Jones Lang LaSalle Incorporated
Q2 2019 Earnings Call Transcript

Published: 6 Aug 2019

[Operator:]

Good day and thank you for standing by. Welcome to the Jones Lang LaSalle Incorporated second quarter 2019 earnings conference call. For your information, this conference call is being recorded. I would now like to turn the conference over to Karen Samhat, Senior Vice President of Investor Relations. Please go ahead.

[Karen Samhat:]

Thank you, Operator. Good morning and welcome to our second quarter 2019 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 Web site along with the slide presentation intended to supplement our prepared remarks. Please visit ir.jll.com.

[Christian Ulbrich:]

Thank you, Karen. And welcome to everyone to this review of our results for the second quarter and first half of 2019. Stephanie Plaines, our CFO joins the call and she will comment on our performance following my opening remarks. To summarize, we had a very strong and encouraging second quarter and first half. Second quarter revenue and fee revenue both increased by double digits in local currency. Adjusted diluted earnings per share totaled $2.94 for the quarter, up 30% compared with Q2 2018 and up 19% for the first half. Growth was primarily organic was our Americas leasing business continued to deliver excellent performance. Our annuity revenue base was strengthened by growth in corporate solutions superior performance at LaSalle. LaSalle recorded a very strong capital raise in the quarter, which along with contributions from recent acquisitions brought assets under management to record $68.4 billion. On July 1, we completed our acquisition of HFF. The acquisition marks a major move forward on our beyond strategy combining the talent, market knowledge and experience of JLL and HFF to accelerate our journey to be the world's most strategic creative and connected real estate capital advisor. Aided by the strong cultural alignment of the two organizations, we are hard at work and already making real progress integrating the two. We will share combined results and progress on integration during our third quarter call. Also in July, we announced two additions to our Board of Directors, Debbie McAneny brings a deep knowledge of the real estate industry to JLL. She served has an HFF Board Member until the acquisition and currently sits on the Boards of KKR Real Estate Finance Trust, PHL Credit Advisors, RREEF Property Trust and RREEF America REIT II. Bobbie Mehta has extensive experience with financial services firms and their use of technology. He was President and CEO of TransUnion from 2007 to 2012, prior to that he held senior positions at HSBC including CEO of HSBC North America Holdings and CEO of HSBC Finance Corporation. He currently serves on the Boards of the Allstate Corporation Northern Trust and TransUnion amongst others. We welcome Bobby and Debbie to JLL and look to them to contribute to JLL's continued growth and superior client service. They further strengthen our distinguished Board of Directors.

[Stephanie Plaines:]

Thank you, Christian, and welcome everyone to our call. We are very pleased with our continued strong momentum through the second quarter. We had another record performance while heading into the second half of 2019 with robust pipeline. Before we start as a reminder, we report percentage changes in local currency unless otherwise noted. As Christian outlined fee revenue increased 12% compared with second quarter 2018 and increased 9% for the first half. For the quarter, the growth was nearly all organic led by strong LaSalle and leasing performance as well as solid growth in our annuity businesses. Our capital markets business performed well against market investment volumes moderating from near record levels. In addition, LaSalle continued to see elevated levels of capital raising, which will drive future growth and assets under management. Real estate services fee revenue growth grew 10% for the quarter and 9% for the first half compared with last year. Growth was broad based, with all service lines contributing to strong organic growth. Most notable was our leasing business where we achieved impressive fee revenue growth of 14% for the quarter and 17% for the first half. Leasing has been the most significant driver of real estate services growth for the fifth consecutive quarter. Our annuity fee revenue base was strengthened by corporate solutions growth across all geographies and excellent LaSalle advisory fee performance. Corporate solutions grew 9% for the quarter and 11% for the first half and our advisory fees reached a new record this quarter. Adjusted EBITDA margin calculated on a fee revenue basis was 13.9% for the quarter. Margin expanded 90 basis points compared with second quarter 2018 driven by solid performance at LaSalle across all revenue streams. In addition, our Real Estate Services margins continued to expand inclusive of continued investments. For more detailed information please see Slide 5 of the supplemental materials. Turning now to debt management, total net debt was $937 million at quarter end reflecting a slight decrease from first quarter in 2019 and from the second quarter 2018. Consistent with a strong balance sheet, net debt to trailing 12 months adjusted EBITDA was 1x for the quarter a decrease from 1.2x one year ago. Our operating cash flow for the second quarter of 2019 included the expected improvement in trade payables following the prior quarter's payment accelerations related to EMEA's financial ERP implementation in April.

