CBRE

CB Richard Ellis Group, Inc. (CBRE) 2009 10-K Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009. CBRE is the world's largest commercial real estate services firm by revenue, operating over 300 offices globally with approximately 29,000 employees. The company provides a full range of services including property management, leasing, sales, valuation, investment management, and development services under the "CB Richard Ellis" and "Trammell Crow" brands. The reporting period was characterized by a severe global economic downturn and credit market disruption, which significantly impacted transaction volumes and real estate values.

Key Financial Metrics (2009)

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenue decreased 18.8% to $4.17 billion, driven by weak worldwide sales and leasing activity and lower appraisal revenue due to the global economic slowdown. Foreign currency translation negatively impacted revenue by $129.2 million.
• Profitability Recovery: The company returned to profitability with $33.3 million in net income, a significant improvement from the $1.01 billion net loss in 2008. The 2008 loss was heavily influenced by a $1.16 billion goodwill and intangible asset impairment charge, which did not recur in 2009.
• Cost Reduction: Operating expenses decreased 20.8% to $1.38 billion due to aggressive cost-cutting measures, including reduced payroll, travel, and marketing costs. Cost of services decreased 16.4% as commission-based compensation correlated with lower revenue.
• Segment Performance:
  • Americas: Revenue down 19.2%; Operating income of $180.6 million vs. a $512.5 million loss in 2008.
  • EMEA: Revenue down 24.3%; Operating income of $57.4 million vs. a $50.0 million loss in 2008.
  • Asia Pacific: Revenue down 6.1%; Operating income of $46.0 million.
  • Development Services: Revenue down 26.1%; Operating loss of $58.8 million, improved from a $258.9 million loss in 2008 due to lower impairment charges.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects recovery to depend on sustained global economic growth, positive employment gains, and the return of credit market normalcy. No specific financial guidance for 2010 was provided in the text, but the company anticipates continued cost containment.
• Capital Markets Activity: In 2009, the company raised approximately $440 million through equity offerings (including a direct placement to Paulson & Co. and at-the-market offerings) and issued $450 million of 11.625% senior subordinated notes due 2017. It also repaid $432 million of senior secured term loans.
• Legal Proceedings (Unusual Item): In early 2010, the company voluntarily disclosed to the DOJ and SEC that employees in China made payments to local government officials in violation of company policy, potentially violating the U.S. Foreign Corrupt Practices Act. The company believes the amounts are immaterial but is investigating and implementing remedial measures.
• Risks:
  • Leverage: High debt levels ($2.1 billion) and restrictive covenants limit flexibility. The company must maintain specific leverage and coverage ratios.
  • Goodwill Impairment: While no impairment was recorded in 2009, a significant decline in future cash flows or stock price could trigger future charges.
  • Real Estate Investment Risk: The company holds real estate assets and co-investments that are subject to market volatility and potential impairment.

Key Facts for Investor Verification

• Debt Covenants: Verify compliance with the Credit Agreement's leverage ratio (max 4.25x through March 2011) and interest coverage ratio (min 2.00x through March 2011).
• China Investigation: Monitor updates regarding the FCPA investigation in China and potential fines or penalties.
• Real Estate Portfolio: Review the valuation of the $693.4 million real estate portfolio and the $4.7 billion in development projects in process for potential future impairments.
• Equity Dilution: Note the significant increase in shares outstanding (from ~262 million in 2008 to ~322 million in 2009) due to equity raises and stock-based compensation.
• Non-Controlling Interests: Verify the impact of non-controlling interests, which recorded a net loss of $61.0 million in 2009, primarily within the Development Services segment.