TORONTO, Nov. 7, 2018 /CNW/ - Brookfield Real Estate
Services Inc. (TSX: BRE) (the "Company"), a leading provider of
services to residential real estate brokers and their
REALTORS®1 today announced its third quarter
financial results and the approval of a monthly dividend to holders
of the Company's restricted voting shares. The Company will also be
continuing its relationship and has entered into an amended
Management Services Agreement (the "Amended MSA") with Brookfield
Real Estate Services Manager Limited (the "Manager"), a subsidiary
of Brookfield Business Partners LP (TSX:BBU) ("BBP"). The Amended
MSA provides for certain amendments to the existing Management
Services Agreement intended to, among other things, improve certain
economic aspects of the agreement for the Company. These amendments
will become effective immediately, except for the changes to the
compensation of the Manager which will be effective January 1, 2019. The Amended MSA will have an
initial term expiring on December 31,
2028, with provisions for automatic ten-year renewals
thereafter.
THIRD QUARTER RESULTS HIGHLIGHTS
- The Company's network of REALTORS® (the
"Network") increased to 18,799, up from 18,135 as at December
31, 2017.
- Royalty revenues decreased relative to the prior year as a
result of a decrease in the premium franchise fees and variable
franchise fees partly offset by an increase in fixed franchise
fees.
- Net earnings for the Company improved to $12.5 million in the quarter due to a large,
non-cash fair value gain related to the Exchangeable Units issued
by the Company.
- Cash flow from operations ("CFFO") on a rolling twelve-month
basis decreased by 4.3% compared to 2017 to $2.44 per Share, driven by a decrease in variable
fees and premium fees.
- The Company distributed dividends of $3.2 million to holders of restricted voting
shares.
- The Board of Directors of the Company approved a dividend to
shareholders of $0.1125 per
restricted voting share payable December 31, 2018 to
shareholders of record November 30,
2018, representing a target annual dividend of $1.35 per restricted voting share.
THIRD QUARTER OPERATING RESULTS
Royalties for the three months ended September 30, 2018 were $11.1 million, compared to $12.2 million in Q3 2017 as a result of a
decrease in the premium franchise fees and variable franchise fees
partly offset by an increase in fixed franchise fees. Premium fee
royalties expired for six locations in the first quarter and the
remaining 15 locations in the third quarter. For the rolling
twelve-month period ended September 30,
2018, royalties were $42.5 million, down marginally
compared to $44.4 million for the
same period in 2017.
The Company generated net earnings of $12.5 million, or $1.32 per share ("Share") for the three months
ended September 30, 2018, compared to
net earnings of $5.0 million or
$0.52 per Share, for the same period
in 2017. The primary driver of net earnings during the quarter was
a gain on the determination of the fair value on the Exchangeable
Units of $9.2 million in the quarter
compared to a loss of $0.3 million in
the third quarter of 2017. The fair value of the Exchangeable Units
is determined with reference to the trading price of the Company's
Restricted Voting Shares.
CFFO for the third quarter was $8.3
million or $0.65 per Share on
a diluted basis, a 9.8% decrease as compared to $9.2 million or $0.71 per Share for the same period in 2017. For
the rolling twelve-month period ended September 30, 2018, CFFO was $2.44 per Share as compared to $2.55 per Share for the rolling twelve-month
period ended September 30, 2017.
During the third quarter, the Company paid dividends totaling
$3.2 million (or $0.34 per share) to holders of restricted voting
shares. Dividend payments of $9.6
million year to date represent an increase of 3% over
2017.
"As expected, during the third quarter the royalty stream from
the 15 remaining premium fee contracts ended," said Phil Soper, President and Chief Executive
Officer, Brookfield Real Estate Services Inc. "While these
fixed-term contracts have now expired, the core business of growing
renewable franchise royalties continues to perform strongly. The
Company remains focused on network growth through both recruitment
and acquisition, and continues to see healthy demand for its brand
offerings."
THE COMPANY NETWORK
As at September 30, 2018, the
Network was comprised of 18,799 REALTORS®, operating
under 295 franchise agreements providing services from 673
locations, with an approximate 20% share of the Canadian
residential real estate market ("Canadian Market") based on 2017
transactional dollar volume.
CASH DIVIDEND
The Company declared a cash dividend of $0.1125 per restricted voting share payable on
December 31, 2018, to shareholders of
record on November 30, 2018. This
represents a target annual dividend of $1.35 per restricted voting share.
