filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
99K characters. Original on sec.gov · Markdown
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report. Discussion regarding our financial condition and results of operations for the year ended December 31, 2018 and comparisons between the years ended December 31, 2019 and 2018 is included in Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the company’s Annual Report filed with the SEC on March 2, 2020.
Overview
We are the world’s largest commercial real estate services and investment firm, based on 2020 revenue, with leading global market positions in our leasing, property sales, occupier outsourcing and valuation businesses. As of December 31, 2020, the company has more than 100,000 employees (excluding affiliates) serving clients in more than 100 countries.
Our business is focused on providing services to real estate investors and occupiers. For investors, we provide capital markets (property sales, mortgage origination, sales and servicing), property leasing, investment management, property management, valuation and development services, among others. For occupiers, we provide facilities management, project management, transaction (both property sales and leasing) and consulting 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). In 2020, CBRE sponsored a SPAC, CBRE Acquisition Holdings, which has the sole purpose of acquiring a privately held company with significant growth potential and to create value by supporting the company in the public markets. The company that it acquires is expected to operate in an industry that will benefit from the experience, expertise and operating skills of CBRE. CBRE Acquisition Holdings trades on the NYSE under the symbols “CBAH,” “CBAH.U,” and “CBAH.W.”
Our revenue mix has shifted toward more stable revenue sources, particularly occupier outsourcing, and our dependence on highly cyclical property sales and lease transaction revenue has declined markedly over the past decade. We believe we are well-positioned to capture a substantial and growing share of market opportunities at a time when investors and occupiers increasingly prefer to purchase integrated, account-based services on a national and global basis. We generate revenue from both management fees (large multi-year portfolio and per-project contracts) and commissions on transactions.
In 2020, 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 2020 we were ranked #128 on the Fortune 500. We have been voted the most recognized commercial real estate brand in the Lipsey Company survey for 20 years in a row (including 2021). We have also been rated a World’s Most Ethical Company by the Ethisphere Institute for eight consecutive years (including 2021), and are included in both the Dow Jones World Sustainability Index and the Bloomberg Gender-Equality Index for two years in a row.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with 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 (ASC) 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.
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 Financial Accounting Standards Board (FASB) ASC Topic 350, “Intangibles – Goodwill and Other” (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, 2020 and 2019 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.
On March 18, 2020, the Families First Coronavirus Response Act (FFCR Act), and on March 27, 2020, the CARES Act were each enacted in response to the Covid-19 pandemic. The FFCR Act and the CARES Act contain numerous tax provisions, such as net operating loss carry-back periods, alternative minimum tax credit refunds, deferral of employer payroll taxes deferring payroll tax payments, establishing a credit for the retention of certain employees, relaxing limitations on the deductibility of interest, and updating the definition of qualified improvement property. This legislation currently has no material impact to income tax expense on the company’s financial statements.
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
In a typical year, 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 have tended 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. The severe and ongoing impact of the Covid-19 pandemic may cause seasonality to deviate from historical patterns.
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 (particularly those caused or exacerbated by Covid-19) 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, with specific sensitivity to growth in office-based employment; 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 effects on our operating margins of difficult market conditions, such as we are currently experiencing with the Covid-19 pandemic, is partially mitigated by the inherent variability of our compensation cost structure. In addition, when negative economic conditions have been particularly severe, like during the current Covid-19 pandemic, 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 revenue has increased 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.
From 2010 to early 2020, commercial real estate markets had generally been characterized by increased demand for space, falling vacancies, higher rents and strong capital flows, leading to solid property sales and leasing activity. This healthy backdrop changed abruptly in the first quarter of 2020 with the emergence of the Covid-19 pandemic and resultant sharp contraction of economic activity across much of the world. Since then, there has been a severe impact on commercial real estate markets, as many property owners and occupiers have put transactions on hold and withdrawn existing mandates, sharply reducing sales and leasing volumes. We expect to see the highly challenging operating environment continue, as Covid-19 caseloads remain elevated across our major markets, business travel and face-to-face business dealings are limited and the overwhelming majority of workers remain out of their offices. The recovery of real estate markets around the world remain uncertain as of the date of this report.
Covid-19 is putting downward pressure on parts of our business and creating larger opportunities in other parts. The severe economic effects of the pandemic continued to weigh most heavily on higher-margin property lease and sales revenue in the Advisory Services segment. However, global industrial leasing revenue, fueled by e-commerce, grew strongly during the fourth quarter, reflecting the resiliency of this asset type. Also, during the fourth quarter, we saw improvement in sales activity in the U.S. and certain North Asia markets, but transaction volumes there and elsewhere in the world remain well below pre-pandemic levels.
The future performance of our global real estate services and investment businesses depends on a recovery of global market conditions, including restored business and consumer confidence, sustained economic growth, solid and consistent job creation, stable, functioning global credit markets and a receding of the Covid-19 pandemic.
Effects of Acquisitions
We have historically made significant use of strategic acquisitions to add and enhance service capabilities around the world. Most recently, we acquired Telford Homes Plc (Telford), a leading developer of multifamily residential properties in the London area, in October 2019. Telford, which is reported in our Real Estate Investments segment, expanded our real estate development business outside the U.S. for the first time.
In June 2018, we acquired FacilitySource Holdings, LLC (FacilitySource) 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. FacilitySource results are reflected in our Global Workplace Solutions segment.
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, which, in some cases, we held a small equity interest. In early 2021, we acquired a construction and project management firm based in Southern California.
During 2020, we completed six in-fill acquisitions: leading local facilities management firms in Spain and Italy, a U.S. firm that helps companies reduce telecommunications costs, a technology-focused project management firm based in Florida, a firm specializing in performing real estate valuations in South Korea, and a facilities management and technical maintenance firm in Australia. During 2019, in addition to the Telford strategic acquisition, we completed eight in-fill acquisitions: a leading advanced analytics software company based in the U.K., a commercial and residential real estate appraisal firm 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 U.K.
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 structures often include deferred and/or contingent purchase consideration in future periods that are subject to the passage of time or achievement of certain performance metrics and other conditions. As of December 31, 2020, we have accrued deferred purchase consideration totaling $82.5 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 conduct a significant portion of our business and employ a substantial number of people outside of the U.S. and, as a result, we are subject to risks associated with doing business globally. Our Real Estate Investments business has a significant amount of euro-denominated assets under management, 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 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.
