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 June 30, 2011

 

¨ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    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 July 29, 2011 was 325,097,062.

 

 

 


Table of Contents

FORM 10-Q

June 30, 2011

TABLE OF CONTENTS

 

          Page  
PART I—FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Consolidated Balance Sheets at June 30, 2011 (Unaudited) and December 31, 2010      3   
   Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010 (Unaudited)      4   
   Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (Unaudited)      5   
   Consolidated Statement of Equity for the six months ended June 30, 2011 (Unaudited)      6   
   Notes to Consolidated Financial Statements (Unaudited)      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      57   

Item 4.

   Controls and Procedures      59   
PART II—OTHER INFORMATION   

Item 1.

   Legal Proceedings      60   

Item 1A.

   Risk Factors      60   

Item 6.

   Exhibits      61   

Signatures

     63   

 

2


Table of Contents

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

 

    June 30,
2011
    December 31,
2010
 
    (Unaudited)        
ASSETS    

Current Assets:

   

Cash and cash equivalents

  $ 752,109      $ 506,574   

Restricted cash

    49,221        52,257   

Receivables, less allowance for doubtful accounts of $39,078 and $33,272 at June 30, 2011 and December 31, 2010, respectively

    968,585        940,167   

Warehouse receivables

    308,249        485,433   

Income taxes receivable

    36,356        —     

Prepaid expenses

    100,251        96,951   

Deferred tax assets, net

    112,969        112,304   

Real estate and other assets held for sale

    558        16,295   

Other current assets

    50,756        50,889   
 

 

 

   

 

 

 

Total Current Assets

    2,379,054        2,260,870   

Property and equipment, net

    216,584        188,397   

Goodwill

    1,407,543        1,323,801   

Other intangible assets, net of accumulated amortization of $182,361 and $166,295 at June 30, 2011 and December 31, 2010, respectively

    333,940        332,855   

Investments in unconsolidated subsidiaries

    145,158        138,973   

Deferred tax assets, net

    6,300        10,320   

Real estate under development

    90,469        112,819   

Real estate held for investment

    539,920        626,395   

Available for sale securities

    33,930        31,936   

Other assets, net

    129,834        95,202   
 

 

 

   

 

 

 

Total Assets

  $ 5,282,732      $ 5,121,568   
 

 

 

   

 

 

 
LIABILITIES AND EQUITY    

Current Liabilities:

   

Accounts payable and accrued expenses

  $ 441,799      $ 445,337   

Compensation and employee benefits payable

    337,062        346,539   

Accrued bonus and profit sharing

    224,969        455,523   

Income taxes payable

    —          18,398   

Short-term borrowings:

   

Warehouse lines of credit

    302,490        453,835   

Revolving credit facility

    111,220        17,516   

Other

    16        16   
 

 

 

   

 

 

 

Total short-term borrowings

    413,726        471,367   

Current maturities of long-term debt

    42,038        38,086   

Notes payable on real estate

    153,598        154,213   

Liabilities related to real estate and other assets held for sale

    46        12,152   

Other current liabilities

    17,598        15,153   
 

 

 

   

 

 

 

Total Current Liabilities

    1,630,836        1,956,768   

Long-Term Debt:

   

Senior secured term loans

    979,500        602,500   

11.625% senior subordinated notes, net of unamortized discount of $11,671 and $12,318 at June 30, 2011 and December 31, 2010, respectively

    438,329        437,682   

6.625% senior notes

    350,000        350,000   

Other long-term debt

    85        54   
 

 

 

   

 

 

 

Total Long-Term Debt

    1,767,914        1,390,236   

Pension liability

    40,061        40,007   

Non-current tax liabilities

    81,217        78,306   

Notes payable on real estate

    366,353        461,665   

Other liabilities

    156,693        128,791   
 

 

 

   

 

 

 

Total Liabilities

    4,043,074        4,055,773   

Commitments and contingencies

    —          —     

Equity:

   

CB Richard Ellis Group, Inc. Stockholders’ Equity:

   

Class A common stock; $0.01 par value; 525,000,000 shares authorized; 324,992,942 and 323,594,919 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively

    3,250        3,236   

Additional paid-in capital

    854,983        814,244   

Accumulated earnings

    280,929        185,337   

Accumulated other comprehensive loss

    (56,158     (94,602
 

 

 

   

 

 

 

Total CB Richard Ellis Group, Inc. Stockholders’ Equity

    1,083,004        908,215   

Non-controlling interests

    156,654        157,580   
 

 

 

   

 

 

 

Total Equity

    1,239,658        1,065,795   
 

 

 

   

 

 

 

Total Liabilities and Equity

  $ 5,282,732      $ 5,121,568   
 

 

 

   

 

 

 

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

 

3


Table of Contents

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except share data)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  

Revenue

  $ 1,422,218      $ 1,171,919      $ 2,607,323      $ 2,197,802   

Costs and expenses:

       

Cost of services

    839,822        678,714        1,553,577        1,293,908   

Operating, administrative and other

    432,856        372,033        809,881        710,739   

Depreciation and amortization

    25,385        27,616        48,563        53,911   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    1,298,063        1,078,363        2,412,021        2,058,558   

Gain on disposition of real estate

    6,027        3,623        7,999        3,623   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    130,182        97,179        203,301        142,867   

Equity income from unconsolidated subsidiaries

    17,068        14,235        32,247        7,651   

Interest income

    1,902        3,111        4,570        4,911   

Interest expense

    34,216        50,275        67,934        100,067   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before provision for income taxes

    114,936        64,250        172,184        55,362   

Provision for income taxes

    46,336        26,704        69,742        34,003   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    68,600        37,546        102,442        21,359   

Income from discontinued operations, net of income taxes

    6,267        7,140        16,911        7,140   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    74,867        44,686        119,353        28,499   

Less: Net income (loss) attributable to non-controlling interests

    13,644        (10,104     23,761        (19,664
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 61,223      $ 54,790      $ 95,592      $ 48,163   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Income from continuing operations attributable to CB Richard Ellis Group, Inc.

  $ 0.19      $ 0.15      $ 0.30      $ 0.13   

Income from discontinued operations attributable to CB Richard Ellis Group, Inc.

    —          0.02        —          0.02   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 0.19      $ 0.17      $ 0.30      $ 0.15   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding for basic income per share

    317,698,275        312,910,934        317,133,967        312,895,372   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Income from continuing operations attributable to CB Richard Ellis Group, Inc.

  $ 0.19      $ 0.15      $ 0.30      $ 0.13   

Income from discontinued operations attributable to CB Richard Ellis Group, Inc.

    —          0.02        —          0.02   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 0.19      $ 0.17      $ 0.30      $ 0.15   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding for diluted income per share

    324,093,042        318,425,227        323,510,069        317,736,844   
 

 

 

   

 

 

   

 

 

   

 

 

 

Amounts attributable to CB Richard Ellis Group, Inc. shareholders

       

Income from continuing operations, net of tax

  $ 61,223      $ 47,279      $ 95,592      $ 40,652   

Income from discontinued operations, net of tax

    —          7,511        —          7,511   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 61,223      $ 54,790      $ 95,592      $ 48,163   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

 

    Six Months Ended
June 30,
 
    2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income

  $ 119,353      $ 28,499   

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

   

Depreciation and amortization

    49,088        54,079   

Amortization of financing costs

    3,241        5,325   

Gain on sale of loans, servicing rights and other assets

    (25,437     (20,343

Gain on disposition of real estate held for investment

    (19,695     (11,879

Equity income from unconsolidated subsidiaries

    (32,247     (7,651

Provision for doubtful accounts

    6,830        12,421   

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

    21,292        22,018   

Incremental tax benefit from stock options exercised

    (14,495     (236

Distribution of earnings from unconsolidated subsidiaries

    11,855        11,793   

Tenant concessions received

    11,807        3,424   

Decrease in receivables

    4,131        4,961   

(Increase) decrease in prepaid expenses and other assets

    (4,523     4,352   

Decrease (increase) in real estate held for sale and under development

    32,525        (10,868

Decrease in accounts payable and accrued expenses

    (34,955     (23,737

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

    (256,597     (83,708

(Increase) decrease in income taxes receivable

    (28,245     113,243   

Increase (decrease) in other liabilities

    400        (601

Other operating activities, net

    (718     (85
 

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (156,390     101,007   
 

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Capital expenditures

    (47,148     (7,161

Acquisition of businesses, including net assets acquired, intangibles and goodwill, net of cash acquired

    (41,075     (62,720

Contributions to unconsolidated subsidiaries

    (17,094     (10,852

Distributions from unconsolidated subsidiaries

    34,988        16,130   

Net proceeds from disposition of real estate held for investment

    109,667        57,249   

Additions to real estate held for investment

    (6,315     (5,212

Proceeds from the sale of servicing rights and other assets

    11,416        9,741   

Decrease in restricted cash

    3,974        7,804   

Other investing activities, net

    (704     (954
 

 

 

   

 

 

 

Net cash provided by investing activities

    47,709        4,025   
 

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Proceeds from senior secured term loans

    400,000        —     

Repayment of senior secured term loans

    (19,000     (60,770

Proceeds from revolving credit facility

    744,733        16,349   

Repayment of revolving credit facility

    (652,000     (10,496

Proceeds from notes payable on real estate held for investment

    3,551        8,741   

Repayment of notes payable on real estate held for investment

    (91,471     (48,493

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

    1,665        3,214   

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

    (26,594     (3,412

Repayment of short-term borrowings and other loans, net

    —          (4,047

Proceeds from exercise of stock options

    4,858        312   

Incremental tax benefit from stock options exercised

    14,495        236   

Non-controlling interests contributions

    8,630        22,103   

Non-controlling interests distributions

    (30,679     (6,954

Payment of financing costs

    (18,454     (5,707

Other financing activities, net

    (91     (217
 

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    339,643        (89,141

Effect of currency exchange rate changes on cash and cash equivalents

    14,573        (13,885
 

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

    245,535        2,006   

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

    506,574        741,557   
 

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

  $ 752,109      $ 743,563   
 

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   

Cash paid (received) during the period for:

   

Interest

  $ 68,221      $ 85,408   
 

 

 

   

 

 

 

Income tax payments (refunds), net

  $ 95,744      $ (77,047
 

 

 

   

 

 

 

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

 

5


Table of Contents

CB RICHARD ELLIS GROUP, INC.

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(Dollars in thousands)

 

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

Balance at December 31, 2010

  $ 3,236      $ 814,244      $ 185,337      $ (94,602   $ 157,580      $ 1,065,795   

Net income

    —          —          95,592        —          23,761        119,353   

Stock options exercised (including tax benefit)

    14        19,339        —          —          —          19,353   

Compensation expense for stock options and non-vested stock awards

    —          21,292        —          —          —          21,292   

Foreign currency translation gain

    —          —          —          44,715        830        45,545   

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

    —          —          —          (6,777     —          (6,777

Contributions from non-controlling interests

    —          —          —          —          8,630        8,630   

Distributions to non-controlling interests

    —          —          —          —          (30,679     (30,679

Other, net

    —          108        —          506        (3,468     (2,854
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ 3,250      $ 854,983      $ 280,929      $ (56,158   $ 156,654      $ 1,239,658   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

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 the “company”, “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. 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.

The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results of operations to be expected for the year ending December 31, 2011. 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, 2010, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2010.

2. New Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU 2010-29 specifies that when a public company completes a business combination, the company should disclose revenue and earnings of the combined entity as though the business combination occurred as of the beginning of the comparable prior annual reporting period. The update also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. The requirements of ASU 2010-29 are effective for business combinations that occur on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We do not believe the adoption of this update will have a material impact on the disclosure requirements for our consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 specifies when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The requirements of ASU 2011-03 will be effective for the first interim or annual period beginning on or after December 15, 2011, with early adoption prohibited. We do not believe the adoption of this update will have a material effect on our consolidated financial position or results of operations.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” These amendments were issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level 3 fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2011, with early adoption prohibited. We are currently evaluating the impact of adoption of this update on our consolidated financial statements, but do not expect it to have a material impact.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income.” This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. ASU 2011-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted, and will require retrospective application for all periods presented. We do not believe the adoption of this update will have a material impact on the disclosure requirements for our consolidated financial statements.

3. REIM Acquisitions

On February 15, 2011, we announced that we had entered into definitive agreements to acquire the majority of the real estate investment management business of Netherlands-based ING Group N.V. (ING) for approximately $940 million in cash. The acquisitions include substantially all of the ING Real Estate Investment Management (REIM) operations in Europe and Asia, as well as substantially all of Clarion Real Estate Securities (CRES), its U.S.-based global real estate listed securities business (collectively referred to as ING REIM). On February 15, 2011, we also announced that we expected to acquire approximately $55 million of CRES co-investments from ING and potentially additional interests in other funds managed by ING REIM Europe and ING REIM Asia. Upon completion of the acquisitions (which we refer to as the REIM Acquisitions), ING REIM is expected to become part of our Global Investment Management segment (which conducts business through our indirect wholly-owned subsidiary, CBRE Investors), which will continue to be an independently operated business segment upon completion of the acquisitions. In addition, we expect to incur transaction costs relating to the acquisitions of approximately $150 million (pre-tax), including financing, retention and integration costs. We secured borrowings of $800.0 million of new term loans to finance the REIM Acquisitions (see Note 9). Of this amount, $400.0 million was drawn on June 30, 2011 to finance the CRES portion of the REIM Acquisitions, which closed on July 1, 2011 (see Note 17). The acquisition of ING REIM’s operations in Europe and Asia is expected to close in the second half of 2011 and is subject to approval by certain stakeholders, including regulatory agencies in Europe and Asia. We anticipate financing the acquisition of ING REIM’s operations in Europe and Asia primarily with the remaining $400.0 million of new term loans we have secured and cash on hand.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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.

There were no significant non-recurring fair value measurements recorded during the three and six months ended June 30, 2011 or the three months ended June 30, 2010. The following non-recurring fair value measurements were recorded during the six months ended June 30, 2010 (dollars in thousands):

 

    Net Carrying Value
as of

June 30, 2010
    Fair Value Measured and Recorded Using     Total  Impairment
Charges for the
Six Months Ended
June 30, 2010
 
         Level 1               Level 2               Level 3         

Investments in unconsolidated subsidiaries

  $ 32,803      $ —        $ —        $ 32,803      $ 6,947   

During the six months ended June 30, 2010, we recorded investment write-downs of $6.9 million, of which $2.5 million were attributable to non-controlling interests. Such write-downs were included in equity loss from unconsolidated subsidiaries within our Global Investment Management segment in the accompanying consolidated statements of operations. During the six months ended June 30, 2010, $5.9 million of the investment write-downs were driven by a decrease in the estimated holding period of certain assets and $1.0 million was driven by a decline in value of an investment attributable to continued capital market disruption. 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.

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

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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 warehouse lines of credit outstanding for CBRE Capital Markets and our revolving credit facility. 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 $1.0 billion at June 30, 2011, which approximates their actual carrying value at June 30, 2011 (see Note 9).

11.625% Senior Subordinated Notes: Based on dealers’ quotes, the estimated fair value of our 11.625% senior subordinated notes was $509.0 million at June 30, 2011. Their actual carrying value totaled $438.3 million at June 30, 2011.

6.625% Senior Notes: Based on dealers’ quotes, the estimated fair value of our 6.625% senior notes was $359.6 million at June 30, 2011. Their actual carrying value totaled $350.0 million at June 30, 2011.

