FirstService Corporation (FSRV) CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.23.13 | About: Colliers International (CIGI)

FirstService Corporation (FSRV) Q3 2013 Earnings Conference Call October 23, 2013 ET

Executives

Jay Hennick – Founder and CEO

John Friedrichsen – SVP and CFO

Scott Patterson – President and COO

Analysts

Frederic Bastien – Raymond James

Sami Abboud – Scotiabank

Tal Woolley - RBC Capital Markets

Whitney Stevenson - JMP Securities

David Gold - Sidoti

Brandon Dobell – William Blair

Stephen MacLeod – BMO Capital Markets

Operator

Good day, ladies and gentlemen, and welcome to Third Quarter Investors’ Conference Call. Today’s call is being recorded. Legal counsel requires us to advice 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 40F as filed with the US Securities and Exchange Commission.

As a reminder, today’s call is being recorded. Today is Wednesday, October 23, 2013. At this time, for opening remarks and introductions, I’d like to turn the call over to the Founder and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Jay Hennick

Thank you and good morning everyone. As the operator said, I’m Jay Hennick, Founder of the company. 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 strong year-over-year results with revenue up 9%, EBITDA up 11% and earnings per share up 8%, all in what was another very busy quarter for our company on many levels. Each of our service lines reported strong revenue growth. Both Colliers International and FirstService Brand grew EBITDA by more 30%. We completed the re-branding at FirstService Residential, and we redeemed all of our outstanding convertible debentures. And also we successfully completed the sale of Field Asset Services. With so much accomplished FirstService is better positioned today than in any other time in its history to deliver strong growth in revenue and profits in the years ahead.

In terms of Field Asset Services, we sold the business to insurance company Assurant, Inc at the quarter end. While Field Assets was successfully repositioned for future growth, the changing environment in the U.S. residential mortgage market currently favors service providers like Assurant who can offer clients a more comprehensive suite of services. I would like to take this opportunity to thank our former management team for all of their efforts during our years of ownership and wish them well as part of the Assurant. Needless to say from FirstService's perspective investing in Field Assets back in 2007 was very fortuitous indeed. The strong cash flows generated during the U.S. housing and financial crisis proved to be counter cyclical to some of our other service lines and the substantial earnings that we generated provided us with the fire power we needed to capitalize on opportunities at the right time in the economic cycle.

As you know, Colliers International is one of the top three global players in commercial real estate and it continues to show momentum as we strengthen our platform one step at a time. During the quarter, EBITDA grew by 31% with margins up almost 130 basis points versus the prior year. Growth came both internally and from recent acquisitions and higher margins from our concentrated efforts to refine and strengthen our global platform. During the quarter, Colliers was also named best overall real estate advisory firm in Asia, China, Singapore and several other markets in the Far East by the Euromoney annual survey which demonstrate once again the strength of our market presence and the experience we have in the region. And Colliers continuous to make progress winning new mandate from large corporate client. So far this year Colliers was selected by British Telecom to be its exclusive global service solutions provider and has won major mandate from large clients such as Aon, NBC Universal, Dolby, Siemens, Sonopy [ph] to just a name few. We continue to receive outstanding feedback on our Colliers' 360 portfolio, analytic and business intelligence tools which is turning into a real big differentiator for Colliers as one of the few commercial real estate firms who can truly offer services to clients on a global basis.

Revenues at FirstService Residential were also up by 8% during the quarter all from internal growth. We are pleased to have completed the re-branding of all of our property management operations across North America to the FirstService Residential brand name. Bringing the FirstService Brand to the forefront was a natural step for us. It allowed us to deliver a consistent brand message and service delivery model across the board and it positioned us well to continue leveraging the more than 1.6 million units we managed across North America.

In terms of acquisitions, we completed the small but important acquisition adding Curry Association Management just after quarter end. Curry is that city's largest residential management company and it will be re-branded as FirstService Residential Kansas City over the coming months. Having such a large presence in the (inaudible) will allow us to bring our unique business model to this growing market and show our new clients there, some of the many differentiators we offer as the largest residential management firm in North America.

