Colliers International Group Inc (CIGI) 2008 Q2 法說會逐字稿

Welcome to FirstService Corporation's second quarter 2008 results conference call. Today's call is being recorded. Legal counsel requires us to advise that the discussions scheduled to take place today may contain forward-looking statements that involve risks and uncertainties. Actual results may be 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 Form 10-K and in the Company's other filings in the Canada and U.S. Securities Commissions.

At this time, for opening remarks and introductions, I'd like to turn the call over to the Founder and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Thank you. Good morning, everyone. As the operator said, I'm Jay Hennick, the Founder and 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 reported another quarter of record results. For the quarter, revenues increased 26%, EBITDA was up 30% and earnings per share up 28% all over the prior year. John will provide more details on our financial results in just a few minutes. Operationally, needless to say, we're happy with these results and you'll hear more detail from Scott in his operations report following John's report. In terms of acquisitions we were again very busy during the quarter as we continued to take advantage of strategic opportunities that help take our business to the next level. So far this year we've spent about $115 million on acquisitions, adding about $30 million of annualized EBITDA, a record for FirstService and we're only halfway through the current year. I'm optimistic that we'll be able to complete a few more important acquisitions before the year ends.

As many of you know, our goal over the next five years is to more than double our size to about $4 billion in revenue and triple our share value from where it is today. To accomplish this, we're going to have to continue to grow our business internally by at least 8% a year and add about 15% of our EBITDA each year through acquisitions. So far this year, our internal growth has been running about 12% and with about $30 million in EBITDA already acquired, we're firmly on track to achieve our goal. If we're successful, all of our shareholders and all of our management teams will generate exceptional returns on their investment in FirstService shares and, for us, there can be no better investment for our future.

Now let me spend a few minutes on some of the acquisitions we completed during the quarter. Just after the first quarter ended, as we mentioned in the first quarter conference call, we completed two smaller, but important tuck-in acquisitions in our Colliers International commercial real estate services business. First we partnered with a senior management team of the existing Colliers affiliate in southeast Europe with seven offices and more than 130 professionals covering the markets of Greece, Bulgaria, Croatia, Serbia and Montenegro. This Colliers affiliate has been operating in the region for more than ten years and has an established and significant presence in the area. More importantly, the acquisition complimented our existing operations in Central and Eastern Europe, markets like Poland, the Czech Republic, Romania, Hungary and Slovakia where we've been operating for many years. Together our combined business in the region now exceeds $50 million a year in annual revenues across ten contiguous countries, seven of which are already part of the EU and together they represent the region and the market that has more than 120 million people, approximately half the size of the U.S.

We also took the opportunity to increase our ownership stake in Colliers Brazil from 50% to 90%, leaving the balance of the equity with the senior management team. Brazil is another country that is overflowing with opportunities and it's one of the largest markets in Latin America and the 11th largest in the world. Increasing our presence in key emerging markets is an important part of our long-term growth strategy for Colliers International and something that we'll continue to pursue whenever the opportunity presents itself, so that we can truly be in a position to serve our clients on a global basis. Needless to say, investing in these regions is never easy. There are always factors that must be considered in each case that might impact the long-term success of our operations. However, completing these investments the FirstService way, in partnership with local management, with existing Colliers affiliates who we know and who our management teams and brokers have known and worked with for years has become a real advantage in executing our growth strategy. And we're capitalizing on this advantage to the benefit of our shareholders.

We were also pleased to complete the acquisition of an 80% interest in Boston-based Meredith & Grew. Founded more than 100 years ago, Meredith & Grew is one of the leading full-service real estate companies in New England. One of the positive aspects of Meredith & Grew is that over 40% of its revenue comes from commercial property management and advisory services that they perform for some of New England's largest property owners and academic institutions. Over the next few quarters, we will add the important Colliers name to Meredith & Grew, as we begin to integrate their operations into our growing North American commercial real estate services platform. Colliers International today represents about 150 offices in 26 countries around the world for FirstService and generates in excess of $750 million in annualized revenues.

