Description

Thesis

• In summary we think Collier's is a good business with numerous compounder characteristics (asset lite, high fcf conversion, excess cashflow reinvested back into the business, strong roic, fragmented market, long term performance track record, founder lead) that is trading at a valuation that doesn't properly reflect its future growth opportunity set or the changing economics of its business model.

• Colliers continues to trade as a highly cyclical real estate brokerage despite diversifying into more recurring, higher margin and less macro-sensitive revenue streams. These business lines including engineering and design, loan origination and servicing, property and project management and most notably; investment management.

• We believe the market is overly focused on negative near term real estate trends and overlooking Colliers continued shift away from a lower margin, variable cost, CRE provider to a business where the bulk of incremental profitability is being driven by an alternative asset management platform with >40% margins and >$100 billion in assets under management.

• We estimate CIGI is trading at ~7.5-8x 2024 EBITDA or 12-13x FCF, near term FCF growth benefits from high incremental margins with high visibility in Collier's asset management business which helps hedge risk against sustained near term headwinds in more macro-sensitive revenue lines.

• We believe Collier's portfolio could also be looked at on a simple SOTP basis, segmenting Collier's Investment Management Platform from its remaining real estate services. We believe the later is trading at 4-5x 2024 FCF when applying a market multiple to investment management's 2024 fee-related earnings.

• We forecast IM accounting for roughly 1/3rd of Colliers 2023 EBITDA and nearly all of incremental growth due to well known but hard to quantify short term head winds impacting Colliers' other service lines. This is up from >20% of total EBITDA and nearly 60% of incremental EBITDA growth in 2022.

• Well much lesser known than peers such as Blackstone and Brookfield, Colliers has emerged as one of the world's fastest growing alternative asset manager platforms as measured by institutional capital raised over the last 5 years:

• Alternative asset managers such as Blackstone and Brookfield have traded as high as 25x 2024 FRE with the majority of alt managers trading at a mid-to-high teens multiples.

• Applying a 15x multiple on Collier's 2024 fee related earnings (FRE) implies a 2x EBITDA and 4-5x FCF multiple on Colliers remaining businesses.

• Applying a 20x 2024 FRE multiple would value CIGI's remain co at $0.

• FRE accruing to Colliers is entirely driven by assets under management and doesn't include earnings streams related to fund performance in the form of carried interest. Why? Carried interest is currently paid out to acquired Investment managers with CIGI's FRE reported net of these payments.

• Additionally, Colliers has several non-asset management business where we can apply multiples based on public comps.

  • CIGI's Outsourcing & Advisory segment which accounted for >30% of 2022 EBITDA includes services related to project management (~1/3rd of revenue) and engineering and design (~2/3rds) – both have semi-recurring revenue streams and are accretive to CIGI's top line growth. We expect E&D to be a key vertical for future M&A.  Engineering and design includes services for the public and private sector (urban planners, surveyors, architects, environmental scientists). Project management includes services relating to construction, e.g., construction monitoring and bid document reviews.

  • Peers such as WSP Global, Aecom and Stantec trade at 13-14x EV/EBITDA. Applying a 12x multiple solely on the E&D business would leave remaining Colliers (including investment and project management) trading at approximately 5x our 2024 EBITDA estimate and 10x on cash flow.

• Applying both a 12x E&D EBITDA multiple AND 15x for FRE would imply a deeply negative value for Colliers remaining sales/capital markets and leasing businesses. These CRE peers currently trade at a 7-8x EBITDA while the last major transaction for a real estate capital markets pureplay being HFF which was acquired by JLL in 2019 for 12.0x.

Colliers Overview

• Colliers is the fourth largest commercial real estate services provider globally. The industry is notable amongst professional services for its high degree of fragmentation with the 5 largest firms controlling <20% of market share. Services vary slightly by company but generally include sales and lease brokerage, valuation and advisory offerings, along with property and project management.

• Colliers is the sister company of FirstService (FSV) and spun out from legacy FSV in June 2015. As an aside, aaron16's FSV pitch is one of my favorite all VIC writeups and likely one of its most successful. From 2016 to 2022, Colliers’ Revenue, AEPS and FCFPS have compounded at 15%, 17% and 15% per year respectively via a combination of buy and build with modest financial leverage:

• Returns on Capital have significantly outperformed comps:

• Throughout its history CIGI has had a consistent track record of acquiring non-investment management assets for 6-7x EBITDA with a standard structure of acquiring 65-80% of the equity upfront while retaining the previous owners/operators via a minority equity position.

• While most service lines arguably lack differentiation amongst peers, in our view the most notable distinction is Colliers' foray into alternative asset management. Colliers peers have little to no exposure to this business model as a percentage of total revenue. Alternative asset management for bigger peers such as JLL and CBRE generally consists of high cost funds trafficking in publicly traded real estate investments i.e  high cost mutual funds focused solely on real estate.

• This strategic shift has structurally changed the profitability of Collier's business and we expect it will become increasing evident to the market over the medium term.

