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

Hey, good morning, everybody. I'm Patrick O'Shaughnessy. I cover capital markets here for Raymond James. Welcome to the Raymond James Institutional Investor Conference. A little bit different version this year, but I think we can make it all work. I appreciate everybody's flexibility. Starting us off this morning, we have Jones Lang LaSalle. We have, on their behalf, CEO, Christian Ulbrich; and CFO, Karen Brennan. Format is going to be Q&A. Before we do that, we will -- I'll kick it over to Christian for a brief introduction. For folks joining us, feel free to submit questions via the chat functionality and I will do my best to work them in where appropriate. So with that, good morning, Christian and Karen.

Good morning, Patrick.

Good morning.

Good morning to all of you. I know it's early days for you in the U.S. So JLL, if you're not that familiar with the company, it's a leading professional services company, it's specializing in real estate services and investment management. We offer our services pretty much all around the globe in more than 80 countries. There's more than 90,000 people working for us. We're a Fortune 500 company. Our roots go back to 1760 to the U.K., 1760. So we have a real old tradition in our company, and we have been growing since then. There are a couple of macro trends, which are very impactful for our business. First and foremost, it's the urbanization. It's the world going digital and then more lately ESG. All 3 of them are actually favoring our business, and we are happy to go into that detail later on. And then more specific to the real estate industry, we have an ongoing strong growth in corporate real estate outsourcing, which is a big part of our business. And then the overall allocation to real estate has been very favorable over the last 10, 20 years, and we continue to see more money, which is trying to get invested into real estate, which is also a strong kind of tailwind for us. Finally, our industry has been on a consolidating path for quite some time and has continued to do so and certainly now accelerated by the pandemic. The whole organization is very much organized around our company purpose. We are shaping the future of real estate for a better world. And again, that is not only our strong belief, but it's also a major business driver for us. So with that, I'm handing back to Patrick.

All right, terrific. Thank you, Christian. And definitely, I think we'll try to work some of those themes that you outlined there into our Q&A here. So first question from me, the global financial crisis, a big -- sorry, I think I wrote this first one wrong. So the global financial crisis, 2008, 2009, that really led to, I think, an existential crisis for the commercial real estate brokerage industry. You had some entities like Grubb & Ellis ultimately went bankrupt, others were forced to raise capital. I think you contrast that to 2020, which is by no means a stressful year, with JLL's fee revenue only finished the year down 14%. What are the elements that made the business so much more resilient in this downturn? And was there anything that surprised you in terms of how well it held up?

Sure, Patrick. I mean, first of all, I don't think we should really compare this crisis with the global financial crisis because, as you know, the cause of the crisis at the time with regards to sub-prime issues are very different than a global pandemic. Secondly, you are asking that person to the right -- you're asking that question to the right person because my first global executive board meeting within JLL I personally attended was 2 weeks after Lehman went down. And then since then, all our meetings in the first kind of 6, 8, 10 months after Lehman went down were obviously completely impacted how the crisis at the time developed. And I think for all of us in the leadership team at JLL, we were surprised at the time how our business kind of melted down, and we all put that very high on our agenda that this should never happen again to us that we have such a volatile kind of reaction to a crisis. And so since then, we have massively diversified our business with regards to services, with regards to geography, but also very importantly, with regards to asset classes. And I just pick 1 here, Capital Markets, which most people would have expected to be much more hit this year for us. And we surprised people with the resilience in our Capital Markets business. When we go back to 2008, 2009, we were predominantly doing investment sales advisory for office buildings, large office buildings. Today, we are covering not only all asset classes, the full spectrum. And very importantly, what we didn't have in 2009 was multifamily, whereas we have a very, very large multifamily business and a residential business overall. And secondly, we are not only on the investment advisory side. We're also on the debt side. And especially the debt business was holding up incredibly well in 2020. But that shows you just 1 example in 1 service area, and you can do that across the board. Our corporate real estate outsourcing business, which is usually underpinned by 5-year contracts, is obviously moving through this crisis without much impact. And so we are a very much more mature business today than we were kind of 12, 13, 14 years ago.

Got it. And so building off of that last question, how does your experience in this downturn impact how you're going to manage the company going forward? Is there an opportunity to add back a bit of risk to the business model on the balance sheet? Or do you think you got it about right?

