Colliers International Group Inc. (NASDAQ:CIGI) Q4 2023 Earnings Call Transcript

Colliers International Group Inc. (NASDAQ:CIGI) Q4 2023 Earnings Call Transcript February 8, 2024

Colliers International Group Inc. beats earnings expectations. Reported EPS is $2, expectations were $1.92. Colliers International Group Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Colliers International Fourth Quarter Year-End Investor 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. Actual results may differ materially 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 in 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, today’s call is being recorded. Today, it’s February 8, 2024. 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 welcome to the fourth quarter conference call. I’m Jay Hennick, Chairman and Chief Executive Officer of the company. Joining me today is Chris McLernon, Chief Executive Officer of our Real Estate Services business; and, of course, Christian Mayer, our Chief Financial Officer. This call is being webcast and can be accessed in the Investor Relations section of our website, where you can also find the presentation slide deck. In the fourth quarter, Colliers experienced robust revenue growth in its high-value recurring service lines. Over the past five years, Colliers has strategically transformed into a more diversified professional services company by adding significant recurring revenue platforms such as investment management and engineering and project management.

Today, more than 70% of our earnings comes from these recurring services, providing our company with more balanced, more resilience and more predictability than ever and similar in many ways to other highly diversified global professional service companies. Throughout the year, we observed industry-wide declines in one segment of our business, our transaction segment, our capital markets business. However, we expect a return to higher transaction velocity in the latter part of this year as interest rates and credit conditions hopefully stabilize. In the interim, pricing for most real estate assets continue to adjust as buyers and sellers try to find equilibrium that they need to transact business. With our nearly 30-year track record of creating substantial shareholder value, Colliers is poised for continued success.

Anticipating a rise in transaction revenue later this year and supported by a very strong pipeline for new growth prospects, we are more excited than ever about the future. And with that, let me turn things over to Chris McLernon to discuss some highlights on the services side. Following that, Christian will provide his financial report, and then we’ll open things up for questions. Chris?

Chris McLernon: Thank you, Jay, and good morning. I’m proud of the results that Colliers Real Estate Services delivered in the fourth quarter and the full year. Despite industry-wide headwinds, we have become more resilient than ever, demonstrating the strengths of our highly diversified professional services platform by both service line and by geography. Our Outsourcing & Advisory business saw a 10% revenue growth in the fourth quarter and for the full year has grown 11%, led by engineering, project management and property management. Our engineering and project management pipelines are filled with a balanced mix of public and private sector clients that want to work with us because of our expertise and ability to provide integrated solutions.

Additionally, the growth of our property management business has been driven by strong portfolio retention and expansion within our existing client base as well as the addition of new clients due to receiverships in key markets. We expect the growth rate for these high-value services to remain resilient over the long-term. As mentioned, transaction volumes remained subdued during the quarter because of interest rate volatility, tighter lending standards and pricing mismatch between real estate buyers and sellers. However, with expectations of interest rates stabilizing, we have greater confidence that transaction velocity will improve in the second half of this year. Importantly, during the slowdown, we have continued to invest in our business, filling gaps, taking market share and top grading leadership.

Having been with Colliers for 35 years, I’m especially proud of our enterprising professionals and our culture, the bedrock of our success. I’m pleased to share that we have been named among the world’s top companies for women by Forbes, in addition to our inclusion on Forbes World’s Best Employers list. I’ll now turn over the call to Christian to provide more details on our financials.

Christian Mayer: Thank you, Chris, and good morning. I’ll provide some additional commentary on our consolidated results, our financial outlook for 2024 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 fourth quarter, revenues were $1.2 billion, flat when compared to the same quarter of last year and in line with our expectations for the quarter. Our recurring Outsourcing and Advisory and Investment Management service lines each reported robust revenue growth, predominantly internally generated. Leasing revenue declined modestly across all asset classes.

Capital Markets revenue declined 16% in its seasonally strongest quarter, on top of a 43% decline reported in Q4 of last year, with transaction sentiment continuing to be impacted by interest rate volatility and availability of credit. On an overall basis, our internal revenues declined 2%. Consolidated adjusted EBITDA for the fourth quarter was $198 million, down 2% relative to the prior year with margins at 16.1% versus 16.6% in the prior year quarter. The margin reduction was attributable primarily to service mix with a decline in higher margin capital markets revenues not fully offset by our ongoing cost control efforts. We achieved cost savings of $28 million during the fourth quarter and $94 million for the full year. We have extended our cost control efforts into 2024 to match the duration of the expected transactional revenue downturn, but the beneficial year-over-year impact of this has been largely realized.

Our initial financial outlook for 2024 reflects our best information given the ongoing challenges in transaction market conditions. For the first half of the year, we expect capital markets and leasing transaction volumes to be roughly flat to 2023. In the second half, we anticipate year-over-year increase in activity, particularly in capital markets, coinciding with our expectations of stabilization and interest rates and an improvement in credit conditions. In our recurring service lines, we are expecting mid to high single-digit revenue growth. Investment management fundraising for 2023 totaled $3 billion, given the difficult market backdrop. We continue to see strong interest in our alternative investing strategies, which we expect will accelerate fundraising for 2024 to between $5 billion and $8 billion.

