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Brookfield Real Estate Services Inc. - Q1-2018 Earnings & Price Target Update

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Brookfield Real Estate Services Inc. is a leading Canadian provider of services to residential real estate brokers and their realtors. Cash flow is generated from franchise royalties and service fees derived from a national network of real estate brokers and agents in Canada operating under the Royal LePage, Via Capitale Real Estate Network and Johnston & Daniel brand names. At Mar-31-2018, their network consisted of 18,708 realtors operating under 297 franchise agreements and from 677 locations, with an approximate 20% share of the Canadian real estate market. This is an increase from 17,580 as at Dec-31-2016. Revenue from royalties is comprised of both fixed and variable components. Approximately 90% of royalties are comprised of fixed franchise fee per realtor, the 1% variable franchise fee and premium franchise fees. The remaining royalty stream is made up of franchise fees generated from warranty fees, technology fees and other fees. Approximately 72% of annual royalties were partly insulated from the fluctuations in the Canadian Market as they were not directly driven by transaction volumes. On Jan-1-2018, they acquired 38 Franchise Agreements comprised of 563 realtors operating under the Royal LePage and Via Capitale Brands. The estimated purchase price of these agreements was $8.8M, with an estimated annual royalty stream of $1.3M.

They generate revenues by both fixed and variable fee components with approximately 71% of the revenue based on fees that are fixed in nature. Variable fees are primarily driven by the total transactional dollar volume from the sales commissions of realtors, fixed fees are based on the number of agents and sales representatives in the network. By revenue, approximately 57% is from the Greater Toronto Area, 18% from BC, approximately 10% each from Quebec and Alberta with the balance split between the Prairies and Maritimes. Compared to the distribution of realtors across Canada, they are under-represented in British Columbia and Alberta. They have a relatively strong presence in Ontario (as a result of a historical base there) and Quebec (due in part to the acquisitions of the Via Capitale Network).

The La Capitale network is located in Quebec with agreements typically having five-year terms and approximately 76% of the royalties are fixed in nature. The fixed element of the royalties is comprised primarily of a fixed fee of $170 per agent per month while the other fees are driven primarily from a self-insured program called APEC, under which participating agents provide a warranty on such items as appliances, plumbing, electrical and heating systems.

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