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

Okay. I believe we are live and ready to go. So thank you all for joining in. My name is Tony Paolone, and I'm an equity research analyst at JPMorgan covering Jones Lang LaSalle. So appreciate you jumping into this fireside chat. It's my pleasure to announce a couple of members of the management team here with us today. First is Karen Brennan, Chief Financial Officer of JLL. Karen's been in the role now for a couple of months. So we're very excited to have her be bold and come speak at a conference this early on in her tenure, so thank you for that in advance. And Chris Stent, who heads up Investor Relations for JLL. Thanks for being part of this as well, Chris. Appreciate you all being here. Real quick before we jump into things, just a couple of housekeeping items. I'm going to have a dialogue here with management for maybe to about half past the hour, and then we'll open it up for questions. On the question side, I believe all of you have a link that you could click into and submit questions. That basically sends me an e-mail, and I'll just aggregate those and go through them when we get to the Q&A portion and ask those questions. If for some reason that doesn't work, feel free to just e-mail me directly. It's going to go to the same place. My e-mail address is anthony.paolone@jpmorgan.com. So hopefully, that ends up working for everybody. With that, let's get into things.

And Karen, let's jump right in and go for, I think, what is a pretty big part of your business and a pretty key topic right now and talk about leasing. We'll start there and kind of go around the parts of the business. But it's a very topical item with the pandemic. Office is a big part of leasing. Can you give us a little bit of color what's going on? What are you seeing out there? I think you're on mute.

Are we unmuted now?

There you go. Great.

Okay. Sure, let's talk about...

[ Right before you talk about ] -- Perfect.

Great. Well, let's try this again. Thanks, Tony. I think that's a great place to start. So as it relates to impacts to office leasing demand, there are 3 things at play here. So first, we have health crisis. Second, we have an economic downturn as a result of that health crisis. And then third, we have this forced immediate change in behavior with widespread work from home. It's important to take a step back and say what the impacts are both short term and long term as we think about the future of office leasing trends. And although it might not feel like it at the moment, the health crisis and economic downturn will not last forever. We will come out the other side of this, and the uncertainty and focus on cost reduction will dissipate and momentum will return similar to what we've seen in previous cycles. The third dynamic, the forced behavioral change, is the one that I think is most in everyone's minds right now. And to that, the question is, well, what does this mean? Is this -- how does this impact the longer-term absorption levels or office take-up. I'll go through the factors impacting that. But net-net, based on our conversations with our clients today, we believe that the longer-term dynamics for office demand will be consistent with those pre-pandemic. But what will the office look like and how will space layout and design emerge, that will change. So there are 4 things we're looking at now and talking about most in our conversations with our clients. Two of those, I would say, are trends that were already underway pre-pandemic that are being accelerated as a result of the pandemic, and 2 are pandemic specific. So the 2 trends that were already underway at various paces depending on the industry of our client that we were speaking with are an increase in remote working, flexible working as a part of someone's work schedule; and the second is a focus on increased collaboration space so that when employees are together in the office, there's a greater need for more conference rooms and other formal and informal spaces for employees to come together to do what companies are looking for their employees to do whether in the office together, which is collaborate, innovate, share company culture. So those are the first 2 that were already under way and are accelerating. The second 2 which are more specific to COVID are de-densification and then potential changes in commuting patterns. So in many markets where with -- typically with the highest rents, companies are making decisions from a cost perspective to decrease the amount of space per individual employee. And so asking -- individual workspaces were getting smaller. Some locations went to bench seating. These are results of what's going on. Obviously, that's changing right now. And then the changes in commuting, the desire for an urban core hub location for a company is still very prominent in our conversations, but there are discussions around opening additional locations to provide further flexibility given commuting patterns and uncertainty and desire to not be in crowded public transportation situations. So those last 2, still TBD as companies make decisions for the here and now. But then longer term, do -- they decide to pandemic-proof their overall office footprint. So those are the 4 at play right now. I'd say, overall, it's an incredibly interesting time for our industry and for these conversations, but we are at the center of these conversations with our clients, and we'll be navigating this journey with them together.

Interesting. And the way you laid it out into those brackets, I think, is helpful. Are we at a point where customers feel comfortable or occupiers feel comfortable making decisions yet around some of these ideas around the hub maybe doing some spokes, so to speak? Or do we need things to move further along, we need a couple of quarters? Like, what's the time line look like?

