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Executives

Jay Hennick – Founder and CEO

John Friedrichsen – SVP and CFO

Scott Patterson – President and COO

Analysts

Sara O'Brien – RBC Capital Markets

Stephanie Price – CIBC

David Gold – Sidoti

Frederic Bastien – Raymond James

Brandon Dobell – William Blair

FirstService Corporation (FSRV) Q2 2010 Earnings Call Transcript July 28, 2010 11:00 AM ET

Operator

Welcome to FirstService Corporation's second quarter earnings 2010 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 risks and uncertainties. Actual results may be materially different from those contained in these forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the Form 10-K and in the company's other filings with the Canada and US securities commission. As a reminder, today's conference is being recorded. Today is Wednesday, July 28, 2010.

At this time, for opening remarks and introductions, I would like to turn the call over to the founder and chief executive officer, Mr. Jay Hennick. Please go ahead, sir.

Jay Hennick

Thank you, and good morning, everybody. As the operator said, I'm Jay Hennick, chief executive officer 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 solid second quarter results. Our revenues were up 18%, EBITDA was 8%, and adjusted earnings per share were up 4%. Year-to-date, revenues were up 15%, EBITDA up 21%, and adjusted earnings per share up 15%. John will provide full details in his financial review in just a few minutes.

Overall, we're pleased with the second quarter results, with commercial real estate rebounding sharply over the prior year, and both residential property management and property services delivering solid results despite challenging economic conditions. Scott will expand on all of these in his operational report.

Notwithstanding the very strong quarter at Colliers, the challenge going forward for us is the continued lack of visibility in this segment of our business. As we move into the second quarter, most indicators suggested that we were accelerating to economic recovery and our results to-date would surely echo that sentiment. However, as the quarter ended, most of these same indicators were suggesting that growth had slowed, especially in Europe. For this reason, we intend to continue to manage our business very closely this year on a region-by-region basis and see how things roll out.

Q2 was also busy with several key projects and new initiatives. In the US, positive momentum continued with significant new recruitment activity and sizeable new client wins and corporate solutions and in our asset and property management businesses. At the same time, we undertook a major re-branding effort as we moved all offices that were not already operating as Colliers International to the global standard. So far, about 75% of the offices have completed the re-branding to Colliers International, with the balance expected by year-end. Our recent acquisition of Colliers Chicago is integrated seamlessly into our global business. And their growing asset and property management operation has been a strong contributor.

We also entered into 17 new license agreements with market leaders in secondary markets that we do not already own. Each of these firms has re-branded as Colliers International and is fully integrated as well into our platform.

Through Colliers International, FirstService is the world's third largest player in commercial real estate, with more than 480 company-owned and licensed offices in 61 countries around the world. We still have lots of work to do to strengthen our platform. But there is no question that as the commercial real estate market rebounds, our results from this segment of our business will follow suit creating significant incremental value for FirstService shareholders.

Turning to residential property management, which as you know is a very resilient business with more than 80% of its revenues coming from recurring three-year contracts that have 95%-plus retention rate. It's also a business with multiple growth opportunities, both internally and through acquisition. FirstService Residential Management is the largest player in the industry, managing more than 1 million low, medium, and high-rise residential properties across North America.

Yesterday, we announced another small, but important acquisition in New York. Goodstein Management is one of New York's most respected providers of residential property management services, managing more than 9,000 condominiums and co-op units, including some very high profile properties in New York City. Together, we now manage more than 80,000 residential units in the New York region, making us the largest player in that market by a large margin. Over the next year, we hope to complete several smaller tuck-under acquisitions adding new units under new management in existing markets and continuing to grow our business in the new ones.

Over the past year, we've also been successful growing our national accounts business serving large government agencies, banks, and other real estate investors who have acquired residential property assets, either through foreclosure or purchase, and need to have them managed or leased. Few companies can operate these services on a national scale. And as the market leader with operations across North America, we are uniquely positioned to service them. We expect this part of our business to continue to grow rapidly for the foreseeable future as more governments and institutional investors strategically acquire residential real estate assets for investment purposes.

