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Executives

Jay Hennick – Founder and Chief Executive Officer

Scott Patterson – President and Chief Operating Officer

John Friedrichsen – Senior Vice President and Chief Financial Officer

Analysts

Sara O’Brien – RBC Capital Markets

Dave Gold – Sidoti

Frederic Bastien – Raymond James

Stephen MacLeod – BMO Capital Markets

Brandon Dobell - William Blair

Stephanie Price – CIBC

Damir Gunja – TD Securities

FirstService Corp. (FSRV) Q3 2010 Earnings Call October 27, 2010 11:00 AM ET

Operator

Welcome to FirstService Corporation's third quarter earnings 2010 conference call. Legal counsel requires us to advise that the discussion scheduled to take place 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 Canada and US Securities Commission. As a reminder, today's call is being recorded and today is Wednesday, October 27, 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, everyone. As the operator said, I'm Jay Hennick, the 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 very solid third quarter results. Revenues were up 18% for the quarter; adjusted EBITDA of 5% and adjusted earnings per share was up slightly versus the prior year quarter.

For the nine-month period, revenues were up 16%, adjusted EBITDA up 14% and adjusted earnings per share up 7%. And finally, our cash flow, another very important indicator of our success continued to be very strong up 32% versus the prior year quarter. John will provide full details on our financial results in a few minutes.

Overall, as I said we're pleased with our third quarter results. Colliers International demonstrated very strong revenue growth in the United States, Canada, Australia and Asia while continuing to invest in its brand and in its global platform. Revenues in residential property management and property services also grew relative to the prior year period despite more difficult market conditions. Scott will expand on all of this in his operational report following shortly.

Since gaining control of Colliers at the end of 2009, FirstService initiated a massive re-branding effort to create brand consistency on a worldwide basis. Many of you will recall seeing Colliers signage co-branded with many different local names in many different markets. We are in the process of transitioning away from this to one uniform Colliers International name brand providing singular and consistent branding in all 61 countries where we operate.

We decided to undertake this initiative because we believe the Colliers International brand offers tremendous potential for the future. Colliers International is not only the third most recognized commercial real estate brand in the world, in fact some say the second most recognized. But it also conveys an immediate sense of integrity and experience to clients globally. It’s truly an institutional brand in the industry, something that’s very hard to replicate.

During the quarter, Colliers also entered into a new licensing agreement in the research triangle area, otherwise known as Raleigh-Durham. Anthony & Company widely regarded as the best firm in the area has become Colliers International and we’re pleased to add the new Colliers Raleigh-Durham to our global organization. There are two or three more licenses being contemplated in secondary markets in the coming months, none of which is material, but each will help strengthen our service capabilities throughout our US platform.

And finally, as you will recall, FirstService acquired 29.9% interest in publicly traded Colliers UK at the end of last year. We made the investment to help stabilize the business, upgrade operating systems and strengthen the management team. Like New York, London is an important market that drives business to other markets. During the quarter, Colliers UK continued to show some progress, although slower than we would have liked as market conditions in Western Europe remain weaker than expected.

FirstService residential is the largest manager of residential properties in North America. We currently manage more than 4100 properties, low, medium and high-rise residential buildings, gated communities, active adult communities and a variety of other properties that comprise over 1.2 million homes where more than 3.5 million Americans live. This is the core business for FirstService and it has many similarities to our commercial property management business we operate under the Colliers International banner.

As I said earlier, revenues were up relative to the prior quarter, but the real story in this segment was on the acquisition front. Early in the quarter, we acquired highly respected good scheme property management in New York City. FirstService residential now manages more than 85,000 residential units in the Greater New York area making us the largest player in the market by a wide margin.

And then in September, we also announced our first Canadian acquisition adding condominium first, the market leader in Calgary, Alberta. We are in the process of integrating the condominium first adding operating systems and introducing new programs that will provide greater value to our new clients in the Alberta market.

The other area of our residential property management business that continues to see volume increases is our national accounts business. Providing property management and rental services to large government agencies and financial institutions that repossess residential assets or buy them in the aftermarket in bulk for future resale is a growing part of our business.

Given our national footprint and the ability to service these clients throughout the United States, we have a real advantage and that’s translating into incremental revenue and profit opportunities for our local offices. In property services, revenues were also up relative to the prior year as, Scott, will explain in more detail in a minute.

But one of the characteristics of this business that is often overlooked by our shareholders is the diversification, that diversification is the reason property services continues to deliver solid results year-after-year regardless of the state of the economy. For example, some of our franchise systems are consumer oriented, like California Closet, CertaPro Painters and Pillar to Post Home Inspections.

Each has been affected by the economy, each continues to pick up share relative to smaller competitors and each will rebound nicely when the markets do. That gives FirstService built-in revenue and profit growth potential as the economy strengthens, even though we still feel like we are bumping along the bottom a little bit too slowly.

