TSX Quarterly - Colliers International Group Inc. (TSX:CIGI) | 2021 Q3

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Hello and welcome to Colliers International's Third Quarter 2021 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 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 on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is November the 2nd, 2021. 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, Jay. As announced earlier today, Colliers reported strong third 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 the press release issued today. All references to revenue growth are expressed in local currency. Third quarter 2021 revenues were $1.02 billion, up 46% relative to the prior year period, with continued momentum from earlier quarters. Revenues were up strongly across all service lines, particularly capital markets and investment management. Growth for the quarter was virtually all internally generated. Compared to 2019 pre-pandemic levels, capital markets revenues were up 34% and leasing was up 8%, with office leasing recovering to within 5% of 2019 levels. Our Q3 consolidated adjusted EBITDA was $124 million, up 32% from $92 million reported one year ago, with margins at 12.1% versus 13.3% in the prior year period. Our margins were impacted by performance-based incentive compensation, the reinstatement of variable costs, and higher support staffing costs, all due to the strong rebound in transaction activity levels. America's Q3 revenues were $617 million, up 45% over the prior year period. Capital markets revenues were up 92%, driven by significant increases in industrial and multi-family sales transaction activity. Leasing revenues were up 34%, largely due to stronger industrial and office leasing activity across the region versus the prior year period. Office leasing activities showed steady improvement in Q3, although remained below pre-pandemic levels. Outsourcing and advisory revenues are up 24%, driven by strong internal growth in engineering and design, valuation, and mortgage services. Adjusted EBITDA for the region was $66 million, up 20% from last year, with the margin impacted by performance-based incentive compensation from strong year-over-year growth and operating results, the reinstatement of certain variable costs, and higher support staffing costs. Third quarter EMEA revenues were $155 million, up 29% year-over-year, with strong revenue increases in each service line, particularly leasing and capital markets. Adjusted EBITDA for the region was $15 million, up from $8 million last year, on higher revenues and continued savings from pandemic-related cost measures. In the Asia Pacific region, third quarter revenues were $172 million, up 51% relative to the prior year period, with all service lines reporting robust growth, led by capital markets and leasing. On a geographic basis, growth was led by Australia, New Zealand, and China. Adjusted EBITDA was $21 million compared to $13 million last year, with the increase attributable to operating leverage and continued cost management in light of the pandemic. Certain parts of Australia, New Zealand, and Japan were under pandemic stay-at-home orders during the quarter, which made our operating results all the more impressive. Investment Management revenues were $78 million, up 87% versus the prior year period. After eliminating the impact of pass-through carried interest, revenues were up 50%, driven by management fee growth. Assets under management were $46 billion at quarter end, up 27% from one year ago, and reflected another record quarter of fundraising following on the record capital commitments achieved in the first and second quarters. Adjusted EBITDA for the quarter was $28 million, up from $15 million generated in the prior year period, reflecting solid operating leverage on incremental management fee revenue. Our consolidated operating cash flow for the first nine months of 2021 was $211 million. However, adjusting for the non-recurring cash component of the LTIA settlement, cash flow was $300 million, almost triple the $104 million generated in the same period in 2020, impacted by a combination of higher earnings and a reduction of working capital usage which was elevated during the pandemic last year. Capital expenditures for the nine months ended September 30, 2021 were $44 million, a significant increase from the prior year, and reflected investments in leaseholds in several markets, including certain markets where we deferred relocations and expansions during the pandemic. For the full year 2021, we expect capex to be in the range of $55 to $60 million. Almost one-third of this capex will be landlord-funded leasehold improvements, reducing the net cash capital expenditures to approximately $40 million. Turning to our debt capital structure, our leverage ratio, defined as net debt to pro forma adjusted EBITDA, was 0.5x at September 30, 2021. After quarter end, we issued $300 million in U.S. and euro-denominated senior notes due 2031 and paid down our revolving credit facility in full. As a result, we now have well over $1 billion of liquidity available to fund future acquisitions and ongoing operations. In addition to this liquidity, our capital structure has low leverage, low borrowing rates, and latter debt maturities extending to 2031. With all this in place, we believe we are perfectly positioned to execute on our Enterprise 25 growth plan. Given the strong results reported for Q3 and continued momentum, we're updating and increasing our financial outlook for the full year 2021. We now expect to exceed the top end of the previous outlook. We expect that adjusted EBITDA could be 40 to 45% above 2020 levels. The new outlook includes two months of the Bergman acquisition completed yesterday and is subject to the risks and uncertainties outlined in the accompanying slides. 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, as a reminder, to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask a question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Stephen McLeod with Capital Markets. Your line is open.

