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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): OCTOBER 15, 1998
CB RICHARD ELLIS SERVICES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 001-12231 52-1616016
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(STATE OR OTHER (COMMISSION FILE (IRS EMPLOYER
JURISDICTION OF NUMBER) IDENTIFICATION NO.)
INCORPORATION)
533 SOUTH FREMONT AVENUE, LOS ANGELES, CALIFORNIA 90071
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (213) 613-3123
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(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
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ITEM 5. OTHER EVENTS
On October 15, 1998, James J. Didion, Chairman of the Board and Chief
Executive Officer of CB Richard Ellis Services, Inc. (the "Company"), issued a
letter to the Company's shareholders discussing the recent decline of the
Company's common stock price and related investment community concerns. The
letter is filed as an exhibit hereto.
On October 15, 1998, the Company issued a press release announcing that the
Company's Board of Directors approved a stock repurchase program under which the
Company will begin purchasing up to $10 million of its common stock during the
period beginning October 16, 1998 through December 31, 1998. The press release
is filed as an exhibit hereto.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) The following are furnished as exhibits to this report:
99.1 Letter dated October 1998 from James J. Didion, Chairman of the Board
and Chief Executive Officer of CB Richard Ellis Services, Inc.
99.2 Press release dated October 15, 1998 issued by CB Richard Ellis
Services, Inc.
This report may contain forward-looking statements as well as historical
information. Forward-looking statements, which are included in accordance with
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, may involve known and unknown risks, uncertainties and other factors that
may cause the company's actual results and performance in future periods to be
materially different from any future results or performance suggested by the
forward-looking statements in the report. Such forward-looking statements speak
only as of the date of this report. The company expressly disclaims any
obligation to update or revise any forward-looking statements found herein to
reflect any changes in company expectations or results or any change in events.
-2-
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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 SERVICES, INC.
Date: October 15, 1998 By: /s/ Debra L. Morris
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Debra L. Morris
Global Chief Accounting Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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99.1 Letter dated October 1998 from James J. Didion, Chairman of the Board
and Chief Executive Officer of CB Richard Ellis Services, Inc.
99.2 Press release dated October 15, 1998 issued by CB Richard Ellis
Services, Inc.
<PAGE>
EXHIBIT 99.1
[LETTERHEAD OF CB RICHARD ELLIS, INC.]
October 1998
TO OUR SHAREHOLDERS
As I'm certain you're painfully aware, the market pricing of CB Richard Ellis
stock has been devastated over the last 90 days, declining more than 60%, and,
based on consensus analysts' estimates, moving from an EPS multiple of
approximately 16 to less than 8, with no Company-specific bad news. Although I
would expect the analysts to lower their estimates due to the current turmoil in
the capital markets and the resulting potential for temporarily reduced
investment sales and mortgage origination activity -- and in the last few weeks
we've seen some signs of delays and pricing concerns in these areas -- the
probable multiple at our current stock value level will still be below 8, and we
have a solid history of performance.
So what's wrong -- are there legitimate concerns about our business? I thought
it important that I address these questions.
In visiting with people throughout the investment community, we hear several
consistent themes about our Company --
- the perception that the brokerage business is widely cyclical, and that
investment sales will be dramatically impacted by the current capital
markets crisis;
- the perception that uncertainties in the CMBS markets will substantively
slow activity levels;
- a concern over the extent we've leveraged the Company in the course of
completing the strategic acquisitions we've completed over the last 18
months;
- the probability of a recession in 1999, and the possibilities of a
liquidity crisis due to the weakening global economy.
Before I respond to the reality of these concerns in our view, I want to be sure
you understand the fundamental strength of your Company. CB Richard Ellis leads
the commercial real estate services industry by a fairly wide margin, and by
almost any measure. The Company possesses the most powerful delivery platform
ever put together in a commonly owned and managed structure. We are creating
sustainable competitive advantage with this platform and the financial results
confirm it. We'll generate $1 billion in revenues this year, and substantial
profitability.
