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

All right. We are live. So we'll go ahead and get going. Thanks, everybody, for joining us this afternoon. For those of you who don't know me, I'm Patrick O'Shaughnessy, I'm the Capital Markets analyst here at Raymond James. And up next, we have Jones Lang LaSalle. And on their behalf, we have CFO, Karen Brennan. Karen, thanks for joining us.

Hi everybody. Great to be here.

We're just going to do a fireside chat format, some Q&A, and then I'll open up to the room towards the end of the session. So with that, we'll go ahead and get started. So you guys recently reported your fourth quarter earnings. And as part of that, you spoke about new segment reporting that you're going to be moving to going forward, 5 reporting segments that are better aligned with how you manage the business as opposed to geographic segments. Is it fair to say that geographic reporting made more sense when Jones Lang LaSalle was clearly a brokerage firm, but that the company's broader service offering today really requires a different corporate structure.

Yes. That's a great question and very timely, we announced this last week. And so yes, you're right that our business has evolved across increasing number of service lines. And so we have that diversification of our revenue streams. But importantly, from a client perspective, our relationship with them has also evolved. So we're not now just a transaction-only relationship. It is really that of a strategic adviser and so they're looking across all these different service lines for us to work with them together. And beyond that reason, there's a few other points I'd call out that are really relevant to how and why we're organized this way and the benefits. So if you think beyond that client point, it allows us to actually be able to deliver better on their behalf. So if someone is coming to us and saying, "Hey, I like you to manage all of my office space for me from my offices globally" right? There's a consistent service offering regardless of where you are in the world or a capital markets transaction for someone who's looking to understand the broader landscape, cross-border capital flows and who the buyers are at the moment in time. So we're really better positioned and streamlined to deliver on behalf of our clients. I'd also say it allows us, from a strategic perspective, to be better at decision-making. So we have both a bottoms-up perspective from our people around the world on the ground within new service lines, and then you can tie it together at the top and really make decisions for those things that drive growth and scale them more effectively. So that moves to from an operational perspective, right? You can take those decisions, you can move more quickly. And the same point goes towards any investments you're making in your business to enable that growth, such as technology. And then finally, I'd say, we're expecting it to elevate the level of conversation that we're having with you, other analysts, shareholders and potential investors to explain our business in a clearer way. To be able to link more clearly the macroeconomic drivers to our overall business performance. So we're pretty excited to our reporting this way going forward.

Got it. We're looking forward to it. And maybe building off of that point, in your recent investor presentation, you guys noted that the company is going to accelerate our One JLL journey by formalizing how we work across services. What are some examples of internal structures that you guys have in place to facilitate that collaboration.

Yes. Another great question. And if you take a starting point, our teams have been very collaborative, but as our business has been growing around the world, across different service lines, it's important to build on that culture and actually have a framework around how do you connect the dots, how do you tie in to a colleague somewhere else in a different business line or a geography that has important information that you need to either first approach a client or to actually deliver on behalf of that client. And so we're putting in place frameworks that allow us to do that, by starting at leadership levels and then going deeper in the organization so that our people know how to speak with. And I won't go into all the specifics of how we do that, but I will say that 2 weeks ago, I was at our internal conferences, and we had our top producers together and this was a big theme for the conference was how are we connecting, how are we delivering together as One JLL and the stories were incredibly compelling, right? And you could feel the energy and see that the benefits of when our teams come together. So whether it's our work dynamics, colleague reaching out to the capital markets, team to effect a transaction there or a tenant representation, leasing broker reaching out to the Capital Markets colleagues with specific expertise in the sector, right? You could see the power of that coming together. So we're really excited about that.

Does building that out require kind of reimagine your compensation structure? Or does the existing compensation structure already supports that sort of cross-selling and teamwork effort?

Yes. There's -- it largely supports already today. We'll certainly continue to look at it and refine it as we go forward to make sure it's right creating the behaviors and people are aware of what they need to do and what we want them to do.

