Q2 2023 Colliers International Group Inc Earnings Call
[music].
Yeah.
Welcome to the Colliers International second quarter Investors Conference call today's call is being recorded.
Legal counsel requires us to advise that just 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 form 40 F. As filed with the U S Securities and Exchange Commission.
As a reminder, today's call is being recorded today is August 2nd 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.
Thank you operator, good morning, and thanks to everyone for joining us for this second quarter Conference call I'm, Jay Hanna Chairman and Chief Executive Officer of the company with me today is Chris Mclaren and Chief Executive Officer of our real estate services business at Christian Mayer, our chief financial.
The 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 the second quarter Colliers experienced strong growth in recurring revenues, which contributed 65% of our adjusted EBITDA.
Having such a large percentage of recurring revenue highlights our balanced and resilient business model enables us to withstand market fluctuations and truly sets us apart from the others.
Once again investment management, and outsourcing and advisory experienced robust growth during the quarter, while capital markets and to a lesser extent leasing declined versus the prior year a record quarter.
As everyone knows lower interest rate and lower interest rates and lower investment volume sorry have been caused by rising interest rates challenging debt availability and continued price discovery, which we expect will quickly rebound once conditions stabilize.
Since the rest of our business has been performing well, we're maintaining our financial outlook for the year as Christian will elaborate on.
Our company is basically comprised of two parts.
<unk> one of the top global leaders in commercial real estate. This segment makes up about 70% of our adjusted EBITDA and is led by CEO , Chris Mcclarnon, Chris.
Chris will provide some highlights in a few minutes.
The second segment is investment management, which is our fastest growing business.
Since 2016, Colliers has built a highly differentiated private investment platform with an impressive $100 million of assets under management.
Importantly, 85% of our AUM is comprised of perpetual or other long duration investment vehicles, giving us predictable revenue streams over the long term.
As importantly, 70% of these assets are in defensive strategies like seniors and student housing health care and infrastructure classes that are highly sought after with strong tail wins for the future.
During the second quarter I am continued to scale with revenues up 58%, including the benefit of acquisitions.
We continue to invest in our platform, adding investment professionals and new products as well as strengthening our distribution capabilities.
Well fund raising remains a challenge for the entire industry.
The interest in our investment vehicles has never been greater.
We expect our fund raising we will accelerate as we move towards the end of the year.
And now let me ask Chris Mclaren and to discuss some of the highlights from our real estate services business. Once he has completed Christian will provide as usual financial report and then we'll open things up to questions Chris.
Thank you Jay and good morning.
Our vision at Colliers is to accelerate the success of our clients and our people, while creating value for our shareholders today.
Today <unk> is stronger than ever it is our unique enterprising culture that sets us apart from our competitors as we continue to attract and retain the best talent in the industry.
Taking share from our competitors.
Although transactional services of capital markets and leasing declined versus prior year due to the challenging market conditions, our outsourcing and advisory services showed strong growth continuing the momentum from the first quarter.
Globally capital markets investment volumes that hit the lowest level seen in a decade due to the rapid rise in continued uncertainty around interest rates combined with the tightening debt markets, which is affecting price discovery between buyers and sellers.
We are confident that our transaction business will rebound strongly once market conditions improve.
In the meantime to counter the decline in transactional revenue, we have been very proactive optimizing our costs throughout the business. We have done this before and our enterprising culture with leadership at all levels are fully aligned with shareholders allows us to make hard decisions quickly and in the best interest of our clients.
<unk> people and shareholders.
Finally during the quarter, we continued to make progress toward our enterprise 2025 plan growing our outsourcing and advisory business internally and strengthening our service offering by completing three strategic investments in the U S, Australia and New Zealand.
Now, let me pass things over to Christian.
Thank you, Chris and good morning.
Now that you've heard from Jay about investment management and from Chris on real estate services.
Ill add some comments on our consolidated results, our balance sheet and our financial outlook for the full year.
Please note that all references to revenue growth made on this call are expressed in local currency and the non-GAAP measures discussed here today are as defined in the materials accompanying this call.
Okay.
