Everybody for joining us this afternoon. I'm Patrick O'Shaughnessy, the capital markets analyst here at Raymond James.
Some of you everyone are probably getting sick of seeing me, but I had the fortune of having a good lineup of companies joining us here. Up next, we have Jones Lang LaSalle, and on their behalf, we have CFO Karen Brennan. Maybe, Karen, if you could kick this off by for the people who are a little bit less familiar with Jones Lang LaSalle, maybe providing a one or two minute overview of the company.
Sure. No problem. Thanks, Patrick, for having us. Great to be here. First, just for a quick overview, we're a real estate services company. We provide a full range of services across the real estate lifecycle for owners, investors, and occupiers. Think leasing, investment sales, property and facilities management, valuations.
We also have an investment management arm as well. I'm going to highlight that we're one of the two largest players globally and have a global footprint. The third thing I'd emphasize is that there are really strong secular tailwinds for our industry. If you think about outsourcing trends, capital flows to real estate, sustainability ambitions, and the like, really well-positioned overall as an industry.
A question I've been asking your peers, I'm going to ask you as well, is what do you think Jones Lang LaSalle does better than any other company?
I'd say two things. First of all, it's really the breadth of industry knowledge, the quality of our research capability, and the platform that we have really allows us to provide outstanding advice to our clients that really is informed by a truly global perspective based on hundreds of years of history, that we can look both backward and forward in terms of where the market is going and how to best advise them to solve their solutions.
The other thing I would say is really the way our people come together. The culture of teamwork, their ability to see that connectivity across the different business lines, where we think about real estate in the full life cycle, and bring that to our clients as opposed to just thinking of the individual transaction that you might do.
We really approach it as taking that knowledge, taking those teams, providing advice to our clients and solving their problems rather than just an individual transaction approach.
Can you maybe walk us through how those advantages apply across the company's different segments?
I'll start with on the occupier side. If you're working with a large corporate who's coming to you, some of them may have already outsourced to a real estate services provider, some of them may have not. They're coming to you, and we try and start the conversation on what is your business strategy, and let's talk about what role real estate plays in your overall business strategy, right?
S tart there, not start with, what are you looking to do? What can I lease or sell for you, or what can I run for you?
Take a holistic view around what's important to their industry as it relates to their people and how they're delivering to their clients. Look across what are the most impactful areas we can work with them.
Is that changing their footprint?
Is it increasing their space?
Is it upgrading what they're providing to their employees?
Is it meeting their clients in a different part of the world?
Do they need to implement technology?
Do they have a net zero target they need to meet, right?
Bringing those different teams to them once you start with what are the most important things you do and in what order. That's really on the corporate side and really tapping into our Work Dynamics team but then pulling in different parts of the business. If you're working with an investor and you think about what are they trying to do as you size up the market in an uncertain environment or in a great environment, how does their overall portfolio look?
What's their investment objective?
What's their balance of the different, properties?
How do you think about supply and demand and know that in different locations?
What are the global trends and capital flows that are happening around the world that will inform what happens to real estate returns over time? Again, bringing that all to the table so that then when you talk about, are you advising them on buy side, selling?
Are you bringing your property management team?
Are we leasing?
Are we refinancing their debt?
Right. Are we helping them implement technology throughout their portfolio or achieving their sustainability targets, right?
Again, different conversation depending on the starting point, but bringing the same services together in a way that really helps them solve their problems.
As you mentioned, you're a top two series service provider by revenue and net income. The math is you're roughly half the size of CBRE Group in terms of both of those metrics. How do you think about the threshold at which a firm in your space achieves sufficient scale to effectively compete?
We're there. We're above the threshold, we are competing very well as it relates to our global footprint and the type of clients we have. We have an outstanding client roster and work with some of the largest companies and investors around the world. From here, as you think about the differential between us and our larger peer, it really just means we have a lot of runway to go, right?
