Colliers International Group Inc (CIGI) 2011 Q2 法說會逐字稿

Welcome to FirstService Corporation's quarterly earnings 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 known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Company's Annual Information Form, as filed with the Canadian Securities Administrators, and in the Company's annual report on Form 40-F, as filed with the US Securities and Exchange Commission.

As a reminder, today's call is being recorded. Today is Wednesday, July 27, 2011.

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. I'm Jay Hennick, Founder and CEO of the company, and with me today is Scott Patterson, President and Chief Operating Officer, and John Friedrichsen, Senior Vice President and Chief Financial Officer.

This morning, FirstService reported solid results in each of its three operating divisions, despite challenging market conditions in certain regions and uneven global economic recovery.

Overall for the quarter, revenues were up 13% to $566 million, EBITDA up 5% to $47 million, and earnings per share was also up 13% to $0.54 per share. John will provide more details on our financial results in just a few minutes, and then Scott will follow with his operational report.

At Colliers International, revenues were up significantly over the prior year, with strong increases in Central and Eastern Europe and Asia Pacific, and solid increases in the Americas, led by Latin America. During the quarter, we continued to be very active on the recruiting front, particularly in the US, adding high-quality professionals and other key executives in brokerage, in corporate services and in property management, as we continue to build out our key markets, augment our service lines and add new ones.

As the commercial real estate industry strengthens on a global basis, market leaders like Colliers International that have both the financial strength and the ability to service clients worldwide have a distinct advantage over smaller, less capitalized competitors. As the third-largest player in the industry, we are more confident than ever about the future for Colliers International.

FirstService Residential also continued to perform well, notwithstanding weakness in some of its regions, including Florida, California, Nevada and Arizona, as you might expect. Revenues from the core management services were up nicely, as were revenues from newer services, like residential rental management, FirstService Energy and others. And we continue to take advantage of market conditions to grow this business through acquisitions, completing another two significant ones since the end of the last quarter.

So far this year, we have completed four acquisitions in residential property management, as we continue to increase the number of units under management and expand into new markets. Late in the quarter, we completed the acquisition of Excellence Community Management, a highly-regarded provider of residential management services in Nevada. This acquisition added 38,000 residential units to our growing portfolio, and when combined with our other operations in the state, solidifies ourselves as the market leader in this important market.

Another significant acquisition completed just after the quarter end was the acquisition of Simerra Property Management, one of Toronto's largest and most respected residential management firms. Simerra manages 280 low, medium and high-rise residential properties, including more than 32,000 units, with another 20,000 expected to come onstream within the next 12 months. Toronto is one of the premier high-rise condominium markets in North America, and establishing a presence in this market, the home of our corporate headquarters, has long been a priority for us.

We are also proud of the fact that over the last 12 months, we have become the largest manager of residential communities in Canada, managing a total of more than 130,000 units in British Columbia, Alberta and Ontario. FirstService Residential is North America's largest manager of residential communities, managing more than 5,300 properties, comprising more than 1.3 million residential units, from 81 offices, including 7 in Canada.

During the quarter, in Property Services, we completed a strategic review of our operations and decided to reorganize to reduce costs and better align ourselves for growth. Over the last 12 months, we've been approached by certain parties interested in acquiring our franchise division. As a result, we engaged financial advisors to investigate the strategic alternatives, including the potential sale of the business. After exploring the alternatives, we concluded that it was not in the best interest of our shareholders to sell the business. The franchise operations is a business we understand. We have great confidence in our management teams and operating partners, and most importantly, as we see it, the prospects for the business, particularly as the US economy recovers, far outweigh the proceeds we could have realized on any sale at the present time.

One of the outcomes of the strategic review was a decision to transition the oversight of the division for the executive team here at FirstService and to purchase the balance of the shares of the division we did not already own. We expect to realize annual savings of about $2.5 million a year and, by purchasing the balance of the shares, we also expect to see a sharp increase in our earnings per share in the future.

I want to take this opportunity to thank Steve Rogers for his many years of service to our company, and we all look forward to his continuing involvement as a director of our company.

