Colliers International Group Inc. (CIGI) Earnings Call Transcript & Summary

Welcome to the Colliers International First Quarter Investors Conference Call. Today's call is being recorded. Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's annual report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, this call is being recorded today, May 2, 2023. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Chairman and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Thank you, operator. Good morning, and thanks for joining us for this first quarter conference call. I'm Jay Hennick, Chairman and Chief Executive Officer of the company. And with me today is Christian Mayer, Chief Financial Officer. As always, this call is being webcast and is available on the Investor Relations section of our website, along with a presentation slide deck. During our seasonally slow first quarter, investment management and outsourcing and advisory delivered robust growth. Leasing was up slightly and as expected, Capital Markets declined considerably in line with overall market conditions. Since our initial outlook 90 days ago, we've seen higher interest rates and challenging debt markets impact transaction volumes. Now with the additional stress on the banking system and increasing limitations on debt availability, there is more uncertainty around property valuations. Until these factors become more predictable, we expect the level of transaction activity to remain low. Let's remember Colliers has chosen to provide an outlook unlike most others. We do this to give our shareholders our best estimate at any given point in time, and we like to do this, especially in challenging times like we're seeing now. If you step back, not much has really changed in our outlook for the full year, as you'll hear from Christian. Putting aside Capital Markets, the momentum from the rest of our business is very strong. Revenues from investment management and outsourcing and advisory increased 40% and 13%, respectively, in our slowest quarter. And together, these segments now represent more than 60% of our overall adjusted EBITDA. Having such a large proportion of our earnings coming from these revenue streams highlights the transformation of Colliers into a much more balanced, diversified and resilient company. After quarter end, we continue to build our global business by completing acquisitions in Australia and New Zealand in our Engineering & Design and Project Management segments. In addition, we announced the early redemption effective June 1 of this year of our outstanding 4% convertible notes. Eliminating these notes reduces our interest costs and simplifies our balance sheet even further. Shareholders know that Colliers has seized its greatest opportunities during challenging times. Higher interest rates and tighter access to capital really gives us a tremendous advantage in completing acquisitions, in recruiting key professionals and leaders and in scaling our newer growth engines, all of which translates into additional value for our shareholders. With that said, I'll now turn things over to Christian for a financial overview. Christian?

Thank you, Jay, and good morning. Please note that all references to revenue growth are expressed in local currency, and that the non-GAAP measures we will discuss today are as defined in the materials accompanying the call. Revenues for our seasonally slow first quarter were $966 million, down 1% relative to the prior year quarter, which as a reminder, was an exceptional quarter for our transactional business. Our recurring n Investment Management and Outsourcing & Advisory service lines generated strong growth up 40% and 13%, respectively. Leasing revenues were up 2%, benefiting from continuing activity in industrial and alternative asset classes. As expected, Capital Markets declined sharply in line with overall market conditions, continuing the trend that started last fall. On an overall basis, internal revenues declined 9% entirely on lower transaction volumes. First quarter adjusted EBITDA was $105 million relative to $121 million 1 year ago, with margins at 10.8% versus 12.1% in the prior year quarter. The margin reduction is attributable to the decline in Capital Markets volume partially offset by growth in our higher-margin investment management operations as well as aggressive cost controls across the company. Americas revenues were $582 million, down 8% relative to the prior period. Outsourcing & Advisory was up 9%, driven by Engineering & Design, including recent acquisitions. Leasing activity was up 1%. Capital Markets, including debt origination was down 41%. Adjusted EBITDA was $54 million, down 33% from last year. The margin in the Americas was 9.3%, down 330 basis points due to the slowdown in Capital Markets. EMEA first quarter revenues were $143 million, down 2% versus the prior year period. Outsourcing & Advisory revenues were up 27%, but were offset by reduced Capital Markets transaction volume. Our EMEA transactions business has greater fixed costs that transaction operations in other parts of the world and in normal times, also generates higher margins. However, the significant decline in volume for the seasonally slow first quarter drove an adjusted EBITDA loss of $11 million versus the profit of $5 million last year. In the Asia Pacific region, revenues were $120 million, up 7%, leasing revenues increased significantly in both industrial and office asset classes. However, Capital Markets was down 26%, given market conditions. This region is showing promising signs of recovery year-over-year after the pandemic era restrictions that extended into last year. Adjusted EBITDA was $8 million relative to $10 million in the prior year quarter. First quarter Investment Management revenues were $121 million, up 96% excluding pass-through carried interest, driven by acquisitions and management fee growth from increased assets under management year-over-year. Adjusted EBITDA for the quarter was $55 million, more than double the prior year quarter. Assets under management at quarter end was $97.6 billion, down slightly relative to year-end. Asset values in our portfolios primarily alternative and infrastructure assets were down modestly and mostly offset by net capital inflows from investors during the quarter. Like overall market sentiment, the fundraising environment for most asset classes remained challenging during the first quarter. However, given the alternative and infrastructure focus of our investment strategies, we believe fundraising will accelerate in the second half of the year. We expect overall AUM growth of about 10% for the full year. Our financial leverage ratio at quarter end defined as net debt to pro forma adjusted EBITDA was 2.2x, which reflects acquisitions completed during 2022 as well as seasonal working capital usage. Absent any further acquisitions, we expect our leverage to decline to around 1.8x by year-end. Last week, we took the opportunity to increase credit availability under our revolving credit facility to $1.75 billion, giving us more than $800 million of total liquidity for opportunities to strengthen and expand our business. Back in early February, we provided our initial outlook for 2023. Since then, a significant banking crisis has occurred, availability of credit has tightened further and the level of uncertainty around asset valuations has increased, causing us to revise our outlook for the year. We now expect lower volumes in our transactional business to persist for the remainder of the year. We expect Capital Markets to be down 30% to 40% for the second quarter with year-over-year comparisons becoming more favorable in the third and fourth quarters. We expect modest -- sorry, we expect robust revenue growth to continue in our recurring service lines, investment management and outsourcing and advisory. We will also continue to be vigilant on cost control across our company. Overall, adjusted EBITDA should be up between 6% and 14% and adjusted earnings per share should be down slightly to up slightly versus prior year. On higher interest costs as well as the impact of a larger proportion of earnings coming from non-wholly owned operations. That concludes my prepared remarks. I would now like to open the call for questions. Operator, can you please open the line?

