Colliers International Group Inc. Q1 FY2022 Earnings Call

Welcome to the Colliers International First Quarter Investors 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 be materially different from any future results, performance or achievements computed 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 on Form 10-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded today, May 3, 2022. 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 for joining us for the first quarter conference call. I'm Jay Hennick, Chairman and Chief Executive Officer of the company, and with me today is Christian Mayer, our Chief Financial Officer. As always, this conference call is being webcast live, and is available in the Investor Relations section of our website. A presentation slide deck is also available to accompany this call. Today, Colliers delivered very strong first quarter results across all service lines, building on the momentum from last year. Revenue, EBITDA and earnings per share were all up sharply. And we were pleased to see that assets under management in our Investment Management segment was also up considerably. Last week, we announced the promotion of Chris McLernon to Chief Executive Officer of our Real Estate Services global business. Over the past 12 years as the leader of our EMEA business Chris delivered some very exceptional results. In his new role, Chris will oversee our capital markets, leasing and outsourcing and advisory businesses globally, reporting to me. Having him on board will provide us with the bench strength we need to successfully pursue our ambitious 2025 growth plan. During the quarter, we were also busy on the acquisition front. We added our affiliate operations in Cincinnati and Cleveland. We completed the previously announced acquisition of our affiliate in Italy, and Colliers Engineering & Design expanded its operations in the U.S. Southwest. Just after quarter end, we completed the acquisition of Antirion, which is currently being integrated into our global investors platform in Europe. Once we complete the new partnership with the Basalt Infrastructure Partners, our IM business will represent almost 25% of our consolidated EBITDA. This marks an important milestone in our service line diversification, increases our recurring revenue streams and represents another step in the transformation of Colliers into a very different kind of company. In the future, we expect our IM segment to represent an even greater proportion of our overall EBITDA. So far this year, we completed or announced acquisitions totaling more than $400 million, and our pipeline remains strong. If we're successful, 2022 should be a record year of capital allocation for Colliers. The bottom line of all of this is this, the leadership team of Colliers has a proven 27-year track record of creating significant value for shareholders. The Colliers business model is balanced, highly recurring and diversified, and generates a lot of free cash flow that we reinvest in our growth. All of these characteristics together with our unique enterprising culture, growth mindset and significant inside ownership position us very well to continue delivering superior returns for our shareholders. And let me be clear on one other thing. At its core, Colliers is an extremely well-managed service business. Because of this, we're able to weather the various macro events that might impact others like inflation, interest rates, pandemics, regional conflicts and supply chains to name a few. Our results over the past number of years have demonstrated this in spades. With that said, I'll now turn things over to Christian. Christian?

