Colliers International Group Inc (CIGI) 2010 Q1 法說會逐字稿

Welcome to the FirstService Corporation's first-quarter earnings 2010 conference call. Today's call is being recorded. Legal counsel requires us to devise 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 in the Company's other filings with Canada and US securities commissions.

As a reminder, today's conference is being recorded Wednesday, April 28, 2010. 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 morning, everyone. As the operator has said, I'm Jay Hennick, Chief Executive Officer of the Company. And with me today is Scott Patterson, President and Chief Operating Officer; and John Fredrickson, Senior Vice President and Chief Financial Officer.

This morning, FirstService reported better than expected first-quarter results with particularly strong improvement from our Colliers International commercial real estate services division. The first quarter is traditionally the weakest quarter in the commercial real estate industry and the fact that Colliers International posted a profit in the quarter for the first time since 2007 is a clear sign that real estate markets are beginning to regain their confidence.

With improving market conditions in commercial real estate, the steps taken over the last year to strengthen our ownership of Colliers and the continued strength of our residential property management and property services divisions, FirstService is in a better position today than at any time in our history to create value for our shareholders.

For the quarter, revenues were up 11%, EBITDA was up 62% and adjusted earnings per share was up 88%, all versus the prior year, an excellent performance to say the least. John will provide more details on our financial results in a few minutes.

Aside from Colliers, our ever resilient residential property management business posted solid operating results once again and our property services segment also grew nicely versus the prior year. Scott will provide more details on all of this in his operational report in just a few minutes.

Over the past few months, we've been very busy, particularly in our commercial real estate services division. In October, the global shareholders of Colliers overwhelmingly agreed to transition the Company from a decentralized network of affiliate owners to one Colliers, to one centrally owned business under the operation and control of FirstService.

Also in October, we strengthened our foothold in London, one of the strongest referral markets in the world, with a significant strategic investment in Colliers UK which also owns Colliers in Spain and Colliers in Ireland. Then early this quarter, we announced that we would be combining our CRE business in the US with the US operations of Colliers under the global Colliers International name.

This includes FirstService Williams in New York as well as our property valuations, hotel and hospitality consulting and project management businesses across North America. At the same time, we entered into license agreements with market leaders in markets that we do not already own.

Each new licensee has been chosen because they were leaders in their respective markets and each will be rebranded as Colliers International and integrate into our global operating platform. Once all these moves are completed, Colliers International in the US will have complete coverage nationally and will operate seamlessly with our other markets on a global basis.

Last week we also announced another significant move, adding Chicago market leader Colliers Bennett & Kahnweiler to our rapidly growing commercial real estate services segment. The investment in Colliers Chicago further strengthens our US platform and allows us to better serve local, national and international clients from the Midwest.

Founded in 1947, Colliers Chicago employees more than 200 real estate services professionals and manages more than 50 million square feet of industrial, commercial and office properties. In 2009, one of the worst in recent history for commercial real estate, the firm completed transactions totaling more than $1.3 billion in value, generating more than $30 million in revenue. We are extremely pleased to welcome our new partners from Colliers Bennett & Kahnweiler into the FirstService family of companies.

Today, FirstService through its Colliers International subsidiary is the world's third-largest player in commercial real estate with more than 480 Company-owned and licensed offices in 61 countries around the world. But we still have lots of work to do.

We must ensure that we deliver a uniform and differentiated service offering to our clients where ever and whatever their needs. The biggest opportunity in the near term will be in winning large global mandates for multinational companies whose requirements are more complex in nature and international in scope.

We must also strengthen our ability to attract and retain the best and brightest in the industry. We now have a compelling story to tell about who we are and what we stand for and where we are going. And we must continue to invest in our platform and infrastructure and take advantage of the economies of scale and synergies of a larger and more collaborative organization.

The Colliers International brand is well known for quality and integrity on a worldwide basis. It is truly an icon in the global real estate services industry.

As owners, FirstService has a tremendous opportunity to liberate the full potential of this brand across our entire organization. With our three complementary service segments in commercial real estate, residential property management and property services and now with our own iconic global leader in real estate services; we have so many opportunities to leverage our existing real estate services and add new ones in the months and years ahead.

Those are just a few of the reasons why we believe FirstService is in a better position today than ever to create value for our shareholders. Now, I would like to turn things over to John to provide his financial report. Scott will follow his operational review and then we will open things up to questions. John?