Property services also had a very strong quarter with EBITDA up 31% and margins up almost 500 basis points in the seasonally strong third quarter. All of our service brands including Paul Davis Restoration, California Closets, CertaPro Painters and pillar to post home inspections are showing increased momentum as customers begin spending again as house values continues to recover.

So all and all the third quarter was an excellent quarter all around. And we look forward to the balance of the year with great confidence, and we expect to finish well ahead of last year in virtually every category. Now, before we open things up for questions, let me turn things over to John for some of the financial details from the quarter and then Scott will provide his operational reports. John?

John Friedrichsen

Thank you, Jay. As already reported earlier this morning in our press release and highlighted by Jay in his opening remarks FirstService reported strong results in our third quarter building on a momentum seen through the first half of the year and noticeable improvement over the more constrained results reported in Q3 last year. Our results are a function of the focused efforts and investment decisions made by FirstService and our operating teams over the last few years and generally a continuing improvement in market conditions. A recent political wanker and discord in U.S. related to its fiscal situation did elevate uncertainty during the last part of quarter. Despite this uncertainty and ongoing challenges in certain other markets our operation performed exceedingly well.

Following results are those from continuing operations reflecting the sale of Field Asset Services at the end of the quarter. Revenues were $608.3 million, up 9% from $559 million in our third quarter last year with internal growth in local currency revenues of 8% or about 6% in US dollars factoring in the negative impact of FX in the quarter. Adjusted EBITDA totaled $55.4 million, up 11% from $49.7 million last year with our margin coming in at 9.1% versus 8.9% last year. Adjusted diluted earnings per share came in at $0.68 up 8% over the $0.63 reported from continuing operations in Q3 last year. As outlined in our press release and summary financial statement 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 operations all of which are outlined in detail in our release and consistent with our approach in disclosures in prior periods.

Before commenting on our cash flow statement and balance sheet, I have some comments on the divesture of Field Asset Services to follow-up on Jay’s opening remarks. From the fourth quarter of 2007 when FAS was acquired by FirstService to the end of our just completed third quarter this business generated an excess of $100 million in after tax cash flow for FirstService of which about $20 million was reinvested in CapEx primarily at [indiscernible] infrastructure to support the operations of FAS. So despite recording a small after tax loss in the sale of FAS the real economics were very favorable for FirstService during the past six years, culminating in an additional after tax sales proceeds of more than $50 million validating Field Asset Services as the preeminent preservation services platform in the US mortgage involved industry.

Turning now to our cash flow statement, we saw strong results in our third quarter generating $35 million in the cash flow from operation before working capital, up 29% compared to Q3 of last year and while after factoring and changes to working capital our cash flow from operations totaled $64.9 million, up 18% over the $55.2 million reported in the Q3 of last year.

During the quarter, our investment in new acquisitions was negligible coming off with heavy investment in Colliers Germany in the first half of the year. We continued to invest in our operations with $9.7 million expanded in capital expenditures up from $8.3 million in the same quarter last year. Year-to-date we have invested about $22 million in CapEx on par with last year. We do expect to finish the year with elevated CapEx compared to more normalized levels mainly on account of significant CapEx that will be required to fit out Colliers new premises in New York City which will total approximately $10 million once completed in early 2014 about half of which will be incurred in Q4. While the new landlord will be funding much of the fit out in tenant inducements, we expect to record incremental spend on a GAAP basis that will resolve in CapEx between $40 million and $42 million for the full year 2013 compared to the $44 million of CapEx invested in 2012 which as you may recall included $6 million related to Colliers U.K.'s new office in London.

