Business Context and Reporting Period
Company: CB Richard Ellis Group, Inc. (CBRE)
Reporting Period: Fiscal year ended December 31, 2006
Overview: CBRE is the world's largest commercial real estate services firm by revenue, operating in over 300 offices globally with approximately 24,000 employees. The company provides a full range of services including tenant representation, property leasing, sales, development, mortgage origination, and investment management. In 2006, CBRE became the first commercial real estate services company included in the S&P 500.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Revenue | $4,032.0 million | $3,194.0 million |
| Operating Income | $550.1 million | $372.4 million |
| Net Income | $318.6 million | $217.3 million |
| Diluted EPS | $1.35 | $0.95 |
| EBITDA | $653.5 million | $454.2 million |
| Operating Margin | 13.6% | 11.7% |
| Net Cash from Operating Activities | $370.5 million | $359.7 million |
| Total Assets | $5,944.6 million | $2,815.7 million |
| Total Debt (Long-term + Current) | $2,204.7 million | $833.2 million |
| Cash and Cash Equivalents | $244.5 million | $449.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 26.2% to $4.0 billion, driven by organic growth (over two-thirds of the increase) and acquisitions. Key drivers included higher transaction revenue, increased appraisal/valuation fees, and mortgage brokerage activity.
- Profitability: Net income rose 46.6% to $318.6 million. Operating income increased 47.7% to $550.1 million. Operating expenses as a percentage of revenue remained essentially flat at 32.3%.
- Acquisition Impact: The company completed its largest acquisition to date, Trammell Crow Company, on December 20, 2006. This added a Development Services segment (revenue of $8.8 million for the 11 days of ownership) and significantly increased goodwill and intangible assets.
- Debt Structure: Total debt increased significantly to $2.2 billion. The company redeemed its 11.25% senior subordinated notes and tendered substantially all of its 9.75% senior notes in 2006. However, it incurred approximately $2.1 billion in new senior secured term loans to finance the Trammell Crow acquisition.
- Segment Performance:
- Americas: Revenue up 15.4% to $2.5 billion; Operating income up 25.1% to $303.9 million.
- EMEA: Revenue up 32.0% to $933.5 million; Operating income up 83.4% to $173.0 million.
- Asia Pacific: Revenue up 90.1% to $354.8 million, largely due to the consolidation of IKOMA (Japanese affiliate).
- Global Investment Management: Revenue up 79.1% to $228.0 million, driven by increased carried interest revenue.
Guidance, Outlook, and Risks
- Outlook: Management anticipates total interest expense for 2007 to be approximately $140 million, up from $45.0 million in 2006, due to the new term loans. The company expects to continue using cash flow to reduce high-interest debt and pursue in-fill acquisitions.
- Subsequent Events: In January 2007, the company sold its 19% ownership in Savills plc for net proceeds of approximately $311.0 million, expecting to record a pre-tax loss of approximately $34.0 million in 2007. In February 2007, the company entered into interest rate swap agreements with a notional amount of $1.4 billion to hedge variable interest rate exposure.
- Risks:
- Leverage: Significant debt service obligations and restrictive covenants limit financial flexibility.
- Integration: Risks associated with integrating Trammell Crow Company and realizing anticipated synergies.
- Economic Sensitivity: Business performance is highly correlated with general economic conditions and commercial real estate market fundamentals.
- International Operations: Exposure to foreign currency fluctuations (37.6% of revenue from outside the U.S.) and political/economic risks in foreign jurisdictions.
Key Facts for Investor Verification
- Debt Covenants: Verify compliance with the new Credit Agreement's financial ratios (interest coverage and leverage ratios) given the increased debt load.
- Trammell Crow Integration: Monitor the realization of synergies and the impact of integration costs (estimated at $30 million for 2007) on future earnings.
- Interest Rate Exposure: Assess the effectiveness of the new interest rate swaps in mitigating the risk of rising rates on the $2.1 billion variable-rate term loans.
- Seasonality: Note that revenue and earnings are historically concentrated in the third and fourth quarters, making quarter-over-quarter comparisons difficult.
- Accounting Reclassification: Confirm understanding of the reclassification of certain reimbursements from cost of services to revenue in 2006, which increased reported revenue and cost of services for 2005 and 2004 but had no impact on operating income.