[Home]

Management's Discussion of Results of Operations (Excerpts)

For purposes of readability, Zenith attempts to strip out all tables in excerpts from the Management Discussion. That information is contained elsewhere in our articles. The idea of this summary is simply to review how well we believe Management does its reporting. Also, this highlights what Management believes is important.

In our Decision Matrix at the end of each article, a company with 0 to 2 gets a "-1", and 3 to 5 gets a "+1."

On a scale of 0 to 5, 5 being best, Zenith rates this company's Management's Discussion as a 4.


Overview

CBRE Group, Inc. is a Delaware corporation. References to “CBRE,” “the 
company,” “we,” “us” and “our” refer to CBRE Group, Inc. and include all of its 
consolidated subsidiaries, unless otherwise indicated or the context requires 
otherwise.

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. We serve clients in more 
than 100 countries.

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” (enterprise-focused flexible workspace solutions).

Our revenue mix has shifted in recent years toward more revenue earned as part 
of contracts encompassing multiple business lines 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 this growing market 
opportunity. 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.

In the first quarter of 2020, the outbreak of the widespread novel coronavirus 
(COVID-19) illness resulted in tremendous amounts of uncertainty, interruption 
of business activity and significantly impacted global markets. On March 11, 
2020, the World Health Organization declared COVID-19 a pandemic, pointing to 
over 118,000 cases of the coronavirus illness in over 110 countries and 
territories around the world at that time. As of the date of this Quarterly 
Report, many of our locations and those of our clients are subject to 
significant operational limitations intended to mitigate the spread of COVID-19 
and a substantial subset of our employee population has been transitioned to a 
remote work environment.

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. Critical accounting policies represent the areas where more 
significant judgments and estimates are used in the preparation of our 
consolidated financial statements. A discussion of such critical accounting 
policies, which include revenue recognition, goodwill and other intangible 
assets, and income taxes can be found in our 2019 Annual Report. There have 
been no material changes to these policies as of March 31, 2020.

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. In light of the severe economic dislocations caused by COVID-19, and 
the resulting uncertainty in the business outlook, the quarterly distribution 
of financial results in 2020 may not conform with 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 
Quarterly 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, 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 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.

Since 2010, commercial real estate markets have 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 shutdown of economic activity across much 
of the world, which has led to sharp increases in unemployment, dislocations in 
debt and equity markets and businesses instituting cost-cutting and 
capital-preservation measures. There has been a significant impact on 
commercial real estate markets beginning in the first quarter of 2020, as many 
property owners and occupiers have put transactions on hold and withdrawn 
existing mandates, driving lower sales and leasing volumes. We expect to see 
this trend continue in the second quarter of 2020. For example, in the month of 
April 2020 our U.S. sales and leasing businesses experienced revenue declines 
of around 40%. The timing of these impacts varies by geography with Asian 
markets experiencing the earliest effects from the pandemic, while many other 
markets did not begin to experience significant effects until the end of the 
first quarter.

Real estate investment management and property development markets have been 
equally affected by the abrupt macroeconomic, real estate and capital markets 
changes brought about by COVID-19, which is another trend we expect to continue 
in the second quarter of 2020. Additionally, actively managed public real 
estate equity funds and programs continue to be 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 an improvement in macroeconomic conditions, including a return to 
sustained economic growth, lifting of significant operational restrictions on 
businesses, 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.

Strategic in-fill acquisitions have also played a key role in strengthening our 
service offerings. The companies we acquired have generally been regional or 
specialty firms that complement our existing platform, or independent 
affiliates in which, in some cases, we held a small equity interest. During 
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 the three months ended March 31, 2020, we acquired 
leading local facilities management firms in Spain and Italy, a U.S. firm that 
helps companies reduce telecommunications costs and a leading provider of 
workplace technology project management, consulting and procurement services to 
occupiers across the U.S.

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 March 31, 2020, we have accrued deferred consideration totaling $111.3 
million, which is included in accounts payable and accrued expenses and in 
other long-term liabilities in the accompanying consolidated balance sheets set 
forth in Item 1 of this Quarterly Report.

International Operations

We are closely monitoring the impact of the COVID-19 global pandemic on 
business conditions across all regions in which we operate. COVID-19 has 
significantly impacted our operations and has the potential to further reduce 
our business activity (see discussion in the “Risk Factors” section in Part II 
of this Quarterly Report). In addition, we continue to monitor developments 
related to the United Kingdom’s withdrawal from the European Union (Brexit) 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. Any currency 
volatility associated with COVID-19, Brexit or other economic dislocations 
could impact our results of operations.

