Colliers International Group Inc. (NASDAQ:CIGI) Q3 2023 Earnings Call Transcript

Colliers International Group Inc. (NASDAQ:CIGI) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Welcome to the Colliers International Third Quarter Investor Conference Call. Today’s call is being recorded. Legal counsel requires us to advise that the discussions 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. Additionally, information concerning that 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 on Form 40-F as filed with the US Securities and Exchange Commission.

As a reminder, today’s call is being recorded. Today is November 2, 2023. And at this time, for opening remarks and instructions, I would like to turn the call over to Global Chairman and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir.

Jay Hennick: Thank you, operator. Good morning and welcome to our third quarter conference call. As the operator mentioned, I’m Jay Hennick and joining me today is Chris McLernon, Chief Executive Officer of our Real Estate Services business; and Christian Mayer, our Chief Financial Officer. This call is being webcast and can be accessed in our Investor Relations section of our website where you can find the presentation slide deck. During the third quarter, Colliers achieved significant growth in our high-value recurring service lines with a 12% increase in outsourcing and advisory and a robust 23% increase in investment management. Our proven business model marked by a diverse array of high-value recurring services has continued to demonstrate our resilience.

Today, about 70% of our earnings come from recurring revenues which bolsters our ability to navigate through various market fluctuations, including the current disruptions affecting our transactional business. Since the release of our second quarter report back in August, we’ve seen further industry-wide declines in transaction volumes due to ongoing factors such as rising interest rates, stricter credit conditions and continued uncertainty around return to work dynamics. As a result, we’ve adjusted our outlook for the traditionally strongest fourth quarter to be more conservative in our stance, as Christian will outline in just a few minutes. As I’ve said in the past, capital markets and leasing our essential services for all real estate investors, owners and occupiers or tenants.

They may be impacted from time to time as they are now but they will rebound once things stabilize which could be as early as the second half of 2024. Several years ago, Colliers embarked on a strategic journey to rebalance and reposition our company by integrating more recurring revenue streams. We introduced 2 important new growth engines, engineering and design and investment management, both of which have seen substantial growth and success since inception and we expect that success to continue well into the future. Our nearly 30-year track record of performance demonstrates our success and dedication to continuing to create substantial shareholder value and we’ll do that by continuing to grow our businesses 1 step at a time, expanding into new high-value recurring services and continually seeking out strategic growth opportunities especially in times like these.

Now, let me turn things over to Chris McLernon to discuss some of the highlights. Following that, Christian will provide us with his customary financial report and then we’ll open things up to questions. Chris?

Chris McLernon: Thank you, Jay and good morning. Our mission at Colliers is to maximize the potential of property and real assets to accelerate the success of our clients and our people while creating value for our shareholders. Today, Colliers remains resilient, benefiting from our years of strengthening our core business while adding fast-growing recurring service lines. In Outsourcing & Advisory, we achieved an impressive 12% year-over-year growth, 50% of which came internally through new contract wins. We expect this growth to continue in Engineering, Design, Project Management and Property Management. As mentioned, we have seen further declines in capital markets in Q3 due to interest rate volatility, limited access to debt and the continued price gap between buyers and sellers of real estate assets.

We are confident that capital markets will rebound, perhaps in the second half of 2024 and we are poised to take advantage once market conditions stabilize. Over the past few years, we’ve accelerated our investments in capital markets platform to grow our business, fill gaps and take market share. For example, in the U.S., we have built a significant debt advisory business at Colliers Mortgage. Today, our platform spans the entire U.S. with more than 150 experienced debt professionals to assist our clients originate and place real estate debt at just the right time. Once again, our expertise and ability to deliver exceptional results for property occupiers, owners and investors as recognized by Euromoney. Colliers was named Global Agency of the Year across the Americas, EMEA and APAC which is a testament to our strong and growing position in the industry.

