Colliers International Group Inc (CIGI) 2005 Q4 法說會逐字稿

Welcome to the FirstService Corporation's fourth-quarter year-end financial results conference. Today's call is being recorded. Forward-looking statements include the Company's financial performance outlook and statements regarding goals, beliefs, strategies, objectives, plans, or current expectations. These statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results to be materially different from the future results, performance, or achievements contemplated in the forward-looking statements.

Such factors include general economic and business conditions, which will among other things impact demand for the Company's services and the cost of providing services; the ability of the Company to implement its business strategy including the Company's ability to acquire suitable acquisition candidates on acceptable terms and successfully integrate newly acquired businesses within existing businesses; changes in or the failure to comply with government regulations; and other factors which are described in the Company's filings with the Ontario Securities Commission and the Securities and Exchange Commission.

At this time for opening remarks and introductions I would like to turn the call over to the President and Chief Executive Officer of FirstService Corporation, Mr. Jay Hennick. Please go ahead, sir.

Thank you, operator, and good morning, everyone. I am Jay Hennick, the President and Chief Executive Officer of the Company, and with me today is John Friedrichsen, the Senior vice president and Chief Financial Officer. This morning FirstService reported record year-end financial results with strong performances from each of our business units. Revenues were up 37%; adjusted earnings up 44%; and earnings per share up 34%, in each case well above the top end of our forecast.

FirstService has achieved significant corporate milestones in fiscal 2005 as we surpassed a revenue run rate of more than $1 billion, added another important platform for growth, expanded our business into international markets, and secured significant new long-term debt capital. Fiscal 2005 also marks the 12th consecutive year in which we grew our revenues, earnings, and earnings per share over the prior year, and the 10th time in our 12 years as a public company that we grew our business by more than 20% over the prior year.

Our ability to continue to achieve this type of growth year after year is a testimony to our solid fundamentals, disciplined way of doing business, and our strong management teams. All of these contribute to a track record of performance of which we are all very proud. More importantly, we are confident that we will deliver another strong performance again this year.

We started the year in excellent shape, given the strong performances that we achieved last year. We will have the full-year benefit of our new commercial real estate platform, Collier's International; and generally we are enjoying favorable operating business environments in our various markets. With this in mind, we have increased our guidance to between $0.97 and $1.07 per share; and of course these estimates do not include the benefit of any acquisitions we might complete during the year, which will be additive to these numbers. John will provide further details on these and our financial results in just a few minutes.

Just after year end we concluded a new issue of senior notes. This debt offering is an understated yet very important show of confidence in FirstService and in our operating and growth strategy by an impressive group of noteholders. FirstService locked in another $100 million of long-term capital at a he very attractive fixed rate of interest. In total, we now have more than 150 million of capital available to fund our growth. If we are able to put this capital to work by completing a number of accretive acquisitions over the next few years, we will be able to add to our earnings and earnings per share without issuing additional capital, which should be great news for our shareholders.

In the area of corporate governance we also announced today that we separated the role of Chairman and CEO at FirstService. I am personally delighted with the appointment of Peter Cohen, a long-time director and formally our lead director, to the role of Chairman of the Board. I will remain President and CEO.

As an organization we are always looking to raise the bar under the expert guidance of David Beatty, who is the chairman of our nominating and corporate governance committee and is also a leading advocate in this important area. In addition to the appointment of Peter as Chairman, we also welcome the addition of Michael Natale to our executive management team as Vice President Performance and Risk Management. Michael is a seasoned professional with experience in important areas of internal audit, corporate governance, and financial and risk management; and most recently Michael was a senior officer of Jefferson Wells, one of the industry leaders in Sarbanes-Oxley compliance.

Before I go into the operational details I would like to ask John to take a few minutes to take you through our financials, and then I will return. I would like to have everyone hold your questions until the end of the call. John?