Turning to our property improvement division, we also significantly expanded this platform with the acquisition of an 80% interest in Field Asset Services, a market leader in the property preservation area for foreclosed properties in the United States. Founded in 1996 by residential mortgage servicing professionals, Field Assets operates a national outsource, contractor repair network for some of America's blue chip residential mortgage lenders and service companies. Field Assets signs contracts with its clients to oversee and administer all of their foreclosed properties. They then retain third-party service contractors to secure the property, provide maintenance and repair services during the foreclosure period and often are asked to upgrade the property to prepare it for resale. In so doing, they manage all service delivery issues and provide electronic billing and payment services for their clients. Last year, Field Assets managed more than $5.6 billion in client assets, managing and overseeing more than 56,000 homes using their state-of-the-art management information systems and unique business delivery process.

This is the second largest acquisition in the history of FirstService behind Colliers International and it is something we've been working on for quite some time, well before the so-called credit crunch. We think this business provides us with a number of very interesting growth opportunities as we look forward. Needless to say, Field Assets will benefit from the near term growth in foreclosed properties in the U.S. And we also see an opportunity to drive business to some of our franchisees whenever these foreclosed properties need to be painted, repaired or inspected, to name a few. But Field Assets will also benefit over the long-term. Because this industry is an industry that has heretofore been very unsophisticated and has been serviced by smaller professionals that really just want to service the properties in the hopes of getting the commissions on the resale once these properties are prepared for resale. The process developed by Field Assets substantially reduces cost for clients and standardizes and simplifies the approach to dealing with these foreclosed properties. We also believe their leading edge technology can be transferred to other verticals, like for example, the insurance industry or used as a separate platform for providing national contractor services for the property management industry, a business we know well.

All of these are just opportunities for us, but for now, the big challenge is to service our customers in a market that's just exploding with new residential home foreclosures in the U.S. and that's where we're going to be spending our near term efforts. A few weeks ago, we increased our financial outlook to reflect the acquisition of Field Assets, Meredith & Grew and a few others. The current range of between $1.37 and $1.49 results in growth of between 20 and 30% over last year and, as I said, doesn't include the benefit of any further acquisitions we might make before year-end. And finally, in the quarter, as you'll hear from John, we more than doubled our current financing capabilities to more than $275 million. This is a significant increase in our credit facility that will support our growth plans in the future, but completing this financing in the current debt markets is a testament to our track record of performance and our ability to continue to pursue our strategy over the long term. Now let me ask John to take you through the financial details for the quarter and as usual, we'll take questions once Scott has completed his operational review. John?

Thank you, Jay. As Jay already outlined, we reported strong overall results in our second quarter ended September 30th with all four of our operating segments generating growth over last year. Our solid operating performance, ongoing investment in tuck-under acquisitions and strong balance sheet positions us well going forward to continue generating additional value for our shareholders. And once again, our results reinforced the advantage that our service line and geographic diversification provides to our shareholders, a key factor in successfully managing future growth while mitigating risk and a differentiator that will set us apart from our peers as we continue to move through the business cycle.

Here are the highlights of our consolidated results for the quarter, all of which are from continuing operations. Revenue's up 26% in the quarter to $27.7 million with 12% internal growth of which 2% was due to stronger Canadian and Australian currencies relative to the U.S. dollar and the balance related to acquisitions. EBITDA up 30% to $42.7 million. Adjusted net earnings up 27% to $16.6 million. And adjusted diluted earnings per share up 28% to $0.46 cents per share with a percentage increase based on adjusting the prior year's EPS to pro forma $0.06 cent per share impact of the initial preferred share dividend declared in our second quarter. As outlined in prior conference calls, the adjustment to net earnings and earnings per share represents a non-cash rapid amortization of short-lived intangible assets relating to pending commercial real estate brokerage transactions and listings that we recognized on acquisitions completed within our commercial real estate services platform.

