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

All right. Good morning. Thank you for joining us bright and early here. I'm Stephen Sheldon. For those who don't know me, I'm an analyst in the tech group here at William Blair. I cover the real estate space, including JLL. So for compliance purposes, I'm required to inform you that a complete list of research disclosures and potential conflicts of interest is available at our website at williamblair.com. So it's great to have the JLL team at our conference here this year. There are obviously a lot of changes going on in the commercial real estate space. But as I've talked about many times, I think change is exactly what providers like JLL monetize, and so changes -- change is often a good thing. And they're playing in an industry where secular drivers are supporting market share gains for the biggest players. So from the company today, we have President and CEO, Christian Ulbrich; we have CFO, Karen Brennan; we also have some of the IR team here, Brian Hogan. as many at William Blair probably know well; we've got Scott Einberger. So thank you all for being here. And with that, I'm going to pass to Christian for the presentation.

Good morning, everybody. I'm standing up. It's easier. Thank you for your interest in JLL. We want to kick it off with a very small video on what we are doing, just to get you into the topic. [Presentation]

So we can not only do really nice videos, we have been around for a fairly long time, our roots go back to 1760, and we have been an industry leader for decades. And so that is also recognized with lots of awards. Most notably, we have been one of the very, very few companies in the world who have been, for the last 16 years included into the world's most ethical companies of the world. Now bringing it into today, we are a Fortune 200 company, and we are operating in 80 countries which we are running more than 300 offices around the globe in order to deliver our clients a seamless service wherever they need it, and has a very strong focus within our organization to identify the right clients we want to serve, and then we grow with those clients. If our clients have chosen us, and then they grow very strongly, then we will grow with them very strongly. Currently, about 103,000 employees around the world. And a very important part of our business is sustainability. You may know that the build environment is responsible for roughly 40% of the carbon footprint in the world. More than 8% of our clients have net-zero agreements in place. And in order to deliver on that, they need to reduce the carbon footprint on their build environment. And this is something where we are clearly the leader in our industry. We are driving our business through 5 business segments, which we also use as our publicly shown P&Ls. The largest is Markets Advisory, simply speaking, it's predominantly Leasing and Property Management services. You can see the split up of that, of our overall business makeup. The next biggest one is capital markets, mostly investment sales and debt advisory, but also valuation businesses. The second largest piece -- the third largest piece is what we call Work Dynamics. So it's the workplace management, the corporate real estate outsourcing as well as project management. So we are one of the largest project managers in North America and around the globe. Then we have -- unique within our industry, we have a segment which we call JLL Technologies where we are tech enabling our core services, and we are tech enabling our clients. Our real estate has been relatively late to the tech party, but it's coming at a very, very fast pace. And as you can imagine, buildings are a massive amount of data collection, and you can turn that data which a building provides into a lot of valuable advice for your clients to have higher productivity in the building by their workforce, to try -- to run that building in a more efficient way and to just get to overall better outcome for the whole world. And finally, we are having LaSalle as part of our platform, LaSalle, one of the most renowned investment management brands in the world, roughly 80 billion assets under management. Again, a global platform right across all the major markets in the world. What is unique about our industry is that this industry, although around for so many, many decades, is still benefiting from very significant tailwinds. We have put them out back in 2016. We are constantly checking on them, whether they are still the most relevant ones and whether they are still in play. First and foremost, growth in corporate real estate outsourcing. Only 30% or less than 30% of large corporates in the world have actually outsourced their real estate needs to companies like us. This is pretty amazing when you think about they do their accounts themselves and they don't do many things themselves, but many of them still do their corporate real estate needs themselves. So this is a very, very long growth play for us and for the sector. Secondly, when you go before the GFC, real estate was part of the alternative asset classes and only over the last 10, 12, 13 years, it developed to a uniquely defined asset class with very fast rising allocations to that asset class. And if you think that this is over because of the current turmoil, I can assure you, it's not over. We see it already again in Asia where allocations to real estate are rising again. And so this is, again, a very strong trend for our business that more money is trying to find a home into real estate. In fact, more money than their new investment-grade buildings being erected. So we have constantly an overhang of money versus the amount of assets which are really investment grade. And that leads -- is tightly connected to the third trend, increased urbanization. At the end of the day, what we are doing is a business in urban areas, and those urban areas are growing. They're not only growing in emerging environments, but also growing in very mature environments in the U.S. and Western Europe. And you see the trend line here that over the next 25 years, roughly another 12%, 13% of people will move from rural areas into urban areas, which means that our target addressable market is growing as we sit here and will continue to grow. Again, this is very unique for our industry. Then the tech-driven Fourth Industrial Revolution, as I said, real estate was late to the party. It's now coming at lightning speed, and it takes enormous investment to deal with it, and that is benefiting the very large players in our industry because they can deliver on that tech investment and they can justify those costs by a broad set of revenues and growth opportunities. We believe that we are clearly leading on that area. And then finally, as I mentioned before, sustainability is a very important aspect for the build environment. You see super strict regulation coming into play. Interestingly enough, New York is leading worldwide on that regulation, but others are following, Singapore. It's not only the Europeans who are focused on that topic. It's right across the world. And it makes a big difference to the valuation of a building, whether it meets the green credentials or whether it doesn't need the green credentials. It plays into financing, it plays into the spreads which are being asked for buildings that they are being financed. Within our industry, when you look at the market penetration, the top 5 firms globally are only covering currently 28% of global investment sales activity. If you compare that to other mature industries, there's massive headroom to grow. And even worse, on the commercial real estate outsourcing market, the top 5 firms are only covering 5% of that market. So again, it just supports the point that there's massive organic growth opportunity within our industry. The main differentiation factors, there are very, very few companies who truly have global scale and run an integrated platform, but our clients are running on a global basis. We have relationships with about 80% of the Fortune 500 companies, and they are all going into many markets and they want consistent services. It is the technology and data piece, which is so critical going forward. And then we have one very unique aspect going back to our roots, we're more than 250 years, it's the One JLL approach to things. And that is clearly critical because you are driving margin, you're driving growth if you are able to sell more products and more services to the same clients. And we have the ability to penetrate our clients in a much better way because there's a huge amount of trust amongst our folks, and they work together to the outcome for our clients. And I want to bring that to life here with one example we were confronted with a biotech client, very fast-growing, and they had multiple service providers and lack completely holistic approach to their real estate footprint. But the business was growing really rapidly, and they wanted to focus on their business and not focusing on how they can host their people and how they can create more lab space. We looked at that situation. We created an integrated solution for the site selection. We leased buildings for them. We project manage buildings for them. We project manage new lab space for them. We took over the operations of those spaces so that they could really focus on their core business. We shared best practice for a lot of other biotech and life sciences clients, which we are servicing. We brought the right technology into the buildings and we obviously also took care of the critical systems because you don't want to have any downtime in the lab space or in the data centers they have to run. And that resulted over the last 10 years, we increased that client revenue for us 5x. They grew their footprint from 50,000 square feet to more than 2 million square feet, and we're servicing them now in 34 locations across 4 continents. I can tell you there are very few competitors out there who can deliver on a story like that. Now going a little bit deeper into the 5 segments so that you fully understand what it means. Again, Markets Advisory, our largest area. We do about 42,000 leases -- we did about 42,000 leases last year. We managed about 3 billion square feet of space. You can see the split up on the leasing side, it's predominantly offices slightly more than 50% last year, 30% coming from industrial. Overall, the leasing piece of that Markets Advisory bucket is roughly 80%, and the property management piece is 15%. Obviously, the property management business is highly recurring, but also the leasing business has a strong recurring element because we have a lot of multiyear contracts with clients where all the leases which are coming up will be executed by us. And those leases are coming up, whether they like it or not because there's a term to them. And so they can then decide whether they are moving out of that building, whether they kick the can down the road for 1 or 2 years, but they have to take decisions, and those decisions will then be executed by us. And even if they leave a building, then we will do the dilapidation of that building. And so there's always something for us to do in that business. So it also has a pretty strong recurring element. If we go to capital markets, you see here, it's investment sales and advisory. It's the equity side, it's the debt side and then we value buildings. Last year, we transacted $1.1 billion worth of assets a day, every single day, $1.1 billion. If you think about it, the average transaction is roughly $50 million a day. You can see how many transactions that is every day on every transaction we have, on average, 7 under-bidders. So the amount of data we are collecting of people who are trying to buy a building, who are trying to finance a building, who weren't successful with their offer is amazing, and we can translate that data into advice for our clients going forward. The same is around -- we value last year, roughly $3 trillion worth of buildings. Again, it's a tremendous amount of data, which is being collected and which guides us, what our clients should do going forward. You see here the split. It's a much broader split. More than 30% is down to residential as an asset class on the capital markets side, 17% is office, 17% is industrial, retail, hotels, lab space, data centers, you name it. And you can see that the investment sales that in equity advisory side is almost 80% of that revenue stream. Going to Work Dynamics, Roughly speaking, 2 major services. One is workplace management, which would include facility -- the facility management of the buildings. And then, as I said, project management, we do refurbishment, we do fit-out, we do ground-up building project management across various asset classes. You see here, slightly more than 1/3 for offices than industrial, retail. A lot of other, again, other includes lab space, data centers. We also do a couple of sports stadiums at the moment. And so it's a broad range of topics where we do the project management. We'll move on, JLL Technologies. It's only 2% of our external P&L. The majority of that business is tech-enabling our core services. So it's an internal service where no revenue will be charged. You see the success of that business and the growth of those service lines. They have higher revenues per hat because the way they are tech enabled, the amount of data they are collecting, that differentiates them. We also have a small external segment around JLL Technologies, which is built up by 2 areas. First of all, we are implementing technology, third-party technology, IBM technology on clients' side. That is part of that P&L. And the other part is we are owner of multiple software companies, and we are selling those software to clients as a service, and that is making up that technology P&L. Final piece on that one is we have started 2018, our venture capital fund investing into proptech and in sustainability products. The reason is, as I said, there's so much technology coming into our space in order to invest into slightly more than 40 companies, we have analyzed more than 3,000 companies from the U.S., from Europe, from India, from China, who are all trying to change the way the real estate world is operating. And in order to stay on top of it and to bring the best technology to our clients first, that is the reason why we set that venture capital fund. Last, LaSalle, our investment management platform. As I said earlier, it's roughly [ $80 billion ] assets under management all across the globe. We are highly successful in Asia, in Japan, in China, but also in Europe and then here in the U.S. We are servicing more than 500 clients who have invested into the LaSalle platform. You see the breakdown between the different asset classes. Again, it's very well spread out across the different asset classes. This is a highly recurring stream, 85% of the fees are the advisory fees, so the fees which we are charging to those funds for our services. And then on top of that, we get some transaction fees. And finally, we are taking some incentive fees if we are particularly successful with the performance of those funds. I hand over now to Karen Brennan, who will go into more detail around the financing.

