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Executives

Philip Soper - President, Chief Executive Officer

Kevin Cash - Chief Financial Officer

Analysts

Brad Sturges - CIBC World Markets

Brookfield Real Estate Services Inc (OTCPK:BREUF) Q2 2014 Earnings Conference Call August 6, 2014 10:00 AM ET

Operator

Good morning, my name is Nick and I would like to welcome everyone to the Brookfield Real Estate Services' Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session (Operation Instructions) Thank you. Mr. Soper, you may begin your conference call.

Philip Soper

Thank you Nick, and good morning everyone. With me in the room is Kevin Cash, Chief Financial Officer. I will begin with a brief look at the high level of results in the overall Canadian real estate market. Kevin will dive into our second quarter financials in more detail and I’ll conclude with some remarks on recent operational developments. After that we would be happy to take questions.

I wish to remind you that some remarks expressed during the call may contain forward-looking statements that may differ materially from results published in this morning’s press release. I encourage everyone on the call to read the cautionary language in our news release and in our annual information form posted on our Web site and on CEDAR.

The Company’s operational and financial performance for the three months ended June 30 was soft. As frequent listeners to this call will be familiar with our structure designed as it is to smooth Company revenue from the cyclical peaks and valleys that characterize our industry. In expanding markets a larger percentage of our underline agent population, increase in productivity and a high percentage of our agents reached the cap threshold. Conversely in periods of falling home prices or decline in industry sales volume, this aspect of the company fee structure provides protection from declines in revenue.

Put another way, given the predominance of our fixed fee to the revenue stream, during periods of market expansion like we’ve seen so far in 2014, our business benefits somewhat from the upswing but to a lesser extent than the overall market. The benefit is of course on the flip side. The company has shown that it’s well insulated from declines in market activity.

Looking at key metrics -- the key metrics that we use to mention company performance, both cash flow from operations and royalties were up for the second quarter in fiscal 2014 as a whole. For the second quarter, Company royalties were 9.9 million up 0.2 million or 2% compared to quarter two last year. For the second quarter our cash flow from operations was 6.9 million, up 0.3 million or 5% from the same period in 2013.

It is important to note that our cash flow is well in excess of the distributions and despite raising our targeted dividend 9% over 2013 levels, our pay ratio is a healthy 69%. We believe we’re well placed to continue meeting our objective providing shareholders with an investment vehicle that pays stable and growing dividend. With the dreadful weather that disrupted economic activity across North America in the first quarter, a fading memory, quarter two market activity recovered nicely and was up over the same period, three month period last year.

Last year’s market activity was down as the real estate industry worked its way through a normal cyclical correction. If you recall that was mid 2012 to mid 2013. We saw double digit declines in many markets in transactional volume.

Transactional volumes in 2014 demonstrates we’ve worked our way through that correction, and the overall sales figures are more in line with historical norms. If you look at the market overall, pent-up demand in listing supply shortages continue particularly in three cites - Vancouver, Calgary and Toronto. There is little evidence of our condominium demand softness in Toronto, Vancouver and we'd expect prices in general to moderate for the second half of 2015 as both supply and increasing prices work to bring demand into check. Our company generates approximately 71% of revenue from fixed fees, which are based on the number of realtors in the network. The variable component of our revenue is primarily driven by the total transactional dollar volume from sales commissions of our agents and sales representatives.

We continue to see our network of grocers grow and if you look at 2014 year-to-date there was an additional net 12 agents in the second quarter joining the 375 we added in the first quarter. At June 30, 2014 the Company was made up of 15,697 realtors operating through 277 businesses providing services through 636 branches across the country. The Company is represented in every community inside across Canada. It has strong representation in the largest real estate market in the country, Ontario, as well as in Quebec where we operate both the Royal LePage and Via Capitale brand. In Atlantic Canada where market share is in line with the overall Canadian average, as I shared with listeners before the company has opportunity to grow the market share in British Columbia and Alberta, where we put considerable focus on those market.

