Jones Lang LaSalle Incorporated (JLL) Earnings Call Transcript & Summary

We will go ahead and get started. Thank you, everybody, for attending this. My name is Patrick O'Shaughnessy. I cover capital markets for Raymond James. Happy to have Jones Lang LaSalle here this year, and we have on their behalf CFO Stephanie Plaines. Stephanie is going to go through some slides, and then we'll do a little bit of Q&A afterwards. So with that, I'll turn it over to Stephanie.

Hi, everyone. Good afternoon. Thank you, Patrick, for having me. Stephanie Plaines. I'm the CFO of Jones Lang LaSalle. Thanks for attending this afternoon. It's the late session. And I think if you're like many of us, you've gotten e-mails on travel restrictions and coronavirus and all that. So I'm sure you had to take great lengths to be here. So thanks for your time. I'm going to tell you a little bit about Jones Lang LaSalle, give you some background on the company, talk about the financial results and then get into what we're excited about the future of the company. With that, just starting out with the preliminary cautionary note regarding forward-looking statements. Okay. So who we are? Jones Lang LaSalle. We're a leading professional real estate services company specializing in real estate management and investment management on a global scale, for those of you that don't know us. So our mission statement is to really shape the vision of real estate for a better world. We're using this -- using advanced technology to the change rewarding opportunities, create amazing spaces for our clients and our customers and do this in a sustainable real estate manner across the globe to serve our clients, our people and our communities. So we're a very integrated model. We have a number of different pillars that we focus in on in business lines, but let me tell you a little bit about our revenue stream right now. So we're about $7.1 billion for 2019. We just concluded our fiscal year, and I'll go through our financial results in a minute with you. So we have over 93,000 employees across the globe, and they serve over 80 countries. So as you can see, we're very well broad diversified. And our business is split between the Americas, EMEA and Asia Pacific. So we're about 55% Americas-based and then well covered in the rest of world as well. As well as you think of our business in terms of transactional based and annuity based, we're about a 55% annuity-based business and about 45% transactional, and I'll get into a few details on that. In terms of the history of the company, we have a long-dated history, which we're really proud of. We're founded in 1760. So there's not a lot of companies that can say that. So we're over 250 years old. While this shows $7.1 billion in revenue, that's our fee revenue. So our reportable revenue is about $18 billion. So -- and we're a Fortune 189 company. So those may be more familiar statistics to you. Okay. What we do. Obviously, we're diversified across a number of different revenue streams and provide a full-service suite of options for our clients around the globe. Our Leasing business is probably our most well-known business. That's brokerage across the globe, and we provide full-suite services end-to-end for clients. Most of our clients across this portfolio tend to be about the Fortune 100 companies. Roughly 90% of our clients fit into that definition. Capital markets, a very important business for us, and I'll get into that in a minute. It's about 25% of our portfolio overall. And we in July made a recent acquisition, our largest acquisition to date, of a public company called, HFF. We made that in July. We're very excited about it, and I'll talk a little bit about that later on how we're doing in terms of that development. Going down left to right, Advisory, Consulting & Other. So that's a business that's really scaling and growing. We have a number of digital solutions we're offering our clients. We also have a large and scaling valuation business and a consultancy and advisory business. Some of our annuity-based businesses, which I mentioned, which we call under the umbrella called Corporate Solutions, our property and facilities management. So those are really the outsourcing portion of our business, for those that aren't familiar with that, so managing properties for the owner and for the occupier, and we're doing that in all 3 geographic regions. Project & Development Services, which is really design and build for real estate projects in our portfolio. And then our LaSalle business, which is our Investment Management business. It's a separate business from a proprietary perspective. It's about 8% of our revenue stream, as you can see. And I'll go into a little bit of detail after that. In terms of the sectors that we cover, it's very, very broad. And if you've been -- for those of you that are following us, we've really evolved and diversified over a number of years. Our traditional has been in the office space. But we are growing larger and larger in industrials and logistics. Particularly over the past 2 years, we've seen very high-growth in this area, the economic trends as well as our increased penetration with our clients. The retail sector as well, which is very well known. Multifamily is an expanding business with us as well. So we purchased a company called Oak Grove in 2015, which also catapulted us into this business. And then in hotels, which we do around the globe as well. All right, well, we define the business focusing on 4 key drivers that enable us to really meet the challenges of a