For our second quarter revenues were $1 1 billion down 4% relative to the prior year, which was a record second quarter for our business.
Our capital markets and leasing service lines reported revenue declines of 38% and 7% respectively in line with market conditions, and our expectations continuing challenging trend started last summer.
Our recurring investment management, and outsourcing and advisory service lines each reported strong growth.
On an overall basis internal revenues declined 10% attributable entirely to lower transaction volumes.
Consolidated adjusted EBITDA for the second quarter was $147 million relative to $161 million in the prior year with margins at 13, 6% versus 14, 3% in the prior year quarter.
The margin reduction was attributable to the decline in capital markets volume, particularly in our EMEA region, where producer compensation is partially fixed.
The overall margin impact was moderated by growth in our higher margin investment management operations as well as aggressive cost control actions across the company.
We have achieved cost savings of approximately 28% during the second quarter.
And we expect a similar or greater level of savings in each of the third and fourth quarters.
Turning to our balance sheet, our financial leverage ratio defined as net debt to pro forma adjusted EBITDA.
Was two four times at June 30th reflecting capital deployed on acquisitions during the past 18 months, which are performing in line with our expectations.
As well as seasonal working capital usage.
Absent any significant further acquisitions, we expect our leverage to decline to under two times by year end.
On June one we completed the early redemption of our 4% convertible notes issuing $4 1 million new subordinate voting shares.
The early redemption eliminates the interest expense related to those notes and increases the amount of permanent capital on our balance sheet.
At present <unk>.
5% of our indebtedness is that a is that attractive low fixed interest rates.
Our weighted average interest rate for the second quarter was four 6% up 130 basis points over the prior year.
Less than the 450 basis point jump in floating reference rates during the same period, demonstrating our active management of borrowing costs.
With respect to our financial outlook for the full year 2023, we are maintaining our current outlook.
We expect lower capital markets and leasing transaction volumes to persist for the remainder of the year with the impact partly offset by cost control efforts across our company.
We also expect continuing strong growth in our recurring service lines investment management and outsourcing and advisory.
Overall, we expect full year adjusted EBITDA to be up between 6% at 14% relative to 2022.
We expect the majority of our second half growth to be focused in the fourth quarter.
Due to easier prior year comparative in our transactional business and.
And expected incremental management fees from fundraising and investment management.
Full year adjusted earnings per share is expected to be down slightly to up slightly on higher interest expense as well as the impact of a larger proportion of earnings coming from non wholly owned operations.
That concludes.
Fluids my prepared remarks.
I'd 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'll hear three Tom pump technology request and your question is what will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by the <unk>.
If you are using a speaker phone please lift the handset before pressing and Keith.
Please only press star one one time, if you press more than once you may be removed from the Q1 moment. Please for your first question.
Your first question comes from Stephen Macleod with BMO capital markets. Please go ahead.
Great. Thank you good morning, good morning, everyone.
Just a couple of questions.
Just a couple of questions one is around the investment management fund raising environment.
You suggested that you.
You expect a very strong back half for fundraising and I'm. Just curious if you can give a little bit of color around what's driving that.
As you pointed out Jay I think in your prepared remarks that.
Fundraising is a challenge in the industry, but youre still expecting a strong accelerated back half.
Yeah.
You look at.
It's still unclear.
<unk>.
I think that the reason.
We're seeing or the entire industry is seeing a slowdown is for the same reasons capital markets. In some ways is seeing a slow down everybody is trying to figure out how that might impact value of assets within funds and so on and so forth the beauty of our investment management platform.
<unk> and the fact that we create we curated over a long period of time is that we focused on defense strategies infrastructure and other highly sought after investment classes. So redemptions for us have been modest if if if at all.
There is there's been redemptions and many many funds that have more traditional real estate asset classes, but I think investors generally are being more cautious, but our pipelines have never been stronger. So we are having more meetings, there's more converse.
Station with new potential Lps throughout the entire system. So we're all excited about that it's just taking longer for them to make.
Final decisions.
<unk>.
But.
