Feb 12, 2014
Executives
Jay Hennick - Founder and CEO Scott Patterson - President and COO John Friedrichsen - SVP and Chief Financial Officer
Analysts
Sami Abboud - Scotiabank Stephen MacLeod - BMO Capital Markets David Gold - Sidoti & Company, LLC Stephanie Price - CIBC World Markets Brandon Dobell - William Blair & Co.
Operator
Welcome to Fourth Quarter Year-End Investors’ Conference Call. Today’s call is being recorded.
Legal counsel requires us to advice that discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may vary materially different from any future results, performance or achievements contemplated in the forward-looking statements.
Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company’s annual information form as filed with the Canadian Securities Administrators and in the company’s annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission.
As a reminder, today’s call is being recorded. Today is Wednesday, February 12, 2014.
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 officer and good morning everyone. Thanks for joining our conference call.
With me today, is Scott Patterson, our President and Chief Operating Officer, and John Friedrichsen, Senior Vice President and Chief Financial Officer. This morning, FirstService reported finished the year very strongly posting record quarter and full year results.
For the quarter, revenues were $692 million up 16%, EBITDA was $73 million, up 28% and earnings per share were up $0.97 up 26% over the prior year quarter. For the year revenues hit a record $2.34 billion up 12%, EBITDA was a $186 million up 22% and earnings per share came in at $2.15 up total of 31% over the prior year.
Colliers International one of the leading global players in commercial real estate continued to bolster its global platform making excellent progress both operationally and financially with substantial growth in revenues and profits. Revenues for the quarter were up 20%, with EBITDA up a total of 44% a tremendous achievement by any measure.
We were especially pleased with our margins. For the year EBITDA margins were up more than 200 basis points to almost 9% following the strong margin performance last year and well on our way to our stated target of 10%.
Based on our current mix of business we believe EBITDA margins of 10% are sustainable allowing us to continue to grow our global real estate services platform aggressively while continuing to invest in our future. Meanwhile First Service residential delivered solidly year-over-year while dedicating considerable time, efforts and resources to its full rebranding initiative establishing a new chapter in the story of North America’s largest manager of resident communities.
FirstService brands also have robust growth in revenues and profits over the past year benefiting from increased consumer spending as the U.S. economy continues to improve.
John and Scott will have much more to say about all of this in their prepared remarks shortly. 2013 was the year of many successes and accomplishments.
Here are some of the other highlights from the year. We continue to invest in the net promoter system to enhance our ability to measure and improve the customer experience and of course employee satisfaction increasing the net promoter system and team MPS as we call it internally here at FirstService are taking hold right across our entire organization and overtime we continue to believe that MPS will become a key differentiator for all of our service companies.
Early in the year we welcomed Chuck Fallon as the new CEO of FirstService Residential. Chuck’s impressive track record in globally recognized Fortune 500 companies and perhaps as importantly his genuine commitment to delivering exceptional customer service is already paying huge dividends as we continue to expand our market leading presence in residential property management.
During the year we successfully sold Field Asset Services. A business that provided us with very strong cash flows and earnings during the global financial crisis that no longer fit our real estate services strategy.
The addition of Colliers, Germany was a major achievement and furthered our growth strategy in Europe in the same way as Colliers, UK did last year. As you know one of the key elements of the FirstService growth strategy is to balanced internal growth with acquisitions.
And during the year, we invested about $55 million to acquire a total of 11 companies expanding our market share and adding services in existing and new markets. We continue to see interesting opportunities virtually across the board and expect 2014 to be another active year on the acquisition front.
Corporately we completed the private placement of $150 million of 3.84% senior notes with the 12 year term. Securing low cost and long term capital is indicative of our investments grade quality and a significant vote of confidence in our financial strength diversification and historical track record of performance.
We also simplified our capital structure eliminating our preferred shares and calling our debentures for early redemption. And our balance sheet at the end of the year was a strong it’s ever been with low leverage and ample liquidity to continue to support our continued growth.
And finally for the first time in our history, we instituted the dividend on our common shares. This important step not only created a new source of income for our shareholders, but also introduced FirstService to a whole new universe of dividend oriented investors.
