Jones Lang LaSalle Incorporated (NYSE:JLL) Q1 2024 Earnings Call Transcript

Jones Lang LaSalle Incorporated (NYSE:JLL) Q1 2024 Earnings Call Transcript May 6, 2024

Jones Lang LaSalle Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Q1 2024 JLL Earnings Conference Call. My name is Benjamin and I will the operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. [Operator Instructions] As a reminder, the conference is being recorded. I will now turn the call over to Scott Einberger, Head of Investor Relations. Scott, you may begin.

Scott Einberger: Thank you, and good morning. Welcome to the first quarter 2024 earnings conference call for Jones Lang LaSalle, Incorporated. Earlier this morning, we issued our earnings release, along with the slide presentation, an excel file, intended to supplement our prepared remarks. These materials are available on the Investor Relations section of our website. Please visit ir.jll.com. During the call and in our slide presentation and our accompanying excel file, we reference certain non-GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures to GAAP in our earnings release and slide presentation. As a reminder, today’s call is being webcast live and recorded.

A transcript and recording of this conference call will be posted to our website. Any statements made about future results and performance, plans, expectations, and objectives are forward-looking statements. Actual results and performance may differ from those forward-looking statements as a result of factors discussed in our soon to be filed Annual Report on Form 10-K for the fiscal year December 31, 2023, and in other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statements. I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer for opening remarks.

Christian Ulbrich: Thank you, Scott. Hello, and welcome to our first quarter 2024 earnings call. I am very pleased with our first quarter results. We were able to grow both resilient and transactional revenue and turned up into meaningful profit growth. The year started with some positive momentum, highlighted by an increase in bidders and the closing of several large deals in North America. These green shoots encapsulate investors’ willingness to deploy capital when market conditions warrants. However, once inflation data came in higher than expected and the hope for several interest rate cuts later this year diminished, real estate capital markets became much quieter again. In the first quarter, global commercial real estate investments totaled $135 billion, a year-over-year decline of 4% according to JLL Research.

The pace of decline moderated in the quarter across the Americas and EMEA, while Asia-Pacific experienced its second consecutive quarter of growth. Debt market conditions improved in early 2024, both in terms of pricing and liquidity. However, commercial real estate markets have taken a pause over the last several weeks as lenders and investors adapt to a shift in the interest rate outlook. Lender confidence remains varied and it’s strongest for industrial living and datacenters, especially for high quality assets, up smaller deal sizes. Turning to Office Leasing, activity improved in the quarter of buy compared a subdued 2023 levels. Globally, Office Leasing volumes increased 7% year-over-year according to JLL Research. Both the US and Asia-Pacific saw increases in demand as occupiers continued to upgrade to premium quality sustainable space that improves the employee experience.

In Europe, limited available space continues to dampen transaction activity. The number of large lease transactions improved in the quarter, but is still well below pre-pandemic levels. The global office vacancy rate ticked up 30 basis points to 16.5% in the first quarter driven mainly by North America, where the market continues to process leases that require 10% to 15% less space. On the Industrial side, first quarter leasing activity declined globally as decision-making slowed amid geopolitical and economic uncertainty. In the US, occupiers continued to manage through the record amount of space that was leased following the pandemic. Across much of Europe and Asia-Pacific, a limited supply of modern energy efficient space is constraining activity.

Our growth in average rental rates moderated across all three regions, long-term fundamentals in the Industrial sector remains strong, supported by near-shoring requirements and demand for high quality sustainable space that allows for technology integration, automation. Finally, in the Retail sector, Consumer Spending and International Tourism remains resilient, supporting demand for space in prime locations. Turning to JLL, our first quarter results were driven by both revenue growth and the cost management actions we have taken. Collectively, our resilient revenue base grew 12% in the quarter, as clients leveraged the full suite of services we provide across our workplace and property management platforms. Our Leasing and Capital Markets business performed well, given the broader industry and economic environment.

As we noted, in the past, JLL has the number one US debt origination platform, as well as the leading equity placement platform according to the Mortgage Brokers Association. We are uniquely positioned to manage the upcoming wave of debt maturities and capitalize on an eventual increase in commercial real estate transactions. With that, I will now turn the call over to Karen, who will provide more details on our results for the quarter.