In property services, as you know, part of our business is operating market leading service-based franchise systems. During the quarter, revenues and profits from this portion of our business were up nicely versus the prior year. Some of our systems are market neutral, meaning that they're typically unaffected by the state of the economy. And these systems are doing quite well. Others, like our more consumer-oriented franchise systems, continue to be affected by what's going on out there. And although these businesses are profitable, we have now started to see some growth re-emerge.

The other part of our business is field asset services, the market leader in foreclosure and property preservation. In this business, services are delivered by independent third party contractors. And like our franchisees, these contractors use our proprietary operating systems to execute day-to-day. Although business at field assets has been very strong over the past number of years, the number of properties entering the foreclosure process over the last few quarters has been relatively flat versus the prior year.

Local state and federal governments have been initiating legislations at all levels and creating programs designed to temper the number of properties entering foreclosure for a variety of reasons. The fact is that the total number of distressed properties in America, those that are under water, have grown to become the largest in the history of the country. Some estimate just under 50% of the homes in America, with a mortgage that are worth less than the value of the mortgage. These are staggering numbers.

Most of these distressed properties will ultimately have to go through some form of foreclosure process. And when they do, it will create a huge new wave of incremental revenue for field assets. Unfortunately, however, we really can't predict when that will happen. So in the meantime, we will continue to grow and diversify our field asset business and continue to reap the benefits of the very weak US housing market.

Overall, FirstService is in excellent shape with our commercial real estate business quickly turning around, residential property management and property services continuing to show solid growth. And the balance – and our balance sheet has ample capacity to continue to grow. In the end – at the end of the day the bottom line is, FirstService is well-suited to continue to generate significant returns for our shareholders for many years to come.

And now, let me turn things over to John to provide his financial report. Scott will follow with his operational review. And then, we'll open things up to questions. John?

John Friedrichsen

Thank you, Jay. As announced in our press release earlier this morning and by Jay in his remarks, FirstService reported solid overall results for our second quarter despite market conditions that remain challenging, though improved over the severe downturn experienced in our second quarter last year. The year-over-year improvement in our results from our commercial real estate operations was significant, while both our residential property management and property services operations contributed solid results.

The following is a summary of our consolidated results for our second quarter. Revenues increased 18% to $501.4 million from $425.3 million last year, in which 3% was due to foreign exchange and another 3% on account of acquisitions. EBITDA totaled to $44.6 million versus $41.2 million last year, an increase of 8%, generating an overall EBITDA margin of 8.9% compared to 9.7%, due primarily to an increase in the proportion of revenues generated by our commercial real estate operations, which have lower margins.

Adjusted net earnings increased 6% to $145 million – sorry, $14.5 million from $13.6 million last year. And adjusted diluted earnings per share came in at $0.48, up 4% from $0.46 reported in our second quarter last year.

As outlined in our press release and summary financial results released this morning, adjusted earnings and EPS include certain adjustments to these measures determined under GAAP. These adjustments are required as we believe the GAAP is not necessarily 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.

We move from the P&L to our cash flow statement, we generated strong cash flow from operations in our second quarter, increasing to $40.7 million, compared to $25.6 million in the same quarter a year ago, an increase of 59%. A favorable movement in working capital contributed to this significant increase. It was a reversal of the negative impact on cash flow that changes in working capital had as we closed out 2009.

We continue to deploy our capital carefully during the quarter, with a modest $2 million in cash invested in acquisitions and a further $8.8 million in capital expenditures. We are on track to invest about $30 million in CapEx this year, with about 60% directed to our commercial real estate operations, and the balance split evenly between our other two platforms. This level of CapEx is well within our self-imposed historical limits relative to our annual revenue and EBITDA.

During the quarter, we also repaid $14.2 million of our principal on our 8.06% notes, essentially funneling us to our revolver, which currently bears interest less than 1.5%, thereby favorably impacting our interest costs going forward.