Looking forward to 2014 and beyond, we remain optimistic that we will continue to build on our momentum in each of our three service lines. Earlier this week, we announced our first acquisition in the UK since, we acquired the business last year, adding Briant Champion Long or BCL as it's referred to in the market, which is one of the leading property service specialist primarily focused in Central London.
This acquisition not only strengthens our capability in this important area, but it allows us to pursue expanded opportunities in the retail services sector across the UK and Europe leveraging the Colliers International platform and adding BCL's impressive list of blue chip. Public, private and institutional clients to our growing roster at Colliers.
We welcome the entire BCL team into Colliers International. The fact is FirstService is better positioned today than in any time in our history to continue to accomplish great things as we continue to follow our journey to deliver value to our shareholders as we’d say one step at a time.
And our results to-date speak for themselves. A $100,000 investments in the shares of FirstService when we first listed on NASDAQ is worth about $2.8 million today, that's more than a 20% annualized return over 18 years.
If we continue to follow the FirstService way, carefully building our operations, seeking out new growth opportunities when they become available and prudently deploying our capital we further expect to continue to deliver strong returns for our shareholders for many years to come. And now let me ask John to take you through the financial details for the quarter and then Scott will provide his operational report, following that we’ll open things up for questions.
John?
John Friedrichsen
Thank you, Jay. As we report in our press release issued earlier this morning and Jay already covered in his opening remarks, FirstService reported record operating results in our fourth quarter 2013 and the full year.
Results were solid across the board led by the strong performance of Colliers in commercial real estate, a company by significant contributions from residential management and franchise property services business. Here are the highlights from our consolidated results from continuing operations for the fourth quarter and full year.
Revenues totaled $692 million in the quarter, up 16% on a local currency basis compared to $604 million in our fourth quarter last year, with the term growth of 12% on a consolidated basis. For the full year in 2013, revenues totaled $2.34 billion versus $2.11 billion last year, up 12% on local currency basis, 8% of which was generated internally and the balance from acquisitions.
Adjusted EBITDA for the quarter was $73 million, up 28% and $57 million in Q4 last year and for the full year adjusted EBITDA totaled $185 million, up 22% from the $152 million reported last year. And finally adjusted EPS came in at $0.97 per share in the fourth quarter, an increase of 26% over the $0.77 posted last year.
For the full year, adjusted EPS was $2.15, up 31% compared to $1.64 for 2012. As outlined in prior conference calls and details in our press release this morning, there are several adjustments made from GAAP earnings per share to determine our reported adjusted earnings per share, all of which are consistent with those disclosed in past reporting periods.
FirstService ended 2013 with strong growth and cash flow from operations and at all time highs, generating $39 million in Q4, up 16% before working capital changes and $98 million for the year, up 22% over 2012. Net of working capital investment related to our strong finish to the year, cash flow from operations totaled $116 million versus $103 million last year, up 13%.
Investment and financing activities during 2013 included $38 million net of cash acquired to fund the upfront investment and acquisitions and $6 million to increase our stake in existing businesses compared to about $19 million and $6 million respectively last year. CapEx for 2013 came in lower than expected at $35 million, primarily due to timing around spend related to our new office for Colliers in New York, which will incur in Q1 2014 and which will amount to approximately $10 million.
For 2014 we anticipate our CapEx across all of our operations to be approximately $50 million inclusive of the new Colliers New York office improvements and the similar investment later this year expected in Sydney Australia. Other significant [cashable] items in 2013 included just under $50 million in cash proceeds upon disposal of our portfolio services business completed at the end of Q3 and just over a $39 million of cash from usage to complete the cash redemption portion related to the elimination of our preferred shares.
Finally we paid out $9 million in preferred and common dividend last year and with the preferred share redeemed, dividends in our common share of the current annual rate of $0.40 per share will amount to about $14 million in 2014. Turning to our balance sheet, our net debt position at the end of the year was $230 million, down significantly from the $306 million at the end of 2012, while our leverage ratio expressed in terms of net debt to trailing 12 month adjusted EBITDA was 1.2 times, down from 1.9 times a year ago.
Needless to say, our leverage is now at a very moderate level and below our range over the last six years of 1.5 to 2.8 times. Our leverage level will increase somewhat back to the lower-end of this range at the end of Q1 based on seasonal cash requirements and contingent payments to be made that relate to previously completed acquisitions.