We are closely monitoring the impact of the Covid-19 pandemic on business conditions across all regions worldwide. Covid-19 has significantly impacted our operations and has the potential to further constrain our business activity. See “The Covid-19 pandemic could have a material adverse effect on our business, results of operations, cash flows and financial condition” in Part I, Item 1A. “Risk Factors” for additional risks related to the Covid-19 pandemic.
Our businesses could also suffer from political or economic disruptions (or the perception that such disruptions may occur) that affect interest rates or liquidity or create financial, market or regulatory uncertainty. For example, we are continuing to monitor the trade and economic effects of the U.K.’s withdrawal from the European Union (Brexit), particularly its impact on sales and office and retail leasing activity in the U.K. Any currency volatility associated with the Covid-19 pandemic, Brexit or other economic dislocations could impact our results of operations.
During the year ended December 31, 2020, approximately 44% of our revenue was transacted in foreign currencies. The following table sets forth our revenue derived from our most significant currencies (U.S. dollars in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| United States dollar | $ | 13,472,013 | 56.5 | % | $ | 13,852,018 | 58.0 | % | |||||||||||||||
| British pound sterling | 3,083,810 | 13.0 | % | 2,972,704 | 12.5 | % | |||||||||||||||||
| euro | 2,612,421 | 11.0 | % | 2,492,952 | 10.4 | % | |||||||||||||||||
| Canadian dollar | 788,497 | 3.3 | % | 774,825 | 3.2 | % | |||||||||||||||||
| Indian rupee | 469,977 | 2.0 | % | 503,630 | 2.1 | % | |||||||||||||||||
| Australian dollar | 417,060 | 1.8 | % | 453,847 | 1.9 | % | |||||||||||||||||
| Chinese yuan | 387,099 | 1.6 | % | 349,762 | 1.5 | % | |||||||||||||||||
| Japanese yen | 341,447 | 1.4 | % | 325,558 | 1.4 | % | |||||||||||||||||
| Swiss franc | 334,558 | 1.4 | % | 194,354 | 0.8 | % | |||||||||||||||||
| Singapore dollar | 259,721 | 1.1 | % | 300,116 | 1.3 | % | |||||||||||||||||
| Other currencies (1) | 1,659,592 | 6.9 | % | 1,674,325 | 6.9 | % | |||||||||||||||||
| Total revenue | $ | 23,826,195 | 100.0 | % | $ | 23,894,091 | 100.0 | % |
(1)Approximately 40 currencies comprise 6.9% of our revenue for the years ended December 31, 2020 and 2019.
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, 2020, the net impact would have been a decrease in pre-tax income of $3.1 million. Had the euro-to-U.S. dollar exchange rates been 10% higher during the year ended December 31, 2020, the net impact would have been an increase in pre-tax income of $9.3 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.
Fluctuations in foreign currency exchange rates may result in corresponding fluctuations in revenue and earnings as well as the assets under management for our investment management business, which could have a material adverse effect on our business, financial condition and operating results. Due to the constantly changing currency exposures to which we are subject and the volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future operating results. 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, 2020 and 2019 (dollars in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Fee revenue: | |||||||||||||||||||||||
| Global workplace solutions | $ | 3,307,083 | 13.9 | % | $ | 3,126,931 | 13.1 | % | |||||||||||||||
| Property and advisory project management | 1,257,569 | 5.3 | % | 1,259,222 | 5.3 | % | |||||||||||||||||
| Valuation | 614,307 | 2.6 | % | 630,399 | 2.6 | % | |||||||||||||||||
| Loan servicing | 239,596 | 1.0 | % | 206,736 | 0.9 | % | |||||||||||||||||
| Advisory leasing | 2,404,273 | 10.1 | % | 3,269,993 | 13.7 | % | |||||||||||||||||
| Capital markets: | |||||||||||||||||||||||
| Advisory sales | 1,658,702 | 7.0 | % | 2,130,979 | 8.9 | % | |||||||||||||||||
| Commercial mortgage origination | 577,851 | 2.4 | % | 575,963 | 2.4 | % | |||||||||||||||||
| Investment management | 474,939 | 2.0 | % | 424,882 | 1.8 | % | |||||||||||||||||
| Development services | 356,591 | 1.4 | % | 235,740 | 0.9 | % | |||||||||||||||||
| Total fee revenue | 10,890,911 | 45.7 | % | 11,860,845 | 49.6 | % | |||||||||||||||||
| Pass through costs also recognized as revenue | 12,935,284 | 54.3 | % | 12,033,246 | 50.4 | % | |||||||||||||||||
| Total revenue | 23,826,195 | 100.0 | % | 23,894,091 | 100.0 | % | |||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | 19,047,620 | 79.9 | % | 18,689,013 | 78.2 | % | |||||||||||||||||
| Operating, administrative and other | 3,306,205 | 13.9 | % | 3,436,009 | 14.4 | % | |||||||||||||||||
| Depreciation and amortization | 501,728 | 2.1 | % | 439,224 | 1.8 | % | |||||||||||||||||
| Asset impairments | 88,676 | 0.4 | % | 89,787 | 0.4 | % | |||||||||||||||||
| Total costs and expenses | 22,944,229 | 96.3 | % | 22,654,033 | 94.8 | % | |||||||||||||||||
| Gain on disposition of real estate | 87,793 | 0.4 | % | 19,817 | 0.1 | % | |||||||||||||||||
| Operating income | 969,759 | 4.1 | % | 1,259,875 | 5.3 | % | |||||||||||||||||
| Equity income from unconsolidated subsidiaries | 126,161 | 0.5 | % | 160,925 | 0.7 | % | |||||||||||||||||
| Other income | 17,394 | 0.1 | % | 28,907 | 0.1 | % | |||||||||||||||||
| Interest expense, net of interest income | 67,753 | 0.3 | % | 85,754 | 0.4 | % | |||||||||||||||||
| Write-off of financing costs on extinguished debt | 75,592 | 0.3 | % | 2,608 | 0.0 | % | |||||||||||||||||
| Income before provision for income taxes | 969,969 | 4.1 | % | 1,361,345 | 5.7 | % | |||||||||||||||||
| Provision for income taxes | 214,101 | 0.9 | % | 69,895 | 0.3 | % | |||||||||||||||||
| Net income | 755,868 | 3.2 | % | 1,291,450 | 5.4 | % | |||||||||||||||||
| Less: Net income attributable to non-controlling interests | 3,879 | 0.0 | % | 9,093 | 0.0 | % | |||||||||||||||||
| Net income attributable to CBRE Group, Inc. | $ | 751,989 | 3.2 | % | $ | 1,282,357 | 5.4 | % | |||||||||||||||
| Adjusted EBITDA | $ | 1,892,385 | 7.9 | % | $ | 2,063,783 | 8.6 | % |
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 depreciation and amortization, asset impairments, interest expense, net of interest income, write-off of financing costs on extinguished debt, and provision for income taxes. Amounts shown for adjusted EBITDA further remove (from EBITDA) the impact of costs associated with transformation initiatives, costs associated with workforce optimization efforts, fair value adjustments to real estate assets acquired in the Telford Acquisition (purchase accounting) that were sold in the period, costs incurred related to legal entity restructuring, integration and other costs related to acquisitions, carried interest incentive compensation expense (reversal) to align with the timing of associated revenue, and costs associated with our reorganization, including cost-savings initiatives. 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 credit facilities and 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. 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, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net income attributable to CBRE Group, Inc. | $ | 751,989 | $ | 1,282,357 | |||||||
