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

Yes. Hey, good morning, everyone, and welcome to day 2 of the UBS Financial Services Conference, which is obviously virtual this year. This is -- I'm Alex Kramm, Senior Research Analyst at UBS covering the U.S. exchanges, rating agencies, information services companies and commercial real estate brokers. And while I just mentioned real estate brokers as the last in the list, that's where we're getting started today. First off here from me today is JLL. Very excited to have a new participant this year with Christian Ulbrich, the CEO of JLL. And there's no formal presentation. So from that perspective, we'll just do a quick chat here and hopefully hit on most of the topics that are on people's minds. There is a chat function to ask questions. So if you want to ask any questions live, I'll hope to work them in the conversation. So with that, I'll just get started here. Again, thanks for doing this.

It's my pleasure.

Since there is no formal presentation, let's start very big picture. Forget COVID for a minute. Let's think about the outlook for medium, long term for the real -- for the commercial real estate brokers. As an industry, why do you think that will continue to flourish like it has over the last few years?

Well, we have identified a couple of years ago 5 macro trends, which are really relevant for us. And 3 of them are more general and 2 are more down to our industry. The more general one are urbanization, sustainability and the world going digital. And we looked at those trends also in the light of COVID whether they will change, and we believe all of them will have some element of change. But directionally, it's still intact. We will still see people moving towards the urban centers. And that is especially true in the more emerging environments, but it's also true in the very mature environments. People want to live around the urban centers. And interestingly enough, COVID might even support that, which may be counterintuitive at first sight. But when you think about health care and having access to excellent hospitals and those type of services, you find them more in the urban environments than in the rural environments. And urbanization is obviously a major contributor to the business of JLL and other companies like us because at the end of the day, we say we are covering a country, but we are not really covering a country, we are covering markets, we are covering cities. And the more activities is in those urban centers, the more business that we have. Sustainability is obviously a more recent trend over the last couple of years, but you can have -- take different statistics. But roughly speaking, 35% of the carbon footprint is coming from the build environment. And we have heard now from many global CEOs that they have very ambitious targets with regards to reducing their footprint. They will only be able to reduce their footprint if they touch their build environment. And this is something where JLL is obviously very, very sophisticated in helping our clients to bring their footprint in their build environment down, and that is something which we see as a major growth area for us over the next 5 to 10 years. And then digitization is something which is addressing all of our lives. When you think about the amount of data which you can collect in buildings and turn that data into valuable information and into actually a value for your business, that needs quite a sophisticated knowledge of technology. And this is clearly benefiting the large providers like us who are able to really invest heavily into technology to capture all that data and turn it into advice. So we see that as a macro trend, which is very beneficiary for us as an organization. And then the last 2. Corporate real estate outsourcing has been growing over years usually for us in the double-digit area. That is obviously something which is now accelerating once again. It's always going a little bit of waste. But whenever there's crisis, that is accelerating because companies are turning to their real estate and think, "Oh, what can we do with it?" And it's now not only about cost, it's more so about the well-being and getting people back into the office. And so they are turning to expert advice. And so we see that business having very significant growth rates going forward. And then the last point is the overall growth in capital, Alex, and you will know about that. Capital is growing. And within that different opportunities, you have the allocation to real estate as an important one, and it has been growing over the last couple of years towards a target of 12%. Now the absolute amount is growing. So that helps that the 12% is becoming a bigger number while we speak. But what we have seen also that with the very low interest rate environment, the allocation to real estate is even growing further. So we may see that 12% picking up to 12.5%, 13%, 14%. That doesn't sound much in percentage terms, but in absolute numbers, this is massive because the amount of investment-grade real estate where people can invest in is quite limited. And so this is something which is very, very meaningful for us as an industry, and that is one of the reasons why we are so incredibly bullish for our capital markets business.

Great. You mentioned JLL in you answer -- or your company in your answer a little bit already. But more specifically to you now and maybe just to expand a little bit, like you obviously are in a large market share position globally. Can you talk about how you retain that market share? And then how do you feel about growth for JLL relative to the industry? And you have these 2025 targets that you established a few years ago. Are they -- are those still applicable today? I know a lot has changed. So I know it's a loaded question, but maybe just talk about the growth outlook from here more in the longer-term perspective relative to the targets.

