the impact of foreign currency translation, which had a 2.2% positive impact on total cost of revenue during the year ended December 31, 2019. Cost of revenue as a percentage of revenue increased from 77.1% for the year ended December 31, 2018 to 78.2% for the year ended December 31, 2019, primarily driven by our mix of revenue, with revenue from our Global Workplace Solutions segment, which has a lower margin than our other revenue streams, comprising a higher percentage of revenue than in the prior period.
Our operating, administrative and other expenses on a consolidated basis increased by $70.2 million, or 2.1%, during the year ended December 31, 2019 as compared to the same period in 2018. During the year ended December 31, 2019, we incurred $47.0 million of costs in connection with our reorganization (including cost-savings initiatives) as compared to $35.2 million of such costs incurred in the prior year. Additionally, in the current year, we incurred higher payroll-related costs, higher integration and other costs associated with acquisitions (primarily due to the Telford Acquisition), costs related to a legal entity restructuring and increased occupancy costs. These items were partially offset by the impact of foreign currency translation, which had a 2.2% positive impact on total operating expenses during the year ended December 31, 2019, as well as lower bonuses in our Real Estate Investment segment (driven by lower property sales during 2019 as compared to the same period in the prior year, which were reflected in equity income from unconsolidated subsidiaries). During the year ended December 31, 2018, we also incurred $8.9 million of costs as a result of a litigation settlement, which did not recur during the year ended December 31, 2019. Operating expenses as a percentage of revenue decreased from 15.8% for the year ended December 31, 2018 to 14.4% for the year ended December 31, 2019, reflecting the operating leverage inherent in our business.
Our depreciation and amortization expense on a consolidated basis decreased by $12.8 million, or 2.8%, during the year ended December 31, 2019 as compared to the same period in 2018. This decrease was primarily attributable to $27.4 million of lower amortization expense largely associated with intangibles from prior acquisitions. The decrease in amortization expense was partially offset by a rise in depreciation expense of $14.6 million during the year ended December 31, 2019 driven by technology-related capital expenditures.
During the year ended December 31, 2019, we recorded an intangible asset impairment of $89.8 million in our Real Estate Investments segment. This non-cash write-off resulted from a review of the anticipated cash flows and the decrease in assets under management in our public securities business driven in part by continued industry-wide shift in investor preference for passive investment programs.
Our gain on disposition of real estate on a consolidated basis increased by $4.9 million, or 33.2%, during the year ended December 31, 2019 as compared to the same period in 2018. These gains resulted from property sales within our Real Estate Investments segment.
Our equity income from unconsolidated subsidiaries on a consolidated basis decreased by $163.7 million, or 50.4%, during the year ended December 31, 2019 as compared to the same period in 2018, primarily driven by lower equity earnings associated with gains on property sales reported in our Real Estate Investments segment.
Our other income on a consolidated basis was $28.9 million for the year ended December 31, 2019 versus $93.0 million for the same period in the prior year. The income during the year ended December 31, 2019 was primarily driven by net realized and unrealized gains related to co-investments in our real estate securities business within our Real Estate Investments segment. The income in the prior year included a one-time gain of $100.4 million associated with remeasuring our investment in a previously unconsolidated subsidiary in New England in our Advisory Services segment to fair value as of the date we acquired the remaining controlling interest.
Our consolidated interest expense, net of interest income, decreased by $12.9 million, or 13.1%, for the year ended December 31, 2019 as compared to the same period in 2018. 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. Lower interest expense associated with the term loans under our credit agreement (driven by more favorable interest rates stemming from our amendment to our credit agreement in 2019) also contributed to the decrease.
