January 29, 2008 / 1:15 PM / 10 years ago

UPDATE 2-FirstService profit clipped by credit crunch

(Adds details, quotes, stock price; in U.S. dollars unless noted)

By John McCrank

TORONTO, Jan 29 (Reuters) - FirstService Corp (FSV.TO) reported a 30 percent drop in third-quarter profit on Tuesday, largely due to the toll the global credit crunch has taken on its soon-to-be-defunct mortgage securitization business.

The property services company, whose brands include Colliers International and Pillar to Pillar Home Inspections, said it earned a net $5.4 million, or 15 cents a share, in the three months ended Dec. 31, down from a profit of $7.8 million, or 25 cents a share, a year earlier.

Analysts had expected, on average, earnings of 27 cents a share, according to Reuters Knowledge.

FirstService said it recorded a $4.3 million non-cash charge in the quarter related to interest rate hedges covering fixed-rate mortgage assets.

The company entered the Canadian mortgage securitization business in 2005, underwriting pools of conventional first mortgages, using capital provided primarily by co-lenders, and then securitizing and selling them to investors in the form of mortgage-backed securities.

"The current credit crunch has resulted in very limited liquidity for commercial mortgage-backed securities," the company said in a release.

FirstService's remaining FirstMortgage assets, totaling about $21.5 million, will be sold as market conditions permit and are expected to allow the company to record a gain equivalent to any loss it took on the interest rate hedges, John Friedrichsen, senior vice-president and chief financial officer, said in a conference call.

"This charge had a corresponding negative impact on our diluted earnings per share of 7 cents ... in the third quarter," Friedrichsen said.

"However, we have not excluded this amount from our reported adjusted EPS of 29 cents for the quarter ... since we do not have clarity around the timing of the reversal of this amount," he said.

The Toronto-based company said it also took a $3.3 million non-cash charge related to stock option grants.

Excluding the charges, FirstService said its adjusted diluted earnings per share from continuing operations grew 32 percent to 29 cents, from 22 cents a year earlier.

Net earnings from continuing operations were $7.98 million, or 15 cents a share, compared with $7.75 million, or 25 cents a share, a year earlier.

Revenue grew 34 percent in the quarter to $502.2 million from $374.8 million, largely due to strong brokerage performances in in Asia and Eastern Europe.

FirstService lowered its adjusted earnings per share outlook for the year ending March 31, but raised its revenue outlook, based on results from the first three quarters.

It now estimates adjusted earnings per share for the yea in a range of $1.30 to $1.40, compared with a previous range of $1.37 to $1.49.

It expects revenue of $1.70 billion to $1.75 billion, from a previous estimate of $1.625 billion to $1.725 billion.

Shares of FirstService were up 32 Canadian cents, or 1.6 percent, at C$20.86 on the Toronto Stock Exchange.

$1=$1 Canadian Additional reporting by Frank Pingue; editing by Rob Wilson

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