Moving to our balance sheet, our net debt position at quarter end was $300 million compared to $462 million at the end of our second quarter with both the cash proceeds from the sales of FAS and the early conversion of our $77 million and 6.5% convertible debentures contributing significantly to this reduction. Our leverage expression in terms of net debt to trailing 12 month EBITDA was 1.6 times down from 2.6 times at the end of the Q2 in the current year and 2.4 times at the end of Q3 last year were significantly lower leveraged and close to $250 million in available cash and un-drawn credit and our bank lines we have ample financial capacity to augment our strong cash flow from operations and funding additional investments to help fuel the growth of our business needs and also support the quarterly dividend on our common shares.

Now I would like to turn things over to Scott for his comments. Scott?

Scott Patterson

Thank you, John and good morning. As you heard from Jay we generated solid results in our commercial real estate division for the quarter, up 9%, 5% organic growth with the balance coming from the acquisition of Colliers Germany. Organic growth globally was led by gains in Australia, Canada, the U.K. and Central and Eastern Europe. In local currency organic growth was even stronger at 8%, declined in the Canadian and Australian dollar over the last 12 months negatively impacted reported revenue growth.

By service line growth was driven by 20% plus increases in sales commission revenues supported by 10% increases in appraisal revenues offsetting part by 7% decline in leasing primarily coming out of North America. Property management, project management and other revenues were approximately flat year-over-year.

Revenues for Americas region which comprises over 50% of our total were flat. High single-digit growth in Canada was offset by declines in Latin America which reported a very strong third quarter in 2002 and revenues from our U.S. operations were approximately flat year-over-year.

Our service line strong increases in sales commission revenue upgraded 25% in U.S. and Canada were offset by 16% decline in leasing revenue. Leasing activity was down year-over-year across the Americas region particularly in our major markets.

In our Asia-Pac region revenues were up by 5% driven by very strong results in Australia and New Zealand which grew approximately 15% year-over-year on local currency, 7% when translated into US dollars.

Sales commission and leasing revenues contributed equally to the strong results in AMG which were tampered by flat results in aggregate from the rest of Asia.

Turning to our Europe region, revenues were up 62% largely due to the addition of Colliers Germany earlier this year but organic growth for the rest of Europe was a very healthy 19%. The growth was primarily driven by strong results in U.K. relative to prior year and supported by solid single-digit growth across Central and Eastern Europe. Regional revenue from sales, leasing and appraisal were all up approximately equally year-over-year.

In terms of profitability Colliers generated an EBITDA margin of 8.2% for the quarter, up from 6.9% in the prior year primarily due to improved profitability in our Europe region driven by two factors. Firstly, strong revenue growth in the U.K. led to a solidly profitable result compared to our reported loss in the prior year, and secondly the addition of the German business enhances our overall margin.

Looking to the fourth quarter for Colliers we believe we have sufficient pipeline activity and momentum to support a strong finish to 2013, the Q4 year-over-year organic growth and margin improvement in each of our three regions. Our primary concern around Q4 performance relates to the U.S. economy which continues to slow in the third quarter. The recent government shutdown and lack of any sustainable agreement has deferred uncertainty into 2014 which could further immune leasing activity in particular. Our leasing environment is currently very cautious and is likely to remain this way for the foreseeable future.

In our residential property management division, revenues were $243.9 million for the quarter, up 7% organically driven by new contract wins and increases in management fee revenue. We experienced solid growth in each of our core regions across North America with particular strength in Florida and our North region including our Canadian offices and mini atlas. Our new client wins continue to be somewhat balanced between new development, wins from competitors and the transition from self-management to professional management. Our growth this quarter came entirely from new contract wins as ancillary revenues were flat with the year ago period continuing a trend we are seeing for several quarter now increases in transfer and disclosure revenues, financial services, landscaping and other revenues, we are offset by decline in collecting services and related revenues. Our collection business has been in decline in line with the market for well over a year now and we made a decision during the quarter to aggressively downsize our service offering and as a result acted several markets and incurred charges $2 million. The charge primarily reflecting increased to the receivable provision but also include lease termination and severance cost. We have acted in Texas, Florida and Arizona market that still have portfolios of delinquent pile in these markets that need to be work through the collection or write off. As a result we are consulting with local law firms to continue work the existing portfolio and to service our client our new delinquency. The increased receivable provisions reflect the unsecured nature of our receivable and are aligned in place on outside parties to collect on our behalf.