Thank you, Jay. As announced this morning, Colliers reported strong first quarter financial results. My comments follow the flow of the slides posted on the Investor Relations section of colliers.com to accompany this call. Please note that the non-GAAP measures referenced on this call are as defined in this morning's press release. All references to revenue growth are expressed in local currency. First quarter revenues were $1 billion, up 31% relative to the prior year period with revenues up strongly across all service lines. Growth for the quarter was primarily internally generated. Compared to 2019 pre-pandemic levels, Capital Markets revenues were up 52%, and leasing was up 27%, with office leasing recovering to within 5% of Q1 '19 levels. Q1 '22 adjusted EBITDA was $121 million, up 33% from 1 year ago, with margins at 12.1%, up slightly from 11.9% in the prior year quarter driven by the Americas region. First quarter Americas revenues were $642 million, up 35% over the prior year. Leasing activity was up 41%, led by industrial. Capital Markets activity was up 35%, and was led by industrial, land and multifamily asset classes. Ops leasing activity was within 2% of Q1 2019 pre-pandemic levels. Outsourcing & Advisory revenues were up 31% driven by Engineering & Design, including recent acquisitions as well as valuation and loan servicing. Adjusted EBITDA was $81 million, up 43% from last year, with the margin up 60 basis points to 12.6% on favorable operating leverage from higher revenues in all service lines. First quarter EMEA revenues were $153 million, up 30% from 1 year ago, with robust growth across all service lines, led by outsourcing and advisory and capital markets. Adjusted EBITDA was $5 million, up 23% on higher revenues, although margin was impacted by revenue mix from increased project management activity which runs at lower margins than other services. First quarter Asia Pacific revenues were $119 million, down 3% driven by COVID-19 lockdowns in several Asian markets as well as a tough prior year comparison, which benefited from a number of high-margin capital markets transactions. Adjusted EBITDA was $10 million, down from $15 million in the prior year quarter. Investment management revenues were $86 million, up 94% versus the prior year period. After eliminating the impact of pass-through carried interest, revenues were up 38% driven by management fee growth. Assets under management were $52 billion at quarter end, up 26% from 1 year ago. Adjusted EBITDA for the quarter was $27 million, up 51% versus the comparative quarter on solid flow-through from incremental management fee revenue. Our financial leverage ratio, as defined as net debt to pro forma adjusted EBITDA was 0.9x as of March 31, 2022. Most of our debt is locked in at attractive fixed interest rates, averaging less than 3%. During the first quarter, we invested in acquisitions, and we utilized our normal course issuer bid for the first time as a public company. We repurchased just under 1 million shares in March and April. Given our current trading price, our low leverage, future growth prospects and significant financial capacity, we believe it is prudent to make modest share repurchases at this time. With our strong balance sheet, disciplined capital deployment and solid operating cash flow, we continue to be very well capitalized for future growth. We are increasing our outlook for the full year 2022 to reflect our strong Q1 results as well as recent acquisitions. The outlook is subject to risks and uncertainties as outlined in the accompanying slides. We now expect low double-digit revenue growth, consisting of high single-digit internal growth, and the balance from previously completed and recently announced acquisitions. We expect our adjusted EBITDA margin to improve 40 to 80 basis points relative to 2021 from a combination of internal operating leverage and higher margin acquisitions. Finally, our adjusted earnings per share are expected to grow at a high-teens percentage rate for 2022. That concludes my prepared remarks. I would now like to open the call for questions. Operator, can you please open the line?

And our first question coming from the line of Stephen Sheldon with William Blair.

Congrats on the strong results. First thing I wanted to ask about just the APAC and the Asia Pacific region. Can you talk about the trends you saw there throughout the quarter? The weakness related to COVID lockdowns get more pronounced to the quarter went along, or did you start to see any signs of stabilization just would be good to, I guess, get some more commentary there as we think about the cadence for the rest of the year.

I think you're talking about Asia Pacific as opposed to EMEA. But correct me if I'm wrong, Sheldon.

Sorry. Yes, Asia Pacific. Yes.

Yes. Stephen, the lockdown situation in Q1 was really the main driver of the revenue there. Certainly, we've been in lockdowns before. Lockdowns caused delays in the transactional side of the business. Of course, the recurring side of the business continues to operate, the property management and valuations and that sort of thing. Revenues were impacted in Q1 from the lockdowns. We expect that will ease as the year progresses. And we think the revenue growth there will be stronger in the future.

Now as you know, in China, for example, there are 3 cases of COVID, and they've closed the whole country down. So notwithstanding that, we still generated pretty respectable revenues and earnings in that marketplace. But there are other markets in Asia that are going through similar lockdowns. So it is slowing us down a bit. But as you can see from the results, not materially so.

Yes. Got it. That's helpful. And then just wanted to ask about the AUM growth in Investment Management. I mean it's been really impressive and consistently strong. So what's working so well on that side in terms of capital raising? And what about Colliers broad-based capabilities, I guess is there anything to call out that's helping to support that growth?