Sure. I mean JLL is a living organism. And our main assets are our people, and those people need to feel well when they are working for us. And we need to inspire them, we need to motivate them, we need to readily train them and we need to offer them the right products and we need to offer them the right technology platform. All of these different aspects are relevant, and we are working on all of these different aspects on a daily basis. And that helps us to kind of keep our market-leading position. And having this current recession because of COVID, when we established that 2025 financial outlook for us, we were clear that over those 8 years, there will be at some point in time an economic backdrop. So this doesn't take anything away from our 2025 targets. We are still absolutely confident that we will deliver on them. And so the moment COVID is kind of coming a little bit under control, we will be back on a growth trajectory at JLL.

Okay. No. Great. Maybe just since you mentioned COVID now, how can you not, maybe go a little bit more near term. I mean can you just -- you talk -- obviously, you just had an earnings call and you just talked about some of that. But can you just give us an update again where we stand? What have you seen since the pandemic started? What do you expect for the remainder of 2020? What businesses have been more resilient or not? And also, what are the signposts that you're looking for and we should be looking for as we're thinking about the next few quarters, in particular, 2021?

Yes. I mean COVID is something which kind of run around the world, starting from the very East and then coming to Europe and then making it over the Atlantic, depending from which side you are looking. The second quarter was obviously, hopefully, the worst quarter because almost the whole world was touched by it. I had this morning a long conference with our Chinese leadership. And it's quite interesting, in Mainland China, everything seems to be completely back to normal. Everybody is in the office. Everybody is totally fired up to do business. Whereas in Hong Kong, they are still in a lockdown. They have now the third lockdown, and we are not allowed to have our people in the office. So yes, it's still patchy in Asia. But large or significant parts of Asia, especially Mainland China, is already kind of in back-to-normal mode. In Europe, it's still kind of a mix of COVID and holiday season. We are in the middle of the holiday season in Europe. But we have -- all of our offices are open again. We have a mix of working from home and coming to the office. And I would say, the U.S. is a little bit lagging. People are staying mostly at home. We have our offices open, and -- but the traffic in the offices is still quite limited. The good thing about the U.S. is that the people are super pragmatic, and they have figured out to execute deals also in a very efficient way from home. And we are obviously benefiting from all our investment into technology. And having a 3D visualization of the space you want to potentially rent and you get that kind of explained via video conference by your trusted broker, maybe not as good as seeing the space live, but much more efficient, frankly. And so people are getting used to using those type of tech tools to get their business done. And so for the remainder of the year, it will continue to be a little bit patchy depending on the numbers of the infections. But I think the world will get used to dealing and operating in this environment, and it will become much more normal course of business. People are back on planes, and they wear face masks, and that's it. 6 months ago, we would have found that really weird, and now it's quite normal that you wear a facemask if you're on a plane. And so I think we will just adjust to it. And therefore, I'm fairly optimistic that we are -- we will get kind of used to operate in this environment and hopefully, at some point in time, we all have a vaccine so that we don't even have to wear face masks anymore when we travel.

Yes. We hope so. I actually got a question from the audience that fits in here. So let me just read it out for you. It kind of combines the last 2 questions a little bit that I asked. So the question goes, after COVID-19 and post recovery, what normalized organic growth rate might JLL average over the following 10 years? Above or below GDP, the organic growth rate looks like about 3% over the long-time range. So if it's possible, can you articulate some of the ranges of possibilities in growth rates, that would be very helpful. Thanks for the question, by the way.

Yes. I mean I would be disappointed if we wouldn't be in the high single-digit organically because usually, we are able to take quite significant market share in those type of environments. And we got quite a hit in the second quarter and the third quarter will also be behind last year. And so coming out of that, we should see stronger growth for some time than we had before because catching up and winning additional market share. And so that is kind of the outlook for the coming years that we are getting back on our growth trajectory we had before. I mean what we all should be clear about, this is a time of tremendous change. And change means for some, something negative; and for others, it means massive opportunity. And I would see JLL being on the opportunity side in this environment.

