CBRE

CB Richard Ellis Group, Inc. - Q2 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009. CB Richard Ellis Group, Inc. (CBRE) operates as the world's largest commercial real estate services firm, providing property management, leasing, sales, valuation, and development services globally. The reporting period reflects continued severe global economic downturns, credit market disruptions, and a significant decline in commercial real estate transaction volumes.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased 27.3% year-over-year for the quarter and 27.5% for the six-month period. This was driven by weak worldwide sales and leasing activity, lower appraisal revenue, and a $69.9 million negative impact from foreign currency translation in the quarter.
• Profitability Shift: The company reported a net loss of $6.6 million for the quarter compared to net income of $16.6 million in the prior year quarter. For the six months, the net loss was $43.3 million versus net income of $37.0 million in 2008.
• Cost Reductions: Cost of services decreased 23.1% and operating expenses decreased 29.9% year-over-year for the quarter, reflecting aggressive cost-cutting measures, reduced commissions, and lower incentive compensation.
• Impairment Charges: The company recorded $6.9 million in impairment charges for the quarter and $22.8 million for the six months, primarily related to investments in unconsolidated subsidiaries and real estate assets.
• Financing Costs: A one-time write-off of $29.3 million in financing costs occurred in the first half of 2009 due to the amendment and restatement of the Credit Agreement.

Guidance, Outlook, and Risks

• Capital Markets Activity: In June 2009, the company issued $450 million of 11.625% senior subordinated notes due 2017 and completed equity offerings raising approximately $146.4 million. Proceeds were used for general corporate purposes and debt repayment.
• Debt Management: The company prepaid $188.1 million of term loans in the second quarter to reduce interest rate spreads. Management projects compliance with financial covenants (minimum coverage ratio of 2.00x and maximum leverage ratio of 4.25x) for 2009.
• Deferred Compensation Plan (DCP): The company is in the process of terminating its U.S. DCPs, with accelerated distributions occurring in 2009. A cash tax benefit of approximately $100 million is expected from these distributions.
• Risks: Significant risks include continued global economic recession, illiquidity in credit markets, potential for additional asset impairments, and the ability to refinance debt on favorable terms. Credit rating agencies downgraded the company's senior debt in early 2009.

Investor Verification Checklist

• Covenant Compliance: Verify the company's ability to maintain the 2.00x interest coverage ratio and 4.25x leverage ratio under the Credit Agreement given the current economic environment.
• Asset Impairments: Monitor for further write-downs on real estate held for investment and unconsolidated subsidiary investments, as market conditions remain volatile.
• Debt Maturities: Review the amortization schedule for the senior secured term loans and the impact of the new 11.625% notes on future interest expense.
• DCP Tax Benefit: Confirm the realization of the projected $100 million tax benefit from the DCP distributions in the 2009 tax filings.
• Segment Performance: Assess the divergence between the Americas segment (largest revenue contributor) and the Global Investment Management segment, which faced significant headwinds.