Colliers International Group Inc (CIGI) 2008 Q3 法說會逐字稿

Welcome to FirstService Corporation third 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 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 the company's other filings with Canada and U.S. securities commission. 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.

Good morning, everyone. As the operator mentioned, I'm Jay Hennick, the Founder and Chief Executive Officer of the company and 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 record third quarter results. Revenues were up 34%. EBITDA up 29% and adjusted earnings per share up 32% all over the prior year. Not only did each of our Colliers Commercial Real Estate, Property Management and Integrated Securities Segments more than hold their own, our property improvement business delivered very strong results, primarily from newly acquired Field Assets Services, one of North America's largest foreclosure management and service companies. Given current market conditions, Field Assets gives us another excellent engine for growth in an otherwise challenging U.S. economy. Having a count cyclical service line within the FirstService family comes in very handy in times like this and helps us further diversify our revenue base and provide further stability to our proven business model. Field Assets contracts with large U.S. financial institutions and other Blue Chip residential mortgage lenders to manage their properties during the foreclosure period and until these homes are ultimately resold to the new owner. We not only oversee the maintenance and prepare of these properties, we are also often asked to renovate and upgrade them to make them more attractive to prospective buyers and to yield better results on the foreclosed assets.

Last year, Field Assets managed more than $5.6 billion in the client assets overseeing more than 56,000 homes for the total year. This year we hope to double these numbers and our team is working very hard to keep pace with the growing demand for our services. You'll hear more about this and the quarter's results from our other business segments from both John and Scott in a few minutes. Increasing our presents in key emerging markets has long been an important part of our growth strategy for Colliers International. During the quarter, our commercial real estate services segment further strengthened its business in key emerging markets with the acquisitions of controlling interest in Colliers Russia and Colliers Ukraine. The balance of the equity in each of this operations is retained by the senior management team and active brokers. With these acquisitions, our annualized revenues in eastern Europe now exceeds $100 million across 12 continuous countries. And with the acquisition of Colliers Russia, we are firmly established in all high-growth Brit markets of Brazil, Russia, India, and China. As I have said in the past, investing in these regions are not easy. There are always a number of factors and circumstances in each country and in each region that must be taken into account in addition to the usual acquisition considerations. However, when acquiring other Colliers' affiliates in other geographic regions, we are fortunate because in all cases we have known these business and their principals for many years through their involvement in a Colliers' global network. So when we finally decide to invest, we do so with confidence that their operations and people will integrate well into our overall platform. For FirstService, this has always been one of the hidden advantages of our investment in Colliers International and we've been capitalizing on this benefit since our initial acquisition about four years ago. As you have seen, we have been very busy with acquisitions this year.

So far, we have spent about $140 million adding about $40 million in annualized revenue and annualized EBITDA, which by far is a record for FirstService. Our goal over the next five years is to triple our size and more than triple our share value from where it is today. To accomplish this, we're going to have to grow each year by about 8% on average and add about 15% to the prior year's EBITDA through acquisitions. With our activities so far this year, we have a solid head start on our five year plan but challenge will be can we maintain these levels of growth in the years ahead. As we look out over the next 12 to 18 months and look at prospect for internal growth, we are very cautious but we're confident that we will be able to take advantage of our utilities that might not have been available in different market conditions. We have a proven business model that has sustained us over a long period of time. We have a large percentage of recurring and contract revenue that gives us a high degree of stability. And we have a strong balance sheet that will allow us to capitalize on opportunities that present themselves and there are many opportunities out there for us. The key, of course, will be to continue to allocate our capital as effectively in the future as we have in the past. During the quarter, our company was required to take two non-material, non-cash and non-recurring charges that impacted our financial results. The larger one relates to an estimated $4.3 million market-to-market loss on interest rate swaps used to hedge our fixed rate commercial mortgages held for resale in our Canadian mortgage securitization operations. Year-to-date we've expensed a total of $5.8 million, both of which have impacted our quarterly and year-to-date results considerably.