But with combined cash on hand and availability under our revolving credit facility at the end of 2013 of over $300 million and our lower leverage, our balance sheet and liquidity has never been stronger, an enviable position to say the least as we continue to carefully and strategically deploy capital and execute on our growth initiatives. We have finished 2013 not only with a strong balance sheet, but as Jay said earlier, a simpler capital structure as well.
Having eliminated both our 7% preferred shares and 6.5% convertible debenture laying a strong financial foundation for the road ahead. And with a simpler capital structure also lower cost of debt finishing last year and entering 2014 with a weighted average cost of debt of about 2.3%.
Now I would like to turn things over to Scott for his comments. Scott?
Scott Patterson
Thank you, John. Let me start my divisional review with Colliers and I will focus my comments on the fourth quarter operating performance, we can cover our full year metrics in the Q&A or separately.
As you’ve heard from Jay and John, we had a very strong finish to the year at Colliers. Q4 performance in every region exceeded expectations.
Total revenues were $437 million, up 21% over the prior year in local currency driven by very strong organic growth of 14% with the balance coming from the acquisition of Colliers Germany. Organic growth is driven by particularly strong results in Asia-Pac and Europe and supported by double-digit growth in U.S.
By service line, our global growth for the quarter was led by leasing, which was up 20% over the prior year quarter, while investment sales were up strong 13%. Our shift relative to the first three quarters of the year when investment sales accounted for the bulk of our growth and signed leasing environment is improving in most of our markets.
Revenues for our Americas region were $233 million, up 11% driven by solid double-digit growth in the U.S. and Latin America.
Canada performance was flat with a year ago in Canadian dollars and down 4% in U.S. dollars due to the year-over-year declines in the Canadian dollar.
Our growth in the U.S. was led by sharp 20% plus increases in leasing revenues due primarily to strong results in our major markets, particularly New York City where we closed several large leasing transactions towards the end of the year.
The strong result in Latin America was driven largely by investment sales and appraisal activity in Mexico where we have a leading market position. Economic reforms in Mexico served to accelerate deal momentum during the quarter.
Activity results were [boring] in most of our other markets in Latin America. In our Asia-Pac region revenues were up 21% in local currency driven by very strong brokerage activity in Australia and New Zealand where year-over-year investment sales revenues were up over 20% and leasing revenues were up near 20%.
Revenues for the rest of Asia were up almost 10% led by a strong quarterly performance in China, driven by investment sales and appraisal activity. Turning to our Europe region, revenues were up 65% year-over-year including Germany and 28% organically excluding the acquisition.
Organic growth was primarily driven by our UK business. We saw significant growth in investment sales doubled prior year supported by appraisal revenues, which were up 20%.
When we acquired this business in early 2012, the top priority for our regional executive team was to deepen our service offering in London through recruiting. We started to see the results of these efforts in the fourth quarter with several large transactions contributing to our strong performance.
As Jay already mentioned, we further strengthened our business in London with the acquisition of Briant Champion Long and expect to continue to focus investment on this important market over the next several years. The rest of Central and Eastern Europe also posted solid year-over-year gains for the quarter led by [Portland] and The Netherlands.
Our German operations had a strong Q4 and met expectations for the first nine months of ownership. Colliers generated fourth quarter EBITDA of $61.7 million or 14.1% of revenues, up from 11.6% in the prior year.
The increase is primarily due to operating leverage in the U.S. and Asia-Pac.
We also benefited from the positive impact of adding the higher margin driven business to the mix. In summary, we are very pleased with the Colliers performance for the quarter.
As I said earlier, we exceeded expectation in each of our three regions. The (inaudible) in the market has improved and the enterprise building investments we have made over the last several years, particularly in our major markets enabled us to more fully leverage the market momentum during the quarter.
Looking forward, we expect stable to improving markets in all regions. Our pipelines are healthy.
We had a strong recruiting year in 2013 and we feel optimistic about the momentum we have heading into 2014. Turning now to residential property management: Revenues were $219 million for the quarter, up 9% over the prior year, 8% organically.
Organic growth was driven by new contract wins, which led to 10% increases in management fee revenue offset in part by modest declines in ancillary fee revenue. Each of our four regions had strong quarters in terms of contract wins and contributed equally to the 10% increase in management fees.