• Our final but lowest conviction thesis driver is around the possibility of Collier's creating synergies between its IM platform and remaining businesses.

• As Collier's portfolio of CRE services matures, we believe there is also an opportunity for CIGI to leverage existing relationships within Investment Management Platform and cross sell/expand wallet share within its remaining businesses. Professional service providers amount to a combination of reputation and client relationships. By adding an investment management platform Colliers has a chance to create network effects and a differentiated service offering vs peers, allowing more touch points and monetization opportunities through each aspect of the commercial real estate process.

• This might look something like: 

  • Firstly Collier's leverages relationships with existing LP's from it's investment management platform. LP's include some of the largest global purchasers of commercial real estate both on a direct and in-direct basis.

  • Prior to listing, Colliers can engage in engineering and design services either for the pre-build or during modifications

  • Second Colliers can provide loan origination, debt servicing and financial consulting for the property

  • Next Collier's could broker a sale of the building or lease the building and provide property management services.  This building could be sold to an existing LP or directly into to the portfolio manager of one of CIGI's investment funds.

• Time will tell if this becomes a viable driver of market share gains for Colliers and we don't ascribe any value to it today but feel it is worth highlighting. 

Investment Management Overview

• Given our belief that the variant perception around Colliers centers around its investment management platform, that is where we will focus most of this pitch. Investment management is quickly approaching 40% of CIGI's consolidated EBITDA with >40% margins and very high incrementals that we believe can drive margins closer to 55-60% over time. IM margins were 46% in Q1/23 up 250bps y/y.

• Colliers origins in investment management began in 2016 with the acquisition of ICADE, a $2bn AUM French asset manager. Today Colliers has ~$100bn of AUM across its investment management platform, $52bn of which is fee-paying. Investment management EBITDA (which can be used interchangeably with FRE) has grown from zero to ~$200M over the same period. Colliers does not currently accrue carried interest via performance fees. We think of Carried Interest as free upside that isn't priced into the stock today.

• Roughly one half of Colliers real estate funds managed are focused on the ‘Alternative’ real estate classes such as health-care, seniors housing, student housing, self storage, and digital assets. These asset classes tend to be backed by positive demographic tailwinds.

• ~27% of funds are focused on ‘traditional’ real estate verticals such as office, retail and multifamily, ~20% are infrastructure related: utility, social, transport, energy/renewables, communication with the a mid single digit percentage of assets allocated to credit funds.

• The IM platform has  ~1,000 LPs. LP's are primarily institutional; pensions, endowments, sovereign wealth funds etc. Retail investors are a small part of the investor base that CIGI is looking to grow (with acquisition of Versus Capital).

• Geographically, investment management is mostly focused in the Americas (~80%) with the remainder in EMEA.

• The most notable manager within the platform is Harrison Street, a global manager with a nearly 20 year track record focused on specialized real estate strategies within education (student housing), healthcare (life sciences, seniors housing) and storage (data centers). HS senior management continues to own 25% of the equity, in line with Colliers preferred acquisition strategy of retaining acquired managers via a sizeable minority equity component.

• Other managers include:

  • Rockwood Capital LLC (~17B AUM): Mostly US focused; multi res, office, mixed use, life science, retail, hotels; focus on high growth sun-belt markets and real estate credit.

  • Basalt Infrastructure (~$9B AUM): Focused on utility, transport, energy, renewals, communications

  • Versus Capital (~$6B AUM): Two continuously offered closed end funds (VCRRX & VCMIX) that give Colliers exposure to institutional real estate for the retail channel via an established network of RIA's. Longer term there is an opportunity for Colliers to register funds on the Wirehouse channel providing direct access to HNW clients at large wealth management firms.

  • Colliers Global Investors: Mostly traditional office/retail/industrial/hotel in Europe.

Fund Economics 

• Not all funds are created equal. Approximately 52% of assets under management are fee-bearing. Fees (revenue) are priced on committed capital opposed to capital deployed. A 10 year life is typical for most funds. Performance fees in the form of carried interest are subject to hurdle rates which vary by fund and are not collected until the end of the fund's life.

• AUM fund structure is compromised of 48% long dated funds,  38% perpetual or open ended and 15% in managed accounts through Versus Capital

  • Open ended funds are unintuitively the least attractive structure and account for ~1/4 of the perpetual/open ended category. These are comparable to open ended mutual funds with more frequent  mark to market on fund NAVs, creating additional performance volatility. Funds are subject to redemptions with gating mechanisms to prevent spikes in outflows.

  • Managed accounts can be thought of as a component of an alternatives sleeve for high net work investors. The structure has higher fees and therefore higher margins due to smaller AUM contributions by individual LP's opposed to institutional investors. Carried Interest is based on individual agreements. 

  • Long-dated funds are typically, 10-year funds with two 1-year renewal options. Base fees on long-dated funds are generally ~1.5% of committed capital.

  • Revenue is typically derived based on percentage of funds managed. Currently there is no carried interest earned by Colliers. Carried interest is reported within revenue but is 100% paid out to CIGI's investment managers meaning it is 0% margin revenue.