Patrick, I'll take that one. So first, just to recap where we are from a balance sheet perspective overall. So we have very low leverage and strong liquidity. At the end of December, our reported net leverage was 0.2x adjusted EBITDA, and we had fully paid down our $2.75 billion revolver and had over $500 million of cash on hand. So we're very well positioned as we begin to emerge from the pandemic. So this balance sheet strength and our ability to generate really strong cash flow affords us the opportunity to reinvest in our business. And the primary way we are planning to do that and are doing that is through organic investments. And so we are focused on a number of opportunities that are being generated from the business right now and that we see in the market. And I think really screening through those to say, all right, which are most strategic, which are the most attractive returns on our invested capital and how do we think about the long-term horizon for those opportunities. So that's certainly an area of focus. We will also consider and are considering M&A opportunities as they arise. High bar there for us. We have a very well diversified, as Christian just said, business platform around the world. And we'll be looking at those again for -- are they priced properly? Are they value accretive? Are they a strong strategic and cultural fit? And do they generate a return on invested capital of at least 12%? And so we'll be looking at both organic and M&A going forward. Then going back to what I think is the thrust of your question around how will we finance this, yes, we intend to use debt. Right now, as I mentioned, we had a very low leverage, and we'll be targeting a range between 0.5x and 1.25x going forward, recognizing that we will have periods outside of that due to short-term factors and seasonality.

Got it. And then going back to a past acquisition that you did, your last big one, you guys announced the acquisition of HFF in March of 2019. And the concern at the time was, hey, yes, it gives you more scale, but you're buying a transactional business relatively late in the cycle. Two years after this deal announcement and living through a year of COVID and office shutdowns, how would you evaluate that deal in hindsight?

Patrick, it's still obviously early days. I said in my ingoing statement, our history goes back to 1760, so we don't do deals for 1 or 2 years. We do deals for the long term. And as Karen said, we are very strategic about the development of our business, and we identified this gap in our footprint many, many years ago. And since then, we were looking for the right opportunity to close that gap. And you get brilliant businesses only at times where it also makes sense for the seller and not only makes sense for the buyer. And HFF was a brilliant business. So I'm pretty convinced it will turn out as probably one of the best if not the best acquisition we have ever done in the past. And we witnessed already the resilience, as I said earlier, the resilience of our Capital Markets business during this pandemic. And we obviously, delivered on all the promises we made with regards to cost synergies. But what we could already see despite the overall muted environment, that the cross-selling between the clients which HFF brought to the table and the clients which we already had is going much better than we predicted. We had a couple of very nice transactions around corporate capital markets. So our Corporate Solutions business, having access to the largest corporates of the world, they did a couple of sale and leaseback transactions where we were able to bring that expertise from HFF to the table to the clients we have relationships with anyway. So it will play out really well going forward.

Got it, got it. And then I do think that historically, a primary use of the company's excess capital is acquisitions, HFF being the most recent big example. Given your current scale and your global breadth as well as the consolidation of the industry, are consolidating deals still a good use of capital? And if not, what are the implications for your capital allocation strategy?

So we're always looking to strengthen and grow our business, and we will continue to be highly disciplined around M&A opportunities. And as we see them, we will evaluate them against the criteria that I mentioned earlier. So when we see them, we'll pursue them. In the meantime, we're committed to returning cash to our shareholders and investing in organic growth in our business. And we've recently shifted from, in 2020, from returning cash to shareholders through dividends to share repurchases, and we returned $100 million of cash to shareholders in the year. We've also announced that going forward, we will be utilizing share repurchases as a primary way to return cash to shareholders, and our Board authorized a $500 million share repurchase program for the year. We like the flexibility that, that affords us, so then we can really look at organic investment growth opportunities, M&A opportunities and share repurchases alongside each other and look at the relative return and make a decision based on our outlook and how attractive we find those opportunities to be at a point in time. So that's certainly for us, a great place to be in. And then going forward, to put a framework around that for our shareholders, we're committed to returning 20% of free cash flow over the long term. And again, this is over the long term to give us flexibility, but it marks an increase from what we've done historically. So if you look back over the last several years, the percentage return of free cash flow has varied, but has been roughly around 10%. So it does mark an increase. And overall, again, just taking a step back in our capital allocation framework, we're seeking to maximize shareholder value through this decision-making in these different buckets.

Got it. So now shifting gears a little bit to the current business outlook, I'm hearing from other companies in my coverage universe and elsewhere that they are -- have already or are currently contemplating substantially shrinking their office footprints. I think that during 2020, there have been the view that increased working from home would be offset by de-densification. Are we seeing that play out at all?