changing real estate environment and the economic trends we see going forward. So the first big trend is obviously rising investment capital allocations to real estate. So the latest statistic that I saw is that we're now over about 10% of portfolios being allocated to real estate. So that's exciting. We think it's a really important space. We're encouraged by the amount of intention that's coming into it, and we think that it's a great place for investors to designate this as a growing asset class. Next big trend is outsourcing. So while we're still sitting on about 80% of corporates. This is only -- corporates around the globe are still doing their own work. So only 20% are really participating in outsourcing, which speaks to the potential of this business. It's slightly larger in the U.S., where it's a more sophisticated market and it varies a little bit on geography, but we still believe there's a lot of upside on outsourcing. The complexities of the business, the ability for large corporations to execute at scale to find the savings and the synergies to deal with their sustainable ESG programs and all the complexities of making the workspace a desirable designated place are driving that trend. I think we're all aware of the trends that we've become a more urbanized world. Particularly in the amp of coronavirus, you can see the amplification of the migration of people and work relocating into cities. So as we focus on that, the demand for real estate services will only continue to grow and the investment management of that as well. And then, of course, The Fourth Industrial Revolution, where technology is the next key to our growth unlocking in this century. So in 2017, we had our first Investor Day, some of you may remember, and we announced our corporate strategy called the Beyond strategy. And it was supported by a number of strategic intentions on 4 business areas that we have focused in on as well as some financial parameters that we've committed to the investment community to honor. And we use these strategic principles to guide our investments today. We're making great progress on the strategy. I'll go into that in a few minutes, and I'll take you through some of the big tenets of it. But the headlines are, obviously, first starting on the financials on the top line. So overall, we're committing to an average annual fee revenue growth of about 9% overall. That's foundationally built in 4 major businesses. Our Corporate Solutions business, which you can see on the screen, we're designating that to grow on average about a 10% CAGR. This is a 2025 Beyond strategy goal. So that is our outsourcing business. That is property and facility management and integrated facility management mainly. That has obviously great partnership with our clients. We focus in on client centricity, the value chain and, obviously, the use of technology to drive those savings at scale to our clients. Our next business is Capital Markets. So Capital Markets represents, again, about 25% of our portfolio. We designated this business to double in size, and with the acquisition of HFF, we did in July -- we've almost met that obligation. So we're going to be able to probably hit this goal just continuing to scale the business organically, and I'll talk about that business in just a minute. Then what we call local markets. We're expecting that to grow about 7%. It's really heavily dominated by our Leasing and our brokerage business, our property and development services business as well. So we're really focused here on driving further productivity, getting scale and using technology in our businesses. And then fourth is our LaSalle Investment Management business, which, again, is about 8% of our revenue stream right now, and we're on the path to double that business. That will also double our assets under management as well. So we're focused on growth and top-tier performance, particularly in core open-ended funds. All that provides the platform for our EBITDA margin expansion growth, and that is to grow between a 14% and a 16% consolidated EBITDA margin swimlane. All right. So we just closed our fiscal year in December. And very pleased to say we had what I call a triple record. So we had record top line revenue, margin and EPS results and all double-digit growth rates. So we're really pleased with our landing spot that all the businesses kind of came together. Those 5 service lines that you saw just a little while ago added up to a very, very stellar landing position. Overall, consolidated revenue and fee revenue both grew at 12%. And across those service lines, there was healthy growth across all the businesses and the geos. When we think about the business and we just digested a large acquisition, HFF, we're talking more and more about our organic growth and our M&A growth as well. So we've designated like that our organic growth will grow between 6% to 8% organic annualized, and we landed the year at about a 6%, so right in the range of that. So we're pleased with those results. And for the first time, our consolidated EBITDA revenue increased to $1 billion. So for us, that's a big milestone. We're very proud of that. And we posted our EBITDA margin at the top end of the range of about 15.6%. So our target, again, is about a 14% to 16% EBITDA margin range. We just completed about 7 months ago our largest transformative acquisition, HFF, which is debt capital markets business. It's a monolithic business. Many of you know that it was a publicly listed company with a great culture and, obviously, very talented employees. So