Our adjusted EBITDA growth is expected to outpace revenue growth as we gain operating leverage from the capital markets recovery as well as the benefit of additional assets under management in our higher-margin investment management operations. Adjusted earnings per share is expected to exceed EBITDA growth as interest expense starts to moderate from both debt paydown and lower floating rates as well as a reduction in the non-controlling interest share of earnings as our wholly-owned transactional operations rebound. Turning to our balance sheet. Our financial leverage ratio, defined as net debt to pro forma adjusted EBITDA, was 2.2x at the end of 2023. For 2024, we expect leverage to rise modestly in the first half due to seasonal working capital usage, then to decline to between 1.5x and 2x by the end of the year, assuming no significant acquisitions.

That concludes my prepared remarks. I would now like to open the call for questions. Operator, can you please open the line? Question-and-Answer Session

See also 16 Remote Jobs That Pay at Least $30 Per Hour and 30 Largest Companies in the World by Revenue.

Q&A Session

Operator: Thank you, sir. [Operator Instructions] And your first question will be from Stephen MacLeod at BMO Capital Markets. Please go ahead.

Stephen MacLeod: Great. Thank you. Good morning. Good morning guys.

Jay Hennick: Good morning, Stephen.

Stephen MacLeod: Just want – good morning. Just wanted to circle around on a couple of things. Just with respect to the outlook, you reiterated confidence in a return to transaction velocity in H2. And just wondering if you can give a little bit of color about sort of what your clients and customers are telling you about that to give you strong visibility into that outlook?

Chris McLernon: Yes, sure, Steve. It’s Chris here. So I think the first thing is we’ve had 18 months of a really challenging period for capital markets. We’re starting to see some optimism in sentiment rising in real estate investment. And clients are shifting from having discussions to making decisions as there is a clear outlook to interest rates mid-year. So we’re seeing assets come to market with more realistic valuations as well. So what we’re seeing, I think, going forward is a gradual return and then picking up velocity in the second half of the year.

Stephen MacLeod: Okay. That’s great. And are there any specific regional areas or asset classes that are more robust in terms of activity than others at this point?

Chris McLernon: Yes. I’d say investors are looking at the industrial and logistics. You still have some strong fundamentals behind that with e-commerce and onshoring. There is a low vacancy. However, it has crept up from, say, 2% to 4% to 5% in most markets, but there is still a thesis there behind industrial and logistics. So there is demand around the world for that product. I’d also say in the living sector, student housing, build to rent senior housing because of the demographics and shortage of housing. And then thirdly, I’d say prime A office where tenants are looking to flight to quality. They’re looking for central business district locations, great transit, great amenities, ESG credentials. So those are the things that are in demand in the marketplace today.

Stephen MacLeod: Great. Thanks, Chris. And then just turning to the high-value O&A business and outlook. Just wondering – I mean, Chris, you gave a little bit of color on the prepared remarks around like project management, portfolio management – or sort of project management, engineering and property management. Just curious if you can give maybe by each subsector within Outsourcing & Advisory sort of what you’re seeing and how you expect that to evolve through the year and where you’re seeing notable pockets of strength?

Chris McLernon: Sure. So let’s talk about project management first. We’re seeing some strength in a very strong business in Canada. India, we’re the market leader there and India has got a GDP of about 6.5%. So we’re taking advantage of that and doing a lot of new corporate campuses there. We’re seeing strength in our Dutch business and our Polish business from a project management standpoint. Property management across the board, we’re picking up, extending the portfolio from our existing clients, winning new clients. So I think that, that’s universal around the world that property management is going well. And then on the engineering side of things, we’ve got some long-term contracts, and there is a great book of business going forward, and it’s balanced between private and public sectors.

Stephen MacLeod: Great. Thanks for that color, Chris. I will turn it back in line. Thank you.

Operator: Thank you. Next question will be from Daryl Young at Stifel. Please go ahead.

Daryl Young: Hi, good morning everyone.

Jay Hennick: Yes, Daryl, good morning.

Daryl Young: Jay, just in your opening remarks, you made reference to a robust pipeline of new opportunities. And I’m just wondering you can give a bit more color around this. And I think in the past, around the 2025 plan, you mentioned there might be additional verticals needed later in the plan to achieve it. So I’m just kind of trying to bridge the robust pipeline of new opportunities with this outlook and the 2025 plan.

