Colliers International Group Inc (CIGI) 2007 Q1 法說會逐字稿

Welcome to the FirstService Corporation's first quarter 2007 results conference call. Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve risks and uncertainties. Actual results may materially different from those contained in these forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Company's annual report on Form 10-K and in the Company's other filings with Canada and U.S. Securities Commissions. At this time for opening remarks and introductions. I would like to turn the call over to the Founder and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Thank you and good afternoon. As the operator said, I'm Jay Hennick, the Chief Executive Officer of the Company. With me today is Scott Patterson, our President and Chief Operating Officer, and John Friedrichsen, Senior Vice President and Chief Financial Officer. This morning FirstService again reported record first quarter results, and we increased our financial outlook for the year. For the quarter, FirstService revenues were up 30%, EBITDA up 27%, and earnings per share 34%, all over the prior year. John will provide detailed financial--a review of our financial results in just a few minutes. Each of our service lines contributed very nicely to the results through a combination of strong internal growth and disciplined operational management, as you'll hear from Scott in his operational review. And we have been busy on the acquisition front, as well. We completed several tuck-under acquisitions that will add to our revenue, EBITDA and earnings per share, well into the future.

Let me now discuss some of the acquisitions. At the beginning of the quarter we announced that our Colliers International Commercial Real Estate Division increased its stake in Central and Eastern Europe to 80%. The balance of the equity in this business is owned by the operating management team. The region includes Poland, Romania, the Czech Republic, Slovakia and Hungary. I just returned from a tour of these offices, and I was very impressed with some of the things that we saw there. These countries are growing much faster than the more mature economies of Western Europe, and most have either joined, or are on track to joining the European Union. The result is rapidly growing economies with real estate markets that are also taking off. Since we've been in these markets for many years, and have specialized knowledge about the way they work, we're in a unique position to help real estate investors and owners, source, manage and lease properties and otherwise help them capitalize on a variety of new opportunities opening up in these markets. We intend to continue to invest in these operations, following the FirstService partnership philosophy of being partners with the operating management teams. In our view, operating with the FirstService philosophy is even more important in emerging markets. It is not only essential that we have a focused and committed management team in place, but it's also important that the managers themselves have a real incentive to remain with the business and participate in the growth and shareholder value creation over the long term.

During the quarter, Colliers also announced the acquisition of PRDnationwide, one of the leading real estate companies in Australia. This acquisition, with 4 commercial real estate offices and 150 residential real estate franchise locations, strengthens our position as the number 1 commercial real estate player in Australia, and helps us further leverage of our important Colliers International brand. It also puts us into the residential real estate business in Australia in a big way, through a very successful franchise system. PRD's commercial operations will be integrated in the existing Colliers offices, while the residential franchise system will continue to operate as a stand-alone business. PRD's strategy of placing franchised real estate -- residential real estate offices around communities that it serves, is a strategy that could apply very nicely in North America in our Residential Property Management business. We intend to continue to watch this opportunity very closely over the next few years, and decide whether it's a strategy we could employ here.

Late in the quarter, we also announced the acquisition of Cohen Financial. Cohen is one of the largest commercial mortgage origination and service companies in the U.S. Last year Cohen originated more than $5 billion in commercial real estate loans for its 10 offices. The addition of Cohen Financial is another important step in our growth strategy for Colliers. As discussed in the past, we see a tremendous opportunity to expand our commercial real estate platform by leveraging our extensive broker network globally, and also into other complementary service areas. Together with Colliers Mortgage in Canada, our mortgage origination and servicing business generates about $50 million a year in annualized revenue, and we have just scratched the surfaces--surface of capitalizing on the opportunities in this area. Partnering with strong management teams in complementary service areas that will allow us to leverage our base business has been the cornerstone of the FirstService business model from day 1. We did it in residential property management, we did it in property improvement, and we're doing it now in commercial real estate.

Our acquisition growth this quarter was not limited to Colliers. In Residential Property Management we added a significant player in Orlando, Florida, which has now been integrated into our existing operations there. In Property Improvement we added 2 more California Closets franchise operations, as well as North America's leading home repair and remodeling franchise system, Handyman Connection. Handyman Connection generated about $75 million in customer level revenues last year through its 160 franchisees operating across the U.S. and in Canada. It also takes our very successful Property Improvement business unit to over $1 billion in annual system-wide sales, which is a tremendous accomplishment from very humble beginnings. We are confident that Handyman Connection will benefit from our franchise industry experience and operating model, and we expect to be able to help them accelerate their growth in the future with a variety of new initiatives we have planned for them.

