Colliers International Group Inc (CIGI) 2011 Q3 法說會逐字稿

Welcome to FirstService Corporation's quarterly earnings conference call. 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 and today is Wednesday, October 26, 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. As the operator mentioned, I'm Jay Hennick, the 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 very respectable year-over-year growth in both Colliers and FirstService residential management. Revenues in property services were slightly down however, as property preservation and distressed asset management operations were impacted by government regulation and other constraints, preventing our clients, banks and other mortgage servicers from taking action on their distressed properties, slowing the number of properties that actually came under our management during the quarter.

For the quarter overall, revenues were up 10% at $585 million, EBITDA up 4% to $48 million, and earnings per share was flat with the prior year quarter.

John will provide more details on our financial results in a just a few minutes.

Despite the economic conditions that remain challenging and impacting businesses everywhere, FirstService continues to be in a very enviable position. We benefit from the stability and scale opportunities of being a world leader in residential and commercial property management, with more than 60% of our revenues coming from recurring property management contracts. This has always given FirstService a very predictable business model and is one of the key reasons we've been able to deliver more than 20% annualized returns to our shareholders over the past 17 years as a public company.

At Colliers International we remain on plan and we continue to see abundant growth opportunities, particularly as the market for commercial real estate begins to strengthen. Our strategy for this business has been clear from the start -- gain control of the brand, the third largest in the world, which we have now done. And then focus on strengthening our offices and diversifying our revenue streams one step at a time.

During the quarter, we continued our aggressive recruiting activities, particularly in the United States, and we added both quality professionals and strong franchise partners in different geographic markets.

We also continue to invest in our property management and corporate solution platforms, both of which benefit from our growing scale and the ability that we have to service clients on a global basis. In a few minutes, Scott will provide more detail on this and more in his operational report to follow.

At FirstService Residential nothing much has changed since last quarter and in fact nothing much ever seems to change quarter after quarter, ever since we first entered the business 15 years ago. Perhaps nothing except that we continue to enhance our service capabilities, increase our scale, and expand our geographic presence, all of which create significant enhanced, competitive advantages, and greater barriers to entry. And in many respects, we've only just begun to realize the potential of this business.

Managing residential properties for homeowners and renters is a very stable and resilient business. In our case, it's an essential service to more than 3 million people living in 1.3 million homes and almost 5,000 different properties across North America. The fact is current market conditions have been difficult on our clients. It has been challenging to win increases in our base fees for sure, but we also see it as our responsibility to keep our clients focused on their expenses, cutting back both operating and capital expenditures where possible.

There is no question that both impact our near-term margins, albeit modestly. But we believe by operating our business this way we will be rewarded in the future with higher customer satisfaction ratings and stronger customer loyalty, further strengthening our market leading franchise.

The good news is that in difficult times acquisition opportunities are abundant, and so far this year we've completed a total of four acquisitions in this segment of our business and we hope to complete another one or two before year-end. Completing acquisitions when others are concerned allows us to purchase coveted operations more cost effectively, while strengthening our operations and expanding to new markets.

One excellent example is our recent expansion into Canada. Over the last 18 months we've become the largest manager of residential properties in this county, managing more than 140,000 units in British Columbia, Alberta and Ontario.

In property services, service brands Paul Davis Restoration and CertaPro Painters continued to lead the way in year-over-year gains, but well-known consumer oriented brand California Closets also did well, primarily by taking share from smaller operators and regional competitors.

And as I mentioned earlier, revenues in property preservation and distressed asset management were down slightly versus the prior year. Field Assets operates in a market that currently has more than 6 million properties in distress. This is the so-called shadow inventory we all read about, but only 1 million of those homes are actually in foreclosure.

Unless constraints on our clients are altered in some way, we expect to see a constant flow of new properties coming under our management for many years to come. If the constraints are lifted in any way however, we could see a large number of properties coming a lot sooner, adding significant incremental revenue streams earlier than anticipated. Either way, we will be ready.