The nature of this business has been to underwrite pools of conventional first mortgages using capital provided primarily by our co-lenders and then securitize and sell these mortgages to investors in the form of mortgage-backed securities. Because of current market conditions, there is currently very limited liquidity for commercial mortgage-backed securities in the market today, and we do not expect that this will change in the near term. As a result, we have decided to wind down our mortgage securitization business in Canada. We intend to sell our remaining mortgage assets when market conditions return to normal and we fully expect to be able to realize an offsetting gain on these assets when these mortgages are ultimately sold. The second accounting charge relates to the result of a comprehensive review of our historical stock option granting processes covering the 13-year period from fiscal 1995 to 2007. Last October, FirstService received a confidential inquiry from the Ontario Securities Commission relating to these practices. We understand that the OSC has made similar requests of many other Canadian public companies. Our board have responded by appointing a special committee of independent directors and authorizing them to complete a full review and make recommendations. The special committee found that the practice followed by the company was not, in retrospect, accounted for correctly, and the result is a $3.3 million non-material, non-cash additional compensation expense that will correct this error for the full 13-year period. Based on our result for the quarter and year-to-date as well as the net non-cash charge related to the market-to-market adjustments I've referred to, we've updated our outlook for the balance for the end of the year. Although the range of our revenue was higher than previously expected, we have reduced the EBITDA and EPS ranges from our earlier outlook.

In terms of EPS, we now expect to be in the range of $1.30 to $1.40, up from $1.02 last year adjusted for the preferred share dividend. At the mid point of this range, this translates into about a 20% increase over the last year, a very strong result by any standard. John will elaborate further on this outlook in just a few minutes. So in summary, overall, we are very pleased with our third quarter results given current market conditions and we find ourselves in an excellent position to take advantage of opportunities out there as I said earlier. Now, let me ask John to take you through the financial details for the quarter. Scott will then provide his operational report, and then we'll open things up to the questions. John?

Thank you, Jay. As Jay indicated in his comment, we've reported strong overall operating results in our third quarter and in December 31. Here are the highlights of our consolidated results for the quarter, all of which are continuing operations. Revenues up 34% to $502.2 million with 14% of internal growth, which 5% was due to the stronger Canadian and Australian currencies relative to the U.S. dollar for the balance of our growth related to acquisitions. EBITDA up 29% to $35.4 million adjusted net earnings up 30% to $12.2 million and adjusted dilutes earnings per share up 32% to $0.29 per share. As outlined in prior conference calls, the adjustment to net earnings and earnings per share represent the 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 service in platform. In addition, these measures exclude the impact of the one-time non-cash charge to correct our stock option grant accounting as Jay mentioned in his comments. I will comment on this further but first we'll provide some additional information on a charge in the quarter related to our commercial mortgage business, which will now reduce EBITDA and adjusted net earnings and earnings per share in our third quarter. As Jay indicated, and as announced in our press release this morning, FirstService recorded a $4.3 million and non-cash charge in the third quarter due to a market-to-market loss on derivatives used to hedge fixed rate commercial first mortgaged helped for resell in our Canadian mortgage securitization operations. As you may be aware and as Jay mentioned, the current credit crunch, which began last August, has resulted in very limited liquidity for Commercial Mortgage Backed Securities and we did not expect conditions to improve in the near term. As a result, we have been unable to securitize mortgages held for resell in our historical timeline of 90 to 120 days. Accordingly after the end of the third quarter, we decided to wind down these operations. Our remaining first mortgage assets which total about $21.5 million in which are secured by several high quality commercial properties were created throughout Canada will be sold as market conditions permit. At which time, we would expect to record again equivalent to any loss we've recorded on the interest rate hedges on our portfolio.

The wind down cost associated with this operations relating primarily to severance are not expected to be significant. As a result of the $4.3 million market-to-market charge in the quarter, reported EBITDA was negatively impacted by this amount and absent of sale of the mortgage portfolio or volatility in the value our of hedges prior to March 31st, our annual EBITDA will be similarly impacted by the year-to-date charge of $5.8 million. This charge had a corresponding negative impact on our diluted earnings per share, of $0.07 per share in the third quarter, $0.10 year-to-date. However, we have not excluded this amount from our reported adjusted EPS of $0.29 for the quarter and $1.33 year-to-date since we don't have clarity around the timing of the reversal of this amount. We also disclosed in the press release this morning that FirstService recorded $3.3 million in one-time non-cash incremental compensation expense relating to our stock option grants during the period 1995 to 2006, all of which we took in the third quarter. The amount was determined by the company and our [lenders] would be not material to the current period or any prior period. Accordingly, every statement of prior period results was not required. Additional information regarding this matter has been included in our press release. Now, I would like to turn to our investment activity during the quarter before commenting on our balance sheet and outlook for the balance of our current fiscal year.

