McGrath Real Estate - Strategic Business Plan 2006

MCGRATH REAL ESTATE STRATEGIC BUSINESS PLAN 2006

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McGrath Real Estate - Strategic Business Plan 2006 EXECUTIVE SUMMARY
The purpose of this paper is to outline planned improvements to the existing business and operating model, explore earnings growth opportunities and future options where the Real Estate product can leverage its franchise and branch network to participate in emerging markets. Over the last five years, Real Estate’s Gross Margin has increased by an average of 18% p.a. from $18.8m to $41.6m. Over this same period EBIT has increased to $5.8m (F06 forecast $7.6m). Although achieving satisfactory return on funds employed of 24%, there is significant scope to improve profitability compared to the wider real estate industry operating around 50-60%. Management proposes the following strategic objectives to increase EBIT to $41m over a 5 year horizon. Item #1 Objective Improve Existing Business 1. Restructure Rural & Regional branches 1.1. Co-agentise rural sales team 1.2. Franchise regional stand alone operations & divestment of rent-roll 2. Expand metropolitan franchise network 3. Integrated office concept (channel marketing) 4. Improve overall Real Estate brand profile particularly on-line presence. Build Earnings 1. Franchise acquisitions – multi-branding 2. Provide Industry services capitalising on strategic stakes in REALTECH (property management) & Centernet (sales) 3. Establish alliance with utility providers Implementation

2 yrs 4 yrs 5 yrs 3 yrs 2 yrs

#2

2 yrs 3 yrs

3 yrs

In achieving the above mentioned forecasts, Management would deliver a fully integrated Real estate business operating in rural, regional and metropolitan areas right across the country. Operations would be structured to drive profitability, rather than sales and capital will be deployed in areas of highest returns and growth in the market place. The brand profile of McGrath would be significantly enhanced with a greater profile in metro locations. Fully integrated McGrath offices will be established in regional and metro locations that provide a suite of services, such as insurance, wealth management, banking and telco, further reducing reliance on climate driven markets for the McGrath Group. Multiple brands will allow McGrath to increase market share in areas reaching saturation, and provide accelerated entry into areas with poor coverage at present. To support franchise operations, industry services will be provided by McGrath controlled entities that ensure access to extensive databases and provide reliable annuity type earnings. Future options with uncertain profitability will continue to be explored as the market changes. These objectives are discussed in terms of risk management, capital requirements, improved profitability, implementation and resources employed.

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McGrath Real Estate - Strategic Business Plan 2006
The table below provides a summary of the financial outcomes expected from each stated objective over a 5 year period. fy06 Actual Obj #1 Obj #2 fy10 Forecast

$000's

Sales Direct Costs Gross Margin Overheads EBIT Funds Employed ROFE

80,729 (42,896) 37,832 (32,650) 5,182 23,000 23%

(41,627) 41,390 (238) 17,074 16,836 (22,000) na

36,538 (11,411) 25,127 (6,150) 18,977 65,067 29%

75,639 (12,918) 62,721 (21,726) 40,995 66,067 62%

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McGrath Real Estate - Strategic Business Plan 2006 BACKGROUND
1.0 THE BUSINESS OVER THE LAST FIVE YEARS

In F02 the Real Estate product gross revenue totalled $50m which was primarily driven by broadacre sales contributing 67%, residential sales 25%, franchise business 5%, and property management 3%. Funds employed were some $5m with 267 Real Estate staff employed in the business. At that time, management recognised the rural farming population would continue to decline. It was anticipated that further consolidations and amalgamations of properties would see the number of farms fall from 130,000 to less than 100,000. This trend has resulted in decreased volume of sales, although this fall was largely offset against an increase in the average sale price. Also, the drive for further efficiency would see major corporate and farming families acquire adjoining properties, becoming less reliant on real estate agents to broker transactions. Management embarked on a strategy to reduce reliance on broadacre sales and “drought proof” the business. This involved improving efficiency and productivity of salespeople in the broadacre sector and commencing an acquisition programme in major regional centres with large populations to leverage the McGrath brand and capture a market share of residential and lifestyle sales. These acquisitions were reinforced with the purchase of property management portfolios to provide additional income and to support sales. Finally, there was a renewed emphasis on developing the metropolitan franchise business. This required the introduction of a new franchise agreement to provide for a revenue based fee card on gross sales commission (in line with our major franchise competitors such as Ray White and LJ Hooker), as opposed to the existing agreement which was restrictive by way of flat fees and a prime marketing area (these restrictions made it difficult to expand the franchise network). In addition to this strategy there was a requirement to retain and build market share in broadacre sales due to prevailing drought conditions which resulted in existing competitors cutting their commission rates in order to maintain market share. New competitors such as Ray White, Raine & Horne, LJ Hooker, and (more recently) Harcourts, who were looking to expand their regional networks have now entered the broadacre sector. Offset against adverse economic conditions, the Real Estate product saw a boom in broadacre prices for pastoral and cropping properties in WA, NT and QLD and achieved a steady increase in residential sales in regional areas based on strong capital growth driven by higher prices in the major capital cities. 2.0 FUTURE MARKET TRENDS