| Add: | |||||||||||
| Depreciation and amortization | 501,728 | 439,224 | |||||||||
| Asset impairments | 88,676 | 89,787 | |||||||||
| Interest expense, net of interest income | 67,753 | 85,754 | |||||||||
| Write-off of financing costs on extinguished debt | 75,592 | 2,608 | |||||||||
| Provision for income taxes | 214,101 | 69,895 | |||||||||
| EBITDA | 1,699,839 | 1,969,625 | |||||||||
| Adjustments: | |||||||||||
| Costs associated with transformation initiatives (1) | 155,148 | — | |||||||||
| Costs associated with workforce optimization efforts (2) | 37,594 | — | |||||||||
| Impact of fair value adjustments to real estate assets acquired in the Telford Acquisition (purchase accounting) that were sold in the period | 11,598 | 9,301 | |||||||||
| Costs incurred related to legal entity restructuring | 9,362 | 6,899 | |||||||||
| Integration and other costs related to acquisitions | 1,756 | 15,292 | |||||||||
| Carried interest incentive compensation (reversal) expense to align with the timing of associated revenue | (22,912) | 13,101 | |||||||||
| Costs associated with our reorganization, including cost-savings initiatives (3) | — | 49,565 | |||||||||
| Adjusted EBITDA | $ | 1,892,385 | $ | 2,063,783 |
(1)During 2020, management began the implementation of certain transformation initiatives to enable the company to reduce costs, streamline operations and support future growth. The majority of expenses incurred were cash in nature and primarily related to employee separation benefits, lease termination costs and professional fees. See Note 21 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(2)Primarily represents costs incurred related to workforce optimization initiated and executed in the second quarter of 2020 as part of management’s cost containment efforts in response to the Covid-19 pandemic. The charges are cash expenditures primarily for severance costs incurred related to this effort. Of the total costs, $7.4 million was included within the “Cost of revenue” line item and $30.2 million was included in the “Operating, administrative, and other” line item in the accompanying consolidated statements of operations for the year ended December 31, 2020.
(3)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, 2020 Compared to Year Ended December 31, 2019
We reported consolidated net income of $752.0 million for the year December 31, 2020 on revenue of $23.8 billion as compared to consolidated net income of $1.3 billion on revenue of $23.9 billion for the year ended December 31, 2019.
Our revenue on a consolidated basis for the year ended December 31, 2020 decreased by $67.9 million, or 0.3%, as compared to the year ended December 31, 2019. The revenue decrease reflects decreases in our Advisory Services segment due to the impact of Covid-19, including lower sales (down 22.2% as compared to the same period in 2019) and leasing revenue (down 26.5% as compared to the same period in 2019). These decreases were partially offset by increases in revenue in our Global Workplace Solutions segment (up 8.0% as compared to the same period in 2019) led by growth in our facilities management line of business, driven by its contractual nature, and improved revenue in our Real Estate Investments segment (up 25.9% as compared to the same period in 2019) largely due to the Telford Acquisition and an increase in investment management fees. Foreign currency translation had a negligible impact on total revenue during the year ended December 31, 2020.
Our cost of revenue on a consolidated basis increased by $358.6 million, or 1.9%, during the year ended December 31, 2020 as compared to the same period in 2019. This increase was primarily due to higher costs associated with our Global Workplace Solutions segment due to growth in our facilities management business and higher costs in our Real Estate Investments segment due to the Telford Acquisition. We also incurred $42.1 million of costs (primarily employee separation benefits) related to the company’s transformation initiatives during 2020 to enable the company to reduce costs, streamline operations and support future growth. These items were partially offset by lower commission expense incurred during the year ended December 31, 2020. Our sales and leasing professionals generally are paid on a commission basis, which substantially correlates with our sales and lease revenue performance. Accordingly, the decrease in advisory sales and leasing revenue led to a corresponding decrease in commission expense. These items were partially offset by the impact of foreign currency translation which had a 0.12% positive impact on total cost of revenue during the year ended December 31, 2020. Cost of revenue as a percentage of revenue increased from 78.2% for the year ended December 31, 2019 to 79.9% for the year ended December 31, 2020, 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 decreased by $129.8 million, or 3.8%, during the year ended December 31, 2020 as compared to the same period in 2019. The negative impact of Covid-19 on our operating results led to a corresponding reduction in certain operating expenses such as travel and entertainment, marketing and employee events to manage financial performance as well as reduced stock compensation expense. These items were partially offset by $113.0 million of costs, primarily related to employee separation benefits, lease termination costs and professional fees related to the company’s transformation initiatives mentioned above, as well as $30.2 million of costs related to workforce optimization efforts executed primarily in the second quarter of 2020. We also incurred higher incremental costs associated with Telford, which we acquired on October 1, 2019, rent expense for our new flexible space offering, higher bad debt expense as a result of Covid-19, and higher charitable contributions due to donations to our Covid-19 relief fund. Foreign currency translation had a negligible impact on total operating, administrative and other expenses during the year ended December 31, 2020. Operating expenses as a percentage of revenue decreased from 14.4% for the year ended December 31, 2019 to 13.9% for the year ended December 31, 2020, reflecting the operating leverage inherent in our business and reduced discretionary spending.
