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

Yes. Hello, everyone, and sorry for the slight delay to get started here. Welcome to the UBS Financials Conference. This is the first meeting of many here. We're starting off with Jones Lang LaSalle. I'm Alex Kramm, senior research analyst at UBS covering U.S. exchanges, rating agencies, information services and the commercial real estate service companies. I was going to say brokers, but I get told that companies like Jones Lang LaSalle are so much more than brokerage companies now. So I'm going to try to remember that. But in any case, we're happy to have Christian over here from JLL to spend 45 minutes or so with us to give us an update on the business. There's not going to be any formal presentation. So I hopefully will address the topic on everybody's minds, and we'll go from here. So again, Christian, thanks for joining us this morning and look forward to this. Also, before we get into the Q&A here, there should be on everybody's screen an opportunity to ask questions. If -- I will try to work those into the conversation. So please do, if you have any questions yourself.

With that again, Christian, thanks for doing this. And why don't we just get started on a very, very big picture perspective here? So there's no presentation. So why don't we start with the industry for a minute? I know everybody's been focused on COVID, but if we put this to the side for a second, if we look out for the medium or longer term, why do you think the CRE brokerage or services business will continue to flourish structurally? And then of course, how does JLL fit into that long-term outlook and perhaps even remind us about your medium- or long-term financial targets so we can frame the discussion a little bit?

What a question, Alex. Thank you. Well, first of all, we are servicing 2 main types of clients: The large occupier clients and the professional investors into real estate. And when we look at the large occupier clients, we see a very strong trend towards corporate real estate outsourcing, meaning that they hand over the management of their real estate footprint to professional services companies. And that has been a trend for long, but this trend is accelerating. And it is accelerating in a way driven by real estate becoming a much more important part to -- for companies to deliver on their purpose, to deliver on their sustainability goals and to deliver on their people goals with regards to what type of employees they attract, what type of people they can retain. And for all of that, real estate is a very, very critical factor. And that has now moved real estate in the kind of attention area of the COO, of the Chief HR Officer. And they are trying to get to a point where they have a very consistent quality of space they offer to their employees. And that means that they are outsourcing to ideally one provider per country or per region or even globally. And that obviously favors very much companies like us who have a global footprint. On the investor side, you will have noted that over many years that we have 2 important trends there. Overall, the money which needs to be invested is growing very significantly. That's something which we obviously feel in the real estate space as well. But on top of that, the allocation to real estate is growing. So we have a very significant growth in allocation to real estate as an asset class, and those trends have been very consistent. We expect that to continue for the foreseeable future. And for the time being, we have more growth in the money which wants to get into real estate that we have investment-grade real estate. And that is one of the reasons why pricing has been going up very significantly. And so those trends favor us because when you can't identify enough buildings in your home turf, you need to go abroad. And again, you look for a service provider who can help you to do so. And again, that favors those type of companies with a global footprint as JLL. So all in all, I would say irrespective of the pandemic, the outlook for our industry is very, very strong. And we are, therefore, also pretty optimistic about our short-term and medium-term business outlook.

Yes. Maybe more specific, I know I worked about 3 or 4 questions into 1 there to start. But in terms of the financial targets, I mean, what does all of this mean from a numbers perspective?

Well, we recently had our 2Q call -- earnings call, and we raised our margin target for adjusted EBITDA margin on fee revenue from 14% to 16%, where it was sitting before, to 16% to 19%. We have also made the point that we expect to operate in that margin corridor in 2022. And thereafter, during the course of 2022, we will come back to our shareholders to make a more specific call for the time after 2022. We want to see now how we've -- once the pandemic is really behind us, what that means at the moment, numbers are spiking up again all around the globe. And therefore, for anything beyond 2022, we would like to have a clearer picture around that.

Yes. And I know I'll get to the margin in a minute here later in the conversation. But in terms of the growth outlook, I mean, margin is one thing. But what do you think the long-term position is of the company in terms of the top line growth? I know you've talked about that in kind of a more holistic way as well.

I mean, we tend to believe that we can grow in the very high single-digit area very consistently over a longer period of time. Obviously, in 2021, that will be more because there is a bit of a catch-up. But longer term, I think our industry allows us to grow in the high-digit growth very consistently over many years.