As outlined in our release earlier today, we recorded a non-cash marked-to-market adjustment on interest rate hedges, on our commercial mortgage portfolio held for resale and our commercial real estate services operations. This adjustment of $2.2 million negatively impacted our overall and commercial real estate services, EBITDA and EBITDA margin during the quarter. Under accounting rules, the equal and offsetting gain on the value of the mortgages cannot be recognized until they are sold. Accordingly, we expect to record a $2.2 million gain upon securitization of the commercial mortgage portfolio, which we anticipate will be completed prior to year end. As Jay indicated in his comments and as previously announced during the second quarter, we completed a renegotiation of our $110 million revolving credit facility, which was maturing in April 2008. Despite less than ideal credit markets, we successfully closed on a $225 million revolver, adding a term of five years along with improved pricing covenants and a $50 million accordion feature, bringing total availability to $275 million to support our future growth requirements.

Our balance sheet remains very strong with our net debt position at the end of the quarter totaling $187 million, up from $136 million six months ago at our March 31 year end. Our leverage, expressed in terms of net debt to trailing 12-month EBITDA, adjusted for the full-year impact of acquisitions owned for less than a year was 1.24 times, up from 1.11 times at year end and well below our historical operating range of 2.5 to 3 times. With a well capitalized balance sheet and up to $275 million in immediately available credit capacity, we have ample financial capacity to fund a significant level of future growth without issuing any additional equity. Looking forward to the balance of fiscal 2008, we are confirming the outlook we updated a few weeks ago at the beginning of October in conjunction with the announcement of our acquisition of Field Asset Services. That is revenues in a range of $1.625 billion to $1.725 billion, EBITDA in the range of $149 million to $159 million and adjusted diluted earnings per share in the range of $1.37 to $1.49. The diluted earnings per share amounts are after expected dividends on preferred shares equating to $0.23 per common share during fiscal 2008. Our outlook assumes no material change in current economic conditions in our major markets and excludes the impact of any further acquisitions completed between today and end of our fiscal year ending March 31, 2008. Now I would like to turn things over to Scott for his comments. Scott?

Thank you, John. As you have heard, we had a solid second quarter, generating total revenue growth of 26% and organic growth of 10% excluding foreign currency translation gains. I will go through each segment and set up brief operating highlights and internal growth drivers and then we'll open up the call to questions. Let me start with our commercial real estate platform, Colliers International, where revenues for the quarter were up 31% largely as a result of acquisitions completed in the last 12 months, including Colliers Hawaii in the first quarter of this year and Colliers Southeast Europe and Meredith & Grew during the second quarter. Internal growth during the quarter was 10% excluding the positive impact of foreign currency translation gains. The internal growth in this division continues to be driven by very strong year-over-year results in Australia, Asia, Central Europe and Latin America, buoyant markets where we have leadership market positions. This is a trend that has been consistent for the last six quarters.

Our strong international growth was tempered by flat year-over-year results in North America. Within the North American business we experienced solid growth in our Canadian brokerage operation and strong year-over-year results in our North American non-brokerage services business, including property management and appraisal. This growth was offset by declines in our U.S. brokerage business and our mortgage brokerage and servicing operations including Coyne Financial and Colliers Mortgage in Canada. The credit issues that hit the subprime markets earlier this year and subsequently led to a widespread credit correction negatively impacted our U.S. brokerage and commercial mortgage operations during the quarter particularly in the month of September. Transaction volumes declined and we are expecting this weakness to continue at least through our third quarter.

Our EBITDA margin in the second quarter was 5.6% which is consistent with the margin generated in the prior-year quarter, however the composition is quite different. In general, the margins in our international operations are improving through operating leverage, but these gains were offset during the quarter by losses accrued in our mortgage operation, losses that were exaggerated by the $2.2 million marked-to-market loss on interest rate swaps that John referenced in his comments. Adjusted for this, the margin during the quarter was 6.8%, a 120 basis point increase over the prior year. Looking forward we expect continued strength from our international operations. Activity in pipelines remains solid, somewhat offset by weakness in the U.S. where our pipelines are down 20% from a year ago.

