28/02/2024 - Jones Lang LaSalle Inc.: Fourth Quarter 2023 Transcript

Corrected Transcript

27-Feb-2024

Jones Lang LaSalle, Inc. (JLL)

Q4 2023 Earnings Call

	Total Pages: 15
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Jones Lang LaSalle, Inc. (JLL)	Corrected Transcript
Q4 2023 Earnings Call	27-Feb-2024

CORPORATE PARTICIPANTS

Scott Einberger	Karen Brennan
Investor Relations Officer, Jones Lang LaSalle, Inc.	Chief Financial Officer, Jones Lang LaSalle, Inc.
Christian Ulbrich
President, Chief Executive Officer & Director, Jones Lang LaSalle, Inc.

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OTHER PARTICIPANTS

Michael A. Griffin	Jade Rahmani
Analyst, Citigroup Global Markets, Inc.	Analyst, Keefe, Bruyette & Woods, Inc.
Matthew Filek	Patrick Joseph O'Shaughnessy
Analyst, William Blair & Co. LLC	Analyst, Raymond James & Associates, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: Thanks for standing by and welcome to the Q4 2023 JLL Earnings Conference Call. I would now like to welcome Scott Einberger, Investor Relations Officer, to begin the call. Scott, over to you.

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Scott Einberger

Investor Relations Officer, Jones Lang LaSalle, Inc.

Thank you and good morning. Welcome to the Fourth Quarter 2023 Earnings Conference Call for Jones Lang LaSalle, Incorporated. Earlier this morning, we issued our earnings release along with a slide presentation and Excel file intended to supplement our prepared remarks. These materials are available on the Investor Relations section of our website. Please visit ir.jll.com.

During the call and in our slide presentation and accompanying Excel file, we reference certain non-GAAP financial measures, which we believe provides useful information for investors. We include reconciliations of non- GAAP financial measures to GAAP in our earnings release and slide presentation. As a reminder, today's call is being webcast live and recorded. A transcript and recording of this conference call will be posted to our website.

Any statements made about future results and performance, plans, expectations and objectives are forward- looking statements. Actual results and performance may differ from those forward-looking statements as a result of factors discussed in our 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 statements. I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer, for opening remarks.

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Christian Ulbrich

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

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Jones Lang LaSalle, Inc. (JLL)	Corrected Transcript
Q4 2023 Earnings Call	27-Feb-2024

Thank you, Scott. Hello and welcome to our fourth quarter 2023 earnings call. JLL's first 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 US Treasury bond yield and a growing consensus that interest rates have reached peak levels across most major economies. 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 a global commercial real estate investment of $166 billion, reflecting a year-over-year decline of 24%, according to JLL Research. Liquidity remains available and debt markets are active favoring asset types such as residential, industrial and data centers. In 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.

In 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 ticked up 25 basis points to 16.2% in the fourth quarter. 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 US 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.

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 Dynamics segment delivered 80 basis points of adjusted EBITDA margin expansion compared to the prior year. We are on pace to achieve our previously communicated goal of delivering a mid-teens margin profile for our Work Dynamics segment.

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

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Jones Lang LaSalle, Inc. (JLL)	Corrected Transcript
Q4 2023 Earnings Call	27-Feb-2024

and asset classes such as multifamily, industrial, and data centers. We believe these asset classes have structural tailwinds and will lead the 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. We continue to make progress towards JLL Technologies being profitable on a sustained basis, excluding equity earnings.

In our LaSalle's business, advisory fee revenue have remained resilient, despite impacts to AUM from valuation declines and 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.

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Karen Brennan

Chief Financial Officer, Jones Lang LaSalle, Inc.

Thank you, Christian. Before I begin, a reminder that variances are against the prior year period in 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 fee revenues grew 5% for the full year, with growth accelerating in the fourth quarter as we transitioned 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 lowered our cost base by $210 million on a run rate basis.

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 the year earlier. Adjusted EBITDA totaled $306 million, down 9%, and reflected a margin of 14.3%, compared with 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 cost were partially 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.

