Royal LePage Franchise Services Fund
TSX : RSF.UN

Royal LePage Franchise Services Fund

November 08, 2006 23:25 ET

Royal LePage Franchise Services Fund Announces Third Quarter 2006 Results and Monthly Cash Distribution

Record Royalties in Third Quarter

TORONTO, ONTARIO--(CCNMatthews - Nov. 8, 2006) - Royal LePage Franchise Services Fund (TSX:RSF.UN)(the "Fund") today announced record royalties for the third quarter of 2006 of $8.5 million, a 6.7% increase over the same period of 2005. Operating earnings before management fees for the third quarter increased 6.8% over the same period in 2005 to $7.7 million. Distributable cash for the quarter of $6.2 million decreased $0.1 million or 1.6% compared to $6.3 million in the third quarter of 2005. Net earnings of $1.8 million or $0.19 per unit decreased $0.2 million or 10.0% compared to earnings of $2.0 million or $0.20 per unit in the third quarter of 2005.

The increase in royalty revenue reflects growth in the Fund's underlying network of Realtors, and continued strength in the residential resale housing market. "Canada's solid housing market continued to advance during the third quarter, characterized by a moderating pace in both unit sales and average price appreciation relative to the first half of the year and 2005. The welcome shift to balanced market conditions, which began late in 2005, continued throughout most of the Central and Eastern regions of the country. However, the housing market in the Western provinces, and notably in Alberta, is still experiencing double digit growth as a result of the high migration and manageable affordability in this booming energy-based economy," said Phil Soper, president and chief executive, Royal LePage Franchise Services Fund.

Financial and Operating Highlights
For the three months ended September 30, 2006 and 2005



Q3 2006 Q3 2005
(thousands) (per unit) (thousands) (per unit)
---------------------------------------------
Royalties $8,470 $0.64 $7,937 $0.60

Operating earnings
before management
fees(1) $7,702 $0.58 $7,210 $0.54

Net Earnings $1,848 $0.19 $2,024 $0.20

Distributable cash(2) $6,162 $0.46 $6,295 $0.47

Distributions $3,827 $0.29 $3,662 $0.28


(1)Defined as royalties less administration expense and interest expense. Operating earnings before management fees does not have a standardized meaning under Canadian generally accepted accounting principles and accordingly may not be comparable to similar measures used by other issuers.

(2)Defined as royalties less administrative expenses, interest expense and management fee. Distributable cash does not have a standardized meaning under Canadian generally accepted accounting principles and accordingly may not be comparable to similar measures used by other issuers. Management believes that distributable cash is a useful supplemental measure of performance as it provides investors with an indication of the amount of cash available for distribution to unitholders. Investors are cautioned that distributable cash should be not construed as an alternative to using net earnings as a measure of profitability or the statement of cash flows.

The reduction in the Fund's distributable cash and net earnings during the quarter compared with the prior year mainly reflected the Fund's previously announced decision, commencing in the first quarter of 2006, to accrue all management fees as earned.

Fund Growth

During the third quarter, the Fund network grew organically by 39 Realtors. Together, with the 274 Realtors added during the first six months of 2006, the Fund has grown organically by 313 Realtors or 2.6% since January 1, 2006. With the anticipated acquisition of franchise contracts on January 1, 2007 with 375 agents, the Fund network would have combined growth of 688 new Realtors, which exceeds our 2006 growth objective of adding 500 new Realtors.

Monthly Cash Distribution

The Royal LePage Franchise Services Fund today declared a cash distribution of $0.0958 per unit for the month of November 2006, payable December 29, 2006, to unitholders of record on November 30, 2006.

Impact of Taxation on Income Trusts

On October 31st, Canada's Finance Minister announced proposed changes to Canada's taxation system designed to level the playing field between trusts and corporations. For income trusts that were publicly traded on October 31, 2006, including the Fund, it is proposed that the new tax will first apply to the Fund's 2011 taxation year. At this time, it is too early to determine the extent to which the proposed legislation will affect the Fund; accordingly management will continue to monitor and analyze this situation and its implications to the Fund as they develop.

Outlook

"Nationally, the moderating growth trend in housing markets is forecast to continue for the remainder of the year. Strong economic conditions, low unemployment rates, modestly growing salaries and wages, and sound consumer confidence are contributing to the overall strength of the residential real estate sector," commented Phil Soper. "For all but the West, we expect to see continued single digit increases in housing prices. The sellers' market that we have lived with for some years has been replaced by a healthy balanced market characterized by more reliable conditions. With excellent coverage across the country, and higher Realtor productivity than the industry as a whole, the Fund remains well positioned to continue to generate growth for our unitholders."

