Q1 2023 Colliers International Group Inc Earnings Call
Speaker 2: Welcome to the Collier's International First Quarter Investors Conference Call. Today's call is being recorded. Legal counsel requires us to advise that this discussion schedule to take place today may contain forward-looking statements that involve known and unknown risks.
Speaker 2: 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 and Ministry of Health.
Speaker 2: and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.
Speaker 3: 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.
Speaker 3: As always, this call is being webcast and is available in the Investor Relations section of our website, along with a presentation slide deck.
Speaker 3: During our seasonally slow first quarter, Investment Management and Outsourcing and Advisory delivered robust growth.
Speaker 3: leasing was up slightly and as expected capital markets declined considerably in line with overall market conditions.
Speaker 3: Since our initial outlook 90 days ago, we've seen higher interest rates and challenging debt markets impact
Speaker 3: Now, with the additional stress on the banking system and increasing limitations on debt availability, there is more uncertainty around property valuations.
Speaker 3: Until these factors become more predictable, we expect the level of
Speaker 3: Let's remember Colliers has chosen to provide an outlook unlike most others.
Speaker 3: 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.
Speaker 3: If you step back, not much has really changed in our outlook for the full year as you'll hear from Christian.
Speaker 3: Putting aside capital markets, the momentum from the rest of our business is very strong.
Speaker 3: 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%
Speaker 3: 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.
Speaker 3: After quarter-end, we continue to build our global business by completing acquisitions in Australia and New Zealand in our engineering and design and project management segments.
Speaker 3: In addition, we announced the early redemption effective June 1st of this year of our outstanding 4% convertible notes.
Speaker 3: Eliminating these notes reduces our interest costs and simplifies our balance sheet even further.
Speaker 3: Shareholders know that Colliers has seized its greatest opportunities during challenging times.
Speaker 3: 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.
Speaker 3: all of which translates into additional value for our shareholders.
Speaker 3: 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.
Speaker 3: relative to the prior year quarter, which as a reminder was an exceptional quarter for our transactional business.
Speaker 3: generated strong growth up 40% and 13% respectively.
Speaker 3: 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.
Speaker 3: First quarter adjusted EBITDA was 105 million relative to 121 million one 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.
Speaker 3: partially offset by growth in our higher-margin investment management operations, as well as aggressive cost controls across the company.
Speaker 3: America's revenues were 582 million. Down 8% relative to the prior period.
Speaker 3: Outsourcing and advisory was up 9% driven by engineering and design, including recent acquisitions. Leasing activity was up 1%. Capital markets, including debt origination, was down 41%. Adjusted EBIT that was $54 million, down 33% from last year.
Speaker 3: The margin in the Americas was 9.3% down 330 basis points due to the slowdown in capital markets.
Speaker 3: In the first quarter revenues were 143 million down 2% versus the prior year period.
Speaker 3: Outsourcing and advisory revenues were up 27%, but were offset by reduced capital markets transaction volume.
Speaker 3: Our EMEA transactions business has greater fixed costs than transaction operations in other parts of the world.
Speaker 3: 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.just advisor sponsored a oats and a
Speaker 3: Adjusted EBITDA was $8 million relative to $10 million in the prior year quarter.
Speaker 3: driven by acquisitions and management fee growth from increased assets under management year over year. Adjusted even down 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 of primarily alternative and infrastructure assets were down modestly and mostly offset by net capital inflows from investors during the quarter.
Speaker 3: Like overall market sentiment, the fundraising environment for most asset classes remained challenging during the first quarter.
Speaker 3: However, given the alternative and infrastructure focus of our investment
Speaker 3: We believe fundraising will accelerate in the second half of the year.
Speaker 4: Our financial leverage ratio at quarter-end defined as net debt to perform an adjusted EBITDA was 2.2 times, 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 1.8 times 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.
Speaker 5: opportunities to strengthen and expand our business.
Speaker 6: Back in early February , we provided our initial outlook for 2023.
Speaker 7: That concludes my prepared remarks. I would now like to open the call for questions. Operator, can you please open the line? Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touch tone phone. You will hear a three tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Chandri Luthra with Goldman Sachs. Please go ahead.