New development continues to strengthen in most regions and contribute to our organic growth, particularly in Toronto, New York City, South Florida, California and Texas. Offsetting our growth in management fees was a decline in ancillary fee revenue including collections, and transfer and disclosure income, in Arizona and Nevada, particularly where home sales and our communities were down 10% year-over-year.
Our EBITDA margin in the quarter was 5.4%, down slightly from prior year, improved margins in our core management business for the quarter from operating leverage were offset by declines in higher margin ancillary revenue and increased investment in technology and customer care centers relative to a year ago. Looking forward in residential property management, we are quite optimistic about 2014.
North American rebranding effort is firmly behind us, it’s been extremely well received internally and in the marketplace and we’re confident it’s contributing to our increasing momentum. We expect to continue to generate high single-digit organic growth through a combination of new development, wins from competitors and the transition by communities from self management to professional management.
And we expect to show margin improvement in 2014. If you add back one-time costs associated with rebranding and the restructuring of our collection business, our margin in 2013 would have been close to 7.5%.
This is our target for the current year. We expect to generate increases through operating leverage, but these will be offset by continuing investment in technology and centralized shared services infrastructure.
We expect steady, incremental margin increases thereafter for the next several years. Let me now turn to our property services division, which consists of our FirstService brands businesses.
As expected, we had a strong finish to the year in this business with 8% organic growth for the quarter. California Closets, and CertaPro Painters continued to lead the way in terms of growth but each of the five other franchise systems and every one of their nine company-owned operations contributed solid single-digit year-over-year growth for the quarter.
Home improvement spending and remodeling in the U.S. was strong throughout 2013 and we certainly benefited as a result.
But we know we’re also gaining share in most of our markets which is the positive reflection on our brands and the strategies our teams have developed. Leads research indices point the continued strength in the home improvement market through 2014 and suggest that we’re still in the early stages of the U.S.
economic recovery, which bodes well for this division and gives us confidence that our healthy pipeline of leads and job bookings will continue. Margin for the quarter was 19.6%, up from 18% in the prior year due to operating leverage.
The margin for the year was over 20% for the first time since 2007 in this division. That concludes our prepared comments.
And I would now like to ask the operator to open up the call to questions.
Operator
Thank you. (Operator Instructions).
Okay. So, our first question comes from Sami Abboud from Scotiabank.
Please go ahead.
Sami Abboud - Scotiabank
Hi. Good morning, gentlemen.
I am speaking on behalf of Anthony Zicha. My first question would be regarding the residential rental operations that are now being held for sale.
If you could please provide more color on the impact, both financial and non-financial that you would expect to that segment going forward?
Scott Patterson
Right, okay. So, there is a small rental business that is in the process of being sold and is classified as discontinued operation for the quarter and it’s been pulled out of our divisional numbers historically.
That business has been included in the residential property management division. It has provided rental management services for the REO market primarily but also some multi-family management and single family management for institutions and private investors.
The REO business accounted for over half of the revenues in this operation. And similar to our experience with Field Assets, that has declined significantly over the last several years; this business shared many of the same customers as Field Assets.
And we made decision during the quarter to terminate certain of the REO plants, it was very difficult for us to downsize and lockstep with the declining revenues and then to sell the remaining multi-family and single family piece of the business to management and we expect close to sale of that business this quarter. Revenues for the year 2013 were $25 million or thereabouts and the business lost $2 million, much of that in the fourth quarter.
On a go forward basis, this business will be about half the size it was after terminating those customers.
Sami Abboud - Scotiabank
Okay, thanks. And given the recent tuck-in acquisition of Briant Champion Long, can we expect Colliers to be more focused on this type of higher margin business in 2014 and beyond even?
And when can we expect this type of service to represent say approximately 20% of Colliers revenues?
Scott Patterson
Well, that -- I'll quickly answer and then I’ll pass over to Jay, who is more involved in that acquisition and strategy in London. But that business was specific to our UK business and Central London and it’s been a focus of ours since acquiring Colliers UK to bolster our office and retail sales and leasing in Central London and this acquisition goes a long way towards that.
Jay, do you want to add?