Got it. So 1 of the new segments is going to be JLL Technologies. Can you help us understand what's in that segment? And how you view technology overall is providing Jones Lang LaSalle with a competitive advantage?

Sure. So first, to talk about what's in the segment. So JLL Technologies is something that we've talked about a bit over the last several quarters, but this is the first time we're coming out and speaking about it as a segment. So what's in there is our revenue generated from our clients' use of technology. And so that includes Software-as-a-Service revenues as well as other technology services, advisory consulting as well as our equity earnings from our investments in technology. So that's all in there as well as the expenses associated with the teams that are delivering these things. So both the technology for our clients and also the team that is screening, overseeing, finding, selecting the investments and then overseeing those relationships with those companies longer term.

Got it. How do you think about the prospect of property technology being potentially disruptive to your industry over time? There's certainly been a lot of fundraising in the proptech space. And so I think that those contributing funds would probably think that they're being disruptive in some way or from. Is there a real chance that technology can disintermediate the current market structure? Or conversely, does technology competitively advantage the scale players such as yourself?

Yes. So I think I actually missed the second part of your earlier question before it was around the competitive advantage will kind of tie these together. I think that will be a nice way to bring it back. So as we think about, well, what does technology mean to JLL and why are we investing in it? And why is this a priority for us. First, we want to make sure we're bringing the best technology to our clients and all our different service offerings. Second, we want to make sure that we're driving for greater efficiency across our business across all segments. And third, we want to make sure we're staying abreast of what's going on in the market and how it's evolving and developing. So that we can make sure from our strategic direction perspective that we are on the right path and we continue to challenge ourselves around where the market is going and making sure we're leading it. So as you think about, well, is this a disruptor or is this an opportunity? It's both, really. For any trends in an industry, if you fail to embrace them if you fail to pay attention to them, it could disrupt the incumbents. If you embrace them and lead and say, we are going to evolve how we do things and it's clearly an opportunity, and that's how we're thinking of it. If you look at what's going on in the space right now in proptech -- and just, I'll put out some stats, which I think are interesting. We put out a report last year that cited specific volumes of proptech investment for the first half of 2021 reached nearly $10 billion, which was a record for that period of time. And then also, if you look at just the sheer number of proptech companies out there, it's increased from 2,000 to 8,000 companies over the last decade. So right, there's huge momentum behind this evolution in the industry. And what we're really seeking to do is making sure we're taking the best of what's out there. partnering, enabling bringing that to our clients in a way that makes sense for them because our clients are largely overwhelmed, in many cases, around, all right. There's a lot of different things out there they're coming at me from different directions, right? This is what I'm doing today. Where will this be going? How can you help me? And so we're very focused on that going forward. So I'd say, in terms of competitive advantage and who is going to benefit from this and help our clients and who's positioned to do that best. I'd say it comes back to 2 things. First, you have the expertise to be able to do that and navigate the complexity in the technology, which we believe we do. We've been hiring talent specifically to help do this with our clients. And then second is, do you have the scale and platform where you have the financial capability to do it and then the ability to actually have the scale to deliver the return on those investments that you make over time.

Got it. And then maybe to kind of follow up on that. What's the process that you guys go through to determine, hey, this is something that we should develop ourselves versus something we should partner versus something that we should buy.

Yes. We have -- we've done some detailed assessments of the different opportunity sets within technology, right? And so you think about all the different things that can span. We think technology will fundamentally evolve how we deliver as it relates to how buildings are operated and managed, how buildings are valued. How transactions are executed, the tenant experience, right? And so sustainability. And so we bucket those in, look at each of them and say, right, where is the industry today? Where do we think it will go, where do we want it to go? And then what are the different paths we can get there? And then you evaluate the build versus buy decision making around that according to financial metrics, right, how the -- where the intersection of those different initiatives are? What's the best way to optimize your team structure to go capture them.

