CB Richard Ellis Group, Inc. — 2010 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2010; quarterly figures below include the quarter ended December 31. CBRE provides commercial real estate advisory, outsourcing, investment management, mortgage and development services worldwide. It reported five segments: Americas, EMEA, Asia Pacific, Global Investment Management and Development Services. Contractual fee-for-service businesses represented approximately 38% of 2010 revenue.
Key financial metrics
| Metric | 2010 | 2009 | Change or context |
|---|---|---|---|
| Revenue | $5.115 billion | $4.166 billion | Up 22.8% |
| Operating income | $446.4 million | $241.8 million | Operating margin 8.7%, versus 5.8% |
| Net income attributable to CBRE | $200.3 million | $33.3 million | Diluted EPS $0.63, versus $0.12 |
| EBITDA | $647.5 million | $372.1 million | Non-GAAP measure; not equivalent to free cash flow |
| Cash from operating activities | $616.6 million | $213.6 million | Investing cash use $62.5 million; financing cash use $784.2 million |
| Cash and cash equivalents at year-end | $506.6 million | $741.6 million | Cash declined $235.0 million during 2010 |
| Total assets / total liabilities | $5.122 billion / $4.056 billion | $5.039 billion / $4.255 billion | CBRE stockholders’ equity was $908.2 million |
| Debt | $1.428 billion long-term debt, including current portion; $471.4 million short-term borrowings | $2.121 billion long-term debt; $339.8 million short-term borrowings | Also had $627.5 million of real-estate notes payable, generally nonrecourse |
Current assets were $2.261 billion and current liabilities were $1.957 billion at year-end. The $700 million revolving credit facility had $17.5 million drawn and $20 million of letters of credit outstanding. The filing reports $1.9 billion of total consolidated debt and short-term borrowings, excluding real-estate notes payable. Interest expense was $191.2 million. Credit-agreement covenant ratios were 8.16x interest coverage and 0.94x net leverage, versus required limits of at least 2.25x and at most 3.75x, respectively.
Fourth-quarter 2010 revenue was $1.651 billion, operating income $172.9 million, and net income attributable to CBRE $95.1 million (diluted EPS $0.30). The comparable 2009 quarter reported revenue of $1.296 billion, operating income of $140.4 million and attributable net income of $64.3 million.
Material changes versus prior comparable period
- Revenue growth reflected higher worldwide sales activity (up 51.5%), leasing (up 29.3%) and outsourcing (up 8.5%). Foreign-currency translation added $44.1 million to revenue.
- Cost of services rose 20.9%, slower than revenue growth; it declined to 57.9% of revenue from 58.8%. Operating, administrative and other expenses rose 16.2%, but declined to 31.4% of revenue from 33.2%.
- Markets began recovering in 2010, with sales and leasing activity improving across regions. Management said activity remained generally below 2006–2007 levels. All five segments improved EBITDA year over year; Development Services revenue nevertheless fell 13.8%.
- Operating cash flow increased substantially. Cash fell as financing activities used $784.2 million, primarily reflecting repayments of senior secured term loans.
- CBRE issued $350 million of 6.625% senior notes due 2020 and refinanced its credit agreement, extending the revolving facility maturity to 2015. It repaid approximately $357.4 million of term loans using note proceeds and cash on hand.
- The company reported no goodwill or indefinite-lived intangible-asset impairment in 2010 or 2009, following $1.2 billion of such charges in 2008. Real-estate and related asset impairment charges totaled $38.9 million in 2010, down from $74.3 million in 2009.
Outlook, risks, contingencies and unusual items
- Management described improving real estate fundamentals and expected the recovery to depend on stronger economic growth and employment, continued credit-market improvement, and a rebound in business and consumer sentiment. No specific earnings or revenue guidance was provided.
- Management expected up to $100 million of net capital expenditures in 2011 and stated that operating cash flow and the revolver were expected to meet anticipated cash needs for at least the next 12 months.
- On February 15, 2011, after year-end, CBRE agreed to acquire most of ING’s real estate investment management operations and CRES for approximately $940 million in cash. The transactions, expected to close in the second half of 2011 subject to approvals and consents, were to be financed with cash and credit-agreement borrowings. CBRE expected approximately $150 million of pre-tax transaction costs and approximately $800 million of new term loans.
- Principal risks include real estate market and credit-cycle exposure, dependence on transaction volumes and client spending, leverage and covenant constraints, floating-rate debt, foreign-currency exposure, client defaults, employee retention, and risks tied to investments, development guarantees and acquisition integration. Approximately 40% of 2010 revenue was generated outside the U.S.
- Year-end commitments included $11.5 million for Global Investment Management co-investments and $22.0 million for Development Services investments. The company also disclosed $22.6 million of letters of credit, $10.8 million of guarantees and development completion and budget guarantees; management did not expect material losses under the latter.
- CBRE’s Fannie Mae DUS program included $2.1 billion of loans subject to potential loss sharing of up to one-third; related loan-loss accruals were approximately $4.0 million. The U.K. defined-benefit pension plans were underfunded by $40.0 million; expected 2011 contributions were $3.6 million.
- Pending or threatened ordinary-course lawsuits were not expected by management to have a material effect. The previously disclosed China FCPA-related investigation and SEC and Department of Justice reviews were closed without action. KPMG gave unqualified opinions on the financial statements and internal control over financial reporting.
- CBRE did not pay cash dividends and said it did not anticipate doing so in the foreseeable future, intending instead to retain earnings for debt reduction and growth. The filing notes pronounced seasonality, with results historically strongest in the third and fourth quarters.
Important facts for investors to verify
- Whether the proposed ING/CRES acquisitions closed as planned, their final financing and costs, and subsequent integration and performance.
- Whether the real estate market recovery and transaction-volume growth continued, particularly in the Americas and EMEA, and how much revenue growth came from activity versus currency translation or accounting changes.
- Cash conversion and liquidity after debt repayments, including the refinancing or repayment of near-term maturities and continued compliance with credit covenants.
- The exposure and realized losses, if any, from real-estate notes, mortgage warehouse lines, Fannie Mae loss sharing, development guarantees and committed co-investments.
- The sustainability of reported earnings after unusual items and accounting effects, including financing-cost write-offs, real-estate impairments, discontinued-operation gains and the adoption of VIE consolidation rules.