Q3 2021 Jones Lang LaSalle Inc Earnings Call

Good morning, and at this time I would like to welcome everyone to the Jones Lang Lasalle incorporated incorporated third quarter earnings Conference call for your information. This conference call is being recorded.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star followed by the number two on your telephone keypad. Thank you I would now like.

Comments 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 the annual report on Form 10-K of the fiscal year ended December 31, 2020 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.

Thank you Chris.

Hello, and thank you all for joining our third quarter earnings call.

While the operating environment remains dynamic.

Im pleased to report the recovery, we have seen over the past several quarters continues to accelerate and resulted in another quarter of strong performance.

Our outstanding service orientation, and the constant flow of product innovation.

Drivers of the impressive result.

Again extend my appreciation for our employees' dedication.

Last month, we announced the agreement to acquire a building engine.

U S market, leading building operations technology platform.

Form how properties are run.

It provides exceptional experiences for operators and tenants and improves the net operating income across some of the most successful commercial real estate portfolios.

This strategic acquisition enabled shale L to leverage building engines open platform to create a comprehensive ecosystem of building operations application.

I'm extremely excited about the growth opportunities this acquisition will provide across our entire business.

As we expand buildings engine client space more widely.

A number of building engines applications already integrate with Jello technologies robust technology product portfolio.

Giving our clients and industry, leading solution for all of that building operation.

As I mentioned last quarter, the hybrid workplace transformation as we emerge from the pandemic will drive technology demand across the entire real estate ecosystem.

Acquisition. In addition to our announced acquisition of Skyline AI reoccur.

Reaffirms our commitment to ensuring that we out the forefront of providing our clients with the most relevant technology for their real estate needs.

Turning to the market environment, we continue to witness generally improving conditions, although not uniformly as the lingering effects of the pandemic and recent search of the Delta Varian has had different impacts to economies.

Especially across Asia Pacific markets are still paid is wide ranging travel restrictions and local regulations, which prevents people from working at their offices and meeting with clients in person.

CLO research reports that overall sentiment and activity has continued to improve upon the momentum recorded in the first half of this year.

Quarterly global leasing volumes were up 39% higher than a year ago.

Volumes are still 25% below.

Q3, 2019, illustrating our continued significant road to recovery.

Across all three regions quarterly market leasing volumes are below where they were in 2019 with the U S. Lagging the most with a 31% decline compared to the same period in 2019, while Europe and Asia Pacific, We call it declines of 26% and 4%.

<unk> respectively.

Tenant turnkey conditions persist in most markets.

The ongoing flight to quality trend has seen rents or premium or prime buildings catch up in some markets.

The real estate capital markets continued their recovery in the third quarter with global transaction volumes, marking a 77% increase from a year ago and an 8% increase from Q3 2019.

Diminishing operational uncertainty and rising institutional allocations are bolstering liquidity in the commercial real estate markets.

The three most liquid countries the U S, Germany, and the UK accounted for 70% of global activity in the quarter.

With that as a backdrop im pleased to announce such Ll recall it exceptionally strong results in the third quarter building upon the momentum generated throughout 2021.

Consolidated revenue rose, 22% to $4 $9 billion and fee revenue increased 45% to $2 1 billion in local currency.

Adjusted EBITDA of $352 million represented an increase of 44% from the prior year.

Adjusted EBITDA margin contracting to 17, 1% from 17, 2% in local currency.

Adjusted net income totaled $237 million for the quarter and adjusted diluted earnings per share totaled $2 $4 56.

Our transaction based service lines have shown particularly strong performance was leasing and capital markets recording a growth of 73 and 103% respectively.

Coinciding with the recovery of transaction related activity and improving market sentiment.

Our valuation advisory service was key growth engine for our advisory consulting and other business, which was up 21% product water.

Moving towards capital allocation alongside supporting both organic and inorganic strategic investments across our platform. We also continued with our share repurchase program.

Consistent with the guidelines of our capital allocation framework as well as our continued commitment to the return of capital to shareholders over the long term.

Approximately $150 million of shares in the third quarter.

