Q4 2023 Jones Lang LaSalle Incorporated Earnings Call
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Operator: Thank you for standing by and welcome to the Q4 2023 JLL Earnings Conference. I would now like to welcome Scott Einberger, Investor Relations Officer, to begin the call. Scott, over to you. Thank you and good morning.
Thank you for standing by and welcome to the Q4 2023 J L. L earnings Conference call I would now like to welcome Scott Weinberger.
Scott Weinberger: That's their relations officer to begin the call Scott over to you.
Scott Weinberger: Thank you and good morning.
Scott Einberger: Welcome to the fourth quarter 2023 earnings conference call for Jones Lang LaSalle Incorporated. Earlier this morning, we issued our earnings release. Along with the slide presentation, an Excel file intended to supplement our prepared remarks. These materials are available on the investor relations section of our website, please visit IR.jll. During the call and in our slide presentation and accompanying Excel file, we referenced 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.
Scott Weinberger: Welcome to the fourth quarter of 2023 earnings Conference call for Jones Lang Lasalle incorporated.
Scott Weinberger: Earlier this morning, we issued our earnings release.
Scott Weinberger: Along with the slide presentation, an excel file intended to supplement our prepared remarks.
These materials are available on the Investor Relations section of our website.
Scott Weinberger: Please visit IR Dot J L L Dot com.
Scott Weinberger: During the call and in our slide presentation and accompanying an 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.
Scott Weinberger: Reminder, today's call is being webcast live and recorded.
Scott Einberger: A transcript and recording of this conference call will be posted to our website. Any statements made about future results and performance, plans, expectations, and objectives are forward-looking statements. Actual results and performance may differ from those forward-looking statements as a result of factors discussed in our soon-to-be-filed annual report on Form 10-K for the fiscal year December 31, 2023, and in other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statement. I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer, for opening remarks. Thank you, Scott.
A transcript and recording of desk conference call will be posted to our website.
Scott Weinberger: Any statements made about future results and performance plans expectations and objectives are forward looking statements.
Scott Weinberger: All results and performance may differ from those forward looking statements as a result of factors discussed in our soon to be filed annual report on Form 10-K for the fiscal year December 31, 2023, and then other reports filed with the SEC.
Scott Weinberger: The company disclaims any undertaking to publicly update or revise any forward looking statements.
Scott Weinberger: I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer for opening remarks.
Christian Ulbrich: Thank you Scott.
Christian Ulbrich: Hello and welcome to our fourth quarter 2023 earnings call. JLL's fourth quarter financial results reflect the strengths of our resilient business lines, which grew a combined 9% in the quarter. This growth helped offset the soft transaction market our industry has experienced over the past year. Sentiment in the global real estate market has improved since our last earnings call in early November, a result of the drop in the 10-year U.S. Treasury bond yield, and a growing consensus that interest rates have reached peak levels across most major economies.
Christian Ulbrich: Hello, and welcome to our fourth quarter 2023 earnings call.
Christian Ulbrich: <unk> fourth quarter financial results reflect the strength of our resilient business lines, which grew a combined 9% in the quarter.
Christian Ulbrich: This growth helped offset the soft transaction market our industry has experienced over the past year.
Sentiment in the global real estate market has improved since our last earnings call. In early November a result of the drop in the 10 year U S Treasury bond yields and a growing consensus that interest rates have reached peak levels across most major economies.
Christian Ulbrich: While falling debt costs will lead to a more predictable operating environment going forward, it will take time and prolonged stability for pricing to fully adjust. The path forward may be uneven, but we are confident that bid-ask spreads will normalize and transaction volumes will improve. The fourth quarter saw global commercial real estate investment of $166 billion, reflecting a year-over-year decline of 24% according to JLL Research.
Christian Ulbrich: While falling debt cost will lead to a more predictable operating environment going forward.
Christian Ulbrich: It will take time and prolonged stability for pricing to fully adjust.
Christian Ulbrich: The path forward may be uneven, but we are confident that it asks spreads will normalize and transaction volumes will improve.
Christian Ulbrich: The fourth quarter saw global commercial real estate investment of $166 billion, reflecting the year over year decline of 24%. According to <unk> research.
Christian Ulbrich: Liquidity remains available, and debt markets are active, favoring asset types such as residential, industrial, and data centers. The current market environment, smaller deal sizes remain the most attractive to lenders, although we have seen a modest number of larger deals come into the market over the past few months. On the leasing side, occupiers continue to take a cautious approach, but office demand is stabilizing as many companies are making progress on their return to office initiatives. Similar to investment sales, large lease transactions are starting to return to the market, but have not come back in a meaningful way yet. As we have noted in the past, larger deals are a more significant portion of our fee revenue base in both leasing and investment sales. As larger transactions come back into the market, we expect to benefit disproportionately. The global office market volume was up 4% year over year in the fourth quarter, according to JLL Research. Asia-Pacific leasing demand remains resilient, with most markets ahead of pre-pandemic levels of office attendance. Global office vacancy rates picked up 25 basis points to 16.2% in the fourth quarter.
A quiddity remains available and debt markets active favoring asset types, such as residential industrial and data centers.
Christian Ulbrich: The current market environment smaller deal sizes remain the most attractive to lenders, although we have seen a modest number of large deals coming to the market over the past few months.
Christian Ulbrich: On the leasing side occupiers continue to take cautious approach, but office demand is stabilizing as many companies are making progress on their return to office initiatives.
Christian Ulbrich: Similar to investment sales large lease transactions are starting to return to the market, but have not come back in a meaningful way yet.
Christian Ulbrich: As we have noted in the past lots at the yields a more significant portion of our revenue base in both leasing and investment sales.
Christian Ulbrich: As lots of transactions come back into the market, we expect to benefit disproportionately.
Christian Ulbrich: The global office market volume was up 4% year over year in the fourth quarter. According to <unk> research.
Christian Ulbrich: Asia Pacific leasing demand remains resilient with most markets ahead of pre pandemic levels of office attendance.
Christian Ulbrich: Mobile office vacancy rates picked up 25 basis points to 16, 2% in the fourth quarter.
Christian Ulbrich: Companies are still focused on upgrading into higher quality, sustainable space, supporting demand in buildings that offer these features. Turning to the industrial sector, fourth quarter leasing activity declined in the U.S. and Europe as the industrial sector continues to manage through the record amount of space that was leased following the pandemic. Asia-Pacific leasing was resilient, supported by a wave of new supply and ongoing demand from e-commerce. Rental growth remained positive in the fourth quarter, but continued to moderate across all three regions. Long-term fundamentals in the industrial sector are strong, supported by nearshoring requirements and demand for energy efficient space. The retail sector saw solid leasing activity in the fourth quarter across most markets, benefiting from resilient consumer spending and a recovery in international travel.
Christian Ulbrich: Companies are still focused on upgrading into higher quality sustainable space supporting demand in buildings that offer these features.
Christian Ulbrich: Turning to the industrial sector fourth quarter leasing activity declined in the U S and Europe as the industrial sector continues to manage through the record amount of space that was leased following the pandemic.
Christian Ulbrich: Asia Pacific leasing was resilient supported by a wave of new supply and ongoing demand from E Commerce.
Christian Ulbrich: Rental growth remained positive in the fourth quarter, but continued to moderate across all three regions.
Christian Ulbrich: Long term fundamentals in the industrial sector are strong supported by near shoring requirements and demand for energy efficient space.
Christian Ulbrich: The retail sector saw solid leasing activity in the fourth quarter across most markets benefiting from Brazilian consumer spending and a recovery in international travel.
Christian Ulbrich: Turning to JLL's results for the quarter. We continue to focus on growing our resilient business lines as part of our strategy to further diversify our platform and drive long-term shareholder value. Our workplace management and property management business lines both reported double-digit fee revenue growth in the quarter as we continue to benefit from new client wins. For the full year 2023, our work dynamic segment delivered 80 basis points of adjusted EBITDA margin expansion compared with the prior year. We are on pace to achieve our previously communicated goal of delivering a mid-teens marching profile for our work dynamic sector.
Turning to <unk> results for the quarter, we continued to focus on growing our resilient business lines as part of our strategy to further diversify our platform and drive long term shareholder value.