Our write-off of financing costs on extinguished debt on a consolidated basis was $2.6 million for the year ended December 31, 2019 as compared to $28.0 million for the year ended December 31, 2018. The costs for the year ended December 31, 2019 were incurred in connection with the refinancing of our credit agreement. The costs for the year ended December 31, 2018 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 $69.9 million for the year ended December 31, 2019 as compared to $313.1 million for the same period in 2018. Our effective tax rate decreased from 22.7% for the year ended December 31, 2018 to 5.1% for the year ended December 31, 2019. The lower tax rate for year ended December 31, 2019 was primarily driven by a $277.2 million net tax benefit recorded in 2019 attributable to outside basis differences recognized as a result of a legal entity restructuring.
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 revenue in our Global Workplace Solutions segment (up 14.6%) and improved revenue in our Advisory Services segment due to property and advisory project management revenue (up 17.7%), increased advisory leasing (up 18.8%), advisory sales (up 5.9%) and commercial mortgage origination activity (up 18.4%). Higher revenue in our Real Estate Investments segment (up 17.0%) also contributed to the increase. In addition, foreign currency translation had a 0.5% 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 revenue 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 Global Workplace Solutions segment. 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 advisory leasing and sales transaction revenue led to a corresponding increase in commission expense. Higher costs in our property and advisory project management business also contributed to the increase. Lastly, foreign currency translation had a 0.5% negative impact on total cost of revenue during the year ended December 31, 2018. Cost of revenue 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 revenue from our Global Workplace Solutions segment, which has a lower margin than our other revenue streams, comprising a higher percentage of revenue in 2018 than in 2017.
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 0.8% 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 Real Estate Investments 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 of $20.0 million 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 Real Estate Investments 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, net of interest income, decreased by $28.3 million, or 22.3%, 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 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, would have been 21.7% for the year ended December 31, 2018 compared to 27.7% 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.
Segment Operations
On August 17, 2018, we announced a new organizational structure that became effective on January 1, 2019. Under the new structure, we 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 additional information on our segments, see Note 19 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
Advisory Services
The following table summarizes our results of operations for our Advisory Services operating segment for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Fee revenue: | ||||||||||||||||||||||||
| Property and advisory project management | $ | 1,259,222 | 13.9 | % | $ | 1,181,152 | 14.0 | % | $ | 1,003,113 | 13.6 | % | ||||||||||||
| Valuation | 630,399 | 6.9 | % | 598,806 | 7.1 | % | 556,008 | 7.5 | % | |||||||||||||||
| Loan servicing | 206,736 | 2.3 | % | 183,366 | 2.1 | % | 157,449 | 2.1 | % | |||||||||||||||
| Advisory leasing | 3,269,993 | 36.0 | % | 3,080,117 | 36.5 | % | 2,592,203 | 35.1 | % | |||||||||||||||
| Capital markets: | ||||||||||||||||||||||||
| Advisory sales | 2,130,979 | 23.5 | % | 1,980,932 | 23.5 | % | 1,869,872 | 25.4 | % | |||||||||||||||
| Commercial mortgage origination | 575,963 | 6.4 | % | 539,348 | 6.4 | % | 455,599 | 6.2 | % | |||||||||||||||
| Total fee revenue | 8,073,292 | 89.0 | % | 7,563,721 | 89.6 | % | 6,634,244 | 89.9 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 996,176 | 11.0 | % | 876,281 | 10.4 | % | 745,481 | 10.1 | % | |||||||||||||||
| Total revenue | 9,069,468 | 100.0 | % | 8,440,002 | 100.0 | % | 7,379,725 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of revenue | 5,465,391 | 60.3 | % | 5,043,807 | 59.8 | % | 4,358,248 | 59.1 | % | |||||||||||||||
| Operating, administrative and other | 2,169,980 | 23.9 | % | 2,160,957 | 25.6 | % | 1,894,133 | 25.7 | % | |||||||||||||||
