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FirstService Corporation (FSV) Stock | NASDAQ: FSV | TSX: FSV.TO

Covered by Stratosphere

North America's Property Manager

FirstService Corporation ("FirstService") is the largest outsourcer of property services in North America. Since 1989, FirstService has been building a trusted relationship with thousands of communities scattered across Canada and the US. It operates two main segments:

1. FirstService Residential

2. FirstService Brands

The company was founded by Jay Hennick when he was a teenager. To this day, the raw entrepreneurial spirit of the company lives on through management, employees, and franchisees. Customers come first, and ironically, so do shareholders - the long-term mindset of the company led it to its successes, solid reputation, and consistent value creation for customers, employees, and shareholders alike.

Stratosphere Score

7

Growth

6

Valuation

9

Quality

5

Margins

3

Dividend

4

Balance Sheet

6
Adrian Iwanicki

Author

Adrian Iwanicki

Equity Analyst

Investment Thesis

  1. FirstService residential services are the biggest property management operations in North America. FirstService brands hold leading positions with many of its principal brands in their respective markets. Both segments' operations are vast and can be found across most of Canada and the US.

  2. FirstService boasts a capital-light business model with durable, predictable, and recurring revenues that lead to strong cash flows. Strong customer contract retention rates help the company focus on winning new contracts rather than retaining customers.

  3. The FirstService Partnership Philosophy ("FPP") empowers management teams of acquired companies to continue leading their companies in their local markets with a long-term abundance mindset. FirstService management also has substantial skin in the game to think long-term.

  4. HOAs (i.e., homeowner's associations) are gaining popularity in the US, presenting a major organic growth opportunity for FirstService as North America's leading property manager.

  5. The property management and property services markets are highly fragmented with many small operators. FirstService can increasingly use its scale, network, and strong financial profile to grow via acquisitions to build out its moat.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Real Estate, Everywhere

FirstService has massive scale covering a sizable portion of the North American continent. Residential covers Ontario, Alberta, and BC in Canada, and a number of populous states across the US through 8,500 communities and almost 2 million residential units, including 3,200 high-rise condos.

FirstService Residential North American CoverageSource: fsiresidential.com

Brands also has broad reach through its brands with its workforce of 13,000 (including franchised operations) and network of 1,500 franchises scattered across the US and Canada.

The property management and services industries are highly fragmented. The scale at which FirstService operates its two segments is unmatched by any competitor.

To make matters worse for competitors, FirstService has an “unfair” advantage when it comes to consolidating a market with thousands of independent and small- to mid-sized operators — it has stand-out scale, public market funding access, and a clean balance sheet to consolidate the industry and grow substantially through acquisitions.

Guaranteed Revenue (Almost)

Patience is a virtue, and so is customer retention in FirstService’s books. FirstService Residential boasts high customer retention rates in the mid-90% range via its contractual model and significant expertise in the property management realm that comes from a buildup of knowledge and experience over several decades.

FirstService is a trusted partner that customers keep coming back to. Not only that, but they are also extremely satisfied customers that spread the word and help FirstService grow organically across the US and Canada.

Residential is a durable, recession-proof, and non-cyclical business that provides the most crucial services people need to keep their communities up and running. We believe HOAs and condos view property management spend as non-discretionary and always required, frankly, whether the world is booming or coming to an end.

Although the Brands segment’s revenue profile is a tad more cyclical in nature than Residential, these essential services are constantly in demand and serve to protect people’s homes and help keep them updated. Customers delay painting, flooring, and closet projects during times of economic hardship, but eventually they come flocking back to release their home update backlogs.

The COVID-19 pandemic has placed far greater importance on the upkeep of our living spaces. We believe FirstService benefits as a large player in the space that helps people ensure their houses are up to par with the work-from-home world.

Keeping Operations Light

No matter how you slice it, FirstService is a capital-light business with little maintenance and growth capital expenditures required to keep operations going and remain competitive in a fragmented industry.

Over the past decade, capital expenditures merely nibble into revenues — only about 2% of revenues are dedicated towards capital projects and maintenance investments on fixed assets and intangibles.

Since FirstService is a collector of businesses that seeks inorganic growth opportunities as they present themselves, low capital requirements create the perfect fuel for FirstService to focus on locating solid acquisition targets to expand its North American presence and build its footprint.