Over the coming 5 years the number of farmers/farms will continue to decline. Inefficient farms will either be consolidated, or in some instances bought back by the government where it is perceived that the land will not support traditional farming enterprises. The trend of higher commission payments to top performing sales people will continue while higher direct and indirect costs particularly in advertising will continue to erode profitability. As other large Franchisors, particularly Ray White, LJ Hooker and Raine and Horne continue to expand into regional locations McGrath market share in broadacre sales will face increasing pressure. Our competitors, as part of their drive in regional Australia have reduced their franchise fees below those in metropolitan areas with a view to attracting either independent businesses or salespeople who wish to establish their own businesses. The low entry cost and reduced franchise fees of 5%-7% are attractive. These brands have relationships with receivers, managers, and administrators, whereas previously only McGrath and Landwork were seen as alternatives for the sale of distressed property. Landwork recently appointed a new General Manager, John Smith (previously Ray White) who has already embarked on a drive to increase market share by reducing commission rates and paying advertising costs. Landwork have appointed new regional managers and embarked on the recruitment drive targeting our top performers offering franchises in major regional locations where they are aiming to expand their network. Despite the introduction of training initiatives and sales contact management software aimed at improving productivity and reducing costs, margins continue to be eroded by increasing indirect costs. Page 4 of 17

McGrath Real Estate - Strategic Business Plan 2006
Further, the business continues to face pressure from top performers to increase the commission split to match that of our competitors. There will be greater pressure on the business to provide better marketing tools, particularly ECommerce solutions i.e. Internet, and innovative point of sale material. This provides earnings opportunities in the provision of these services along with channel marketing potential.

3.0

THE BUSINESS TODAY

In F05 the Real Estate product achieved $88m in gross revenue, broadacre sales contributing 36%, residential 46%, Property Management 13% and franchise 5%. Funds employed were some $23m mainly comprised of goodwill for acquired rent-rolls. The total number of staff employed in the product is 557 FTEs, with a further 519 part-time positions (83 FTE’s) allocated to Real Estate from other products. Over the last five years, the market value of McGrath property management portfolio has grown to approximately $30m, which is 30% above funds invested in acquiring the asset: F02 Staff (FTE) # -Management -Support -Sales -Property Mgrs Total Properties under mgnt Funds Employed Rent-roll - Market Value F05

17 50 180 20 267 5,000 4,720 9,750

24 128 314 90 557 13,015 23,130 30,585

$ $

$ $

Currently the Real Estate product can be clearly defined in to 3 areas of operation: Rural Branch (Agri Focus) Company Owned Employee SGM Sales CRM / AS400 Regional Stand-alone / High Street Address Company Owned Employee SGM Sales CRM / AS400 / REALTECH Metro Capital Cities Franchise Franchise SGM Sales CRM / REALTECH

Location Ownership Employment Management Matrix Software Provider

Rural - (traditional branch network) This is where Salespeople are employed on a commission only basis with Real Estate employees working within a traditional branch environment supporting the other products such as merchandise and livestock etc. This model provides for the rural operation to work in conjunction with other products in a typical rural environment, based on leads and/or referrals from either other products or existing clients utilising their association with the McGrath corporate identity. In the majority of these locations it is not necessary for the Real Estate product to be located in a high street address. These Salespeople are employees and utilise the services of HR, IT etc, and are directly responsible to the Branch and State Management Team.

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McGrath Real Estate - Strategic Business Plan 2006
The advent of Work Choice has resulted in each of these commission employees receiving a minimum retainer of $29,750 offset against commission earned.

Regional (stand-alone address) These businesses are located in high street addresses and are generally stand-alone businesses. In the vast majority of these locations, McGrath Ltd carry-out non-Real Estate activities in duplicated operations incurring additional fixed costs. This is particularly true in the case of the Insurance and Wealth Management businesses, where there is potential to combine these products with Real Estate in suitable high street addresses which would be preferable to branch locations generally on the outskirts of town. The location of these businesses is necessary to drive listings and buyer enquiries for residential/lifestyle sales and need to be competitive with other real estate agents. As with rural branches, salespeople are employees and are supported by the same management structure and software. It is proposed that these businesses will utilise the CRM (Centernet E-system) and REALTECH property management software platforms. These software systems will provide consolidated databases to enable performance management and utilised channel marketing opportunities with McGrath Ltd holding an equity stake in each service provider. The regional network comprises 37 stand-alone locations employing 282 direct employees. These regional stand-alone businesses have a direct manager as well as support from Product and State General Managers. These businesses have provided a major increase in brand awareness outside McGrath traditional rural footprint. These businesses are substantially different from McGrath traditional branch business and require specialist skill sets relating to residential sales and property management that are not possessed at branch and state management level.