| Depreciation and amortization | 304,766 | 3.4 | % | 280,921 | 3.3 | % | 243,791 | 3.3 | % | |||||||||||||||
| Operating income | 1,129,331 | 12.4 | % | 954,317 | 11.3 | % | 883,553 | 11.9 | % | |||||||||||||||
| Equity income from unconsolidated subsidiaries | 6,894 | 0.1 | % | 16,017 | 0.3 | % | 20,740 | 0.3 | % | |||||||||||||||
| Other income (loss) | 7,532 | 0.1 | % | 103,808 | 1.2 | % | (31 | ) | 0.0 | % | ||||||||||||||
| Less: Net income attributable to non-controlling interests | 1,021 | 0.0 | % | 55 | 0.0 | % | 461 | 0.0 | % | |||||||||||||||
| Add-back: Depreciation and amortization | 304,766 | 3.4 | % | 280,921 | 3.3 | % | 243,791 | 3.3 | % | |||||||||||||||
| EBITDA | 1,447,502 | 16.0 | % | 1,355,008 | 16.1 | % | 1,147,592 | 15.5 | % | |||||||||||||||
| Adjustments: | ||||||||||||||||||||||||
| Costs associated with our reorganization, including cost-savings initiatives (1) | 11,088 | 0.1 | % | 37,219 | 0.4 | % | — | 0.0 | % | |||||||||||||||
| Costs incurred in connection with litigation settlement | — | 0.0 | % | 8,868 | 0.1 | % | — | 0.0 | % | |||||||||||||||
| Costs incurred related to legal entity restructuring | 6,899 | 0.1 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Integration and other costs related to acquisitions | 303 | 0.0 | % | 2,576 | 0.0 | % | 27,351 | 0.4 | % | |||||||||||||||
| 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 | — | 0.0 | % | (100,420 | ) | (1.2 | %) | — | 0.0 | % | ||||||||||||||
| Adjusted EBITDA and Adjusted EBITDA on revenue margin | $ | 1,465,792 | 16.2 | % | $ | 1,303,251 | 15.4 | % | $ | 1,174,943 | 15.9 | % | ||||||||||||
| Adjusted EBITDA on fee revenue margin | 18.2 | % | 17.2 | % | 17.7 | % |
| (1) | Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective on January 1, 2019. |
|---|
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenue increased by $629.5 million, or 7.5%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The revenue increase reflects strong organic growth fueled by higher leasing, sales and commercial mortgage origination activity as well as improved property and project management revenue. Foreign currency translation had a 1.7% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, euro and Indian rupee.
Cost of revenue increased by $421.6 million, or 8.4%, for the year ended December 31, 2019 as compared to the same period in 2018, primarily due to higher commission expense resulting from improved leasing and sales transaction revenue. Higher costs in our property and project management business also contributed to the increase. Foreign currency translation had a 1.7% positive impact on total cost of revenue during the year ended December 31, 2019. Cost of revenue as a percentage of revenue was relatively consistent at 60.3% for the year ended December 31, 2019 versus 59.8% for the same period in 2018.
Operating, administrative and other expenses increased by $9.0 million, or 0.4%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The increase was largely driven by higher payroll-related costs (partially driven by increased headcount) and higher occupancy costs. Additionally, in the current year, we incurred $6.9 million of costs related to a legal entity restructuring. These items were partially offset by the impact of foreign currency translation, which had a 2.1% positive impact on total operating expenses during the year ended December 31, 2019. During the year ended December 31, 2019, we also incurred $10.5 million of costs in connection with our reorganization (including cost-savings initiatives) as compared to $34.5 million of such costs incurred in the prior year. Lastly, during the year ended December 31, 2018, we incurred $8.9 million of costs as a result of a litigation settlement, which did not recur in 2019.
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, 2019, MSRs contributed to operating income $182.4 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $123.0 million of amortization of related intangible assets. 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.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Revenue increased by $1.1 billion, or 14.4%, 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 leasing, sales and commercial mortgage origination activity as well as improved property and project revenue. Foreign currency translation had a 0.3% positive impact on total revenue during the year ended December 31, 2018, primarily driven by the strength in the British pound sterling and euro, partially offset by weakness in the Australian dollar and Brazilian real.
