Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission File Number 001 - 32205

 

 

CB RICHARD ELLIS GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   94-3391143

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer Identification Number)

11150 Santa Monica Boulevard, Suite 1600

Los Angeles, California

  90025
(Address of principal executive offices)   (Zip Code)
(310) 405-8900  
(Registrant’s telephone number, including area code)  

(Former name, former address and

former fiscal year if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x   Accelerated filer ¨   Non-accelerated filer ¨   Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

The number of shares of Class A common stock outstanding at April 30, 2010 was 321,774,914.

 

 

 


Table of Contents

FORM 10-Q

March 31, 2010

TABLE OF CONTENTS

 

          Page
   PART I—FINANCIAL INFORMATION   

Item 1.

  

Financial Statements

  
   Consolidated Balance Sheets at March 31, 2010 (Unaudited) and December 31, 2009    3
   Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (Unaudited)    4
   Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (Unaudited)    5
   Consolidated Statement of Equity for the three months ended March 31, 2010 (Unaudited)    6
   Notes to Consolidated Financial Statements (Unaudited)    7

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   30

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   50

Item 4.

  

Controls and Procedures

   51
   PART II—OTHER INFORMATION   

Item 1.

  

Legal Proceedings

   52

Item 1A.

  

Risk Factors

   52

Item 6.

  

Exhibits

   52

Signatures

   54

 

2


Table of Contents

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

     March 31,
2010
    December 31,
2009
 
     (Unaudited)        

ASSETS

    

Current Assets:

    

Cash and cash equivalents

   $ 680,295      $ 741,557   

Restricted cash

     37,919        46,797   

Receivables, less allowance for doubtful accounts of $42,163 and $41,397 at March 31, 2010 and December 31, 2009, respectively

     720,226        775,929   

Warehouse receivables

     94,643        315,033   

Income taxes receivable

     154,507        163,032   

Prepaid expenses

     93,565        99,309   

Deferred tax assets, net

     75,563        75,330   

Real estate and other assets held for sale

     6,209        7,109   

Other current assets

     34,277        42,629   
                

Total Current Assets

     1,897,204        2,266,725   

Property and equipment, net

     165,565        178,975   

Goodwill

     1,295,498        1,306,372   

Other intangible assets, net of accumulated amortization of $143,853 and $138,244 at March 31, 2010 and December 31, 2009, respectively

     322,736        322,904   

Investments in unconsolidated subsidiaries

     127,559        135,596   

Deferred tax assets, net

     408        3,395   

Real estate under development

     149,691        160,164   

Real estate held for investment

     770,897        526,169   

Available for sale securities

     32,629        32,016   

Other assets, net

     105,228        107,090   
                

Total Assets

   $ 4,867,415      $ 5,039,406   
                

LIABILITIES AND EQUITY

    

Current Liabilities:

    

Accounts payable and accrued expenses

   $ 429,440      $ 458,510   

Compensation and employee benefits payable

     256,244        240,536   

Accrued bonus and profit sharing

     186,618        278,444   

Short-term borrowings:

    

Warehouse lines of credit

     94,040        312,872   

Revolving credit facility

     20,147        21,050   

Other

     13,329        5,850   
                

Total short-term borrowings

     127,516        339,772   

Current maturities of long-term debt

     60,172        138,682   

Notes payable on real estate

     188,523        159,921   

Liabilities related to real estate and other assets held for sale

     1,208        1,267   

Other current liabilities

     13,686        11,909   
                

Total Current Liabilities

     1,263,407        1,629,041   

Long-Term Debt:

    

Senior secured term loans

     1,569,043        1,545,490   

11.625% senior subordinated notes, net of unamortized discount of $13,217 and $13,498 at March 31, 2010 and December 31, 2009, respectively

     436,783        436,502   

Other long-term debt

     128        129   
                

Total Long-Term Debt

     2,005,954        1,982,121   

Pension liability

     61,028        64,945   

Non-current tax liabilities

     73,805        73,462   

Notes payable on real estate

     561,645        390,181   

Other liabilities

     112,101        115,361   
                

Total Liabilities

     4,077,940        4,255,111   

Commitments and contingencies

     —          —     

Equity:

    

CB Richard Ellis Group, Inc. Stockholders’ Equity:

    

Class A common stock; $0.01 par value; 525,000,000 shares authorized; 321,820,235 and 321,767,407 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively

     3,218        3,218   

Additional paid-in capital

     766,989        755,989   

Accumulated deficit

     (21,635     (15,008

Accumulated other comprehensive loss

     (136,433     (115,077
                

Total CB Richard Ellis Group, Inc. Stockholders’ Equity

     612,139        629,122   

Non-controlling interests

     177,336        155,173   
                

Total Equity

     789,475        784,295   
                

Total Liabilities and Equity

   $ 4,867,415      $ 5,039,406   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

     Three Months Ended
March 31,
 
     2010     2009  

Revenue

   $ 1,025,883      $ 890,449   

Costs and expenses:

    

Cost of services

     615,194        553,419   

Operating, administrative and other

     338,706        306,159   

Depreciation and amortization

     26,295        25,392   
                

Total costs and expenses

     980,195        884,970   

Operating income

     45,688        5,479   

Equity loss from unconsolidated subsidiaries

     (6,584     (10,197

Interest income

     1,800        2,305   

Interest expense

     49,792        34,798   

Write-off of financing costs

     —          29,255   
                

Loss before provision for (benefit of) income taxes

     (8,888     (66,466

Provision for (benefit of) income taxes

     7,299        (12,047
                

Net loss

     (16,187     (54,419

Less: Net loss attributable to non-controlling interests

     (9,560     (17,730
                

Net loss attributable to CB Richard Ellis Group, Inc.

   $ (6,627   $ (36,689
                

Basic loss per share attributable to CB Richard Ellis Group, Inc. shareholders

   $ (0.02   $ (0.14
                

Weighted average shares outstanding for basic loss per share

     312,879,640        261,999,151   
                

Diluted loss per share attributable to CB Richard Ellis Group, Inc. shareholders

   $ (0.02   $ (0.14
                

Weighted average shares outstanding for diluted loss per share

     312,879,640        261,999,151   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

     Three Months Ended
March 31,
 
     2010     2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (16,187   $ (54,419

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     26,295        25,392   

Amortization and write-off of financing costs

     2,817        31,670   

Write-down of impaired real estate and other assets

     —          9,425   

Gain on sale of loans, servicing rights and other assets

     (7,347     (1,611

Equity loss from unconsolidated subsidiaries

     6,584        10,197   

Provision for (recovery of) doubtful accounts

     3,564        (5,520

Compensation expense related to stock options and non-vested stock awards

     10,787        8,121   

Distribution of earnings from unconsolidated subsidiaries

     4,483        2,017   

Tenant concessions received

     1,773        579   

Decrease in receivables

     43,598        120,588   

Decrease in deferred compensation assets

     —          213,006   

Decrease in prepaid expenses and other assets

     14,450        7,803   

Increase in real estate held for sale and under development

     (4,112     (7,780

Decrease in accounts payable and accrued expenses

     (20,990     (68,952

Decrease in compensation and employee benefits payable and accrued bonus and profit sharing

     (69,391     (46,714

Increase (decrease) in income taxes payable

     11,816        (10,953

Increase (decrease) in other liabilities, including deferred compensation liabilities

     274        (243,354

Other operating activities, net

     (1,323     (969
                

Net cash provided by (used in) operating activities

     7,091        (11,474

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (2,898     (2,604

Acquisition of businesses including net assets acquired, intangibles and goodwill

     (3,765     (8,715

Contributions to unconsolidated subsidiaries

     (6,326     (10,527

Proceeds from the sale of servicing rights and other assets

     3,346        5,389   

Additions to real estate held for investment

     (4,229     (4,814

Decrease in restricted cash

     8,088        1,993   

Other investing activities, net

     936        (13
                

Net cash used in investing activities

     (4,848     (19,291

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Repayment of senior secured term loans

     (54,816     (105,500

Proceeds from revolving credit facility

     3,740        419,078   

Repayment of revolving credit facility

     (4,040     —     

Proceeds from notes payable on real estate held for investment

     3,940        4,983   

Repayment of notes payable on real estate held for investment

     (10,142     (392

Proceeds from notes payable on real estate held for sale and under development

     1,798        15,726   

Repayment of notes payable on real estate held for sale and under development

     (637     (15,430

Proceeds from (repayment of) short-term borrowings and other loans, net

     7,498        (981

Non-controlling interests contributions

     2,980        2,914   

Non-controlling interests distributions

     (555     (5

Payment of financing costs

     (4,357     (16,705

Other financing activities, net

     367        (659
                

Net cash (used in) provided by financing activities

     (54,224     303,029   

Effect of currency exchange rate changes on cash and cash equivalents

     (9,281     (7,624
                

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (61,262     264,640   

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

     741,557        158,823   
                

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

   $ 680,295      $ 423,463   
                

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid (received) during the period for:

    

Interest

   $ 29,602      $ 28,809   
                

Income tax refunds, net

   $ (5,094   $ (1,789
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(Dollars in thousands)

 

    CB Richard Ellis Group, Inc. Shareholders     Non-controlling
interests
    Total  
    Class A
common
stock
  Additional
paid-in
capital
  Accumulated
deficit
    Accumulated other
comprehensive loss
     

Balance at December 31, 2009

  $ 3,218   $ 755,989   $ (15,008   $ (115,077   $ 155,173      $ 784,295   

Net loss

    —       —       (6,627     —          (9,560     (16,187

Adoption of Accounting Standards Update 2009-17 (see Note 2)

    —       —       —          —          29,534        29,534   

Compensation expense for stock options and non-vested stock awards

    —       10,787     —          —          —          10,787   

Foreign currency translation loss

    —       —       —          (23,766     (360     (24,126

Unrealized gains on interest rate swaps and interest rate caps, net of tax

    —       —       —          122        —          122   

Contributions from non-controlling interests

    —       —       —          —          2,980        2,980   

Distributions to non-controlling interests

    —       —       —          —          (555     (555

Other

    —       213     —          2,288        124        2,625   
                                           

Balance at March 31, 2010

  $ 3,218   $ 766,989   $ (21,635   $ (136,433   $ 177,336      $ 789,475   
                                           

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying consolidated financial statements of CB Richard Ellis Group, Inc. (which may be referred to in these financial statements as “we,” “us,” and “our”) have been prepared in accordance with the rules applicable to Form 10-Q and include all information and footnotes required for interim financial statement presentation, but do not include all disclosures required under accounting principles generally accepted in the United States (GAAP) for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as otherwise noted) considered necessary for a fair presentation have been included. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, and reported amounts of revenue and expenses. Such estimates include the value of real estate assets, accounts receivable, investments in unconsolidated subsidiaries and assumptions used in the calculation of income taxes, retirement and other post-employment benefits, among others. These estimates and assumptions are based on management’s best judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including consideration of the current economic environment, and adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatility in equity prices and foreign currency exchange rates, among other things, have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

In 2008 and most of 2009, worldwide commercial real estate fundamentals weakened significantly, highlighted by declining employment, highly constrained consumer and business spending and significant capital markets turmoil. High unemployment rates negatively impacted office markets as companies reduced their occupancy, placed excess space on the market for sublease and deferred occupancy decisions. Weak industrial production and reduced global trade adversely affected warehouse and distribution markets. The retail sector was significantly hampered by declining sales and retailers experiencing financial difficulty. Sales transactions declined sharply due to constrained liquidity in the capital markets as many lenders tightened lending standards for commercial real estate. Capitalization rates increased as potential buyers of commercial real estate re-evaluated commercial real estate versus other asset classes available for investment. Market fundamentals for the primary property types which we service, develop or own, weakened significantly. A return to positive economic growth in the United States (U.S.) in the second half of 2009 did not have a meaningful impact on commercial real estate fundamentals. Property values remained under pressure and occupancy and rental rates continued to decline. In early 2010, however, continuation of the nascent economic recovery and improvement in the credit markets, led to a pick up in sales and leasing velocity. The recoverability of our investments in unconsolidated subsidiaries and our investments in real estate has been impacted by the overall downturn in the global economy. The assumptions utilized in our recoverability analysis of these investments reflected our outlook for the commercial real estate industry and the impact on our business. This outlook incorporated our belief that market conditions had deteriorated and that these challenging conditions could persist for some time. If conditions in the broader economy, commercial real estate industry, specific markets or property types in which we operate worsen, we could have additional impairment charges.

The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2010. The consolidated financial statements and notes to consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2009.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

2. Consolidated Variable Interest Entities

In December 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU incorporates Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the FASB in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact such entity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities, which enhances the information provided to users of financial statements. We adopted ASU 2009-17 effective January 1, 2010 and as a result, we began consolidating certain variable interest entities that were not previously consolidated by us.

A consolidated subsidiary (the Venture) sponsored investments by third-party investors in eight commercial properties through the formation of tenant-in-common limited liability companies and Delaware Statutory Trusts (collectively referred to as “the Entities”) that are owned by the third-party investors. The Venture also formed and is a member of a limited liability company for each property that serves as master tenant (Master Tenant). Each Master Tenant leases the property from the Entities through a master lease agreement. Pursuant to the master lease agreements, the Master Tenant has the power to direct the day to day asset management activities that most significantly impact the economic performance of the Entities. As a result, the Entities were deemed to be variable interest entities since the third-party investors holding the equity investment at risk in the Entities do not direct the day to day activities that most significantly impact the economic performance of the properties held by the Entities.

The Venture has made and may continue to make voluntary contributions to each of these properties to support their operations beyond the cash flow generated by the properties themselves. As of the most recent reconsideration date, such financial support has been significant enough that the Venture was deemed to be the primary beneficiary of each entity. During the three months ended March 31, 2010, the Venture funded $0.3 million of financial support to the Entities.

The Entities were initially consolidated by the Venture upon adoption of ASU 2009-17 on January 1, 2010. The Entities’ assets and associated mortgage notes payable aggregated $251.0 million and $221.5 million, respectively, and were recorded based on their fair value at adoption. We did not recognize a gain or loss on the initial consolidation of these Entities. The assets of the Entities are the sole collateral for the mortgage notes payable and other liabilities of the Entities and as such, the creditors and equity investors of these Entities have no recourse to our assets held outside of these Entities.

For the three months ended March 31, 2010, aggregate revenue and operating expenses relating to the operating activities of the Entities were $6.1 million, and $3.8 million, respectively, and are included in the accompanying consolidated statements of operation. The aggregate losses of the Entities for the three months ended March 31, 2010 were $2.5 million and were all attributable to non-controlling interests.

Investments in real estate of $249.5 million and mortgage notes payable of $221.8 million ($3.5 million of which is current) are included in real estate assets held for investment and notes payable on real estate,

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

respectively, in the accompanying consolidated balance sheets as of March 31, 2010. In addition, non-controlling interests of $27.7 million in the accompanying consolidated balance sheets as of March 31, 2010 are attributable to the Entities.

3. New Accounting Pronouncements

In December 2009, the FASB issued ASU 2009-16, “Transfers and Servicing (ASC Topic 860)—Accounting for Transfers of Financial Assets.” ASU 2009-16 revises previous authoritative guidance related to accounting for transfers of financial assets, and requires more disclosures about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. Among other things, ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. We adopted ASU 2009-16 effective January 1, 2010 and it did not have a material effect on our consolidated financial position or results of operations.

