Q4 2022 Jones Lang LaSalle Inc Earnings Call
Good morning, ladies and gentlemen, welcome to the queue for 2022, <unk> fourth quarter earnings Conference call.
My name is <unk> I will be your moderator for today's call.
Whoopi made it at a presentation a question about the call with an opportunity for questions and answers at the end.
I'd like to ask a question. Please press star followed by one or your telephone keypad.
I would like to pass the cough right over to your House, Scott Lambert Burger with J L. L. Scott. Please go ahead.
Thank you and good morning.
Come to the fourth quarter and full year of 2022 earnings conference call for Jones language.
Raided.
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.
J L L dotcom during.
During the call and then our slide presentation and accompanying excel file we will reference certain non-GAAP financial measures.
Which we believe provide useful information for investors. We include reconciliations of non-GAAP financial measures to gap in our earnings release and slide presentation.
As a reminder, today's call is being webcast live and recorded.
A transcript of recording of this conference call will be posted to our website.
Any statements made about future results and performance.
<unk> expectations and objectives are forward looking statements.
Results and performance may differ from those forward looking statements as a result of factors discussed in our annual report on Form 10-K.
Fiscal years ended December 31st 2021 in December 31st 2022, and then other reports filed with the SEC.
The company disclaims any undertaking to publicly update or revised any forward looking statements.
I will now turn the call over to Christian will break our president and Chief Executive Officer for opening remarks.
Thank you Scott.
Hello, and thank you all for joining our fourth quarter of 2022 earnings call.
Before we begin today's call.
Like to take a moment to express our thing to see to the people of Turkey, and Syria, who have been impacted by multiple earthquakes.
We are focused on supporting our people clients and suppliers in the region.
Over the past 12 months rising interest rates.
He had wings and geopolitical events.
Continued to put downward pressure on the macroeconomic environment.
For real estate markets.
Rapid rise in interest rates have led to a slowdown in investment sales activity.
According to J L. L research global commercial real estate investments total $203 billion in the fourth quarter.
A year over year decline of 56%.
With us spreads across asset classes.
Wider than normal and reflect the need for continued price discovery to occur.
Lack of transactions, if limiting liquidity in some markets.
With investors expect it to remain patient as prices et cetera.
Which points liquidity will improve.
<unk> powder is at near record levels with $386 billion sitting on the sidelines down slightly from the end of 2021.
We expect this dry powder to be deployed once interest rates stabilized and bit off spreads normalized.
The macro economic pressures are also being felt in the global office leasing market.
Volume was down 19% yoga in the fourth quarter. According to G. L. L research.
Tenants are delaying decisions all taking short term actions in light of the macroeconomic uncertainty.
Global office vacancy rates picked up modestly to 14.9% in the fourth quarter.
In most markets high quality premium acids continued to significantly outperformed the rest of the market as occupiers focus on upgrading space.
And the industrial space occupies of taking a more cautious approach with demand slowing across all three regions in the fourth quarter.
However market fundamentals remain strong in the industrial space with low vacancy rates and healthy rental growth in many markets.
The retail and hotel sectors outperformed on a relative basis in the fourth quarter.
<unk> picked up in the U S. After slow third quarter.
In Asia Pacific retail continues to perform well in many major markets.
Hotels continued the recovery that began early in 2022 as consumer spending on travel persist.
L L financial results for the fourth quarter reflect the points I just discussed.
We saw a decline in our investment sales business as inflation and rising interest rates continue to slow the transaction market.
Our leasing business also saw slowdown both in volume and average deals sauce.
As we have spoken about in the past magnitude of a slowdown is more pronounced in our investment sales business than an hour leasing business as our leasing business has a more brazilians revenue base.
This dynamic is reflected in our first quarter results.
Most investment sales and leasing lapping record results from the first quarter of 2021 <unk>.
Impacting the year over year decline on a percentage basis.
In contrast, our more resilient business lines, such as property management workplace management valuation advisory loan servicing entail all technologies into.
In total deliver positive P revenue growth during the quarter, despite the economic headwinds.
We have worked hard over the last decade to diversify our business lines and add more resilient revenue streams to our portfolio.
Finally, Lasalle grew advisory fee revenue during the quarter highlighting the annuity like nature of this revenue stream.
We remain focused on our adjusted EBITDA margin and will continue to make targeted investments to drive future growth.
In addition, we have taken steps to drive operational efficiencies across our business and reduce our cost base.
The cost of actions, we have taken to date occurred across business segments, and happy and focused on non revenue generating growth.
Our change to a segment reporting structure has allowed us to quickly identify and take action to remove these cost.
As a result of these actions we have removed approximately $140 million of cost on an annualized basis.