I will now turn the call over to Karen Brendan who will provide further detail on the results for the quarter.

Thank you Christian.

Our third quarter results reflect strong execution continued business momentum and the benefits of investments in our global platform over the last several years.

Total quarterly fee revenue and profitability surpassed 2019 model with.

With considerable strength in the Americas region and transaction based revenues across the globe.

The improving overall activity within the commercial real estate operating environment, along with our building pipelines investments in people and technology and the secular growth trends of our industry leave us optimistic and momentum will continue and.

And we are mindful of the dynamic factors at play within the global economy.

Prior to providing a detailed review of our operating performance I'll remind everyone that variances are against the prior year period in local currency unless otherwise noted.

Our consolidated real estate services fee revenue increased 47% due in part to lapping COVID-19 impacted results from the prior year.

Compared to third quarter 2019, real estate services fee revenue grew 12% on a relative strength in the Americas and transaction based revenues.

The real estate services adjusted EBITDA margin of 16, 6%.

So with 16, 2% a year earlier and 15, 4% in the third quarter of 2019.

The growth of our transaction based revenues.

The expected reduction of search in 2020, non permanent savings as well as incremental investments in our people and technology platform that we believe enhances our strategic positioning and will drive future incremental revenues and operating efficiency.

Our margin results do not yet reflect a fully normalized expense base for certain expense categories, such as <unk> as well as our continued hiring admits the current wage inflation to capitalize on growth opportunities that we see ahead.

Turning to the Americas capital markets and leasing led broad based fee revenue growth compared.

Compared with third quarter 2019 fee revenue was up approximately 25% with growth across all service lines, except project and development services.

We are seeing clients continue to delay it build out projects as they seek more clarity regarding future workplace demands.

Within Americas capital markets fee revenue from U S investment advisory sales nearly tripled.

And U S debt advisory more than doubled as optimism continues to broaden across sectors.

Our multifamily debt origination and loan servicing businesses maintained strong momentum highly.

Highlighted by an acceleration in the growth rate of our loan servicing fee revenue to 35% from 26% in the prior quarter.

Americas leasing fee revenue was a record high as growth accelerated.

Driven by good operating momentum pent up demand in certain asset classes and some pull forward transactions.

Compared with the third quarter 2019.

Erica is leasing fee revenue increased 26%.

Relative to last year, all asset classes exhibited growth led by the industrial sector, while office retail and life Sciences were also strong.

America's office leasing fee revenue was approximately 1% above 2019 levels.

Transaction velocity has increased meaningfully and is up 40% from 2019.

Average deal size increase for the first time since the onset of the pandemic, but remains about 10% below 2019.

Our full year 2021 U S leasing growth pipeline is up 44% from 2020 and 4% from 2019.

Supporting our optimism for continued strong growth through the end of the year.

<unk> in closing rates will be key determinants.

From a profitability standpoint, the americas' adjusted EBITDA margin increased to 22, 4% from 29% in 2020 and.

<unk> 19, 3% in 2019 driven.

Driven primarily by strong growth in transactional revenues that were partially offset by the expected reduction of certain 2020, non permanent savings and incremental investments in our people and technology platform.

We continue to ramp up hiring to execute on growth opportunities.

In EMEA fee revenue growth was led by our transaction based service lines and was most notable in the UK and Germany.

<unk> revenue within each of the EMEA capital markets leasing and valuation advisory within the advisory consulting and other service line.

It was ahead of 2019 levels as vaccinations has led to improving market sentiment.

Clearly in the industrial office and residential sectors.

EMEA profitability declined due to several factors.

And the expected reduction of certain 2020 non permanent savings.

Investments in our people and technology platform.

Ongoing softness and challenges within our UK mobile engineering business.

And overall wage inflation.

We are taking a number of steps to address emea's profit contribution.

And we'll be closely monitoring progress against our financial objectives for each of the service lines Asia Pacific fee revenue growth was driven by our transaction based revenues. However performance was mixed across the region due to varying pandemic recoveries.

Asia Pacific capital markets, with particularly strong and the office retail and industrial sectors, and largely concentrated in Australia and Japan.