As you've heard, in addition to our strong internal growth this quarter, we've been very busy with acquisitions. So far in total we've added about $10 million in annual EBITDA to FirstService, through a variety of complementary acquisitions that will fuel our growth well into the future. We have also increased our outlook for the year to between $1.20 to $1.30 per share. That's between 20% and 30% growth over last year, and it doesn't include the benefit of any further acquisitions we might make for the balance of the year. Our goal over the next 5 years is to be a $2.5 billion Company. If we're able to achieve it, it means that we will be twice the size that we are today, with a share price that's also more than double, which should be excellent news for all of our shareholders. To accomplish this, we're going to have to continue to do all the right things and be disciplined in our execution. We're going to have to grow internally by about 10% per year on average, which is something that we have we have been successful doing over the long term, notwithstanding that during the quarter we grew at 18% internally, which of course is not sustainable.

Our internal -- the balance of our strategy, in terms of achieving our goal for the Company, is to balance the internal growth with a steady stream of acquisitions, which we need to generate about $10 million a year in EBITDA through acquisitions. We're fortunate so far this year to have been able to accomplish $10 million in acquisitions, but this is something that we're going to have to continue to do over a long period of time. Needless to say our goal of doubling our size and more than doubling our share value is very ambitious, and if we accomplish it, it will be excellent news for our stake holders. I think it is achievable however, given our business model and track record, our financial resources, and the great growth opportunities we have in each of our service lines.

In summary, we had a great quarter across the board. Our balance sheet is strong and we're in an excellent position to continue to capitalize on the opportunities ahead. Now, let me ask John to take you through the financial details for the quarter. And after Scott has completed with his operational review, we'll open things up to questions. John?

Thank you, Jay. As announced earlier today, FirstService reported consolidated results for our first quarter fiscal 2007 at record levels. Strong results that exceeded our own expectations. Through the efforts of our management partners and their teams, we continue to demonstrate the effectiveness of our business model in an economic environment that remains supportive of growth, but also showing signs that more challenging conditions may lie ahead. Our results, once again, demonstrate the attractive attribute that our service line diversification provides to our shareholders. Consolidated revenues, EBITDA, adjusted net earnings, and diluted earnings per share from continuing operations all showed significant gains in our first compared to last year. Revenues were up 30% to $325.5 million, with 18% internal growth and the balance due to acquisitions. EBITDA up 27% to $37.3 million, with an overall EBITDA margin of 11.6%, at a level similar to last year. Adjusted net earnings up 34% to $15.3 million, with adjusted diluted earnings per share up 34% to $0.47 per share from $0.35 last year. As outlined in prior conference calls, the adjustments in net earnings and earnings per share represent the non-cash amortization of short-lived intangible assets relating to pending commercial real estate brokerage transaction listings, recognized in acquisitions completed within our commercial real estate services platform. After considering the impact of this amortization, GAAP diluted earnings per share in the quarter was $0.43 versus $0.34 last year.

Also, as previously announced as part of year end earnings release last May, at the beginning of our first quarter on April 1st, we recognized and recorded a non-cash, non-recurring charge on our adoption of FAS 123R relating to the expensing of stock options, in the amount of about $1.4 million. During the quarter we invested close to $36 million in immediately accretive acquisitions that provide new growth opportunities and that will build value for our shareholders. We also spent about $6.5 million in capital expenditures during the quarter, to both maintain and support growth in our businesses. Consistent with past practices, we will continue to carefully control CapEx and allocate capital within our self-imposed annual CapEx limit of not more than 2% of revenues, and estimate full-year CapEx for our existing operations of about $20 million. Finally, we spent about $7.8 million to acquire just over 1% of our outstanding shares during the quarter. We will continue to utilize our issuer bid to buy back our shares from time to time, when we believe they are undervalued.

