| CB RICHARD ELLIS GROUP INC Item 1A Risk Factors Set forth below and elsewhere in this report and in other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report and other public statements we make |
| The success of our business is significantly related to general economic conditions and, accordingly, our business could be harmed in the event of an economic slowdown or recession |
| Periods of economic slowdown or recession, significantly rising interest rates, a declining employment level, a declining demand for real estate or the public perception that any of these events may occur, can reduce volumes for many of our business lines |
| These economic conditions could result in a general decline in rents, 14 ______________________________________________________________________ [37]Table of Contents which in turn would reduce revenue from property management fees and brokerage commissions derived from property sales and leases |
| In addition, these conditions could lead to a decline in sales prices as well as a decline in funds invested in commercial real estate and related assets |
| An economic downturn or a significant increase in interest rates also may reduce the amount of loan originations and related servicing by our commercial mortgage brokerage business |
| If our real estate and mortgage brokerage businesses are negatively impacted, it is likely that our other lines of business would also suffer due to the relationship among our various business lines |
| Further, as a result of our debt level and the terms of our existing debt instruments, our exposure to adverse general economic conditions is heightened |
| If the properties that we manage fail to perform, then our financial condition and results of operations could be harmed |
| The revenue we generate from our asset services and facilities management lines of business is generally a percentage of aggregate rent collections from properties, although many management agreements provide for a specified minimum management fee |
| Accordingly, our success partially depends upon the performance of the properties we manage |
| The performance of these properties will depend upon the following factors, among others, many of which are partially or completely outside of our control: • our ability to attract and retain creditworthy tenants; • the magnitude of defaults by tenants under their respective leases; • our ability to control operating expenses; • governmental regulations, local rent control or stabilization ordinances which are in, or may be put into, effect; • various uninsurable risks; • financial conditions prevailing generally and in the areas in which these properties are located; • the nature and extent of competitive properties; and • the real estate market generally |
| We have numerous significant competitors and potential future competitors, some of which may have greater financial resources than we do |
| We compete across a variety of business disciplines within the commercial real estate industry, including investment management, tenant representation, corporate services, construction and development management, property management, agency leasing, valuation and mortgage brokerage |
| In general, with respect to each of our business disciplines, we cannot give assurance that we will be able to continue to compete effectively or maintain our current fee arrangements or margin levels or that we will not encounter increased competition |
| Each of the business disciplines in which we compete is highly competitive on an international, national, regional and local level |
| Although we are the largest commercial real estate services firm in the world in terms of 2005 revenue, our relative competitive position varies significantly across product and service categories and geographic areas |
| Depending on the product or service, we face competition from other real estate service providers, institutional lenders, insurance companies, investment banking firms, investment managers and accounting firms, some of which may have greater financial resources than we do |
| In addition, future changes in laws could lead to the entry of other competitors, such as financial institutions |
| Many of our competitors are local or regional firms |
| Although substantially smaller than us, some of these competitors are larger on a local or regional basis |
| We are also subject to competition from other large national and multi-national firms that have similar service competencies to ours |
| Our international operations subject us to social, political and economic risks of doing business in foreign countries |
| We conduct a significant portion of our business and employ a substantial number of people outside of the United States |
| During 2005, we generated approximately 32dtta1prca of our revenue from operations outside the 15 ______________________________________________________________________ [38]Table of Contents United States |
| Circumstances and developments related to international operations that could negatively affect our business, financial condition or results of operations include, but are not limited to, the following factors: • difficulties and costs of staffing and managing international operations; • currency restrictions, which may prevent the transfer of capital and profits to the United States; • unexpected changes in regulatory requirements; • potentially adverse tax consequences; • the responsibility of complying with multiple and potentially conflicting laws; • the impact of regional or country-specific business cycles and economic instability; • the geographic, language and cultural differences among personnel in different areas of the world; • greater difficulty in collecting accounts receivable in some geographic regions such as Asia, where many countries have underdeveloped insolvency laws and clients are often slow to pay, and in some European countries, where clients also tend to delay payments; • political instability; and • foreign ownership restrictions with respect to operations in countries such as China |
| We have committed additional resources to expand our worldwide sales and marketing activities, to globalize our service offerings and products in selected markets and to develop local sales and support channels |