Metropolitan There are currently 180 franchise offices operating in the metropolitan capital cities. This business has continued to increase revenue over the past 3 years by over 20% annually, and it is anticipated that revenue will increase by 30% to in excess of $5m in F08. This is by far our most profitable business based on funds employed and gross profit margin. Franchise operations provide a high level of brand awareness outside McGrath traditional rural footprint, contributing in excess of $30m p.a. in advertising alone. State Management teams have little understanding of the legal requirements of franchising and the need to deal with individually-owned and operated principals as opposed to direct employees.

Cost Allocations (Are they driving the Right Behaviour?) Given current cost allocation methodology, other products are able to allocate direct and indirect costs to the Real Estate product whereas Real Estate sales and property management employees do not allocate any costs to other products and are predominately commission based (65% of Real Estate staff are commission based). Stand-alone locations are fully costed ($10.2m) but attract a further $4.5m in allocated costs from the branch network. The product is allocated a further $4.2m of branch costs where there are no full-time Real Estate employees (serviced by local branch managers and salespeople in nearby branches). As a result of the cost allocations and excessive IT infrastructure, many of these regional businesses are no longer profitable. As part of the overall cost reduction initiatives within McGrath, some states are looking to divest these non-profitable businesses without a clear understanding of the impact this may have on developing a national regional network strategy.

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McGrath Real Estate - Strategic Business Plan 2006 OBECTIVE #1 – IMPROVE EXISTING BUSINESS
4.0 RESTRUCTURE RURAL & REGIONAL BRANCHES Rural Branch (Agri Focus) Company Owned Employee / Franchise / Co-Agency SGM–Product GM Sales CRM / AS400 Regional Stand-alone / High Street Address Franchise Franchise Metro Capital Cities Franchise Franchise

Location Ownership Employment

Management Matrix Software Provider

Product GM Sales CRM / REALTECH

Product GM Sales CRM / REALTECH

Co-Agentise Rural Sales Teams Management recommends a co-agency arrangement to replace the retainer/commission model for salespeople that would operate as follows: • • Salespeople contracted on a Conjunctional Agency arrangement, and be liable for a desk fee (inclusive of rent, telephone etc.); Rent would be reflective of the current market conditions. Some branch businesses may be influenced by McGrath 3-Crowns leasing arrangement, which may be above the prevailing market; McGrath Ltd would remain stakeholder and be responsible for payment of disbursements on settlement and commission to these parties; Both direct and indirect costs would be greatly reduced but this may impact elsewhere on the business given the allocations would have to be distributed amongst other products; and McGrath Ltd retains client loyalty and ensures cooperation at the branch level with interaction between products such as Livestock and Merchandise which will continue to drive the referral business.

• •

The Co-agency model is preferred over franchising the traditional business to ensure: • McGrath maintains a direct relationship with the client; • Accountability for costs to the co-agent; • Efficient behaviour is driven by the co-agent; • Strong referrals from other products within the branch network; and • Retaining acceptance from the broader rural community. It is becoming increasingly difficult to recruit and retain dedicated managers for our regional businesses. Our top performing salespeople are expressing an interest in alternative employment options similar to those of our competitors which are seen as far more attractive than the current commission employment terms. Further, McGrath Real Estate must continue to reduce the cost of sale, not only by reducing allocated costs, but through better management of direct costs (such as advertising) and more appropriate IT infrastructure applications. The addition of principal management and responsibility will drive these initiatives in a manner that cannot be matched from the current management structure. Co-agency model addresses the emergence of new legislation that provides for superannuation (9%) on the salesperson’s total commission up to $120k per individual rather than the base retainer. Based on F07 commissions, this is expected to impact the bottom line by $1.4m.