Overall, we expect to deliver strong results in the seasonally stronger back half of the year, and we remain excited about our prospects for the future in each of our three divisions. FirstService has already established itself as a global leader in real estate services, a huge industry with enormous growth opportunities. And, as one of the largest property managers in the world, with more than 2.4 billion square feet of residential and commercial properties under management, we are in a perfect position to capitalize in so many ways. Through Colliers International, we manage more than 1.2 billion square feet of commercial, office and industrial properties. At FirstService Residential, we manage 1.2 billion square feet of low, medium and high-rise residential communities. And at Field Assets, we manage and maintain more than 100,000 properties per year for financial institutions, mortgage insurers and other property investors. Being one of the largest property managers in the world also offers us the opportunity to leverage our size and scale to differentiate our services to our customers. We leverage the combined buying power of the properties we manage, which now totals more than $7 billion per year, to help our clients save costs and operate their properties more effectively, which ultimately translates into higher property values. This is a tremendous competitive advantage for FirstService, and it's something that's very difficult for others to replicate.

Having more than 60% of our revenue coming from recurring contracts has always been an advantage that FirstService has used and has created a very stable business model, and it's one of the key reasons that we've been able to deliver more than a 22% annualized return to our shareholders over the past 16 years we have been a public company.

Now, let me ask John to take you through the financial details for the quarter and, as I said, Scott will follow with his operational report and then we'll open up the call for questions. John?

Thank you, Jay.

As announced in our press release earlier this morning and by Jay in his remarks, FirstService reported solid overall results for our second quarter in 2011, despite market conditions that remain challenging, though continuing to show modest improvement over conditions experienced in 2010.

The following is a summary of our consolidated results for our second quarter.

Revenues increased 13% to $565.5 million, from $501.4 million last year, of which 3% was due to foreign exchange and another 4% on account of acquisitions.

EBITDA totaled $46.8 million, versus $44.6 million last year, an increase of 5%, generating an overall EBITDA margin of 8.3%, compared to 8.9% last year. And adjusted EPS came in at $0.54, up 13% from the $0.48 reported in our second quarter of last year.

As outlined in our press release and summary of financial results released this morning, adjusted EPS includes certain adjustments to EPS determined under GAAP which we believe are not indicative of the economic earnings from our operations, all of which are outlined in detail in our release and consistent with our approach and disclosures in prior periods.

Before moving on to our capital deployment and balance sheet, I'd like to comment on a couple of the things that impacted our operating results in the quarter.

Firstly, as outlined in our press release this morning, our reported revenues and adjusted EBITDA in our commercial real estate services division were negatively impacted by $3.3 million on account of a non-cash adjustment to reverse a portion of the management fee revenue generated on a series of property management contracts with one client group in the Americas region. An internal review completed during the second quarter determined, in consultation with our client, that a portion of the management fees recorded over the past 6 quarters were not chargeable. Based on our review and additional work completed, we believe this was an isolated incident and do not expect any similar charges going forward.

Excluding the negative impact of this $3.3 million charge, consolidated revenues and adjusted EBITDA would have been $568.8 million and $50.1 million, respectively, resulting in a margin of 8.8% versus our reported 8.3%, which our revenues and adjusted EBITDA in our commercial real estate division would have been $249 million and $14.4 million, respectively, resulting in a margin of 5.8% versus our reported 4.5%.

Secondly, as Jay already mentioned in his comments and as reported again in our press release this morning, we incurred a charge of $4.3 million in the second quarter relating to the reorganization of our Property Services division and the related additional investment of $29.9 million to acquire the balance of the shares we did not already own, all just after quarter-end. The charge of $4.3 million was excluded from our reported adjusted EBITDA and adjusted EPS for the quarter. This charge, which consists primarily of severance payments to departed employees, will result in annual cost savings of approximately $2.5 million, while the additional investment will result in a reduction of the expense attributable to non-controlling interests. In total, we expect the additional investment to be accretive to adjusted EPS to the tune of about $0.10 annually, all based on the trailing 12-month operating results of our Property Services division.

We continued to deploy our capital carefully during the quarter with about $9 million in cash invested in acquisitions and a further $8 million in capital expenditures. We're on track to invest about $35 million in CapEx this year, an amount that's well within our self-imposed historical limits relative to annual revenue and EBITDA.

During the quarter, we were paid the first $20 million of principal payment on our 5.44% notes issued in 2005 and the last $14.3 million principal payment on our 8.06% notes issued in 2001, essentially funding both of these through our revolver, which currently bears interest less than 1.25%, thereby favorably impacting our interest costs going forward.

