Q3 2024 Colliers International Group Inc Earnings Call
Welcome to the Colliers International third-quarter investors' conference call. Today's call is being recorded. Legal Council requires us to advise that the discussions scheduled to take place today may contain forward-looking statements that involve known and unknown risk-sensitive youth.
Actual results may materially different from any feature 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 as contained in the company's annual information form, as filed with the Canadian Securities Administrators, and in the company's annual report on Form 40F, as filed with the U.S. Securities and Exchange Commission.
Speaker Change: As a reminder, today's call is being recorded. Today's Tuesday November 5, 2024, and at this time for opening remarks and introductions, I would like to turn the call over to Global Chairman and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.
Thank you, operator, good morning and thanks for joining us. As the operator mentioned, I'm Jay Hennick, Chairman and Chief Executive Officer with me today as Chris McLernon and CEO of our Real Estate Services segment and Christian Mayer, Chief of the Natural Officer.
As always, this call is being webcast and is available in the investor-relation section of our website along with the presentation slide deck.
This quarter, Pauliard's realigned its operating segments to better reflect the future potential and value of our complementary growth engines. And we delivered solid growth across each one of them.
Engineering grew by 21%, driven by acquisitions.
In real estate services, revenues and capital markets rose a strong 17 percent, exceeding our expectations, while leasing continued to grow nicely, building on last quarter's strong momentum.
And in investment management, recurring management fee revenue showed a modest increase, though fundraising fell below expectations, reflecting a trend seen across the industry.
We anticipate stronger fundraising in 2025.
Assets under management grew by $2.4 billion during the quarter, rising from $96 billion to nearly $99 billion, which is very positive.
We also completed the acquisition of Englobe, creating a substantial new growth platform in Canada.
After the quarter, we added GWAL in Canada and Pritchard Francis and TTM in Australia, continuing our growth trajectory in this segment of our business.
Overall, we continue to have a robust M&A pipeline that positions us well to continue to grow and strengthen our operations for the long term.
Over the past decade, Colliers has transformed, one step at a time, into a uniquely differentiated global professional services and investment management firm.
Through the Collier's Way, we have continued to strengthen our commercial real estate operations around the world while adding new growth engines and service lines to provide more recurring revenue streams and diversification to our successful business model.
Today, recurring revenues contribute more than 70% of our earnings, providing exceptional balance and predictability, driving greater shareholder value now and into the future.
Speaker Change: with experienced leadership, significant inside ownership, and a proven 30-year record of delivering 20% annualized returns for shareholders.
We expect to sustain mid to high single-digit growth going forward. And as we enter 2025, we expect further upside to come from improving capital markets.
enhanced investment strategies and capital raising in our investment management business and continued incremental growth through acquisitions across all segments of our business as we have been doing for so so often in the past.
Speaker Change: Now, let me ask Chris McLernon to discuss some highlights, and after Chris is completed, we will hear from Christian on his financial report. Chris?
Chris McLernon: Thank you, Jay, and good morning everyone. Collier's Real Estate Services delivered another quarter of strong results.
Chris McLernon: Capital markets revenues rose 17% exceeding expectations and marking a second consecutive period of growth. We saw growth across the core asset classes of office up 77%, retail up 53%, and industrial up 19%.
Collier's transaction volumes were up meaningfully in the Americas and APAC regions, supported by the recent softening of interest rates, improved lending conditions, and the narrowing of price expectations between buyers and sellers.
Debt Origination continued to show solid improvement in the quarter with both agency and non-agency business performing well.
Speaker Change: Leasing continued to build on last year's, last quarter's momentum, achieving a six percent growth in the third quarter, led by EMEA and the U.S. regions.
Speaker Change: In particular, office leasing was up 22% on the back of several large transactions during the quarter with strong performances in the UK, Germany, Poland, and the US markets.
Most major markets are rebounding with rental rates stabilizing. Demand for Class A office space remains high as occupiers continue to focus on improving the employee experience and modernizing workspaces.
Speaker Change: Our recurring outsourcing services again delivered steady growth of 5%. We are seeing increasing momentum in our valuation and advisory business driven by the multifamily sector and the increased activity in capital markets.