Fantastic. Yes. I know -- thanks. I know the focus is very much on margin from investors these days. But I think top line growth is where it all starts, right? Anyways, moving on, maybe a little bit more near term, made -- talked about the operating environment at the moment. You mentioned it for a second ago already. But it does seem like the business has recovered very quickly, maybe quicker than what most of us thought to almost pre-pandemic levels. So can you talk about the current performance a little bit more? How much do you think is pent-up demand? And when do you think we're really going to be fully recovered to a more normalized expansion phase or maybe we're already there?

Yes. I mean, we obviously, in 2020 in -- kind of in the second quarter, there was a bit of nervousness also on my side to see how the company will go through an unprecedented environment. But very quickly, we could see that as we frankly expected, the resiliency of our business model is very different than compared to the times during the GFC. A lot of our different services have a high degree of great stickiness. I don't want to necessarily call it annuity income. A lot of it is annuity income, but there's also a massive stickiness of revenues in transactional areas. And just to give an example, if people are not trading their buildings, well, then they need to refinance their buildings. So they need to replace co-owners with new equity. And as we provide those type of services, we were able to still deliver good revenues in our Capital Markets business, especially when you compare that to the times in 2008. And that was one element. But also very importantly, we have grown a very large business around the global and big corporates in the world. We call that business line now, most recently after a name change, our Work Dynamics business. And that Work Dynamics business was actually doing great during the pandemic because the occupiers were very nervous around what kind of environment they have to provide to their employees to keep them safe and healthy, and they needed advice. And the same was true for our property management business. I mean, we have an office in Wuhan. And so we experienced the pandemic in January 2020 in our office in Wuhan. And we immediately got a lot of learnings, which we sent around the world. And they ended up also being used in the U.S., those learnings. And those type of benefits we have from that global footprint allowed us to come through the pandemic very strongly. And as I have said at times before, now we frankly are actually a winner of the pandemic because some of the macro trends which are benefiting our business have been accelerated by the pandemic. And so going to your question, when will we finally completely overcome the pandemic? Don't know because that's more a medical question than a real estate question. But as you can see during our -- from our second quarter results, we are now back to 2019 levels. And the only comparison which I accept within the company when people talk about the performance of their business is how they do against 2019. I don't care how they do against 2020. We want to go back on a clear growth journey going forward, and I'm very optimistic that we can do that.

Fantastic. Maybe just digging a little bit deeper about the performance right now. Can you talk about the end markets a little bit? I mean, you just mentioned Wuhan. But in general, what regions are you seeing the most demand? What industries are performing better than others? What are your expectations for the various business lines for the remainder of the year and maybe also already into 2022? I know you touched on some of this already, but maybe a little bit more meat on the bone, I guess.

I mean, from a client perspective, obviously, you have a lot of industries which are doing very well throughout the pandemic, most prominently, obviously, the whole technology sector. We have a very large market share within the technology sector, and that is something we benefit from. We expect them to continue to be very successful, and we will grow with them. But I think it's fair to say that in every industry, you have companies which are particularly successful. And they are investing heavily into their real estate footprint and trying to create an office environment which is super attractive for their employees. And in order to do so, they need a lot of services and support. And so it's not only leasing space. It's kind of the whole concept of space, the design of space and then executing on that. Filling that space into that new way is something which drives a lot of growth into our organization. So a focus on specific industries is important. Life sciences is another one which we kind of invested in early because we saw the specific growth in that area. And then services, so I mean, everybody knows that the whole industrial sector is a big beneficiary of the last couple of years. And it is very visible now. But funny enough, in the first 2 quarters of this year, we see a strong recovery in our retail services. Now this is not a big business for us, but it was nice to see how strongly retail is recovering because there's a lot of repurposing of space taking place. And therefore, again, when the going gets tougher, using a provider -- a service provider like us is more obvious to people than when it's super easy to lease out a store. You have very often landlords trying to do that themselves, especially outside of the U.S., whereas in those environments, they wouldn't even try to do that. And so we get a lot of new assignments and new clients in that area at the moment. I don't know what I missed out on. The whole Project & Development Services business is something where we believe to see very constant growth over the next couple of years because of the new expectations how space should be designed. The only caveat to that is to find enough experienced project managers. This is, at the moment, a big shortage, but it's still a fast-growing business for us.

No. I think that's great. Maybe just going back and we'll get more into detail in a minute, but I think one of the things that surprised a lot of investors last year was the resiliency of the business model. And you talked about this a little bit already, but maybe you can expand on it and just remind us what the most important moves that you or the company made last year. What have been the biggest lessons that you've learned? What are the permanent changes you've made? Where have you started to maybe even reverse course a little bit? And I don't know if it's going back on offense but going back to some things that you maybe did before. And then again, more longer term, like where and why is the company now better positioned for the future than pre-pandemic? So any sort of additional thoughts would be great.