Well, I think it all starts with the exceptional platforms that we have already as part of our Investment Management platform. Harrison Street, Colliers Global Investors and soon to be Basalt. These are all exceptional alternate asset platforms. They're managed by extremely seasoned professionals that own a direct equity stake in our business. And Stephen, as you know, over many years, that's been a core of the way Colliers operates. Our role is to help them accelerate their growth. There's various ways for us to have done that. You see in the case of Harrison Street, which is 4.5 years in history now. And the company has tripled its size. It's tripled its EBITDA and it's just starting. So there's a variety of ways in which we help them do that. But I would say that by and large, starting with exceptional professionals that have a significant equity stake in the business is really the backbone of the success of Harrison Street. And of course, Basalt has many, many of the same characteristics. So we're very excited about this aspect of our business. We think it's substantially hidden within Colliers. And we think our strategy in that area is second to none.

And our next question coming from the line of George Doumet with Scotiabank.

Congrats on the results. Jay, I think you made it obvious that you wanted to grow the Investment Management segment to be on kind of 23% of total EBITDA. I won't ask you how much, but can you maybe give us a sense of maybe what specific asset classes or areas that you want to get bigger in?

The percentage we don't know because it's all a function of strategically acquiring the right businesses in the right way. So it's unlikely that we will acquire 100% of any exceptional Investment Management platform. However, there is a growing desire among entrepreneurially run businesses to join our strategy, and we are excited about it. The only number we have provided is that over the next five years, our recurring revenue streams should exceed 65%. We are uncertain how much of that will come from our other recurring services or Investment Management. However, you will observe a trend and transformation as we continue to pursue this growth strategy.

Okay. And should we expect more, I guess, of infrastructure, student housing, senior housing. Is that kind of the focus in?

Harrison Street clearly leads in that sector in the U.S. Over the past year, they have launched their first open-ended fund in Canada. Their business in Europe is also very successful and expanding. Their focus is primarily on infrastructure, student housing, senior housing, and other alternative asset classes that offer better returns for investors. This approach is central to our overall platform as we look to the future.

Okay. And you guys have been active on the NCIB as referenced for the first time as a public company. Operating performance has been strong. The shares haven't really reacted accordingly. I'm just wondering, is buying our own stock here maybe more attractive than M&A? Would you consider maybe a more meaningful return of capital to shareholders?

Well, I mean, it's something that we evaluate every day, George.

Hour.

Every hour. And I think, first and foremost, we are interested in growing our business organically and through acquisition. But when we see the market not appreciating the value of our shares, then that caused us to take consideration of that in April and in March, we acted. And we may continue to act in the future on that, and we'll decide that on a day-by-day basis.

Okay. Just one last one for me. In general, Occupier Services was a big strategy of ours. We spoke about it quite a bit before the pandemic. Can you maybe just give us an update in terms of where we are now?

Yes. We continue to be active in that Global Occupier Services, and we have a recruiting plan to grow that business meaningfully over the next 5 years as part of our Enterprise '25 plan. I think we're on track with that, and you see it and reflected in the results.

Our next question coming from the line of Stephen MacLeod with BMO Capital.

Great. I just wanted to ask about the outlook and the revised guidance and just get a little bit of sense as to sort of what factors you're considering in the 2022 outlook with respect to maybe near-term visibility and potentially longer-term visibility as you get into the back half of the year?

Yes. Thanks, Steve. We increased our guidance for the year, in part on the strong result in Q1. And also, our good visibility into Q2 transaction activity. We also have very good visibility on the recurring side of our business, which is half the revenue, and that gives us confidence in our outlook. Now as it relates to the back half of the year in transactions, we did not typically increase the guidance for that. There are obviously some macro factors at play here, situations with the conflict in Eastern Europe, interest rates and all that stuff. But by and large, we are, as I mentioned, increasing our outlook for the reasons outlined.

Great. And then I just wanted to ask about Harrison Street and the Investment Management business. What kind of visibility do you have regarding the strong fundraising momentum that you experienced at the end of Q4 and as you move into Q1, for the remainder of the year?

We have very strong visibility. This year, we're in the market with Christian, four or six?

Six.

Six funds. All funds are increasing in size from previous funds. As you probably know, 80% to 90% of the investors roll into the subsequent fund. And so we are quite excited about the prospects of fundraising in the current year, and Basalt is also actively fundraising as is Antirion. So it will be very interesting to see how we do over the next couple of quarters, but our internal expectations are significantly better than last year, which itself was a record year for us.

