McGrath Real Estate - Strategic

St rategic 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 Objective Implementation

#1 Improve Existing Busin ess

1. Restructure Rural & Regional branches
1.1. Co-agentise rural sales team 2 yrs
1.2. Franchise regional stand alone operations & 4 yrs
divestment of rent-roll
2. Expand metropolitan franchise network 5 yrs
3. Integrated office concept (channel marketing) 3 yrs
4. Improve overall Real Estate brand profile 2 yrs
particularly on-line presence.

#2 Build Earning s
1. Franchise acquisitions – multi-branding 2 yrs
2. Provide Industry services capitalising on strategic 3 yrs
stakes in REALTECH (property management) &
Centernet (sales)
3. Establish alliance with utility providers
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.
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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 Obj #1 Obj #2 fy10

$000's  Actual Forecast

Sales 80,729 (41,627) 36,538 75,639

Direct Costs (42,896) 41,390 (11,411) (12,918)

Gross Margin 37,832 (238) 25,127 62,721

Overheads (32,650) 17,074 (6,150) (21,726)

EBIT 5,182 16,836 18,977 40,995

Funds Employed 23,000 (22,000) 65,067 66,067

ROFE 23% na 29% 62%
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McGrath Real Estate - Strategic Business Plan 2006

BACKGROUND
1.0 THE BUSINESS OVER THE LA ST 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.
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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 E-
Commerce 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 F05

Staff (FTE) #
-Management 17 24
-Support 50 128
-Sales 180 314
-Property Mgrs 20 90
Total 267 557

Properties under mgnt 5,000 13,015

Funds Employed $ 4,720 $ 23,130

Rent-roll - Market Value $ 9,750 $ 30,585

Currently the Real Estate product can be clearly defined in to 3 areas of operation:

Rural Regional Metro

Location Branch (Agri Focus) Stand-alone / High Capital Cities
Street Address
Ownership Company Owned Company Owned Franchise
Employment Employee Employee Franchise
Management Matrix SGM SGM SGM
Software Provider Sales CRM / AS400 Sales CRM / AS400 / Sales CRM /
REALTECH REALTECH

Rural - (traditional br anch 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
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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
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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 Business

Development
Officer 
Manager 
(NEW)
(NEW)

Commercial
Manager 

National Franchise Manager Product

Manager  Services

Manager Sales
Manager’s Metro
CRM

Manager’s Manager Property

Regional 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.
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McGrath Real Estate - Strategic Business Plan 2006

P&L FY05 FY06 FY07 FY08 FY09 FY10
$000's
Sales
McGrath - Rural 45,066 51,049 22,682 23,042 23,408 23,781
McGrath - Stand Alone 31,623 32,572 25,517 18,057 10,181 1,878
McGrath - Franchise 4,040 5,262 6,451 8,130 10,442 13,442
Non-McGrath - Franchise 0 0 7,103 14,636 15,527 17,575
Industry Services 0 1,791 3,601 7,602 11,874 18,963
Total Sales 80,729 90,673 65,354 71,467 71,434 75,639
Direct Costs
Mcgrath - Rural (25,495) (29,753) (291) (306) (321) (337)
McGrath - Stand Alone (16,863) (17,369) (12,892) (8,898) (4,653) (143)
McGrath- Franchise (538) (525) (606) (714) (855) (1,026)
Non McGrath - Franchise 0 0 (543) (1,153) (1,223) (1,384)
Industry Services 0 (1,075) (2,043) (4,029) (6,329) (10,027)
Total Direct Costs (42,896) (48,721) (16,374) (15,100) (13,381) (12,918)
Gross Margin
McGrath - Rural 19,571 21,296 22,390 22,736 23,087 23,444
McGrath - Stand Alone 14,760 15,203 12,626 9,159 5,528 1,735
McGrath - Franchise 3,502 4,737 5,846 7,416 9,588 12,416
Non McGrath - Franchise 0 0 6,560 13,483 14,304 16,191
Industry Services 0 717 1,558 3,573 5,545 8,936
Total Gross Margin 37,832 41,953 48,980 56,368 58,053 62,721
% Margin 47% 46% 75% 79% 81% 83%
% Growth 11% 17% 15% 3% 8%

Overheads
McGraths - Rural (13,977) (14,437) (11,081) (11,413) (11,756) (12,108)
McGraths - Stand Alone (16,221) (16,858) (13,211) (9,176) (4,887) (333)
McGrath - Franchise (2,452) (2,576) (2,601) (2,767) (2,945) (3,135)
Non McGraths - Franchise 0 0 (3,313) (2,862) (2,948) (4,129)
Industry Services 0 (669) (1,337) (1,859) (1,938) (2,021)
Total Overheads (32,650) (34,540) (31,543) (28,078) (24,474) (21,726)
EBIT
McGrath - Rural 5,594 6,859 11,309 11,323 11,332 11,336
McGrath - Stand Alone (1,461) (1,655) (585) (17) 641 1,402
McGrath - Franchise 1,050 2,161 3,245 4,649 6,643 9,281
Non McGrath - Franchise 0 0 3,248 10,621 11,357 12,062
Industry Services 0 48 221 1,714 3,607 6,915
Total EBIT 5,182 7,413 17,437 28,290 33,579 40,995
% Margin 6% 8% 27% 40% 47% 54%
% Growth 43% 135% 62% 19% 22%

Funds Employed 23,000 33,000 78,000 62,500 57,000 66,067

ROFE 23% 22% 22% 45% 59% 62%