Jay Hennick
Yes, there is no magic to this. We do retail specialty in virtually every mark across the world.
The business in London was a decent retail business but Briant Champion are the undisputed leaders in Central London. And so, it was a tremendous opportunity for both organizations frankly to bring them together as one under the leadership of the CEO of Briant Champion and integrate the operations together, making us one of the leading players, not just in London but also in the UK.
So, our focus as Scott has mentioned and we've mentioned several times before is to continue to build our major markets, New York, London and a variety of others. And we can do that by adding services, strengthening our core business and adding market share which is the way we see Briant Champion fitting into the Colliers UK business.
Sami Abboud - Scotiabank
Okay, thanks. And I guess this goes maybe to my last question on the acquisition pipeline.
You mentioned that 2014 looks good and there will be some acquisitions there. If you could please maybe give us some more color on the size of the acquisition, maybe what geographies you expect to focus on in 2014?
Jay Hennick
One of the great things about FirstService now and Colliers in particular is that our growth opportunities are virtually global. So, we are looking at opportunities in so many different parts of the world, again focused on major markets, and there is never guarantees with the acquisitions, it’s always a strategic from a standpoint of whether it makes sense from our perspective and it makes sense from the perspective of the principals of the target.
But one of the great things, another great thing that we have going for us is, we’re one of the few global platforms out there. So using Briant Champion as an example, because it is before us, the principals there have enjoyed tremendous success of their business over a long period of time.
But the business got the point where they were very local in the UK market and wanted to have access to a global platform like Colliers provides. So we believe that we have significant enhanced value to deliver to the professionals that become part of Colliers.
And we've been leveraging that in virtually every market as we continue to grow. So we’re hopeful that we can continue to add primarily smaller tuck-under acquisitions, which is sort of in our core secret sauce at FirstService, always looking to add a larger platform or two when the time is right, as we did with Germany this year.
But if we can continue to add smaller tuck-under acquisitions our way, where we can enhance the operations after the fact there just a perfect addition to our platform and do a lot in the way of enhancing shareholder value for our shareholders.
Sami Abboud - Scotiabank
Okay. Thank you very much gentlemen and congratulations on the solid quarter.
Jay Hennick
Thank you.
Operator
Thank you. Our next question comes from Mr.
Stephen MacLeod. Please go ahead.
Stephen MacLeod - BMO Capital Markets
Thank you, good morning.
Jay Hennick
Good morning Steve.
Stephen MacLeod - BMO Capital Markets
The Colliers business as you mentioned had a very strong margin in the quarter partially attributable to operating leverage. I am just wondering what’s different in the business or what are you doing in the business to generate that operating leverage?
Is there a change in the mix of business that you’re taking in or what’s kind of the driver of the leverage?
Jay Hennick
It’s not a change in the mix on an annualized basis but the strong finish was driven primarily by brokerage, which included many large deals and that results in higher margins and strong operating leverage through that three month period as you notice this seasonal business and we generally show higher margins in our fourth quarter and the strong, strong finish we had drove those up higher. But I think Stephen, in general our margins are on track with expectation maybe a year ahead of where we thought we’d be, but generally on track.
Stephen MacLeod - BMO Capital Markets
Okay, great. So, can you just sort of expect to close the gap to 10% equally over the next two years?
Jay Hennick
I think that’s fair.
Stephen MacLeod - BMO Capital Markets
Yeah, okay, great. And then on the FirstService Residential business.
So you mentioned that you’re sort of looking for a flat margin outlook for 2014 on the 7.4% excluding the costs. How do you get back to the 9% sort of margin profile that you had on a relatively consistent basis over the in the mid 2000s?
Jay Hennick
The ‘13, ‘14, ‘15 are going to be different years in the sense that while we will continue to add contracts and drive operating leverage, at the same time we are investing to really support the brand and the biggest area is in IT and shared services, infrastructure. There are certain back office functions and administrative functions that are or were being done in 20 different locations and there are opportunities to create efficiencies and service improvements by regionalizing or centralizing these functions.
But we have to create capabilities and invest in the infrastructure to do that, customer care centers are one example that was a 2013 initiative. There are many others that we will be working on in 2014 and 2015.