Thank you, Jay. In our press release issued earlier today, FirstService reported significantly improved results from our operations for our first quarter ended March 31, 2010. The most significant contributor was our Colliers International commercial real estate operations which delivered strong improvement over the results generated in the first quarter of 2009, a period many believe to have been the bottom of the cycle.

We also continue to benefit from our diversification with both our residential property management and property services divisions generating solid revenues and EBITDA in the quarter. Scott will have more to say on each of our segments in a few minutes.

I will now address our overall consolidated results for the quarter and then provide some comments on our capital usage and balance sheet. So for the first quarter of fiscal 2010, consolidated revenues increased to $402.4 million, up 11% from $361 million in the January to March quarter of 2009.

Just over 4% of the growth was due to favorable impact of foreign exchange, while 1% of our revenue growth came from acquisitions. EBITDA was $20.1 million, up 62% compared to the $12.4 million reported in the same quarter last year and adjusted earnings per share came in at $0.15 versus $0.08 last year.

Our adjustments to GAAP EPS and arriving at adjusted EPS are fully disclosed in our press release issued this morning and include adjustments we've outlined in the past. Two items are worthy of comment.

Firstly, we continue to be required to record a tax valuation allowance with regard to the value of tax loss carryforwards relating to into our North American commercial real estate operations which equated as $0.12 per share but down considerably from $0.39 per share recorded in Q1 of last year.

Secondly, we have deducted a pickup in our income statement relating to a non-cash gain on settlement of a liability previously recorded in connection with a past acquisition. And this adjustment had the effect of reducing adjusted EPS by $0.08.

Turning to our cash flow and investing activities during the first quarter, we saw $12.1 million improvement in our cash usage from operations compared to the first quarter of last year, of which $8 million in the prior period related to usage in connection with a discontinued operation. We had invested $2.5 million in acquisitions during our first quarter, all relating to the payment of an earnout on a past acquisition.

And as Jay already noted, subsequent to the end of the quarter, we closed on an investment in Colliers Bennett & Kahnweiler based in Chicago which we view as a strategically important move to continue building our presence in the US, while also adding to our global footprint another top international city, one that hundreds of corporations either call home or that at least play host to part of their operations.

Meanwhile, our capital expenditures increased to $6.3 million or $4.2 million last year but still down from the 2008 levels of $7.1 million in Q1. While we increased our CapEx spend over last year's levels in our first quarter, primarily in IT to support our operations and service delivery, we continue to manage our CapEx closely and carefully.

Turning back to our balance sheet, our net debt position stood at about $243 million at the end of the quarter compared to $213 million at our December 31 year-end. While our leverage ratio, expressed in net debt to EBITDA was 1.84 times, up slightly from 1.75 times at our year-end, but well below the 3.5 times in our debt covenants.

Assuming the conversion of our $77 million convertible debenture into common shares, our pro forma leverage was 1.26 at the end of the first quarter. In terms of our financial capacity, with cash on hand of about $70 million and about $140 million in undrawn availability under our $225 million revolving credit line, we have well over $200 million of liquidity, more than ample to fund operations and investments in our operations that will deliver shareholder value over the long term. Now, over to Scott for the operational highlights. Scott?

Thank you, John. Let me start my divisional review with commercial real estate where revenues for the quarter were $154.1 million, up 30% from the weak first quarter of 2009. Adjusting for the impact of FX fluctuation, revenues were up 18%.

Continuing the trend from late 2009, we experienced strong gains in Asia, Australia, and the US offset in part by modest year-over-year declines in Canada and Central and Eastern Europe and tempered by flat results in Latin America. Globally, the increase was driven primarily by a 30% local currency rise in investment sales transactions, although each of our major service lines -- leasing, appraisal, property management and project management -- also showed double-digit year-over-year increases.

All of our regions are showing increased levels of activity and as we stated in our year end conference call comments, we believe that we are through the bottom of the recessionary cycle across all regions and currently at various stages of recovery. Let me now spend a minute focusing on each of our major regions.

In the Americas, revenues were up 16%, driven by strong 25% growth in the US, offset by a 10% year-over-year decline in Canada and flat results in Latin America. The US performance was driven by increases in both investment sales and leasing activity, particularly in New York City, Boston and Phoenix.