Okay. Good. And then just one more on COVID, and I think you touched upon it a little bit, too. But you can't really get away in terms of not talking about how the office of the future will change, how work from home will change. So what do you think this new environment looks like once we get out of it or the near-term pandemic issue?

Yes. Well, I mean a lot of companies have, for the first time, experienced the benefits from working from home, and they have learned that it is not all that bad. Others have done it before. So -- but many, many have done it for the first time. So what it will inevitably do, it will increase the number of companies which will allow their employees to decide to work 1, 2, 3 days a week from home and come to the office less often. Now the most important piece, which we will see as change coming, is not that some people are working from home and some people are coming to the office. It will be that we will see a trend to unassigned seatings in the office. Because as long as people have assigned seats in the office and they work from home, it will only mean that you have an empty office and a lot of empty desks. And so we will see a trend over the next couple of years where more and more companies will try to convince their employees or their employee representation, depending which country you are in, that you are coming to unassigned seats, which will then allow you to reduce the amount of space in an office for plain work desks. So clean desk policy. And at the end of the day, Alex, you have to take your picture from your family home and clean up your stuff and the next day, somebody else will use that desk. And when you come back again, you may use another desk. But that then comes immediately with an extension of the collaborative space in every office. Because the more you allow your people to work from home, the more important it will be that when they come to the office that they touch and feel the company, that they really understand the culture, the value and the purpose of the company. And they won't do that in a little crummy work desk. You need this collaborative space where they interact with their colleagues, where they have a coffee together, where they brainstorm together. And those type of space will grow massively. That is a trend which has developed already 10 years ago and has been growing since then, but this will now accelerate massively over the next couple of years. Now the question is now the reduction of work space in an office for the work desk and the increase of collaborative space, how will that play out? And nobody will be able to give you a really credible answer to that at this point in time because at the moment, we still have the mix between the reduction of work space driven by the recession and the reduction of work space driven by COVID and changing behaviors thereafter. And so we have to wait because the pieces which are driven by the recession will fall away after we are getting out of the recession. What will last is the changing behavior due to COVID. My personal opinion is that it will be about the same space which is needed, less for the work desk, more for the collaborative space. But how exactly that will play out, we will have to wait. But just to be clear, I'm completely unconcerned about that topic. I mean this is the most asked question which I get from journalists when I do TV interviews. And they all think that this is a terrifying situation for us. I'm completely unconcerned about it. There are other things in the world which I'm concerned about, but not the question whether people will still need office space.

Fair enough. Actually, one very quick follow-up here. You just -- I've heard you say this before that you think there will be more shared desks. Just thinking from personal experience, I've never had a shared desk. But the idea in the midst of an -- a pandemic to work in an environment where you go into the office and you don't know who sat and sneezed on your desk the day before seems kind of something that I can't see happening. But maybe people forget, I mean we forgot a lot of things over the years and people move on and go back to normal life. But do you think there will be more shared desks? Because some people argue, we will have more individual offices again, but I guess you're close obviously to the companies.

Well, have you been going on holiday in the last 6 months?

No. I'm going tomorrow.

Okay. Will you stay in a hotel?

No. In a house.

But is it your house or is it a rented house?

It's a rented house, yes. I don't know who...

Okay. So why would you be less concerned to -- going on holiday and staying in an Airbnb than you are in your own company, your own employer, who you trust that this is your friend, your employer that they are able to clean the desk? This is -- really, Alex, this is something people will get used to. We are constantly exposed when we go to a restaurant, when we stay in a hotel, when we use public transportation. We're constantly exposed to something. I think we should trust our employers that they are capable to find the right cleaning company who's cleaning the desks before somebody else is using them easily. Actually, we are using at the moment technology so that that cleaning process is even happening during the day. We have camera sensors who will identify. They can't see whether it's you. They see that a human being is leaving a desk and it looks that the desk is being vacated now for long because you have packed your stuff, and then the camera is sending a signal and that will immediately create an order to a cleaning person to come and clean that desk, and then that desk will be readily available for the next employee. There will be a little signage on that this has been cleaned now, and then somebody else can use that desk. This is completely a nonissue going forward, and people will overcome it. The idea that a single office is better for you means that you have to trust the cleaning person who comes overnight, that the cleaning person doesn't sneeze on your desk. I mean you're always at risk in life. Life is risky.