Some of the cost actions have an immediate impact while others take time to materialize.
Based on the timing of these actions, we expect to realize one of $25 million the cost savings in 2023.
If carefully balanced the need to reduce our costs without impacting our ability to immediately return to gross mode ask conditions improved and will continue to identify further opportunities to drive efficiencies in 2023.
I will now turn the call over to Karen.
We'll provide more details on our results for the quota.
Thank you Christian.
Before I begin a reminder, that variances are against the prior year period in local currency unless otherwise noted.
2022, with a talent to have similar to what we experienced in 2021, but in reverse.
Our strong performance in the first half of 2022 like offset by headwind in a second half, particularly the fourth quarter with a rapid slowdown in investment sounds amazing value.
Despite the industry wide slowdown we delivered solid four year fee revenue growth and continue to make progress and strengthening our platform for long term value creation.
Using our strong investment grade balance sheet, we returned about $600 million of capital to shareholders. Yeah share repurchases over the course of the year are also making incremental investment in our people and platform.
<unk> topics later in my remarks.
For the full year consolidated Steve Avenue, seven per cent to $8.3 billion.
Are more resilient business line collectively great, 16%, including 14% organic crowd.
Transaction oriented <unk>, 4%.
Seven per cent growth in racing.
Adjusted EBITDA for the four year decline, 14% to $1.2 billion with eight per cent of the decline from lower equity earnings.
The full year adjusted EBITDA margin declined 370 basis point 15.4 per cent.
<unk> more than half of that by approximately 190 basis points equity.
140 basis points from higher travel entertainment and marketing expenses.
80 basis points from incremental investment in our people and platform.
And 30 basis points to my.
Changes to commission structures within capital market.
Adjusted EPS at $15.71 decline, 17% driven by higher interest and amortization expenses.
Lower adjusted EBITDA.
Partially offset by five per cent reduction in the average check out.
Shifting to the fourth quarter performance.
The new declined 16% of our record fourth quarter of 2021.
The macroeconomic factors that Christian describe drove a 40% decline in investment thousand debt and equity by the receipt.
And an 18% decline in breathing.
In contrast are resilient business lines collectively grew 12% with notable strength in our workplace management business line within work dynamic as.
As well as in jail, all technology and <unk>.
Adjusted EBITDA, 42% from the prior year quarter to $339 million, mostly due to I 124 million dollar adverse swing in equity.
Alright, Jackson EBITDA margin of 15.5% is down 710 basis points from the fourth quarter of 2021.
Period, which generated the highest quarterly margin and over 15 years.
Lower equity earnings contributed approximately 550 basis points to the margin decline.
Additional drivers of the decrease included Bauer transaction date, Steve Avenue, and higher fixed compensation expense.
Tied to investment to dry feature growth over the past several quarters.
Actually offset by lower performance based incentive compensation.
Moving to a detailed review of operating performance by segment, beginning with markets Advisory.
Fourth quarter leasing field Avenue and declined 18% filing at 68% growth rate in the prior year quarter.
Macro condition theory to cross region.
Two that are listing fee revenue declines across geography.
America is down 20% Asia Pacific down, 16% anemia down 10%.
Oh, I'm comparison to strong growth rate in the prior year quarter.
On a global basis, all primary asset classes Dot transaction volume declined along with lower average deals side, particularly in the office after.
Of note large scale office places in the U S.
Pronounced decline.
Our fourth quarter office sector fee revenue fell 17% compared favorably with the 19 per cent contraction in global office leasing volume According to jail all research.
And the industrial sector, Steve Avenue growth declined 21 per cent.
Directionally consistent with expectations given in tight supply insignificant crossing over the past several years.
This compares favorably with a 26 per cent decrease in global industrial market activity from a year ago, According to jail or research.
It's Christian described we're seeing more sustainably thing demand for high quality assets, despite softer demand more broadly.
In addition leasing activity varies by sector angiography.
Instant our grocery last leasing pipeline is larger from this time, a year ago with comparatively stronger growth in industrial in retail and parts of the office sector.
While the girls, placing pipeline provide cautious optimism for the full year 2023.
Near term activity is likely to be subdued, especially when.
Comparing to the strength, we saw in the first half of 2022.
Also within markets Advisory property management eighth Avenue for the fourth quarter to 8%, primarily organic and generally consistent with a four year growth rate of 9%.
Which speaks to the resiliency of the business line.
I do know that at the end of 2022, we disposed as a business that accounted for nearly $23 million on the advisory and consulting fee revenue annually.
Contribution to adjusted EBITDA with the material.