Let me now move onto residential property management, where our second quarter was consistent with our first. Revenues grew 31% over the prior year, 11% organically, with the balance from the acquisitions of Service America, the MERIT Companies and Premier Communities. Internal growth in the quarter was driven by a 16% increase in property management revenues tempered somewhat by flat year-over-year revenues generated from ancillary services. We continue to experience double-digit organic growth in property management revenues in each of our markets. And on average, across the U.S., two thirds of our growth was the result of new contracts to manage existing buildings and communities and one third continues to come from new development, primarily active adult communities and high rise condo buildings.

In terms of ancillary service revenue, general increases in the services provided to our communities outside Florida were offset by continuing year-over-year weakness in our ancillary services business in Florida, particularly our property transfer revenues and revenues generated from our landscaping and lawn maintenance operations. The EBITDA margin for the quarter was 11.4%, up from 10.8% in the prior year, primarily due to operating leverage on the management side of our business. Looking forward we expect to continue to generate double digit growth in this division, driven by continuing market share gains across the U.S.

Property improvement. Revenues in our property improvement division grew organically by approximately 3% relative to the prior-year quarter, led by solid gains in College Pro Painters and (inaudible) Davis Restoration, but offset by declines in the revenue that we realized from California Closets and our Pillar to Post home inspection operation. System-wide sales at California Closets were up modestly compared to a year ago, but we continue to experience a decline in the sale of product to our franchisees as we transition out of our role as supplier of this commodity material. System-wide sales at our smaller franchise systems, including Floor Coverings International, Handyman Connection and College Pro Painters were up slightly from the year-ago quarter. And revenues from our franchise operations were approximately flat. Our EBITDA margin in this division was down slightly to 30% from 30.7% in the prior year.

Looking forward, we expect our year-over-year percentage growth in this division to continue in the low single digit range, negatively impacted by a home improvement market which continues to weaken versus a year ago. In our Integrated Security Division, we continue to enjoy the positive momentum we experienced in the past five quarters with revenue up 15% year-over-year. Revenue growth continues to be driven by strong sales and installation of large, complex systems solutions within certain high growth market verticals where we have specific expertise. EBITDA margin for the quarter was 6.4%, up from 5% in the prior year. The increase in margin reflects operating leverage and, to a certain extent, improved pricing as we continue to differentiate ourselves within our selected market verticals. Looking forward we expect continued positive trends from our Security division. At September 30th, our sales pipeline was approximately 15% higher than a year ago bolstered by another quarter of strong bookings. That concludes my remarks. I would now ask that Michelle open the call to questions, please.

Thank you. (OPERATOR INSTRUCTIONS) Please stand by for your first question. Your first question comes from Sara O'Brien, RBC Capital Markets. Please go ahead.

Hi, guys. Wondered, Jay, maybe if you can talk about the commercial real estate platform. You talked, I think maybe it was Scott's comment saying that in the U.S., the pipeline was down 20% year-over-year. Can you talk about how much, when we talk about financing, closing around the December timeframe, how much of that would be, kind of at risk in your total brokerage portfolio right now?

I don't understand the question, Sara. Can you give it to me again.

Yep, sorry about that. I'm just wondering in commercial real estate, we know that traditionally Q4, the December timeframe is a strong one for closing on transactions, how much of your portfolio, in the pipeline, do you expect is at risk of financial closings being deferred?

You know what? It's very difficult to say. We are, as Scott said, we're doing very nicely outside of North America. Canada is actually doing well relative to the rest of the market, but the debt markets are making it difficult to complete transactions for those that use debt as part of the transaction. So it's very difficult to get a gauge looking forward to the December quarter to know whether some of these finance -- these transactions will be completed, primarily, those that require debt financing. Having said that, there is, I mean there's a little bit of positive news in that some institutions that don't use debt capital are using this as an opportunity to buy assets that they might not otherwise be able to get at slightly lower purchase prices, but how that gets translated over the next quarter is really difficult to predict.