To build on that platform that we have to scale further and to drive revenue growth and margin expansion.
You said in the past that your Work Dynamics platform is difficult to replicate. Can you explain why that's the case?
Sure. If you think about the starting point for someone who's a corporate that's talking to you on the Work Dynamics side, fundamental, what will be on their mind will be, all right, there's a risk in this.
There's risk in trusting another company to run my real estate on my behalf or to execute some of these really important decisions, again, as it relates to executing on my business strategy. I want someone who is actually in locations and has an established business built out where I can trust that that will happen, and I'm not taking greater risk into how I operate because of the service provider that I'm partnering with. We have that platform. We have invested in teams around the world.
We're in the countries where our clients operate and can give them the confidence that we can do that in a very strong way. You also need to make sure that you've built out things like procurement and that you can drive through pricing power and you can deliver on what you're underwriting on their behalf in terms of their cost structure for their overall operations.
We've been doing that for a number of years. We've been delivering well on behalf of our clients. Once you have that built out, you can then add other clients to your platform without incurring additional costs to build up in a certain location. It's more of a matter of then, you know, matching and hiring talent and people to size your teams on top of the platform that's established and the processes that are in place.
Maybe just to follow up on that, if I could. If you wanted to, let's say, you weren't in this business today, Work Dynamics, and you wanted to get into it, what are the barriers to that happening today?
You really have to look at which clients you want to service and making sure that you had a presence in enough locations, and then that you had people who had experience in actually delivering to those clients, people that understand those clients' industry. Again, it's this operational risk element where if you're talking about, well, I am going to trust you to run my data center, right?
You need to have deep experience in what that means and making sure that there is nothing bad that will happen as it relates to delivering and executing. It's the physical geographic footprint and people on the ground with the right skill sets that are needed to actually deliver those services.
Got it. It's helpful. Thank you.
How do you think about the power of the platform as it pertains to hiring and retaining talent?
That's something that's really important to us, and we spend a lot of time thinking about. The brand is certainly a very powerful one, in the industry.
One of the things that, you know, depending on where you are in your career, it's still important is how productive can I be with organization A versus organization B?
What tools do I have available to me to make my job easier?
Then what can I do in terms of new business leads and, you know, pipeline generation that I have to do on my own versus relying on those around me or the broader organization?
How many doors get opened for me because of my business card and the name on my business card of my company rather than just my name?
We stack up favorably on all those metrics as people think about where they wanna go and what the opportunity is ahead of them, to be able to do more, as part of a team in our, in our business as opposed to individually with a smaller player.
Then to follow up on that, I think specific within capital markets, how do brokers, really strong brokerage teams and capital markets view the trade-off between wanna be affiliated with a platform versus maybe sometimes wanna be a big fish in a smaller pond with, you know, a smaller peer?
It goes back to some of the things I just said in terms of what the opportunity is for them. There's certainly the ability to, execute individually into single transactions and kind of keep an existing client base, and that's important. It's the power of what's next, what's more, how do you grow the overall pie.
Talking to our capital markets leaders, they get incredibly excited and love when they are successful, when they bring together people, not just within the capital markets teams, but they bring in their leasing teams for a pitch, right?
The leasing teams bring in them for a pitch, and you go and you see a client together.
It's those things I talked about earlier around solving the problem and, okay, we need to the decision on are we, are we buying?
Are we selling?
Are we expanding?
Are we contracting?
What's happening here?
Bringing everything together. The transactions that happen as follow-ons to those conversations, right?
You're not just going in to pitch a single deal, but you're going in to meet a client and the C-suite of that client to talk about something, are incredibly fruitful. Our capital markets leadership team continues to tell me stories, which I love to hear from them around areas they've been really successful doing that.
This past November, JLL hosted Investor Day, during which you provided updated 2025 financial targets. Those targets included $10 to 11 billion in fee revenue and an adjusted EBITDA margin in the 16% to 19% range. That revenue target implies a 10% CAGR from the consensus 2023 fee revenue estimate. What provides you with confidence that the business can generate that level of top-line growth from 2023 through 2025?