Notes Payable on Real Estate: As of June 30, 2011, the carrying value of our notes payable on real estate was $520.0 million (see Note 8). These borrowings mostly have floating interest rates at spreads over a market rate index. It is likely that some portion of our notes payable on real estate have fair values lower than actual carrying values. Given our volume of notes payable and the cost involved in estimating their fair value, we determined it was not practicable to determine an estimated fair value for these notes payable. Additionally, only $13.6 million of these notes payable are recourse to us as of June 30, 2011.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Global Investment Management:

        

Revenue

   $ 158,903      $ 109,590      $ 299,155      $ 275,824   

Operating loss

   $ (8,636   $ (92,723   $ (43,298   $ (355,722

Net loss

   $ (20,102   $ (113,824   $ (70,267   $ (448,650

Development Services:

        

Revenue

   $ 28,167      $ 31,625      $ 47,581      $ 52,561   

Operating income

   $ 37,424      $ 37,739      $ 76,797      $ 35,069   

Net income

   $ 26,689      $ 25,036      $ 59,131      $ 13,464   

Other:

        

Revenue

   $ 32,417      $ 31,748      $ 66,802      $ 60,894   

Operating income

   $ 4,643      $ 4,758      $ 8,433      $ 7,504   

Net income

   $ 4,640      $ 4,917      $ 8,499      $ 7,775   

Total:

        

Revenue

   $   219,487      $    172,963      $   413,538      $    389,279   

Operating income (loss)

   $ 33,431      $ (50,226   $ 41,932      $ (313,149

Net income (loss)

   $ 11,227      $ (83,871   $ (2,637   $ (427,411

During the six months ended June 30, 2010, we recorded non-cash write-downs of investments of $6.9 million 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.

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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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

 

     June 30, 2011      December 31, 2010  

Assets:

     

Real estate held for sale (see Note 7)

   $ 558       $ 15,399   

Other current assets

     —           20   

Property and equipment, net

     —           869   

Other assets

     —           7   
  

 

 

    

 

 

 

Total real estate and other assets held for sale

     558         16,295   

Liabilities:

     

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

     —           11,650   

Accounts payable and accrued expenses

     46         370   

Other current liabilities

     —           28   

Other liabilities

     —           104   
  

 

 

    

 

 

 

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

     46         12,152   
  

 

 

    

 

 

 

Net real estate and other assets held for sale

   $ 512       $ 4,143   
  

 

 

    

 

 

 

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. Additionally, we consolidate certain variable interest entities that hold investments in real estate. Certain real estate assets secure the outstanding balances of underlying mortgage or construction loans. Our real estate is reported in our Development Services and Global Investment Management segments and consisted of the following (dollars in thousands):

 

     June 30, 2011      December 31, 2010  

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

   $ 558       $ 15,399   

Real estate under development (non-current)

     90,469         112,819   

Real estate held for investment (1)

     539,920         626,395   
  

 

 

    

 

 

 

Total real estate (2)

   $ 630,947       $ 754,613   
  

 

 

    

 

 

 

 

(1) Net of accumulated depreciation of $42.4 million and $37.8 million at June 30, 2011 and December 31, 2010, respectively.
(2) Includes balances for lease intangibles and tenant origination costs of $8.9 million and $2.5 million, respectively, at June 30, 2011 and $10.1 million and $3.3 million, respectively, at December 31, 2010. 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)

 

8. Notes Payable on Real Estate

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

 

     June 30, 2011      December 31, 2010  

Current portion of notes payable on real estate

   $ 153,598       $ 154,213   

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

     —           11,650   
  

 

 

    

 

 

 

Total notes payable on real estate, current portion

     153,598         165,863   

Notes payable on real estate, non-current portion

     366,353         461,665   
  

 

 

    

 

 

 

Total notes payable on real estate

   $ 519,951       $ 627,528   
  

 

 

    

 

 

 

At June 30, 2011 and December 31, 2010, $11.5 million and $1.4 million, respectively, of the non-current portion of notes payable on real estate and $2.1 million and $2.3 million, respectively, of the 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 credit facilities with Credit Suisse Group AG (CS) and other lenders to fund strategic acquisitions and to provide for our working capital needs. On November 10, 2010, we entered into a new credit agreement (as amended, the Credit Agreement) with a syndicate of banks led by CS, as administrative and collateral agent, to completely refinance our previous credit facilities. On March 4, 2011, we entered into an amendment to our Credit Agreement to, among other things, increase flexibility to various covenants to accommodate the REIM Acquisitions and to maintain the availability of the $800.0 million incremental facility under the Credit Agreement. On March 4, 2011, we also entered into an incremental assumption agreement to allow for the establishment of new tranche C and tranche D term loan facilities.

As of June 30, 2011, our Credit Agreement provides for the following: (1) a $700.0 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, maturing on May 10, 2015; (2) a $350.0 million tranche A term loan facility requiring quarterly principal payments, which began on December 31, 2010 and continue through September 30, 2015, with the balance payable on November 10, 2015, (3) a $300.0 million tranche B term loan facility requiring quarterly principal payments, which began on December 31, 2010 and continue through September 30, 2016, with the balance payable on November 10, 2016; (4) a $400.0 million delayed draw seven year tranche C term loan facility with a maturity date of March 4, 2018; (5) a $400.0 million tranche D term loan facility requiring quarterly principal payments beginning September 30, 2011 and continuing through June 30, 2019, with the balance payable on September 4, 2019 and (6) an accordion provision which provides the ability to borrow an additional $800.0 million, which can be further expanded, subject to the satisfaction of what we believe are customary conditions. In regards to the tranche C and tranche D term loan facilities, we have up to 180 days from the date we entered into the incremental assumption agreement to draw on these facilities during which period we are required to pay a fee on the unused portions of each facility. After 180 days, any unused portions of these facilities would no longer be available for use. On June 30, 2011, we drew down $400.0 million of the tranche D term loan facility to finance the CRES portion of the REIM Acquisitions, which closed on July 1, 2011 (see Note 17). The acquisition of ING REIM’s operations in Europe and Asia is expected to close in the second half of 2011 and we anticipate financing it primarily with the entire $400.0 million of tranche C term loan facility and cash on hand.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The revolving credit facility allows for borrowings outside of the United States (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 June 30, 2011 bear interest at varying rates, based at our option, on either the applicable fixed rate plus 1.65% to 3.15% or the daily rate plus 0.65% to 2.15% as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement). As of June 30, 2011 and December 31, 2010, we had $111.2 million and $17.5 million, respectively, of revolving credit facility principal outstanding with related weighted average interest rates of 4.4% and 3.5%, respectively, which are included in short-term borrowings in the accompanying consolidated balance sheets. As of June 30, 2011, letters of credit totaling $13.6 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 June 30, 2011 bear interest, based at our option, on the following: for the tranche A term loan facility, on either the applicable fixed rate plus 2.00% to 3.75% or the daily rate plus 1.00% to 2.75%, as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement), for the tranche B term loan facility, on either the applicable fixed rate plus 3.25% or the daily rate plus 2.25%, for the tranche C term loan facility, on either the applicable fixed rate plus 3.25% or the daily rate plus 2.25% and for the tranche D term loan facility, on either the applicable fixed rate plus 3.50% or the daily rate plus 2.50%. As of June 30, 2011 and December 31, 2010, we had $323.8 million and $341.3 million, respectively, of tranche A term loan facility principal outstanding and $297.7 million and $299.2 million, respectively, of tranche B term loan facility principal outstanding, which are included in the accompanying consolidated balance sheets. As of June 30, 2011, we also had $400.0 million of tranche D term loan facility principal outstanding, which is included in the accompanying consolidated balance sheets. As of June 30, 2011, there were no amounts outstanding under our tranche C term loan facility.

In March 2011, we entered into five interest rate swap agreements, all with effective dates in October 2011, and immediately designated them as cash flow hedges in accordance with FASB ASC Topic 815, “Derivatives and Hedging.” The purpose of these interest rate swap agreements is to hedge potential changes to our cash flows due to the variable interest nature of our senior secured term loan facilities. The total notional amount of these interest rate swap agreements is $400.0 million, with $200.0 million expiring on October 2, 2017 and $200.0 million expiring on September 4, 2019. There was no hedge ineffectiveness for the three and six months ended June 30, 2011. During the three and six months ended June 30, 2011, we recorded net losses of $13.2 million and $11.5 million, respectively, to other comprehensive loss in relation to these interest rate swap agreements. As of June 30, 2011, the fair values of these interest rate swap agreements were reflected as an $11.5 million liability and were included in other long-term liabilities in the accompanying consolidated balance sheets. The fair value measurements employed for these interest rate swap agreements were based on observable market data, which falls within Level 2 of the fair value hierarchy.

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 65.0% of the capital stock of certain non-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 indentures governing our 6.625% senior notes and 11.625% senior subordinated notes contain numerous restrictive covenants that, among other things, limit our ability to incur

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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 2.25x and a maximum leverage ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement) of 3.75x. Our coverage ratio of EBITDA to total interest expense was 13.58x for the trailing twelve months ended June 30, 2011 and our leverage ratio of total debt less available cash to EBITDA was 1.25x as of June 30, 2011.

On April 19, 2010, we entered into a Receivables Purchase Agreement, which allowed 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 bore interest at the commercial paper rate plus 2.75%. This agreement expired on April 18, 2011 and we did not renew this arrangement. As of December 31, 2010, there were no amounts outstanding under this agreement.

10. Commitments and Contingencies

We are a party to a number of pending or threatened lawsuits arising out of, or incident to, the ordinary course of our business. Our management believes that any liability imposed on 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.

We had outstanding letters of credit totaling $13.3 million as of June 30, 2011, 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 as well as letters of credit related to operating leases. These letters of credit are primarily executed by us in the ordinary course of business as well as in connection with certain insurance programs. The letters of credit expire at varying dates through July 2012.

We had guarantees totaling $13.7 million as of June 30, 2011, excluding guarantees related to pension liabilities, consolidated indebtedness and other obligations for which we have outstanding liabilities already accrued on our consolidated balance sheet, and operating leases. The $13.7 million primarily consists of guarantees of obligations of unconsolidated subsidiaries, which expire at varying dates through November 2013.

In addition, as of June 30, 2011, we had numerous completion and budget guarantees relating to development projects. These guarantees are made by us in the ordinary 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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

In January 2008, CBRE Multifamily Capital, Inc. (CBRE MCI), a wholly-owned subsidiary of CBRE Capital Markets, Inc., entered into an agreement with Fannie Mae, under Fannie Mae’s DUS Lender Program (DUS Program), to provide financing for multifamily housing with five or more units. Under the DUS Program, CBRE MCI 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 originated under the DUS Program. CBRE MCI has funded loans subject to such loss sharing arrangements with unpaid principal balances of $2.5 billion at June 30, 2011. Additionally, CBRE MCI has funded loans under the DUS Program that are not subject to loss sharing arrangements with unpaid principal balances of approximately $522.7 million at June 30, 2011. CBRE MCI, 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 June 30, 2011 and December 31, 2010, CBRE MCI had $3.3 million and $2.2 million, respectively, of cash deposited under this reserve arrangement, and had provided approximately $4.7 million and $4.0 million, respectively, of loan loss accruals. Fannie Mae’s recourse under the DUS Program is limited to the assets of CBRE MCI, which totaled approximately $104.3 million (including $46.6 million of warehouse receivables, a substantial majority of which are pledged against warehouse lines of credit and are therefore not available to Fannie Mae) at June 30, 2011.

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 2.0% to 5.0% of the equity in a particular fund. As of June 30, 2011, we had aggregate commitments of $18.0 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 June 30, 2011, we had committed to fund $21.4 million of additional capital to these unconsolidated subsidiaries.

11. Income Per Share Information

The following is a calculation of income per share (dollars in thousands, except share data):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

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

           

Net income attributable to CB Richard Ellis Group, Inc. shareholders

   $ 61,223       $ 54,790       $ 95,592       $ 48,163   

Weighted average shares outstanding for basic income per share

     317,698,275         312,910,934         317,133,967         312,895,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 0.19       $ 0.17       $ 0.30       $ 0.15   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

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

           

Net income attributable to CB Richard Ellis Group, Inc. shareholders

   $ 61,223       $ 54,790       $ 95,592       $ 48,163   

Weighted average shares outstanding for basic income per share

     317,698,275         312,910,934         317,133,967         312,895,372   

Dilutive effect of contingently issuable shares

     4,040,084         2,918,526         3,776,379         2,346,809   

Dilutive effect of stock options

     2,354,683         2,595,767         2,599,723         2,494,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding for diluted income per share

     324,093,042         318,425,227         323,510,069         317,736,844   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 0.19       $ 0.17       $ 0.30       $ 0.15   
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three and six months ended June 30, 2011, options to purchase 55,587 shares of common stock were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect.

For the three and six months ended June 30, 2010, options to purchase 838,830 shares of common stock were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect. Additionally, 398,047 and 397,577 of contingently issuable shares were excluded from the computation of diluted earnings per share because their inclusion would have had an anti-dilutive effect for the three and six months ended June 30, 2010, respectively.

12. Comprehensive Income (Loss)

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Net income

   $ 74,867      $ 44,686      $ 119,353      $ 28,499   

Other comprehensive income (loss):

        

Foreign currency translation gain (loss)

     15,550        (36,468     45,545        (60,594

Unrealized (losses) gains on interest rate swaps and interest rate caps, net

     (7,833     174        (6,777     296   

Other, net

     998        (75     506        2,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     8,715        (36,369     39,274        (58,085

Comprehensive income (loss)

     83,582        8,317        158,627        (29,586

Less: Comprehensive income (loss) attributable to non-controlling interests

     14,116        (10,468     24,591        (20,388
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 69,466      $ 18,785      $ 134,036      $ (9,198
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Interest cost

   $ 4,209      $ 3,884      $ 8,322      $ 7,947   

Expected return on plan assets

     (4,337     (3,605     (8,573     (7,376

Amortization of unrecognized net loss

     345        530        682        1,085   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 217      $ 809      $ 431      $ 1,656   
  

 

 

   

 

 

   

 

 

   

 

 

 

We contributed $0.9 million and $1.8 million to fund our pension plans during the three and six months ended June 30, 2011, respectively. We expect to contribute a total of $3.7 million to fund our pension plans for the year ending December 31, 2011.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

14. Discontinued Operations

In the ordinary course of business, we dispose of real estate assets, or hold real estate assets for sale, that may be considered components of an entity in accordance with Topic 360. If we do not have, or expect to have, significant continuing involvement with the operation of these real estate assets after disposition, we are required to recognize operating profits or losses and gains or losses on disposition of these assets as discontinued operations in our consolidated statements of operations in the periods in which they occur. Real estate operations and dispositions accounted for as discontinued operations for the three and six months ended June 30, 2011 and 2010 were reported in our Global Investment Management and Development Services segments as follows (dollars in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011      2010     2011      2010  

Revenue

   $ 1,355       $ 978      $ 2,385       $ 978   

Costs and expenses:

          

Operating, administrative and other

     852         356        1,234         356   

Depreciation and amortization

     234         168        525         168   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

     1,086         524        1,759         524   

Gain on disposition of real estate

     6,601         11,879        17,638         11,879   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

     6,870         12,333        18,264         12,333   

Interest income

     —           1        —           1   

Interest expense

     603         715        1,353         715   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations, before provision for income taxes

     6,267         11,619        16,911         11,619   

Provision for income taxes

     —           4,479        —           4,479   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations, net of income taxes

     6,267         7,140        16,911         7,140   

Less: Income (loss) from discontinued operations attributable to non-controlling interests

     6,267         (371     16,911         (371
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations attributable to CB Richard Ellis Group, Inc.

   $ —         $ 7,511      $ —         $ 7,511   
  

 

 

    

 

 

   

 

 

    

 

 

 

15. Industry Segments

We report our operations through the following segments: (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.

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Our Development Services business consists of real estate development and investment activities primarily in the U.S.

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Revenue

           

Americas

   $ 897,828       $ 722,255       $ 1,647,943       $ 1,367,866   

EMEA

     261,087         225,378         466,055         413,538   

Asia Pacific

     188,546         158,678         349,046         293,110   

Global Investment Management

     57,554         46,896         107,876         86,303   

Development Services

     17,203         18,712         36,403         36,985   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,422,218       $ 1,171,919       $ 2,607,323       $ 2,197,802   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

EBITDA

           

Americas

   $ 115,375       $ 89,847       $ 193,503       $ 151,835   

EMEA

     21,375         19,865         24,381         23,990   

Asia Pacific

     17,437         12,777         29,879         21,035   

Global Investment Management

     2,470         10,766         8,460         5,836   

Development Services

     9,438         28,380         22,916         33,898   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 166,095       $ 161,635       $ 279,139       $ 236,594   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA represents earnings before net interest expense, 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 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 has 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
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Americas

        

Net income attributable to CB Richard Ellis Group, Inc.

