Memo

To: Benoit Durand

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FSV SPTSX SPTSXS

Charles Timmons Gabriel Bouchard-Phillips

From: The All-Nighters Date: 02/08/2013 Re: FirstService Corporation Preamble The purpose of this memo is to evaluate whether a fully diversified, small cap portfolio (i.e. the VBA Portfolio) should hold its position in FirstService Corporation (FirstService) in the hope that it provides significant upside return. The Van Berkom Case Competition seeks to promote a long term, value approach to investing in small capitalization global securities, as such, our team has conducted its analysis with this philosophy in mind.

2009 2010 Recommendation:

2011

2012

2013 Unwind

Risk 12-Month Target Price 60-Month Target Price Market Data (US$) Current Price 52-Week Low 52-Week High Market Cap. ($mm) EV ($mm) Dividend Per Share Dividend Yield Avg. Daily Vol. (90 Day) Financial Data (US$) Fiscal Year End Shares O/S (mm) Float Shares (mm) Net Debt ($mm) Net Debt/Tot. Cap. Net Debt/EBITDA Estimates (US$) Year Sales ($mm) EBITDA EPS EV Year Q1 Q2 Q3 Q4 Year EV/EBITDA P/E 2010A 1,986.30 147.30 1.61 2011A 2,224.20 161.60 1.81 2012E 2,286.00 158.00 1.62

Medium US$ 32.00 US$ 45.00

31.50 24.62 32.39 940.00 1,570.00 $0.00 0% 97,895 31-Dec 30.10 24.30 433.60 30.50% ~2.5x 2013E 2,350.00 175.00 1.80 1,620.00 2013E 0.05 0.50 0.65 0.80 2013E 9.0x 15.5x

Specifically, we have been tasked with determining if a 15% annual return is possible (forward) between January 1st, 2013 and December 31st, 2017 thereby doubling VBAs investment in FirstService by the end of 2017. Naturally, theres a simple answer for every simple question: is it possible? Sure. However, our analysis of FirstService begs a far more nuanced question: is it probable? Well, in our opinion, not really. Analysis FirstService is divided into three principal operating segments: Commercial Real Estate (CRE); Residential Property Management (RPM); and Property Services (FAS). We believe that the rate of growth of the business (which has been predicated on acquisitions for the last decade) is about to reach a negative inflection point. We feel that this tapering is illustrated by EBITDA growth not being concomitant with revenue growth at an accelerating rate of disparity (14.3% Revenue CAGR vs. 7.1% EBITDA CAGR between 2008-2011; both on a decreasing trend). We believe that estimates of future growth are built upon the assumption that FirstService can continue to acquire growth by picking up businesses at implied valuations of approximately 5x EBITDA, which we feel is rather optimistic due to improving economic metrics. Further, we feel that the nature of the market (extreme regional fragmentation) is due to the advantages that local and regional firms have over FirstService and ServiceMaster due to the insights local competitors have on their immediate environments.

1,452.33 1,371.32 1,575.00 EPS Quarterly Estimates (US$) 2010A 0.15 0.48 0.61 0.37 2010A 10.5x 18.0x 2011A 0.14 0.54 0.61 0.52 Valuations 2011A 9.6x 16.0x 2012E (0.10) 0.45 0.60 0.70 2012E 9.9x 17.6x