Christian Ulbrich: Our workplace management and property management business lines, both reported double digit fee revenue growth in the quarter as we continued to benefit from new client wins.
Christian Ulbrich: For the full year 2023 hour work dynamic segment delivered 80 basis points of adjusted EBITDA margin expansion compared to the prior year.
Christian Ulbrich: We are on pace to achieve our previously communicated goal of delivering a mid teens margin profile for our work dynamic segment.
Christian Ulbrich: Performance in our leasing capital markets business was in line with expectations given the broader industry environment and continued slowdown in transaction activity. We have selectively added to our brokerage teams and asset classes such as multifamily, industrial, and data center. We believe these asset classes have structural tailwinds and will lead to recovery as transaction activity improves. In addition, our industry-leading debt platform will serve as a catalyst as an increased level of real estate debt matures in the coming months. JLL Technologies' fourth quarter operating income highlights the work we have done to drive operational efficiencies in this segment of our business.
Christian Ulbrich: Performance in our leasing and capital markets business was in line with expectations, given the broader industry environment and continued slowdown in transaction activity.
Christian Ulbrich: We have selectively added to our brokerage teams in asset classes, such as multifamily industrial and data centers.
Christian Ulbrich: We believe these asset classes have structural tailwind and will lead the recovery as transaction activity improves.
Christian Ulbrich: Additionally, our industry, leading debt platform will itself as a catalyst as an increased level of real estate debt matures in the coming months.
Christian Ulbrich: Yeah, that'll technology's fourth quarter operating income highlights the work we have done to drive operational efficiencies in this segment of our business. We continue to make progress towards shallow technologies being profitable on a sustained basis, excluding equity earnings.
Karen Samhat: We continue to make progress towards JLL technologies being profitable on a sustained basis, excluding equity earnings, and our LaSalle business advisory fee revenue have remained resilient. Despite impacts to AUM from valuation declines in a softer fundraising environment. As transaction activity improves, we expect that fundraising levels across the industry will pick up. Recent valuation declines have created attractive investment opportunities in our new funds, and we expect that funds launched during this period of time will prove to offer favorable returns. With that, I will now turn the call over to Karen, who will provide more detail on our results for the quarter and full year. Thank you, Christian.
Christian Ulbrich: In our Lasalle business advisory fee revenue would have remained resilient despite impacts to <unk> from valuation declines in a softer fundraising environment.
Christian Ulbrich: Astra and the actual activity improves we expect that fundraising levels across the industry will pick up.
Christian Ulbrich: Recent valuation declines have created attractive investment opportunities in our new funds and we expect that fund launch during this period of time will prove to offer favorable returns.
Christian Ulbrich: With that I will now turn the call over to Karen will provide more detail on our results for the quarter and full year.
Karen: Thank you Christian before I begin a reminder, that variances are against the prior year period in local currency unless otherwise noted.
Karen Samhat: Before I begin, a reminder that variances are against the prior year period and local currency, unless otherwise noted. I'm pleased with the focus of our leadership teams over the course of last year to strengthen our platform, improve our operating efficiency, and drive long-term value creation, while continuing to deliver exceptional service to our clients. Strong progress was made despite persistent softness in transactional market activity, evidenced by full year investment sales market volume reaching its lowest level since 2012, as well as office and industrial leasing volume 16% lower than 2020. Though our transaction-oriented fee revenue fell 17% for the full year, both leasing and investment sales outperformed respective declines in the broader market. Our resilient C revenues grew 5% for the full year, with growth accelerating in the fourth quarter as we transition new client mandates that we won earlier in the year, a testament to the trust our clients have in JLL managing their real estate portfolios. Over the course of the year, we took actions that lower our cost base by $210 million on a run rate basis.
Karen: I am pleased with the focus of our leadership teams over the course of last year to strengthen our platform improve our operating efficiency and drive long term value creation, while continuing to deliver exceptional service to our clients.
Karen: Strong progress was made despite persistent softness in transactional market activities evidenced by full year investment sales market volume, reaching its lowest level since 2012.
Karen: As well as office and industrial leasing volume, 16% lower than 2020.
Karen: So our transaction oriented fee revenue fell 17% for the full year, both leasing and investment sales outperformed respective declines in the broader market.
Karen: Our resilient fee revenues grew 5% for the full year with growth accelerating in the fourth quarter as we transition new client mandate that we won earlier in the year of.
Karen: Testament to the trust, our clients have and Jaylo, managing our real estate portfolio.
Over the course of the year, we took actions that lowered our cost base by $210 million on a run rate basis.
Karen Samhat: Our free cash flow increased nearly $400 million from 2022, and we reduced our leverage towards the middle of our target range while we invested in our business and returned capital to shareholders. We remain focused on positioning our business to capitalize on near and long-term opportunities to drive growth, profitability, and cash flow. Our fourth-quarter results reflect the diversity of our revenue base and the resiliency of our platform. At the consolidated level, fourth quarter fee revenue was $2.2 billion, a 2% decline from a year earlier.
Karen: Our free cash flow increased nearly $400 million from 2022, and we reduced our leverage towards the middle of our target range, while we invested in our business and return capital to shareholders.
Karen: We remain focused on positioning our business to capitalize on near and long term opportunities to drive growth profitability and cash flow.
Karen: Our fourth quarter results reflect the diversity of our revenue base and the resiliency of our platform.
Karen: At the consolidated level fourth quarter fee revenue was $2 2 billion and 2% decline from a year earlier.
Karen Samhat: Adjusted EBITDA totaled $306 million, down 9%, and reflected a margin of 14.3% compared to 15.3% a year ago. The $55 million incremental equity losses, as well as lower transaction-oriented fee revenue and the timing of incentive compensation accruals, were the predominant headwinds to margin performance. Growth in our resilient revenue businesses, cost management actions during the year, and an actuarial benefit related to healthcare costs were partial offsets. Fourth quarter adjusted diluted EPS of $4.23 declined a more modest 2% as the adjusted EBITDA drivers and higher interest expense were largely offset by a lower effective tax rate. For the full year, consolidated fee revenue declined 11% to $7.4 billion. Adjusted EBITDA for the full year declined 40% to $737 million.
Karen: Adjusted EBITDA totaled $306 million.
Karen: Down, 9% and reflected a margin of 14, 3% compared with 15, 3% a year ago.
Karen: The $55 million incremental equity losses, as well as lower transaction oriented fee revenue and the timing of incentive compensation accruals were the predominant headwinds to margin performance.
Growth in our resilient revenue businesses cost management actions during the year and in actuarial benefit related to healthcare costs were partial offsets.
Karen: Fourth quarter adjusted diluted EPS of $4 23.
Karen: Declined a more modest 2% as the adjusted EBITDA drivers and higher interest expense largely offset by a lower effective tax rate.
Karen: For the full year consolidated fee revenue declined 11% to seven 4 billion.
Karen: Adjusted EBITDA for the full year declined 40% to $737 million approximately 50% of the decline was from the adverse change in equity earnings with the balance largely from lower transactional revenue.
Karen Samhat: Approximately 50% of the decline was from the adverse change in equity earnings, with a balance largely from lower transactional revenue. These items overshadowed resilient revenue growth and cost management actions. The full year adjusted EBITDA margin declined 500 basis points to 10%, including approximately 320 basis points from lower equity earnings.
Karen: These items overshadowed resilient revenue growth and cost management actions.
Karen: Full year, adjusted EBITDA margin declined 500 basis points to 10%.
Including approximately 320 basis points from lower equity earnings.
Karen Samhat: Adjusted EPS of $7.40 declined 52%, with the adjusted EBITDA drivers, as well as the adverse change in equity earnings and higher interest expense, partially offset by a lower effective tax rate. Moving to a detailed review of our operating performance by segment, beginning with markets advisory. The 3% decline in segment C revenue in the quarter was mainly due to 5% lower leasing activity. Leasing fee revenue grew in the Asia-Pacific region across most asset classes but was more than offset by softer leasing activity across most asset classes in the Americas and EMEA. Industrial leasing fee revenue was consistent with the prior year, which compares favorably to the 23 percent decrease in global industrial market activity, according to JLL Research. These things see revenue decline to 15% for the full year with largely consistent drivers as our fourth quarter commentary.