[Operator Instructions] Your first question comes from Chandni Luthra with Goldman Sachs.

I'd like to start with the 10.8% margin that you reported in the quarter. We understand that things got very difficult starting with events of the banking industry on March 8, 9, basically one week into March. But the truth is that sizable part of the quarter was already done by then. So help us understand how was the business, especially margins trending before March 8? And how much was sort of the margin decline attributed to events after March 8? And how do you figure EMEA and all this because nothing changed significantly in EMEA. So help us understand that dynamic, please.

Chandni, it's Christian here, and thanks for the question. As you know, Q1 is our seasonal slow quarter in Capital Markets and in leasing as well. And the Capital Markets revenue impacts were pronounced in the quarter really throughout the quarter, and you got to realize that we released our outlook in the first week of February. And some of these things were developing throughout the quarter. Of course, the banking crisis was later in the quarter, but these are factors that we're developing through the quarter. And as a result of our -- the seasonal slow quarter as well as the revenue impacts, which are more pronounced in that seasonal slow quarter, especially in EMEA, that had a significant impact on our margin. And secondly, I would also -- to continue the question about margin impacts, in the second, third and fourth quarters, we will have higher baseline revenues, even if they're down year-over-year. So we expect to have higher margins in those quarters. We're also, as I mentioned in my prepared remarks, implementing cost control actions that will have a significant impact on our margin for the balance of the year.

So I guess for my second question, I would like to sort of dig deeper into that 2Q to 4Q, where you do have margins -- implied margins at 16.7% based on the guide, like given your second quarter Capital Markets is down just as much as first quarter, and there is obviously economic uncertainty that you talked about for the back half of the year. Like how do you get comfortable around that implied margin improvement from here? And what sort of cost cuts are you embedding? How much of it is -- is there any headcount reduction? What are the other cost measures? How much of it is in Europe versus how much of it is in Americas? If you could throw any more detail there, it would be very helpful.

Sure, Chandni. Just let me reiterate the point around the higher level of baseline revenues in Capital Markets and in leasing in the second, third and fourth quarters. That will have a direct impact on the margin from those businesses for those future quarters, even if revenues are down significantly as we expect, they will be at least in the second quarter. The cost control actions we have taken across the company have been pretty significant, in particular, around non-revenue producing headcount. We continue to be actively looking for and recruiting revenue-producing headcount. That is our goal to grow the business. But certainly, non-revenue-producing headcount has been an area of focus, as has discretionary spend, as has reduction of office space and as has efficiency improvements. And on a full year basis, we would expect that would impact 2% -- have a 2% impact on our full year margin.

Your next question comes from Michael Doumet with Scotiabank.

Maybe I guess another way to get around the last couple of questions. If I step back and look at the 2023 EBITDA guide and I believe last quarter, you highlighted that M&A would contribute about $75 million of rollover EBITDA in 2023. So that puts organic EBITDA for '23 at $705 million. Now it looks like the organic EBITDA declined by $25 million to $30 million in Q1 alone, which already puts you at the low end of the 2023 guidance. So is the expectation that on a whole organic EBITDA declines in Q2, but in the second half, it starts to increase again? Just trying to break those numbers down a little bit.

Yes, Michael, that's a good question. Certainly, Q2, we will have some organic EBITDA declines. As I mentioned, a 30% to 40% decline in Capital Markets revenues is going to drive -- is going to have an impact on our organic EBITDA that we generate. And now looking ahead to the second half of the year, the comparisons get considerably easier, in particular Q4, which is the seasonal high quarter in the Capital Markets business. And if you recall, last fall, that business segment of ours was down 40% year-on-year. So depending on how conditions improved in the fourth quarter, I know that will have an impact on the overall margin profile and the organic EBITDA profile.