Some of our franchise systems are market neutral like Paul Davis Restoration. Paul Davis will continue to serve insurance companies and their clients when there is a fire or flood, again regardless of the state of the economy. Over the past 24 months, despite what is being going on everywhere, Paul Davis continues to grow one step at a time adding revenue and earnings along the way.

It’s been a great growth story over many years for FirstService. And of course, field assets is the ultimate in counter cyclicality. The more foreclosures and properties in distress, the better our business will be. And that’s what’s going on in the industry right now with all the delays and the uncertainty, one thing remains very clear, the number of homes in the US underwater on their mortgages, the so called shadow inventory continues to grow quarter-after-quarter.

Based on industry forecast, it will now take until 2014 for the shadow inventory to clear the market and for foreclosures to return to normal. There might be lots of starts and stops along the way, but with this kind of revolver debt in the marketplace and this size of shadow inventory, we’re confident that field assets will be busy for a long time to come.

So in summary, with commercial real estate gaining strength and with the continued solid results coming from our residential property management and property services division, FirstService is in excellent shape operationally. And with our strong balance sheet, low leverage ratios and significant financing capacity, we’re also well positioned to continue to generate strong returns for our shareholders for the balance of the year and beyond.

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. Despite an elevated level of continuing economic uncertainty in most of our major markets, FirstService reported solid overall results in our third quarter ended September 30th. Our service line diversification continues to provide us with an edge in dealing with this uncertainty and also allowing us to take advantage of the varied pace of economic recovery and improve our market positions.

Due to our long-term track record and entrepreneurial culture, we continue to make decisions with balanced short-term results with creating long-term value. Here the highlights of our consolidated results for the quarter, revenues were $530.4 million, up 18% from $451.1 million in our third quarter last year with internal growth of 13%, 2% related to foreign exchange and 3% on the Canada acquisitions. Adjusted EDITDA totaled $45.7 million, up from $43.5 million last year with the margin coming in at 8.6% versus 9.6% last year.

And our adjusted diluted earnings per share came in at $0.61 versus $0.60 last year. GAAP EPS for the quarter was $0.18 compared to $0.16 for the same quarter last year. But the difference between GAAP and adjusted EPS predominantly related to the change in value of our non-controlling interests, charges related to acquisition accounting and amortization of intangibles and a further tax valuation allowance relating to tax loss carry forwards in our Colliers International operations in US and Central and Eastern Europe, all of which are outlined in our press release issued this morning.

Before commenting on our quarterly cash flow and balance sheet, I’d like to make a couple of additional comments relating to our consolidated operating results. Firstly, in regard to our adjusted EBITDA, our results for the quarter were negatively impacted by $2 million relating to re-branding cost in our Colliers business. And if not for these charges, adjusted consolidated EBITDA would have been $47.7 million generating an EBITDA margin of 9%.

Secondly, our reported adjusted EBITDA of $45.7 million in the third quarter was up 5% over last year, yet our adjusted EPS was up less than 2%. The main contributors to the lag and adjusted EPS growth were higher interest cost associated with our $77 million convertible debenture financing completed in Q4 last year and adding $0.02 per share and the share of loss arriving from our equity pick-up on certain Colliers International operations in which we have less than 50% ownership interest, which negatively impacted adjusted EPS in the quarter by $0.03 per share.

Turning now to our cash flow statement, we saw strong results in our third quarter following similarly strong cash flow reported in our prior quarters this year. We generated over $44 million in cash flow from operations, up over 30% compared to $33 million in Q3 last year excluding discontinued operations. During the quarter, we invested about $9 million in acquisitions, which Jay already mentioned, compared to the nominal investment in this area in our third quarter last year.

Meanwhile, we invested $8 million in CapEx, up slightly from $7.2 million last quarter, in the quarter last year, most of which has been earmarked for upgrades in our information technology across our three service platforms, which is consistent with our prior quarters this year. Year-to-date, we’ve invested about $23 million in CapEx and expect to finish the year in $30 million to $32 million range, which we expect will be in our historical range relative to our annual revenues in EBITDA.

Turning to our balance sheet, we were able to utilize our free cash flow to reduce debt levels during the quarter, with our net debt position at the end of the quarter totaling $215 million, down from $236 million at our last quarter ended June 30th. Our leverage expressed in terms of net debt, the trailing 12-month EBITDA, was 1.5 times down from 1.7 times at June 30th, and just over 2 times at the end of Q3 last year. We continue to manage our leverage at the lower end of our historical operating range over the past 10 years of 1.5 to 3 times and, of course, far below our debt covenant of 3.5 times.

With low leverage and well over $200 million of cash on hand and under-on availability on our $225 million revolver, we’re well positioned to fund a significant level of growth opportunities while supporting our operations during a recovery that reflects a higher than usual level of uncertainty.