Karen: Adjusted EPS of $7 40, <unk> declined 52% with the adjusted EBITDA driver as well as the adverse change in equity earnings and higher interest expense, partially offset by a lower effective tax rate.
Karen: Moving to a detailed review of our operating performance by segment.
Karen: Beginning with markets advisory.
Karen: The 3% decline in segment fee revenue in the quarter with mainly due to 5% lower leasing activity leasing fee revenue grew in the Asia Pacific region across most asset classes.
Karen: That was more than offset by softer leasing activity across most asset classes in the Americas and EMEA.
Karen: Industrial leasing fee revenue was consistent with the prior year, which compares favorably to the 23% decrease in global industrial market activity. According to <unk> research.
Karen: Leasing fee revenue declined 15% for the full year with largely consistent drivers at their fourth quarter commentary.
Karen Samhat: As Christian described, we continue to see more sustained leasing demand for high quality assets, which is favorable for our business. Our global growth leasing pipeline continues to hold up and we are encouraged by the recent trends in the OECD's Business Confidence Index, which generally leads leasing activity by two to three quarters. Still, occupiers continue to delay leasing decisions, particularly for large-scale transactions.
Karen: Christian described we continue to see more sustained leasing demand for high quality assets, which is favorable for our business mix.
Karen: Our global growth leasing pipeline continues to hold up and we are encouraged by the recent trends and the OECD business confidence index, which generally leads leasing activity by two to three quarters.
Karen: Still occupiers continue to delay leasing decisions, particularly for large scale transactions.
Karen Samhat: The Contractual Nature of Lease. Limited new office and industrial building starts, and our expanding pipeline, provides optimism for long-term growth, though the timing and pace of acceleration and leasing activity is uncertain. Also within markets advisory, property management fee revenue grew 12% in the quarter and 11% for the full year, which both driven largely from portfolio expansions in the Americas and incremental fees from interest rate sensitive contracts in the UK. Considering the current level of interest rate and the forward interest rate curve, the incremental revenue benefits from these contracts to the property management growth rate are likely to moderate as the year progresses. The Markets Advisory fourth quarter adjusted EBITDA margin expansion reflected our cost management actions in 2023, as well as incentive compensation accrual timing.
Karen: The contractual nature of leases limited new office and industrial building starts and our expanding pipeline provides optimism for long term growth, though the timing and pace of acceleration in leasing activity is uncertain.
Karen: Also within markets Advisory property management fee revenue grew 12% in the quarter and 11% for the full year with bulk driven largely from portfolio expansion in the Americas and incremental fees from interest rate sensitive contract in the UK.
Karen: Considering the current level of interest rates and the forward interest rate curve.
Karen: Incremental revenue benefit from these contracts at a property management growth rates are likely to modern progressive.
Karen: The market's advisory fourth quarter, adjusted EBITDA margin expansion reflected our cost management actions in 2023, as well as incentive compensation accrual timing.
Karen: The lower leasing fee revenue net of lower commissions and higher incentive compensation accruals in 2023 drove the full year margin contraction, partially offset by property management fee revenue growth and our cost management actions.
Karen Samhat: The lower leasing fee revenue, net of lower commissions, and higher incentive compensation accruals in 2023 drove the full year margin contraction, partially offset by property management fee revenue growth and our cost management action. Shifting to our capital markets segment. Fee revenue declined 12% in the quarter and 28% for the full year, as investor decision-making was prolonged by sharp interest rate increases and heightened volatility, along with elevated economic and geopolitical uncertainty.
Karen: Shifting to our capital market segment.
Karen: Fee revenue declined 12% in the quarter and 28% for the full year as investor decision, making with prolonged by sharp interest rate increases and heightened volatility along with elevated economic and geopolitical uncertainty.
Karen: Our global investment sales fee revenue, which accounted for approximately 40% of segment revenue in the quarter fell 18% and compared favorably with the 24% decline in our global sales volume Christian reference.
Karen Samhat: Our global investment sales fee revenue, which accounted for approximately 40% of segment fee revenue in the quarter, fell 18% and compared favorably with a 24% decline in the global sales volume Christian recommended. P-revenue declined across most geographies and major asset classes, however, we had several bright spots in the Asia-Pacific region, highlighted by Japan. Our U.S. and EMEA investment sales, though down from a year earlier, perform notably better than their respective regions' market activity. For the full year, the 40% decline in investment sales D revenue compared favorably with a 43% decline in market volume activity, with EMEA notably outperforming the market. Our loan servicing fee revenue grew 3% in the quarter as lower prepayment fees tempered 6% growth of recurring servicing fees. For the full year, loan servicing fee revenue fell 3% as prepayment fees were approximately $13 million lower than the prior year, which masked 6% growth in the core servicing fees in 2023. The rise in interest rates has nearly eliminated early refinancing activity, which generates prepayments.
Karen: Fee revenue declined across most geographies and major asset classes. However, we had several bright spots in the Asia Pacific region highlighted by Japan.
Our U S and EMEA investment sales.
Karen: Down from a year earlier performed notably better than our respective regions market activity.
Karen: For the full year, the 40% decline in investment sales day revenue compared favorably with the 43% decline in market volume activity with EMEA, and notably outperforming the market.
Karen: Our loan servicing fee revenue grew 3% in the quarter as lower prepayment fees temporary 6% growth of recurring servicing fees.
Karen: For the full year loan servicing fee revenue fell 3% as prepayment fees were approximately $13 million lower than the prior year, which now 6% growth in the core servicing fees in 2023.
Karen: The rise in interest rates is nearly eliminated early refinancing activity, which generate the prepayment fee.
Karen: The underlying increase in the servicing fees was driven by the continued growth in our Fannie Mae portfolio.
Karen: Capital markets adjusted EBITDA margin contraction for the quarter and full year was predominantly driven by lower transactional fee revenue net of lower commission expense as well as incentive compensation accrual timing.
Karen: The decremental margin within capital markets for the quarter was a bit higher than typical.
Karen: All your decremental margin was in line with the historical average and our expectation considering the differences in geographic compensation structures and discrete items.
Karen Samhat: The underlying increase in the servicing fees was driven by the continued growth in our Fannie Mae portfolio. The capital markets adjusted EBITDA margin contraction for the quarter and full year was predominantly driven by lower transactional fee revenue, net of lower commission expense, as well as incentive compensation accrual timing. The decremental margin within capital markets for the quarter was a bit higher than typical, though the full-year decremental margin was in line with the historical average and our expectations considering the differences in geographic compensation structures and discrete items. 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 when market conditions improve. 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 over the past few months, which has coincided with the general recent stability of the 10-year Treasury rate that is well below the October 2023. The amount and pace of revenue growth over the course of 2024 will be heavily influenced by the factors impacting deal timing and closing rates that Christian described. So we anticipate higher growth rates in the second half of 2024. Moving next to work dynamics.
The investments we've made in our capital market talent and platform over the past several years position us to capitalize on a rebound in transaction volumes when market conditions improve.
Karen: Looking ahead, the global capital markets investment sell debt and equity advisory pipeline is up modestly compared with this time last year and client engagement momentum has picked up over the past few months, which has coincided with the general recent stability of the 10 year Treasury rate is well below the October 2023 peak.
Karen: The amount and pace of revenue growth over the course of 2024 will be heavily influenced by the factors impacting deal timing and closing rates that Christian described though we anticipate higher growth rates in the second half of 2024.
Karen: Moving next to work dynamic.
Karen: Fee revenue growth of 8% in the quarter was led by an acceleration within workplace management.
Karen: The 17% increase in workplace management fee revenue as a result of the ramp up of the new global client wins and mandate expansions, we secured earlier in 2023.
Karen: For the full year, the ramp up of the new contracts in the latter part of the year drove 7% growth in workplace management fee revenue, which is on top of 15% growth in 2022.
Karen: Project management grew 2% in the quarter from broad based activity across geographies. So demand moderated from prior quarters generally in line with its historical landfill leasing trends.
Karen: For the full year project management grew 9% improvement in work dynamics adjusted EBITDA margin for the quarter and the full year was primarily attributable to the revenue growth along with ongoing cost management.