Our EBITDA margin in the quarter was 8.2% compared to 9.5% in the prior year. The decline primarily the result of the $2 million in collection charge plus the [fine on] $700,000 of re-branding and related IT expenses. The merging was approximately in line with prior year after adjustment for these two amounts.

Looking forward at FirstService Residential for the fourth quarter, we expect to see continued organic growth with a margin that is in line or slightly better than prior year. Looking now at property services and with the big sale Field Asset, these divisions now consist of our FirstService Brand businesses. As a reminder this group comprises seven franchise systems, a word for which is California Closets, Paul Davis Restoration and CertaPro Painters plus nine company owned California Closets franchise. FirstService Brand has enjoyed a very strong 2013 which continue to the third quarter. Revenues were up 12% year-over-year although organic driven by very strong growth in California Closets and CertaPro Painters but supported by year-over-year growth in each of the franchise systems and every one of the company owned operations. Home improvement spending and remodeling in the U.S. continuous to be very strong and we are benefiting as a result. But we believe we also gained share through aggressive brand marketing and regeneration. Lease importance and average job size continue to trend up and we expect a strong finish to the year in this division. The margin for the seasonally strong third quarter was 33.2%, up from 28.3% in the prior year, the increase reflective of the strong leverage inherent in the franchise operating model, and the royalty generated revenues relative to other more labor intensive services businesses. That concludes our prepared comments. I would now like to ask the operator to take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

So the first question comes from Frederic Bastien of Raymond James. Please go ahead, Frederic.

Frederic Bastien – Raymond James

Hi, good morning everyone. Your franchise operations recorded EBITDA margin of 33% during the quarter which is really that as good as I seen the business deliver. Yes, I think we are on or at the end of earning stage of recovery and some of your discussions on finance so I was wondering how much more leverage do you think you can squeeze out of that business?

Scott Patterson

In terms of the margins I think that -- that margin is close to high water mark for us. There is a significant amount of operating leverage in this business so as revenues increased. We would see some improvement but unlikely to see the 500 basis points kind of move that we saw year-over-year this past quarter.

Frederic Bastien – Raymond James

And I see this I guess you are feeling as strong as quarter for that particular business. Where would that bring you on annualized basis in terms of margins?

Scott Patterson

Annualized it will be up from last year and close to --it will be high teen close to 20%.

Frederic Bastien – Raymond James

Great, thanks. Now moving on the call you said you had a very strong, if I recall you had a very strong fourth quarter last year, and do you think you can match the EBITDA that you produced last year in the fourth quarter this year?

Scott Patterson

Our pipelines in North America are approximately the same as prior year, but they are up in our other regions. We think that the based on what we know today we will match or exceed fourth quarter last year revenue and margin.

Frederic Bastien – Raymond James

Okay, that's good to hear. And lastly so your balance sheet is improved dramatically as well. How do you or where do you deploy that capital?

Scott Patterson

Well, I think it's the same old story Frederic, first and foremost we are looking for attractive accretive acquisition opportunities which obviously fit with our strategy, will help our strengthen our businesses. At first and foremost where will go. We will continue to manage carefully our capital expenditures and speak about some extra CapEx we will have with respect to New York which is an expensive place to build an office but something is needed, and I think we really support our business going forward there. That first and foremost where it's going to go. And I am sure we will get and deliver as lots of acquisition opportunities out there to pursue but it's great position to be in, having a very strong balance sheet at this time in the cycle, and now we are pleased to be where we are today.

Frederic Bastien – Raymond James

Is the focused going to be on continuing to build your kind of businesses or we are looking at another vertical?

