Q1 2023 Colliers International Group Inc Earnings Call
Speaker 1: Tr.
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 the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risks and uncertainties.
Speaker 2: 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 statement is contained in the following slide.
Speaker 2: 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. And 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. Jay Hennick Thank you, Operator. Good morning, and thanks for joining us for this first quarter conference call.
Speaker 3: and as expected, capital markets decline 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 transaction volumes. 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 transaction activity to remain low.
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 as 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. 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%.
Speaker 3: 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,
Speaker 3: 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. 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.
Speaker 3: 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.
Speaker 3: 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: Revenues for our seasonally slow 1st 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 investment management and outsourcing advisory service lines. 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.
Speaker 3: As expected capital markets declined sharply in line with overall market conditions. Continuing the trend that started last fall.
Speaker 3: On an overall basis, internal revenues declined 9% entirely on lower transaction volumes.
Speaker 3: 1st 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.
Speaker 3: 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.
Speaker 3: America's revenues were 582 million, down 8% relative to the prior period.
Speaker 3: Outsourcing 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 EBITDA was $54 million, down 33% from last year. The margin in the Americas was 9.3%.
Speaker 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 we're 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: And in normal times also generates higher margins.
Speaker 3: However, the significant decline in volume for the seasonally slow first quarter drove an adjusted EBITDA loss of $11 million versus a profit of $5 million last year.
Speaker 3: 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.
Speaker 3: 1st quarter investment management revenues were 121M, up 96%, excluding pass through carried interest. Driven by acquisitions and management fee growth from increased assets under management year over year.
Speaker 3: Adjusted even though for the quarter was $55 million, more than double the prior year quarter.
Speaker 3: Assets under management at quarter end was 97.6 billion down slightly relative to year end.
Speaker 3: 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 by the
Speaker 2: to up slightly versus prior year on higher interest costs as well as the impact of a larger proportion of earnings coming from non-fully owned operations. 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 touchtone 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.
Speaker 4: Your first question comes from Chandri Luthra with Goldman Sachs. Please go ahead. 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 sizable part of the quarter was already done by then. So help us understand, you know, how was the business, especially margins trending before March 8th.
Speaker 4: and how much was the margin decline attributed to 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 3: 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 3: 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 3: 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 3: To continue the question about margin impacts in the 2nd, 3rd and 4th 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 3: 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 4: 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 of 16.7% based on the guide. Given your second quarter capital markets is down just as much as first quarter.
Speaker 4: and there's obviously economic uncertainty that you talked about for the back half of the year. How do you get comfortable around that implied margin improvement from here? And what sort of cost cuts are you embedding? 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 America? If you could throw any more detail there, it would be very helpful.
Speaker 3: 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.
Speaker 3: Continue to be actively looking for and recruiting revenue producing headcount that that is our goal to to grow the business. But certainly non revenue headcount has been an area of focus as a discretionary spend as has reduction of office space.
Speaker 3: And as has efficiency improvements and on a full year basis, we would expect that would impact 2%. Have a 2% impact on our career margin. Great, thank you.
Speaker 2: Your next question comes from Michael Dumay with Scotiabank. Please go ahead. THErol Off cruise
Speaker 2: Hey, good morning, guys.
Speaker 2: I guess another way to get around the last couple of questions, you know, if I if I step back and You know looking at 2023 EBITDA guide And I believe last quarter you highlighted that M&A would contribute about 75 million of rollover EBITDA in 2023. So You know that puts Organic EBITDA for 23 at 705 million.
Speaker 2: 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 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.
Speaker 3: Yeah, Michael, that's a good question. Certainly Q2, we will have some organic EBIT declines. As I mentioned, a 30 to 40 percent decline in capital markets.
Speaker 3: Revenues is going to drive, you know, is going to have an impact on our organic that we generate. And now looking ahead to the 2nd, half of the year, the comparisons get considerably easier. In particular Q4, which is the seasonal high quarter in the capital markets.
Speaker 3: Business and if you recall last fall, you know, that business. A segment of ours was down 40% year on year. So, you know, depending on how conditions improve. In the, in the 4th quarter, I know that will have an impact on the, on the overall. Margin profile and the organic profile.
Speaker 2: In the guide, in the second half, you have moderating capital markets declined and increasing organic growth in investment management. In one of your comments, I think you commented that you expect AUM and IM to grow about 10%. What gives you the visibility or confidence that that can happen through the balance of the year?