Although we haven't released third quarter results yet, we're comfortable that
we will substantially exceed prior year results, and be close to consensus
analysts' EBITDA estimates. However, in the last few weeks, it's become clear
that the disruption in the capital markets will affect some investment sales
transactions, and, therefore, impact fourth quarter results somewhat. We do not
believe this is a long-term phenomenon, and as asset repricing takes effect, the
markets should clear. There will probably be some sellers withdrawing
properties from active sale consideration, but there will be activity since many
sales are driven by rationale other than price, and in any event, the repricing
will most likely not exceed 15-20%. Since the fourth quarter is generally our
best quarter, we continue to expect a strong performance. Our largest business
- -- brokerage, is "on track," as are all other business segments. The only areas
we may see this slowing is in investment sales and possibly in mortgage
originations, and as I mentioned earlier, we anticipate the slowing to be
temporary. Overall, business has been very good, and as we plan for 1999, we
anticipate continuing strong year-to-year results.
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CB Richard Ellis is the strongest firm in the industry in terms of both
performance and market positioning, and we're very confident as to our future!
Now, I'd like to speak to the negative perceptions we've sensed in the
investment community --
CYCLICALITY IN BROKERAGE
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While there's some cyclicality in activity levels, and, therefore, in brokerage,
it is rarely broadly based and tends to be mitigated by geographic spread and
revenues from nonbrokerage operations. Only in national or global recessionary
periods have we seen broad-based activity slowdowns, and even those are
mitigated by market position. Let me cite an example of this in terms of
historical perspective. We've tracked our brokerage revenues over a 22-year
period -- 1973 through 1994 -- and as you know, that period included two
recessions, a depression, and a tax act (1986) that structurally changed the
industry. Our revenues during those periods reacted as follows --
1974/75 Recession 1981/82 Recession
1974 + 12.2% 1981 + 18.8%
1975 - 7.6% 1982 - 6.4%
1976 + 29.9% 1983 +41.6%
1986 Tax Act 1990/91 Depression
1986 + 8.8% 1990 - 5.9%
1987 - 2.3% 1991 - 21.2%
1988 + 19.6% 1992 + 6.0%
Most economists are not forecasting national recession in 1999, simply slower
growth, but if recession comes, we should experience relatively minor damage --
particularly since we've further spread our geographic coverage through
international expansion, and lessened the dominance of brokerage revenues
through the broadening of service lines over the last few years.
We look at our brokerage business as a strength, not a weakness!
MORTGAGE MARKETS AND INVESTMENT SALES UNCERTAINTIES
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While there is disruption in the capital markets, and particularly in the
Commercial Mortgage-Backed Securities (CMBS) conduit lending sector, private
mortgage markets remain liquid. Insurance lenders and other sources have taken
the lead in covering the short term CMBS conduit withdrawals. We've been in the
commercial mortgage origination and servicing businesses since 1935, and the
bulk of our activity is classic insurance company correspondency lending. We
take no balance sheet risk in this business so the volatility of spreads over
treasuries is not a factor in our profitability.
As discussed earlier, we do anticipate some slowing in the investment sales
sector -- primarily in the larger asset and portfolio transactions, and as
downward repricing becomes accepted, the slowing should be mitigated. Demand
for investment-grade assets remains strong and there will be substantial volume
as the market clears.
We look to 1999 as a good year in the private mortgage markets. You should know
that 1998 year to date has exceeded all expectations in this business, and
September 1998 was our mortgage business's best month ever!
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EXCESSIVE LEVERAGE
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As we've moved decisively to become the leading consolidator in the commercial
real estate services business, we've been actively accelerating achievement of
our strategic vision through acquisitions. In completing more than ten
acquisitions since our IPO in November 1996 (all of which were accretive to
EBITDA), we've taken on approximately $250 million in increased debt, both
senior and subordinated tranches. We're essentially through with major
acquisitions, since our worldwide network is now in place, and the Company's
intent is to use its cash flow to reduce current debt levels.