THE MANAGEMENT SERVICES AGREEMENT
The Company has been managed pursuant to the Management Services
Agreement ("MSA") which initially had a five-year term expiring
December 31, 2018 and which had
recently been extended to June 30,
2019. In April 2018, the
Manager requested that the board of directors approve amendments to
the MSA to update it to better align with current market practices
and provide better visibility of fees for both the Company and the
Manager in a way that better aligns interests. The Manager's
compensation formula has remained largely unchanged since 2003 when
the Company was established as an income trust. Since that
time, the Network has grown and as a result the costs to support
the expanded Network have also increased. As such, the
Special Committee has approved an increase in management fees in
order for the Company to maintain its market leadership in the
range and quality of franchise services being offered throughout
the next ten-year term.
The Amended MSA was negotiated on behalf of the Company by a
Special Committee of the Board of Directors of the Company
comprised exclusively of Independent Directors. This negotiation
process was commenced by the Special Committee in May of 2018. The
Special Committee engaged independent legal counsel and an
independent financial advisor to assist in negotiating and
evaluating the terms of the Amended MSA. As part of this process,
the Special Committee considered various alternatives to entering
into the Amended MSA available to the Company. Following this
thorough process conducted with the assistance of its external
advisors, the Special Committee determined that the terms of the
Amended MSA are reasonable and in the best interests of the
Company.
"We are pleased to announce the Amended MSA as it supports the
long-term success of the Company," said Spencer Enright, Chair of the Board. "Under the
Amended MSA, the Company will earn revenue from new franchise
agreements at their inception and will have access to broader
revenue streams."
The Amended MSA contains a number of changes which have been
made to simplify the relationship between the Manager and the
Company as well as improve certain economic aspects of the
agreement for the Company and the Manager. These changes
include:
- The Company (through its operating subsidiaries) will directly
enter into new franchise agreements with franchisees. This will
eliminate the need to purchase franchise agreements from the
Manager and will allow the Company to earn revenue from these
agreements from their inception.
- The Manager will assign to the Company at no cost, all existing
franchise agreements not previously purchased by the Company. These
contracts would otherwise have been eligible for purchase on
January 1, 2019 under the previous
MSA.
- The Manager will also assign to the Company at no cost,
contracts associated with revenue streams that it has developed
outside of the franchise agreements owned by the Company. These
ancillary revenues include, for example, mortgage referral fee
revenues generated through associations with various Canadian
residential mortgage lenders. This will result in an immediate
increase in revenues for the Company and provide revenue
diversification beyond royalty fees.
- The obligation of the Company to acquire franchise agreements
from the Manager is discontinued under the Amended MSA. In lieu of
the Company acquiring franchise agreements annually, the Company
will pay the Manager a fixed management fee of $840,000 per month.
- The variable management fee paid to the Manager will increase
to 23.5% of CFFO before management fees from the current 20%. After
five years, the variable fee will increase to 25% of CFFO before
management fees. The Manager will have the opportunity to earn a
higher management fee if the Company's market capitalization
reaches certain thresholds. This strengthens the alignment of
interests between the Company and the Manager.
- The Amended MSA results in the elimination of historically
large, unpredictable capital expenditure requirements from
franchise agreement purchases, thus reducing the volatility of cash
requirements of the Company.
THE AMENDED FINANCE ARRANGEMENTS
In conjunction with the changes to the MSA, the Company has
agreed to certain amendments to its financing arrangements (the
"Debt Facilities") with Canadian Imperial Bank of Commerce
("CIBC"). The main amendments to the Debt Facilities
include:
- An extension of the committed Debt Facilities to December 31, 2023.
- An increase in the borrowings under the non-revolving, term
variable rate facility from $53
million to $55 million.
- A reduction in the required EBITDA (as defined in the Debt
Facilities agreement) to interest coverage ratio from 5.0 times to
3.0 times.
- An increase in the permitted level of borrowings from 2.5 times
EBITDA to 4.0 times.
- The obligation to make limited principal repayments under the
Debt Facilities in circumstances where borrowings exceed 3.4 times
EBITDA.
There are no significant changes to the security arrangements or
interest arrangements associated with the Debt Facilities as a
result of these amendments.
"These amendments to our Debt Facilities complement the Amended
MSA and provide an attractive extension of tenor and financial
flexibility," said Mr. Enright. "We appreciate the support of
our lenders in helping us position the Company for broader growth
in the residential real estate market segment."