Jay Hennick

It's Jay here, we have so much opportunity and all three of our businesses but principally Colliers and FirstService Residential because of the breadth and scope of both of the businesses. So our current focus from an acquisition standpoint is strengthening those two businesses on a global basis, adding service lines that might enhance our overall product offering to clients, so that's where our focus is.

Operator

All right. Our next question is from Sami Abboud of Scotiabank. Please go ahead, Sami.

Sami Abboud – Scotiabank

Hi, good morning. I am speaking on behalf of Anthony Zicha. My first question would be on related to I guess the acquisition. Your balance sheet is relatively is very healthy actually compared to last year's. Would you consider delivering your balance sheet to make acquisition material size or are you aiming to keep a balance sheet less than two times?

Jay Hennick

Well, the balance sheet strong this quarter and as John might confirm, our seasonally strong balance sheet quarter is actually yearend so we expected to get much stronger by year end. As a second part of your question is - no. We have as always been opportunistic in terms of acquisitions. And careful in the way we spend our capital. So if a great opportunity presented itself we would be there. We always believed we have the fire power regardless of where our balance sheet was; we now are in much more fortunate position that way. But it is all going to be can we find accretive acquisitions that can be integrated well into our existing platform and add value FirstService shareholders so I hate to sound like a broken record but it's been the same since our day one for us on that.

Sami Abboud – Scotiabank

Okay. And my last question would be regarding the FAS brand. I know I mean Colliers and FirstService Residential may be through that acquisition opportunities out there. FAS brand growth opportunities, can you talk about those please.

Scott Patterson

I think its essential organic growth that we are focused on with this division; home improvement spending continues increase and continues to take advantage of that and that's our focus. There are many internal initiatives that we are working and we believe we are growing at a rate that's greater than the market. But we think we got lots of room for growth.

Jay Hennick

And if we can just add something what Scott said if we continue to find organic growth in the 12 plus range why we wouldn't just stay focused there that is our total thinking.

Sami Abboud – Scotiabank

Okay and that will not include opening up more franchise locations or would that include that as well?

Scott Patterson

One of the things that we are working on is territory remediation and it's where territories are perhaps are too big other wise not being fully capitalized on, we are buying that turf back or persuasion [indiscernible] creating new franchises and so that is something we have been working on last year in particular and we will be for the next couple of years and that provides us with incremental growth.

Operator

Our next question is from Tal Woolley of RBC Capital Markets. Please go ahead, Tal.

Tal Woolley - RBC Capital Markets

Hi, good morning, everybody. Just wondering with rates coming certainly move back up, I am wondering if you can talk about within the commercial within the Colliers business. Are there certain lines that we should think about being more sensitive that moving rates? I am just wondering you have seen healthy growth in sales, do you think some of that is people try to get jump on, the higher rate and try to refinance now.

Scott Patterson

I am not sure we see that I mean investment sales market has been blunt all year, and it's really capital looking to take advantage of the real estate sector and yield is relatively to where rates are. As long as the rates -- as long as there are gap exist between rates and cap rate in livable yield I think that we will see continued help, in investments sales our pipelines are not declined. I would add to that I think really on recently within a last year to 18 months have bank lending particularly as it relates to commercial real estate really started to increase, is still far below it was during the last cycle as not just recovering so additional liquidity in the market will help with those volumes.

Tal Woolley - RBC Capital Markets.

Okay. And then just at a corporate level, any change in view on financing strategy for new acquisition, you got something a clean of the balance sheet but with rates moving any thoughts the way you look at financing acquisitions going forward or just steady as years.

Scott Patterson

I think the short answer is steady as you go; we have a very defined way that we complete acquisitions with lots of downside protection to these regions, we can structure them that way and we will continue to search our deal in the same way.

Tal Woolley - RBC Capital Markets.

Okay and in the residential business sounds like you did a fairly thorough review of the business lines that you want to be in and the geographies. Is there any more re-toying about business that we should expect going forward?