we're happy to have them in the family, and they're really bolstering our position, which I'll go into a minute. We haven't neglected our own core businesses, particularly, have been very focused on margin expansion. So productivity of our sales force, looking to streamline and simplify our businesses with back-of-the-house platform savings. And just general, more efficiencies that we're gaining operating at scale has driven margins, particularly in Asia Pacific in 2019. Our cash flow is doing very, very well. We had a very strong 2019, and we were able to leverage that strong cash flow to pay down some of the debt that we took on in the HFF acquisition, which I'll talk about in just a minute. And just a reminder, again, to the audience of our targets that we are using for guiding us through 2020 and beyond. Okay. HFF. So HFF, very important, transformative, as I mentioned, the largest deal that we've ever done, $2 billion. It was structured as a cash and stock deal, so 50-50. So we were able to use our currency for that transaction as well as borrow during our existing facility and available cash, which we were pleased about. It actually combined us to bring JLL to a #2 position in the very important growing capital markets sector. As you know, capital markets last year had a very strong showing. They had record results: $800 billion growth, up 4%. So it was a record year for investment sales across the globe, surpassing only 2007. So pleased with the performance there. We've integrated the businesses already. We're well on our way integrating teams. They had 27 offices, and we're combining teams and going on joint calls and continuing to scale the business. So the results, the first months in are very positive both on the revenue side and on the margin side. We've set ourselves synergy targets of about $60 million overall in the next 2 to 3 years, and we've committed to delivering about $28 million of synergies, both cost and revenue run rate synergies, in the first 12 months. So in Q4, we were able to say that we've achieved $10 million of the [Audio Gap] glide path to achieving those over the mentioned period. It does certainly provide a lot of incremental growth for us in 2020. We'll cycle that halfway through the year and designate it as organic, but it is certainly also a growth pillar for us on the EBITDA and on the working capital as well. All right. I thought it's important just to kind of take us back a little bit, for those that aren't familiar with us on our revenue projection growth. And I think this kind of picture tells a number of stories. So we're pleased to say that we've been growing at a 12% CAGR overall. So this is from 2016 to 2019. And part of that growth is obviously organic. And then in 2019, we have a slight help actually from the HFF acquisition, but both businesses are growing very strongly. More importantly, I think, the conversion of our top line, which is above the double digits, if you look at it over that time frame, is that we're converting at about a 19% CAGR on EPS. And if you think about that from the EBITDA perspective, it's right about in line with that. It's about an 18%. So we're pleased that we're able to convert. The revenue streams are mix shifting well into the business, and the cost initiatives that we're running are performing well. So all right. And then JLL, obviously, as an investment, which is obviously what we're here to talk about, and welcome your questions. So it is a very diversified company. As you can see, it's $18 billion across 5 service lines. It's across 80 countries, and well diversified in terms of transactional businesses and annuity businesses. It's changed a lot, for those that have followed it, in the great economic downturn. We've become, obviously, more diversified those revenue streams but also across sectors that we play. So we're more amplified in different classes besides office, as I mentioned, technology, industrial, logistics, life sciences, for example. And we're seeing more and more activity come from typically less traditional areas, governmental work, student housing, health care, things like that, that are also growing the business. We've become a top 2 competitor, obviously, in a very consolidated industry. It's taking a considerable amount of capital designation in technology and in people. This industry is consolidating, and we think that there are favorable global and real estate trends that will continue to project us well into the next 200 years since we've been around that long. We're striving for organic growth and M&A that's opportunistic. We're pretty careful with our M&A wallet. We've done some transactions, most recently, the one I mentioned with HFF, but we tend to scrutinize them very well, but we are obviously opportunistic when the time is right. I talked about the stable revenue stream. So over 50% of that is what we consider recurring. So that gives us some health and suspension on an economic up- and downturn. We're focused on profitability expansion. We're pleased with the picture I just showed you earlier, where we're converting very well, which allows us to fund the businesses organically. It also allows us to maintain a very healthy balance sheet. So -- and to continue to do deals, such as HFF, and maintain good financial health. We are a dividend-paying company, for those of you that do follow us. So we've been paying dividends and increasing them consecutively over 10 years. And then we have strong foundational measures, which I think I just mentioned. So with that, thank you for your time.