Karen Brennan: Thank you, Christian. Before I comment on our performance, there are a few items to note regarding changes to our reporting presentation effective in January that we previewed during the fourth quarter call and late February. First, JLL Technologies and LaSalle’s equity earnings have been excluded from adjusted EBITDA and adjusted net income calculations. While we exclude these investment-rated items, equity earnings from our operating ventures across the other segments continue to be included. Second, our definition of LaSalle’s assets under management now includes uncalled committed capital and cash conforming with the industry standard. This definition change has no impact on the fees we earn. Third, following the conclusion of a Comment Letter from the SEC in February, we no longer report on the non-GAAP measure of fee revenues.

As such, our discussion of revenue and associated growth rates are inclusive of gross contract cost and net non-cash MSRs. This primarily impacts the Work Dynamics segment on the Property Management business line within the Markets Advisory segments. Given the absence of fee revenue in our reported financials, we no longer specifically report adjusted EBITDA margins. Importantly, these presentation changes have no impact on how we manage our business, nor on our profitability or cash flow. Nearly all of the information we previously provided is included in or can be derived from our new presentation. Comparable historical information is available at ir.jll.com. Separately, and consistent with prior practice, variances discussed are against the prior year period in local currency, unless otherwise noted.

Now on to the discussion of our performance. Revenue increased 9% to $5.1 billion on continued strengths in our resilient revenues and return to growth in our Transactional revenues. The revenue growth, along with the benefits of our cost reductions were the primary drivers of the 70% increase in adjusted EBITDA to an $187 million and a 168% increase in adjusted diluted EPS to $1.78. The first quarter reflects the strength and diversity of our platforms, as well as our continued focus on improving operating efficiency. The 12% increase in our resilient revenues was consistent with the pace in the fourth quarter and it was led by growth in Workplace Management and Property Management. A notable increase in investment sales activity, albeit on a soft 2023 comparison, drove a 1% increase in Transactional revenue, the first year-over-year increase since the second quarter of 2022.

The 1% decline in platform operating expenses are a testament to our cost management actions, as well as our ongoing initiatives to enhance efficiency. The increase in profitability led to a 6% year-over-year improvement in free cash flow and a reduction in leverage, while we continue to invest in our business and return capital to shareholders. We remain focused on positioning our business to best capitalize on near and long-term opportunities to drive growth, profitability, and cash flow. Moving to a detailed review of our operating performance by segments. Beginning with Markets Advisory, the 5% growth in revenue in the quarter was mainly driven by Property Management. Portfolio expansions in the Americas and the UK and incremental pass-through expenses drove 8% Property Management revenue growth, after five down quarters, Leasing revenue returned to growth increasing 2%, though on a soft prior year quarter.

The growth was led by mid-single-digit growth in the US, as most other geographies were down. Increased deal size and transaction volumes in the office sector drove the growth in the US, which more than offset declines in the Industrial sector globally. We continued to see more sustained leasing demand for high quality assets and so our pick up in large deals, both of which are favorable for our business mix, still occupiers continued to delay leasing decisions and large deals remain materially below the long-term average. Our global gross leasing pipeline continues to hold up, supported in part by the contractual nature of leases. The improvement in the OECD Business Confidence Index from late 2023 through March, which generally leads leasing activity by two to three quarters, along with limited new office and industrial building starts and stabilization in sublease space provides optimism for pickup in activity in the latter part of 2024 and over the longer term.

We will be closely watching whether the recent escalation in geopolitical tensions impacts business confidence metrics. The revenue growth and cost management actions drove a 33% increase in Markets Advisory adjusted EBITDA. Shifting to our Capital Markets segment, revenue increased 6% in the quarter, though often muted prior year quarter. Even as economic, geopolitical, and interest rate outlook uncertainty prolongs investor decision-making, our global investment sales revenue, which accounted for nearly 40% of segment revenue in the quarter grew 20% when compared favorably with the 4% decline in the global sales volume Christian referenced. Revenue increased across most geographies, led by Japan and Germany and nearly all major asset classes notably, office and healthcare.

Investment sales revenue in each region performed notably better than their respective market activities, led by Asia Pacific, according to JLL Research. Our US investment sales debt and equity advisory, which accounts for approximately a third of segment revenue, grew low-single-digits. The Capital Markets adjusted EBITDA improvement was predominantly driven by revenue growth, as well as cost management actions, which more than offset an increase in our multifamily loan loss reserves. The investments we’ve made in our Capital Markets talent and platform over the past several years position us to capitalize on a rebound in transaction volumes. Looking ahead, the Global Capital Markets Investment sales debt and equity advisory pipeline is up modestly, compared with this time last year and client engagement momentum has picked up.