Finally, we purchased just over $17 million of equity held by our minority shareholders during the quarter, which will reduce the amount of non-controlling interest share of our earnings in the accretive to future earnings per share.

Moving to our balance sheet, our net debt position at quarter-end was $236 million, compared to $213 million at our year-end. And our leverage, expressed in terms of net debt to trailing 12-month EBITDA, was 1.7 times. Excluding $77 million of our five-year unsecured convertible debentures, our net debt stood at $159 million and our leverage less than 1.3 times. With modest leverage in more than $200 million and available cash and undrawn credit under our revolver, we have ample capacity to fund our operations and acquisition-related growth opportunities.

Now, I’d like to turn things over to Scott for his operational highlights. Scott?

Scott Patterson

Thank you, John. Let me start my divisional review with commercial real estate, where revenues for the quarter were $217.1 million, up 52% from the weak second quarter of 2009. Adjusting for the impact of FX fluctuation, revenues were up 44%, 37% organically with the balance from the recent acquisition of Colliers Chicago. Our strong results were driven by significant gains in North America and Asia Pac relative to the prior year, tempered by more modest gains in Europe and flat year-over-year results in Latin America.

In general, the increase was the result of much higher transaction volumes globally, both sales and leasing in combination with the return of larger sales transactions relative to what we have seen over the last 24 months. Property management revenues also showed very strong growth in our major markets, while appraisal and project management grew more modestly.

Let me now spend a few minutes focusing on each of our major regions. In the Americas, revenues were up 55% driven equally by very strong gains in both the US and Canada. Latin America was flat year-over-year. In the US, all of our offices and operations showed some level of growth over the weak June 2009 quarter, with particular strength coming from New York City, Boston, and the US Northwest. Similarly in Canada, we reported growth in all our offices led by the major markets, Toronto, Vancouver, and Calgary. North American revenue increases were driven by investment sales activity that was doubled the depressed levels of last year’s quarter and leasing revenues that were up by almost 50%.

Property management, project management, and appraisal also showed gains over the prior year, but at more modest rates. We generated a high single-digit margin in the Americas for the quarter, up from the low single-digit margin in the March quarter and a breakeven result in the prior year quarter. Looking forward in the Americas, we expect to see year-over-year improvement for the third quarter, but we are somewhat cautious about our outlook for the fourth quarter and beyond due to concerns that the economic recovery seen through the first half of this year may be stalling in the US and Canada.

In our Asia Pac region, year-over-year revenues were up 44% in US dollars and approximately 33% in local currency driven by strong increases in China, India, Singapore, and Hong Kong. Our large Australia and New Zealand business also grew a solid 10% over the prior year. And we showed some level of growth in each of the other 10 countries that we operate in across Asia Pac. Strong increases in sales, leasing, and property management contributed approximately equally to quarterly growth in this region.

We generated a low double-digit EBITDA margin in Asia Pac for the quarter, up slightly from the March quarter and approximately the same as the prior year quarter. Looking forward in Asia Pac, we expect to see continued year-over-year gains during the second half of the year, but at more modest levels, a reflection of the relatively stronger second half we experienced last year, particularly in Australia and New Zealand.

In our Central and Eastern Europe region, including Russia, revenues were up approximately 10% led by modest increases in sales and leasing. Revenue growth, particularly in Poland and Russia, was partially offset by declines in Hungary and Southeast Europe, including Greece. The operating environment across Central and Eastern Europe continues to be very difficult. Transaction activity is up from a very slow second quarter of 2009, but only marginally.

We generated negative EBITDA in this region of $500,000, compared to our $1.5 million loss in the March quarter and $2.8 million loss in the second quarter of last year. Cost containment efforts continue in this region. And we are carefully monitoring staffing levels and discretionary costs as we await an upturn in the market. Looking forward in Central and Eastern Europe, we expect the operating environment to continue to be difficult through the balance of 2010. Though we expect to show year-over-year improvement in the second half of the year, the gains will be modest.