The year-over-year decline in Canada is a bit misleading and more reflective of a few large deals closing in the prior year quarter than a downward trend. All of our pipeline metrics point to much higher activity levels than a year ago and we should see evidence of this over the next two quarters. We generated a low single-digit margin in the Americas compared to a $2.8 million negative EBITDA reported in the prior year.

Looking forward in the Americas, we expect to see continued year-over-year improvement in the US for the balance of the year and stronger year-over-year results in Canada and Latin America. In our Asia Pacific region, year-over-year revenues were up 80% in US dollars and approximately 60% in local currency driven by dramatic increases in China, Singapore, Taiwan and India, and supported by very strong 40% year-over-year growth in revenues from our large operation in Australia.

We operate in 15 countries across Asia Pacific and every one of our operations reported year-over-year growth in the first quarter driven primarily by increases in investment sales activity, but in the aggregate; leasing, appraisal and property management were also up across the region. We generated a high single digit EBITDA margin in Asia Pacific for the quarter compared to a $3.6 million negative EBITDA in the prior year quarter.

Looking forward in Asia Pacific, we expect to see continued year-over-year gains for the balance of the year. But the rate of gain will slow throughout the region as the Chinese economy cools and this ripples through to impact other economies, particularly Hong Kong and Australia.

In our Europe region including Russia, revenues were up slightly in US dollars, but down approximately 8% in local currencies. Solid growth in Poland and Romania was offset by declines in Russia, primarily Moscow.

Aggregate results from the 12 countries that make up the balance of our Central and Eastern Europe region were approximately flat with the prior year quarter. The operating environment remains difficult throughout the region, but we believe we've turned the corner and look for stronger year-over-year comparisons for the balance of the year.

We generated negative EBITDA in this region of $1.5 million for the quarter compared to a negative EBITDA in the prior year of $5 million on similar revenue levels, a reflection of the significant cost containment efforts by the management teams across Central and Eastern Europe. Profits generated in our other regions more than offset the loss from Europe and as Jay mentioned in his opening comments, we're happy to report a positive EBITDA in the seasonally difficult March quarter for our commercial real estate division.

Let me now turn my attention to residential property management where we generated revenues of $146.9 million for the quarter, approximately flat with prior year quarter. Increases of approximately 4% in management fee revenue were offset by declines in revenues from ancillary services.

Regionally, our management revenue growth was again driven by contract wins in the Northeast and Southwest including Nevada, Arizona, and Texas. Management fee revenues from California were flat with the year ago and management revenues from our Florida operations were down slightly from prior year.

Our ancillary fee revenue in the aggregate was down approximately 10% for quarter due to a mix of factors. Landscape and HVAC services in Florida continued to trend down modestly as community associations look to cut or defer services wherever possible. The unusually cold weather in Florida during the quarter amplified this trend as landscape enhancement sales and HVAC revenues were further impacted.

Weather was also a factor in the Northeast, as snow cover throughout the region during the quarter inhibited our ability to assess sites and complete pool construction and repair relative to the prior year. This work has effectively been delayed and we expect to capture these revenues in future periods.

Our EBITDA margin in the quarter was flat with prior year at 7.9%. Looking forward in residential property management, we expect to see modest growth through the balance of the year with margins that are comparable to prior year or up slightly.

In our property services division which comprises field asset services, Paul Davis restoration, and several consumer oriented franchise systems; revenues grew by 5.8% with FAS posting 6.4% growth in our franchise group as a whole growing by 3.2%. The year-over-year growth at FAS was impacted by large volumes from a new client which was transitioned in Q1 of 2009 causing a spike in revenues.

Excluding these volumes, year-over-year growth was approximately 16%. Our first-quarter revenues were also somewhat impacted by a seasonal foreclosure moratorium. In our fourth-quarter call, we reported that several of our large customers chose not to initiate foreclosures from late November through to early January, which impacted activity in revenues during December and January.

While sequentially our revenues were up 5.5% for the quarter relative to December, they were still off levels achieved in the June and September quarters of last year. In our calls and presentations over the last six months, we've been describing the shadow inventory of delinquent mortgages that has been building in the US.

The Obama administration's mortgage modification plan has effectively lengthened the foreclosure process and delayed the transition from delinquency to foreclosure. This trend continues.

A significant backlog of delinquent mortgages exists today and it continues to build. Based on 2009 foreclosure levels, the shadow inventory is well over two years.

Our customers continue to advise us that foreclosure numbers will accelerate, but we've not seen it yet. And our best information indicates that we will not see it until the latter part of the year at the earliest.