The Entrepreneurial Spark

FirstService keeps the entrepreneurial spirit of its company alive and well, even as it continues to purchase many businesses and partner with countless entrepreneurs to grow its footprint.

Since 1989, FirstService has partnered with over 300 entrepreneurs and business professionals thanks to the FirstService Partnership Philosophy (“FPP”), the key to maintaining its operational excellence from each franchise right up to the top of FirstService.

The FPP contains four main attributes that contribute to the success of each franchise, partnership, acquired business, and FirstService in its entirety:

  1. Alignment of Interests

  2. Partnering with Proven Management

  3. Leveraging Knowledge and Relationships

  4. Long-Term Capital

Without getting into the nitty-gritty, FirstService makes for a very attractive acquirer and large partner for smaller businesses in the property management and services spaces.

Owners retain a majority stake in the businesses they will continue to run on a day-to-day basis, keeping the decisions at the “ground level” with themselves and their frontline teams rather than at the top — at FirstService’s headquarters.

Besides the decentralized structure, FirstService’s time horizon with the businesses it acquires and partners with is forever. The company continually reinvests into these businesses and helps them scale using the vast FirstService footprint, managerial expertise, and ability to:

  1. Source acquisitions

  2. Share best practices

  3. Introduce and catalyze cross-selling and partnership opportunities within its own network of brands, companies, and franchises.

When most companies look for short-term value, thinking long-term and retaining skin in the game is absolutely one of the most important competitive advantages a company can have. FirstService has got it.

Opportunities Ahead

  • According to FirstService, there are between 8,000 to 9,000 community association management companies in operation today across Canada and the US. Brands is also immensely fragmented – the most market share one of its primary brands holds is 7% (California Closets) and it is the top provider of those services in its space. Both Residential and Brands are swimming in an open ocean in which they are the sharks.

  • Resident satisfaction with community associations is an important pillar to a company like FirstService which holds about 6% market share. Depending on the source referenced, there are between 350,000 and 400,000 community associations around the US. Of this amount, approximately 35% (~130,000) of these community associations are self-managed today and present an astronomical conversion opportunity for FirstService. Self-management is not only costly and inefficient (generally speaking), but these community associations also do not have the trusted vendor relationships to source major resources that a large property manager, like FirstService, would have.

  • Adding to the amount of community associations that could be converted as customers of FirstService is a growing trend towards building HOAs. A quarter of US homes are in community associations today, but 75% of all new homes being built in the US are part of HOAs. Looking back at the trend of HOAs over the past ten years, it is abundantly clear that this trend will continue for some time.

  • FirstService has one of the most shareholder-friendly management teams that exist in the modern world while the stock continues to fly under the radar of many major institutions and investors across the globe. At FirstService, the company’s insiders have substantial skin in the game, staying personally invested at a collective ~15%. We can reasonably believe that big chunks of these insiders’ net worth are tied up with FirstService and so management’s interests are closely aligned with those of long-term shareholders – creating value and ultimately wealth.

Risks

Real Estate

FirstService’s most obvious risk is its gearing to the real estate market through its Brands segment. Falling property prices and general economic woes could throw off Brands’ growth trajectory and increasingly harm FirstService as a whole as Brands overtakes Residential as the largest segment.

When house prices rise, homeowners are generally more confident in taking on larger projects. Although the North American housing market has been hot as of late, there is no guarantee these favourable conditions will persist. We urge FirstService investors to keep a close look on the housing market – weakness could substantially hurt Brands’ discretionary service offerings.

Acquisition Risk

As with any other serial acquirer, FirstService runs the risk of poorly executing on acquisitions strategically, mistargeting opportunities, or overpaying. Much of its growth also relies on inorganic growth, so the absence of adequate business targets could result in a plummeting share price depending on what investors have baked in as their growth expectations.

Fragmentation — The Ugly

On the one hand, a highly fragmented market presents a huge opportunity for FirstService. On the other hand, it also means that there are relatively low barriers to entry and thousands of service provider options customers can choose from.

Local players build trusted relationships with local customers using their specific knowledge of how things work, how business is done, and what customer preferences are to score contracts within their communities.

We believe FirstService does a good job of offsetting this risk, though. The FPP encourages its franchises and businesses to continue operating under the decentralized FirstService management structure.

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