The market advisory fourth quarter, adjusted EBITDA margin declined 230 basis points from a year ago to 17.4%, primarily due to lower listing fee revenue investments and talent to match growth in our business over the past year.
And incremental T, Andy and marketing expenses.
Despite full year fee revenue growth of 8% within market advisory the adjusted EBITDA margin declined 110 basis points to 16.0 per cent on the same factors impacting the movement in the corner as well as investments in our technology platform.
Shifting to a capital market segment.
The market conditions Christian described are a key factor in a 34% decline in segment feedback for the fourth quarter.
I know that the contractions off a fourth quarter of 2021 growth rate of 53 per cent.
Indicative of the strength and breath of global capital markets platform Jailer global investments out the revenue decline at 45% compared favorably to the 56 per cent fall in global deal volume Christian reference.
For perspective, the fourth quarter market volume decline was the sharpest since the fourth quarter of 2008 and in terms of dollars with the lowest overall market volume in fourth quarter 2011.
Steve Avenue from you as investment fell about 61% slightly better than a 62 per cent decline in the U S market. According to jail all research.
Valuation advisory receive Avenue, which is more resilient than investment belt that inequities, either three or three per cent in the fourth quarter.
Both with broad based across regions and sectors.
Alright loan servicing fee revenue fell 10% on approximately $7 million of lower prepayment.
Which more than offset about eight per cent of ordinary servicing for ya.
Our long servicing portfolio increased 2% driven largely by Fannie Mae origination.
The fourth quarter capital markets, adjusted EBITDA margin contracted 440 basis points from a year ago to 19.3%.
Lower fee revenue.
Higher Commission expanse from the change in her compensation next two more commissions from cash bonus.
<unk>.
An increase in our multifamily alone with her.
An incremental investment and head count to drive future growth over the past several quarters.
For the full year with capital markets fee revenue flat. He adjusted EBITDA margin about 340 basis points to 18.2 per cent driven.
Driven primarily by the same extent factor.
Well as incremental investment and technology.
Looking ahead, the global capital markets investment debt and equity badly pipeline.
Distant with this time last year.
Modest growth in the America, and Asia Pacific is offset by a slight decline in India.
The amount in case of revenue growth through the will be heavily influenced by the factors impacting your timing and closing right Christian described.
I also remind you of the tougher growth comparisons for the first half of the year.
Moving next to work dynamic.
Fourth quarter fee revenue grew 11% with double digit growth across our annuity in transaction revenue stream.
Ma'am.
Client wins and global contract extensions and prior period.
19% fee revenue growth and workplace management.
Project management fee revenue grew 13% propelled by improvement and then return to work trying.
The slowdown in leasing activity adversely impacted portfolio services Avenue of growth and a quarter.
The work dynamics fourthquarter, adjusted EBITDA margin extend it 110 basis points from a year ago, driven by increased Gal and cost management strategies enacted over the past year <unk>.
Partially offset by incremental investment in technology and people.
For the full year large scale client win and global contract extensions in 2021 hop drive, 15% work dynamics fee revenue growth.
The segments adjusted EBITDA margin extended 80 basis 0.2, 11.6% from 2022.
The drivers of the full year margin expansion were consistent with those with a quarter.
The 2022 client wins, an expansion within the workplace management, which are indicative of future demand given contract with the time exhibited telegraphed.
So they were more moderate and scale than the prior yeah.
Project management pipeline currently strong however growth trends are generally linked to leasing L. D at lad.
Therefore, the current moderation and overall leasing activity produces certainty of pipeline conversion in Nevada part of the year.
Turning to jail of technologies.
Steve Avenue inclusive of M&A increased 36% in the fourth quarter.
Organic growth of 21% was driven largely by enterprise client.
Looking at the full year fee revenue grew 40, 70% of which 23 per cent with organic driven by new customers and client expansion.
As a reminder, jail all technologies also influences the revenue cross yellow through software the differentiates our services.
Equity earnings in accord are driven by a handful of impairment or valuation decline, partially offset by more modest valuation increases an a T M dot net.
An approximate 100 million dollar adverse to make an equity, earning net of carried interest from a prior year period drove over 90 per cent of the contraction in the jail technologies, adjusted EBITDA margin and a quarter.
The primary drivers of the full year adjusted EBITDA margin decline will consistent with a quarter.
As for Lasalle strong capital deployment and fair value increases over the past 12 months drove three per cent growth in assets under management, which translated to a 16 per cent rise and advisory fee revenue, mostly within our core open <unk>.
Equity earnings for the fourth quarter or $21 million lower than the prior year, driven by moderating asset valuations broadly, which are likely to be a headwind into near term advisory fee revenue growth in Tennessee generation.
