Brookfield Real Estate Services' (BREUF) CEO Phil Soper on Q2 2016 Results - Earnings Call Transcript

| About: Brookfield Real (BREUF)

Brookfield Real Estate Services, Inc (OTCPK:BREUF) Q2 2016 Earnings Conference Call August 4, 2016 10:00 AM ET

Executives

Phil Soper - President & CEO

Glen McMillan - Chief Financial Officer

Operator

Good day. My name is Lindsey, and I would like to welcome everyone to the Brookfield Real Estate Services Inc Second Quarter of 2016 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. [Operator Instructions]. Thank you.

I would now like to introduce you to Mr. Phil Soper, President and CEO of Brookfield Real Estate Services Inc. Mr. Soper, you may begin your conference call.

Phil Soper

Thank you, Lindsey and good afternoon everyone. Thank you for joining us. With me today is our Chief Financial Officer, Glen McMillan.

On today's call, I will begin with a brief look at our quarterly highlights, Glen will then discuss our financial results for the quarter and I’ll conclude by providing some remarks on recent business, operational, and market developments. After that, Glen and I'd be happy to take your questions.

I want to remind you that some of the remarks expressed during this call may contain Forward-Looking statements. You should not place reliance on these forward-looking statements, because they involve known and unknown risks and uncertainties that may cause the actual results or performance of the Company to differ materially from the anticipated future results expressed or implied by such forward-looking statements. I encourage everybody as always to review the cautionary language found in our news release and in our regulatory filings and on SEDAR.

The company has had a very successful first half of 2016 with strong second quarter financial and operational results. Cash flow from operations on a rolling 12 months basis saw a significant increase of 12% to $2.35 per share compared to 2015. Underpinning our success is an increase in royalties supported by strong accretive growth in acquisition and realtor recruiting and retention. At June 30, 2016 the company’s network of realtors grew to 17,405, up from 17,320 in the first quarter. Operating under 303 franchise agreements, providing services from 670 locations with approximately a 1% share of the Canadian residential real estate market based on 2015 transactional dollar value.

The Canadian housing market transactional dollar volume and national average host price continue to increase in the second quarter of 2016, driven by strong markets in the greater Toronto or in Vancouver areas. Glen and I will provide more detailed commentary on the state of the Canadian housing market later in the call. Given the strength of the market expansion in the second quarter, it is appropriate to remind listeners that the company is structured to avoid the rapid swings to the positive or negative that can occur in a cyclical industry like real estate.

As a franchise, our revenue is primarily fixed in nature, while we don’t fully participate in a short-term spike in Canadian home values for example, we are protected on the downside when markets correct. We’d be happy to answer any questions at the end of the call related to that.

Finally, the company declared a dividend to shareholders of 0.1083 per restricted voting share payable September 30th, 2016 to shareholders on record on August 31st, 2016. This represents a targeted annual distribution by $1.30 per restricted voting share.

With that, I’ll turn things over to Glen for a look at our second quarter.

Glen McMillan

Thank you Phil and good morning everyone. As Phil mentioned, during the second quarter of 2016, Brookfield Real Estate Services Inc generated strong financial results. Our royalties and cash flow from operations continued to exceed previous results on a quarterly and on a rolling 12 months basis. In the second quarter, the company generated cash flow from operations of $8 million or $0.63 per share which represents an increase of 7% compared to the 7.5 million or $0.59 a share for the same period in 2015.

For the rolling 12 months period ended June 30, cash flow from operations was $2.35 per share as compared to $2.09 per share for the rolling 12 months period ended June 30th, 2015. Royalty revenue totaled 10.9 million for the quarter compared to 10.3 million in 2015 and for the six months period ended June 30th, royalties totaled 20.3 million compared to 18.8 million last year, representing an 8% improvement.

The increase in royalties and improvement in cash flow from operations were driven primarily by an increase in a number of realtors in the company’s network and as Phil noted earlier, augmented by strong real estate markets across the country. In the second quarter of 2016, the company generated net earnings of $1.2 million or $0.12 per share compared to $40,000 or less than $0.01 per share for the same period in 2015. For the first six months of the year, net earnings were 2.1 million or $0.22 per share compared to a net loss of $3.5 million or $0.37 per share for the same period in 2015.

In the second quarter, the Canadian real estate market grew by 22% to $90.6 billion in total transactional dollar volume driven by a 12% increase in the national average selling price and a 9% increase in units sold. For the 12 month period ended June 30th 2016, the Canadian market closed up 20% at $254.2 billion compared to the 12 month period ended June 2015 with the most significant increases, continuing to account in the greater Toronto area and greater Vancouver. This 20% gain was driven by an increase of 12% in average selling price and an 8% increase in units sold.

If we consider the Canadian market excluding Toronto and Vancouver, the growth is more modest at 12% for the 12 month period ended June 30th, 2016 compared to 2015. For the 3 and 12 months ended June 30th, 2016, the GPA market experienced increases in transactional dollar volumes of 25% and 23% respectively when compared to the same periods last year with healthy growth in both prices and volume.