I have to say that we are still early days to draw any final conclusions how things will develop. Clearly, you see a lot of de-densification at the moment, and it is not only that people want to have more kind of space for their elbows. We also see, in some markets, a strong trend back to single offices, which are obviously taking a lot of additional space. At the same time, we have, at the moment, the majority of folks, especially in the Western world, working from home. And so we have to wait how that is playing out. We will see very different outcomes industry by industry. If you generalize here, what we are currently observing is that the most successful companies in the tech world, who are very generous in offering their people to work from home for the foreseeable future, are the ones who are most aggressive in picking up additional office space for de-densification and to create kind of very safe and focused on the health of their employees designed office space. And then you have, obviously, industries who have been suffering very, very much by the pandemic who see this current environment as an opportunity to save costs and how that will play out once the industry is recovering is too early. What I think is really useful to focus as much as possible on the facts we have, and the most facts we currently have is when we analyze Asia Pacific, because Asia Pacific was first in this pandemic. And at least, in some parts of Asia Pacific, has been dealt with that pandemic more effectively than most of the Western world. And we have, for example, in Shanghai, already the second quarter, since the second quarter 2020, the office take-up has gone up again. There's a net plus again. But in Singapore, if you don't want to use a Chinese example, in Singapore, the [ fourth ] quarter was net plus 2020. And so not all countries will behave the same. But we are still pretty confident that there will be a very significant reemergence of the office and whether that will be at the end of the day, overall, 5% or 10% less space being used overall is -- has still to kind of be watched. And then the next big question is what type of space will that eventually be? Because what we have seen in the past is when grade A space has become more price attractive, you see companies who usually are sitting in grade B space moving up into the grade A space. So there is still so much flux that we have to wait.

Got it. And then so as we're kind of waiting for this all to flesh itself out and figure out what corporate real estate footprints are going to look like coming out of the pandemic, how are you thinking about the implications of that for your Leasing and your Capital Markets franchises? Obviously, your results over 2020 suggested capital markets could be pretty resilient despite that. But as we're looking at 2021 and into 2022, like how are you thinking those sort of macro dynamics are going to impact your business?

Well, first and foremost, these type of more drastic changes, which we have seen over the last 12, 18 months, are offering kind of the opportunity for people having different views because they have a different perspective how that is playing out. And that is obviously, at the end of the day, good for our business because we can then bring in our great advice and help people to take advantage of that situation. If the Leasing business will be muted for longer, that will certainly have some impact on our Leasing business. But as I said, we have to see that a little bit more over a longer-term because our company is focused in our activities very much on the grade A space in grade A locations and a little bit on B. We are not really active on the C side. And so vacancy will kind of trickle down from A to B to C. And then at the end of the day, you will see some C buildings [ building ] obsolete and need to be repurposed. But it will not necessarily longer-term impact that type of area where we are really active in. But it will have an impact on the price levels of the rent. If rental levels come down, first of all, our fees are coming down, but also that will have an impact on the Capital Markets business because that has to kind of find a new balance if prices for rents will come down, then investors will expect a slightly higher yield to offset that potential decline over the next couple of years. But overall, for the time being, we believe that our constant ability to take further market share will outgrow these headwinds, which we may have from those arguments you just put forward. And so we are still very optimistic about our Leasing and Capital Markets business going forward.

Got it. And then for your advisory solutions, your Corporate Solutions business. How are you guys working with corporations right now to help them think about their footprints, to help them think about what their office space needs to look like? And to the extent that you're having more conversations with clients right now, how are you working on sustaining and monetizing those relationships over time?

Well what we have seen already before is that real estate kind of provide your employees -- a [ built ] environment has been seen as a necessary thing which every corporate has to do. And so for many corporates, this was very much seen under the cost lens. And over the last 10 years, that has [ readily ] evolved, very often now, corporate real estate reports up into HR because it is seen as something very different. It is seen as a way to kind of attract talent, retain talent, make talent more productive, bring engagement scores up. It is seen as an opportunity to demonstrate the brand internally, but also externally. And so if you take all these points, that's why you see very much that kind of case A going forward that the most successful companies will try to bring their people into the most exciting space where the health and well-being of their people will be brilliantly covered, but also space which is underpinning their overall goals, their purpose, their brand. I always like to use that example, a company which has signed up for kind of science-based carbon targets and wants to reduce their carbon footprint very significantly over the next 10, 15 years has to demonstrate that also with their office buildings, they are occupied. And so there is such a tremendous opportunity, what you can do with your office footprint, and we are advising on all of these areas, including the technology, which you can use to help the health and well-being of your employees to help the carbon footprint of your buildings. And so for us, the complexity, which has risen over the last couple of years, is actually offering more opportunity to get revenues up.

Got it. And then, I guess, circling back to brokerage for a second here, so we talked about how office has been notably soft of late, but industrial and multifamily, which you brought up earlier, have definitely held up much better. Do you see these property types as likely to experience structurally higher growth coming out of the pandemic?