The increase in advisory fee revenue and platform scale benefit.
More than offset by the lower equity earnings and lower transaction in in Tennessee revenue, resulting in a decline in the south adjusted EBITDA margin for the quarter.
For the year.
Adjusted EBITDA declined 40% is lower equity earnings and in Tennessee revenue more than offset a 17% increase advisory fees Avenue and platform scale benefit.
Hello, or equity earnings and in Tennessee revenue drug substantially all of that for your adjusted EBITDA margin contractions.
Moving to free cash flow, which was below our expectations for the year.
We generated $532 million of free cash flow in the fourth quarter, bringing.
Bringing a full year to an outflow of $6 million.
Full year outflow was driven by one higher commission payments in 2022, reflecting greater payments in early 2022 for connections from the strong performance in the prior year fourth quarter.
As well as incremental connection this year.
<unk> for the full year leasing drugs and changes to the capital markets incentive compensation structure.
Two.
Higher bonus payouts this year tied to 2021 performance.
Three higher cash tax payment.
Related to timing and prior profitability and.
Four lower profitability in 2022.
Cashflow conversion is a high priority and we remain focused on improving our working capital efficiency.
Now for an update on our balance sheet and capital allocation.
December 31, Ah reported net leverage of 1.0 time is at the mid point of our target range and up from 0.2 times a year earlier, primarily due to share repurchases incremental investments in our business.
Free cash flow.
As a reminder, our luggage ratio typically peaks in the first part of the year, we have a history of deleveraging quickly.
Liquidity totaled $2.6 billion at the end of the fourth quarter, including $2.1 billion of Undrawn credit facility capacity.
As previously indicated we did not repurchase any shares in the fourth quarter.
Our period and share count was down about 5% from a year earlier as a result of our approximate $600 million of share repurchases over the course of the first nine months of the year.
As we stated in our Investor breathing in November we are committed to reviewing share repurchase activity in 2023.
You know I understand repurchases will be dependent on the evolution of the market recovery and the performance of our business, particularly cash generation.
Approximately $1.2 billion remained on our share repurchase authorization as of December 31, 2022.
Along with share repurchases.
Investment in our business to further strengthen resiliency.
<unk> platform and drive profitable longterm growth remains a top priority.
Despite the sharper and shorter macroeconomics cycle, having a pronounced impact on our business in the last three years, we have demonstrated our ability to navigate the rapid changes in the business environment and continue to focus on balancing both short term and long term implications for our business growth and profitability.
With strong growth comparisons and a broader market environment in mind. We currently anticipate the softness we saw in our more transaction oriented the revenue to persist through the first half of the year.
We continue to calibrate both are cost basis and investment priority to further transform our platform. While also preparing for anticipated rebounded activity.
Christian noted we've taken actions to respond to the near term challenges and reduce our cost base.
The approximately $140 million a run rate cost reduction actions to date.
Select approximately 2.0% of our 2022 C based compensation and benefits and Oh, a oh expenses.
Inclusive these cost action and a minimal equity earnings assumption.
We anticipate our full year 2023, adjusted EBITDA margin to be in the 14 to 16 per cent range.
We have a track record of fee revenue growth meaningfully exceeding global G. D P growth and healthy margin expansion over the long term.
This is largely due to investments in our people and platform along with our focus on anticipating our client evolving needs.
Which position to continue to drive stakeholder value.
Christian back to Ya.
Thank you Karen.
As we look forward to 2023.
I'll make outlook is still on so.
While inflation rates are beginning to slow many central banks have not reached the end of that tightening cycles all of them entering the slow down from a positional strings strong labor markets and corporate balance sheets in good shape.
Overall, we expect capital markets activity to recover quickly compared to previous downturns and for the current slowdown to be relatively short.
Interest rates are expected to stabilize in the coming months, allowing forbid us spreads to normalize and the current face of price discovery to pass.
The effective when combined with a significant amount of available capital painting increasingly optimistic picture for the second half of 2023.
<unk> continued to engage in conversations with J L. L about current market conditions and are ready to transfer at when uncertainty Ah Bates.
Ask the current period of uncertainty subsides, a higher than normal number of expiring leases will help boost office activity.
Hydro sectors, such as industrial Lifesciences in data centers.
Likely to emerge from a temporary pulse strong Vermont.
Today, you have heard how we have taken cost actions to manage our business to the slow down and to live on our margin targets for 2023 and beyond.
We are focused on improving free cash flow and remain committed to returning capital to shareholders.
Before I close I would like to thank all our employees across the world for their commitment and hard work during the past year.
Well, we all would have like 2022 to end on a more positive note.