Cost of revenue increased by $685.6 million, or 15.7%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily due to higher commission expense resulting from improved leasing and sales transaction revenue. Higher costs in our property and project management business also contributed to the increase. Foreign currency translation had a 0.4% negative impact on total cost of revenue during the year ended December 31, 2018. Cost of revenue as a percentage of revenue was relatively consistent at 59.8% for the year ended December 31, 2018 versus 59.1% for the same period in 2017.
Operating, administrative and other expenses increased by $266.8 million, or 14.1%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The increase was largely driven by higher payroll-related costs (partially driven by increased headcount) and higher occupancy costs. During the year ended December 31, 2018, we also incurred $34.5 million of severance costs in connection with our reorganization, including cost-savings initiatives, as well as $8.9 million of costs as a result of a litigation settlement. Foreign currency translation had a 0.7% negative impact on total operating expenses during the year ended December 31, 2018.
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.
Global Workplace Solutions
The following table summarizes our results of operations for our Global Workplace Solutions operating segment for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Fee revenue: | ||||||||||||||||||||||||
| Global workplace solutions | $ | 3,126,931 | 22.1 | % | $ | 2,739,107 | 22.2 | % | $ | 2,317,693 | 21.5 | % | ||||||||||||
| Total fee revenue | 3,126,931 | 22.1 | % | 2,739,107 | 22.2 | % | 2,317,693 | 21.5 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 11,037,070 | 77.9 | % | 9,626,255 | 77.8 | % | 8,474,270 | 78.5 | % | |||||||||||||||
| Total revenue | 14,164,001 | 100.0 | % | 12,365,362 | 100.0 | % | 10,791,963 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of revenue | 13,138,627 | 92.8 | % | 11,405,405 | 92.2 | % | 9,946,851 | 92.2 | % | |||||||||||||||
| Operating, administrative and other | 637,282 | 4.5 | % | 620,924 | 5.0 | % | 511,133 | 4.7 | % | |||||||||||||||
| Depreciation and amortization | 120,975 | 0.9 | % | 147,222 | 1.2 | % | 136,127 | 1.3 | % | |||||||||||||||
| Operating income | 267,117 | 1.8 | % | 191,811 | 1.6 | % | 197,852 | 1.8 | % | |||||||||||||||
| Equity (loss) income from unconsolidated subsidiaries | (1,423 | ) | 0.0 | % | 115 | 0.0 | % | — | 0.0 | % | ||||||||||||||
| Other (loss) income | (1,170 | ) | 0.0 | % | 52 | 0.0 | % | 1 | 0.0 | % | ||||||||||||||
| Less: Net (loss) income attributable to non-controlling interests | (271 | ) | 0.0 | % | 188 | 0.1 | % | (397 | ) | 0.0 | % | |||||||||||||
| Add-back: Depreciation and amortization | 120,975 | 0.9 | % | 147,222 | 1.2 | % | 136,127 | 1.3 | % | |||||||||||||||
| EBITDA | 385,770 | 2.7 | % | 339,012 | 2.7 | % | 334,377 | 3.1 | % | |||||||||||||||
| Costs associated with our reorganization, including cost-savings initiatives (1) | 38,256 | 0.3 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Integration and other costs related to acquisitions | — | 0.0 | % | 6,548 | 0.1 | % | — | 0.0 | % | |||||||||||||||
| Adjusted EBITDA and Adjusted EBITDA on revenue margin | $ | 424,026 | 3.0 | % | $ | 345,560 | 2.8 | % | $ | 334,377 | 3.1 | % | ||||||||||||
| Adjusted EBITDA on fee revenue margin | 13.6 | % | 12.6 | % | 14.4 | % |
| (1) | Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective on January 1, 2019. |
|---|
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Revenue increased by $1.8 billion, or 14.5%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. The revenue increase was fueled by growth in the market for real estate outsourcing services. Foreign currency translation had a 2.4% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the Argentine peso, Australian dollar, Brazilian real, British pound sterling, Canadian dollar, Chinese yuan, euro, and Indian rupee.