These amended banking arrangements are subject to completion of
final agreements and are expected to be effective from January 1, 2019.
CONFERENCE CALL
Brookfield Real Estate Services Inc. will host its quarterly
conference call on Wednesday, November 7,
2018 at 10:00 a.m. ET. To
access the call by telephone, please dial (888) 231-8191 or (647)
427-7450.
Participants can join via webcast at:
https://event.on24.com/wcc/r/1868832/523E1E77BF4849E60577427ADFEB7416
Please connect approximately ten minutes prior to the beginning
of the webcast to ensure participation.
A recording of the conference call will be available in the
Investor Centre section of the Company's website by Friday, November 16, 2018.
CFFO
This news release and accompanying financial highlights make
reference to CFFO on a total and per Share basis. CFFO is defined
as operating income prior to deducting impairment and amortization
of intangible assets. CFFO is used by the Company to measure the
amount of cash generated from operations which is available to pay
income taxes and distributions to the Company's shareholders on a
diluted basis where such dilution represents the total number of
Shares of the Company that would be outstanding if Exchangeable
Unitholders converted Class B LP units into Shares of the Company.
The Company uses CFFO to assess its operating results and the
financial position of its business and believes that many of its
shareholders and analysts also find this measure useful. CFFO does
not have any standard meaning prescribed by International Financial
Reporting Standards and therefore may not be comparable to similar
measures presented by other companies.
FORWARD-LOOKING STATEMENTS
This news release contains forward-looking information and other
"forward-looking statements". Words such as "will", "continue",
"expected", "improve", "remains", "growth" "resulting", "supports",
"target" and "extension" and other expressions that are predictions
of or could indicate future events and trends and that do not
relate to historical matters identify forward-looking statements.
Reliance should not be placed on forward-looking statements because
they involve known and unknown risks, uncertainties and other
factors that may cause the actual results, performance or
achievements of the Company to differ materially from anticipated
future results, performance or achievement expressed or implied by
such forward-looking statements. Factors that could cause actual
results to differ materially from those indicated in the
forward-looking statements include: changes in the Company's
strategy with respect to dividends, changes in the supply of houses
for sale in Canada or in any
particular region within Canada,
changes in the demand for houses in Canada or any particular region within
Canada, changes in general
economic conditions (including interest rates, consumer confidence
and other general economic factors or indicators), changes in
global and regional economic growth, the demand for and prices of
natural resources on local and international markets, the level of
residential real estate transactions, the availability of
attractive investment opportunities, the average rate of
commissions charged, competition from other real estate brokers or
from discount and/or Internet-based real estate alternatives, the
closing of existing real estate brokerage offices, other
developments in the residential real estate brokerage industry or
the Company that could reduce the number of
REALTORS® in the Company's Network or royalty
revenue from the Company's Network, our ability to maintain brand
equity through the use of trademarks, the methods used by
shareholders or analysts to evaluate the value of the Company and
its publicly traded securities, the availability of equity and debt
financing, changes in tax laws or regulations, changes in the
corporate structure of the Company or its affiliates, demand for
the services the Company provides to REALTORS ® , and
other risks detailed in the Company's annual information form,
which is filed with securities commissions and posted on SEDAR
at www.sedar.com. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise, except
as required by law.
About Brookfield Real Estate Services Inc.
Brookfield Real Estate Services Inc. is a leading provider of
services to residential real estate brokers and a network of over
18,000 REALTORS®1. We operate in Canada under the Royal LePage, Via Capitale
and Johnston & Daniel brands. For more information, go to
www.Brookfieldresinc.com.
Brookfield Real Estate Services Inc. is an affiliate of
Brookfield Business Partners, a business services and industrials
company focused on owning and operating high-quality businesses
that benefit from barriers to entry and/or low production
costs. Brookfield Business Partners is listed on
the New York and Toronto stock exchanges.
Further information is available
at https://bbu.brookfield.com.
1 REALTORS® is a trademark identifying
real estate licensees in Canada
who are members of the Canadian Real Estate Association.
Brookfield Real
Estate Services Inc.