As it has been our experience over the past decade, the Company continues to experience a very high level of franchise renewals in agent retention. Our agreements in our Royal LePage business are 10 to 20 years in duration, with most being of the 10 year length significantly exceeding the industry norm and reducing churn in agreement renewal risk. Our Via Capitale franchise agreements are more in line with the industry norm and are typically five years in duration. They represent about 7% of Company realtors.

The Company overall -- our renewal profile by year looking ahead is not skew one particular year and we believe it’s very manageable. So in summary we continue to see a stable and growing revenue line as supported by reliable long-term contracts. The Company has been able to grow steadily through periods of both rising and falling home sale volumes.

With that I’ll turn the things over to Kevin Cash for a closer look at our second quarter performance.

Kevin Cash

Thank you Phil and good morning everyone. For the three months ended June 30, 2014 the Company generated cash flow from operations of $6.9 million, which was up 6% from the same period in 2013. On a rolling 12 months basis, cash flow from operations was $2 per share which was up from $1.97 we recorded at the end of 2013. During the quarter the Canadian market closed up 12.7% at $63.4 billion as compared to the same period in 2013, which was driven by 5.9% and 5.1% increase in price and units respectively, which was intern driven by recent spike at home prices and sales volumes in the last part of Q2. For the same period the GTA market closed up 15.4% at 17.9 billion as compared with same period in 2013 and this was driven by an 8.3% and 6.6% increase in price and units respectively.

On a rolling 12 month basis, the Canadian and GTA market that’s compared with same period 2013 closed up 15.8% and 18.1%. For the three months ended June 30, 2014 our network of 15,697 agents grew by 12, as recovery of agent attrition expense in our Ontario market during the first quarter was largely offset by loss of agents in Quebec. Similar to the last three years, the number of Quebec agents industry wide chose not to renew their licenses in the second quarter which resulted in approximate 4.6% province wide decrease in agents for the six months ended June 30, 2014 for the overall agent population in Quebec.

If prior years are any indication of the future, the Quebec agent population will be stable for the balance of the year with moderate growth occurring until next year’s license renewals. For the quarter, six franchisees representing 247 agents that were subject to renewal, renewed. During the quarter four agreements representing 11 agents were terminated.

Now with the market in the agent context for the period, turning back to the cash flow from operations for the quarter -- the 369,000 increase in cash flow from operations for the quarter over the same quarter 2013 was primarily driven by 1% increase in royalties and $233,000 decrease in operating costs. The increase in royalties resulted primarily from an increase in the number of agents in the network and the implementation of the previously announced $2 increase in the Royal LePage fixed franchise fee.

Variable fees for the quarter are flat year-over-year, this is resulted impart from an increase in the percentage of the underlying growth commission income of the network, which is reaching the cap variable fees threshold that Phil spoke to earlier. In expanding markets we expect a higher percentage of agents will reach this threshold sooner. Conversely in periods of falling home prices or declining industry sales volumes, this aspect of the Company’s fee structure provides protection from declines in revenue.

Premium fees for the quarter were relatively flat year-over-year as competitive offerings have captured a higher portion of the overall increase in market activity. Administration costs were lower due primarily to the non-recurrings of approximately $400,000 in cost associated with the completion of the management services agreement which was signed at the end of the second quarter last year. This was partially offset by approximately $200,000 in provision for certain franchisees who are experiencing financial or operating challenges.

From a net income perspective, for the quarter the Company generated net and comprehensive income before taxes of $4.6 million up 237,000 for the same quarter of 2013. The components of the quarter year-over-year increase primarily results from the following six items. 1) The 369,000 increase in cash flow which we’ve already discussed. 2) A $533,000 gain on the fair value of exchangeable units as the company share price closed down $0.79 at $14 per share at the end of the quarter, as compared to closing down $0.63 at $12.20 at the end of the same period in 2013. 3) There was a 516,000 reduction in the amortization of intangible assets, as many of the underlying contracts for the time of the inception of the company in 2003 continue to reach the end of their amortization period. 4) A 282,000 decrease in the fair value of the Company’s purchase obligations, due primarily to the write down attributable to a franchisee who was experiencing operating challenges.