Cost of revenue increased by $1.7 billion, or 15.2%, for the year ended December 31, 2019 as compared to the same period in 2018, driven by the higher revenue. Foreign currency translation had a 2.4% positive impact on total cost of revenue during the year ended December 31, 2019. Cost of revenue as a percentage of revenue was relatively consistent at 92.8% for the year ended December 31, 2019 versus 92.2% for the same period in 2018.
Operating, administrative and other expenses increased by $16.4 million, or 2.6%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018. During the year ended December 31, 2019, we incurred $36.3 million of severance costs in connection with our reorganization, including cost-savings initiatives, as well as higher overall costs attributable to the FacilitySource acquisition (acquired in June 2018). These costs were partially offset by the impact of foreign currency translation, which had a 2.7% positive impact on total operating expenses during the year ended December 31, 2019.
Year Ended December 31, 201****8 Compared to Year Ended December 31, 201****7
Revenue increased by $1.6 billion, or 14.6%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. The revenue increase was fueled by growth in the market for real estate outsourcing services. Foreign currency translation had a 0.5% 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, Brazilian real and Indian rupee.
Cost of revenue increased by $1.5 billion, or 14.7%, for the year ended December 31, 2018 as compared to the same period in 2017, driven by the higher revenue. Foreign currency translation had a 0.5% negative impact on total cost of revenue during the year ended December 31, 2018. Cost of revenue as a percentage of revenue was constant at 92.2% for both the year ended December 31, 2018 and 2017.
Operating, administrative and other expenses increased by $109.8 million, or 21.5%, for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This increase was primarily driven by higher payroll-related costs. Additionally, during the year ended December 31, 2018, we incurred $6.5 million of integration costs associated primarily with the FacilitySource acquisition (acquired in June 2018). These costs were also impacted by foreign currency translation, which had a 0.7% negative impact on total operating expenses during the year ended December 31, 2018.
Real Estate Investments
The following table summarizes our results of operations for our Real Estate Investments operating segment for the years ended December 31, 2019, 2018 and 2017 (dollars in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2019 | 2018 | 2017 | ||||||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Investment management | $ | 424,882 | 64.3 | % | $ | 434,405 | 81.2 | % | $ | 377,644 | 82.6 | % | ||||||||||||
| Development services | 235,740 | 35.7 | % | 100,319 | 18.8 | % | 79,455 | 17.4 | % | |||||||||||||||
| Total revenue | 660,622 | 100.0 | % | 534,724 | 100.0 | % | 457,099 | 100.0 | % | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Cost of revenue | 84,995 | 12.9 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Operating, administrative and other | 628,747 | 95.2 | % | 583,892 | 109.2 | % | 453,454 | 99.2 | % | |||||||||||||||
| Depreciation and amortization | 13,483 | 2.0 | % | 23,845 | 4.5 | % | 26,196 | 5.7 | % | |||||||||||||||
| Intangible asset impairment | 89,787 | 13.6 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Gain on disposition of real estate | 19,817 | 3.0 | % | 14,874 | 2.8 | % | 19,828 | 4.3 | % | |||||||||||||||
| Operating loss | (136,573 | ) | (20.7 | %) | (58,139 | ) | (10.9 | %) | (2,723 | ) | (0.6 | %) | ||||||||||||
| Equity income from unconsolidated subsidiaries | 155,454 | 23.5 | % | 308,532 | 57.7 | % | 189,467 | 41.4 | % | |||||||||||||||
| Other income (loss) | 22,545 | 3.4 | % | (10,840 | ) | (2.0 | %) | 9,435 | 2.2 | % | ||||||||||||||
| Less: Net income attributable to non-controlling interests | 8,343 | 1.2 | % | 2,486 | 0.5 | % | 6,403 | 1.4 | % | |||||||||||||||
| Add-back: Depreciation and amortization | 13,483 | 2.0 | % | 23,845 | 4.5 | % | 26,196 | 5.7 | % | |||||||||||||||
| Add-back: Intangible asset impairment | 89,787 | 13.6 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| EBITDA | 136,353 | 20.6 | % | 260,912 | 48.8 | % | 215,972 | 47.3 | % | |||||||||||||||