Our professionals around the world continue to be enterprising, especially in the current market environment. Our latest global employee engagement survey saw our strongest scores ever, nicely exceeding external benchmarks. Our strong culture was also recently recognized by our inclusion in Forbes World’s Best Employers 2023 list. Now, let me pass this over to Christian.

Christian Mayer: Thank you, Chris and good morning, everyone. I will provide some additional commentary on our consolidated results, our financial outlook for the full year and our balance sheet. 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. In the third quarter, revenues were $1.1 billion, down 6% relative to the comparative prior year quarter. Our Capital Markets and Leasing service lines reported revenue declines of 42% and 9%, respectively, continuing the trends that started during the third quarter of last year. Having said that, our recurring service lines, Investment Management and Outsourcing and Advisory, each reported robust growth from a combination of acquisitions and strong internal growth.

On an overall basis, internal revenues declined 10%. Consolidated adjusted EBITDA for the second quarter was $145 million, flat relative to the prior year with margins of 13.7% versus 13.1% in the prior year quarter. The margin uptick was driven by growth in our higher-margin investment management operations with margin compression in our transaction business partially offset by ongoing aggressive cost control actions across the company. We achieved cost savings of $25 million during the third quarter and $53 million year-to-date. We expect an additional roughly $30 million of cost savings in the fourth quarter. We are preparing to extend our cost control efforts into 2024 to match the duration of the expected transactional revenue downturn.

We have revised our financial outlook for 2023 to reflect the declines in transaction velocity that occurred in the third quarter and the more challenging current market environment. We expect capital markets and leasing transaction volumes to be down 5% to 15% in the seasonally strongest fourth quarter relative to the prior year period with the impact partly offset by ongoing cost control efforts. In our recurring service lines, we are expecting to see continued growth, both internally as well as from recent smaller tuck-in acquisitions. In Investment Management, fundraising year-to-date has been softer than expected and that trend continued in the third quarter. For the full year, we now expect fundraising to be approximately $3 billion compared to $8 billion raised in 2022.

We do, however, continue to see strong interest in our alternative investing strategies which should translate into accelerated fundraising in 2024. Implied in our full year outlook is the expectation that fourth quarter EBITDA will be roughly flat versus the prior year quarter. Although we had previously expected EBITDA to increase in the fourth quarter, a flat result will demonstrate the resilience of our recurring revenue streams and the highly variable nature of the cost structure in our transactional operations given the current market conditions. Our adjusted earnings per share is expected to continue being impacted by higher interest expense as well as the larger proportion of earnings coming from non-wholly owned operations. As such, we now expect full year adjusted earnings per share to be down from last year to the range of $5.10 to $5.50.

In terms of our balance sheet, our financial leverage ratio defined as net debt to pro forma adjusted EBITDA was 2.4x at September 30, consistent with the level reported at June 30 and driven by capital deployed on acquisitions, over the past 2 years. These acquisitions are predominantly in recurring service lines and are performing well. We now expect our leverage to decline to 2x to 2.2x by year-end. That concludes my prepared remarks. I would now like to open the call for questions. Operator, can you please open the line?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Michael Doumet of Scotiabank.

Michael Doumet: The first question I had was really just as it relates to the slowing leasing activity. Just wondering if you can break that down in terms of end markets and how that’s evolved in the last 12 months. Just wondering if you see incremental weakness in industrial and if so, what that means for the cadence into 2024.

Chris McLernon: Michael, it’s Chris here. Just some commentary. There are some bright spots throughout the global platform. If you look at leasing in our Asia Pacific region, we were up 9.5% year-over-year. And that relates across the board. We had some strong leasing in Australia, New Zealand, Singapore, Hong Kong and India and that would predominantly be in office and industrial. Another bright spot would have been Canada. We had a 52% increase in leasing. So there is some leasing taking place on the negative side. You’d see we’ve always been quite strong in industrial leasing around the world. And it’s the lack of supply, you’re looking at 3% to 4% vacancy. So it’s hard to get some transactions there. So, I think we’re seeing looking forward some continued growth in leasing in Asia Pacific and the recovery in the Americas and EMEA may be a little bit slower.