No. Very good. I enjoyed that. Thank you. But very quickly, just last one on COVID. You touched upon it a little bit already, but it seems like you're doing -- you're making a lot of changes. I mean the example just now is astounding or exciting. But what are the things where you are -- you expect to benefit coming out of this? And maybe giving some examples where you already have benefited because you've helped certain industries in these tough times.

COVID, the 2 biggest benefits for us are, first of all, that we could progress really massively on the technology front, especially on the data front. The challenge we have as many other companies will have after 10 years of a bull market, we tell our successful brokers that they have to change the way they work, that we want them to work along a digitized process. And that when they call you up and you, Alex, have a potential need for more space, that this immediately enters the system and then the system knows that there has been a conversation with Alex, and Alex is looking for 50,000 square feet potentially. All that data in the system is very, very important for us to run the company in the best possible way. But in a bull market, very often, the brokers were hesitant to bring that in because they were -- just didn't want to bother. In the current environment, they all bring everything into the system because they can only communicate with you via technology. They will only be able to show you the building at the moment if we offer them a 3D visualization of the target building. And so everything which is happening at the moment is entering our systems, which provides us a significant increase in valuable data, which we then can turn around to the benefit of our clients, but also to our own benefit in running the company. So that is the 1 big -- first 1 big benefit of COVID to us as an organization, that all the investment which we have made over the last couple of years in technology is really now helping us to leapfrog going forward. The second big advantage of COVID is the C-suite attention. At the moment, you will hardly find a single CEO or CFO or Chief HR Officer who isn't willing to talk about their real estate footprint because they're all keen to get their people back into an office, and they need to find a way to make that safe and comfortable so that their people are motivated to come back to the office. And so the office footprint, the real estate footprint is now a C-suite topic as it was never before. And that helps us now to engage with the right people and to bring the advice to the right people because there is hardly any company out there which -- where we couldn't provide great advice, which will help them to become more productive in a much more efficient way. But sometimes, it's hard to get to the right people. And so for us, at the moment, it's so much easier to get access to the decision-makers and help them to take the right decisions going forward. So these are 2 very large benefits for us going forward. And we will leverage that going forward because once you have those relationships with the C-suite, you -- these relationship will last. Relationships which you build in a crisis environment are much more sustainable than relationships which you build in a sunny side up environment.

Fair enough. Shifting gears a little bit on to the margin topic, which is dear to my heart, I guess. I think investors have over time always viewed you as a margin expansion story or an opportunity to catch up to your larger competitor, who seems to have higher margin than you have. Now on the earnings call, you and Karen, I think it was actually on my question, when asked about margins, you're very focused on coming out of this recession that the focus needs to be on growth. So can you just flesh this out a little bit? Is margin expansion off the table for now? Is it going to be something that we shouldn't be looking for over the next few years? Or is it just a function of scale that as you get to a bigger size, potentially the margins will just naturally be much higher?

It's a combination of all of that. First of all, we are as margin focused as we were before COVID. We defined for 2025 financial outlook a margin kind of target and we defined also a growth target, and both have to be in balance. We have said more specifically that on our Corporate Solutions business that we want that business to create higher returns, and that is something which we have been working on now for probably the last 2 years, and we are on a multiyear trajectory there and that is working incredibly well. So simply speaking, we are willing to not win a new contract if it doesn't meet our margin target and our working capital targets. When you look at more the transactional side, that has really a lot to do with scale. If you have the right scale in the market, that helps you to drive the right margins. And so when you look at the acquisition of HFF, the margins of our capital markets business in the U.S. were always also lagging because we didn't have the right scale. So HFF wasn't only to kind of have much more revenue and much better coverage for our clients, but the combination of the 2 companies is driving margins in that business. And so it's a combination of the 2. One doesn't necessarily go without the other in the long term. If you're only focused on margins, you may lose out on the revenue side and then you're losing scale. And the other way around as well. If you're only looking for growth, then you may get in contracts which are not profitable.