Thank you, Jay. We finished the year with results at the top end of our range of expectations. My comments will address both the fourth-quarter and annual results on a consolidated basis and by operating segment.

In accordance with U.S. GAAP, reported operating results for the quarter and for the year exclude those for the previously announced sale of two operations during our fourth quarter, the disposition of our concrete restoration business in South Florida, and a small franchise system, as well as our Canadian lawn care operations at the beginning of fiscal 2005, the results of which are classified as discontinued operations for the current year and comparative periods.

For the fourth quarter, revenues on a consolidated basis grew 62% to 246.4 million. Internal growth was approximately 10% for the quarter, with 52% of the growth in revenues attributable to acquisitions, primarily CMN, which operates as Collier's International and which was acquired during our third quarter. For the year our revenues grew 37% to 812.3 million. Return on growth for the year was 10%, while acquisitions contributed to a 27% growth in revenues.

Consolidated EBITDA in the fourth quarter totaled 13 million compared to 9.5 million in the prior-year quarter, an increase of 37%. For the year EBITDA totaled 78.8 million, up from 54.5 million or 45%. EBITDA for all periods presented in our release has been adjusted to exclude the impact of other nonoperating income. EBITDA margins were 9.7%, up from 9.2%, with the increase mainly due to higher margins in business services.

In the fourth quarter, adjusted consolidated net income decreased to 2.8 million compared to 4 million in the fourth quarter last year, resulting in adjusted diluted earnings per share of $0.07 compared to $0.13 last year. The difference is entirely related to the acquisition of CMN during the year, and in particular the additional interest costs incurred in connection with the additional debt drawn to fund the CMN acquisition, as well as the additional depreciation from CMN, with only a very modest amount of income generated by CMN due to its traditionally seasonal low period of January through March. For the year adjusted consolidated net income totaled 28.2 million, compared to 19.7 million last year, an increase of 43%.

Adjusted diluted earnings per share totaled $0.90 versus $0.67 last year, up 34%. I just referred to adjusted net income and diluted earnings per share for the fourth quarter of the year, to exclude the accelerated non-cash amortization of the brokerage backlog intangible asset recorded on the CMN acquisition. Brokerage backlog amortization expense for the year was 8.7 million or $0.18 per diluted share. Another 1.9 million of backlog amortization expense will be recorded in the first two quarters of fiscal 2006, at which point it will be substantially amortized.

On a segmented basis, in property improvement services and residential property management, the following amounts exclude the results of our discontinued operations. Fourth-quarter revenues in our property improvement services division increased 17% to 23.8 million, compared to 20.4 million in the same quarter last year. Acquisitions contributed 3% of the growth, and the balance of 14% was internally generated. Solid revenue growth in our nonseasonal operations, particularly Paul Davis Restoration and California Closets, contributed to the growth. EBITDA declined just about $200,000, compared to 500,000 during the fourth quarter last year, primarily due to adjustments made to the accounting for long-term incentive plan, which totaled about $500,000.

For the year, revenues increased to 111.8 million, up 25% from 89.4 million last year, with 14% of the growth generated internally and the balance through acquisitions. Meanwhile EBITDA increased to 19.9 million, up from 14.9 million, an increase of 33% over the prior year. EBITDA margins were 17.8%, compared to 16.7% in the same period a year ago.

Revenues in integrated security services for the quarter increased to 36.3 million from 30.4 million, up 19% compared to last year. Growth related to acquisitions contributed 3% of the revenue growth, with the balance of 16% all internally generated, which also included 4% from the stronger Canadian dollar. EBITDA in the fourth quarter increased to 2.1 million from 1.6 million, up 34%. This increase, along with the increase in EBITDA margins to 5.9% from 5.2% in the quarter last year, were driven by a greater proportion of higher-margin system sales and improved operational efficiencies, primarily in our Canadian operations.