Regarding management, we have a natural concern with founder Jay Hennick controlling 50.4% of votes with 20x supervoting shares. Further, we feel that the minimal capex requirements of the business (~2% of sales) should have endowed FirstService with a greater free cash flow profile. The use of cash to buy back shares during 2011 and 2012 is disturbing because it indicates that either there is a dearth of accretive acquisition opportunities or that management cannot put the funds to good use neither alternative is conducive to continuing growth. Regarding the accounting treatment of the firm, we generally do not appreciate managements penchant for using adjusted EPS over a long-term basisespecially given the size of the firm. Items such as the over-aggressive revenue recognition which had to be written down in 2010 and 2011, the 2011 reversal of deferred
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income tax asset valuation allowance, the unnecessary and speculative fixed-to-variable interest rate swap (which provided gains in 2011, will probably be a wash in 2012 and will probably generate a loss in 2013) and significant one-time gains attributable to changes in FX rates (particularly notable for contributing 48% of internal growth in 2011) speak to both the suboptimal financial decision-making of management and more alarmingly, the propensity for irreproducible results by the firm. FirstService has an operating outlook of 5%-10% internal revenue growth, we believe only the lower end of this is attainable assuming that the CRE segment has a good year. The Commercial Real Estate segment is FirstServices only shining beacon. At the end of 2011 this business was responsible for 45% of revenuewe believe this may have crossed over 50% by Q4 2012. We find the drivers of this segment to be: commercial property values; interest rates and access to credit; vacancy and lease rates; as well as investor and consumer confidence. We find increasing interest rates and a deceleration in the improvement of investor confidence to be significant risks to the ongoing growth of the CRE segment. The objectives of the business include: strengthening existing operations; expanding existing service offerings into property services, project management, and corporate advisory services; and expansion into new markets. We see a ~15.0 % growth in revenue to approximately $350.0mm and a 0.5%-1.0% change in EBITDA margin for 2012 (going to ~8.5%) and perhaps a slight increase in 2013. This increase is mainly due to increasing operating leverage. The Residential Property Management segment is FirstServicess most stable segment due to its longer-term contracts. At the end of 2011 this segment was responsible for 34% of revenuewe anticipate that this proportion will slightly increase to about 36% by Q4 2012. We find the drivers to be: the homeownership rate; the yield on 10-year U.S. T-Bills; the U.S. unemployment rate; rental vacancy rates; and population growth. We find increasing interest rates and a lack of improvement in unemployment statistics to be significant risks to the ongoing growth of the RPM segment. The objectives of the business include: building market share through a portfolio of differentiated services; driving operational efficiencies using leverage of scale and size; and providing innovative solutions to add value to client portfolios by increasing operational efficiencies. We see ~6.0% growth in revenue to approximately $200.0mm for 2012. We foresee a slight negative change in the EBITDA margin continuing from 2011. The company alarmingly believes that a decline in margin [is] attributable to increases in operating costs outpacing the ability to pass price increases through to clients. It should be noted that while this segment is the most stable, 2011 growth of 15% was achieved by acquiring 9% and growing only 6% internally. The Property Services segment is the cannonball tied to FirstServices ankle. We anticipate that this segment, which accounted for 21% of 2011 revenue will bring in 14% of the 2012 top line and continue decreasing as it is restructured (Q4 segment revenue could be as low as 10% of sales). The drivers of this segment are: the rate of foreclosure of existing housing inventory; spending on home renovation and maintenance; overall economic health including unemployment rate, wage inflation, and producer prices. The objectives for the business include: expanding services in Field Asset Services into remodeling and inspections; and leveraging the strengthening U.S. economy to accelerate the growth of FS Brands. Though the firm doesnt release a breakdown of revenue by brand, we believe, in consultation with industry analysts, that the Field Asset Services division was approximately 60% of 2011 revenue in the Property Services segment, the remaining 40% being attributable to FS Brands. We believe that by Q4 2012 this proportion might well become reversed as demand for Field Asset Services main service (delinquent and foreclosed property services) steadily decreases with an improving economic cycle. It is possible that revenues could drop over 30.0% to ~$80.0mm in Q4 for an aggregate 2012 amount of less than $320.0mm. The EBITDA margin could continue its downward trajectory from 14.8% in 2010, to 13.2% in 2011 to 13.0% in 2012. The company says that a decline in margin [is] attributable to additional costs from increases in the scope of client engagements in property preservation and distressed asset management operations, as well as declines in property volumes. Conclusion Subjectively, FirstServices prospects leave something to be desired. Objectively, using an 8.0x EV/EBITDA Multiple on our 2013 estimate, we believe the firm is fully valued at approximately $32. We modeled the cash flows of FirstService using several techniques (Two-Stage Perpetual Growth Method, EBITDA Multiple Growth Method and DM SUMS Method) and could make arguments for reasonable valuations in the $27 to $42 range. We believe that 60 months out, FirstService will most likely be trading for no more than $45therefore we cannot recommend holding it to satisfy a 15% annual return mandate. Looking at FirstService in the context of the VBA Portfolio, we believe your team has done exceptionally well in timing its investment. According to our research of all publicly available filings dating back to 2008 and assuming no intermittent trading, it would appear that VBAs current position of 1,086,900 shares at ~$31.30 at an average adjusted cost of ~$13.00 have already provided a return of over 140%. Taking into account the decreasing liquidity and increasing risk (both intrinsic and of the security itself), we can only recommend that VBA begin to unwind its position and reinvest the capital in more value-accretive investments which we would be happy to discuss.