• Currently, carried interest on funds launched prior to acquisition by Colliers is fully passed through while Colliers participates in ~40% of carried interest on new funds launched post acquisitions. Pass-through carried interests totals $90M since 2018 (approximately 9-10% of total fee revenue) coming mostly from Harrison Street. The first fund vintages eligible for Colliers to collect meaningful carried interest will likely not be until 2025 or later, corresponding to the first fund launched by Harrison Street post 2018 acquisition.

• Carried interest fees are typically 15%-20% of profits above an 8-9% hurdle rate for LP investor returns.  Carried interest structure differs across funds/investment managers. Performance fees can be inherently lumpy given market conditions, remaining fund life, asset divestments, and potential clawbacks for poor performance.

• We think the north star for Collier's IM platform is Blue Owl (NYSE:OWL) a $16bn market cap credit- focused alternative asset manager which also takes majority equity positions in GP's. OWL trades at mid-teens multiple of 2023 FRE guidance despite rising credit risk and management infighting but unlike Colliers Investment Management Platform, OWL's investor base is primarily retail clients with a higher aggregate fee structure. 

Balance Sheet

• Collier's has $1.6bn USD in debt against a market cap of $4.4bn and 2022 EBITDA of $630mn. Q1/23 cash was $179mn.

• The debt comprises of: $1.bn drawn from Collier's senior unsecured revolving credit facility with a weighted average interest rate of 5.8%, ending May 2027. Debt costs are subject to sustainability-linked initiatives with adjustments based on various ESG Initiatives.

• Remaining debt includes €210M May 2028 senior unsecured notes fixed at 2.23%, €125M October 2031 senior unsecured notes at 1.52%, and an additional $150M October 2031 senior unsecured notes at 3.02%,

• Approximately 62% of Collier's debt is fixed at a weighted average rate of ~2.7%. In April 2023, CIGI issued notice to redeem all of its $230M convertible notes effective June 1, 2023.

Risks

Core Business Cyclicality

• Colliers is not immune from macro-sensitivity. The most direct impact is on Colliers’ Capital Markets business which represented ~20% of 2022 Adjusted EBITDA, of which the office vertical represented ~36%.

• Tighter credit and higher rates have resulted in material declines in transaction volume globally, which were down an estimated 60% in Q1/23. Colliers’ 2023 guidance contemplates a 30-40% decline in CM revenues in H1/23 with y/y improvement in H2/23. This is not a business that provides significant forward visibility for management, Colliers cut its original 2023 guidance at the time of Q1 results.  It is possible that Capital markets and macro sensitive business lines remain depressed well beyond our current expectations.

• An important consideration is that for Colliers brokerage related services (sales and leases) volume is a much more material driver of revenue than asset prices. Colliers is more impacted by wider bid-ask spreads leading to lower transaction volumes opposed to reduced commissions from lower real estate values.  One of the themes we saw during COVID was companies delaying long-term decisions by signing shorter duration lease renewals in the interim, given that commissions are still partially a function of the total transaction value, this does weigh on near-term revenue generation.

Investment Management

• It is conceivable that the higher rate environment will continue to impacting IRRs on Collier's new and existing investment management funds while slowing the fundraising environment for future funds and stagnating AUM growth. IM could see significant asset write downs or redemptions as institutional investors re-balance portfolios.

• An offset to this is Collier's has yet to accrue any amount of carried interest and won't be subject to lapping strong performance periods with high amounts of carried interest. We believe that real estate remains and attractive and under invested asset class for many institutional investors globally as a percentage of global investment allocations.

• Rates stay higher for longer, making CRE less attractive as an asset class relative to other forms of yield.

• Much like a highly regarded public equities manger, Collier's IM platform including its star manager Harrison Street is subject to key-man risk via a small group of GP's which drive fundraising and investment decisions. 

Valuation

• We see the opportunity for a mid-teens IRR in CIGI over the next 5 years based on what we feel are reasonable assumptions and don't include future M&A. As mentioned previously, we believe CIGI trades at 12-13x 2024 FCF.

Key assumptions include:

• Total revenue growth of 1% in 2023 and 6% in 2024 with ~$500mn in 2023 investment management revenue growing >10% in 2024 at low 40s EBITDA margins.

• LSD 2 year revenue CAGRs for Outsourcing and Advisory and Collier's Lease Brokerage with a negative double digit two-year stack for Colliers Sales Brokerage.

• 2024 margins x-investment management return stay in line with 2022 levels after dipping in 2023.

• Total EBITDA growth for CIGI is in the MSD range in 23 and low teens in 2024. Management has called out $50m (8% vs FY22) in 2023 EBITDA growth just from previously completed acquisitions being included in FY results, we assume negative growth in 2023 outside of this dynamic with a modest rebound in growth and margins in 2024.

• Capital intensity at ~2% of revenue

• We ignore working capital which has historically been a source of funds for Colliers.

Catalyst

investment management growth + profitability, more optimistic sentiment around CRE, ongoing business compounding