For the year, revenues increased to 143.2 million or 17%, from 122.7 million last year, with 11% of this growth generated internally, including about 3% due to foreign exchange and the balance from acquisitions. Annual EBITDA increased 20% to 10.3 million from 8.4 million over the prior year. The yearly EBITDA margin was 7.2% compared to 6.9% last year.

Revenues in the residential property management for the fourth quarter were 68.9 million compared to 54.6 million last year, an increase of 26%. Internal growth was 12%, while acquisitions completed in Chicago and Las Vegas contributed growth of about 14%. Internal growth was generated primarily by an increase in core management services with modest growth contributed by ancillary services. EBITDA margins in the quarter also increased nicely to 8% from the 7.2% last year.

For the year, revenues increased by 20% to 275.2 million from 228.8 million. EBITDA totaled 24.1 million compared to 19.7 million last year, an increase of 22%. EBITDA margins in this segment increased to 8.8% for the year compared to 8.6% a year ago.

Turning to commercial real estate services, revenues at our Collier's International business, acquired on November 30, 2004, totaled 70.9 million during the fourth quarter, while EBITDA during this seasonal low January-March period was 476,000. For the year-to-date results from date of acquisition, which includes one additional month, the seasonal peak month of December, revenues totaled 121 million, generating EBITDA of 11.2 million.

Revenues in business services were 46.3 million for the quarter, virtually unchanged from 46.2 million in the fourth quarter last year. However, despite flat revenues, EBITDA was 7.7 million versus 5.5 million reported in the fourth quarter last year, an increase of 40%. EBITDA in the quarter was positively impacted by the recognition of revenue related to a completed contract, which also was the primary contributor to the increased EBITDA margins to 16.7% for the quarter compared to 11.9% last year.

For the year, revenues in business services totaled 160.9 million compared to 152.4 million last year, an increase of 6%, all internally generated. EBITDA for the year totaled 22.4 million, up 22% versus 18.4 million last year, resulting in EBITDA margins for the full year of 13.9% versus 12% last year.

Quarterly corporate costs at FirstService for the quarter totaled 2.9 million compared to 2 million last year, with the increase due mainly to higher performance-based compensation expenses and costs related to the Company's current SOX 404 compliance initiatives.

Our cash flow from operations for FirstService totaled 37 million for fiscal 2005, up from 35.7 million last year. It is important to note that timing negatively impacted our reported cash flow at year-end, as cash receipts relating to a couple of significant receivables were collected just after year end and together total about 9 million. Adjusting for these amounts, cash flow from operations after working capital adjustments was up about 29%.

Investing activity increased primarily due to the Collier's acquisition with the total 56.9 million in acquisitions, up significantly from 16 million last year.

Meanwhile capital expenditures increased to 17 million from 13.1 million last year, as we invested additional amounts in fixed assets to support our future growth and improve efficiencies, including updated software and IT-related expenditures in our business services and integrated securities services segments, and the expansion of certain branches in our residential property management and commercial real estate businesses. Despite the increase in CapEx our investment remained below our target of not greater than 2% of annualized run rate revenues in fiscal 2005; and we expect to remain below this level in relation to our revenues in fiscal 2006.

Turning to our balance sheet, our net debt position stood at about 183 million at year-end compared to 148 million the end of last year, resulting in a leverage ratio expressed in net debt to EBITDA adjusted for the full-year impact of acquisitions of just over 2.1 times, and well below the bottom of our operating range, 2.5 to 3 times, at compared to 2.5 times at the end of last year.

As Jay previously announced -- as previously announced and as Jay previously mentioned at the outset, just after year end we completed our $100 million issue of senior notes bearing a fixed interest rate of 5.44% due in April 2015 and with an eight-year average life. The notes were placed privately with eight major financial institutions in the U.S.; proceeds from the notes were used to fully repay outstandings under our revolving credit facility after year-end.