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|
|
|
|
Interim Balance
Sheet Highlights
|
|
|
|
|
As at
(Unaudited, in
thousands of Canadian dollars)
|
|
|
September
30,
2018
|
December
31,
2017
|
Cash
|
|
|
$
|
4,267
|
$
|
3,458
|
Other current
assets
|
|
|
4,318
|
4,645
|
Total current
assets
|
|
|
8,585
|
8,103
|
Non-current
assets
|
|
|
88,702
|
85,420
|
Total
assets
|
|
|
$
|
97,287
|
$
|
93,523
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
|
|
$
|
1,119
|
$
|
803
|
Purchase
obligation
|
|
|
2,307
|
1,497
|
Interest payable on
Exchangeable Units
|
|
|
484
|
484
|
Dividends payable to
shareholders
|
|
|
1,067
|
1,067
|
Other current
liabilities
|
|
|
-
|
400
|
Total current
liabilities
|
|
|
4,977
|
4,251
|
Debt
facilities
|
|
|
68,920
|
65,677
|
Exchangeable
Units
|
|
|
55,738
|
54,973
|
Total
Liabilities
|
|
|
129,635
|
124,901
|
Shareholders'
deficit
|
|
|
(32,348)
|
(31,378)
|
Total Liabilities
and Shareholders' deficit
|
|
|
$
|
97,287
|
$
|
93,523
|
|
|
|
|
|
Interim Earnings
Highlights
|
|
|
|
|
|
|
|
|
|
(Unaudited, in
thousands of Canadian dollars)
|
Three months
ended
September
30,
2018
|
Three months
ended
September 30,
2017
|
Nine
months
ended
September
30,
2018
|
Nine
months
ended
September 30,
2017
|
Royalties
|
$
|
11,141
|
$
|
12,235
|
$
|
33,082
|
$
|
34,772
|
Administration
Expense
|
(82)
|
(163)
|
(716)
|
(706)
|
Management
Fee
|
(2,078)
|
(2,288)
|
(6,069)
|
(6,428)
|
Interest
Expense
|
(669)
|
(626)
|
(2,020)
|
(1,923)
|
Cash Flow from
Operations
|
8,312
|
9,158
|
24,277
|
25,715
|
Impairment, write-off
and amortization of intangible assets
|
(2,222)
|
(1,280)
|
(6,284)
|
(5,573)
|
Interest on
Exchangeable Units
|
(1,452)
|
(1,444)
|
(4,355)
|
(4,299)
|
Gain / (loss) on fair
value of Exchangeable Units
|
9,151
|
(333)
|
(765)
|
(2,762)
|
Gain on interest rate
swap
|
108
|
547
|
171
|
1,017
|
Gain / (loss) fair
value of purchase obligation
|
2
|
213
|
(541)
|
35
|
Income tax
expense
|
(1,355)
|
(1,904)
|
(3,985)
|
(4,567)
|
Net and
comprehensive earnings
|
$
|
12,544
|
$
|
4,957
|
$
|
8,518
|
$
|
9,566
|
Basic earnings per
Restricted Voting Share
|
$
|
1.32
|
$
|
0.52
|
$
|
0.90
|
$
|
1.01
|
Diluted earnings
per Share
|
$
|
0.38
|
$
|
0.52
|
$
|
0.90
|
$
|
1.01
|
Cash Flow from
Operations per Share on a diluted basis
|
$
|
0.65
|
$
|
0.71
|
$
|
1.89
|
$
|
2.01
|
Cash Flow from
Operations per Share on a diluted basis - rolling twelve-month
period ended September 30,
|
|
|
$
|
2.44
|
$
|
2.55
|
|
|
|
|
|
Interim Cash Flow
Highlights
|
|
|
|
|
(Unaudited, in
thousands of Canadian dollars)
|
Three
months
ended
September 30,
2018
|
Three
months
ended
September 30,
2017
|
Nine
months
ended
September 30,
2018
|
Nine
months
ended September
30, 2017
|
Cash provided by
Operating activities:
|
$
|
6,840
|
$
|
6,695
|
$
|
16,007
|
$
|
16,645
|
Cash provided used
for Investing activities:
|
(260)
|
(12)
|
(8,796)
|
(10,179)
|
Cash provided /
(used) by/for Financing activities:
|
(7,201)
|
(6,661)
|
(6,402)
|
(6,924)
|
Change in cash for
the period
|
(621)
|
22
|
809
|
(458)
|
Cash, beginning of
the period
|
4,888
|
2,622
|
3,458
|
3,102
|
Cash, end of the
period
|
$
|
4,267
|
$
|
2,644
|
$
|
4,267
|
$
|
2,644
|
SOURCE Brookfield Real Estate Services Inc.