Yes. It's dependent on industry and on individual company situation. Some are making decisions. Some are still wait -- taking a wait and see approach. There'll be some level of experimentation. And frankly, our clients want to hear from us what we're doing with others, how it's going, what that experience has been and really go through with them in detail to weigh the pros and cons. So you're seeing an uptick in number of conversations and discussions to put things out there and explore, but it's still early on. We're -- I feel -- again, still take a long time, roughly 6 months into this. But decisions for longer-term commitments are still being carefully considered in the current environment. And again, you have to decouple the impact of the short term here and now health crisis economic downturn and impact to certain industries from the longer-term use of office space.

Right. And are there any parts of the world that seem to be further along and getting to some conclusion on how to move forward or others that might be lagging? And then also, if you move away from office, because you do lease other space besides office, where are the other strengths and weaknesses perhaps?

Yes. So in terms of -- I'll take the last -- second part first in terms of other leasing trajectories in the market. Industrial logistics supply chain is incredibly strong. We've seen a big increase in that business year-over-year, quarter-over-quarter. And that was, again, a trend that was in place pre-pandemic and continue to accelerate due to e-commerce. And so really strong momentum there, and decisions are being made by corporates. And what -- in terms of what's happening around the world, that's something that we're in dialogue a lot. Some of our companies -- many of our clients are MNCs. Some are operating in one region or one country. But we're able to look across the world, look at different experiments on what happened with government policy and relaxation and where it worked well, where they had to put further restrictions back in place, how that impacted people's ability to go back into the office and then what happened there. So it's great to be able to look around the world given the virus did not spread immediately, but it did spread quickly, so certainly, trends there. In markets that opened sooner, you can see that there's a return to a new normal, right? There's the ability to adjust and adapt how people are conducting business. It does not look exactly like it did before, but it is happening.

I think that's a good segue maybe over to capital markets because I'm curious, do -- what do we need to see for capital markets to start coming back and to see transaction volume start to pick up? Is it further progress in understanding where rents are so that investors can underwrite? Or how are we thinking about capital markets?

Yes. Certainly, some of it's related to more clarity on the occupier markets and what's happening in momentum. But capital markets don't move completely in lockstep with what's happening in leasing markets. Investors look to see what they think the trends are going to be, where they have data around and conviction around their view of the future and then identifying what price they think they should be transacting out. And so there's actually a fair amount of liquidity out there, and there's certainly transactions going on in the more resilient sectors where there are less concerns around the impact of COVID on long-term fundamentals and dynamics. So it's coming together. It requires enough people to assess the situation, digest the information they have on hand, make a call on pricing and then they end up on the buy or sell side. And then those groups need to come together and work through, of course, the bid-ask spread that is there today. I will say, importantly, there -- the difference in liquidity is one not to be forgotten. Just anecdotally, think about what happened when -- during the financial crisis when I was at LaSalle, we had some clients who might say -- call and say, "Hey, please don't call my capital right now. This is not -- obviously, not a great situation out there." And I would really contrast that to the environment now where we have clients call us and say, "If I gave you more capital, where do you see the opportunities and how are they priced?" So it's important to not lose sight of the differences between the situation today and what happened during the GFC as it relates to capital markets activity.

That's interesting. And can you give a little color on where that liquidity seems best right now in the capital markets and where we might be a bit further off from seeing things come back?

Yes. So liquidity, really that's in industrial supply chain logistics sector for the reasons I articulated before, also seeing good interest in multifamily residential in different places around the world. And then life sciences as well, for obvious reasons, is of particular interest to the investor community today.

Right. So HFF was a very large transaction for you all last year. Can you talk about how that integration is going, how you're measuring the success of that given that the backdrop has certainly shifted quite a bit? And how are you thinking about that?

Yes. We -- when we were focused on the HFF transaction, definitely, the key metrics that were part of that included the synergies in terms of both revenue and expense side. And we had targeted $28 million of synergies for the first 12 months, and we achieved that. So the integration is going very well with HFF into the JLL organization.

Great. And how do you manage in an environment like this with turnover? Traditionally, there's a great deal of competition and focus on retention. Do brokers just stick around more in an environment like this? Does it become a bit more self-selecting? Like, how is the competitive landscape on the people side right now?

Yes. We certainly are very focused on our talent and retaining our talent. During the GFC, we came out the other side with greater market share, and we'd like to do that again here. And we believe the JLL platform has a lot to offer for our -- for the brokers that are part of our business. And so we're certainly focused on it, and it's something we'll continue to be mindful of.

I'd like to shift over to the outsourcing business. This was a business that was organically growing double digits pre-COVID, perhaps one of the most interesting businesses in the space and wondering what's happening now. What are you seeing the customers in that business doing?