We also increased the amount of our revolving credit facility to 110 million; extended the term to three years; and replaced CIBC with HSBC in our syndicate, which also includes Citibank, RBC, JPMorgan Chase, and Scotia. Needless to say, we appreciate the confidence and support of our financial backers and welcome the new institutions to our Company.

As part of these financing arrangements we also increased the relative amount of fixed rate financing on our debt with the new notes issue and the unwinding of $50 million in interest rate swaps, going from an all floating-rate interest rate structure last year to one that is more balanced, with about 60% of our debt now fixed. With the recent financings completed on favorable terms, lower leverage, and a greater proportion of fixed-rate debt our balance sheet is in solid shape. And with long-term funding in place we have the necessary financial capacity to continue to fund acquisitions and invest in our growth.

Looking forward to our current year fiscal 2006, we are revising our preliminary outlook, previously provided in January, upwards. Our projected range of revenues remains unchanged at between 1.05 billion to 1.1 billion, while our EBITDA range has been increased to between 92 and 97 million from between 90 and 95 million for the year. The upper end of our adjusted diluted earnings per share range has also been increased to $1.07 from $10.5, with our updated projected range now at $0.97 to $1.07.

The increase in EBITDA is based on slightly stronger expected results across our operating segments, including our new commercial real estate services platform, Collier's International. The updates to adjusted diluted earnings per share take into account revised expectations of interest expense based on our new debt financings, as well as changes in minority interest and diluted shares outstanding.

This updated outlook is based on the current economic conditions in our markets remaining unchanged for the balance of our fiscal year; an average exchange rate of the US$0.80 to C$1.00; a 50 basis point average increase in interest rates during the year; and no changes in generally accepted accounting principles materially impacting our results. These amounts do not include the impact of any acquisitions or divestitures that may be completed after today prior to the end of fiscal 2006.

I must remind you that the above outlook is forward-looking and the actual results may differ materially; and the Company undertakes no obligation to update this information. Now back to Jay for the operational highlights. Jay?

Thinks, John. Property management had another exceptional quarter, with revenues up 26% and profits up 40% on much higher operating margins; and for the year revenues and profits were at record levels. As most of you know, FirstService is the largest provider of residential property management services to communities in North America. We now manage more than 3,000 properties including over 550,000 homes; and we do that from 35 offices in 16 states, while administering total client budgets of more than $2 billion annually.

Our strategy in this business is to add units under management both internally and through acquisition and then leverage our management relationship to do more for our clients. The more we do in the form of additional services, the greater our competitive advantage and the more potential we have to increase our revenues and profits. Looking at a business in this way is one of the key reasons we have been able to grow our property management business at more than twice the overall the industry average growth rate.

The acquisition last year or our new platform in Las Vegas is now fully integrated, and so far the results have been better than planned. Not only is this market one of the fastest-growing in America, but it is also growing vertically for the first time, giving us another opportunity to differentiate our services from our competitors, who have limited experience managing high-rise residential developments.

We also announced that we sold our concrete restoration business in South Florida. This business was a solid performer in the past, but in recent years became more difficult to operate at an acceptable margin, primarily as a result of increased competition. More importantly, it was distracting the management team from its core business of providing residential property management and related services to homeowners, services that deliver much more consistent results. With management now free to focus on their business, we are confident that they will be able to further accelerate their growth and do a lot more in the margin area.

Property improvement also had another solid quarter, with revenues up 17% over the prior year and record results for the full year. We continue to enjoy strong results from franchise systems California Closets, Paul Davis Restoration, Pillar to Post home inspections, and College Pro and CertaPro Painters.

Just after year-end we announced two additional acquisitions of California Closets franchises, adding about $5 million in annualized revenue. The addition of Dallas and Phoenix brings the total number of company-owned branchises to eight including Boston, Seattle, Jacksonville, Chicago, San Francisco, and Toronto. Together they generate about $40 million in annual revenue.