And at the same time, we have also been very successful over the years increasing our revenues by adding ancillary services like renovations, remodeling, repairs, and code compliance to our base service contracts. And we continue to do this. Currently we're working with our clients on a new service to monitor, maintain and preserve their collateral prior to foreclosure, particularly with such a large number of homes in the pre-foreclosure or shadow inventory stage. It's still early days, but the opportunity to add real and tangible value to our clients by preserving the value of their collateral a lot earlier in the process is significant and important to them.

The key to creating long-term shareholder value, especially in times of volatility and uncertainty, is to stick to your proven business model. Prudently seek out new business opportunities, both internally and through acquisition, and always maintain a strong balance sheet with ample growth capital, all of which have been a key to the success of FirstService.

Overall, while our results for the third quarter were respectable given market conditions, we had hoped that they would be a little bit stronger. However, given our pipelines in commercial real estate and other key indicators, we are optimistic we will finish the year well and set ourselves up nicely for fiscal 2012.

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

Thank you, Jay. Despite the elevated level of economic uncertainty experienced in most of our major markets, which has sidetracked our recovery seen in the first half of the year, FirstService reported respectable overall results in our third quarter ended September 30th. Here are the highlights of our consolidated results for the quarter.

Revenues were $585.4 million, up 10% from $530.4 million reported in our third quarter last year. With internal growth of 4% relating to acquisitions and 2% related to foreign exchange.

Adjusted EBITDA totaled $47.6 million, up from $45.7 million last year, with our margin coming in at 8.1% versus 8.6% last year. Adjusted diluted earnings per share came in at $0.61, the same as EPS reported in Q3 of last year.

As outlined in our press release and summary of financial results released this morning, adjusted EPS includes certain adjustments to earnings per share 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 turning to our quarterly cash flow and balance sheet, I'd like to comment on an item relating to our consolidated operating results, principally the fact that we reported an increase in EBITDA, yet our adjusted EPS was flat for the quarter. This is primarily attributable to the share of loss arising from our 29.9% ownership interest in Collier's International UK, which negatively impacted adjusted EPS in the quarter by $0.06 [technical difficulty] $0.04 in Q3 of last year. The impact of the losses at Colliers UK are non-cash in nature, but required by GAAP despite the passive nature of our investment in this self-sustaining operation.

Turning now to our cash flow statement, we saw solid results in our third quarter, generating over $47 million in cash flow from operations, up 7% compared to Q3 of last year.

During the quarter we invested about $12 million in new acquisitions compared to $9 million invested in the third quarter last year. And in addition, we increased our stake in our existing businesses by a total of $34 million, most of this related to the completion of the reorganization of our property services division, which we outlined during our second quarter conference call.

We also invested $11 million in CapEx, up from $8 million in the same quarter last year, most of which was spent on upgrades in our information technology with the largest portion being substantial investments in our Colliers International operation, which is consistent with the amount spent in prior quarters this year and last. Year-to-date we have invested about $24 million in CapEx and expect to finish the year in the $34 million to $36 million range.

As noted in our press release this morning, we repurchased shares on the open market during the quarter under our issuer bid, repurchasing 136,000 common shares at an average price of $27.22 per share and about 150,000 preferred shares at an average price of $25 per share.

Moving to our balance sheet, our net debt position at quarter-end was $311 million, compared to $287 million at the end of the second quarter, and our leverage, expressed in terms of net debt to trailing 12-month EBITDA, was 2 times. Excluding the $77 million in our 5-year unsecured convertible debentures, our net debt stood at $234 million and our leverage at about 1.5 times.

With modest leverage and more than $150 million in available cash and undrawn credit under our bank lines, which we will be renewing in early to mid 2012, 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 his comments. Scott?

Thank you, John, and good morning.