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

Scott Patterson

Thank you, John. Let me start my review with our largest division, commercial real estate, where revenues for the quarter were $222.7 million, up 42.8% from the third quarter of 2009. Adjusting for FX, fluctuation revenues were up 36%, 32% organically. The strong results were driven by significant gains in the US, Canada, Asia and Australia, tempered by flat results in Latin America and modest net declines in Europe.

Improved market conditions and transaction activity in most regions that we operate led to dramatic increases in brokerage revenues relative to the soft third quarter of 2009.

In the aggregate, sales and leasing revenues were up approximately equally, both over 50%. We also experienced strong increases in appraisal and property management revenues in all our major markets.

Let me now spend a minute focusing on each of our major regions. In the Americas, revenues were up 48% driven by very strong year-over-year gains in the US of close to 60%. Canada also posted strong growth of 40%, well as mentioned above Latin America was approximately flat with the year ago.

Growth in the US was driven primarily by an increase in growth projectivity, particularly in New York City, Boston and our West Coast offices. Consistent with our June quarter, each of our US offices showed some level of growth relative to the prior year. In Canada, the strong results were led by growth in our major markets, Toronto, Vancouver and Calgary.

Our margin in the Americas for the third quarter was mid single digit, similar to the prior year quarter. There were several factors during the quarter, which offset the operating leverage that we would normally expect to see with 48% revenue increase. More significant is that on average in US and Canada, our brokers were hitting higher commission splits compared to the prior year quarter, which increased total commission expense by 4% of revenue.

In addition, we continue to invest in the US in several areas, including recruiting, building out of corporate services platform, opening new offices and technology. Investments that are critical for us long term and we expect will start to yield a return beginning in 2011.

Finally, as John and Jay both mentioned, the re-branding cost was a significant number in the Americas during the quarter .Looking forward in this region, we expect to see continued strong year-over-year growth in the fourth quarter. In our Asia-Pac region, year-over-year revenues were up 40% in US dollars and approximately 31% in local currency driven by strong increases in Australia, China, India and Singapore and continuing the trend we saw in the first six months of this year, we showed a solid level of growth in each of the other 11 countries, that we operate in across Asia-Pac.

Strong increases in leasing activity in our major markets, principally office leasing was the main growth driver during the quarter in Asia-Pac, but we also experienced a significant year-over-year increase in property management revenues in the region.

We generated a low double-digit EBITDA margin in Asia-Pac for the quarter, up from the June quarter and from the prior year. Looking forward in Asia-Pac, we expect to see continued year-over-year gains from the fourth quarter, but at a more modest level than that experienced this quarter, reflective of the strong fourth quarter of 2009, which was up almost 50% over 2008.

In our Central and Eastern Europe region including Russia, revenues were down 11% in US dollars and approximately 6% local currency. As modest increases in Central Europe led by our operation in Poland were more than offset by declines in Southeast Europe including Greece and Bulgaria. Despite the year-over-year decline in revenue, we generated a small profit in Europe for the quarter compared to a $2.5 million loss incurred in the prior year quarter, a positive reflection of the cost and payment efforts in the region over the last 24 months.

Looking forward in Central and Eastern Europe, we expect current trends to continue through the fourth quarter and into early 2011. We’re seeing some signs of improvement in the region, but our expectations were very slow recovery. In the aggregate for our commercial real estate division, we expect to show a solid fourth quarter comparison led by continuing year-over-year improvement in North America.

We will provide some general outlook comments on 2011 during our fourth quarter and year-end conference call in February. Let me now turn my attention to residential property management where we generated revenues of a $181.6 million for the quarter, up 4% over the prior year, 1% organically.

Consistent with our first six months, we achieved growth in management fee revenue of approximately 4%, but this was almost entirely offset by declines in ancillary service revenue, primarily landscaping in Florida. The growth in management fee revenue was driven by contract wins in Dallas, Las Vegas and the Northeast and supported by continued growth in our rental management business.

I reported in our last quarterly call that we had won three contracts that provide rental management services to mortgage lenders interested in earning a cash return on foreclose of property is an alternative to resale. This is still a small business for us in relative terms, but it is growing rapidly and in the current environment we expect it to continue to grow over the next few quarters.

As mentioned, declines in our ancillary fee revenue offset much of the growth we experienced in our management fee revenue. This was almost entirely due to continuing declines in our landscaping business in Florida, which is off over 10% compared to the prior year as a result of several lost contracts. The competitive environment remain very difficult in Florida, and particularly as it relates to ancillary services such as landscaping and pool maintenance where high unemployment has driven up a number of competitors by a significant number.

Our EBITDA margin in the quarter was 10.7%, up 60 basis points from the prior year. Looking forward in residential property management, we expect to see modest growth in the fourth quarter, primarily from acquisitions completed over the last 12 months. In our property services division, both field asset services and our franchise group grew approximately 5% over the prior year taking divisional revenues to $126 million for the quarter.