In the aggregate, for our commercial real estate division, we expect to show a strong year-over-year revenue comparison for the third quarter, but at this point remain cautious beyond the third quarter due to a lack of pipeline visibility and concerns around slowing growth in North America.

Let me now turn my attention to residential property management where we generated revenues of $169.2 million for the quarter, up slightly from $167.9 million in the prior year. Similar to our first quarter, increases of 4% in management fee revenue were almost entirely offset by declines in revenues from ancillary services, specifically landscaping and cold maintenance. Regionally, our management revenue growth was driven by contract wins in Atlanta, Dallas, and the Northeast. Management fee revenues in Florida, California, Arizona, and Nevada were approximately flat with the year ago.

Our growth in Atlanta is of particular note. We have more than doubled the size of our presence in this market since our acquisition of Community One in early 2009. We manage over 700 high-rise condominiums and co-op buildings across the US, and have a clear leadership position in all our markets. High-rise management contracts require more complex service capabilities than a typical homeowners association. And in Atlanta, we have quickly been able to demonstrate our expertise in this area. We have won several murky high-rise clients over the last six months. And we expect to add several more before the end of 2010.

As Jay touched on in his opening comments, our growth in the quarter was also enhanced by strong increases in our rental management business. We have always offered rental management services in those markets, where our managed buildings and communities have invested their own units. We effectively offer a one-stop management solution to investors.

During 2009, we began receiving inquiries from mortgage lenders interested in our service offering as they explore the option of renting their REO distressed property, with the dual goal of earning the cash return on the property and ensuring that the foreclosed home remains occupied. In the first six months of this year, we have won three separate contracts with large mortgage lenders to provide rental management services for REO property. This is currently not a large part of our business, but we do expect it to grow rapidly over the next couple of years.

As mentioned, declines in our ancillary fee revenue offset the growth we experienced in our management fee revenue. In the aggregate, ancillary fees were down approximately 10% for the quarter, due primarily to declines in landscaping revenues in Florida and the Southwest and a continuing lag in pool construction revenues in the Northeast. We believe that pool construction and maintenance work has been largely delayed. And we remain optimistic that we will see most of this come back in the third and fourth quarter of this year.

Our EBITDA margin in the quarter was 9.8%, down slightly from the prior year. Looking forward in residential property management, we expect to see modest growth through the balance of the year with margins that are comparable to prior year or up slightly.

In our property services division, which comprises field asset services and our franchise group, revenues were $115 million, approximately flat with a year ago. We experienced a slight revenue decline at FAS of 2%, which was offset by an 8% year-over-year increase in our franchise group as a whole. The activity levels at FAS during the June quarter were consistent with those experienced in the March quarter. And we expect a similar level of activity for the September quarter.

All relevant market data point to a significant shadow inventory of delinquent mortgages that have been building in the US for the last several quarters. The Obama administration's mortgage modification plan in combination with political pressure from every level of government continues to lengthen and delay the foreclosure process. Our customers continue to advise us that foreclosure numbers will increase, but the expectation is that we will not see a material increase until the fourth quarter at the earliest.

Looking at our franchise systems, as I mentioned, revenues for the quarter were up 8%, building on the 3% growth that we experienced in the March quarter. Each of our systems grew over the prior year. And the level of growth was relatively consistent across the eight different franchise systems.

EBITDA margins for this division were 16.8%, down from 19.8% in the prior year, relating entirely to reduced margins at FAS. The Q2 2009 FAS margin was unusually high, reflecting the operating leverage realized from a surge in volume in Q1 of last year.

We invested in the operating infrastructure through the third and fourth quarter of 2009 adding space and increasing the headcount to a level appropriate to properly service existing volumes. As I mentioned in the first quarter, the existing cost structure and resulting margins are more indicative of what we expect to report in this business. And I note that the margin has been approximately consistent for the last three quarters. Looking forward in this division, we expect to show Q3 revenues and margins at FAS that are consistent with the June quarter or slightly up, which would represent a slight revenue decline from Q3 2009.