In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which provides amendments to the FASB ASC Subtopic 820-10 that require new disclosures regarding (i) transfers in and out of Level 1 and Level 2 fair value measurements and (ii) activity in Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosures regarding (i) the level of asset and liability disaggregation and (ii) fair value measurement inputs and valuation techniques. As required, we adopted the new disclosures and clarifications of existing disclosure requirements, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are currently evaluating the disclosure impact of adoption on our consolidated financial statements, but do not expect it to have a material impact.

4. Fair Value Measurements

The “Fair Value Measurements and Disclosures” Topic of the FASB ASC (Topic 820) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 also establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

 

   

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2 – Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

   

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. The fair value measurements employed for our impairment evaluations were generally based on a discounted cash flow approach and/or review of comparable activities in the market place. Inputs used in these evaluations included risk-free rates of return, estimated risk premiums as well as other economic variables.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following non-recurring fair value measurements were recorded during the three months ended March 31, 2010 and 2009 (dollars in thousands):

 

     Net Carrying Value
as of

March 31, 2010
   Fair Value Measured and Recorded Using    Total  Impairment
Charges for the
Three Months Ended

March 31, 2010
             Level 1              Level 2              Level 3        

Investments in unconsolidated subsidiaries

   $ 38,172    $ —      $ —      $ 38,172    $ 6,947

 

     Net Carrying Value
as of

March 31, 2009
   Fair Value Measured and Recorded Using    Total Impairment
Charges for the
Three Months Ended

March 31, 2009
             Level 1              Level 2              Level 3        

Investments in unconsolidated subsidiaries

   $ 40,255    $ —      $ —      $ 40,255    $ 7,054

Real estate held for investment

   $ 30,950    $ —      $ —      $ 30,950      2,991

Notes receivable

     $—      $ —      $ —        $—        6,434
                  

Total impairment charges

               $ 16,479
                  

Investments in Unconsolidated Subsidiaries

During the three months ended March 31, 2010 and 2009, we recorded investment write-downs of $6.9 million and $7.1 million, respectively, within our Global Investment Management segment. Such write-downs were included in equity loss from unconsolidated subsidiaries in the accompanying consolidated statements of operations. Of these amounts, $2.5 million and $1.9 million, respectively, were attributable to non-controlling interests. During the three months ended March 31, 2010, $5.9 million of the investment write-downs were driven by a decrease in the estimated holding period of certain assets held within our Global Investment Management portfolio and $1.0 million was driven by a decline in value of an investment attributable to continued capital market turmoil. During the three months ended March 31, 2009, the write-downs were attributable to declines in value of several investments, primarily as a result of significant capital market turmoil, which adversely affected global commercial real estate fundamentals (as evidenced by low transaction volumes and illiquidity in the capital markets due to the tightened lending standards for commercial real estate). When we performed our impairment analysis, the assumptions utilized reflected our outlook for the commercial real estate industry and the impact on our business. This outlook incorporated our belief that market conditions deteriorated and that these challenging conditions could persist for some time.

Real Estate

During the fourth quarter of 2008, commercial real estate fundamentals in the U.S. weakened significantly, impacted by the overall downturn in the economy and market illiquidity. These conditions continued in the first quarter of 2009. When we performed our quarterly real estate impairment analysis during the first quarter of 2009, we identified two projects where the carrying value was not recoverable primarily due to a decrease in the estimated holding periods of the projects. As a result, during the three months ended March 31, 2009, we recorded impairment charges of $3.0 million to reduce the carrying value of the impaired real estate projects to their estimated fair values. These charges are included in operating, administrative and other expenses in the accompanying consolidated statements of operations within our Development Services segment. Of this amount, $2.6 million was attributable to non-controlling interests.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

If conditions in the broader economy, commercial real estate industry, specific markets or product types in which we operate worsen and/or markets remain illiquid, we may be required to evaluate additional projects or re-evaluate previously impaired projects for potential impairment. These evaluations could result in additional impairment charges, which may be material.

Notes Receivable

In the first quarter of 2009, we recorded a $6.4 million impairment charge on two notes receivable secured by real estate as a result of the borrower defaulting on the notes. This impairment charge was included in operating, administrative and other expenses in the accompanying consolidated statement of operations within our Development Services segment. Of this amount, $6.0 million was attributable to non-controlling interests. These defaults resulted from the borrowers’ noncompliance with certain terms of the note agreements. As a result, we accepted assignment of the underlying real estate assets in lieu of foreclosing under our security deeds. The impairment charge we recorded represents the difference between the carrying amounts of the notes and the fair value of the real estate assets acquired. This transaction also resulted in a non-cash reclassification of $16.7 million from notes receivable to real estate held for investment during the three months ended March 31, 2009.

We do not have any material assets or liabilities that are required to be recorded at fair value on a recurring basis.

Topic 820 also requires disclosure of fair value information about financial instruments, whether or not recognized in the accompanying consolidated balance sheets, as follows:

Cash and Cash Equivalents and Restricted Cash: These balances include cash and cash equivalents as well as restricted cash with maturities of less than three months. The carrying amount approximates fair value due to the short-term maturities of these instruments.

Receivables, less Allowance for Doubtful Accounts: Due to their short-term nature, fair value approximates carrying value.

Warehouse Receivables: Due to their short-term nature, fair value approximates carrying value. Fair value is determined based on the terms and conditions of funded mortgage loans and generally reflects the values of the warehouse lines of credit outstanding for our wholly-owned subsidiary, CBRE Capital Markets.

Available for Sale Securities: These investments are carried at their fair value.

Short-Term Borrowings: The majority of this balance represents our revolving credit facility and our warehouse lines of credit outstanding for CBRE Capital Markets. Due to the short-term nature and variable interest rates of these instruments, fair value approximates carrying value.

Senior Secured Term Loans: Based upon information from third-party banks, the estimated fair value of our senior secured term loans was approximately $1.6 billion at March 31, 2010. Their actual carrying value totaled $1.6 billion at March 31, 2010 (See Note 9).

11.625% Senior Subordinated Notes: Based on dealers’ quotes, the estimated fair value of our 11.625% senior subordinated notes was $496.9 million at March 31, 2010. Their actual carrying value totaled $436.8 million at March 31, 2010.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Notes Payable on Real Estate: As of March 31, 2010, the carrying value of our notes payable on real estate was $751.3 million (See Note 8). These borrowings mostly have floating interest rates at spreads over a market rate index. Given the credit crunch experienced during 2008 and continuing through the first quarter of 2010, it is likely that some portion of our notes payable on real estate have fair values lower than actual carrying values. However, given the volume of notes payable we have and the cost involved in estimating their fair value, we determined it was not practicable to do so. Additionally, only $3.5 million of these notes payable are recourse to us as of March 31, 2010.

5. Investments in Unconsolidated Subsidiaries

Investments in unconsolidated subsidiaries are accounted for under the equity method of accounting. Combined condensed financial information for these entities is as follows (dollars in thousands):

 

     Three Months Ended
March 31,
 
     2010     2009  

Development Services:

    

Revenue

   $ 20,936      $ 14,405   

Operating (loss) income

   $ (2,670   $ 1,564   

Net loss

   $ (11,572   $ (2,200

Global Investment Management:

    

Revenue

   $ 166,234      $ 143,709   

Operating loss

   $ (262,999   $ (317,701

Net loss

   $ (334,826   $ (359,718

Other:

    

Revenue

   $ 29,146      $ 33,135   

Operating income

   $ 2,746      $ 3,532   

Net income

   $ 2,858      $ 3,624   

Total:

    

Revenue

   $ 216,316      $ 191,249   

Operating loss

   $ (262,923   $ (312,605

Net loss

   $ (343,540   $ (358,294

During the three months ended March 31, 2010 and 2009, we recorded write-downs of investments of $6.9 million and $7.1 million, respectively, within our Global Investment Management segment (See Note 4).

Our Global Investment Management segment involves investing our own capital in certain real estate investments with clients. We have provided investment management, property management, brokerage and other professional services in connection with these real estate investments on an arm’s length basis and earned revenues from these unconsolidated subsidiaries. We have also provided development, property management and brokerage services to certain of our unconsolidated subsidiaries in our Development Services segment on an arm’s length basis and earned revenues from these unconsolidated subsidiaries.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

6. Real Estate and Other Assets Held for Sale and Related Liabilities

Real estate and other assets held for sale include completed real estate projects or land for sale in their present condition that have met all of the “held for sale” criteria of the “Property, Plant and Equipment” Topic of the FASB ASC (Topic 360) and other assets directly related to such projects. Liabilities related to real estate and other assets held for sale have been included as a single line item in the accompanying consolidated balance sheets.

Real estate and other assets held for sale and related liabilities were as follows (dollars in thousands):

 

     March 31, 2010    December 31, 2009

Assets:

     

Real estate held for sale (see Note 7)

   $ 6,204    $ 7,101

Other current assets

     5      8
             

Total real estate and other assets held for sale

     6,209      7,109

Liabilities:

     

Notes payable on real estate held for sale (see Note 8)

     1,175      1,175

Accounts payable and accrued expenses

     33      92
             

Total liabilities related to real estate and other assets held for sale

     1,208      1,267
             

Net real estate and other assets held for sale

   $ 5,001    $ 5,842
             

7. Real Estate

We provide build-to-suit services for our clients and also develop or purchase certain projects which we intend to sell to institutional investors upon project completion or redevelopment. Therefore, we have ownership of real estate until such projects are sold or otherwise disposed. Certain real estate assets owned by us secure the outstanding balances of underlying mortgage or construction loans. The majority of our real estate is included in our Development Services segment. Real estate owned by us consisted of the following (dollars in thousands):

 

     March 31, 2010    December 31, 2009

Real estate included in assets held for sale (see Note 6)

   $ 6,204    $ 7,101

Real estate under development (non-current)

     149,691      160,164

Real estate held for investment (1)

     770,897      526,169
             

Total real estate (2)

   $ 926,792    $ 693,434
             

 

(1) Net of accumulated depreciation of $30.4 million and $26.7 million at March 31, 2010 and December 31, 2009, respectively.
(2) Includes balances for lease intangibles and tenant origination costs of $20.2 million and $5.2 million, respectively, at March 31, 2010 and $20.4 million and $5.9 million, respectively, at December 31, 2009. We record lease intangibles and tenant origination costs upon acquiring real estate projects with in-place leases. The balances are shown net of amortization, which is recorded as an increase to, or a reduction of, rental income for lease intangibles and as amortization expense for tenant origination costs.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In the first quarter of 2010, one of our consolidated real estate projects was sold to an affiliate of the project’s lender at a foreclosure auction. The related real estate note payable was nonrecourse to us. As a result of this transaction, we recorded the following non-cash activity (dollars in thousands):

 

     Debit (Credit)  

Assets:

  

Real estate held for investment

   $ (16,221

Restricted cash

     (279

Other current assets

     (524
        

Total assets

     (17,024
        

Liabilities:

  

Notes payable on real estate, current

     16,520   

Accounts payable and accrued expenses

     504   
        

Total liabilities

   $ 17,024   
        

During the three months ended March 31, 2009, we recorded impairment charges of $3.0 million on our real estate held for investment within our Development Services segment (See Note 4).

8. Notes Payable on Real Estate

We had loans secured by real estate, which consisted of the following (dollars in thousands):

 

     March 31, 2010    December 31, 2009

Current portion of notes payable on real estate

   $ 188,523    $ 159,921

Notes payable on real estate included in liabilities related to real estate and other assets held for sale (see Note 6)

     1,175      1,175
             

Total notes payable on real estate, current portion

     189,698      161,096

Notes payable on real estate, non-current portion

     561,645      390,181
             

Total notes payable on real estate

   $ 751,343    $ 551,277
             

At March 31, 2010 and December 31, 2009, $3.5 million of the non-current portion of notes payable on real estate were recourse to us, beyond being recourse to the single-purpose entity that held the real estate asset and was the primary obligor on the note payable.

9. Debt

Since 2001, we have maintained a credit agreement with Credit Suisse Group AG (CS) and other lenders to fund strategic acquisitions and to provide for our working capital needs. On March 24, 2009, we entered into a second amendment and restatement to our credit agreement (the Credit Agreement) with a syndicate of banks led by CS, as administrative and collateral agent, amending and restating our amended and restated credit agreement dated December 20, 2006. In connection with this amendment and restatement, we wrote off financing costs of $29.3 million during the three months ended March 31, 2009, which included the write-off of $18.1 million of

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

unamortized deferred financing costs and $11.2 million of Credit Agreement amendment fees paid in March 2009. On August 24, 2009, we entered into a loan modification agreement to our Credit Agreement, which included the conversion of $41.9 million of amounts outstanding under our revolving credit facility to term loans. On both February 5, 2010 and March 29, 2010, we entered into additional loan modification agreements to our Credit Agreement to further extend debt maturities and amortization schedules.

Subsequent to the March 29, 2010 loan modification, our Credit Agreement includes the following: (1) a $558.1 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, with tranche 1 in the amount of $225.1 million maturing on June 24, 2011 and tranche 2 in the amount of $333.0 million maturing on June 24, 2013; (2) a $579.8 million A term loan facility, which is further broken down as follows: i) a $135.9 million tranche A term loan facility requiring quarterly principal payments beginning December 31, 2010 through September 30, 2011, with the balance payable on December 20, 2011; ii) a $48.6 million tranche A-1 term loan facility payable on December 20, 2013; iii) a $203.2 million tranche A-2 term loan facility, requiring quarterly principal payments of $8.7 million beginning September 30, 2012 and continuing through March 31, 2013, with the balance payable on June 24, 2013; iv) a $167.5 million tranche A-3 term loan facility payable on December 20, 2013; v) a $24.1 million tranche A-3A term loan facility, requiring quarterly principal payments of $0.06 million beginning June 30, 2010 and continuing through September 30, 2013, with the balance payable on December 20, 2013; and vi) a $0.5 million tranche A-4 term loan facility payable on December 20, 2011, and (3) a $1,053.0 million B term loan facility, which is further broken down as follows: i) a $642.8 million tranche B term loan facility requiring quarterly principal payments of $1.9 million through September 30, 2013, with the balance payable on December 20, 2013; ii) a $295.2 million tranche B-1 term loan facility payable on December 20, 2015; and iii) a $115.0 million tranche B-1A term loan facility payable on December 20, 2015. During the three months ended March 31, 2010, we repaid the following amounts: $50.7 million of our tranche A term loan facility, which was applied to the required 2010 principal repayments; $1.2 million of our tranche A-1 term loan facility, which was applied against the balance due at maturity; $0.5 million of our tranche A-4 term loan facility, which repaid the entire outstanding balance; $1.9 million of our tranche B term loan facility, which covered the required quarterly principal payments due March 31, 2010; and $0.5 million of our tranche B-1 term loan facility, which covered a portion of the balance due at maturity. Some of these prepayments led to a reduction in the interest rate spreads governing our tranche A and A-1 term loan facilities as well as our revolving credit facility.