Karen: We remain confident in our segment growth and margin trajectory over the coming years broadly we continue to see solid new sales trends and strong contract renewal and expansion rate as the demand for professional management of corporate real estate increases.
Karen Samhat: See revenue growth of 8% in the quarter was led by an acceleration within workplace, A 17% increase in workplace management fee revenue is a result of the ramp up of the new global client wins and mandated expansions we secured earlier in 2023. For the full year, the ramp-up of the new contracts in the latter part of the year drove 7% growth in workplace management fee revenue, which is on top of 15% growth in 2022. Project Management accrued 2% in the quarter from broad-based activity across geography. So demand moderated from prior quarters, generally in line with its historical lag-to-losing trend. For the full year, project management grew 9%.
Karen: The new workplace management contracts from Fortune 100 companies, we secured in the early part of 2023, we'll continue to support solid momentum through the first half of 2024.
Karen: So at a more moderate pace in the latter part of 2023.
Karen: We remain focused on securing additional project management mandates however, the slower economic and leasing backdrop may dampen near term growth rates.
Karen: Turning to <unk> technologies.
Karen: <unk> enterprise client demand drove 14% fee revenue growth, which was on top of a 21% year over year organic growth rate in the fourth quarter 2022.
Karen: For the full year, 16% fee revenue growth solid 23% organic growth in the prior year.
Karen: We continue to see strong retention rate of Jaylo technology software and solutions revenue.
Karen: However, slower new client wins in 2023 will moderate growth rates in the near term.
Karen: The combination of the fee revenue growth and incremental operating efficiency gains drove an improvement in <unk> technologies adjusted EBITDA margin that was more than offset by adverse changes in equity losses net of carried interest both for the quarter and the full year. The timing of certain expenses was also a benefit to the fourth quarter margin.
Karen Samhat: The improvement in work dynamics adjusted EBITDA margin for the quarter and the full year was primarily attributable to the revenue growth along with ongoing cost management. We remain confident on the segment's growth and margin trajectory over the coming years. Broadly, we continue to see solid new sales trends and strong contract renewal and expansion rates as the demand for professional management of corporate real estate increases. The new workplace management contracts from Fortune 100 companies we secured in the early part of 2023 will continue to support solid momentum through the first half of 2024, though at a more moderate pace in the latter part of 2023. We remain focused on securing additional project management mandates.
Karen: The equity losses resulted from valuation declines in certain portfolio investments and reflect the challenging environment for venture capital.
Karen: Segment profitability remains a top focus and we are pleased with the fourth quarter as positive margin contribution excluding equity losses.
Karen: Now to Lasalle advisory fee revenue declined 4% in the quarter, primarily on the impact of valuation declines within our assets under management over the past year.
Karen: Absent the foreign currency exchange movements assets under management were 7% lower than a year earlier with approximately 70% of the decline attributable to valuation reductions with the balance from net acquisition and disposition activity.
Karen Samhat: However, the slower economic and leasing backdrop may dampen near-term growth. Turning to JLL technology. Existing enterprise client demand drove 14% fee revenue growth, which was on top of a 21% year-over-year organic growth rate in the fourth quarter 2022. For the full year, 16% fee revenue growth followed 23% organic growth in the prior year. We continue to see strong retention rates of JLL technology, software, and solutions revenue. However, slower new client wins in 2023 will moderate growth rates in the New York, The combination of the fee revenue growth and incremental operating efficiency gains drove an improvement in JLL Technologies' adjusted EBITDA margin that was more than offset by adverse changes in equity losses that have carried interest, both for the quarter and the full year.
Karen: Capital raising activity and new capital deployment continues to be subdued given the evolving market environment, which also moderates transaction revenues for.
Karen: For a perspective, new investments for the quarter and trailing 12 months, we're about 70% lower than the respective prior year periods.
Karen: Incentive fees, which are a function of the disposition timing and asset performance increase for the full year, often muted 2022 and drove 2% full year segment revenue growth.
Karen: For 2023, we had about $25 million of equity losses from declining asset valuation as compared with the nearly breakeven in 2022.
Karen: The reduction in Lasalle adjusted EBITDA margin in the quarter was largely attributable to lower revenue as well as timing of certain personnel costs and annual compensation accruals.
Karen: The full year margin decline was primarily driven by the equity losses, partially offset by higher incentive fees.
Karen: Turning to free cash flow we.
Karen: We recorded a net inflow of $389 million for the year compared with a $6 billion outflow in the prior year the.
Karen: The improvement was driven largely by better net working capital, including improved collection of trade receivables.
Karen Samhat: The timing of certain expenses was also a benefit to the fourth quarter margin. The equity loss has resulted from valuation decline in certain portfolio investors, and reflect the challenging environment for venture capital. Segment profitability remains the top focus, and we are pleased with the fourth quarter's positive margin contribution, excluding equity loss. Now to LaSalle. Advisory fee revenue declined 4% in the quarter, primarily on the impact of valuation declines within our assets under management over the past year.
Karen: Along with lower cash outflows associated with taxes paid and annual incentive compensation and commissions, which outpaced lower cash from earnings.
Karen: The lower cash from earnings was largely attributable to dampen transaction oriented business performance.
Karen: Cash flow conversion as a high priority and we are very focused on our working capital efficiency.
Karen: Shifting to our balance sheet and capital allocation during.
Karen: During the quarter, we strengthen our liquidity position through a $400 million bond offering with proceeds used to reduce our borrowings on our credit facility.
Karen: Liquidity totaled $3 1 billion at the end of the fourth quarter, including $2 $7 billion of Undrawn credit facility capacity.
Karen Samhat: Absent foreign currency exchange movements, assets under management were 7% lower than a year earlier, with approximately 70% of the decline attributable to valuation reduction, with a balance from NAP Acquisition and Disposition Act. Capital Raising Activity and New Capital Deployment continues to be subdued given the evolving market environment, which also moderates transaction revenues. For perspective, new investments for the quarter and trailing 12 months were about 70% lower than the respective prior year period. Incentive fees, which are a function of the disposition, timing, and asset performance, increased for the full year off of muted 2022 and drove 2% full-year segment fee revenue growth.
Karen: As of December 31 reported net leverage was one six times up from 1.0 times a year earlier, primarily due to the adverse impact of noncash equity losses, as well as lower cash earnings over the trailing 12 months.
Karen: The equity losses had a 0.3 times adverse impact on our fourth quarter reported net leverage ratio.
Karen: Over the medium term, we intend to manage the business towards the middle of our zero to two times leverage range with leverage above the midpoint of the target range in 2023, we selectively deploy capital towards growth initiatives and repurchased $62 million of shares to offset stock compensation dilution as we prioritize deleveraging our balance sheet.
Karen: Considering the seasonality and current leverage we anticipate near term share repurchases to continue at a pace that will offset expected full year stock compensation dilution looks.
Karen: Looking further out the amount of share repurchases will be dependent on the performance of our business, particularly cash generation and the macroeconomic outlook. We will also weigh it against our broader investment opportunities that in particular M&A.
Karen Samhat: For 2023, we had about $25 million of equity losses from declining asset valuations, compared with a nearly break-even 2022. The reduction in LaSalle's adjusted EBITDA margin in the quarter was largely attributable to lower revenue as well as timing of certain personnel costs and annual compensation accruals. The full year margin decline was primarily driven by the equity losses, partially offset by higher incentives.
Karen: Regarding our 2020 for full year financial outlook, we are cautiously optimistic that transaction activity will pick up in the second half of the year.
Karen: Growth in our more resilient business lines remained solid.
Karen: We continue to scale, our platform and investable capture future growth opportunities and drive operating leverage.
Karen: We're targeting a full year of 2024, adjusted EBITDA margin, excluding equity earnings to be within a range of 12, 5% to 14, 5%.
Karen Samhat: Turning to free cash flow. We recorded a net inflow of $389 million for the year compared with a $6 million outflow in a prior year. The improvement was driven largely by better net working capital, including improved collection of trade receivables, along with lower cash outflows associated with taxes paid and annual incentive compensation and commission, which outpays lower cash from earnings. The lower cash from earnings was largely attributable to dampened transaction-oriented business performance.
Karen: With many initiatives in play to drive growth and efficiency. We are excited about the value creation prospects of our business across market cycles.