As we continue to increase our international operations through either 
acquisitions or organic growth, fluctuations in the value of the U.S. dollar 
relative to the other currencies in which we may generate earnings could 
adversely affect our business, financial condition and operating results. Our 
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 three months ended March 31, 2020, approximately 43% of our business 
was transacted in non-U.S. dollar currencies, the majority of which included 
the Australian dollar, British pound sterling, Canadian dollar, Chinese yuan, 
euro, Indian rupee, Japanese yen, Singapore dollar and Swiss franc.

Approximately 37 currencies comprise 6.4% and 7.2% of our revenues for the 
three months ended March 31, 2020 and 2019, respectively.

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 
three months ended March 31, 2020, the net impact would have been a decrease in 
pre-tax income of $1.0 million. Had the euro-to-U.S. dollar exchange rates been 
10% higher during the three months ended March 31, 2020, the net impact would 
have been an increase in pre-tax income of $1.9 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 three months ended March 31, 2020 and 2019 (dollars in 
thousands):


Three Months Ended March 31,

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 
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 (reversal) expense 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. We 
also use adjusted EBITDA as a significant component when measuring our 
operating performance under our employee incentive compensation programs.


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.

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 
2019

We reported consolidated net income of $172.2 million for the three months 
ended March 31, 2020 on revenue of $5.9 billion as compared to consolidated net 
income of $164.4 million on revenue of $5.1 billion for the three months ended 
March 31, 2019.

Our revenue on a consolidated basis for the three months ended March 31, 2020 
increased by $753.7 million, or 14.7%, as compared to the three months ended 
March 31, 2019. The revenue increase reflects strong organic growth fueled by 
higher revenue in our Global Workplace Solutions segment (up 18.3%) and 
improved revenue in our Advisory Services segment due to property and advisory 
project management revenue (up 8.7%) and loan servicing revenue (up 23.2%) as 
well as increased advisory sales (up 11.7%). Higher revenue in our Real Estate 
Investments segment (up 56.4%) driven by the Telford Acquisition also 
contributed to the increase. Foreign currency translation had a 0.7% negative 
impact on total revenue during the three months ended March 31, 2020, primarily 
driven by weakness in the Argentine peso, Australian dollar, Brazilian real and 
euro.

Our cost of revenue on a consolidated basis increased by $690.6 million, or 
17.2%, during the three months ended March 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. 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 0.7% positive impact on total cost of revenue during 
the three months ended March 31, 2020. Cost of revenue as a percentage of 
revenue increased from 78.3% for the three months ended March 31, 2019 to 80.0% 
for the three months ended March 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 year period.

Our operating, administrative and other expenses on a consolidated basis were 
essentially flat at $790.1 million for the three months ended March 31, 2020 as 
compared to $792.9 million for the same period in 2019. Operating expenses as a 
percentage of revenue decreased from 15.4% for the three months ended March 31, 
2019 to 13.4% for the three months ended March 31, 2020, reflecting the 
operating leverage inherent in our business.

Our depreciation and amortization expense on a consolidated basis increased by 
$8.0 million, or 7.5%, during the three months ended March 31, 2020 as compared 
to the same period in 2019. This increase was primarily attributable to a rise 
in depreciation expense of $9.4 million during the three months ended March 31, 
2020 driven by technology-related capital expenditures.

Our asset impairments on a consolidated basis totaled $75.2 million and $89.0 
million for the three months ended March 31, 2020 and 2019, respectively. 
During the three months ended March 31, 2020, we recorded $50.2 million of 
non-cash asset impairment charges in our Global Workplace Solutions segment and 
a non-cash goodwill impairment charge of $25.0 million in our Real Estate 
Investments segment. As a result of the recent global economic disruption and 
uncertainty due to the novel coronavirus (COVID-19) pandemic, we deemed there 
to be triggering events requiring testing of certain assets for impairment as 
of March 31, 2020. Based on these tests, we recorded the aforementioned 
non-cash impairment charges, which were 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. During the three months ended March 
31, 2019, we recorded a non-cash intangible asset impairment charge of $89.0 
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 
$3.6 million, or 18.6%, during the three months ended March 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 $52.0 million, or 71.6%, during the three months ended March 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.

