CBRE

Business Context and Reporting Period

Company: CBRE Holding, Inc. (a holding company for CB Richard Ellis Services, Inc.)
Reporting Period: Fiscal year ended December 31, 2002
Business Overview: One of the world's largest global commercial real estate services firms, operating in 47 countries through 206 offices with approximately 9,500 employees. The company provides brokerage, investment management, valuation, asset services, and facilities management. Operations are organized into three geographic segments: Americas, Europe/Middle East/Africa (EMEA), and Asia Pacific.

Key Financial Metrics (Year Ended Dec 31, 2002)

Material Changes vs. Prior Period

• Revenue: Remained flat at approximately $1.17 billion compared to 2001. Declines in lease transaction revenue (Americas and Asia Pacific) were offset by higher sales transaction revenue and consulting fees.
• Profitability: The company returned to profitability with Net Income of $18.7 million, reversing a Net Loss of $16.6 million in 2001. Operating income increased significantly to $106.1 million from $48.6 million in 2001.
• Cost Structure: Operating, administrative, and other expenses decreased by 3.6% ($18.7 million) due to cost-cutting measures and foreign currency gains. Depreciation and amortization dropped 35.0% primarily due to the discontinuation of goodwill amortization under SFAS No. 142.
• Interest Expense: Increased 21.0% to $60.5 million due to the debt structure resulting from the 2001 Merger.
• Segment Performance:
  • Americas: Revenue decreased 3.5%; Operating income increased to $81.3 million.
  • EMEA: Revenue increased 13.0%; Operating income increased to $17.3 million.
  • Asia Pacific: Revenue increased 14.1%; Operating income turned positive at $7.4 million (from a loss of $1.5 million in 2001).

Guidance, Outlook, Risks, and Unusual Items

• Acquisition Activity: On February 17, 2003, the company entered into an agreement to acquire Insignia Financial Group, Inc. for approximately $415 million (including debt repayment), expected to close in June 2003.
• Liquidity: Management anticipates existing sources of liquidity (cash flow from operations and revolving credit facilities) will be sufficient for non-acquisition requirements for the next twelve months. Capital expenditures for 2003 are expected to be approximately $28.8 million.
• Risks:
  • Economic Sensitivity: Business is highly dependent on general economic conditions; a slowdown or recession could harm leasing and sales activities.
  • Debt Service: The company is highly leveraged with significant debt service obligations. Failure to comply with debt covenants could result in default.
  • Geographic Concentration: Approximately 29% of sales and lease revenue originated in California, exposing the company to local market downturns.
  • Foreign Currency: Approximately 27% of revenue is generated outside the US, subjecting earnings to currency fluctuations.
• Unusual Items: The 2001 results included $28.6 million in merger-related and nonrecurring charges, which were absent in 2002. The adoption of SFAS No. 142 eliminated goodwill amortization, improving reported operating income.

Investor Verification Checklist

• Debt Covenants: Verify compliance with leverage and coverage ratios required by the Senior Credit Facility and Senior Notes.
• Insignia Acquisition: Monitor the status of financing and regulatory approvals for the $415 million Insignia acquisition.
• California Exposure: Assess the impact of the California commercial real estate market downturn on the 29% of revenue derived from that region.
• Interest Rate Sensitivity: Evaluate the impact of rising interest rates on the company's variable-rate debt (approx. 10% of weighted average variable rate increase would reduce pre-tax income by $1.6 million).
• Goodwill Impairment: Review the annual goodwill impairment testing results, as the company holds significant goodwill ($577 million) on its balance sheet.