That's fantastic. And then maybe just finally, with respect to the macro backdrop and the potential for rising rates, are you beginning to see any of those conversations or any of those factors beginning to creep into conversations about transaction activity? Or is that something that is just kind of on hold for now and people are waiting to see how things unfold.

Well, I tried to make the point in my prepared remarks. Macro concepts really don't affect Colliers. They never did, and anybody who thinks they do is mistaken. Where we're impacted is in the investment decisions of investors that may or may not decide to continue with their investments, and it's all over the place. Some say as interest rates go up, we're going to sell assets. Some say, we have shopping malls, we're selling all the shopping malls and getting out of shopping malls because we don't like it anymore. Others say, logistics are impacted by supply chain, so they're not going to build as many logistics centers. Inflation could be beneficial to owners of real estate, but we don't really own real estate. All we do is buy, sell and lease real estate. So all we want is velocity in our nonrecurring business. As Christian said, more than just over 50% of our business is recurring today. So we're really talking about the nonrecurring portion of our business, and there's more velocity. There's more pipeline. There's more activity in Capital Markets, in Leasing today than ever before. And when I listen to the geniuses out there talking about the macro events and the tailwinds and all that stuff, they're talking about owners of real estate potentially. They're not talking about those who serve those owners as we do. So I wanted to make that point, and I thank you for bringing it up, Steve, because as a long-term investor, and building huge value for shareholders over a long period of time, I smile at some of the editorial around this. So I think we're in an amazing position to capitalize, and really not affected by too much of what goes on. Look, everybody is, stuff happens. But as you could see from our own results over the past 10 years, 5 years, pick it, we just continue to get stronger and grow better and gain share. So I think Colliers and, frankly, some of its peers have tremendous business models that are unappreciated by the marketplace.

And our next question coming from the line of Scott Fromson with CIBC.

I appreciate the detail you provided regarding the drivers and factors, particularly your outlook and its strength. I have a quick question: are there specific business lines within the markets where you are seeing gains in market share?

We are seeing market share gains everywhere. Just look at the quarter's results, which have been consistently impressive, showing a 30% increase in nearly every area, surpassing our expectations. I would like to commend our team's efforts, but the reality is these results outpace our internal forecasts in every market. This indicates there is still significant potential ahead. Our pipelines remain robust, and we are enthusiastic about the next phase.

And our next question coming from Daryl Young with TD Securities.

Congratulations on the strong results. The O&A segments have always shown remarkable resilience. I am still receiving numerous inquiries from investors regarding their connection to the transaction side and the importance of transactions in driving O&A growth. Would you like to share your thoughts on this and clarify whether O&A can continue to grow even if there is a slight decline in transactions?

Well, Daryl, as an example, in property management, we managed 2 billion square feet of space around the world. Most of those contracts also include leasing services for the owners of those assets. The property management contract generates recurring monthly revenue, while leasing is more opportunistic. When a tenant needs space, we facilitate the transaction on behalf of the landlord. The two services are interconnected and complement each other. Ultimately, while we anticipate recurring revenue and leasing transactions, any delays in tenant decision-making might push that leasing revenue to a later quarter.

And I would add an important element of that is our engineering and project management business, which I'm going to get the aggregate number slightly wrong, but it's probably together $600 million or $700 million globally. Is that what it is, Christian?

Yes.

$600 million globally. These are all long-duration relationships that continue to recur after the relationship is completed. If we are retained by an owner to assist with the construction of a new building, it typically takes about three years, and often continues beyond that period. We may then take over the property management of that contract, and the owner might choose to build additional buildings. In project management and engineering, there are engineering services needed every day in large complexes. Once we become the engineer of record, it involves a long-term commitment to support the job over time. Our outsourcing and advisory services are high-value offerings, not just basic cleaning services. They foster long-term, valuable client relationships, providing us with an advantage because we understand how the building operates and where its vulnerabilities may lie. As ongoing service providers and specialists, we maintain our roles for extended periods. I don't think many investors recognize this aspect of our operations. This part of our business continues to grow rapidly. As the commercial real estate market matures, with an increase in new construction and infrastructure projects, our investment management firms require project management capabilities to effectively manage and oversee these constructions. We expect this segment of our business to keep growing, providing a level of consistency and resilience that many others lack.