We continue to anticipate higher growth rates in the second half of 2024. However, as Christian described, the volatility and an outlook for interest rates, along with elevated geopolitical tensions continue to weigh on investor sentiments and are impacting deal timing and closing rates, particularly in the near-term. Moving next to Work Dynamics, 11% revenue growth was led by a 15% increase in workplace, management revenue, with the 2023 global client wins and mandate expansions further ramped up. Within project management, lower pass-through cost drove the 3% decline in revenue, as management fees were flat. In addition, the softer leasing activity in 2023 has moderated new project contracts. The increase in Work Dynamics adjusted was primarily attributable to the revenue growth absence of Tetris Contract losses we noted last year and ongoing cost management.

Overall, the vast market opportunity, demand for our services and their well-positioned global platform give us confidence in the sustainability of the segments’ revenue and profit growth trajectory over the coming years. Workplace Management continues to see solid new sales trends, alongside strong contract renewal and expansion rates. The large 2023 wins will continue to support solid momentum through the first half of 2024 though likely at a more moderate pace in the past few quarters. We remained focused on securing additional project management mandates. However, the slower economic backdrop and soft late 2023 leasing environment may down the near term growth rates. Turning to JLL Technologies, lower bookings in the second half of 2023, as well as delays in client decisions were the primary drivers of the 12% decline in revenue.

We continue to see strong retention rates of JLL Technology Software revenues. However, the combination of the change in our go-to-market approach, which primarily consisted of reducing our sales and marketing expenses in the latter part of 2023 and delays in client decisions is likely to continue to pressure growth in the near term. The reduction in certain expenses associated with cost management actions and incremental operating efficiency gains drove an improvement in JLL Technologies’ adjusted EBITDA, which more than offset the lower revenue. While the path is unlikely to be leaning on us, we aim to strike an appropriate balance between investing to drive growth and progressing to sustained profitability within the segment. The combination of the revenue pressures and timing of expenses, including carried interest accruals may adversely impact JLL Technologies’ profitability in the near term.

Now to LaSalle, revenue from Advisory Fees declined 7% in the quarter, primarily on the impact of ongoing valuation declines within our assets under management over the past year, as well as lower fees in Europe from structural changes in our business mix. We anticipate valuation declines to pressure our assets under management over the next few quarters. Absent foreign currency exchange movements, assets under management were 3% lower than a year earlier, entirely attributable to valuation reductions. Capital raising and deployment activity continue to be subdued in the evolving market environment, which also shows in the media transaction and incentive fees in the quarter. The decline in LaSalle’s adjusted EBITDA in the quarter was largely attributable to the lower revenue, mostly offset by benefits from cost management actions and lower compensation accruals.

Turning to free cash flow, the growth in earnings more than offset some modest growth-related working capital headwinds and drove a 6% of improvement in free cash flow, which was a net outflow of $721 million in the quarter. As a reminder, the first quarter outflow primarily stemmed from annual incentive compensation payments, coinciding with typically seasonally slower business performance, cash flow conversion is the high priority and we are very focused on our working capital efficiency. Shifting to our balance sheet and capital allocation, liquidity totaled $2.3 billion at the end of the first quarter, including $1.9 billion of undrawn credit facility capacity. As of March 31st, reported net leverage was 1.9 times, down from 2.0 times a year earlier, due to a reduction in net debt, partially offset by lower cash earnings over the trailing 12 months.

The first quarter typically marks the seasonal high point for leverage given the nature of our cash flows. Over the medium term, we intend to manage the business towards the middle of our zero to two times leverage range. During the quarter, we selectively deployed capital towards growth initiatives and repurchased $20 million of shares during the quarter. Organic reinvestment in our business remains a top priority for capital allocation, augmented with targeted M&A. Considering the seasonality of cash flow, current leverage, and the broader macro and geopolitical volatility, we anticipate near term share repurchases to continue at a pace that will at least offset expected full year stock compensation dilutions. Looking further out, the amount of share repurchases will be dependent on the performance of our business, particularly cash generation and the macroeconomic outlook, while also weighed against our broader investment opportunity set.