Speaker Change: Our investments in our people and business, which help us fill gaps and capture market share, we will continue to enhance our platform and deliver long-term value for our shareholders.
Speaker Change: This past quarter, Time included Colliers on its list of world's best companies. In addition, we were named to Forbes World's Best Employers ranking for the second year in a row and are proudly the only global, full-service commercial real estate firm on the list.
These accolades speak volumes about our growth and ability to deliver a world-class experience for our clients and our professionals.
Speaker Change: Now I'll turn things over to Christian, who will provide more details on our financials.
Christian Mayer: Thank you, Chris. Good morning.
Christian Mayer: Please note that all references to revenue growth made on this call are expressed in local currency and that the non-GAAP measures discussed here today are as defined in the materials accompanying this call.
Christian Mayer: As noted by Jay, in the third quarter we realigned our operating segments to better reflect our operations and the value and growth potential of each. A summary of historical results is available to be downloaded on our investor relations site.
Christian Mayer: Thank you. Thank you.
Christian Mayer: Third quarter revenues were $1.2 billion, up 11% relative to the prior year period.
Christian Mayer: Each of our segments and service lines reported solid revenue growth for the quarter.
Internal growth was 5% overall and was led by capital markets, which was up meaningfully against a low base in the prior year, particularly in the Americas and Asia Pacific.
Christian Mayer: The engineering segment's internal growth was flat for the quarter due to the completion of several large project management contracts in the prior year period, which resulted in a challenging comparative.
Christian Mayer: Adjusted EBITDA for the third quarter was $155 million, up 6% over the prior year.
Christian Mayer: Our margin for the quarter declined slightly to 13.1% due to higher captive insurance reserves in our corporate segment and the margin dilutive effect of pass-through performance fees in our investment management segment.
Christian Mayer: Our real estate services margin remained flat for the quarter with operating leverage from higher revenues offset by continued aggressive recruiting in strategic markets.
Christian Mayer: Turning to investment management, we raised a total of $1.1 billion of new capital commitments during the quarter, bringing year-to-date fundraising to $2.6 billion.
Speaker Change: We now expect to raise about $3.5 billion for the full year, which is an increase of 15% over 2023, but below our expectations for 2024.
Speaker Change: We are in the process of deploying Capital Raised and have started to fundraise for new vintages launching early next year.
Speaker Change: Our highly differentiated, direct, private capital investing strategy, with a focus on alternatives and infrastructure, continues to resonate with investors, and we expect fundraising velocity to increase in 2025.
Speaker Change: Assets under management increased $2.4 billion during the quarter to $98.8 billion. Growth was driven by fundraising, positive mark-to-market adjustments in almost all asset classes,
Speaker Change: and foreign exchange gains in our European portfolio.
Speaker Change: Moving to our balance sheet, our financial leverage ratio defined as net debt to perform adjusted EBITDA was 2.5 times as of September 30th, with about 0.5 turns attributable to capital deployed on the recently completed angle of acquisition.
Speaker Change: We expect leverage to decline to just over two times by year-end as we generate seasonally strong fourth quarter cash flows.
Speaker Change: We have revised our outlook based on our year-to-date operating results and our updated fundraising expectations for the fourth quarter, as I noted a moment ago.
Speaker Change: With less than two months remaining in the year, our investment management results are essentially locked within a tight range.
Speaker Change: Our real estate services performance, particularly in capital markets, is subject to greater variability as we approach year-end and could lead to the higher end of the outlook range.
Speaker Change: Our expectation for adjusted earnings per share growth is being impacted by the mix of earnings and higher-than-planned depreciation expense due mainly to technology investments.
Speaker Change: Let me take a moment to put this year's financial performance into context. In real estate services, we are encouraged by the beginning of the rebound in capital markets, albeit from a low base last year.
Speaker Change: Leasing continues to show solid momentum and we've been taking advantage of market conditions to recruit aggressively.
Speaker Change: Our engineering business is poised for internal growth based on our current backlog of work as well as incremental earnings from acquisitions completed this year.
Speaker Change: Investment management has demonstrated consistent, resilient earnings despite challenging fundraising during the past two years, but we expect conditions to improve in 2025.