Let me start my divisional review with Commercial Real Estate, where revenues for the quarter were $252.9 million, up 14% from the third quarter of 2010. 6% organically, 2% from acquisitions, and 6% from the favorable impact of FX translation.

Geographically, our growth was driven by increases in the Americas, in Central and Eastern Europe, tempered by flat year-over-year results in Asia-Pac. By service line, our growth was driven by solid increases in sales commissions and supported by smaller increases in property management and appraisal.

Leasing revenues were down in most markets compared to the third quarter of 2010 when we reported 50% increases in leasing revenues relative to the same quarter in 2009.

Let me give you a little more color on each region. In the Americas, revenues were up 12%, 7% organically with the balance split equally between acquisitions and FX translation gain. Organic growth was driven by solid increases in brokerage activity and project management in Canada, and strong growth in investment sales commissions in Latin America.

Our US operations generated more modest, single-digit growth with strong increases in sales commissions, somewhat offset by declines in leasing revenue. We generated a mid single-digit market in the Americas, up about 100 basis points from the prior year, tempered by continuing investment in the US in recruiting and also in property management as we continue to build-out our platform in this essential service area.

Our pipelines at quarter end across the region were healthy and bolstered by several deals that slipped from the third quarter into the fourth and have since closed. Baring an economic shock that significantly slows current activity levels, we would expect to report solid year-over-year increases in fourth quarter revenue and EBITDA for the Americas region.

In our Asia-Pac region, year-over-year revenues were up 12% in US dollars, almost all from FX translation gains resulting from stronger Asian currency versus the third quarter of 2010. Solid organic growth in Asia was tempered by modest year-over-year declines in Australia. In general across the region, increases in investment sales commissions were offset by year-over-year declines in leasing activity, particularly in Australia where we reported extremely strong leasing revenues in the third quarter of 2010. So a tough comparison.

For the quarter we generated a high singe-digit EBITDA margin in Asia-Pac, which is down several hundred basis points from the low double-digit margin generated in the prior year due primarily to the lower revenues and reduced operating leverage in our more mature Australia business and fewer large high-margin deals relative to the prior year.

Looking forward to the balance of the year in Asia-Pac, we expect the fourth quarter, similar to the third, to show revenue increases in certain markets, offset by modest revenue declines in others. And on an aggregate result, net of FX, approximate that -- those results that achieved in the fourth quarter of 2010. We expect our margin to bounce back on a relative basis and be comparable for prior year also.

In our Europe region, including Russia, revenues were up by 50%, 32% organically, 9% from FX and 9% attributable to the acquisition of BHH in the Netherlands, which occurred in the fourth quarter of 2010. Organic growth was primarily driven by increases in leasing commissions in Poland and Russia.

We operate in 14 countries in Central and Eastern Europe, and year-over-year revenue was flat to slightly up for the most of the countries except Poland and Russia as I mentioned. Our market leading business in Poland continues to win market share and show particular strength in industrial leasing and investment sales.

In Russia, both our Moscow and Saint Petersburg offices continue to show strong results against weak comparative results in 2010 with retail, office and industrial leasing activity all contributing towards a 2011 resurgence.

Despite the revenue gains in the region, we incurred a loss primarily due to two factors. The sharp appreciation of the US dollar in September and the resulting negative FX impact on inter Company US dollar denominated loans in Romania and Russia.

Secondly, we had unusually high bad debt write-offs in Eastern Europe. Normalized for these losses, the EBITDA was low single-digit and an improvement over the prior year.

Looking forward, our pipelines are reasonably healthy in this region, and Russia in particular continues to recover, but there is obviously a great deal of uncertainty across Europe relating to [sobering] debt issues and retail bank exposure. Based on the visibility we have today, we believe our fourth quarter will compare favorably to prior year.

In summary, the increased likelihood of a European debt default and the double dip recession have added volatility and uncertainty to the market. Our pipelines are healthy in most regions and we are positioned to deliver a solid fourth quarter, up over 2010. But any kind of economic shock over the next few months could stall closing and negatively impact our results.

