Colliers International parent FirstService Corp. has decided to transition out of a large property services agreement with a U.S. government-sponsored entity to manage a portfolio of foreclosed residential properties.
The agreement, initially awarded in 2008 to FirstServices' Field Asset Services (FAS) company, was reset earlier this year with a significantly increased scope in work without an increase in additional pricing to FirstService, said John Friedrichsen, senior vice president and CFO of FirstService.
The reset also came at a time when competition for such work has become very competitive and the total amount of REO resolution work has plateaued, Friedrichsen said.
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Field Asset Services provides pre-foreclosure, REO and renovation field services for major residential mortgage lenders. First Service acquired 80% of the Austin, TX-based firm in 2007 at a time when the market was experiencing significant growth in portfolios of foreclosed residential properties. However, that growth has now stalled, Friedrichsen said.
The current annual run rate of revenues generated by the agreement is approximately $100 million, down 30% from the prior year, as a result of industry-wide reductions in order volumes consistent with declines in foreclosure activity in the U.S.
That foreclosure volume could increase again, Friedrichsen said. However, while the backlog of properties in distress remains at near-record levels, assuming no change in the regulatory environment, foreclosure repossessions are expected to remain at current levels for the balance of the year, he said.
For the quarter ended March 31, FirstService reported that its property services revenues (which includes Field Asset Services) totaled $84.8 million, down 26% from $114.5 million in the same quarter a year ago. Adjusted EBITDA for the quarter was $2.9 million, versus $11.3 million in the prior year quarter.
FirstService said Field Asset Services attempted to provide services under revised terms, but determined it could not do so profitably at an acceptable quality standard, Friedrichsen said.
Friedrichsen said confidentially agreements prevented FirstService from identifying the U.S. GSE to which it is under contract.
Field Asset Services is headed by Dale McPherson, its president and CEO and a divisional executive for FirstService. McPherson was recently selected to join the FNMA Vendor Advisory Board. FNMA is the acronym for Federal National Mortgage Association or Fannie Mae, the largest U.S. government sponsored entity.
Friedrichsen said that after discussions with the unidentified GSE, it was agreed that FAS would transition out of the contract as soon as Aug. 1.
FirstService said excluding $2 million in pre-tax reorganization charges which will be taken in the third quarter, the impact on its adjusted EBITDA is expected to be positive.
Friedrichsen said the company had not determined whether dropping the contract would result in any layoffs at Field Asset Services, but that it hoped to transition employees under the contract to other of FAS' clients.
The contract is Field Asset Services largest contract, but not its only one. The company has approximately 25 other clients and serves an REO portfolio of about $7 billion in residences.
"We made the difficult decision to transition out of this contract in our Property Services division when it became clear it was not profitable," said Jay S. Hennick, founder and CEO of FirstService. "Since winning this assignment back in 2008, our team consistently exceeded quality and service standards and was rewarded with increased volumes and share over the years. However, as market conditions changed and foreclosure volumes declined, the scope of the services expected increased without commensurate compensation. As a result, we exit a relationship representing about 4% of our revenues but positively impact our EBITDA going forward."
FirstService generates more than $2.3 billion in annual revenues and has more than 23,000 employees worldwide.
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