Yes, Patrick, I'll take that one. So the short answer is yes, but let me expand on that a bit, and I'll take industrial first and then multifamily second. So first, just to put the strength of industrial in some context, I would state it more strongly than even you did in your question. If you look at our fee revenues from both Leasing and Capital Markets within the industrial sector, those both increased over 30% in 2020 from prior year. So that's pretty, pretty, pretty strong statement there about the activity and the momentum that it's building. And one of the things we've said in the past is that the -- and others are saying is that the pandemic has really accelerated trends that were already in place. And so some of those secular trends that have been causing the really strong occupancy, increase in rental rates, increase in capital markets activities through investor interest in that sector are expected to continue. Certainly, the e-commerce secular trend, right, that's the obvious one, that has clearly accelerated. But then as you think about any pandemic-specific factors that might influence that even further, the notion of supply chain resilience has really come to the fore for our clients. And as you think about how supply chains were tested during the pandemic and then also right now with the real-time example of rolling out vaccine distribution. And so as corporates look at building that resiliency in, right, what additional space they need, that's certainly some good momentum there and expected to have continued strong growth. And investor capital will continue to follow the sector, right? It's a steady growing income stream at a time of uncertainty in other areas. So we expect that to continue quite strongly. Then moving to multifamily, Christian touched on this a little bit earlier around the strength of multifamily and our business compared to the global financial crisis. And this sector on its own and within our Capital Markets business, if you look at the fee revenues across different property types in 2020, was the largest share. And so that's, again, a statement that there is a resiliency there and strength there. It's a sector where it's very well-established in certain markets in the world and institutionally owned and managed by investors. In other parts of the world, it's still emerging as an institutional asset class. And so there will be continued momentum around it as it becomes more institutional. There's more transparency around the property metrics and buying and selling as there are more options for management of those assets. And then investors, as they think about that as an asset class, it has been an attractive one, and it will continue to be as a property type where you can really pivot across the different economic cycles. And so you can pivot to go into defensive mode or then capture growth on as economic recovery takes hold. And so it's attractive from that perspective because you can maintain [ some of the ] low cash flow across cycles. So again, this is a trend that has been in play. But given what's going on with COVID and changes, more broadly, we expect to continue and accelerate.

Got it. And you mentioned capital flows a couple of times in your answer just now. Just more broadly, what is your view on the likely flow of money into commercial real estate as an asset class, both in terms of the quantity as well as the nature? Does it go into multifamily, industrial more so than office and retail and other areas? Obviously, there's a ton of dry powder on the sideline right now. Do you expect that to continue to grow? And what are the dynamics underlying that?

Yes, so we do -- there's a few different themes you touched on, which are -- which I'll try and pick up. First, just going to the actual numbers and statistics on what we've been tracking around overall capital, institutional capital flows to real estate. They have been increasing steadily and did increase in 2020 as well. Cornell University has an allocation monitor report that we utilize and pull into our JLL capital flows research, and they're showing a 200 basis points increase and weighted average capital allocations to real estate. And so it's increasing from 2013 to 2021. So it was just under 9% in 2013 and is forecasted to be just under 11% by the end of 2021. So really good momentum there. If you think about why is that happening, as investors are seeking diversification and yields, real estate compares favorably to other sectors that investors could pursue. And again, as I touched on earlier, increasing transparency around information and decision-making for that asset class is continuing around the world, and that's something we track through our general transparency index to say, among other factors, where investors might be comfortable going. And again, institutionalization of management and operating of these assets continues to go. So that trend is there for increasing allocation then you can say, okay, well, what's the next level down, right? How often and what type of commitments are these investors making to investment managers? And we did see that drop off in 2020. The decline was approximately 35%, plus or minus, off of 2019, but that was off of several years of peak capital raising numbers. And that really seems to be reflecting investors taking a pause, scanning the landscape, understanding what was happening, digesting the information, and then making a decision around where they want to go or pivot moving forward. And so then that gets to your question around, well, what are you seeing in terms of risk profiles and property types. And there, the early stages of 2020, everyone was focused on where can I go to take advantage of this distress in the market? What are those opportunities? And then -- and the other side of that was, okay, now it's even more important that I'm seeking really stable long-term income streams where I'm really certain of the credit underlying those. And so those were kind of the 2 main areas of focus. And now when it's become very clear, the different directions and dynamics at play for different property types and different -- and across different industries, importantly, which underlies the lease rental streams at those property types that investors now have more clarity to move forward. So we're seeing good momentum, right? Obviously, a different story to how much capital is flowing into hotels and hospitality and which types of those assets versus industrial that I mentioned earlier, but broadly, the trend is powerful enough that overall, the allocations are increasing, and we expect the good momentum to continue.

