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CBG AT A GLANCE

P/E ► -2.72   EV/EBITDA ► -7.02   ROA ► -17.3% LOW ROE ► -165.6% VERY LOW Debt to Equity ► 14.0 HIGH Current Ratio ► 1.19 AVG Interest Coverage Ratio ► -5.69 LOW

 

 

 

 

 

 

CB Richard Ellis Group (NYSE: CBG) is the largest commercial real estate brokerage firm in the world based on their 2007 revenue of $6.03 Billion USD.^[1] Their operating income in 2007 reached over $698 Million USD, with net income of over $390 Million USD.^[1]

In December of 2006, CB Richard Ellis acquired Trammel Crow Company for $2.2 Billion USD, boosting its 2006 revenues to more than $4 Billion USD and making it the first commercial real estate brokerage firm to qualify for the Fortune 500 list of largest corporations based on revenue.^[2] CB Richard Ellis had its revenues more than triple between 2003 and 2007, in large part due to the acquisition of Trammel Crow and the real estate boom that lasted between 2005 and 2007.^[3][1] However, CB Richard Ellis has faced financial challenges brought upon by the 2007 credit crunch and 2008 financial crisis. For instance, CB Richard Ellis has seen its net income drop to $77 Million USD through the first 3Q of 2008, over a 71% decrease compared to its first 3Q 2007 net income of $268 Million USD.^[4] Other risks CB Richard Ellis faces include significant increases in interest rates, as well as its high level of debt; as of December 31, 2007 CB Richard Ellis had $1.8 Billion USD of long term debt.^[5][6] At the end of September, 2008, the amount of debt increased to $1.9 Billion USD, with a debt to asset ratio of 0.30, which is twenty times greater than its next largest competitor.^[7]

Company Overview

CB Richard Ellis is an international, commercial real estate brokerage firm whose services include tenant representation, property and agency leasing, property sales, development services, commercial mortgage origination and servicing, capital markets services, property, valuation and appraisal services, and a wide range of real estate management services.^[8] In 2007 it provided services to 85 of the Fortune 100 companies.^[9]It earns revenue from contractual management fees as well as charging on a per project, or per transaction basis.^[9]Its global infrastructure and brand name, as well as its full service capabilities give it advantages over smaller, more regional firms. However, the commercial real estate industry is highly cyclical, and also highly correlated to the macroeconomic state. In other words, CB Richard Ellis is susceptible to booms and recessions. Since its revenues are tied to real estate activity, economic slowdowns or recessions suppress purchases and sales of real estate, and also decrease the value of real estate and rent.^[10] This has a negative impact on CB Richard Ellis' revenues. The increased difficulty of investors to obtain credit due to the credit crunch of 2007 reduces the number of commercial real estate transactions, further hurting the revenues of CB Richard Ellis.

Business and Financial Metrics

Financial Metrics

In 2007, CB Richard Ellis earned revenues of $6.03 Billion USD, with operating income at nearly $700 Million USD, net income of $390 Million USD, and a profit margin of 6.48%.^[1]Growth between 2005 and 2006 can be explained by the real estate boom that began in 2005. The company says over two thirds of the $838 Million USD increase in revenues between 2005 and 2006 was due to organic growth, with the remainder due to acquisitions of smaller firms.^[13] CB Richard Ellis attributes the large increase in revenue, operating income, and net income between 2006 and 2007 to the acquisition of Trammel Crow Company at the end of 2006, as well as organic growth.^[14] While its revenues increased 49.7% from 2006 to 2007, its operating costs increased over 51%, primarily due to increased payroll expenses and bonuses related to generating the higher revenue.^[14] Since revenues increased at a slightly slower rate than expenses, the small decrease in profit margin makes sense.