It was our second best Yeah, an adjusted EBITDA dollars an hour <unk> adjusted EBITDA margin within the last 10 years.
The efforts of our colleagues that made that possible and positions L. A well to take advantage of the coming recovery in the commercial real estate market.
We have therefore confident cheating our 2025 financial targets of $10 billion to $11 billion, a fee revenue and a 16% to 19% adjusted EBITDA Marcher.
Operator, please explain the Q&A process.
Absolutely if.
If you would like to ask a question. Please press star followed by one on your telephone keypad.
Any reason you would like to remove that question. Please press star followed by two.
Again to ask a question press star one.
As a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question. We will pass it briefly ask questions are registered.
The first question comes from the line of Michael Griffin, What city Michael Your line is now open.
Great. Thanks, Christian I wanted to expand on your comments just the end of the prepared remarks about the number of leases expiring in the near term essentially bruising office activity. I mean is that a read through of what you might think office leasing demand is going to be for twenty-three and maybe they were getting hard at 24, just given the challenges the sector faces and anything.
You could spend on there would be would be helpful.
I might good morning, Oh listen what we're seeing is that it is still that trend continuing the best companies are trying to offer the employees the best possible space in each market the active in as a way to improve the return to offices and the wellbeing.
Employees and and that in itself will be a driver of our office leasing business. Because we are very active and the date a space.
And we should also forget that is K recessionary environment, which we see predominantly in the western World.
Not happening in Asia, the whole of Asia is back to the office.
Three normal levels comparable to 2019 pre pandemic and the overall environment there is very strong.
And and so as you know the Americans slightly lost all recharged <unk>.
EMEA sits in the middle in Asia, It's very strong. So overall, we are cautiously optimistic.
The leasing markets will pick up over the course of this year, but maybe can wants to provide a little bit more commentary.
We're really seeing differences anti flying around the world and by property type and one thing that's really important to highlight as a slight to quality point.
That we keep bringing up over the last few quarters.
Particularly for buildings constructed since 2015, that's the only category from an age perspective that is recording strong positive net absorption since the pandemic, whereas the other categories in older buildings more than offsetting that amount.
And Karen can you remind us how much of the leasing revenue is driven by office I think you gave us a year over year decline in the prepared remarks, but just a percentage of that leasing revenue that might come from the office sector.
Yeah, it's between 50 and 60 per cent roughly frankly your basis.
Great and then just for my next question you touched on the external growth opportunities being being selective just given the current capital market environment that we're in for 2023, I mean any sense. If you were to to execute on any opportunities of of what business lines you'd you'd like to <unk>.
And on where maybe you'll see the most opportunity.
[noise] Oh overall, we are very happy with a footprint we are having in the different business lives. There are always some tucking opportunities, but there's nothing which we are really missing and I wanted to put slide up to stop that we feel that pricing is still.
Very high given the environment. So we have been cautious around <unk>.
And a.
For some time now and we will continue to be over the course of this year and going forward.
But what we are seeing is that many of our client that's super ambitious ESG targets.
And that will force them, if they are not moving the real estate space and move into more modern buildings is Carolyn ships described they would have to significantly upgrade the spaces and so generally speaking.
One of the most interesting opportunities sits around that appropriate development services as we pulled up business line, but again, we are very happy with our existing capacity.
If there's something coming around the corner, we would certainly located.
Great. That's it for me thanks for your time.
Thank you.
Next question comes from the lineup Anthony prolonged with J P. Morgan you May you proceed.
Great. Thank you my first question relates to work dynamics and I'm, just trying to put together some of the current events around your project management, I guess tying to leasing activity, but also some of the whims.
Workplace management I guess, you brought him Why'd, you do have visibility on growth and work dynamics revenue for 23.
Well first of all we're very happy with the performance of a work done it makes business in 2022.
And we.
Expressed at our Investor meeting in November that we are confident that we will be able to extend march and conduct business.
Pretty consistently over the coming years and nothing has changed about that view over the last couple of months. So first of all I would say, we put margins of top line growth within that business.
But we we continued to be confident about that top line growth.
Well what is important to understand here. Despite the fact that the return.
Officers still relatively slow in the U S that.
Those companies, who are outsourcing their real estate two service providers like us.
Ultra those companies, who are very active on expanding and doing M&A. So we will see more buildings coming to us from our existing clients over all despite a potential reduction in the office footprint.
To tell us when per employee and so that will drive the top line growth N S. A alluded to earlier that whole notion around the E of the ESG.
Is driving a lot of activity from our planes, which helps us to try to build our top line grows. So there are numerous services, which we offered to those clients and all of their activities is helping us to grow our top line.
Okay. So I mean.