Finally, as we outlined in our press release this morning, immediately after our second quarter, we accessed the incremental $50 million accordion feature in our revolver, increasing same from $225 million to $275 million and on the same terms as the existing facility.

Moving to our balance sheet, our net debt position at quarter-end was $287 million, compared to $290 million at the end of our first quarter, and our leverage, expressed in terms of net debt to trailing 12-month EBITDA, was 1.9 times. Excluding the $77 million in our 5-year unsecured convertible debentures, our net debt stood at $210 million and our leverage less than 1.4 times.

With modest leverage and more than $100 million in available cash and undrawn credit under our revolver, we have ample capacity to fund our operations and any attractive acquisition-related growth opportunity.

Now I'd like to turn things 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 $245.7 million, up 13% from the second quarter of 2010. Organic growth was 10% for the quarter, 4% after adjusting for the impact of FX fluctuation, driven by strong results in Asia-Pac, Central and Eastern Europe and Latin America.

In general, the second-quarter revenue increase was the result of higher transaction volumes globally, primarily investment sales activity. Property management, appraisal and project management revenues in the aggregate were approximately flat with the prior year.

We reported EBITDA in this division, excluding the adjustment referred to by John, of $14.4 million, or 6%, which is in line with the margin from the prior year. Healthy margin increases in most of our major countries and regions -- Asia, Australia, Central and Eastern Europe, Latin America -- were offset by increased costs and lower margins in the US during the quarter.

Let's look more closely at our major regions, starting with the Americas, where revenues were up 8%, 3% organically, driven by strong increases in Latin America, primarily Brazil and Peru, tempered by modest year-over-year growth for the US and Canada, relative to a very strong second quarter of 2010, which saw both operations up over 55% versus the prior year.

While revenues in the US were slightly lower than expected for the quarter, a result of slowing economic growth and lower confidence levels, we made great strides operationally as we continued to build out our US platform. During the quarter, we recruited approximately 50 new producers in the US and separately consolidated much of our property management back office function in the US East into one location in Charlotte. While these initiatives will help accelerate growth go-forward, they resulted in incremental costs during the quarter of approximately $3 million. As a result, the EBITDA margin in the quarter for the Americas was mid-single digit, up over the first quarter but down approximately 200 basis points from the prior year.

Looking forward in the Americas, pipeline levels would suggest that we will continue to see modest year-over-year revenue growth for the balance of the year, and while we will continue to recruit aggressively and otherwise invest in our US platform, we do expect to show margin improvement in the Americas for the balance of the year.

In our Asia-Pac region, year-over-year revenues were up 21% in US dollars and 8% in local currency, driven by strong increases in investment sales in Australia, Hong Kong and India. Our other major operations in the region, including China, Singapore and New Zealand, were approximately flat with the very strong results recorded in the prior-year quarter. We generated a solid low double-digit EBITDA margin in Asia-Pac for the quarter, up sharply from the March quarter, and 180 basis points over the second quarter of 2010.

Looking forward in Asia-Pac, we are somewhat cautious about the second half of the year due to interest rate increases and an expected slowdown in residential and commercial development in China, which will have some ripple impact on the entire region.

We had a very strong quarter in our Central and Eastern Europe region, including Russia, generating revenue growth of 24% in local currency over a relatively weak second quarter of 2010. Growth was driven by very strong increases in both sales and leasing in Romania, Poland, Bulgaria and Russia, and supported by general increases in activity across the other 10 operations in this region. We generated a solid double-digit margin during the quarter, compared to a small loss in the prior-year quarter, due to increased revenues and resulting operating leverage. The substantial leverage realized in the quarter is reflective of the disciplined cost-containment efforts by our teams in this region through a difficult period of the last two to three years.

Looking forward in Central and Eastern Europe, we expect to see favorable year-over-year results in the third quarter but remain cautious about the fourth quarter, due to the ongoing threat of sovereign debt default in Europe and the resulting uncertainty.

In summary, we remain optimistic about the balance of the year for our commercial real estate division. Pipelines are solid in all regions, and while we don't have clear visibility through the year-end, we believe we are well-positioned to show year-over-year increases in revenue and margin for both the third and fourth quarters.

Let me now turn my attention to Residential Property Management, where we generated revenues of $195.7 million for the quarter, up 16% over the prior year, 7% organically, with the balance from several acquisitions completed over the last 12 months and referenced by Jay in his comments.