| If we are unable to successfully implement these plans, to maintain adequate long-term strategies that successfully manage the risks associated with our global business or to adequately manage operational fluctuations, our business, financial condition or results of operations could be harmed |
| In addition, our international operations and, specifically, the ability of our non-US subsidiaries to dividend or otherwise transfer cash among our subsidiaries, including transfers of cash to pay interest and principal on our debt, may be affected by limitations on imports, currency exchange control regulations, transfer pricing regulations and potentially adverse tax consequences, among other things |
| Our revenue and earnings may be adversely affected by foreign currency fluctuations |
| Our revenue from non-US operations is denominated primarily in the local currency where the associated revenue was earned |
| During 2005, approximately 32dtta1prca of our business was transacted in currencies of foreign countries, the majority of which included the Euro, the British Pound Sterling, the Canadian dollar, the Hong Kong dollar, the Singapore dollar and the Australian dollar |
| Thus, we may experience fluctuations in revenues and earnings because of corresponding fluctuations in foreign currency exchange rates |
| For example, during 2004, the US dollar dropped in value against many of the currencies in which we conduct business |
| We have made significant acquisitions of non-US companies and we may acquire additional foreign companies in the future |
| As we increase our foreign operations, fluctuations in the value of the US dollar relative to the other currencies in which we may generate earnings could adversely affect our business, financial condition and operating results |
| 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 US dollar may make it more difficult to perform period-to-period comparisons of our reported results of operations |
| From time to time, our management uses currency hedging instruments, including foreign currency forward and option contracts and borrows in foreign currencies |
| Economic risks associated with these hedging instruments include unexpected fluctuations in inflation rates, which impact cash flow relative to paying down debt, and unexpected changes in the underlying net asset position |
| These hedging activities also may not be effective |
| 16 ______________________________________________________________________ [39]Table of Contents Our growth has depended significantly upon acquisitions, which may not be available in the future |
| A significant component of our growth has occurred through acquisitions, including our acquisition of Insignia in July 2003 |
| Any future growth through acquisitions will be partially dependent upon the continued availability of suitable acquisition candidates at favorable prices and upon advantageous terms and conditions |
| However, future acquisitions may not be available at favorable prices or upon advantageous terms and conditions |
| In addition, acquisitions involve risks that the businesses acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of businesses acquired will prove incorrect |
| Future acquisitions and any necessary related financings also may involve significant transaction-related expenses |
| For example, through December 31, 2004, we incurred dlra200dtta9 million of transaction-related expenditures in connection with our acquisition of Insignia in 2003 and dlra87dtta6 million of transaction-related expenditures in connection with our acquisition of CB Richard Ellis Services in 2001 |
| Transaction-related expenditures included severance costs, lease termination costs, transaction costs, deferred financing costs and merger-related costs, among others |
| We incurred our final transaction expenditures with respect to the Insignia acquisition in the third quarter of 2004 |
| If we acquire companies in the future, we may experience integration costs and the acquired businesses may not perform as we expect |
| We have had, and may continue to experience, difficulties in integrating operations and accounting systems acquired from other companies |
| These challenges include the diversion of management’s attention from other business concerns and the potential loss of our key employees or those of the acquired operations |
| We believe that most acquisitions will initially have an adverse impact on operating and net income |
| Acquisitions also frequently involve significant costs related to integrating information technology, accounting and management services and rationalizing personnel levels |
| In connection with the Insignia acquisition we have incurred dlra35dtta1 million of expenses through December 31, 2005, which are related to the integration of Insignia’s business lines, as well as accounting and other systems, into our own |
| If we are unable to fully integrate the accounting and other systems of the businesses we acquire, we may not be able to effectively manage them |
| Moreover, the integration process itself may be disruptive to our business as it requires coordination of geographically diverse organizations and implementation of new accounting and information technology systems |
| A significant portion of our operations are concentrated in California and our business could be harmed in the event of a future economic downturn in the California real estate markets |
| During 2004 and 2005, approximately 20dtta9prca and 19dtta5prca, respectively, of revenue was generated from transactions originating in California |
| As a result of the geographic concentration in California, any future economic downturn in the California commercial real estate market and in the local economies in San Diego, Los Angeles and Orange County could harm our results of operations |
| Our success depends upon the retention of our senior management, as well as our ability to attract and retain qualified and experienced employees (including those acquired through acquisitions) |