In terms of servicing existing debt levels, we're estimating EBITDA for 1998
substantially exceeding prior year levels, and a 4-5 to 1 interest coverage
ratio is indicated, a comfortable range in any scenario. We expect to reduce
debt by more than $25 million by the end of 1998, and by another $75 million+ by
the end of 1999.
Your senior management team is experienced, and used to dealing with leverage,
and while we intend to be cautious in these times of uncertainty, we are
comfortable with our debt servicing capability. As our stock regains its
rational value, our debt to capitalization levels will be under the 25% level.
A 1999 RECESSION/LIQUIDITY CRISIS
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While we may talk ourselves into a worldwide recession in 1999 --the "Sam
Donaldson effect," the fundamentals simply aren't there, particularly in the
commercial real estate sector. Think about the current facts --
* U. S. inflation remains low
* Interest rates are low and softening
* Vacancy rates in commercial space are at 10+ year lows, and demand still
exceeds supply in most property types
* New construction is filling some demand, but no significant overbuilding is
evident in the markets.
The U. S. economy is still healthy, and although GDP growth may be slower in
1999, there is only low probability logic for a recession or long-term activity
slowdown in the commercial real estate business. We can implement a contingency
plan with significant cost reduction measures, if necessary, but we are not
planning for a national recession, and the fundamentals for such a conclusion
simply aren't there.
Thanks for listening!
Best regards,
/s/ Jim
James J. Didion
Chairman and CEO
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EXHIBIT 99.2
[LETTERHEAD OF CB RICHARD ELLIS SERVICES, INC]
PRESS RELEASE
FOR IMMEDIATE RELEASE ---- October 15, 1998
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<S> <C> <C>
For further information: At the Financial Relations Board
Cary Brazeman Karen Taylor Stephanie Mishra
CB Richard Ellis General Information Investor/Analyst Contact
(213) 613-3227 (310) 442-0599 (415) 986-1591
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CB RICHARD ELLIS ANNOUNCES STOCK REPURCHASE PROGRAM
Los Angeles, CA (October 15, 1998)
CB Richard Ellis (NYSE:CBG), the world leader in real estate services, today
announced that its Board of Directors has approved a repurchase program under
which it will begin purchasing up to $10 million of its common stock. The
duration of the repurchase program is October 16, 1998 - December 31, 1998.
Under the program, the company expects to purchase shares of common stock from
time-to-time through open market and privately negotiated transactions at prices
deemed appropriate by management. The repurchase will be funded by a
combination of cash on hand and borrowing pursuant to the company's Bank Credit
Agreement.
Any shares repurchased will be available for reissuance in connection with the
company's employee benefit plans.
As of September 30, 1998, the company had 20.7 million shares of common stock
outstanding.
This release may contain forward-looking statements as well as historical
information. Forward-looking statements, which are included in accordance with
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995, may involve known and unknown risks, uncertainties and other factors that
may cause the company's actual results and performance in future periods to be
materially different from any future results or performance suggested by the
forward-looking statements in the release. Such forward-looking statements speak
only as of the date of this release. The company expressly disclaims any
obligation to update or revise any forward-looking statements found herein to
reflect any changes in company expectations or results or any change in events.
CB Richard Ellis (NYSE:CBG) is the world leader in real estate services. Based
in Los Angeles with over 9,000 employees worldwide, the company serves real
estate owners, investors and occupiers through over 200
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principal offices in 29 countries. Services include property sales and leasing,
property management, corporate advisory services and facilities management,
mortgage banking, investment management, capital markets, appraisal/valuation,
research and consulting. CB Commercial and REI Limited, which merged in April
1998 to form CB Richard Ellis, had combined 1997 revenues of $848 million.
For more information on CB Richard Ellis Services, Inc. (via facsimile and at no
cost), call 1-800-PRO-INFO and dial client code "CBG". If calling from outside
the United States, please dial 1-732-544-2850. CB Richard Ellis (NYSE:CBG) is
the world leader in real estate services.
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