The revolving credit facility allows for borrowings outside of the U.S., with sub-facilities of $5.0 million available to one of our Canadian subsidiaries, $35.0 million in aggregate available to one of our Australian and one of our New Zealand subsidiaries and $50.0 million available to one of our United Kingdom (U.K.) subsidiaries. Additionally, outstanding borrowings under these sub-facilities may be up to 5.0% higher as allowed under the currency fluctuation provision in the Credit Agreement. Borrowings under the revolving credit facility as of March 31, 2010 bear interest at varying rates, based at our option, on either the applicable fixed rate plus 2.25% to 4.00% or the daily rate plus 1.25% to 3.00% for the tranche 1 facility, and on either the applicable fixed rate plus 2.50% to 4.75% or the daily rate plus 1.50% to 3.75% for the tranche 2 facility, in all cases as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement). As of March 31, 2010 and December 31, 2009, we had $20.1 million ($12.3 million under tranche 1 and $7.8 million under tranche 2) and $21.1 million ($13.1 million under tranche 1 and $8.0 million under tranche 2), respectively, of revolving credit facility principal outstanding with related weighted average interest rates of 4.6% and 5.3%, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. As of March 31, 2010, letters of credit totaling $29.1 million were outstanding under the revolving credit facility. These letters of credit were primarily issued in the normal course of business as well as in connection with certain insurance programs and reduce the amount we may borrow under the revolving credit facility.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Borrowings under the term loan facilities as of March 31, 2010 bear interest, based on our option, on the following: for the tranche A term loan facility, on either the applicable fixed rate plus 2.75% to 4.50% or the daily rate plus 1.75% to 3.50%; for the tranche A-1 term loan facility, on either the applicable fixed rate plus 3.50% to 4.50% or the daily rate plus 2.50% to 3.50%; for the tranche A-2 term loan facility, on either the applicable fixed rate plus 3.25% to 5.50% or the daily rate plus 2.25% to 4.50%; for the tranche A-3 and A-3A term loan facilities, on either the applicable fixed rate plus 4.00% to 5.00% or the daily rate plus 3.00% to 4.00%; for the tranche B term loan facility, on either the applicable fixed rate plus 4.00% to 5.00% or the daily rate plus 3.00% to 4.00%; and for the tranche B-1 and B-1A term loan facilities, on either the applicable fixed rate plus 4.50% to 5.50% or the daily rate plus 3.50% to 4.50%. For all term loan facilities, both the fixed rate and daily rate options are determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement). The tranche A-1, A-2, A-3, B-1 and B-1A term loan facilities include a targeted outstanding amount (as defined in the Credit Agreement) provision that will increase the interest rate by 2% if the outstanding balance exceeds the targeted outstanding amount at the end of each quarter. As of March 31, 2010 and December 31, 2009, the outstanding balance did not exceed the targeted outstanding amount. As of March 31, 2010 and December 31, 2009, we had $135.9 million and $326.3 million of tranche A term loan facility principal outstanding, respectively, $47.4 million and $48.6 million of tranche A-1 term loan facility principal outstanding, respectively, $203.2 million of tranche A-2 term loan facility principal outstanding, $167.5 million of tranche A-3 term loan facility principal outstanding, $640.9 million and $642.8 million of tranche B term loan facility principal outstanding, respectively, and $294.7 million and $295.2 million of tranche B-1 term loan facility principal outstanding, respectively, which are included in the accompanying consolidated balance sheets. As of March 31, 2010, we also had $24.1 million of tranche A-3A term loan facility principal outstanding and $115.0 million of tranche B-1A term loan facility principal outstanding, which are also included in the accompanying consolidated balance sheets.

The Credit Agreement is jointly and severally guaranteed by us and substantially all of our domestic subsidiaries. Borrowings under our Credit Agreement are secured by a pledge of substantially all of the capital stock of our U.S. subsidiaries and 65% of the capital stock of certain non-U.S. subsidiaries, and by a security interest in substantially all of the personal property of the U.S. subsidiaries. Also, the Credit Agreement requires us to pay a fee based on the total amount of the revolving credit facility commitment.

Our Credit Agreement and the indenture governing our 11.625% senior subordinated notes contain numerous restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, create or permit liens on assets, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. Our Credit Agreement also currently requires us to maintain a minimum coverage ratio of EBITDA (as defined in the Credit Agreement) to total interest expense of 2.00x through March 31, 2011 and 2.25x thereafter and a maximum leverage ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement) of 4.25x through March 31, 2011 and 3.75x thereafter.

10. Commitments and Contingencies

We are a party to a number of pending or threatened lawsuits arising out of, or incident to, our ordinary course of business. Our management believes that any liability imposed upon us that may result from disposition of these lawsuits will not have a material effect on our business, consolidated financial position, cash flows or results of operations.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

We had outstanding letters of credit totaling $38.6 million as of March 31, 2010, excluding letters of credit for which we have outstanding liabilities already accrued on our consolidated balance sheet related to our subsidiaries’ outstanding reserves for claims under certain insurance programs. These letters of credit are primarily executed by us in the normal course of business as well as in connection with certain insurance programs. The letters of credit expire at varying dates through January 2011.

We had guarantees totaling $14.3 million as of March 31, 2010, excluding guarantees related to pension liabilities, consolidated indebtedness and other obligations for which we have outstanding liabilities already accrued on our consolidated balance sheet as well as operating leases. The $14.3 million primarily consists of guarantees of obligations of unconsolidated subsidiaries, which expire at varying dates through March 2014.

In addition, as of March 31, 2010, we had numerous completion and budget guarantees relating to development projects. These guarantees are made by us in the normal course of our Development Services business. Each of these guarantees requires us to complete construction of the relevant project within a specified timeframe and/or within a specified budget, with us potentially being liable for costs to complete in excess of such timeframe or budget. However, we generally have “guaranteed maximum price” contracts with reputable general contractors with respect to projects for which we provide these guarantees. These contracts are intended to pass the risk to such contractors. While there can be no assurance, we do not expect to incur any material losses under these guarantees.

From time to time, we act as a general contractor with respect to construction projects. We do not consider these activities to be a material part of our business. In connection with these activities, we seek to subcontract construction work for certain projects to reputable subcontractors. Should construction defects arise relating to the underlying projects, we could potentially be liable to the client for the costs to repair such defects, although we would generally look to the subcontractor that performed the work to remedy the defect and also look to insurance policies that cover this work. While there can be no assurance, we do not expect to incur material losses with respect to construction defects.

In January 2008, CBRE Capital Markets entered into an agreement with Fannie Mae, under Fannie Mae’s Delegated Underwriting and Servicing (DUS) Lender Program, to provide financing for apartments with five or more units. Under the DUS Program, CBRE Capital Markets originates, underwrites, closes and services loans without prior approval by Fannie Mae, and in selected cases, is subject to sharing up to one-third of any losses on loans issued under the DUS program. CBRE Capital Markets has funded loans subject to such loss sharing arrangements with unpaid principal balances of $1.3 billion at March 31, 2010. Additionally, CBRE Capital Markets has funded loans under the DUS program that are not subject to loss sharing arrangements with unpaid principal balances of approximately $435.3 million at March 31, 2010. CBRE Capital Markets, under its agreement with Fannie Mae, must post cash reserves under formulas established by Fannie Mae to provide for sufficient capital in the event losses occur. As of March 31, 2010 and December 31, 2009, CBRE Capital Markets had $1.2 million of cash deposited under this reserve arrangement, and had provided approximately $2.3 million and $2.0 million, respectively, of loan loss accruals.

An important part of the strategy for our Global Investment Management business involves investing our capital in certain real estate investments with our clients. These co-investments typically range from 2% to 5% of the equity in a particular fund. As of March 31, 2010, we had aggregate commitments of $30.0 million to fund future co-investments.

Additionally, an important part of our Development Services business strategy is to invest in unconsolidated real estate subsidiaries as a principal (in most cases co-investing with our clients). As of March 31, 2010, we had committed to fund $27.6 million of additional capital to these unconsolidated subsidiaries.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

11. Loss Per Share

Basic loss per share attributable to CB Richard Ellis Group, Inc. is computed by dividing net loss attributable to CB Richard Ellis Group, Inc. shareholders by the weighted average number of common shares outstanding during each period. The computation of diluted loss per share attributable to CB Richard Ellis Group, Inc. generally further assumes the dilutive effect of potential common shares, which include stock options and certain contingently issuable shares. Contingently issuable shares consist of non-vested stock awards. For the three months ended March 31, 2010 and 2009, all stock options and contingently issuable shares were anti-dilutive, since we reported a net loss for these periods. As a result, basic and diluted loss per share was equivalent for these periods. The following is a calculation of loss per share attributable to CB Richard Ellis Group, Inc. (dollars in thousands, except share data):

 

     Three Months Ended
March 31,
 
     2010     2009  

Computation of basic and diluted loss per share attributable to
CB Richard Ellis Group, Inc. shareholders:

    

Net loss attributable to CB Richard Ellis Group, Inc.

   $ (6,627   $ (36,689

Weighted average shares outstanding for basic and diluted loss per share

     312,879,640        261,999,151   
                

Basic and diluted loss per share attributable to CB Richard Ellis Group, Inc. shareholders

   $ (0.02   $ (0.14
                

Had we reported net income for the three months ended March 31, 2010 and 2009, options to purchase 4,497,203 and 4,807,380, respectively, shares of common stock would have been included in the computation of diluted earnings per share, while options to purchase 2,984,430 and 7,366,454, respectively, shares of common stock would have been excluded from the computation of diluted earnings per share as their inclusion would have had an anti-dilutive effect. Additionally, had we reported net income for the three months ended March 31, 2010 and 2009, 9,789,081 and 119,934, respectively, of contingently issuable shares would have been included in the computation of diluted earnings per share, while 947,439 and 4,535,161, respectively, of contingently issuable shares would have been excluded from the computation of diluted earnings per share as their inclusion would have had an anti-dilutive effect.

12. Comprehensive Loss

The following table provides a summary of comprehensive loss (dollars in thousands):

 

     Three Months Ended
March 31,
 
     2010     2009  

Net loss

   $ (16,187   $ (54,419

Other comprehensive loss:

    

Foreign currency translation loss

     (24,126     (28,211

Unrealized gains on interest rate swaps and interest rate caps, net

     122        4,606   

Other, net

     2,288        360   
                

Total other comprehensive loss

     (21,716     (23,245

Comprehensive loss

     (37,903     (77,664

Comprehensive loss attributable to non-controlling interests

     (9,920     (19,552
                

Comprehensive loss attributable to CB Richard Ellis Group, Inc.

   $ (27,983   $ (58,112
                

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

13. Pensions

We have two contributory defined benefit pension plans in the U.K., which we acquired in connection with previous acquisitions. Our subsidiaries based in the U.K. maintain the plans to provide retirement benefits to existing and former employees participating in these plans. During 2007, we reached agreements with the active members of these plans to freeze future pension plan benefits. In return, the active members became eligible to enroll in the CBRE Group Personal Pension Plan, a defined contribution plan in the U.K.

Net periodic pension cost consisted of the following (dollars in thousands):

 

     Three Months Ended
March  31,
 
     2010     2009  

Interest cost

   $ 4,063      $ 3,298   

Expected return on plan assets

     (3,771     (2,863

Amortization of unrecognized net loss

     555        240   
                

Net periodic pension cost

   $ 847      $ 675   
                

We contributed $0.8 million to fund our pension plans during the three months ended March 31, 2010. We expect to contribute a total of $3.6 million to fund our pension plans for the year ending December 31, 2010.

14. Guarantor and Nonguarantor Financial Statements

The following condensed consolidating financial information includes:

(1) Condensed consolidating balance sheets as of March 31, 2010 and December 31, 2009; condensed consolidating statements of operations for the three months ended March 31, 2010 and 2009; and condensed consolidating statements of cash flows for the three months ended March 31, 2010 and 2009, of (a) CB Richard Ellis Group, Inc., as the parent, (b) CB Richard Ellis Services, Inc. (CBRE), as the subsidiary issuer, (c) the guarantor subsidiaries, (d) the nonguarantor subsidiaries and (e) CB Richard Ellis Group, Inc. on a consolidated basis; and

(2) Elimination entries necessary to consolidate CB Richard Ellis Group, Inc., as the parent, with CBRE and its guarantor and nonguarantor subsidiaries.

Investments in consolidated subsidiaries are presented using the equity method of accounting. The principal elimination entries eliminate investments in consolidated subsidiaries and inter-company balances and transactions.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF MARCH 31, 2010

(Dollars in thousands)

 

    Parent   CBRE   Guarantor
Subsidiaries
  Nonguarantor
Subsidiaries
  Elimination     Consolidated
Total

Current Assets:

           

Cash and cash equivalents

  $ 4   $ 229,835   $ 283,882   $ 166,574   $ —        $ 680,295

Restricted cash

    —       —       10,328     27,591     —          37,919

Receivables, net

    —       —       298,641     421,585     —          720,226

Warehouse receivables (a)

    —       —       94,643     —       —          94,643

Income taxes receivable

    15,691     131,617     —       25,418     (18,219     154,507

Prepaid expenses

    —       —       40,876     52,689     —          93,565

Deferred tax assets, net

    —       —       54,437     21,126     —          75,563

Real estate and other assets held for sale

    —       —       —       6,209     —          6,209

Other current assets

    —       —       22,949     11,328     —          34,277
                                     

Total Current Assets

    15,695     361,452     805,756     732,520     (18,219     1,897,204

Property and equipment, net

    —       —       98,659     66,906     —          165,565

Goodwill

    —       —       798,778     496,720     —          1,295,498

Other intangible assets, net

    —       —       293,931     28,805     —          322,736

Investments in unconsolidated subsidiaries

    —       —       66,457     61,102     —          127,559

Investments in consolidated subsidiaries

    794,472     2,624,632     895,692     —       (4,314,796     —  

Intercompany loan receivable

    —       —       635,000     102,858     (737,858     —  

Deferred tax assets, net

    —       —       —       31,850     (31,442     408

Real estate under development

    —       —       —       149,691     —          149,691

Real estate held for investment

    —       —       4,680     766,217     —          770,897

Available for sale securities

    —       —       32,411     218     —          32,629

Other assets, net

    —       27,723     37,283     40,222     —          105,228
                                     

Total Assets

  $ 810,167   $ 3,013,807   $ 3,668,647   $ 2,477,109   $ (5,102,315   $ 4,867,415
                                     

Current Liabilities:

           

Accounts payable and accrued expenses

  $ —     $ 18,302   $ 112,493   $ 298,645   $ —        $ 429,440

Compensation and employee benefits payable

    —       626     140,959     114,659     —          256,244

Accrued bonus and profit sharing

    —       —       68,499     118,119     —          186,618

Income taxes payable

    —       —       18,219     —       (18,219     —  

Short-term borrowings:

           

Warehouse lines of credit (a)

    —       —       94,040     —       —          94,040

Revolving credit facility

    —       9,868     —       10,279     —          20,147

Other

    —       —       329     13,000     —          13,329
                                     

Total short-term borrowings

    —       9,868     94,369     23,279     —          127,516

Current maturities of long-term debt

    —       59,751     230     191     —          60,172

Notes payable on real estate

    —       —       —       188,523     —          188,523

Liabilities related to real estate and other assets held for sale

    —       —       —       1,208     —          1,208

Other current liabilities

    1,190     —       9,698     2,798     —          13,686
                                     

Total Current Liabilities

    1,190     88,547     444,467     747,422     (18,219     1,263,407

Long-Term Debt:

           

Senior secured term loans

    —       1,569,043     —       —       —          1,569,043

11.625% senior subordinated notes, net

    —       436,783     —       —       —          436,783

Other long-term debt

    —       —       —       128     —          128

Intercompany loan payable

    196,838     124,962     416,058     —       (737,858     —  
                                     

Total Long-Term Debt

    196,838     2,130,788     416,058     128     (737,858     2,005,954

Deferred tax liabilities, net

    —       —       31,442     —       (31,442     —  

Pension liability

    —       —       —       61,028     —          61,028

Non-current tax liabilities

    —       —       73,805     —       —          73,805

Notes payable on real estate

    —       —       —       561,645     —          561,645

Other liabilities

    —       —       78,243     33,858     —          112,101
                                     

Total Liabilities

    198,028     2,219,335     1,044,015     1,404,081     (787,519     4,077,940

Commitments and contingencies

    —       —       —       —       —          —  

Equity:

           

CB Richard Ellis Group, Inc. Stockholders’ Equity

    612,139     794,472     2,624,632     895,692     (4,314,796     612,139

Non-controlling interests

    —       —       —       177,336     —          177,336
                                     

Total Equity

    612,139     794,472     2,624,632     1,073,028     (4,314,796     789,475
                                     

Total Liabilities and Equity

  $ 810,167   $ 3,013,807   $ 3,668,647   $ 2,477,109   $ (5,102,315   $ 4,867,415
                                     

 

(a) Although CBRE Capital Markets is included among our domestic subsidiaries, which jointly and severally guarantee our 11.625% senior subordinated notes and our Credit Agreement, a substantial majority of warehouse receivables funded under the JP Morgan Chase Bank, N.A. (JP Morgan), the Fannie Mae As Soon As Pooled (ASAP) and Bank of America (BofA) lines of credit are pledged to JP Morgan, Fannie Mae and BofA, and accordingly, are not included as collateral for these notes or our other outstanding debt.