Our depreciation and amortization expense on a consolidated basis increased by $62.5 million, or 14.2%, during the year ended December 31, 2020 as compared to the same period in 2019. This increase was primarily attributable to a rise in depreciation expense of $60.5 million during the year ended December 31, 2020 driven by technology-related capital expenditures and accelerated depreciation related to lease terminations included in our transformation initiatives.
Our asset impairments on a consolidated basis totaled $88.7 million and $89.8 million during the years ended December 31, 2020 and 2019, respectively. For the year ended December 31, 2020, asset impairments comprised the following: $50.2 million of non-cash asset impairment charges in our Global Workplace Solutions segment; a non-cash goodwill impairment charge of $25.0 million and non-cash asset impairment charges of $13.5 million in our Real Estate Investments segment. Primarily as a result of the recent global economic disruption and uncertainty due to Covid-19, we deemed there to be triggering events during 2020 that required testing of goodwill and certain assets for impairment. Based on these events, we recorded the aforementioned non-cash impairment charges, which were primarily driven by lower anticipated cash flows in certain businesses directly resulting from a downturn in forecasts as well as increased forecast risk due to Covid-19 and changes in our business going forward. During the year ended December 31, 2019, we recorded a non-cash intangible asset impairment charge 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 a continued industry-wide shift in investor preference for passive investment programs.
Our gain on disposition of real estate on a consolidated basis increased by $68.0 million, or 343.0%, during the year ended December 31, 2020 as compared to the same period in 2019. These gains resulted from property sales within our Real Estate Investments segment.
Our equity income from unconsolidated subsidiaries on a consolidated basis decreased by $34.8 million, or 21.6%, during the year ended December 31, 2020 as compared to the same period in 2019, 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 $17.4 million for the year ended December 31, 2020 versus $28.9 million for the same period in the prior year. The decrease was primarily due to higher net unrealized gains in the prior year compared to the current year on certain of our co-investments.
Our consolidated interest expense, net of interest income, decreased by $18.0 million, or 21.0%, for the year ended December 31, 2020 as compared to the same period in 2019. This decrease was primarily due to lower interest expense on borrowings associated with our credit agreement (driven by lower interest rates) as well as reduced net interest expense overseas associated with cash pooling arrangements.
Our write-off of financing costs on extinguished debt on a consolidated basis was $75.6 million for the year ended December 31, 2020 as compared to $2.6 million for the year ended December 31, 2019. The costs for the year ended December 31, 2020 included a $73.6 million premium paid and the write-off of $2.0 million of unamortized premium and debt issuance costs in connection with the redemption, in full, of the $425.0 million aggregate outstanding principal amount of our 5.25% senior notes. The costs for the year ended December 31, 2019 were incurred in connection with the refinancing of our credit agreement.
Our provision for income taxes on a consolidated basis was $214.1 million for the year ended December 31, 2020 as compared to $69.9 million for the same period in 2019. Our effective tax rate increased from 5.1% for the year ended December 31, 2019 to 22.1% for the year ended December 31, 2020. 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.
Segment Operations
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, 2020 and 2019 (dollars in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Fee revenue: | |||||||||||||||||||||||
| Property and advisory project management | $ | 1,257,569 | 16.3 | % | $ | 1,259,222 | 13.9 | % | |||||||||||||||
| Valuation | 614,307 | 7.9 | % | 630,399 | 6.9 | % | |||||||||||||||||
| Loan servicing | 239,596 | 3.1 | % | 206,736 | 2.3 | % | |||||||||||||||||
| Advisory leasing | 2,404,273 | 31.1 | % | 3,269,993 | 36.0 | % | |||||||||||||||||
| Capital markets: | |||||||||||||||||||||||
| Advisory sales | 1,658,702 | 21.5 | % | 2,130,979 | 23.5 | % | |||||||||||||||||
| Commercial mortgage origination | 577,851 | 7.5 | % | 575,963 | 6.4 | % | |||||||||||||||||
| Total fee revenue | 6,752,298 | 87.7 | % | 8,073,292 | 89.0 | % | |||||||||||||||||
| Pass through costs also recognized as revenue | 946,694 | 12.3 | % | 996,176 | 11.0 | % | |||||||||||||||||
| Total revenue | 7,698,992 | 100.0 | % | 9,069,468 | 100.0 | % | |||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | 4,693,684 | 61.0 | % | 5,465,391 | 60.3 | % | |||||||||||||||||
| Operating, administrative and other | 2,030,873 | 26.4 | % | 2,169,980 | 23.9 | % | |||||||||||||||||
| Depreciation and amortization | 348,669 | 4.5 | % | 304,766 | 3.4 | % | |||||||||||||||||
| Operating income | 625,766 | 8.1 | % | 1,129,331 | 12.4 | % | |||||||||||||||||
| Equity income from unconsolidated subsidiaries | 2,245 | 0.0 | % | 6,894 | 0.1 | % | |||||||||||||||||
| Other income | 17,329 | 0.2 | % | 7,532 | 0.1 | % | |||||||||||||||||
| Less: Net income attributable to non-controlling interests | 887 | 0.0 | % | 1,021 | 0.0 | % | |||||||||||||||||
| Add-back: Depreciation and amortization | 348,669 | 4.5 | % | 304,766 | 3.4 | % | |||||||||||||||||
| EBITDA | 993,122 | 12.9 | % | 1,447,502 | 16.0 | % | |||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Costs associated with transformation initiatives (1) | 113,987 | 1.5 | % | — | 0.0 | % | |||||||||||||||||
| Costs associated with workforce optimization efforts (2) | 27,418 | 0.4 | % | — | 0.0 | % | |||||||||||||||||
| Costs incurred related to legal entity restructuring | 9,362 | 0.1 | % | 6,899 | 0.1 | % | |||||||||||||||||
| Costs associated with our reorganization, including cost-savings initiatives (3) | — | 0.0 | % | 11,088 | 0.1 | % | |||||||||||||||||
| Integration and other costs related to acquisitions | — | 0.0 | % | 303 | 0.0 | % | |||||||||||||||||
| Adjusted EBITDA and Adjusted EBITDA on revenue margin | $ | 1,143,889 | 14.9 | % | $ | 1,465,792 | 16.2 | % | |||||||||||||||
| Adjusted EBITDA on fee revenue margin | 16.9 | % | 18.2 | % |
(1)During 2020, management began the implementation of certain transformation initiatives to enable the company to reduce costs, streamline operations and support future growth. The majority of expenses incurred were cash in nature and primarily related to employee separation benefits, lease termination costs and professional fees. See Note 21 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(2)Primarily represents costs incurred related to workforce optimization initiated and executed in the second quarter of 2020 as part of management’s cost containment efforts in response to the Covid-19 pandemic. The charges are cash expenditures primarily for severance costs incurred related to this effort. Of the total costs, $6.1 million was included within the “Cost of revenue” line item and $21.3 million was included in the “Operating, administrative, and other” line item in the accompanying consolidated statements of operations for the year ended December 31, 2020.