Speaker 8: Hi. Good morning. Thank you for taking my question. 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 8th, 9th, basically one week into March. But the truth is that –
Speaker 9: to do events after March 8th. And how do you figure EMEA in all this? Because nothing changed significantly in EMEA. So help us understand that dynamic, please.
Speaker 10: 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.
Speaker 11: You know, really throughout the quarter, and you got to realize that we released our outlook in the 1st 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.
Speaker 12: And, you know, as a result of our, you know, the seasonal slow quarter as well as the. Revenue impacts, which are more pronounced in that seasonal slow quarter, especially in a Mia. That had a significant impact on our margin. And and secondly, you know, I would also.
Speaker 13: 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.
Speaker 14: 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.
Speaker 15: 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.
Speaker 16: And there's obviously economic uncertainty that you talked about for the back half of the year. Like how do you get comfortable around that, you know, implied margin improvement from here? And what sort of cost cuts are you embedding? You know, how much of it is in? Is there any headcount reduction? What are the other costs?
Speaker 17: measures, how much of it is in Europe versus how much of it is in America. If you could throw any more detail there, it would be very helpful. Sure, 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.
Speaker 18: 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.
Speaker 19: As has reduction of office space and as has efficiency improvements and on a full year basis, we would expect that would impact two percent have a two percent impact on our clear margin.
Speaker 20: Great. Thank you. Your next question comes from Michael Dumay with Scotiabank. Please go ahead.
Speaker 21: Hey, good morning guys.
Speaker 22: I guess another way to get around the last couple of questions, you know, if I if I step back and You know 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
Speaker 23: 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.
Speaker 24: organic EBITDA for 23 at $705 million. Now it looks like the organic EBITDA declined by $25 to $30 million in Q1 alone, which already puts you at the low end of the 2023 guidance. So is the expectation you know that on a whole organic EBITDA declines in Q2 but
Speaker 25: in the second half, it starts to increase again. Just trying to break those numbers down a little bit.
Speaker 26: Yeah, Michael, that's a good question. Certainly Q2, we will have some organic EBITDA declines. You know, as I mentioned, a 30 to 40% decline in capital markets revenues is going to drive, you know, is going to have an impact on organic EBITDA.
Speaker 27: 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, you know that business segment of ours was down.
Speaker 28: 40% year on year. So, you know, depending on how conditions improve in the fourth quarter, I know that will have an impact on the overall margin profile and the organic EBITDA profile. So, it's embedded in the guide, I guess, in the second half is you have moderating capital markets declined and increasing organic earnings, UK earnings, in different areas.
Speaker 29: you know, 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 that can happen to the balance of the year?
Speaker 30: We have active fundraising that is ongoing in our, in our operation. Maybe Jake can comment further on that, but certainly it's, you know, we have. Infrastructure oriented funds that are in the market, our alternative funds are in the market. Uh, you know, we think there is capital in investors hands that needs to be deployed.
Speaker 31: Our fundraising for the first quarter, although soft, was better than most.
Speaker 32: 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
We are cautiously optimistic, but probably more more optimistic than cautiously that, you know, towards 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, you know, I think I think the.
the outlook which is the question you have around you know assets under management at the end of the year being up say 10 percent over last year you know I think that that is a hopefully a conservative estimate of where we'll end up
Really interesting. And maybe just a squeeze of 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, it's like you're talking about half a point, you know, three quarters of a point.
in each, all very modest. Okay, perfect. Thanks very much guys. Your next question comes from Steven McLeod with BMO Capital Markets. Please go ahead.
Thank you, good morning guys. 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
you know 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 colour 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, you know, 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
is how do you value some of these assets? How do you value them?
How do you value some of these assets? How do you value them? And it's not just higher interest rates.
its 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
There's a lot of you. 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 capital markets transactions.
debt levels because debt is just not available. And you know the comments earlier in our prepared
We all read the paper. This is crystal clear.
hate to say it, but any mora should know a lot!
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. Thanks Jay. And then just around the EMEA business, you know, you made an interesting point Christian about the higher proportion of fixed costs in EMEA. Is there a way to kind of quantify 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?
Yeah, I mean, look, Steven, the, the, the EMEA business was especially, you know, especially challenging capital markets in the 1st quarter down 55%. Year on year, you know, we don't expect that kind of a variance to continue. Um.
through that type of a 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 you know that is it drives the difference between EMEA and the Americas. But you know notwithstanding all that strong businesses in the U.S. and in Europe , I mean our business in Europe is very
Christian mentioned the the compensation structure it's more of a 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
Asia-Pacific 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.