Scott Patterson

No, not I mean it was just one service line. I wouldn't call it re-toying, it was very focused on one specific service and we think that we have I mean that business will be small for us on go forward basis. And we [own outstanding] anything else in the future.

Tal Woolley - RBC Capital Markets.

And that collection I think you call that business as it has been that was fairly substantial revenue, potential margin business?

Scott Patterson

Yes.

Tal Woolley - RBC Capital Markets.

Okay and then John just wondering can we get the like the full current share counts with the preferred converts removed and that of any repurchasing right now, where the current share counts stands?

John Friedrichsen

We are about almost 36 - 35.6 million shares that’s the absolute number at the end of the quarter.

Operator

Our next question is from Whitney Stevenson of JMP Securities. Please go ahead Whitney

Unidentified Analyst

Hey guys this is Smith [ph] with Whitney, how are you?

Scott Patterson

Hello and how are you?

Unidentified Analyst

Good. Just curious about the FAS sale, Field Asset Services and may be if you can provide some history in terms of what you guys paid for that and what your total investment was and maybe the IOR around that business and so?

Scott Patterson

Total dollars was just over $60 million in change which included our initial investment plus the residual and our IOR are around in that in terms of overall advertise cash was about 15%.

Unidentified Analyst

Great, I think Whitney has one or two. Thank you.

Whitney Stevenson - JMP Securities

Yeah, hi there guys. I just wanted to ask if you could give a little more specific on Colliers business domestically and I know that you gave the sales at 25% the leasing down 16 for U.S. and Canada combined. Are those numbers significantly different if pullout Canada?

Scott Patterson

No, they are not. They are actually pretty similar in all countries.

Whitney Stevenson - JMP Securities

Okay, perfect. And then just if you have any thoughts that you could talk a little bit about domestic leasing environment and maybe your thoughts on why the segment continues to lag the sales in the recovery?

Scott Patterson

Well I think the occupiers increasingly have become conscious through 2013. This time last year we were seeing many large long-term lease transactions in our major markets, and this year we are seeing in terms of activity perhaps a similar number of deals but they are trending towards sub-lease and short-term renewals and it’s uncertainty in the economy that’s driving it and we think it's going to extend through 2014 now with the lack of any real solution at the government level. We would need to see strong economic growth and stronger employment numbers I think before we see return to healthy leasing environment.

Whitney Stevenson - JMP Securities

Okay and then not two, just one follow-up, not to harp on the issue too much but you know you got the rates question and I am just wondering if there is anything that you see in the dynamic that allowing investments sales to continue on such a strong trajectory despite the fact that owners and sellers are subjected to the same macro issues in the U.S. right now that occupiers are.

Scott Patterson

I think that globally there is a great deal of capital that is still seeking shape, yield and so that capital is finding its way to North America as well particularly I think from Asia and as John pointed out the financing environment is much better, much improved and it is helping also.

Operator

Our next question is from David Gold of Sidoti. Please go ahead, David.

David Gold - Sidoti

Hey, good morning. Just a couple of points to follow-up, one is we think about the commercial real estate business domestically and I know that some questions have been raised but when we think about flat in the quarter how much of that do you attribute to sort of broadly speaking the economy as it has been and how much of it do you think was a little bit of maybe slowdown with the rate increase and now whether that's sort of in sales and [approximately] adjusted to it. We presume we see some small set may be that gets us to growth that we see in the fourth quarter. Is it hard to quantify?

Scott Patterson

I think it's the economy in general it's creating caution and uncertainty in the full of decisions around upgrading and increasing space.

Jay Hennick

It's more lease related. If you take a look at the numbers, let's just speak of our numbers last year versus this year the leasing numbers are down whereas the investment sales numbers are up which would support what Scott saying.

David Gold - Sidoti

Right, but I guess if you look you know sort of where you ended for the quarter versus where you thought you would be say go back to April/May as rate started to spike, was there much change there or presumably obviously the economy issues have been with us for sometime so if there are variants that will be more related to the interest rates or such thing. In other words, did your expectations change much from say may be before the rate started to spike?