   $ 52,015      $ 35,038      $ 81,524      $ 37,584   

Add:

        

Depreciation and amortization

     14,831        14,997        27,662        29,687   

Interest expense

     25,740        38,972        51,572        78,686   

Royalty and management service income

     (6,895     (5,347     (13,515     (9,492

Provision for income taxes

     30,951        7,062        49,327        17,431   

Less:

        

Interest income

     1,267        875        3,067        2,061   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 115,375      $ 89,847      $ 193,503      $ 151,835   
  

 

 

   

 

 

   

 

 

   

 

 

 

EMEA

        

Net income attributable to CB Richard Ellis Group, Inc.

   $ 10,541      $ 5,278      $ 10,392      $ 6,250   

Add:

        

Depreciation and amortization

     2,253        2,384        4,515        4,774   

Interest expense

     18        36        157        125   

Royalty and management service expense

     3,422        3,329        6,153        5,541   

Provision for income taxes

     5,248        9,189        3,788        7,984   

Less:

        

Interest income

     107        351        624        684   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 21,375      $ 19,865      $ 24,381      $ 23,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

Asia Pacific

        

Net income attributable to CB Richard Ellis Group, Inc.

   $ 6,186      $ 5,907      $ 9,087      $ 6,650   

Add:

        

Depreciation and amortization

     1,988        2,007        3,971        4,119   

Interest expense

     809        613        1,229        1,170   

Royalty and management service expense

     3,239        1,745        6,846        3,538   

Provision for income taxes

     5,745        4,288        9,535        7,488   

Less:

        

Interest income

     530        1,783        789        1,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 17,437      $ 12,777      $ 29,879      $ 21,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Global Investment Management

        

Net loss attributable to CB Richard Ellis Group, Inc.

   $ (9,777   $ (1,119   $ (12,232   $ (9,587

Add:

        

Depreciation and amortization (1)

     3,405        3,613        7,191        6,470   

Interest expense (2)

     5,688        6,063        10,453        10,478   

Royalty and management service expense

     234        273        516        413   

Provision for (benefit of) income taxes

     3,093        1,992        2,933        (1,770

Less:

        

Interest income

     173        56        401        168   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (3)

   $ 2,470      $ 10,766      $ 8,460      $ 5,836   
  

 

 

   

 

 

   

 

 

   

 

 

 

Development Services

        

Net income attributable to CB Richard Ellis Group, Inc.

   $ 2,258      $ 9,686      $ 6,821      $ 7,266   

Add:

        

Depreciation and amortization (4)

     3,142        4,783        5,749        9,029   

Interest expense (5)

     2,753        5,306        6,240        10,323   

Provision for income taxes (6)

     1,299        8,652        4,159        7,349   

Less:

        

Interest income

     14        47        53        69   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (7)

   $ 9,438      $ 28,380      $ 22,916      $ 33,898   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

(1) Includes depreciation and amortization related to discontinued operations of $0.2 million and $0.5 million for the three and six months ended June 30, 2011, respectively.
(2) Includes interest expense related to discontinued operations of $0.6 million and $1.4 million for the three and six months ended June 30, 2011, respectively.
(3) Includes EBITDA related to discontinued operations of $0.8 million and $1.9 million for the three and six months ended June 30, 2011, respectively.
(4) Includes depreciation and amortization related to discontinued operations of $0.2 million for the three and six months ended June 30, 2010.
(5) Includes interest expense related to discontinued operations of $0.7 million for the three and six months ended June 30, 2010.
(6) Includes provision for income taxes related to discontinued operations of $4.5 million for the three and six months ended June 30, 2010.
(7) Includes EBITDA related to discontinued operations of $12.9 million for the three and six months ended June 30, 2010.

16. Guarantor and Nonguarantor Financial Statements

The following condensed consolidating financial information includes:

(1) Condensed consolidating balance sheets as of June 30, 2011 and December 31, 2010; condensed consolidating statements of operations for the three and six months ended June 30, 2011 and 2010; and condensed consolidating statements of cash flows for the six months ended June 30, 2011 and 2010, 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 intercompany 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 JUNE 30, 2011

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Current Assets:

           

Cash and cash equivalents

  $ 66      $ 118,592      $ 434,546      $ 198,905      $ —        $ 752,109   

Restricted cash

    —          4,840        16,386        27,995        —          49,221   

Receivables, net

    —          —          411,097        557,488        —          968,585   

Warehouse receivables (a)

    —          —          308,249        —          —          308,249   

Income taxes receivable

    7,137        450        9,542        19,227        —          36,356   

Prepaid expenses

    —          1,749        40,696        57,806        —          100,251   

Deferred tax assets, net

    —          —          92,205        20,764        —          112,969   

Real estate and other assets held for sale

    —          —          558        —          —          558   

Other current assets

    —          —          31,884        18,872        —          50,756   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Assets

    7,203        125,631        1,345,163        901,057        —          2,379,054   

Property and equipment, net

    —          —          146,730        69,854        —          216,584   

Goodwill

    —          —          804,283        603,260        —          1,407,543   

Other intangible assets, net

    —          —          306,533        27,407        —          333,940   

Investments in unconsolidated subsidiaries

    —          —          96,387        48,771        —          145,158   

Investments in consolidated subsidiaries

    1,345,654        1,612,308        1,130,868        —          (4,088,830     —     

Intercompany loan receivable

    —          1,468,486        635,000        103,453        (2,206,939     —     

Deferred tax assets, net

    —          —          —          40,801        (34,501     6,300   

Real estate under development

    —          —          7,573        82,896        —          90,469   

Real estate held for investment

    —          —          4,223        535,697        —          539,920   

Available for sale securities

    —          —          33,930        —          —          33,930   

Other assets, net

    —          47,593        38,546        43,695        —          129,834   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 1,352,857      $ 3,254,018      $ 4,549,236      $ 2,456,891      $ (6,330,270   $ 5,282,732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current Liabilities:

           

Accounts payable and accrued expenses

  $ —        $ 9,936      $ 130,767      $ 301,096      $ —        $ 441,799   

Compensation and employee benefits payable

    —          626        200,924        135,512        —          337,062   

Accrued bonus and profit sharing

    —          —          139,405        85,564        —          224,969   

Short-term borrowings:

           

Warehouse lines of credit (a)

    —          —          302,490        —          —          302,490   

Revolving credit facility

    —          76,449        —          34,771        —          111,220   

Other

    —          —          16        —          —          16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term borrowings

    —          76,449        302,506        34,771        —          413,726   

Current maturities of long-term debt

    —          42,000        —          38        —          42,038   

Notes payable on real estate

    —          —          —          153,598        —          153,598   

Liabilities related to real estate and other assets held for sale

    —          —          46        —          —          46   

Other current liabilities

    —          —          15,444        2,154        —          17,598   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Liabilities

    —          129,011        789,092        712,733        —          1,630,836   

Long-Term Debt:

           

Senior secured term loans

    —          979,500        —          —          —          979,500   

11.625% senior subordinated notes, net

    —          438,329        —          —          —          438,329   

6.625% senior notes

    —          350,000        —          —          —          350,000   

Other long-term debt

    —          —          —          85        —          85   

Intercompany loan payable

    269,853        —          1,937,086        —          (2,206,939     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Long-Term Debt

    269,853        1,767,829        1,937,086        85        (2,206,939     1,767,914   

Deferred tax liabilities, net

    —          —          34,501        —          (34,501     —     

Pension liability

    —          —          —          40,061        —          40,061   

Non-current tax liabilities

    —          —          81,217        —          —          81,217   

Notes payable on real estate

    —          —          —          366,353        —          366,353   

Other liabilities

    —          11,524        95,032        50,137        —          156,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    269,853        1,908,364        2,936,928        1,169,369        (2,241,440     4,043,074   

Commitments and contingencies

    —          —          —          —          —          —     

Equity:

           

CB Richard Ellis Group, Inc. Stockholders’ Equity

    1,083,004        1,345,654        1,612,308        1,130,868        (4,088,830     1,083,004   

Non-controlling interests

    —          —          —          156,654        —          156,654   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity

    1,083,004        1,345,654        1,612,308        1,287,522        (4,088,830     1,239,658   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

  $ 1,352,857      $ 3,254,018      $ 4,549,236      $ 2,456,891      $ (6,330,270   $ 5,282,732   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Although CBRE Capital Markets is included among our domestic subsidiaries, which jointly and severally guarantee our 11.625% senior subordinated notes, our 6.625% senior notes and our Credit Agreement, a substantial majority of warehouse receivables funded under the JP Morgan Chase Bank, N.A. (JP Morgan), Kemps Landing Capital Company, LLC (Kemps Landing), Bank of America (BofA) and TD Bank, N.A. (TD Bank) lines of credit are pledged to JP Morgan, Kemps Landing, BofA and TD Bank, and accordingly, are not included as collateral for these notes or our other outstanding debt.

 

23


Table of Contents

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2010

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Current Assets:

           

Cash and cash equivalents

  $ 4      $ 223,845      $ 96,862      $ 185,863      $ —        $ 506,574   

Restricted cash

    —          4,830        16,086        31,341        —          52,257   

Receivables, net

    —          —          364,634        575,533        —          940,167   

Warehouse receivables (a)

    —          —          485,433        —          —          485,433   

Income taxes receivable

    16,581        28,957        —          3,915        (49,453     —     

Prepaid expenses

    —          —          40,653        56,298        —          96,951   

Deferred tax assets, net

    —          —          92,205        20,099        —          112,304   

Real estate and other assets held for sale

    —          —          558        15,737        —          16,295   

Other current assets

    —          —          31,401        19,488        —          50,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Assets

    16,585        257,632        1,127,832        908,274        (49,453     2,260,870   

Property and equipment, net

    —          —          118,425        69,972        —          188,397   

Goodwill

    —          —          803,075        520,726        —          1,323,801   

Other intangible assets, net

    —          —          304,639        28,216        —          332,855   

Investments in unconsolidated subsidiaries

    —          —          82,593        56,380        —          138,973   

Investments in consolidated subsidiaries

    1,132,091        856,753        1,042,686        —          (3,031,530     —     

Intercompany loan receivable

    —          1,434,571        635,000        177,302        (2,246,873     —     

Deferred tax assets, net

    —          —          —          40,185        (29,865     10,320   

Real estate under development

    —          —          —          112,819        —          112,819   

Real estate held for investment

    —          —          4,214        622,181        —          626,395   

Available for sale securities

    —          —          31,936        —          —          31,936   

Other assets, net

    —          31,274        22,985        40,943        —          95,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 1,148,676      $ 2,580,230      $ 4,173,385      $ 2,576,998      $ (5,357,721   $ 5,121,568   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current Liabilities:

           

Accounts payable and accrued expenses

  $ —        $ 9,211      $ 138,613      $ 297,513      $ —        $ 445,337   

Compensation and employee benefits payable

    —          626        204,034        141,879        —          346,539   

Accrued bonus and profit sharing

    —          —          235,694        219,829        —          455,523   

Income taxes payable

    —          —          67,851        —          (49,453     18,398   

Short-term borrowings:

           

Warehouse lines of credit (a)

    —          —          453,835        —          —          453,835   

Revolving credit facility

    —          10,120        —          7,396        —          17,516   

Other

    —          —          16        —          —          16   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total short-term borrowings

    —          10,120        453,851        7,396        —          471,367   

Current maturities of long-term debt

    —          38,000        —          86        —          38,086   

Notes payable on real estate

    —          —          —          154,213        —          154,213   

Liabilities related to real estate and other assets held for sale

    —          —          86        12,066        —          12,152   

Other current liabilities

    —          —          12,621        2,532        —          15,153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Current Liabilities

    —          57,957        1,112,750        835,514        (49,453     1,956,768   

Long-Term Debt:

           

Senior secured term loans

    —          602,500        —          —          —          602,500   

11.625% senior subordinated notes, net

    —          437,682        —          —          —          437,682   

6.625% senior notes

    —          350,000        —          —          —          350,000   

Other long-term debt

    —          —          —          54        —          54   

Intercompany loan payable

    240,461        —          2,006,412        —          (2,246,873     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Long-Term Debt

    240,461        1,390,182        2,006,412        54        (2,246,873     1,390,236   

Deferred tax liabilities, net

    —          —          29,865        —          (29,865     —     

Pension liability

    —          —          —          40,007        —          40,007   

Non-current tax liabilities

    —          —          78,306        —          —          78,306   

Notes payable on real estate

    —          —          —          461,665        —          461,665   

Other liabilities

    —          —          89,299        39,492        —          128,791   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

    240,461        1,448,139        3,316,632        1,376,732        (2,326,191     4,055,773   

Commitments and contingencies

    —          —          —          —          —          —     

Equity:

           

CB Richard Ellis Group, Inc. Stockholders’ Equity

    908,215        1,132,091        856,753        1,042,686        (3,031,530     908,215   

Non-controlling interests

    —          —          —          157,580        —          157,580   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Equity

    908,215        1,132,091        856,753        1,200,266        (3,031,530     1,065,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

  $ 1,148,676      $ 2,580,230      $ 4,173,385      $ 2,576,998      $ (5,357,721   $ 5,121,568   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Although CBRE Capital Markets is included among our domestic subsidiaries, which jointly and severally guarantee our 11.625% senior subordinated notes, our 6.625% senior notes and our Credit Agreement, a substantial majority of warehouse receivables funded under the Kemps Landing, JP Morgan, BofA and Fannie Mae ASAP lines of credit are pledged to Kemps Landing, JP Morgan, BofA and Fannie Mae, and accordingly, are not included as collateral for these notes or our other outstanding debt.

 

24


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 JUNE 30, 2011

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Revenue

  $ —        $ —        $ 834,952      $ 587,266      $ —        $ 1,422,218   

Costs and expenses:

           

Cost of services

    —          —          502,310        337,512        —          839,822   

Operating, administrative and other

    9,437        1,701        231,817        189,901        —          432,856   

Depreciation and amortization

    —          —          14,320        11,065        —          25,385   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    9,437        1,701        748,447        538,478        —          1,298,063   

Gain on disposition of real estate

    —          —          —          6,027        —          6,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (9,437     (1,701     86,505        54,815        —          130,182   

Equity income from unconsolidated subsidiaries

    —          —          11,979        5,089        —          17,068   

Interest income

    —          26,492        400        2,039        (27,029     1,902   

Interest expense

    —          25,979        27,656        7,610        (27,029     34,216   

Royalty and management service (income) expense

    —          —          (7,988     7,988        —          —     

Income from consolidated subsidiaries

    67,158        67,906        15,327        —          (150,391     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before (benefit of) provision for income taxes

    57,721        66,718        94,543        46,345        (150,391     114,936   

(Benefit of) provision for income taxes

    (3,502     (440     26,637        23,641        —          46,336   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    61,223        67,158        67,906        22,704        (150,391     68,600   

Income from discontinued operations, net of income taxes

    —          —          —          6,267        —          6,267   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    61,223        67,158        67,906        28,971        (150,391     74,867   

Less: Net income attributable to non-controlling interests

    —          —          —          13,644        —          13,644   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 61,223      $ 67,158      $ 67,906      $ 15,327      $ (150,391   $ 61,223   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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 JUNE 30, 2010

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Revenue

  $ —        $ —        $ 670,790      $ 501,129      $ —        $ 1,171,919   

Costs and expenses:

           

Cost of services

    —          —          397,544        281,170        —          678,714   

Operating, administrative and other

    10,734        2,151        189,287        169,861        —          372,033   

Depreciation and amortization

    —          —          14,517        13,099        —          27,616   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    10,734        2,151        601,348        464,130        —          1,078,363   

Gain on disposition of real estate

    —          —          3,313        310        —          3,623   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (10,734     (2,151     72,755        37,309        —          97,179   

Equity income from unconsolidated subsidiaries

    —          —          12,398        1,837        —          14,235   

Interest income

    —          45        626        2,599        (159     3,111   

Interest expense

    —          39,453        117        10,864        (159     50,275   

Royalty and management service (income) expense

    —          —          (6,096     6,096        —          —     

Income from consolidated subsidiaries

    61,260        86,312        27,966        —          (175,538     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before (benefit of) provision for income taxes

    50,526        44,753        119,724        24,785        (175,538     64,250   

(Benefit of) provision for income taxes

    (4,264     (16,507     33,412        14,063        —          26,704   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    54,790        61,260        86,312        10,722        (175,538     37,546   