During three months to the end of December, we invested about $6 million in acquisitions and $10 million in capital expenditures bringing our total investments for the nine-month period to about $137 million in acquisitions and $28 million in capital expenditures and both maintain and expand the infrastructure of our operations to support our service delivery. Turning to our balance sheet our net debt position of the end of the quarter was just under $230 million while our leverage expressed in terms of net debt trailing 12 on EBITDA was 1.37 times up from 1.24 times at the end of our second quarter and 1.1 times at the end of last year. Still, significantly under our historical operating range of 2.5 to 3 times. With cash on hand and availability under our revolving credit facility of well over $200 million and our low leverage, we'll continue to have ample financial capacity to fund continuing investment and augment our term growth without issuing any additional equity. Looking forward to the balance of fiscal 2008, we have updated the outlook presented during our second quarter conference call on October 30th. Following revised outlook assumes no material change in current economic conditions in our major markets, excludes the impact of any further acquisitions completed between today and the end of our fiscal year ended March 31, 2008. Our update estimates call for revenues in the range of 1.7 to $1.75 billion EBITDA in the range of 145 to $155 million and adjusted diluted earnings per share in the range of $1.30 to $1.40. As indicated in prior disclosures and in our press release this morning, EBITDA excludes non-cash stock-based compensation expense, but doesn't include the $5.8 million non-cash charge in respect to our Canadian mortgage securitization business as previously described. Adjusted diluted earnings per share excludes the $0.11 per share impact of the one-time non-cash incremental stock option expense of $3.3 million, but doesn't include the $0.10 per share impact of the $5.8 million charge previously outlined.

Reflected in our outlook, our lower margin estimates were commercial real estate operations on account of higher commission and variable compensation accruals to be made in our fourth quarter and will prorate the expenses equally over future quarters. This represents the change in timing from our fourth quarter last year when these expense accruals were lower. Further more our commercial mortgage operations are expected to contribute to lower margins in our fourth quarter relative to the prior year. We will be providing our preliminary outlook for the year ended March 31, 2009 at a later date once we have completed the review of our internal operating budgets for next year. Now, I would like to turn things over to Scott for his comments. Scott?

Thanks, John. Operationally, we're quite pleased with our third quarter results in. We faced deteriorating market condition for many of our businesses and in many of our regions but our management teams across all four divisions came through and posted solid results. Total revenue growth was 34% with internal growth of 13%. 8% excluding net back translation gains. I will go through each, as John has been said, our brief operating highlights and challenges and then we will open up the call for questions. Let me start with commercial real estate. Our revenue for the quarter were up 34%. Largely as a result of acquisitions completed in the last 12 months, including Colliers Hawaii, Colliers Southeast Europe, Colliers Russia and MERIT and group. Internal growth during the quarter was 7% excluding the positive impact of the FX translation gains. The internal growth in this division was again driven by our international operations. Australia, Asia, Central Europe and Latin America. These markets have remained strong throughout 2007 and our improving leadership positions in these markets have enabled us to capitalize. This is a trend that has been consistent for the last seven quarters. Our stronger international growth was tempered by flat in the year-over-year results in North America.

Within the North American business, we have experienced very strong growth in our Canadian operations, offset by declines in our U.S. brokerage operations, and significant declines in our U.S. mortgage brokerage and servicing operations Coyne Financial. Credit issues for the hit subprime markets in earlier this year and have subsequently led to an economic slowdown have negatively impacted our U.S. brokage and commercial mortgage operations for the past two quarters. Transaction volumes have been declined considerably relative to a year ago. Our EBITDA margin in the third quarter was 5.7%, down from 7.2% in the prior year. Margins in our international operations improved significantly during the quarter through operating leverage. These gains were offset by weak margins in our U.S. brokerage business and losses incurred in our mortgage operations. Losses that were exaggerated by the $4.3 million market-to-market loss that John referenced in his comments. Adjusting for the market-to-market loss brings our margin for the quarter to 7.4%, a 20 basis points increase over the prior year. Looking forward, we believe we will show continued growth out of our international operations. Activity and pipelines remain solid, but we expect year-over-year gains to be more moderate due to the dramatic increases that we have seen out of these businesses over the last 12 months. Similarly, we expect continued strength out of our Canadian operations, but much lower growth rates than we have seen.