Got it. So maybe pivoting now to another new segment in your reporting. It's going to be Work Dynamics. Maybe if you can just recap for the folks in the room, what's going to be included within Work Dynamics -- and then also kind of speak to the competitive environment for that business?

Yes. So Work Dynamics, first, taking a step back, what is it? Because again, we haven't reported work dynamics as a segment previously. So the foundation of Work Dynamics is the corporate outsourcing of real estate. And so a company will come to less and say, "I'd like you to manage either my office, my distribution facilities, my data centers, and so on and so forth, right, depending on what industry they're in and where they are in the world. And increasingly, clients are saying to us, I'd like you to do that for me globally or in multiple locations. And that's where right scope and scale and presence really matters. In addition to that foundational day-to-day management of their facilities and offices, we also offer other services around that. And going back to my earlier point on strategic adviser, it's beyond the -- okay, here's what I have today. Can you go take care of that for me? Into the, well, what should I have today, right? What's my optimal portfolio? How should I plan for the future? How do I think about workforce planning in a post-COVID world, right? Where we're trying to figure out what the right strategy is for both a talent attraction, retention perspective. And then also, what does that mean in terms of our culture, our ability to innovate and bring our people together, right? Help us understand what that looks like. And we're really seeing with our clients a shift from real estate as a cost, a necessary cost to something that they're investing in and thinking about more holistically and they want to have conversations with us around what should I do? What are my peers in my industry and what's best-in-class based on what you've seen and what you're recommending to your clients. And so we'll go through that discussion with them. Another area of real importance right now is sustainability, where clients, right, are setting targets and looking to us to help them achieve those targets given the specific amount of that relates to their occupancy. And so beyond that, right, the big themes around workplace management, you also have some practical things like, okay, so I've decided to change my fit out, change my configuration in my office as I'm bringing people back and I want more collaboration space. So oversee that for them and direct that for them as well. It's lease administration and so on. So there's a suite of services, a package of services that these corporates will come to us and say, please help me with this. And then to your -- I think part of your question 2 was, well, how do you think about competitive advantage, who set up best to deliver that? It does go back to a few different things. I touched on scale, geographic presence, right? Can you do this for me locally, regionally, globally in the same way, and I can expect the same level of service. It goes to also technology and being able to deliver more efficiently for them and continuing to raise the bar in terms of our expectations as well. And we think we're well positioned on both fronts.

So as that business gets more complex and more multifaceted and more global, is it fair to say that the competitive set of firms against some of your competing really has shrunk?

No, we believe it's shrinking as we continue to have these clients, have these expectations, right? And so we'll continue -- the field will continue to narrow. And those companies that can invest in technology and meet their clients where they are in the world. will really be important going forward in this today.

Got it. And then Work Dynamics as a segment, sounds broadly similar to the Global Workplace Solutions segment that CBRE discloses. You probably don't want to front run yourself too much, but would you expect workplace or Work Dynamics to have a similar margin profile as CBRE's similar unit?

Now why don't I talk a bit about what would drive differences in margin? And when we have numbers out there too, we can have a deeper conversation. So basically, I just talked about a lot of different services. And so business mix is something that's really important to consider, right? Business mix across those service lines and then business mix from a geographic perspective, right, in terms of where you have platforms and how scale those platforms are. Another area is how much companies have made a decision, and we're certainly deciding to invest heavily in technology and sustainability. And so making investments there, we see opportunity for growth, opportunity to deliver better on behalf of our clients. And then finally, really scale. And so as we continue to grow our business and scale and densify the number of clients we have in certain locations, right, there's benefits there to margins.

Got it. And then a topic that you touched on in a previous question, how do you see clients elevated awareness and interest in ESG is impacting your business right now?