Speaker Change: In summary, our three businesses are well positioned for the years ahead.
Speaker Change: That concludes my prepared remarks.
Speaker Change: We'll now open the call for questions. Operator, can you please open the line?
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. If you are using a speakerphone, please lift the handset before pressing any keys.
Speaker Change: Your first question comes from Stephen Sheldon at William Blair. Please go ahead.
Stephen Sheldon: Hey, thanks.
Stephen Sheldon: First here, can you just walk through the moving pieces for the Profit Guide reduction? How much of that is due to lower fundraising and expected profit in IM? And it also sounds like you're reinvesting in an RES to support the growth outlook there. So maybe, you know, how much more are you reinvesting there maybe relative to what you included in the guidance last quarter? Just more detail on the moving pieces of the Profit Guide.
Speaker Change: Yeah Stephen, so I think as we noted in the in our comments and then the press release
Speaker Change: The adjustment to the earnings outlook is entirely due to investment management, fundraising.
Speaker Change: And to give you a bit more color on investment management, now the capital commitments that are generated in any given year become accretive to revenues in a modest way and to EBITDA in a very significant way because of the high incremental margins on this, you know, in the range of
Speaker Change: 40 to 50 percent incremental EBITDA margin. So that is very impactful to our earnings and with our
Speaker Change: fundraising outlook and now, you know, we've got three quarters completed and our outlook for Q4 we have adjusted that accordingly and and that's really what's driving the change in the outlook.
Stephen Sheldon: Okay, got it. And then maybe for Chris on the leasing side, you know, a little bit of deceleration there this quarter, although I mean the growth rate is still very good. You know, I think some of your peers have reported continued acceleration there. So anything to call out there and just generally how are you thinking about the outlook for leasing growth in the fourth quarter?
Speaker Change: and heading into next year and would also love some commentary on what you're seeing. You gave some good commentary on office. What have you seen on the industrial side?
Speaker Change: We had a pretty good quarter for leasing on the back momentum of the previous quarter.
Chris McLernon: You know, we're seeing some larger deals starting to come to market, you know, there's been some hesitation over the last few years, but now there's some confidence in the economy, so some of these bigger decisions are being made, and we're seeing that in some transactions at Collier's.
Speaker Change: Certainly the trend is the return to office continues.
Speaker Change: and that through mandates or just through, you know, people wanting to get back and...
Speaker Change: be in a cultural situation and share time with employees. So that's all positive. And then we're seeing, you know, that definite trend of going to the prime space, you know, that has to be more of an experience space.
Speaker Change: In terms of industrial leasing, we had an 8% increase in the U.S.
Speaker Change: in the third quarter. It's our largest market for industrial leasing, so that's a...
Speaker Change: a good sign, but generally around the world there is a hesitation from tenants.
Speaker Change: to sign leases, there's been more vacancy on the market so it takes more time to look at the alternatives. And then there's also the hangover from, you know, this real buildup and taking space from the COVID e-commerce period.
Speaker Change: But the fundamentals long-term are very strong for industrial with e-commerce continuing, on-shoring, near-shoring. So we're feeling that there'll be more of an equilibrium in the industrial leasing by mid-2025.
Speaker Change: Got it. Very helpful. Thank you.
Speaker Change: Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1.
Speaker Change: Your next question comes from Jimmy Shen at RBC Capital Markets. Please go ahead.
Jimmy Shen: Just on the fundraising within investment management, some of your peers are talking about better asset monetization environment, which could actually lead to better fundraising, which it sounds like that's what you guys are saying. I'm just wondering to what extent are you seeing the same with the funds that are close to?
Speaker Change: end of life, and then what does your 2025 fundraising pipeline look like?
Speaker Change: Yeah, Jamie, we have been deploying capital this year, but we've also been
Speaker Change: And we noted it last quarter, we've also been harvesting gains in our portfolios.
Speaker Change: So we do have certain older vintage funds that are nearing the end of their lives, and those are...
Speaker Change: Funds where you take the opportunity to selectively sell assets and realize those gains and return.
Speaker Change: that capital to investors, you know, that's the capital cycle. And it certainly facilitates future fundraising for us.
