Colliers International Group Inc. (NASDAQ:CIGI) Q4 2022 Earnings Call Transcript

Colliers International Group Inc. (NASDAQ:CIGI) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Welcome to the Colliers International Fourth 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 risk 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 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, today’s call is being recorded. Today is February 9, 2023. And at this time, for opening remarks and introductions, I would like to turn the call over to Global Chairman and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Jay Hennick: Thank you, Operator. Good morning, and thanks for joining us for this fourth quarter and year-end conference call. I’m Jay Hennick, the Chairman and Chief Executive Officer. And with me today is Christian Mayer, Chief Financial Officer. As always, this call is being webcast and is available in the Investor Relations section of our website. A presentation slide deck is also available there to accompany today’s call. During the fourth quarter, investment management and outsourcing and advisory delivered strong revenue growth, while leasing matched the record results from the prior year period. As expected interest rate volatility and challenging debt markets impacted capital markets in our seasonally strongest quarter.

We expect this to continue through the first half of 2023. However, transactions are still being completed and there’s significant pent-up demand for real estate assets, which should translate into additional volumes in future quarters, especially as conditions stabilize. Aside from capital markets, momentum from the balance of our business is better than expected as you’ll hear from Christian. Strong full-year performance was driven by high value recurring service lines, which continues to validate our strategy of transforming Colliers into a different kind of diversified services company. With our globally balanced and highly diversified business, significant recurring revenues and proven track record of capitalizing on opportunities, Colliers is stronger and more resilient than ever.

Earnings from high value recurring revenues now make up about 58% of our pro forma EBITDA and this is growing. Last year, we completed a record $1 billion in acquisitions across our global enterprise. These acquisitions not only strengthen our core, but they also create additional opportunities to drive shareholder value. In investment management, a segment established only six years ago, we finished the year with total assets under management of $98 billion, placing Colliers amongst the top global players in the alternative private capital industry. One of the most important attributes of this business is that 85% of our assets are in perpetual or long dated funds 10 years or more. These revenues are very stable and have grown historically year-over-year, and we expect this to continue in the future.

As you might remember, in 2020, we announced our Enterprise ’25 growth strategy. The goal was to double our profitability and generate more than 65% of our earnings from high value recurring revenues over the following five years. Last year, was the second year of our plan, and so far, we’re well ahead of our targets. If we’re able to achieve this as we’ve done in the past, it will be excellent news for shareholders. Colliers has a highly respected global brand and growth platform. We have a well-balanced and highly diversified business with a unique enterprising culture and leadership team who have a significant equity stake in our company. The combination of these characteristics truly sets Colliers apart from the rest. But perhaps most importantly, we have a 28-year track record of delivering 20% annual growth and share value to shareholders, a track record we are very proud of.

Now, let me turn things over to Christian. Christian?

Christian Mayer: Thank you, Jay, and good morning. My comments will follow the flow of the slides posted on the Investor Relations section of colliers.com accompanying this call. Please note that the non-GAAP measures referenced on the call are defined in today’s press release. All references to revenue growth are expressed in local currency. Our fourth quarter revenues were $1.2 billion relative to $1.3 billion in the prior year period. Revenues were up strongly and are recurring Outsourcing & Advisory and Investment Management service lines. Our leasing operations were up 3% benefiting from continuing activity in office and industrial leasing. Capital markets, as Jay mentioned, declined across all regions reflecting the impact of higher interest rates, reduced availability of capital, and geopolitical uncertainty.

On an overall basis, internal revenues declined 11% entirely on lower capital markets activity. Adjusted EBITDA for Q4 was $203 million, up 6% from one year ago, with margins at 16.6%, up 230 basis points relative to the prior year quarter. The margin improvement primarily reflect service mix shift toward our high margin Investment Management operations. Americas fourth quarter revenues were $679 million, down 16% relative to the prior period. Outsourcing & Advisory was up 9% driven by engineering and design, including recent acquisitions. Leasing activity matched the record results from the prior year quarter. Capital markets, including debt origination was down 51% relative to record volumes in the prior year’s seasonally strongest fourth quarter.

Adjusted EBITDA was $83 million down 12% from last year. The margin in the Americas was 12.2%, up 60 basis points reflecting lower average commission levels; lower performance-based incentive compensation, as well as careful control of discretionary costs during the quarter. Q4 EMEA revenues were $228 million, up 8% from one year ago. Project management activity is up across the region as releasing transactions. Adjusted EBITDA was $36 million versus $42 million last year, with the margin primarily impacted by service mix with a higher proportion of project management revenues at modest margins. Asia-Pacific revenues were $194 million down 3%. Capital markets revenues were impacted by interest rate volatility and continued COVID restrictions in Asia, while leasing improved in both industrial and office asset classes.