Is it fair to say, though that work dynamics should be.
Probably the the way you are seeing things right now the brightest spot the business segments for for 23.
Well it depends how you define white spot it's a it's a.
Very important part of our business and the proportion of that business will continue to grow over the next couple of years.
S. You know what is the transactional markets returning to a more normalised activity.
The ability of our capital markets and our leasing business tends to be still significantly higher so I'm careful to.
Make a category around what's brightest here.
Okay, I understand and then with regards to the hundred and $40 million of cost savings can you give us a little more context around whether you see those as being permanent or are they coming by way of lower <unk> costs, just due to us your activity levels, just any more depth there would be great.
Sure I'll take that one so that's $140 million on a run rate basis, and again approximately $125 million of that will come through in the calendar year 2023.
Primarily related to compensate reductions in compensation and benefits from the restructuring of our business some reductions in head count and if you look at where that's from its really primarily non producer a head count and is associated with the position that we no longer require as we shifted our business operating model from the geographic to the business line.
So I guess.
Okay got it and then just last one real quick you talked about just being careful with capital allocation can you just comment on just any expectations for investments in the <unk> in capex for the year.
Well, we continued to invest into the long term performance of J L. L and and we have a strong conviction that it is very important to have the heating pad platform within our industry. We believe we have it but we want to stay ahead of our competition with that.
And so we will continue to invest their.
But we are applying the same kind of discipline around those investments as we apply to all other investments, we do they have to create shareholder value and and so they.
They have to compete for capital as all the other areas of our business have to compete for capital.
Okay and maintenance Capex.
Yeah, well you know, we're continuing to invest in our platform and our people and we don't expect significant increases from where we've been trying to historically, we tend to look at sizing that on an annual basis within a certain band L keeping that.
That's reasonable for the size of our business and our activities.
[noise] Okay. Thank you.
Thank you.
Next question Catherine in line of Sandri locally with Goldman Sachs. You May proceed.
Hi, Good morning. Thank you for taking my question I'd like to stick with the team of capital allocation little bit you know in 2023, when do you expect to brink by back in the mix and how should we think about free cash conversion in 2000 twenty-three, especially as you notice how does the <unk>.
Changes that you made last year, you'll be lapping dose to help us understand that a bit. Please thank you.
Yeah sure. So I'm sure repurchases you know I mentioned in the remarks that we intend to.
Resume our share repurchases over the course of 2023.
It will certainly be looking at the broader macro environment are free cash flow.
And of all got levels as we think about the size and timing of those announced that were repurchasing as it relates to driving free cash flow is certainly an area of focus for us going forward and I left it out the number of specific factors that impact of that in 2022, and you think about the first couple of <unk>.
I ticked off which were won the higher commissions related to strong record fourth quarter activity in 2021, as well as higher bonuses and incentive compensation payments in March of 2022 also related 2021, alright, you'll have a the reverse effect in the first quarter of 2023, So you have that.
That fact or play in the other element that will be watching carefully as how the recovery.
Recovery of the transaction businesses manifest over the course of the year.
Because that obviously has a significant impact on our cash flow raw.
Got it and Karen would it be possible for you to give US you know some guideposts around fee revenue in 2023, especially as we think about investment salesman and leasing I understand you're not giving revenue guidance that could help us understand you know how should be modest perhaps first call.
<unk> with respect to the fourth quarter that you guys just reported.
Are offering that you are in terms of first half forced the second half any guideposts would be helpful. Thank you.
Sure certainly that's a great question, because it's certainly a challenging air that where we're heading into right now we're expecting.
Ah continued.
Continued that have headwinds for particularly investment thousand leasing in the first and second quarter of the year.
And are planning accordingly, based on what we know right now in San connect from our clients that we talk to them and based on expectations for the broader market.
That that things will begin to recover in the second half of the year will obviously be watching that very closely and looking at our pipelines, which still look healthy and are growing as we continue to have conversations with clients, but the time to convert that to actual transactions is really dance standard on this period of uncertainty so I'll be looking at our conversion.
And and monitoring that closely and report report.
Report back each quarter on progress, we're making what we're seeing in each of those line.
Got it and I'll squeeze one more as well Christian this one's for you.
Could you give us a sense of federal cap right now across different property types and how much more correction is needed for buyers and sellers meet I guess, what I'm trying to understand is how much is transaction activity a function of cap rates as opposed to capitalism.
Capital in that market availability and and lower interest rates. Thank you.
I can't give you a cap rates because it depends so much which country and which asset class and then what type of ethic within that ethics class you are talking about.
Very very <unk>.