Looking now at our franchise systems, as I mentioned, revenues for the quarter were up 3.2%. For the first time, this group has shown year-over-year growth since June 2008. Importantly, each of our franchise systems showed some level of growth over the prior year and we expect this trend to continue as leads and other activity level metrics are all up compared to 2009.

EBITDA margins for this division were 10.7%, down from 14.1% in the prior year relating entirely to reduced margins at FAS. The Q1 2009 FAS margin was unusually high, reflecting the operating leverage realized from the surge in volumes that I described earlier relating to on-boarding the new customer.

The operating infrastructure at FAS grew significantly in the third and fourth quarters of 2009 with increased space and an increase in headcount of close to 100, a necessary investment to properly handle adjusting volumes. The current cost structure and resulting margins are more indicative of what we expect to report in this business and I note that sequentially the FAS margin for Q1 of this year is up modestly from the December quarter of 2009 but down from the unsustainable levels in Q1, Q2 and Q3 of 2009.

Looking forward in this division, we expect continued strength at FAS but we will not likely see year-over-year growth until the shadow inventory of delinquent mortgages begins to make its way through the foreclosure process. We do expect to show modest year-over-year growth for our franchise group through the balance of the year.

I would now like to turn the call over to the operator to receive questions.

Sara O'Brien, RBC Capital Markets.

Scott, just on your comments on commercial real estate, I don't know if I missed it, but just wondered if you could give any kind of EBITDA outlook? Given that Q1 was positive, do you expect for the year like a 4 to 5% margin is kind of a slam dunk at this level or what would hold you back from giving some kind of a guidance?

I'll let John contribute also. We are expecting to be profitable in each quarter, but I'm not sure we're in a position to be very specific about what our margin expectations are.

I would just say that we well over a year ago stopped providing specific guidance. But what I would say is the results for the first quarter were good. I think it's too early to determine whether or not it would alter our view for the entire year, I think we may have a better sense of that after next quarter.

Okay, but just given your comments that you feel even in Canada that everything is kind of bottom, you've seen the worst and it's ticking up from here, what would make us not believe that your margins are going to expand from here?

I think margin should expand. I guess it's a question as to what the velocity will be or the pace.

Okay, great. And then property services, we're hearing a lot about the consumer being back, consumer confidence is up. Do you think you could see a real boost in your franchise businesses like Cal Closets and the painting businesses and what kind of operating leverage could you see if that does come back in a big way, call it in Q2, Q3?

We are certainly seeing as I said in my comments, increases in activity. But it's not significant. These businesses are all profitable, so we will -- we certainly see some leverage with increased volumes, particularly the seasonal businesses in the next two quarters. But I wouldn't expect the margins to be significantly higher than we posted in Q2 and Q3 last year.

Okay and then maybe just on minority interest, kind of an accounting question, but very high as a percentage of earnings before minority interest in this quarter and I know you have to mark to market it now. But again, I'm going to have to ask for some kind of guidance for the rest of the year on this. Now that you've got the Chicago operations in there, where do you see it coming out if we were to model it going forward, how you guys model it?

Minority interest should be in the 20 to 25% range. That's what we are going to head. It's a bit of an anomaly, a few odd things impacting it in the first quarter. That should not be indicative of where we would expect it for the rest of the year. So moving it to 20 to 25% in that range is a good number for minority interest.

Would that be for the year or per quarter, we could look at it that way?

That would be where we would end up for the year.

Okay, great. Thank you.

Stephanie Price, CIBC World Markets.

Several affiliate firms have joined Colliers International in the last couple weeks. Could you talk a bit about why the affiliates are choosing to join Colliers and whether you're seeing any revenue streams from them?

I can't hear the question, can you give me that again, Stephanie?

No problem. I'm just asking about the affiliate firms that have joined Colliers recently. Just wanted to get a bit of color on why they are choosing Colliers and also in terms of any revenue streams that you're going to see from them?

The affiliates, most of the affiliates were the former Colliers affiliates that now have become our licensees. There have been others from other organizations like Grubb & Ellis and NAI. We've selected market leaders in each of the geographic regions that we do not have Company-owned operations, so we are quite excited about having these new partners part of our global platform.

In terms of the revenue generated from them, it's traditional licensing fees. We don't think we're going to make very much money if anything on them because they are going to become part of our global platform.

