Colliers International Group Inc (CIGI) 2011 Q4 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 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 February 15, 2012. 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, everyone, and good morning, everyone, joining our call today. With me is Scott Patterson, our President and Chief Operating Officer, and John Friedrichsen, Senior Vice President and Chief Financial Officer.

This morning FirstService reported strong fourth-quarter and full-year results. For the fourth quarter revenues were $595 million, up 8%, EBITDA was $45 million, up 20%, and earnings per share was $0.52 per share, up 41%. For the full year revenues hit a record $2.2 billion. EBITDA was $162 million, up 10%, and earnings per share came in at $1.81 per share, up 12% over the prior year.

Colliers International led our growth for the year with strong increases in revenues and profits, particularly in the Americas, Asia, and central and eastern Europe as we continued to strengthen the brand, increase our margins, and integrate worldwide operations. FirstService Residential Management also delivered solid results both on the top and bottom lines, completing several strategic acquisitions during the year in new and existing markets and strengthening its position as North America's largest residential property manager.

And in Property Services, despite the challenges in the US economy, we achieved better than expected results at our FirstService brands franchise business while Field Assets, our counter cyclical property preservation and distressed asset management operation, fell short as foreclosure volumes decreased considerably, particularly in the final quarter of the year. Scott and John will have much more to say about our operational and financial results in just a few minutes.

At its core, FirstService is a property management company that generates more than 60% of its revenues from recurring property management contracts. Having a stable and predictable revenue stream takes away much of the cyclicality experienced by others in the real estate services industry while still having significant and global growth opportunities.

With more than 2.3 million square feet of commercial and -- a billion square feet of commercial and residential real estate under management, FirstService is one of the world's largest property managers. The leadership positional allows us to leverage our scale, create significant value for our clients in areas such as energy, insurance, financial products, and a variety of other areas, all of them helping to create significant incremental competitive advantages for FirstService. Here are some of the highlights of the past year.

In terms of acquisitions, we completed eight this year, including market leading service businesses in Minneapolis, Vancouver, Charlotte, Las Vegas, and Toronto. After considering the possible divestiture of our FirstService brands franchise business, we ultimately reaffirmed our commitment to the business primarily because of our confidence in our operating management teams and because of the potential we continue to see in this service line as the US economy strengthens.

One outcome of this decision was to transition divisional management to the executive team here at FirstService. This not only reduced operating costs, but it also increased our operational efficiency which we expect will translate into greater growth opportunities in the years to come.

We continued to expand our focus on the net promoters system. Back in 2009, FirstService was an early adopter of the net promoters score methodology, which is a rigorous system designed to increase client loyalty by defining, assessing, and improving service delivery. The result has been higher customer retention rates and improved customer satisfaction, which is impressive given the business environment we've been operating in over the past few years.

Beginning this year in 2012, we plan to expand our efforts further to measure and improve overall employee satisfaction. If we can create a culture that delights customers with employees who are committed to delivering exceptional service, we can create the ultimate competitive advantage.

And finally, we continued to achieve excellent results in our sustainability efforts. Our unique and proprietary database allows us to track and measure historical energy consumption and operating costs for our managed communities.

During the year, in New York City alone, we delivered more than 350 energy report cards. Those resulted in 92 energy conservation engagements from oil to gas and steamer to boiler conversions, lighting retrofits, and building system upgrades, just to name a few.

At the same time, we also completed New York City's largest multifamily residential aggregated energy procurement program. In total, we saved our clients more than $11 million in New York City, or about 9% of their baseline energy costs. Our continued investment in sustainability is another reason why more clients are choosing FirstService to manage their properties.

In summary, we remain confident that our successful track record, proven business model, solid financial position, and focus on global real estate services will continue to deliver strong returns for our shareholders in 2012 and beyond.

Over the years our shareholders have done extremely well with their investment in FirstService. A $100,000 investment when we first listed on the NASDAQ in 1995 is worth more than $2 million today. That's more than a 20% annualized return over a 16-year period, an exceptional return by any standard.

Given the abundance of growth opportunities we see in the real estate services industry, one of the world's largest markets, the future for FirstService and its shareholders is extremely bright indeed.

Now let me ask John to take you through the financial details for the quarter. Then Scott will provide his operational report, and, following that, we'll open things up for questions. John --

Thank you, Jay. As reported in our press release issued earlier this morning and already highlighted by Jay in his opening remarks, FirstService reported solid operating results across its three real estate services platform for the year and our fourth quarter of 2011. Here are the highlights of our consolidated results for the quarter and full year.