We will balance the investment carefully with the organic growth and our expectation is flat to slightly up in ‘14 and then incremental margin improvement from there. And we certainly expect that to get back to 9 and expect the goals to drive to 10 over the next several years.
Scott Patterson
I would like to add something to that. Scott.
The beautiful thing about this business is the retention rates are extremely high and the net promoter scores continue to climb across the company. So we’re enjoying nice internal growth, we are keeping our clients happy and happier and the retention rates are demonstrating that and if we can continue to refine our business model behind the scenes without impacting clients other than in the positive way.
We have a phenomenal business here that will pay great dividends over many years in the future.
Stephen MacLeod - BMO Capital Markets
Great. And on those investments that you are talking about over the next two years, is that strengthening the platform to complete sort of tuck-in acquisitions?
I mean is it easier to plug and play at that point?
Jay Hennick
It will be, certainly it will accelerate our ability to integrate and possibly impact businesses, the margin at the acquired businesses.
Stephen MacLeod - BMO Capital Markets
Okay, that’s great. Thank you very much.
Operator
Thank you. Our next question comes from David Gold.
Please go ahead.
David Gold - Sidoti & Company, LLC
Hi, good morning.
Jay Hennick
Good morning.
David Gold - Sidoti & Company, LLC
Just a little bit of follow-up on the trends which you see in Colliers, first couple of things. Can you breakdown or give a sense for the strength that you would see in the December quarter between [same] capital markets and leasing businesses and maybe talk a little bit more on what you’re seeing in leasing if you’ve seen the same pick-up that some of the competitors have pointed to?
Jay Hennick
Well globally, we were up, our leasing was up 20% and our investment sales were up 13%. The momentum we have in investment sales is really coming out of Australia, Germany, the UK and the U.S.
heading into 2014. And really the leasing environment improved in all of our regions.
As you would expect with the improvement that I'm talking in most of our regions, the one exception perhaps on the leasing front would be Asia, where China, Hong Kong, India, Singapore are all somewhat more cautious. And I would describe this market as flat with the year ago in terms of pipeline activity momentum.
David Gold - Sidoti & Company, LLC
Got you. And so, broadly speaking in the other geographies as you look at your pipelines presumably that the momentum that we saw in the fourth quarter continues?
Jay Hennick
Well, I mean we have a very strong quarter in terms of leasing, but we had -- that's a, we had a weak comp generally in terms of leasing in our prior year. It's also somewhat reflective of our recruiting in our major markets, which is focused on office leasing.
But we expect investment sales and appraisal, which generally go hand in hand to be a driver of growth in ‘14 and we expect leasing to pick-up in most of our regions modestly in 2014.
David Gold - Sidoti & Company, LLC
Got you. And then one other silly and obvious question, but I might be curious on your view.
As we think about at least domestically interest rates starting to move and presumably I guess ‘13 wasn't nearly as bad a year as some had [hypocrisies] given the movement in rates. How sensitive do you think business in ‘14 is to any increases on the interest rate side?
So in another words, do we think, 50 basis points margin issue, but a 100 starts to slow things down or is it not that simple?
John Friedrichsen
Well, I won’t comment on specific numbers or amounts, I will say that talking to our team at Colliers, interest rates in and of themselves are not seeing necessarily as an indicator of momentum, it’s really the gap between the bid [mask] and whether or not returns to investors are better than alternative investment opportunities. And currently commercial real estate is a favourite asset class, risk adjusted returns are attractive and we don’t see that changing in time.
David Gold - Sidoti & Company, LLC
Perfect. And then just one last, you’ve made some transformational changes over the last few years really in all three of the businesses to some degree.
Can you give us a sense for today what you think the peak margins are earning to the three business lines?
Jay Hennick
Well, we are driving 10 in 10 Colliers and residential property management. And the margin in our brands business is 20 this year.
And there is a mix issue going forward there and that that will strength some leverage from the franchise businesses and increases in system wide sales. At the same time, we are very focused on growing our company-owned businesses which carry a lower margin.
So, that story will unfold over the next several years.
David Gold - Sidoti & Company, LLC
Got you. So, is 20 the benchmark then?
Jay Hennick
It is for ‘14.
David Gold - Sidoti & Company, LLC
Okay. Perfect, thanks so much.
Operator
Thank you. Our next question comes from Stephanie Price.