 

20


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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2009

(Dollars in thousands)

 

    Parent   CBRE   Guarantor
Subsidiaries
  Nonguarantor
Subsidiaries
  Elimination     Consolidated
Total

Current Assets:

           

Cash and cash equivalents

  $ 4   $ 242,586   $ 283,251   $ 215,716   $ —        $ 741,557

Restricted cash

    —       —       13,786     33,011     —          46,797

Receivables, net

    —       2     297,717     478,210     —          775,929

Warehouse receivables(a)

    —       —       315,033     —       —          315,033

Income taxes receivable

    14,062     171,549     —       23,046     (45,625     163,032

Prepaid expenses

    —       —       44,148     55,161     —          99,309

Deferred tax assets, net

    —       —       54,183     21,147     —          75,330

Real estate and other assets held for sale

    —       —       —       7,109     —          7,109

Available for sale securities

    —       —       865     —       —          865

Other current assets

    —       4,660     25,371     11,733     —          41,764
                                     

Total Current Assets

    14,066     418,797     1,034,354     845,133     (45,625     2,266,725

Property and equipment, net

    —       —       106,488     72,487     —          178,975

Goodwill

    —       —       797,142     509,230     —          1,306,372

Other intangible assets, net

    —       —       293,886     29,018     —          322,904

Investments in unconsolidated subsidiaries

    —       —       68,144     67,452     —          135,596

Investments in consolidated subsidiaries

    811,588     2,535,355     903,699     —       (4,250,642     —  

Intercompany loan receivable

    —       —       635,000     47,271     (682,271     —  

Deferred tax assets, net

    —       —       —       34,162     (30,767     3,395

Real estate under development

    —       —       —       160,164     —          160,164

Real estate held for investment

    —       —       4,680     521,489     —          526,169

Available for sale securities

    —       —       31,796     220     —          32,016

Other assets, net

    —       25,914     40,671     40,505     —          107,090
                                     

Total Assets

  $ 825,654   $ 2,980,066   $ 3,915,860   $ 2,327,131   $ (5,009,305   $ 5,039,406
                                     

Current Liabilities:

           

Accounts payable and accrued expenses

  $ —     $ 5,905   $ 126,319   $ 326,286   $ —        $ 458,510

Compensation and employee benefits payable

    —       626     118,310     121,600     —          240,536

Accrued bonus and profit sharing

    —       —       128,133     150,311     —          278,444

Income taxes payable

    —       —       45,625     —       (45,625     —  

Short-term borrowings:

           

Warehouse lines of credit(a)

    —       —       312,872     —       —          312,872

Revolving credit facility

    —       10,501     —       10,549     —          21,050

Other

    —       —       350     5,500     —          5,850
                                     

Total short-term borrowings

    —       10,501     313,222     16,049     —          339,772

Current maturities of long-term debt

    —       138,120     232     330     —          138,682

Notes payable on real estate

    —       —       —       159,921     —          159,921

Liabilities related to real estate and other assets held for sale

    —       —       —       1,267     —          1,267

Other current liabilities

    1,190     —       8,946     1,773     —          11,909
                                     

Total Current Liabilities

    1,190     155,152     740,787     777,537     (45,625     1,629,041

Long-Term Debt:

           

Senior secured term loans

    —       1,545,490     —       —       —          1,545,490

11.625% senior subordinated notes, net

    —       436,502     —       —       —          436,502

Other long-term debt

    —       —       —       129     —          129

Intercompany loan payable

    195,342     31,334     455,595     —       (682,271     —  
                                     

Total Long-Term Debt

    195,342     2,013,326     455,595     129     (682,271     1,982,121

Deferred tax liabilities, net

    —       —       30,767     —       (30,767     —  

Pension liability

    —       —       —       64,945     —          64,945

Non-current tax liabilities

    —       —       73,462     —       —          73,462

Notes payable on real estate

    —       —       —       390,181     —          390,181

Other liabilities

    —       —       79,894     35,467     —          115,361
                                     

Total Liabilities

    196,532     2,168,478     1,380,505     1,268,259     (758,663     4,255,111

Commitments and contingencies

    —       —       —       —       —          —  

Equity:

           

CB Richard Ellis Group, Inc. Stockholders’ Equity

    629,122     811,588     2,535,355     903,699     (4,250,642     629,122

Non-controlling interests

    —       —       —       155,173     —          155,173
                                     

Total Equity

    629,122     811,588     2,535,355     1,058,872     (4,250,642     784,295
                                     

Total Liabilities and Equity

  $ 825,654   $ 2,980,066   $ 3,915,860   $ 2,327,131   $ (5,009,305   $ 5,039,406
                                     

 

(a) Although CBRE Capital Markets is included among our domestic subsidiaries, which jointly and severally guarantee our 11.625% senior subordinated notes and our Credit Agreement, a substantial majority of warehouse receivables funded under the JP Morgan, BofA and the Fannie Mae ASAP lines of credit are pledged to JP Morgan, BofA and Fannie Mae, and accordingly, are not included as collateral for these notes or our other outstanding debt.

 

21


Table of Contents

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(Dollars in thousands)

 

     Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Revenue

   $ —        $ —        $ 602,434      $ 423,449      $ —        $ 1,025,883   

Costs and expenses:

            

Cost of services

     —          —          367,146        248,048        —          615,194   

Operating, administrative and other

     10,376        363        175,192        152,775        —          338,706   

Depreciation and amortization

     —          —          14,217        12,078        —          26,295   
                                                

Total costs and expenses

     10,376        363        556,555        412,901        —          980,195   

Operating (loss) income

     (10,376     (363     45,879        10,548        —          45,688   

Equity loss from unconsolidated subsidiaries

     —          —          (3,591     (2,993     —          (6,584

Interest income

     —          58        860        1,072        (190     1,800   

Interest expense

     —          40,136        122        9,724        (190     49,792   

Royalty and management service (income) expense

     —          —          (5,001     5,001        —          —     

(Loss) income from consolidated subsidiaries

     (372     24,006        (6,112     —          (17,522     —     
                                                

(Loss) income before (benefit of) provision for income taxes

     (10,748     (16,435     41,915        (6,098     (17,522     (8,888

(Benefit of) provision for income taxes

     (4,121     (16,063     17,909        9,574        —          7,299   
                                                

Net (loss) income

     (6,627     (372     24,006        (15,672     (17,522     (16,187

Less: Net loss attributable to non-controlling interests

     —          —          —          (9,560     —          (9,560
                                                

Net (loss) income attributable to CB Richard Ellis Group, Inc.

   $ (6,627   $ (372   $ 24,006      $ (6,112   $ (17,522   $ (6,627
                                                

 

22


Table of Contents

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2009

(Dollars in thousands)

 

     Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Revenue

   $ —        $ —        $ 558,400      $ 332,049      $ —        $ 890,449   

Costs and expenses:

            

Cost of services

     —          —          352,090        201,329        —          553,419   

Operating, administrative and other

     7,473        4,425        160,435        133,826        —          306,159   

Depreciation and amortization

     —          —          13,833        11,559        —          25,392   
                                                

Total costs and expenses

     7,473        4,425        526,358        346,714        —          884,970   

Operating (loss) income

     (7,473     (4,425     32,042        (14,665     —          5,479   

Equity loss from unconsolidated subsidiaries

     —          —          (4,032     (6,165     —          (10,197

Interest income

     —          26        874        1,451        (46     2,305   

Interest expense

     —          27,471        134        7,239        (46     34,798   

Write-off of financing costs

     —          29,255        —          —          —          29,255   

Royalty and management service (income) expense

     —          —          (1,071     1,071        —          —     

(Loss) income from consolidated subsidiaries

     (32,197     4,542        (6,975     —          34,630        —     
                                                

(Loss) income before (benefit of) provision for income taxes

     (39,670     (56,583     22,846        (27,689     34,630        (66,466

(Benefit of) provision for income taxes

     (2,981     (24,386     18,304        (2,984     —          (12,047
                                                

Net (loss) income

     (36,689     (32,197     4,542        (24,705     34,630        (54,419

Less: Net loss attributable to non-controlling interests

     —          —          —          (17,730     —          (17,730
                                                

Net (loss) income attributable to CB Richard Ellis Group, Inc.

   $ (36,689   $ (32,197   $ 4,542      $ (6,975   $ 34,630      $ (36,689
                                                

 

23


Table of Contents

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2010

(Dollars in thousands)

 

     Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Consolidated
Total
 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

   $ 2,929      $ 35,254      $ (24,277   $ (6,815   $ 7,091   

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     —          —          (1,206     (1,692     (2,898

Acquisition of businesses including net assets acquired, intangibles and goodwill

     —          —          (1,144     (2,621     (3,765

Contributions to unconsolidated subsidiaries

     —          —          (4,970     (1,356     (6,326

Proceeds from the sale of servicing rights and other assets

     —          —          3,337        9        3,346   

Additions to real estate held for investment

     —          —          —          (4,229     (4,229

Decrease in restricted cash

     —          —          3,457        4,631        8,088   

Other investing activities, net

     —          —          (922     1,858        936   
                                        

Net cash used in investing activities

     —          —          (1,448     (3,400     (4,848

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Repayment of senior secured term loans

     —          (54,816     —          —          (54,816

Proceeds from revolving credit facility

     —          —          —          3,740        3,740   

Repayment of revolving credit facility

     —          —          —          (4,040     (4,040

Proceeds from notes payable on real estate held for investment

     —          —          —          3,940        3,940   

Repayment of notes payable on real estate held for investment

     —          —          —          (10,142     (10,142

Proceeds from notes payable on real estate held for sale and under development

     —          —          —          1,798        1,798   

Repayment of notes payable on real estate held for sale and under development

     —          —          —          (637     (637

(Repayment of) proceeds from short-term borrowings and other loans, net

     —          —          (2     7,500        7,498   

Non-controlling interests contributions

     —          —          —          2,980        2,980   

Non-controlling interests distributions

     —          —          —          (555     (555

Payment of financing costs

     —          (4,137     —          (220     (4,357

(Increase) decrease in intercompany receivables, net

     (3,434     10,948        26,358        (33,872     —     

Other financing activities, net

     505        —          —          (138     367   
                                        

Net cash (used in) provided by financing activities

     (2,929     (48,005     26,356        (29,646     (54,224

Effect of currency exchange rate changes on cash and cash equivalents

     —          —          —          (9,281     (9,281
                                        

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     —          (12,751     631        (49,142     (61,262

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

     4        242,586        283,251        215,716        741,557   
                                        

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

   $ 4      $ 229,835      $ 283,882      $ 166,574      $ 680,295   
                                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

          

Cash paid (received) during the period for:

          

Interest

   $ —        $ 25,065      $ 13      $ 4,524      $ 29,602   
                                        

Income tax (refunds) payments, net

   $ —        $ —        $ (10,803   $ 5,709      $ (5,094
                                        

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2009

(Dollars in thousands)

 

     Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Consolidated
Total
 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

   $ 9,668      $ (13,860   $ 622      $ (7,904   $ (11,474

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Capital expenditures

     —          —          (1,766     (838     (2,604

Acquisition of businesses including net assets acquired, intangibles and goodwill

     —          —          (1,778     (6,937     (8,715

Contributions to unconsolidated subsidiaries

     —          —          (3,699     (6,828     (10,527

Proceeds from the sale of servicing rights and other assets

     —          —          5,329        60        5,389   

Additions to real estate held for investment

     —          —          —          (4,814     (4,814

Decrease in restricted cash

     —          —          1,052        941        1,993   

Other investing activities, net

     —          —          (18     5        (13
                                        

Net cash used in investing activities

     —          —          (880     (18,411     (19,291

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Repayment of senior secured term loans

     —          (105,500     —          —          (105,500

Proceeds from revolving credit facility

     —          415,000        —          4,078        419,078   

Proceeds from notes payable on real estate held for investment

     —          —          —          4,983        4,983   

Repayment of notes payable on real estate held for investment

     —          —          —          (392     (392

Proceeds from notes payable on real estate held for sale and under development

     —          —          —          15,726        15,726   

Repayment of notes payable on real estate held for sale and under development

     —          —          —          (15,430     (15,430

(Repayment of) proceeds from short-term borrowings and other loans, net

     —          —          (1,076     95        (981

Non-controlling interests contributions

     —          —          —          2,914        2,914   

Non-controlling interests distributions

     —          —          —          (5     (5

Payment of financing costs

     —          (16,202     —          (503     (16,705

(Increase) decrease in intercompany receivables, net

     (9,443     (142,216     153,118        (1,459     —     

Other financing activities, net

     (225     —          —          (434     (659
                                        

Net cash (used in) provided by financing activities

     (9,668     151,082        152,042        9,573        303,029   

Effect of currency exchange rate changes on cash and cash equivalents

     —          —          —          (7,624     (7,624
                                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     —          137,222        151,784        (24,366     264,640   

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

     4        7,203        9,467        142,149        158,823   
                                        

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

   $ 4      $ 144,425      $ 161,251      $ 117,783      $ 423,463   
                                        

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

          

Cash paid (received) during the period for:

          

Interest

   $ —        $ 23,599      $ —        $ 5,210      $ 28,809   
                                        

Income tax (refunds) payments, net

   $ —        $ —        $ (3,799   $ 2,010      $ (1,789
                                        

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

15. Industry Segments

We report our operations through five segments. The segments are as follows: (1) Americas, (2) EMEA, (3) Asia Pacific, (4) Global Investment Management and (5) Development Services.