Michael Doumet: That’s great. Just going back to the Q4 expectation for flattish EBITDA, Christian, just wondering if you can maybe break that down a little bit again. So you’re expecting capital markets leasing to be down between 5% and 15%. Presumably, O&A is rising there, just not sure on the quantum, if you can talk about that? And then lastly on investment management for Q4.

Christian Mayer: Yes. Thanks, Michael. So in terms of O&A, we do expect organic growth in Q4. That’s going to continue and we’ve been running mid- to high single-digit organic growth there this year and that’s going to continue. And in terms of investment management, we have a nice cadence management fee revenue that is in the EBITDA in Q3. That’s going to continue and we do expect a little bit of fundraising in the fourth quarter as well that will be additive to EBITDA in the Investment Management segment.

Operator: Our next question comes from the line of Stephen Sheldon at William Blair.

Stephen Sheldon: First thing here just on if you think about 2024 adjusted EBITDA, can you help us think about how much benefit you might have in terms of incremental flow-through from cost actions taken so far? And I guess the planned reduction that you talked about for 4Q which I think was $30 million, if I heard that correctly. How much of an incremental boost could that be as we think about bridging 2024 adjusted EBITDA back to 2023?

Christian Mayer: Yes, Stephen, thanks for that question. We certainly expect to be able to continue and sustain the level of cost actions we’ve taken to date. So that was our — that’s kind of our operating assumption into 2024. It may be difficult to increase the level of cost action but that’s something we will consider as we go through our budgeting process here over the course of the next month and have detailed reviews with our operators, I believe, locally and regionally.

Stephen Sheldon: Okay. I guess just as we think about the $52 million year-to-date cost-cutting number, is that kind of are you reaching that full run rate in 2023? Or I assume there’d be some flow-through actions into — I guess [indiscernible] based into 2023 and how much of this flow-through in 2024?

Christian Mayer: Exactly. So we have reached our run rate at this point and $25 million to $30 million a quarter is the run rate. And those actions took effect in Q2 of this year. So they are now fully in effect and they will continue until we see a meaningful recovery in the transaction business.

Stephen Sheldon: Okay. And then just on the IM side, I just kind of want to ask on how we should think about modeling AUM in the fourth quarter? I think you kind of mentioned maybe that there would be a step-up given the fundraising activity. But just — and then — so kind of how should we think about 4Q? what are you seeing that gives you confidence about fundraising equity maybe picking back up next year?

Jay Hennick: Well, let me talk — let me let Christian talk about the fourth quarter and how we’re seeing the fourth quarter. But fundraising across the board with absolutely every publicly traded firm that reports their fundraising has been tough regardless of asset class which has been interesting, of course, traditional real estate has been hit the most but alternate asset classes and infrastructure like we have has done much better but still soft. What’s been interesting is there is a lot of interest in our funds and I believe other funds that are in the market that are similar to our types of funds but there’s been just been a delay that’s impacted us. So if we look at our pipelines relative to last year, they’re up materially, whether we can convert them towards the end of the year or most probably mostly into the first part of 2024 is still a question to be answered.

But the results of our investment management professionals have been stellar relative to others in their industry. They’re in the market actively with several different strategies. So that puts us in the game. And we’re cautiously optimistic that 2024 will be a very strong year for fundraising. My guess is it will do better than we did last year in overall fundraising but we still have to wait and see.

Christian Mayer: And Stephen, on turning to the fourth quarter, we do expect some fundraising. It will be modest. And as I outlined in my comments, fundraising this year is significantly less than it was in 2022. And so I would expect our AUM will be roughly flat to perhaps up a little bit in the fourth quarter. Positive benefit from fundraising and also some ongoing activity in terms of mark-to-market which we’ve been experiencing now over the last year, modest mark-to-market on our traditional real estate assets primarily. So hopefully that’s helpful.