"From a North American perspective, Canada's housing market is likely to outperform the American market throughout 2007," he added. "A number of factors are working in Canada's favour, including healthy personal and governmental debt levels, the relatively modest rise in interest rates in our country, and general affordability in our major cities."

Fund Structure

The Fund generates both fixed and variable fee components. Variable fees are primarily driven by the total transactional-dollar volume from agent sales commissions, while fixed franchise fees are based on the number of agents and sales representatives in the network. Approximately 65% of the Fund's revenue is based on fixed fees from a large number of long-term franchisee contracts, which provide revenue stability and help insulate the Fund from market fluctuations.

Q3 Conference Call

A conference call for investors, analysts and media to review the first quarter results will be held on Thursday, November 9, 2006, at 10:00 a.m. (EST). To participate in the conference call, please dial toll free 1-866-296-6505 at approximately 9:50 a.m., EST. The pass code for this call is 53439. For those unable to participate in the conference call, it will be available by webcast, and a replay will also be posted online following the conference call at www.rsfund.ca under "Financial Reports" which can be found under "Investment Info."

About Royal LePage Franchise Services Fund

The Royal LePage Franchise Services Fund is a leading provider of services to residential real estate brokers and their Realtors. The Fund generates cash flow from franchise royalties and service fees derived from a national network of real estate brokers and agents in Canada operating under the Royal LePage and Johnston & Daniel brand names. As at September 30, 2006, the Fund Network was comprised of 12,201 Realtors operating from 579 locations under 276 franchise agreements. The Fund Network has an approximate 20% share of the Canadian residential resale real estate market based on transactional-dollar volume. Royal LePage Franchise Services Fund is a TSX listed income trust, which pays monthly distributions and trades under the symbol "RSF.UN".



ROYAL LEPAGE FRANCHISE SERVICES FUND
Interim Consolidated Balance Sheets

As at September 30, December 31,
(in thousands of dollars) 2006 2005
(unaudited)
--------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 4,708 $ 9,941
Accounts receivable 3,159 2,434
Prepaid expenses 27 84
--------------------------------------------------------------------------
7,894 12,459
Deferred charges 557 684
Intangible assets (note 3) 127,149 133,022
--------------------------------------------------------------------------
$ 135,600 $ 146,165
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Liabilities and Unitholders' Equity
Current liabilities
Accounts payable and accrued liabilities $ 2,189 $ 2,064
Purchase obligation (note 3) 27 2,893
Distribution payable to unitholders 956 915
--------------------------------------------------------------------------
3,172 5,872
Long-term debt (note 5) 38,000 38,000
Non-controlling interest 23,956 25,824
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65,128 69,696
Unitholders' equity 70,472 76,469
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$ 135,600 $ 146,165
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See accompanying notes to the interim consolidated financial statements


ROYAL LEPAGE FRANCHISE SERVICES FUND
Interim Consolidated Statement of Earnings
(unaudited)
Three Three Nine Nine
months months months months
(in thousands of dollars, ended ended ended ended
except unit and per unit Sept. 30, Sept. 30, Sept. 30, Sept. 30,
amounts) 2006 2005 2006 2005
--------------------------------------------------------------------------
Royalties
Fixed franchise fees $ 3,485 $ 3,127 $ 10,318 $ 9,071
Variable franchise fees 2,377 2,444 6,485 6,010
Premium franchise fees 1,685 1,497 3,498 3,176
Other fee revenue and
services 923 869 2,593 2,414
--------------------------------------------------------------------------
8,470 7,937 22,894 20,671
--------------------------------------------------------------------------
Expenses
Administration 163 125 513 393
Management fee (note 7 (ii)) 1,540 915 6,080 2,745
Interest expense 605 602 1,795 1,685
Amortization of intangible
assets 3,657 3,569 10,893 10,561
--------------------------------------------------------------------------
5,965 5,211 19,281 15,384
--------------------------------------------------------------------------
Earnings before undernoted 2,505 2,726 3,613 5,287
Non-controlling interest (657) (702) (1,002) (1,396)
--------------------------------------------------------------------------
Net earnings $ 1,848 $ 2,024 $ 2,611 $ 3,891
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Basic and diluted earnings
per unit (9,983,000 units)
(note 6) $ 0.19 $ 0.20 $ 0.26 $ 0.39
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--------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