Revenues totaled $594.9 million in the quarter, up 8% from the $552.1 reported in our fourth quarter in 2010, with internal growth and acquisitions contributing equally to overall growth in revenues. For the full year in 2011 revenues totaled $2.22 billion versus $1.99 billion last year, up 12%, with 6% internal growth, 4% from acquisitions, and 2% on account of foreign exchange.

Adjusted EBITDA for the quarter was $44.5 million, up 20% from $37 million in the same period last year. And for the full year, adjusted EBITDA totaled $161.6 million, an increase of 10% over the $147.3 million in 2010. And finally, adjusted diluted earnings per share was $0.52 in the fourth quarter, compared to $0.37 per share last year, an increase of 41%. For the year, adjusted diluted earnings per share was $1.81, up 12%, from the $1.61 reported in 2010.

As outlined in prior conference calls, and detailed in our press release this morning, there are several adjustments made from GAAP earnings per share to determine our reported adjusted earnings per share. On a GAAP basis, our EPS was $2.01 for the fourth quarter this year, versus a loss of $0.12 per share for the quarter in 2010. And for the year, GAAP EPS was $2.03 versus $0.11 in 2010.

Though I won't go into any detail on every adjustment, there are two that are worthy of comment. Firstly, for some time now we have been adding back to our adjusted EPS the impact of the tax valuation allowance required in connection with the value of our tax loss carry forwards arising primarily from our commercial real estate operations in the US.

I'm pleased to report that we have been able to reverse this valuation allowance in connection with a reorganization of part of our US operations that resulted in GAAP -- in the GAAP criteria for reversal being met, allowing us to realize the accounting benefits of these loss carry forwards.

Accordingly, and to be consistent with the treatment of the valuation allowance of the past, our adjusted EPS reflects a reduction of $1.80 for the quarter and $1.46 for the full year in 2011 from the GAAP EPS otherwise reported. Going forward we do not expect to adjust GAAP EPS for this item.

The second adjustment to arrive at our adjusted EPS is an add-back on account of a non-cash $0.10 per share loss related to the $3.1 million write-down of our 29.6% interest in Colliers UK. This write-down was required based on the decline in trading value of Colliers UK shares as at December 31, 2011.

I should add that the losses of the Colliers UK, picked up as part of our equity accounting for this investment, negatively impacted our EPS in the amount of $0.13 for the full year in 2011 versus a loss of $0.12 last year. But these amounts have not been have adjusted out in calculating our adjusted EPS in 2011 and 2010.

Moving on, cash flow from operations was strong for the quarter with FirstService generating $57.5 million, versus $80.2 million -- and $80.2 million for the year. Investment in financing activity during the quarter included about $20 million invested to increase our stake in existing businesses.

During the quarter we invested just over $13 million in our CapEx, bringing CapEx spend for 2011 to about $37 million versus $32 million in 2010 and averaging just over 22% of adjusted EBITDA over the last couple of years. For 2012, we anticipate our CapEx to be a similar amount to 2011 but a smaller percentage of adjusted EBITDA.

Turning to our balance sheet, our net debt position at the end of the quarter inclusive of our $77 million in convertible debentures was about $296 million, up from $217 million at the end of 2010. While our leverage ratio, expressed in terms of net debt to trailing 12-month adjusted EBITDA was 1.8 times, up from 1.4 times a year ago with the higher leverage attributable primarily to our investment made to increase our share -- our share in our existing businesses. Excluding convertible debentures from our debt, our leverage ratio was 1.4 times.

Needless to say, our leverage continues to be at a very moderate level and well below our historical peak of about three times. With combined cash on hand and availability under our revolving credit facility at the end of the quarter of over $150 million and our modest leverage, we continue to have ample liquidity and financial capacity to fund our operations and investment activity to support our future growth.

Finally, our current $275 million revolver matures in September 2012. While we have been the beneficiary of relatively low interest rates agreed to in mid-2007 prior to the financial crisis of 2008, we made the decision at the beginning of the quarter to renew our revolver for a further five-year term.

We're in the late stages of completing our renewal which will include an increase in availability but at a slightly higher cost, reflecting the reality of the current bank lending market. We expect to complete our renewal during the first quarter and will announce further details upon closing. Now I would like to turn things over to Scott for his comments. Scott?

Thank you, John. I will focus my comments on the fourth-quarter operating performance and trends, not the full-year results. We can provide full-year metrics in the Q&A or separately. Let me start my divisional review with commercial real estate where revenues for the quarter were $300.4 million, up 12% from the fourth quarter of 2010 -- 10% organically.