Moving to our balance sheet. Our net debt position at quarter end was $132 million and our leverage, expressed in terms of net debt to trailing 12 month EBITDA, adjusted to include the annual contributions of acquisitions owned for less than a year, was 1.26 times, still well below our historical operating range of 2.5 to 3 times, but up from 0.8 times at our March 31st year end, primarily because of our acquisition activity since the end of the year. We also made a $14 million principal repayment on our 8% notes due in 2011, which will lower our overall cost of debt, all of which I will remind you, is at fixed rates. With just over $100 million of cash on our balance sheet, our $110 million undrawn revolver, and low leverage, we're in a great position to fund future growth.

Looking forward to the balance of the year, we are increasing the outlook we last updated in early June. Based on our operating results to date, and expectations for the balance of the year, we now estimate revenues to be in the range of $1.2 billion to $1.275 billion, EBITDA of $105 million to $114 million, and adjusted diluted earnings per share from continuing operations of $1.20 to $1.30 per share. The foregoing amounts exclude the impact of any acquisitions or divestitures that may be completed between now and March 31st, 2007, and no material changes in current economic conditions in our major markets. I'm also obligated to remind you that these amounts are forward-looking, and that actual results may differ materially from those stated in our outlook. Now I'd like to turn things over to Scott for his operational highlights.

Thanks, John. As you've heard, the strong internal growth that we generated for the year ended March 31, 2006, continues through the first quarter of fiscal '07, with each of our 4 platforms generating double-digit internal growth and contributing to our Company-wide organic growth rate of 18%. I'm going to spend a few minutes on each of our platforms, setting out brief operating highlights and internal growth drivers, and then we will open the call to questions. Let me start with our Commercial Real Estate platform, Colliers International, where revenues for the quarter were up 39%, largely as a result of the acquisitions of Cohen Financial and PRDnationwide, but also driven by an internal growth rate of 12%. Colliers continues to enjoy healthy markets in most of its regions, and experienced particularly strong increases in North American brokerage, North American services, and across all service lines in Australia. A key component of Colliers growth strategy has been to expand and grow its [non-brokered] services to round out the service offering to clients, but also to create a revenue stream that is more recurring in nature, and less susceptible to market fluctuation. The strong growth and contribution during the quarter by the North American Services Group provides positive evidence towards progress in executing its strategy. For greater clarity, non-brokered services includes property management, mortgage origination and banking, mortgage servicing, appraisal, consulting and real estate outsourcing service, among others.

Another key Colliers strategic initiative and competitive differentiator is its aggressive investment in people development, retention and recruitment. These initiatives are closely measured, monitored and reported on in every region. First quarter of our continued advancement on this front with a net addition of several high-profile producers and executives around the globe. At quarter end, our pipeline of transactions remained quite strong and close to historical highs. While there is growing sentiment of a median-term slowdown in some of our regions and business lines, we currently have sufficient visibility to be optimistic about the expected results in Colliers through the next 2 to 3 quarters. Our first quarter EBITDA margin for Colliers was 11.9%, approximately the same as the year-ago quarter, with increased average margins in real estate services offsetting slight declines in brokerage services.

Let me now move on to Residential Property Management, which grew internally at an impressive 23% for the first quarter, matching the organic growth it achieved during fiscal 2006. The revenue growth in the quarter was driven primarily by the year-over-year impact of the significant number of net new contracts won over the last 12-plus months. During fiscal 2006 we grew the number of associations and units under management by almost 20%. We then augmented the volume growth by later adding ancillary services to new and existing associations at the discretion of the client. Providing incremental value-added services to our management clients is one of the keys to our internal growth strategy. A high percentage of our new contract wins have come from new development and condo conversions in South Florida, Las Vegas, Phoenix and the mid-Atlantic region.

Our size, experience and leading-edge systems and processes position us very favorably with the large developers and home builders relative to our competition. We have benefited from this competitive advantage throughout the hot development market of the last couple of years. This market has cooled considerably in the last quarter, and while we expect to continue to benefit from new development through the balance of fiscal 2007, we expect our internal growth to decline from the 20%-plus range to a more sustainable mid--teen rate. We have confidence in the long-term double-digit growth rate for this platform, which is supported by a forecast market growth rate of 8% to 10%, and enhanced by forecast market share gains and the provision of ancillary service offerings. We're the clear leader in residential property management in the United States and have leveraged this scale to bring cost savings to our customers and invested product development and technology. These differentiators continue to drive consistent market share gains in every region that we operate. The EBITDA margin for the quarter was 10.8%, up from 10.3% in the prior year, driven primarily by operating leverage, but tempered somewhat by increasing fuel and labor costs, which are only partially being passed on to customers at this point.