Yes, it's a really big focus for us. So if we look across our top 50 clients, most of them say 95% of them or so have set out specific sustainability targets broadly. And they're all a little bit different, but very common themes across them. But then if you go to what is the path to get to right that target, a little under 20% of them coming for most people, right, have it fully mapped out because this is unchartered territory, where everyone is working through, right? This is what we want to do. How do we get there? And if you think about all that broader real estate plays in a sustainability journey, it's important because the built environment overall is about 40% of carbon emissions. And so people will naturally say, "All right, how does my real estate footprint impact that? How do I think about that? How can I become more energy efficient? How can I achieve my net 0 carbon targets. And so we obviously, as I've just talked about, right, play an important role in terms of advising on sustainability, and we're going on that journey ourselves with our own targets that we've set. And so it is -- it will continue to be a focus for us, an area of investment going forward.

Got it. Let's pivot to the brokerage side of things. Obviously, inflation is -- or top of mind for a lot of folks right now. I think kind of the frame that you guys have mentioned and your peers have mentioned is that historically, commercial real estate as an asset class does well in inflationary environments. Can you walk through why that's been the case?

Yes. Great -- it's a great question, and this is certainly, right, something on everyone's minds, what happens with inflation, how real estate fair, has certainly fared well historically. There's a few different factors at play as you think about it. So if you think about the underlying real estate as an asset, you have the rental stream, which depending on which property type you're in is periodically reset. But if office leases are typically longer, industrial leases can be just as long or shorter depending on the size and multifamily leases are typically reset every year, retail right can be much longer. So they all have a bit of a different profile, so investors can look across their portfolio and say, right, what's the duration of income streams that I have across different property types, and you can tell your portfolio accordingly based on your views of inflation. Another important component of inflationary considerations in your real estate portfolio is that largely lease structures around the world include clauses where the expenses are passed through to tenants in 1 form or another. And there's different ways that's done. But typically, the tenant is sharing in the exposure or bearing most of the exposure to some of these expense increases, right? When the rent resets, right, that can shift. But again, people can think about their portfolio overall and how that plays into it. And then you have the capital value side of it, which will also fluctuate based on a number of macroeconomic considerations, but will include impacts of inflation, which can be on the negative and the positive side. And if you think about the additional capital that's coming into the real estate sector overall because of its relative attractiveness to other asset classes, right, you have that benefit there as well. And then the final point I'd make, and this is I'm trying to make it as short as responsible is really around supply and demand. And so if you think about the available stock that's out there as construction prices go up, right? Generally, supply will come down and that will constrain overall supply pressures on rental rates. And so you have those different forces at hand. They try to do -- there's more to consider, but kind of a little shortcut in terms of narrative there. But it's attractive because you have -- there's different levers and things at play, and so people have generally found that to be true over the cycle.

Got you. But of course, from a broker revenue standpoint, you want supply to meet demand at a high level. And so there's a lot of dry powder and there's a lot of interest in investment in commercial real estate. What are you guys seeing on the supply side in terms of transactions that are going to be coming to the market.

Yes. So there's certainly right now a significant amount of dry powder out there and capital looking to find its way into the asset class more broadly. And the number of transactions, right, that are happening has been increasing, and we've seen this continued pull to the sector, which didn't even slowed a little bit during COVID, but the March continued in terms of new capital allocations to real estate. So your question is very right, spot on, well, what happens? Where is that going to find a home. The 1 property type that's most in favor right now, I'd say, well, this industrial and multifamily are the 2. But industrial is 1 right now where the level of available transactions, whether for a lease or sell, right? It's just -- it's smaller than the market would like it to be. Leasing vacancy rates are less than 1% in many markets. And so there's not a transaction to be had in those cases. And then from a capital markets perspective, right, it's how much can come out to the market at any given time. What we see happening is investors saying, okay, well, there's a lot of competing capital in these areas, where else can I go? And we continue to see real estate investors looking to other alternative property types within real estate, such as life sciences or data centers that they might not have previously invested in, but want to expand their overall portfolio exposure to given broader trends and available transactions. And so we're seeing that happen, and we are specifically looking to invest where we see that growth and anticipate that growth to help serve and advise our clients where they might be going into a property type for the first time.