For our franchise systems, we are somewhat cautious about the year-over-year comparisons for the third and fourth quarters in light of the steep decline in consumer confidence over the last two months.

That concludes my comments. I would now like to ask the operator to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Please standby for your first question. The first question comes from Sara O'Brien of RBC Capital Markets. Please go ahead.

Sara O'Brien – RBC Capital Markets

Hi, guys.

Jay Hennick

Good morning, Sara.

Sara O'Brien – RBC Capital Markets

Jay mentioned in his comments that you could grow in diversified field asset services. I'm just wondering, if the volumes don't come into Q4, that's more an F'11 phenomenon. What can you do to diversify and grow that business? And can you cost cut to improve the margins if the volumes don't come in as expected?

Jay Hennick

Well, there are actually two questions. In terms of cost-cutting to adjust for margins, I think we've got a very close eye on that. As Scott said, we've been watching our costs. We've properly sized the business. We're looking at it now because almost every day, our clients are telling us volumes are going to increase. So it's a bit of a fine line in terms of managing the headcount of this significant business. But I think the guys are doing a good job there.

In terms of diversification, we have – there're several other services that we could be providing and are providing to our clients, same client base, to widen the number of services that we provide. One of them is a very interesting renovation business, where we help them upgrade the quality of the property going through foreclosure to help the resale or leasing of that property. And that business is something that we started about a year ago, and has accelerated quite nicely and continues to accelerate. So as more houses are put on the market for sale, we have a good opportunity to continue to expand our programs there.

The other piece of the business, which has become more important to lenders and other owners of assets is ongoing inspections of the properties during a longer period of time. What's happened is a lot of the lenders have taken back property. And they're not putting them on the market as quickly as they would otherwise be doing. And they would like us to inspect the property on a more regular basis. And that's creating another significant revenue opportunity for us on a monthly basis.

So those are two new initiatives that field assets implemented. We're quite excited about what they could mean in terms of incremental revenues. And there are others that we're testing, but not yet fully implemented.

Sara O'Brien – RBC Capital Markets

Okay. Can you just remind us the business model in field asset services, when you bid on a territory of properties, once you've done your initial work, is it – is there an on – a recurring revenue stream? Or is it a one-shot deal and anything after that is incremental revenue to you?

Jay Hennick

It's a fixed price for a period of time. And beyond that period of time, that's recurring revenue for a variety of services that are – that we provide by contract. But what's happened is because the owners now own them for a longer period of time and with increased local legislation being implemented by local cities and counties, our clients want additional inspection services provided to those properties in the form of pictures and GPS date and timestamp output that they can provide – that they can have as a measure of ongoing security for their operations.

Sara O'Brien – RBC Capital Markets

Okay. So we should not expect that the longer the hold period of your customers that it's going to be a drive on your margins, basically it just means that incremental revenue at approximately the same kind of margin going forward.

Jay Hennick

Yes, that's right.

Sara O'Brien – RBC Capital Markets

Okay. Perfect. And then if I can, just on commercial real estate, you talked about a little bit of caution going into Q4 and maybe some costs associated to branding for the Colliers brand across the US. I just wondered margin-wise if you expect an incremental up-flow into Q4 for margins and where you'd expect to end the year.

John Friedrichsen

I think on the margin – Sara, it's John. We're expecting, I think we just indicated this earlier, mid-single-digit margins based on expected volumes at this point. So that's pretty much where we would expect to be this year.

Scott Patterson

But speaking to the branding costs – Sara, it's Scott. They will impact this business this year in terms of margin. We incurred costs during the second quarter of over $1 million. And we'll see $3 million to $4 million over the second half of the year.

Sara O'Brien – RBC Capital Markets

Okay. And then just one last question, given that you have repurchased $70 million worth of minority shareholder or non-controlling interest, what should we use modeling going forward for the minority interest state of earnings? Is it still 20% to 25%? Or do we take that down?