As you heard from us in the first two quarters of this year, activity levels at FAS and foreclosures in general remain flat while mortgage delinquencies and the foreclosure shadow inventory continue to build. Our customers have been advising us to expect increases in the foreclosure numbers for some time, and in August and September, in particular, we began to see more activity. Revenues for the quarter finished 9% higher than the June quarter and September revenues represented the highest monthly total since June 2009.

All indications pointed to a breakthrough in terms of reducing the enormous shadow inventory of delinquent mortgages. This momentum was interrupted in late September with the announcement by GMAC, JP Morgan and Bank of America among others that there may have been errors in their foreclosure filings and further that employees may have executed affidavits without confirming their accuracy.

Many of our customers temporarily halted their foreclosure operations while they conducted a review of the documentation processes. We are feeling this now, foreclosure filings continue but volumes are down considerably. Our clients advise us that the delay will last anywhere from 30 to 60 days. They all believe they have resolved their documentation and process issues, but the foreclosures need to be re-filed with municipalities and process which will take some time.

Adding to the uncertainty of the upcoming holiday season, beginning the third week of November, which has historically been a quiet period for foreclosure filings. This could effectively extend the delay to early 2011. Based on the information we have today, we believe our fourth quarter revenues will be down 10% to 20% sequentially from the September quarter, and at or slightly above prior-year levels.

Stepping back, as Jay indicated in his comments, the bigger picture remains the same. The backlog of mortgage delinquency is still there and our client still needs to work their way through it. We hope to be in a position to provide more clarity on our year-end call. Looking at our franchise systems, as I mentioned revenues for the quarter were up approximately 5% as a group. Growth was spread evenly across the eight different systems each continues to track the positive of year-over-year trend that started for us in the first quarter. Our expectation is that the year-over-year results from our franchise systems will continue to improve slowly and consistently in the coming quarters.

EBITDA margins for this division was 17.6%, down from 20.1% in the prior year due to reduced margins of FAS, as I mentioned in the first and second quarter calls. We invested in our operating infrastructure through the last half of 2009 adding space and increasing headcounts to a level that we believe is necessary to service existing volumes. The margins generated by FAS in our third quarter are similar to those reported for the last three quarters, indicative of what we expect to report in this business longer term.

That concludes our prepared comments; I would now ask the operator to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sara O’Brien with RBC Capital Markets, please go ahead.

Sara O’Brien – RBC Capital Markets

The commercial real estate margins, you mentioned there is a, the $2 million in re-branding cost. But in terms of operating leverage given that the volumes were up so much, can we see that margin tick up in either the back half or I guess the last quarter this year into F ‘11 or do we have to wait in to sort of F ’11, late timeframe to see that pick up?

John Friedrichsen

Well, I’ve made the comment that this quarter we are also impacted by increased splits in Canada and US as a result of the significant revenue increase. We will see that for a certain extent in the fourth quarter, but we will also see another large increase in revenues that we expect will realize leverage on. So our margins in the fourth quarter will be higher than the third and comparable to prior year. In 2011, we will definitely see higher margins than in 2010.

Sara O’Brien – RBC Capital Markets

Okay, great. Just wondered on the field asset service, you mentioned volumes to be down, sort of 10% to 20% in last quarter, how much operating leverage do you gain in that? Should we expect the margin in the segment to come down significantly because of those delays?

John Friedrichsen

No. We’re expecting that our margins will remain comparable to the September quarter. That business has quite a bit of variability in it. Right now, they’ve set themselves up to respond to increasing volumes and declines based on what they have experienced the last three quarters.

Sara O'Brien – RBC Capital Markets

Okay, great. And just wondered, in terms of corporate expenses, a little higher than I would have expected at $5.4 million. What kind of a run rate do you expect going forward into F 11 for that?

Jay Hennick

Well, I think we should see actually, probably a bit of reduction Sara next year. We are at an elevated level right now based on kind of year-over-year EPS gains. Going into next year, hard to say, but we would expect it to normalize back closer to historical levels, which would be in the lower teens on an annual basis.

Sara O'Brien – RBC Capital Markets

Okay.

Operator

Thank you. Our next question comes from Dave Gold with Sidoti. Please go ahead.

Dave Gold – Sidoti

Hi, good morning.

Scott Patterson

Good morning Dave.

Dave Gold – Sidoti

So, a couple of things. One, I was hoping on field, if you can give a little bit more of a sense then for essentially the way things have stopped. I understand you can give 30 to 60 days or maybe a little longer based on year end. But basically if they have to start over, how does that truly affect you in basically confidence in adjusting that 30 or 60-day delay?