(3)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, 2020 Compared to Year Ended December 31, 2019
Revenue decreased by $1.4 billion, or 15.1%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The revenue decrease primarily reflects the impact of Covid-19, which resulted in lower sales and leasing revenue. Foreign currency translation had a negligible impact on total revenue during the year ended December 31, 2020.
Cost of revenue decreased by $771.7 million, or 14.1%, for the year ended December 31, 2020 as compared to the same period in 2019, primarily due to reduced commission expense resulting from lower sales and leasing revenue as a result of Covid-19. Foreign currency translation had a negligible impact on total cost of revenue during the year ended December 31, 2020. Cost of revenue as a percentage of revenue increased to 61.0% for the year ended December 31, 2020 versus 60.3% for the same period in 2019, primarily as a result of costs incurred during the year ended December 31, 2020 for the transformation initiatives and workforce optimization that were not incurred during the year ended December 31, 2019.
Operating, administrative and other expenses decreased by $139.1 million, or 6.4%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The negative impact of Covid-19 on our operating results led to corresponding decreases in bonus and stock compensation expense. In addition, to manage financial performance, we reduced certain operating expenses such as travel and entertainment, marketing and employee events. These items were partially offset by $80.8 million of costs, primarily related to employee separation benefits, lease termination costs and professional fees, as management commenced the implementation of certain transformation initiatives during the year ended December 31, 2020 to enable the company to reduce costs, streamline operations and support future growth. Lastly, we saw an increase in charitable donations largely driven by a sizeable donation by the company to its Covid-19 relief fund. Foreign currency translation had a negligible impact on total operating expenses during the year ended December 31, 2020.
For the year ended December 31, 2020, mortgage servicing rights (MSRs) contributed to operating income $207.8 million of gains recognized in conjunction with the origination and sale of mortgage loans, offset by $134.3 million of amortization of related intangible assets. 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.
Global Workplace Solutions
The following table summarizes our results of operations for our Global Workplace Solutions operating segment for the years ended December 31, 2020 and 2019 (dollars in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Fee revenue: | |||||||||||||||||||||||
| Global workplace solutions | $ | 3,307,083 | 21.6 | % | $ | 3,126,931 | 22.1 | % | |||||||||||||||
| Pass through costs also recognized as revenue | 11,988,590 | 78.4 | % | 11,037,070 | 77.9 | % | |||||||||||||||||
| Total revenue | 15,295,673 | 100.0 | % | 14,164,001 | 100.0 | % | |||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | 14,180,395 | 92.7 | % | 13,138,627 | 92.8 | % | |||||||||||||||||
| Operating, administrative and other | 643,207 | 4.2 | % | 637,282 | 4.5 | % | |||||||||||||||||
| Depreciation and amortization | 125,692 | 0.8 | % | 120,975 | 0.9 | % | |||||||||||||||||
| Asset impairments | 50,171 | 0.3 | % | — | 0.0 | % | |||||||||||||||||
| Operating income | 296,208 | 2.0 | % | 267,117 | 1.8 | % | |||||||||||||||||
| Equity income (loss) from unconsolidated subsidiaries | 368 | 0.0 | % | (1,423) | 0.0 | % | |||||||||||||||||
| Other income (loss) | 1,192 | 0.0 | % | (1,170) | 0.0 | % | |||||||||||||||||
| Less: Net loss attributable to non-controlling interests | — | 0.0 | % | (271) | 0.0 | % | |||||||||||||||||
| Add-back: Depreciation and amortization | 125,692 | 0.8 | % | 120,975 | 0.9 | % | |||||||||||||||||
| Add-back: Asset impairments | 50,171 | 0.3 | % | — | 0.0 | % | |||||||||||||||||
| EBITDA | 473,631 | 3.1 | % | 385,770 | 2.7 | % | |||||||||||||||||
| Costs associated with transformation initiatives (1) | 38,179 | 0.2 | % | — | 0.0 | % | |||||||||||||||||
| Costs associated with workforce optimization efforts (2) | 5,004 | 0.0 | % | — | 0.0 | % | |||||||||||||||||
| Costs associated with our reorganization, including cost savings initiatives (3) | — | 0.0 | % | 38,256 | 0.3 | % | |||||||||||||||||
| Adjusted EBITDA and Adjusted EBITDA on revenue margin | $ | 516,814 | 3.3 | % | $ | 424,026 | 3.0 | % | |||||||||||||||
| Adjusted EBITDA on fee revenue margin | 15.6 | % | 13.6 | % |
(1)During 2020, management began the implementation of certain transformation initiatives to enable the company to reduce costs, streamline operations and support future growth. The majority of expenses incurred were cash in nature and primarily related to employee separation benefits, lease termination costs and professional fees. See Note 21 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(2)Primarily represents costs incurred related to workforce optimization initiated and executed in the second quarter of 2020 as part of management’s cost containment efforts in response to the Covid-19 pandemic. The charges are cash expenditures primarily for severance costs incurred related to this effort. Of the total costs, $1.2 million was included within the “Cost of revenue” line item and $3.8 million was included in the “Operating, administrative, and other” line item in the accompanying consolidated statements of operations for the year ended December 31, 2020.
(3)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, 2020 Compared to Year Ended December 31, 2019
Revenue increased by $1.1 billion, or 8.0%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The revenue increase was primarily attributable to growth in our facilities management line of business, which is contractual in nature. Foreign currency translation had a 0.13% negative impact on total revenue during the year ended December 31, 2020, primarily driven by weakness in the Argentine peso and Brazilian real partially offset by strength in the British pound sterling and euro.