Speaker Change: Before turning the call back to questions I'd like to note a few reporting changes we will make effective in the first quarter of 2024.
Speaker Change: First shale technologies, and Lasalle equity earnings related to investment activities will be excluded from our adjusted EBITDA and adjusted net income calculation.
Speaker Change: Equity earnings from our operating joint ventures across the business will continue to be included.
Speaker Change: We believe this change will allow for clear visibility and better comparability of our operating financial performance across reporting periods.
Speaker Change: Second we are aligning with sales assets under management definition to conform to industry standards, which includes uncalled committed capital and cash.
Karen Samhat: Cash flow conversion is a high priority and we are very focused on our working capital efficiency. Shifting to our balance sheet and capital allocation. During the quarter, we strengthen our liquidity position through a $400 million bond offering, with proceeds used to reduce our borrowings on our credit facility. Liquidity totaled $3.1 billion at the end of the fourth quarter, including $2.7 billion of on-drawing credit facility capacity. As of December 31st, reported net leverage was 1.6 times, up from 1.0 times a year earlier, primarily due to the adverse impact of non-cash equity losses, as well as lower cash earnings over the trailing 12 months. The equity losses had a 0.3 times adverse impact on our fourth quarter reported net leverage ratio.
Speaker Change: Third beginning next quarter, we will no longer report fee revenue or fee based operating expenses. Following the conclusion of a comment letter from the SEC regarding the presentation of these metrics in our financial statements.
Speaker Change: We are working through alternative ways to provide the information and visibility we believe those measures springs.
Speaker Change: Importantly, this third reporting change it's solely a matter of non-GAAP measure presentation. As there is no impact to the underlying performance of our business our audited GAAP financial statements adjusted EBITDA, adjusted net income or free cash flow.
We will provide historical financial information that reflects all three reporting changes that Jeff discussed prior to our first quarter earnings call Kristian back to you.
Thank you Karen.
Speaker Change: Looking ahead to 2024, we believe there are reasons for cautious optimism as we are beginning to see green shoots emerge in the commercial real estate market.
Karen Samhat: Over the medium term, we intend to manage the business towards the middle of our zero to two times leverage range. With leverage above the midpoint of the target range in 2023, we selectively deployed capital towards growth initiatives and repurchased just $62 million of shares to offset stock compensation solutions as we prioritize deleveraging our balance sheet. Considering the seasonality and current leverage, we anticipate near-term share repurchases to continue at a pace that will 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.
Speaker Change: According to <unk> proprietary global bit intensity index that has to be a growing number of bid us entering the market since late 2023, which is an encouraging sign for transactional markets.
Speaker Change: As interest rates stabilize lenders and investors will be able to appropriately priced real estate assets, which will lead to a tightening of the bid ask spread.
Speaker Change: This process is already underway with the U S UK and Australia furthest along on the price adjustment cycle.
Speaker Change: In the Asia Pacific region, Industrial net absorption set a new annual record in 2023.
Speaker Change: Strong fundamentals in this region so to support continued recovery in leasing and investment sales activity.
Speaker Change: In North America, and Europe inflation is moderating setting the stage for rate cuts in the second half of the year.
Karen Samhat: We'll also weigh it against our broader investment opportunities that, in particular, M&A. Regarding our 2024 full year financial outlook, we are cautiously optimistic that transaction activity will pick up in the second half of the year, growth that are more resilient business lines remain solid. We continue to scale our platform and invest to both capture future growth opportunities and drive operating leverage. We are targeting a full year 2024 adjusted EBITDA margin excluding equity earnings to be within a range of 12.5% to 14.5%.
Speaker Change: These factors are resulting in an increase in investor interest specifically in high quality assets.
Speaker Change: We believe this will spur a modest recovery in transaction activity for these two region as the year progresses.
Speaker Change: Price discovery process can take time to play out and as a result, 2024 is likely to be a year of transition for the commercial real estate market.
Speaker Change: As a global player with a diversified platform and strong balance sheet, we are well positioned to help clients navigate this transition.
Karen Samhat: With many initiatives in play to drive growth and efficiency, we are excited about the value creation prospects of our business across market cycles. Before turning the call back to Christian, I'd like to note a few reporting changes we will make effective in the first quarter of 2024. First, JLL Technologies and LaSalle's equity earnings related to investment activities will be excluded from our adjusted EBITDA and adjusted net income calculation.
Speaker Change: Our technology and data tools provide clients with leading insights into market trends and opportunities.
Speaker Change: Our <unk> model brings together the unique capabilities of our different business lines.
Speaker Change: This past year has proven that our operating model can deliver solid margin performance. Despite a slower transaction environment, we're committed to driving margin expansion and believe the steps we have taken to streamline our operating model and grow our resilient business lines will strengthen the long term margin profile of our business.
Karen Samhat: Equity earnings from our operating joint ventures across the business will continue to be included. We believe this change will allow for clearer visibility and better comparability of our operating financial performance across reporting. Second, we are aligning LaSalle's assets under management definition to conform to industry standards, which includes uncalled committed capital and cash. Third, beginning next quarter, we will no longer report fee revenue or fee-based operating expenses following the conclusion of a comment letter from the SEC regarding the presentation of these metrics in our financial statements. We are working through alternative ways to provide the information and visibility we believe those measures bring.
Speaker Change: We continue to see opportunities to invest in our business, both organically and through M&A, where <unk> have become more attractive recently.
Speaker Change: We are focused on adding people and capability that strengthen our offerings to clients.
Speaker Change: Confident that the investments we have made and will continue to make in our business positioning us for success as market conditions improve.
Speaker Change: Finally, I would like to thank our colleagues for their commitment to serving our clients in a challenging environment and look forward to what we can achieve together in 2024.
Speaker Change: Operator, please explain the Q&A process.
Speaker Change: The floor is now open for your questions to ask a question at this time simply press star followed by the number one on your telephone keypad.
Karen Samhat: Importantly, this third reporting change is solely a matter of non-GAAP measure presentation, as there is no impact to the underlying performance of our business, are out of the gap financial statements, adjusted EBITDA, adjusted net income, or pre-cash flow. We will provide historical financial information that reflects all three reporting changes I just discussed prior to our first quarter earnings call. Christian, back to you.
We'll now take a moment to compile a roster.
Speaker Change: Our first question comes from the line of Michael Griffin with Citi. Please go ahead.
Michael Griffin: Great. Thanks, maybe.
Michael Griffin: Maybe just going back to the SEC comment letter you mentioned, Karen I was wondering if you could provide maybe some additional color around that is the guidance in 2024 expected off of that new definition in terms of impacting adjusted EBITDA margin just trying to get a sense for how we should.
Christian Ulbrich: Thank you, Karen. Looking ahead to 2024, we believe there are reasons for cautious optimism as we are beginning to see green shoots emerge in the commercial real estate market. According to JLL's Proprietary Global Bid Intensity Index, there has been a growing number of bidders entering the market since late 2023, which is an encouraging sign for transactional markets. As interest rates stabilize, lenders and investors will be able to appropriately price real estate assets, which will lead to a tightening of the bid-ask spread. This process is already underway with the U.S., U.K. and Australia furthest along in the price adjustment cycle. In the Asia-Pacific region, industrial net absorption set a new annual record in 2023. Strong fundamentals in this region should support continued recovery in leasing and investment sales activity. In North America and Europe, inflation is moderating, setting the stage for rate cuts in the second half of the year.
Michael Griffin: About margins going forward. If there is a kind of a new definition of this fee based revenue and operating expenses.
Karen: Yeah sure first I want to emphasize again that this change does not impact the quality of our financial statements or the performance of the business. So to repeat what I said earlier, the audited GAAP financial statements in footnotes adjusted EBITDA adjusted net income adjusted EPS and free cash flow all will not change as a result of the topic.
Karen: And so what the SEC is focused on is as follows in the current presentation, we provide both GAAP revenue and fee revenue.
Karen: And the FCC has a heightened focus on revenue metrics with deductions and specifically deductions that they categorized as an expense.
Karen: So therefore, the FCC is focusing on our fee revenue since that calculation has a deduction for reimbursable costs.