These four increases were partially offset by a 782,000 increase of interest due to exchangeable unit holders. These stakeholders hold their interest in the company at the partnership level of the Company structure and accordingly receive their distributions pre-tax as compared to public share holders who receive their dividends after tax.

The increase in expense for the quarter represents the true up for the economic interest of these unit holders who pay their taxes at another level in the company and to those of the public shareholder. The monthly distribution for these stakeholders have also been increased to reduce the amount of future true ups. And lastly a 681,000 impairment charge was taken in the quarter for terminated franchises and for franchisees who were experiencing ongoing operating and financial challenges. For the six months ended June 30, 2014, cash flow from operations was $12.6 million, up 475,000 or 4% from the same period in 2013, with 210,000 of this increase coming from increased royalty fees due primarily to a 2% increase in fixed fees and 1% increase in variable fees. And 265,000 from a decreased operating cost to reasons previously described.

From a net income perspective, for the six month ended June 30, 2014, the Company generated net and comprehensive income before income taxes of $325,000 as compared to $4.6 million for the same quarter of 2013, after taking into account the 475,000 increase in cash flow from operations, the major components still remain in year-over-year decrease is primarily attributable to the following items. 1) A $3.6 million loss in the fair value of the Company’s exchangeable units, again due to change in the share price of the Company. 2) An 884,000 increase in interest on exchangeable unit holder's interest for the reasons described earlier. An 827,000 loss in the fair value of the Company’s purchase obligations, due to better than estimated performance of the underlying contract. A 362,000 increase in impairment charges for franchisees experience ongoing operational financing challenges and these are partially offset by 905,000 decrease in amortization of intangible assets for reasons described earlier. To finish, we’re encouraged by the increase in year-over-year market activity and we’re pleased to see that the fixed nature of our royalty fee continue to generate strong, stable cash flow which partially insulates the Company’s royalties from market fluctuation. With that, I’d now like to turn the call back to Phil.

Phil Soper

Thank you, Kevin. Before we open up the call for questions I’d like to offer some comments on our operations and some insight into industry and market developments. The Company has made significant investments and enhancements to our operating platforms during the past year. And we’ll continue to do so, some of these will be revealed or introduced, launched at our bi-annual national conference which will be held in Toronto at the end of September, beginning of October. A lot of our focus has been on the all important mobile technology space, our recently introduced mobile app featured a draw and search function that has been very well accepted. The app’s innovative design allows users to easily zero in on a specific geographic area of interest on a map by simply tracing the area of interest with their finger on their smartphone.

The new technology builds on investments or brands made in technology over the past years, both Royal LePage and Via Capiatale recently launched a new mobile friendly Web site featuring Google renowned map based technologies. I've shared some of this in the last couple of calls and I’m pleased to see they’ve been well received by home buyers. At the last call I shared a news that the largest franchisee acquisition conversion in the Company’s history occurred in the first quarter when the largest, a previously Coldwell Banker Company -- Coldwell Banker Terrequity restructured as Royal LePage Terrequity, I received a very nice letter from the owner operator of Royal LePage Terrequity, in which he says and I’m just quoting one line, we’re very excited to be part of Royal LePage network and the countless new opportunities for us to grow that I know will bring to my team, already we’re seeing many doors opening to us, which were previously inaccessible under our old brand. So it’s a lovely testimonial. They are a great firm and as I did say in the first quarter, we have a very healthy backlog building in 2014 and believe that it will be very strong year for growth.