Organic growth was driven by increases in management fee revenue and supported by modest increases in ancillary fee revenue during the quarter. Every one of our operations across North America showed some level of management fee growth. 7% organic growth matches the level generated in Q1 and is reflective of the competitive differentiators that we have invested in and developed over a long period of time. Our year-to-date organic growth is impressive when one considers that there is very little unit growth or price appreciation in the market currently. Our growth almost entirely represents market share gains.

Our EBITDA margin in the quarter was 9.2%, down 60 basis points from 9.8% in the prior year, primarily due to ongoing pricing pressure in both our core management business and across many of our ancillary services. We have been extremely successful in retaining our clients, but it has been difficult to secure price increases upon renewal, particularly in those states that have been hit hardest by the housing crisis -- Florida, California, Phoenix and Nevada. Certain of our costs continue to rise, including fuel, and as a result, we have suffered some dilution in our margin over the past several quarters.

Looking forward in Residential Property Management, we expect to show solid revenue growth for the balance of the year from continued market share gains and from our ongoing acquisition efforts, with margins that are comparable to prior year or down slightly.

In our Property Services division, total revenues were up 8% over the prior year to $124 million for the quarter, with growth balanced approximately equally between FAS and our Franchise group. The high single-digit organic growth generated at FAS for the quarter is impressive when compared to our REO volumes, which were flat year over year. The growth is reflective of our success in driving ancillary revenues, including renovations, remodeling, repairs and inspections -- services revenues that are generally incremental to our standard contract. As mentioned, REO volumes were flat year over year and have been relatively stable for the last 12 months. The shadow inventory of delinquent mortgages still exists and it remains an enormous number. However, as widely reported by industry sources and the media, federal and state regulations continue to limit the number of delinquent mortgages and homes that are ultimately repossessed by mortgage lenders. The release of the backlog seems inevitable and we remain ready to respond to any increases in volume, but our expectation and working assumption for the near term is that the number of repossessions will remain stable at current levels.

Looking at our Franchise Systems, revenues were up 8% over the prior year with growth spread across each of the franchise systems and the branchise operations. We are pleased with the results from our franchise group in the second quarter, particularly in light of the slowdown in the US economy during the quarter and falling consumer confidence. Our leads, bookings and other key metrics remain solid across our franchise operations, but we are somewhat cautious about the remainder of the year, as home sales have been disappointing, putting further downward pressure on house prices.

EBITDA margins for the division were 17%, up slightly from the prior year. Margins for the FAS and the Franchise group were approximately consistent with prior-year levels.

I will now ask the operator to open the call for questions.

Thank you. (OPERATOR INSTRUCTIONS.) Your first question comes from Frederic Bastien of Raymond James. Please go ahead.

Frederic?

Alright. Over the past year, we've seen Colliers recruit fairly heavily or aggressively some new producers, but we haven't seen a lot of acquisitions. Is this something that we should expect to change over the course of the next 6 to 12 months or should we expect continuation of what we've seen recently?

Well, we've done a couple of smaller ones earlier in the year and late the prior year, but we have a very solid platform now across most of the US in virtually all the key markets so that the goal for us really going forward, especially in the near term, is to continue to augment our businesses, strengthen our teams, add service lines that we think are complementary, and it's something that we at FirstService are very good at doing. So we're quite excited about the new recruits. They've been done strategically, and we've been fortunate with some of the changes in the general market conditions in some of the competitors, and we've been a real location of choice for some of these key professionals, both on the brokerage side, but also, as importantly, on the management side -- property management and other areas. So the long answer to your short question is our game plan in the near term in the US is to continue to strengthen our existing markets and add and augment services where appropriate.

And if you look at the -- sort of the map of the world, are there any areas where you feel you need to be stronger?

Yes. I think the answer is we feel we need to be stronger in many markets, and that's both the opportunity and the challenge going forward. So this whole strategy of recruiting, growing, augmenting service lines can really apply virtually across the board. This market -- this commercial real estate market in particular -- is so vast and, although there's one or two large players in the marketplace, they represent such a small percentage of the overall business done. So from our perspective, it's just a huge opportunity to continue to grow our business over the long term.

Okay. Thanks. Switching to Property Services, you've decided not to sell the franchise operations for now. Presumably that's because of your -- maybe your inability in the current environment to get a good multiple for them, but if we move forward to, say, 2016 -- 5 years from now -- we have a better economy. Does FirstService still own the franchise operations?