In the U.S., our pipelines are down approximately 15% from a year ago and we expected weak results across our U.S. operations over the near term. The uncertainty in the market has caused activity levels to decelerate significantly, which impacts all of our U.S. commercial real estate operations. Let me now move on to residential property management where our third quarter results were relatively strong in a difficult environment. Revenues were up 24%, 8% organically with the balance in the acquisitions of Service America, America Companies and Premier Communities. Internal growth in the quarter was driven by a 14% increase in property management revenues. Offset somewhat by a high single digit decline in the revenues generated from ancillary services. We continue to generate solid growth in property management revenues despite a new development market that is at a virtual stand still. Both in our growth has come from market share gains. Net contract wins with the expense of competitors were for building that are switching from self management to professional management. This continuing trend provide strong evidence of the competitive advantage we enjoy as the largest manager of community associations in the U.S. In terms of ancillary service revenue, we experience declines in most of our service operations around the country. Many of our community boards are faced with the some level of maintenance to delinquency and to our unit foreclosure, which reduces community operating cash flow in the short-term. As a result, the boards are looking to reduce operating cuts like cutting the level of service and deferring discretionary expenditures for services such as painting, land escaping and certain repairs. In our experience, this creates a backlog that will result in high levels of activity for us in the future. These expenditures cannot be deferred indefinitely.

The EBITDA margin for the quarter was 8% and up 30 basis points from 8.3% in the prior year. The margin from our base management business was up, driven by our operating leverage that we continue to achieve but this increase was more than offset by margin declines in our service operations. More specifically, the margin was impacted by a weakness in our painting and construction business and higher off season losses in our pool management business as a result of declines in pool construction revenues. Looking forward, we expect to continue to generate solid growth in this division driven by continuing market share gains. For our property improvement division, the third quarter marked the first reporting period that including the results of Field Asset Services which was acquired October 1. The impact on the result was significant with revenues up 90% over the prior year period and a higher average EBITDA margin. The fast result for the quarter exceeded our expectations particularly in November and December as foreclosure volumes for existing customers escalated throughout the period.

On a same-store basis, excluding FAS, revenues in this division were up 3% with each of the major systems California Closets, Paul Davis Restoration and CertaPro Painters showing system wide sales in the royalty gains. Somewhat offset by net declines at the other systems, particularly our Pillar to Post home inspection franchise system. California Closets experienced another sharp drop in the product sales, which also negatively impacted divisional sales growth in the quarter. As has been reported for several quarters, California Closets continues to transition out of its role as a product distributor to its franchisees. This has the effect of reducing reported revenues of positively impacting the reported margin. Revenues from our California Closet franchise operations were up slightly for the quarter. EBITDA margin in this division was up to 14.5% for the quarter compared to 11.2% in the prior year. I mentioned earlier that the inclusion of the FAS results a positively impacted divisional margins and we also saw a margin increases at CertaPro Painters and California Closets. CertaPro is growing rapidly over the past few years, and we're starting to see the operating leverage in this growth.

The California Closets margins were up as a result of the mix change driven by the continuing decline in sale of low margin product for franchises. Looking forward the growth in our properties improvement division will primarily be driven by FAS as foreclosure volumes continue to grow. Our customer base of mortgage lenders have seen a number of properties acquired through foreclosure increased dramatically and for the last several months we have been aggressively recruiting and training to build capacity to meet this demand. At the same time, we are managing our growth to ensure that we can change and provide our key customers with the same level of quality services they have received historically and come to expect. Excluding FAS in our consumer franchise systems, we feel like we have performed very well this year and are extremely proud of our management teams. And quarter after quarter, we continue to find ways to grow the businesses and facing home remodeling market that has been on a decline for the past three quarters. Our results also speak the durability of our consumer franchise brands in this division. Remodeling market is expected to continue to decline for the next several quarters, but it is our expectation that our franchise systems will continue to win market share and in the aggregate show flat to low single digit growth. We need to integrate a security, we continue to enjoy a positive momentum that we have experienced for the past 18 months, albeit at a slightly lower growth rate. Total revenues were up 16% and 6% after adjusting for FX gains. Our growth from the quarter was particularly strong in our U.S. operations, driven by the sale of system solutions where there are market verticals but we continue to enhance our reputation expertise and market position.