It's a great question, and certainly one, in this environment, right, where people wanna say, "Well, how do you, how do you think about that? How should we think about that?" First, we take a step back and say, "What has our business delivered across cycles over a multi-year period?"
That's been in the mid to high single digits, CAGR. That's kind of a starting point. Then you look at what happens coming out of downturns, and we have a much higher growth rate coming out of the downturn. Because what effectively happens is that the transaction volume, while it's falling off during these periods of inactivity, whether it's in investment sales or leasing, is not just disappearing. It's really on pause for the most part.
Some of them will fall away, but a lot of it gets bunched up and deferred until such time as people are ready to make a decision and transact. You come out the other side stronger because of that pent-up activity. That's one element that gives us confidence coming out of a down market. The other is that down cycles are really opportunities for us to gain more market share.
Going back to what I talked about before on the power of the brand, people wanna have certainty of execution in times of uncertainty.
They don't want to take risks around not achieving what they thought they were going to as it relates to, you know, achieving a certain price in terms of, you know, the range they think they're going to sell a building at, achieving a certain lease transaction that needs to happen in a way that fits their corporate strategy in a certain timeline. They come to people that they believe can deliver because they have that reputation and certainty of execution. Those two together, right?
The strength coming out of the downturn, and the fact that we're sitting here in 2023 looking out to 2025, we feel good about that. We also, we had our investor briefing in November, and at that point, right, certainly storm clouds on the horizon and bad things starting to happen in the market.
We're thoughtful about that and built some assumptions around a bit of a downturn in the first half of 2023 into our forecast, and it's really more what's that slope of the curve on the way down and then how the kind of the ramp on the way back out on the other side.
How big of a role do you expect M&A to play, I guess, both in your achieving your 2025 targets as well as longer term?
Our 2025 targets are primarily organic business growth focused. We certainly anticipate some level of tuck-in M&A, but as we sit here today, we don't see any major gaps in our portfolio of businesses that we're looking to fill. There's smaller areas, in certain specific, geographies or service lines where we'd like to bolster our teams, and we look at different ways we can do that, but it's not expected to play a major role as it relates to that growth trajectory for 2025.
We're certainly going to continue to look at M&A and you know, keep our pipeline active and screen, but we have a really, on a high bar in the current environment.
You touched on, sometimes there's a nice return of revenues coming out of a recession or a tough period. Can your business, can commercial real estate overall be healthy without a healthy office property type?
Yes, absolutely. It's times when there's uncertainty around a particular property type or macro conditions overall that clients will come to us more. That's what we're hearing from our teams, is that just they're busier than ever, right?
The transactions aren't happening, but clients are calling saying, "All right. What are we going to do? Talk through this. What does this mean? Help me understand how my building's positioned. What do I do differently?"
The transactions will happen eventually, and we're having those conversations. There's an opportunity there, around different things and the evolution of portfolios. I would say also there's different sides to the property market.
There's certainly buildings that are performing quite strongly. The best of the best still has rent growth going on. Buildings are full.
Some of the more commodity type assets are struggling, there's an opportunity there as well. You have to have a conversation around what's next for this building, what level of capital investment is required, how do I reposition it?
Is it a conversion play?
What does that look like? How long does it take?
Can I do that, or am I selling that to someone else?
Am I bringing in a partner?
How do I execute on that?
All those questions and that again, evolution transition of different buildings into something different if that needs to happen or improving what is there today is a huge opportunity for us, and we can advise our clients on how to get there.
How do you think about pricing power throughout your business?
Are there some elements where you have some? Are there other elements where you're a price taker?
You really in a time of uncertainty price becomes less the discussion.