I think we look at it at that time. That's a long way away right now. The current market conditions, as both John and Scott have talked about -- the consumer attitude right now is not the strongest. This business continues to do well, as you can see from the year-over-year growth. And we're recommitted to the business and focused on the growth prospects. A little bit more on that. There's a history behind this. There was another family of franchise systems that were sold late last year, and that really precipitated the whole strategic discussion on our party. It was never really something that we were going to sell near term, but we were inundated with calls from others and thought that the appropriate thing for us to do is to -- would be to look at the prospect of selling. So recommitted, quite excited about it. We know the management teams. We know the industry. We think better than almost anybody out there, and our way of operating is something that's held us in good stead over a long period of time. So as long as we continue to focus on our business, we should be able to continue to grow it for many years to come.

Great. Thanks. That's all I have.

Thank you. Your next question comes from Stephanie Price of CIBC. Please go ahead.

Good morning.

Good morning.

When we think about the possibility of -- can you talk a bit about the possibility of FAS gaining market share? And is that where some of the revenue increase is coming from this quarter or was it mainly services?

The increases this quarter are from ancillary services. As I indicated in my comments, the actual volume of files, if you will -- foreclosures that we received -- is flat year over year. Now, the number in the market is actually down. So our market share is up, but the reason for the revenue increase is from the ancillary services.

Okay. And do you expect it to continue to gain market share? Or how is the environment right now? It seems pretty competitive.

It is competitive. I think our view is that we're expecting the volumes that we've been experiencing to remain stable for the foreseeable future, and we're expecting some stability in the market as well.

Okay. And in terms of Colliers, can you talk a bit about how much more recruiting is left to go? I know you've been pretty aggressive the first half of the year.

The second quarter in particular, we were active. We will continue to see a high level of activity, we believe, in the third quarter, but recruiting is something that is central to our growth strategy, as Jay just said. So we expect to net-add producers every quarter.

Okay. And in terms of the normal course issuer bid you announced in June, can you kind of talk a bit about your thoughts on share buybacks as a use of cash?

Sorry. Can you repeat the question, Stephanie?

Sorry. Normal course issuer bid that you announced back in June -- can you talk a bit about share buybacks and your use of cash there?

Look. We have -- we were active in the first quarter and I guess, like we have in the past from time to time when we believe our shares are not fully reflective of the real value, we will use our capital to go in and buy back shares, and we're always balancing that against deploying our capital for acquisitions. And as you've seen recently, certainly on the residential property management side, we've had good opportunities. We expect more of the same. So we're constantly balancing that and we'll see where things are. But we do have the issuer bid in place to facilitate those repurchases.

Okay. And just lastly on the residential property management, in the past, management in the business has talked about $1.2 billion revenue target by 2015. Can you kind of talk about if you continue to see that and how much of a ramp you'll need on the cost side if you do get there?

It's still a goal, but as you know, this is a business where you win one contract at a time organically, and we won't add costs until we add the revenue. We have been very active on the acquisition front in the last 12 months. We expect that to continue, and that will be a big part of our growth between now and that $1.2-billion figure.

Okay. Great. Thank you.

Thank you. Your next question comes from Will Marks of JMP Securities. Please go ahead.

Thank you and good morning. Hello. I wanted to see if I could get a little more granularity perhaps on global leasing and sales trends. It seems like, in aggregate, things are looking up or looking positive, but I assume that there are pockets of weakness. We've heard about London, for example, with some companies showing some declines in leasing.

Will, we're generally optimistic about the regions that we're in, and when we provide our results, we exclude the UK where we have a minority investment. Asia led the recovery and they've really led in terms of the strength of our results over the last 12 months. Central and Eastern Europe is -- we're seeing robust return of leasing and investment sales transactions. In the US and Canada, we're seeing some strength in investment sales transactions and leasing that is obviously still tied to the economy, and in the US, for us, has been relatively flat.

I'm sorry. Flat meaning year over year?

Yes.

Okay. And then in terms of -- I guess looking ahead, are you seeing any kind of impact, just over the last month or two, from government issues, debt ceiling issues?

Just increase in uncertainty. I can't point to anything tangible.

Okay. And just the only other question was -- you may have mentioned in the prepared remarks, but did you give global leasing or sales growth trends?

No. I said we were -- transaction volumes drove our growth, primarily sales. I did not give percentages.

Okay. And I assume you're not going to, correct?

No.