Yes. Fair enough. Shifting gears to the balance sheet for a minute. I mean you're a little bit in capital conservation mode, but your balance sheet is still very healthy, I would say.

I hope so.

What -- so shifting to M&A then. I mean this could be the time, right? So how do you view the environment? What are the targets or the areas where you really feel you should be in a position to take advantage of maybe from a regional or product or business perspective?

Listen, after doing HFF, we have filled the last major hole in our traditional services. There will still be opportunities to add on here and there, but a big play in our traditional services is obviously resulting in quite a lot of revenue breakage. And therefore, we would have to see an opportunity where we can digest quite a significant amount of revenue breakage and still create shareholder value. So what I'm trying to say that traditional, just scaling up by buying a company, which is doing exactly what you do, is hard to make that work for your shareholders if you don't have a hole in that specific space like we had with HFF in the capital markets space. And so what we are more focused on is what are the clients really trying to solve? And I said earlier that the C-suite is very focused on their real estate footprint now. And with that, we have an opportunity to provide a holistic solution to them. Because when you speak to a CEO, he isn't interested when you tell them, "Listen, in Baltimore, there's a bit of space here and that is cheaper than the neighbor building. Would you want to look at it?" That's not their point. Their point is they need a solution where they have a space which fits to their company, to their values, to their purpose, to what they want to achieve. And that has to be a solution where the fit out of that space is completely integrated in that thought process and not only the lease contract. And so what we would describe as the office of the future, what is the office of the future and delivering that as a holistic product to our clients, that is what we are interested in and that may result in additions in areas which are currently adjacent to our services. I mentioned it earlier, we have currently 600 designers who help clients to define what is the right fit out for them to meet their brand, to meet their values, to meet their purpose, and that is potentially an area where we'll continue to grow and that's how -- our clients want a one-stop shop. That is key for them. They don't want to shop around with 5, 6, 7 service providers just to get a new office done.

Since you mentioned HFF just now, can you give us an update there? I mean some -- of course, some could argue while you expand on capital markets at an inopportune time hindsight, I guess. But obviously, you were not excited just for the next year for this one, right? So where do we stand today? How has it maybe already improved some of the things that JLL does? And what are you still looking for or what gets you still excited ahead with that combination?

Well, I guess it is intuitive to everybody that integrating such a company in a crisis time like COVID makes it much easier. Because everybody is keen to be successful and to do business, and that is true for all the brokers because they are predominantly paid on the success. And when the going gets significantly tougher than it was before, the more open are they to reach out to their new colleagues to see whether there are any cross-selling opportunities, hunting in packs, coming with new ideas, using new technology which they didn't have before, accessing our data pools which they couldn't access before. So from an integration point of view, COVID was very helpful. And so we see tremendous work on cross-selling between the teams. And so that is all very, very positive. And on the cost side, we are well in our time target to deliver the cost synergies. That is all not taking anything away that the overall volumes in the market are significantly down and therefore, our revenues are down. But within that lower-market environment, we see more of those cross-selling opportunities and therefore, synergies than we were putting in our plan when we did the deal.

Great. And then just last one on this topic. To what degree can you speak to how you've taken advantage in this environment on the recruiting side already? Because we talked about M&A and HFF obviously brought you a lot of new people. But this may be also the time to pick up incremental talent when some of your competitors are maybe in a weaker position. So have you been active? Is this a big focus right now? And any kind of numbers you can put around that already, if you have them?

Well, to be honest, I don't want to put numbers around. But I can assure you, yes, it is a big focus. I mean when you want to hire people in a super, super tight labor market, that is particularly difficult. At the moment, it is becoming much easier to get fantastic talent over, which is maybe currently working at companies who are not as in a good shape as JLL is. So I have been personally involved in many of our leadership cohorts in our markets business to reinforce that message that we are in growth mode. And this is the time where you pick up fantastic talent, train them, get them familiar with the JLL platform so that they're most productive once we are getting out of that pandemic. And so we are making very good progress around that.