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Jones Lang LaSalle, Inc. (JLL)	Corrected Transcript
Q4 2023 Earnings Call	27-Feb-2024

For the full year, consolidated fee revenue declined 11% to $7.4 billion. 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. 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. 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 fee 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% decrease in global industrial market activity according to JLL Research. Leasing fee revenue declined 15% for the full year with largely consistent drivers as our fourth quarter commentary.

As Christian described, we continue to see more sustained leasing demand for high quality assets, which is favorable for our business mix. 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. The contractual nature of leases, limited new office and industrial building starts and our expanding pipeline provides optimism for long-term growth. But the timing and pace of acceleration in leasing activity is uncertain.

Also, within Markets Advisory, Property Management fee revenue grew 12% in the quarter and 11% for the full year with 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 rates and the forward interest rate curve, the incremental revenue benefit 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. 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.

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. Our global investment sales fee revenue, which accounted for approximately 40% of segment fee revenue in the quarter, fell 18% and compared favorably with the 24% decline in the global sales volume Christian referenced.

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 US and EMEA investment sales, though down from the year earlier, performed notably better than their respective regions' market activity. For the full year, the 40% decline in investment sales fee revenue compared favorably with the 43% decline in market volume activity with EMEA notably outperforming the markets.

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Jones Lang LaSalle, Inc. (JLL)	Corrected Transcript
Q4 2023 Earnings Call	27-Feb-2024

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 prepayment fees. 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 expectation 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 peak. 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. Fee revenue growth of 8% in the quarter was led by an acceleration within Workplace Management. The 17% increase in Workplace Management fee revenue is a result of the ramp-up of the new global client wins and mandate 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 grew 2% in the quarter from broad-based activity across geographies, though demand moderated from prior quarters, generally in line with the historical land leasing trends. For the full year, Project Management grew 9%. 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. However, the slower economic and leasing backdrop may dampen near-term growth rates.

Turning to JLL Technologies. 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 rate of JLL Technologies software and solutions revenue. However, slower new client wins in 2023 will moderate growth rates in the near term.

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 net of

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Jones Lang LaSalle, Inc. (JLL)	Corrected Transcript
Q4 2023 Earnings Call	27-Feb-2024

carried interest, both for the quarter and the full year. The timing of certain expenses was also a benefit to the fourth quarter margin. The equity losses resulted from valuation declines in certain portfolio investments and reflect the challenging environment for venture capital. Segment profitability remains a top focus, and we are pleased with the fourth quarter's positive margin contribution, excluding equity losses.

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. Absent 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 activities.

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 timings and asset performance, increased for the full year off a muted 2022 and drove 2% full-year segment fee revenue growth.

For 2023, we had about $25 million of equity losses from declining asset valuations, as compared with the nearly breakeven 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 incentive fees.

Turning to free cash flow, we recorded a net inflow of $389 million for the year, compared with a $6 million outflow in the 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 commissions, which outpaced lower cash from earnings. The lower cash from earnings was largely attributable to dampened transaction-oriented business performance. 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 strengthened 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 undrawn credit facility capacity.

As of December 31, reported net leverage was 1.6 times, up from 1.0 times the 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.

Over the medium term, we intend to manage the business towards the middle of our 0 to 2 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 dilution, as we prioritized de- leveraging 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 dilutions. 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'll also weigh it against our broader investment opportunity set, 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 in our more resilient business lines remains solid. We continue to scale our

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Jones Lang LaSalle, Inc. (JLL)	Corrected Transcript
Q4 2023 Earnings Call	27-Feb-2024

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%. 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 calculations. 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 periods. 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.

Importantly, this third reporting change is solely a matter of non-GAAP measure presentation as there is no impact on 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 I just discussed prior to our first quarter earnings call. Christian, back to you.

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Christian Ulbrich

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

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 US, UK 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. 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 One JLL model brings together the unique capabilities of our different business lines.

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

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