| Our continued success is highly dependent upon the efforts of our executive officers and other key employees, including Brett White, our Chief Executive Officer and President; and Kenneth J Kay, our Chief Financial Officer |
| White and Kay currently are not parties to employment agreements with us |
| We also are highly dependent upon the retention of our property sales and leasing professionals, who generate a significant majority of our revenues, as well as other revenue producing professionals |
| If any of our key employees leave, or we lose a significant number of key revenue producers, and we are unable to quickly hire and integrate qualified replacements, our business, financial condition and results of operations may suffer |
| In 17 ______________________________________________________________________ [40]Table of Contents addition, the growth of our business is largely dependent upon our ability to attract and retain qualified personnel in all areas of our business, including brokerage and property management personnel |
| If we are unable to attract and retain these qualified personnel, our growth may be limited and our business and operating results could suffer |
| Our results of operations vary significantly among quarters during each calendar year, which makes comparisons of our quarterly results difficult |
| A significant portion of our revenue is seasonal |
| 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 |
| The concentration of earnings and cash flow in the fourth quarter is due to an industry-wide focus on completing transactions toward the fiscal year-end |
| This has historically resulted in lower profits or a loss in the first and second quarters, with profits growing (or losses decreasing) in each subsequent quarter |
| This variance among quarters during each calendar year makes comparison between such quarters difficult, but does not generally affect the comparison of the same quarters during different calendar years |
| Our leverage and debt service obligations could harm our ability to operate our business, remain in compliance with debt covenants and make payments on our debt |
| We are leveraged and have debt service obligations |
| 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 |
| 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 |
| Our debt could have other important consequences, which include, but are not limited to, the following: • we could be required to use a substantial portion of our cash flow from operations to pay principal and interest on our debt; • our level of debt may restrict us from raising additional financing on satisfactory terms to fund working capital, strategic acquisitions, investments, joint ventures and other general corporate requirements; • our interest expense could increase if interest rates increase because the loans under our amended and restated credit agreement governing our senior secured credit facilities bear interest at floating rates; • our leverage could increase our vulnerability to general economic downturns and adverse competitive and industry conditions, placing us at a disadvantage compared to those of our competitors that are less leveraged; • our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and in the commercial real estate services industry; • our failure to comply with the financial and other restrictive covenants in the documents governing our indebtedness, which, among others, require us to maintain specified financial ratios and limit our ability to incur additional debt and sell assets, could result in an event of default that, if not cured or waived, could harm our business or prospects; and • from time to time, Moody’s Investors Service and Standard & Poor’s Ratings Service rate our outstanding senior secured term loan, our 9^ 3/4prca senior notes due 2010 and our 11^ 1/4prca senior subordinated notes due 2011 |
| These ratings may impact our ability to borrow under any new agreements 18 ______________________________________________________________________ [41]Table of Contents in the future, as well as the interest rates and other terms of any such future borrowings and could also cause a decline in the market price of our common stock or changes in the interest rate for the term loan under our most recently amended and restated credit agreement |
| We cannot be certain that our earnings will be sufficient to allow us to pay principal and interest on our debt and meet our other obligations |
| If we do not have sufficient earnings, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell more securities, none of which we can guarantee that we will be able to do |
| We are able to incur more indebtedness, which may intensify the risks associated with our leverage, including our ability to service our indebtedness |
| Our amended and restated credit agreement governing our senior secured credit facilities and the indentures relating to our 9^ 3/4prca senior notes due 2010 and our 11^ 1/4prca senior subordinated notes due 2011 permit us, subject to specified conditions, to incur a significant amount of additional indebtedness, including up to dlra150dtta0 million of additional indebtedness under our revolving credit facility |
| Our amended and restated credit agreement also permits us to borrow up to dlra25dtta0 million of additional term loans under our term loan facility, subject to the satisfaction of customary conditions |
| Our debt instruments impose operating and financial restrictions on us, and in the event of a default, all of our borrowings would become immediately due and payable |
| Our debt instruments, including the indentures governing our 9^ 3/4prca senior notes due 2010, our 11^ 1/4prca senior subordinated notes due 2011 and our amended and restated credit agreement, impose, and the terms of any future debt may impose, operating and other restrictions on us and many of our subsidiaries |
| These restrictions will affect, and in many respects will limit or prohibit, our ability and our restricted subsidiaries’ abilities to: • incur or guarantee additional indebtedness; • pay dividends or make distributions on capital stock or redeem or repurchase capital stock; • repurchase equity interests; • make investments; • create restrictions on the payment of dividends or other amounts to us; • transfer or sell assets, including the stock of subsidiaries; • create liens; • enter into transactions with affiliates; • enter into sale/leaseback transactions; and • enter into mergers or consolidations |