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McGrath Real Estate - Strategic Business Plan 2006
Co-agency model would allow salespeople to act as a conjunctional agent through establishing their own licensing credentials. This would be attractive due to the taxation benefits, however will involve taking responsibility for accounting and direct costs etc. The majority of McGrath salespeople are licensed and would see this model as an attractive proposition. Prior to implementation McGrath would offer support and incentives to salespeople who may wish to pursue a licence in order to pursue this option There is 183 commission staff employed in the rural network. Management estimates up to 40% may not take-up the co-agency model and would require redundancy payments of approximately $1.5m. Adopting this model for the regional network will mean that allocated costs of $4.2m currently allocated from non Real Estate network costs, would have to be absorbed by other products. It is proposed under the basis of confidentiality arrangements, and subject to agreement with state management and other products, that we engage in dialogue with a group of our top performing salespeople over the coming month to discuss the merits of this initiative. Importantly, McGrath Workplace Agreements expire at the end of June and we need to gage the level of interest from our top salespeople prior to roll-out in July. If the Co-agency model is adopted in the case of the rural business, as we believe to be the case for our top performers, it will result in salespeople earning less than $100k p.a. in Gross Commission leaving the business/industry. McGrath is then potentially faced with the challenge of backfilling these positions either from adjoining branches, increasing workload for our existing co-agents and additional resources from state product managers who will have additional capacity as they will no longer be responsible for the stand-alone businesses. Existing product managers will therefore have expanded roles, with greater emphasis on sales, although only one manager does not currently list and sell property. Product Managers’ retainers would be offset against commission, and they would be able to attract additional earnings through referrals sharing of up to 10% of the gross commission based on leads generated by the company. Forecast for Rural Branches
P&L $000's Gross Commission Direct Costs Commission Advertising Payroll On-costs Total Direct Costs Gross Margin % Margin % Growth Overheads State Administration State Product Allocated Branch Direct Branch National Total Overheads EBIT % Margin % Growth Funds Employed ROFE FY05 Actual 45,066 (20,145) (2,329) (3,022) (25,495) 19,571 43% FY06 Forecast 51,049 (22,461) (2,911) (4,380) (29,753) 21,296 42% 9% (670) (2,762) (5,106) (4,666) (1,234) (14,437) 6,859 13% 23% 500 1372% FY07 22,682 0 (291) 0 (291) 22,390 99% 5% (690) (3,038) (1,276) (4,806) (1,271) (11,081) 11,309 50% 65% 500 2262% FY8 23,042 0 (306) 0 (306) 22,736 99% 2% (710) (3,129) (1,315) (4,950) (1,309) (11,413) 11,323 49% 0% 500 2265% FY9 23,408 0 (321) 0 (321) 23,087 99% 2% (732) (3,223) (1,354) (5,099) (1,348) (11,756) 11,332 48% 0% 500 2266% FY10 23,781 0 (337) 0 (337) 23,444 99% 2% (754) (3,319) (1,395) (5,252) (1,389) (12,108) 11,336 48% 0% 500 2267%

(744) (2,360) (5,055) (4,620) (1,198) (13,977) 5,594 12% 500 1119%

Assumptions: • 40% commission split earn rate for McGrath (60% for co-agent) Page 8 of 17

McGrath Real Estate - Strategic Business Plan 2006
• • • $15,000 p.a. desk fee per co-agent Retain all direct branch costs due to uncertainty in removal 75% reduction in branch allocated costs reflective of expected head count reduction

Franchise Regional Operations Management recommends franchising the regional stand-alone businesses. The current Franchise Agreement would apply which provides for, amongst other things, the requirement to adopt McGrath software platforms i.e. CRM (Centernet) for sales and Property Management (REALTECH), as well as providing access to their client database. In addition, the agreement will provide that where possible, other products such as Insurance, Home Loans, Telecommunications and Wealth Management could lease space on commercial terms. Brand integrity safeguards would apply. The principal would have their own capital at risk and this would ensure that revenue and efficiency will increase in future years, providing normal conditions prevail. This model may provide for some redundancies but should be minimised as the majority of employees would be absorbed under the franchise model. Whilst revenue of $31m will be lost, this would be offset by the reduction of $27m in direct costs in the stand-alone businesses that includes the reduction of 282 FTE employees. Further, franchise revenue of $2m would be generated with only one additional franchise manager and one support person required. The regional businesses would be offered to the existing management team and employees in the first instance. McGrath may be responsible for the payout of employee entitlements but this could be negotiated as part of the purchase price. Given the size of the property management portfolio of these businesses, there may be a need for McGrath Ltd to assist the financing of these transactions on commercial terms over a 3 year period. McGrath would retain a lien over the property management rights (rent-roll) until full payment was received for these assets. These businesses may take between 12 months to 4 years to divest, however, the sales businesses can all be franchised contemporaneously with the franchise being held by McGrath Ltd until appropriate buyers can be found. Forecast for Standalone Branches
P&L $000's Branch Commission Franchise Commission Gross Commission Direct Costs Commission Advertising Payroll On-costs Total Direct Costs Gross Margin % Margin % Growth Overheads State Administration State Product Allocated Branch Direct Branch State Franchise National Total Overheads EBIT % Margin % Growth Funds Employed ROFE FY05 Actual 31,623 0 31,623 (12,742) (1,386) (2,735) (16,863) 14,760 47% FY06 Forecast 32,572 0 32,572 (13,124) (1,428) (2,817) (17,369) 15,203 47% 3% (619) (1,602) (3,494) (10,499) (150) (494) (16,858) (1,655) -5% 13% 22,000 -8% FY07 25,162 356 25,517 (10,138) (142) (2,611) (12,892) 12,626 49% -17% (478) (1,237) (2,699) (8,110) (305) (382) (13,211) (585) -2% -65% 16,500 -4% FY08 17,278 780 18,057 (6,962) (144) (1,793) (8,898) 9,159 51% -27% (328) (850) (1,853) (5,569) (314) (262) (9,176) (17) 0% -97% 11,000 0% FY09 8,898 1,283 10,181 (3,585) (144) (923) (4,653) 5,528 54% -40% (169) (438) (954) (2,868) (323) (135) (4,887) 641 6% -3828% 5,500 12% FY10 0 1,878 1,878 0 (143) 0 (143) 1,735 92% -69% 0 0 0 0 (333) 0 (333) 1,402 75% 119% 0 #DIV/0!