There is little visibility into 2012 at this point. To the extent we can we will provide outlook commentary on 2012 in our year-end call.

Third quarter results for our residential property management division were very similar to our first two quarters of this year, a continuation of the same theme. Solid organic growth and market share gains across North America, with some margin erosion relative to prior year due to pricing pressure. Total revenues were $208.7 million for the quarter, up 15% over the prior year, 7% organically with the balance from acquisitions completed over the last 12 months.

Recall from my comments in prior quarters that 7% growth represents market share gain as there is really no unit growth to speak of or price appreciation in the market currently. These gains are gratifying and reflective of the competitive differentiators that we have invested in and developed over a number of years.

Our EBITDA margin in the quarter was 10%, down 70 basis points from the prior year quarter, primarily due to ongoing price pressure as I mentioned. While we have been very successful in retaining our clients all year and maintain client retention rates in the mid-90s, it has been difficult to secure price increases, as you heard from Jay, upon renewal, while certain of our costs continue to rise.

Looking forward in Residential Property Management, we expect to continue to show solid revenue gains over the next several quarters, with our year-over-year margin comparisons becoming more stable beginning in the fourth quarter.

In our Property Services division, including field asset services plus our franchise brand, total revenues were down 2% from the prior year and roughly flat sequentially compared to the June quarter. The year-over-year decline is a result of reduced volumes at FAS, offset somewhat by increased revenues across our franchise system.

As we discussed in our second quarter conference call, foreclosure activity is down markedly this year compared to last, the result of increased state and federal regulation, court delays, and self imposed slowdowns or even cessation of foreclosure activity by many of the largest mortgage lenders as they re-file or revisit pending cases to prevent errors.

Nationally, property repossession by mortgage lenders was down 32% in the third quarter compared to prior year. FAS REO volumes declined in line with the market, but revenues were down only 6% for the quarter as we continue to have success in driving ancillary revenues, including remodeling, repairs, rental services, code compliance and inspection.

Looking forward, there are signs that mortgage lenders are starting to step up foreclosure activity. First time default notices increased 14% in the third quarter compared to the second quarter. Initial default notices are the first step in the foreclosure process and the sequential increase reverses a trend of five consecutive quarters of decline.

While more homes entered the foreclosure process during the quarter, it will not impact the FAS results in the near-term unless the foreclosure timeline accelerates from current levels. The average time nationally from initial default notice until foreclosure is greater than 11 months and in certain states it is greater than two years. The increased activity points to higher volumes for FAS some time in 2012. Our expectation for the fourth quarter and early 2012 is for volume levels that approximate that experienced in the third quarter and that continue to lag prior year numbers.

Turning to our franchise systems, revenues were up 7% year-over-year, driven by solid growth across the larger system, Paul Davis Restoration, California Closets and CertaPro Painter. Paul Davis Restoration in particular had a strong third quarter, as most of its franchisees were busy with flooding and damage from poor weather and storms throughout the US, particularly in the Northeast with Irene and Lee. Much of this activity of Paul Davis is carrying through October, which together with continued and consistent market share gains at each of our other systems should lead to another quarter of mid to high single-digit growth.

The margin in property services for the quarter was 15.8%, down from 17.6% in the prior year. The margin decline was at Field Asset services and is the result of revenue mix change and increases in the scope of services required under certain contract. As I mentioned, ancillary services such as remodeling and inspections, were up significantly this quarter over the prior year and these services generally carry a lower margin.

Also, mortgage lenders and services are currently under extreme and conflicting pressure, internally to minimize preservation costs and externally to maintain their REO properties to a standard that does not negatively impact neighboring home values. This pressure, scope creep, and the revenue mix change are expected to impact FAS in the fourth quarter also. Potential volume increases in 2012 and the related operating leverage will help in the longer-term.