Cost of revenue increased by $1.0 billion, or 7.9%, for the year ended December 31, 2020 as compared to the same period in 2019, driven by the higher revenue leading to higher pass through costs. Foreign currency translation had a 0.14% positive impact on total cost of revenue during the year ended December 31, 2020. Cost of revenue as a percentage of revenue was relatively consistent at 92.7% for the year ended December 31, 2020 versus 92.8% for the same period in 2019.
Operating, administrative and other expenses increased by $5.9 million, or 0.9%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019. This increase was attributable to costs incurred as a result of Covid-19, including higher bad debt expense, $3.8 million of costs incurred (mainly severance) primarily related to workforce optimization initiated and executed in the second quarter of 2020 as part of management’s cost containment efforts in response to the Covid-19 pandemic, and increased staff bonus accruals. During the year ended December 31, 2020, investments were also made in both people and technology associated with ongoing efforts to remediate material weaknesses in our Europe, Middle East and Africa (EMEA) region. These increases were partially offset by a targeted reduction in certain operating expenses, such as travel and entertainment costs, during the year ended December 31, 2020 as a result of Covid-19. Foreign currency translation had a negligible impact on total operating expenses during the year ended December 31, 2020.
Real Estate Investments
The following table summarizes our results of operations for our Real Estate Investments operating segment for the years ended December 31, 2020 and 2019 (dollars in thousands):
| Year Ended December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Investment management | $ | 474,939 | 57.1 | % | $ | 424,882 | 64.3 | % | |||||||||||||||
| Development services | 356,591 | 42.9 | % | 235,740 | 35.7 | % | |||||||||||||||||
| Total revenue | 831,530 | 100.0 | % | 660,622 | 100.0 | % | |||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Cost of revenue | 173,541 | 20.9 | % | 84,995 | 12.9 | % | |||||||||||||||||
| Operating, administrative and other | 632,125 | 76.0 | % | 628,747 | 95.2 | % | |||||||||||||||||
| Depreciation and amortization | 27,367 | 3.3 | % | 13,483 | 2.0 | % | |||||||||||||||||
| Asset impairments | 38,505 | 4.6 | % | 89,787 | 13.6 | % | |||||||||||||||||
| Gain on disposition of real estate | 87,793 | 10.6 | % | 19,817 | 3.0 | % | |||||||||||||||||
| Operating income (loss) | 47,785 | 5.8 | % | (136,573) | (20.7) | % | |||||||||||||||||
| Equity income from unconsolidated subsidiaries | 123,548 | 14.9 | % | 155,454 | 23.5 | % | |||||||||||||||||
| Other (loss) income | (1,127) | (0.1) | % | 22,545 | 3.4 | % | |||||||||||||||||
| Less: Net income attributable to non-controlling interests | 2,992 | 0.3 | % | 8,343 | 1.2 | % | |||||||||||||||||
| Add-back: Depreciation and amortization | 27,367 | 3.3 | % | 13,483 | 2.0 | % | |||||||||||||||||
| Add-back: Asset impairments | 38,505 | 4.6 | % | 89,787 | 13.6 | % | |||||||||||||||||
| EBITDA | 233,086 | 28.0 | % | 136,353 | 20.6 | % | |||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Impact of fair value adjustments to real estate assets acquired in the Telford Acquisition (purchase accounting) that were sold in the period | 11,598 | 1.4 | % | 9,301 | 1.4 | % | |||||||||||||||||
| Costs associated with workforce optimization efforts (1) | 5,172 | 0.6 | % | — | 0.0 | % | |||||||||||||||||
| Costs associated with transformation initiatives (2) | 2,982 | 0.4 | % | — | 0.0 | % | |||||||||||||||||
| Integration and other costs related to acquisitions | 1,756 | 0.2 | % | 14,989 | 2.3 | % | |||||||||||||||||
| Carried interest incentive compensation (reversal) expense to align with the timing of associated revenue | (22,912) | (2.8) | % | 13,101 | 2.0 | % | |||||||||||||||||
| Costs associated with our reorganization, including cost-savings initiatives (3) | — | 0.0 | % | 221 | 0.0 | % | |||||||||||||||||
| Adjusted EBITDA | $ | 231,682 | 27.8 | % | $ | 173,965 | 26.3 | % |
(1)Primarily represents costs incurred related to workforce optimization initiated and executed in the second quarter of 2020 as part of management’s cost containment efforts in response to the Covid-19 pandemic. The charges are cash expenditures primarily for severance costs incurred related to this effort and were included in the “Operating, administrative and other” line in the accompanying consolidated statements of operations for the year ended December 31, 2020.
(2)During 2020, management began the implementation of certain transformation initiatives to enable the company to reduce costs, streamline operations and support future growth. The majority of expenses incurred were cash in nature and primarily related to employee separation benefits, lease termination costs and professional fees. See Note 21 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(3)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, 2020 Compared to Year Ended December 31, 2019
Revenue increased by $170.9 million, or 25.9%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, primarily driven by the Telford Acquisition in our development services line of business and an increase in investment management fees primarily related to growth in AUM. Foreign currency translation had a 0.7% positive impact on total revenue during the year ended December 31, 2020 primarily driven by strength in the British pound sterling and euro.
Cost of revenue increased by $88.5 million, or 104.2%, for the year ended December 31, 2020 as compared to the year ended December 31, 2019, driven by the Telford Acquisition, which we acquired on October 1, 2019.
Operating, administrative and other expenses increased by $3.4 million, or 0.5%, for the year ended December 31, 2020 as compared to the same period in 2019, primarily driven by incremental costs associated with Telford which we acquired on October 1, 2019, increased results driven bonus expense in our development services line of business (driven by higher property sales in 2020), rent expense for our new flexible space offering, workforce optimization costs, and transformation initiative costs. These increases are partially offset by decreases in certain operating expenses, such as travel and entertainment costs, as a result of Covid-19, a reduction in integration and transaction costs for Telford, and a reduction in carried interest expense. Foreign currency translation had a negligible impact on total operating expenses during the year ended December 31, 2020.