[Christian Ulbrich:]

Thank you, Stephanie. To illustrate how we achieved these results. Slide 18 shows recent wins across service lines and geographies. In our Corporate Solutions business, we won 43 new assignments in the first half expanded existing relationships with another 30 clients and renewed 16 contracts.

[Operator:]

And our first question comes from Anthony Paolone with JPMorgan. Please go ahead.

[Anthony Paolone:]

Yes. Thank you. My first question is maybe for Christian and Stephanie. I'm trying to synthesize comments around the leasing environment being basically down in terms of activity for the full year and trying to understand what second half of the year perhaps revenue growth might look like for you specifically. And just trying to understand, if growth is going to be really hinged on market share gains or otherwise?

[Christian Ulbrich:]

Well, I mean as you have seen our leasing performance has been very strong in the U.S. in particular, which was driven by a broad based kind of performance of our businesses and their specific growth coming from all these flex based co-working companies, financial services and the tech companies where we tend to have a very high market share. So, yes, if those type of companies have a particular growth in their occupancy needs that means we will win market share. We tend to believe that the market for us continues to be pretty strong, we would call our work in hand is very, very strong, the pipeline is strong going into the third and then fourth quarter. So, we have all reason to be very confident around our leasing business going forward.

[Anthony Paolone:]

Okay. And then on outsourcing, can you talk about the backlog there and what you're seeing that helps give comfort that revenue should continue to grow in the high single digits or low double digit range?

[Christian Ulbrich:]

Well, the overall outsourcing business continues to be very strong and this is something which is -- which will continue and I could almost say which will especially continue if the overall economic outlook comes a little bit more blurred or even tougher because then especially those companies who have been hesitant to outsource those services will have another sharp look at their cost base and see the potential to not only increase quality and productivity, but to reduce costs. So what we have seen so far this year that the momentum is really, really strong and that is a business which is pretty long-term -- the business we win today will kind of translate into revenues next year. And just to give you one small metrics at the end of Q2, we have pretty much exactly twice as much new business in our hand than we had a year ago. So, we see continuous momentum and growth in that business and that is a pretty stable longer-term trend. I wouldn't expect anything to change around that trend in 2020.

[Stephanie Plaines:]

Tony, I would add a little bit -- I would add to Christian's comments that we've seen that growth in our Corporate Solutions business for the second quarter this year across all our segments. So, we are pretty confident that they're performing strong with that pipeline that Christian mentioned more than doubled. We have good momentum going into the second half of the year as well as we're very focused on the profitability and expanding that. So, we're seeing very good results and they're in line with our expectations.

[Anthony Paolone:]

Okay. Thank you for that. And then, last question if we do see global economic growth step down appreciably what changes would you make to the business overall?

[Christian Ulbrich:]

Well, we have been operating in a pretty interesting environment now for several quarters. There's a lot going on in the world. It hasn't filtered through to our performance. We continue to grow very strongly and frankly despite all those difficulties we see in the world, we don't have any reason to believe that our momentum will slow down. When you go to very specific situations as we have currently in the U.K., we have adapted our cost base early on and we are -- despite that volumes are significantly down in the U.K. and we are still pretty happy with our business because we reduced the cost base early on. As you know our business has the ability to deal with volatility quite nicely because the transactional business which has first impacted by volatility in the market has pretty fluid compensation plans and they adapt accordingly. And so, that's why it is probably in our industry slightly easier to write the ways of the economy than it is in other industries.

[Anthony Paolone:]

Okay. Thank you.

[Operator:]

Your next question comes from Stephen Sheldon with William Blair. Please go ahead.

[Stephen Sheldon:]

Good morning. First, great trends in the American capital market what appears to be market share gains. Can you talk some specifically about the pipeline you're seeing there including any visibility you have to this point including HFF? And then, also any chance that with the first quarter of ownership that there's a little bit of distraction from integration as you think about forecasting for the third quarter?