Speaker 3: We have active fundraising that is ongoing in our in our operations. Maybe Jay 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.
Speaker 3: You know, 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.
Speaker 3: Yeah, and the nature, of course, of our of our investment management business with. With alternative asset classes, needs based assets, et cetera. If our fundraising for the 1st quarter, although soft was better than most.
Speaker 3: And the number of people that are a number of potential investors is higher now than ever before, especially in our asset classes. Is there's just more of a delay in allocating capital. So.
Speaker 3: We are cautiously optimistic, but probably more more optimistic than cautiously that towards towards the 2nd, 3rd and 4th quarter will have. A significant uptick in funds raised.
Speaker 3: 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 the outlook, which is the question you have around assets under management at the end of the year being up safe.
Speaker 2: and maybe the value or the change in value of the assets.
Speaker 3: Yes, they're all very modest, Michael. I mean, it's like you're talking about half a point, you know, 3 quarters of a point. In each.
Speaker 3: Yeah, they're all very modest Michael. I mean, it's like you're talking about half a point, you know, 3 quarters of a point. In each. All very modest.
Speaker 2: 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...
Speaker 3: curious if what you're hearing from your clients and potential clients who are
Speaker 3: 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 color around that. I mean everybody everybody is talking about it. There's all kinds of town halls.
Speaker 3: In our investment management arm every year, we're, we're looking to divest certain assets and buy other assets and have allocations to do both. And so there's tremendous, there's tremendous appetite to buy and sell. The problem is, as.
Speaker 5: 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?
Speaker 5: 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.
Speaker 5: 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, um,
Speaker 5: 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.
Speaker 5: Primarily for cash or very low debt levels, because debt is just not available.
Speaker 5: And, you know, the comments earlier in our prepared remarks around the new realities
Speaker 5: We all read the paper. This is crystal clear. I hate to say it, but any moron should know that this is what happens out there. But...
Speaker 5: 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.
Speaker 5: But it's just not there yet, Stephen. Okay, that's.
Speaker 2: That's great color. Thanks Jay. 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 what
Speaker 2: Like what impact that would have had to the EMEA business relative to the Americas where you know 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.
Speaker 3: Yeah, I mean, like, 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. So, that's strong, uh, we have to help them.
Speaker 3: You know, that type of a year, we are variants 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.
Speaker 3: Our revenue producers are fully commission based and that, you know, that that is, uh, it drives drives the difference between the and the Americas. But, you know, notwithstanding all that strong businesses in the US. And in Europe , I mean, our business in Europe is very strong.
Speaker 5: 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 1st quarter,
Speaker 5: 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 pack.
Speaker 5: We did very well relative to the other parts of the industry, I think.
Speaker 5: in our Asia-Pac business across the board. Now, we were helped somewhat because the prior year, China was virtually closed down.
Speaker 5: 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.
Speaker 5: But, you know, we think exceptional platforms and and raring to go as the markets change.
Speaker 2: Great. Okay. Thanks, guys. I'll get back in line. Your next question comes from Daryl Young with TD Securities. Please go ahead. Bet on that.
Speaker 3: Would you see the $65 million EBITDA bogey as still achievable, just given what's transpired on the capital market side?
Speaker 3: Darryl, it's Christian here. I think we've missed the first five seconds of your question. The line was quiet.
Speaker 3: Oh, 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 of acquired equity that does as achievable?
Speaker 3: Just some of the commentary you made around the opportunities for acquisitions in this disruptive environment. The question is, do you still see the $65 million acquired EBITDA as achievable this year?
Speaker 5: Well, we set a goal, as you know, we set a goal of growing 10% of the prior year's EBITDA on average.
Speaker 5: Well, we set a goal, as you know, we set a goal of growing 10% of the prior year Ziva Dha on average over five years.
Speaker 5: 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 outsourcing and advisory segment. So, we have a very interesting pipeline of transactions.
Speaker 5: I'm not, I mean, we're not pushing to do another year of 60M of EBITDA in acquisitions unless there's something special out there. And there are a few things.
Speaker 5: And I think that the markets will allow us to take advantage as we have in the past.
Speaker 5: Of some unique additions to strengthen our business, but where they're going to be and what it will total by year end. I can't really I can't really predict that right now. But what I can predict is that there's fewer people in the market buying businesses.
Speaker 5: 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
Speaker 5: I wouldn't say unlimited access to capital, but a lot of capital availability.
Speaker 5: To really add an interesting part of our business when it's right, but we're not going to.