Where we expect to see some big pickup is in corporate services, global corporate accounts that one or the other might refer to our corporate services group, property valuations, commercial property management. All of those additional opportunities enhance the flow of our business and therefore should translate over time into incremental revenues and profits for us. But the actual fees that they generate will be more than used up by the expenses and supporting their individual operations.

Okay and just in terms of the cross selling that's going on right now between Colliers offices, do you have any way to give a sort of revenue percentage of that or where you expect it to go in the future?

Again, I'm having trouble hearing. Give me that question again.

Now, it's our right. Just in terms of cross-selling between Colliers offices at present, is there any way to give a revenue percentage to that or where you expect it to go in the future?

Cross selling of services is something that we monitor, but I don't think that we have it to the extent that we need to have it, frankly. It is happening significantly.

The commercial real estate business is by nature a referral business but I don't think that we have that information available here today. But I do know that it is in the Colliers results and we could probably get you some color on that, John, over the next couple of days.

Right, just one final question. Are there any other areas in the US that you're looking to acquire a stake in? Are there any other holes that need filling at this point?

Well we now believe that we have a full platform across the US. The areas that -- the markets in which we have licensed partners, we're very comfortable with those operators. We do have close and hopefully closer relationships with them over time so they could create acquisition opportunities for us.

But I think over the next 12 months, our strategy will be continue to enhance our strength in key financial markets -- New York, now Chicago, Boston, Los Angeles, many other markets on the West Coast, Phoenix and Dallas. Those are markets that we're focusing a lot of energy on and that might be in additional recruits in those markets. It might also be in adding additional real estate services in those branches, specifically markets where -- and services where we think that we can add to our client experience.

David Gold, Sidoti & Co.

Just a couple more questions really on Colliers and how things are sort of changing. I guess a day hasn't gone by in presumably the last week or maybe the last couple of weeks or we haven't seen a release or two about either affiliates or I guess the Chicago acquisition.

I guess just more broadly, I wanted to get a sense there for as we go forward, do we continue to ramp that up? Is it something that we will see a lot more of over the next couple of months? And two, in your opinion, particularly you, Jay, how do you think about whether to bring out affiliates or just buy a share -- to basically acquire versus affiliates given that I guess the acquisitions give you more control presumably than the affiliates do?

The first question is -- the answer to the first question is this. We have 80, 90% of them in the house now. There may be some additional markets. Our phones are flooded, our management team is carefully looking at new additions in sort of secondary and tertiary markets. But all the other principal markets are covered.

So you may see some additional press releases in the next quarter or so, but by and large, that's behind us. Secondly, we have Company-owned markets in the US which are basically the key principal markets.

We do have opportunities to do additional consolidation of some of the affiliates and believe that over the next 12 or 18 months, you might see some in some markets where we think a particular affiliate has lots more to offer or manage the management team or some members of the management team want to retire and some of the younger guys want to step up their position. So the beauty of our situation right now is we have all those options available to us.

So I think you'll see some consolidation in the US. You will also see some consolidation potentially in some of our global markets where we think that we can continue to build the strength of the brand in those markets.

Okay, that's helpful. And just one more again in the same business, Colliers commercial real estate. How should we think about hiring plans for this year?

Sorry?

How do think about -- or how do you think about let's say hiring plans? Are there spots where -- we hear for a while you were pretty aggressively picking up folks, particularly on the transaction side. Just curious if that's something that's still underway or with the affiliates and the acquisitions, does that cover some of the growth that you wanted there?

We continue to be actively recruiting. We're actively recruiting everywhere right now. We're quite bullish on the changes that we're seeing in the US market, notwithstanding some of the comments that both Scott and John made earlier.

There is some light we are seeing. I don't know whether it's going to stick. But there's a lot of things happening in terms of mortgages coming up for maturity that could create some activity in the market.

Interest rate changes could create some activity in the market. There's a lot of things happening. And so we are looking at augmenting our teams. The other thing that we are seeing and it's quite encouraging actually is corporate services potential opportunities are accelerating.

Up until now, there's been very few options for large corporations that wanted to have global mandates on their real estate services. We believe that the new Colliers has a real opportunity to have a significant seat at the table and win incremental business.

So we have got lots of momentum and that is getting translated into opportunities and those opportunities need great people to help us fulfill them. So I think we will continue to recruit and build all of our brokerage corporate services and ancillary service lines principally in the US I think over the next 12 months.