Thanks, Christian. So I'll just spend a few brief minutes to bring to life the financials, some of the things that Christian has been talking about. So starting with our fee revenue growth since 2016, we've had mid 8% compounded annual growth rate and have increased for just over $5 billion of fee revenue to just over $8 billion of fee revenue. If you go back over a longer time horizon back to the early 2000s, it's a low double-digits CAGR for our fee revenue growth. And we've demonstrated that we bounce back from macroeconomic cycles very rapidly. Moving next to adjusted EBITDA, our key profitability measure as well as our adjusted EBITDA margin. We are very focused on margin expansion, and we have demonstrated that over the last several years and through 2016 and also back over a longer time horizon, you'll see the 10.7% CAGR there. And we've committed to continuing to expand our margins in terms of the margin corridor that we're putting out to the Street on a periodic basis. Moving quickly to the adjusted EPS growth. You see the same trend lines there, where we're growing our adjusted EBITDA faster than our fee revenue and our adjusted EPS faster than our adjusted EBITDA of 11% CAGR as well, that's coming from the fee revenue growth, the expansion of our margins as well as share repurchases of late. So touching on briefly, when Christian talks about the industry tailwinds that we have as well as our ability to gain market share, it's really coming through in terms of the performance of our overall fee revenue relative to global GDP growth. We have a history of outpacing global GDP by 3x, and you'll certainly see on the top line here, the impact of the cycles, but we bounced back more strongly on the other side of that. So what happens when we're in a downturn? How do we manage our business? There are 3 key components here that I've outlined. The first is really on our resilient fee revenue, which really provides ballast to our growth. Christian spoke about that when he went through each of our business lines. The second is our variable cost base. Certainly, a large portion of our incentive structures -- compensation structures have a variable component, including commissions, but we also have other expenses across the business that we can flex based on the macroeconomic environment and our expectations for growth. And finally, we are focused on taking fixed cost actions, particularly of late as we have transitioned our businesses from being organized around a geographic focus to our global business lines. We have been able to really take advantage of some transitions and how we're structuring our business and leveraging our global scale. We have mentioned of late that we've taken out $140 million of fixed costs that will translate through our run rate in coming years. Touching briefly on capital allocation priorities, we really focus on 3 areas: The first is really investments in our business to drive future growth. We have a modest amount that we invest through our LaSalle platform in co-investments alongside our clients and co-mingled funds around the world. And then also the venture capital investing that Christian spoke about in our JLL Technologies segment; second, very focused on returning capital to shareholders; and third, selective M&A. We're really focused on more infill opportunities as we have no major gaps in our business portfolio right now. We do this all while maintaining our investment-grade balance sheet. This table shows the fluctuation in our net leverage over time. Our business is seasonal over the course of the year, so we show both year-end leverage and peak leverage over the course of the year. We aim to operate the business within a range of 0 to 2x, trailing 12-month adjusted EBITDA when typically, we'll have a higher level in the first quarter of the year, and then we will delever as the year progresses. We also have our investment-grade ratings at the top here with Moody's and Standard & Poor's. Finally, just touching on our share repurchases briefly. This shows that we've transitioned from a dividend through 2019 to commencing share repurchases in 2020. We continue to evaluate share repurchases relative to M&A opportunities available in the market and looking at the relative return against each other. We continue to find our current valuation attractive and have reinstated our share repurchase program for the year, and we have about $1.2 billion left remaining in our share repurchase authorization. With that, back to Christian to wrap up.