| Our amended and restated credit agreement also requires us to maintain compliance with specified financial ratios |
| Our ability to comply with these ratios may be affected by events beyond our control |
| The restrictions contained in our debt instruments could: • limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and • adversely affect our ability to finance ongoing operations, strategic acquisitions, investments or other capital needs or to engage in other business activities that would be in our interest |
| 19 ______________________________________________________________________ [42]Table of Contents A breach of any of these restrictive covenants or the inability to comply with the required financial ratios could result in a default under our debt instruments |
| If any such default occurs, the lenders under the senior secured credit facilities and the holders of our 9^ 3/4prca senior notes due 2010 and our 11^ 1/4prca senior subordinated notes due 2011, pursuant to the respective indentures, may elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable |
| The lenders under our senior secured credit facilities also have the right in these circumstances to terminate any commitments they have to provide further borrowings |
| If we are unable to repay outstanding borrowings when due, the lenders under the senior secured credit facilities will have the right to proceed against the collateral granted to them to secure the debt, which collateral is described in the immediately following risk factor |
| If the debt under the senior secured credit facilities, our 9^ 3/4prca senior notes due 2010 or our 11^ 1/4prca senior subordinated notes due 2011 were to be accelerated, we cannot give assurance that this collateral would be sufficient to repay our debt |
| If we fail to meet our payment or other obligations under the senior secured credit facilities, the lenders under the senior secured credit facilities could foreclose on, and acquire control of, substantially all of our assets |
| In connection with the incurrence of indebtedness under our senior secured credit facilities and the completion of our acquisition of Insignia, the lenders under our senior secured credit facilities received a pledge of all of our equity interests in our significant domestic subsidiaries, including CB Richard Ellis Services, Inc, CB Richard Ellis Investors, LLC, CBRE Melody, Insignia and CB Richard Ellis Real Estate Services, LLC, and 65prca of the voting stock of our foreign subsidiaries that is held directly by us or our domestic subsidiaries |
| Additionally, these lenders generally have a lien on substantially all of our accounts receivable, cash, general intangibles, investment property and future acquired material property |
| As a result of these pledges and liens, if we fail to meet our payment or other obligations under the senior secured credit facilities, the lenders under the senior secured credit facilities will be entitled to foreclose on substantially all of our assets and liquidate these assets |
| Our co-investment activities subject us to real estate investment risks which could cause fluctuations in earnings and cash flow |
| An important part of the strategy for our investment management business involves investing our capital in certain real estate investments with our clients |
| As of December 31, 2005, we had committed dlra31dtta2 million to fund future co-investments |
| We expect that approximately dlra18dtta8 million of these commitments will be funded during 2006 |
| 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 |
| These adverse consequences could include damage to our reputation with our co-investment partners and clients, as well as the necessity of obtaining alternative funding from other sources that may be on disadvantageous terms for us and the other co-investors |
| Providing co-investment financing is also a very important part of CB Richard Ellis Investor’s investment management business, which would suffer if we were unable to make these investments |
| Although our debt instruments contain restrictions that limit our ability to provide capital to the entities holding direct or indirect interests in co-investments, we may provide this capital in many instances |
| Participation in real estate transactions through co-investment activity could increase fluctuations in earnings and cash flow |
| Risks associated with these activities include, but are not limited to, the following: • losses from investments; • difficulties associated with international co-investments described in “—Our international operations subject us to social, political and economic risks of doing business in foreign countries” and “—Our revenue and earnings may be adversely affected by foreign currency fluctuations;” and • potential lack of control over the disposition of any co-investments and the timing of the recognition of gains, losses or potential incentive participation fees |
| 20 ______________________________________________________________________ [43]Table of Contents Our joint venture activities involve unique risks that are often outside of our control which, if realized, could harm our business |
| We have utilized joint ventures for commercial investments and local brokerage and other partnerships both in the United States and internationally, and although we currently have no specific plans to do so, we may acquire minority interests in other joint ventures in the future |
| In many of these joint ventures, we may not have the right or power to direct the management and policies of the joint ventures and other participants may take action contrary to our instructions or requests and against our policies and objectives |
| In addition, the other participants may become bankrupt or have economic or other business interests or goals that are inconsistent with ours |
| If a joint venture participant acts contrary to our interest, it could harm our business, results of operations and financial condition |