These acquisitions are a continuation of our proven strategy to selectively repurchase franchises operating in attractive markets where we believe we can add value. We intend to continue to pursue this strategy wherever and whenever we see upside potential. At the same time, we also determined that our smallest franchise system, Stained Glass Overlay, was not generating the return on invested capital we required. With this in mind we made the decision to sell this business to the existing manager.

Finally, California Closets' ready-to-assemble storage systems are now on the shelves of Target stores across the U.S., thanks to a new licensing initiative with Dorel Industries. This new offering does not in any way conflict with our traditional closet product. It was designed for customers who want less expensive closet alternatives that they can assemble and install themselves, rather than having a professionally designed and installed California Closets organized system. Dorel is a highly regarded consumer products company that has built its reputation on manufacturing and selling products through major retailers, and we look forward to this new relationship generating incremental royalty streams for FirstService beginning this year.

In both the United States and Canada our integrated security services platform is seeing strong growth in revenues and margin. Revenue for the quarter was up 19% over the prior year, most of which came from internal growth; and EBITDA increased 33% with much higher margins. In Canada, Intercon Security had strong sales and achieved new levels of operating efficiency in both its electronic and security manpower operations. U.S. branches have been successful selling the proprietary access product and central station monitoring services developed by Intercon, while our Canadian branches have capitalized on SST's strong national accounts program to sell third-party products to clients wishing to purchase a more open security system.

The momentum we had last year should lead to another very strong year this year in revenue and profits. Our integrated security services platform is well positioned to take advantage of increasing expenditures by clients wishing to augment their security, which is of course a very important area for all of us to think about.

As John mentioned, while revenues and margins that result improved significantly for the quarter, we remain focused on increasing our capacity utilization and improving our operating procedures. We continue to see more margin improvement ahead in business services, which will translate into increased revenues and profits for FirstService.

The main highlight for the quarter was the 10-year $100 million outsourcing contract Resolve signed with the Royal Bank of Canada to assume the management and administration of their student loan portfolio. Winning this new contract demonstrates once again the excellence Resolve has in this important area and further increases the number of student loans under its administration. The Royal Bank portfolio is the largest non-government-owned student loan portfolio in Canada, and with this contract Resolve will be administering more than 800,000 student loan contracts for clients across North America.

In the area of services to the insurance industry Manulife Financial also turned to Resolve this quarter to provide services in connection with their group health claims processing for policyholders acquired as part of Manulife's acquisition of John Hancock. The contract has an initial term of three years, but has as the ability to be expanded into a variety of additional and related areas for Manulife and John Hancock.

The fourth quarter was the first full quarter in which Collier's International was part of FirstService. While the quarter represented the traditionally slow period of January to March, we're pleased with the results that came in better than we expected. Collier's operations in Hong Kong, Australia, and New Zealand delivered strong performances in the quarter; and overall the pipeline for brokerage listing and sales is about 20% higher than it was last year, which gives us an excellent start for the current fiscal year. We continue to be impressed with the strong management team at Collier's, CMN, and all of us at FirstService are very excited about the multitude of opportunities for growth we have in our new commercial real estate services platform.

Those were the highlights for the quarter; and now operator, I would like to open it up for questions.

(OPERATOR INSTRUCTIONS) David Newman, National Bank Financial.

Just a few questions if I might. On the business services side, I assume that completed contract -- was that the GM OnStar?

No, the contract that was completed was the Phase 1 contract on the firearms registration.

Okay.

I think we started the work 2.5 or 3 years ago, John?

Yes.

It finally finished.

Very good. So now that it is completed, what is your expectations for the margins? It sounds like it contributed for the quarter?

It contributed for the quarter; but we are also seeing utilization rates getting better. We think that we have got some room in our margin also in getting a little smarter in the way we operate the business. But what is very comforting for all of us is to start to see the margin in business services move back up, to not yet historical levels, but much higher levels than we have seen the past 18 months to two years.

