CBRE

Business Context and Reporting Period

Company: CB Richard Ellis Group, Inc. (CBRE)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: CBRE is the world's largest commercial real estate services firm, offering tenant representation, property management, development services, and investment management globally. The reporting period includes the first full quarter of operations following the December 2006 acquisition of Trammell Crow Company, which significantly expanded the company's development services and global footprint.

Key Financial Metrics

Note: Total Debt includes short-term borrowings ($83.6M), current maturities of long-term debt ($11.8M), notes payable on real estate ($386.0M), and long-term debt ($2.06B).

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 61.6% to $1.21 billion, driven by organic growth and the inclusion of Trammell Crow Company. Foreign currency translation provided a $25.3 million positive impact.
• Profitability Decline: Despite higher operating income, Net Income dropped 67.5% to $12.0 million. This was primarily due to a $37.5 million "Other Loss" from the sale of an investment in Savills plc and a $31.9 million charge for merger-related costs (severance and integration).
• Interest Expense Surge: Interest expense more than doubled to $42.0 million (up 201.3%) due to the $2.1 billion in senior secured term loans incurred to finance the Trammell Crow acquisition.
• Cash Flow Volatility: Operating cash flow swung from a $184.8 million outflow in Q1 2006 to a $115.2 million inflow in Q1 2007. The inflow was largely driven by $311.0 million in proceeds from the sale of the Savills plc stake.
• Segment Performance: The new Development Services segment reported an operating loss of $10.7 million, largely due to purchase accounting adjustments. Global Investment Management saw revenue surge 181.6% due to carried interest revenue.

Guidance, Outlook, and Risks

• Outlook: Management anticipates annual interest expense for 2007 to be approximately $140 million. They expect to incur total integration expenses of approximately $40 million in 2007 related to the Trammell Crow and Insignia acquisitions.
• Liquidity: The company maintains a $600 million revolving credit facility with $41 million outstanding as of March 31, 2007. Management believes internally generated cash flow and the credit facility are sufficient to meet requirements for the next 12 months.
• Key Risks:
  • Leverage: High debt levels increase the risk of inability to service debt obligations and limit financial flexibility.
  • Integration: Risks associated with integrating Trammell Crow Company and realizing expected synergies.
  • Market Conditions: Sensitivity to macroeconomic conditions, interest rates, and commercial real estate transaction volumes.
  • Deferred Compensation: Significant unfunded obligations ($250.5 million liability) for deferred compensation plans.
• Unusual Items: The $34.9 million pre-tax loss on the sale of Savills plc and the $31.9 million merger-related charges are non-recurring items impacting current period earnings.

Investor Verification Checklist

• Debt Service Coverage: Verify the company's ability to service the $2.1 billion term loan and $42 million quarterly interest expense given the reduced net income.
• Integration Costs: Monitor the $40 million projected integration expense for 2007 to ensure it does not exceed estimates.
• Development Segment: Assess the timeline for the Development Services segment to turn profitable, as purchase accounting currently suppresses earnings.
• Deferred Compensation Liability: Review the funding status of the $250.5 million deferred compensation liability and potential cash outflows upon employee departures.
• Real Estate Exposure: Evaluate the $523 million in real estate assets held for development and investment, particularly regarding market valuation risks.