Scott Patterson

Well Dave, the comments that we are providing today are really from our clients. We are harassing them, staying very close to them. There is clearly a great deal of uncertainty right now around this issue. But we are providing the best information that we have and the best information that they have. They have restarted their foreclosure process and our expectation is that saving except for the holiday season, we would be back into it for more in the summer. The holiday season will likely temper that, but so at this point we’re expecting to start 2011 at higher levels. But again, we’ll know better in our year-end call and we’ll provide more clarity if we have it.

Dave Gold – Sidoti

Okay. Can you give us a better sense to remind me at what point in the process usually they hire you?

Scott Patterson

When they’re foreclosed.

Dave Gold – Sidoti

Okay, so at the end?

Scott Patterson

And when the owners are out of their home.

Dave Gold – Sidoti

I see, okay. Got it. And then, I guess the other question in there, on the branding that still left to be done in the [Inaudible] site, what work is left to be done there in order of magnitude, as we talk about this revenue in the first half of next year. Is this a good run rate the $2 million a quarter?

Jay Hennick

I think that’s a number you can use going into, for the balance of this year and into the first half of next year, which I would I guess in aggregate total about six. That would be a good number; it will be in the five to six range, and it’s been rolled out globally, so region by region.

Dave Gold – Sidoti

Got it. Okay, that’s it for me. Thanks.

Jay Hennick

You’re welcome.

Operator

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

Frederic Bastien – Raymond James

Hi guys.

Jay Hennick

Hello

Frederic Bastien – Raymond James

Just wondering if you expect to have any growth on a year-over-year basis with respect to the franchise businesses?

Jay Hennick

In the fourth quarter?

Frederic Bastien – Raymond James

Yes.

Jay Hennick

Yes. I think we expected there will be continued year-over-year growth for the foreseeable future slow and consistent

Frederic Bastien – Raymond James

So that should have set some of the, some of the losses you’re expecting from FAS? I guess that will offset any risk.

Jay Hennick

Our fourth quarter, we still believe our revenues is, based on the information we have today will be comparable to our last year 2009 fourth quarter.

Frederic Bastien – Raymond James

Okay, thanks. And my other question relates to Colliers. Are there any key markets in the U.S where you still not have a presence, and whether you’re expecting to be moving in that direction in a short term?

Jay Hennick

Well we’re very active obviously in all activities in the U.S. We’re now present, Chicago as the last key market and that’s come on board two quarters ago. So, we are strongly represent virtually everywhere in every major market.

There are some secondary markets that we want to fill out just to provide consistent service delivery across the board and we’re going to do that through licensing as oppose to actually opening those markets, because long term it’s probably the best way to operate them.

There maybe one or two interesting additional opportunities to add a key market as a company owned operation, we will see how things transpire over the next couple of quarters, but we’re covered everywhere now.

Frederic Bastien – Raymond James

And would you mind providing a little bit more color on the key market you would like to improve or enhance your presence in?

Scott Patterson

No, that’s not something that, that’s not ...

Frederic Bastien – Raymond James

I thought I’d try. Thank you.

Operator

Thank you. Our next question comes from Stephen MacLeod, and he is with BMO Capital Markets. Please go ahead.

Stephen MacLeod – BMO Capital Markets

Thanks, good morning guys.

Jay Hennick

Good morning, Stephen.

Stephen MacLeod - BMO Capital Markets

Good morning. Just a couple of questions for you on the Colliers side, you have this brand reinvestment that you’re, not reinvestment brand investment that you’re doing right now. Can you just clarify; sort of what the numbers are expected to be over the next three quarters? If it is 2 million a quarter, that’s probably a good run rate.

Jay Hennick

Yes.

Stephen MacLeod - BMO Capital Markets

Okay. Are you able to talk a little bit about what kind of positive impacts you’re beginning to see from the re-branding investment that you already put through?

Jay Hennick

Good question. It is actually been a huge momentum gain, you can see by the results this past quarter in the U.S. relative to our peers. I think we’re gaining share in many markets. The consistent Colliers branding is helping considerably with recruiting. It’s helping us with client, new client wins, because it’s a clear and consistent story and that’s one of the reasons why we decided that we would incur the expenditures that we have on upgrading the branding company-wide.

We’re talking a lot about the branding, but branding also includes marketing materials, it includes online presence, it includes a whole variety of things that help to create a one Colliers and we really started to some degree a step behind everyone else, as I said in my comments, because up until now in the U.S. there were some markets that we didn’t know that carried on business using a local name. So it was Colliers X or Colliers Y and so creating one Colliers with the consistent platform has made a big difference in all the areas I mentioned and I think it’s going to continue to make a big difference in the quarters ahead.

So, we’re really looking forward to continuing to generate significant revenue growth quarter-after-quarter, particularly in the U.S. over the next year or so and stay tuned and hopefully we can deliver that.

Stephen MacLeod - BMO Capital Markets

Okay. And regionally, do you see the Colliers re-branding getting more traction in different markets relative to others?