Property Improvement. Revenues in this division grew 18% for the quarter, driven primarily by strong internal growth of 15%. This internal growth rate matches the rate achieved by this platform in fiscal 2006, and is impressive in that it continues at approximately double the national growth in home remodeling expenses. The internal growth rate was driven by increases in the systemwide sales of the major franchise systems, but also by solid growth across our Company-owned California Closet franchises. Systemwide sales growth was again led by significant gains at CertaPro Painters, which benefited from a net increase in the number of franchises relative to a year ago, plus substantial increases in average revenue per franchisee. Systemwide sales also increased at California Closets, Paul Davis Restoration, and College Pro Painters. While the overall growth was tempered slightly by high single-digit declines at the Pillar to Post Home Inspection franchise system, as a result of the significant slow-down in the residential resale market.

The Branchise operations as a group were also significant contributors for the quarter, growing internally at a mid-teen rate. We continued to achieve success through our strategy of selectively buying back some of our larger franchises, and turning them into Company-owned operations with proven managers as our partners. This success is evidenced by an average branchise growth rate that consistently outpaces the healthy growth achieved by the California Closet system as a whole. During the quarter, we increased the number of our branchise operations from 8 to 10 with the addition of Cal Closets Fresno and Sacramento, and we expect to continue to add units as opportunities arise.

Moving on to Integrated Security. Our revenues for the quarter grew internally by 22% on a year-over-year basis against a weak comparison, which was down 5% from the year prior quarter. On a sequential basis compared to the fourth quarter of 2006, revenues are up 4%. Internal growth was strong at both the Canadian and U.S. operations. The U.S. revenue growth was driven by the installation of certain large systems jobs which have been in the pipeline and expected for some time. Solid bookings during the quarter has kept the pipeline at relatively high levels, and the revenue outlook for the balance of the year is good. Canadian growth was also driven by strong systems installations across all the Intercon branches, and in part was a result of beginning installation of the Royal Bank contract. As a reminder, Intercon entered into an agreement last year with the Royal Bank of Canada to design and install sophisticated access control, [inaudible] systems at more than 1,000 bank branches across the country. This installation component is expected to continue through September 2007. The EBITDA margin for our Security division was 5.1%, approximately the same as the prior-year quarter, and up from 3.4% from the fourth quarter of fiscal '06. We continue to focus resources on margin improvement in this division, and expect to see gradual improvements throughout the year.

Operator, this concludes our prepared comments and I would now like to ask you to accept questions.

[OPERATOR INSTRUCTIONS] David Newman, National Bank.

Fabulous quarter, once again. On the residential side, obviously Florida is obviously a bit softer. Are you seeing a pickup, or are you seeing a continued bucking of the trend, I would call it, in the Southwest and in Vegas? We're looking at even plane departures in Vegas still seem to be quite high. I assume that market is still very robust?

David, Scott. We're continuing to win business and add associations, but not at the same rate as last year. Not at the same rate as a year ago.

Okay. And Scott, just in terms of the -- obviously down in Florida, you've got some buildings that are I guess on tap. At what point do the builders actually pass that building on to you? In other words, what is the sort of occupancy rate that they have to have to be able to pass it on for you? And if a building is half full as opposed to being completely full, where do you sort of miss out on? I guess, the ancillary revenues?

Well, there are highrise buildings and there are homeowner associations. They're treated somewhat differently. I think a building would certainly be more than half full before it's passed over. It wouldn't be necessarily passed over until a board of directors is elected and assume control of the building. But for most of the highrise buildings, we're working with the developer. We sign contracts with the developer, and then look to then engage the board of directors. Homeowner associations are a little bit different. We tend to have less business under development, and in realty, as [pods] are transferred to homeowners, we then sign contracts and move into an ongoing monthly relationship.

Are you seeing with the builders -- I mean, obviously, are some of these builders really national in scope? And do they want to partner with you as a enter new markets? In other words, would this be a potential organic growth for FirstService in the Residential Property Management?

Well, it has been. Again, new development has slowed considerably. But we have relationships across the country with many of the large developers, and would be working with some of these developers in many markets at the same time.