Income from discontinued operations, net of income taxes

    —          —          —          7,140        —          7,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    54,790        61,260        86,312        17,862        (175,538     44,686   

Less: Net loss attributable to non-controlling interests

    —          —          —          (10,104     —          (10,104
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 54,790      $ 61,260      $ 86,312      $ 27,966      $ (175,538   $ 54,790   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Revenue

  $ —        $ —        $ 1,531,087      $ 1,076,236      $ —        $ 2,607,323   

Costs and expenses:

           

Cost of services

    —          —          923,270        630,307        —          1,553,577   

Operating, administrative and other

    19,242        1,888        440,240        348,511        —          809,881   

Depreciation and amortization

    —          —          26,605        21,958        —          48,563   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    19,242        1,888        1,390,115        1,000,776        —          2,412,021   

Gain on disposition of real estate

    —          —          —          7,999        —          7,999   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (19,242     (1,888     140,972        83,459        —          203,301   

Equity income from unconsolidated subsidiaries

    —          —          28,427        3,820        —          32,247   

Interest income

    —          52,547        1,241        3,541        (52,759     4,570   

Interest expense

    —          51,873        52,150        16,670        (52,759     67,934   

Royalty and management service (income) expense

    —          —          (16,235     16,235        —          —     

Income from consolidated subsidiaries

    107,697        108,461        20,757        —          (236,915     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before (benefit of) provision for income taxes

    88,455        107,247        155,482        57,915        (236,915     172,184   

(Benefit of) provision for income taxes

    (7,137     (450     47,021        30,308        —          69,742   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    95,592        107,697        108,461        27,607        (236,915     102,442   

Income from discontinued operations, net of income taxes

    —          —          —          16,911        —          16,911   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    95,592        107,697        108,461        44,518        (236,915     119,353   

Less: Net income attributable to non-controlling interests

    —          —          —          23,761        —          23,761   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 95,592      $ 107,697      $ 108,461      $ 20,757      $ (236,915   $ 95,592   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Elimination     Consolidated
Total
 

Revenue

  $ —        $ —        $ 1,273,224      $ 924,578      $ —        $ 2,197,802   

Costs and expenses:

           

Cost of services

    —          —          764,690        529,218        —          1,293,908   

Operating, administrative and other

    21,110        2,514        364,479        322,636        —          710,739   

Depreciation and amortization

    —          —          28,734        25,177        —          53,911   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    21,110        2,514        1,157,903        877,031        —          2,058,558   

Gain on disposition of real estate

    —          —          3,313        310        —          3,623   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

    (21,110     (2,514     118,634        47,857        —          142,867   

Equity income (loss) from unconsolidated subsidiaries

    —          —          8,807        (1,156     —          7,651   

Interest income

    —          103        1,486        3,671        (349     4,911   

Interest expense

    —          79,589        239        20,588        (349     100,067   

Royalty and management service (income) expense

    —          —          (11,097     11,097        —          —     

Income from consolidated subsidiaries

    60,888        110,318        21,854        —          (193,060     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before (benefit of) provision for income taxes

    39,778        28,318        161,639        18,687        (193,060     55,362   

(Benefit of) provision for income taxes

    (8,385     (32,570     51,321        23,637        —          34,003   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    48,163        60,888        110,318        (4,950     (193,060     21,359   

Income from discontinued operations, net of income taxes

    —          —          —          7,140        —          7,140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    48,163        60,888        110,318        2,190        (193,060     28,499   

Less: Net loss attributable to non-controlling interests

    —          —          —          (19,664     —          (19,664
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 48,163      $ 60,888      $ 110,318      $ 21,854      $ (193,060   $ 48,163   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Consolidated
Total
 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

  $ 18,631      $ 30,098      $ (144,258   $ (60,861   $ (156,390

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Capital expenditures

    —          —          (40,694     (6,454     (47,148

Acquisition of businesses including net assets acquired, intangibles and goodwill, net of cash acquired

    —          —          (2,290     (38,785     (41,075

Contributions to unconsolidated subsidiaries

    —          —          (16,873     (221     (17,094

Distributions from unconsolidated subsidiaries

    —          —          24,352        10,636        34,988   

Net proceeds from disposition of real estate held for investment

    —          —          —          109,667        109,667   

Additions to real estate held for investment

    —          —          —          (6,315     (6,315

Proceeds from the sale of servicing rights and other assets

    —          —          11,332        84        11,416   

(Increase) decrease in restricted cash

    —          (10     (300     4,284        3,974   

Other investing activities, net

    —          —          (704     —          (704
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    —          (10     (25,177     72,896        47,709   

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Proceeds from senior secured term loans

    —          400,000        —          —          400,000   

Repayment of senior secured term loans

    —          (19,000     —          —          (19,000

Proceeds from revolving credit facility

    —          718,000        —          26,733        744,733   

Repayment of revolving credit facility

    —          (652,000     —          —          (652,000

Proceeds from notes payable on real estate held for investment

    —          —          —          3,551        3,551   

Repayment of notes payable on real estate held for investment

    —          —          —          (91,471     (91,471

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

    —          —          —          1,665        1,665   

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

    —          —          —          (26,594     (26,594

Proceeds from exercise of stock options

    4,858        —          —          —          4,858   

Incremental tax benefit from stock options exercised

    14,495        —          —          —          14,495   

Non-controlling interests contributions

    —          —          —          8,630        8,630   

Non-controlling interests distributions

    —          —          —          (30,679     (30,679

Payment of financing costs

    —          (18,255     —          (199     (18,454

(Increase) decrease in intercompany receivables, net

    (37,922     (564,086     507,119        94,889        —     

Other financing activities, net

    —          —          —          (91     (91
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (18,569     (135,341     507,119        (13,566     339,643   

Effect of currency exchange rate changes on cash and cash equivalents

    —          —          —          14,573        14,573   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    62        (105,253     337,684        13,042        245,535   

CASH AND CASH EQUIVALENTS, AT BEGINNING OF PERIOD

    4        223,845        96,862        185,863        506,574   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, AT END OF PERIOD

  $ 66      $ 118,592      $ 434,546      $ 198,905      $ 752,109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

         

Cash paid during the period for:

         

Interest

  $ —        $ 53,102      $ 12      $ 15,107      $ 68,221   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax payments, net

  $ —        $ —        $ 55,955      $ 39,789      $ 95,744   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CB RICHARD ELLIS GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010

(Dollars in thousands)

 

    Parent     CBRE     Guarantor
Subsidiaries
    Nonguarantor
Subsidiaries
    Consolidated
Total
 

CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:

  $ 9,936      $ 58,386      $ 84,825      $ (52,140   $ 101,007   

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Capital expenditures

    —          —          (3,376     (3,785     (7,161

Acquisition of businesses including net assets acquired, intangibles and goodwill

    —          —          (2,303     (60,417     (62,720

Contributions to unconsolidated subsidiaries

    —          —          (7,830     (3,022     (10,852

Distributions from unconsolidated subsidiaries

    —          —          15,961        169        16,130   

Net proceeds from disposition of real estate held for investment

    —          —          —          57,249        57,249   

Additions to real estate held for investment

    —          —          —          (5,212     (5,212

Proceeds from the sale of servicing rights and other assets

    —          —          9,708        33        9,741   

Decrease (increase) in restricted cash

    —          —          8,336        (532     7,804   

Other investing activities, net

    —          —          (954     —          (954
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

    —          —          19,542        (15,517     4,025   

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Repayment of senior secured term loans

    —          (60,770     —          —          (60,770

Proceeds from revolving credit facility

    —          —          —          16,349        16,349   

Repayment of revolving credit facility

    —          —          —          (10,496     (10,496

Proceeds from notes payable on real estate held for investment

    —          —          —          8,741        8,741   

Repayment of notes payable on real estate held for investment

    —          —          —          (48,493     (48,493

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

    —          —          —          3,214        3,214   

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

    —          —          —          (3,412     (3,412

Repayment of short-term borrowings and other loans, net

    —          —          (547     (3,500     (4,047

Proceeds from exercise of stock options

    312        —          —          —          312   

Incremental tax benefit from stock options exercised

    236        —          —          —          236   

Non-controlling interests contributions

    —          —          —          22,103        22,103   

Non-controlling interests distributions

    —          —          —          (6,954     (6,954

Payment of financing costs

    —          (4,994     —          (713     (5,707

(Increase) decrease in intercompany receivables, net

    (10,484     (96,284     62,640        44,128        —     

Other financing activities, net

    —          —          —          (217     (217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (9,936     (162,048     62,093        20,750        (89,141

Effect of currency exchange rate changes on cash and cash equivalents

    —          —          —          (13,885     (13,885
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    —          (103,662     166,460        (60,792     2,006   

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      $ 138,924      $ 449,711      $ 154,924      $ 743,563   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

         

Cash paid (received) during the period for:

         

Interest

  $ —        $ 76,484      $ 2      $ 8,922      $ 85,408   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (refunds) payments, net

  $ (6,424   $ (78,380   $ (9,967   $ 17,724      $ (77,047
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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17. Subsequent Event

On July 1, 2011, we completed the CRES portion of the REIM Acquisitions, acquiring substantially all of CRES for $323.9 million and CRES co-investments from ING for an aggregate amount of $58.6 million. We used borrowings from our tranche D term loan facility under our Credit Agreement to finance these transactions (see Note 3 and Note 9).

 

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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 June 30, 2011 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, 2010. 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 third quarter and beyond. For important information regarding these forward-looking statements, please see the discussion below under the caption “Forward-Looking Statements.”

Overview

We are the world’s largest commercial real estate services firm, based on 2010 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, 2010, we operated more than 300 offices worldwide, excluding affiliate offices, with approximately 31,000 employees providing commercial real estate services under the “CB Richard Ellis” and “CBRE” brand names 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. Since 2006, we have been the only commercial real estate services company included in the S&P 500. In every year since 2008, we have been the only commercial real estate services firm to be included in the Fortune 500. Additionally, the International Association of Outsourcing Professionals has included us among the top 100 global outsourcing companies across all industries for five consecutive years, including in 2011 when we ranked 6th overall and were the highest ranked commercial real estate services company. In 2010, we were named the premier real estate services provider globally by a number of institutions, including The Financial Times, Euromoney and the International Property Awards, sponsored by Bloomberg. In 2011, we were the highest ranked commercial real estate services company among the Fortune Most Admired Companies.

When you read our financial statements and the information included in this Quarterly Report, 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, decreasing demand for real estate, falling real estate values, or the public perception that any of these events may occur, will negatively affect the performance of some or all of our business lines. From late 2007 through 2009, the severe global economic

 

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downturn and credit market crisis had significant adverse effects on our operations by depressing transaction activity, decreasing occupancy and rental rates, sharply lowering property values and restraining corporate spending. These trends, in turn, adversely affected our 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. These negative trends began to reverse in 2010 as commercial real estate markets improved in step with the stabilization and recovery of global economic activity.

Weak economic conditions from late 2007 through 2009 also affected our compensation expense, which is structured to generally 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 was partially mitigated by the inherent variability of our compensation cost structure. In addition, at times when negative economic conditions are particularly severe, as they were in 2008 and 2009, our management has moved decisively to improve operational performance by lowering operating expenses through such actions as reducing discretionary bonuses, curtailing capital expenditures and adjusting overall staffing levels, among others. As general economic conditions and company performance improved, we began to restore some of these expenses in 2010 and continued to do so in 2011. Notwithstanding the ongoing market recovery, a return of adverse global and regional economic trends remains one of the most significant risks to the financial condition and performance of our operations.

Economic conditions first began to negatively affect our performance in the Americas, our largest segment in terms of revenue, beginning in the third quarter of 2007. The effects became more severe as the decline in economic activity (particularly in the United States) accelerated throughout 2008 and most of 2009. The global capital markets disruption in late 2008, in particular, caused a significant and prolonged decline in property sales, leasing, financing and investment activity that adversely affected all of our business lines. Commercial real estate fundamentals began to stabilize in early 2010 and to improve in the second half of 2010 and the first half of 2011 following a return to positive economic growth in the United States. The current recovery has been characterized by slowly decreasing vacancy rates, stabilizing or slightly increasing rental rates, broadening credit availability and greater property sales and leasing activity. The recovery trends appeared to gain momentum in late 2010 and the first half of 2011, but market activity has generally remained well below levels experienced in 2006 and 2007.

In Europe, weakening market conditions first 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 deepened and persisted through 2009. Economic activity improved in 2010 and the first half of 2011, but growth has been generally slower than in other parts of the world amid concerns about sovereign debt issues and the need for fiscal austerity. As a result, leasing activity in most of Europe has remained subdued in 2010 and the first half of 2011. Investment sales in Europe were adversely affected by the financial crisis in late 2008 and most of 2009. Larger markets like London and Paris showed strong increases in investment sales starting in late 2009, but activity appeared to plateau in mid-2011. Other markets with stronger economies, such as in Germany and the Nordic countries, have continued to see brisk investment markets through the middle of 2011.

Real estate markets in Asia Pacific were also affected, though generally to a lesser degree than in the United States and Europe, by the global credit market dislocation and economic downturn. This resulted in lower investment sales and leasing activity in the region in 2008 and most of 2009. Transaction activity revived significantly in late 2009, reflecting strong economic growth in countries such as Australia, China and India, and this trend has continued into the first half of 2011. The natural disasters that affected parts of the Asia Pacific region, notably Japan, Australia and New Zealand, in late 2010 and early 2011 did not have a material impact on our overall business performance in Asia Pacific during the six months ended June 30, 2011.

Deteriorating conditions also adversely affected real estate investment management and property development activity beginning in late 2007 as property values declined sharply, and both financing and disposal

 

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options became more limited. However, market conditions for these businesses began to improve in 2010 with the pace of recovery of the financing and sales markets picking up later in the year and the first part of 2011.

Notwithstanding the current market recovery, the further strengthening of our global sales, leasing, investment management and development services operations is predicated on the need for more vigorous economic growth and higher aggregate employment in major countries, especially the United States, and continued improvement in the global credit markets as well as in business and consumer confidence.

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. In December 2006, we acquired the Trammell Crow Company (the Trammell Crow Company Acquisition), our largest acquisition to date, which deepened our outsourcing services offerings for corporate and institutional clients, especially project and facilities management, strengthened our ability to provide integrated management solutions across geographies, and established resources and expertise to offer real estate development services throughout the United States.

On February 15, 2011, we announced that we had entered into definitive agreements to acquire the majority of the real estate investment management business of Netherlands-based ING Group N.V., or ING, for approximately $940 million in cash. The acquisitions include substantially all of the ING Real Estate Investment Management, or REIM, operations in Europe and Asia, as well as substantially all of Clarion Real Estate Securities, or CRES, its U.S.-based global real estate listed securities business (collectively referred to as ING REIM). On February 15, 2011, we also announced that we expected to acquire approximately $55 million of CRES co-investments from ING and potentially additional interests in other funds managed by ING REIM Europe and ING REIM Asia. Upon completion of the acquisitions, which we refer to as the REIM Acquisitions, ING REIM is expected to become part of our Global Investment Management segment (whose business is conducted through our indirect wholly-owned subsidiary, CBRE Investors), which will continue to be an independently operated business segment upon completion of the acquisitions. CBRE Investors has primarily focused on value-add funds and separate accounts. ING REIM has primarily focused on core funds and global listed real estate securities funds, except in Asia, where ING REIM manages value-add and opportunity funds. There is expected to be little overlap in the companies’ client bases, with a majority of CBRE Investors’ clients being U.S.-based and a majority of ING REIM’s clients based in Europe. On July 1, 2011, we completed the acquisition of CRES for $323.9 million and CRES co-investments from ING for an aggregate amount of $58.6 million. The acquisition of ING REIM’s operations in Europe and Asia is expected to close in the second half of 2011 and is subject to approval by certain stakeholders, including regulatory agencies in Europe and Asia.

As of December 31, 2010, the assets under management, or AUM, in the ING REIM portfolio we are acquiring totaled approximately $59.8 billion, including CRES AUM, which we acquired on July 1, 2011. CBRE Investors’ assets under management totaled $37.6 billion as of December 31, 2010. ING REIM, when combined with our existing Global Investment Management operations, will provide us with a significantly enhanced ability to meet the needs of institutional investors across global markets with a full spectrum of investment programs and strategies.