(601) (1,555) (3,392) (10,193) 0 (480) (16,221) (1,461) -5% 22,000 -7%

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McGrath Real Estate - Strategic Business Plan 2006
Assumptions: • • • 5.0 10 branches divested and franchised p.a. (completed within four years) Organic growth of number of franchise offices at 3% p.a. Divestment of all rent-rolls at value $2,300 per property EXPAND METROPOLITAN FRANCHISE NETWORK

The Metropolitan franchisees would continue to grow organically in metropolitan locations and there would be further economies through revenue generated by providing industry services such as software and training etc. Revenues would increase as a direct consequence of the Principals being responsible for the leadership and management of these businesses. Additional franchise recruitment and retention managers will be sought in high growth regions to drive the increase in franchise numbers.

Forecast for Metropolitan Franchise
P&L $000's Gross Commission Advertising Gross Margin % Margin % Growth Overheads State Administration State Product State Franchise National Total Overheads EBIT % Margin % Growth Funds Employed ROFE FY05 Actual 4,040 (538) 3,502 87% FY06 Forecast 5,262 (525) 4,737 90% 35% (122) (329) (1,632) (494) (2,576) 2,161 41% 106% 500 432% FY07 6,451 (606) 5,846 91% 23% 0 0 (1,958) (643) (2,601) 3,245 50% 50% 500 649% FY08 8,130 (714) 7,416 91% 27% 0 0 (2,105) (662) (2,767) 4,649 57% 43% 500 930% FY09 10,442 (855) 9,588 92% 29% 0 0 (2,263) (682) (2,945) 6,643 64% 43% 500 1329% FY10 13,442 (1,026) 12,416 92% 29% 0 0 (2,433) (702) (3,135) 9,281 69% 40% 500 1856%

(135) (319) (1,518) (480) (2,452) 1,050 26% 500 210%

Assumptions: • • • • • Organic growth of number of franchise offices at 15% p.a. Growth in franchise earnings at average of 9% p.a. Transition to new fee card over 5 year period 75% reduction in branch allocated costs reflective of expected head count reduction 100% reduction of state product & admin costs

6.0

INTEGRATED OFFICE CONCEPT

At present McGrath has some 11 integrated offices operating from high street locations in major regional and metropolitan locations under both branch and franchise management. The fixed costs are shared between products such as Real Estate, Home Loans and Insurance with the potential to expand with Wealth Management and Telco. These businesses benefit through the close interaction of staff and cross referring clients from both Real Estate sales and property management transactions. McGrath should explore the opportunity of establishing two pilot sites with one in regional and one in the metropolitan locations to explore cross referrals and operating cost efficiencies. Page 10 of 17

McGrath Real Estate - Strategic Business Plan 2006
The two major driving forces are Insurance and Real Estate, and we should be working towards a concept for both of these markets covering such crucial issues as location, size, visual impact etc, with a view to exploring a McDonalds type approach in relation to procedures, systems etc. A newly appointed Business Development Manager will have the responsibility for developing such a program, focussing on demographic growth and incomes, etc. Management believes the ideal area to start this development is Queensland. 7.0 REAL ESTATE BRAND PROFILE