Karen: Right now, we're working with the SEC to determine an alternate presentation that can be used and it's our intention that will provide a presentation that includes the same insights that the investment community is familiar with today.
Christian Ulbrich: These factors are resulting in an increase in investor interest, specifically in high quality assets. We believe this will spur a modest recovery in transaction activity for these two regions as the year progresses. The price discovery process can take time to play out. And as a result, 2024 is likely to be a year of transition for the commercial real estate market. As a global player with a diversified platform and strong balance sheet, we are well positioned to help clients navigate this transition. Our technology and data tools provide clients with leading insights into market trends and opportunities, while our OneJLL model brings together the unique capabilities of our different business lines.
Speaker Change: Got you.
Speaker Change: That was really helpful. And then maybe stepping back the higher level question just on expectations of transaction activity I mean.
Speaker Change: Christian if you're kind of looking at bid ask spreads now relative to where they were call. It 12 months ago, how much have they narrowed and then how do you think that is going to impact more transactions coming back to market.
Christian Ulbrich: Sure Michael.
Christian Ulbrich: While they have clearly narrowed it depends a little bit on the quality of the underlying assets.
Christian Ulbrich: Which asset classes, we are speaking about but generally speaking.
Christian Ulbrich: We see now a much closer.
Christian Ulbrich: Situation between bid and ask than we saw six months ago or even three months ago.
Operator: This past year has proven that our operating model can deliver solid margin performance despite a slower transaction environment. We are committed to driving margin expansion and believe the steps we have taken to streamline our operating model and grow our resilient business lines will strengthen the long-term margin profile of our business. We continue to see opportunities to invest in our business, both organically and through M&A, where valuations have become more attractive recently. We are focused on adding people and capability that strengthen our offerings to clients. I'm confident that the investments we have made and will continue to make in our business position us for success as market conditions improve. Finally, I would like to thank our colleagues for their commitment to serving our clients in a challenging environment and look forward to what we can achieve together in 2024. Operator, please explain the Q&A process. The floor is now open for your questions. To ask a question at this time, simply press star followed by the number one on your telephone keypad.
Christian Ulbrich: Channels are coming on the interest rate side, which we have seen towards the end of the year and at the beginning of the year help now the last couple of weeks went in the other direction again, but overall.
Christian Ulbrich: <unk> is a clear willingness in the market to trade.
Christian Ulbrich: And we believe that will continue over the course of the year, obviously picking up going into the second half.
Christian Ulbrich: Yeah.
Speaker Change: Great. That's it for me thanks for the time.
Speaker Change: Sure.
Speaker Change: Our next question comes from the line of Stephen Sheldon with William Blair. Please go ahead.
Speaker Change: We had some minutes silicon for Stephen Sheldon. Thank you for the questions for Lasalle how are you thinking about the potential trend in assets under management over the course of 2024, given the current fundraising environment and the potential drag from mark to market adjustments on CRE asset values.
Speaker Change: And then thank you mentioned a reporting change with respect to the definition of assets under management. During the prepared remarks could you just touch on how that factors into the equation as well.
Speaker Change: Okay.
Stephen Hardy Sheldon: Sure I'll take that one first let's just start with a change in reporting of the assets under management. So taking a step back there are three industry bodies that came together in a crease in the U S and Robin your oven and revenue Asia Pacific and they aligned on a definition for assets under management, because the industry was using a different metrics across the board.
Michael Griffin: We'll now take a moment to compile our roster. Our first question comes from the line of Michael Griffin with Citi. Please go ahead.
Karen Samhat: Great, thanks. Maybe just going back to the SEC comment letter you mentioned, Karen, wondering if you could provide, you know, maybe some additional color around that is the guidance in 2024 expected off of that new definition in terms of impacting adjusted EBITDA margin, just trying to get a sense for how we should think about margins going forward, if there's a kind of a new definition of this fee based revenue and operating expense. Yeah, sure. First, I want to emphasize again that this change does not impact the quality of our financial statements or the performance of the business. So to repeat what I said earlier, the audited GAAP financial statements and footnotes, adjusted EBITDA, adjusted net income, adjusted EPS, and free cash flow all will not change as a result of the topic. And so what the SEC is focused on is as follows. In the current presentation, we provide both gap revenue and fee revenue. And the SEC has a heightened focus on revenue metrics with deductions, and specifically deductions that they categorize as an expense.
Speaker Change: Ed.
Speaker Change: We were on the more conservative end of that so the impact for Lasalle is that our year end a U N will increase from the $74 billion that as of December 31, under our old Matt measurement methodology to 89 billion.
Speaker Change: <unk> forward under the new methodology in terms of what we expect going forward for Lasalle.
Speaker Change: We certainly have a significant amount of dry powder on the sidelines now ready to deploy and it will be a matter of time for the transaction markets to return them recover before that will start to be deployed.
Speaker Change: And increasing advisory fees.
Speaker Change: I would say Theres still a continued pressure we anticipate from further valuation declines coming through and that has come through we'll start over the last 12 months, but we expect a little bit more pressure in 2024 as well.
Speaker Change: Okay got it that's very helpful. Thank you and then had a two part question on leasing.
Speaker Change: First what are you seeing in terms of lease durations are there any signs that tenants are becoming more comfortable signing longer term lease commitments and second are you starting to see larger leasing deals flow through and if so are there any asset classes to call out in particular.
Karen Samhat: So therefore, the SEC is focusing on our fee revenue, since that calculation has a deduction for reimbursable costs. Right now, we're working with the SEC to determine an alternate presentation that can be used, and it's our intention that we'll provide a presentation that includes the same insights that the investment community is familiar with today. Gotcha. That was really helpful.
Speaker Change: Yeah. So first on the lease term I'll talk about our U S class a office.
Speaker Change: Has metrics benchmark here to focus on for the full year 2023.
Speaker Change: Our direct deals the weighted average lease term was eight two years and that was a significant increase from 2022 at seven one years, but still below pre pandemic levels, which were really around eight eight years. We're also seeing importantly, and uptake of the sublease activity leasing and so there is some.
Christian Ulbrich: Um, and then maybe stepping back a higher level question just on expectations of transaction activity. I mean, Christian, if you're kind of looking at bid ask spreads now, relative to where they were called 12 months ago, how much have they narrowed? And then how do you think that is going to impact more transactions coming back to market? Sure, Michael.
Speaker Change: Going on there those are typically shorter term leases that's around $4 nine or five years and so that's dragging down the overall weighted average lease term, but generally that's trending in the right right direction and industrial while also seeing similar trends, where some of the larger occupiers are willing to sign longer term leases.
Christian Ulbrich: Well, they have clearly narrowed. It depends a little bit on the quality of the underlying assets and also which asset classes we are speaking about. But generally speaking, we see now a much closer situation between bid and ask than we saw six months ago, even three months ago, the kind of the calming on the interest rate side, which we have seen towards the end of the year and at the beginning of the year have helped now the last couple of weeks went in the other direction again. But overall, there is a clear willingness in the market to trade. And we believe that will continue over the course of the year, obviously picking up more to the second half. Great. That's it for me.
Speaker Change: I think there was a second part to your question can you remind me if I missed it.
Speaker Change: Yes, I was just wondering if larger leasing deals are starting to flow through and if they are there any assets in particular to call out.
Speaker Change: Yes, we are starting to see an uptick in the larger <unk>.
Speaker Change: <unk> transactions focusing on office to start.
Speaker Change: That there was an uptick in the fourth quarter, but it was a modest uptick and if you compare a large lease deals in office in the U S, which we define our research team defined as over 100000 square feet.
Speaker Change: They're on a trailing 12 month basis is still 60% below.
Michael Griffin: Thanks for the time. Our next question comes from the line of Stephen Sheldon with William Blair. Please go ahead.
Speaker Change: The pre pandemic numbers, so we're seeing an uptick and that's encouraging but it certainly has.
Stephen Hardy Sheldon: Thank you for the questions. For LaSalle, how are you thinking about the potential trend in assets under management over the course of 2024, given the current fundraising environment and the potential drag from mark to market adjustments on CRE asset values? And then think you mentioned a reporting change with respect to the definition of assets under management during the preparator marks. Can you just touch on how that factors into the equation as well? Thank you. Sure, I'll take that one.