That's been the case I would say now for two quarters, maybe a little maybe three quarters, so sooner or later, they're going to have to start to make some decisions and we think that will be at the front end of those decisions given our asset classes.
Okay. That's great. That's good color. Thank you Jay.
And then just within capital markets and leasing.
Obviously, you've talked about just the sort of weaker backdrop persisting for the back half of the year, which I think is the expectation that everyone has.
Can you talk a little bit about just sort of your activity levels.
Are you seeing a lot of kicking.
Kicking the tires and just the transactions are not getting done I mean, just as it relates to potentially pent up demand.
Yes, Hi, Steve It's Chris here, we're certainly taking more meetings in Q2 and going into Q3.
<unk> more and bringing new mandates to market certainly at the lesser numbers and volumes, but we are seeing activity that will transact probably towards Q4.
The market has stalled and as I said in my opening remarks that we're at a 10 year level.
You have got Germany for example, down 68% year over year U S down 65%.
So, but we're seeing some some.
Good meeting starting to take place in investors wanting to test the market.
That's great.
Thanks, Chris I appreciate that color thanks, guys.
Yeah.
Your next question comes from Stephen Sheldon with William Blair. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions and great great quarter overall in a tough environment did want to ask about the slowdown in outsourcing and advisory in the Americas I think it had been growing kind of high single digits. The past few quarters down to 3% year over year this quarter anything specific driving that such a tough call.
Comps for one off items and then how are you thinking about the growth outlook there.
Over the next few quarters and into early 2024.
Okay.
Just give me a secular Stephen we're going ahead.
We don't know, we don't know if youre facts ratio.
Just by them that surprised by your question.
Okay.
Like Ed.
Yes.
Maybe I'll ask.
My name is actually up in the Americas, Stephen Bye Bye about 10 million bucks on a quarter over quarter basis.
So.
Sure.
The year over year slowdown.
Because it had been growing I think my numbers at least 9% <unk>, 7% <unk> down at 3% this quarter year over year.
So I don't know if maybe valuation had slowed down given that there might be some.
Transactional pieces there.
Alright, Thanks, I understand the question now.
Part of our outsourcing and advisory business has.
His evaluation practice and that valuation practice.
Recurring service offering in that.
Provides ongoing property valuation on an annual basis to <unk>.
Institutional clients, who.
Contract us to do that work.
There is some additional.
Additional work that gets done on the front end as transactions occur and as new loans are originated.
That part of the valuation business.
<unk> declined clearly.
And maybe thats, what youre, what youre seeing there that could probably be the.
Probably the single biggest driver.
Reduction in volume there.
Okay.
Okay.
Got it that's what I figured.
And then just.
2025 quickly approach and you guys have your targets out there.
Just curious.
It seems like you've done multiple of the kind of five year targets when you're thinking about providing your outlook for 2030, I know, there's a lot going on in the near term, but just curious where when we maybe start expecting to see some of those longer term targets again.
It's funny you you mentioned 2030.
We're doing lots of work on 2030 right now.
Which is way ahead of where we would have been.
Several years ago, we generally would start our five year plan.
Three and a half years, maybe four years into our current plan. We actually started early this time.
But I don't think we would make it public much much before.
We can.
We're finished the current five year plan, but theres been a lot of thinking around the 2030 plan what do we look like in 2030, it's quite exciting from our perspective, we see some very very interesting ways for us to continue our current current.
Our growth trajectory, but right now it's quite remote.
And my commentary is just.
It's just around.
The fact that we think that we can continue to grow at the same kind of clip we have historically for much further than the current five year plan.
Got it and maybe just one more.
Chris I think you kind of talked about seeing.
Some good activity on the capital market side of the deal.
Volumes still down quite a bit year over year. It looks like you picked up some of your peers have reported green shoots in areas like or sub sectors like multifamily industrial.
Sectors like that just curious what youre seeing out there if we looked at by almost by sub sector of our different asset classes within commercial real estate is there more activity happening in certain subsectors in others.
Yes, absolutely.
Number one asset class that investors are looking at is that industrial logistics its been a five year boom in the marketplace.
You can see is quite low so we're seeing rental appreciation and so that continues to be a hot sector.