[Christian Ulbrich:]

Well, first and foremost, I'm very, very proud what our capital markets business has delivered across the globe, but also very specifically in the U.S. because frankly speaking if there's any distractions is probably the biggest issue in the period between signing and closing a deal, because you can't do really a lot. But, everybody is concerned what's happening. And so, that they were able to outperform the market in that quarter is really brilliant. Now, the pipeline again is very strong in the U.S. and we are talking, our original JLL pipeline that doesn't include HFF and talk about HFF separately. So, the pipeline of JLL is without HFF already very strong and so there's good momentum in that business. If you move over to EMEA, which has always been for us a very, very important part of our capital markets business. They have a much, much stronger pipeline now for the third and the fourth quarter than we had in the first two quarters. So, we expect quite a nice pickup in that business going forward for the remainder of the year. And then, our APAC business is also looking very encouraging for the third and the fourth quarter. With regards to HFF, we will obviously start reporting on HFF after the third quarter. But, so far we are very happy how the integration is running. This is super, super professional team and we are coming together very nicely and clients are highly appreciative of the combination. So, the first couple of weeks together have been really great and exciting weeks for us.

[Stephen Sheldon:]

That's great. And then, apologies, if I missed this, but just an update on the expected cost and revenue synergies with the deal closing, are there any changes to the expectations you've laid out? And also maybe just your updated level of confidence about hitting those targets? Is there still the same? Thanks.

[Stephanie Plaines:]

Hi, Stephen. We are still very, very confident on the synergies that we outlined back in March when we talked to you about the acquisition. So, just to kind of recall where we were we said 60 million in run rate synergies about two-thirds of those coming from a cost base and one-third coming from our revenue expected synergies. And of the 60 million, we said 28 million will come in those first 12 months. So, we're excited about that. As Christian said its early days, but we are committed to those figures and we definitely have good visibility to those right now.

[Stephen Sheldon:]

Great. Thank you.

[Stephanie Plaines:]

Thank you.

[Operator:]

Your next question comes from Jade Rahmani with KBW. Please go ahead.

[Jade Rahmani:]

Thanks very much. On the leasing side is there any indication that the technology appetite for large space is waning so much slowing somewhat?

[Christian Ulbrich:]

Not really. I mean they continue to be very strong employers and the question on what kind of environment you provide for your employees in order to be very attractive is something which is also applicable for tech companies. They also have to fight hard for their talent and so they are all interested in upgrading their space, diversifying from a geographic location their space and that drives the demand. And so, this is a trend which will probably continue to be the case.

[Jade Rahmani:]

I'm turning to the EMEA business. What impact are you seeing from Brexit and has the amount of uncertainty that's increased recently begun to impact the business in a more pronounced way. You said that the capital markets pipelines have picked up there. So, that's somewhat surprising.

[Christian Ulbrich:]

Yes. I mean as you know Brexit has been now around as kind of an overarching threat to the market for more than two years. And there's a certain amount of time you can push out decisions, and then, you have to make your decision. And so, it's not surprising that there's still quite a lot of activity especially on the leasing market, which continues to be relatively, relatively strong. On the capital markets side, it depends a little bit where you go to France is very, very strong, but when you go over to the U.K. you have markets like the City of London, where capital markets volume has decreased by 70%. Now, what's happening and why our numbers are still pretty strong is, there is a general trend when the environment gets more uncertain -- when the going gets tough, you turn to the advisors where you feel kind of the biggest comfort. And that's why we tend to pick up more market share in those type of more difficult environments than in an environment where people would expect many advisers to perform greatly. And so, if you are surprised that we have that strong book of business frankly we are not that surprised we saw a similar situation in 2008/2009 where the market volumes overall came down quite significantly. But, within that market, our share has risen very significantly. I don't want to compare the current situation with 2008/2009, but for the U.K. in specific we have a pretty tough environment and that's why we are able to pick up market share.

[Jade Rahmani:]

Thank you very much. On the HFF transaction, in terms of transaction expenses, I think the S4 laid out 52 million in transaction costs and 22 million in retention bonuses. Should we expect those to be amortized over a period or expensed in the third quarter?

[Stephanie Plaines:]

Hi, Jade. On the numbers you quoted, 21.6, yes, we expect that to be amortized and on the 52 million we expect that to be expensed.

[Jade Rahmani:]

Okay. Can you give an update as to where leverage is currently post the deal close?

[Stephanie Plaines:]

Yes. So, when we published the information in March on the HFF transaction, we gave some guidance there on where we thought our leverage would get to if you recall that we said it would be adding about 900 million of debt and that would bring us up above a 1.5, but below obviously or to x level. Now there's some moving parts in there, obviously, when we get to Q3, we'll have cash generation from HFF et cetera, but, we're starting out the acquisition a little elevated closer to about 1.3, 1.4.