Jay Hennick

No. I think that that's a good range. It will be favorably impacted, so we may be closer to the bottom of that range. But it does get impacted by the mix of earnings and where earnings are being generated, and how much minority interests or non-controlling interests is in that particular operation. But the trend would be moving downwards as a result of the repurchase or the purchase of the equity interest.

Sara O'Brien – RBC Capital Markets

Okay. Perfect. Thanks a lot.

Operator

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

Stephanie Price – CIBC

Good morning.

Jay Hennick

Good morning, Steph.

Stephanie Price – CIBC

In terms of the residential property management position, you had the acquisition (inaudible). Can you talk a little bit about devaluations that you're seeing in that business? Are they trending down given the environment right now?

Jay Hennick

In fact, they're staying pretty much the same as they've always been. As you can see in the numbers of residential property management, it's a very resilient business. So notwithstanding what's been going on in the overall economy, these companies continue to generate the same level of profitability as they have historically.

And I think what's interesting is the psyche of the sellers is changing somewhat because in the past, they might have held on to their business over a longer period of time or not sought a partner to help them take their business to the next level. There is a good number of prospects out there that are primed for a per service-type of a philosophy, where we acquire a significant equity stake in the business. They retain an equity stake in the business. And we help them grow the business over the long term. So we're seeing more of that as people look to lessen their risk in their personal lives. So that's opened some doors for us. But acquisition candidates generally in that business and acquisition multiples have stayed pretty stable.

Stephanie Price – CIBC

And just touching over the FAS, in terms of the margins in the business, given that foreclosure rate is lengthening, are you coming to discount as the environment gets more competitive out there?

John Friedrichsen

I don't believe in markets getting more competitive. But as Jay mentioned, our customers are expecting us to provide more services and increased level of services. So while we're getting compensated for most of that, there is some scope (inaudible). And so we've experienced some of that. I think we're at a stable level now. But it's really customer expectations as the whole period lengthens, not necessarily competition.

Stephanie Price – CIBC

All right. Thank you.

Operator

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

David Gold – Sidoti

Hi, good morning.

Jay Hennick

Good morning, David.

David Gold – Sidoti

A couple of questions for you, one, on the Colliers side, can you give a sense or a little bit of an update for – you made a lot of progress, obviously, since the beginning of the year. But what's left to do, in your mind, as far as building up the brand further, one, on the costs that you mentioned; and two, from an acquisition perspective? Are there holes in the footprint that you still feel is important to fill?

Scott Patterson

Well, the good news is we don't there're very many holes in the footprint in North America, for sure. We own all the major markets. We have great partners in the secondary markets under license agreements, which give us the right to step in and be their partner when the time is right. So from an acquisition standpoint in North America, I think we're in good shape market-wise.

Where we are spending lots of time, re-branding has been a big initiative making sure that everybody is consistent, updated Web sites that are consistent with our new philosophy. Lots of recruiting efforts have happened throughout the US and continue with the momentum that we have generated. And we're looking for strategic opportunities to augment the strength of some of our larger markets.

We think that there's a huge opportunity with the third largest global brand to drive lots of business on a global basis. And historically, the mindset or philosophy as a business was not as focused on transferring business from market to market. So we're spending time looking at that aspect of our business, and recruiting where appropriate to drive some business to some of our other regions.

Jay Hennick

Scott.

Scott Patterson

Sorry.

Jay Hennick

The corporate services is another area that's enjoyed some great growth in recent times. It was a relatively new initiative two years ago. It's gotten some great – it's gotten some great wheels under it. And so, there're lots of opportunities with that and with our asset and property management business, which is growing very significantly. And a lot of it is coming from our real property in another – in the commercial space as opposed to the residential space that Scott talked about earlier.

So we're seeing lots of activity. And so, our focus is to strengthen our existing business and existing markets, look for opportunities to drive business outside of the US. But market-by-market, I think we're well covered now. There are some minor places. But overall, I think we're done.

David Gold – Sidoti

Okay. And can you just – your comment, Jay, on basically getting folks to work together, so to speak, is that as simple as just incentivizing them properly?