28



Our consolidated interest expense, net of interest income, decreased by $5.2 
million, or 24.4%, for the three months ended March 31, 2020 as compared to the 
same period in 2019. This was primarily driven by an increase in interest 
income during the first quarter of 2020.

Our write-off of financing costs on extinguished debt on a consolidated basis 
was $2.6 million for the three months ended March 31, 2019. The costs for the 
three months ended March 31, 2019 were incurred in connection with the 
refinancing of our credit agreement.

Our provision for income taxes on a consolidated basis was $51.2 million for 
the three months ended March 31, 2020 as compared to $43.9 million for the same 
period in 2019. Our effective tax rate increased from 20.4% for the three 
months ended March 31, 2019 to 22.8% for the three months ended March 31, 2020. 
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act 
(CARES Act) was enacted in the United States in response to the COVID-19 
pandemic. The CARES Act has not had, nor is it expected to have, a significant 
impact on our effective tax rate for 2020.

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 14 of the Notes to Consolidated Financial Statements 
(Unaudited) set forth in Item 1 of this Quarterly Report.

Advisory Services


Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 
2019

Revenue increased by $97.1 million, or 5.3%, for the three months ended March 
31, 2020 as compared to the three months ended March 31, 2019. The revenue 
increase reflects strong organic growth fueled by higher sales and loan 
servicing activity as well as improved property and project management revenue. 
Foreign currency translation had a 0.8% negative impact on total revenue during 
the three months ended March 31, 2020, primarily driven by weakness in the 
Australian dollar, Brazilian real and euro.

Cost of revenue increased by $74.9 million, or 6.9%, for the three months ended 
March 31, 2020 as compared to the same period in 2019, primarily due to higher 
costs in our property and project management business. Higher producer bonuses 
also contributed to the increase. Foreign currency translation had a 1.0% 
positive impact on total cost of revenue during the three months ended March 
31, 2020. Cost of revenue as a percentage of revenue was relatively consistent 
at 60.0% for the three months ended March 31, 2020 versus 59.0% for the same 
period in 2019.

Operating, administrative and other expenses decreased by $9.2 million, or 
1.8%, for the three months ended March 31, 2020 as compared to the three months 
ended March 31, 2019. This decrease was largely driven by the overall impact of 
COVID-19, which resulted in lower bonus and stock compensation expense, 
partially offset by higher bad debt expense and accruals for losses on loans. 
Foreign currency translation also had a 0.9% positive impact on total operating 
expenses during the three months ended March 31, 2020. These items were 
somewhat reduced by the impact of higher payroll-related costs (partially 
driven by increased headcount).

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 three 
months ended March 31, 2020, MSRs contributed to operating income $35.6 million 
of gains recognized in conjunction with the origination and sale of mortgage 
loans, offset by $30.5 million of amortization of related intangible assets. 
For the three months ended March 31, 2019, MSRs contributed to operating income 
$38.3 million of gains recognized in conjunction with the origination and sale 
of mortgage loans, offset by $27.7 million of amortization of related 
intangible assets.



Global Workplace Solutions


Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 
2019

Revenue increased by $580.3 million, or 18.3%, for the three months ended March 
31, 2020 as compared to the three months ended March 31, 2019. The revenue 
increase was fueled by growth in the market for real estate outsourcing 
services. Foreign currency translation had a 0.7% negative impact on total 
revenue during the three months ended March 31, 2020, primarily driven by 
weakness in the Argentine peso, Brazilian real and euro.

Cost of revenue increased by $560.7 million, or 19.1%, for the three months 
ended March 31, 2020 as compared to the same period in 2019, driven by the 
higher revenue. Foreign currency translation had a 0.7% positive impact on 
total cost of revenue during the three months ended March 31, 2020. Cost of 
revenue as a percentage of revenue was relatively consistent at 93.4% for the 
three months ended March 31, 2020 versus 92.8% for the same period in 2019.

Operating, administrative and other expenses increased by $12.3 million, or 
9.1%, for the three months ended March 31, 2020 as compared to the three months 
ended March 31, 2019. The increase was largely driven by higher payroll-related 
and temporary help costs incurred, partially attributable to investments made 
in both people and technology associated with efforts to remediate material 
weaknesses in our Europe, Middle East and Africa (EMEA) region. These costs 
were partially offset by the impact of $8.5 million of severance costs incurred 
in the first quarter of 2019 in connection with our reorganization, including 
cost-savings initiatives, which did not recur in the first quarter of 2020. 
Additionally, foreign currency translation had a 1.1% positive impact on total 
operating expenses during the three months ended March 31, 2020.