All right. Great. Thank you, Stephanie, and some questions now. Maybe kick it off with the question of the day. Current events, coronavirus. Can you talk a little bit about how coronavirus might be impacting you guys operationally and/or how it is impacting client demand for leasing and investment sales services?

Sure. It's nice to not be behind the podium, by the way. So yes, so I think on the coronavirus, just to talk a little bit about our presence, so we are obviously -- have offices around the globe. But in China, in particular, we have 21 offices and 20,000 people working in China. So we're obviously watching this very closely, and we have an office in Wuhan. What's interesting about Wuhan, I'm not sure if -- those of you that have now soon become very familiar with it, there are -- 300 of the Fortune 500 actually have representation in Wuhan. So it really is a very important industrial part of China that's strongly impacted. Our business's -- our exposure to China, Greater China, right now is about 5%. And if we think about China, Greater China, in terms of our overall Asia Pacific portfolio, it's about 1/3 of our Asia Pacific portfolio. What we're seeing is obviously a significant slowdown in business, businesses being paused on almost all fronts, most demonstratively in our Capital Markets business and our Leasing business. So that's not to be unexpected. There are sanctions. There are people working completely remotely, and things have come to, in some instances, almost a grinding halt. What I would say about the businesses that we have in Asia Pacific is we're more than 50% annuity based. So that's the outsourcing business, and that, obviously, are long-term contractual businesses, 3-, 5-year plus, and those continue to grow. The sectors that we're seeing it most pronounced is obviously in real -- in residential and hotels and things that have a more commercial kind of consumer drumbeat. We are monitoring it daily. It is fluid, both for our own employees, and then for our clients. I think having that kind of corporate solutions outsourcing window helps us view the market because as the businesses get back and started, most of our JLL employees sit on those desks of those corporates that are inside of China and in that particular area. We're watching Japan. We're watching, obviously, for any further activity or slowdown there. We have not seen that yet of any notable rate, but it could obviously change. It's very fluid, which I'm sure many of you in the audience can appreciate. And then in Singapore. When we studied this, I think, for those that remember SARS, and it's never nice to remember another pandemic, China looked very different, or this part of the world looked very different. I think China was -- it's now 9x bigger, Greater China, than it was then. And the impact that we saw in our business was very clear in -- isolated to Hong Kong and Singapore. So this feels just in all aspects a very different downturn. In SARS, we learned the business bounced back pretty quickly. And so our current thinking with our own internal research is that, as and per this gets better, that we don't see that the business is being suspended at all, but it's being paused, and we would expect that those transactions would continue to flow in, Patrick.

Great. No, I appreciate that detail. That's very helpful. So maybe switching gears then and talking more specifically about JLL. The company is over 200 years old. You joined about a year ago.

250.

250 years old. You joined about a year ago, right around the time of our conference last year, actually. What has -- what attracted you to the role? And what surprised you the most since you joined?

Yes, so I'm almost a year. Thanks for the question. And what attracted me to the role is I -- there are a couple of things. It's always about the talent of the company, the quality of employees and the passion that they have. And I think, again, a company that's been around 250 years at global scale was important and impressive to me. Number two, I had known Jones Lang LaSalle from previous lives as a client, and they had stellar -- they had a stellar reputation for just partnership, credibility, integrity, et cetera. And third, I think that the real estate -- just real estate asset class is just, dare I say, it isn't getting as much attention as it probably should, and I was very intrigued in a sector that is still emerging. There are not a lot of sectors that are still growing at 9%, 10% CAGRs that you can say that don't have technology involved, and I thought that would be also a great place to contribute so...

Got you. And then I think it was 2 weeks after you joined Jones Lang LaSalle you guys announced the acquisition of HFF. So welcome to the job. You talked about it a little bit, but maybe digging in further to some of the comments on your fourth quarter earnings call about how revenue synergies are progressing, the specific areas where you're seeing that cross-selling really accelerate and then broker retention relative to your initial expectations.

Yes, sure. So it's an exciting time to come in. And so I can't claim any benefit, any wisdom for that. It was just to take the ball forward, and the ball forward is obviously to help support those 2 businesses to integrate and to continue to keep us at a #2 and drive us to a #1 position. So we're on track with all aspects of that acquisition. We -- to your comment on the broker attrition, we did plan in the underwriting some broker attrition to happen both on the HFF side and on the JLL side. I would say that it has slightly exceeded, as we said on the earnings call, mine and Christian's expectations on that. It's been mostly on the JLL side. They do have better competencies in some areas and in some geographies and in some sectors. So we're not overly concerned with that. We think we're on the other side of that now and working towards, obviously, continuing to build the bench. But on the other side, we've seen more cross-selling activity than we originally predicted. Synergies are a funny thing. You have to kind of figure out what happens at what pace. But the amount of collaboration that is happening between the teams from day 1 to go to pitches together or to bring new businesses is higher than we had actually predicted in the underwriting, and that's why we're still committed to the synergy designation that we have.

Got it. And then your 2020 expectations that you set out and you spoke about again today. Your outlook for global volumes was down 5% for global leasing and global real estate down -- or flat to down 5%. But then at the same time, you had this outlook for positive 6% to 8% real estate services growth organically. Why do you expect Jones Lang LaSalle to grow so much faster than the industry as a whole?