Very good. And just switching gears over to the Commercial Real Estate and then I'll let someone else take over. Just in terms of your mix of business overall, obviously when you first acquired CMN or Colliers, you have a certain , I think it was 70% brokers' transactions. What is the current mix of business? And I guess even geographically, obviously, looks like the U.S. might soften up before some of these other markets. So I'm just trying to get a sense of what the percentages are, and how it's evolved over time.

Well, I think the mix is probably today greater than 70%, because our brokerage in the last 18 months, has benefited from a very strong market and has grown more quickly than our non-brokerage services. As you heard from Jay in his comments, and again from me, we're very focussed on growing the non-brokeraged services and are achieving some success there. We don't have a target mix, but we are looking for more balance.

Okay. And geographically, it sounds like you have got a bit more exposure to X-U.S. now?

I don't think so.

No? Okay. Is that just because of brokerage growth, once again?

Sorry. I didn't catch that last comment.

Sorry. Is that because the brokerage growth once again is giving you more exposure to the U.S.? As a percentage of revenues?

Oh, I see what you're saying. The U.S. certainly grew more quickly in the last quarter, and has been extremely buoyant. I think our mix of revenue is probably -- yes, the U.S. component would have grown in the last 6 months more quickly than the balance of our operations.

Okay. If I can just squeeze one last one in there. How do you guys feel overall about the cycle? What is your thoughts on where it could go?

It's Jay. The cycle is obviously very -- things are very bullish right now in many markets. Some have cooled down a little bit, but generally very bullish. And interest rates being where they are, is obviously pretty good for the business. But, we're looking at this business long-term. And we see so many opportunities in so many different markets, not only in the base business, but also in added services, like mortgage origination and brokerage and servicing, and like property management in some of these different markets. So we're really looking at this business, from our perspective, for the long-term. Having a strong presence in a market where we're pretty good in 2 out of 5 potential service areas, and spending time building the other 3, is a real positive for us. Especially because we've done it, and we look at all of our service lines in the same way.

The other thing is, in some ways, we're hoping the market cools a bit. Because acquisition of new territories and new regions and new tuck-unders is also part of our strategy. And it is very difficult for us to buy a business, unless the acquisition is structured right, that's had a couple of great years. And it's a little uncertain as we look forward for 2 years. So, our -- long story short, the business is a good one as far as FirstService is concerned, offers us lots of growth opportunities. The cycle is good. Maybe cooling a bit. We see that as a positive.

Excellent. Nice results, guys.

Matt Litfin, William Blair & Co.

I wanted to follow-up on that last caller's question on Colliers. I think what he was referring to is you've recently bought in Australia and you've upped your investment in Eastern Europe. So I think if you looked at fiscal '07 , what do you think roughly we're going to see in terms of a geographic breakdown of revenue between the Americas, Europe and Asia-Pacific? Just rough percentages.

Really, Matt, we're looking at approximately 60% North America, 30% would be then outside, primarily in Australia, and that particular region. And then the balance of it would be the smaller stuff in Eastern Europe, some operations in Central and South America. That's basically the way it would break out.

Okay. Great. John, in your prepared comments you had said, "signs you see that more difficult economic times lie ahead." What are these signs specifically that you're referring to?

Well, I didn't mean to overdramatize the situation. I think it was more that we have had a very, very buoyant economy, particularly in North America for a number of years. We're seeing some signs that are suggesting that things may slow, in particular in our Residential Real Estate business. What we're seeing in the number of transactions, the selling of property is slowing, and those are just signs that we're starting to see. The increase in energy prices, increase in interest rates, we all know ultimately that may have a cooling effect on the economy, generally. So I think it is meant to say that we're focused on it. We're aware that we've had very, very good operating conditions. And we need to be looking ahead and ensuring that we're prepared, if things are not quite as buoyant going forward. That's all it was meant to mean.

Okay. Other income in the quarter seemed rather high. What was that?

It is a mix of number of things. We have some income related to the Resolve Business that we sold. We're receiving income on that. We had a bit of a gain on a sale of some equity to partners in one of our businesses, that's pretty much it. They're one-off transactions. We also have an equity pickup on some of the CMN subsidiaries which are not consolidated, because of their ownership position, and that has continued to be on that line as well.