Geographically our growth was driven by strong increases in the Americas and Central and Eastern Europe, tempered by flat year-over-year results in Asia Pac, continuing a trend we have seen for the last two quarters. By service line, our growth was driven by mid-teen increases in both sales and leasing revenues, and supported by solid single-digit increases in property management, appraisal, and project management.

In our Americas region, revenues were up 19% organically driven by strong sales and leasing results in North America, and very strong investment sales activity in Latin America, primarily Brazil and Mexico. In the US, results were buoyed by particularly strong revenues out of the major centers -- New York, Chicago, and Los Angeles. And in Canada for the quarter we had large year-over-year investment sales increases from our western offices.

We generated a margin in the Americas of approximately 10%, up 300 basis points from the prior year, due primarily to increased revenues and operating leverage in our US business. Our pipelines at year end across the region were healthy, and, despite challenged economic growth in the US, we are currently cautiously optimistic that we will show solid growth in 2012 in the Americas, largely driven by our US operations.

In our Asia Pac region revenues were flat year-over-year with a 20% increase in Asia revenues offset by a 10% revenue decline from our large Australian business. Growth in Asia was entirely due to strong increases in brokerage and property management in China, as our other businesses in Asia together were flat with the prior year.

The revenue decline in Australia for the quarter was primarily due to a very tough comparative quarter in the prior year. Australia finished very strongly in 2010 driven by record results in office and industrial leasing.

For the quarter in Asia Pac, we generated a solid mid-teen margin, off slightly from the prior year due to relative increases in property management revenues which carry a lower margin than brokerage. Looking forward, we expect to show solid single-digit growth in Asia Pac in 2012 led by continued strength in China and stronger results out of Australia and New Zealand. However, we will have tough comparatives in the first two quarters relative to a strong first half of 2011 in this region.

In our Europe region, including Russia, revenues were up by 20%, most of it organic growth driven primarily by strong increases in leasing revenues in Russia as both our St. Petersburg and Moscow offices had very strong quarters relative to the prior year. Our other operations in this region were on balance flat with a year ago, with stronger leasing revenues across the region offsetting declines in investment sales and appraisal.

We generated a margin of better than 15% during the quarter in Europe, up markedly from the prior year due to the leverage achieved in Russia and the lower cost structure generally across the region relative to the prior year. Looking forward, our pipelines are reasonably healthy in this region, and Russia, in particular, continues to recover, but there remains a high level of uncertainty across Europe.

In summary, for our commercial real estate division, we are quite pleased with our results for the fourth quarter. Looking to 2012, despite many economic challenges, the global real-estate market continues to recover. We are optimistic that we will show top-line growth and margin improvement in 2012 led by our US operations. However, our visibility for '12 is less than clear.

Residential property management revenues were up $187.9 million for the quarter, up 14% over the prior year -- 5% organic with the balance from six acquisitions completed over the last 12 months, including most recently Gittleman Property Management in Minneapolis. The organic growth in the quarter reflects market share gains resulting from new contract wins over the past year and were spread evenly across North America with each office in each of our four regions contributing to the growth.

Our EBITDA margin in the quarter was 6.4%, down from 7% in the prior-year quarter, due to a large severance payment and costs related to an ongoing legal dispute. Adjusted for these charges, the margin was approximately flat with a year ago. Looking forward, in Residential Property Management, we expect to continue to show solid revenue gains quarter over quarter through 2012 with increasing margin stability.

In our Property Services division, including Field Assets Services plus our franchise brands, total revenues were down 11% from the prior year as a result of volume and revenue declines at FAS offset somewhat by increased revenues across our franchise systems. As we indicated in our third-quarter call, foreclosure activity was down significantly in 2011 compared to 2010, the result of increased state and federal regulation, court delays, self-imposed slowdowns, and a far reaching probe into the Robo-Signing scandal.

Property repossession by mortgage lenders was down 22% in the third and fourth quarters compared to the prior year. FAS REO volumes declined in line with the market, but the revenue decline was mitigated somewhat as we continued to have success in driving ancillary revenues including remodeling, rental services, code compliance and inspections.

While foreclosures were down in 2011, mortgage delinquency rates were largely unchanged, which means the foreclosure shadow inventory remains an extremely large number. These delinquent mortgages will need to be dealt with at some point, in some manner, but the timing and path forward is unclear.

First time default notices increased 14% in the third quarter compared to the second, a sign that mortgage lenders were stepping up foreclosure activity, but notices fell back again in the fourth quarter. And, currently, there is no indication that the volumes will pick up, and we may see further decline.