Yes. So the growth that we quoted on the earnings call was the overall market. And I think that's just part of the service that we offer in terms of research. So that was office. And I would say that we -- research is assuming that it goes down 0% to 5% on the global. But our growth is committed to 6% to 8%. So I would say it's just a reflection of how we see ourselves taking share and continuing to grow. And our business has expanded, obviously, beyond office. Office is about 70% of our business right now. And so those other areas that are obviously amplifying to grow are logistics, for sure, and technology and then some of the other emerging areas I mentioned, like coworking, that are fueling that difference.

Got it. So flexible workspace, I think, was the hot topic of 2018 and for most of 2019, and then we had the well-publicized failed IPO of WeWork. And I think the perception now is flexible workspace has kind of ground to a stop. How important was kind of the growth of flexible workspace as a model to your Leasing, I think, in particular, Leasing revenue growth in 2017, 2018, 2019? And then kind of what's your outlook going forward?

Sure. Yes. So I think everyone knows where they were in WeWork. But we're very bullish on flex space. So we believe it is the future. We don't believe that it is a trend. In our outlook for 2030, thereabouts, is that it will eventually be 30% of all the tenant -- the occupier space out there. So it's here to stay. WeWork is one of over 6,000 flex space providers around the globe, but they are obviously, in certain parts of the world, here and in London, one of the premier shops. Our exposure, to your question, to coworking right now and our penetration, it's still relatively light. So it's less than 2% overall for the market. And for us, it's significantly less than 4% or 5% of our Leasing business, but it's an important business that our clients are asking for, and we're very bullish on it. We saw some softening, to your question, Patrick, in Q4, with WeWork, obviously, contracting. We were still positive in Q4 just slightly and overall positive for the year. So we're expecting these trends to supersede just WeWork because of the large pent-up demand that's in the market.

Okay. I'll pause to see if there's any questions in the audience. Okay. One last one for me then, I think, before we wrap up. So your corporate solutions business, the outsourcing business, on the slide, it shows you guys expected to grow 10% plus. What are some of the key drivers that you think underlies that relatively ambitious growth goal?

Yes, there's a number of those for the outsourcing business, those that are based here domestically in the U.S. I would say that in certain sectors, corporates are relatively mature and thinking about outsourcing certain things, either their first generation, and they're thinking about just the general portions of the business or getting more sophisticated in it. But there are certain parts of the world, especially in Europe and Asia Pacific, where there's almost no outsourcing. So we're seeing that grow, and that's how we get to that 10% CAGR ambition overall. But there are complexities, including technology and, I think, ESG that are driving that. So corporates are continuously looking for ways to drive savings out of their real estate portfolio and monetize those in any way they can. They may be -- they may want to want to sell the asset, they may want to have somebody manage it. There's all different constructs for that, but they're continuously focused in on space utilization. So we're using a lot of technology coming from some of our investments and our own developments internally to help in space utilization and get more out of that. On the side of ESG or just carbon footprint, a lot of technology that's used to drive savings, for things like in this building, lighting and heating and air, are very important to our customers and our clients, and we're using technology in that basis. And then if you kind of think about where real estate is sitting, for many of you in the room, real estate sits under the CFOs. It has traditionally, and it's moving around. So it's moving to the CTOs or even CHROs. And as that happens, we're seeing a couple of things. We're seeing that real estate becomes, if you will, something that is supposed to be brand emblematic. You may recognize that with better workplaces, different amenities offered by your respective companies, so being a competitive advantage to attract and retain talent. So the use of your physical space is very important to attracting, retaining and providing creative spaces and productive spaces. So that's number one. The second is on, I think, ESG. So I was at Davos in January, and there was certainly much more amplification of companies issuing their carbon statements explicitly in the market. And if you think about if you're a big company, a very large top 50 multinational, how do you go about executing, if you will, a plastic-free, if you will, policy across 80 countries? You can probably get there pretty easily with like 65, and the rest of them are very, very challenging to do that across your offices. That's just one example. And two, if you want to procure green solutions for your business to maintain or actually achieve your carbon neutrality or carbon plus even, depending on what your ambitions are, you're going to need the support of a provider of those services. And we think Jones Lang LaSalle is very well positioned, and we're in active engagement in providing services to our clients already. So we're excited about that part of our growth as well, and that also just drives us to the 10% CAGR.

All right. Well, terrific. I think on that note, we'll wrap it up. Thank you very much, Stephanie, and we'll have a breakout session downstairs.

Thank you.