Jay Hennick

Well, in most cases and not most cases, in all cases where we owned the market and we own Colliers now in 42 countries, it always carried on business has Colliers International. So, the re-branding in the U.S., the benefits there and of course, we only own 29.9% of the U.K. Both the U.S. and the U.K. market are markets that drive business to other global regions, and so as we continue to have a uniform presence and market ourselves in the U.S. and the U.K. under a common brand, we hope that will translate into additional business for us in some of our other offices around the world and it is now.

Stephen MacLeod - BMO Capital Markets

Okay. That’s great. And continuing on the Colliers business, Scott you mentioned that in the U.S. and Canada you saw a higher broker commissions splits, is that something that is expected to change over the next 12 to 18months or sooner?

Scott Patterson

No, it’s a trend that we normally see from the first to second to third quarter, as brokers achieve higher revenue thresholds; they generally achieve higher splits in their favor. We saw it from prior year third quarter to this year, because of the significant revenue increase.

So, we had much higher number of brokers and achieving higher splits this year. So, it’s not going to change over the next year, the trends will remain the same and they are really dependent on revenue going.

Stephen MacLeod - BMO Capital Markets

Okay. So that it accumulate through the year?

Jay Hennick

Right.

Stephen MacLeod - BMO Capital Markets

Okay. And then finally looking at the property services business FAS specifically, if, you have a stoppage in foreclosure volumes that are coming into the system right now. Can you talk about some of the other services that you are providing are you able to continue to maintain a level of revenues through maintenance and ongoing services for the property?

Jay Hennick

Well, if the homes aren’t selling, the foreclosed homes that we currently managed don’t sell we’ll continue to earn revenue on managing those properties, but ultimately we need new files and that’s what drives the business. So, if the file stops, then slowly our revenue will decline as our homes are sold.

Stephen MacLeod - BMO Capital Markets

Okay. Thanks and I will get back in line.

Jay Hennick

Okay.

Operator

Thank you. Our next question comes from Brandon Dobell and he is with William Blair. Please go ahead.

Brandon Dobell - William Blair

Thanks. You may have though o this before, I hoped on late, but any commentary about the pipeline of new contracts in the residential property services business, like managing those communities. I haven’t heard much about that beyond those two acquisitions you guys made, any commentary about organic growth in that business?

Jay Hennick

The market really isn’t growing, residential property management. There has been no new development to speak off for the last couple of years. So the growth is slowed and it becomes a market share gain. We are certainly winning new contracts, particularly larger associations and high-rise more complex properties where we bring a competitive advantage. But it’s also become a very, very competitive market and we’re losing contracts at the same time, primarily due to price, and they tend to be a smaller contract.

So, we continue to grow. You saw a 1% this quarter. We expect organically 1%. Next quarter, we expect similar results. But until the market starts to grow again, it will not increase significantly.

Brandon Dobell – William Blair

Any change in the tone of conversations with some of your subsidiaries about the option to put back remaining ownership to you or for you guys to purchase that remaining ownership, just given the, kind of the health or relative lack of health for these business segments that you guys have, or is it just kind as usual with the managers are running those businesses…?

Jay Hennick

Well, you recall the 18 months ago, we had a larger number of minority shareholders, all in the commercial real estate segment, wanting to monetize some of their investments. The way our deals are all structured, as you know Brandon, you can only put one third of your equity to us with at any given time, but generally speaking our businesses, other than commercial real estate are so recurring and they’ve grown year-over-year and they are such cash flow generating businesses, share value consistently grows year-after-year.

So, unless somebody needs additional capital to do something, their best investment is to leave it right here in their operating business. It’s very interesting to note that we’ve had multiple calls from others in their commercial real estate space looking for opportunities to increase their equity stake in commercial real estate, which may send some messages to us all that thing seem to be changing.

But I would say that the ownership of the various businesses will remain pretty much the way they are, unless we take some alternate steps, but I would say it will remain the same.

Brandon Dobell – William Blair

Okay fair enough. And then, I wanted to go back to the broker commission put question for a second. I understand that there is a through the year increase based on volumes and multipliers, but is there a structural change in those split, so as the cycle improves just see the top level of those splits go up as it change with the re-branding efforts, consolidation efforts. Do you see any major changes on how you’re paying the majority of the brokers, especially in the U.S., but also in Europe?

Jay Hennick

There’s no structural change. All our deals, particularly with all the new recruits are consistent, and they cap at a certain level. There are some legacy deals that remain at higher levels, but I think when the market comes back, we’ll see our commission expands will be lower than it was in 2007 for example. So, we are managing it down and there is no original structural changes market increases.

Brandon Dobell – William Blair

And a final question. Within Colliers is the consolidations of the branding effort, do you think that’s a necessary condition for you guys to have in placed before you take a look at the investor management business maybe a bigger stark or a present property management, or do you think you can explore those opportunities either through acquisition or through recruiting without having all the Colliers brands in all sort of way, come in next year?