| Integration and other costs related to acquisitions | 14,989 | 2.3 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Carried interest incentive compensation expense (reversal) to align with the timing of associated revenue | 13,101 | 2.0 | % | (5,261 | ) | (1.0 | %) | (8,518 | ) | (1.9 | %) | |||||||||||||
| Impact of fair value adjustments to real estate assets acquired in the Telford Acquisition (purchase accounting) that were sold in period | 9,301 | 1.4 | % | — | 0.0 | % | — | 0.0 | % | |||||||||||||||
| Costs associated with our reorganization, including cost-savings initiatives (1) | 221 | 0.0 | % | 706 | 0.1 | % | — | 0.0 | % | |||||||||||||||
| Adjusted EBITDA | $ | 173,965 | 26.3 | % | $ | 256,357 | 47.9 | % | $ | 207,454 | 45.4 | % |
| (1) | Primarily represents severance costs related to headcount reductions in connection with our reorganization announced in the third quarter of 2018 that became effective on January 1, 2019. |
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Year Ended December 31, 201****9 Compared to Year Ended December 31, 201****8
Revenue increased by $125.9 million, or 23.5%, for the year ended December 31, 2019 as compared to the year ended December 31, 2018, primarily driven by the Telford Acquisition in our development services line of business. Foreign currency translation had a 2.6% negative impact on total revenue during the year ended December 31, 2019, primarily driven by weakness in the British pound sterling and euro.
Cost of revenue was $85.0 million for the year ended December 31, 2019 and was attributable to Telford, which we acquired on October 1, 2019.
Operating, administrative and other expenses increased by $44.9 million, or 7.7%, for the year ended December 31, 2019 as compared to the same period in 2018, primarily driven by costs incurred in connection with the Telford Acquisition as well as higher carried interest expense. Higher costs (primarily payroll-related and occupancy) attributable to investments in our new flexible space offering also contributed to the increase. These items were partially offset by lower bonuses in our development services line of business (driven by lower property sales in 2019 as compared to 2018, which were reflected in equity income from unconsolidated subsidiaries). Foreign currency translation also had a 1.8% positive impact on total operating expenses during the year ended December 31, 2019.
A roll forward of our AUM by product type for the year ended December 31, 2019 is as follows (dollars in billions):
| Funds | Separate Accounts | Securities | Total | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Balance at January 1, 2019 | $ | 35.0 | $ | 60.2 | $ | 10.3 | $ | 105.5 | ||||||||
| Inflows | 5.0 | 10.1 | 0.7 | 15.8 | ||||||||||||
| Outflows | (2.0 | ) | (6.6 | ) | (5.3 | ) | (13.9 | ) | ||||||||
| Market appreciation | 2.1 | 1.2 | 2.2 | 5.5 | ||||||||||||
| Balance at December 31, 2019 | $ | 40.1 | $ | 64.9 | $ | 7.9 | $ | 112.9 |
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 |
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| • | 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. |
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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, 2018 Compared to Year Ended December 31, 2017
Revenue increased by $77.6 million, or 17.0%, 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 carried interest revenue in our global investment management line of business and higher incentive and development fees in our development services line of business. Foreign currency translation also had a 2.0% positive impact on total revenue during the year ended December 31, 2018, primarily driven by the strength of the British pound sterling and euro.
Operating, administrative and other expenses increased by $130.4 million, or 28.8%, for the year ended December 31, 2018 as compared to the same period in 2017, primarily driven by higher payroll-related costs (including bonuses) and higher carried interest expense. Foreign currency translation had a 1.5% 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 |
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.