Perfect, perfect. Just one other quick one just for Scott. [On field asset], your comment was continued strength but not growth, I think. Is that to say flat or down would be your expectation at this point for the year?

It's really unclear, David. I think we continue to see steady volumes and until -- we have not seen an uptick over the levels we've seen in the last two quarters. So our expectations are that we will but it's not clear when.

Gotcha, perfect. Thank you all for your help.

Will Marks, JMP Securities.

I just had a question on the specific breakdown of sales and leasing trends, whether you can comment on the quarter, what the growth was in each of those areas within Colliers, or even if it's just some qualitative comments, that would be helpful.

Well in my prepared comments, I indicated that the investment sales were up 30% globally. Our leasing activity was up about half of that globally. There were certain differences from market to market in the Americas. Both were strong. But generally both were up around the world.

Sorry, I got on the call late, but looking at -- taking that a step further in terms of the outlook, do you expect anything different throughout the year as -- I don't think we're seeing really much of a pickup in investment sales and could that be sort of icing on the cake in the future?

I think we're expecting investment sales activity relative to prior year certainly to be divvied up in all of our regions.

Brandon Dobell, William Blair.

Couple quick ones. Within residential property management, I know the past couple quarters, you saw kind of a deterioration in the number of services or breadth of services or some [affirmative] of things being done. Have you seen those trends reverse or is it still pretty cautious among those communities where you're involved?

We are not seeing it reverse. This quarter there were a few different things that impacted the ancillary services, principally weather in Florida, the Northeast and we will see some of that come back in future quarters, particularly around pool construction and maintenance. We expect to get that back in the next three quarters. But generally, our communities are cash constrained and are looking for ways to cut or defer expenses and we are feeling some of that.

Turning to FAS for a second, how would you characterize the mood of your clients right now? Are they more willing to continue to defer stuff, put moratoriums on or are they starting to get the impression that that's just delaying the inevitable and they'd rather just kind of get to business and start to put these foreclosures through the process?

Our customers are advising us and they have been that they believe the shadow inventory will ultimately transition into foreclosure. They have been expecting it, we have been expecting it for some months.

But there's continued pressure to look for ways to keep people in their homes and to delay the process. So I think the belief is that ultimately a high percentage of these delinquent mortgages will move into foreclosure. But again as I said earlier, the timing is uncertain.

Within Colliers, I guess a couple questions here. First, how should we think about the use of capital for potential transactions within Colliers this year? Should we -- I know (inaudible) you guys have talked about kind of an acquisition pipeline broadly across the enterprise. But with this opportunity being a little bit different, should we expect it to be a big use of the firm's operating cash flow this year or should we keep our expectations pretty low?

I think that for the most part, we are not comfortable. We're actually thrilled with our current situation in the US right now.

We now have a uniform streamlined business. I think we are going to continue to rebrand. Some of the affiliates were not rebranded. They came over from Grubb & Ellis or NAI. And some of our other service lines are not fully rebranded.

So we are actively doing that right now. It's a gargantuan task and I think that for the most part, we're going to focus our efforts on those for the balance of the year. So I don't see capital being spent on acquisitions and commercial real estate in the next two quarters or so. Famous last words, there may be an opportunity or something that develops in the US.

There may be something outside of the US in commercial real estate. We are always looking at adding additional service lines to our Colliers platform. There's one or two that we're looking at that could make great additions to the business over time. But near-term, I think we are just going to continue to ride things here for a little bit and get done what need to get done.

That's a good segue to my last question. Within the activity you see in the affiliates and those kind of opportunities, should we assume that that continues to bulk up the brokerage transaction business with not that much impact in terms of property management? Or do you see (technical difficulty) bigger property management business that we may expect?

Okay, you're going to have to try that again, Brandon. You went in and out.

Yes, I was hearing the feedback. The question was within the affiliates or the opportunities you see maybe outside of it, how much of an impact are those going to have on the size of your property management business? It feels like so far it's been mostly brokerage, but in the past, you talked about trying to broaden the property management opportunity you have.

Are the other Colliers affiliates big property managers? Do you see that being a focus or is it really just augmenting what you already have in sales and leasing?

Property management is a huge focus, not a small focus. It's a huge focus and one of the major qualifications for any of the new affiliate partners that we brought on is a capability and an existing infrastructure in property management.