Compared to the first three quarters of 2007, the first three quarters of 2008 for CB Richard Ellis have seen an 8% decline in revenue, 47% decline operating income, 71% decrease in net income while its profit margin dipped to 2%.^[4] Through the first nine months of 2007 and 2008, cash flows for CB Richard Ellis changed from a positive $289 Million USD in 2007 to negative $231 Million USD in 2008, highlighting the vulnerability of the firm (and industry as a whole) to U.S. economic cycles.^[15] The company attributes these decreases in revenue, operating income, net income, and profit margin to the weakening of the macroeconomic conditions that began in late 2007, which greatly reduced the number of real estate transactions.^[4]

Business Segments

CB Richard Ellis 2007 revenue breakdown by section^[16]

CB Richard Ellis breaks its operating segments into five categories: 1)The Americas, 2) EMEA (Europe, Middle East, and Africa), 3) Asia Pacific, 4) Global Investment Management, and 5) Development Services.^[4]

The Americas (61% of 2007 revenue, 29.2% of 2007 net income)^[16][17]

CB Richard Ellis earns the bulk of their revenue from their Americas segment. While the Americas is the largest segment of its operations by revenue, it is not the highest earning segment in terms of net income. In 2006, 62.2% of CB Richard's $4 Billion USD revenues came from the Americas, a decrease from 2005, where revenues from the Americas made up 68% of its $3.2 Billion USD total revenues.^[18] Within the Americas segment, there are two major branches under CB Richard Ellis: Advisory Services and Outsourcing Services.

• Advisory Services

Real estate services, such as providing strategic advice and execution to owners, investors, and occupiers related to leasing, disposition, and acquisition of property fall under their advisory service category.Other services under the advisory category include market value appraisals, litigation support, and discounted cash flow analysis, among others. In the year 2007, advisory services made up 42.5% of its consolidated revenue.^[18]

• Outsourcing Services

Services under this category include property management and asset management. Outsourcing with regards to commercial real estate refers to having a management company help run your business, and does not refer to outsourcing jobs overseas. For instance, if you inherit an office building, but have little knowledge of how to run it, you can "outsource" management of it to companies that offer this service. Outsourcing offers improved efficiency, better execution, and lower costs by relying on third-party real estate experts, and has become a long term trend in commercial real estate. CB Richard Ellis offers a full range of services, from transaction management, project management, facilities management, property management, construction management as well as marketing, leasing, accounting, and financial services. At the end of December 2007, CB Richard Ellis managed over 1 billion square feet of commercial space for property owners and occupiers.^[19]

EMEA (22%, 46.2%)^[16][17]

The EMEA segment operates in thirty three countries, most notably in the United Kingdom, France, Germany, Spain, and Russia. Although only 22% of its revenue comes from the EMEA segment, it is the highest earning segment in terms of net income, earning $180 Million USD net income off of its $1.3 Billion USD revenue.^[17] On February 8, 2008 CB Richard Ellis acquired Eurisko Consulting SRL, the largest independent commercial real estate services company in Romania.^[20] The services offered in the EMEA segment are along the same lines as in the Americas. In 2006, EMEA made up 23.2% of total revenues, an increase from 2005 which had 22.2% of total revenues.^[21]

Asia Pacific (9%, 11.2%)^[16][17]

The Asia Pacific segment operates in twelve countries. Among others, it operates in China, Hong Kong, India, Japan, Singapore, South Korea, and Taiwan. In 2007, the Asia Pacific segment earned a net income of $43.8 Million USD off of its $548 Million USD revenues.^[17] The services offered in the Asia Pacific segment mirror those in the Americas and EMEA. Revenues from this segment have increased steadily, from 5.8% in 2005 to 8.8% in 2006.^[21]

Global Investment Management (6%, 16.2%)^[16][17]

CB Richard Ellis provides investment management services to clients, including pension plans, investment funds, and other organizations trying to generate returns or diversification through real estate investments.^[22]In 2007, this segment earned $63.3 Million USD of net income from its $348 Million USD revenue.^[17] Between December 31, 1998 and December 31, 2007, assets managed by CB Richard Ellis have increased from $6.1 Billion USD to $37.8 Billion USD.^[22]

Development Services (2%, -3%(loss))^[16][17]