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

 

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  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.

Our calculation of AUM may differ from the calculations of other asset managers (including ING REIM, as described below), 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. The methodologies used by the ING REIM business units and CBRE Investors to determine their respective AUM are not the same and, accordingly, the reported AUM of ING REIM would be different if calculated using a methodology consistent with that of CBRE Investors’ methodology. To the extent applicable, ING REIM’s reported AUM at December 31, 2010 was converted from Euros to U.S. dollars using an exchange rate of $1.3379 per €1.

Strategic in-fill acquisitions, which tend to be smaller purchases of local and/or niche market companies, have also played a key role in expanding our geographic coverage and broadening and strengthening our service offerings. 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. From 2005 to 2008, we completed 58 in-fill acquisitions for an aggregate purchase price of approximately $592 million. In light of the economic environment, we did not complete any acquisitions in 2009 and only made two small niche acquisitions in 2010, an industrial practice in the United Kingdom in the second quarter of 2010 and a commercial property asset management and consultancy services firm in Hong Kong in the fourth quarter of 2010. During the six months ended June 30, 2011, we completed three in-fill acquisitions, including a valuation business in Australia, a retail property management business in central and eastern Europe and our former affiliate company in Switzerland. As market conditions continue to improve, we expect to make additional acquisitions to supplement our organic growth.

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, which can include severance, lease termination, deferred financing and merger-related costs, among others, and the charges and costs of integrating the acquired business and its financial and accounting systems into our own. For example, we incurred $196.6 million of transaction-related expenditures in connection with our acquisition of Trammell Crow Company in 2006 and $15.8 million of transaction-related expenditures in connection with the expected REIM Acquisitions through June 30, 2011. In addition, through June 30, 2011, we incurred expenses of $62.3 million related to Trammell Crow Company in connection with the integration of its business lines, as well as accounting and other systems, into our own. As with prior material acquisitions, we anticipate incurring significant integration expenses associated with the expected REIM Acquisitions in 2011 and beyond. We expect the total (pre-tax) transaction costs relating to the REIM Acquisitions, including financing, retention and integration costs, to be approximately $150 million.

International Operations

As we increase our international 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

 

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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 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, we 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 June 30, 2011, our total debt, excluding our notes payable on real estate and warehouse lines of credit (both of which are generally nonrecourse to us), was approximately $1.9 billion, which includes $400.0 million of term loans drawn on June 30, 2011 to finance the CRES portion of the REIM Acquisitions, which closed on July 1, 2011. In connection with the acquisition of ING REIM’s operations in Europe and Asia (which we anticipate closing in the second half of 2011), we expect to draw down an additional $400.0 million of delayed-draw term loans that have already been secured under our credit agreement to finance such acquisitions.

Our level of indebtedness and the operating and financial restrictions in our debt agreements place constraints on the operation of our business. Although our management believes that long-term indebtedness has been an important lever in the development of our business, including facilitating our acquisition of Trammell Crow Company and the proposed REIM Acquisitions, 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.

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, 2010. There have been no material changes to these policies as of June 30, 2011.

 

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Results of Operations

The following table sets forth items derived from our consolidated statements of operations for the three and six months ended June 30, 2011 and 2010, presented in dollars and as a percentage of revenue (dollars in thousands):

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  

Revenue

  $ 1,422,218        100.0   $ 1,171,919        100.0   $ 2,607,323        100.0   $ 2,197,802        100.0

Costs and expenses:

               

Cost of services

    839,822        59.1        678,714        57.9        1,553,577        59.6        1,293,908        58.9   

Operating, administrative and other

    432,856        30.4        372,033        31.7        809,881        31.1        710,739        32.3   

Depreciation and amortization

    25,385        1.8        27,616        2.4        48,563        1.8        53,911        2.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    1,298,063        91.3        1,078,363        92.0        2,412,021        92.5        2,058,558        93.7   

Gain on disposition of real estate

    6,027        0.5        3,623        0.3        7,999        0.3        3,623        0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    130,182        9.2        97,179        8.3        203,301        7.8        142,867        6.5   

Equity income from unconsolidated subsidiaries

    17,068        1.2        14,235        1.2        32,247        1.2        7,651        0.3   

Interest income

    1,902        0.1        3,111        0.3        4,570        0.2        4,911        0.2   

Interest expense

    34,216        2.4        50,275        4.3        67,934        2.6        100,067        4.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before provision for income taxes

    114,936        8.1        64,250        5.5        172,184        6.6        55,362        2.5   

Provision for income taxes

    46,336        3.3        26,704        2.3        69,742        2.7        34,003        1.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    68,600        4.8        37,546        3.2        102,442        3.9        21,359        1.0   

Income from discontinued operations, net of income taxes

    6,267        0.5        7,140        0.6        16,911        0.7        7,140        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    74,867        5.3        44,686        3.8        119,353        4.6        28,499        1.3   

Less: Net income (loss) attributable to non-controlling interests

    13,644        1.0        (10,104     (0.9     23,761        0.9        (19,664     (0.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to CB Richard Ellis Group, Inc.

  $ 61,223        4.3   $ 54,790        4.7   $ 95,592        3.7   $ 48,163        2.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (1)

  $ 166,095        11.7   $ 161,635        13.8   $ 279,139        10.7   $ 236,594        10.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA, as adjusted (1)

  $ 172,367        12.1   $ 165,241        14.1   $ 292,922        11.2   $ 252,694        11.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes EBITDA related to discontinued operations of $0.8 million and $1.9 million for the three and six months ended June 30, 2011, respectively, and $12.9 million for the three and six months ended June 30, 2010.

 

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EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization, while amounts shown for EBITDA, as adjusted, remove the impact of certain cash and non-cash charges related to acquisitions, cost containment and asset impairments. Our management believes that both of these measures are useful in evaluating our operating performance compared to that of other companies in our industry because the calculations of EBITDA and EBITDA, as adjusted, generally eliminate 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 these measures to evaluate the operating performance and for other discretionary purposes, including as a significant component when measuring our operating performance under our employee incentive programs. Additionally, we believe EBITDA and EBITDA, as adjusted, are useful to investors to assist them in getting a more accurate picture of our results from operations.

However, EBITDA and EBITDA, as adjusted, are not recognized measurements under U.S. generally accepted accounting principles, or GAAP, and when analyzing our operating performance, readers should use EBITDA and EBITDA, as adjusted, 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 and EBITDA, as adjusted, may not be comparable to similarly titled measures of other companies. Furthermore, EBITDA and EBITDA, as adjusted, are not intended to be measures of free cash flow for our management’s discretionary use, as they do not consider certain cash requirements such as tax and debt service payments. The amounts shown for EBITDA and EBITDA, as adjusted, 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.

EBITDA and EBITDA, as adjusted for selected charges are calculated as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Net income attributable to CB Richard Ellis Group, Inc.

   $ 61,223       $ 54,790       $ 95,592       $ 48,163   

Add:

           

Depreciation and amortization (1)

     25,619         27,784         49,088         54,079   

Interest expense (2)

     34,819         50,990         69,287         100,782   

Provision for income taxes (3)

     46,336         31,183         69,742         38,482   

Less:

           

Interest income

     1,902         3,112         4,570         4,912   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA (4)

   $ 166,095       $ 161,635       $ 279,139       $ 236,594   

Adjustments:

           

Integration and other costs related to acquisitions

     6,272         964         13,783         1,970   

Cost containment expenses

     —           2,642         —           9,677   

Write-down of impaired assets

     —           —           —           4,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA, as adjusted (4)

   $ 172,367       $ 165,241       $ 292,922       $ 252,694   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes depreciation and amortization related to discontinued operations of $0.2 million and $0.5 million for the three and six months ended June 30, 2011, respectively, and $0.2 million for the three and six months ended June 30, 2010.
(2) Includes interest expense related to discontinued operations of $0.6 million and $1.4 million for the three and six months ended June 30, 2011, respectively, and $0.7 million for the three and six months ended June 30, 2010.
(3) Includes provision for income taxes related to discontinued operations of $4.5 million for the three and six months ended June 30, 2010.
(4) Includes EBITDA related to discontinued operations of $0.8 million and $1.9 million for the three and six months ended June 30, 2011, respectively, and $12.9 million for the three and six months ended June 30, 2010.

 

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Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

We reported consolidated net income of $61.2 million for the three months ended June 30, 2011 on revenue of $1.4 billion as compared to consolidated net income of $54.8 million on revenue of $1.2 billion for the three months ended June 30, 2010.

Our revenue on a consolidated basis for the three months ended June 30, 2011 increased by $250.3 million, or 21.4%, as compared to the three months ended June 30, 2010. This increase was primarily driven by higher worldwide sales (up 44.0%), leasing (up 21.8%) and outsourcing (up 13.1%) activity. Foreign currency translation had a $53.5 million positive impact on total revenue during the three months ended June 30, 2011.

Our cost of services on a consolidated basis increased by $161.1 million, or 23.7%, during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. Our sales and leasing professionals generally are paid on a commission basis, which substantially correlates with our revenue performance. Accordingly, the increase in revenue led to a corresponding increase in commission accruals. In addition, commission reinstatements to pre-recession levels in the third quarter of 2010 contributed to the increase. Higher salaries and related costs associated with our global property and facilities management contracts and additions to headcount in anticipation of transaction revenue growth also contributed to the increase in cost of services in the current year. Foreign currency translation had a $30.7 million negative impact on cost of services during the three months ended June 30, 2011. Cost of services as a percentage of revenue increased to 59.1% for the three months ended June 30, 2011 from 57.9% for the three months ended June 30, 2010, primarily driven by the aforementioned commission reinstatements and additions to headcount.

Our operating, administrative and other expenses on a consolidated basis increased by $60.8 million, or 16.3%, during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The increase was primarily driven by higher payroll-related costs, which resulted from our improved operating performance and increased headcount, as well as the restoration of salaries to pre-recession levels in the third quarter of 2010, substantially restored bonus target levels in the fourth quarter of 2010 and the reinstatement of our U.S. 401(k) company match in December 2010. Also contributing to the increase was higher carried interest incentive compensation expense accruals and increased marketing and travel costs in support of our growing revenue in the current year period. Foreign currency translation had a $16.8 million negative impact on total operating expenses during the three months ended June 30, 2011. Nevertheless, operating expenses as a percentage of revenue decreased to 30.4% for the three months ended June 30, 2011 from 31.7% for the three months ended June 30, 2010, which is indicative of effective cost control in the indirect and support areas of our business.

Our depreciation and amortization expense on a consolidated basis decreased by $2.2 million, or 8.1%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This decrease was primarily attributable to lower depreciation expense within our Development Services and Americas segments in the current year.

Our gain on disposition of real estate on a consolidated basis was $6.0 million for the three months ended June 30, 2011 as compared to $3.6 million for the three months ended June 30, 2010. These gains resulted from activity within our Development Services segment.

Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $2.8 million, or 19.9%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This increase was primarily driven by higher equity income reported by our Global Investment Management segment in the current year.

Our consolidated interest income was $1.9 million for the three months ended June 30, 2011, a decrease of $1.2 million, or 38.9%, as compared to the three months ended June 30, 2010. This decrease was mainly driven

 

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by higher interest income reported in our Asia Pacific segment in the prior year, which resulted from the final measurement of a deferred purchase obligation related to the purchase of the remaining non-controlling interests in our Indian subsidiary.

Our consolidated interest expense decreased by $16.1 million, or 31.9%, during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The decrease was primarily due to lower interest expense associated with our credit agreement due to debt repayments made in the second half of 2010 and lower interest rates resulting from our refinancing activities in the fourth quarter of 2010. This decrease was partially offset by interest expense incurred related to the $350.0 million of 6.625% senior notes issued on October 8, 2010.

Our provision for income taxes on a consolidated basis was $46.3 million for the three months ended June 30, 2011 as compared to $26.7 million for the three months ended June 30, 2010. Our effective tax rate from continuing operations, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, increased to 43.1% for the three months ended June 30, 2011 as compared to 36.1% for the three months ended June 30, 2010. The changes in our provision for income taxes and our effective tax rate were primarily the result of an increase in income reported in the current year as well as a change in our mix of domestic and foreign earnings (losses), including a greater impact in the current year of losses sustained in jurisdictions where no tax benefit could be provided. We expect that the impact of such losses should lessen as 2011 progresses such that we believe our full year 2011 effective tax rate should approximate 40%.

Our consolidated income from discontinued operations, net of income taxes, was $6.3 million for the three months ended June 30, 2011 as compared to $7.1 million for the three months ended June 30, 2010. The income in the current period was reported in our Global Investment Management segment and mostly related to a gain from a property sale, which was all attributable to non-controlling interests. The income in the prior year period was reported in our Development Services segment and mostly related to a gain on a property sale.

Our net income attributable to non-controlling interests on a consolidated basis was $13.6 million for the three months ended June 30, 2011 as compared to a net loss attributable to non-controlling interests of $10.1 million for the three months ended June 30, 2010. This activity primarily reflects our non-controlling interests’ share of income and losses within our Global Investment Management and Development Services segments.

Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

We reported consolidated net income of $95.6 million for the six months ended June 30, 2011 on revenue of $2.6 billion as compared to consolidated net income of $48.2 million on revenue of $2.2 billion for the six months ended June 30, 2010.

Our revenue on a consolidated basis for the six months ended June 30, 2011 increased by $409.5 million, or 18.6%, as compared to the six months ended June 30, 2010. This increase was primarily driven by higher worldwide sales (up 40.0%), leasing (up 15.4%) and outsourcing (up 13.4%) activity. Foreign currency translation had a $71.9 million positive impact on total revenue during the six months ended June 30, 2011.

Our cost of services on a consolidated basis increased by $259.7 million, or 20.1%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. As previously mentioned, our sales and leasing professionals generally are paid on a commission basis, which substantially correlates with our revenue performance. Accordingly, the increase in revenue led to a corresponding increase in commission accruals. In addition, commission reinstatements to pre-recession levels in the third quarter of 2010 contributed to the increase. Higher salaries and related costs associated with our global property and facilities management contracts and additions to headcount in anticipation of transaction revenue growth also contributed to the increase in cost of services in the current year. Foreign currency translation had a $41.8 million negative impact on cost of services during the six months ended June 30, 2011. Cost of services as a percentage of revenue increased to 59.6% for the six months ended June 30, 2011 from 58.9% for the six months ended June 30, 2010, primarily driven by the aforementioned commission reinstatements and additions to headcount.

 

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Our operating, administrative and other expenses on a consolidated basis increased by $99.1 million, or 13.9%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase was primarily driven by higher payroll-related costs, which resulted from our improved operating performance and increased headcount, as well as the restoration of salaries to pre-recession levels in the third quarter of 2010, substantially restored bonus target levels in the fourth quarter of 2010 and the reinstatement of our U.S. 401(k) company match in December 2010. Also contributing to the increase was higher carried interest incentive compensation expense accruals and increased marketing and travel costs in support of our growing revenue during the six months ended June 30, 2011. Foreign currency translation had a $21.5 million negative impact on total operating expenses during the six months ended June 30, 2011. Nevertheless, operating expenses as a percentage of revenue decreased to 31.1% for the six months ended June 30, 2011 from 32.3% for the six months ended June 30, 2010, which is indicative of effective cost control in the indirect and support areas of our business.

Our depreciation and amortization expense on a consolidated basis decreased by $5.3 million, or 9.9%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This decrease was primarily attributable to lower depreciation expense within our Americas and Development Services segments in the current year.

Our gain on disposition of real estate on a consolidated basis was $8.0 million for the six months ended June 30, 2011 as compared to $3.6 million for the six months ended June 30, 2010. These gains resulted from activity within our Development Services segment.

Our equity income from unconsolidated subsidiaries on a consolidated basis increased by $24.6 million, or 321.5%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This increase was primarily driven by higher equity earnings associated with gains on property sales within our Development Services segment in the current year. Also contributing to the increase were higher impairment charges associated with equity investments in our Global Investment Management segment in the prior year.

Our consolidated interest income was relatively consistent at $4.6 million for the six months ended June 30, 2011 versus $4.9 million for the six months ended June 30, 2010.