The Real Estate product through its 400 branch network across Australia contributes significantly to McGrath brand value. Sales generated through the branch network, which total over 7,000 transactions per annum result in advertising spend across all forms of media in excess of approximately $11M per annum. Much of the advertising spend is recovered through vendor paid advertising and the volume achieved supports discounted rates that are passed on for the benefit of other products. The Real Estate franchise network with its metropolitan profile invests over $30M in media advertising and is involved in some 16,000 transactions per annum. Whilst the company benefits directly from the profile which these businesses generate, no costs are borne by McGrath. In addition to the media spend, franchisees contribute to a marketing and training levy which is used to support the overall image of the brand in franchise areas. In recent years there has been a shift from utilising print media to on-line marketing initiatives. The major media companies have heavily invested in establishing real estate portals with realestate.com having in excess of 34% market share followed by Domain.com, Myhome and Homehound. The market dominance of realestate.com has seen internet charges escalate at 30% per annum with Realestate.com now capitalised at over $600M. The business is controlled by Murray with the other major equity participant the White family who own the Ray White real estate network. The Ray White group also have a contractual relationship with realestate.com for referrals to their home loans business Emoca. Last year McGrath secured an equity position in Myhome which is a joint venture between RE Media and M-corp. RE have now offered the industry a 46% equity stake in the Myhome portal. Eight franchisors have expressed interest in participating in the equity earn proposition which is based on contributed revenue over a three year period. It is anticipated that the other groups will be in a position sign equity agreements over the next two months. McGrath Limited has the opportunity of securing 5%-7% of equity in this vehicle. Some equity may need to be provided to franchisees based on their financial commitment and spend on site. RE believe that they will float the company within three years and they are of the view that the business would be capitalised at $200M-$300M. In addition to supporting the Myhome site the McGrath Real Estate web page which is currently ranking in the top 10 (against competition from the major portals) and will be continually developed with enhancements and upgrades completed every six months. The development of the Real Estate site and its functionality will be used as part of the overall strategy for the website in delivering multiproduct offerings to our client network.

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McGrath Real Estate - Strategic Business Plan 2006 OBJECTIVE #2 - BUILDING EARNINGS
One of the major challenges for the product is to build alternative earnings options. Management is currently exploring 3 initiatives. 8.0 FRANCHISE ACQUISITIONS – MULTI-BRANDING

The divestment of our regional stand-alone businesses would free up some $25m of funds employed based on current market prices, reduce direct and allocated costs, and provide an ongoing revenue stream by increasing franchise revenue as well as attracting additional earnings through the provision of industry services. This capital could be used to pursue acquisition opportunities such as: • R & H franchise network in Queensland, estimate cost $6m (100 offices); • Stockdale & Leggo franchise network in Victoria, estimated total cost $12.5m (90 offices); and • Century21 national franchise network $33m (300 offices). The major cost benefit would be in providing a full range of services which provides additional earnings whilst reducing direct costs to the franchisee via economies of scale. We understand that Ray White and LJ Hooker may be considering multi branding as a means of gaining market share where they have already achieved franchise saturation and as a means of supporting their home loans and other businesses. Forecast Financials for Multi-branding P&L $000's Gross Commission Advertising Gross Margin % Margin % Growth Overheads State Franchise National Synergies Total Overheads EBIT
% Margin % Growth

FY05 Actual 0 0 0

FY06 Forecast 0 0 0

FY07 7,103 (543) 6,560 92%

FY08 14,636 (1,153) 13,483 92% 106% (3,605) (367) 1,111 (2,862) 10,621
73% 227%

FY09 15,527 (1,223) 14,304 92% 6% (3,713) (378) 1,144 (2,948) 11,357
73% 7%

FY10 17,575 (1,384) 16,191 92% 13% (4,917) (390) 1,178 (4,129) 12,062
69% 6%

0 0 0 0 0

0 0 0 0 0

(3,500) (163) 350 (3,313) 3,248
46%

Funds Employed ROFE Assumptions: • • • • •

0

0

38,500 8%

38,500 28%

38,500 29%

45,067 27%

S&L's and C21 acquired in FY07 S&L's $5.5m upfront (50%) and $7m in 3 yrs (100%) C21 $33m 100% 3% growth in average per franchise earnings 3% organic growth in number of franchisees