Part of what we’re focusing on, with renewed enthusiasm this year, are recruiting initiatives. We have four pilots underway, recruiting, training for management pilots, with the largest coaching and training company in the world out of San Diego, the [indiscernible] company and essentially is a system of individual group and company accountability in which we take personal goals and roll them up to a good level and allow management in the field to support each other.

So it’s a different approach and as I said involve both accountability to the group, that you're a member but also to your coach. So we’re looking for some strong results out of that. We introduced a new program in British Columbia with a company called Real Smart which will help new entrance enter the industry and providing incentives if they joined our company, but we’ll trade anyone and this is a new approach for us while we'll provide broad based training and just in a way soft of the benefits of our company and we're focused on British Columbia because it’s strategically so important to us. We’ve introduced something call the Talent Mix which is a lead generation program for potential professionals looking to either make a switch to one of our brands or to enter the industry from another profession.

And finally Work For which is a social media system for identifying, funneling and determining which candidates are good fit for our business, because many-many in the business, even though we have a substantial market share in the business, by revenue only about 15% of the professionals in the industry are members of our company. And part of that is quite picky about those who would make a good Royal LePage or Via Capitale realtor.

Moving to industry development. Firstly in the American industry, somebody who may have caught in the American business or real estate product, that the two largest listings portals or the consumer portals that advertise our homes for sale, United States Zillow and Trulia have indicated their desire to merge Zillow acquiring Trulia subject to regulatory approval. I thought it would be worthwhile I pointing out that in Canada there is no equivalent, predominately because the principal consumer portal in the country is a cooperative owned by the REALTORS themselves and that is REALTOR.ca.

And it is many, many times more dominant in our market than the closed equivalent in the United States which is called REALTOR.com, would be the real turn themselves, the professional association in the United States sold their portal to a public company many years ago and don’t operated as a portal and it just by comparison has half the traffic of Zillow and well that’s half of combined Zillow Trulia, where as in Canada the Royal LePage.ca is the highest commercial real estate followed by Remax.ca. But we are only a quarter of the volume the Realtor.ca does. So if anyone was curious I could go on to additional detail, but there just isn’t the kind of business is like Zillow and Trulia operating in Canada as a result.

The only other industry development I wanted to mention was that in industry regulatory news, discussions between the Toronto Real Estate Board and Federal Competition Bureau are ongoing. Two parties have different opinions, relative to how consumers' privacy should be protected versus opening up currently private databases for public access to encourage competition. We do not believe a decision either way will have a significant impact on the Company, no in the case in these matters that where there's a debate over some kind of technology and this is a Web site debate, that is then turned over to lawyers and bureaucrats, it takes years and years and years to argue the fine legal points and in the meantime the industry has just moved on technologically and in terms of what matters to consumer, clients and agents. And that is in fact what appears to be happening in this space as well, but I thought I’d update you as to that occurred.

Finally I’m pleased to inform you that we’ve had several changes to our Board of Directors. George Myhal and Allen Karp have resigned as Directors of the Company and the Honorable Trevor Eyton and Mr. Spencer Inwright were appointed to the Board in their place at a Board meeting yesterday. Spencer Inwright was elected the Chairman of the Board. Gail Kilgour, a longtime member of our Board was appointed Chair of the Corporate Governance Committee and Senator Eyton was welcomed as a Board member.

Senator Eyton is a former businessman and retired Canadian senator, brings a tremendous amount of broad experience and talent to the Board. He was President and Chief Executive Officer of Brascan - now Brookfield Asset Management of course, from 1979 to 1991. Served on the Brookfield Brascan board for 33 years, along with a number of other candidates, leading corporate entities. So we’re very proud to have Senator Eyton as part of our Board.

Spencer Inwright, our new Chair brings a depth of Executive and Operational experience to the role. He was the Brookfield Asset Management's Senior Executive, responsible for Brookfield Real Estate Services Manager Limited. And prior to joining Brookfield has had a number of senior leadership roles with Coca-Cola, including General Manager of Minute Maid Canada and Chief Financial Officer of Coca-Cola, Canada Limited.