Our consolidated interest expense decreased by $32.1 million, or 32.1%, during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The decrease was primarily due to lower interest expense associated with our credit agreement due to debt repayments made in the second half of 2010 and lower interest rates resulting from our refinancing activities in the fourth quarter of 2010. This decrease was partially offset by interest expense incurred related to the $350.0 million of 6.625% senior notes issued on October 8, 2010.

Our provision for income taxes on a consolidated basis was $69.7 million for the six months ended June 30, 2011 as compared to $34.0 million for the six months ended June 30, 2010. Our effective tax rate from continuing operations, after adjusting pre-tax income to remove the portion attributable to non-controlling interests, decreased to 42.2% for the six months ended June 30, 2011 as compared to 45.5% for the six months ended June 30, 2010. The changes in our provision for income taxes and our effective tax rate were primarily the result of a significant increase in income reported in the current year as well as a change in our mix of domestic and foreign earnings (losses), including losses sustained in jurisdictions where no tax benefit could be provided.

Our consolidated income from discontinued operations, net of income taxes, was $16.9 million for the six months ended June 30, 2011 as compared to $7.1 million for the six months ended June 30, 2010. The income in the current period was reported in our Global Investment Management segment and mostly related to gains from property sales, which was all attributable to non-controlling interests. The income in the prior year period was reported in our Development Services segment and mostly related to a gain on a property sale.

 

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Our net income attributable to non-controlling interests on a consolidated basis was $23.8 million for the six months ended June 30, 2011 as compared to a net loss attributable to non-controlling interests of $19.7 million for the six months ended June 30, 2010. This activity primarily reflects our non-controlling interests’ share of income and losses within our Global Investment Management and Development Services segments.

Segment Operations

We report our operations through the following segments: (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 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.

 

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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 and six months ended June 30, 2011 and 2010 (dollars in thousands):

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2011     2010     2011     2010  

Americas

               

Revenue

  $ 897,828        100.0   $ 722,255        100.0   $ 1,647,943        100.0   $ 1,367,866        100.0

Costs and expenses:

               

Cost of services

    567,338        63.2        448,937        62.2        1,044,667        63.4        859,224        62.8   

Operating, administrative and other

    217,473        24.2        186,075        25.8        414,890        25.2        360,916        26.4   

Depreciation and amortization

    14,831        1.7        14,997        2.0        27,662        1.6        29,687        2.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 98,186        10.9   $ 72,246        10.0   $ 160,724        9.8   $ 118,039        8.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (1)

  $ 115,375        12.9   $ 89,847        12.4   $ 193,503        11.7   $ 151,835        11.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EMEA

               

Revenue

  $ 261,087        100.0   $ 225,378        100.0   $ 466,055        100.0   $ 413,538        100.0

Costs and expenses:

               

Cost of services

    155,738        59.6        132,132        58.6        287,011        61.6        251,583        60.8   

Operating, administrative and other

    84,195        32.2        72,820        32.3        154,977        33.3        137,796        33.3   

Depreciation and amortization

    2,253        0.9        2,384        1.1        4,515        0.9        4,774        1.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 18,901        7.3   $ 18,042        8.0   $ 19,552        4.2   $ 19,385        4.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (1)

  $ 21,375        8.2   $ 19,865        8.8   $ 24,381        5.2   $ 23,990        5.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Asia Pacific

               

Revenue

  $ 188,546        100.0   $ 158,678        100.0   $ 349,046        100.0   $ 293,110        100.0

Costs and expenses:

               

Cost of services

    116,746        61.9        97,645        61.5        221,899        63.6        183,101        62.5   

Operating, administrative and other

    53,862        28.6        48,220        30.4        95,966        27.5        88,925        30.3   

Depreciation and amortization

    1,988        1.0        2,007        1.3        3,971        1.1        4,119        1.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

  $ 15,950        8.5   $ 10,806        6.8   $ 27,210        7.8   $ 16,965        5.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (1)

  $ 17,437        9.2   $ 12,777        8.1   $ 29,879        8.6   $ 21,035        7.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Global Investment Management

               

Revenue

  $ 57,554        100.0   $ 46,896        100.0   $ 107,876        100.0   $ 86,303        100.0

Costs and expenses:

               

Operating, administrative and other

    57,942        100.7        39,930        85.1        103,498        95.9        80,869        93.7   

Depreciation and amortization

    3,171        5.5        3,613        7.7        6,666        6.2        6,470        7.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

  $ (3,559     (6.2 )%    $ 3,353        7.2   $ (2,288     (2.1 )%    $ (1,036     (1.2 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (1) (2)

  $ 2,470        4.3   $ 10,766        23.0   $ 8,460        7.8   $ 5,836        6.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Development Services

               

Revenue

  $ 17,203        100.0   $ 18,712        100.0   $ 36,403        100.0   $ 36,985        100.0

Costs and expenses:

               

Operating, administrative and other

    19,384        112.7        24,988        133.5        40,550        111.4        42,233        114.2   

Depreciation and amortization

    3,142        18.2        4,615        24.7        5,749        15.8        8,861        24.0   

Gain on disposition of real estate

    6,027        35.0        3,623        19.4        7,999        22.0        3,623        9.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

  $ 704        4.1   $ (7,268     (38.8 )%    $ (1,897     (5.2 )%    $ (10,486     (28.4 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA (1) (3)

  $ 9,438        54.9   $ 28,380        151.7   $ 22,916        63.0   $ 33,898        91.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.
(2) Includes EBITDA related to discontinued operations of $0.8 million and $1.9 million for the three and six months ended June 30, 2011, respectively.
(3) Includes EBITDA related to discontinued operations of $12.9 million for the three and six months ended June 30, 2010.

 

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Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010

Americas

Revenue increased by $175.6 million, or 24.3%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This improvement was primarily driven by higher sales and leasing activity as well as increased commercial mortgage brokerage and outsourcing activity. Foreign currency translation had a $7.5 million positive impact on total revenue during the three months ended June 30, 2011.

Cost of services increased by $118.4 million, or 26.4%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, primarily due to increased commission expense resulting from higher sales and lease transaction revenue. In addition, commission reinstatements to pre-recession levels in the third quarter of 2010 contributed to the increase. Higher salaries and related costs associated with our property and facilities management contracts also contributed to an increase in cost of services in the current year. Foreign currency translation had a $4.6 million negative impact on cost of services during the three months ended June 30, 2011. Cost of services as a percentage of revenue increased to 63.2% for the three months ended June 30, 2011 from 62.2% for the three months ended June 30, 2010, mainly due to the commission reinstatements.

Operating, administrative and other expenses increased by $31.4 million, or 16.9%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The increase was primarily driven by higher payroll-related costs, which resulted from increased headcount and improved operating performance as well as the restoration of salaries to pre-recession levels in the third quarter of 2010, substantially restored bonus target levels in the fourth quarter of 2010 and the reinstatement of our U.S. 401(k) company match in December 2010. Also contributing to the increase were higher marketing and travel costs in support of our growing revenue. Foreign currency translation had a $1.8 million negative impact on total operating expenses during the three months ended June 30, 2011.

EMEA

Revenue increased by $35.7 million, or 15.8%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, driven by foreign currency translation, which had a $25.2 million positive impact on total revenue during the three months ended June 30, 2011. Leasing and outsourcing growth also drove the increase, particularly in France, the Netherlands, Spain and the United Kingdom.

Cost of services increased by $23.6 million, or 17.9%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, largely due to foreign currency translation, which had a $14.8 million negative impact on cost of services during the three months ended June 30, 2011. The increase was also driven by increased headcount resulting from select hiring in 2010 and early 2011 in anticipation of improving transaction revenue and in support of new initiatives and recently won contracts that we believe should translate into meaningful revenue. Cost of services as a percentage of revenue increased to 59.6% for the three months ended June 30, 2011 from 58.6% for the three months ended June 30, 2010, primarily driven by the previously mentioned additions to headcount.

Operating, administrative and other expenses increased by $11.4 million, or 15.6%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, largely due to foreign currency translation, which had a $7.5 million negative impact on total operating expenses during the three months ended June 30, 2011. The increase was also driven by higher payroll-related costs, including bonuses, largely resulting from additions to headcount.

Asia Pacific

Revenue increased by $29.9 million, or 18.8%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, driven by foreign currency translation, which had a $19.4 million positive

 

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impact on total revenue during the three months ended June 30, 2011. Higher outsourcing activity in Asia, most notably in India, increased sales activity, led by Australia and China, and increased leasing activity, particularly in China, also contributed to the improvement.

Cost of services increased by $19.1 million, or 19.6%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010, largely driven by foreign currency translation, which had an $11.3 million negative impact on cost of services during the three months ended June 30, 2011. Higher salaries and related costs associated with our property and facilities management contracts as well as increases in headcount throughout the region also contributed to the increase. Cost of services as a percentage of revenue was relatively consistent at 61.9% for the three months ended June 30, 2011 versus 61.5% for the three months ended June 30, 2010.

Operating, administrative and other expenses increased by $5.6 million, or 11.7%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This increase was primarily due to foreign currency translation, which had a $5.9 million negative impact on total operating expenses during the three months ended June 30, 2011, and higher payroll related costs due to increased headcount. These increases were partially offset by lower legal fees incurred in the current year.

Global Investment Management

Revenue increased by $10.7 million, or 22.7%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This was largely driven by higher asset management fees in the current year. Foreign currency translation had a $1.4 million positive impact on total revenue during the three months ended June 30, 2011.

Operating, administrative and other expenses increased by $18.0 million, or 45.1%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This increase was primarily driven by a net accrual for carried interest incentive compensation of $5.3 million for dedicated Global Investment Management executives and team leaders with participation interests in certain real estate investments under management during the three months ended June 30, 2011 as compared to a net reversal of carried interest incentive compensation of $0.5 million in the prior year period. Also contributing to the increase were higher bonus accruals and costs incurred in the current year associated with the REIM Acquisitions. Foreign currency translation had a $1.6 million negative impact on total operating expenses during the three months ended June 30, 2011.

Total AUM as of June 30, 2011 amounted to $39.1 billion, up 4.0% from year-end 2010 and 16.0% from the second quarter of 2010. The second-quarter 2011 total AUM does not yet include $21.1 billion of global listed real estate securities assets now managed by CBRE Clarion Securities, which were acquired from ING on July 1, 2011.

Development Services

Revenue decreased by $1.5 million, or 8.1%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 primarily due to lower rental income as a result of property dispositions.

Operating, administrative and other expenses decreased by $5.6 million, or 22.4%, for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. This decrease was primarily driven by lower bonus accruals (largely due to prior-year property sales in excess of current-year property sales) and lower property operating expenses as a result of the property dispositions noted above.

Development projects in process as of June 30, 2011 totaled $4.9 billion, unchanged from year-end 2010 and up $0.5 billion from the second quarter of 2010. The inventory of deals in the pipeline as of June 30, 2011 was $1.4 billion, up $0.2 billion from year-end 2010 and $0.6 billion from the second quarter of 2010.

 

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Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010

Americas

Revenue increased by $280.1 million, or 20.5%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This improvement was primarily driven by higher sales and leasing activity as well as increased commercial mortgage brokerage and outsourcing activity. Foreign currency translation had a $13.3 million positive impact on total revenue during the six months ended June 30, 2011.

Cost of services increased by $185.4 million, or 21.6%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, primarily due to increased commission expense resulting from higher sales and lease transaction revenue. In addition, commission reinstatements to pre-recession levels in the third quarter of 2010 contributed to the increase. Higher salaries and related costs associated with our property and facilities management contracts also contributed to an increase in cost of services in the current year. Foreign currency translation had an $8.3 million negative impact on cost of services during the six months ended June 30, 2011. Cost of services as a percentage of revenue increased slightly to 63.4% for the six months ended June 30, 2011 from 62.8% for the six months ended June 30, 2010, primarily due to the commission reinstatements.

Operating, administrative and other expenses increased by $54.0 million, or 15.0%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. The increase was primarily driven by higher payroll-related costs, which resulted from increased headcount and improved operating performance as well as the restoration of salaries to pre-recession levels in the third quarter of 2010, substantially restored bonus target levels in the fourth quarter of 2010 and the reinstatement of our U.S. 401(k) company match in December 2010. Also contributing to the increase were higher marketing and travel costs in support of our growing revenue. Foreign currency translation had a $3.2 million negative impact on total operating expenses during the six months ended June 30, 2011.

EMEA

Revenue increased by $52.5 million, or 12.7%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, driven by foreign currency translation, which had a $25.4 million positive impact on total revenue during the six months ended June 30, 2011. Also contributing to the increase was higher outsourcing activities throughout the region, and increased sales and leasing activity, led by France and the United Kingdom.

Cost of services increased by $35.4 million, or 14.1%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, driven by foreign currency translation, which had a $14.4 million negative impact on cost of services during the six months ended June 30, 2011. Also contributing to the increase were additions to headcount resulting from select hiring in 2010 and early 2011 in anticipation of improving transaction revenue and in support of new initiatives and recently won contracts that we believe should translate into meaningful revenue. Cost of services as a percentage of revenue increased to 61.6% for the six months ended June 30, 2011 from 60.8% for the six months ended June 30, 2010, primarily driven by a shift in the mix of revenue, with outsourcing revenue comprising a greater portion of the total than in the prior year, as well as the previously mentioned additions to headcount.

Operating, administrative and other expenses increased by $17.2 million, or 12.5%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, driven by foreign currency translation, which had a $7.3 million negative impact on total operating expenses during the six months ended June 30, 2011. The increase was also driven by higher payroll-related costs largely resulting from additions to headcount and higher marketing and travel costs in support of our growing revenue in the current year.

Asia Pacific

Revenue increased by $55.9 million, or 19.1%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, driven by foreign currency translation, which had a $31.8 million positive

 

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impact on total revenue during the six months ended June 30, 2011. Higher sales activity, led by Australia and China, increased leasing activity, particularly in China, and higher outsourcing activity in Asia, most notably in India, also contributed to the increase.

Cost of services increased by $38.8 million, or 21.2%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010, driven by foreign currency translation, which had a $19.1 million negative impact on cost of services during the six months ended June 30, 2011. Higher salaries and related costs associated with our property and facilities management contracts, increases in headcount throughout the region and higher commission expense resulting from increased transaction revenue also contributed to the increase. Cost of services as a percentage of revenue increased to 63.6% for the six months ended June 30, 2011 as compared to 62.5% for the six months ended June 30, 2010, primarily driven by additions to headcount.

Operating, administrative and other expenses increased by $7.0 million, or 7.9%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This increase was primarily due to foreign currency translation, which had a $9.4 million negative impact on total operating expenses during the six months ended June 30, 2011 and higher payroll related costs due to increased headcount. These increases were partially offset by lower legal fees incurred in the current year.

Global Investment Management

Revenue increased by $21.6 million, or 25.0%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This was largely driven by higher asset management and acquisition fees in the current year. Foreign currency translation had a $1.4 million positive impact on total revenue during the six months ended June 30, 2011.

Operating, administrative and other expenses increased by $22.6 million, or 28.0%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This increase was primarily driven by costs incurred in the current year associated with the REIM Acquisitions. Also contributing to the increase were higher carried interest incentive compensation and higher bonus accruals in the current year. Foreign currency translation had a $1.6 million negative impact on total operating expenses during the six months ended June 30, 2011.

Development Services

Revenue was relatively consistent at $36.4 million for the six months ended June 30, 2011 versus $37.0 million for the six months ended June 30, 2010.

Operating, administrative and other expenses decreased by $1.7 million, or 4.0%, for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This decrease was primarily driven by lower property operating expenses as a result of property dispositions.

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 2011 expected capital requirements include up to $100.0 million of anticipated net capital expenditures. During the six months ended June 30, 2011, we incurred $35.3 million of net capital expenditures. As of June 30, 2011, we had aggregate commitments of $18.0 million to fund future co-investments in our Global Investment Management business, all of which is expected to be funded in 2011. Additionally, as of June 30, 2011, we had committed to fund $21.4 million of additional capital to unconsolidated subsidiaries within our Development Services business, which we may be required to fund at any time. In recent years, the global credit markets have experienced unprecedented tightening, which could affect both the availability and cost of our funding sources in the future.