Asia Pacific leasing fee revenue was up 33% from a year ago and up 1% from 2019 with growth led by the office and industrial sectors, and most notably in China and Australia.

In addition to incremental investments in our people and technology platform. The expected reduction of certain 2020, non permanent savings wage inflation and geographic revenue mix drove a decline in Asia Pacific's profitability, partially offset by the growth in our higher margin transaction based revenue.

Our global work dynamics fee revenue was flat versus a year ago, but up 3% from 2019.

Mid single digit underlying growth of our more annuity like facility management business, driven primarily by new client wins and contract extensions in the Americas and EMEA was offset by the absence of Covid related project work in 2020.

Turning to Lasalle.

<unk> revenue increased 16% driven by advisory fee growth within its core open end funds as well as $22 million of incentive fees tied to strong investment performance on dispositions on behalf of clients in Asia Pacific and Europe.

We anticipate full year 2021 incentive fees to be approximately $70 million.

Up from our prior estimate of $45 million.

Lasalle raised a record $4 billion of capital in this quarter and had $12 billion of dry powder at quarter end.

Which speaks to the continued trend of increasing capital allocation to real estate and our strong track record.

Lasalle profitability was adversely impacted by deferred compensation expense associated with the runoff of our previous compensation program.

Shifting now to an update on our balance sheet and capital allocation.

We are very pleased with how the business has performed and the resiliency of the cash flows over the past 18 months.

With reported net leverage of <unk>, four times and liquidity of $3 $1 billion at the end of the third quarter, we have the capacity to both invest for long term growth and return cash to shareholders.

The investment opportunities that remains dynamic and we intend to maintain our flexibility to capitalize on M&A opportunities and organic investments to drive long term shareholder value.

Alongside continued share repurchases.

Through the end of the third quarter, we repurchased $191 million of stock this year.

We are seeking M&A opportunities, where we can generate strong top and bottom line growth across more than one service line or use our diversified platform to accelerate growth within the target company.

We are focusing on specific strategic categories and screening potential opportunities against both the strategic fit and our targeted financial metrics, including margin accretion and minimum ROIC hurdles.

Our pending acquisition of building engines as a strong strategic fit that improves the technology solutions, we can deliver across our client base.

We also expect the acquisition to create significant long term shareholder value.

I'll elaborate briefly on our focus on and investment in technology initiatives, which comprised three buckets.

First investments in early stage prop tech companies that are transforming the real estate industry.

Second investments in technology companies that accompanying strategic partnerships to drive growth and third.

Our investments in our technology platform that further differentiate and enhance our service capabilities.

We began investing in early stage prop tech companies in 2018.

Today, our investments across the early stage prop tech companies and strategic partnerships.

Collectively valued materially higher than our cost basis as evidenced by the markups within the portfolio over the past several quarters.

Beyond the direct investment return these investments inform our strategic direction allow us to provide cutting edge technology solutions to our clients and generate incremental revenue.

Looking ahead to the balance of 2021 are improving underlying business fundamentals and growing pipelines give us confidence that the momentum is likely to continue so we expect it to progress at different speeds across geographies and sectors.

Accordingly, we will continue to invest strategically to drive future growth, while seeking to effectively manage expenses that are expected to gradually return such as <unk> <unk>.

And in an environment of wage inflation, which we expect to persist in the near term.

We continue to expect to operate within our 16% to 19% adjusted EBITDA margin target for the full year 2021 and 2022.

In closing I would like to thank my <unk> colleagues for their continued dedication to delivering best in class client service and thought leadership, which are paramount to <unk> long term value creation for all stakeholders.

Kristian back to you.

Thank you Kevin.

As we are currently in the midst of the 2021, United Nations Climate change conference known as Cop 26.

I would like to reiterate the key role the latest industry has on the road from that deal.

<unk> is committed to being a partner on this journey and we continue to enhance our product offerings and solutions dedicated to help our clients realize their contribution to a more sustainable environment.

This really we recently collaborated with World Economic Forum in developing 10 Green building principles to guide the industry's transition.