9.0 PROVISION OF INDUSTRY SERVICES Industry Services Page 12 of 17

McGrath Real Estate - Strategic Business Plan 2006
Real Estate businesses require sales (customer relations management) and property management software solutions to improve efficiency and to provide greater management visibility and control of sales team and staff. Numerous businesses have been established to provide such solutions to the industry but have not achieved the necessary scale to reach material profitability. i.e. the number of agents utilising their platforms to ensure a reasonable return on investment. A multi-brand approach will support an investment in industry services as sufficient scale can be developed internally without having to rely on external franchise groups and independents. Further, the use of software systems provide McGrath with access to extensive databases for the marketing of products such as home loans, telco, wealth management and insurance in new target markets. Sales Customer Relations Management A memorandum of understanding has been executed with Centernet (sales CRM) to take a 33% equity stake. This requires McGrath to achieve parity with Century 21 in terms of number of franchisees and branches utilising the Sales CRM. In doing so, McGrath will receive a free carry equity position in the Australian licensing subsidiary and this has been driven by the necessity to achieve scale on the Centernet E-System. Further negotiations are continuing to obtain a 50% equity stake in the parent Company which owns all intellectual property and overseas licensing rights. Ultimately this software could be provided to the other networks and can potentially be used in other areas of the McGrath business such as wool broking and livestock sales. Property Management Software McGrath Ltd has made a strategic investment in REALTECH Corp Ltd. Under the strategic alliance formed, McGrath will move some 10,000 (from total of 13,000 managements) property managements on to the REALTECH Property Management platform, effectively outsourcing all back office related functions. This software will also be offered to McGrath franchisees and others interested parties. Management has already established a degree of interest from some McGrath franchisees in utilising the software at a minimum cost of $210 per management per annum. Franchisees see value in the REALTECH platform due to: • Efficiency in auto-link with external listing portals; • Removes banking and transaction functionality from agent office, thereby reducing transaction costs and potential fraud; • Landlord login and property analysis functions; and • Management analysis and evaluation functions for staff performance. Given McGrath equity position this will provide additional earnings once scalability has been achieved and could also apply to other brands under our control. McGrath’ management is currently working on a strategy to allow REALTECH to divest its rent-roll (valued at over $55m) under a franchise/management agreement. Ideally these rent-rolls will be divested to McGrath franchisees (on commercial terms) and as part of this agreement, franchisees will be required to bring their existing rent-roll on to the REALTECH platform. This will increase overall scale and drive greater cost efficiencies and profitability. It is expected that subject to successful divestment of the rent-rolls, REALTECH will be left with around $10m in cash and the REALTECH software and back office business. Establish NEWCO – Industry Service Provider At present Management is exploring the incorporation of both the sales CRM and REALTECH Corp property management software under a newly established entity, NEWCO. In the event a multi-brand approach were pursued, McGrath would be in a position to offer services to between 700 and 800 franchise locations and would generate substantial annuity type earnings. Further, this new entity could also supply industry services to the wider industry and may provide revenue based equity earnout options to external franchise groups to drive scalability.

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McGrath Real Estate - Strategic Business Plan 2006
Financials for Industry Services
P&L $000's CRM RUN Gross Commission CRM Direct Costs RUN Direct Costs Total Direct Costs Gross Margin % Margin % Growth CRM/RUN Total Overheads EBIT
% Margin % Growth

FY05 Actual 0 0 0 0 0 0 0

FY06
Forecast 0 1,791 1,791 0 (1,075) (1,075) 717

FY07 139 3,461 3,601 (52) (1,990) (2,043) 1,558 43% (1,337) (1,337) 221
6%

FY08 761 6,841 7,602 (266) (3,763) (4,029) 3,573 47% 129% (1,859) (1,859) 1,714
23% 677%

FY09 1,007 10,868 11,874 (352) (5,977) (6,329) 5,545 47% 55% (1,938) (1,938) 3,607
30% 110%

FY10 2,011 16,952 18,963 (704) (9,323) (10,027) 8,936 47% 61% (2,021) (2,021) 6,915
36% 92%

0 0 0

(669) (669) 48

Funds Employed ROFE

0

10,000

22,000 1%

12,000 14%

12,000 30%

20,000 35%

Assumptions: • • • • REALTECH minorities in FY07 (additional $8m) with divestment of rent-roll completed FY08 CRM 50% in FY07 ($4m) and 50% in FY10 ($8m) Franchises on CRM doubled over 5 years (to c750) Properties on REALTECH 5x over 5 years to c90k

Proposed ownership structure for Service Provider model:

McGrath Ltd 100%

NEWCO (Owns software IP )

McGrath Real Estate (Owns franchise IP )

Service Provider incl. Back-Office

Realtech Corp Prop Mgt

CENTERNET Sales

McGrath network Elders network 400 offices 400 offices

C21 network C21 network 300 offices 300 offices

Others Others 300++ offices 300 offices

Equity stake in related service providers eg utilities insurance, home loans, & telco, , on preferred terms

REAL ESTATE INDUSTRY (Services provided at price differential to Elders )

Page 14 of 17

McGrath Real Estate - Strategic Business Plan 2006
10. DEVELOP ALLIANCE WITH ESTABLISHED UTILITY PROVIDER

The success of pursuing multi-brands, provision of software, would enable McGrath Limited to gain access to a broad range of potential clients outside our traditional rural footprint. At present the McGrath Real Estate network is responsible for some 23,000 vendor/purchaser transactions per annum in addition to our property management portfolio which is approximately 13,000 properties. This client database has the capacity to deliver channel marketing opportunities to some 25,000 landlords and tenants. As McGrath property management portfolio is transferred to the REALTECH Property Management software platform there will be the potential to provide a full range of utility options to these parties. The REALTECH alliance provides scope to offer these services to REALTECH’s database in excess of 50,000 potential clients. Already REALTECH are offering bundled packages covering insurance, telecommunications, electricity, gas, pay TV etc. to their client base which is achieving additional revenue for the business. Utility One and Connect Now have already established utility portals and are able to deliver this service to this target market.. The opportunity exists for the business to take an equity position in one of these utility portals leveraging McGrath/REALTECH’s property portfolio. REALTECH is responsible for a large percentage of referrals to Connect Now with discussions having already taken placein regard to an equity position. Development manager should be appointed to develop the strategy to maximise cross referrals and cost efficient delivery of services for other McGrath products.