 

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On February 15, 2011, we announced that we had entered into definitive agreements to acquire the majority of the real estate investment management business of Netherlands-based ING for approximately $940 million in cash. The acquisitions include substantially all of the ING REIM operations in Europe and Asia, as well as substantially all of CRES, its U.S.-based global real estate listed securities business. On February 15, 2011, we also announced that we expected to acquire approximately $55 million of CRES co-investments from ING and potentially additional interests in other funds managed by ING REIM Europe and ING REIM Asia. In addition, we expect to incur transaction costs relating to the acquisitions of approximately $150 million (pre-tax), including financing, retention and integration costs. On July 1, 2011, we acquired CRES for $323.9 million and CRES co-investments from ING for an aggregate amount of $58.6 million. We used borrowings from our tranche D term loan facility under our credit agreement to finance these transactions. The acquisition of ING REIM’s operations in Europe and Asia is expected to close in the second half of 2011 and is subject to approval by certain stakeholders, including regulatory agencies in Europe and Asia. We anticipate financing the acquisition of ING REIM’s operations in Europe and Asia primarily with $400.0 million of new delayed-draw term loans and cash on hand.

During 2003 and 2006, we required substantial amounts of equity and debt financing to fund our acquisitions of Insignia and Trammell Crow Company. In the past two years, we also conducted two debt offerings. The first, in 2009, was part of a capital restructuring in response to the global economic recession, and the second, in 2010, was to take advantage of low interest rates and term availability. 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 have 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.

As evidenced above, from time to time, we consider potential strategic acquisitions. We believe 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 we believed to be reasonable. However, it is possible that we may not be able to find acquisition financing on favorable terms, or at all, 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 anticipated principal amounts of our long-term indebtedness. We are 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 our cash flow is insufficient, then we expect that we would need to refinance such indebtedness or otherwise amend its terms to extend the maturity dates. We cannot make any assurances that such refinancing 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. The underfunded status of our pension plans included in pension liability in the accompanying consolidated balance sheets was $40.1 million and $40.0 million at June 30, 2011 and December 31, 2010, respectively. We expect to contribute a total of $3.7 million to fund our pension plans for the year ending December 31, 2011, of which $1.8 million was funded as of June 30, 2011.

 

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The third long-term liquidity need is the payment of deferred obligations related to acquisitions. As of June 30, 2011, we had $13.6 million of deferred purchase obligations outstanding related to in-fill acquisitions completed during the six months ended June 30, 2011. As of December 31, 2010, there were no deferred purchase obligations outstanding.

Historical Cash Flows

Operating Activities

Net cash used in operating activities totaled $156.4 million for the six months ended June 30, 2011 as compared to net cash provided by operating activities of $101.0 million for the six months ended June 30, 2010. The increase in cash used in operating activities in the current year versus the same period last year was primarily due to higher bonuses, commissions and income taxes paid in the current year. These items were partially offset by a decrease in real estate held for sale and under development and an increase in bonus accruals in the current year as well as improved operating performance in the current year.

Investing Activities

Net cash provided by investing activities totaled $47.7 million for the six months ended June 30, 2011, an increase of $43.7 million as compared to the six months ended June 30, 2010. The increase was primarily driven by higher net proceeds received from the disposition of real estate held for investment and higher distributions received from investments in unconsolidated subsidiaries in the current year as well as greater payments associated with in-fill acquisitions in the prior year. These increases were partially offset by higher capital expenditures and contributions to investments in unconsolidated subsidiaries in the current year.

Financing Activities

Net cash provided by financing activities totaled $339.6 million for the six months ended June 30, 2011 as compared to net cash used in financing activities of $89.1 million for the six months ended June 30, 2010. The increase in cash provided by financing activities in the current year versus the same period last year was primarily due to $400.0 million of tranche D term loan facilities drawn at June 30, 2011 used to finance the CRES portion of the REIM Acquisitions that closed on July 1, 2011. In addition, higher net borrowings under our revolving credit facility in the current year as well as higher repayments of our senior secured term loans in the prior year also contributed to the increase. These items were partially offset by higher net repayments of notes payable on real estate and greater distributions to non-controlling interests in the current year.

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.

Since 2001, we have maintained credit facilities with Credit Suisse Group AG, or CS, and other lenders to fund strategic acquisitions and to provide for our working capital needs. On November 10, 2010, we entered into a new credit agreement (as amended, the Credit Agreement) with a syndicate of banks led by CS, as administrative and collateral agent, to completely refinance our previous credit facilities. On March 4, 2011, we entered into an amendment to our Credit Agreement to, among other things, increase flexibility to various covenants to accommodate the REIM Acquisitions and to maintain the availability of the $800.0 million incremental facility under the Credit Agreement. On March 4, 2011, we also entered into an incremental assumption agreement to allow for the establishment of new tranche C and tranche D term loan facilities.

 

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Our Credit Agreement currently provides for the following: (1) a $700.0 million revolving credit facility, including revolving credit loans, letters of credit and a swingline loan facility, maturing on May 10, 2015; (2) a $350.0 million tranche A term loan facility requiring quarterly principal payments, which began on December 31, 2010 and continue through September 30, 2015, with the balance payable on November 10, 2015, (3) a $300.0 million tranche B term loan facility requiring quarterly principal payments, which began on December 31, 2010 and continue through September 30, 2016, with the balance payable on November 10, 2016; (4) a $400.0 million delayed draw seven year tranche C term loan facility with a maturity date of March 4, 2018; (5) a $400.0 million tranche D term loan facility requiring quarterly principal payments beginning September 30, 2011 and continuing through June 30, 2019, with the balance payable on September 4, 2019 and (6) an accordion provision which provides the ability to borrow an additional $800.0 million, which can be further expanded, subject to the satisfaction of what we believe are customary conditions. In regards to the tranche C and tranche D term loan facilities, we have up to 180 days from the date we entered into the related incremental assumption agreement to draw on these facilities during which period we are required to pay a fee on the unused portions of each facility. After 180 days, any unused portions of these facilities will no longer be available for use. On June 30, 2011, we drew down $400.0 million of the tranche D term loan facility to finance the CRES portion of the REIM Acquisitions, which closed on July 1, 2011. The acquisition of ING REIM’s operations in Europe and Asia is expected to close in the second half of 2011 and we anticipate financing it primarily with the entire $400.0 million of the tranche C term loan facility and cash on hand.

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 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 June 30, 2011 bear interest at varying rates, based at our option, on either the applicable fixed rate plus 1.65% to 3.15% or the daily rate plus 0.65% to 2.15% as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement). As of June 30, 2011 and December 31, 2010, we had $111.2 million and $17.5 million, respectively, of revolving credit facility principal outstanding with related weighted average interest rates of 4.4% and 3.5%, respectively, which are included in short-term borrowings in the consolidated balance sheets set forth in Item 1 of this Quarterly Report. As of June 30, 2011, letters of credit totaling $13.6 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 June 30, 2011 bear interest, based at our option, on the following: for the tranche A term loan facility, on either the applicable fixed rate plus 2.00% to 3.75% or the daily rate plus 1.00% to 2.75%, as determined by reference to our ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement), for the tranche B term loan facility, on either the applicable fixed rate plus 3.25% or the daily rate plus 2.25%, for the tranche C term loan facility, on either the applicable fixed rate plus 3.25% or the daily rate plus 2.25% and for the tranche D term loan facility, on either the applicable fixed rate plus 3.50% or the daily rate plus 2.50%. As of June 30, 2011 and December 31, 2010, we had $323.8 million and $341.3 million, respectively, of tranche A term loan facility principal outstanding and $297.7 million and $299.2 million, respectively, of tranche B term loan facility principal outstanding, which are included in the consolidated balance sheets set forth in Item 1 of this Quarterly Report. As of June 30, 2011, we also had $400.0 million of tranche D term loan facility principal outstanding, which is included in the accompanying consolidated balance sheets set forth in Item 1 of this Quarterly Report. As of June 30, 2011, there were no amounts outstanding under our tranche C term loan facility.

In March 2011, we entered into five interest rate swap agreements, all with effective dates in October 2011, and immediately designated them as cash flow hedges in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 815, “Derivatives and Hedging.” The purpose of these interest rate swap agreements is to hedge potential changes to our cash flows due to the variable interest

 

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nature of our senior secured term loan facilities. The total notional amount of these interest rate swap agreements is $400.0 million, with $200.0 million expiring on October 2, 2017 and $200.0 million expiring on September 4, 2019. There was no hedge ineffectiveness for the three and six months ended June 30, 2011. As of June 30, 2011, the fair values of these interest rate swap agreements were reflected as an $11.5 million liability and were included in other long-term liabilities in the consolidated balance sheets set forth in Item 1 of this Quarterly Report.

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 65.0% of the capital stock of certain non-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 October 8, 2010, CB Richard Ellis Services, Inc., or CBRE, our wholly-owned subsidiary, issued $350.0 million in aggregate principal amount of 6.625% senior notes due October 15, 2020. The 6.625% senior notes are unsecured obligations of CBRE, senior to all of its current and future subordinated indebtedness, but effectively subordinated to all of its current and future secured indebtedness. The 6.625% senior notes are jointly and severally guaranteed on a senior basis by us and each subsidiary of CBRE that guarantees our Credit Agreement. Interest accrues at a rate of 6.625% per year and is payable semi-annually in arrears on April 15 and October 15, having commenced on April 15, 2011. The 6.625% senior notes are redeemable at our option, in whole or in part, on or after October 15, 2014 at a redemption price of 104.969% of the principal amount on that date and at declining prices thereafter. At any time prior to October 15, 2014, the 6.625% senior notes may be redeemed by us, in whole or in part, at a redemption 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 October 15, 2014 redemption price plus all remaining interest payments through October 15, 2014. In addition, prior to October 15, 2013, up to 35.0% of the original issued amount of the 6.625% senior notes may be redeemed at a redemption price of 106.625% of the principal amount, plus accrued and unpaid interest, solely with the net cash proceeds from public equity offerings. If a change of control triggering event (as defined in the indenture governing our 6.625% senior notes) occurs, we are obligated to make an offer to purchase the remaining 6.625% senior notes at a redemption price of 101.0% of the principal amount, plus accrued and unpaid interest. The amount of the 6.625% senior notes included in the consolidated balance sheets set forth in Item 1 of this Quarterly Report was $350.0 million at both June 30, 2011 and December 31, 2010.

On June 18, 2009, CBRE 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 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 consolidated balance sheets set forth in Item 1 of this Quarterly Report, net of unamortized discount, was $438.3 million and $437.7 million at June 30, 2011 and December 31, 2010, respectively.

 

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Our Credit Agreement and the indentures governing our 6.625% senior notes and 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 2.25x and a maximum leverage ratio of total debt less available cash to EBITDA (as defined in the Credit Agreement) of 3.75x. Our coverage ratio of EBITDA to total interest expense was 13.58x for the trailing twelve months ended June 30, 2011 and our leverage ratio of total debt less available cash to EBITDA was 1.25x as of June 30, 2011. 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 6.625% senior notes and 11.625% senior subordinated notes.

From time to time, Moody’s Investor Service, Inc., or Moody’s, and Standard & Poor’s Ratings Services, or Standard & Poor’s, 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 $413.7 million and $471.4 million with related average interest rates of 3.1% and 2.8% as of June 30, 2011 and December 31, 2010, respectively, which are included in the consolidated balance sheets set forth in Item 1 of this Quarterly Report.

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 currently provides for a $40.0 million revolving credit note, bears interest at 0.25% and has a maturity date of December 1, 2011. As of June 30, 2011 and December 31, 2010, there were no amounts outstanding under this 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 loan 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 currently provides for a $5.0 million credit line, bears interest at 1% and has a maturity date of February 28, 2012. As of June 30, 2011 and December 31, 2010, there were no amounts outstanding under this agreement.

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 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 currently provides for a $4.0 million credit line, bears interest at 0.25% and has a maturity date of August 4, 2012. As of June 30, 2011 and December 31, 2010, there were no amounts outstanding under this facility.

On April 19, 2010, we entered into a Receivables Purchase Agreement, which allowed 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 bore interest at the commercial paper rate plus 2.75%. This agreement expired on April 18, 2011 and we did not renew this arrangement. As of December 31, 2010, there were no amounts outstanding under this agreement.

 

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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, BofA, TD Bank, N.A., or TD Bank, and Kemps Landing Capital Company, LLC, or Kemps Landing, 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. Effective October 12, 2010 through January 10, 2011, the warehouse line of credit was temporarily increased from $210.0 million to $250.0 million. Effective November 22, 2010 through February 1, 2011, the warehouse line of credit was temporarily increased further from $250.0 million to $300.0 million. This agreement has been amended several times and currently provides for a $210.0 million senior secured revolving line of credit, bears interest at the daily LIBOR plus 2.50% and has a maturity date of September 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 currently provides for a $125.0 million senior secured revolving line of credit, bears interest at the daily one-month LIBOR plus 2.0% with a maturity date of May 30, 2012.

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 balance 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%.

On December 21, 2010, CBRE Capital Markets entered into a secured credit agreement with TD Bank to establish a warehouse line of credit. This agreement provides for a $75.0 million senior secured revolving line of credit, bears interest at the daily one-month LIBOR plus 2.0% with a maturity date of December 31, 2011.

On December 21, 2010, CBRE Capital Markets entered into an uncommitted funding arrangement with Kemps Landing providing CBRE Capital Markets with the ability to fund Freddie Mac multi-family loans. Under the agreement, the maximum outstanding balance cannot exceed $200.0 million, outstanding borrowings bear interest at LIBOR plus 2.75% with a LIBOR floor of 0.25% and the agreement expires on December 20, 2011.

During the six months ended June 30, 2011, we had a maximum of $557.0 million of warehouse lines of credit principal outstanding. As of June 30, 2011 and December 31, 2010, we had $302.5 million and $453.8 million of warehouse lines of credit principal outstanding, respectively, which are included in short-term borrowings in the consolidated balance sheets set forth in Item 1 of this Quarterly Report. Additionally, we had $308.2 million and $485.4 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 June 30, 2011 and December 31, 2010, respectively, and which are also included in the consolidated balance sheets set forth in Item 1 of this Quarterly Report.

Off-Balance Sheet Arrangements

We had outstanding letters of credit totaling $13.3 million as of June 30, 2011, excluding letters of credit for which we have outstanding liabilities already accrued on our consolidated balance sheet related to our

 

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subsidiaries’ outstanding reserves for claims under certain insurance programs as well as letters of credit related to operating leases. These letters of credit are primarily executed by us in the ordinary course of business as well as in connection with certain insurance programs. The letters of credit expire at varying dates through July 2012.

We had guarantees totaling $13.7 million as of June 30, 2011, excluding guarantees related to pension liabilities, consolidated indebtedness and other obligations for which we have outstanding liabilities already accrued on our consolidated balance sheet, and operating leases. The $13.7 million primarily consists of guarantees of obligations of unconsolidated subsidiaries, which expire at varying dates through November 2013.

In addition, as of June 30, 2011, we had numerous completion and budget guarantees relating to development projects. These guarantees are made by us in the ordinary 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 Multifamily Capital, Inc., or CBRE MCI, a wholly-owned subsidiary of CBRE Capital Markets, Inc., entered into an agreement with Fannie Mae, under Fannie Mae’s Delegated Underwriting and Servicing Lender Program, or DUS Program, to provide financing for multifamily housing with five or more units. Under the DUS Program, CBRE MCI 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 originated under the DUS Program. CBRE MCI has funded loans subject to such loss sharing arrangements with unpaid principal balances of $2.5 billion at June 30, 2011. Additionally, CBRE MCI has funded loans under the DUS Program that are not subject to loss sharing arrangements with unpaid principal balances of approximately $522.7 million at June 30, 2011. CBRE MCI, 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 June 30, 2011 and December 31, 2010, CBRE MCI had $3.3 million and $2.2 million, respectively, of cash deposited under this reserve arrangement, and had provided approximately $4.7 million and $4.0 million, respectively, of loan loss accruals. Fannie Mae’s recourse under the DUS Program is limited to the assets of CBRE MCI, which totaled approximately $104.3 million (including $46.6 million of warehouse receivables, a substantial majority of which are pledged against warehouse lines of credit and are therefore not available to Fannie Mae) at June 30, 2011.

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 2.0% to 5.0% of the equity in a particular fund. As of June 30, 2011, we had aggregate commitments of $18.0 million to fund future co-investments, all of which is expected to be funded in 2011. 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.