Our guiding principle is to shape the future of real estate for a better world.

Looking ahead to the end of the year and 2022.

Continue to see promising opportunities across the commercial real estate industry.

Fully committed to capitalizing on that.

We believe that 2022 will be a year in which growth rates start to normalize.

While uncertainty in near term headwinds persist we believe that these challenges will soon give rise to a more bullish confidence.

As we evaluate our execution against our long term strategy.

We remain encouraged by the multipronged growth strategy, we previously outlined and are committed to enhancing our capabilities to support our growth objectives, both organically and inorganically.

M&A will remain an important component of our growth strategy, which.

Which we will utilize for the right opportunity.

As Karen mentioned, we remain committed to adhering to our stringent underwriting criteria as we thoroughly evaluate opportunities in the key areas of focus which are aligned with our strategic priorities.

Our global platform thought leadership commitment to excellence and continued operational and strategic execution make sale L. A preferred partner across our end markets and business segments.

We remain well positioned to capitalize on the continued macroeconomic recovery and favorable underlying trends bolstering the commercial real estate industry to achieve sustainable growth and create meaningful long term shareholder value.

Operator, please explain the Q&A process.

At this time I would like to remind everyone in order to ask a question. Please press Star then the number one has had a thank you Pat.

Pause just for a moment to compile the Q&A roster.

Our first question today comes from Anthony <unk> of J P. Morgan Anthony. Please go ahead.

Great. Thank you.

My first question relates to thinking about the rest of this year and margins you gave a bridge for the.

The margin puts and takes in the third quarter and I'm. Just wondering if you could help put into context. Some of this incremental tech spending and costs coming back to kind of bridge margins in the <unk> I think last year you were over 21%.

Yes, good morning, Tony.

And thinking about the fourth quarter.

First start with the top line and thinking about the pipelines and we mentioned earlier were encouraged with our respective pipelines in both our leasing and capital markets business for the quarter.

But we are watching that closely because right clothing conversion rates are always impacted by decision, making by occupiers and investors, so really but the sentiment how the sentiment plays out in the fourth quarter will certainly impact our conversion there.

So I want to highlight that our typical seasonality has already been impacted year to date by the various EBIT COVID-19 recoveries across different geographies across different sectors and right now we expect that to continue into the fourth quarter so well.

This kind of difference that differential.

Seasonality, we expect to continue as it relates to the expense side.

We mentioned a couple of factors that play there. We're certainly hiring today for growth, we see right now and growth we anticipate in the future and we wanted to call out some of the continued.

<unk>.

And wage inflation that we're seeing.

Selling as we continue hiring and then also continued return on some of those non permanent cost savings. So all those factors will come into play in the fourth quarter.

Do you think there are the.

You had a small bit of diminution year over year from some of those items coming back do you think thats the order of magnitude we should be thinking about.

In the fourth quarter or is there something materially different we should keep in mind.

Yes, we're not going to give specifics on that target margin for the fourth quarter, but just wanted to highlight a few points to consider as you think about your forecast.

Okay.

Then.

Is there any update you can provide on the potential sale of your China property management business.

What type of proceeds that could.

<unk>.

We're not going to comment on market speculation.

Okay, and then just last question.

On the Skyline AI.

And building engine deals sure.

Should we think about.

Just P&L point of view as you put that money to work in those deals.

Is that.

Kind of where capex to enhance the overall business or do those come with immediate EBITDA.

Yes, so taking a big step back against some of our framework on overall financials for building engines. So one of the.

Key financial objectives, we have is to increase our higher margin annuity revenues and sell building engines is a strong fit with that.

As a company that is expected to be cash flow positive for the for this year.

But it's not anticipated to have a material impact on our revenue or profitability for the first few years.

And then I would say that beyond that.

We'd expect building engines to be accretive to both the top and bottom line consolidated performance at a growth rate that significantly exceeds the core business.

So that provides some helpful context there.

Okay got it thank you.

Thank you Anthony Your next question comes from the line of Stephen Sheldon from William Blair. Please go ahead.

Thanks, Good morning.