I’d like to personally think our previous Chair George Myhal and Chair of the governance committee Allen Karp for their contribution to the firm over many-many years. We wish them both much success with their future endeavors. With that I’m going turn the call back to the operator and open things up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Brad Sturges from CIBC. Your line is now open.

Brad Sturges - CIBC World Markets

Just on the potential pipeline, I think last quarter you gave a number as of May 1st of 524 realtors in the pipeline. Where would that number be today?

Philip Soper

I don’t know the exact number, Kevin might have the exact number. It hasn’t changed material, some of the things we’ve been working on, we hope, obviously these are all commercial deals and subject to due diligence and final negotiation. But we'd hope to have some significant announcements to make in the next quarter.

Brad Sturges - CIBC World Markets

And then within the network rate, now looks like there is a little bit of an organic gain overall, you noted some weakness in Quebec. Where were you seeing the gains organically during the quarter?

Philip Soper

Two things there Brad, so one, the game came back in Ontario. So that’s where we, we talked about that in the first quarter we had lost a number of agents in Ontario now we’ve got most of that back. And Quebec what’s happened there is, I just want to make sure everyone is clear, is that the whole province has gone down in the number of agents and it’s the typical thing, April 1, the license is up for renewal and agents continued to decide not to renew.

Brad Sturges - CIBC World Markets

With Quebec as a whole is urban -- I guess obviously there’s you know had a lot of discussion on regulation changes within the market. But would there be any impacts as well from maybe entrants at the lower end of the market and more for-sale-by-owner type models that are having an impact on the realtor network within Quebec?

Philip Soper

The for sale by owner percentage in Quebec has been higher than the rest of Canada for probably as long as we’ve been tracking those statistics, well before the company IPOed in 2002. It tracks more similarly to what you see in the United States, the rest of Canada has been pretty stable at a low level, the predominant model for buying or selling a home is to use a licensed professional in all the provinces in Quebec. It’s still the predominant model, but it’s less so, the change -- I haven’t seen any numbers that would indicate that the overall percentage has shifted materially. There has been consolidation though in the for-sale-by-owners phase. And I'd say that's a state and across the county with people turning to classified websites like Kijiji or Craigslist or in Quebec, The Property Owl, that we'll charge them a fee just to post their home-for-sale online but they don’t receive any -- there is no assistance, they’re not paying for professional service. And that market has consolidated particularly in Quebec, but it has materially grown, I don’t believe, again I don’t have the statistics right in front of me.

Really what we’re seeing is just a continued softness in the number of new people entering the industry. The regular in the province made some changes which I shared with you last year, that we would hoped would change that and see a growth in the number of new registrants, but it hasn’t happened yet. The courses that are acquired to receive your license are more expensive, take longer and the patch rate is lower than in anywhere out in the country by significant margin. And I personally just don’t think we've found the balance yet.

So we continue to work with the regulator and encourage changes, change comes very slowly at the government regulatory level, both in terms of the change to implement this it took years before they moved to put these changes in place which were done with all the right intentions, improving the quality of professional representation in the real estate industry which we're a big supporter of. We just think there is some changes to the program that would help new people, both young people coming right out of college university, but also mid career people looking for a change to more easily get into the industry.

So we continue to look for ways and continue to look for ways that are two big businesses in the province Royal LePage and Via Capitale from work together to improve this. But while we’ve seen some slowing of the rate of attrition in the industry as a home mass attrition, it’s not an expanding population in Quebec at this stage.

Brad Sturges - CIBC World Markets

And with your comments there on the for-sale-by-owner, why would or is there a particular reason why Canada except for Quebec be different -- have a different adoption rate for that compared to, let say the U.S. or Quebec. Is there something specific or is it not really known I guess at this stage.?