Okay, and when you look at your overall pipeline, including international, I mean is international at risk of debt financing as well right now or is it really North American focused?

It's primarily North American focused and U.S. in particular, but there's, reading, just reading some of the material coming out of the U.K., they themselves are going, we're not in, Colliers is not in the U.K. and they're going through some of the debt crunch issues as well, difficulty in getting debt et cetera. So whether that is going to spill out into other markets, I don't know. But right now we're feeling -- we continue to feel very positive about the international portion of our business.

Okay, great. And I just wondered, you alluded to some equity going into real estate markets and, in -- when the debt market is a bit tough. For yourselves, with this new credit available, is commercial real estate a focus for acquisitions for you?

It's very much a focus for acquisitions. If we said this when the times were buoyant, having tempered markets the way we have now creates some opportunities that might not otherwise be there. We believe in this business long-term. We continue to try and build out our global presence. There are some very interesting opportunities that have presented themselves that might not have, had the markets been much stronger. So the answer is yes, we're going to continue to pursue our strategy here.

Okay, and just because of the credit facility being upped to $270 million, should we expect larger transactions going forward or is it sill kind of the tuck-in style that you expect --?

We're going to continue to focus on our tuck-in acquisitions. That's what's built our business over a long period of time and so I think you'll see much more of the same.

Okay, thanks, I'll circle back.

Thank you, your next question is from Frederic Bastien with Raymond James. Please go ahead.

Good morning. My first question is on the residential property management side. The margins that you came out with were much stronger than what we were expecting, also much stronger than a year ago. I know you commented on the leverage, but yet what I thought was in the prior conference call, if I recall properly anyways, you were a bit more cautious on what you believed you could achieve on the margin front for this business. Has anything changed? What affected this good margin?

I think there's really two things Frederic. We are getting a little bit of positive mix impact from the addition of MERIT and Premier, which generally run at higher margins than our other business. But that, the bulk of it is just a focus -- our management team is quite focused right now that the development market has slowed, much more focused on labor management and the existing operations and so a combination of that and just general operating leverage is the reason for the 60 basis point increase.

Okay, great. That's good to see. My other question is on the security side. Do you think that the revenue growth and also the EBIT margin that you achieved in this current quarter is sustainable into the future?

Certainly we believe it's sustainable for the balance of this year into next based on current activity and momentum.

Great, thanks, good quarter.

Thanks.

Thank you. Your next question comes from David Gold with Sidoti. Please go ahead.

Hey good morning.

Good morning.

Couple of questions. One, on property management, can you speak a little about, I guess it sounds like still a third of that is coming from new development. One, the pipeline. And then two, I think over time we talked about your shift in, at least of late, the strategy a little bit more, more towards those existing buildings and I'm curious, on sort of progress there.

So let me focus on the new development which is really, in the second quarter, some completion work on projects that were started before the development market slowed down and they've been completed and we're bringing them on now. I think the bigger mover in that whole market is the active adult phenomena. And these communities continue to develop, to be developed and I think within the next five years 70% of new community development will be active adult resort-style communities for the 55-year-old plus age group, communities really targeted at the Baby Boomer generation. We have a specific service offering, a specific management team and a particular expertise that continues to be developed around this active adult market and this is driving our development growth currently and we expect it to help fuel our growth over the next several years. In terms of market share gains and existing buildings, we continue to focus our efforts there. Two thirds of our growth, as I said, were from market share gains in the past quarter and we see that continuing.

And just on a go-forward basis, do we continue to focus, say on that adult sub specialty or given, you know the change in new development, presumably pipelines over the next couple years, do we refocus a little more, try to get some more of the existing business and stop selling into that as much?

We refocused on existing buildings 18 months ago.

Mm-hmm.

So we're dialed right in on market share gains right now.

Mm-hmm.

And so, our, we won't change our tactics go forward. That's been done.

Got it. Got it. I thought I remembered that, I just wanted to be sure. And then John, operating cash flow, a big, you know sort of delta there, year to year. Can you talk a little bit about that?