This concludes our prepared comments and I would now like to ask the operator to open the floor to questions.

(Operator instructions) Frederic Bastien, Raymond James.

My first question relates to Colliers CRE. The investment you made almost -- I guess it's almost two years ago to the day -- wondering how that is going and whether there are plans to perhaps increase your investment now. Wanted to know what your expectations are for that particular business.

Well, that particular business is not performing as we would like. We have a 29.9% interest, not a controlling interest in that business, so it's a public Company, it has a Board, and there's a lot of -- bureaucracy isn't the right word, but there's a lot of slowness to taking action in the UK on that business that would not be the case had we owned it entirely on our own.

The market itself, as everyone knows, is very, very difficult. UK in particular is very weak. So all of these kinds of requirements, all of these kinds of issues are impacting the Company's results. And as John mentioned, it impacted us to the tune of $0.06 a share on an earnings per share basis this quarter compared to $0.04 last year this quarter.

So business is not great and in some respects our hands are tied based on the current configuration. And we're waiting to see where we go with this business longer-term. But currently we're just going to sit and wait. There's no need to make a further investment there. Let's see if they can pick up their operations, the market can change. We're actually quite fortunate that we only have a third position in that marketplace. Many of our peers have a significantly larger business there and it's impacting them more than it is us.

Fair enough, thanks. On the overall, so to Colliers you mentioned -- you highlighted a couple of one-time costs that might have, or probably have impacted the margin profile of Colliers. But there's one that's kind of recurring, it's your investments -- I wouldn't call them costs -- but they're investments in staffing up your offices and the like. How much longer can we expect you to make those kinds of investments? And just wanted to get a sense of as to when we can expect margins to start creeping up.

The head count increase is primarily taking place in the US and is somewhat opportunistic this year, taking advantage of instability at certain of our competitors and taking advantage of the opportunity to bring in some talented professionals. So we're doing that on the brokerage side and also on the property management side. And there is a lag in terms of the producers bringing in revenue and paying for themselves.

So net net that is a cost to us this year. If the market cooperates, we'll see a return in 2012, but this results in a market share increase for us. We've added around 60 producers in brokerage and close to that number in property management this year. We have brought in revenue as well, but it hasn't paid for itself at this point.

And Scott, the 60 brokers you mentioned, is that a net figure? Have you won more and lost some or?

Yes, that's net figure.

Will Marks, JMP Securities.

I wanted to just follow-up on a few things. One, mentioned UK weakness, as we all know. How long has this been going on for? Is this something that pre-dated the kind of August beginning of problems elsewhere in terms of global economy?

I think this business -- and let's just start with the business first. I think this business, from the date we made the initial investment was flat for probably six months and then deteriorated further as the market got tougher, it got tougher in the UK. We are excited about some of the new people that Tony Horrel, the CEO, has recruited into the business there. But it is very, very difficult market conditions. Central London is relatively strong, it's the balance of the UK that's a problem. And so is their -- they also own the operations in Spain and Ireland, both under very difficult pressure right now.

And is the -- I mean are you seeing weakness in leasing and sales? Or -- it sounds like in the rest of the world it's kind of mostly sales still fairly strong and leasing has been weak. And how about in the UK?

Well, I can't comment on the splits in the UK, but I can say that in terms of investments sales in Central London, they continue in the same way as investment sales have been recently strong in some of the larger markets in the US. But outside of Central London, they've been virtually nonexistent. And in terms of the leasing, I can't really comment because I -- but John may have some color on that.

We will -- the reality is we have a 29.9% interest in the business, but it's not like the rest of Colliers where we have access to detailed information. We have available their publicly released information, but not that granular in terms of actual information around investment sales versus leasing and so forth.

I would like to -- a few more questions tied to sales and leasing in particular I think due to the impressive margins that these businesses spin off. Can you maybe start with the US and I believe you mentioned strength in sales offset somewhat by leasing. Is that correct?