Philip Soper

It’s sociological really, it’s consumer preference. For example, we sell a wide variety of services with our brokerage services in Quebec, it is very-very common for consumers in Quebec to purchase protection for their household appliances, job loss protection, major home systems protection, they purchase that with our brokerage services in Quebec and there has been almost no interest in finding buying these services we've tried in other parts of Canada.

In Quebec people tend to the infamous move there, where people tend to focus they’re moving all in one weekend in Hawaii, which creates a tremendous stress on the moving industry, the real estate industry and despite lots of efforts by regulators and industry, and financial institutions spread things out this long tradition of moving in the single month, in the same one week period continues to drive activity there.

So the business of buying and selling real estate is different in Quebec than anywhere in the country, both in positive and negative et cetera. So there's sources of revenue we don’t have elsewhere, but there is also some challenges, one of them being, people are more likely to sell their home their own without professional representation there and have for a very long time.

Brad Sturges - CIBC World Markets

So in essence I guess with the rest of the country, you would expect a lower adoption rate over the medium term I guess. Even maybe in the longer term compared to what you’re experiencing in Quebec for the U.S?

Philip Soper

Lower adoption of…

Brad Sturges - CIBC World Markets

For-sale-by-owner.

Philip Soper

And it’s not adoption, I guess it's -- there is just a lower willingness to take that kind of risk. It’s just not seen as a [indiscernible] for most consumers in most parts of the country.

Brad Sturges - CIBC World Markets

Okay. And switching gears a little bit, I believe you have your debt maturity coming up February of next year, 53 million. Just give maybe a little bit commentary on expectations for refinancing the debt.

Kevin Cash

It’s Kevin. We are working on that, we have been working on it for quite some time and we are well advanced on that. We just don’t have anything we can announce.

Brad Sturges - CIBC World Markets

In terms of that can you expand on maybe what terms would look like, would it be similar in nature to what’s already in place?

Kevin Cash

We’re thinking five year term if that’s what you’re asking, yes.

Brad Sturges - CIBC World Markets

And rate?

Kevin Cash

The rate will be either fixed or variable depending what the market bears. We've got quotes on both.

Brad Sturges - CIBC World Markets

I guess compared to what’s in place, just generally speaking how does the available financing look in terms of interest cost?

Kevin Cash

The prevailing rates are lower.

Brad Sturges - CIBC World Markets

Lower, okay. So there’ll be some accretion to cash flow?

Kevin Cash

Correct.

Brad Sturges - CIBC World Markets

Potentially.

Kevin Cash

Yes, potentially. Correct.

Brad Sturges - CIBC World Markets

And then with the true up on the exchangeable units, what would be the run rate going forward for the interest on the exchangeable units?

Kevin Cash

It’s about another 600 -- we think it should be another $600,000 to the regular $1.40 on the 3.3 million shares. So 3.3 million shares times $1.40 plus 600,000 -- divide that by 12 and you get the…

Brad Sturges - CIBC World Markets

Got you, perfect. And with -- I guess during the quarter the cash access came down, looks like above 300,000. Is that related to the true up on the interest on exchangeables?

Kevin Cash

No, it’s just a function of our underlying taxable.

Brad Sturges - CIBC World Markets

Okay, so that’s not really onetime in nature. You expect that run rate to be going forward?

Kevin Cash

For the exchangeable unit holders?

Brad Sturges - CIBC World Markets

No, for cash access for restricted boarding shareholders? The cash access was almost 800,000 down from total 1100?

Kevin Cash

I'll have to look at our forecast going forward in cash back to the asset to answer that question.

Brad Sturges - CIBC World Markets

We could take it offline.

Kevin Cash

And if we do the [indiscernible] we’re talking about, it’s going to change that again, because I have more tax shield available.

Brad Sturges - CIBC World Markets

Got you, okay. And lastly just on the variable and premium fees. Looks like it was a little, overall a little bit softer than the previous year in Q2, was that related to softness in the resell market, I guess near the end of Q1 and that should be picked up I guess looking into Q3 given how strong resell volumes have been in the second quarter?