Late last week a long running investigation into bank foreclosure abuse was concluded with a deal between 40 state attorneys general and five of the largest mortgage lenders in the US. As part of the deal, the banks have set aside $17 billion to provide some relief to borrowers that owe more than their home is worth.

The aggregate negative equity in the US is estimated at $700 billion. So the deal itself will do little to resolve the housing crisis. But the possible good news for FAS in the housing market is that, with the investigation behind them, it is felt by some experts that the banks can now move forward with more certainty in clearing their large backlogs of delinquent mortgages through the foreclosure process.

An alternative view is that the fine details of the deal around foreclosure process and procedure may further extend the foreclosure time line and further reduce volumes. Time will tell, but the shadow inventory remains, and a large percentage of these delinquent mortgages will eventually make their way through the default and foreclosure process, and FAS will ultimately capture its share of this work.

Turning to our franchise systems, revenues were up 7% organically versus the prior year, driven by strong mid-teen growth at California Closets and supported by solid single-digit growth across the rest of the franchise systems.

Consumer sentiment is anemic, and home improvement markets are flat, but each of our brands continue to grow through market share gains as many smaller competitors have been unable to fund marketing programs or working capital through the downturn. We expect this trend to continue through the first half of 2012 and hold out some optimism that home improvement spending will pick up in the second half as housing markets and the economy in general continue to recover.

The margin in Property Services for the quarter was 9.1%, down from 13.3% in the prior year, entirely due to margin deterioration at Field Asset Services, as the margin across our franchise systems was flat year-over-year. The margin decline at FAS was the result of reduced revenues and operating leverage, some mix change, as ancillary revenues, remodeling in particular, carry lower average margins than recurring service work, and increases in the scope of services required by two larger customers relative to the prior year.

While FAS has taken aggressive steps over the last six months to reduce its cost structure, in line with reduced foreclosure volumes, we expect that we will show some further margin decline in 2012 from the negative leverage associated with the lower volumes and the full-year impact of the relative mix change I described.

I would now like to ask the operator to open the call for questions.

Thank you. (Operator Instructions) We have a question from Valerie Blume.

I was looking for maybe an update on the acquisition environment. I know last year it was concentrated on Residential Property Management. Should we expect sort of the same for this year?

This is Jay speaking. There is a lot of interesting acquisition opportunities we're looking at. It's not just concentrated in Residential Property Management. It's also concentrated in the Commercial Real Estate Services area. The volumes of acquisitions, generally, that we're seeing are not the same level that we've seen historically. But we're hoping to add two or three interesting acquisitions this year if we're successful. So, I am optimistic, and adding and diversifying our revenue streams in commercial real estate is a focus for us for sure.

Okay. So that could just potentially be adding some of the Colliers offices that you don't currently have a majority interest in, or --?

Well, that's one potential, but the other area that I was referring to is diversifying -- further diversifying revenue streams. When we initially entered this industry, we believed that the right mix of our business would be well diversified between not just brokerage services but also ancillary services like valuations, other real estate advisory services, among other things. And we have been successful in changing the mix of our business so far, and we believe that we can continue to do that, and we can continue to do that on a global basis. So, core acquisitions of commercial real estate operations, whether they're part of Colliers or not part of Colliers, to strengthen a business region are to our way of thinking sort of standard acquisitions. But we also believe there's an opportunity this year to further diversify our revenue streams again, which will only strengthen the platform that much more.

Okay. And just on the Colliers side, just the noted strength in the US, how much would you sort of attribute to market share gains versus just an overall pickup in volume, like industry wide?

We made a number of recruits in 2010 and 2011, and so we would consider that an increase in share. We did add to the number of brokers. But the market also improved in the fourth quarter, and we rode that as well.

Okay. And then just one more question. On the Field Assets, with the Federal Housing Agency's REO initiative of turning some of the homes into rental properties, I know you guys touched on that last quarter. I'm just wondering sort of how big you see this opportunity for Field Assets.

Well, there is certainly increasing support and momentum in the market for the REO to rental initiative. Government owned enterprises, Fannie and Freddie, but also the banks -- they're all looking at the bulk sale of REO properties to investors who will then convert them into rental housing. FirstService is in a very good position to be a service provider to these investors. We have our national footprint of residential management and, in combination with our ability to provide repairs and upgrades to these properties on a national basis through Field Asset Services, we're in a very good position to benefit from this.

In addition, it could serve as a catalyst to stimulate the movement of delinquent mortgages through the foreclosure process. So it's certainly a net-net positive for us. 2012 -- we think there will be a number of pilots that will be set up, and we expect to participate in at least a few of those. I think that the more aggressive activity will take place towards the end of this year and 2013.