Really really strong quarter overall, I think one thing that the profitability in EMEA and APAC took a step back I think you gave some detail on it but Karen I think you mentioned.

But you will be taking a number of steps in EMEA.

Profitability in mind. So can you just give some more detail on what those steps may include.

Yes.

Im taking that question it's Christian.

Listen we have in EMEA, our business, which is compounded by a very strong transactional business, which has shown very significant recovery and we are very pleased with that but then we also have.

A very large business around our mobile engineering and also round our take out business.

And the mobile engineering without business are still significantly influenced by the pandemic.

The return to office is still relatively weak.

And therefore there is.

Lower demand for our mobile edge nearing business than we would have hoped at the beginning of the year and that finds its way into the P&L and the same is true wawa fit out business.

We have taken very.

Significant steps to work on the cost base of our EMEA business.

And we are pretty optimistic that that will be visible in 2022, and obviously the seasonality in EMEA is always slightly stronger than in the other two geographies. So we are also quite positive about the fourth quarter for India.

Great. That's helpful. And then just would love an update on broader capital allocation thoughts going forward great to see some of the recent acquisitions.

See a lot more attractive opportunities out there to ramp investing in M&A.

If you thought about this year I guess, how the priorities on the capital allocation side changed at all during the year. If there had been any incremental changes there. Thanks.

I'll take that one.

We have just taking a step back as you look at our balance sheet situation today, we have <unk>.

<unk> capacity.

And flexibility.

To maintain.

And investments in our organic business and M&A and share repurchases and so we're constantly monitoring our pipeline of M&A activity, which is as dynamic as well as the different opportunities that our targeting and that present themselves from an organic perspective. So we continue to.

To monitor and we will continue to invest in those you'll note that in the first half of this year, we didn't have any M&A activity and now we've announced a couple of transactions at the same time.

We also continue to.

Repurchase our stock.

Thank you.

Thank you as a reminder.

Please press star and the number one on your telephone keypad.

For any questions.

We'll now move over to <unk>.

Jade Rahmani of <unk> Jay.

Line is now open.

Thank you very much can.

Can you give any color as to which areas you're ramping up hiring the moat.

James It's Christian.

I mean in absolute numbers, it's clearly within our work dynamics business.

Well, we have a very strong pipeline and we have as a.

We're strong in.

Influx of new colleagues, but we also do a lot of <unk>.

Investment in new talent into our transactional businesses I mean, the outlook of the transactional business going into 2022.

Very bright and so we are.

All the effort to secure additional talent.

Thank you and considering the capital markets.

Volumes this year look the.

In excess of the prior peak.

Further growth in capital markets from 2022.

Yes, absolutely I mean, the environment for the capital markets business.

Very strong.

Capital inflow coming.

Invesco seeking new investors seeking money being deployed within the real estate sector is an ongoing trend.

And.

Therefore within that stable environment, we believe that we are incredibly well positioned, especially when you consider that one of our superior strength is to bring capital from one region of the world to another region, which has been very slow over the last two years because of the.

Restrictions around trouble once those travel restrictions being released we will see much more capital again coming from Asia to the U S from the U S to Europe or Asia.

We have already seen that over the last couple of weeks.

And with the opening of the U S. From November eight onwards, we will see more of that.

Thank you very much are you seeing any supply chain.

<unk> in your property management businesses, your project and development services or any other business lines.

Not that it would be meaningfully impacting our business performance.

A couple of challenges, which we have to deal with but so far the topics.

Actually in our control.

And lastly would you be able to quantify your cost basis and <unk> invest.

Investments you've made.

Yes.

And we're not going to go into detail on that right. Now is there is there.

<unk> stages.

In buckets that we referenced earlier.

What are you looking to understand there.

Just the magnitude of potential future gains I know you've taken fair value gains and this year there have been some.

Earnings that may not be considered recurring so thinking about the earnings growth profile for next year.

Do you expect meaningful Bottomline growth should we make any adjustments for some of those valuation gains or are you still expecting meaningful bottom line growth on top of the reported adjusted earnings for this year.