ROYAL LEPAGE FRANCHISE SERVICES FUND
Interim Consolidated Statements of Unitholders' Equity
(unaudited)
Net
(in thousands of dollars) Units Earnings Distributions Total
--------------------------------------------------------------------------
Balance, December 31, 2004 $ 92,938 $ 5,278 $ (15,518) $ 82,698
Changes during the period:
Net earnings - 3,891 - 3,891
Unit distributions - - (8,239) (8,239)
--------------------------------------------------------------------------
Balance, September 30, 2005 $ 92,938 $ 9,169 $ (23,757) $ 78,350
--------------------------------------------------------------------------
Balance, December 31, 2005 $ 92,938 $ 10,034 $ (26,503) $ 76,469
Changes during the period:
Net earnings - 2,611 - 2,611
Unit distributions - - (8,608) (8,608)
--------------------------------------------------------------------------
Balance, September 30, 2006 $ 92,938 $ 12,645 $ (35,111) $ 70,472
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--------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


ROYAL LEPAGE FRANCHISE SERVICES FUND
Interim Consolidated Statements of Cash Flows
(unaudited)
Three Three Nine Nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
(in thousands of dollars) 2006 2005 2006 2005
---------------------------------------------------------------------------
Cash provided by (used
for):
Operating activities
Net earnings for the
period $ 1,848 $ 2,024 $ 2,611 $ 3,891
Items not affecting
cash
Non-controlling
interest 657 702 1,002 1,396
Amortization of
deferred charges 42 40 127 98
Amortization of
intangible assets 3,657 3,569 10,893 10,561
Changes in non-cash
working capital 63 429 (502) (431)
---------------------------------------------------------------------------
6,267 6,764 14,131 15,515
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Investing activities
Deposit on acquisition
(note 3) - - (4,978) (7,048)
Purchase of intangible
assets - - (15) 7
Payment of purchase price
obligation - - (2,893) -
---------------------------------------------------------------------------
- - (7,886) (7,041)
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Financing activities
Distributions paid to
unitholders (2,869) (2,746) (8,608) (8,239)
Distributions paid to
non-controlling
interest (958) (916) (2,870) (2,746)
Proceeds from long-term
debt - - - 38,000
Repayment of term loan - - - (30,600)
Deferred charges - - - (801)
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(3,827) (3,662) (11,478) (4,386)
---------------------------------------------------------------------------
Increase (decrease) in
cash and cash equivalents
during the period 2,440 3,102 (5,233) 4,088
Cash and cash equivalents,
beginning of period 2,268 5,430 9,941 4,444
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Cash and cash equivalents,
end of period $ 4,708 $ 8,532 $ 4,708 $ 8,532
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Cash and cash equivalents
are comprised of:
Cash $ 708 $ 2,532 $ 708 $ 2,532
Commercial Paper 4,000 6,000 4,000 6,000
---------------------------------------------------------------------------
$ 4,708 $ 8,532 $ 4,708 $ 8,532
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Supplementary Cash Flow
Information
Interest paid $ 559 $ 554 $ 1,676 $ 1,362
---------------------------------------------------------------------------
See accompanying notes to the interim consolidated financial statements


ROYAL LEPAGE FRANCHISE SERVICES FUND
Notes to the Interim Consolidated Financial Statements
As at and for the period ended September 30, 2006 (in thousands of dollars) (unaudited)

1. ORGANIZATION

Royal LePage Franchise Services Fund (the "Fund") is a limited purpose trust established under the laws of the Province of Ontario and pursuant to an Amended and Restated Declaration of Trust. On August 7, 2003, the Fund raised $99,830 (before issue costs) by issuing units on the Toronto Stock Exchange. These proceeds together with the proceeds of a term loan were utilized to acquire franchise agreements, relationships and trademark rights.

These consolidated financial statements include the accounts of Royal LePage Franchise Services Fund, its wholly-owned subsidiary RL RES Holding Trust ("RLHT"), and its 75% owned subsidiaries, Residential Income Fund General Partner Limited ("RIFGP") and Residential Income Fund L.P. (the "Partnership"). RIFGP is the managing general partner of the Partnership. Trilon Bancorp Inc. (the "non-controlling interest") owns the remaining 25% interest in the Partnership and RIFGP. The Fund receives certain management, administrative and support services from Residential Income Fund Manager Limited ("RIFML"), a party related to the non-controlling interest via common control.