Real Estate Investments

Three Months Ended March 31, 2020 Compared to the Three Months Ended March 31, 
2019

Revenue increased by $76.3 million, or 56.4%, for the three months ended March 
31, 2020 as compared to the three months ended March 31, 2019, primarily driven 
by the Telford Acquisition in our development services line of business as well 
as higher carried interest revenue and increased asset management fees. Foreign 
currency translation had a 0.7% negative impact on total revenue during the 
three months ended March 31, 2020, primarily driven by weakness in the euro.

Cost of revenue was $55.0 million for the three months ended March 31, 2020 and 
was attributable to Telford, which we acquired on October 1, 2019.

Operating, administrative and other expenses decreased by $6.0 million, or 
3.7%, for the three months ended March 31, 2020 as compared to the same period 
in 2019, primarily driven lower carried interest expense and lower bonuses in 
our development services line of business (driven by lower property sales in 
the first quarter of 2020 as compared to the same period in 2019, which were 
reflected in equity income from unconsolidated subsidiaries). These items were 
partially offset by higher costs attributable to the Telford Acquisition as 
well as investments in our new flexible space offering. Foreign currency 
translation also had a 0.5% positive impact on total operating expenses during 
the three months ended March 31, 2020.


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. During the three months ended March 31, 2020, we 
incurred $48.9 million of capital expenditures, net of tenant concessions 
received, which includes approximately $20.0 million related to technology 
enablement. Given the uncertainty caused by COVID-19, we are not providing an 
estimate of net capital expenditures anticipated for the fiscal year ended 
December 31, 2020 as we are currently re-evaluating such spend, although we 
currently expect net capital expenditures to be meaningfully lower than 
initially forecast in our 2019 Annual Report. As of March 31, 2020, we had 
aggregate commitments of $82.5 million to fund future co-investments in our 
Real Estate Investments business, $35.5 million of which is expected to be 
funded in 2020. Additionally, as of March 31, 2020, we are committed to fund 
$42.7 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 March 31, 2020, 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. Given 
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, 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.

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 March 31, 2020 and December 31, 2019, we had accrued $111.3 
million ($37.1 million of which was a current liability) and $111.7 million 
($41.6 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 1 of this Quarterly Report.

As described in our 2019 Annual Report, our board of directors has authorized a 
program for the company to repurchase up to $500.0 million of our Class A 
common stock. As of December 31, 2019, $400.0 million was available for share 
repurchases under the authorized repurchase program. During the three months 
ended March 31, 2020, we spent $50.0 million to repurchase, through an existing 
stock repurchase plan entered into pursuant to Rule 10b5-1 under the Exchange 
Act, 1,050,084 shares of our Class A common stock with an average price paid 
per share of $47.62. As of May 7, 2020, we had $350.0 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. 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 
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 used in operating activities totaled $136.3 million for the three 
months ended March 31, 2020, a decrease of $256.3 million as compared to the 
three months ended March 31, 2019. The decrease in net cash used in operating 
activities was primarily driven by a lower overall net increase in working 
capital during the first quarter of 2020 as compared to the same period in 
2019.

Investing Activities

Net cash used in investing activities totaled $92.2 million for the three 
months ended March 31, 2020, an increase of $18.3 million as compared to the 
three months ended March 31, 2019. This increase was largely driven by higher 
amounts paid for in-fill acquisitions as well as greater contributions to 
unconsolidated subsidiaries during the three months ended March 31, 2020. These 
increases were partially offset by higher distributions received from 
unconsolidated subsidiaries during the three months ended March 31, 2020.

Financing Activities

Net cash used in financing activities totaled $93.9 million for the three 
months ended March 31, 2020 as compared to net cash provided by financing 
activities of $300.0 million for the three months ended March 31, 2019. The 
decrease of approximately $393.9 million was primarily due to the impact of net 
borrowings of $336.0 million from our revolving credit facility in the first 
quarter of 2019 that did not recur in the first quarter of 2020.

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 credit agreement, as amended by a 
December 20, 2018 incremental loan assumption agreement and such March 4, 2019 
incremental assumption agreement, 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 this 2019 incremental 
assumption agreement.

The 2019 Credit Agreement is a senior unsecured credit facility. As of March 
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 (the 4.875% senior notes) 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. 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 (the 5.25% senior 
notes). 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. Interest accrues at a rate of 5.25% per year and is 
payable semi-annually in arrears on March 15 and September 15.