Good morning, guys. I just had a couple of questions that I wanted to follow up on, specifically around operating costs. I know the operating costs came down a lot through the pandemic, and Christian, you've previously given numbers around sort of where you are on a run rate basis. Can you talk about how many of those costs have actually come back into the system?

Yeah, Steve, I think the majority of the costs are back in the system, particularly in the Americas. EMEA and Asia Pacific regions are still benefiting from some of those operating cost reductions, and you can see that in the margins in the quarter. We managed very prudently over the past year and a half, and we're trying to remain as disciplined as possible in terms of returning cost to the system as we emerge from the pandemic.

Great, that's helpful. Then my second question is more high-level here. You released your five-year plan last week, which has a great five-year outlook. I'm wondering if you can talk a little bit about some of the key drivers that may lead you to potentially outperform that five-year outlook, and where you're seeing the majority of growth when you think about doubling EBITDA over that time period?

That's great color, thank you. With respect to the engineering and design business, you cited it as a good contributor to this quarter's Americas growth, and I'm wondering what you're seeing in terms of engagements and the pipeline in that business?

Great, thank you guys. That's it for me.

Thank you.

Our next question comes from the line of Stephen Sheldon with William Blair. Your line is open.

Thanks, good morning. I guess just first, relative to what you were previously expecting with your guidance, what have been the biggest surprises on the way things have progressed over the last two to three months, especially across the different service lines and across the geographies?

Yes, Stephen, we have pretty good visibility on the recurring revenue side of our business, so not any significant surprises there. But certainly, on the transactional side, we have been continuing to see very strong capital markets activity and a rebound in leasing activity. Industrial leasing, office leasing, stronger than expected. When we sat here three months ago, so those have been very strong contributors to our performance.

Got it, that's helpful. And then I just wanted to ask about the labor supply challenges out there. Is that a notable headwind, or could it become more of one as you think about the next few quarters? Just get your thoughts on that topic.

Yeah, it's definitely an issue that we are noticing. There are more broad economic and demographic, social trends post-pandemic that are happening. There are elevated levels of turnover across all sectors of the economy, and in the professional services sector as well, and that does affect our employee base. We're managing as best we can through that, but it has not had a material impact on our business to date. Although, when you think about some of our professionals, it's difficult to recruit engineers and project managers and those types of folks. One of the biggest factors constraining our growth will be the recruitment of those types of professionals going forward, because the pipelines are very strong and the activity is going to be very strong. It's a matter of getting the staff to complete those assignments.

Make sense. Thank you.

Our next question comes from the line of Daryl Young with TD Securities. Your line is open.

Good morning, guys. Just with respect to the five-year plan, I'm wondering if there's a focus embedded in there on returning to some of the gateway cities. I know you've been somewhat over-indexed to the secondary markets historically, but just wondering if that's a core part of the plan going forward?

Okay, great. And then just thinking about the growth in that strategy, you've historically had a really nicely balanced organic and M&A mix. Would you see more M&A going forward, or M&A contributing a greater proportion of the growth in this next five-year plan than historical?

Okay, perfect. And then just last one on margins. In the quarter, was there anything unique in terms of incentive rules or anything that would have pushed margins down further, or is this sort of more of the run rate going forward now that all the discretionary costs have come back, and then we would see margins grind higher over the next couple of years?

Well, Daryl, our incentive plans are based on year-over-year EBITDA growth, and because of the low base from 2020, the accruals this year are elevated. The plans haven't changed; it's just the baseline is lower, and the growth this year is higher, and you're seeing that in the results.

Gotcha, perfect. Thanks very much, guys. Got some good results.

Thanks.

Our next question comes from the line of Frederick Bastian with Raymond James. Your line is open.

Good morning, guys. The EBITDA you generated by investment management represented a step change over what we've seen in the past. Given your successes in fundraising and also the acquisition that you're hoping to close early next year, how should we think about the segment's performance over the next four to five quarters?

Okay, but if I just straight-line the quarterly performance, you're now over $100 million annualized. Is that a fair kind of run rate that we should be thinking about, with added growth?