| If we fail to comply with laws and regulations applicable to real estate brokerage and mortgage transactions and other business lines, we may incur significant financial penalties |
| Due to the broad geographic scope of our operations and the numerous forms of real estate services performed, we are subject to numerous federal, state, local and foreign laws and regulations specific to the services performed |
| For example, the brokerage of real estate sales and leasing transactions requires us to maintain brokerage licenses in each US state in which we operate |
| If we fail to maintain our licenses or conduct brokerage activities without a license, we may be required to pay fines or return commissions received or have licenses suspended |
| In addition, because the size and scope of real estate sales transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with the numerous US state licensing regimes and the possible loss resulting from non-compliance have increased |
| Furthermore, the laws and regulations applicable to our business, both in the United States and in foreign countries, also may change in ways that increase the costs of compliance |
| We may have liabilities in connection with real estate brokerage and property management activities |
| As a licensed real estate broker, we and our licensed employees are subject to statutory due diligence, disclosure and standard-of-care obligations |
| Failure to fulfill these obligations could subject us or our employees to litigation from parties who purchased, sold or leased properties that we or they brokered or managed |
| We could become subject to claims by participants in real estate sales claiming that we did not fulfill our statutory obligations as a broker |
| In addition, in our property management business, we hire and supervise third-party contractors to provide construction and engineering services for our managed properties |
| While our role is limited to that of a supervisor, we may be subject to claims for construction defects or other similar actions |
| Adverse outcomes of property management litigation could negatively impact our business, financial condition or results of operations |
| Our stock price is subject to volatility |
| Our stock price is affected by a number of factors, including quarterly variations in our results and those of our competitors; changes to the competitive landscape; estimates and projections by the investment community; the arrival or departure of key personnel; the introduction of new services by us or our competitors; and acquisitions, strategic alliances or joint ventures involving us or our competitors |
| In addition, the stock market, in general, has historically experienced significant price and volume fluctuations |
| Any of these factors may cause declines in the market price of our common stock |
| When the market price of a company’s common stock drops significantly, stockholders sometimes institute securities class action lawsuits against the company |
| A securities class action lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources from our business |
| 21 ______________________________________________________________________ [44]Table of Contents Forward-Looking Statements This Annual Report on Form 10-K 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 Annual Report on Form 10-K to identify forward-looking statements |
| These statements relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable |
| These statements also relate to our future prospects, developments and business strategies |
| 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: • changes in general economic and business conditions; • the failure of properties managed by us to perform as anticipated; • our ability to compete globally, or in specific geographic markets or business segments that are material to us; • changes in social, political and economic conditions in the foreign countries in which we operate; • foreign currency fluctuations; • our ability to complete future acquisitions on favorable terms; • integration issues and costs relating to acquired businesses; • an economic downturn in the California real estate market; • significant variability in our results of operations among quarters; • our leverage and debt service obligations and ability to incur additional indebtedness; • our ability to generate a sufficient amount of cash to satisfy working capital requirements and to service our existing and future indebtedness; • the success of our co-investment and joint venture activities; • our ability to retain our senior management and attract and retain qualified and experienced employees; • our ability to comply with the laws and regulations applicable to real estate brokerage and mortgage transactions; • 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 to offset incentive compensation expense related thereto; • changes in the key components of revenue growth for large commercial real estate services companies, including consolidation of client accounts and increasing levels of institutional ownership of commercial real estate; • reliance of companies on outsourcing for their commercial real estate needs; • our ability to leverage our global services platform to maximize and sustain long-term cash flow; 22 ______________________________________________________________________ [45]Table of Contents • our ability to maximize cross-selling opportunities; • trends in use of large, full-service real estate providers; • diversification of our client base; • improvements in operating efficiency; • protection of our global brand; • trends in pricing for commercial real estate services; • the ability of CBRE Melody to periodically amend, or replace, on satisfactory terms the agreements for its warehouse lines of credit; • our ability to achieve annual cash interest savings; • the effect of implementation of new tax and accounting rules and standards; and • the other factors described in this Annual Report on Form 10-K, including under the heading “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies |
| ” 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 |