Okay. That's all for me. Thanks, guys.

Thanks.

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

Hi. Good morning.

Good morning.

I was hoping you could add a little bit of color and your sort of front-line thinking -- a little more, that is -- as to real estate trends and sort of the cycle. One of your competitors this morning sort of spoke to the markets as a pause, but given slowing economic growth and given government finance issues, but suggested that the cycle's still in a lengthy cycle, continues to plod along. What do you think and what do you think the risk is, given the slowing economy, to the overall real estate cycle from where we sit?

David, as I said in our prepared comments, our pipelines are solid right now, and we have reasonable visibility through the third quarter, and I think we're generally optimistic about the balance of the year. But some of the issues that you raised -- government debt levels -- it certainly is increasing the uncertainty around the world. But we are seeing increases in the levels of activity in every region that we operate in.

Gotcha. Gotcha. So presumably, it sounds like you'd agree that the cycle sort of continues and maybe just moving a little slower?

Yes. We expect to be up year over year for the next two quarters.

Okay. And then one other question. Acquisition plans from here for property management, where it seems you've been most active.

We're actually taking advantage of the market conditions, especially in the US, although we've been quite successful in Canada over the past year. But I think the uncertainty has created an opportunity for us to acquire businesses that we wouldn't otherwise be able to acquire, and they're very consistent -- the acquisitions -- with the way we operate, because people are concerned about the future, they're concerned about their families, they want to take some money off the table but stay and continue to operate the business and take advantage of some of the synergies and market revenue enhancement opportunities that we provide. So we've been very busy in that area. The acquisitions are not huge by any scale, but each one of them adds incremental EBITDA. The returns that we generate on these acquisitions are in the high teens, sometimes low 20's, and so we're going to continue to pull those down, strengthening our positions, adding geographic regions. One of the -- you'll recall a couple of years ago, one of the big priorities for our residential management team was to grow internationally, and Canada was top of the list. Well, now they're the leader in Canada. And so it's a great management team that's got a great future. And as Scott indicated, the goal is still $1.2 billion over the next 5 years, and I think these guys will beat it. So that's the view on residential property management acquisitions.

Perfect. Thank you all.

Thanks.

Thank you. Your next question comes from Stephen MacLeod of BMO. Please go ahead.

Thank you. Good morning, guys.

Good morning, Steve.

Good morning. Just on the Property Services reorganization, you bought back what it sounds like the balance of the equity -- the non-controlling interest -- in that business. So is that a bit of a shift from your strategy of having the operators own the equity -- the guys that are on the ground -- the teams that are on the ground -- to keep the incentivized? Is there something we're missing or is there still some equity on the ground for the Property Services business in the franchise side?

Well, it's an excellent question and it's something that we actually toyed about in putting in our organized comments or prepared remarks. No, operationally, in each one of the franchise systems, the operators continue to own an equity stake in the business and so they're fully vested in growing those businesses over a long period of time. What we did do is, because there was a divisional structure in place, initially and for many years, there has been some synergies of some size between our contractor networks and our franchise systems that, over time, were basically implemented into our system. So as we looked at the business deeply and looked at the next five years, we saw that by realigning the holding company management team and transitioning it over to FirstService, we were able to eliminate a layer of management and equity ownership and hopefully not only manage the businesses as well as we've done in the past, but help them accelerate growth, particularly on the Field Asset side of the business where we think we can really help them take the business to another level. So that's a little bit of the color behind that move. But operationally, the guys in every one of the businesses on the front lines have an equity stake in the business.

Okay. And then on the $2.5 million cost savings that you expect to realize, are there any offsets with respect to you having to add infrastructure to manage the business at the executive level?

No. Not really, Stephen. If anything, it's not even worth talking about. No, we're good and we have the capacity to deal with it.

Okay. Great. And then are you able to remind us of the revenue and EBITDA split between the Franchise and Field Asset Services businesses?

Well, we haven't -- we don't have that specifically disclosed. We've talked about it in the past, but you can use about $350 million in terms of annual revenue in the Field Asset Services side and the balance of revenue in the segment is both the franchise systems and the corporate branchises, as we call them -- corporate California Closet Stores that we own.

Okay. And is the split relatively the same on an EBITDA basis?

EBITDA would be -- no.

No? Okay. Okay. That's great. Thank you.

Thank you. Your next question comes from Brandon Dobell of William Blair. Please go ahead.