The Americas segment is our largest segment of operations and provides a comprehensive range of services throughout the U.S. and in the largest regions of Canada and selected parts of Latin America. The primary services offered consist of the following: real estate services, mortgage loan origination and servicing, valuation services, asset services and corporate services.

Our EMEA and Asia Pacific segments provide services similar to the Americas business segment. The EMEA segment has operations primarily in Europe, while the Asia Pacific segment has operations primarily in Asia, Australia and New Zealand.

Our Global Investment Management business provides investment management services to clients seeking to generate returns and diversification through direct and indirect investments in real estate in the U.S., Europe and Asia.

Our Development Services business consists of real estate development and investment activities primarily in the U.S., which we acquired in the Trammell Crow Company Acquisition on December 20, 2006.

Summarized financial information by segment is as follows (dollars in thousands):

 

     Three Months Ended
March 31,
 
     2010     2009  

Revenue

    

Americas

   $ 645,611      $ 577,041   

EMEA

     188,160        162,161   

Asia Pacific

     134,432        93,094   

Global Investment Management

     39,407        37,296   

Development Services

     18,273        20,857   
                
   $ 1,025,883      $ 890,449   
                

EBITDA

    

Americas

   $ 61,988      $ 38,641   

EMEA

     4,125        (3,117

Asia Pacific

     8,258        1,940   

Global Investment Management

     (4,930     (426

Development Services

     5,518        1,366   
                
   $ 74,959      $ 38,404   
                

EBITDA represents earnings before net interest expense, write-off of financing costs, income taxes, depreciation and amortization. Our management believes EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Such items may vary for different companies for reasons unrelated to overall operating performance. As a result, our management uses EBITDA as a measure to evaluate the operating performance of our various business segments and for other discretionary purposes, including as a significant component when measuring our operating performance under our employee incentive programs. Additionally, we believe EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations.

However, EBITDA is not a recognized measurement under GAAP and when analyzing our operating performance, readers should use EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as tax and debt service payments. The amounts shown for EBITDA also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges and are used to determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Net interest expense and write-off of financing costs have been expensed in the segment incurred. Provision for (benefit of) income taxes has been allocated among our segments by using applicable U.S. and foreign effective tax rates. EBITDA for our segments is calculated as follows (dollars in thousands):

 

     Three Months Ended
March  31,
 
         2010             2009      

Americas

    

Net income (loss) attributable to CB Richard Ellis Group, Inc.

   $ 2,546      $ (17,376

Add:

    

Depreciation and amortization

     14,690        14,258   

Interest expense

     39,714        27,700   

Write-off of financing costs

     —          29,255   

Royalty and management service income

     (4,145     (827

Provision for (benefit of) income taxes

     10,369        (13,253

Less:

    

Interest income

     1,186        1,116   
                

EBITDA

   $ 61,988      $ 38,641   
                

EMEA

    

Net income (loss) attributable to CB Richard Ellis Group, Inc.

   $ 972      $ (8,382

Add:

    

Depreciation and amortization

     2,390        2,540   

Interest expense

     89        2   

Royalty and management service expense

     2,212        156   

(Benefit of) provision for income taxes

     (1,205     2,800   

Less:

    

Interest income

     333        233   
                

EBITDA

   $ 4,125      $ (3,117
                

Asia Pacific

    

Net income attributable to CB Richard Ellis Group, Inc.

   $ 743      $ 487   

Add:

    

Depreciation and amortization

     2,112        2,128   

Interest expense

     557        648   

Royalty and management service expense

     1,793        457   

Provision for (benefit of) income taxes

     3,200        (1,674

Less:

    

Interest income

     147        106   
                

EBITDA

   $ 8,258      $ 1,940   
                

Global Investment Management

    

Net loss attributable to CB Richard Ellis Group, Inc.

   $ (8,468   $ (5,501

Add:

    

Depreciation and amortization

     2,857        1,203   

Interest expense

     4,415        548   

Royalty and management service expense

     140        214   

(Benefit of) provision for income taxes

     (3,762     3,527   

Less:

    

Interest income

     112        417   
                

EBITDA

   $ (4,930   $ (426
                

Development Services

    

Net loss attributable to CB Richard Ellis Group, Inc.

   $ (2,420   $ (5,917

Add:

    

Depreciation and amortization

     4,246        5,263   

Interest expense

     5,017        5,900   

Benefit of income taxes

     (1,303     (3,447

Less:

    

Interest income

     22        433   
                

EBITDA

   $ 5,518      $ 1,366   
                

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

16. Subsequent Events

We have evaluated events and transactions that have occurred subsequent to March 31, 2010 through the date of issuance of our consolidated financial statements, for potential recognition or disclosure in these consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q for CB Richard Ellis Group, Inc. for the three months ended March 31, 2010, represents an update to the more detailed and comprehensive disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2009. Accordingly, you should read the following discussion in conjunction with the information included in our Annual Report on Form 10-K as well as the unaudited financial statements included elsewhere in this Quarterly Report on Form 10-Q.

In addition, some of the statements and assumptions in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or Section 21E of the Securities Exchange Act of 1934, each as amended, including, in particular, statements about our plans, strategies and prospects as well as estimates of industry growth for the second quarter and beyond. See “Forward-Looking Statements.”

Overview

We are the world’s largest commercial real estate services firm, based on 2009 revenue, with leading full-service operations in major metropolitan areas throughout the world. We offer a full range of services to occupiers, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estate. As of December 31, 2009, we operated more than 300 offices worldwide, excluding affiliate offices, with approximately 29,000 employees providing commercial real estate services under the “CB Richard Ellis” brand name and development services under the “Trammell Crow” brand name. Our business is focused on several competencies, including commercial property and corporate facilities management, tenant representation, property/agency leasing, property sales, valuation, real estate investment management, commercial mortgage origination and servicing, capital markets (equity and debt) solutions, development services and proprietary research. We generate revenues from contractual management fees and on a per project or transactional basis. In 2006, we became the first commercial real estate services company included in the S&P 500. In 2007, 2008 and 2009, we were the only commercial real estate services company included on the Business Week list of 50 “Best in Class” companies across all industries. In 2008, we became the first commercial real estate services firm to be included in the Fortune 500 and remained the only commercial real estate services company on this list in 2009 and 2010. Additionally, the International Association of Outsourcing Professionals has included us among the top 100 global outsourcing companies across all industries for four consecutive years, including 2010 when we ranked 13th overall.

When you read our financial statements and the information included in this section, you should consider that we have experienced, and continue to experience, several material trends and uncertainties that have affected our financial condition and results of operations that make it challenging to predict our future performance based on our historical results. We believe that the following material trends and uncertainties are crucial to an understanding of the variability in our historical earnings and cash flows and the potential for continued variability in the future:

Macroeconomic Conditions

Economic trends and government policies affect global and regional commercial real estate markets as well as our operations directly. These include: overall economic activity and employment growth, interest rate levels, the cost and availability of credit and the impact of tax and regulatory policies. Periods of economic weakness or recession, significantly rising interest rates, declining employment levels, declining demand for real estate, declining real estate values, or the public perception that any of these events may occur, have negatively affected and may continue to negatively affect the performance of many of our business lines. The severe global economic downturn and credit market crisis had significant adverse effects on our operations in 2008 and 2009. Weak economic conditions resulted in, and may continue to result in, low levels of transaction activity, decreased occupancy and rental rates, reduced property values and restrained corporate spending. These trends, in turn,

 

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adversely affected and may continue to affect, revenue from property management fees and commissions derived from property sales, leasing, valuation and financing, and funds available to invest in commercial real estate and related assets.

Negative economic conditions have also affected, and may continue to affect, our compensation expense, which is generally structured to decrease in line with a fall in revenue. Compensation is our largest expense and the sales and leasing professionals in our largest line of business, advisory services, generally are paid on a commission and bonus basis that correlates with our revenue performance. As a result, the negative effect of difficult market conditions on our operating margins is partially mitigated by the inherent variability of our compensation cost structure. In addition, at times when negative economic conditions are particularly severe, as they have been recently, our management has taken decisive actions to improve operational performance by, among other things, reducing discretionary bonuses, curtailing capital expenditures and adjusting overall staffing levels. Notwithstanding these actions, adverse global and regional economic changes remain one of the most significant risks to the financial condition and performance of our operations.

Economic conditions began to negatively affect our performance in the Americas, our largest segment in terms of revenue, beginning in the third quarter of 2007. U.S. economic activity progressively weakened throughout 2008 and most of 2009 highlighted by declining employment and highly constrained consumer and business spending. The economic weakness became most severe following the global capital markets disruption in late 2008, which caused credit availability to freeze up, investors to become more risk averse and assets of all types to lose significant value. These conditions also caused the economy to contract further and job losses to accelerate, resulting in a significant decline in leasing activity, space absorption, occupancy levels and rental rates. In addition, investment sales in the United States fell sharply in the face of significantly constrained liquidity, weakened property fundamentals, and the re-pricing of risk caused by economic and market uncertainty. A return to positive economic growth in the United States in the second half of 2009 and a turn toward positive employment growth in early 2010 did not have a meaningful impact on commercial real estate fundamentals. Property values remained under pressure and occupancy and rental rates continued to decline. The credit markets, however, did improve and transaction velocity in sales as well as leasing began to pick up in early 2010.

In Europe, weakening market conditions began to manifest in the United Kingdom in late 2007 and throughout the continent in early 2008. The major European economies also entered into a recession in 2008, which persisted through 2009. Low rates of economic growth have been experienced in early 2010. Leasing activity in the first quarter of 2010 remained subdued, but did revive somewhat compared with 2009’s depressed levels. Investment sales in Europe were adversely affected by the financial crisis in late 2008 and most of 2009. However, larger markets like London and Paris began to show modest increases in investment sales during the fourth quarter of 2009. This trend continued in early 2010 and started to become evident in more European markets. The markets in Asia Pacific were also affected, though generally to a lesser degree than the United States and Europe, by the global credit market dislocation and economic downturn. This resulted in lower investment sales and leasing activity in 2008 and most of 2009. In late 2009, transaction activity began to revive in Asia Pacific, reflecting the economic rebound in some countries in this region, including China and Australia. The recovery in this region accelerated in early 2010. Lastly, deteriorating conditions have also adversely affected investment management and development activity since late 2007 as property values have declined sharply, and both financing and disposition options continue to be more limited.

Recovery of our global sales, leasing, investment management and development services operations is contingent on, among other things, the world’s major economies, including the United States, generating stronger, sustained growth, with positive employment gains, credit markets returning to normal with stable, predictable and reasonably-priced financing and business confidence returning for an extended period.

 

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Effects of Acquisitions

Our management historically has made significant use of strategic acquisitions to add new service competencies, to increase our scale within existing competencies and to expand our presence in various geographic regions around the world. For example, we enhanced our mortgage brokerage services through our 1996 acquisition of L.J. Melody & Company (now known as CBRE Capital Markets) and we significantly increased the scale of our investment management business through our 1995 acquisition of Westmark Realty Advisors (now known as CB Richard Ellis Investors), our 1997 acquisition of Koll Real Estate Services and our 1998 acquisition of the London-based firm Hillier Parker May & Rowden. Our 2003 acquisition of Insignia Financial Group, Inc. (Insignia) significantly increased the scale of our real estate advisory and outsourcing services business lines in our Americas segment and also significantly increased our presence in the New York, London and Paris metropolitan areas. In December 2006, we acquired Trammell Crow Company, our largest acquisition to date. The acquisition of Trammell Crow Company deepened our offering of outsourcing services for corporate and institutional clients, especially project and facilities management, strengthened our ability to provide integrated management solutions across geographies, added our Development Services business and provided additional people, resources and expertise to offer real estate services throughout the United States.

Strategic in-fill acquisitions have also played a key role in expanding our geographic coverage and broadening and strengthening our service offerings. From 2005 to 2008, we completed 58 in-fill acquisitions for an aggregate purchase price of approximately $592 million. The companies we acquired have generally been quality regional firms or niche specialty firms that complement our existing platform within a region, or affiliates in which, in some cases, we held an equity interest. In light of the recent economic environment, from 2008 through the three months ended March 31, 2010, no acquisitions have been completed. However, we believe acquisitions will once again serve as a growth engine, supplementing our organic growth as market conditions improve.

Although our management believes that strategic acquisitions can significantly decrease the cost, time and commitment of management resources necessary to attain a meaningful competitive position within targeted markets or to expand our presence within our current markets, our management also believes that most acquisitions will initially have an adverse impact on our operating and net income, both as a result of transaction-related expenditures and the charges and costs of integrating the acquired business and its financial and accounting systems into our own. For example, we incurred $200.9 million of transaction-related expenditures in connection with our acquisition of Insignia in 2003 (the Insignia Acquisition) and $196.6 million of transaction-related expenditures in connection with our acquisition of Trammell Crow Company in 2006. Transaction-related expenditures included severance costs, lease termination costs, transaction costs, deferred financing costs and merger-related costs, among others. We incurred our final transaction expenditures with respect to the Insignia Acquisition in the third quarter of 2004 and the Trammell Crow Company Acquisition in the fourth quarter of 2007. In addition, through March 31, 2010, we have incurred expenses of $41.9 million related to Insignia and $59.6 million related to Trammell Crow Company in connection with the integration of these companies’ business lines, as well as accounting and other systems, into our own. During the three months ended March 31, 2010, we incurred $1.0 million of integration expenses, the majority of which were related to the acquisition of Trammell Crow Company. We expect to incur total integration expenses relating to past acquisitions of approximately $5 million during 2010, which primarily include residual integration costs associated with our acquisition of Trammell Crow Company.

International Operations

We have made significant acquisitions of non-U.S. companies and we may acquire additional foreign companies in the future. As we increase our foreign operations through either acquisitions or organic growth, fluctuations in the value of the U.S. dollar relative to the other currencies in which we may generate earnings could adversely affect our business, financial condition and operating results. Our management team generally seeks to mitigate our exposure by balancing assets and liabilities that are denominated in the same currency and by maintaining cash positions outside the United States only at levels necessary for operating purposes. In addition, from time to time we enter into foreign currency exchange contracts to mitigate our exposure to

 

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exchange rate changes related to particular transactions and to hedge risks associated with the translation of foreign currencies into U.S. dollars. Due to the constantly changing currency exposures to which we are subject and the volatility of currency exchange rates, our management cannot predict the effect of exchange rate fluctuations upon future operating results. In addition, fluctuations in currencies relative to the U.S. dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations.

Our international operations also are subject to, among other things, political instability and changing regulatory environments, which may adversely affect our future financial condition and results of operations. Our management routinely monitors these risks and related costs and evaluates the appropriate amount of resources to allocate towards business activities in foreign countries where such risks and costs are particularly significant.

Leverage

We are highly leveraged and have significant debt service obligations. As of March 31, 2010, our total debt, excluding our notes payable on real estate and warehouse lines of credit, was approximately $2.1 billion. Our level of indebtedness and the operating and financial restrictions in our debt agreements both place constraints on the operation of our business. Although our management believes that the incurrence of long-term indebtedness has been important in the development of our business, including facilitating our acquisitions of Insignia and Trammell Crow Company, the cash flow necessary to service this debt is not available for other general corporate purposes, which may limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate services industry. Our management seeks to mitigate this exposure both through the refinancing of debt when available on attractive terms and through selective repayment and retirement of indebtedness.