Jay Hennick: Yes. So it’s a great question. And for those long-term shareholders of our company, they’ll know that acquisition growth is a key part of our overall growth strategy. We have a full pipeline of opportunities right now, probably fuller than we’ve had in a long time. They are, however, in line with our existing platforms, but they are bigger. They’re more diverse geographically. They fill some significant gaps. There is lots of leverage to be generated from them. We don’t – they’re not at a point where we’ve tied anything down. But as you would know, Daryl, it takes a long time to build relationships. We look for specific targets that we can partner with the operating management team, particularly in markets where we see huge growth opportunities.

So we’re very excited about many things that we’ve got on our plate right now, and we’re hoping to be able to convert those over the next 12 or 18 months. But they, for the most part, would all be in existing areas, mostly recurring. As I think about it, most of them are recurring – the lion’s share is recurring. There is lots of blocking and tackling, existing business units, filling gaps across the world in base parts of our business and brokerage in capital markets and a variety of other things. But for the lion’s share of our opportunities, as I think through the pipeline, it’s recurring revenue segments virtually across the board.

Daryl Young: Okay. Great. That’s great color. Thanks. And then flipping to the capital markets side, the results were, I’d say, impressive in my mind, particularly against some of the industry data that we were looking at. Could you maybe just give us a bit of color on where those market share wins are coming from? And is it a function of the people adds you’ve done across the last few years of the downturn? Or is it asset classes or anything there?

Chris McLernon: Yes, I can give you one example. We’ve had a record year in terms of recruiting in the U.S. The Colliers brand is really resonating in the marketplace. And if you look at the RCA volumes as an example, they’re down 41% in the U.S., and our sales is only down 25%. So that would show that we’re having market share there.

Daryl Young: Got you. Okay. And then one last one, just around EMEA and the margin trends there, a nice recovery here in Q4 versus the first nine months of the year. Is that something you expect to hold across the year? And is that sort of structural costs that have come out of that platform?

Christian Mayer: Yes, Daryl, I mean, as you know, from our history, Q4 is a very strong quarter in EMEA, and a lot of transactional activity happens in Q4. And historically, the lion’s share of EBITDA is generated in Q4. That was, again, the trend this year. I do expect, going forward, we will have a stronger EBITDA performance throughout the year, given the expected rebound in activity levels as well as cost actions that have been taken in that region to adjust to those lower activity levels.

Chris McLernon: The other thing I can add is that Germany and the Nordics were specifically a challenging year last year in terms of capital markets. It’s highly transactional for us, and it’s something we’re working on in terms of balancing the business. Some of those markets in the cities in Germany were down 80%. So we expect some activity to come back and it won’t be as extreme as last year. So definitely improving in Europe in 2024.

Jay Hennick: Well, it has to do with, yes, with the geopolitical circumstances, particularly around Germany and some of the other markets in Europe. But we are seeing some white shoots in those markets right now.

Chris McLernon: Some green shoots, yes.

Jay Hennick: Green shoots.

Chris McLernon: Yes.

Jay Hennick: Green shoots.

Daryl Young: Again, terrific. I’ll get back in the queue and thanks very much guys.

Jay Hennick: Thanks, Daryl.

Operator: Thank you. Next question will be from Jimmy Shan at RBC Capital Markets. Please go ahead.

Jimmy Shan: Thanks. So first, maybe just a couple of clarification on the guidance. The $5 billion to $8 billion of additional AUM in 2024, I’m assuming that’s a fee-paying AUM, and then that’s one. And the second one would be, would there be any…

Christian Mayer: Yes, so…

Jimmy Shan: …M&A baked into your guidance?

Christian Mayer: Okay. So Jimmy, the first question, the fee-paying AUM, the fundraising that we will do is predominantly in closed-end funds, and that will generate fees on the capital that’s committed. So we’ll be predominantly fee-paying capital. And secondly, there are no new acquisitions baked into our guidance, our outlook for 2024. There is a small amount of lap over from acquisitions completed in 2023, that’s in the outlook, but nothing new.

Jimmy Shan: Okay. Great. And then just on the Investment Management business, infrastructure and credit seem to be where – or at least you want to allocate dollars. And when I look at your AUM pie chart, you do have 25% exposure to those two spaces. I’m just kind of curious as to how you’re looking to grow these two strategies, if you are looking to grow them at all? And whether you’re looking to grow organically or maybe add a new platform in the pipeline, the healthy pipeline that you made reference to it?

Jay Hennick: Well, as we have historically, we’ve shown strong internal growth, particularly in Investment Management. And infrastructure alternatives have been key parts of our growth. We have a small credit business that we inherited as part of one of the platform acquisitions. And so that has grown very nicely for that platform, but we’d like to add credit to our overall family. It’s a key component of our longer-term strategy. Number one, there is tremendous synergies between our existing business and having a credit platform. So we’re actively looking to add credit in a more significant way, primarily through acquisition. But if no acquisition comes through, we’ll continue to grow our credit, our existing credit business, which is operated by an exceptional group of professionals and has some very interesting opportunities to accelerate its growth on its own. But when you look at the pie chart, it is still a small piece of our overall AUM.