Yes. The -- our Corporate Solutions business continues to be very resilient. It is up year-over-year on a year-to-date basis through June. We are seeing some differences in geographies. You saw the significant growth in our Property & Facility Management business in the Americas, up well over 20% year-over-year and quarter-over-quarter, so really good gains there that really speak to all the great work that is being done. I think in Europe, so within EMEA, our mobile engineering business was significantly impacted in the second quarter with site closures. So literally, the mobile engineers in their trucks were not able to access certain sites, so that had a profound impact. And certainly, within our Tetris business, as construction sites were closed, they were not able to perform certain activity. So you saw that really in the results there. So I think EMEA was soft due in large part to some of the closures of sites and the fact that we have this large mobile engineering business. And Asia Pacific held pretty firm despite the conditions. So what we're seeing is, in any economic downturn, a large occupier of real estate is going to be looking to be more efficient, how can they operate at a lower cost going forward. So we think that the pandemic is going to accelerate the trend towards outsourcing that we've seen. We think we are very well positioned to benefit from that trend. We're seeing very strong pipeline and interest. It is a long selling cycle. And the selling cycle is long and then the transition, once a decision is made, can take up to 2 or 3 months. So -- but what we're seeing is good interest in what we do, and we have a global platform. There's not a lot of companies that have that. And we feel like we are very well positioned to come out of this in a very strong competitive spot.

Yes. And it's interesting. Coming out of the GFC, it was pretty clear that the value proposition of saving an occupier money helped drive the business. How do we think about that against if you have a client now that's just using less space or they're just not operating at normal capacity because of the pandemic? Does that cut the other way on fees for a period of time until they come back? Or how do we think about that netting -- those netting dynamics?

Yes. Each client is a little different. It's not uncommon for 10% to 15% of contract work in a given year to be in the category of discretionary spend. So certainly, some companies are asking for a reduction in scope. Offsetting some of that can be a desire for increased cleaning both in terms of frequency and in terms of the depth of that cleaning. But as I said at the beginning, we're seeing good growth particularly in our Property & Facility Management business. So I think that a lot of companies are mindful of the need to retain not only the people managing their sites but doing some of the maintenance and everything so that the site is ready when the workforce comes back in part and in full once we get on the other side of the pandemic.

Right. Maybe just over -- I'd like to cover a little bit now on investment management. And I know, Karen, this is near and dear to your heart, having just come out of that team. What happens to flows in an environment like this? You alluded to earlier the capital call dynamic. I thought that was interesting. But what does LaSalle see in an environment like that in terms of whether money is coming in or out of commercial real estate?

Yes. If you look at broader statistical trends for capital raising for the first half of 2020 compared to the first half of 2019, they're certainly down from prior year but not dramatically. And there are still new commitments being made to different types of vehicles, whether it's an open-end fund, a closed-end fund or a separate account. And it's not all at one end of the risk spectrum either. I referenced before, right, an increase in capital looking for a higher return and potential distress. In the current environment, that's certainly there. But there's also continued interest and real estate increasing allocations because of the more resilient sectors and the ability to place capital for the long term. And so we're still seeing that. We're coming off of years of record capital raising and increasing allocations to this space. And to date, we really haven't seen any dramatic pullback. There's obviously a pause from investors as they evaluate where everything is across their entire portfolio including and beyond real estate and what is the right mix and how do they think about the risk-return dynamics across the broader universe. But we have not yet seen any stress shift away.

Great. To pivot again and spend a few minutes on technology, it's been important across the whole CRE services space. And I know JLL, over the last several years, has spent a lot of money on systems and things of that nature. But as you start to look out, can you articulate some of the priorities on the tech side that JLL has today?

Sure. Let me start with a little bit of rewind to get some background on most recent part of the journey. So we had announced in 2017 JLL Spark, which is a venture capital fund, where we were evaluating and investing in proptech. And so that was enabling us to see what was out there, test it against our -- what we're doing with our existing real estate services, adopt and use it where we think it makes sense and also benefit from an economic perspective where there is continued growth in those companies. So that was kind of part one from a few years ago. And then there's been a continued trend in the different real estate services we offer of innovation and technology being embedded into the platform in ways the transaction teams are using data analytics in different ways. And so we're seeing that happening, and we made a decision to turbocharge that, so to speak, and really focus on that going forward. So in October of last year, have announced JLL Technologies where we have specific team and business unit within our company that's focused on leading innovation across our business.

Understand. And how much of that -- like, at least when I think about the tech initiatives, some of it is along the lines that you mentioned around giving various producers the analytical tools to better service their customers. Then I think of also tech as being its own discrete product that could produce revenue. How much of either of those -- like, how do you think of either of those in the system? Do you have both? Or are you focused on one versus the other?