Thank you so I hope we have been able to bring across that we are incredibly well positioned in a still highly-fragmented market. As shown, we tend to have a strong growth pattern roughly 3x global GDP. There's important differentiation factors which are favoring our ability to win market share. We are very proud of our One JLL culture, enabling cross-selling opportunities. This is still the highest growth opportunity we have to sell more services to the same clients. And we have this clear road map for further top line growth and adjusted EBITDA growth. How are we executing on that? Again, very important is utilizing technology to drive productivity within our own platform, but also within our clients' platform, leveraging our shared services platform. We run large services centers in India, in the Philippines and also in China. Expanding our product offering to our existing clients, and then it's all about analyzing the data, which we are collecting on a daily basis, live data and turning that into advice for our clients. We have provided some guidance around our financial targets for 2023. We expect to run the company between 14% to 16% adjusted EBITDA margin. This is the target which we laid out in December. And then for 2025, we see further margin expansion. We will end 2025 with a fee revenue somewhere between $10 billion to $11 billion and an adjusted EBITDA margin profile somewhere between 16% to 19%. And as Karen just alluded, we are very focused on the stability of our balance sheet. So we will always keep our balance sheet below a 2 multiple on net debt to adjusted EBITDA. So that was it. Thank you very much.

Yes. Maybe we'll do a couple of questions here, then we'll move to the breakout upstairs. But maybe just on those 2025 financial targets, and I think when you guys set those out, the environment, the macro environment has at least changed a decent amount. But what do you think -- how much of that is in your control as you think about those 2025 targets? What do you need to get right from an execution perspective to be able to hit that?

Yes. We are less concerned about the 2025 targets that we would be above the '23 targets because as you rightly say, we are obviously also -- have to live with a market environment. And the market environment, we have to be clear, what we have seen over the last 12 months in our industry is a worse environment than what we saw in 2008, 2009. This tremendous spike of interest rates in a very, very short period of time, but even more so, the massive expansion of the spreads has been a massive burden on the transactional markets around the globe. And price adjustment takes time, and that's why we have seen in the first quarter, transaction volumes being reduced by 54%. There's only so much we can do to react on that. We have a lot of flex in our cost base, but still there are limitations because the labor market is still very tight. And you don't want to get rid of those people, which you have to rehire 12 months and 18 months later. We are in it for the long term. Therefore, the 2025 piece is easier for us. If we don't have a massive recession in 2025, we are fairly confident that we can deliver that because we are running a multiyear program on driving efficiency into our organization, and that is very well planned out. And so there is not a lot of nervousness amongst the two of us that we cannot deliver '25.

Got it. And we've got time for maybe one -- the propensity to outsource -- that's one of -- that was the first secular tailwind that you kind of talked about within your business. What does that propensity to outsource look like when the macro gets tougher? Do you see the urgency to outsource kind of noncore real estate players like yourselves in an environment like this?

Yes. I mean this is the nice thing about that portfolio of businesses we have. Obviously, our capital markets business is at the moment more challenged than other parts of our business, whereas our Work Dynamics business is having a really great time at the moment. The win rates we had over the last 5 months have been the highest in the history of the company. And the reason for that is that every client, whether highly successful tech companies or other sectors which are more challenged, all of them are trying to focus on their cost base, on the productivity of their people, on the retention of their people, how can they bring them back into the office. So those are the topics people are discussing, and that drives the need for professional outsourcing solutions. And as we said, there are still a lot of companies who have never outsourced, and you have a lot of companies who have selectively out-tasked to various providers, but there is still a huge amount of clients who still need to make that step to a fully outsourced program, and we see that at the moment happening at rapid speed.

Sounds good. I think we'll leave it there. We'll move it up to the breakout upstairs, which will be in Richardson. So thank you so much, Christian and Karen.

Thank you. Thanks for your interest.

Thank you.