Well part of our <unk> business.

Investing into tech companies was minority Stakes.

And we are they have built a platform, where we are helping those companies too.

Two meaningful increase the revenue CAGR was the support of our growth teams.

<unk>.

That is something which.

Is obviously, increasing our cost base bump up the state in time will increase our equity earnings over the future.

And so you will see going forward as part of our business model that we will have more equity earnings.

Into our P&L.

<unk> had that in the past predominantly only coming from Lasalle investment management, but going forward. It will also come from jail LTE the overall environment for prop tech.

Credibly favorable.

And so we feel very well positioned to take advantage of that also in 2022 and beyond.

Thank you very much.

Thank you Jay.

Before we move on to our final questions.

Final reminder, that'll be staff, followed by the number one on your telephone keypad to ask a question.

We will now take a question from Patrick O'shaughnessy.

Patrick Your line is now open.

Alright, good morning, what's your latest thinking on how joelle can engage with the flexible workspace sector, particularly in light of your largest competitors all making significant investments in that space of late.

Listen we stated that before on calls that we believe that the flex space Center will.

Become a meaningful proportion of the overall office leasing markets and we are very active in that area to service our clients.

And so we are helping them to identify the right flex space providers.

We are helping as an occupied we are helping.

Owners of real estate to find the right flex space provide us.

And we are also operating flex space white labeled for our clients.

We are not doing is we are not competing against our client in the sense that we create.

Creating our own brand, while supporting a specific brand and competition to.

To the others.

So that's a slight difference in strategy, but we are very comfortable.

With the development of that business, we have seen great progress and so.

That will be our strategy for the near future.

Great. Thank you.

And then it looks to me like you've been outperforming your peers of late and brokerage revenues and I guess of late in the third quarter, specifically, but both in leasing and capital markets.

Better year over year growth in the third quarter then.

Your comps have already reported what would you point towards as reasons for your market share gains of late.

Well you will understand that I will not comment on our competitors I can only say that we are very pleased with our own performance and we believe that our very significant investments into technology is increasingly differentiating our offer to our <unk>.

Lines and brings our brokers may have some theory position to win more business it could be more productive and so when you see on our margin walk the amount of money. We are investing into TLLP that is just one kind of way of looking at it the other way of looking at it that that investment has been.

To make our core service lines more productive and to create that competitive advantage and so far we believe that strategy is working really well.

Alright terrific. Thank you.

Thank you Patrick Your next question comes from the line of Anthony Powell Lane.

Denis.

Your line is open.

Great. Thanks.

In your press release, you called out <unk> technology solutions is helping drive.

Some of the revenue and advisory consulting and other and I was just wondering is is that.

Mark to market or was that.

Actual like service line that just did well on the revenue side.

Yeah.

Yes, that's a service line that did well on the revenue side.

Okay.

What exactly is that.

<unk> technology solutions.

Well, what we are doing around <unk> technology solutions.

Our re seller of.

Sheep products.

Sure helping.

People occupying space to operate their space manage this space.

This is a business, which we have build but also added who M&A, especially in the years between 15 and 18.

And that is developing very nicely.

But it's not.

Prior to every product of <unk>, we are we sell out year.

Of the party products.

Okay got it and then.

Just carrying on a buyback.

Can you just elaborate a bit more on just kind of what was the magic of the $150 million in the third quarter versus thinking about say a pace on a go forward basis.

The bracket should put around.

Just the buyback and how youre thinking about it.

Yes, im not going to put any specific brackets around that.

As I said.

Said earlier really looking at our opportunities.

For M&A organic investment in share repurchases and our use of cash more broadly.

And we'll continue to pursue all three but I'm not going to.

Put a specific number out there for <unk>.

For next quarter.

Okay. Thank you.

Okay.

Thank you Anthony.

There are no further questions at this time I will now hand, the call back to management for closing remarks.

Thank you operator, well with no further questions, we will close today's call.

On behalf of the entire <unk> team. We thank you all for participating on the call. This morning, and I look forward to speaking with you again following the fourth quarter.

This concludes today's conference call you may now.

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