On February 5, 2010 and March 29, 2010, we entered into loan modification agreements to our credit agreement, which extended the maturity and amortization schedules on $139.1 million of our term loans and $132.5 million of our revolving credit facility capacity. Since August 2009, we have extended the maturity and amortization schedules on approximately $1.3 billion of debt. During the three months ended March 31, 2010, we also repaid $54.8 million of our senior secured term loans outstanding under our credit agreement. These actions have given us increased flexibility and significantly extended the weighted average maturity of our outstanding debt.

Critical Accounting Policies

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect reported amounts. The estimates and assumptions are based on historical experience and on other factors that management believes to be reasonable. Actual results may differ from those estimates. Critical accounting policies represent the areas where more significant judgments and estimates are used in the preparation of our consolidated financial statements. A discussion of such critical accounting policies, which include revenue recognition, our consolidation policy, goodwill and other intangible assets, real estate and income taxes can be found in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no material changes to these policies as of this Quarterly Report on Form 10-Q for the three months ended March 31, 2010.

Basis of Presentation

Segment Reporting

We report our operations through five segments. The segments are as follows: (1) Americas, (2) EMEA, (3) Asia Pacific, (4) Global Investment Management and (5) Development Services. The Americas consists of operations located in the United States, Canada and selected parts of Latin America. EMEA mainly consists of operations in Europe, while Asia Pacific includes operations in Asia, Australia and New Zealand. The Global

 

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Investment Management business consists of investment management operations in the United States, Europe and Asia. The Development Services business consists of real estate development and investment activities primarily in the United States, which were acquired in the Trammell Crow Company Acquisition.

Results of Operations

The following table sets forth items derived from our consolidated statements of operations for the three months ended March 31, 2010 and 2009, presented in dollars and as a percentage of revenue (dollars in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Revenue

   $ 1,025,883      100.0   $ 890,449      100.0

Costs and expenses:

        

Cost of services

     615,194      60.0        553,419      62.2   

Operating, administrative and other

     338,706      33.0        306,159      34.4   

Depreciation and amortization

     26,295      2.5        25,392      2.8   
                            

Total costs and expenses

     980,195      95.5        884,970      99.4   

Operating income

     45,688      4.5        5,479      0.6   

Equity loss from unconsolidated subsidiaries

     (6,584   (0.7     (10,197   (1.2

Interest income

     1,800      0.2        2,305      0.3   

Interest expense

     49,792      4.9        34,798      3.9   

Write-off of financing costs

     —        —          29,255      3.3   
                            

Loss before provision for (benefit of) income taxes

     (8,888   (0.9     (66,466   (7.5

Provision for (benefit of) income taxes

     7,299      0.7        (12,047   (1.4
                            

Net loss

     (16,187   (1.6     (54,419   (6.1

Less: Net loss attributable to non-controlling interests

     (9,560   (1.0     (17,730   (2.0
                            

Net loss attributable to CB Richard Ellis Group, Inc.

   $ (6,627   (0.6 )%    $ (36,689   (4.1 )% 
                            

EBITDA

   $ 74,959      7.3   $ 38,404      4.3
                            

EBITDA represents earnings before net interest expense, write-off of financing costs, income taxes, depreciation and amortization. Our management believes EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry because the calculation of EBITDA generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions. Such items may vary for different companies for reasons unrelated to overall operating performance. As a result, our management uses EBITDA as a measure to evaluate the operating performance of our various business segments and for other discretionary purposes, including as a significant component when measuring our operating performance under our employee incentive programs. Additionally, we believe EBITDA is useful to investors to assist them in getting a more accurate picture of our results from operations.

However, EBITDA is not a recognized measurement under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, readers should use EBITDA in addition to, and not as an alternative for, net income as determined in accordance with GAAP. Because not all companies use identical calculations, our presentation of EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA is not intended to be a measure of free cash flow for our management’s discretionary use, as it does not consider certain cash requirements such as tax and debt service payments. The amounts shown for EBITDA also differ from the amounts calculated under similarly titled definitions in our debt instruments, which are further adjusted to reflect certain other cash and non-cash charges and are used to

 

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determine compliance with financial covenants and our ability to engage in certain activities, such as incurring additional debt and making certain restricted payments.

EBITDA is calculated as follows (dollars in thousands):

 

     Three Months Ended
March 31,
 
     2010     2009  

Net loss attributable to CB Richard Ellis Group, Inc.

   $ (6,627   $ (36,689

Add:

    

Depreciation and amortization

     26,295        25,392   

Interest expense

     49,792        34,798   

Write-off of financing costs

     —          29,255   

Provision for (benefit of) income taxes

     7,299        (12,047

Less:

    

Interest income

     1,800        2,305   
                

EBITDA

   $ 74,959      $ 38,404   
                

Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

We reported a consolidated net loss of $6.6 million for the three months ended March 31, 2010 on revenue of $1.0 billion as compared to a consolidated net loss of $36.7 million on revenue of $890.4 million for the three months ended March 31, 2009.

Our revenue on a consolidated basis for the three months ended March 31, 2010 increased by $135.4 million, or 15.2%, as compared to the three months ended March 31, 2009. This increase was primarily driven by higher worldwide sales, leasing and outsourcing activity. Foreign currency translation had a $43.1 million positive impact on total revenue during the three months ended March 31, 2010.

Our cost of services on a consolidated basis increased by $61.8 million, or 11.2%, during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. Our sales and leasing professionals generally are paid on a commission and bonus basis, which substantially correlates with our revenue performance. Accordingly, the increase in revenue led to a corresponding increase in commissions and bonuses. Foreign currency translation had a $26.2 million negative impact on cost of services during the three months ended March 31, 2010. Cost of services as a percentage of revenue decreased from 62.2% for the three months ended March 31, 2009 to 60.0% for the three months ended March 31, 2010. This decrease was primarily the result of the large increase in overall revenue and a shift in the mix of revenue with transaction revenue comprising a greater portion of the total than in the prior year period.

Our operating, administrative and other expenses on a consolidated basis increased by $32.5 million, or 10.6%, during the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. Operating expenses as a percentage of revenue decreased to 33.0% for the three months ended March 31, 2010 from 34.4% for the three months ended March 31, 2009, reflective of our cost containment efforts. Operating expenses in the first quarter of 2009 benefited significantly from lower net bonus and carried interest incentive compensation accruals, recoveries of previously recorded lease reserves for vacated facilities and reduced legal and bad debt provisions, which did not recur in the first quarter of 2010. These reductions in the first quarter of 2009 were partially offset by impairment charges incurred in our Development Services segment, which also did not recur in the current year period. Foreign currency translation had a $12.0 million negative impact on total operating expenses during the three months ended March 31, 2010.

 

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Our depreciation and amortization expense on a consolidated basis was relatively consistent at $26.3 million for the three months ended March 31, 2010 as compared to $25.4 million for the three months ended March 31, 2009.

Our equity loss from unconsolidated subsidiaries on a consolidated basis decreased by $3.6 million, or 35.4%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This decrease was primarily driven by higher equity losses on investments in our Global Investment Management segment in the prior year period.

Our consolidated interest income was $1.8 million for the three months ended March 31, 2010, a decrease of $0.5 million, or 21.9%, as compared to the three months ended March 31, 2009. This decrease was mainly driven by lower interest income earned in our Development Services segment due to a decrease in notes receivable in the current year period.

Our consolidated interest expense increased by $15.0 million during the three months ended March 31, 2010, or 43.1%, as compared to the three months ended March 31, 2009. The increase was primarily due to interest expense associated with the $450.0 million of 11.625% senior subordinated notes issued in June 2009.

We wrote off $29.3 million of financing costs during the three months ended March 31, 2009 in connection with the amendment of our credit agreement on March 24, 2009.

Our provision for income taxes on a consolidated basis was $7.3 million for the three months ended March 31, 2010 as compared to a benefit of income taxes of $12.0 million for the three months ended March 31, 2009. Our effective tax rate from continuing operations, after adjusting pre-tax loss to remove the portion attributable to non-controlling interests, increased to 1086.2% for the three months ended March 31, 2010 as compared to 24.7% for the three months ended March 31, 2009. The changes in our provision for income taxes and our effective tax rate were primarily the result of a more significant loss reported in the first quarter of 2009 versus the first quarter of 2010 as well as a greater impact in the current year of losses sustained in jurisdictions where no tax benefit could be provided. The impact of such losses should lessen as 2010 progresses such that our full year 2010 effective tax rate should approximate 38%.

Our net loss attributable to non-controlling interests on a consolidated basis was $9.6 million for the three months ended March 31, 2010 as compared to $17.7 million for the three months ended March 31, 2009. This activity primarily reflects our non-controlling interests’ share of losses within our Global Investment Management and Development Services segments.

 

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Segment Operations

The following table summarizes our revenue, costs and expenses and operating income (loss) by our Americas, EMEA, Asia Pacific, Global Investment Management and Development Services operating segments for the three months ended March 31, 2010 and 2009 (dollars in thousands):

 

     Three Months Ended March 31,  
     2010     2009  

Americas

        

Revenue

   $ 645,611      100.0   $ 577,041      100.0

Costs and expenses:

        

Cost of services

     410,287      63.6        383,092      66.4   

Operating, administrative and other

     174,841      27.1        156,799      27.2   

Depreciation and amortization

     14,690      2.2        14,258      2.4   
                            

Operating income

   $ 45,793      7.1   $ 22,892      4.0
                            

EBITDA

   $ 61,988      9.6   $ 38,641      6.7
                            

EMEA

        

Revenue

   $ 188,160      100.0   $ 162,161      100.0

Costs and expenses:

        

Cost of services

     119,451      63.5        110,017      67.8   

Operating, administrative and other

     64,976      34.5        55,684      34.3   

Depreciation and amortization

     2,390      1.3        2,540      1.6   
                            

Operating income (loss)

   $ 1,343      0.7   $ (6,080   (3.7 )% 
                            

EBITDA

   $ 4,125      2.2   $ (3,117   (1.9 )% 
                            

Asia Pacific

        

Revenue

   $ 134,432      100.0   $ 93,094      100.0

Costs and expenses:

        

Cost of services

     85,456      63.6        60,310      64.8   

Operating, administrative and other

     40,705      30.3        29,949      32.2   

Depreciation and amortization

     2,112      1.5        2,128      2.2   
                            

Operating income

   $ 6,159      4.6   $ 707      0.8
                            

EBITDA

   $ 8,258      6.1   $ 1,940      2.1
                            

Global Investment Management

        

Revenue

   $ 39,407      100.0   $ 37,296      100.0

Costs and expenses:

        

Operating, administrative and other

     40,939      103.9        29,382      78.8   

Depreciation and amortization

     2,857      7.2        1,203      3.2   
                            

Operating (loss) income

   $ (4,389   (11.1 )%    $ 6,711      18.0
                            

EBITDA

   $ (4,930   (12.5 )%    $ (426   (1.1 )% 
                            

Development Services

        

Revenue

   $ 18,273      100.0   $ 20,857      100.0

Costs and expenses:

        

Operating, administrative and other

     17,245      94.4        34,345      164.7   

Depreciation and amortization

     4,246      23.2        5,263      25.2   
                            

Operating loss

   $ (3,218   (17.6 )%    $ (18,751   (89.9 )% 
                            

EBITDA

   $ 5,518      30.2   $ 1,366      6.5
                            

 

(1) See Note 15 of the Notes to Consolidated Financial Statements (unaudited) for a reconciliation of segment EBITDA to the most comparable financial measure calculated and presented in accordance with GAAP, which is segment net income (loss) attributable to CB Richard Ellis Group, Inc.

 

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Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

Americas

Revenue increased by $68.6 million, or 11.9%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase was primarily driven by higher sales and leasing activity, which is indicative of the early stages of a commercial real estate recovery. Foreign currency translation had a $10.7 million positive impact on total revenue during the three months ended March 31, 2010.

Cost of services increased by $27.2 million, or 7.1%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, primarily due to higher commission expense resulting from higher sales and lease transaction revenue. Foreign currency translation had a $6.6 million negative impact on cost of services during the three months ended March 31, 2010. Cost of services as a percentage of revenue decreased to 63.6% for the three months ended March 31, 2010 from 66.4% for the three months ended March 31, 2009 primarily due to the increase in overall revenue and a shift in the mix of revenue with transaction revenue comprising a greater portion of the total than in the prior year period.

Operating, administrative and other expenses increased by $18.0 million, or 11.5%. Operating expenses in the first quarter of 2009 benefited significantly from lower net bonus accruals, recoveries of previously recorded lease reserves for vacated facilities and reduced legal provisions, which did not recur in the first quarter of 2010. Foreign currency translation had a $2.8 million negative impact on total operating expenses during the three months ended March 31, 2010.

EMEA

Revenue increased by $26.0 million, or 16.0%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase was primarily attributable to higher sales, leasing and outsourcing activities, particularly in the United Kingdom, France, Germany and the Netherlands. Foreign currency translation had a $13.3 million positive impact on total revenue during the three months ended March 31, 2010.

Cost of services increased by $9.4 million, or 8.6%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase was primarily driven by foreign currency translation, which had an $8.3 million negative impact on cost of services during the three months ended March 31, 2010. Higher commission expense resulting from increased transaction revenue also contributed to the variance. Cost of services as a percentage of revenue decreased to 63.5% for the three months ended March 31, 2010 from 67.8% for the three months ended March 31, 2009, primarily driven by the increase in overall revenue and a shift in the mix of revenue with transaction revenue comprising a greater portion of the total than in the prior year period.

Operating, administrative and other expenses increased by $9.3 million, or 16.7%. Operating expenses in the first quarter of 2009 benefited significantly from lower net bonus accruals and reduced bad debt provisions, which did not recur in the first quarter of 2010. Foreign currency translation had a $4.4 million negative impact on total operating expenses during the three months ended March 31, 2010.

Asia Pacific

Revenue increased by $41.3 million, or 44.4%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This revenue increase was primarily driven by higher sales, leasing and outsourcing activity, particularly in Australia, China and Singapore. Foreign currency translation had an $18.2 million positive impact on total revenue during the three months ended March 31, 2010.

Cost of services increased by $25.1 million, or 41.7%, as compared to the three months ended March 31, 2009, driven by foreign currency translation, which had an $11.3 million negative impact on cost of services

 

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during the three months ended March 31, 2010. Higher commission expense resulting from increased transaction revenue also contributed to the variance. Cost of services as a percentage of revenue decreased to 63.6% for the three months ended March 31, 2010 from 64.8% for the three months ended March 31, 2009, primarily driven by the increase in overall revenue and a shift in the mix of revenue with transaction revenue comprising a greater portion of the total than in the prior year period.

Operating, administrative and other expenses increased by $10.8 million, or 35.9%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase was primarily due to higher operating costs, including payroll-related, travel and marketing costs, which were driven by efforts to grow our business in this region. Foreign currency translation had a $3.7 million negative impact on total operating expenses during the three months ended March 31, 2010.