Please go ahead.
Stephanie Price - CIBC World Markets
Good morning.
Jay Hennick
Hello.
Stephanie Price - CIBC World Markets
Just on your balance sheet, obviously a lot stronger than we’ve seen for several years. Can you talk a bit about at this point what your uses of cash are going to be your focus?
Are you thinking about paying down more debt, are you looking at increasing the dividends. Where are you going at this point?
John Friedrichsen
Stephanie, it’s John. Well first and foremost, we’re focused on deploying our capital to acquisition opportunities, which will enhance our business as Jay has already spoken about.
So, that is absolutely top priority and if we can execute those correctly, obviously the returns to our shareholders are significant. In the meantime, because some of those tend to be a little bit opportunistic, we will pay debt down to the extent that we have significant free cash flow, obviously we have internal investment we continue to make capital asset replenishment and some related to growth and then of course our common dividend.
But first and foremost, we are focused on growing our business and we’re going to be patient about it. And in the meantime we’ll just pay down our debt.
Stephanie Price - CIBC World Markets
Okay great. And on the RPM division, can you talk a bit about the ancillary revenue.
So, it was down modestly, it sounds like you’re expecting it to be sort of flat next year. Given the improving housing markets, I would have expected maybe it would have been up next year, can you talk about that a bit?
Jay Hennick
Well, I think generally our ancillary revenues will grow with contract wins and unit growth, collection is the one exception. And I think we’ll see the bottom in that business in terms of our year-over-year comparisons probably midway through 2014.
This quarter we did have a reduction in transfer and disclosure income in Arizona and Nevada where home sales in those markets were down in fourth quarter versus the prior year, which we see as bit of an anomaly. And so, I would expect that our ancillaries if I said they would be flat, I don’t recall that, but I would expect them to be up in ‘14 modestly.
Stephanie Price - CIBC World Markets
Okay, great. And in terms of the investments that you are making in the business in the technology in the customer care centers et cetera, can you quantify, is there any way to quantify how much of an impact that’s going to be to the RPM margins next year and what ex that the margins could have been or would have been?
Jay Hennick
I think we are looking to grow that business through leverage over the next several years at close to 50 basis points a year. So, that would give you a sense for next year.
Stephanie Price - CIBC World Markets
Okay, great. Thank you very much.
Operator
Thank you. Our next question comes from Brandon Dobell.
Please go ahead.
Brandon Dobell - William Blair & Co.
Thanks good morning guys.
Jay Hennick
Good morning.
Brandon Dobell - William Blair & Co.
A couple of quick ones, John maybe the fourth quarter build out in Sydney should we expect any P&L impact or is that all going to be capitalized?
John Friedrichsen
Predominantly capitalized maybe a little bit of P&L, but that will be CapEx.
Brandon Dobell - William Blair & Co.
Okay, got you. And now with field asset out of the mix, how do we think about I guess the seasonality of the profits in new property management given that FAS was such a big impact on the profitability just I guess a reminder on how that business should look quarter-to-quarter as we through the year?
Scott Patterson
You are talking about property services?
Brandon Dobell - William Blair & Co.
Yes, correct.
Scott Patterson
Well, yes. I mean FAS had some plain things going on, but property services will continue to be largely a quarter two, quarter three business because there is certain operations and certain service they provide that are driven by seasons.
So Q2 and Q3 will continue to be the strongest back to our -- and I think we will see sort of a reversion to the pattern that you would have seen a few years ago, pre Field Asset Services. I don’t think that’s changed dramatically.
Having said that, growing the California Closets business, which we have been doing probably -- maybe a little bit less seasonality, as a result of growth in the business.
Brandon Dobell - William Blair & Co.
Okay, fair enough. Within residential, maybe a sense of how important new development has been the past couple of years, the driver for unit growth as opposed to kind of organic wins maybe?
Jay Hennick
Development accounted for about a quarter of our wins this year, and that ramped up through the year. And we expect it to be a big contributor in ‘14, ‘15.
Brandon Dobell - William Blair & Co.
Okay. And then some on the Colliers finally, as you think about headcount growth in the three geographic regions, got a couple of questions there.