I guess --okay then, breaking that all out, what do you think is sustainable in terms of a quarterly number? I assume it is not 2.2 million per quarter, but what are you looking at there, given you do own Resolve, or at least a piece of it?

Probably in the neighborhood of a million or a little less, in that range.

Thanks. Final question, maybe for Jay. Is there any interest or increased appetite for new platform acquisitions, or are you buckling down and focusing on what you own?

We're focussed on a lot on what we own, Matt. We have got lots of opportunity, and we can buy assets we think, at the right valuations right now in our world. So we're keeping our eye focussed there.

Great. Thanks and congratulations.

Frederic Bastien, Raymond James.

Of the 27% growth due to acquisitions at CMN, how much of that can be attributed to the Sealy acquisition of November last year.

I don't have that information in front of me, but it would not be that significant. I mean, that acquisition we've I guess, captured some of the results of last year, but year-over-year that was not a large business for us. They were doing about $60 million in annual revenue.

Yes.

So, you can do the arithmetic on that.

So the bulk of the growth came from the most recent acquisitions?

Well, those acquisitions were just recently completed. So we did -- we got some impact of those acquisitions., But it certainly was not attributable to all of those. The Cohen transaction and PRD transaction was completed just early in the quarter. So you'd look at Sealy as being about perhaps 40% of that, of the growth piece.

Okay. And I guess turning to Cohen Financial, what is your outlook for the commercial mortgage banking industry, and for the actual division, for the remainder of the year? Similar to what your outlook is for the industry in general?

What we've include in our outlook is the basically the trailing 12-month numbers that Cohen generated last year. We think that it is great opportunity for both the management team at Cohen, who are our partners, and also Colliers, because if we're able to originate through the Colliers channel 10 or 15% more mortgages than we would otherwise be able to originate, it is a tremendous home run both ways. So in our outlook we've included just trailing numbers. But we're hopeful that over the course of the next 12 to 18 months, we can really start mining the Colliers broker channel and enhance the results. And that will have an impact both at Colliers and also at Cohen. Because the increased transaction -- increased transaction revenue will impact both sides of that business.

Great. That's helpful. Maybe 1 last question. Are you contemplating franchising businesses other than the California Closets?

Not at the current time, but we are looking at it. The -- it's a strategy that's worked for us. But right now, the expertise that we think we have is in the branchise of California Closets. And so until we see growth there slowing, I think we're going to keep our focus there.

Okay. Which franchises would represent a good potential candidate?

CertaPro Painters might be interesting. Paul David might be interesting. And the new one, Handyman Connection, might be interesting. In the case of Handyman Connection, they have 2 or 3 franchisees that are doing $3 million and $4 million a year in revenue in different geographic regions. Lots of retention. Lots of repeat business. Lots of recurring revenue. There's a great opportunity to cross-sell that Handyman service to our managed communities, which is something that we're on right now. And so that is another thing that we look at, when we look at franchise system acquisitions, is what are the other potentials that we have, and branchising is one of them. Although our focus really is right now just on the California Closet side.

Perfect. Thanks. Good quarter.

David Gold, Sidoti.

Jay, couple questions for you really around Colliers commercial real estate. First, was actually pleased to see such a strong showing for what's usually seasonally a little weaker, as we progress through the year. And I guess the question is, if we looked at last year, as you progressed during the year, the margins there came in some presumably as people met, I guess incentive bonus targets, and things of that nature. And just curious if last year is a good benchmark to use for the margins there? Or might be some upside to that?

Now, do you mean all of the -- this is John, David. Are you talking about margins for the entire year for the commercial real estate business?

Right, right. Presumably, I guess as we progressed last year through the year, in Colliers quarter by quarter, the margin -- yes, basically, June was essentially the high point.

Right. Well, overall I guess the best way to frame it is that we expect margins for the business generally to be similar to last year, albeit we have acquired a couple of businesses that have higher margins in them. Which would be the Cohen business and PRD business. So those tend to have a higher margin, and we will see the benefit of that for the balance of the year.

Okay. And just an update if you can, particularly with respect to the U.S., what you're seeing in the commercial real estate space.

In terms of what, David?

Terms of outlook, demand. Basically, any sort of softening or anything of that -- or have we basically held up. Presumably the strength has held up, but as things progress, basically signs or outlook the rest of the year.