Same with multifamily with many cities around the world. He has got a.
Over demand situation.
Where.
Rental tenants are looking for properties and so we're seeing rental increases in multifamily. So I think that's a.
Good sector.
There's the whole flight to quality in terms of office leasing so the very best buildings. The trophy assets with the best <unk> Best locations best tenants are still going to be an attractive investment.
And then I would say the alternatives.
Student housing data centers.
Et cetera, but the problem is it's such a small pool of assets, but it's very much in demand.
Those are the sectors that we're seeing that have interest with investors today.
I would also add another thing to what Chris said.
It's geographic.
Our geographic diversification, if you take a look at our APAC numbers.
They were surprisingly better than the rest of the world, which is interesting because things may be turning there a little bit whereas in the U S capital markets and leasing were down whereas at APAC, They werent down nearly as much and so we don't know whether those are.
Early signs yet.
Yeah.
To us that's a green shoot.
Absolutely Jay just to follow on up on that.
In Asia Pacific, We've got a first class regional and local management teams and we're seeing real good progress in our Japanese capital markets business going from strength to strength.
We've also improved our operations in Korea, and Singapore. So we saw a couple of large transactions this quarter in those two markets.
Then a pillar of strength is still our Australian business and we're seeing some again industrial logistics sales and then the return to residential project marketing.
With the heavy immigration coming into Australia, so definitely some green shoots there.
Thank you guys appreciate the color here.
Ladies and gentlemen, as a reminder, should you're asking a question. Please press star followed by the one your next.
Comes from Derek <unk> with Raymond James Please go ahead.
Hi, Thanks, it's nice to have Chris join us for the call and because their money for each one.
So thanks for your comments on the APAC region, because that's one of the questions I had.
That's my biggest concern coming into the current where Mike Jones on behalf of the quite nicely.
Especially in the Americas. So certainly showed you you've been quite proactive with our cost structure.
Question is around.
The outlook you provided.
The back half I think you mentioned in your prepared remarks, you expected more savings.
That could be achieved.
Wondering if you could provide additional color around.
Yes.
Further if we have been active on managing our costs.
And we've been positioning ourselves.
Two <unk>.
This decline in capital markets activity that started.
Nine months ago.
So we have been proactive in reducing head count and producer support and administration.
Rolls.
Managing that headcount as best we can despite the fact that there is activity as Chris says.
People looking at transactions.
So.
Prudent there on our head count.
Managing the discretionary costs in the business.
Travel.
Conferences that sort of thing.
So we've made some very good progress.
Progress there as I mentioned in my prepared remarks $28 million.
The second quarter.
We're looking for are the same or better in the third and fourth quarters and that will possibly impact our margin for the full year.
How would that differ from the cost savings that you achieved during COVID-19 or how different of an approach to do.
Did you.
Same playbook Frederic.
But a different situations slightly.
During the pandemic it was actually much more black and white.
Our people were at home transactions simply Werent being talked about and Werent being explored so we made more dramatic.
Cuts to those.
Those areas.
I think from a.
Overall perspective.
Era cuts were significantly more.
More in dollars.
But they were focused on the same areas of our transactional business.
Just to add some additional color.
Remember we've got this decentralized partnership model and so we've got leadership locally aligned to performance and <unk>.
They are being proactive.
It's a basket of businesses and so we've got some countries performing well some service line is performing well so it's not looking at cost containment across the board it's being selective.
And looking at those service lines and countries that are chat.
Challenged and letting the ones that are going well continue to run well.
And let's not forget the highly variable nature of our our professionals globally around the world that compensation that adjusts based on their production.
So we feel as you're hearing from from Chris and from.
From Christian.
Net.
This is a road we've been down several times before.
The structure of our business is quite unique in this respect and and I think leadership has consistently had the fortitude to act when times like these occur and we're doing that and the results are showing up so we're pleased with that.
Awesome. Thank you that's all I have.
Okay.
Thanks, Brian . Your next question comes from Jamie Shen with RBC capital markets. Please go ahead.
Thanks. Good morning, guys just wanted to follow up on this.