The development services segment is operated by Trammell Crow Company, a wholly-owned subsidiary of CB Richard Ellis. They offer services, concentrated mostly in the United States, from all stages of the development process, from site identification to project close-out. The development services segment generated revenues of $134 Million USD in 2007, compared to total operating costs of $183 Million USD.^[23] The company claims the loss is a result of "purchase accounting" related to the acquisition of Trammel Crow, which requires the write up of assets to its fair value. Therefore, this segments 2007 revenues were decreased by $61.6 Million USD as a result of purchase accounting.^[23] At the end of 2007, there were $6.5 Billion USD of development proejcts in process.^[24]

Key Trends and Forces

Negative impacts of Credit Crunch and 2008 Financial Crisis highlight the cyclical nature of the real estate industry

Both Los Angeles and San Francisco are among the most affected areas in the real estate market. Source: Real Capital Analytics^[25]

Similar to automobile industry, the commercial real estate industry is sensitive to the overall health of the economy. Since a major source of revenue for CB Richard Ellis comes from the sale and financing of commercial properties, and the success of these transactions depends heavily on the availability and cost of credit, any disruptions in the availability of credit will negatively impact its revenue.^[26] The Troubled Assets Relief Program (TARP) by the U.S. government has helped ease the 2007 credit crunch, evidenced by the 30-year fixed mortgage rate decreasing to a record low 5.13% on January 10, 2009.^[27] Lower interest rates mean buyers can borrow money for less, and should make purchasing commercial real estate more attractive. However, despite the low interest rates, the national vacancy rate increased in late 2008, and the average rent per square foot decreased from $34 to $31.^[28] U.S. legislation introduced in the beginning of 2009 is trying to allocate some the Troubled Assets Relief Program (TARP) funds to help commercial real estate businesses, but the results of the legislation remain to be seen^[29]Therefore, while the conditions for improvement by CB Richard Ellis appear to be in place, it remains to be seen if the low interest rates and potential TARP funding actually increase real estate activity.

CB Richard Ellis Debt looms as potential problem

At the end of December, 2007 CB Richard Ellis had approximately $2.3 Billion USD in total debt, with approximately $1.8 billion USD of it taken on in order to acquire Trammel Crow Company.^[30] A high level of debt imposes both operating and financial restrictions on a business, because interest has to be paid, and the loan amortized. In other words, cash generated by the company goes toward paying off debt rather than other potential business activities. With approximately $1.1 Billion USD scheduled to be due in 2011, and another $1.1 Billion USD due in 2013, CB Richard Ellis faces the challenging task of refinancing or paying off their debt obligations in the face of a cyclical downturn.^[31] The resulting debt to asset ratio of 0.37 is nearly twenty times higher than its largest competitor, Jones Lang LaSalle (JLL), who has a debt to asset ratio of 0.019.^[6][32]

Geographical concentration increases volatility of revenues

In 2007, 9.8% of CB Richard Ellis revenues came from transactions that occurred in the state of California.^[33] While this is less than the 13.5% in 2006, it still represents a significant concentration of revenue tied to a single geographical location.^[33] In other words risks as well as benefits tied to the region are amplified. For instance, Los Angeles and San Francisco, two of the most adversely affected real estate markets by the economic downturn, are both in California. CB Richard Ellis has also been affected in New York City, the most affected city. Compared to December 2007 in Manhattan, its December 2008 vacancy rate increased from 4.9% to 7.6%, its leasing activity decreased from 2.26 Million square feet to less than 0.72 Million square feet, and its average asking rent decreased from $68.69 per square foot to $67.20 per square foot.^[34]

Competitors

Although CB Richard Ellis acquired Trammel Crow Company in 2006, two major competitors remain. Jones Lang LaSalle (JLL) and Grubb & Ellis Company represent its largest competitors.