For the 3 and 12 month ended June 30th 2016, the greater Vancouver market increased by 30% and 43% respectively when compared with the same period in 2015, again with both volumes and prices contributing for the increase.

With that, I’d now like to turn the call back over to Phil for some additional insights and commentary on the market and operations.

Phil Soper

Thanks Glen, the second quarter 2016 was marked by a strong growth in the Canadian Residential real estate market and as we’ve talked about. And again this was most notable in the greater Toronto area and in greater Vancouver, while low interest rates remain the primary driver of Canada’s sustained real estate market expansion, home price trends are increasingly influenced by those local factors. From the web provided by extending exports to the drive helped by the process energy sector.

Since delays 2014 class of oil prices and the subsequent drop in the value of the Canadian dollars, the nation’s economy has been dominated by growth in British Columbia, Ontario, Manitoba and Quebec. The poor provinces most hide to the finish goods and services export sector and by expansion in the health of the U.S. economy, which remains our most important foreign market.

British Columbia’s economy has outperformed the balance in the country for 2 years running and is expected to continue to do so into 2017. Good forward immigration and intra-provincial migration trends favor the province particularly from Alberta to BC. The BC workforce is going at a faster pace than other provinces. While the lower Canadian dollar does put a damper on the returns from natural resource sales of the province, on balance the simulative impact of cheaper Canadian goods and services because of the low dollar have helped the region grow. This economic strength is echoed in the province’s housing market.

Vancouver, Canada’s most expensive market is experiencing the strongest home price appreciation in the nation. In fact, prices have grown at such a rapid rate that housing affordability is becoming a public policy issue with the spotlight being shown on foreign ownership in the region. I’ll touch on that further and later in the call. The first signs of slowing of this expansionary cycle began to show halfway through the quarter as the pace of unit sale growth in the greater Vancouver area began to flatten on a year-over-year comparative basis. A change in sales volume is often a leading indicator of future price behavior. So we may well be headed for more rationale home price appreciation as the year progresses.

And just this morning, we saw additional information on unit sale growth and it was actually down year-over-year, but if one was to look at the same period in 2015, there was an unusual spike in unit sales last year. So my statement about a flattening unit sales volume still holds. This week, the British Columbia government introduced legislation that adds a 15% property tax as transfer tax for foreign national buying real estate in metro Vancouver. While we applaud the effort from all levels of government to better understand Canada’s housing market including the impact of foreign investors, we remain convinced that the heavy handed use of tax policies and effort to artificially influence asset value in an open market economy like ours is flat with peril, particularly in a cyclical industry like housing. In the near-term we do not see the new taxes, having the material negative impact on company performance, both because sales of foreign investors in Vancouver constituted tiny portion of revenue and because our revenue streams are primarily fixed in nature as I mentioned earlier.

Ontario continued to see substantial year-over-year home price appreciation in the second quarter with robust sales activity and healthy price growth in both Toronto proper and across the province with no near-term signs of slowing down. A stronger U.S. economy including robust employment growth has been particularly kind to Ontario, driven by the low Canadian dollar, low interest rates and for Ontario low oil prices, businesses in the province have been exporting more finished goods and services. Working against these positives, particularly in Northern Ontario, our low metal and other commodity pricing.

We’re new in this market, the Toronto Real Estate Board is appealing the decision ordered by the Completion Tribunal to release property sold data and pending sold data for broad dissemination on the internet requiring explicit in form consumer consent, on the grounds that it infringes upon privacy legislation. The board was recently awarded a stay of proceedings while the higher courts evaluated its claim. We are actively monitoring this case. Within our business, we have long supported and publicly supported more open access to real estate data. If this information is made more broadly available, we will integrate it into our brand’s platforms to provide clients with more information and better service. That said, we are sympathetic to the Toronto Real Estate Board’s dilemma. Today, they are caught between choosing which federal law they must break, the Competition Act or the Privacy Act, the federal government needs to provide direction.

Quebec’s broad based recovery story continues in the second quarter with Montreal homes experiencing healthy price increases. An increase in full time jobs and renewed stability and confidence in Quebec’s economy is being reflected in the province’s residential housing sector particularly in the Montreal region. And strength in exports in United States is expected to continue to support provincial growth throughout the remainder of the year. The negative impact of the downturn in the resource sector in contrast remains concentrated in Alberta, Saskatchewan, New Brunswick and Newfoundland.

A region that is provided a pleasant surprise this quarter is actually Alberta. While the conference board of Canada has projected that its economy will get 2% this year as a result of a sharp pull back in exploration and capital investment in the energy sector along with the impact of the Fort McMurray fires, residential real estate prices in the region have remained remarkably resilient. We do expect further softness as a result of pure transactional sales in the province. In other words there has been a dip on a year-over-year basis in the number of homes trading in hand and as I mentioned in the case of Vancouver that is often a leading indicator of which direction price is going. So we would expect further softness in Alberta but the market has remained remarkably resilient nonetheless.