Regarding our 2024 full year financial outlook, growth trends in our more resilient business lines collectively remain solid. The timing of a sustained recovery in the Transactional business lines continues to be difficult to confidently predict considering the volatility in interest rate outlook, elevated geopolitical risk and mixed economic indicators. Still, given our pipeline activity, we’re cautiously optimistic for a pickup in transaction activity in the latter part of the year. We continue to scale our platform and invest to both capture future growth opportunities and drive operating leverage. While we previously provided a full year 2024 target margin range, to confirm with our new presentation format, we had shifted to an adjusted EBITDA dollar target range.

For full year 2024, we are targeting an adjusted EBITDA range of $950 million to $1.15 billion, which is consistent with our previously communicated range. Our mid-term targets, again aligning with our new presentation format now consists of revenue and growth contract costs ranges, which are $25 billion to $30 billion and $15 billion to $19 billion respectively, as well as an adjusted EBITDA range of $1.6 billion to $2.1 billion. Importantly, these ranges are consistent with our previously communicated mid-term targets. The timeframe to achieve these targets will depend in part on the timing and pace of recovery in the Transactional markets. The many strategic initiatives we have undertaken to drive growth and efficiency give us confidence in the long-term resiliency and the value creation prospects of our business.

Christian, back to you.

Christian Ulbrich: Thank you, Karen. Let me look out to later this year. The market will adapt to a higher for longer interest rate environment. Pricing for the very best assets is beginning to stabilize in the US, UK and Australia, but prices have declined 15% to 35% from peak levels. According to JLL’s proprietary Global Bid Intensity Index, there has been a growing number of bidders across most sectors in early 2024, which dynamic is strongest for the Industrial and living sectors. Real estate as an asset class remains attractive based on its unique investment characteristics and returns. In Leasing, we expect the strong demand for high quality sustainable space to continue and due to the shortage of this type of space to drive an increase in rental rates.

In today’s changing world, we have proved our ability to deliver superior client outcomes, while effectively managing profitability. Our One JLL model brings together the unique capabilities of our platform across the commercial real estate space, allowing us to sell more services and products to the same clients. Our technology and data tools provide our clients with leading insights into market trends and differentiate our offering, while also helping to increase productivity. We remain focused on growing our business, as well as also expanding our margins, especially in our resilient business lines. As we strengthening our service and product offerings, we will selectively add people and capabilities, both organically and through very targeted M&A.

Despite an ongoing challenging operating environment, the prospects of JLL are bright and we are optimistic for 2025 and beyond. Before I close, I would like to thank our colleagues for their foremost commitment to always serving our clients. Operator, please explain the Q&A process.

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Q&A Session

Operator: [Operator Instructions] Thank you. And your first question comes from the line of Stephen Sheldon with William Blair. Please go ahead.

Stephen Sheldon: Hey, good morning. Thanks for taking my questions. First one, I just wanted to ask is it seems like there are Leasing signs alike to Capital Markets. So, how are you thinking about your capacity there if things potentially improve later this year? Karen, I think you had some positive commentary there on talent levels, acceptance, so can you get some more detail there? How much your capacity producer levels have maybe changed at a very high level? And are you still investing there? Are you planning to continue investing there as we think about the rest of this year, maybe ahead of a broader pickup in activity?

Christian Ulbrich: Good morning, Stephen. It’s Christian speaking. We haven’t reduced our producer capacity at any kind of notable number. And so, we have more than enough capacity to drive higher revenues, grow our folks at the markets, returning in the second part of this year. We are using this current market environment to ex, here and there a few broker where we believe there’s room for more capacity within our teams. But also that is at a relatively small number.

Stephen Sheldon: And then just in Work Dynamics, a nice step up in profit this quarter. Can you maybe help parse out some of the moving pieces there? I think you had a drag in the Tetris contract. And maybe just kind of how that cost containment efforts should have maybe help the support of a higher profit level there? Just any detail on the step up in Work Dynamics profit?

Christian Ulbrich: Yeah, we were just calling out that last year we had a drag in the Tetris contract. So year-over-year that didn’t drove the numbers this year. And just kind of bring that back to people’s attention. Overall, as we noted in previous earnings calls, we had significant wins last year, which then obviously we’re taking life and we are benefiting from that this year. And on top of that, we are constantly trying to increase our productivity within all our service lines, but also within Work Dynamics and the combination of that top line growth, more business coming in and the efforts around productivity has resulted in this margin expansion this quarter.