Philip Soper

It was a stronger, a weaker first quarter for sure. But you have to look at where the growth is in the -- and map it against where the premium fees come from. And that includes geographically and the kind of brokerages that are experiencing growth. So put another way, brokerages that paid premium fees are focused on their own operational profitability. So the strongest, usually the most profitable brokerages in the markets they trade in. In this market where there’s been a shortage of listing supply in the regions where we have premium fee generating offices. There has been some what I call intense price competition at the realtor level, in other words brokerages, paying higher splits to the realtors that the leading brokerages typically don’t participate in. So they won’t go after a marginal realtor and lower their prices to the realtor increase the split to the realtor, because it would affect the entire base.

So when you see a spike in activity like we have in Toronto proper, that’s not accompanied by a fundamental change in the market overall, it’s just demand-supply imbalance which has driven prices up. You often see the better brokerages not participating in that spike up in activity and you see some people chasing it to their detriment. I’ll give you an example.

There was a competitive brokerage, it happened to be a REMAX brokerage that tried to attract a number of new realtors to the business in the western part of the GTA, they grew rapidly over two years by just offering a discount and failed spectacularly this spring, so they, in what appeared to be a very strong market for them with increasing realtor count, their own internal financials fell to pieces and the business collapsed and some 300 plus realtors were out on the street, some of joined Royal LePage businesses those who were qualified. Others were reallocated to other businesses across the country, but the brokerage itself failed. So the businesses have to be very-very careful during times of what I call imbalance and we see imbalance in Toronto and Vancouver right now, not so much in Calgary because it’s supported by an underlying expansion in the population and the economy as a whole. But the short term imbalance that we see in Toronto and Vancouver isn’t sustainable and the better companies aren’t going to chase that increased activity in the short term at the peril of their bottom line. And we’ve got the better companies in the industry, so a bit of a long winded answer. I think what you'll see in the second half of the year, I predict and into 2015, is a return to more normal appreciation in the market overall and you’ll see a closer tracking of those fees to the market overall.

Brad Sturges - CIBC World Markets

So I guess, for clarity for my purpose it sounds like some other brokerages not in Royal LePage or Via Capitale been more incentivized to maybe take lower fees in order to attract more business, or you see that to be somewhat of a short term in nature that should normalize again going into the second half?

Philip Soper

Yes, well said.

Brad Sturges - CIBC World Markets

And just on the bad debt expense provision -- is that just related to the deferral of royalty revenues that was accrued in the -- or that occurred in the first quarter?

Kevin Cash

No, no, we’ve got our provision for a couple of franchisees that were experiencing difficulties. They are still with us and we’re working with them, but that was more prudent to take a provision at this time. The one that we had in the first quarter is paying current and we're not as -- at that point we weren’t worried about them but again it was prudent to take a provision at that time.

Brad Sturges - CIBC World Markets

So to go back for the deferral in the first quarter, was there a catch up in Q2 to correct for that or is it -- how should we be looking at that?

Kevin Cash

Well that one, in respect to that one they are paying current and we recognize the revenue as they pay. So until they pay Q1 -- when they pay Q1 we’ll recognize it.

Brad Sturges - CIBC World Markets

So it hasn’t been recognized yet.

Kevin Cash

That’s correct.

Brad Sturges - CIBC World Markets

Okay great. Thank you.

Operator

(Operator Instructions) There are no further questions at this time. Mr. Soper, I’ll turn the call back over to you.

Phil Soper

I’d like to thank everybody for tuning in and listening to this second quarter call. We look forward to updating you on our progress in three months time.

Operator

This concludes today’s conference call, you may now disconnect.

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Source: Brookfield Real Estate Services' (BREUF) CEO Philip Soper on Q2 2014 Results - Earnings Call Transcript

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