Speaker Change: And we did have some more of that activity in the third quarter. We expect that activity to continue, you know, deploy new capital and then also harvest gains and realize gains on existing investments and recycle that capital to investors.
Speaker Change: And that will lead to additional fundraising going forward, because that is a very positive signal, obviously, for us.
Speaker Change: our LPs. In terms of our 2025 fundraising outlook, we'll talk about that in February when we deal with our year-end results and our 2025 outlook.
Speaker Change: Okay.
Speaker Change: In terms of the real estate services margin,
Speaker Change: pointed out the flat margins. Sounds like it's aggressive recruiting. So how do we think about the operating leverage going forward now with if we see team recovery? Do we expect that? How do we think about that margin?
Speaker Change: So, our real estate services business, just to pull back a bit here, we've got leasing, capital markets, and outsourcing. Three different service lines.
Speaker Change: our leasing and capital markets business, as we generate additional revenues there, we do expect incremental margins in the order of about 20% on an incremental revenue dollar. But that is, when you look at the real estate services segment, that's muted somewhat by the incremental margins coming from valuation or from property management, which are more modest in nature.
Speaker Change: Okay so like if we see a decent amount of recovery within leasing and capital markets, you know, unlike this quarter we should probably see improvement in margin.
Speaker Change: Yeah, I would expect that, absolutely, in the fourth quarter. And as you know, Q4 is our seasonal peak quarter, so the margin is always higher in that period.
Speaker Change: The margin should be higher, absolutely.
Speaker Change: Okay and then last question just again as some of your peers have called out sort of big growth in the mortgage origination business you know in
Speaker Change: And I know you guys have balked up in terms of producers and sounds like you were underutilized. How big of a business do you see that being? And again, how do you see that recovering within the capital markets?
Speaker Change: Let me try that one. You know we investment we we we made some heavy investments
Speaker Change: probably 18 months ago, in retrospect, probably a little bit too early.
Speaker Change: But we have 160, 170 producers in the debt capital division of our company, which is significantly more than we've ever had before.
Speaker Change: and we're seeing a return, albeit slower than we'd like.
Speaker Change: But when things come back to normal and, you know, as capital markets picks up, in particular,
Speaker Change: we should see a lot of incremental activity through that business. Already this year, their numbers internally are up significantly over last year.
Speaker Change: And, you know, it really does move with capital markets. So, there's more capital markets transactions, both sides.
Speaker Change: There will be a lot more debt, which means that we'll generate more revenues and profits from that aspect of our business.
Speaker Change: I hope that helps. Okay, thank you.
Speaker Change: Thank you. The next question comes from Himanshu Gupta at Scotiabank. Please go ahead.
Himanshu Gupta: Thank you and good morning.
Himanshu Gupta: So just on the engineering division, I mean good to see this being reported as a you know separate segment and you have achieved scale here as well. So how should we think about the organic growth in engineering in this business?
Speaker Change: So, I mentioned the organic growth in our engineering practice on an ongoing basis.
Speaker Change: should be in the high single-digit, you know, five to seven, eight percent range as we you know, roll out across, you know, across 2025 and on an ongoing basis.
Speaker Change: thereafter.
Speaker Change: In the third quarter, I'll just point out again, I mentioned it in my call comments, we had a very tough comparative and very strong results in the third quarter of 2023, which were the result of a couple of large projects that were completed in that period.
Speaker Change: and are resulting in a lower organic growth rate for Q3 of 2024.
Speaker Change: Got it. So five to seven kind of organic growth and on the margin side I mean obviously I think there was some volatility in the last few quarters but going forward I mean would you say like low double-digit kind of margin stay on this business?
Speaker Change: I think that's right, I mentioned, yep.
Speaker Change: Okay, thank you. And then just to follow up on the investment management division, I am, you mentioned fundraising was lower than expectations in Q4. Was it, you know, the pipeline getting pushed out to next year or do you think in that potential capital or investors have moved on?
Speaker Change: Amen.
Speaker Change: We expect significantly more fundraising in 2025.
Speaker Change: for a whole variety of reasons. One, we think the market is coming back, as we've discussed.
Speaker Change: But secondly, we have a lot of new product in the marketplace. Our existing funds...