A roll forward of our AUM by product type for the year ended December 31, 2020 is as follows (dollars in billions):
| Funds | Separate Accounts | Securities | Total | ||||||||||||||||||||
| Balance at January 1, 2020 | $ | 40.1 | $ | 64.9 | $ | 7.9 | $ | 112.9 | |||||||||||||||
| Inflows | 5.3 | 9.1 | 1.4 | 15.8 | |||||||||||||||||||
| Outflows | (2.1) | (7.5) | (1.6) | (11.2) | |||||||||||||||||||
| Market appreciation (depreciation) | 3.9 | 1.4 | (0.1) | 5.2 | |||||||||||||||||||
| Balance at December 31, 2020 | $ | 47.2 | $ | 67.9 | $ | 7.6 | $ | 122.7 |
AUM generally refers to the properties and other assets with respect to which we provide (or participate in) oversight, investment management services and other advice, and which generally consist of real estate properties or loans, securities portfolios and investments in operating companies and joint ventures. Our AUM is intended principally to reflect the extent of our presence in the real estate market, not the basis for determining our management fees. Our assets under management consist of:
- the total fair market value of the real estate properties and other assets either wholly-owned or held by joint ventures and other entities in which our sponsored funds or investment vehicles and client accounts have invested or to which they have provided financing. Committed (but unfunded) capital from investors in our sponsored funds is not included in this component of our AUM. The value of development properties is included at estimated completion cost. In the case of real estate operating companies, the total value of real properties controlled by the companies, generally through joint ventures, is included in AUM; and
- the net asset value of our managed securities portfolios, including investments (which may be comprised of committed but uncalled capital) in private real estate funds under our fund of funds investments.
Our calculation of AUM may differ from the calculations of other asset managers, and as a result, this measure may not be comparable to similar measures presented by other asset managers.
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 2021 include up to approximately $235 million of anticipated capital expenditures, net of tenant concessions. As of December 31, 2020, we had aggregate commitments of $76.5 million to fund future co-investments in our Real Estate Investments business, $30.1 million of which is expected to be funded in 2021. Additionally, as of December 31, 2020, we are committed to fund $34.8 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, 2020, we had $2.8 billion of borrowings available under our revolving credit facility and $1.8 billion of cash and cash equivalents available for general corporate use.
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. Given compensation is our largest expense and our sales and leasing professionals are generally paid on a commission and/or bonus basis that correlates with their revenue production, the negative effect of difficult market conditions 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. 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. On December 28, 2020, we redeemed the $425.0 million aggregate outstanding principal amount of our 5.25% senior notes due 2025 in full. We funded this redemption using cash on hand.
As noted above, we believe that any future significant acquisitions 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 consideration in future periods that are subject to the passage of time or achievement of certain performance metrics and other conditions. As of December 31, 2020 and 2019, we had accrued deferred purchase consideration totaling $82.5 million ($14.3 million of which was a current liability) and $111.7 million ($41.6 million of which was a current liability), respectively, which was included in “Accounts payable and accrued expenses” and in “Other liabilities” in the accompanying consolidated balance sheets set forth in Item 8 of this Annual Report.
Lastly, as described in Note 16 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report, our board of directors authorized a program for the repurchase of up to $500.0 million of our Class A common stock over three years. During the year ended December 31, 2020, we spent $50.0 million to repurchase 1,050,084 shares of our Class A common stock at an average price of $47.62 per share using cash on hand. Our stock repurchases have been funded with cash on hand and we intend to continue funding future repurchases with existing cash. We may utilize our stock repurchase program to continue offsetting the impact of our stock-based compensation program and on a more opportunistic basis if we believe our stock presents a compelling investment compared to other discretionary uses. The timing of any 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. As of December 31, 2020, we had $350.0 million of capacity remaining under our repurchase program.
Historical Cash Flows
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Operating Activities
Net cash provided by operating activities totaled $1.8 billion for the year ended December 31, 2020, an increase of $607.4 million as compared to the year ended December 31, 2019. The company experienced an overall increase in net working capital of approximately $1.1 billion, partially offset by lower net income of $535.6 million as compared to the same period in the previous year. The positive impact from net working capital was largely attributable to a decrease in accounts receivable due to a heightened focus on cash collections across our businesses, and lower net income tax payments due to the refunds received in the current year related to the prior year tax restructuring, partially offset by a net decrease to accounts payable and accrued expenses, as well as compensation payable and accrued bonus.
Investing Activities
Net cash used in investing activities totaled $341.6 million for the year ended December 31, 2020, a decrease of $379.4 million as compared to the year ended December 31, 2019. This decrease was largely driven by a decrease of $26.9 million in capital expenditures during 2020 and lower amounts paid for acquisitions compared to 2019 which was driven primarily by the Telford Acquisition.
Financing Activities
Net cash used in financing activities totaled $625.3 million for the year ended December 31, 2020, an increase of $353.3 million as compared to the year ended December 31, 2019. This increase was primarily due to the impact of the full redemption of the $425.0 million aggregate outstanding principal amount of our 5.25% senior notes (including a premium of $73.6 million) and due to $44.8 million in lower net contributions received from non-controlling interests during the year ended December 31, 2020. This was partially offset by the impact of repayment of debt assumed in the Telford Acquisition of $110.7 million during 2019. In addition, we used $95.1 million less for repurchase of common stock during the year ended December 31, 2020.
Summary of Contractual Obligations and Other Commitments
The following is a summary of our various contractual obligations and other commitments as of December 31, 2020 (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) | $ | 1,390,273 | $ | 1,514 | $ | 488,759 | $ | 300,000 | $ | 600,000 | ||||||||||||||||||||||
| Short-term borrowings (2) | 1,389,294 | 1,389,294 | — | — | — | |||||||||||||||||||||||||||
| Operating leases (3) | 1,517,258 | 214,887 | 411,882 | 338,828 | 551,661 | |||||||||||||||||||||||||||
| Financing leases (3) | 539,243 | 64,363 | 87,077 | 23,702 | 364,101 | |||||||||||||||||||||||||||
| Total gross notes payable on real estate (4) | 80,064 | — | 65,064 | — | 15,000 | |||||||||||||||||||||||||||
| Deferred purchase consideration (5) | 82,539 | 14,301 | 52,754 | 10,934 | 4,550 | |||||||||||||||||||||||||||
| Total contractual obligations | $ | 4,998,671 | $ | 1,684,359 | $ | 1,105,536 | $ | 673,464 | $ | 1,535,312 |
| 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 (6) | $ | 140,458 | $ | 140,458 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| Tax liabilities (7) | 54,761 | — | 24,328 | 30,433 | — | |||||||||||||||||||||||||||
| Co-investments (8) (9) | 111,252 | 64,845 | 27,317 | 5,472 | 13,618 | |||||||||||||||||||||||||||
| Letters of credit (8) | 154,484 | 154,484 | — | — | — | |||||||||||||||||||||||||||
| Guarantees (8) (10) | 42,078 | 42,078 | — | — | — | |||||||||||||||||||||||||||
| Total other commitments | $ | 503,033 | $ | 401,865 | $ | 51,645 | $ | 35,905 | $ | 13,618 |
The table above excludes estimated payment obligations for our qualified defined benefit pension plans. For information about our future estimated payment obligations for these plans, see Note 14 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(1)Reflects gross outstanding long-term debt balances as of December 31, 2020, 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): 2021 – $36,380; 2022 to 2023 – $72,649; 2024 to 2025 – $59,098 and thereafter – $4,808.