It's more of a, "Do I have certainty that I'm working with someone that can get this done and deliver in a really high quality way?" That's what we're focused on with our clients, is making sure that we can provide the service and we get paid well for what we're providing to them, and they see value in what we're doing.
There's a lot of moving parts when it comes to your EBITDA margin target. There's business mix dynamics. The legacy brokerage revenue streams tend to have higher margins than property and facilities management. There's also the unpredictability of equity income. How much control do you feel like JLL has over the company's overall margin trajectory?
If you talk about the margin trajectory and our control, I'd say there's two different answers if you're looking at short-term versus long-term. We always make sure we're trying to focus on both. You want to be taking decisions that you're investing for growth for the future, but mindful of the current economic conditions.
I'd say in any industry, where you have some level of fluctuation in fee revenue as a result of macro conditions, right? The ability to perfectly match your expense and revenue base in an individual quarter is more difficult to do.
What we are looking to do is not on a quarter to quarter basis, but over a multi-year period or annual basis to look at where are margins going, and we believe strongly in the ability to continue to expand margins from both fee revenue growth over time as well as driving greater efficiencies in our business. We really focus on what's the right balance around decision-making to invest for the future and where we see the opportunities going, the market going, where our clients will need highly talented people, and then making sure we're driving greater efficiency over time and scaling our platform.
JLL spent around $600 million on share repurchases during 2022. How would you think about capital allocation priorities as we move into 2023?
In an uncertain macro environment, you want to make sure that you have a strong balance sheet and flexibility to play both offense and defense, and that you're able to return cash to shareholders when the environment where you feel your valuation is attractive, as well as pursue M&A opportunity if it's appropriately priced.
We want to maintain the flexibility to do both things. We have signaled that we were explicit during our earnings call that we will intend to resume share repurchases in 2023. As I said earlier, we'll continue to look at M&A, but don't expect that to form a significant portion of what we're doing in the year.
Why don't I pause and see if there's any questions out in the audience? All right. No hands at the moment, so I'll keep going.
Okay.
Feel free. JLL Technologies, I think that is an area that differentiates you from some of your peers in terms of its, you know, a major source of your capital allocation, but also it's a business line for you guys. What do you guys hope to get from that business that maybe helps, either drive long-term EPS growth for you, competitive differentiation or something else?
Sure. Great question. Let me take a step back and talk a little bit about our technology team and work that you can see that's visible as in its own external segment, and then the part that's not, that's embedded within our other business segments. I'll start with the second one first. We have teams working with our individual business segments with them on tools that will drive productivity and win more clients and deliver to our clients in a better way. That's kind of our core enabling technology team.
The part that you're seeing in the external segment is really around our revenue products, which are twofold. One is software as a service. We have the Building Engines acquisition that we made in December of 2021. Another platform called Corrigo is in there.
We have some consulting technology solutions business. We also have our venture capital investing arm, where we are screening what's new and next in the world of PropTech, how we think that will transform our industry, implementing and reselling those technologies that we believe are beneficial to our clients and help us deliver better service to them.
I think sometimes technology is brought up as, can it be a disruptor to your business model? Sometimes people look at residential real estate, and Zillow is maybe kind of that theoretical analog.
How are you seeing technology impact the competitive dynamics in your business?
That's why we're very focused on and trying to get ahead of it and make sure we're there, looking at what's coming out of the world of PropTech. Our clients are asking us for help with that because there's so much out there, and the industry has really exploded over the last several years. It's this question of what's good, what's bad, what can talk to each other, what should I implement, and how fast?
What are the risks around that?
How do I pull that data together with the data that I already have, right?
This notion of I can't figure it out on my own, I'm hoping you can help us. That's why we've been spending a lot of time and working to screen and test and work with these companies.
One of the things we're hearing consistently from these companies that we're partnering with or investing in is they're realizing that they can't access clients and the same way that we can as a large service provider, and they don't know exactly how their technology solution actually sits within or alongside the services that we're providing as a large service provider.