Some have it more than others, but part of the national platform is that property management services would be delivered in the same way using our existing platform. They may be delivered regionally in some of the secondary markets that are the affiliate markets, but they would all be done in a consistent format.

We have a key executive by the name of Mike Kent who has been leading this initiative for the past two years. So for example in the Colliers Bennett & Kahnweiler business, they have a significant portfolio, about 50 million square feet of property management. That would be delivered in a manner consistent with our property management services on the East Coast or the West Coast.

So property management is an important element of the overall strategy and of course, as you know, Brandon, leads to so many other opportunities in the commercial real estate space. Valuing properties, leasing properties, ultimately selling properties, asset management properties; all of those opportunities get created by having a wide base of property management clients.

Got it and finally for John, SG&A, you know pretty decent number compared with what it's been the past couple of quarters. Should we think of the cadence on the SG&A line to be similar to what we have seen in years past or is there some ramp in SG&A spend that we should build into how we think about the profitability this year?

No, we are going to be carefully monitoring SG&A. We're very focused on maintaining our cost around premises. In terms of the other big component would be people and we are selectively as Jay indicated earlier, we are recruiting and selectively adding people primarily on the revenue production side. Some of that may appear in SG&A. But overall, we expect to control this line very carefully this year.

Got it, thanks a lot.

Sara O'Brien, RBC Capital Markets.

Just on that last question. If you are hiring now and you're starting to see commercial real estate jump up sort of 18% year over year, is this something that could pressure margins? I know you just commented they have to be revenue-generating, but is there any kind of pushback on the margin front that you can see from that over the next year?

No, we wouldn't expect to. The management team at Colliers along with us are very focused on the margins and we're going to manage that closely.

Okay and then maybe just on Jay's explanation of sort of how property management is a huge focus in CRE. You've got the affiliates coming in with that. If they are only paying you a fee, how do you capitalize on that property management business? Is it like a learning transfer going to FirstService or is it you take over the property management ultimately?

It's going to vary but for the most part, they're going to come onto our systems and process at additional cost. They are going to have all of their property management services that are delivered outside of their geographic region being delivered by our Company-owned operations or other affiliates depending upon the markets.

And they now have the capability of going back to the same clients that may own real estate in their geographic region and be able to offer their services on a national basis which they have never been able to do before. So there is a combination of benefits in bringing them all together. For those on the inside of FirstService and watching what has transpired over the past six months, it's been quite exceptional because truly market leaders in these regions that have been on their own or associated with Colliers or associated with other name brand firms have left those name brand firms to join us because of the capability.

So not only can they offer property management services on a national basis, they can offer brokerage services on a national or international basis or valuation services on a national or international basis. So my explanation earlier, the referral component, creating the flow of business is so critically important in commercial real estate.

It's not just the fees that you might generate as a licensee. It is creating that collaborative flow of business across the US and globally. So it's quite exciting and with a little bit of luck and markets moving in the right direction, we should see some nice upticks in our US business over the next period of time.

Okay and would you expect that that kind of organic growth from referrals will be the primary revenue growth generator or do you see yourself going out and buying property management firms to complement that or even oversee all of that?

I think there's a little of both. We are always keen and have always been keen on commercial property management or residential property management. They're actually very similar disciplines.

So wherever we can augment an existing platform with commercial real estate management firms, we are going to do that. But I think that one and one could make three in terms of referrals. Creating this collaboration across all of our different operations will create flow and flow will create transactions and transactions will create additional revenue and internal growth for us. So that's one of the reasons why we want to slow down our acquisition growth in the US and let things take hold and focus internally on our existing operations and the way in which we refer and build our business channels and pipelines.

Okay, great. And just one last one on residential property management. Just wondering on the ancillary services, is it a case of -- I know you talked about weather and deferral of services, but are you seeing some of these communities going more to the mom and pops who are kind of underbidding on the cost of the service and that's what's bringing this down? Or is it just that they are actually saying no, we don't need these services right now?

We don't think we're losing this revenue. We think that it's either being cut or deferred. We don't think we're losing it.

(multiple speakers) what's interesting is that the property management fee revenue was up. So it's the ancillaries that are down.

Right, so it's not a pricing competitive basis. It's just -- it's deferred or eliminated altogether?

Right.

(Operator Instructions) There are no further questions. Please continue.

Thank you everyone for joining us for this first-quarter conference call. We look forward to visiting with you again at the second quarter. Thank you.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.