Scott Patterson

David, we are very close to our internal expectations.

David Gold - Sidoti

Perfect. And then one other, strategically and then you can just put some color on this but when we think about with the sale of field presumably you have an opportunity to do little bit more with a repositioning around real estate, I mean many businesses quite happy but are there other let say -- or rather other areas not that you would like to get into it but say may be otherwise that you would like to reposition business a little bit that over the next few months or couple of years.

.

Scott Patterson

Well you know again looking at over the next couple of years we are just focused on Colliers and FirstService Resi in terms of continuing our growth. The brand business has got a great story around internal growth, it got some very aggressive plans around doubling their size over an extended period time which is exciting, but I think from our perspective if we can maintain a very solid level of growth in Colliers, and I just have to emphasize we have the opportunity in FirstService Residential to do it on North American basis growth and service lines underneath a very strong brand. We have the same opportunity to do it globally under the Colliers brand, and so the example that I have used historically as in Germany as an example we do not provide property management services of any sort or of any magnitude. We may do it in one market or the other and it’s a huge opportunity for Colliers Germany and we don't do valuations in Colliers Germany. So those are two areas of our business that we can very easily over the course of the next couple of years strengthen under a very strong Colliers brand in that marketplace. And there are countless examples like that in different geographic regions that we consider to be strong and growth oriented for our company. So if we can allocate our capital under two very strong brands that have globally growth proportions it's the safest form of growth gross number one and acquisition cost is much more modest than adding a new service line which would have to be significant and obviously at a higher valuation than we would otherwise be comfortable with.

Operator

The next question is from Brandon Dobell of William Blair. Please go ahead, Brandon.

Brandon Dobell – William Blair

Thanks, good morning, guys. I want to touch on Colliers' first side from the New York expenditures here in the fourth quarter. Anything which is expected in the next several quarters in terms of build out or things that would change the cost structure or that much or should we expect the dollars of operating expenses to look pretty similar in 2014 what they look like in 2013.

Scott Patterson

Similar Brandon, no real change and we set the course on the side -- on the CapEx I mentioned and that we should pretty much do but I don't anticipate larger some of expenditures down the road at this point.

Brandon Dobell – William Blair

Okay. And I think Colliers in the face of the kind of continuing weakness in U.S. leasing, there is two way a guy can go right, you sit there and try and take share of the [people] you have in a market that's a little sluggish or you go out and you get more aggressive on hiring people to drive share regards what the market's doing. How do we think about those two choices for you and I guess stick with the U.S. but if it applies more globally especially on the leasing side may be address that as well.

Scott Patterson

Well, recruiting continues to be a focus particularly in the U.S. We added 30 net new producers in the U.S., a big chunk of those would be major market, office leasing. So it is continued focus for us. It's very competitive, recruiting environment rate now certainly in the U.S. that's the case. But we have had success in the last two years 2011-2012, we are having great results, I was recruiting classes and so it's working for us and we are -- the plan is to continue.

Brandon Dobell – William Blair

Okay. Any I guess early read and how we should think about capital needs for 2014 given all the puts and take the past couple of years around re-branding and another expenses here for New York build, should CapEx be lowered in 2014 and 2013.

Scott Patterson

Well yes 2014 will have a little bit of carryover as it relates to this New York CapEx, it should be in the aggregate of about $10 million, so that will be added on to what I would have expected to be a kind of mid to high 30s, so we’ll probably end up north of 40 again next year. And then beyond that normalize back to the upper 30s to 40 I guess as we build the business overall will expect it to continue, I think sort of medium term we would look at CapEx has been approximately 20% of overall EBITDA that will a little bit higher than that right now but as we grow the business that percentage should decline slightly.