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 2020 include up to approximately $385 million of anticipated capital expenditures, net of tenant concessions. As of December 31, 2019, we had aggregate commitments of $72.1 million to fund future co-investments in our Real Estate Investments business, $46.3 million of which is expected to be funded in 2020. Additionally, as of December 31, 2019, we are committed to fund $50.1 million of additional capital to unconsolidated subsidiaries within our Real Estate Investments business, which we may be required to fund at any time. As of December 31, 2019, we had $2.8 billion of borrowings available under our 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.
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 three elements. The first is the repayment of the outstanding and anticipated principal amounts of our long-term indebtedness. If our cash flow is insufficient to repay our long-term debt when it comes due, 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, 2019 and 2018, we had accrued $111.7 million ($41.6 million of which was a current liability) and $136.3 million ($41.7 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.
Lastly, in October 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 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, under the October 2016 program, 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. In February 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 previous program terminated upon the effectiveness of the new program. In both August 2019 and November 2019, our board of directors authorized an additional $100.0 million under our new program, bringing the total authorized amount under the new program to a total of $500.0 million as of March 2, 2020.
During the year ended December 31, 2019, under the March 2019 program, we spent $100.0 million to repurchase 1,936,458 shares of our Class A common stock with an average price paid per share of $51.64. As of March 2, 2020, we had $400.0 million of capacity remaining under our current stock repurchase program. Our stock repurchases have been funded with cash on hand and we intend to continue funding future stock repurchases with existing cash. 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 $1.2 billion for the year ended December 31, 2019, an increase of $92.1 million as compared to the year ended December 31, 2018. The increase in net cash provided by operating activities was primarily due to improved operating performance, partially offset by lower distribution of earnings from unconsolidated subsidiaries during the year ended December 31, 2019.
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.
Investing Activities
Net cash used in investing activities totaled $721.0 million for the year ended December 31, 2019, an increase of $160.3 million as compared to the year ended December 31, 2018. This increase was largely driven by an increase of $65.7 million in capital expenditures and higher amounts paid for acquisitions (driven by the Telford Acquisition) during the year ended December 31, 2019. Additionally, higher contributions to unconsolidated subsidiaries and lower distributions received from unconsolidated subsidiaries during the year ended December 31, 2019 contributed to the higher net use of cash in 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.
Financing Activities
Net cash used in financing activities totaled $271.9 million for the year ended December 31, 2019, a decrease of $234.7 million as compared to the year ended December 31, 2018. This decrease was primarily due to the impact of the full redemption of the $800.0 million aggregate outstanding principal amount of our 5.00% senior notes (including $20.0 million premium) during the year ended December 31, 2018. This was partially offset by the impact of higher net borrowings of $552.7 million from our senior term loans during the year ended December 31, 2018 and the repayment of debt assumed in the Telford Acquisition of $110.7 million during the year ended December 31, 2019.
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.
Summary of Contractual Obligations and Other Commitments
The following is a summary of our various contractual obligations and other commitments as of December 31, 2019 (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) | $ | 1,775,392 | $ | 1,814 | $ | 47 | $ | 748,531 | $ | 1,025,000 | ||||||||||
| Short-term borrowings (2) | 981,709 | 981,709 | — | — | — | |||||||||||||||
| Operating leases (3) | 1,432,656 | 175,958 | 378,357 | 308,981 | 569,360 | |||||||||||||||
| Financing leases (3) | 99,041 | 35,532 | 46,578 | 16,931 | — | |||||||||||||||
| Defined benefit pension liability (4) | 107,996 | 107,996 | — | — | — | |||||||||||||||
| Total gross notes payable on real estate (5) | 13,271 | 6,773 | 6,498 | — | — | |||||||||||||||
| Deferred purchase consideration (6) | 111,664 | 41,569 | 25,211 | 40,100 | 4,784 | |||||||||||||||
| Total Contractual Obligations | $ | 4,521,729 | $ | 1,351,351 | $ | 456,691 | $ | 1,114,543 | $ | 1,599,144 | ||||||||||
| 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) | $ | 125,837 | $ | 125,837 | $ | — | $ | — | $ | — | ||||||||||