Yes. I think the resiliency of last year where we were still able to kind of come out at the low end of our long-term margin target, 14% to 16%, despite the pandemic was, first of all, we were very focused in the years before to identify those sectors which we believe will have the biggest growth rates going forward. I touched on technology, life sciences. And so we had a lot of clients in the technology sector. And despite the public comments some of them made around that their employees can work from home as long as they want to, at the same time, they were picking up new spaces in other geographies and -- so that not everybody has to kind of work from the West Coast going forward. And so that was one area which helped us. The other area, I said on the capital markets front already. In 2008, we were predominantly on the investment sales side, whereas in 2021, we have a pretty balanced business between investment sales on the one side and on the other side, debt advisory and equity advisory. And if people are not trading, and there was obviously far less trading going on in 2021 -- in 2020, we did a lot of debt arrangements and equity arrangements. The other aspect was that we were very quick in kind of assessing and preparing that landscape with the advantage I already mentioned that we experienced it from January onwards in China. And for the first couple of weeks, we had hoped that it would be contained in that region. But the moment it kind of came to Europe, it was pretty clear that it would go around the world. And so we were preparing our biggest market, the U.S., before the first COVID cases were in the U.S. for that pandemic. And so we took pretty significant cost actions. And then the comp system for our transactional business is actually very -- is anyway very adaptable to fluctuations in revenue streams because people are paid mostly by commissions. And then we shouldn't forget that governments around the world were very supportive with government help. And that government help also contributed that we were able to deliver that 14% margin.

Great. And then I guess, not shifting gears, but the question that, obviously, we've been asking for over a year now, it keeps on coming up, are the structural changes to the office. We haven't -- I don't think you've actually mentioned office yet, but it's still clearly your biggest end market. So give us an update. We talked over the last year about the evolving landscape. So where are we today? How do you think work from home is changing the business? How is it changing your business? How is it going to impact sales and leasing? Yes, what -- I don't know if we have an answer yet, but let's try, I guess.

I think it's pretty clear that there will be more work from anywhere going forward. Whether it's home and then how you define home, but there will be more work from anywhere. Companies have witnessed now that this is working fine. It is not obviously everywhere the same, and it's not for everybody the same great experience. When you are young in your career, where you still try to make a lot of new connections and build your network, it's very helpful if you can come to an office and work in a central business district to make all those connections. And so -- and when you have small children at home, it may not be great to be constantly at home. But overall, we will see more work from anywhere. But what also is, I think, pretty clear that the office is the main point of collaboration, the main point of coming together, where employees experience the brand of their employer, where they experience the culture of the company they work for and where they can demonstrate kind of with their colleagues all the creativity and innovation which is needed to drive the business forward. And so what we are seeing is that companies are making massive investments into office space, not necessarily a lot of additional space, but they are repurposing space which was occupied with traditional work desks. And they reduce the amount of work desks, and they're replacing that space with collaboration space, with what I would call entertainment space and all kinds of exciting kind of configurations where people will think, "Oh, wow, that's where I want to be." And so the office of tomorrow compared to the office 10 years ago is a pretty fundamental shift from a relatively boring kind of space, which was just designed to kind of create workplaces, to something where you are constantly experiencing the wow factor like a very fancy 5-star class hotel, where you find areas in the buildings where you say, "Wow, yes, I want to sit down and have a coffee." But in the offices, you want to have a coffee with a colleague and talk about the next product. And so we don't see a reduction of space. There's absolutely no evidence for that. What we see is a very, very strong push from our clients to bring their employees back into the office but obviously in a kind of nudging way. They nudge them back into the office, and one way of nudging is that they are increasing the quality of the space.

Yes. I've been going back to the office since June, and it's been great, in particular, if you have a large team. And people need to learn, right? So yes, can totally echo everything you just said. Just maybe before we get on to the margin, the -- you mentioned the outsourcing businesses that you just rebranded. Can we also -- again, and you mentioned some of it already, but talk about the structural changes you have seen in that business and how you feel positioned going forward both as a company or -- but also from this overall trend to more outsourcing, if it's accelerating, where you're seeing new use cases? And then people always ask about the TAM in that business. This is a business where people think there's a lot of white space. So how do you see the opportunity ahead of you? And how much are you actually capturing at this point?