Yes.

And is the leasing -- your total revenues were up and I know there's some -- the market share gain, but is the leasing down considerably? Is it double-digit weakness? And is the sales -- I mean I see some sales, that's more public, we can get data. But on the leasing how bad is it?

It was down I would say low double-digit for us, Will. I mean we're finding that our strength is more industrial and in retail and secondary markets and more closely tied to the economy. And we're finding that with the capital markets as volatile as they are and the problems in Europe that it's weighing down the decision-making in the US and companies increasingly are reluctant to make long-term leases decisions. I think there is still in some of the global gateway markets class A office space is still a strong market. We don't have the same market position there.

That's fair enough. And actually same question in Europe. You did address the UK, but maybe just Europe as a whole. Are we seeing the same kind of reluctancy among tenants?

Well, our footprint is primarily Central and Eastern Europe. And we are finding that they're coming off some very difficult years and we're seeing more strength there. I mentioned in my comments in particular Poland and Russia. But we're seeing some strength in leasing in -- as those markets recover from very, very low levels.

And then just finally on Asia. It sounded like Australia offsetting some of the strength in Asia. Is that in both leasing and sales?

Leasing primarily. Our sales -- investment sales activity was -- grew across Asia-Pac. Leasing was reasonable in Asia, but it was down in Australia. And we had a very strong quarter last year with some significant sized deals that carried large margins with them also. And it impacted our revenues and margins in Australia as a comparison.

Brandon Dobell, William Blair & Company.

In the property management business, maybe a little more color on how some of the companies you acquired in '08 and '09, and maybe even early '10, are acting. Are you seeing faster than that 7% kind of growth number? Have you been able to streamline those operations more or less than you expected? I guess I'm trying to figure out how you've done relative to your expectations return wise on those deals you made.

I think the return has been good, the experience has been good. As we integrate those businesses and bring our best practices to them. The organic growth net net has probably been higher with our acquired companies. Toronto in particular, which is a vibrant condo market right now, our business is doing very well. But in general the experience has been good. Now I would say outside of Toronto the growth has matched that of our other businesses.

And then within the contracts that are -- you have renewed recently or that you've got some visibility into I guess in the fourth quarter here, what's the -- I guess the behavior of your clients? Are they still pushing back pretty hard on price? Do you see any lessening of the pushback on some of those other services that over the past year or so have been a little bit tough to predict?

I don't think we're seeing any pressure alleviating right now, particularly in the sunbelt states where it remains -- growth in the US actually, where the housing market remains very difficult. The budgets are still under pressure at all these communities. And so we, as Jay said, as I said, we're renewing our contracts and we are winning business, but we're not seeing any price increases at this point.

And then turning over to the old asset services for a second, any sense of how much lower margin some of the ancillary services are compared to kind of the core services that we've heard about the past couple of years? I'm trying to get a sense of how much of an issue this, let's call it revenue mix shift, is going to be as we think about the next several quarters in that business.

I would say on average 200 to 300 basis points lower. But inspections is growing rapidly, remodeling is growing rapidly right now. And those margins are lower than our preservation business 200 or 300 basis points.

And then finally in the Colliers part of the business, you mentioned you picked up 60 or so professionals within property management. Are those people coming over from firms and then bringing business with them? Or is the idea that they've had a track record with clients and now you can go out and use them to go try and pitch future deals? I'm just trying to get a sense of what the lag may be on that part of the kind of hiring versus production equation within Colliers.

Let me clarify. It was 60 brokerage net increase. And the number of property management additions is less than 50. But I would say the answer to your question is both -- well, I'm going to let Jay add a little more color.

Yes, that's what I was going to say, Scott. It's actually both. I mean some of them are bringing business and some significant business with them. Obviously the brokers have their own brokerage relationships and come with prospects, but they also come with deals that are already in the hopper, which we don't really benefit from until new deals are generated within Colliers.