The leasing business.
Capital markets revenue.
Some of your peers were down about the same level, but that leasing seems to have done.
A little bit better I wonder if.
You know, whether that's a different asset mix geographies and kind of what would account for seemingly.
Seemingly better year over year performance.
And then maybe how do we think about the trajectory of that business over the next few years I know weak office.
So strong, but maybe if you could provide some color as to how to think about the growth beyond beyond this year.
Yes. This is Chris here.
It is a geographic topics, so Asia Pacific leasing was up 24% year over year on the quarter and this was attributed to a.
A couple of things one again I mentioned the <unk>.
<unk> performance in some of our Asia Pacific operations.
Korea, Singapore.
Japan and then we've also got a.
Growing business in India.
But predominantly it would be Australia again, we are the leader in the E class landlord leasing business and there is a whole trend at the flight to quality for office users to go to the best.
Buildings, and so we're capturing a lot of that market in Australia, which is helping the overall leasing markets for the company.
Okay.
And in terms of your guidance.
For the year I guess two question one is.
Okay.
What would that assume in terms of AUM growth.
In the back half.
And then instead of it's Egypt confidence and the Guy really predicated on your cost cutting efforts that you've done so far is that in any way kind of the main driver to you being able to sustain the guidance.
Yes.
Answer your question Jimmy.
At June 30 was 99 billion, we certainly expect to be.
Well north of 100.
Sure.
No exactly know, where that's going to be but but definitely a few billion and north of a 100.
By the end of the year and that will come from.
Fundraising that we expect will occur before.
At the end of the year.
As Jay mentioned, we've had very modest redemption activity. So that's not really a factor of valuation and our AUM is.
It's also a modest negative but not something that we're concerned about so it's really all about fundraising for us in terms of our trajectory.
And just as a reminder.
Our fee paying AUM is the number that.
Generate that revenue our AUM at the gross measure that includes leverage so if we raise.
For discussion purposes, a $1 billion.
Our AUM will actually go up.
10 state by $2 million, given the leverage that's done in the portfolio.
So just be cognizant of that.
In terms of your other questions.
Cost control is certainly will be a continuing focus for the balance of the year as I've mentioned, a couple times on the call.
And that's part of what is in our outlook.
So had a couple of tuck in acquisitions.
Actually three tuck in acquisitions this year.
To date, so those will continue to annualize into the results over the next two quarters.
So and of course, our outsourcing business will also continue to grow over the next two quarters and that will drive some additional EBITDA to help us achieve our outlook.
Okay.
Hi.
Your next question comes from Maxim.
So <unk> with National Bank financial Please go ahead.
Hi, good morning, gentlemen.
Alright.
I just wanted to start a little bit with EMEA. If it's possible would you mind, providing you with more color in terms of.
The operating earnings.
Loss in the quarter is it again more of a function of the compensation structure.
Than anything else.
Sort of any additional data points you can provide on that geography.
Yes, Max it's it really is that it's the compensation structure, which has a partially fixed component and capital markets and as you can see in the materials to capital markets revenues in EMEA are down.
Quite quite significantly in the quarter. So that's the driver of it.
The revenues are offset by growth in outsourcing and advisory, but those margins and that sort of thing and advisory.
Or sort of low low double digit area, whereas the capital markets business in EMEA is a significantly higher margin operation and as the revenues come down that that market margin deleveraging.
More significantly impacts the amount of EBITDA generated as well as the operating earnings that are generated.
Okay. Thanks, a lot.
Clarifying question and then.
Jamie maybe a bit more of a broader question I mean, yes.
If you listen to some of sort of the bearish commentary around kind of commercial real estate.
In general is that actually potentially the biggest shoe dropping is kind of on 25.
26 sort of timeframe I'm just wondering what are your thoughts on maybe counterpoints to thoughtfully with the world in terms of the potential stabilization.
When it comes to.
The volume of the properties and how the sausage.
<unk> done that.
Sort of timeframe. Thank you.
So.
I think it's.
I divide the question into two first of all there's various asset classes in real estate.
We all know what they are.