Seasonality

The Fund's business follows a seasonal pattern, with revenue traditionally being lower in the first and fourth quarters. Due to this seasonality, the interim earnings statements are not necessarily indicative of annual earnings.

2. SUMMARY OF ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The accounting principles used in these interim consolidated financial statements are consistent with those used in the annual consolidated financial statements. They do not include all the information and disclosure required by GAAP for annual financial statements, and should be read in conjunction with the December 31, 2005 annual consolidated financial statements.

3. INTANGIBLE ASSETS

On January 1, 2006, the Partnership acquired 16 franchise agreements from RIFML at an estimated purchase price of $6,222 in accordance with the Management Services Agreement ("MSA"). On January 4, $4,978 was paid in cash on deposit against this purchase price obligation in accordance with the MSA. The final purchase price is based on the actual audited royalties derived from these franchises for the 12-month period ending October 31, 2006. Accordingly, the final purchase price is not determinable until that time.

Until the final purchase price is determined, each quarter the purchase price obligation is recalculated based on the actual royalties received. Correspondingly, the deposit on acquisition is reduced by the calculated amount and transferred to intangible assets. These assets are then amortized in accordance with the Fund's policy and calculated on a prospective basis.

The recalculated purchase price obligation in excess of the deposit on acquisition will be recorded as a purchase obligation and the corresponding amount added to the intangible assets and amortized as described above.

During the three and nine months ended September 30, 2006, $1,423 and $4,978, respectively, was transferred from "deposit on acquisition" and recorded as "intangible assets". During the three and nine months ended September 30, 2006, $27 was recorded as "purchase obligation" and the corresponding amount was added to intangible assets.

On May 1, 2006, $15 was paid in cash for legal due diligence relating to the January 1, 2006 acquisition and was recorded as "intangible assets".

On January 1, 2005, the Partnership acquired 38 franchise agreements from RIFM at a purchase price of $9,934 calculated in accordance with the MSA. On February 18, 2005, $7,041 was paid in cash against this purchase price obligation and the remaining $2,893 was paid in cash on January 4, 2006.



A summary of intangible assets is as follows:

September 30, 2006
-------------------------------------------------------------------------

Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Franchise agreements $ 127,271 $ 41,868 $ 85,403
Relationships and trademarks 42,350 604 41,746
-------------------------------------------------------------------------
$ 169,621 $ 42,472 $ 127,149
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-------------------------------------------------------------------------

December 31, 2005
-------------------------------------------------------------------------

Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Franchise agreements $ 123,622 $ 31,136 $ 92,486
Relationships and trademarks 40,979 443 40,536
-------------------------------------------------------------------------
$ 164,601 $ 31,579 $ 133,022
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-------------------------------------------------------------------------


4. OPERATING CREDIT FACILITY

On February 16, 2005, the Partnership obtained a credit facility (the "revolver") of up to $2,000 from a Canadian financial institution. This revolver may be used to provide working capital to the Partnership from time to time. The revolver is subject to annual renewal with outstanding principal under the revolver subject to interest at the lender's prime rate plus 1% to 1.5% or the banker acceptance rate plus 2% to 2.5%, based on the ratio of total debt to Adjusted EBITDA of the Partnership as defined in the credit agreement. As at September 30, 2006, the operating credit facility had not been drawn upon.

5. LONG-TERM DEBT

On February 18, 2005, the Partnership completed the issuance of a $38,000 private debt placement (the "private placement") provided by Canadian institutional investors. The private placement is for a five-year term with interest fixed at 5.882%, and only interest payable quarterly in arrears.

6. EARNINGS PER UNIT

The Special Fund Units were not included in the diluted per unit calculations as the effect would have been anti-dilutive.

7. RELATED PARTY TRANSACTIONS

i) Unless disclosed elsewhere, the Fund had the following transactions with parties related to the non-controlling interest during the three and nine months ended September 30, 2006 and September 30, 2005. These transactions have been recorded at the exchange amount agreed to between the parties.