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. In addition, these 
indentures require that the 4.875% senior notes and the 5.25% 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, 4.875% senior notes and 5.25% senior notes are all 
fully and unconditionally and jointly and severally guaranteed by us and 
certain subsidiaries (see Exhibit 22.1 for a listing of all such subsidiary 
guarantors).

The €400.0 million term loan facility under our 2019 Credit Agreement is also 
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, the 
4.875% senior notes or the 5.25% senior notes. Additionally, such subsidiaries 
if considered in the aggregate as if they were a single subsidiary, would not 
constitute a significant subsidiary.


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 Note 11 of the 
Notes to Consolidated Financial Statements set forth in Item 8 included in our 
2019 Annual Report and Notes 4 and 9 of the Notes to Consolidated Financial 
Statements (Unaudited) set forth in Item 1 of this Quarterly Report.

Off –Balance Sheet Arrangements

Our off-balance sheet arrangements are described in Note 11 of the Notes to 
Consolidated Financial Statements (Unaudited) set forth in Item 1 of this 
Quarterly Report and are incorporated by reference herein.


The following factors are among those, but are not only those, that may cause 
actual results to differ materially from the forward-looking statements:


•


disruptions in general economic, political and regulatory conditions, 
particularly in geographies or industry sectors where our business may be 
concentrated;




•


volatility or adverse developments in the securities, capital or credit 
markets, interest rate increases and conditions affecting the value of real 
estate assets, inside and outside the United States;




•


poor performance of real estate investments or other conditions that negatively 
impact clients’ willingness to make real estate or long-term contractual 
commitments and the cost and availability of capital for investment in real 
estate;




•


disruptions to business, market and operational conditions related to the 
COVID-19 pandemic and the impact of government rules and regulations intended 
to mitigate the effects of this pandemic, including, without limitation, rules 
and regulations that impact us as a loan originator and servicer for U.S. 
Government Sponsored Enterprises;




•


foreign currency fluctuations and changes in currency restrictions, trade 
sanctions and import-export and transfer pricing rules;




•


changes in U.S. and international law and regulatory environments (including 
relating to anti-corruption, anti-money laundering, trade sanctions, tariffs, 
currency controls and other trade control laws), particularly in Asia, Africa, 
Russia, Eastern Europe and the Middle East, due to the level of political 
instability in those regions;




•


our ability to compete globally, or in specific geographic markets or business 
segments that are material to us;




•


our ability to identify, acquire and integrate accretive businesses;




•


costs and potential future capital requirements relating to businesses we may 
acquire;




•


integration challenges arising out of companies we may acquire;




•


our ability to retain and incentivize key personnel;




•


our ability to manage organizational challenges associated with our size;




•


negative publicity or harm to our brand and reputation;




•


increases in unemployment and general slowdowns in commercial activity;




•


trends in pricing and risk assumption for commercial real estate services;




•


the effect of significant changes in capitalization rates across different 
property types;




•


a reduction by companies in their reliance on outsourcing for their commercial 
real estate needs, which would affect our revenues and operating performance;




•


client actions to restrain project spending and reduce outsourced staffing 
levels;




•


declines in lending activity of U.S. Government Sponsored Enterprises, 
regulatory oversight of such activity and our mortgage servicing revenue from 
the commercial real estate mortgage market;




•


our ability to further diversify our revenue model to offset cyclical economic 
trends in the commercial real estate industry;




•


our ability to attract new user and investor clients;

37






•


our ability to retain major clients and renew related contracts;




•


our ability to leverage our global services platform to maximize and sustain 
long-term cash flow;




•


our ability to continue investing in our platform and client service offerings;




•


our ability to maintain expense discipline;




•


the emergence of disruptive business models and technologies;




•


the ability of our investment management business to maintain and grow assets 
under management and achieve desired investment returns for our investors, and 
any potential related litigation, liabilities or reputational harm possible if 
we fail to do so;




•


our ability to manage fluctuations in net earnings and cash flow, which could 
result from poor performance in our investment programs, including our 
participation as a principal in real estate investments;




•


our leverage under our debt instruments as well as the limited restrictions 
therein on our ability to incur additional debt, and the potential increased 
borrowing costs to us from a credit-ratings downgrade;