The need to tie those together is very apparent to the companies that we're working with on the PropTech side and also apparent to us. Our clients are asking us, "Please help me join all this together in one cohesive solution. I don't wanna have to figure out this on my own, where I'm working with these groups and also you as you're delivering your service.
How is JLL approaching the topic of sustainability in terms of the solutions that you can bring to bear for your clients?
There's a, there's a lot to do there, and we're having an increasing number of client conversations, and it depends on where they are on their own journey. Certainly, that differs a bit depending on where you are in the world and how far advanced they are in terms of their own sustainability commitments. The built environment and energy use and physical assets plays a significant role in most companies' emissions, and they're looking to reduce that.
The conversations are around either I have a target or I anticipate having a target, from both a cost perspective as well as reaching these targets. How do I get there? What can you do within my building? What should I be doing as I lease a new building? What does that look like?
That's coming across on, you know, the occupancy type decisions. There's also decisions we're having on our capital markets side around, you know, green financing, what alternatives are available there. If I'm already active, what does that look like? If I'm an investor, which assets should I be going into versus staying away from? What additional investment is required?
There's significant opportunity, and it's really embedded within each of our business lines. We're making sure we're, again, going back to talent and how do you attract the right talent and how do you embed those people in your existing teams so it's not a, well, I don't...
You know, someone's not coming to you saying, "Well, I don't know anything about sustainability, but here's my, you know, person over here." It's putting people on the teams as part of a holistic pitch, as part of the discussion up front, to have that conversation with the client. Then you can, you know, select which path you choose in terms of the speed of implementation based on their appetite.
We've talked about M&A a couple of times, previously. You guys acquired HFF in 2019, if I remember-
Yeah.
Correctly. What are your takeaways from that, both in terms of, you know, what surprised you to the upside and maybe what was more challenging than you might have anticipated?
Yeah. That was an acquisition we made, just for those of you who might not be familiar, for our U.S. capital markets business in July of 2019. Your U.S. capital markets business was a gap in our platform that we had identified ahead of time as something where we needed to significantly expand the size and scale of our team. That was a specific response to that need identified.
In terms of what surprised, from a downside and upside perspective, you know, certainly, we lost a number of brokers on our team that we had before the merger. A little bit higher attrition than we initially thought in the early months of the merger. Since that time, we've stabilized and been growing the team from there.
I'd say on the positive side and the upside, the cross-selling opportunities and what's been coming out of that has been more than we anticipated in terms of the synergies, across different parts of our business, certainly between capital markets and leasing. If we also look at some of the work in our debt advisory business and loan origination and pairing that with what we already had in terms of our loan origination business inside.
There's been a number of areas where we've been able to connect teams in different ways, and we're really starting to see that momentum gain ground faster than we anticipated.
Any other questions from the audience? Well, maybe one last one from me then. You guys have the LaSalle asset management business. Obviously, there have been a lot of headlines about outflows from some high-profile real estate funds. What are you guys seeing out there in terms of just broad investor appetite to continue to invest in real estate despite some of the risks that are either real or perceived?
Capital raising is continuing, but it's at a slower pace than it was prior to some of these macro headwinds. We are seeing, however, people saying, "I still wanna be in the asset class. I'm excited about it. I just wanna, you know, have some things to work through before I am committing to, right, fund X, Y, or Z. It's taking me a few more months." We have other clients that are saying, "I'm ready to go. It's just a matter of when I'm ready to go." From a separate account perspective, we have some clients saying, "Here's the capital. You determine where you go, within the closed-end funds or open-end funds," right? There's a little bit more ebb and flow in the capital raising, but broadly strong.
We feel good about the trajectory there.
It's really about the stickiness of that capital and why it's coming into real estate. generally speaking, it has a longer term view that in terms of how it needs to deliver the return.
Terrific. Well, on that note, I think we can wrap it up. Thank you everybody for joining us this after.