Stephen Sheldon: Got it. That’s helpful. And congrats on the nice results.

Christian Ulbrich: Thank you.

Operator: Your next question comes from the line of Peter Abramovitz with Jefferies. Please go ahead.

Peter Abramovitz: Yes. Thank you. So, I know you, with the reporting change you are now switching to do the adjusted EBITDA number you gave for the full year. Just wondering if you have any sort of outlook or to put brackets around I guess, what you expect from a margin perspective as we think of it on a total revenue basis with the new reporting?

Karen Brennan : Yes, hi Peter. This is Karen. Good morning. We’re going to be talking about our targets, whether it’s an in-year target or a – the mid-term targets on an adjusted dollars basis now instead of margin basis. But I will say that the adjusted EBITDA dollar targets that we communicated are equivalent to what we previously communicated for our targets on a margin basis. So if you recall, previously our 2024 targets were in a 12.5% to 14.5% adjusted EBITDA margin. That’s now then converted to $950 million to $1.15 billion for 2024 and then the same goes for our mid-term targets approach.

Peter Abramovitz: Okay. Got it. And then, I wanted to ask about some of the strength in the US office leasing that you called out in your presentation. Was that kind of mainly, you mentioned tenants looking to kind of trade up and get the best possible space. I guess, could you talk about, is it almost strictly kind of in the Class A and trophy segment? Have there been any signs of why sort of further down market? Just wondering if you can kind of provide more context around that.

Karen Brennan : Sure. So we’re continuing to see incremental signs of improvement in office broadly. And that’s generally being led by the highest quality best space available and you’re seeing rents continuing to increase in that space. One other thing we closely monitor is the activity around large lease deals, which we categorize as those deals over 100,000 square feet in the US. And though they are returning to the market as well, but that’s still depressed compared to the pre-pandemic averages right now still almost 50% below that level. So that is still ticking up, but not yet all the way back. And a couple other comments on Leasing, while we’re on this topic, we’re seeing an increase in new tenant requirements as we did last quarter.

And those are within approximately 30% of pre-pandemic levels. And then importantly, the sub-lease vacancy rate is continuing to fall. And so, we’re seeing both the new additions decreasing and then notable backfill activity incurring, particularly in the Bay Area in the US and also in New York.

Peter Abramovitz: All right. That’s helpful. Thanks, Karen.

Operator: Your next question comes from the line of Michael Griffin with Citigroup. Please go ahead.

Michael Griffin : Great. Thanks. I wanted to go back to sort of the mid-term financial targets that you highlighted, Karen. Obviously, the base case is for rent cuts to come in the back half of the year consistent with transaction activity really picking up, should we interpret that as being able to hit those mid-term targets by 2026? And conversely, if the recovery is pushed out further into 2025, would that mean that you’d reach those adjusted EBITDA dollar amounts in the, call it, 2027 or so timeframe?

Karen Brennan : Yeah, at this stage, we’re still categorizing those as mid-term targets. We really want to look at how the remainder of the year transpires in terms of the recovery of the Transactional markets before committing a specific calendar year to achieve those. One of the things we now are saying is relates to our mid-term targets is certainly we’re very focused on having accelerated growth in the adjusted EBITDA relative to the revenue trends. And so that’s something we’re very focused on regardless of the shape of the recovery in the top-line.

Michael Griffin : Great. Thanks. And then, I just wanted to ask on free cash flow. Obviously, it improved this quarter relative to this time last year. But how should we think about the cadence going forward? And do you have a maybe percentage amount in mind for free cash flow conversion for the year?

Karen Brennan : Yeah, so, first let me just talk a little bit about remind of the major drivers of free cash flow in the quarter and then I’ll talk about outlook for the year. So we were at an outflow of $721 million, which was slightly better to the $676 million outflow last year. That was primarily due to cash from improvement in earnings. And then, that was partially offset by some working capital headwinds as the business grew, particularly in our Workplace Management business, along with the timing of some payables. As we think about the rest of the year, the key drivers on a full year basis will certainly be reflective of our overall earnings level. But importantly, the business mix for those earnings will also impact the working capital outcomes.