Jones Lang LaSalle Incorporated
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good morning. At this time, I would like to welcome everyone to the Jones Lang LaSalle Incorporated Fourth Quarter Earnings Conference Call. For your information, this conference call is being recorded. Thank you. I would now like to turn the conference over to Chris Stent, Executive Managing Director of Investor Relations. Please go ahead.

[Chris Stent:]

Thank you, and good morning. Welcome to our fourth quarter 2020 conference call for Jones Lang LaSalle Incorporated. Earlier this morning, we issued our earnings release, which is available on the Investor Relations section of our website along with the slide presentation intended to supplement our prepared remarks. Please visit ir.jll.com.

[Christian Ulbrich:]

Thank you, Chris. Welcome to our fourth quarter call. Overall, I’m extremely pleased with how our team across the world performed in 2020, providing exceptional services to our clients, while successfully navigating the pandemic-related challenges and delivering solid results for all our stakeholders. Our fiscal year was capped off by a better than expected performance in the fourth quarter, which is a testament to the growing strengths of our platform. While we remained cautious about the first half of 2021 given the extent of uncertainty related to the pandemic, we are proud of JLL’s execution for a unique year in 2020. Before turning to the market environment and our financial performance, I wanted to briefly explain how some of the strategic investments made prior to 2020 supported us to successfully navigate this past year. Our technology investments in finance and HR ERP systems, and the migration of all geographies and business lines into one accounting system, provided management much better visibility into our working capital position, while we were able to significantly improve our receivables collections and enhance cash generation. I cannot emphasize enough how vital this was to effectively manage our overall liquidity, repaying debt ahead of our schedule and continuing to invest to drive future growth. Secondly, the investment in our Capital Markets’ CRM platform, while we also integrated our colleagues from HFF, allowed us to share client information seamlessly and promote cross-selling throughout the organization. This has been a strong contributor to our success in 2020, also evidenced by our fourth quarter performance in Americas Capital Markets relative to the overall market.

[Karen Brennan:]

Thank you, Christian. Our overall fourth quarter performance exceeded the upper end of our expectations driven largely by capital markets. I’ll briefly highlight two notable items that speak to our cautious optimism for 2021, particularly the second half of the year. First, the year-over-year real estate services fee revenue percentage decline in the fourth quarter, improved modestly versus the third quarter, indicative of solid performance of America’s Capital Markets. Second, our continued focus on capital and operating efficiency coupled with earnings. Once again, it yielded strong cash generation in the quarter, which we use to fully pay down our revolving credit facility and return an additional $50 million of cash to shareholders via repurchases. Moving to a detailed review of operating performance, I remind everyone that variances are against the prior year period in local currency, unless otherwise noted. Our transactional leasing and Capital Markets businesses reflected ongoing uncertainty regarding the evolution of the pandemic and its impact on decision-making by corporate occupiers and investors. While we are encouraged by the trends in our pipelines and recent performance in both service lines, we expect transactional activity to remain subdued over the near term before picking up in the second half of the year with leasing lag in Capital Markets.

[Christian Ulbrich:]

Thank you, Karen. If the distribution of vaccines, the general sentiment supports a meaningful recovery in 2021 with some analysts forecasting global economic growth in excess of 5% much of it coming in the second half of the year. Our people are committed to aligning with our client’s objectives and providing advice about how to navigate the transitions ahead. As corporate occupiers begin to re-imagine the future of work, they will rely on best-in-class firms like JLL to help them with this transition. Additionally, we will be working closely with our investor clients and leverage the firm’s broader perspective to provide necessary insights. As we enter 2020, while we remain focused on achieving our long-term priorities. Though we are mindful of the near term challenges and uncertainty that we made, we are poised to see the considerable opportunities in front of us, while maintaining financial discipline important to long-term sustainable growth. In summary, I’m pleased with the way that JLL was able to navigate through such turbulent and trying times of the past year. The results that we were able to achieve would not have been possible without the commitment and relentlessness of our employees, as well as the resilience of the communities within which we operate. At JLL, we are committed to our stated purpose of shaping the future of real estate for a better world. We are cognizant of the important role that we play in today’s challenging and evolving environment. We are well positioned to deliver on our purpose, who JLLs thought leadership, the strong growth in our sustainability services and our ability to bring to market differentiating technology products. I’m confident in our ability to generate long-term profitable, sustained growth, and shareholder value. Operator, please explain the Q&A process.

[Operator:]

Your first question comes from the line of Anthony Paolone from JPM Securities, LLC. Your line is open.

[Anthony Paolone:]

Thanks, and hi everybody. My first question, I guess for Karen, can you maybe walk us through some of the building blocks related to your comment about adjusted EBITDA lagging revenue growth in 2021? I just want to understand, I guess, how the permanent, temporary cost saves play into that as well as like your margin target?

[Karen Brennan:]

Sure, Tony. Good morning. So yes, there are a lot of moving pieces as it relates to comparing 2020 to 2021 from a margin profile perspective. First, just to reiterate, we did deliver within the 14% to 16% range in 2020 despite significantly reduced fee revenues over the course of the year. We’ll be focused on top line growth going into 2021 and so due to timing of expenses and the length of the sales cycle, our margin growth will lag fee revenue growth in 2021. We noted that we took significant cost actions in 2020. Some of those were non-permanent and those comprised $330 million in total over the course of the year, roughly half of those will – were discreet items and it will not repeat in 2021. And the remainder will be coming back more gradually as business volumes recover. We also have some levels of headwind within that related to the government programs that are part of that. The other element of 2020 that will repeat in 2021 were the fixed reductions of $135 million. So we have taken actions on those, over the course of the year, we mentioned them last quarter approximately 1/3 of that total came through our 2020 numbers. And the remainder of that will be realized in 2021. And so high level, you have those moving pieces as it relates to the expenses, but we’ll be moving to drive future growth and we’ll be reinvesting in our people over the course of year.

[Anthony Paolone:]

Okay. And I think I’ll probably have to digest some of those puts and takes, but just to be clear, do you think your margins improve, like within that 14% to 16% band over 2020 in 2021?

[Karen Brennan:]

Yes. As I mentioned, we’ll expect the margin growth to lag the fee revenue growth over the course of 2021.

[Anthony Paolone:]

Did you mean the margin growth or the adjusted EBITDA growth? I guess I’m just getting hung up on it.

[Karen Brennan:]

Adjusted EBITDA.

[Anthony Paolone:]

Okay. And then just separately on a different topic, can you talk about just what’s happening on the outsourcing side, and you’d mentioned in your comments, some of the RFPs in the backlog, it sounded like it was pretty good, but just interested in hearing what occupiers are doing with their footprints and whether even if you have contracts to continue to run their space, whether any of that is shrinking, or they’re looking at their footprints as a way to save money?

[Christian Ulbrich:]

Anthony, it’s Christian, good morning. The outsourcing business is continue to perform really well and frankly medium term, we expect that to benefit from the COVID environment because it becomes very evident for corporate’s who haven’t outsourced yet. But in this environment, you really deliver the health and wellbeing of their employees. It is very hard to self-perform that. So we see that outsourcing trends to increase and so on. This is one of the businesses which are – which has performed really well in 2020. And they will continue to perform very strongly going forward.

[Anthony Paolone:]

Okay. And then last question for me. Just back of the envelope, it seems like between free cash flow and debt capacity staying within your IG credit target, if you’d have about $1 billion or so of liquidity here, you outline the stock buyback, but just what are the prospects for putting capital to work on the investment side and potential acquisitions or other investments?

[Christian Ulbrich:]

Well, first of all, we are very pleased that we are in such a strong and comfortable position to start 2021. We see very significant organic growth potential in 2021. And we are – Karen already alluded to, we are very focused now to regain that strong top line growth rate, which then goes down to our overall profits over the course of the year. With regards to the share repurchase, we view the share repurchase executive saying, we view any investments that we make a rigorous assessment where we believe we can create more value for our shareholders. And on the M&A front, we are open to M&A that it has to kind of pass a very rigorous assessment. We have a full scale business all around the globe that aren’t any holes which we need to cover. And therefore, for the foreseeable near future, we are not pursuing any specific targets there and in that context, you can also see that share repurchase program, which has been approved by our Board of Directors.

[Anthony Paolone:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Stephen Sheldon from William Blair. Your line is open.

[Stephen Sheldon:]

Good morning. On the continued stabilization in Capital Markets activity, curious what you are seeing, particularly in the office subsector? From the visibility you have, what trends are you seeing and how investors and owners are underwriting office investment sales, given some continued questions about corporate demand on the meeting side over the next few years?

[Christian Ulbrich:]

Yes. I mean, Capital Markets is – it’s a combination of feeling in various asset classes. As you know, we are operating in all the different asset classes and clearly, the opposite sector is one of those areas, which was more influence with the pandemic than, for example, residential or logistics. We still see a very strong demand for the best buildings in the best locations. And that is one of the reasons for that every strong uptick of the Capital Markets business overall in the fourth quarter. But for those buildings to a kind of slightly less talks was more question mark around their rent flow. There is no hesitation out there about what is the right rental level for those types of buildings going forward. And that obviously is then reflected sometimes in a gap between what buyers and sellers would like to see around pricing. So that will continue to be hesitancy in the office sector going into 2021. But as I said, that is only – that it’s only applying to those buildings, which have some question marks around their location, around the quality of the buildings or around the rental.

[Stephen Sheldon:]

Got it. That’s helpful. Just wanted to ask about technology, I guess, how has the pandemic changed your technology roadmap looking out of the next few years, are there areas where you may ramp investments more into areas like broker productivity tools or more tenant facing technology solutions and in the property and facilities management? Just curious how you’re thinking about tech investments at this point?

[Christian Ulbrich:]

Well, as you know, we have to be very focused on that over the last couple of years and invested quite strongly into that area. And from our point of view, this is one reason why we were able to deliver such a resilient performance in 2020, especially now with Capital Markets business, where we are run on one global system. We were able to really take advantage of that. And then those areas that you just mentioned to be able to run virtual tools for leasing space is also something where we have a number of tools out there. And what we have seen through the pandemic, how clients have been getting used to run those virtual tools and feel pretty comfortable with it. So what we believe is that this is something where the market will adjust hopefully be much quicker than without the pandemic. And we believe that we are providing our brokers with the leading tools in the market, and we’ll take benefit of that. It should be reflective in the ongoing growing up our market share.

[Stephen Sheldon:]

Great. Thank you.

[Operator:]

Your next question comes from the line Jade Rahmani from KBW. Your line is open.

[Jade Rahmani:]

Thank you very much and nice to hear from all of you. Just a clarifying question, if you’re saying that growth in adjusted EBITDA will lag growth in fee revenue by implication that should suggest that the margin would decline? Looking at your slides, you show that the adjusted EBITDA margin for 2020 came in at 13.9%. And you’re saying that for 2021, you would expect to be within the 14% to 16% long-term target range. So with respect to the 13.9%, that was generated in 2020, you expect the 2021 adjusted EBITDA margin to be higher than that, similar to that, or lower than that?

[Karen Brennan:]

Jade, good morning. We don’t give specific guidance. I can reiterate the comments I made before around our overall cost structure, if that would be helpful. Perhaps clarify something – clarify these things.

[Jade Rahmani:]

Well, I guess I was just thinking that if adjusted EBITDA in dollars would grow slower than fee revenue that would imply some modest margin pressure, which could be a time factor or lag effect. Is that a correct interpretation?

[Karen Brennan:]

We’re talking about percentage growth.

[Jade Rahmani:]

Okay. So the percentage growth – okay, that’s helpful. Turning to the Capital Markets outlook, you’re saying that you’re cautious in the first half, presumably most of that relates to the first quarter because the pandemic really unfolded starting in March. Is that a correct interpretation?

[Christian Ulbrich:]

Well. First of all you, you should bring it down precisely to the months where the pandemic started, because first of all, it’s started at different times in the world. The first quarter in Asia was already completely hit by the pandemic. And secondly, a lot of the capital markets transactions, which we realized in the second quarter were deals, which were kind of prepare site visits, had all – put in place due diligence, had all taken place before the pandemic hit those markets. And we are now moving into a situation where obviously site visits can only take place if the pandemic allows that there isn’t any deal out there where those things the due diligence and all those topics have to be done pre-pandemic. And so I would caution to kind of think that this is a one-on-one kind of correlation between what the pandemic does and when the business is picking up again. I think what’s tough to say is that we are overall much more positive about the Capital Markets outlook than we are for the leasing outlook, especially for the office leasing outlook. For the reasons we alluded to, there’s a lot of interest from investors to get into real estate and to create stable income streams. And so the fourth quarter recovery of the Capital Markets business is showing a bit of a trend going forward that Capital Markets will go first in the recovery and the leasing markets will follow later on.

[Jade Rahmani:]

I think a lot of investors are interested in the property type mix. If you could give any color for the Capital Markets business, what percentage is industrial? What percentage is multifamily, office, hotel, et cetera? I think that would help investors understand the resilience of those businesses. You definitely did call out industrial and multifamily as performing as more resilient, so some of your peers have provided that mix breakout. I think that would be helpful.