Global Investment Management

Revenue increased by $2.1 million, or 5.7%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This was driven by the consolidation of several assets due to the adoption of Accounting Standards Update, or ASU, 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” effective January 1, 2010 (see Note 2 to the Notes to Consolidated Financial Statements (unaudited) for more information). Excluding the impact of this adoption, revenue decreased by $4.0 million, primarily as a result of lower fees due to downward pressure on certain asset management fee structures and a decline in assets under management. Foreign currency translation had a $0.9 million positive impact on total revenue during the three months ended March 31, 2010.

Operating, administrative and other expenses increased by $11.6 million, or 39.3%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. This increase was partially due to a net accrual for carried interest incentive compensation of $1.1 million for dedicated Global Investment Management executives and team leaders with participation interests in certain real estate investments under management in the first quarter of 2010 as compared with a net reversal of carried interest incentive compensation expense of $3.1 million in the first quarter of 2009. Also contributing to the increase in total operating expenses in the current year quarter was a $3.8 million impact from the adoption of ASU 2009-17 and bad debt provisions associated with asset management fees due from a fund. Foreign currency translation had a $1.1 million negative impact on total operating expenses during the three months ended March 31, 2010.

Total assets under management (AUM) as of March 31, 2010 totaled $33.3 billion, a decrease of 8% from March 31, 2009 and 4% from year-end 2009, mainly due to lower property valuations and currency declines.

AUM generally refers to the properties and other assets with respect to which we provide (or participate in) oversight, investment management services and other advice, and which generally consist of real estate properties or loans, securities portfolios and investments in operating companies and joint ventures. Our AUM is intended principally to reflect the extent of our presence in the real estate market, not the basis for determining our management fees. Our material assets under management consist of:

 

  a) the total fair market value of the real estate properties and other assets either wholly-owned or held by joint ventures and other entities in which our sponsored funds or investment vehicles and client accounts have invested or to which they have provided financing. Committed (but unfunded) capital from investors in our sponsored funds is not included in this component of our AUM. The value of development properties is included at estimated completion cost. In the case of real estate operating companies, the total value of real properties controlled by the companies, generally through joint ventures, is included in AUM; and

 

  b) the net asset value of our managed securities portfolios, including investments (which may be comprised of committed but uncalled capital) in private real estate funds under our fund of funds program.

 

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Our calculation of AUM may differ from the calculations of other asset managers, and as a result this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management that is set forth in the agreements governing the investment funds that we manage.

Development Services

Revenue decreased by $2.6 million, or 12.4%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 primarily due to lower rental revenue as a result of property dispositions and lower construction revenue driven by the continuation of weak market conditions.

Operating, administrative and other expenses decreased by $17.1 million, or 49.8%, for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. The decrease was primarily driven by lower impairment charges related to real estate assets, which totaled $9.4 million for the three months ended March 31, 2009 and did not recur in the first quarter of 2010. Also contributing to the decrease in the current year period was a reduction in payroll-related costs largely resulting from continued cost containment efforts, lower job construction costs, which correlated with the above mentioned construction revenue decrease and lower property operating expenses as a result of the property dispositions noted above.

Development projects in process as of March 31, 2010 totaled $4.7 billion and the inventory of pipeline deals as of March 31, 2010 was $0.9 billion, both unchanged from year-end 2009 and down 13% and 40%, respectively, from year ago levels.

Liquidity and Capital Resources

We believe that we can satisfy our working capital requirements and funding of investments with internally generated cash flow and, as necessary, borrowings under our revolving credit facility. Our 2010 expected capital requirements include approximately $60 million of anticipated net capital expenditures, of which $1.1 million has been funded as of March 31, 2010. As of March 31, 2010, we had aggregate commitments of $30.0 million to fund future co-investments in our Global Investment Management business, all of which is expected to be funded in 2010. Additionally, as of March 31, 2010, we had committed to fund $27.6 million of additional capital to unconsolidated subsidiaries within our Development Services business, which we may be required to fund at any time. For more than a year, the global credit markets have experienced unprecedented tightening, which may affect both the availability and cost of our funding sources in the future.

During 2003 and 2006, we required substantial amounts of equity and debt financing to fund our acquisitions of Insignia and Trammell Crow Company. Absent extraordinary transactions such as these and the equity offerings we completed during the unprecedented recent global capital markets disruption in 2008 and 2009, we historically have not sought external sources of financing and relied on our internally generated cash flow and our revolving credit facility to fund our working capital, capital expenditure and investment requirements. In the absence of such extraordinary events, our management anticipates that our cash flow from operations and our revolving credit facility would be sufficient to meet our anticipated cash requirements for the foreseeable future, but at a minimum for the next 12 months.

From time to time, we also consider potential strategic acquisitions. Our management believes that any future significant acquisitions that we make most likely would require us to obtain additional debt or equity financing. In the past, we have been able to obtain such financing for material transactions on terms that our management believed to be reasonable. However, it is possible that we may not be able to find acquisition financing on favorable terms in the future if we decide to make any further material acquisitions.

Our long-term liquidity needs, other than those related to ordinary course obligations and commitments such as operating leases, generally are comprised of three elements. The first is the repayment of the outstanding and

 

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anticipated principal amounts of our long-term indebtedness. Our management is unable to project with certainty whether our long-term cash flow from operations will be sufficient to repay our long-term debt when it comes due. If this cash flow is insufficient, then our management expects that we would need to refinance such indebtedness or otherwise amend its terms to extend the maturity dates. Our management cannot make any assurances that such refinancings or amendments would be available on attractive terms, if at all.

The second long-term liquidity need is the repayment of obligations under our pension plans in the United Kingdom. Our subsidiaries based in the United Kingdom maintain two contributory defined benefit pension plans to provide retirement benefits to existing and former employees participating in the plans. With respect to these plans, our historical policy has been to contribute annually an amount to fund pension cost as actuarially determined and as required by applicable laws and regulations. Our contributions to these plans are invested and, if these investments do not perform in the future as well as we expect, we will be required to provide additional funding to cover the shortfall. During 2007, we reached agreements with the active members of these plans to freeze future pension plan benefits. In return, the active members became eligible to enroll in the CBRE Group Personal Pension Plan, a defined contribution plan in the United Kingdom. The underfunded status of our pension plans included in pension liability in the accompanying consolidated balance sheets was $61.0 million and $64.9 million at March 31, 2010 and December 31, 2009, respectively. We expect to contribute a total of $3.6 million to fund our pension plans for the year ending December 31, 2010, of which $0.8 million was funded as of March 31, 2010.

The third long-term liquidity need is the repayment of obligations related to acquisitions. For example, in connection with our acquisitions of CB Richard Ellis KK (Japan) in 2006 and CB Richard Ellis South Asia Pte Ltd (India) in 2007, we incurred obligations with respect to the future purchase of non-controlling interests in such entities. As of both March 31, 2010 and December 31, 2009, we had $58.5 million of these obligations outstanding, which will be paid in 2010. Our deferred purchase obligations are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.

Historical Cash Flows

Operating Activities

Net cash provided by operating activities totaled $7.1 million for the three months ended March 31, 2010 as compared to net cash used in operating activities of $11.5 million for the three months ended March 31, 2009. The increase in cash provided by operating activities in the current year period versus the same period last year was primarily due to higher net payments to vendors and to employees under our deferred compensation plan in the prior year as well as an increase in commissions, bonuses and income taxes accrued in the current year. Also contributing to the increase was a net provision for doubtful accounts in the current year period versus a net recovery in the prior year period. These items were partially offset by a significant decrease in receivables in the prior year versus a moderate decrease in the current year as well as higher bonuses paid in the current year.

Investing Activities

Net cash used in investing activities totaled $4.8 million for the three months ended March 31, 2010, a decrease of $14.4 million as compared to the three months ended March 31, 2009. The decrease was primarily driven by a larger decrease in restricted cash in the first quarter of 2010 versus the same period last year as well as the use of more cash in the prior year quarter for earn out payments associated with in-fill acquisitions and contributions to investments in unconsolidated subsidiaries.

Financing Activities

Net cash used in financing activities totaled $54.2 million for the three months ended March 31, 2010 as compared to net cash provided by financing activities of $303.0 million for the three months ended March 31, 2009. The sharp decrease in cash provided by financing activities was primarily due to activity under our credit agreement in the first quarter of 2009, including higher net borrowings under our revolving credit facility as well as higher repayments of our senior secured term loans.

 

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Significant Indebtedness

Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay when due the principal of, interest on or other amounts due in respect of our indebtedness and other obligations. In addition, we may incur additional debt from time to time to finance strategic acquisitions, investments, joint ventures or for other purposes, subject to the restrictions contained in the documents governing our indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase.

Most of our long-term indebtedness was incurred in connection with the Trammell Crow Company Acquisition in December 2006. The Trammell Crow Company Acquisition has expanded our global leadership and strengthened our ability to provide integrated account management and comprehensive real estate services for our clients.

Since 2001, we have maintained a credit agreement with Credit Suisse Group AG, or CS, and other lenders to fund strategic acquisitions and to provide for our working capital needs. On March 24, 2009, we entered into a second amendment and restatement to our credit agreement (the Credit Agreement) with a syndicate of banks led by CS, as administrative and collateral agent, amending and restating our amended and restated credit agreement dated December 20, 2006. In connection with this amendment and restatement, we wrote off financing costs of $29.3 million during the three months ended March 31, 2009, which included the write-off of $18.1 million of unamortized deferred financing costs and $11.2 million of Credit Agreement amendment fees paid in March 2009. On August 24, 2009, we entered into a loan modification agreement to our Credit Agreement, which included the conversion of $41.9 million of amounts outstanding under our revolving credit facility to term loans. On both February 5, 2010 and March 29, 2010, we entered into additional loan modification agreements to our Credit Agreement to further extend debt maturities and amortization schedules.

Subsequent to the March 29, 2010 loan modification, our Credit Agreement includes the following: (1) a $558.1 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, with tranche 1 in the amount of $225.1 million maturing on June 24, 2011 and tranche 2 in the amount of $333.0 million maturing on June 24, 2013; (2) a $579.8 million A term loan facility, which is further broken down as follows: i) a $135.9 million tranche A term loan facility requiring quarterly principal payments beginning December 31, 2010 through September 30, 2011, with the balance payable on December 20, 2011; ii) a $48.6 million tranche A-1 term loan facility payable on December 20, 2013; iii) a $203.2 million tranche A-2 term loan facility, requiring quarterly principal payments of $8.7 million beginning September 30, 2012 and continuing through March 31, 2013, with the balance payable on June 24, 2013; iv) a $167.5 million tranche A-3 term loan facility payable on December 20, 2013; v) a $24.1 million tranche A-3A term loan facility, requiring quarterly principal payments of $0.06 million beginning June 30, 2010 and continuing through September 30, 2013, with the balance payable on December 20, 2013; and vi) a $0.5 million tranche A-4 term loan facility payable on December 20, 2011, and (3) a $1,053.0 million B term loan facility, which is further broken down as follows: i) a $642.8 million tranche B term loan facility requiring quarterly principal payments of $1.9 million through September 30, 2013, with the balance payable on December 20, 2013; ii) a $295.2 million tranche B-1 term loan facility payable on December 20, 2015; and iii) a $115.0 million tranche B-1A term loan facility payable on December 20, 2015. During the three months ended March 31, 2010, we repaid the following amounts: $50.7 million of our tranche A term loan facility, which was applied to the required 2010 principal repayments; $1.2 million of our tranche A-1 term loan facility, which was applied against the balance due at maturity; $0.5 million of our tranche A-4 term loan facility, which repaid the entire outstanding balance; $1.9 million of our tranche B term loan facility, which covered the required quarterly principal payments due March 31, 2010; and $0.5 million of our tranche B-1 term loan facility, which covered a portion of the balance due at maturity. Some of these prepayments led to a reduction in the interest rate spreads governing our tranche A and A-1 term loan facilities as well as our revolving credit facility.

The revolving credit facility allows for borrowings outside of the United States, with sub-facilities of $5.0 million available to one of our Canadian subsidiaries, $35.0 million in aggregate available to one of our

 

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Australian and one of our New Zealand subsidiaries and $50.0 million available to one of our U.K. subsidiaries. Additionally, outstanding borrowings under these sub-facilities may be up to 5.0% higher as allowed under the currency fluctuation provision in the Credit Agreement. Borrowings under the revolving credit facility as of March 31, 2010 bear interest at varying rates, based at our option, on either the applicable fixed rate plus 2.25% to 4.00% or the daily rate plus 1.25% to 3.00% for the tranche 1 facility, and on either the applicable fixed rate plus 2.50% to 4.75% or the daily rate plus 1.50% to 3.75% for the tranche 2 facility, in all cases as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement). As of March 31, 2010 and December 31, 2009, we had $20.1 million ($12.3 million under tranche 1 and $7.8 million under tranche 2) and $21.1 million ($13.1 million under tranche 1 and $8.0 million under tranche 2), respectively, of revolving credit facility principal outstanding with related weighted average interest rates of 4.6% and 5.3%, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. As of March 31, 2010, letters of credit totaling $29.1 million were outstanding under the revolving credit facility. These letters of credit were primarily issued in the normal course of business as well as in connection with certain insurance programs and reduce the amount we may borrow under the revolving credit facility.

Borrowings under the term loan facilities as of March 31, 2010 bear interest, based on our option, on the following: for the tranche A term loan facility, on either the applicable fixed rate plus 2.75% to 4.50% or the daily rate plus 1.75% to 3.50%; for the tranche A-1 term loan facility, on either the applicable fixed rate plus 3.50% to 4.50% or the daily rate plus 2.50% to 3.50%; for the tranche A-2 term loan facility, on either the applicable fixed rate plus 3.25% to 5.50% or the daily rate plus 2.25% to 4.50%; for the tranche A-3 and A-3A term loan facilities, on either the applicable fixed rate plus 4.00% to 5.00% or the daily rate plus 3.00% to 4.00%; for the tranche B term loan facility, on either the applicable fixed rate plus 4.00% to 5.00% or the daily rate plus 3.00% to 4.00%; and for the tranche B-1 and B-1A term loan facilities, on either the applicable fixed rate plus 4.50% to 5.50% or the daily rate plus 3.50% to 4.50%. For all term loan facilities, both the fixed rate and daily rate options are determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement). The tranche A-1, A-2, A-3, B-1 and B-1A term loan facilities include a targeted outstanding amount (as defined in the Credit Agreement) provision that will increase the interest rate by 2% if the outstanding balance exceeds the targeted outstanding amount at the end of each quarter. As of March 31, 2010 and December 31, 2009, the outstanding balance did not exceed the targeted outstanding amount. As of March 31, 2010 and December 31, 2009, we had $135.9 million and $326.3 million of tranche A term loan facility principal outstanding, respectively, $47.4 million and $48.6 million of tranche A-1 term loan facility principal outstanding, respectively, $203.2 million of tranche A-2 term loan facility principal outstanding, $167.5 million of tranche A-3 term loan facility principal outstanding, $640.9 million and $642.8 million of tranche B term loan facility principal outstanding, respectively, and $294.7 million and $295.2 million of tranche B-1 term loan facility principal outstanding, respectively, which are included in the accompanying consolidated balance sheets. As of March 31, 2010, we also had $24.1 million of tranche A-3A term loan facility principal outstanding and $115.0 million of tranche B-1A term loan facility principal outstanding, which are also included in the accompanying consolidated balance sheets.