Jay Hennick

Well I mean, you’re saying a lot of things, and I agree with each one of them. The branding is critical, its have a huge, it’s made a huge difference to us in terms of recruiting and new client wins. We think it will continue to do that.

It’s also helped us with acquisition opportunities. There is some licensing in some secondary markets, which would love to be owned operations as opposed licensed operations and so we think that from the standpoint of having a stronger more consistent brand we win on all those areas.

Property management is code of what we do. If you look at property management FirstService why, we probably do pretty close to $1 billion in property management which is more recurring than most of our peers and if you have both our Resi and our commercial management operations together. So we understand property management. We think having the stronger brand is accelerating the growth on the commercial side of our property management, not withstanding the comments earlier on the Resi side.

So, I think that should benefit. Investment Management is an interesting area of discussion, it’s strategic, and it’s something that we talk about all the time. The reality is our clients don’t want us to be in, asset management, they see it as a massive conflict and it is frankly a conflict and it could be a conflict that could be managed, but it’s a conflict notwithstanding and our current thinking although we are always looking at strategic options, our current thinking is that’s one of the differentiators of Colliers versus its pears.

It is not in the investment business, it is not going to be a competitor to our clients, and I think that’s a differentiator that the more we communicate to our potential clients will translate into additional opportunities for us.

Operator

To ask a follow up question form Sara O'Brien with RBC Capital Markets. Please go ahead.

Sara O'Brien -- RBC Capital Markets

Hi, just wondered Scott, maybe if you could talk on the commercial real estate platform, what are your expectations for growth growing forward? I mean I know it’s a little early to talk about F’11, but I guess my sense was you guys were still a little bit cautious going into the next year. Wonder how that plays out in terms of your acquisition appetite going forward from here?

Scott Patterson

Well I won’t comment on acquisitions, I will let Jay do that, but I think that we have positive trends in most of our regions. We are waiting for Central and Eastern Europe to match some of the growth we are seeing in our other regions. But we would expect that to continue into 2011, but I think we will expect the level of growth to be much more modest that we’ve seen this year.

Sara O'Brien -- RBC Capital Markets

Okay

Jay Hennick

Which still translate into, we are quite at its early days, but 2011 should be a much better year overall in commercial real estate than 2010 at least that’s our hope. In terms of acquisitions; look our leverage ratios are extremely low. We are ready willing and able to find the right opportunity, we always operated on our one step of the time kind of philosophy and so there is a lot of activity out there, and we’ll capitalize when the time is right. In the mean time we’ll use our cash flow are to continue to pay down or debt as John indicated and having leverage ratios in the low ones, pretty low.

So, we’re quite excited about having the capital strength to capitalize, if it’s the right opportunity there.

Sara O'Brien -- RBC Capital Markets

Okay, great. And then just a couple of small net piggy ones, but tax rate it’s been in sort of the high 40th past couple of quarters. I guess when we take out the valuation allowance it’s down to about 21%. What do you guys use or what should we use in our models for kind of a regular or normalized tax rate going forward?

Jay Hennick

Probably about 28%, 28% to 30%, I wish we can put our final point on it, but that range would be consistent with where we see it this year and going forward.

Sara O'Brien -- RBC Capital Markets

Okay, great. And then one last one just on property management, I am not sure if you addressed it, but the 100 basis points lift in margin, any reason for that? Is that national accounts or what give you the list in this quarter and is it sustainable?

John Friedrichsen

It wasn’t quite a 100, it was 60.

Sara O'Brien -- RBC Capital Markets

Okay.

John Friedrichsen

But it was good to see just a little mix. Some of the landscaping business that we’re losing frankly as low margin and provide some favorable mix change and we do continue to expand our collection business, which is a higher margin business for us.

Sara O'Brien -- RBC Capital Markets

Okay. Great, thanks a lot.

Operator

You have another question from Stephanie Price and she is with CIBC, please go ahead.

Stephanie Price – CIBC

Good morning.

Jay Hennick

Good morning.

Stephanie Price – CIBC

First, you announced a major corporate real estate services contract at the end of July with a restaurant chain. Could you talk about why Colliers was chosen and who you were competing against and what you are seeing in that market?

Jay Hennick

Oh boy, Stephanie, why do you have to talk about that restaurant chain?

Stephanie Price – CIBC

I didn’t name it by name.

Jay Hennick

Can we talk about AT Kearney; can we talk about [Inaudible] can we talk about some of the thought leaders that we’ve been successful winning over the past couple of quarters? No, we have to talk about the losers.

Actually, I’m demeaning it a little bit only because it creates a laugh for people, but Hooters [ph] is growing exponentially outside of the U.S. It’s creating great opportunities for us in markets that really value U.S. brands, happens to be a subject matter that is always a feeling to at least have of the population out there. So, we’re excited about winning that business and we’re excited about working with the Hooters people who are very aggressively trying to grow their business.