[Christian Ulbrich:]

Yes, I mean, we have – what we have seen in 2020 is that the Offices sector, which was historically by far our largest sector, has declined pretty significantly in our own – now our own revenue term is roughly 30%. The same is true for retail, whereas, the Industrial sector have increased by about 30% within our own business. And so, residential was about flat for us year-over-year and we have now a situation that was in JLL, our residential revenues were now higher than our office revenues, and industrial has come now very close to offices. Over the course of 2021, you will see that the Office sector will show a stronger rebound again, so that it will become a very strong follower to our residential revenues. But this mix in the different asset classes is obviously something, which we are very proud of because it has created that enormous resiliency in our Capital Markets revenue next to the different type of services we are offering where investing advisory is the largest, but the debt advisory business is also a very, very strong sector for us than the equity advisory.

[Jade Rahmani:]

And I know that HFF is partly – sorry, go ahead.

[Karen Brennan:]

I was just going to – I believe part of your question was trying to get out what is the current percentage of mix by property type within Capital Markets, so I could – if you’re interested in that, in isolation for 2020, for overall, office was approximately a quarter of our total revenues, industrial was about 20% and residential about 35%. And that includes investment advisory and debt advisory pieces of the Capital Markets business.

[Jade Rahmani:]

Okay. Yes, so I think that is helpful. I know that each of that historically was at the higher end of the average deal size with the – I think, around $35 million to $40 million average transaction size that would seasonally increase throughout the year. And one of your peers has highlighted its strength in the category of fields below $10 million. And I know in absolute transaction size, I was wondering if that area of the business is potentially targeted as something you’re interested in growing and if perhaps you might be able to share what percentage would fall in that sub $10 million or perhaps sub $5 million transactional category?

[Christian Ulbrich:]

Well, as you know, we are very focused on transactions in the higher side deals at HFF that’s why it was such a strong fit to JLL, and also, we believe that we are certainly leading on cross regional deals. This question around the smaller sector, what you say, below $10 million or even below $5 million, that is something, which is nothing where JLL has being very focused on in the past and certainly a sector, which will be going forward, a very strong technology support to run that as a profitable sector for whoever is focusing on that sector.

[Jade Rahmani:]

Thank you for taking the questions. Go ahead.

[Karen Brennan:]

Just going to add to that as well. We haven’t seen a significant decline in overall transaction size, if that’s what you’re questioning terms of how we’re looking at the recovery in our Capital Markets volume.

[Jade Rahmani:]

Okay, thank you very much.

[Operator:]

Your next question comes from the line of Rick Skidmore from Goldman Sachs. Your line is open.

[Rick Skidmore:]

Thank you, and good morning. Christian, in your prepared comments, you had mentioned that no gaps in the portfolio and that the bar is high for external growth. As you think about external growth, are there businesses or geographies that need greater scale or is the scale sufficient such that, that external growth will be more about just being opportunistic as you go forward? Thanks.

[Christian Ulbrich:]

Well, when you look at the size of the different economies we are active in, then we would welcome further growth in our Asian business, especially in China and Japan, but we don’t reckon that, that will be supported by any type of M&A, but that is part of what Karen was mentioning, we are very focused on driving investments into our business for organic growth. And so, that’s one of our key focus areas. With regards to M&A, with such a full size, full scale platform as JLL has, there may be more of the adjacencies, which are of interest to us going forward. But again, we see so much opportunity to grow organically especially post-pandemic. 2021 is a year where you can really move on the organic side very strongly and that is certainly a more comfortable way of growth and trying to do any type of M&A at this point in time.

[Rick Skidmore:]

Thank you. And then, one follow-up question, separate topic. Just on the office side, what are the – your clients seeing or doing from an office – their office usage, office layout perspective, and is that helping to grow that advisory consulting side of the business?

[Christian Ulbrich:]

Yes, what we’re seeing from our clients is everything at the moment. We have the full spectrum. We have clients where there is a significant push back into the office and there is focus that – their focus is to really improve the health and well-being of the employees in the office that they all feel very comfortable there. And we have the complete other spectrum of clients who don’t want their employees back in the office and they ask us to help them to make sure that the health and well-being of their employees is met when they work from home. As you know there are a lot of people who don’t have a proper desk at home and not the right chairs and all those type of things, so we have the full spectrum. Personally, I think although that may sound a bit counter-intuitive, the need for advice has only grown on the back of that pandemic and advice is what we are providing to our clients. And therefore, at the end of the day, we will see going forward, some type of a hybrid situation where employers allow their people to work literally from everywhere, and some employers will focus very strongly that they should come as often as possible into the office and other employers won’t make any kind of statement around that, they’re comfortable with where their people want to work from. But what they all have in common, they have to provide a really safe environment for their employees, the health and well-being is super important, and that is where we can provide lots of advice to them.