Speaker Change: Some room to run there in terms of what we're seeing from Trent individual deal sizes and industrial over.
Speaker Change: Over the last couple of quarter is we've actually seen kind of more mid size <unk>.
Speaker Change: Transactions being side are assigned as opposed to the largest blocks of warehouse space. Some of that has to do with availability of some of that has to do with the demand mix, but that's the trend we're seeing there.
Speaker Change: Great and thank you for all the metrics on lease duration I appreciate that.
Our next question comes from line of Jade Rahmani with <unk> W. Please go ahead.
Karen Samhat: First, let's just start with the change in reporting of the assets under management. So, taking a step back, there were three industry bodies that came together, NACREF in the U.S., INREV in Europe, and ANREV in Asia Pacific, and they aligned on a definition for assets under management because the industry was using different metrics across the board. We were on the more conservative end of that, so the impact for LaSalle is that our year-end AUM will increase from the $74 billion as of December 31st under our old measurement methodology to $89 billion going forward under the new methodology. In terms of what we expect going forward for LaSalle's AUM, we certainly have a significant amount of dry powder on the sidelines now ready to deploy, and it will be a matter of time for the transaction markets to return and recover before that will start to be deployed. And increasing advisory fees, I would say there's still a continued pressure we anticipate from further valuation declines coming through. That has come through over the last 12 months, but we expect a little bit more pressure in 2024 as well. Okay, got it.
Jade Rahmani: Thank you very much for 2024 and full year are you expecting capital markets and are you expecting leasing to be flat up or down.
Jade Rahmani: Let me kick it off on the capital market side I think it is I have to say that.
Jade Rahmani: The market is as I said earlier willing.
Jade Rahmani: Willing to get engaged again trade.
Jade Rahmani: Ask risks have narrowed and so we expect that overall volumes will be slightly better than in 2023.
Jade Rahmani: Most likely you will see that in the second half of the year.
Jade Rahmani: And on the on the leasing side and carrying may want to add to it.
Jade Rahmani: We probably see a similar picture.
Just alluded to.
Jade Rahmani: You see different signs of activity.
Jade Rahmani: Which which lead towards a slightly improved overall.
Jade Rahmani: <unk> and <unk> also on the leasing side.
Speaker Change: Yeah at a high level I'd, just say right. There, we expect a modest amount of fee revenue growth in these transactional business lines, but primarily occurring in the second half of the year.
Karen Samhat: That's very helpful. Thank you. And then had a two part question on leasing. First, what are you seeing in terms of lease durations? Are there any signs that tenants are becoming more comfortable signing longer term lease commitments? And second, are you starting to see larger leasing deals flow through? And if so, are there any asset classes to call it in particular?
Speaker Change: Thank you turning to the margin guidance does this factor in any impact of the SEC comments and can you just walk us through.
Youre thinking about how do you get to the 12 five to $14 five and then walking from that to the 16% to 19 long term.
Karen Samhat: Yeah, so first on the lease term, I'll talk about U.S. Class A office as a kind of metric benchmark here to focus on. For the full year 2023, for direct deals, the weighted average lease term was 8.2 years, and that was a significant increase from 2022 at 7.1 years, but still below pre-pandemic levels, which were really around 8.8 years. We're also seeing, importantly, an uptick of the sublease activity leasing, and so there's some activity going on there. Those are typically shorter-term leases.
Speaker Change: Yeah. So.
Speaker Change: With respect to that the SEC letter and its impact to our targets right now as I mentioned before the end goal is to provide the same insights into the business as we do today, but in an alternate presentation and this is how we review report and run the business today internally for our management team.
Speaker Change: At the moment. This is what we are continuing continuing to target.
Speaker Change: In terms of where we get how we get to the top end versus the bottom end of the range, it's really largely dependent on the overall macroeconomic environment and what happens with the velocity of transactions coming back if that happens at a pace that's above our current expectations. While we're likely end up at the higher end of the range. If it's below our expectations we could.
Karen Samhat: That's around 4.9 or 5 years, and so that's dragging down the overall weighted average lease term, but generally that's trending in the right direction. In industrial, we're also seeing similar trends where some of the larger occupiers are willing to sign longer-term leases. I think there was a second part to your question. Can you remind me if I've missed it?
Speaker Change: And up at the lower end of the range. So.
Speaker Change: Key determining factor.
Speaker Change: I do want to just remind everyone that we certainly have the benefit of the cost actions, we took last year as well as the continuing improvements in our work dynamics margin as we continue to scale that business as a nice tailwind there.
Karen Samhat: Um, yes, just wondering if larger leasing deals are starting to flow through and if they are, are there any assets in particular to call out? Yes, we are starting to see an uptick in the larger size transactions, focusing on office to start, that there was an uptick in the fourth quarter, but it was a modest uptick. And if you compare large lease deals in office in the US, which we define, our research team defines as over 100,000 square feet, the volume there on a trailing 12-month basis is still 60% below the pre-pandemic number.
Speaker Change: And then let's say you end up at 13, and a half of 2014, how do you get from that to 16% to 19 and medium term I don't know what that means is that 2026 2027.
Speaker Change: Well it obviously depends how the overall market is developing.
Speaker Change: If we are correct that we will see over the next couple of years and continuous improvement open market and buy them in.
Stephen Hardy Sheldon: So we're seeing an uptick, and that's encouraging, but it certainly has some room to run there. In terms of what we're seeing from individual deal sizes in industrial, over the last couple of quarters, we've actually seen kind of more mid-size transactions being signed, as opposed to the largest blocks of warehouse space. Some of that has to do with the validity, some of that has to do with the demand mix, but that's the trend we're seeing there. Great, and thank you for all the metrics on lease duration, appreciate that. Our next question comes from the line of Jade Rahmani with KBW. Please go ahead.
Speaker Change: That will lead us to a law formally stated margin target and as we have alluded to in previous calls we.
Speaker Change: <unk> made our platform much more productive over the last couple of years and so we don't need the same type of topline numbers to get to that bottom line margin profile, which we stated before.
Speaker Change: So we are pretty confident that that will be achievable in with not too distant future.
Speaker Change: Okay.
Speaker Change: Thanks.
Speaker Change: Yes.
Speaker Change: Our next question comes from the line of Patrick O'shaughnessy with Raymond James. Please go ahead.
Jade Rahmani: Thank you very much. For 2024 full year, are you expecting capital markets? And are you expecting leasing to be flat, up, or down? Let me kick it off, Jade.
Patrick O'Shaughnessy: Hey, good morning, how much do you think a potential rebound in capital markets activity is predicated upon interest rate cuts or put another way if central banks and the fed were to not cut in 2024, how would you see that impacting deal activity.
Christian Ulbrich: On the capital market side, I think it is fair to say that the market is, as I said earlier, willing to get engaged again and then trade, but ask rates have narrowed. And so we expect that overall volumes will be slightly better than in 2023. Most likely, you will see that in the second half of the year.
Speaker Change: Well, we have seen that.
Speaker Change: The interest rates play a very important role now the question is.
Speaker Change: Is it the absolute level, which we are seeing or was it the very quick spike in interest rates and also in an options.
Christian Ulbrich: And on the leasing side, and Karen may want to add to it, we probably see a similar picture, as she just alluded to. You see different signs of activity, which lead towards a slightly improved overall transaction environment also on the leasing side. Yeah, at a high level, I'd just say, right, that we expect a modest amount of fee revenue growth in these transactional business lines, but primarily occurring in the second half of the year. ==== Transcribed by Automatic Sync Technologies ==== Thank you. Turning to the margin guidance, does this factor any impact of the SEC comments and can you just walk us through, you know, your thinking about how do you get to the 12 and a half to 14 and a half and then walking from that to the 16 to 19 long term? Yeah.
And therefore.
Speaker Change: I think is a very steady environment. If the market were to expect no interest rate cuts, but also no increases.
Speaker Change: Obviously dampened the overall transaction volume, but it wouldn't fall below 2023 levels.
Speaker Change: Yes, it would still be slightly above and.
Speaker Change: The market is seeing those interest rate.
Speaker Change: Declines those cuts over the course of the year.