Very good. Now that the unit is somewhat stabilized -- I mean, in the past it has been probably in my estimation a little more unpredictable than your other units. Is there any chance that you might consider exiting this line at some point?

I'm sorry, David, First of all, we are not exiting any business. But I don't even know which one you're asking about.

The business services. It has been a little more unpredictable than your residential and your property management and some of your other lines. Is it something you might consider at some point, now that it is somewhat stabilized?

It has always been a very strong performer. At the worst of times it wasn't very bad; it was an 11, 12% EBITDA margin business. And most of its margin was impacted by that customer several years ago that was a significant customer of ours. That created the excess capacity, which we are of course filling.

But it is a good business and it is one that has an exceptional management team. There is lots of new business activity that we are seeing today, probably more than I think we have seen in the past couple of years. There's lots of exciting things happening. It's famous last words, but it is not something that we are doing near term.

Okay. CMN, you have had it for about four months now, five months. Any surprises on the upside or downside? Any synergies that you can see going forward with your core business line?

I think synergy is limited. They will take longer to develop that. Synergies was never part of the story, near-term story with CMN or Collier's. But we are very excited about the business.

The surprise on the upside was the ease of integration. This was a business that had a phenomenal management team, but a share ownership structure that really was inconsistent with the future of the business. It was owned, for some of you that don't recall, it was owned about 70% by retired brokers whose main interest in the business was to exit the business; and the operating brokers and key management team wanted to grow and develop the business to the next level. So the beauty of our transaction was we were able to cash out those that wanted to leave and support those that wanted to continue to grow.

But the other positive is that there are just so many ways that we can grow this business in the future. We really just haven't scratched the surface. So we are in a new area with great upside potential. We are analyzing where we want to capitalize. But there is just a number of different areas that we can grow in.

Just a last question, if I may. It sounds like you are getting some traction on the systems side in your integrated security services versus the manpower. What is the mix today? Where do you see this thing going?

We are getting nice traction. After September 11, we would have all expected there to be a real surge in security expenditures, and we didn't see it. We are now starting to see it, and it is starting to get translated into enhanced sales. The contracts that we are working on now are much larger than ever before, clients like Dow Chemical and others that have huge installations and in a multitude of areas.

So there is only certain companies that are going to be able to deliver that size and that sophistication of service. We are enjoying some of that right now. So yes, great traction. I hope it continues, and we also see some margin enhancement opportunities in that business as well.

That is great. Thanks, guys.

Frederick Bastin, (ph) Raymond James.

Just a follow-up on the question that was asked earlier on Collier's. Is it safe to say that most of the revision to your EBITDA guidance is related to Collier's doing better than expected?

It is part of it. But it is really the adjustment to our guidance is a result of having gone through in a detailed way our budgeting process here. I would have to say that it is really across the board at our various five segments. So Collier's is part of it, (multiple speakers) not nearly all of it.

Did you actually mention the actual percentage of the utilization rates in your business services, or can we get that?

Utilization is in the low 70%. So it is improving slowly; and hopefully we can make more significant advances this year with our plans in place. We also have some capacity which we are going to be losing, if you will. A facility, the lease of which is up in June; and we will not be utilizing. We will be redeploying the work that is done there to another facility. So that will improve our utilization by virtue of just losing that redundant capacity.

One last question, if I may. What tax rate do you build into your guidance going forward?

We are at about 31%.

Great, thank you.

Bill MacKenzie, TD Newcrest.

Just on CMN, I was wondering if you could give us just a bit of a sense for on a year-over-year basis now that business is tracking. In terms of -- I know you didn't have it last year, but just how are -- anything you can give us in terms of revenue growth or EBITDA growth, just to give us a sense of the year-over-year performance.

I think we can give you something on the revenue side. On the EBITDA side it's a little more difficult, because we didn't own the business and we have been taking some initiatives this year that have been really -- I guess (indiscernible) to position ourselves for continuing to grow this business. But on the revenue side we are up above 15% year-over-year basis.