 

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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 June 30, 2011, we had committed to fund $21.4 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. 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 quarter, with revenue and profitability improving in each subsequent quarter.

New Accounting Pronouncements

In December 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2010-29, “Business Combinations (Topic 805), Disclosure of Supplementary Pro Forma Information for Business Combinations.” ASU 2010-29 specifies that when a public company completes a business combination, the company should disclose revenue and earnings of the combined entity as though the business combination occurred as of the beginning of the comparable prior annual reporting period. The update also expands the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, non-recurring pro forma adjustments directly attributable to the business combination included in the pro forma revenue and earnings. The requirements of ASU 2010-29 are effective for business combinations that occur on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We do not believe the adoption of this update will have a material impact on the disclosure requirements for our consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860), Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 specifies when an entity may or may not recognize a sale upon the transfer of financial assets subject to repurchase agreements. That determination is based, in part, on whether the entity has maintained effective control over the transferred financial assets. The requirements of ASU 2011-03 will be effective for the first interim or annual period beginning on or after December 15, 2011, with early adoption prohibited. We do not believe the adoption of this update will have a material effect on our consolidated financial position or results of operations.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” These amendments were issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for level 3 fair value measurements. This ASU is effective for interim and annual periods beginning after December 15, 2011, with early adoption prohibited. We are currently evaluating the impact of adoption of this update on our consolidated financial statements, but do not expect it to have a material impact.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in stockholders’ equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. ASU 2011-05 is effective for

 

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fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted, and will require retrospective application for all periods presented. We do not believe the adoption of this update will have a material impact on the disclosure requirements for our consolidated financial statements.

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. Except for historical information contained herein, the matters addressed in this Quarterly Report are 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.

These forward-looking statements are made based on our management’s expectations and beliefs concerning future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. These uncertainties and factors could cause our actual results to differ materially from those matters expressed in or implied by these forward-looking statements.

The following factors are among those, but are not only those, that may cause actual results to differ materially from the forward-looking statements:

 

   

our ability to close the REIM Acquisitions in Europe and Asia and the timing of such closings;

 

   

integration issues arising out of the REIM Acquisitions and other companies we may acquire;

 

   

costs relating to the REIM Acquisitions and other businesses we may acquire;

 

   

the sustainability of the recovery in our investment sales and leasing business from the recessionary levels in 2008 and 2009;

 

   

disruptions in general economic and business conditions, particularly in geographies where our business may be concentrated;

 

   

volatility and disruption of the securities, capital and credit markets, interest rate increases, the cost and availability of capital for investment in real estate, clients’ willingness to make real estate or long-term contractual commitments and other factors impacting the value of real estate assets;

 

   

continued high levels of, or increases in, unemployment and general slowdowns in commercial activity;

 

   

the impairment or weakened financial condition of certain of our clients;

 

   

client actions to restrain project spending and reduce outsourced staffing levels as well as the potential loss of clients in our outsourcing business due to consolidation or bankruptcies;

 

   

our ability to diversify our revenue model to offset cyclical economic trends in the commercial real estate industry;

 

   

foreign currency fluctuations;

 

   

our ability to attract new user and investor clients;

 

   

our ability to retain major clients and renew related contracts;

 

   

a reduction by companies in their reliance on outsourcing for their commercial real estate needs, which would impact our revenues and operating performance;

 

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trends in pricing for commercial real estate services;

 

   

changes in tax laws in the United States or in other jurisdictions in which our business may be concentrated that reduce or eliminate deductions or other tax benefits we receive;

 

   

our ability to compete globally, or in specific geographic markets or business segments that are material to us;

 

   

our ability to manage fluctuations in net earnings and cash flow, which could result from poor performance in our investment programs, including our participation as a principal in real estate investments;

 

   

our ability to leverage our global services platform to maximize and sustain long-term cash flow;

 

   

our exposure to liabilities in connection with real estate brokerage and property management activities;

 

   

the ability of our Global Investment Management segment to realize values in investment funds sufficient to offset incentive compensation expense related thereto;

 

   

liabilities under guarantees, or for construction defects, that we incur in our Development Services business;

 

   

the ability of CBRE Capital Markets to periodically amend, or replace, on satisfactory terms the agreements for its warehouse lines of credit;

 

   

the effect of implementation of new accounting rules and standards; and

 

   

the other factors described elsewhere in this Quarterly Report on Form 10-Q, included under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and “Quantitative and Qualitative Disclosures About Market Risk” or as described in our Annual Report on Form 10-K for the year ended December 31, 2010, in particular in Item 1A, Risk Factors, or in the other documents and reports we file with the Securities and Exchange Commission.

Forward-looking statements speak only as of the date the statements are made. You should not put undue reliance on any forward-looking statements. We assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the Securities and Exchange Commission.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information in this section should be read in connection with the information on market risk related to changes in interest rates and non-U.S. currency exchange rates in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2010. Our exposure to market risk consists of foreign currency exchange rate fluctuations related to our international operations and changes in interest rates on debt obligations.

During the six months ended June 30, 2011, approximately 40% of our business was transacted in local currencies of foreign countries, the majority of which includes the Euro, the British pound sterling, the Canadian dollar, the Hong Kong dollar, the Japanese yen, the Singapore dollar, the Australian dollar and the Indian rupee. We attempt to manage our exposure primarily by balancing assets and liabilities and maintaining cash positions in foreign currencies only at levels necessary for operating purposes. We routinely monitor our exposure to currency exchange rate changes in connection with transactions and sometimes enter into foreign currency exchange swap, option and forward contracts to limit our exposure to such transactions, as appropriate. In the normal course of business, we also sometimes utilize derivative financial instruments in the form of foreign currency exchange contracts to mitigate foreign currency exchange exposure resulting from inter-company loans,

 

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expected cash flow and earnings. We apply the “Derivatives and Hedging” Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) (Topic 815) when accounting for any such contracts. In all cases, we view derivative financial instruments as a risk management tool and, accordingly, do not engage in any speculative activities with respect to foreign currency.

On February 2, 2011, we entered into four option agreements, including one to sell a notional amount of 0.4 million Euros, which expired on March 29, 2011, one to sell a notional amount of 6.5 million Euros, which expired on June 28, 2011, one to sell a notional amount of 6.5 million Euros, which expires on September 28, 2011 and one to sell a notional amount of 22.0 million Euros, which expires on December 28, 2011. On February 3, 2011, we entered into an additional four option agreements, including one to sell a notional amount of 4.0 million British pounds sterling, which was exercised on March 29, 2011, one to sell a notional amount of 7.4 million British pounds sterling, which was exercised on June 28, 2011, one to sell a notional amount of 6.8 million British pounds sterling, which expires on September 28, 2011 and one to sell a notional amount of 12.0 million British pounds sterling, which expires on December 28, 2011. On February 23, 2011, we entered into three additional option agreements, including one to sell a notional amount of 2.1 million British pounds sterling, which was exercised on June 28, 2011, one to sell a notional amount of 2.0 million British pounds sterling, which expires on September 28, 2011 and one to sell a notional amount of 2.8 million British pounds sterling, which expires on December 28, 2011. Included in the consolidated statement of operations set forth in Item 1 of this Quarterly Report were charges of $1.2 million and $2.6 million for the three and six months ended June 30, 2011, respectively, resulting from net losses on foreign currency exchange option agreements.

In March 2011, we entered into five interest rate swap agreements, all with effective dates in October 2011, and immediately designated them as cash flow hedges in accordance with FASB ASC Topic 815. The purpose of these interest rate swap agreements is to hedge potential changes to our cash flows due to the variable interest nature of our senior secured term loan facilities. The total notional amount of these interest rate swap agreements is $400.0 million, with $200.0 million expiring on October 2, 2017 and $200.0 million expiring on September 4, 2019. There was no hedge ineffectiveness for the three and six months ended June 30, 2011. As of June 30, 2011, the fair values of these interest rate swap agreements were reflected as an $11.5 million liability and were included in other long-term liabilities in the consolidated balance sheets set forth in Item 1 of this Quarterly Report.

We also enter into loan commitments that relate to the origination or acquisition of commercial mortgage loans that will be held for resale. FASB ASC Topic 815 requires that these commitments be recorded at their fair values as derivatives. The net impact on our financial position and earnings resulting from these derivatives contracts has not been significant.

Based upon information from third-party banks, the estimated fair value of our senior secured term loans was approximately $1.0 billion at June 30, 2011. Based on dealers’ quotes, the estimated fair values of our 6.625% and 11.625% senior subordinated notes were $359.6 million and $509.0 million, respectively, at June 30, 2011.

We utilize sensitivity analyses to assess the potential effect of our variable rate debt. If interest rates were to increase by 10.0% on our outstanding variable rate debt, excluding notes payable on real estate, at June 30, 2011, the net impact of the additional interest cost would be a decrease of $2.7 million on pre-tax income and an increase of $2.7 million on cash used in operating activities for the six months ended June 30, 2011.

We also have $520.0 million of notes payable on real estate as of June 30, 2011. Interest costs relating to notes payable on real estate include both interest that is expensed and interest that is capitalized as part of the cost of real estate. If interest rates were to increase by 10.0%, our total estimated interest cost related to notes payable would increase by approximately $1.4 million for the six months ended June 30, 2011. From time to time, we enter into interest rate swap and cap agreements in order to limit our interest expense related to our notes payable on real estate. If any of these agreements are not designated as effective hedges, then they are marked to market

 

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each period with the change in fair value recognized in current period earnings. The net impact on our earnings resulting from gains and/or losses on interest rate swap and cap agreements associated with notes payable on real estate has not been significant.

 

ITEM 4. CONTROLS AND PROCEDURES

Our policy for disclosure controls and procedures provides guidance on the evaluation of disclosure controls and procedures and is designed to ensure that all corporate disclosure is complete and accurate in all material respects and that all information required to be disclosed in the periodic reports submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods and in the manner specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Securities Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Our Disclosure Committee consisting of the principal accounting officer, general counsel, chief communication officer, senior officers of each significant business line and other select employees assisted the Chief Executive Officer and the Chief Financial Officer in this evaluation. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as required by the Securities Exchange Act Rule 13a-15(c) as of the end of the period covered by this report.

No changes in our internal control over financial reporting occurred during the fiscal quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

There have been no material changes to our legal proceedings as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.

 

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ITEM 6. EXHIBITS

 

Exhibit
Number

 

Description

2.1   First Amendment, dated June 20, 2011, to Share Purchase Agreement (CRES), dated as of February 15, 2011, by and among ING Real Estate Investment Management Holding B.V. and others, and CB Richard Ellis, Inc. and others*
2.2   Second Amendment dated July 1, 2011, to Share Purchase Agreement (CRES), dated as of February 15, 2011, by and among ING Real Estate Investment Management Holding B.V. and others, and CB Richard Ellis, Inc. and others*
2.3   First Amendment, dated June 20, 2011, to Share Purchase Agreement (PERE), dated as of February 15, 2011, by and among ING Real Estate Investment Management Holding B.V. and others, and CB Richard Ellis, Inc. and others*
3.1   Restated Certificate of Incorporation of CB Richard Ellis Group, Inc. filed on June 16, 2004, as amended by the Certificate of Amendment filed on June 4, 2009 (incorporated by reference to Exhibit 3.1 of the CB Richard Ellis Group, Inc. Quarterly Report on Form 10-Q filed with the SEC on August 10, 2009)
3.2   Amended and Restated By-laws of CB Richard Ellis Group, Inc. (incorporated by reference to Exhibit 3.2 of the CB Richard Ellis Group, Inc. Current Report on Form 8-K filed with the SEC on December 5, 2008)
4.1(a)   Securityholders’ Agreement, dated as of July 20, 2001 (Securityholders’ Agreement), by and among, CB Richard Ellis Group, Inc., CB Richard Ellis Services, Inc., Blum Strategic Partners, L.P., Blum Strategic Partners II, L.P., Blum Strategic Partners II GmbH & Co. KG, FS Equity Partners III, L.P., FS Equity Partners International, L.P., Credit Suisse First Boston Corporation, DLJ Investment Funding, Inc., The Koll Holding Company, Frederic V. Malek, the management investors named therein and the other persons from time to time party thereto (incorporated by reference to Exhibit 25 to Amendment No. 9 to Schedule 13D with respect to CB Richard Ellis Services, Inc. filed with the SEC on July 25, 2001)
4.1(b)   Amendment and Waiver to Securityholders’ Agreement, dated as of April 14, 2004, by and among, CB Richard Ellis Group, Inc., CB Richard Ellis Services, Inc. and the other parties to the Securityholders’ Agreement (incorporated by reference to Exhibit 4.2(b) of the CB Richard Ellis Group, Inc. Amendment No. 2 to Registration Statement on Form S-1 filed with the SEC (No. 333-112867) on April 30, 2004)
4.1(c)   Second Amendment and Waiver to Securityholders’ Agreement, dated as of November 24, 2004, by and among CB Richard Ellis Group, Inc., CB Richard Ellis Services, Inc. and certain of the other parties to the Securityholders’ Agreement (incorporated by reference to Exhibit 4.2(c) of the CB Richard Ellis Group, Inc. Amendment No. 1 to Registration Statement on Form S-1 filed with the SEC (No. 333-120445) on November 24, 2004)
4.1(d)   Third Amendment and Waiver to Securityholders’ Agreement, dated as of August 1, 2005, by and among CB Richard Ellis Group, Inc., CB Richard Ellis Services, Inc. and certain of the other parties to the Securityholders’ Agreement (incorporated by reference to Exhibit 4.1 of the CB Richard Ellis Group, Inc. Current Report on Form 8-K filed with the SEC on August 2, 2005)
4.2(a)   Indenture, dated as of June 18, 2009, among CB Richard Ellis Services, Inc., CB Richard Ellis Group, Inc., the other guarantors party thereto and Wells Fargo Bank, National Association, as trustee, for the 11.625% Senior Subordinated Notes Due June 15, 2017 (incorporated by reference to Exhibit 4.1 of the CB Richard Ellis Group, Inc. Current Report on Form 8-K filed with the SEC on June 23, 2009)

 

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Exhibit
Number

 

Description

    4.2(b)   Form of Supplemental Indenture among CB Richard Ellis Services, Inc., CB Richard Ellis Group, Inc., certain new U.S. subsidiaries from time-to-time, the other guarantors party thereto and Wells Fargo Bank, National Association, as trustee, for the 11.625% Senior Subordinated Notes Due June 15, 2017 (incorporated by reference to Exhibit 4.1 of the CB Richard Ellis Group, Inc. Current Report on Form 8-K filed with the SEC on September 10, 2009)
    4.3(a)   Indenture, dated as of October 8, 2010, among CB Richard Ellis Services, Inc., CB Richard Ellis Group, Inc., the other guarantors party thereto and Wells Fargo Bank, National Association, as trustee, for the 6.625% Senior Notes Due October 15, 2020 (incorporated by reference to Exhibit 4.1 of the CB Richard Ellis Group, Inc. Current Report on Form 8-K filed with the SEC on October 12, 2010)
    4.3(b)   Form of Supplemental Indenture among CB Richard Ellis Services, Inc., CB Richard Ellis Group, Inc., certain new U.S. subsidiaries from time-to-time, the other guarantors party thereto and Wells Fargo Bank, National Association, as trustee, for the 6.625% Senior Notes Due October 15, 2020 (incorporated by reference to Exhibit 4.1 of the CB Richard Ellis Group, Inc. Current Report on Form 8-K filed with the SEC on November 17, 2010)
  11   Statement concerning Computation of Per Share Earnings (filed as Note 11 of the Consolidated Financial Statements)
  31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002*
  31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002*
  32   Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002*
101.INS   XBRL Instance Document**
101.SCH   XBRL Taxonomy Extension Schema Document**
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document**
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document**
101.LAB   XBRL Taxonomy Extension Label Linkbase Document**
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document**

 

* Filed herewith
** XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CB RICHARD ELLIS GROUP, INC.
Date: August 9, 2011  

/s/    GIL BOROK        

  Gil Borok
  Chief Financial Officer (principal financial officer)
Date: August 9, 2011  

/s/    ARLIN GAFFNER        

  Arlin Gaffner
  Chief Accounting Officer (principal accounting officer)

 

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