(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.
(3)See Note 12 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(4)Reflects gross outstanding notes payable on real estate as of December 31, 2020 (none 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 2.00% to 4.00% at December 31, 2020.
(5)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, 2020 set forth in Item 8 of this Annual Report.
(6)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, 2020 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.
(7)As of December 31, 2020, we have a remaining federal tax liability of $54.8 million 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.
In addition, as of December 31, 2020, our current and non-current tax liabilities (including interest and penalties) for uncertain tax positions, totaled $168.5 million. Of this amount, we can reasonably estimate that none 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 $168.5 million. See Note 15 of our Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(8)See Note 13 of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report.
(9)Includes $76.5 million to fund future co-investments in our Real Estate Investments segment, $30.1 million of which is expected to be funded in 2021, and $34.8 million committed to invest in unconsolidated real estate subsidiaries as a principal, which is callable at any time.
(10)Due to the nature of guarantees, payments could be due at any time upon the occurrence of certain triggering events, including default. Accordingly, all guarantees are reflected as expiring in less than one year.
Indebtedness
Our level of indebtedness increases the possibility that we may be unable to pay the principal amount of our indebtedness and other obligations when due. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents governing our indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase.
Long-Term Debt
We maintain credit facilities with third-party lenders, which we use for a variety of purposes. On March 4, 2019, CBRE Services, Inc. (CBRE Services) entered into an incremental assumption agreement with respect to its credit agreement, dated October 31, 2017 (such agreement, as amended by a December 20, 2018 incremental loan assumption agreement and such March 4, 2019 incremental assumption agreement, is collectively referred to in this Annual Report as the 2019 Credit Agreement), which (i) extended the maturity of the U.S. dollar tranche A term loans under such credit agreement, (ii) extended the termination date of the revolving credit commitments available under such credit agreement and (iii) made certain changes to the interest rates and fees applicable to such tranche A term loans and revolving credit commitments under such credit agreement. 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 credit agreement in effect prior to the entry into the 2019 incremental assumption 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, 2020, 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 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 5.25% senior notes were jointly and severally guaranteed on a senior basis by us and each domestic subsidiary of CBRE Services that guaranteed our 2019 Credit Agreement. Interest accrued at a rate of 5.25% per year and was payable semi-annually in arrears on March 15 and September 15. We redeemed these notes in full on December 28, 2020 and incurred charges of $75.6 million, including a premium of $73.6 million and the write-off of $2.0 million of unamortized premium and debt issuance costs. We funded this redemption using cash on hand.
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 indenture governing our 4.875% senior notes contains 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. In addition, this indenture requires that the 4.875% senior notes be jointly and severally guaranteed on a senior basis by CBRE Group, Inc. and each domestic subsidiary of CBRE Services that guarantees the 2019 Credit Agreement.
Our 2019 Credit Agreement and 4.875% senior notes are fully and unconditionally and jointly and severally guaranteed by us and certain subsidiaries (see Exhibit 22.1 to this Annual Report for a listing of all such subsidiary guarantors). Combined summarized financial information for CBRE Group, Inc. (parent); CBRE Services (subsidiary issuer); and the guarantor subsidiaries (collectively referred to as the obligated group), which excludes investment balances in non-guarantor subsidiaries as well as income from consolidated non-guarantor subsidiaries, is as follows (dollars in thousands):
| December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Balance Sheet Data: | |||||||||||
| Current assets | $ | 3,307,147 | $ | 2,901,618 | |||||||
| Noncurrent assets (1) | 5,252,455 | 5,610,084 | |||||||||
| Total assets (1) | 8,559,602 | 8,511,702 | |||||||||
| Current liabilities | $ | 3,241,264 | $ | 2,893,775 | |||||||
| Noncurrent liabilities | 1,884,629 | 2,201,269 | |||||||||
| Total liabilities | 5,125,893 | 5,095,044 |
| Year Ended December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Statement of Operations Data: | |||||||||||
| Revenue | $ | 13,117,846 | $ | 13,550,005 | |||||||
| Operating income | 363,829 | 670,145 | |||||||||
| Net income | 353,068 | 998,319 |
(1)Includes $360.0 million and $574.6 million of intercompany loan receivables from non-guarantor subsidiaries as of December 31, 2020 and 2019, respectively. All intercompany balances and transactions between CBRE Group, CBRE Services and the guarantor subsidiaries have been eliminated.
The €400.0 million term loan facility under our 2019 Credit Agreement is jointly and severally guaranteed by five of our foreign subsidiaries. Such subsidiaries have been omitted from the table above given they do not jointly and severally guarantee other amounts under the 2019 Credit Agreement or the 4.875% senior notes. Additionally, such subsidiaries, if considered in the aggregate as if they were a single subsidiary, would not constitute a significant subsidiary.
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
We maintain a $2.8 billion revolving credit facility under the 2019 Credit Agreement and warehouse lines of credit with certain third-party lenders. For additional information on all of our short-term borrowings, see Notes 5 and 11 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report.
Subsequent Event
As described in Note 10 of the Notes to Consolidated Financial Statements set forth in Item 8 of this Annual Report, the company made a $50.0 million non-controlling investment in Industrious in the fourth quarter of 2020. On February 19, 2021, the company made an additional non-controlling investment in Industrious, for approximately $150.0 million in the form of primary and secondary shares, as well as shares issued in anticipation of Industrious closing on the transfer of Hana in the second quarter of 2021. Following this transaction, CBRE holds a 35% interest in Industrious. In addition, CBRE has entered into a series of agreements to acquire additional shares, whereby the company will increase its interest in Industrious from 35% to 40%.
Previous: Item 6. Selected Financial Data. · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk.