Colliers International Group Inc.

Welcome to the Collier's International Second Quarter Investors Conference Call. Today's call is being recorded. Legal counsel requires us to advise that this discussion schedule 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 40F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is August 2, 2023, and at this time, for opening remarks and introductions, I would like to turn the call over to the global chairman and chief executive officer, Mr. Jay Hennick. Please go ahead, sir.

Thank you, operator. Good morning, and thanks to everyone for joining us for this second quarter conference call. I'm Jay Hennick, chairman and chief executive officer of the company. With me today is Chris McLernan, chief executive officer of our real estate services business, and Christian Mayer, our chief financial officer. As always, this call is being webcast and is available in the investor relations section of our website, along with the presentation slide deck. During the second quarter, Collier's 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 rates at lower investment volumes, 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. Collier's, 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 McLernan. 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, healthcare, and infrastructure, classes that are highly sought after with strong tailwinds for the future. During the second quarter, IM continued to scale with revenues up 58%, including the benefit of acquisitions. We continue to invest in our platforms. adding investment professionals and new products, as well as strengthening our distribution capabilities. While fundraising remains a challenge for the entire industry, the interest in our investment vehicles has never been greater. We expect our fundraising will accelerate as we move towards the end of the year. And now let me ask Chris McClernand to discuss some of the highlights from our real estate services business. Once he's completed, Christian will provide his 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, Colliers 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 while 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 have hit the lowest levels 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 interests of our clients, people, and shareholders. Finally, during the quarter, we continue 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 US, 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, I will 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 that the non-GAAP measures discussed here today are as defined in the materials accompanying this call. For our second quarter, revenues were $1.1 million, 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 the challenging trend that 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 2.4 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 2.0 times by year end. On June 1st, 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, 55% of our indebtedness is at attractive low fixed interest rates. Our weighted average interest rate for the second quarter was 4.6%, up 130 basis points over the prior year. far 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% and 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 comparatives in our transactional business, 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-whole owned operations. That concludes my prepared remarks. I would now like to open the call for questions. Operator, can you please open the line?

Thank you, ladies and gentlemen. We will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. Please only press star one one time. If you press more than once, you may be removed from the queue. One moment, please, for your first question. Your first question comes from Steve McLeod with BMO Capital Markets. Please go ahead.

Great. Thank you. Good morning, everyone. Just a couple of questions. Good morning. Just a couple of questions. One is around the investment management fundraising environment. You suggested that 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 you're still expecting a strong accelerated back half.

Look, it's still unclear. 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 slowdown. 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 and the fact that we created, we curated it 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 at all, whereas there's been redemptions in 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're having more meetings. There's more conversation 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. But that's been the case, I would say, now for two quarters, maybe three quarters. So sooner or later, they're going to have to start to make some decisions, and we think that we'll 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, you know, obviously you've talked about just the sort of weaker backdrop persisting for the back half of the year, which I think is an expectation that everyone has. Can you talk a little bit about just sort of your activity levels? Are you seeing a lot of kicking of the tires and just the transactions are not getting done? I mean, just as it relates to potentially pent-up demand?

Hi, Steve. It's Chris here. We're certainly taking more meetings in Q2 and going into Q3, pitching more and bringing new mandates to market. certainly at the lesser numbers and volumes, but we're seeing activity that'll, you know, transact probably towards Q4. You know, the market has stalled. And, you know, as I said, my opening remarks that we're at a 10 year low, you've got Germany, for example, down 68% year over year, US down 65%. So, but we're seeing some, some, you know, good meetings starting to take place and, you know, investors wanting to test the market.

That's great. Thanks, Chris. Appreciate that color. Thanks, guys.

Your next question comes from Steven Sheldon with William Blair. Please go ahead.

Hey, good morning, guys. Thanks for taking my questions. Great quarter overall in a tough environment. Did want to ask about the slowdown in outsourcing and advisory in the Americas. I think it's been growing kind of high single digits the past two quarters, down to 3% year over year this quarter. Anything specific driving that, such as tough comps or one-off items? And then how are you thinking about the growth outlook there for the next few quarters and into early 2024?

Just give me a sec here, Stephen. We're going to

We don't know if your facts are right there.

We're surprised by them. We're surprised by your question. Okay.

Like it.

Maybe I'll ask another one. O&A is actually up in the Americas, Stephen, by about $10 million on a quarter-over-quarter basis. So, not sure...

I was asking year-over-year slowdown, because it had been growing, I think, my numbers, at least 9% 4Q, 7% 1Q, down to 3% this quarter, year-over-year. So I don't know if maybe valuation had slowed down, given that there are at least some transactional people there.

Right. I think I understand the question now. You know, part of our outsourcing and advisory business is evaluation practice. And that valuation practice is a recurring service offering in that it provides ongoing property valuation on an annual basis to large financial institution clients who contract us to do that work. There is some additional work that gets done on the front end as transactions occur and as new loans are originated. That part of the valuation business has declined clearly, and maybe that's what you're seeing there, but that could probably be the – that's probably the single biggest driver of a reduction in volume there.

Okay. Got it. That's what I figured. And then just, you know, 2025 quickly approaching, you guys have your targets out there. You know, just – It seems like you've done multiple of these kind of five-year targets. When are you thinking about providing your outlook for 2030? I know there's a lot going on in the near term, but just curious when we would maybe start expecting to see some of those longer-term targets again.

It's funny 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, you know, three and a half years, maybe four years into our current plan. We actually started it early this time. But I don't think we would make it public much before we came, you know, we finished the current five-year plan. But there's been a lot of thinking around the 2030 plan what do we look like in 2030 it's quite exciting and from our perspective we see some very very interesting uh ways for us to continue our our current current um growth trajectory but right now it's quite remote and you know my commentary is just uh is 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, you know, Chris, I think, you know, you kind of talked about seeing some good activity on the capital market side, although, you know, deal volume is still down quite a bit year over year. It doesn't seem like it picked up yet. of your peers have reported green shoots in areas like or subsectors like multi-family industrial subsectors like that just curious what you're seeing out there you know if we looked by almost by sub-sector or different asset classes within commercial real estate is there more activity happening in certain sub-sectors than others yeah absolutely um you know the number one asset class that investors are looking at is that industrial logistics it's been a five-year boom in the marketplace

Uh, vacancy is quite low, so we're seeing rental appreciation and so that that continues to be a hot sector. Same with multifamily with many cities around the world. You've got a, um, you know, uh, an over demand situation, um, you know, where rental tenants are looking for properties. And so we're seeing rental increases in multifamily. So I think that's a good sector. You know, there's the whole flight to quality in terms of office leasing. So the very best buildings, the trophy assets with the best amenities, best locations, best tenants are still going to be an attractive investment. And then I would say the alternatives, you know, 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. So those are the sectors that we're seeing that have interest with investors today.

You know, I would also add another thing to what Chris says, and that's 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 in APAC, they weren't down nearly as much. And so we don't know whether those are early signs yet. But, you know, that's to us, that's a green shoot.

Absolutely, Jay, just to follow on up on that, you know, 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. And then a pillar of strength is still our Australian business. And we're seeing some, again, industrial logistic sales. And then the return to residential project marketing with the heavy immigration coming into Australia. Definitely some green shoots there.

Thank you, guys. Appreciate the call. Good to hear.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Your next question comes from Frédéric Bastien with Raymond James. Please go ahead.

Thanks. It's nice to have Chris join us for this call and presumably for a future one. Also, thanks for your comments on the APAC region because that was one of the questions I had. I guess my biggest concern coming into the print were margins, and they held up quite nicely, especially in the Americas. So it certainly showed you've been quite proactive with your cost structure. The question is around... The outlook you provided for the back half, I think you mentioned in your prepared remarks, you expected more savings to be achieved. Wondering if you could provide additional color there.

Yeah, Frederick, we've been active on managing our costs and we've been positioning ourselves to deal with this decline in capital markets activity that started, you know, really nine months ago. So we have been proactive in reducing headcount in producer support and administration roles, managing that headcount as best we can, despite the fact that there is activity, as Chris says, you know, there's people looking at transactions. So being prudent there on our headcount, managing the discretionary costs in the business, you know, travel, conferences, that sort of thing. So we've made some very good progress there. As I mentioned in my credit remarks, $28 million in the second quarter, and we're looking for the same or better in the third and fourth quarters, and that will possibly impact our margin for the full year.

Thanks. How would that differ from the cost savings that you achieved during COVID, or how different of an approach did you take?

It's the same playbook, Frederick, but a different situation slightly. During the pandemic, it was actually much more black and white. Our people were at home. Transactions simply weren't being talked about and weren't being explored. So we made more dramatic cuts to those areas. I think from a Overall perspective, the pandemic era cuts were significantly more in dollars, but they were focused in 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 they're being proactive. It's a basket of businesses. And so we've got some countries performing well, some service lines 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 challenged and letting the ones that are going well continue to run well.

And let's not forget the highly variable nature of our professionals globally around the world that compensation adjusts based on their production. So we feel, as you're hearing from Chris and from Christian, that this is a road we've been down several times before. The structure of our business is quite unique in this respect. 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. Thanks, Brad.

Your next question comes from Jimmy Shen with RBC Capital Markets. Please go ahead.

Thanks. Good morning, guys. I just wanted to follow up on the leasing business. Capital Markets Revenue versus your peers were down about the same level, but leasing seems to have done a little bit better. I wondered if you know whether that's a different asset mix, geographies, and kind of what would account for 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, industrial strong, but maybe if you could provide some color as to how to think about the growth beyond this year.

Yeah, this is Chris here. It is a geographic topic. So Asia Pacific leasing was up 24% year over year on the quarter. And this was attributed to a couple of things. One, again, I mentioned the improved performance in some of our Asia Pacific operations, you know, Korea, Singapore, Japan, and then we've also got a, you know, a growing business in India. but predominantly it would be Australia. Again, we are the leader in the A class landlord leasing business, and there's a whole trend of 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.

OK. And in terms of your guidance, for the year, I guess two questions. One is, what would that assume in terms of AUM growth in the back half? And then, sort of, is your confidence in the guide really sort of predicated on your cost-cutting efforts that you've done so far? Is that really what's kind of the main driver to you being able to sustain the guidance?

Yeah, I mean, to answer your question, Jimmy, Our AUM at June 30th was 99 billion. We certainly expect to be, you know, well north of 100. You know, sort of, not exactly know where that's going to be, but definitely a few billion north of 100 by the end of the year. And that will come from fundraising that we expect will occur before the end of the year. As Jay mentioned, we've had very modest redemption activities, so that's not really a factor. Valuation in our AUM is 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 AUM trajectory. And just as a reminder, our fee-paying AUM is the number that generates the revenue. Our AUM is a gross measure that includes leverage. So if we raise, just for discussion purposes, $1 billion, our AUM will actually go up potentially 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 certainly will be a continuing focus for the balance of the year, as I've mentioned a couple times on the call already, and that's part of what is in our outlook. We've also 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. 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.

Your next question comes from Maxim Sitchev with National Bank Financial. Please go ahead.

Hi. Good morning, gentlemen. Hi. I just wanted to start a little bit with EMEA, if it's possible. Do you mind providing a bit 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, or is there sort of any additional data points you can provide on that geography? Thanks.

Yeah, Max, it really is that. It's the compensation structure, which has a partially fixed component in capital markets. And as you can see in the material, the capital markets revenues in EMEA are down quite significantly. in the quarter, so that's the driver of it. The revenues are offset by growth and outsourcing and advisory, but those margins in outsourcing and advisory are sort of low double-digit area, whereas the capital markets business in EMEA is a significantly higher margin. And as the revenues come down, that margin deleveraging is more significant and impacts the amount of EBITDA generated as well as the operating earnings that are generated.

Okay. Thanks a lot for the clarifying question. And then, Jay, maybe a bit more sort of a broader question. I mean, if you listen to some of sort of the bearish commentary around kind of commercial real estate, in general, is that actually, you know, potentially the biggest shoe dropping is kind of like 25, 26 sort of timeframe. I'm just wondering what are your thoughts or maybe counterpoints to that view of the world in terms of, you know, the potential stabilization when it comes to, you know, the value of the properties and how the sausage sort of gets made on that sort of timeframe. Thank you.

so um you know i think it's um you know i i divide the question into two first of all you know there's various asset classes in real estate uh we all know what they are uh you know off office is obviously something that's that's under some pressure but as chris mentioned multi-family um and um and our defense assets uh defensive assets infrastructure, these are all doing extremely nicely. Operator, do you mind clearing your throat at a different time? These are all assets that are doing extremely well. And the only difficulty then is availability of capital. But I see 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 of assets and buyers of assets who are prepared to step up for some of the more quality assets that are available. So, you know, I'm reading all the same things that you're reading. I'm hearing 25, I'm hearing 26. I can't believe it would be delayed to that length of time. I think you're going to start to see activity in 24, maybe even early 24. There's funds out there that need to acquire. There's funds out there that need to dispose. You're seeing Blackstone sell massive pieces of their large REIT to redeploy their capital. Um, so I think it's all over the place, frankly, and I think it's going to be, um, uh, at the more sought after real estate assets, you're going to see movement sooner than you think. Of course, we would like to see it starting tomorrow, but the reality is it's, it's going to be sooner than we think because these assets are going to have to turn over. It's much more mature asset real estate is today than ever before. So, um, You know, so we're sort of thinking 24, we're going to be maybe not at record levels, but there's going to be nice activity happening at 24.

Super helpful, Jay. Thank you so much. And then maybe just one last question. Obviously, you continue to build your platform in engineering consulting. And now that you have, you know, quite a bit of size in the business, I'm wondering if you can maybe comment and give us examples around some, you know, cross-selling successes that maybe you would have had across sort of the entirety of call years. Yeah, that's my last question.

Thank you. Yeah, there's just so many. But, you know, the obvious ones are, you know, in engineering, there is a ton of pre-work that has to go into taking a piece of land from raw land to the point where it can be developed or sold. And so our engineering segment is very busy with home builders everywhere, builders of big distribution facilities and so on, in order to get the actual land, sewage, drainage, transportation all set up so that properties can be sold and developed and so on and so forth. So there's a natural connection. The same clients that may own a piece of land or may want to acquire a piece of land need to have some assistance from an engineering firm to entitle that land to do what they want to do. And that's just one example. For us, our engineering and design business includes also project management. which together those businesses are now approaching almost a billion in revenue. And the project management piece of our business generates huge business from the engineering and from 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 from home and a variety of other factors that we all know about. So that's my answer. I'm happy to go into more detail if you want.

No, that's perfect. Thank you. Thank you so much for the call.

Your next question comes from Frédéric Bassin with Raymond James. Please go ahead.

Hi, guys. Brett. Just a quick question on this note of the investment management margins. We're down sequentially from roughly 45 to 42, and I think you're guiding for somewhere close to 50% as we close out the year. Can you just speak to the pressure you see in the margin, what was behind that, and how we get back to the trend you've been forecasting on a go-forward basis?

Yeah, Frederick, 50% margins is 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 a full year margin profile. In the quarter, as Jay mentioned in his remarks, we invested in distribution capabilities and other growth initiatives, 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 ongoing investments in our platform.

No, that's great, Collin. I know you've made significant investments over time, and they've certainly paid off. So thank you for that. All right, thanks.

Thanks, Chris.

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.