And just to close that, it also gives us the opportunity then to come in and provide the leasing services as I described or a sale or disposition if that owner of that asset decides ultimately make that decision. So it ties the 2 parts of the business together.

That's great color.

Was that too much? Did we give you too much there?

That's perfect. I think we can benefit from it right now given some of the concerns that are out there. So it's great information. And maybe just one last quick question. I'm not sure if you'll respond to this, but has any progress been made regarding the potential for another vertical and what that could look like?

We have a full pipeline of activities in our existing verticals, and there are global growth opportunities in each of those areas. I don't see anything significant on the horizon, but we do have the capacity to pursue it if something substantial arises. We are confident that we are establishing strong, unique, and differentiated verticals that will endure and create significant value for our shareholders.

Our next question coming from the line of Frederic Bastien with Raymond James.

The 1 million shares that you repurchased, it started towards the end of the first quarter and then it's up until yesterday or today. Just wondering if it was evenly split between the two quarters.

I think we purchased around 600,000 shares during March and 400,000 roughly in April, Frederic.

I'm interested in understanding the liquidity you anticipate going forward. The Basalt transaction hasn't closed yet, and I know you recently spent additional funds on the share purchase. How confident are you that you can allocate capital in the second half of the year if some strong opportunities arise?

I think we're very well positioned, Frederic. We have a $1 billion revolver, which has a low draw on it, I think around $200 million at the moment. First, we have the Basalt transaction to close. So lots of liquidity in the system, and our leverage is very low. So we're well positioned.

As your business has become more and more recurring in nature, are you comfortable kind of leveraging more too as well? Can you remind me of what your comfort range is right now with respect to net debt-to-EBITDA?

Our comfort zone for leverage is between 1 to 2 times EBITDA, and we are comfortable operating at the 2 times level due to the increased recurring revenue. This year marks a significant transformation for the business. With the Basalt transaction, we will derive 23% of our EBITDA from investment management, which provides high visibility, strong durability, and high-margin EBITDA along with low capital expenditures, leading to robust cash flow. If we find ourselves in a situation where leverage exceeds 2 times due to an acquisition, we are confident in our ability to quickly reduce leverage and return to the 1 to 2 times range. Overall, we feel quite comfortable with our position.

Great. Jay, I've got one for you. Can you comment on the latest acquisition that Colliers E&D did in the U.S. Southwest, how does that kind of fits in the whole strategy? How well diversified you are now in the U.S.? And where you might take that business going forward?

It was an excellent acquisition. From our perspective, it integrated well into our business. Prior to the acquisition, our presence in Texas was small but growing, so we needed to enhance that, which we accomplished. We are very excited about the new partners who have joined us. There's still significant opportunity for growth in engineering both in the U.S. and globally. As you know, given your coverage of many engineering firms, we have a strong global brand and extensive client relationships, which are beneficial, particularly as we pursue partnerships. This approach fosters greater alignment between our daily operations and those of fully owned engineering firms. This has been our standard practice for 27 years, and we know how to develop platforms through strong partnerships. We see potential for similar growth in this segment on a global scale. There is a lot to accomplish, but it remains a relatively small portion of our overall business.

Great. Specifically on a regional basis, within the U.S., if I recall, you were in the Northeast, Southeast, and now kind of Texas. Is California an opportunity for you?

Yes. And if you have an idea in mind, I'll give you my phone number, which I know you already have.

Our next question coming from the line of Chandni Luthra with Goldman Sachs.

Congratulations on a strong quarter. Could you perhaps talk about the driver of higher margin guidance? I mean I know you alluded to getting some operating leverage, but then there's some acquisitions related impact as well, which is obviously working favorably for you. But is there a way to think about a split in kind of what piece, and how much is coming from just leverage in the business?