Great. I'm going to shift again to some audience questions here. So I'm going to read it to you again, which is probably easiest for both of us. What would be the effect on your business of several years of flattish or declining commercial real estate prices? How would that affect your revenue and profit in transaction-oriented businesses?

I don't think it's a realistic scenario, but I take the question as it comes. Well, if there is several years of declining or flattish real estate prices, we will see a lot of our medium-sized competitors dropping out of our industry because they are not large enough to have scale as we do, and they are not small enough to kind of work with an iPad and not much more technology, so their costs will be too high. So they will have to drop out. So we will win even more market share than we would do in another environment, but the fees we will generate will be smaller than we would want them to be. And so it is not the environment I would wish, but it is an environment where we would still kind of continue to deliver great cash flows.

Good. Well, we're getting short on time. So let me just hit a few of the businesses in more detail. I guess on the property and facilities management part of your business, which, again, may be less of the focus right now because everybody is focused on transactional side of this. But in that business, can you just step back for a second and talk about where we are in the evolution there? Like where the total addressable market is for kind of outsourced services? What structural shifts are happening? And then particularly for you, I think you've been in a very strong position there, but how much of your business is still greenfield versus competitive takeaways? And yes, how are you doing relative to your competitors?

Well, we should separate between facility management and property management because facility management, the way we define it is mostly for the large corporates to run their real estate footprint. That is a business which has been growing for us about double digit every year, and it will continue to do so. And as I alluded to earlier, it will probably even accelerate over the next couple of years. So that is something which is very important to us and we are very positive about it. Technology is playing a tremendous part here because, as I said, you capture a tremendous amount of data in your real estate footprint, just kind of what space is -- are the employees actually using? When are they using it? What space aren't they using? I mean there is so much data, which is valuable. But you can only capture that data if you have scale because you need software, you need tools, and that only makes sense if you have a certain type of scale. So that favors the large players in that industry. So that has become an industry where it is down to very, very few companies who are bidding against these global -- for these global contracts. You said greenfield and competitive bids. I mean the majority of our work is with the Fortune 500 companies around that, and that tends to be competitive bids all across. You have some areas in the world where you have first-generation outsourcing. They are still competitive bids, but it is first-generation outsourcing. You find that mostly on the continent in Europe and then in Asia Pacific, namely in China and some other markets. In the U.S., most of the large companies have outsourced their business a couple of years ago and -- when there is a renewal, so it's not a first-time win. The property management business is quite different because you had a trend over the last couple of years of self-performance. You have a REIT who starts to self-perform their property management and other institutional owners who think they can self-perform their property management. Many of them have learned a pretty difficult lesson during COVID because they were one of a certain faced with an environment where they didn't know what to do to assure that their tenants are comfortable to bringing their employees back into the buildings. And they didn't have the chance to use any kind of best practice from other parts of the world. Companies like us, we have been dealing with that situation in China from January onwards. And so we had all the tools ready to see what we have to do to bring the people back into our big offices in Shanghai or Beijing for our clients. We used that best practice and brought it over to other parts of the world. And so we have seen quite some significant wins over the last couple of months of new assignments where people go from self-servicing, self-performance to outsourcing that property management to companies like us. We believe that, that trend is continuing for that reason. And then on top of that same reason as for facility management technology, super, super critical. I mean we will see tremendous price pressures on that. And technology is the only way to become really more efficient in managing those buildings. But again, you need some type of scale. And so we believe that, especially in the U.S., the property management business will show pretty significant growth rates going forward.

Great. I would have loved to ask you about investment management, which I think doesn't get enough attention. But maybe we'll save this for another day because I see we're out of time. So Christian, again, thank you very much for doing this and thanks for coming to the conference and have a good rest of the day with investors. Thank you.

Thank you so much, Alex. All the best to you.