Speaker Change: Over and above what is now included in the predictions that could add another another 5% to 10% of the whole home.
Speaker Change: And that from that pot onwards, so not for the whole year, but when that is happening.
Speaker Change: And so our own expectations are that we will have a pretty cautious trading environment in the first two quarters, but we expect it to lighten up the second half of the year as we already stated couple of times in this call.
Karen Samhat: So, with respect to the SEC letter and its impact to our targets, right now, as I mentioned before, the end goal is to provide the same insights into the business as we do today, but in an alternate presentation. And this is how we review, report, and run the business today internally for our management team. So, at the moment, this is what we are continuing to target. In terms of how we get to the top end versus the bottom end of the range, it's really largely dependent on the overall macroeconomic environment and what happens with the velocity of transactions coming back. If that happens at a pace that's above our current expectations, we'll likely end up at the higher end of the range.
Speaker Change: That's very helpful. Thank you.
Speaker Change: And then a smaller competitive recently defaulted on its debt is the current environment pretty favorable in terms of attracting talent from smaller less diversified competitors.
Speaker Change: Listen we have a very clear.
Speaker Change: Expectations.
Speaker Change: The type of talent, we want to have on our platform.
Speaker Change: We.
Speaker Change: Pretty good in attracting those people to our platform and so that.
Speaker Change: Market called the type of talent, we are looking for is still incredibly tight.
Speaker Change: I don't see any any major impact.
Speaker Change: The context, stating here.
Karen Samhat: If it's below our expectations, we could end up at the lower end of the range. So that's a key determining factor. I do want to just remind everyone that we certainly have the benefit of the cost actions we took last year, as well as the continuing improvements in our work dynamics margin as we continue to scale that business. That's a nice tailwind there. And then let's say you end up at 13 1?2 or 14. How do you get from that to 16 to 19?
Speaker Change: Okay. Thank you very much.
Speaker Change: Our next question comes from Jade Rahmani with K VW. Please go ahead.
Jade Rahmani: Thank you very much.
Jade Rahmani: Jello technologies.
Jade Rahmani: Goodwill component also on the balance sheet do you see any risk to impairing that.
Jade Rahmani: Yes.
Speaker Change: No not at this time.
Speaker Change: Can you comment on the M&A environment, and what what areas of the business you are most interested in growing through M&A transactions.
Christian Ulbrich: And medium term, I don't know what that means. Is that 2026, 2027? Well, it obviously depends how the overall market is developing. If we are correct, that we will see over the next couple of years and continuous improvement of the market environment, that will lead us to our formerly stated margin target. And as we have alluded to in previous calls, we have made our platform much more productive over the last couple of years. And so we don't need the same type of top line numbers to get to that bottom line margin profile, which we stated before. And so we are pretty confident that that will be achievable in the not too distant future. Thanks. Our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Please go ahead. Hey, good morning.
Speaker Change: Private credit is something that everyone is highlighting wanted to see if you could comment there or if there's other parts of the business, where you see better value.
Speaker Change: Well first of all as you know we have been quite hesitant to enter the M&A market over the last couple of years, because we felt the pricing was too high and that it is better value for our shareholders. If we reduce our leverage and buyback SaaS as we have done over the last year.
Speaker Change: Now what we're currently seeing is that M&A pricing has come down.
Speaker Change: And so we have been consistently evaluating deals and and as we continue to do so we are now seeing more and more opportunities, which we climbed.
Patrick O'Shaughnessy: How much do you think a potential rebound in capital markets activity is predicated upon interest rate cuts? Or put another way, if central banks and the Fed were to not cut in 2024, how would you see that impacting deal activity? Well, we have seen that the interest rates play a very important role. Now the question is, is it the absolute level which we are seeing? Or was it the very quick spike in interest rates and also in margins? And therefore, I think it's a very steady environment. If the market were to expect no interest rate cuts, but also no increases, that will obviously dampen the overall transaction volume, but it wouldn't fall below 2023 levels. I would guess it would still be slightly above.
Speaker Change: More interesting than in the past and usually those are in areas, where it offers us the opportunity to.
Bring in several of our different services, which we are providing to clients. So that it is not only touching one business line, but it goes across various business lines.
Speaker Change: The biggest asset we have is our one <unk> approach.
Speaker Change: Selling various services to the same clients is something which drives a lot of our topline growth.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: And lastly, the recent upsurge in the 10 year Treasury yield has that had any diminishing impact on the momentum that you had been seen building in capital markets.
Christian Ulbrich: And if the market is seeing those interest rate declines, those cuts over the course of the year, Over and above what is now included in the predictions that could add another another five to 10 percent of volume In that from that part onwards so not for the whole year, but when that is happening, And so our own expectations are that we will have a pretty cautious trading environment in the first two quarters, but we expect it to lighten up in the second half of the year, as we already stated a couple of times in this call. That's very helpful. Thank you. And then a smaller competitor recently defaulted on its debt. Is the current environment pretty favorable in terms of attracting talent from smaller, less diversified competitors? Listen, we have a very clear expectations what type of talent we want to have on our platform and we, are pretty good in attracting those people to our platform. And so the market for the type of talent we are looking for is still incredibly tight. I don't see any major impact of the context you are stating.
Speaker Change: It is not helpful. We are still seeing a growing client interest to transact. It's always the question when is the right moment to get out into the market. So our teams are incredibly busy advising our clients and we would have preferred that we haven't seen that recent uptick.
Speaker Change: But it doesn't take anything away, what we already said on the call about our outlook for the year.
Speaker Change: Yeah.
Speaker Change: Thank you for taking the follow up.
Speaker Change: Sure.
Speaker Change: I would now like to turn the call over to Christian Ulbrich for closing remarks.
Christian Ulbrich: Thank you operator 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 today, Kevin and I look forward to speaking with you again following the first quarter.
Speaker Change: This concludes today's call you may now disconnect.
Speaker Change: Yeah.
Speaker Change: [music].
Patrick O'Shaughnessy: Okay, thank you very much. Our next question comes from Jade Rahmani with KBW. Please go ahead.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: [music].
Jade Rahmani: Thank you very much. On JLL technologies, there's a goodwill component also on the balance sheet. Do you see any risk to impairing that? No, not at this time.
Speaker Change: Sure.
Speaker Change: Yeah.
Speaker Change: [music].
Christian Ulbrich: Can you comment on the M&A environment and what areas of the business you're most interested in growing through M&A transactions? Private credit is something that everyone is highlighting, wanted to see if you could comment there or if there's other parts of the business where you see better value. Well, first of all, as you know, we have been quite hesitant to enter the M&A market over the last couple of years, because we thought that pricing was too high and that it is better value for our shareholders if we reduce our leverage and buy back shares, as we have done over the last year. Now, what we are currently seeing is that M&A pricing has come down a fair bit. And so we have been consistently evaluating deals.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
[music].
Yes.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: [music].
Christian Ulbrich: And as we continue to do so, we are now seeing more and more opportunities, which we find more interesting than in the past. And usually those are in areas where it offers us the opportunity to bring in several of our different services, which we are providing to clients, so that it is not only touching one business line, but that it goes across various business lines.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: [music].
Speaker Change: Sure.
Christian Ulbrich: That's the biggest asset we have as JLL, our one JLL approach. We are selling various services to the same clients, which is something which drives a lot of our top line growth. And lastly, the recent upsurge in the 10-year Treasury yield, has that had any diminishing impact on the momentum that you had been seeing building in capital markets? © The Bulletproof Executive 2013 All rights reserved.
Speaker Change: Sure.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: [music].
Christian Ulbrich: Thank you. Good luck to you all. Have a great day. It is not helpful.
Jade Rahmani: We are still seeing growing client interest to transact. It's always the question when is the right moment to get out into the market. So our teams are incredibly busy advising our clients. And we would have preferred that we hadn't seen that recent uptick. But it doesn't take anything away what we already said on the call about our outlook for the year. Thank you for taking the follow-up. I would now like to turn the call over to Christian Ulbrich for closing remarks. Thank you, operator. With no further questions, we will close today's call. On behalf of the entire JLL team, we thank you all for participating on the call today. Karen and I look forward to speaking with you again following the first quarter. This concludes today's call. You may now disconnect. ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ?? ??
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Okay.