Jones Lang LaSalle Incorporated : Q1 2024 JLL Earnings Transcript

Corrected Transcript

06-May-2024

Jones Lang LaSalle, Inc. (JLL)

Q1 2024 Earnings Call

CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

Anthony Paolone

Analyst, JPMorgan Securities LLC

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MANAGEMENT DISCUSSION SECTION

Operator:Welcome to the Q1 2024 JLL Earnings Conference Call. My name is Benjamin, and I will be your 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.

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Scott Einberger

Investor Relations Officer, Jones Lang LaSalle, Inc.

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 a slide presentation and 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 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 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.

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Christian Ulbrich

President, Chief Executive Officer & Director, Jones Lang LaSalle, Inc.

Thank you, Scott. Hello and welcome to our first quarter 2024 earnings call. I'm very pleased with our first-quarter results. We were able to grow both Resilient and Transactional revenue and turn that 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 investor willingness to deploy capital when market conditions warrant. 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 data centers, especially for high-quality assets at smaller deal sizes.

Turning to office leasing, activity improved in the quarter, albeit compared to a subdued 2023 level. 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 continue 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 it's 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 continue 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. While growth in average rental rates moderated across all three regions, long-term fundamentals in the industrial sector remain strong, supported by nearshoring requirements and demand for high-quality, sustainable space that allows for technology integration and automation. Finally, in the retail sector, consumer spending and international tourism remains resilient, supporting demand for space in prime location.

Turning to JLL, our first-quarter results were driven by both revenue growths and the cost management actions we have taken. Collectively, our Resilient revenue base grew 12% in the quarter as clients leverage the full suite of services we provide across our Workplace and Property Management platforms. Our Leasing 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 detail on our results for the quarter.

Karen Brennan

Chief Financial Officer, Jones Lang LaSalle, Inc.

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 in late February. First, JLL Technologies' and LaSalle's equity earnings have been excluded from adjusted EBITDA and adjusted net income calculations. While excluding these investment-related 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 revenue. As such, our discussion of revenue and associated growth rates are inclusive of gross contract costs and net noncash MSRs. This primarily impacts the Work Dynamics segment and the Property Management business line within the Markets Advisory segment. Given the absence of fee revenue in our reported financials, we no longer specifically report adjusted EBITDA margin.

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 strength in our Resilient revenues and a return to growth in our Transactional revenues. The revenue growth, along with the benefits of our cost reduction, were the primary drivers of the 70% increase in adjusted EBITDA to $187 million and a 168% increase in adjusted diluted EPS to $1.78. The first quarter reflects the strength and diversity of our platform, 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 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 continue to see more sustained leasing demand for high-quality assets and saw a pickup in large deals, both of which are favorable for our business mix. Still, occupiers continue to delay leasing decisions, and large deals remain materially below the long-term average.

Our global growth 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 and 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 tension impacts business confidence metrics. The revenue growth and cost management actions to drove a 33% increase in Markets Advisory adjusted EBITDA.

Shifting to our Capital Markets segment, revenue increased 6% in the quarter, though off a 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% and 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 health care. Investment sales revenue in each region performed notably better than their respective market activity led by Asia Pacific, according to JLL Research.

Our US Investments Sales, Debt and Equity Advisory, which accounts for approximately a third of segment revenue, grew low single digit. 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 reserve. 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 in and outlook for interest rates, along with elevated geopolitical tension, continue to weigh on investor sentiment 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 as the 2023 global client wins and mandate expansion further ramped up. Within Project Management, lower pass-through costs 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 EBITDA 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 our well-positioned global platform give us confidence and the sustainability of the segment's 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 than the past few quarters. We remain focused on securing additional project management mandates. However, the slower economic backdrop and soft late 2023 leasing environment may dampen 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 Technologies' software revenue. 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 linear, 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 reduction. Capital raising and deployment activity continue to be subdued in the evolving market environment, which also shows in the muted transaction and incentive fees in the quarter. The decline in LaSalle's adjusted EBITDA in the quarter was largely attributable to 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 offsets the modest growth-related working capital headwind and drove a 6% improvement in free cash flow, which was a net outflow of $721 million in the quarter. As a reminder, the first-quarter outflow primarily stems from annual incentive compensation payments coinciding with typically seasonally slower business performance. Cash flow conversion is a high priority, and we're 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 31, 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 0-to-2-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 the top priority for capital allocation, augmented with targeted M&A. Considering 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 dilution. Looking further out, the amount of share repurchases will be dependent on the performance of our business, particularly cash generation, and the macroeconomic outlook will also weigh 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 and interest rate outlook, elevated geopolitical risks, 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 conform with our new presentation format, we have 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 midterm targets, again, aligning with our new presentation format, now consist of revenue and gross contract cost 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 midterm 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.

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Christian Ulbrich

President, Chief Executive Officer & Director, Jones Lang LaSalle, Inc.

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 with dynamic 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 proven 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're 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 a 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.