There is one point I should make here before I jump to that conclusion, and that is that we completed fundraising for one of our opportunistic funds, Fund VIII, during the quarter. When that happens, there are management fees that are earned going back to the first close, which was in Q4 of 2020. So there was a more pronounced amount of management fee in the third quarter because of that completion, the catch-up fees, and the completion of that fundraising activity. So while the growth trajectory is going to be very strong, I would not at this point straight-line your projections. The growth will occur on a more normalized slope.

Okay, awesome. Thanks for that clarification. Switching gears to Colliers Engineering and Design, is the focus over the next five years to gain continued critical mass in the U.S., or do you see this business potentially extending its footprint to other regions like Europe?

Great, thanks. Last one for me, Christian, can you repeat where you expect to end the year in terms of EBITDA growth? My line cut off when you said that.

Yeah, so we expect to exceed the top end of our previous outlook, and in terms of EBITDA, that could be in the 40 to 45% range relative to 2020.

Okay, thanks for clarifying. That's all I have. Good quarter, thanks.

Thank you.

Our next question comes from the line of George Doumet with Scotiabank. Your line is open.

I think last call you guys mentioned that office leasing was down 29% from pre-pandemic levels. Do you have a number as to where we are today? Maybe some color there, Jay, as to when you expect or maybe even possibly see that number surpass pandemic levels? Any color on that office category?

Yeah, thank you. And would you expect that to maybe surpass those levels next year? Any thoughts there?

Okay, thanks. And I think earlier you mentioned that operational costs were back in the Americas, but I believe prior to the pandemic there was a plan to improve those margins in the Americas by 250-plus basis points. So I'm just wondering how much of that is left, maybe how much of that is baked into our five-year plan, and anything you can provide on maybe timing there?

Yeah, George, as I mentioned, the elevated operating costs in the third quarter are a function of the year-over-year performance-based incentives that are very strong, very high this year, given the low base last year. As we look ahead for the next five years, we certainly expect margin enhancement, modest enhancement each year in the Americas region, as we become more efficient and execute on some of our operating plans.

Okay, just one last one if I may. Looking at the five-year plan we have, what's baked in for organic revenue growth for the transactional business, excluding this year's recovery? So just kind of wondering, maybe on a more normalized basis, from next year onwards to 2025, how should we think about organic growth for that business line?

Okay, great. Thanks for answering.

As a reminder, ladies and gentlemen, that's star one to ask a question. Our next question comes from Elena Skrypnyk with CIBC. Your line is open.

Thank you, and good morning, gentlemen. Just wondering, are you seeing market share gains in any particular regions or business lines?

The scoops also reflect the composition of the buyers and sellers, or maybe in other words, are you seeing more activity from global investors?

Thanks, Jay. I'll leave it there.

Our next question comes from the line of Matt Logan with RBC Capital Markets. Your line is open.

Thank you, and good morning. Jay, since this will be my last conference call, I'm wondering if you could humor me and talk about some of the lessons you've learned building successful companies over the past 25 years, and how these lessons will help you achieve your ambitious 2025 targets.

And turning to your recurring services, one thing that I don't think gets enough credit is the quality of your EBITDA. Can you remind us what the organic growth was for the outsourcing and advisory business in 2020, as well as the investment management segment? Or maybe looking forward, how you expect the organic growth for outsourcing and investment management will trend over the next couple of years?

Matt, the organic growth in the outsourcing, advisory, and IM business was in the high single digits. We don't have the number directly in front of us right now, but certainly strong organically in 2020. And as it relates to Enterprise 25, we have high expectations for those businesses, high single digits or better, due to a number of factors. Our engineering and design business operates in a sector where there are tremendous tailwinds for infrastructure spending and development. Our investment management business is very well situated with the focus on alternative assets and real assets, and we think that is going to translate into outsize growth as well. Mortgage is an area we got into last year with high opportunities for growth as we are successful in integrating it into Colliers and increasing the amount of flow that we're able to put through that very strong multi-family channel that we have. So we feel very good about the prospects in our outsourcing, advisory, and IM businesses for the next five years.

Great color, guys. Jay, earlier you'd mentioned Bergman opening doors. Can you talk about how Bergman and the Tirion acquisitions are kind of a one-plus-one-equals-three scenario, and how that relates to driving cross-sell opportunities across the business?

And maybe one last question for me before I turn it back. You've got a lot of white space in your business. If there's one vertical that you're not in currently that you could see yourself entering over the next five years, what would that be?

Thanks, Jay. Thanks, Christian. I will turn it back.

Sure, Matt, you've done a great job for us. Thank you.

Appreciate it, guys.

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