Got it. And then maybe diving into office, the office sector, in particular here. This is probably the first big conference a lot of people have attended in person. It's my first big conference in 2 years. We're all starting to talk about coming back to the office 2 days, 3 days a week, whoever it's going to be. In your conversations with your clients, what are they saying about coming back to office and what they think their demand per square foot is going to be relative to perhaps what the trajectory would have been prepandemic.

Yes. That's definitely a top of the list in terms of most frequently asked questions and people are trying to understand what sort of shift will the pandemic have. And what we're hearing from our clients and advise them on right now is they look to different hybrid work models. To the extent that's resulting in a potential reduction of their square footage and kind of absolute number of bodies in the office. It's being offset by dedensification for the workstations that are there. Because no longer are people trying to cram as many people into as small a space as possible, as a broad theme. But also they're looking for greater collaboration spaces to say, "All right, well, if we're going to be more prescriptive about when people are in the office and which days those are, and we want to be able to accommodate them and actually have that collaboration take place." And so that's an important theme that we're seeing in our conversations with our clients that we expect will continue to play out longer term.

How does the flexibility to work from home kind of impact that discussion? It sounds like you talked to a lot of senior leaders, and they say, "Man, I love to have my people in the office. You talk to the people who need to commute on the train and they say, I'd rather work from home. So at this point, the senior leaders really have a good sense for if they're really going to be able to get people back into the office, even if they want to.

Yes. It's largely going industry by industry. And so when we speak to our clients, they're looking to what's my peers are doing, what's working and what's not? How can we get people in there. There's definitely a strong desire to have it happen. And so it's a matter of finding a way, and again, with back to some of my comments on Work Dynamics around helping our clients find a way where that formula works in terms of what they're asking their employees to do and what the management team wants in terms of further growth and innovation. In terms of some stats that are just -- that will speak to these trends about people coming back and things starting to change. The fourth quarter in the U.S. was the first quarter where we had positive absorption for office space since the pandemic still -- volumes are still 20% below where they were pre pandemic. So there's still some room to go. But that was certainly a positive sign. The other thing we're tracking is sublease activity. So there was certainly an uptick in companies putting their space on the market for sublease and that's being pulled back off the market as well. So it's not -- we're certainly not back to where we were. I'm not saying that, but there is some signs coming through in the data that is tying back to some of the conversations we're having with our clients where they're really trying to figure this out with us.

Got it. Let's talk about your balance sheet. Your net debt to EBITDA was 0.2x at the end of 2021. So you obviously have a fair amount of capital flexibility at this point. How do you think about acquisitions right now versus share repurchases or other potential uses of capital.

Sure. Great question. I think this will be a good time to talk about what we've done over the last few years. So in terms of a return of capital to shareholders. So in 2019, we returned $43 million in the form of dividends, which was roughly what we had done in prior years. In 2020, we returned $100 million through share repurchases. And in 2021, we returned $343 million in share repurchases. And then our Board of Directors recently authorized an incremental $1.5 billion for share repurchases. So we certainly are making a statement that this is an important part of what we're doing as we think about our overall capital allocation strategy. We continue to have flexibility given the strength of our balance sheet to pursue both M&A and share repurchases. And so we'll continue to review and screen for opportunities that we find compelling and continue to invest for growth, but we can do that alongside return of cash to shareholders.

Is it a pretty high hurdle for M&A right now, just given how accretive repurchases should be, especially relative to where consensus estimates currently stand?

Yes. Yes. Certainly, share repurchases are attractive right now, but we'll continue to look for opportunities to invest and reinvest in our business for long-term growth. And so we have a financial framework alongside our strategic framework, and we'll continue to measure opportunities against that. And look at the overall return on invested capital metrics for transactions individually and as a portfolio against our broader objectives of 12%.