Yes. For sure, Chandni. The operating margin increase is half from organic sources. So you saw in the quarter, the Americas business had strong revenues, but also strong margin growth. We expect that to continue through the year across all of our regional businesses from operating leverage from higher revenues, also from some of the continuing cost management activities that we're undertaking around the company. The other half of the margin increase is from acquisitions. And as you know, Investment Management businesses operate at higher margins. So the impact of the Antirion deal, which we just closed on April 1, and the Basalt transaction closing in the second half will drive that additional margin expansion on a consolidated basis.

That is great color. And then for my follow-up, so you guys talked about thinking about buyback at this point given how shares have just generally acted. Is there something embedded in guidance that we should think about as we kind of model our numbers? You have given that high teens earnings growth today? And how much of buyback is embedded in there? Are you giving any guidance around that?

The outlook that you see referring today does not have any additional buybacks factored in.

And our next question coming from the line of Maxim Sytchev with National Bank Financial.

Jay, maybe the first question for you, if it's possible. Given the fact that we've seen obviously some multiple compression in the public markets, I was wondering if you are seeing any change in by the line but from potential sellers as you communicate right now with the targets.

No, I don't think so. I believe the expectations from sellers remain higher than they were a year or two ago for obvious reasons. Assets in the private market are trading significantly higher than many public companies, including Colliers. Therefore, I'm not observing any changes in pricing expectations from sellers.

Okay. That's super helpful. And then Christian, I just had a question for you in terms of noncash working capital, there was a pretty significant control in this quarter versus last year. I'm just trying to see how we should be thinking about it as the year progresses in terms of some of that unwinding, if you can provide any color, it'd be super helpful.

Yes. That's a great question, Max. There were a couple of notable items in our working capital this quarter. One was a contingent consideration payment related to the Harrison Street earn-out, which resulted in a $59 million negative impact on cash from operations. I view this as a nonoperating item, although it is classified as an operating item under GAAP. Secondly, we drew on our accounts receivable facility during the quarter, leading to various cash flow statement adjustments. This caused a significant noncash change in accounts receivable, resulting in a highly negative figure for the quarter. This is a nonrecurring item, and it contributed to the working capital change you observed.

For sure. And then in terms of kind of the rest of the year, is it going to be sort of closer to what we've seen in '21? Or how should we think about it, if we were to exclude the Q1?

Yes. On a full year basis, we expect to be highly cash flow generative as we are each year. The business generates strong operating cash flows. And of course, there is some seasonality to that, with the transactional businesses being very strong in the third and fourth quarters for cash flow, and we expect that to be the case again this year.

Okay. Absolutely. And then just one last clarification. Jay, I'm not sure, did you say that in terms of office leasing, we're still 5% below the 2019 peak. I'm just trying to get the number right. And maybe any color in terms of when you think we're going to be eclipsing those levels and potentially going higher? Or what needs to happen for you to see that?

This past quarter, we were, on a global basis, 5% below Q1 2019 for office leasing. While 5% is not a significant number, we hope to reach those 2019 levels, if not next quarter, then in the following quarter. There is positive momentum and a good trajectory for office leasing, which we are monitoring closely.

Are you noticing any changes in the industrial sector? We've experienced significant growth over the past couple of years, and I'm interested in what you're currently hearing from your clients.

Industrial continues to be very hot. And I think that's the case globally. We're also seeing some publicly traded REITs being acquired in that space. So it's a segment that's very hot right now and continues.

And I would add to that, that we're seeing land sales at record levels, which is going to become industrial property in the future, which will only drive our leasing revenues and our capital markets revenues in the future because of that additional product on the market.

I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Hennick for any closing remarks.

Okay. Thank you very much, operator, and thanks, everyone, for participating in this quarter's call, and we look forward to doing it again next quarter. Thanks for joining us.

Ladies and gentlemen, this concludes the conference call. Thank you for your participation, and have a nice day.