One, how should we think about headcount growth in ‘14 compared to 2013, is there any particular region where you feel you got a service line hole that can be filled by recruiting or maybe there is special focus on a particular service line where you think you got an opportunity to better leverage the office footprint?
Scott Patterson
It continues to be a recruiting -- continues to be a focus in the U.S., Europe and Asia, in particular in the fourth quarter it was the U.S. and Europe and that was primarily our major markets, so, London, New York, LA, Chicago.
And I think that's going to be similar theme in next few years, major market focus and filling in the gaps. They are different in every market for us, but we're focused on filling in service lines and gaps.
Brandon Dobell - William Blair & Co.
Okay. And then final one within Colliers, the trajectory towards 10% EBITDA margins; can you give us a sense of what assumptions are in there for either geographic mix or a service line mix?
And in particular given that your business is more I guess more skewed towards the brokerage side than property management within commercial. What's the risk, I guess that property management accelerates its growth and becomes a bit of a drag on EBITDA margins for the next couple of years?
Scott Patterson
I don't think it's a risk within Colliers. Our recruiting focus is primarily brokerage and major market driven.
So, in terms of getting from 8 to 10, it's important to continue to drive revenues and improve broker productivity, which we've been doing. And I think continuing to drive New York City and London, which are two markets we've invested in and our investment, cost structure are probably little low in front of our revenues right now.
So, when that catches up, it'll help drive us to 10%.
Jay Hennick
And the property management business for us margin-wise virtually across the board is pretty good; it’s not the same as it is in brokerage, but it’s pretty good and it leads to other services that we take advantage of in other real estate advisory areas. So I think property management is going to continue to be a focus for us, although it does dampen margin slightly as does facility management if -- which we don’t currently do, others do, do.
But margins that are considerably below traditional property management margins that we've enjoyed so far. So property management is a great growth opportunity for us but we’re going to be looking at that whole sector as well over the next couple of years and see if there is other areas in which we can strengthen our recurring revenue base even further.
We've done I think a pretty admirable job over the past couple of years. But I think there is more work that we can do in terms of stabilizing.
I’m now just talking core Colliers as opposed to all of FirstService together which has a very high percentage of recurring revenue.
Brandon Dobell - William Blair & Co.
Okay, perfect. Thanks guys.
Operator
Thank you. Our next question comes from [Brian Hikisch].
Please go ahead.
Unidentified Analyst
Hi guys. Congratulations on the good year.
I was just wondering are you able to provide any update on what's going on with Colliers Japan as a potential acquisition candidate, are you guys still considering them at all or circumstances change there?
Jay Hennick
We are always open to acquisition opportunities in geographic regions that make sense. That’s surely a major market for us and that would be something that we would look at if that affiliate is open-minded to doing something.
But right now there is nothing eminent and we’re focusing on the other 44 countries around the world that we own and which are mostly the major markets around the world.
Unidentified Analyst
Okay thanks. And then one other question just for FirstService brands, it seems that the margins dip a bit in the fourth quarter each year and I was just wondering what drives the seasonality in that, is it simply the operating leverage?
Jay Hennick
The revenues come down, I mean there are some businesses paining primarily and others that come off in the fourth quarter and those are high margin businesses in season.
Unidentified Analyst
Okay. Thanks a lot.
Operator
Thank you. We have Stephen MacLeod that has (inaudible).
Please go ahead.
Stephen MacLeod - BMO Capital Markets
Thank you. I just had one follow-up question regarding the BCL acquisition.
Can you just talk about the margin profile and where it is relative to kind of Colliers on a consolidated basis relative to the Colliers Germany acquisitions that you’ve done?
Jay Hennick
We really don’t talk about margin by acquisitions. So, I mean I would say that it’s consistent with margins in Colliers Germany and fits beautifully into our Colliers UK business.
And I don’t think the margins are materially different than they are in the Colliers UK business currently.
Stephen MacLeod - BMO Capital Markets
Right, okay. Great, thank you.
Operator
Thank you. We have no more questions for now.
Jay Hennick
Okay. Thank you everyone for joining us.
And we look forward to the next conference call during the first quarter. And hopefully we can continue to deliver strong results as we have this year.
So, thanks for joining us.
Operator
Ladies and gentlemen, this concludes the fourth quarter year end investor conference call. Thank you for your participation.
And have a nice day.