Our Canadian operations grew at a more modest single digit rate, down from growth rates experienced in the last several quarters and in part due to a very tough comparison quarter last year where we posted strong double digit year-over-year growth. EBITDA margin for the quarter of 6.4%, which is the same margin we posted in the second quarter and approximately where we expect to end up for the year. Up 40 basis points from fiscal 2007. The market for the quarter was down. However, from our third quarter last year when we posted 8.9% driven by an unusually high margin in our Canadian operations. We booked significant installation revenues in the margin in December quarter last year relating to a very large and national contract. The installation for this contract was substantially completed by the end of our second quarter this year. Looking forward, we expect our strong internal growth to continue in this division. At December 31st, our sales pipeline was up over the prior year and 20% higher than at September 30th. Accordingly, we expect a strong finish to the year. I would now like to ask the operator to open the call for questions.

Thank you. (OPERATOR INSTRUCTIONS) And our first question will come from Brandon Dobell of William Blair. Please go ahead.

Thanks. May be a question for you. Within the residential business, what's the percentage mix or of the revenue mix between kind of core property management and ancillary services. I'm just trying to gauge the relative impact of what you might see in services businesses in the next few quarters.

Service is a comparable 40% of total revenues.

Okay. And from a margin prospective, any major difference between the two categories?

I mean, that margin is changing quarter by quarter but in long-term, our expectations of margins are about the same, but certainly our property management margins are higher currently.

Okay. So, it has been the U.S. commercial real estate, you talked about pipelines being down 15%. I guess I want to get a little bit better feel for- - if you look at the service line or product line that you guys play in the U.S., I guess also within Canada, a little bit of color in terms of office versus retail, industrial, and i guess geography wise, central business district versus called secondary or tertiary markets, just want to get a feel for how your business stacks up against whether [inaudible] they're coming.

Well, I mean we have a prior, deeper service operating in Canada where we have a national presence, and we're strong in industrial retail. Really, quite strong across all business lines. In the U.S., we're primarily based on the west coast, although recently we've established a strong presence in Boston and we have a strong land sales practices, strong industrial practices, not as strong in the class A office space. Our approximately split equally between leasing and sales of our business lines. 70%- - 65 to 70% brokerage, the balance services.

You were going through the property improvement business. I just want to make sure I understood your characterization of kind of the near term growth. You said excluding Field Assets is kind of flat to low single digits is that the right direct characterization and did that take into account- - seems like you're almost through the comparison in California Closets and for those product revenues declining or how long do we have to get through that?

We're looking to move out of that business over the next couple of quarters. It has continued to impact it because it has been a slow transition as we've encouraged our franchisees to buy direct and we effectively been weaning them off, the distributorship over time. I can only keep you posted on that, but we're hoping to have an event the next couple of quarters which will move us out of that business.

And then final question- - I'm not sure if it is best for you, Scott or maybe John. As we think about the FAS business initial comments on what your targets are for volumes and the strength of demand, kind of balancing that with going out and hiring a lot of people, how do we think about the near term margin structure in that business or kind of the P&L requirements of going out and hiring and training a lot of people before you start seeing the revenue impact from them?

We are right now somewhat capacity constrained. If we go out and hire and train additional property managers, if you will. We'll see the results of that quickly.

Time frame here, call it the March/June quarter where you've had some new staff kind of sitting around waiting to do things- - sounds like they're like to put the work pretty quickly.

Yes, Brandon. We didn't hear that question.

I'm sorry. It sounds like there's not too much of a lag time between when you guys hire and train people. It doesn't sound like it's a six-month training period. More like a couple of months before they're up and running.

Right.

Okay. Great, thanks a lot.

Thank you. And our next question will now come from Mike Tupholme of TD Newcrest.

Thank you very much. Just wondering in terms of your updated guidance, if you're making any assumptions on either one your ability to securitize your commercial loan book further or assumptions on market-to-market adjustments beyond what you've already recognized year-to-date?

No, Mike, we have not reflected any further change either in the market-to-market or our ability to securitize. We have assumed we will not be securitizing. We will continue to hold mortgages to March 31 and that the market-to-market would stay where it is.

Okay, great. Thanks. And then just in terms of winding down your Canadian mortgage securitization operations, I'm wondering if you feel that it will have any negative impact on your core real estate brokerage operations in Canada?

It's Scott. The original intention was that would help our brokerage operation and I think it did. So by winding it down, there will be some negative impact but we're not expecting a material impact.

Okay. And then sorry. Just to point a clarification on the organic growth within property improvement. Was that 3%?

3% this past quarter.

Okay, great. Thank you.

Thank you.

I am not counting FAS. I'm sorry, excluding Field Asset Services.