But on the property management side, we've been fortunate enough to win some significant property management retainers as these new senior people have joined us and taken leadership roles in our property management business. Obviously property management is a core competency for FirstService, so we want to utilize our leverage and scale that we have in some of our other areas to create a competitive advantage there.

So it'll take some time, but we're cautiously optimistic that we'll be able to build that business. And of course, that translates into other commercial real estate services. The more buildings you manage, the more opportunity you have to do incremental things for those clients.

And a quick follow-on to that, Jay. You've been pretty active on the residential side of property management, looking for acquisitions. Does that same kind of focus cross over into the commercial side? It seems like most of it for the growth there has been through kind of hiring people or leveraging existing brokered relations. Any thought on building that business through kind of regional acquisitions or something like that?

An interesting -- it's a very good question and it's one that we've focused on extensively. There is -- the makeup of the targets in that business are different than in resi property management. There's very, very few traditional third party managers, other than the key brokerage firms. And that's why we are -- focus our efforts on that. Institutions will outsource their institutionally owned properties to big brand name commercial real estate service providers because they realize the benefits.

The balance of the property management is being handled by firms that both own and manage at the same time. So unless they make a conscious decision to dispose of their third party asset management business, which is a hard thing for them to do because it's so integrated into their Company owned operation, it makes acquisitions of course third party management companies very difficult. At least in North America.

David Gold, Sidoti.

Just wanted to chat a little bit more on margins on the commercial real estate side basically. A couple of things. One, to the extent that you're confident that we see some improvement there, particularly as we go to the fourth quarter, is it more driven by less costs on the, say recruiting and hiring side? Or is it more driven by hey, this should be just the sheer volume coming through fourth quarter and we should benefit from that?

It'll be driven by volume.

And I guess part two, what gives you the confidence in seeing the margin bounce? Is it again entirely volume or are there other things taking place, sort of behind the scenes, that offer you some confidence there?

Well, we're expecting a solid fourth quarter with revenue growth. And our expectation is that we'll show some leverage of that incremental revenue. As our goal is to work towards a 10% margin in commercial real estate, and we feel we're on track over the next couple of years to hit that.

And then one other question. When you think about field asset sort of more broadly, obviously the regulatory environment has made it sort of tough in a climate that one would think that that business would do very well. How should we think about going forward basically, the perfect environment for that business? What's basically the best case for that business to make a lot of money?

It's a difficult question to answer, David, so I'm going to answer it this way. What we -- if you would have asked us the question a year ago, we would have said as soon as the shadow inventory starts to break, our revenue streams would accelerate considerably for the next couple of years and we would have shown unbelievable results just by servicing down that shadow inventory.

It is now clear based on all of the data, that that shadow inventory is being managed by an invisible hand and if it continues to be managed down in an orderly way, we will have consistent type volumes around those revenues for a long period of time.

What's also happening in that business is the additional revenue streams, which we were fortunate to initiate several years ago, have masked somewhat the revenues we would have generated had we remained operating our business in the same way as we managed the businesses -- that business initially.

And finally and most importantly, as the business -- as we get deeper and deeper in the business and watch the changes that are happening in the marketplace, new opportunities are opening up. One of them of course is this whole pre foreclosure marketplace, 6 million homes that somebody isn't allowing the lenders to execute on, which means that people are living there for free. And so there's a real opportunity and there's a real need for the ultimate owner of that asset or the security to monitor and maintain those even before foreclosure to ensure that when they get that asset it's in as good a shape as possible.

You're also reading a lot about the whole rental initiatives that the governments are trying to put together. We're knee deep in that. Obviously we're the market leader in that space. We do quite a bit of rental for Fannie and Freddie and several others right now. If the government decides that selectively they want to take some of that shadow inventory and sell it on bulk to buyers of bundles of assets, there's really only one Company that can manage those properties on a North American basis and that's us.