| Tax liabilities (8) | 108,301 | 14,654 | 38,198 | 55,449 | — | |||||||||||||||
| Co-investments (9) (10) | 122,270 | 96,487 | 14,939 | 4,567 | 6,277 | |||||||||||||||
| Letters of credit (9) | 91,766 | 91,766 | — | — | — | |||||||||||||||
| Guarantees (9) (11) | 80,143 | 80,143 | — | — | — | |||||||||||||||
| Total Other Commitments | $ | 528,317 | $ | 408,887 | $ | 53,137 | $ | 60,016 | $ | 6,277 |
| (1) | Reflects gross outstanding long-term debt balances as of December 31, 2019, 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): 2020 – $63,000; 2021 to 2022 – $126,000; 2023 to 2024 – $115,874 and thereafter – $38,582. |
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| (2) | The majority of this balance 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 14 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) | Reflects gross outstanding notes payable on real estate as of December 31, 2019 (only $0.6 million of which is recourse to us, beyond being recourse to the single-purpose entity that held the real estate asset and was the primary obligor on the note payable), assumed to be paid at maturity, excluding unamortized deferred financing costs. Amounts do not include scheduled interest payments. The notes have either fixed or variable interest rates, ranging from 4.29% to 4.75% at December 31, 2019. |
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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, 2019 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, 2019 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, 2019, we have a remaining federal tax liability of $107.8 million (of which $14.2 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. We are paying the federal tax liability for the Transition Tax in annual interest-free installments over a period of eight years through 2025 as allowed by the Tax Act. |
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In addition, as of December 31, 2019, our current and non-current tax liabilities (including interest and penalties) for uncertain tax positions, totaled $141.1 million. Of this amount, we can reasonably estimate that $0.5 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 $140.6 million. See Note 15 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
| (9) | See Note 13 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report. |
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| (10) | Includes $72.1 million to fund future co-investments in our Real Estate Investments segment, $46.3 million of which is expected to be funded in 2020, and $50.1 million committed to invest in unconsolidated real estate subsidiaries as a principal, which is callable at any time. |
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| (11) | 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 October 31, 2017, CBRE Services, Inc. (CBRE Services), our wholly-owned subsidiary, entered into a Credit Agreement (the 2017 Credit Agreement), which refinanced and replaced our prior credit agreement (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 euro term loan facility under the 2017 Credit Agreement in an aggregate principal amount of €400.0 million. The proceeds from the euro term loan facility were used to repay a portion of the U.S. dollar denominated term loans outstanding under the 2017 Credit Agreement. On March 4, 2019, CBRE Services entered into an additional incremental assumption agreement with respect to the 2017 Credit Agreement (the 2017 Agreement as amended by such incremental assumption agreement, the 2019 Credit Agreement), which (i) extended the maturity of the U.S. dollar tranche A term loans under the 2017 Credit Agreement, (ii) extended the termination date of the revolving credit commitments available under the 2017 Credit Agreement and (iii) made certain changes to the interest rates and fees applicable to such tranche A term loans and revolving credit commitments. The proceeds from the new tranche A term loan facility under the 2019 Credit Agreement were used to repay the $300.0 million of tranche A term loans outstanding under the 2017 Credit Agreement.
The 2019 Credit Agreement is a senior unsecured credit facility that is jointly and severally guaranteed by us and certain of our subsidiaries. As of December 31, 2019, the 2019 Credit Agreement provided for the following: (1) a $2.8 billion incremental revolving credit facility, which includes the capacity to obtain letters of credit and swingline loans and terminates on March 4, 2024; (2) a $300.0 million incremental tranche A term loan facility maturing on March 4, 2024, requiring quarterly principal payments unless our leverage ratio (as defined in the 2019 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 and (3) a €400.0 million 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 2019 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 2019 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 $270.0 million of 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, N.A., TD Bank, N.A., Capital One, N.A. and MUFG Union Bank, 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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