Is a very strong correlation between interest rates and tap race and at the moment you clearly have the issue of negative leverage and saw that drives a certain type of by us and that's why you see the best buildings, which.
Actually only trading up the moment because those are very often bored by by US who will buy all accurate T and they are just waiting how that markets and especially spreads developing over the next couple of months and they will probably.
Put some debt on those assets much later in the year, even wait for next year.
We have seen cap rates kind of.
Growing.
Quite significantly over the last couple of months, but any kind of noise coming from the fat.
And coming from the different data sets, which are relevant being taking in and so, especially the last two weeks, where we saw interest rates moving up again and spreads widening again immediately create an additional kind of irritate.
<unk> to the market and so we just have to be patient and.
Go away and as carrying a loaded too we relatively.
Kind of.
Track medic that this year, we have to wait for the third and the fourth quarter.
Before markets, we really return.
First in the second quarter will be slow quarters, and especially if you compare them to 2022 were the first in the second quarter were absolutely record quarters.
And I can if you want to go into specifics on cap rates specific to the U S market. We can talk about that a bet for other different property types of high level. They.
Sector that we've seen the most movement and Fran.
Peak oil from the if you look at year end 2019 would certainly be office, where you know if you say that approximately the arrangements three three quarters to four and a quarter.
Now Capric <unk> 67 per cent and again is Christian mentioned these numbers can fluctuate depending on where you are and the quality of the property, but broadly speaking that's the band.
We've seen it was an industrial right. If you say the the range was between two and three quarters in three and a quarter now the pricing around.
Four and a half to five and three quarters multifamily.
Multifamily peak was similar similar to industrial and the range now is similar to industrial about that tied around the top and and then finally in retail.
Peak pricing within four and a half to five and three quarters and that kind of much recent history and has moved out all that two five and a quarter of six and a quarter.
Very helpful. Thank you very much.
Thank you.
The next question comes from the line of Jade remind me with K B W. You May proceed.
Thanks, very much Wow those cap right, that's quite a move maybe a little bit wider than ever moved and I was thinking.
Just the office, but also helping an industrial.
I wanted to ask you a bigger picture question, just about J allows valuation and the earnings consensus.
I think there's still significant uncertainty valuing this company and it relates to the margin profile.
Also there's you know a a wide range of estimates and the consensus.
But then also the high historical earnings contribution from equity income incentive fees and.
And most recently over the last few years the jail L technologies Proptech investments through Mark to market valuation games and the equity income line. So when you were making internal capital allocation decisions and prioritization setting what valuation metrics are you benchmarking J O two.
<unk> when you decide on share buybacks versus pursuing external growth opportunities are you looking at the adjusted earnings and adjusted EBITDA.
Metrics that you provide to folks like ourselves or is there an internal metric that excludes maybe non-recurring items are items that are less recurring.
Okay. Thank you hold are challenging question early in the morning, very good one listen we have to take obviously different time horizons for the different areas of our business. So if we do tech investments.
The time horizon is more between five to 10 years than if we were to make investments into our traditional service lines, where we can take a much shorter time horizon.
We have had historically if you just take the average of the last couple of years, we have had his Turkey, an average of 100 million equity earnings contributing.
To our result last year was the lowest over many years, but you have to take that in the very long average because obviously, we cannot influence those equity earnings an incentive fees.
On and on a quota basis on an annual basis.
And and therefore on on those we unfortunately have a lot of volatility, which we have to digest and which makes it hard for the market to make estimates, but it is a very important and lucrative part of our business and.
Therefore, we will continue to.
Work on that and and bed Bath in our strategy.
I would just add that from that we should look at return on invested capital on a risk adjusted basis and across up quality of different things we can pursue so.
Obviously, a variety of factors go into that analysis.
And can I go back to your comment just also jada on the size of the.
The movement from peak to current levels of coverage. If you go back and you look at where cap rates were at the end of 2019, then movement is not as great.
If you look at the sector like industrial kind of right in that same zone same for retail housing was multi housing with a little bit lower in offices, certainly lower but you know it's.
To look at the most recent history and kind of pricing at the end of 2021, whether it's for a cap rates or for that cost and say Wow look how far we've moved but if you go back to a time horizon of 2018 2019. The movement doesn't is not as great and people were certainly transaction transacting at those prices.
Since.
You know not not so long ago, although it might feel like a long time ago now given what's transpired over the last few years.
Thank you very much for that clarification, just again on the capital allocation decisions. So if hypothetically you're deciding whether to merge with appear or whether to acquire a business just a a capital markets type of business and then you're comparing that decision where versus.
Buying back the stock are you looking at the stock valuation relative to the average adjusted earnings are adjusted EBITDA over the last few years I mean, it wouldn't make sense to use this year cause it's a down year, but.