Yes. Most of it is timing. If you look at our days sales outstanding, it's pretty consistent relative to where we were last year. There is some work we're doing within security that would be a little bit longer dated type of receivables related to some of these -- security installation work. That would be the majority of it. We'd expect that to come back during the balance of the year.

Perfect. Thank you all.

Thank you, your next question comes from Bill MacKenzie of TD Newcrest. Please go ahead.

Actually Mike Tupholme in for Bill today. Question on corporate costs, I guess after being down year-over-year in Q1, they were a little bit more in line with the prior year this quarter, just wonder if you can talk about where you see those going or trending over the balance of the year?

Corporate costs will be most likely in line. There's not been a whole lot of change here. We'll be incurring additional costs as it relates to Sarbanes Oxley compliance over the balance of the year. That will increase slightly over what it's been year-to-date, but other than that, variable compensation driven off of the growth in earnings per share is -- our compensation plan works on that basis, so it'll be affected by what our growth and EPS over the prior year is ultimately. But we don't expect a significant change for the balance of the year.

Okay, thanks. And then John, have you got an update on the call option for minority interest, where it is right now?

We're about $190 million would be the aggregate total.

Okay, thanks. And then just a clarification, your comments on ancillary services, can you just, quickly reiterate those comments as it relates to your comments about Florida?

The --.

As far as raising increases and offset by declines in which regions?

So our service revenue was flat year-over-year and the comment was that general increases around the country were offset by declines in Florida. And a big part of that is the landscape and lawn maintenance, primarily because of the robust activity levels last year due to landscape installations on new development and condo conversions. That would be the biggest piece. There is some decline in general maintenance also relating to some of the buildings where there are some foreclosures and where the budgets are being tightened up. They're looking to cut back on some of the ancillary services. We're seeing a little bit of that and so forth.

Okay, great. Thank you very much.

Thank you. Your next question comes from Sara O'Brien. Please go ahead.

Just on property management again, with the Florida properties and some under foreclosure, just wondered, are you having any collection problems at all or do you foresee any collection problems with your contracts?

No, no we don't. It's -- we're seeing, starting to see some of the developments where the unit sales have obviously stalled out and some of the units are being foreclosed on. In fact, some of the developments are being foreclosed on, but those properties need to be managed, those property values need to be maintained and it's actually causing a pick-up in our rental business, the management of rentals as lenders try to generate as much income as possible until the units can be sold. The -- none of our communities have been impacted to the extent where we would ever have a collection issue.

Okay, and just before you talked about budgets tightening up for some of the ancillary services, could that impact your margins going forward or do you have enough buffer with the improvement you've made to sustain a year-over-year improvement?

It's more likely to impact our revenue than our margins.

Okay, thank you.

(OPERATOR INSTRUCTIONS) your next question comes from Brandon Dobell, William Blair & Company. Please go ahead.

Hi, this is actually Rob in for Brandon. Looking at commercial real estate, I think CB Richard Ellis talked about seeing investment sales down roughly 8 to 14% going into the December quarter, is this kind of consistent with what you guys are seeing and then can you give a sense on the differences kind of between the top tier and the second tier markets?

I think it's, I think it's very difficult for us to forecast what's going to happen in the next quarter. I think the market today, at least from our perspective is still unpredictable. We don't know, we don't know how many transactions are going to close. We talked about it earlier a little bit on the call, there are some transactions that require debt financing, others that don't, and so it is very difficult for us to forecast.

If I might add, generally our investment sales group have noted that sellers are staying on the sidelines. So the properties that are being sold were running into the availability of debt financing, but we're also finding that unless you have to sell, you're on the sidelines and so that is driving transaction volumes down. We don't have an exact percentage, although I did note in my comments that our pipelines are down 20%.

Okay, great, thanks.

Thank you. (OPERATOR INSTRUCTIONS) Gentlemen, there are no further questions at this time.

Thanks everyone for joining us. We'll speak to you on the next call.

Ladies and gentlemen, this concludes the conference call for today. You may now disconnect your line and have a great day.