• Jones Lang LaSalle (JLL) is a global real estate and investment service firm, providing services such as tenant representation, property management, leasing, and finance among others. In 2007 it had revenues of $2.65 Billion USD, operating income of $342 Million USD, net income of $256 Million USD, and a profit margin of 9.67%.^[35] Jones Lang LaSalle competes against CB Richard Ellis in all business segments except for the development service segment.^[36]
• Grubb & Ellis Co (GBE) is a commercial real estate service firm. It provides transaction services, management services, financial services, and strategic services among others to clients around the world. In 2007 it had revenues of $231 Million USD, operating income of $32.8 Million USD, net income of $20.8 Million USD, and a profit margin of 9%.^[37] It has three business segments that compete with CB Richard Ellis: its investment management segment, transaction services segment, and its management services segment.^[38]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5} CBG 10-K 2007 Item 6 Pg. 31
2. ↑ Business Wire. CB Richard Ellis Group, Inc. Announces Agreement to Acquire Trammell Crow Company
3. ↑ Balance-Sheet Loans Return To Commercial Lending The Wall Street Journal Online
4. ↑ ^{4.0 4.1 4.2 4.3} CBG 10-K 2007 Item 1 Pg. 4
5. ↑ CBG Annual Report 2007 Pg. 16
6. ↑ ^{6.0 6.1} CBG 10-K 2007 Item 6 Pg. 32
7. ↑ CBG 10-Q 2008 Item 1 Pg. 3
8. ↑ CBG 10-K 2007 Item 1 Pg.3
9. ↑ ^{9.0 9.1 9.2} CBG 10-K 2007 Item 1 Pg. 1
10. ↑ CBG Annual Report 2007 Pg. 15
11. ↑ CBG 10-K 2005 Item 6 Pg. 28
12. ↑ CBG 10-K 2006 Item 6 Pg. 30
13. ↑ CBG 10-K 2007 Item 7 Pg. 46
14. ↑ ^{14.0 14.1} CBG 10-K 2007 Item 7 Pg. 44
15. ↑ CBG 10-Q 2008 Item 1 Pg. 5
16. ↑ ^{16.0 16.1 16.2 16.3 16.4 16.5} CBG 10-K 2007 Item 8 Pg. 124
17. ↑ ^{17.0 17.1 17.2 17.3 17.4 17.5 17.6 17.7} CBG 10-K 2007 Item 7 Pg. 50
18. ↑ ^{18.0 18.1} CBG 10-K 2007 Item 1 Pg. 5
19. ↑ CBG 10-K 2007 Item 1 Pg. 6, 7
20. ↑ 08-Feb-2008 BW20080208 CB Richard Ellis Group, Inc. Acquires Eurisko, the Largest Independent Commercial...
21. ↑ ^{21.0 21.1} CBG 10-K 2006 Item 1 Pg. 7
22. ↑ ^{22.0 22.1} CBG 10-K 2007 Item 1 Pg. 8
23. ↑ ^{23.0 23.1} CBG 10-K 2007 Item 7 Pg. 52
24. ↑ CBG 10-K 2007 Item 1 Pg. 9
25. ↑ Investors Awaiting Bargain-Basement Commercial Property
26. ↑ CBG 10-K 2007 Item 1 Pg. 11
27. ↑ www.bankrate.com
28. ↑ Richard Lee. Office market to worsen before it recovers
29. ↑ Jeremy Pelofsky. U.S. TARP bill to help auto dealers, real estate
30. ↑ CBG 10-K 2007 Item 7 Pg. 57
31. ↑ CBG 10-K 2007 Item 7 Pg. 58
32. ↑ JLL 10-K 2007 Item 6 Pg. 25
33. ↑ ^{33.0 33.1} CBG 10-K 2007 Item 1A Pg. 23
34. ↑ CBRE Research Manhattan Snapshot
35. ↑ ^{35.0 35.1} JLL 10-K 2007 Item 6 Pg. 24
36. ↑ JLL 10-K 2007 Item 1 Pg. 5
37. ↑ ^{37.0 37.1} GBE 10-K 2007 Item 6 Pg. 34
38. ↑ ^{38.0 38.1} GBE 10-K 2007 Item 1 Pg. 3
39. ↑ JLL 10-K 2007 Item 1 Pg. 3