Got it. So embedded in the guide, I guess, in the second half is you have moderating Capital Markets declines and increasing organic growth in Investment Management. And one of your comments, Christian, I think you commented that you expect AUM and IM to grow about 10%. What gives you the visibility or the confidence that could happen through the balance of the year?

We have active fundraising that is ongoing in our operations, maybe Jay can comment further on that. But certainly, it's -- we have infrastructure-oriented funds that are in the market. Our alternative funds are in the market. We think there is capital in investors' hands that needs to be deployed. And we believe in the second half that's going to start to create opportunities for us.

Yes. And the nature, of course, of our investment management business with alternative asset classes, needs-based assets, et cetera. If our fundraising for the first quarter, although soft was better than most and the number of people that are number of potential investors is higher now than ever before, especially in our asset classes, there's just more of a delay in allocating capital. So we are cautiously optimistic, but probably more optimistic than cautiously that towards the second, third and fourth quarter, we'll have a significant uptick in funds raised, we have a significant distribution capability across the board, and we've had excellent meetings, especially during these kinds of times. So I think the outlook, which is the question you have around assets under management at the end of the year being up, say, 10% over last year, I think that, that is hopefully a conservative estimate of where we'll end up.

Really interesting. And maybe just to squeeze a follow-up. For the Q1 AUM flat sequentially, any way you can break down fundraising redemption and maybe the value or the change in value of the assets?

Yes. They're all very modest, Michael. I mean, you're talking about 0.5 point, 0.75 of a point in each, all very modest.

Your next question comes from Stephen MacLeod with BMO Capital Markets.

Lots of great color on what you're seeing in the marketplace right now. But I'm just curious if -- what you're hearing from your clients and potential clients who are sort of taking a pause on transaction activity. What are you hearing from them in terms of what they would, like pent-up demand as they get into 2024? Are you hearing any color around that from your clients?

Well, that's a great question. We've got tons of color around that. I mean, everybody is talking about it. There's all kinds of town halls. There's all kinds of industry events that are talking about this very issue. There's huge appetite, both buyers and sellers to buy assets. And we see it more so in our business than probably many of our peers because in our investment management arm, every year we're looking to divest certain assets and buy other assets and have allocations to do both. And so there's tremendous appetite to buy and sell. The problem is, as we've alluded to a couple of times in our prepared remarks is how do you value some of these assets, how do you value them? And it's not just higher interest rates. It's availability of capital, and it's also the negative sentiment that some people have around mortgages that will come due in the near term. So there's a lot of, let's call it, headwinds in this entire industry, but Capital Markets transactions are happening, and we continue to think that they will happen more and more as the year goes on because the best assets are being purchased primarily for cash or very low debt levels because debt is just not available. And the comments earlier in our prepared remarks around the new realities, we all read the paper. This is crystal clear. I hate to say it, but any m**** should know that this is what happens out there. And -- but we are in the business of helping to make transactions happen. And we think that as things stabilize, they will happen and they will happen quickly, but it's just not there yet, Stephen.

Okay. That's great color. And then just around the EMEA business. You made an interesting point, Christian, about the higher proportion of fixed costs in EMEA. Is there a way to kind of quantify what -- like what impact that would have had to the EMEA business relative to the Americas where the cost structure is much more flexible? Like I guess would you expect to see that kind of pressure continuing in EMEA before transactions begin to pick back up?

Yes. I mean, look, Stephen, the EMEA business was especially -- I know especially challenging Capital Markets in the first quarter, down 55% year-on-year. We don't expect that kind of a variance to continue -- that type of year-over-year variance to continue. And certainly, as we go through the year, we should be able to exceed that fixed cost base and generate profitability there. That's our expectation. And in terms of the Americas, it is different in the Americas. We have a highly variable cost structure in the Americas. Our revenue producers are fully commission-based. And that drives the difference between EMEA and the Americas.

But notwithstanding all that, strong businesses in the U.S. and in Europe, I mean, our business in Europe is very strong. Christian mentioned the compensation structure, it's more of an investment banking type compensation structure where there's very modest salaries and then a profit sharing in the success over the course of the year. And during the first quarter, revenues are naturally lower and progressively go up over time. So that's why we're highly confident that, that margin will change as the year progresses in EMEA as an example. And if you take a look at our business in Asia Pac, we did very well relative to the other parts of the industry, I think, in our Asia Pac business across the board. Now we were helped somewhat because the prior year, China was virtually closed down. So lots of moving pieces. But we think exceptional platforms and raring to go as the markets change.

Your next question comes from Daryl Young with TD Securities.

[Technical Difficulty] in challenging markets. Would you see the $65 million EBITDA bogey is still achievable just given what's transpired on the Capital Market side?

Daryl, it's Christian here. I think we missed the first 5 seconds to your question, just the line was quiet. Could you repeat it?

Sorry. Yes, just some of the commentary you made around the opportunities for acquisitions in this disruptive environment. And the question is, do you still see the $65 million of acquired EBITDA as achievable this year?