Three Three Nine Nine
months months months months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2006 2005
---------------------------------------------------------------------------
a) Royalties
Fixed, variable and other
franchise fees $ 478 $ 540 $ 1,555 $ 1,492
Premium franchise fees $ 1,410 $ 1,241 $ 2,906 $ 2,661

b) Expenses
Management fees
(note 7 (ii)) $ 1,540 $ 915 $ 6,080 $ 2,745
Insurance and other $ 23 $ 24 $ 69 $ 68

c) Distributions
Distributions paid to
non-controlling interest $ 958 $ 916 $ 2,870 $ 2,746

The following amounts due to/from related parties are included in the
account balance as described:


September 30, December 31,
As at 2006 2005
---------------------------------------------------------------------------
d) Accounts receivable
Franchise fees receivable and other $ 582 $ 438

e) Accounts payable and accrued liabilities
Distributions payable to non-controlling
interest $ 957 $ 915
Management fees $ 451 $ 325

f) Purchase obligation $ 27 $ 2,893


ii) Management Fees

From inception to December 31, 2005, the Fund had accumulated and retained cash of $9.4 million as a reserve, which in the event of the release of this reserve would result in a 20% management fee payable to RIFML. On January 1, 2006, the Fund released the $9.4 million in reserves, a portion of which was used to fund the 2005 and 2006 franchise agreements purchase obligations. As a result, additional management fees of $1.9 million relating to the $9.4 million in reserves were incurred on January 1, 2006.

8. SUBSEQUENT EVENT

On October 31st, Canada's Finance Minister announced proposed changes to Canada's taxation system designed to level the playing field between trusts and corporations. For income trusts that were publicly traded on October 31, 2006, including the Fund, it is proposed that the new tax will first apply to the Fund's 2011 taxation year. At this time, it is too early to determine the extent to which the proposed legislation will affect the Fund; accordingly management will continue to monitor and analyze this situation and its implications to the Fund as they develop.



SUPPLEMENTAL INFORMATION -- SELECTED FINANCIAL AND OPERATING INFORMATION

Three Three Three Three Three Three Three Three
months months months months months months months months
ended ended ended ended ended ended ended ended
Dec. March June Sept. Dec. March June Sept.
($ 000's, 31, 31, 30, 30, 31, 31, 30, 30,
unaudited) 2004 2005 2005 2005 2005 2006 2006 2006
---------------------------------------------------------------------------

Revenue

Fixed
franchise
fees $2,718 $2,945 $2,999 $3,127 $3,261 $3,380 $3,453 $3,485

Variable
franchise
fees 1,149 1,335 2,231 2,444 1,327 1,610 2,498 2,377

Premium
franchise
fees 1,009 576 1,103 1,497 1,065 688 1,125 1,685

Other fee
revenue and
services 660 740 805 869 872 814 856 923
---------------------------------------------------------------------------
$5,536 $5,596 $7,138 $7,937 $6,525 $6,492 $7,932 $8,470
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% Revenue
by region

British
Columbia 13 15 15 14 14 16 15 14

Prairies 11 11 11 11 11 11 11 11

Ontario 62 57 57 59 59 56 57 59

Quebec 9 13 13 12 12 13 13 12

Maritimes 5 4 4 4 4 4 4 4
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100 100 100 100 100 100 100 100
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Three Three Three Three Three Three Three Three
months months months months months months months months
ended ended ended ended ended ended ended ended
Dec. March June Sept. Dec. March June Sept.
Additions for 31, 31, 30, 30, 31, 31, 30, 30,
the period: 2004 2005 2005 2005 2005 2006 2006 2006
---------------------------------------------------------------------------

Number of
Agents and
Sales
Represent-
atives 13 750 323 119 205 443 177 39

Number of
Agents 38 726 295 138 179 448 130 36

Number of
fixed fee
paying Sales
Represent-
atives - - - 477 89 39 40 (1)

Number of
locations (6) 47 - (4) - 21 (2) (1)

Number of
franchisees (1) 38 (1) (2) - 16 (1) (1)

At end of period
---------------------------------------------------------------------------

Number of
Agents and
Sales
Represent-
atives 10,145 10,895 11,218 11,337 11,542 11,985 12,162 12,201

Number of
Agents 9,355 10,081 10,376 10,514 10,693 11,141 11,271 11,307

Number of
fixed fee
paying
Sales
Represent-
atives - - - 477 566 605 645 644

Number of
locations 518 565 565 561 561 582 580 579

Number of
franchisees 227 265 264 262 262 278 277 276
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FORWARD-LOOKING STATEMENTS

This news release contains forward-looking information and other forward-looking statements. The words such as "should", "will", "continue", "plan", "believe", "expect", "anticipate", "intend", "estimate" and other expressions which are predictions of or indicate future events and trends and which 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, which may cause the actual results, performance or achievements of the Fund 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 set forward in the forward-looking statements include general economic conditions, interest rates, availability of equity and debt financing and other risks detailed from time to time in the Fund's reports filed with Securities Commissions. The Fund undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Contact Information