So we have two groups within our organization that are focused entirely on the potential rental opportunity and a potential breakthrough of that shadow inventory into rental product, which could create another huge revenue stream for us long-term. And that would be sort of permanent longer-term rental type product that will just enhance our rental business significantly.

So in conclusion, it's very fluid, the market. It's in the papers every single day. There's new announcements everyday to try and re-jig the number of homes that are in the shadow inventory. We're all over that, our people are all over that and we think that there's two or three opportunities that could break for us and could really drive the revenue streams of Field Assets up materially in the next couple of years.

Surely the management team is very bullish on the opportunities and we'll have to see over the next couple of years whether we'll be able to pull in one or two of these big opportunities and have them translate into revenue and profits for us.

Frederic Bastien, Raymond James.

John, just wondering if you've been actively buying back shares in the fourth quarter?

Well, we're in blackout, so we're precluded from buying shares currently. Once blackout is over, we will evaluate whether or not it makes sense to dedicate capital to further buybacks or we're always balancing that versus acquisitions. So we'll just sort of take that one step at a time.

Valerie Blume, RBC Capital Markets.

I'm just wondering with Colliers building out of the property management platform you mentioned, is this concentrated largely in the US right now or elsewhere?

The US primarily, but it's a focus for us everywhere. But in terms of the investment, it's primarily in the US right now.

And do you have any recent contract wins you could share with us or?

We have several, but it's not something that we normally share.

And then just back on the margins. Just trying to get a handle of downside risks. Like would you say the margins of 3.6% this quarter, is that pretty much kind of rock bottom or like could it get worse or what are you thinking?

Well, we expect the margin in '11 on a full-year basis to be up over 10% and we expect further improvement from there.

But you don't want to give any sort of range for next year?

I'm looking to my CFO.

Look, Valerie, I mean we're not giving guidance, but I can tell you that as Scott indicated earlier, we have a 10% goal, which is shared with our senior management team that oversees that business directly. We're on a path to getting there and that's a few years away. So steady as she goes.

There may be the odd quarter where you see a little bit of a setback like we had here, but everything else is pointing to increasing our margins as we go along and certainly we'll need the market to kind of be supportive of that as we increase our volumes.

And I'd like to add something else. I mean building a business as we're doing with Colliers, is a one step at a time process. We bought this business and we've done significant growth over a number of years. And there's a unique opportunity right now in the marketplace, as Scott said, to take advantage of some near-term recruiting opportunities, which are impacting our margin.

Frankly, I would spend more on recruiting rather than less, and have it impact our margins near-term more than you're seeing in front of you. And that's simply because these opportunities do not come all the time and you have to take advantage of them when they do come. Mistakes will be made, you'll recruit the wrong guy.

We think we have a model that gives us some downside protection there, but given the nature of some of our competitors in different geographic regions, what's going on with them both financially and culturally, there's a real opportunity to step up our professionalism, quality of our people, both in property management, corporate services and in brokerage. And we should be all over those and we should not be focusing so much on this one quarter impact on margin.

That helps a lot, thank you. And then you just mentioned (inaudible) could probably likely do one to two acquisitions before year-end. Is this in the residential side of the things?

It's in the residential area, yes.

And then you just plan to balance that with probably future buybacks? Is that sort of?

Yes, we'll be as selective as we have in the past and where it makes sense, yes.

Then one last question. On the Field Assets, you mentioned you're providing ancillary services. Would you say you're competitors are also doing that or is this helping you set yourself apart or gain market share?

Certainly we have competitors. They're not necessarily the same competitors that we have in our preservation business. But so we see it as a market share gain, yes.

(Operator instructions) There are no more questions at this time. Please continue.

Thank you, everybody for joining us on the conference call. And we look forward to the next with our year-end numbers. Thanks again.

Thank you, ladies and gentlemen. This concludes your conference call for today. We thank you for your participation and you may now disconnect your line and have a great day.