Got it. All right. I will pause and see if there's any questions in the audience. Go ahead.

Leasing business. Could you talk a little bit more about your leasing business about the rate trends you're seeing maybe by segment? And we hear a lot and see actually no people who have moved from high-cost states to low-cost states. Is that being translated into rates -- and it seems like there are people who are making assumptions that they'll never have to go back into the office? And do you have any idea what percentage that might be?

Yes. So first, let me talk a little bit about leasing transactions broadly. And so the stats -- and it's a great question. The stats I quoted earlier, right, are for office overall. The 1 thing we are seeing is really a bifurcation of different types of office space being beneficiaries of people coming back and others not at all. And so this notion of what does it take to get people back in the office, what does that look like? It's really the higher quality assets that have amenity sets and sustainability credentials. And so making sure that if you're a landlord that you have a building that looks like that and making sure if you don't, you're making some changes that can get you there. In terms of people moving state to state and the dynamics there, there are conversations around that as well. And I would say it's not yet a firm conclusion, but discussions are around, well, are we allowing people to move wherever they want in different states, where does that hybrid look like. Because there are other implications beyond just, well, do I need space for that person in a particular office as it relates to taxes and broader employment law issues that need to be considered. So it's certainly a complex question, but a very good one.

Thank you. If I can squeeze a couple of questions. First is you have a pretty substantial business in EMEA. And given what's going on, I mean probably it's still too early to have an impact, but I'm curious to hear your perspective on how -- as you talk to clients there, what their view on the property market is in general? And the second is on the technology part. You made an acquisition of Building Engines. And I'm curious, does that get you to where you want to be in tech? Or do you need to still make more acquisitions? Or is that an organic growth strategy in tech?

Yes, sure. Great. Both great questions. So first on EMEA I think your question was really around what's the tone on the ground right now. We were encouraged by increasing transaction volumes at the end of last year. You saw what we were able to deliver in the fourth quarter in terms of both our leasing and capital markets transaction. So there's some positive momentum there. I would say as a region, right? People are definitely -- as you're closer to the situation, the war in Ukraine, considering what that might mean. We haven't seen any significant movements yet in that. But we're encouraged by events of recent days by momentum there. On the topic of Building Engines, that was an important acquisition for us. and we continue to look at how does that tie into the rest of our overall strategy. So as I mentioned earlier, we have different pillars within our technology strategy, where we're evaluating build versus buy and the intersection of those different pillars. Building Engine plays nicely and that it can actually tie in a lot of what we're doing as a platform. But I'm not going to sit here and say that's the last acquisition we make in technology. It's certainly a big growth area for us going forward.

Time for 1 more question.

Could you break down the pie chart of your exposures via sort of real estate type in terms of industrial, health care, office? And then maybe help us think about actual pricing trends in sales and leasing for each, maybe with specific numbers if you can?

Yes, I won't be able to give you all the specific numbers off the top of my head, but I will give you a couple of stats here that should be able to help. So first, as you think about our leasing fee revenues overall, approximately half of that is in office, which is down from pre-pandemic and has been replaced by additional revenues from our industrial leasing activity. So we've seen tremendous growth in industrial, and we continue to have good momentum there. That will be constrained largely only by the available stock we expect, right, which I mentioned before, where you have less than 1% of vacancy in certain markets. On the capital market side, we've seen strongest activity within multifamily overall as a property type that's certainly in favor, and we continue to expect to be in favor going forward. And we have -- you asked specifically the pie chart and all property types. So retail, we have some retail business. And interestingly, everyone is saying retail has been really challenged environment, but it has shown some good momentum coming out of the pandemic when retailers are saying, I have a couple of years of pent-up decision-making that needs to happen after not doing anything during COVID and a population around the world that's looking to get back out and be active and get out of their homes. And so there's been some interesting growth trends there as well.

Well on that note, I think we're going to wrap it up. But thank everybody for attending, and thank you very much, Karen.