Speaker Change: basically ended, in many cases, ended or will end in 24. So we've got new funds coming to market in 25. Christian mentioned that there's been some repatriation of capital.
Speaker Change: So, we expect a pretty solid fundraising market in 2025 based on the way we're anticipating it now, but as Christian says, we'll give you a better report and outlook on that in our February results.
Speaker Change: Fair enough. And just from a timing perspective, do you think that, you know, that acceleration in fundraising, it will be more towards the second half of next year? Or is it like the first half of the year? I mean, is there a seasonality in terms of like fundraising, which typically isn't like, you know, closer to the event?
Speaker Change: Well, you know, again, we'll give you that will give you a better outlook, you know, in February, but generally speaking, when funds are initiated, it takes a quarter or two for them to for investors to re up.
Speaker Change: Remember, as you pay back, these investors in every fund, 85% on average, return into the following funds. So not only is this a recurring revenue business.
Speaker Change: But fund to fund, as long as you continue to provide good results for investors, investors tend to re-up into the following, into the subsequent vintages.
Speaker Change: So, generally, a vintage might go three years until the money is invested, and so several are closing out this year, so we expect...
Speaker Change: significant new activity next year. We expect, we hope, we'll see some significant new activity next year, but
Speaker Change: But I think it'll take a quarter or two before you see that velocity, if that's the question you're asking. I think it'll take a quarter or two before we start seeing that money start coming in.
Speaker Change: Thank you, that was very helpful. And my last question is on, Christian, I think you mentioned incremental margin of 20% on leasing and capital markets.
Speaker Change: So my question is that, did you achieve that incremental margin in Q3 as well? I mean, and was it completely offset by that recruitment, that aggressive recruitment you're talking about?
Speaker Change: Yeah, I mean, I think you've answered the question, Himanshu. You know, their investment in recruiting largely offset the incremental margin on those revenues in the quarter.
Himanshu Gupta: And then where are we in the process? I mean do you think like we are at the frag end of this recruitment cycle or is it going to keep on going for the next year as we see return in transaction volumes?
Speaker Change: Yeah, I would say that, you know, recruiting is part of everyday work at Collier's. We're constantly filling gaps and driving, you know, increased market share.
Speaker Change: You know to give you some color in terms of this aggressive recruiting comment, you know our biggest opportunities in the US
Speaker Change: and we're ahead of our targets from last year and we're focused on, you know, the core asset classes, office, industrial, retail. We're making some efforts for landing some multi-market brokers, brokers that, you know, transact across geographies and then both in leasing and capital markets.
Speaker Change: We're looking at specialty sectors like the hotel sector and building a global business.
Speaker Change: where we've recruited experts in the U.S., Japan, U.K., Spain, and Germany.
Speaker Change: and then we're taking advantage of high growth markets like Japan and India.
Speaker Change: bolstering our teams there. And then there's specialty cases where there's some team lifts and I can give you an example in Hong Kong where we added a first-class valuation and capital markets team. So it gives you a flavor of the recruiting and we think it's a real great time to be adding talent to Collier's.
Speaker Change: Thank you so much for coming. I'll jump back.
Speaker Change: Thank you. The next question comes from Daryl Young at Stifel. Please go ahead.
Daryl Young: Good morning everyone. Just dovetailing on that last question about recruiting professionals, has your mix and exposure to secondary versus gateway markets changed significantly in the last few years and is part of the recruitment drive to bulk up in some of the gateway markets?
Daryl Young: So, I guess I just, I get a lot of questions around whether, you know, as some of those markets improve and the office side improves, will colliers participate equally if it's mostly gateway focused in the recovery?
Speaker Change: Yes, I would say that, you know, we're focused in a parallel approach to get into those gateway cities in a deeper way. You know, those are the larger transactions, there's more volume of deals, so there's certainly the aspiration is there in our country and market leaders are focused on bringing in talent to beef up those gateway cities in addition to the secondary cities.
Speaker Change: And then flipping over to the investment management platform, could you just update us on where you're at in terms of integration of some of the sales and marketing side of the business for fundraising? And is that going to be a more concerted effort going forward to have sort of cross-selling of LPs?
Speaker Change: Well, that's a very good question and topical, actually.