As I said in my prepared comments, David, the pipeline in the U.S., in particular, continues to be strong. So we do have visibility for 2 to 3 quarters. But we are seeing some softening, we're hearing about it from our clients in commercial real estate. And we are seeing some increased activity in appraisal and consulting services, which tends to be counter-cyclical to brokerage activity, as clients are understanding their valuations, et cetera, and where their assets stand in terms of value. So we are seeing some signs.

Okay. All right. Got you. Thank you.

[OPERATOR INSTRUCTIONS] Bill MacKenzie, TD Newcrest.

Just Jay, since Resolve was [spun-out], you guys have been fairly active on the acquisition front, and you talked about what you've done, it's about $10 million of EBITDA that you've acquired, which is generally in line with, or close to your annual targets of 10 to 12 million of EBITDA a year. Where, over the next 6 months or so, where do you think things are going to trend? Are you going to take a bit of a pause here, and digest what you've already done? Or is there -- do you still see sufficient opportunities to continue to be active? Certainly, the balance sheet can absorb a lot more debt if there are things that are of interest to you. What is the outlook over the next few quarters from that perspective?

Well, our pipeline is still pretty good for acquisitions. So we are working on some tuck-under acquisitions in our different service lines. And we're hoping to be able to do a few more before the end of the year, frankly. So, fortunately, unfortunately, with acquisitions, especially the types that we do, you have to take them when they're there. And so we've got a few things in the pipe that we would like to get completed still.

Okay. Great. And then, Scott, in the Residential Property Management business last quarter, you talked about how a lot of the new contract growth depressed the margins a little bit. And over time, as you bring those new contracts in and you have the ancillary services, we'd see some margin expansion. I'm just wondering, this quarter again you had huge new contract growth, but the margins were actually pretty solid. I'm just wondering, looking sequentially if there was anything to explain -- the big new contract growth not having as much of a negative impact on the margins this quarter? And also just help me understand a little bit better, what is the timing on getting a new contract, versus getting ancillary services in there. Is this something that first quarter you get a new contract, you get that new business? Or does it take a year or 2 to ramp that up?

Well, frankly, the growth this quarter, Bill, is resulting from the year-over-year impact of contracts that we won in the last 12 months. So we did not add as many contracts in this particular quarter as we did in the fourth quarter and the third quarter of last year. The winning of contracts has cooled off, which ties directly to new development. It does -- we start with a management contract or at times, management-plus any number of a set menu of services, and then add them in over time. Every contract is different. I think that the margin increase we saw this quarter, we're probably a little thin right now in terms of our infrastructure, from all the new activity. And I think our margin, for the balance of the year, we may not see the same kinds of increases as we add managers and continue to recruit and add infrastructure to support the growth we've had. But it was really operating leverage that we -- the 50 basis points that we enjoyed this quarter.

Okay. Great. And then just the timing on when you get a new contract, versus adding in the ancillary services. Like how long does that take under a typical scenario?

Well, generally, they're annual contracts, a lot offer the services. So, it takes -- if you don't get it at the outset, you're looking at the first year anniversary to add in some services, and so on.

Okay. Great. And then, John, just 2 other housekeeping questions. 1, with the change in the accounting on the options, other than the one-time sort of catch-up impact this quarter, is there any ongoing impact on that change?

Well, not related specifically to that change. But we would be incurring about $400,000 a quarter right now in ongoing stock option expenses, of which that kind of expense, we had been reporting that expense going back a couple years now since we first adopted the stock option expensing.

Okay. Great. And then just on the working capital. What sort of -- I guess some of these -- some of the increase in the working capital was timing-related. What type of reversal should we expect next quarter in working capital?

I'm not sure I would have an exact number for you. All I would say is that we would expect, unless an unusual items which cause receivables to increase at the end of the quarter, that we would expect a strong reversal, such that we would -- that working capital investment and receivables investments essentially that was made and that occurred toward the end of the quarter would reverse. We've already seen a fair bit of it, in terms of collections in closing of transactions which were on our balance sheet at the end of the quarter. So I think we'd just come back to a more normalized kind of cash flow that you've seen from us in the past.

Great. Thanks very much.

Gentlemen, at this time there are no further questions in our queue.

Okay. Ladies and gentlemen, thanks for joining us, and we'll speak to you on the next conference call.

Once again, this does conclude today's conference call. Thank you for joining us. Have a great day.