•


the ability of CBRE Capital Markets to periodically amend, or replace, on 
satisfactory terms, the agreements for its warehouse lines of credit;




•


variations in historically customary seasonal patterns that cause our business 
not to perform as expected;




•


litigation and its financial and reputational risks to us;




•


our exposure to liabilities in connection with real estate advisory and 
property management activities and our ability to procure sufficient insurance 
coverage on acceptable terms;




•


liabilities under guarantees, or for construction defects, that we incur in our 
development services business;




•


our and our employees’ ability to execute on, and adapt to, information 
technology strategies and trends;




•


cybersecurity threats or other threats to our information technology networks, 
including the potential misappropriation of assets or sensitive information, 
corruption of data or operational disruption;




•


our ability to comply with laws and regulations related to our global 
operations, including real estate licensure, tax, labor and employment laws and 
regulations, as well as the anti-corruption laws and trade sanctions of the 
U.S. and other countries;




•


changes in applicable tax or accounting requirements;




•


any inability for us to implement and maintain effective internal controls over 
financial reporting;




•


the effect of implementation of new accounting rules and standards or the 
impairment of our goodwill and intangible assets; and




•


the other factors described elsewhere in this Quarterly Report on Form 10-Q, 
included under the headings “Management’s Discussion and Analysis of Financial 
Condition and Results of Operations—Critical Accounting Policies,” 
“Quantitative and Qualitative Disclosures About Market Risk” and Part II, Item 
1A, “Risk Factors” or as described in our 2019 Annual Report, in particular in 
Part II, Item 1A “Risk Factors”, or as described in the other documents and 
reports we file with the Securities and Exchange Commission (SEC).

Forward-looking statements speak only as of the date the statements are made. 
You should not put undue reliance on any forward-looking statements. We assume 
no obligation to update forward-looking statements to reflect actual results, 
changes in assumptions or changes in other factors affecting forward-looking 
information, except to the extent required by applicable securities laws. If we 
do update one or more forward-looking statements, no inference should be drawn 
that we will make additional updates with respect to those or other 
forward-looking statements. Additional information concerning these and other 
risks and uncertainties is contained in our other periodic filings with the 
SEC.

Investors and others should note that we routinely announce financial and other 
material information using our investor relations website 
(https://ir.cbre.com), SEC filings, press releases, public conference calls and 
webcasts. We use these channels of distribution to communicate with our 
investors and members of the public about our company, our services and other 
items of interest. Information contained on our website is not part of this 
Quarterly Report or our other filings with the SEC.


Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk primarily consists of foreign currency exchange 
rate fluctuations related to our international operations and changes in 
interest rates on debt obligations. We manage such risk primarily by managing 
the amount, sources, and duration of our debt funding and by using derivative 
financial instruments. We apply Financial Accounting Standards Board (FASB) 
Accounting Standards Codification (ASC) Topic 815, “Derivatives and Hedging,” 
when accounting for derivative financial instruments. In all cases, we view 
derivative financial instruments as a risk management tool and, accordingly, do 
not use derivatives for trading or speculative purposes.

Exchange Rates

Our foreign operations expose us to fluctuations in foreign exchange rates. 
These fluctuations may impact the value of our cash receipts and payments in 
terms of our functional (reporting) currency, which is U.S. dollars. See the 
discussion of international operations, which is included in Item 2. 
“Management’s Discussion and Analysis of Financial Condition and Results of 
Operations” under the caption “Items Affecting Comparability—International 
Operations” and is incorporated by reference herein.

Interest Rates

We manage our interest expense by using a combination of fixed and variable 
rate debt. Historically, we have entered into interest rate swap agreements to 
attempt to hedge the variability of future interest payments due to changes in 
interest rates. As of March 31, 2020, we did not have any outstanding interest 
rate swap agreements. See discussion of our interest rate swap agreements, 
which is included in Item 2.

The estimated fair value of our senior term loans was approximately $708.8 
million at March 31, 2020. Based on dealers’ quotes, the estimated fair values 
of our 4.875% senior notes and 5.25% senior notes were $620.4 million and 
$459.2 million, respectively, at March 31, 2020.

We utilize sensitivity analyses to assess the potential effect on our variable 
rate debt. If interest rates were to increase 100 basis points on our 
outstanding variable rate debt at March 31, 2020, the net impact of the 
additional interest cost would be a decrease of $1.9 million on pre-tax income 
and an increase of $1.9 million in cash used in operating activities for the 
three months ended March 31, 2020.