[Jade Rahmani:]

Thanks very much.

[Operator:]

Your next question comes from Mitch Germain with JMP Group. Please go ahead.

[Mitch Germain:]

Thank you. Just up on the Americas region, obviously not a lot of operating leverage, is there anything specific that you can point out this quarter that you might have been a bit of an anomaly when you look at some historical quarters?

[Christian Ulbrich:]

No. I mean we have had a very strong first half of the year. And what we have always been very transparent about is, when we see significant outperformance, we are immediately increasing our investment into technology. And that's exactly what has happened in the second quarter. We saw that very strong book of business and we increasingly -- we immediately accelerated our investment in technology. And just to be clear on that, we see technology as a clear reason why we are winning that market share especially in the leasing business, we have introduced a couple of different tech tools. Blackbird is one of them, which really helps us to win business and which differentiates our services from our competitors. And that's why we are so keen to accelerate the rollout of those products as quickly as we can.

[Mitch Germain:]

Great. Last one for me. You initially grew outsourcing a couple of years ago made a big splash capital markets. Is there any other regions, or specific segments within the organization that is going to be a focus as you look at executing on the strategy you laid out of the Investor Day a couple of years ago?

[Christian Ulbrich:]

I mean, we have three big buckets, the capital markets piece you mentioned and we are just five weeks in of doing the biggest acquisition ever which will benefit our capital markets business very strongly. And we will be very, very focused to leverage that not only for the U.S., but also in the rest of the world because as HFT brings really skilled debt business and we will use that debt business to roll that out globally. On the Corporate Solutions side, we are on a multi-year expansion program, which is not only top-line expansion, but also very much margin expansion. We have invested heavily in that business over the last couple of years and we're now coming to a point where we are actually harvesting on those investments. And so that is a continuous focus for us going forward. We still see a lot of potential in EMEA around the Corporate Solutions business and so we expect actually EMEA to have the strongest top-line growth this year of the three regions. But, also APAC is performing extremely well. As you know, corporate real estate outsourcing started in the U.S. and the other two regions were lagging very significantly, but this is now a very much global trend and you have a lot of clients who are outsourcing all three regions of the same time. And so, there is more momentum on top-line growth now in EMEA and APAC and we are obviously, well positioned to take that on. And then, the third big piece is clearly around technology, where we have made really strong investments over last three, four years and we are seeing now the returns coming in sometimes as part of winning market share but also direct revenues which we see now growing quite significantly.

[Mitch Germain:]

Great. Congrats on the quarter.

[Christian Ulbrich:]

Thank you.

[Operator:]

We have a question for Jade Rahmani with KBW. Please go ahead.

[Ryan Tomasello:]

Hi. This is actually Ryan Tomasello swapping in for Jade. Thanks for taking the follow up everyone. Just with the acceleration that we are seeing in proptech interest and investment, I was hoping you could provide us with an update on what's going on over JLL Spark. How does the funds investment pipeline looking, have those existing investments perform? And ultimately did you see JLL Spark's portfolio also serving as a potential M&A pipeline in future years?

[Christian Ulbrich:]

So far, we are very happy with the development of Spark. We have analyzed more than 800 business models which was sent to us, and out of these 800, we have made 13 investments since we started that activity. And as you know, we are only doing investments, when we believe that our clients will immediately benefit from those type of offerings those companies have. And so there is an immediate connection to our clients because what we do is, we are trying to scale those companies which we invest in, within our client base, right away. And so, that has been successful so far and the companies are benefiting immediately from our investment as well as our clients are benefiting because they are first in getting to those technology, which these start-ups have created. And so, in some cases we have actually increased our share in the company in the second round already. And so, overall, the performance of that fund and its early days, it's only out there now for about 15 months. So far, the performance of that fund is well above the usual performance of these early stage venture capital funds you would see in the market.

[Ryan Tomasello:]

And how much of JLL owned capital, do you currently have invested?

[Christian Ulbrich:]

27 million.

[Ryan Tomasello:]

Great. Thanks for all that color.

[Operator:]

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

[Christian Ulbrich:]

Well, with no further questions, we will close today's call. Thank you for participating and Stephanie and I look forward to speaking with you again following the third quarter. And as we said, we are very confident that it will be again a very nice quarter. So, thank you for that and have a nice summer.

[Operator:]

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