Adjusted EBITDA was $34 million relative to $38 million in the prior year quarter. Fourth quarter Investment Management revenues were $121 million, up 53%, excluding pass-through carried interest, revenues were up 87% driven by acquisitions and management fee growth from increased assets under management. Adjusted EBITDA for the quarter was $53 million, up 88% relative to the comparative quarter. For reference, our reported adjusted EBITDA is equivalent to fee-related earnings or FRE that many pure-play IM firms report since our IM earnings are generated from recurring management fees. Fundraising across our platform for the full-year 2022 totaled $8 billion. This was a relatively strong result when compared to the general slowdown in capital allocation by investors across most real estate asset classes.

We have a strong fundraising pipeline, which we hope will drive internal AUM growth of 10% to 15% in 2023. As of December 31, we had $98 billion of AUM. Our fee paying AUM is now $53 billion. As I noted last quarter, the private and defensive nature of the real estate and real assets in our portfolio brings stability to our AUM. Our financial leverage ratio as of December 31 defined as net debt to pro forma adjusted EBITDA was 1.8x. We expect our leverage to be 1.8x to 2x for the first half of 2023 declining to the 1.5x range in the second half. As previously noted, the target leverage range is between 1.2x, and we are comfortable exceeding this range temporarily if a compelling acquisition opportunity becomes available. We have provided an initial outlook regarding our financial performance expectations for 2023.

Our outlook includes all acquisitions completed to-date, and incorporates our best information for each service line and geography. There are three broad themes to our outlook. One, recurring Investment Management revenues are expected to grow significantly from continued capital raising for several products we have in the market right now, as well as the annualization of recent acquisitions. Two, recurring Outsourcing & Advisory operations are expected to continue to grow organically as well as from the annualization of recent acquisitions. And three, we expect capital markets activity to be down 20% to 40% during the first half of 2023 relative to strong prior year comparatives with a return to year-over-year growth in the second half. We expect to maintain disciplined cost control through this period with tight management of discretionary expenses and by gearing our support in administrative staffing levels to match expected revenues.

This outlook is subject to risk and uncertainties outlined on the accompanying slides. That concludes my prepared remarks. I would now like to open the call for questions. Operator, can you please open the line?

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Q&A Session

Operator: Thank you. . Our first question comes from Michael Doumet with Scotia Capital. You may proceed.

Michael Doumet: Hey, good morning, Jay and Christian. My first question, I wanted to dig into the 2023 EBITDA guidance just a little bit. My math tells me, assuming $100 million of incremental EBITDA from the deals that you have closed at the mid-point of the 2023 EBITDA guidance essentially implies flat organic EBITDA. So first, is that thinking correct? And then, second, just broadly is the idea that leasing O&A and IM effectively offset capital markets.

Christian Mayer: Great question, Michael. First off, the EBITDA from the annualization of acquisitions is more like $75 million, not a $100 million. So you need to dial that into your organic growth assumptions, which will I think take those assumptions a bit higher. That’s my key observation to your comment. As it relates to capital markets, I mean, of course, I outlined that we expect to be down significantly in the first half, which will translate to being down in that particular service line by 10% to 20% on a full-year basis. The other parts of the business Outsourcing & Advisory and Investment Management have significant organic growth baked in to each of those areas as we continue to grow organically and generate new business in those segments.

Michael Doumet: Thanks, Christian. That’s a great outlook. And then, maybe just flipping to the Americas here, so we saw margin expansion there despite the contraction in revenue. You highlighted lower commissions, incentive comp and discretionary spend. Just wondering, how we should think about the sustainability of the margin expansion there through the first half of 2023 given the anticipated declines in capital market.

Christian Mayer: Well, look, when you have significant declines in revenues, you’re going to have some margin compression. We’re doing our best to manage costs. We have highly skilled operators in the field that have done this before. Three years ago, we lived through the pandemic and we took a very disciplined approach to cost management. And we’re doing the same in this situation. So we’re going to do the best we can to maintain those margins, but there will be some margin compression of course as revenues declined at those levels we talked about it in the first half.

Michael Doumet: Perfect. That makes sense. Those are my two guys. Thank you.

Operator: Thank you. Our next question comes from Stephen Sheldon with William Blair and Company. You may proceed.