Speaker 5: We're not going 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 what we think is a special company.
Speaker 6: Got it. Okay.
Speaker 5: 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 is workingographers Bone means the office environment is changing.)
Speaker 5: that in newer buildings, 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 the investment.
Speaker 5: On the investment management side, our Rockwood Capital business is actively working with 1 or 2 office owners in New York to repurpose very significant and well-known buildings into
Speaker 5: multi-family residential, those are long-term projects, probably 4 or 5 years to get completed. So the whole office market is going through a flux right now and
Speaker 5: You know, it's to say it's uncertain is probably the best way to conclude because each.
Speaker 5: 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.
Speaker 5: to repurpose that building to a more desired location. I hope that gives you the color you want.
Speaker 5: I'll jump back in the queue and turn it over. Thanks for your comments.
Speaker 2: Your next question comes from Steven Sheldon with William Blair. Please go ahead. The reason I like to ask you this question is a first question.
Speaker 5: Hey, thanks for taking the questions. Just a couple modeling ones. 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 and New Zealand for Jessa Divida? And then, apologies if I missed this, but also what's the total expected inorganic M&A contribution for the year now?
Speaker 3: Kind of relative to the, I believe you got it to 75M last quarter, just any color on those 2. Steven, the acquisitions in New Zealand and Australia are what we consider tuck in acquisitions. So pretty small impact on revenue and EBITDA for the year and likewise on purchase price for those 2 acquisitions.
Speaker 3: In terms of the acquisition pro forma impact for the next three quarters, it's around 40 million of EBITDA that we expect to add from completed acquisitions.
Speaker 5: 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.
Speaker 5: I guess, so how should we expect that to trend over the rest of the year, barring any significant surprises from the Fed?
Speaker 3: Yeah, I mean, the interest expense in the 1st quarter is obviously significantly higher than it wasn't 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. Uh, year on year for that 40% piece of our of our debt that is that is fixed.
Speaker 3: Sorry, that is floating. So, as we look ahead, the redemption of the converts will reduce interest expense by about 2 and a half or 2 to 2.2Million per quarter. Going forward, floating rates continue to rise. So that's going to 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.
Speaker 2: Your next question comes from Fidirik Bessane with Raymond James. Please go ahead. You're welcome.
Good morning, guys.
I just wanted to go back 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. Just curious, why did you decide to hold the line here and maybe not...
Your revised financial outlook implies a largely unchanged EBITDA guidance for the rest of the year. So just curious, why did you decide to hold the line here and maybe not go a bit more conservative with respect to the guidance?
I don't, I see you're going in and out a little thread, so I didn't hear the whole question. Christian didn't either. So we don't know if it's his or mine. So can you try to try us again?
I'll speak up, apologize if I cut, but 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 largely unchanged edit.guidance for the rest of the year.
Just curious why you decided to hold the line for the rest of the year and not maybe go down a bit more conservatively and point for just curious what your thoughts are. Well, so let's start with.
to hold the line for the rest of the year, not maybe go down a bit more conservatively and point for a lower EPDOT. Just curious what your thoughts are. Well, so let's start with, you know.
We're sorry we give guidance today, this quarter. And 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 Frederick you're right. The Q1.
piece of it is a large component of the change in the guide. Look, we build our guidance from the bottom up. We talk to our operators in the field and 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 good information from the field and we do have pipelines of activity that we expect will be completed here in the back half of the year and we also have
The fact that the imperatives 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 a relatively we believe relatively.
Are you able to break down that percentage between internal and internal?
May I just comment on how well the business is running from an organic standpoint?
Yeah, for if we don't provide that that breakdown, but there were some acquisitions and they're smaller ones.
And how is the business going? Because we are still Ap
with the rev profile you're generating and the growth? Yeah, no, 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. That's our, we're very excited about our outsourcing and advisory business and, and, you know, expect to see the same level of growth or better as the year progresses.
the year for sure. Yeah, we're very excited about that. That's our, we're very excited about our outsourcing and advisory business and and you know 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. Please press star followed by the one.
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 more players come forward and develop sort of network-ando relationals with the government and tools, if you would, or... To halftime, and toBILL, and also to Bill M M, uh... Would you give us some at-home advice as to how were your
give some of the long-term consolidation trends towards large diversified players accelerate today.
That's a great question. We get approached all the time from, you know, the big 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 region. We don't do it.
for us to strengthen 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 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.
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 2 steps at a time instead of 1 step at a time and we're looking forward to.
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.