Okay. So it's still early stage, but you're well positioned to capitalize on it.

Yes.

Perfect. Those are all my questions for now, thanks.

Will Marks.

First, related to the last question, would you ever consider being a principal in some capacity, whether it's joint venture or fund in order to secure some of those homes in order to get the management contracts?

Will, we obviously deal with that a lot in some of the areas that Scott was just discussing. We believe we are a service company, first and foremost, and so the short answer is no. We don't have an asset management component to our business, and we would like to stay focused on providing exceptional services, and, in this case, property management services, to institutions. It also keeps our conflicts clean. Many of the people that we have spent time with that are pursuing this REO to rental initiative are all asking for conflict discussions, and this keeps us very clean from a conflict standpoint. So, the answer is no.

Okay, thank you for that. Next question, just on the overview you gave of the different regions within Colliers, you noted that APAC -- that region would have a tough comp in the first half. Looking at that for the other regions, do you have any further comments?

I think that our expectation is to show growth in Europe and the Americas, top line and margin in a more consistent basis across the quarters. But Asia Pac in particular we have some tough comps in the first quarter.

Okay, thank you. Then my final question, very big picture, on a competitive basis, there's certainly a few firms that have become global in scale and scope, and how do you look at it? Would you be more of -- do you feel as if there's a separation from the pack in that it's become maybe less competitive, that the three to five top global players are actually stealing a lot of market share?

There's no question that there are two players that are ahead of the pack. They've been in business a long time. They have strong customer relationships, some of which they're trading back and forth. But there is another tier, which we believe we're in the top of that second tier, that has got a huge opportunity to grow. This market is enormous. Clients are telling us they're sick and tired of going between one global player and another because these two seem to have a very strong position. We're also global and have the same capability, but we are a relative late comer to the game, and we're spending our time accelerating our efforts and taking share, or trying to take share from those two larger players.

Okay. That's great. Very helpful. Thank you.

Stephen McLeod.

Just following up on Field Asset Services, do you foresee a possible scenario where some of those properties that are stuck in the shadow inventory don't make their way into the foreclosure process?

The efforts through short sales and loan modification continue. To date they have not been successful, but ultimately if they are, they will eat away at that inventory and that would be an alternative for that inventory to resolve itself. But a large percentage, I think the market still believes that a large percentage of that inventory will ultimately make it -- needs to make its way through the foreclosure process.

I might add to that, Scott, that the whole concept of REO to rental is another area that may, over time, impact that shadow inventory, but it's really too soon to make a determination.

Right. And, practically, it does need to move through to the REO phase before it can then be sold to investors, but you're right that could accelerate.

And you would have to participate as it moves into the REO status?

Yes.

And then, geographically, are you seeing any difference in foreclosure volumes between judicial and non-judicial states?

Certainly, yes. There's a big gap between judicial states and non-judicial. We participate in both areas, so the data I have given you is a -- across the country average, but there is a big difference.

And what is sort of the split between your geographic exposure? I don't know if you have that number, but just roughly between judicial and non-judicial states?

I don't have that precisely, but we would be weighted towards judicial.

Okay. Great. And then just turning to the Residential Property Management business, Scott, you mentioned that the margin year-over-year was impacted by a large severance payment along with legal costs. I assume that margins were flat so we can back out what that impact was, but do you expect that to continue in the next quarter or beyond, or is it one-time?

I mean, periodically, we will see -- they're certainly one time in this quarter, but we as property manager get named in every and any sort of litigation associated with the property. So, that is an ongoing cost for us, but this past quarter it was an unusual number.

Okay. So excluding that you didn't see -- or you were able to offset fee compression through market share wins?

We're starting to see more stability in the fee compression. We -- in this business the first half of the year I think we expect to see continued pressure, and we're hoping to see it alleviate towards the back half of '12. But we may see some further compression in the first six months.

Okay, great. And on the commercial real-estate business margins were quite strong in the quarter. Is most of that attributable to operating leverage in the seasonally strong fourth quarter?

Yes, in the US in particular. Again, our recruiting efforts are starting to pay off, and our investment in our property management platform and corporate solutions platform are also starting to pay off and show returns.

Okay, great. Thank you very much, guys.

There are no further questions at this time. Please continue.

Okay. Ladies and gentlemen, thanks again for joining us on this conference call, and we look forward to speaking to you again during our first-quarter conference call. Thank you, operator, and thank you, everyone, again for attending.

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