Got it, that's good color. What do you guys see as the long-term role that flexible workspace providers will play in commercial real estate? I think particularly in light of many of the major providers running into substantial financial duress during 2020, then also, you had a couple of competitors announce flexible workspace acquisitions or investments in the last few weeks.

Well I guess, first of all, Patrick, when you are kind of a corporate and you have to send your employees all into a home office, but you still have to pay rent for all your offices, you would like to have more flexibility and just cut these rent payments short. And so the concept, the demand for more flexibility, will certainly be strengthened very much by this pandemic. And so now we have to find ways how this is making sense for all involved parties, the occupier, the landlord and potentially the flex space provider. And so there will be different business models going forward, but I'm absolutely convinced, overall, flex will have a massive boost on the back of the pandemic. And then as we have very, very different forms of hotels from very pure low-budget hotels to kind of 5-star plus hotels, you will see all kinds of flex space services. Either they are offered directly by the landlord, every major multi-tenant building will have to offer flex space for their multi tenants in the building to help them in their needs; or it will be offered by a flex space provider, the ones you touched on earlier. And that could be as a management model or that they lease; or what you will also see is that companies like us and others are stepping in and offering that service as a white label so that you don't even know that we are the ones who are offering the service. So that the landlord, it doesn't bring in kind of a flex-based provider brand into the building, which is potentially being seen longer-term as a competitor. So that's kind of the trend, what we will see. One is for sure, it will become a major important factor in the overall occupier space.

Interesting. Turning to margins. Your 2021 outlook is that EBITDA margins will fall within your targeted 14% to 16% range, with also commentary that expenses will likely grow somewhat faster than revenues. What are the areas of your targeted investment that you're focused on in 2021?

Yes. Sure. I'll take that one. So first, just to answer the question and comment on the EBITDA margins. We're obviously focused on top line and bottom line in 2021. And as you said, we expect to achieve that 14% to 16% margin within our long-term range within -- in the year of 2021. The revenues across the year will really reflect the pace of the recovery. And so based on our current outlook right now, we expect that to happen more strongly in the second half of the year than in the first half of the year. And on the expense side, we will continue to invest over the course of the year. So taken together, that will result in an EBITDA margin bearing from quarter-to-quarter. But over the full year, as I said, we'll be within the 14% to 16% long-term range that we've quoted. And then to your question of where we're investing, 2 things I really want to highlight: first, technology; second, people. On the technology side, 2 prongs there as we think about what types of investments we're making, there are the revenue-generating investments that are both bolstering our core business offerings today as well as offering new products and then also efficiency-enabling investments that we're making across the business to make our people more effective and efficient over time. On the people side, there is really across the organization, but areas to call out will be an area of technology and specific skill sets that we're investing in there. And then also going back to the points I raised earlier, and we talked about around the strength and growth in industrial multifamily and other areas where we see growth opportunity and momentum such as life sciences.

Got it. I think we have maybe time for one more question. So I'm going to follow-up on your commentary there on technology. To what extent is Jones Lang LaSalle able to leverage technology to create a competitive advantage for itself? And conversely, is there a risk that property tech start-ups are able to provide subscale brokerage competitors a more level playing field compared to you guys as they otherwise would be?

Yes, yes, Patrick. We are obviously investing very significantly in technology now for quite a long time, over a decade now. And during the pandemic that paid out very nicely, not only with regards to our corporate infrastructure that we were able to send literally overnight, 48,000 of our employees into a home office without any interruption. But also with regards to our ability to offer our colleagues technology for doing remote kind of site visits or 3D and all kinds of ways that they continue to serve their clients seamlessly and then there are also a lot of tools which we are using from companies, which we have invested in sensors to help companies to create a safe environment, if you have sensors in your office space, and you see where people have been using a desk, there's an automatic message coming to the cleaning staff that they have to clean that table again, those can be reused. I mean there's so much going on. On the other hand, as there is so much going on, and we tend to look predominantly to tech start-ups in the Western world, there's a very, very large tech start-up market in China that we will never be kind of completely safe from disruption from new ideas coming to our industry. We have seen those disruptions in the past, and there will be new disruptions coming. But we feel, as JLL, very confident that we are the ones who will turn that trend that the world is going digital to a major advantage for us because we have the know-how and the financial capacity to lead with that technology in our industry.

All right. Well, very good. I think we are out of time, so we will wrap up there. But Christian, Karen and Chris, thank you guys very much for joining us. And good luck with your meetings the rest of the day.

Great. Thanks, Patrick.