Thank you. And our next question will now come from David Gold of Sidoti. Please go ahead.

Hi, good morning. On field, can you go over for me what the organic growth was year-to-year?

It's in the 40% range.

Okay. And safe bet short of- - and then you said you expect to build it out some but short that we should be able to maintain these kind of run rates?

Maintain these kinds of run rates, not that kind of growth rate.

Right, right. Fair enough. So, by my calculation and based on what you said was about $30 million or so of revenue in the quarter was that about right?

Right. Got you. Perfect. And then two others. One was- - I'm not sure if I remember correctly but I think a quarter ago you pointed to the US pipeline being down about 20%. Does that sound about, right? Yes.

Okay. So now, it's been down about 15 and I guess it's largely a function of having the December quarter- - the big one under your belt and the comps not being as tough or...

Right.

Got you. And then just lastly, Jay, when you think about acquisitions in this climate i would guess it's- - or may be you can give us some caliber one would presume it's become much more of a buyers' market.

It is much more of a buyers' market. We have, as you know, territories that would be very complimentary to our base business and we're pursuing opportunities, but we're very cautious in terms of expectations going forward and in any transaction that we do, we would make sure that we have the downside protection that we usually have in our types of acquisitions and in fact probably more emphasis on that now then ever before.

Makes sense. And then just one last if I might, an idea on the timing of closing up- - winding down the mortgage business?

We don't have any clarity on that, David. We would like to do it as soon as we can, but at the same time we're not going to accept a ridiculous discount on the mortgages. We know that they are very valuable and they're continuing to generate income. So that's all I can say at this point. The operations themselves have been effectively already discontinued. There's one or two people that are there that are just managing the existing mortgage portfolio. So I think that's by and large all behind us.

Very good. Thank you all.

Thank you. And our next question will now come from Frederic Bastein of Raymond James. Please go ahead.

Good morning, guys. Just to take big picture question to start. I'm just wondering how different is Colliers today from what it was, say six to seven years ago and I just want to get some level of comfort on how well positioned you are to withstand a job in commercial real estate activity going forward?

Six or seven years ago, well before we acquired it, it was a much smaller business and much more concentrated on the West Coast of the U.S. Very broker-centric, international operations were for the most part breaking even or losing money, and so when we take a look back to that period of time the results were somewhat skewed because of the heavy concentration in silicon valley and things like that. Today, we are a much bigger platform. We're much more diversified. Scott gave a prior revenue breakdowns of brokerage to services in the 65% brokerage range, the balance being services, which materially better than it was before and our overall business is so much more diversified. You can see a slower U.S. market today, materially slower, and yet our overall results are up over the prior year and that's because we're doing very well in Asia, in the Eastern Europe and in Latin America. So, the geographic diversification so far has been our friend. We think it will continue to continue- - to give us the support that we need to finish the job we set out to do with Colliers. So we're quite excited about our platform today and feel very good about some of the things that we have in front of us.

Okay and then presumably, just following up on that, I guess. If brokage activity drops, I guess the mix of revenue should migrate towards the highest margin activity, right? And so as the result, do you think you can sustain the margins in the current environment?

Well, as you know, brokerage revenues is very performance-driven. If they don't generate property sales or leasing revenues, obviously the cost of our business fall, but we still have huge infrastructure costs and I think that in brokage both leasing and sale falls, it will definitely impact our margins going forward.

Okay, and then when you say your- - I guess year-over-year gains should be more modest in 2008 for CMN are you specifically refer ing to the organic growth.

Yes.

I guess my last question is related to RPM. Are you still comfortable with the previous guidance of I guess 10% organic growth that you were forecasting for this division going forward?

On average, yes. There will be quarters such as the December quarter that will be lower than double digit.

So you're still comfortable with that long-term average, but in the short term you could face a little bit of pressure.

Right.

Okay. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) And our next question will come from Sara O'Brein of RBC Capital Markets.

Hi, guys. Just a question on commercial real estate. I guess I'm a little surprised that the commission expense is coming in higher going forward. Is that from your international markets or is that the U.S. markets?

It's really one of timing more than anything. We need to I think do a better job of accruing earlier in the year on our estimates for the full year and that's real it is.

Okay and I guess I had heard in the past that your compensation structure is supposed to be a little bit more hurtful to your margins. Basically you pay nicer commissions when times are good, but that your employees have to cover their own costs when times are slow, and I just wonder if that doesn't sort of goes counter to margin pressure that maybe you could see a bit of expansion going into a slower market?