Stephanie Price – CIBC

And can you give us sort of an indication of who you are competing against or what Colliers were chosen?

Jay Hennick

Well, I think it was chosen primarily because when you look at the global footprint of Colliers and you compare it to others we have consistently stronger operations in some of the markets where Hooters wants to go to.

Asia, extremely strong in so many Asian markets, and Eastern Europe and Southeastern Europe also, and having a presence there, dots on the map had made a big difference I think in the selection of us versus others.

Stephanie Price – CIBC

Moving on to residential property management, and just with the national accounts part of it. Is there any cross opportunities between that and FAS?

Jay Hennick

There is cross opportunities between that and FAS. It’s not material in the overall schema things, but what FAS does for our properties that we wrench on behalf of the banks, is it does some of the field services, so it will do through it’s contract and network it will do some of the landscaping, it will do some of this, the swimming pool service and inspections to some degree as well on a monthly basis.

So, there is some crossover revenue and it’s been very helpful, I think to the property management guys having a feed on the street in so many markets and so many independent contractors through FAS that we can call on to get the job done.

Stephanie Price – CIBC

And just again the residential property management, I noticed they Grubb & Ellis also our putting forward the national residential property management offering. Can you kind of talk about the impact on FAS and maybe a bit more broadly to Brandon’s question different competition in that market?

John Friedrichsen

I am sorry; I didn’t hear all of that. Could you give me that question again?

Stephanie Price – CIBC

No problem, Grubb & Ellis announced a national residential property management offering during Q3 and I am just wondering about the impact on FirstService and also, and it is more broadly competition in that market.

John Friedrichsen

Well, we are the market leader in that space, it’s nice to see that they have the side a bit residential property management as a good area for them to pursue. They are focused from what we understand is more on the rental apartment side of the business which we do, also but I think theirs is an initiative focused primarily on managing and renting apartments for institutions.

Stephanie Price – CIBC

Okay. Great. Thank you very much.

John Friedrichsen

Welcome.

Operator

Thank you. We have another question from Stephen MacLeod with BMO Capital Markets. Please go ahead.

Stephen MacLeod – BMO Capital Markets

Thanks. I just wanted to clarify one thing. John when you are talking about the tax rate you mentioned 28% to 30%, so is that a normalized tax rate excluding the deferred tax valuation allowance?

John Friedrichsen

Yes, that’s right.

Stephen MacLeod – BMO Capital Markets

Okay. And what is your outlook for the deferred tax valuation allowance going forward?

John Friedrichsen

Well, our effort is to get rid of that thing obviously and utilize these losses and once we have sustainable taxable income, which is always the same as accounting income, but when we have sustainable taxable income, we will be in a position to utilize the losses and then also to remove this allowance.

So that’s something that’s out there, whether or not 2011 or in the 2012 we all know, but certainly if the Colliers contains to deliver and participate in this recovery that we would expect and would be able to utilize and get rid of that in ’11 or probably 2012.

Stephen MacLeod - BMO Capital Markets

Okay. And until that time, what kind of number do you look at on a yearly or quarterly basis or does it just bounce around?

John Friedrichsen

It just going to, it will bounce around. I wish there was more certainty around this, but it’s irrelatively a complex exercise, especially all the moving parts here. And it’s going to probably range, stay closer to 40% would be kind of the number that we would expect, but it could be plus or minus that.

Stephen MacLeod – BMO Capital Markets

So that’s a 40% tax rate - -

John Friedrichsen

Yes, without getting the benefit of these tax loss carry forwards.

Stephen MacLeod - BMO Capital Markets

Okay. And then just one final question, the non-controlling interest share of earnings, how do you sort of see that moving around going forward?

John Friedrichsen

Well, we kind of use the 20% to 22% in that range. I think that’s good for now unless there’s any dramatic change to the NCI component in our businesses. Jay, I think you addressed that earlier. We don’t expect there to be any, but you never know, but for now, the 20% to 22% is probably a good number.

Stephen MacLeod – BMO Capital Markets

Alright, great. Thank you.

John Friedrichsen

Welcome.

Operator

And we do have one more question from Damir Gunja and they are with TD Securities [ph]. Please go ahead.

Damir Gunja – TD Securities

Thanks very much. Just on the FAS, assuming I guess in early 2011, you have a nice return to higher activity levels. Is there an opportunity there to perhaps expand margins or should we be expecting sort of a consistent experience as you had in recent quarters?

John Friedrichsen

Our expectations that the margins that we’ve earned in the last three quarters are the margins that we expect loner-term

Damir Gunja – TD Securities

Okay, thanks very much.

Operator

Thank you. There are no further questions at this time.

John Friedrichsen

Okay, ladies and gentlemen thanks for joining us on this conference call and we look forward to having you, join us again on our fourth quarter. Thank you.

Operator

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.

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