Great. Okay. Thanks, guys. I'll get back in the line. Our next question comes from Daryl Young with TD Securities. Please go ahead.
Would you see the $65 million EBITDA bogey as still achievable given what's transpired on the capital market side?
Darryl, it's Christian here. I think we missed the first five seconds of your question. It just, the line was quiet.
Sorry, yeah 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 acquired EBITDA as achievable.
this year? Well we set a goal as you know, we set a goal of growing 10% of the prior year's EBITDA on average.
over five years. Last year we tripled that number, maybe more than tripled that number, so and as you can see we in the process built a very significant investment management and
We have a very interesting pipeline of transactions. We're not pushing to do another year of 60 million of EBITDA in acquisitions unless there's something special out there and there are a few things.
And I think that the markets will allow us to take advantage as we have in the past.
of some unique additions to strengthen our business, but where they're gonna be and what it'll total by year end, I can't really predict that right now. But what I can predict is that there's fewer people in the market buying businesses.
It's impossible to get financing to buy those businesses. So PE is on the sidelines.
And it creates a great opportunity for somebody like us that has
I wouldn't say unlimited access to capital, but a lot of capital availability.
to really add an interesting part of our business.
when it's right, but we're not going to we're not going to to do something as you would expect, Errol. We've never done this before. We're only going to buy things that we think are special and are going to add to to what we think is a special company. Got it. Okay.
And then secondly just with some of the challenges in the office segment could you maybe highlight for us what opportunities you're seeing out of that and maybe they're in different service lines beyond just the capital markets transactions, but just what this level of disruption is doing in terms of your other advisory services.
Yeah, so the office environment and we typically don't really comment specifically on any asset class, but there's a lot of people talking about the office environment and you know office utilization and return to office and
old buildings versus new buildings and you're hearing that that in new in newer buildings you know the quality of the buildings are such that they're able to generate higher rents per square foot than the lesser quality buildings. Those are all the factors that we see and interestingly on
buildings into a multi-family residential. Those are long-term projects, probably four or five years to get completed. So the whole office market is going through a flux right now and as you can see, as we are looking into the rent, a lot of people are shepherding, who have Gruber, Disney andüber where they are at Binghamton and Whittman<|cy|>. So we are on C assuming like the tenants had theiniest that this my work
You know, it's to say it's uncertain is probably the best way to conclude because each building is different. The locations of the building, the age of the building, all of those things are different. And will have an impact on the ultimate value.
of the business and or how much people will want to invest to repurpose that building to a more desired location. I hope that gives you the color you want.
Yes, that's helpful. I'll jump back in the queue and turn it over. Thanks for your comments. Your next question comes from Stephen Sheldon with William Blair. Please go ahead.
Hey, thanks for taking my questions. Just a couple modeling ones. And the first one, just as we think about the changes to the 2023 guidance, can you frame what you've layered in for the two recent acquisitions in Australia, New Zealand, for JESSE-DVDA? And then, apologies if I missed this, but also what's the total expected inorganic M&A contribution for the year now?
kind of relative to the, I believe you got it to $75 million last quarter, just any colour on those two. Stephen, the acquisitions in New Zealand and Australia are what we consider tuck-in acquisitions. So pretty small impact on revenue and in EBITDA.
that we expect to add from completed
Okay, perfect. And then, just wanted to ask about interest expense over the rest of your given the early redemption. It was 23 million this quarter.
I guess, so how should we expect that to trend over the rest of the year, barring any significant surprises from the Fed? Yeah, I mean, the interest expense in the first quarter is obviously significantly higher than it was in Q1 of last year, given the acquisition activity we undertook, as well as the...
you know, pretty much 200 basis point increase in floating rates year on year for that 40% piece of our debt that is fixed, sorry, that is floating. So, as we look ahead, the redemption of the converts will reduce interest expense by about two and a half or two to two point two million per quarter. Going forward floating rates continue to rise. So that's gonna be an impact for the rest of the year.