As I said our EBITDA, I don't really have the information for you on a year-over-year basis. What I can say is that results are in line with where we expect them to be in this quarter. They have spent a bit of money in a couple of areas to grow the business. So we are in great shape to continue the growth, and we certainly expect Collier's to achieve this year better than what we had originally thought.

So I don't know if I can give you a clear answer. Unfortunately we just didn't own it last year at this time, so we don't have any clear information.

That is great. That is helpful. Just on the tax rate in the quarter, you gave us some color on what to look for going forward. But you booked a small tax recovery in the quarter. Just wondering what happened with the taxes this quarter.

We went through as part of our audit annual review of our tax position, and we were in a situation where we just had -- our tax rate was too high. We had been through some reviews. We evaluated on a comprehensive basis and needed to adjust it down in order for it to make sense.

So we made that adjustment in the fourth quarter, and that was the impact, the long and short of it. On a go-forward basis, like I said earlier, we have about a 31% rate, which is slightly higher than previously. That is on account of the CMN transaction.

Okay, that is great. Then the only other question I had was just looking at your balance sheet; and as you pointed out your debt to EBITDA on a pro forma basis down to 2.1 times, which is way at the low-end end. Then you had some more working capital come in right after the end of the year. I am just wondering, I guess if you don't watch it your balance sheet could get underleveraged pretty quickly.

Just wondering what your thoughts are in terms of use of capital. Any interest in a dividend? Or maybe getting more aggressive on a buyback? Or do you see sufficient opportunities to invest capital via acquisitions and internally in the business to make sure the balance sheet doesn't get too underlevered?

You are right, Bill. Our cash flow has been very strong; and based on our forward forecasting for next year it is getting even stronger. We are at all-time lows in terms of our leverage ratio after making the biggest acquisition we have ever made.

We are looking at a multitude of things, one of which is our acquisition pipeline. Can't we put our access capital to work in a relatively short period of time? Ought we consider dividends? Ought we consider enhancing our share buyback? All of the things that you mentioned are on the table, and we are open to comments or suggestions that you might have.

We are in a good spot here. We generate strong cash flows, and we can redeploy them in businesses that have low capital intensity. So we would like to, in the first place, just reinvest our capital in businesses that we know and understand.

I would add to that, Bill, that notwithstanding that our balance sheet is in great shape, you know us and the other shareholders know us. We are patient investors. We are going to absolutely be active; but we are also (ph) going to be disappointed in terms of investing this additional capital.

That is great, thank you.

Sheila Broughton, Pacific International Securities.

Just a quick question on what will -- I missed Michael Natale's title. I was just wondering, what is his near-term focus going to be? I think part of it was internal audit.

Michael's responsibility is going to be not just internal audit, but Sarbanes-Oxley compliance. Michael has industry experience, and we are hoping that he can help find, in addition to those two responsibilities which are significant ones, also help find incremental margin in our business units. There is always ways to be more effective and efficient in the way we manage our business. For us, if we can pick up a quarter or half a point, it is major. We think that Mike -- I know that is what gets him excited, is enhancing margin. And we are hoping that he can help us do that.

Is there a specific business unit he is going to focus on first?

No, Sarbanes-Oxley -- the good news about Sarbanes-Oxley is, it is all-encompassing and covers our entire operations. Mike has been working with us now for probably 18 months in his former life at Jefferson Wells. So he has in fact visited all of our operations, worked with all of our operating people for a long period of time, as well as the small team that we have here before Mike joined us that was overseeing this area.

So he hits the road running. He hits the road with ideas. And he can help us accelerate the process, but also find us opportunities to enhance our margin.

Great, thank you.

Kevin Steinke (ph), William Blair.

