CBRE

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

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2007. CBRE is the world's largest commercial real estate services firm, operating globally under the "CB Richard Ellis" brand and providing development services under the "Trammell Crow" brand following its December 2006 acquisition. The company operates through five segments: Americas, EMEA, Asia Pacific, Global Investment Management, and Development Services.

Key Financial Metrics (Six Months Ended June 30, 2007)

Note: Total Debt includes $267.3 million in short-term borrowings and $1,932.8 million in long-term debt as of June 30, 2007.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenue increased by 63.4% ($1.0 billion) compared to the prior year. Growth was driven by organic expansion (higher transaction revenue, appraisal/valuation, and outsourcing) and the full-year impact of the Trammell Crow Company acquisition.
• Profitability: Net income increased 51.3% to $153.1 million. Operating margins improved slightly to 10.8% from 11.3% in the prior year, though the Development Services segment reported an operating loss of $22.0 million due to purchase accounting adjustments.
• One-Time Items: The company recorded a pre-tax loss of $34.9 million from the sale of its 19% interest in Savills plc. Additionally, merger-related charges totaled $34.7 million, primarily for severance costs related to the Trammell Crow integration.
• Interest Expense: Interest expense surged 208.4% to $84.2 million due to the $2.1 billion in senior secured term loans incurred to finance the Trammell Crow acquisition.
• Effective Tax Rate: The effective tax rate decreased to 27.2% from 36.6%, largely due to a favorable change in the mix of domestic and foreign earnings and the reversal of an uncertain tax position.

Guidance, Outlook, and Risks

Management Commentary: Management expects continued revenue growth driven by transaction activity and outsourcing services. The company is actively deleveraging, having repaid $130.5 million of term loans in the first half of 2007 and an additional $75.0 million in July 2007. Management anticipates total integration expenses of approximately $40 million for 2007.

Risks and Contingencies:

• Leverage: The company is highly leveraged with significant debt service obligations. Restrictive covenants limit the ability to incur additional debt, pay dividends, or repurchase stock.
• Integration: Risks associated with integrating Trammell Crow Company and other acquisitions, including potential cost overruns and operational disruptions.
• Market Conditions: Performance is sensitive to macroeconomic conditions, interest rates, and the availability of credit in the commercial real estate market.
• Deferred Compensation: Significant unfunded obligations exist for deferred compensation plans ($263.6 million liability) and U.K. pension plans ($59.5 million liability).

Investor Verification Checklist

• Debt Covenants: Verify compliance with the minimum interest coverage and maximum leverage ratios required by the Credit Agreement.
• Integration Costs: Monitor the run-rate of integration expenses for the Trammell Crow acquisition against the $40 million annual estimate.
• Development Pipeline: Review the $9.6 billion inventory of in-process and pipeline projects in the Development Services segment for execution risk.
• Deferred Compensation: Assess the liquidity impact of potential employee departures triggering distributions from the $263.6 million deferred compensation liability.
• Real Estate Exposure: Evaluate the risk associated with $656.0 million of real estate assets owned by the company, including those held for sale and under development.