Alright, guys. Good morning.

Good morning.

Brandon Dobell.

I've been called worse. Believe me. A couple things in Property Management. The newer contracts that you're signing up, or the ones I guess you're inheriting as you acquire these small firms, how do they look relative to the overall base of business, i.e. in terms of scope, in terms of pricing per service. Is there opportunities with these new deals to kind of drag the average up or are you seeing pricing pressure and (inaudible) extend to these new deals as well, which is going to inhibit revenue growth as we look out the next couple years?

Well, let me break out Canada first, which is an interesting divergence between the US model and the Canadian model. In Canada, virtually all of the properties we manage are high-rise of some sort. They would be highly vertical buildings from 6 to 40-story buildings, and that is our sweet spot in terms of adding incremental growth from additional services, providing onsite labor, other recurring services, factoring in FS Energy and some of our ancillary services. That's what those things are really ideal for. So we're quite excited about the Canadian business and we think that, over time, we'll be able to enhance the revenue streams there in some of the areas I just talked about. In the US, business is roughly split 50% vertical -- high-rise -- versus 50% gated communities, townhouse communities and active adult retirement communities. And so, in each case, whenever we make an acquisition, it really is a function of whether it's a vertical company or a horizontal company, and there's opportunities to add in different proportions, depending upon what that business is. So high-rise -- generally more opportunities; vertical -- generally less, but still opportunities.

Okay. Alright. Fair enough. Going back to the commercial real estate segment for a bit, the peers CV and Jones are putting up pretty solid teens growth, even after adjusting for currency, and most of that is pure organic. I guess what I'm trying to figure out on a relative basis, especially in the US, with the hires you're making and the pace of the market growth, what the disconnect is between those kind of bigger-picture market growth stats and your guys' growth this quarter, and is there anything --one-time (inaudible) or should we see that growth accelerate to kind of match the market growth?

I think much of the growth in the market and what they may be experiencing is coming from the capital markets investment sales in the US, and that is not a strength of ours. In North America, our strengths are in the suburban secondary markets, office leasing, industrial, sales and leasing. And in the US West, land sales. Really all areas that are more tied to the economy.

Okay.

And business confidence. And much of what we're seeing in the investment sales pop, if you will, I think is driven by, in particular in the US, a weak US dollar and international capital coming in and acquiring.

So -- and I would add to that, that's both an opportunity for us go-forward and, if you look at the revenues generated from the other lines -- other service lines at some of the others, our numbers are pretty much in line or higher in some regions than the others.

Okay. And I guess taken with the CRE space for a bit, the brokerage you're bringing on recently or have brought on recently -- are you finding that you've got to pay up for those guys in terms of the splits you're giving them and is there -- and if so, is there -- are they short-term pay-ups or are we going to see some upward pressure on that kind of gross margin line for you guys as you try and track the high-quality talent?

Well, there's certainly a cost to recruiting and onboarding and there's transition costs before they get into production. The splits -- we're holding relatively firm on our split model, but there are varying levels of cash incentives that are being offered, and that is either a cash incentive or a forgivable loan, which --

Okay.

Which does result in some short-term cost, yes.

Okay. And then final question. It didn't sound like part of your conversations or conversations around the property or potential property sale of that segment included the Field Asset Services business, but I want to make sure that that was the case, or perhaps did it and, as you think about if and when there is a right price that somebody feels comfortable offering, would you consider moving the Field Asset business or do you think that's -- it's too closely tied with the Property Management business going forward that it makes sense to keep those things aligned?

Well, the discussion was entirely around the franchise operations and really was precipitated by this other family that moved earlier or later last year. So that's -- the conversation was all around that division. In terms of Field Assets, I know what the common view of the Street in that area is right now, but we're actually quite optimistic about some opportunities for growth in that space and we're dedicating quite a bit of energy to try and capitalize on that growth and hopefully, in the quarters to come, you'll hear more about that. But right now, Field Assets is a business that we think has legs, and they have an internal growth strategy that's quite aggressive and, in many respects, we think doable. So we're going to continue to help them execute on their strategies for the foreseeable future.

Okay. Thanks, guys. Appreciate it.

Operator? Operator, if there's no further questions, we would like to adjourn the call. Okay. So we'll see you at the next quarterly conference call. I guess the operator's out to have coffee or something. Anyway, thanks for joining us today and we'll speak to you soon. Bye.