In that calculation or you're stripping out any of the equity income.
Say the jail all technology side.
Yeah, I mean, we're looking we look at our adjusted EBITDA, including escalating equity earnings obviously because of the fluctuation equity earnings.
Okay and then on.
On the adjusted EPS calculation I saw a line item I haven't I don't think I've seen with J O L, which is a subtraction for interest unemployed loans net of forgiveness could you just give any color on what that relates to and why this new disclosures here.
Yeah, [laughter] very very good reading the footnotes unimpressed uhm, so that wasn't ingestion. This quarter previously the you know the interest amounts so.
So first of all let me take a step back those related to interest amount on certain employee contracts that we put in place with producers and our goodness and the interest that is occurring on those and then gets paid back over time based on the conditions for those.
Contracts to be turned off and so it's really a non-cash item as it relates to us because it simply increasing a period of time over which that amount needs to be.
Earned back and we therefore, excluding at.
Is that going to be an ongoing adjustment.
Yes, it will be.
And what what another appointment previously immaterial because of interest rates, but now that interest rates are increasing right that's starting to be more meaningful number.
So this is gonna be a deduction going forward from gathering too adjusted earnings or will it will it become a positive contribution.
It it depends on the timing of the amount of a new contract to put in place and.
Any particular quarter and how much interest is accruing those relative to how much is burned off and a quarter, so because our and particularly in a period like that's why you have transaction volumes that are fluctuating pretty greatly from quarter to quarter.
The outcome can be different in the coming years. It we expect it will be a deduction.
From gap.
Okay.
I'll probably have to follow up with you later on that and then the restructuring charges had also a big uptick quarter over quarter I think usually in the fourth quarter. There is an uptick but definitely outside the range of the last few quarters any colors, you can provide on that and what we would expect for 2023.
Yeah. So we have taken this quarter Israeli related to last quite a related to the restructuring activities that I mentioned as it relates to our headcount reduction due to the changes in our operating model of becoming redundant different management layers.
Being removed as we mentioned that November investor briefing on we're gonna reference today, we're continuing to drive for in terms of operating efficiencies in our business that we cannot have better operating leverage is our platform scales in the future. Some of that will require investment some of that word involve restructure activities and so I would expect some additional restructuring.
Costs to come through in 2023.
Thank you very much.
Thank you.
The final question comes from the line of Patrick <unk> William Blair You May proceed.
Hi understand that the overarching trends are are not ideal, but given some of your peers are reportedly some trends that were a bit more stable can you provide any more color on what drove the deceleration in that business.
And.
Kind of as a two parts of that given given leasing is generally expected to follow trends in capital markets, if you'd expect things to get worse before they get better heading into 2023.
Yeah, Great question. So first on the leasing declines our business mix really tend to skew to the higher high quality larger transactions and and the U S. Anyway. So we looked at from an overall market perspective, the slowdown in office leasing was primarily driven.
By the large 100000 square foot plus occupier segment, which is where major corporate requirements are falling and the overall market leasing levels for that segment right. That's hundred thousand square foot plus was the lowest recorded since early 2021 right right. After the recovery started and it was.
More than 50% below the pre pandemic quarterly average for that size segment. So that really it was for us pretty significant impact.
To our.
To our overall revenues and sorry remind me of your second Oh I remember now is the time.
Timing of declines relative different segments. So the investment sales decline did begin before the leasing declines. They typically that's typically the way right. You'll have leasing decline then sorry, guys investment South declined Emily thing then project management because of the relationship to project management until the thing we did have more pronounce.
Declines compared to the prior year began November for leasing as compared to September for investment style. So that gives you an idea of the time.
Time gap between when we really started to a more significant fall off an activity between those two transaction line.
[noise] got it that's great. Thank you and then just quickly you mentioned that you are still on track to achieve your 2025 targets and in November you did mention that those sumer recessionary environment in 2023.
Yes.
Given the commentary you gave us today would you say that your expectations in terms of the severity of your timing of that environment have changed or what did you say that recent developments or baked and for the most part.
For the time being we are still in line with our expectations expressed in November .
Obviously.
Expecting a pretty strong recovery of the transactional environment in the second half of this year. So let's wait for the second half of this year, whether we have to take anything away from that.
Okay. Thank you Christian I'll, let you guys close up with that.
Thank you.
There are no questions waiting at this time I would now like to pass the conference back over to Christian for closing remarks.
Thank you operator on behalf of the entire L. L team. We thank you all for participating on the call today Kelly I look forward to speaking with you again following the first quarter.
That concludes the conference call. Thank you for your participation you may now disconnect your line.