It's Kevin Steinke from William Blair dialing in for Matt Litfin. I have a question regarding residential property management. In the last couple earnings releases you have referred specifically to higher productivity in the property services operations as a driver of EBITDA margin expansion. Do you have any specific initiatives in place that's driving that? Or is that just a result of just operating leverage in the business?

It is in part operating leverage, but it is in part us capitalizing on the other opportunities created by the budget we administer. For example, we have this year implemented almost fully -- I think we're probably 95% of the way there -- in our property transfer process, which not only reduces our operating cost. And that is a process that is an online process that really handles all of the purchases and sales of the properties in our communities.

If you can imagine, we have 550,000 homes, and probably 12 to 15% of those homes turn over each year. We are actively involved both for the purchaser and the seller as in effect a transfer agent in providing certain paper and process to the buyer and the seller. It prior to this was a very cumbersome process that we needed to have implemented across the board in all of our management operations. Now it is an online process. It has cut significant costs out of the operation and made us more efficient.

That is just one example, and there is a variety of other like things that we do when you become larger and you have the leverage to develop and investment spend in some of these programs. You not only add huge value to your client, which is a competitive advantage, but you are also hopefully cutting costs for yourselves and generating incremental revenue in the process.

The management team in property management is exceptional. They are what I would call buck-smellers. They are looking at all these opportunities on a regular basis; and first and foremost it is a way to demonstrate to their clients that they are helping them save costs and enhance the efficiencies of their property. So there is just a lot of meat on that bone, more than the revenue of that business would indicate. And we just continue to chomp at it and we will just continue doing that for many years to come.

Okay, that is very helpful. As a follow-up to that, you mentioned in your prepared comments that you believe there is a lot more room for improvement in the margin area in residential property management. Could we potentially see EBITDA margins get back to the 10% or so on an annual basis there? Or could it potentially even be higher given the recent acquisitions with higher margins?

I think definitely 10% is in the ballpark, and there is a real shot that we can move it up. But it is generally a low-margin business so you have to bear that in mind overall. But if we can move this to between 10% and 11% over the next couple of years that would be wonderful.

Great, thanks a lot.

(OPERATOR INSTRUCTIONS) Ron Schwartz, CIBC World Markets.

Just one for me, John and Jay. Given your outlook for fiscal '06 if we make a guess that Collier's is somewhere around 22, 23 million type of EBITDA, and back out the contribution this year, try to strip out some of the other acquisitions that have just been made, are we in the ballpark to say that EBITDA's probably growing apples--to-apples somewhere between 3 and 10%? Given the guidance he has put out there, just back of the envelope?

Internal growth would be much higher probably in the 8% to 10% range. I don't know where the three comes from. We have historically, Ron, as you know we have always been in the internal growth area, 8 to 10 on the revenue side and hope that we do better than that on the EBITDA side internal.

I realize that. I am just saying if you kind of assume Collier's is maybe, throw a number out there, 22 million on the EBITDA for fiscal '06, less 92 it is 70, and 70 over, if you adjust last year's EBITDA for Collier's of 11 million you are running it just under 67, so that is just a couple of percentage points growth. I might be off somewhere.

It is not hanging together totally, but we're happy to walk through it with you.

I can follow-up with you, Ron. What Jay said, our guidance overall is about 10% growth. Obviously there is some variability there. You have a range and I can talk to you about that.

Okay, no problem. Thanks.

The only thing I would say, Ron, if you are still there, the one thing that is impacting our overall EBITDA growth as an organization is the enhanced costs of Sarbanes-Oxley and the additional regulation that we are dealing with. I think next year we are budgeting an additional million or $1.5 million in costs relating to that. So when we talk about internal growth by division, we are talking about 8 to 10% internal growth by division; and then we have to offset that with the additional regulatory costs that we are dealing with.

Which comes in on your midline. Got it. Thanks.

There appear to be no further questions at this time.

Thank you, everyone. We will see you again next quarter. Thanks.

That does conclude today's conference call. Thank you for your participation.