Office is obviously something thats, that's under some pressure, but as Chris mentioned.
Okay.
Multifamily.
And and.
And our defense assets defensive assets into.
Infrastructure. These are all doing extremely nicely.
Operator would you mind clearing your throat at a different time.
These are all.
These are all.
Assets that are doing extremely well.
And the only difficulty then is availability of capital.
But there.
C.
I see a normalization happening, but we still need to see some stabilization in interest rates, we need to see a change in mentality among sellers.
Assets and buyers of assets, who are prepared to step up for some of the more quality assets that are that are available. So.
Im reading all the same things that you're reading.
Hearing 25 <unk> 26.
I can't believe it would be delayed to that length of time.
I think youre going to start to see activity in 'twenty four.
Maybe even early 'twenty four there are some funds out there that need to acquire theres funds out there that that need to dispose youre seeing blackstone sell massive pieces of their large REIT to redeploy their capital.
So I think it's all over the place frankly, and I think it's going to be.
At the more sought after real estate assets youre going to see movement sooner than you'd think of course.
We would like to see it starting tomorrow, but the reality is it's going to be sooner than we think because these assets are going to have the turnover. It's much more a mature asset real estate is today than ever before so.
So we're sort of thinking 'twenty four.
We're going to be.
Maybe not at record levels, but theres going to be nice activity happening at 24.
Super helpful. Thank you so much and then maybe just one last question. Obviously you continue to build your platform and engineering consulting and now that you have.
Quite a bit of seismic business I'm wondering if you can maybe comment on give us examples.
Around some.
Cross selling.
Success is that maybe you would've had across sort of the entirety of colliers.
That's my last question. Thank you.
Yes.
So Manny.
The obvious ones is the obvious ones are.
In engineering.
There is a ton of pre work that has to go into taking a piece of land from raw land to.
To the point, where it can be developed or sold.
So our engineering segment is very busy with homebuilders everywhere.
Builders of big distribution.
Facilities and so on in order to.
Get get the actual land sewage drainage.
Transportation all set up so that.
Properties can be sold in developed and so on and so forth. So there's a natural connection the same clients.
They own a piece of land or may want to acquire a piece of land need to have some.
Some assistance from an engineering firm to entitle that land to do what they wanted to do and that's just that's just one example for us.
Our engineering and design business includes also project management.
Which together those businesses are now approaching almost $1 billion in revenue and the project management piece of our business jet.
<unk> generated huge.
Is this from the engineering and from and from our our commercial real estate business.
As people are looking to build renovate.
And alter.
The structure of their real estate assets, including in the office environment, where we're very busy right now.
Trying to decide what the right component of an office is for a downtown office user with work work from home and a variety of other factors that we all know about so.
That's my answer I am happy to go into more detail if you want.
No that's perfect. Thank you. Thank you so much for the color.
Your next question comes from.
Today that same with Raymond James Please go ahead.
Hi, guys.
Great.
Yes.
Just a quick question on notice.
Notice the investment management margins were down sequentially from 45 to $45 42.
And I think you've got in guiding for somewhere to call close to 50% as we close out the year.
Can you just speak to the.
Pressure you've seen the margin what was behind that and how we get back to the the trend.
<unk> been forecasting on a go forward basis.
Yes, Patrick.
50% margins as our target down the line.
Three to five years from.
Now as we continue to scale the business.
We expect to achieve something in the order of 45% thereabouts this year.
In terms of our full year margin profile in the quarter, we as Jay mentioned in his remarks, we invested in distribution capabilities and other.
Growth initiatives.
New new staffing to support New fund launches so those growth investments do have an upfront cost attached to them and.
Those are going to bear fruit here over time.
And we're convinced of that and confident in that and that's why we're making those as ongoing investments in our platform.
No that's great color and I know you've made significant investments over time in the day, they've certainly paid off so thank you for that.
Alright, thanks, guys.
Okay.
There are no further questions at this time. Please proceed.
Well, thanks, everyone for joining us on this second quarter conference call and we look forward to speaking to you again during the third quarter.
Thanks for participating.
Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and have a nice day.
[music].
Okay.