Stephen Sheldon: Hey, thanks. And just to start off with just want to commend you on continuing to give guidance for the year, which is pretty rare in this industry. But first question on capital markets, you kind of mentioned this in your commentary, but just want to dig in, I guess, are you seeing any signs of deals getting pulled or canceled altogether? Or does this truly seems like a timing delay where transactions are taking longer and where there could be a wall of pent-up activity they could unlock in the second half of this year and potentially into 2024?

Jay Hennick: Well, I think it’s a definitely transactions have been canceled. And for all the reasons you’d expect interest rates, availability of capital, near-term expectation that a building was worth X dollars six months ago and its worth substantially less today. But there is huge pent-up demand at least we see it. We see it in Europe, actually the smaller transactions, the smaller buildings are moving, are trading. But we think there’s a big pent-up demand of real estate assets that want to trade, but they still need a period of time to stabilize and stabilize both on the — on both sides. I think higher quality assets will trade sooner than lesser quality assets. But there is a lot of discovery happening. It’s not just price discovery, its — its clients looking at portfolios or ways to acquire two or three assets from a seller who might be under a little bit of financial pressure.

So I would say our capital markets people are busier today than they’ve ever been before. And it’s in an environment where they know the likelihood of near-term completing transactions is not as rapid as it was let’s say a year ago.

Stephen Sheldon: Got it. That’s helpful. And then just as a follow-up for Investment Management, great trends in fundraising, AUM. So I guess just as a high level, what do you attribute that success to? And is that AUM growth — you have a lot of different assets and businesses there now, I guess, is that AUM growth pretty broad-based across the different businesses you have in there or just any more detail on that?

Jay Hennick: Yes. I mean, it is broad across all of the asset classes. We’re in very attractive spaces, alternative assets, infrastructure, traditional, real estate, multi-family, et cetera. And we do a little bit of credit as well. But the thing that, that, that, that really surprises a lot of people is that there is in addition to the fact that, and I commented about this in my comments, that we have a lot of perpetual and long dated funds. You have to remember that the LPs and for us, most of the LPs are big institutions. We have just under a 1,000 LPs, very little direct to retail at this point, although something we’re working on. But these LPs have known us and our platforms for a long period of time. So they move from one fund to another as the closed-ended funds mature, and a new fund is initiated, they move from fund to fund.

So in addition to the fact that they’re long dated strategies closed-ended funds it’s the same investors that are going from fund to fund to fund. So there’s a wonderful cadence of recur ability to this business, and we’re enjoying it. Now, it’s — it’s — it’s cadence that only continues if we continue to deliver top tier performance to our clients. And that is — that has continued through all of the platforms that we have. And I think there’s a lot of reasons why that happens. Part of it is of course, that we have selected carefully, but part of it also is that we are partners with the people that make it happen every day. And they have a significant invested interest in continuing to deliver top tier performance to their clients. Probably more than you wanted to hear, but at least it gives you a little bit more color.

Stephen Sheldon: No, that’s really helpful. Thank you.

Operator: Thank you. Our next question comes from Stephen MacLeod with BMO Capital. You may proceed.

Stephen MacLeod: Hi, good morning. Just wanted to turn a little bit to leasing, which you’ve highlighted in your 2023 outlook expected to be sort of stable and was stable in Q4. And I’m just curious if you can talk a little bit about some of the factors that give you strong visibility into leasing trends in Q — in 2023.

Jay Hennick: We’ve said this for a long time. And I think if you go back really to the fundamentals of leasing, a lease is five years, 10 years, seven years, whatever the lease term is. And during COVID, there was a period of time when landlords, because of the uncertainty would extend lease terms for a year or two. Well, people — well, their tenants got comfortable with what’s the new paradigm, which by the way, I’m not sure they’re comfortable still yet on what the new paradigm is. But ultimately, leases have to be renewed, extended, a move, a move has to take place. And so there is a repeatability to leasing that you don’t necessarily have, for example, in capital markets. So we were not surprised to see leasing give or take the prior year. I think we were — when that we were happy to see it. But leasing has got some interesting repeat qualities that are not really seen by most people.

Stephen MacLeod: Great. Thank you. That’s helpful. And then just on turning to capital markets, just wondering if you can talk a little bit, I know you gave some color Jay which I appreciate, but just wondering if you can talk a little bit about sort of how you’ve seen capital markets evolving in Q1, if at all different in a material way from Q4. Just it feels like there’s a little bit more rate stability now than there was in Q4. So I’m just curious if you had seen some sequential improvements in the capital markets business?