[Rick Skidmore:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Funk from Bank of America. Your line is open.

[Michael Funk:]

Great, thank you very much. Good morning, everyone.

[Christian Ulbrich:]

Good morning.

[Michael Funk:]

So a couple, if I could. So the first one is really on elasticity of demand in office leasing. And just wanted to get a sense of, if you believe that lower effective rents will attract more interest in office leasing or if there are similar variables that potential tenants are looking at that could delay that recovery?

[Christian Ulbrich:]

Well, if you push kind of the question, keep aside, when people will be pretty much vaccinated, which is the key condition to get office occupancy really up again. Sure, you will have – you will see in our papers, which we provide that the global vacancy rate is increasing, and then on the back of that when vacancy rates are moving up, rents will feel some pressure. What you usually see is there are enough very successful companies who are keen to offer their employees space in the best locations, in the best buildings. And so, the moment others will open up that space, there are companies who will move into those type of buildings. And frankly, that doesn’t really need a major decline in rental levels for those type of buildings and medium-term, I wouldn’t expect that to happen, that the best buildings get a lot of pressure. When you see pressure coming in, it’s the moment you’re moving slightly away from the best locations and the best buildings, there you will see more pressure and that will become more attractive to go into those type of buildings, and you really see then, people, companies from even less good buildings and even less good locations moving into those type of buildings. So where that all ends is that the least attractive buildings and the least attractive areas, they will become vacant and to a degree obsolete and will be reprocessed for something else. So there is a lot of movement from the back of those type of economic developments, which we have seen in 2020 and that will kind of show its way starting in 2021 and moving forward over the next couple of years, then you see quite a lot of movement within the different buildings on the different types of companies.

[Michael Funk:]

No, that’s great. Thank you. Appreciate the color. And maybe two, if I could on Capital Markets, I know you mentioned in prepared remarks that there is tightening in the bid-ask spread versus the prior quarter. Was that the bid coming up or was that the ask coming down that tightened that spread?

[Christian Ulbrich:]

Always the response rate depends on how attractive the building is. When you sit on a brand new client building with a long lease, with an outstanding tenant, there wasn’t any reason to bring your ask down. In fact, we saw some tightening on yields on those type of buildings in many instances. But when building a lease, more room for interpretation, how it will perform over the coming couple of years because of our lease contracts coming to an end and there are question marks, what is the right rental level for those type of buildings? Those are the ones where you probably have to get the ask price a little bit down to tighten that spread. So there is not a simple answer to that and this is why it’s helpful to have the buyers when you are selling or buying a building.

[Michael Funk:]

Sure. Understood. And one more, if I could, please. Clearly very, very strong Capital Markets activity in 4Q and there is a normal seasonality to the business. Based on the funnel that you talked about earlier, do you expect seasonality in 2021 4Q to 1Q to be similar to prior periods or is there a reason to believe that it will look different?

[Christian Ulbrich:]

No, I wouldn’t know why it should look different. We always have that seasonality and that the fourth quarter is always the strongest and the third quarter is always the second strongest. We expect the same to be the case. If there is any kind of caveat, I would make about 2021, it’s all down to the first quarter, because Europe is in a pretty strong lockdown, you can’t make a lot of site visits at the moment, not going to give due diligence is there’s very little international travel. So the international investors, if they don’t have people on the ground, can’t come. And so, we are all looking forward to a higher rate of vaccination around the globe. The amount of money which is trying to get into these assets is very, very strong. And so, we may see a slightly slower Q1 than usual, but that will be then probably picked up in Q2 and Q3 again.

[Michael Funk:]

Great, thank you very much for the time.

[Christian Ulbrich:]

Pleasure.

[Operator:]

There are no further questions at this time. I will turn the call back over to management for closing remarks.

[Christian Ulbrich:]

Well, thank you, operator. With no further questions, we will close today’s call. On behalf of the entire JLL team, we thank you all for participating on the call this morning. Karen and I look forward to speaking with you again following the first quarter. Stay safe.

[Operator:]

This concludes today’s conference call. You may now disconnect.