Page 15 of 17

McGrath Real Estate - Strategic Business Plan 2006 OBJECTIVE #3 – FUTURE GROWTH OPTIONS

114. MANAGEMENT STRUCTURE In order to achieve the stated objectives it will be necessary for the existing national team, which comprises a Product GM, and a National Franchise and Commercial Manager to be supported with additional resources. A new management structure is proposed to cater for the changing needs and greater focus on residential and lifestyle sales within the Real Estate Product. The Product General Manager would continue to be responsible for developing strategy and overseeing its implementation. A new Chief Operating Officer would be appointed to take a greater role in the day-to-day real estate operations. A new Business Development Manager who would have responsibility for working with the Product General Manager in the development and implementation of each objective would be appointed and may in the future have responsibility for implementation of, amongst other things, pilot programmes etc.
General Manager Real Estate

Chief Operating Officer (NEW)

Business Development Manager (NEW)

Commercial Manager

National Franchise Manager

Manager Product Services

Manager’s Metro

Manager Sales CRM

Manager’s Regional

Manager Property Management

12.0 FINANCIAL OUTCOME The table below presents the overall Real Estate product financial outcome should all objectives be met under the presumed assumptions.

Page 16 of 17

McGrath Real Estate - Strategic Business Plan 2006
P&L $000's Sales McGrath - Rural McGrath - Stand Alone McGrath - Franchise Non-McGrath - Franchise Industry Services Total Sales Direct Costs Mcgrath - Rural McGrath - Stand Alone McGrath- Franchise Non McGrath - Franchise Industry Services Total Direct Costs Gross Margin McGrath - Rural McGrath - Stand Alone McGrath - Franchise Non McGrath - Franchise Industry Services Total Gross Margin
% Margin % Growth

FY05

FY06

FY07

FY08

FY09

FY10

45,066 31,623 4,040 0 0 80,729 (25,495) (16,863) (538) 0 0 (42,896) 19,571 14,760 3,502 0 0 37,832
47%

51,049 32,572 5,262 0 1,791 90,673 (29,753) (17,369) (525) 0 (1,075) (48,721) 21,296 15,203 4,737 0 717 41,953
46% 11%

22,682 25,517 6,451 7,103 3,601 65,354 (291) (12,892) (606) (543) (2,043) (16,374) 22,390 12,626 5,846 6,560 1,558 48,980
75% 17%

23,042 18,057 8,130 14,636 7,602 71,467 (306) (8,898) (714) (1,153) (4,029) (15,100) 22,736 9,159 7,416 13,483 3,573 56,368
79% 15%

23,408 10,181 10,442 15,527 11,874 71,434 (321) (4,653) (855) (1,223) (6,329) (13,381) 23,087 5,528 9,588 14,304 5,545 58,053
81% 3%

23,781 1,878 13,442 17,575 18,963 75,639 (337) (143) (1,026) (1,384) (10,027) (12,918) 23,444 1,735 12,416 16,191 8,936 62,721
83% 8%

Overheads McGraths - Rural McGraths - Stand Alone McGrath - Franchise Non McGraths - Franchise Industry Services Total Overheads EBIT McGrath - Rural McGrath - Stand Alone McGrath - Franchise Non McGrath - Franchise Industry Services Total EBIT
% Margin % Growth

(13,977) (16,221) (2,452) 0 0 (32,650) 5,594 (1,461) 1,050 0 0 5,182
6%

(14,437) (16,858) (2,576) 0 (669) (34,540) 6,859 (1,655) 2,161 0 48 7,413
8% 43%

(11,081) (13,211) (2,601) (3,313) (1,337) (31,543) 11,309 (585) 3,245 3,248 221 17,437
27% 135%

(11,413) (9,176) (2,767) (2,862) (1,859) (28,078) 11,323 (17) 4,649 10,621 1,714 28,290
40% 62%

(11,756) (4,887) (2,945) (2,948) (1,938) (24,474) 11,332 641 6,643 11,357 3,607 33,579
47% 19%

(12,108) (333) (3,135) (4,129) (2,021) (21,726) 11,336 1,402 9,281 12,062 6,915 40,995
54% 22%

Funds Employed ROFE

23,000 23%

33,000 22%

78,000 22%

62,500 45%

57,000 59%

66,067 62%

Page 17 of 17

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