Jay Hennick

I'm sorry. Give me that again.

David Gold – Sidoti

As far as market-to-market business transfers, is it as simple as just putting the incentives in place and basically incentivizing folks to share relationships, so to speak? What are you doing to that effect?

Jay Hennick

It's much more complicated than that because first of all, it's important that people on this side of the pond understand the client relationships on the other side of the pond. We have an initiative called "Our People", which is rolling out and is quite interesting, which helps our brokers all around the world understand who their partners are, and what they do, and the client that they serve. And so, it gives us a great opportunity to really make our company a lot smaller than it would otherwise be.

Compensation is well-established in terms of sharing compensation. But really, it's surprising as you peel the onion that strong relationships with one client in Australia are not maximized in North America or vice versa. And there're just countless examples of that same thing happening. So there's a lot of time, effort, and energy put into understanding who we serve, top 10 clients, where do we serve them, how do we serve them better in markets that we don't have the same type of penetration. So it's much more complicated and time-consuming. But I think the management team at Colliers is doing a terrific job trying to bridge that gap.

David Gold – Sidoti

Perfect. Thanks so much.

Operator

Thank you. Your next question comes from Frederic Bastien from Raymond James. Please go ahead.

Frederic Bastien – Raymond James

Good morning, gentlemen.

Jay Hennick

Good morning.

Scott Patterson

Hi, Frederic.

John Friedrichsen

Good morning.

Frederic Bastien – Raymond James

Thank you very much. I recall that when you first acquired Colliers, there was a lot of seasonality to your business – to the Colliers business with the second and fourth quarters showing typical strength. I'm just wondering how that business has changed over time and whether there's a bit of seasonality less than that?

John Friedrichsen

Well, that would – it continues to be seasonal, Frederic. I don't think there's been anything fundamental that's changed in terms of that activity other than I think the market conditions in the last couple of years have maybe put some distortions in place. But we still tend to be back-end loaded with respect to this business.

Frederic Bastien – Raymond James

Okay. Distortion was probably the perfect word to use. I'm wondering also if you could provide an update of the breakdown of revenues by region that you're currently seeing at Colliers.

John Friedrichsen

What do you mean in terms of breakdown, just in terms of–?

Frederic Bastien – Raymond James

Just roughly–

John Friedrichsen

Like current percentages?

Frederic Bastien – Raymond James

Yes.

John Friedrichsen

Well right now, North America would be about 69% total overall quarterly revenues, Asia Pacific would be around 30%, and Europe around 7%.

Frederic Bastien – Raymond James

And North America, you said 60%?

John Friedrichsen

Sixty-nine percent.

Frederic Bastien – Raymond James

Okay. Perfect. The last question I have for you is on RPM and the recent acquisition you did. Are these the types of (inaudible) that are left out for grabs? Or are there still – I remember you made a few acquisitions in California. And they were in the $30 million to $40 million range in terms of revenues. Are there still some of those left available? Or are we still – or are we just looking at stocks of that size right now?

Jay Hennick

There are a few available. Some of those – two of the three I'm thinking of are in markets in which we already serve. But there are countless $10 million-type companies out there. And if we can buy $10 million property management companies with 80% recurring revenue and 95% retention, and then bring additional services to bare, there're are huge upsides. Scott gave one example at Atlanta. But there are others – the example in Texas in Dallas is another strike zone-type of deal for us, where we bought a market reader, and then brought our additional services. And now, that business is two or three times the size in a relatively short period of time.

So we're happy in that business to acquire $10 million property management businesses all day long. We can them our way. And typically, the owner operator remains as our partner in a small way in their geographic region if there's no overlap.

Frederic Bastien – Raymond James

Perfect. Thank you.

John Friedrichsen

Frederic, I'd also like just to correct that percentage of revenue. It's 63% in the quarter from North America, not 69%.

Frederic Bastien – Raymond James

Okay. Thanks.

Operator

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

Brandon Dobell – William Blair

Hi, guys. Good morning.