A little bit and then, of course, we will generate cash flow and be paying down revolver balances as we proceed through the year. So that's gonna have a reducing impact on interest expense. So a bunch of moving parts there, Steven. But certainly the Q1 interest, you can take that and kind of build from there using the elements I mentioned.
little bit and then of course we will generate cash flow and be paying down revolver balances as we proceed through the year so that's going to have a reducing impact on interest expense. So a bunch of moving parts there Stephen but certainly the Q1 interest you can take that and kind of build build from there using the the elements I mentioned.
Your next question comes from Fidirik Besset with Raymond James. Please go ahead.
Good morning guys. Fred.
I just wanted to go back on the on the guidance here. Your prepared comments about the remainder of 2023 were understandably more cautious than they were in the middle of February yet.
Your revised financial outlook implies a largely unchanged EBITDA guidance for the rest of the year.
go a bit more conservative with respect to the guidance. I don't, I see you're going in and out a little Fred so I didn't hear the whole question, Christian didn't either so we don't know if it's his or mine so
the remainder of 2020. Sure I'll speak up about apologize if I cut but your your prepared comments about the remainder of 2023 were
your revised financial outlook implied largely on change in ad-hoc guidance for the rest of the year. So just curious why you decided to hold mine for the rest of the year, maybe go down a bit more conservatively and point for the lower EBITDA. Just curious what your thoughts there.
Well, so let's start with, you know, we're sorry we give guidance today this quarter. But Christian, maybe you have the answer he's looking for there, but yeah, we have, I think dial back our guidance a little bit, but certainly.
in all of our businesses, the recurring businesses, you know much more easy to predict and of course the the capital markets business the most difficult to predict but we do have you know good information from the field and we do have pipelines of activity that we expect will be completed here in the in the back half of the year and we also
the fact that the comparatives get meaningfully less challenging in Q3 and Q4. So you know as I mentioned Q4 of 22 was down 40% in capital markets you know so that that will be you know relatively we believe a relatively easy comparison and as such you know less basis in that quarter.
Thanks for that. Now, just turning to outsourcing advisory, you have nice top line growth, 13% in low currency. Are you able to break down that percentage in between internal?
and just a quick comment on how well the business is running from an organic standpoint.
Yeah, for our, if we don't provide that breakdown, but there were some acquisitions and they're smaller ones. And how is the business going?
with the revenue profile you're generating and growth? Yeah, absolutely. I mean the businesses, engineering, design, project management, property management, all performing very well through these times and we expect that to continue.
for the balance of the year for sure. And we're very excited about that. We're very excited about our outsourcing and advisory business. And expect to see the same level of growth or better as the year progresses.
Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one.
Your next question comes from Daryl Young with TD Securities. Please go ahead. Yeah, just a quick follow-up in terms of some of the opportunities for market share wins in this environment. Would you say that you're seeing an increasing number of smaller players in the industry approach you and look to partner with diversified platforms? Do you expect to see...
players?
And but we have.
We have continued to focus on just building our platform one step at a time, like the Nordics acquisitions last year. We've got another couple of similar ones that we're working on now. None of the material.
but all of them are additive in their own regions quite significantly. So you know you might, I'm using the Nordics as an example, we're now the number one player in the Nordics but we have a big gap around property management in that
these significant chunks of our business, whether through acquisition or as we call it an acqui-hire. And in times like these, they're perfect for both, for a whole variety of reasons. But some of them are that some of our peers are...
are themselves having difficulties, financial difficulties, too much leverage, a whole variety of things like that. And Collier seems to be the natural choice, you know, across the world and we're very proud of that.
And, you know, as I've said before to you, it comes down to culture and it comes down to having a lot of people that have a vested interest in the business. And that creates a...
that creates a momentum that is attracting some of the best talent out there. So we're quite excited about that and really going through challenging times is when you can sometimes make two steps at a time instead of one step at a time. So we're looking forward to doing a few of those.
Got it. That's great. Thanks very much. There are no further questions at this time. Please proceed.
Thank you everyone for participating in the conference call. We look forward to delivering some hopefully better results in the second quarter and speak to you then.
Thank you everyone for participating in the conference call. We look forward to delivering some hopefully better results in the second quarter and speak to you then. Thank you again.
Ladies and gentlemen, this concludes your conference call. Thank you for your participation and have a nice day.
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