Looking forward, well some had suggested that Britain’s exit from the European Union will bring forward money into the relative safety of Canada’s real estate market, we anticipate the impact if any will be seen in the commercial property sector, not in housing markets. With that said, amidst the continued world economic uncertainties, the historically low interest rate environment that has fueled Canada’s real estate market growth in recent years is expected to continue longer than previously anticipated. This period of low cost borrowing will in turn further delay the cyclical cooling of Canada’s hottest real estate markets particularly in Ontario, originally forecasted for the second half of 2016.

During the second quarter of 2016, the company continued to attract the best brokers in Asia for the industry to our leading brand nationwide. For the first time in several years, we are seeing new and significant opportunities from the province of Quebec. In fact, our Royal LePage brand is going faster than any other in the province this year. Strengthening our position in the Quebec market, in June of this year we welcomed Royal LePage Pro in Thetford mines which is an Eastern portion of the province and Royal LePage Triumph in its more than 90 realtors who service the Montreal’s South Shore Housing market. Coupled with these recent successes, we believe our healthy pipeline and focused market strategy will ensure our continued growth and success in the Quebec and other markets throughout the remainder of the year and into 2017.

As demonstrated by strong second quarter results in our growing realtor count, the target continues to provide value through ongoing investments and technology and services and ensure brokers and agents were amongst the most informed, supported and successful in the Canadian market. In the second quarter of 2016, the company continued to invest in recruitment and retention programs to help our franchisees efficiently attract and retain the best balance in the real estate business. This included a number of new marketing materials, designed to help franchisees with their recruiting effort like a new email drip campaign and experienced agent transition program. In addition, two new brokerage framing and accountability programs were unveiled to support continuous improvements in recruiting and retention.

In Quebec, where the industry has seen some attrition of REALTORS in recent years, we’ve increased our offering of new agent initiation and training programs in an effort to organically grow our numbers in that province and early indications are that it is working. During the second quarter, the company also continued to deliver a robust industry leading public relations program that generated significant brand awareness across Canada and garnered two covenant media industry awards. As part of this program, the company’s enhanced Royal LePage house price survey and national house price composite providing one of the most comprehensive views of Canada’s national real estate sector continue to receive very positive media attention, garnering the most media impressions of any Royal LePage survey published today. That was in the second quarter of 2016.

In total, this report alone garnered 218 million consumer impressions from over 771 stories including Tier-1 media outlets nationwide. As at June 30th 2016, the company has secured over 1 billion media impressions, just shy of the year in total achieved for the entire year 2015. So we are on a trajectory to garner over 2 billion impressions by the end of the year, truly mindboggling number.

Our Royal LePage brand was also recognized during the second quarter for its leadership role in volunteering and contributing to communities across the nation. The company became the proud recipient of the federal government’s 2016 Canada’s Volunteer Award in the category of business leader. This was previously known as the Prime Minister’s award. It is a widely publicized and coveted public achievement and we’re very proud of receiving this recognition.

Investments in meaningful technologies and lead generation programs continued within the second quarter of 2016 as well. In particular, at our Via Capitale operations, we’ve rolled out transaction processing support services to a number of brokers to reduce the administrative burden on their staff. During the quarter, the company launched a new partnership with a leading luxury real estate services organization which will provide company realtors and their luxury listings with international exposure on the world’s luxury real estate portal.

In the second quarter, we also saw our Royal LePage brand deliver a fully responsive website and launched travel time search functionality. Each of that allows consumers to calculate commute time as part of their considerations when deciding where to buy a home, and a fully and as these are fully responsive websites, they render accurately and beautifully regardless of the device, mobile phone, tablet or desktop computer. These are only a few of our many ongoing initiatives, as we continuously look for ways to grow and enhance our business. Details of additional projects and the works will be shared with you as the year progresses.

In conclusion, in a quarter when some real estate markets continue to expand rapidly, while others experienced the ongoing drag of lower energy and commodity prices, our business expanded at a steady profitable pace which we believe reflects in the health of the company and the value of a business model that emphasizes fixed and recurring revenue stream. As always, we strive for consistency and reliability in up and down markets. We are opportunistic about the state of our business and the growth of opportunities that exists for us throughout the country to continue to expand our network while providing our shareholders an investment vehicle that pays stable and growing dividend.

With that, I will turn the call back to the operator and open up the call to questions.

Question-and-Answer Session

[Operator Instructions] And there are no questions at this time. I’ll turn the call back over to Mr. Phil Soper for closing comments.

Phil Soper

Thanks Lindsey and I wish to thank everybody once again for participating in today’s call. Look forward to updating you again during our next quarterly earnings call in 3 months time. Have a great conclusion year, summer. Thank you.

Operator

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

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