Jay Hennick

Good morning.

Brandon Dobell – William Blair

As I think about the commercial real estate segment, any color or commentary on where the margins could go in that business now that you've got a little more scale, a little more control of things there in the US and some new service lines ramping up? How should we think about it relative to historical and peak trough margins? Should there be a hope that more upside's there? How do we think about that?

Scott Patterson

Yes, Brandon. I think in the near term, over the next couple of years, we're looking to get to 10% in that business. Regionally, we'd be the low double-digit area. And then, our corporate costs would bring us in at around 10%.

Brandon Dobell – William Blair

Okay. That makes sense. In the FAS business, I know it's a bit counter to the rest of that segment, anything else that you can think about within the broader foreclosure market that may make sense now that you've got these relationships with the banks and their services? Or do you think this contractor model is where you want to stick relative to a processing versus technology opportunity (inaudible)?

Jay Hennick

Well, first of all, this is very technology driven. The work is done by contractors, but it's all done using our computer technology and business processes. There are other areas in the foreclosure process that we could enter. We wanted to. Our thinking is we're a property services provider. That's what we're good at. We see related opportunities and other contractor services' networks to augment that business over time. And so, our focus is going to remain in this core business at the present time.

Brandon Dobell – William Blair

Okay. And a question for John, looking at the corporate expenses versus stock-based comp, a little moving around and noise there, and some different – I guess managing their numbers. How do we think about modeling stock-based comp and corporate expenses looking at how the next couple of quarters jumped around a little bit the last couple?

John Friedrichsen

The stock-based comp should be consistent on a quarterly basis with what we had in this last quarter. And the corporate costs increased principally on two counts. You've got higher FX because most of these costs are in Canadian dollars, and then an increase due to variable base – compensation based on – expected profitability. So we would expect that to be higher and trending along the same amounts that we recorded during this quarter.

Brandon Dobell – William Blair

Okay. As a (inaudible) that the compensation based on expected profitability, is that – how near term of a calculation is that? Or is that some indication of how we should think about things in the forward quarters?

John Friedrichsen

No. It's an estimate based on – a reasonable estimate based on full year profitability.

Brandon Dobell – William Blair

Okay. That helps. Thanks, guys.

John Friedrichsen

Okay.

Operator

Thank you. (Operator Instructions) Your next question is a follow-up from Sara O'Brien. Please go ahead.

Sara O'Brien – RBC Capital Markets

Hi. A question for Scott, just commercial estate, a couple of years ago, you guys changed over your comp plans so that – I think the rewards were a little bit less than the up market and a little bit better in the down market. I just wondered how that's fairing out in a recovery in North America in terms of stickiness of your brokers.

Scott Patterson

Well, those changes were made in the US only. Our comp plans, normally we're comfortable with. I mean I think that there's been a lot of progress made in the US around compensation plans. There remain some legacy deals. And as we make acquisitions, there are new legacy deals that are sometimes introduced. All our new recruits are on a consistent plan. So on average, our split ratio has moved in the direction we want it to. And over time, we are – we're looking to change the deals that are up market whenever we can.

Where we have been – where we have aggressively made changes, in some cases we have lost some brokers as a result. But in most cases, it – we've been able to move on and build that office from that point.

Sara O'Brien – RBC Capital Markets

And in terms of your recruiting now, what's the feedback? Or are you getting any pushback on this?

Scott Patterson

No. There are splits when we're recruiting our generally on market. And brokers are wanting to join Colliers. There's a lot of positive buzz right now with our re-branding. And it's a clear, new, fresh alternative for brokers. And our culture is attracting those that are aligned.

Sara O'Brien – RBC Capital Markets

Okay. Perfect. Thanks.

Operator

Thank you. (Operator Instructions) There are no further questions at this time. I'll turn the conference back to Mr. Hennick.

Jay Hennick

Thank you very much everyone for joining us today at this conference call. And we look forward to having you attend the next one. Have a good day.

Operator

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line and have a great day.

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