Brandon Dobell – William Blair

Okay. And looking at end of the fourth quarter and may be in the first quarter any expectations for further either charges or adjustment actually the collections business or anything within that part of the segment that we speak thinking of as a charge or I guess operating profit of the segment or anything else that you think might crop up as you try and work with some of those issues in the fourth quarter?

Scott Patterson

(Inaudible).

Brandon Dobell – William Blair

Okay. And then final one for me within I guess first of this residential and now that you have got the branding all done I guess two part questions, some of which we shouldn't expect any more expenses in the fourth quarter related to branding. I just want to make sure I understand that correctly. And then second, how do you kind of get the synergies out of the acquisitions like -- an acquisition (inaudible) just did the Curry deal, a kind of association management versus property management. Out of those two things put together as a one that serves the bigger growth opportunity or better business to be in, I just want to make sure I understand this strategy there.

Jay Hennick

In terms of branding as I understand it John correct me if I am wrong, were done on branding, it was a major undertaking and we are really quite happy with the results for all kinds of reasons. In terms of acquisitions and using Curry as an example. Curry didn't have the advantages that we did in many areas, they were extremely well managed business but didn't have shared services, didn't have many of the ancillary that we have, insurance, lock box [ph] and a variety of other things. All of which we are now deep with them in terms of implementing them. So we have been successful over the years at enhancing EBITDA that we acquire by adding some unique products and services to clients but also reducing overall operating cost at the branch level. There is a difference obviously between high rise management and low rise management although we are seeing and Scott may want to add a little bit here but we are seeing lots more high rise, mid rise construction happening again in various parts of the U.S. primarily in major markets which is all good for us. And so that is the area of business where we believe we can add more value in terms of energy procurement in a variety of other things which makes us more essential to our client in those markets. Scott?

Operator

Your next question is from Stephen MacLeod of BMO Capital Markets. Please go ahead, Stephen.

Stephen MacLeod – BMO Capital Markets

Thank you, good morning, guys. Just looking out beyond Q4, I know Scott you gave a good overview of what you expect for the fourth quarter. When we look to 2014, can you just talk a little bit about the margin expectations in the Colliers business given all the puts and takes that you discussed? And in addition to the residential property management business.

Scott Patterson

Well, we have talked for sometime even about our goal getting the 10% at Colliers that remains the goal. Our margin will definitely be up this year over prior. And the goal is to increase that in 2014. We believe it will be up in 2014. I don't have a number for you but we continue on March to 10% let me put it to you that way. And it's a similar story in FirstService Residential. We are with their collections business was a drag on us this year in terms of our margin, we continue to have some pricing pressure and of course we have the re-branding some of those things we are working through in 2013, and we expect to see our margin up in 2014, it will be a longer road to 10% at FirstService Residential. But 2014 will be big years for both those divisions in that regard.

Stephen MacLeod – BMO Capital Markets

Okay, great. And on the Colliers side, do you have sort of all the pieces in place in terms of getting their margin at 10% I mean all these incremental work to do but I am just trying to get a sense of how far out that target is.

Scott Patterson

I think we need some help from the market in North America particularly in the U.S. but essentially we have pieces in place, yes.

Stephen MacLeod – BMO Capital Markets

Okay, great. And then just finally can you talk a little bit about the benefits you’ve seen from the FirstService Residential re-branding that you’ve completed over the last couple of quarters.

Jay Hennick

Well, I think in particular it has created great energy and engagement internally amongst different offices and teams; it is definitely impacting the culture and is improving the current activity across the company. We are surprised that how quickly it has taken internally and externally in the market place. But it's early and I think we feel very good about it. Absolutely the right thing to do at the right time but it is still early in terms of seeing any tangible or economic benefits.

Operator

There are no other questions at this time.

Jay Hennick

Okay, ladies and gentlemen, thanks for joining us on this conference call. We look forward to hearing from you again at our yearend conference call coming up in February. So thank you for participating.

Operator

Ladies and gentlemen, this concludes the third quarter investors' conference call. Thank you for your participation and have a great day.

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