Speaker Change: Yeah, I think the the Yeah, and again, I'm going to give you a probably too long an answer But our philosophy our philosophy has always been to differentiate because we are Partners with the operating management teams and each of our strategies and that has given us a huge competitive advantage We think over many others
Speaker Change: But with this soft fundraising environment over the past two years, each one of our platforms
Speaker Change: have expressed.
Speaker Change: a stronger desire to
Speaker Change: integrate to share opportunities than ever before. They operated independently. They all felt like they had.
Speaker Change: great visibility around fundraising, and because of the softness, everybody is open-minded to making some changes. So we are actively looking right now at
Speaker Change: Reorganizing.
Speaker Change: You know, more on that as we develop our thinking over the next couple of quarters.
Speaker Change: But there's some exciting...
Speaker Change: moves we think we can make to augment our management team, strengthen our distribution capabilities, leverage the both institutional and high net worth capital origination formats across the entire platform.
Speaker Change: It'll take some time. It'll take some few bold moves.
Speaker Change: but we have the capability internally and and we think that we can we can accelerate. So yes, we're quite excited about what that could be.
Speaker Change: but you know more on that as we as we develop our thinking.
Speaker Change: That's great. That's good, Collar. Thanks. Maybe one last one. In the opening remarks, you said commercial real estate transaction activity could pick up in the back half of the year such that you deliver at the high end of your guide.
Speaker Change: Is that a function of having some really big transactions in the pipeline that are maybe going to fall over the line at your end or could push into 25 or it's just a little bit more color on what gives you the optimism for that statement?
Speaker Change: Yeah, so I think we're seeing our pipelines build throughout the year and Q4 on capital markets is a seasonably strong quarter for us.
Speaker Change: And we're expecting, you know, 25% roughly increase quarter over quarter, you know, delivery. So some deals will slip over, but it seems like, you know, there is good, strong belief that, you know, we'll come through in that 25%.
Speaker Change: Thank you. Again, ladies and gentlemen, as a reminder, please press star 1 if you have any questions.
Speaker Change: The next question comes from Frederick Bastion at Raymond James. Please go ahead.
Frederick Bastion: Good morning, guys. There was good color on pretty much every business line, but I'm wondering on a geographical basis how Europe and the UK are performing more broadly speaking.
Speaker Change: I think EMEA had a good quarter. The UK has been a solid business.
Speaker Change: for us and immune from a few of the capital markets issues that were most you know most significant in the Nordics and Germany over the last couple of years.
Speaker Change: So, we're pleased with our UK operations and I would say that, you know, on the companies and firms on the continent, our German business, our Nordics business is starting to feel much more confident about the future trajectory, in particular, you know, in capital markets and leasing.
Speaker Change: Thanks for that, Christian. My next question is around the Anglo acquisition. I know it's early days, but are you seeing
Speaker Change: potential for revenue synergies with your project management business in Canada and how that is shaping up with respect to opportunities but also integrating the business within your own platform.
Speaker Change: and Bobby.
Speaker Change: We're seeing more opportunity, frankly, than we expected going into the Englobe transaction. Englobe, we're very pleased with it. Early stages, of course, but very pleased with it.
Speaker Change: But our Collier's Project leaders business in Canada is a market leader.
Speaker Change: and covers the country from coast to coast.
Speaker Change: And so, there's a lot of opportunity that we believe Collier's project leaders and GLOBE can pursue together, and they're looking at that. And so, we think that together, there's more synergy than we expected.
Speaker Change: Thank you. Thanks, Jay. That's all I have.
Speaker Change: Thank you. There are no further questions. I will turn the call back over to Jay Hennick for closing comments.
Jay Hennick: Thanks everyone for joining us for our third quarter conference call. We look forward to our February results and of course providing some comfort and forward-looking outlooks going forward from there. So thanks for participating.
Speaker Change: Ladies and gentlemen, this concludes the conference call. Thank you for your participation and have a nice day.
Speaker Change: Maybe I should have borrowed four jets.
Speaker Change: Music Music Music Music Music Music Music Music Music Music
Speaker Change: Stephen Sheldon, Christian Mayer, Jay Hennick, Christian