I don't see in the slower market how our margin could be expanded in any scenario. I know what you're referring to, Sara. The compensation model, but still regardless of the fact that the percentage is paid to the brokers would be lower and therefore we would get a disproportionate amount of the revenue generated, we're still on a much lower base and the impact will still be a compression to our margins.

It helps us better with the stand to downturn. It creates a more variable cost structure but it won't expand our margins.

Okay, fair enough. And talking about property improvement in the FAS business model, is there some seasonality to the margins just going into summer months? Is there more sort of property improvement that has to be done for a fixed fee on those properties that could hurt your margins or how do you see those margins going forward into property improvement?

There will be some seasonality for the reasons you described, but our revenue mix from various regions of the country is changing rapidly, as is our volumes and pricing, et cetera. So, it's hard for us to provide any clarity on seasonality. Net [net], we wouldn't expect it to be materially different from quarter to quarter.

So about a 14% margin is reasonable going forward for property improvement from now on?

No, because we have seasonality in our other businesses.

Right.

That will skew that dramatically and you can get a sense for that by going over our last several quarters, but property if FAS is business, we expect that margin to be generally stable.

Okay. And just ex FAS as we go into California Closets and CertaPro Painters and College Pro Painters, how do you expect that business to fair given the slow down of the economy . It sounds like it's still going relatively well but are you seeing any material difference having into the next quarter and what are your expectations for the summer months?

These businesses are all having a tough time right now. They scratched out gains on a net basis on the backs of our biggest systems. California Closets, CertaPro and Paul Davis, but it's a tough environment for all of those businesses. We are hoping and [staffing] that our net basis will be flat over the next few quarters. And those business are flat to up by a few percentage points similar to the December quarter, but there in a tough environments right now.

Okay. And just going back to commercial real estate, can you remind me how much of your U.S. business is mortgage origination business?

It's quite small in terms of revenue, particularly in the December quarter but its impact to our margin is significant in that it's losing money in the last two quarters. And its impact on our growth figure is significant because it's revenues were down significantly.

Is it comparable to the Canadian operations or is it...

It's bigger than a brokerage business as opposed to a principal business.

I'm sorry I missed that answer?

It's a brokerage business in the U.S.

Yes.

It's roughly 4 to 5% of our U.S. revenues, probably maybe a touch below that. The Canadian business was a principal business where we were actually a co-lender, which is the business that we've closed.

Okay. Then to finally, Jay, on acquisitions, you talked about it's a buyers' market but are you seeing multiple firm up in this kind of market or are both buyers and sellers wondering what is happening with the credit environment and what do people ultimately pay for commercial real estate or any kind of real estate at this point?

Well, each seller has got a different perspective. I think generally speaking, sellers in the areas that we're looking at have not really adjusted their views. They keep hoping that they can be valued on trailing numbers and somehow the future is not as relevant. And again it's very subjective. But I think there's a lot of people re-evaluating and our platforms in both commercial real estate and residential property management are very attractive to people that want to partner with us. Our typical transactions as you know, Sara, have been where we partner with the operating management teams and when you have market leaders as we do, there's a real opportunities for some of these people to take some money off the table but stay and build and participate in the future growth of these businesses together with us, and that's sort of the core of FirstService and our acquisition philosophy.

Okay. So you expect that, I mean you may come to some kind of terms, multiple but they've maybe a lower multiple than they would expect or like but they can sort of share on the upside going forward.

Exactly.

Okay. And Jay, is commercial real estate still a real focus platform in this market or do you look for other property improvement FAS-type businesses more counter cyclicality to go forward?

Well, we've obviously like to have counter cyclicality in a market like this but you just typically don't find it when you're looking for it in a market like this. We've always been very strategic in our approach and we try to be balanced as possible in commercial real estate. When we first entered the business, it was very broker-centric. It is lot more recurring and repeat now so we're looking for other ways to make and create more recurring or repeat revenue within that business platform, but we've been very strategic and not really focusing on the cyclicality or counter cyclicality. If it's there, great. If not, then capitalize anyway.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS) And currently, Mr. Hennick, we have no other questions.

Okay. Ladies and gentlemen, thanks for joining us and we will see you on our next conference call. Thank you.

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for participating. And at this time, we ask that you please disconnect your lines. Have yourself a great day.