The Credit Agreement is jointly and severally guaranteed by us and substantially all of our domestic subsidiaries. Borrowings under our Credit Agreement are secured by a pledge of substantially all of the capital stock of our U.S. subsidiaries and 65% of the capital stock of certain non-U.S. subsidiaries, and by a security interest in substantially all of the personal property of the U.S. subsidiaries. Also, the Credit Agreement requires us to pay a fee based on the total amount of the revolving credit facility commitment.

On June 18, 2009, CB Richard Ellis Services, Inc., our wholly-owned subsidiary, issued $450.0 million in aggregate principal amount of 11.625% senior subordinated notes due June 15, 2017 for approximately $435.9 million, net of discount. The 11.625% senior subordinated notes are unsecured senior subordinated obligations of CBRE and are jointly and severally guaranteed on a senior subordinated basis by us and our domestic subsidiaries that guarantee our Credit Agreement. Interest accrues at a rate of 11.625% per year and is payable semi-annually in arrears on June 15 and December 15. The 11.625% senior subordinated notes are redeemable at

 

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our option, in whole or in part, on or after June 15, 2013 at 105.813% of par on that date and at declining prices thereafter. At any time prior to June 15, 2013, the 11.625% senior subordinated notes may be redeemed by us, in whole or in part, at a price equal to 100% of the principal amount, plus accrued and unpaid interest and an applicable premium (as defined in the indenture governing these notes), which is based on the present value of the June 15, 2013 redemption price plus all remaining interest payments through June 15, 2013. In addition, prior to June 15, 2012, up to 35.0% of the original issued amount of the 11.625% senior subordinated notes may be redeemed at 111.625% of par, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. In the event of a change of control (as defined in the indenture governing our 11.625% senior subordinated notes), we are obligated to make an offer to purchase the remaining 11.625% senior subordinated notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. The amount of the 11.625% senior subordinated notes included in the accompanying consolidated balance sheets, net of unamortized discount, was $436.8 million and $436.5 million at March 31, 2010 and December 31, 2009, respectively.

Our Credit Agreement and the indenture governing our 11.625% senior subordinated notes contain numerous restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or make distributions to stockholders, repurchase capital stock or debt, make investments, sell assets or subsidiary stock, create or permit liens on assets, engage in transactions with affiliates, enter into sale/leaseback transactions, issue subsidiary equity and enter into consolidations or mergers. Our Credit Agreement also currently requires us to maintain a minimum coverage ratio of EBITDA (as defined in the Credit Agreement) to total interest expense of 2.00x through March 31, 2011 and 2.25x thereafter and a maximum leverage ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement) of 4.25x through March 31, 2011 and 3.75x thereafter. We may from time to time, in our sole discretion, look for opportunities to reduce our outstanding debt under our Credit Agreement and under our 11.625% senior subordinated notes.

From time to time, Moody’s Investor Service, Inc. and Standard & Poor’s Ratings Services rate our senior debt. Neither the Moody’s nor the Standard & Poor’s ratings impact our ability to borrow under our Credit Agreement. However, these ratings may impact our ability to borrow under new agreements in the future and the interest rates of any such future borrowings.

We had short-term borrowings of $127.5 million and $339.8 million with related average interest rates of 2.3% and 2.4% as of March 31, 2010 and December 31, 2009, respectively.

On March 2, 2007, we entered into a $50.0 million credit note with Wells Fargo Bank for the purpose of purchasing eligible investments, which include cash equivalents, agency securities, A1/P1 commercial paper and eligible money market funds. The proceeds of this note are not made generally available to us, but instead deposited in an investment account maintained by Wells Fargo Bank and used and applied solely to purchase eligible investment securities. This agreement has been amended several times and as of March 31, 2010, provides for a $40.0 million revolving credit note, bears interest at 0.25% and has a maturity date of November 1, 2010. As of March 31, 2010 and December 31, 2009, there were no amounts outstanding under this revolving credit note.

On March 4, 2008, we entered into a $35.0 million credit and security agreement with Bank of America, or BofA, for the purpose of purchasing eligible financial instruments, which include A1/P1 commercial paper, U.S. Treasury securities, GSE discount notes (as defined in the credit and security agreement) and money market funds. The proceeds of this note are not made generally available to us, but instead deposited in an investment account maintained by BofA and used and applied solely to purchase eligible financial instruments. This agreement has been amended several times and as of March 31, 2010, provides for a $5.0 million credit line, bears interest at 1% and has a maturity date of February 28, 2011. As of March 31, 2010 and December 31, 2009, there were no amounts outstanding under this revolving note.

On August 19, 2008, we entered into a $15.0 million uncommitted facility with First Tennessee Bank for the purpose of purchasing investments, which include cash equivalents, agency securities, A1/P1 commercial paper

 

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and eligible money market funds. The proceeds of this facility are not made generally available to us, but instead are held in a collateral account maintained by First Tennessee Bank. This agreement has been amended several times and as of March 31, 2010, provides for a $4.0 million credit line, bears interest at 0.25% and has a maturity date of August 3, 2010. As of March 31, 2010 and December 31, 2009, there were no amounts outstanding under this facility.

On April 19, 2010, we entered into a Receivables Purchase Agreement, or RPA, which allows us to transfer an undivided interest in a designated pool of U.S. accounts receivable, on an ongoing basis, to provide collateral for borrowings up to a maximum of $55.0 million. Borrowings under this arrangement generally bear interest at the commercial paper rate plus 2.75% and this agreement expires on April 18, 2011.

Our wholly-owned subsidiary CBRE Capital Markets has the following warehouse lines of credit: credit agreements with JP Morgan Chase Bank, N.A., or JP Morgan, and BofA for the purpose of funding mortgage loans that will be resold and a funding arrangement with Fannie Mae for the purpose of selling a percentage of certain closed multi-family loans.

On November 15, 2005, CBRE Capital Markets entered into a secured credit agreement with JP Morgan to establish a warehouse line of credit. This agreement has been amended several times and as of March 31, 2010, provides for a $210.0 million senior secured revolving line of credit, bears interest at the daily Chase-London LIBOR plus 2.00% and has a maturity date of January 28, 2011.

On April 16, 2008, CBRE Capital Markets entered into a secured credit agreement with BofA to establish a warehouse line of credit. This agreement has been amended several times and as of March 31, 2010, provides for a $125.0 million senior secured revolving line of credit, bears interest at the daily one-month LIBOR plus 2.75% with a maturity date of April 14, 2010. In April 2010, the maturity date was further extended to May 14, 2010.

In August 2009, CBRE Capital Markets entered into a funding arrangement with Fannie Mae under its Multifamily As Soon As Pooled Plus Agreement and its Multifamily As Soon As Pooled Sale Agreement, or ASAP Program. Under the ASAP Program, CBRE Capital Markets may elect, on a transaction by transaction basis, to sell a percentage of certain closed multifamily loans to Fannie Mae on an expedited basis. After all contingencies are satisfied, the ASAP Program requires that CBRE Capital Markets repurchase the interest in the multifamily loan previously sold to Fannie Mae followed by either a full delivery back to Fannie Mae via whole loan execution or a securitization into a mortgage backed security. Under this agreement, the maximum outstanding under the ASAP Program cannot exceed $150.0 million and, between the sale date to Fannie Mae and the repurchase date by CBRE Capital Markets, the outstanding balance bears interest and is payable to Fannie Mae at the daily LIBOR rate plus 1.35% with a LIBOR floor of 0.35%. Effective December 1, 2009 through January 15, 2010, the maximum outstanding under the ASAP Program was temporarily increased from $150.0 million to $225.0 million.

During the three months ended March 31, 2010, we had a maximum of $327.8 million of warehouse lines of credit principal outstanding. As of March 31, 2010 and December 31, 2009, we had $94.0 million and $312.9 million of warehouse lines of credit principal outstanding, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. Additionally, we had $94.6 million and $315.0 million of mortgage loans held for sale (warehouse receivables), which substantially represented mortgage loans funded through the lines of credit that, while committed to be purchased, had not yet been purchased as of March 31, 2010 and December 31, 2009, respectively, and which are also included in the accompanying consolidated balance sheets.

On July 31, 2006, CBRE Capital Markets entered into a revolving credit note with JP Morgan for the purpose of purchasing qualified investment securities, which include but are not limited to U.S. Treasury and Agency securities. This agreement has been amended several times and as of March 31, 2010, provides for a $25.0 million revolving credit note, bears interest at 0.50% and has a maturity date of January 28, 2011. As of March 31, 2010 and December 31, 2009, there were no amounts outstanding under this revolving credit note.

 

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On April 30, 2007, Trammell Crow Company Acquisitions II, L.P. (Acquisitions II), a consolidated limited partnership within our Development Services segment, entered into a $100.0 million revolving credit agreement, or the WestLB Credit Agreement, with WestLB AG, as administrative agent for a lender group. In April 2010, Acquisitions II opted to reduce the amount available under the WestLB Credit Agreement to $20.0 million. Borrowings under this credit agreement are used to fund investments in real estate prior to receipt of capital contributions from Acquisitions II investors and permanent project financing, and are limited to a portion of unfunded capital commitments of certain Acquisitions II investors. As of March 31, 2010, borrowing capacity under this agreement, net of outstanding amounts drawn, was $5.2 million. Borrowings under this agreement bear interest at the daily British Bankers Association LIBOR rate plus 0.65% and this agreement expires on October 13, 2010. Borrowings under the line are non-recourse to us and are secured by the capital commitments of the investors in Acquisitions II. As of March 31, 2010 and December 31, 2009, there was $13.0 million and $5.5 million, respectively, outstanding under the WestLB Credit Agreement included in short-term borrowings in the accompanying consolidated balance sheets.

Other Obligations and Commitments

We had outstanding letters of credit totaling $38.6 million as of March 31, 2010, excluding letters of credit for which we have outstanding liabilities already accrued on our consolidated balance sheet related to our subsidiaries’ outstanding reserves for claims under certain insurance programs. These letters of credit are primarily executed by us in the normal course of business as well as in connection with certain insurance programs. The letters of credit expire at varying dates through January 2011.

We had guarantees totaling $14.3 million as of March 31, 2010, excluding guarantees related to pension liabilities, consolidated indebtedness and other obligations for which we have outstanding liabilities already accrued on our consolidated balance sheet as well as operating leases. The $14.3 million primarily consists of guarantees of obligations of unconsolidated subsidiaries, which expire at varying dates through March 2014.

In addition, as of March 31, 2010, we had numerous completion and budget guarantees relating to development projects. These guarantees are made by us in the normal course of our Development Services business. Each of these guarantees requires us to complete construction of the relevant project within a specified timeframe and/or within a specified budget, with us potentially being liable for costs to complete in excess of such timeframe or budget. However, we generally have “guaranteed maximum price” contracts with reputable general contractors with respect to projects for which we provide these guarantees. These contracts are intended to pass the risk to such contractors. While there can be no assurance, we do not expect to incur any material losses under these guarantees.

From time to time, we act as a general contractor with respect to construction projects. We do not consider these activities to be a material part of our business. In connection with these activities, we seek to subcontract construction work for certain projects to reputable subcontractors. Should construction defects arise relating to the underlying projects, we could potentially be liable to the client for the costs to repair such defects, although we would generally look to the subcontractor that performed the work to remedy the defect and also look to insurance policies that cover this work. While there can be no assurance, we do not expect to incur material losses with respect to construction defects.

In January 2008, CBRE Capital Markets entered into an agreement with Fannie Mae, under Fannie Mae’s Delegated Underwriting and Servicing, or DUS, Lender Program, to provide financing for apartments with five or more units. Under the DUS Program, CBRE Capital Markets originates, underwrites, closes and services loans without prior approval by Fannie Mae, and in selected cases, is subject to sharing up to one-third of any losses on loans issued under the DUS program. CBRE Capital Markets has funded loans subject to such loss sharing arrangements with unpaid principal balances of $1.3 billion at March 31, 2010. Additionally, CBRE Capital Markets has funded loans under the DUS program that are not subject to loss sharing arrangements with unpaid principal balances of approximately $435.3 million at March 31, 2010. CBRE Capital Markets, under its

 

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agreement with Fannie Mae, must post cash reserves under formulas established by Fannie Mae to provide for sufficient capital in the event losses occur. As of March 31, 2010 and December 31, 2009, CBRE Capital Markets had $1.2 million of cash deposited under this reserve arrangement, and had provided approximately $2.3 million and $2.0 million, respectively, of loan loss accruals.

An important part of the strategy for our Global Investment Management business involves investing our capital in certain real estate investments with our clients. These co-investments typically range from 2% to 5% of the equity in a particular fund. As of March 31, 2010, we had aggregate commitments of $30.0 million to fund future co-investments, all of which is expected to be funded during 2010. In addition to required future capital contributions, some of the co-investment entities may request additional capital from us and our subsidiaries holding investments in those assets and the failure to provide these contributions could have adverse consequences to our interests in these investments.

Additionally, an important part of our Development Services business strategy is to invest in unconsolidated real estate subsidiaries as a principal (in most cases co-investing with our clients). As of March 31, 2010, we had committed to fund $27.6 million of additional capital to these unconsolidated subsidiaries, which may be called at any time.

Seasonality

A significant portion of our revenue is seasonal, which can affect an investor’s ability to compare our financial condition and results of operations on a quarter-by-quarter basis. Historically, this seasonality has caused our revenue, operating income, net income and cash flow from operating activities to be lower in the first two quarters and higher in the third and fourth quarters of each year. However, there can be no assurance that the foregoing will occur in 2010. Earnings and cash flow have historically been particularly concentrated in the fourth quarter due to investors and companies focusing on completing transactions prior to calendar year-end. This has historically resulted in lower profits or a loss in the first and second quarters, with revenue and profitability improving in each subsequent quarter.

New Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2009-16, “Transfers and Servicing (ASC Topic 860)—Accounting for Transfers of Financial Assets.” ASU 2009-16 revises previous authoritative guidance related to accounting for transfers of financial assets, and requires more disclosures about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. Among other things, ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets and enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. We adopted ASU 2009-16 effective January 1, 2010 and it did not have a material effect on our consolidated financial position or results of operations.

In December 2009, the FASB issued ASU 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU incorporates Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the FASB in June 2009. The amendments in this ASU replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact such entity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in variable interest entities, which enhances the information provided to users of financial statements. We adopted ASU 2009-17 effective January 1, 2010 and as a result, we began consolidating certain variable interest entities that were not previously consolidated by us (See Note 2 of the Notes to Consolidated Financial Statements (unaudited) for more information).

 

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In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” which provides amendments to the FASB ASC Subtopic 820-10 that require new disclosures regarding (i) transfers in and out of Level 1 and Level 2 fair value measurements and (ii) activity in Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosures regarding (i) the level of asset and liability disaggregation and (ii) fair value measurement inputs and valuation techniques. As required, we adopted the new disclosures and clarifications of existing disclosure requirements, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. We are currently evaluating the disclosure impact of adoption on our consolidated financial statements, but do not expect it to have a material impact.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “anticipate,” “believe,” “could,” “should,” “propose,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will” and similar terms and phrases are used in this Quarterly Report on Form 10-Q to identify forward-looking statements. These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These statements also relate to our future prospects, developments and business strategies.