Jones Lang LaSalle Inc (JLL) 2004 Q3 法說會逐字稿

Good day and welcome to the third-quarter 2004 earnings release conference call for Jones Lang LaSalle Inc. Today's call is being recorded. Any statements made about future results and performance or about plans, expectations, and objectives are forward-looking statements. Actual results and performance may differ from those included in the forward-looking statements as a result of factors discussed in the Company's annual report on Form 10-K for the year ended December 31, 2003 and in our other reports filed with the SEC. The Company disclaims up any undertaking to update or revise any forward-looking statements. A transcript of this call will be posted and available on the Company's Web site within two days of this call.

At this time, I would like to turn the call over to Mr. Colin Dyer, Chief Executive Officer, for opening remarks. Please go ahead, sir.

Thank you, Operator. Good morning. This is Colin Dyer in Chicago, and I have here with me Lauralee Martin.

Thank you. Good morning.

Welcome to all of you on the call. We have with an audience out there today a number of the analysts who follow us, but also a number of our own team members, the JLL team members from around the world, so welcome to all of you to our third-quarter earnings call.

Thank you for joining me today. This is my first conference call since joining Jones Lang LaSalle in August, and I'm very pleased to have the opportunity to talk briefly about my early impressions of the business in addition to reviewing our results and taking your questions.

Joining me today is Lauralee, who I have just introduced, and she will shortly talk about the performance of the business in the third quarter and about our outlook for the remainder of 2004.

Two headlines for the third quarter compared to the third quarter of 2003 our revenues increased by more than 17 percent in local currency terms, while our operating income increased in all business segments. Year-to-date EBITDA increased by 62 percent, further strengthening our already solid cash flow and demonstrating our success in leveraging revenue growth in the current favorable markets. This is really an excellent performance from all areas of the business and provides us with a solid base for the important fourth quarter which we are currently in.

Lauralee is not going to describe some of these results in more detail and talk about our outlook for the full year. Following that I will comment further on market conditions, key successes during the third quarter and my early views of the strengths of our business and the opportunities which we have before us. Let me now hand over to Lauralee.

Thank you, Colin, and good morning to everyone on the call. The results for the third quarter of 44 cents per diluted share, excluding non-recurring credits of 3 cents, were significantly above last year's 20 cents on a comparable basis. These results reflect the performance momentum driven by the impact of the economic recovery that started earlier in the year in United States and that is now advancing around the globe. Revenue growth for the year of 17 percent in local currencies drove our profit increase as all reporting segments had year-over-year increases. Highlights of this revenue growth contribution are as follows.

In the Americas, revenues increased 22 percent in the quarter with the year-to-date increase at 18 percent. Our real estate occupier service business, which we market as Corporate Solutions, had a very strong quarter. This group, which makes up over 55 percent of the Americas region operating income, grew 23 percent in the quarter over the prior year. Within Corporate Solutions, Tenant Representation, the leasing advisory group to corporate and large space occupiers, was up over 60 percent in what is normally a slow quarter of the year for that business. Also the Corporate Solutions facility management group continued to capitalize on business outsourcing trends with their success demonstrated by an over 70 million square feet year-over-year increase in space under management, bringing the total portfolio size to approximately 240 million square feet. We also saw very strong growth in our standard New York operations and in our government and higher education practice group.

In Europe, revenues continued to be driven by strong capital market activity, particularly transactions with cross-border capital flows. Europe also is starting to see activity strengthening in several local leasing markets, particularly in London, Paris, Moscow, and central Europe.

In Asia, revenue continued to come from the growth markets of India, Japan and China. Hong Kong again saw increased activity levels from their significant market leadership position.

Last but clearly not least, LaSalle Investment Management had revenues up 16 percent on local currencies in the quarter from transaction fees as assets under management grew, as well as from incentive fees and equity gains as they continued to sell assets for clients to lock in very strong performance returns.

Total expenses for the firm in local currency increased 16 percent in the quarter and 12 percent year-to-date. Operating and administrative expenses increased 11 percent in the quarter and 9 percent year-to-date in local currency. Principle drivers are expansion costs in our business growth areas, costs for Sarbanes Oxley compliance, and increased reserves in our captive insurance company related to prior year claims. The most significant expense increase was incentive compensation, which on a year-over-year basis relates to timing as well as to higher revenues. We pay our people base salary and incentive bonuses rather than commissions. Planned bonus plans and individual bonus populations are completed at the close of the year in December.

In the interim, we apply a consistent accrual methodology at the business segment level, which is based on the relationship from actual revenues to expected total year revenues which has been applied to the total year target compensation expense. If the timing of revenue achievement varies year over year, then the comparability of the incentive accrual on a quarterly basis is left applicable in evaluating operating income margin.

This particular year, the continued improving performance on an actual basis over expectations has resulted in a more front end accrual of the expected total year incentive compensation in what occurred last year. The impact for this year is that operating margin on fourth-quarter revenues should be modestly higher than that achieved last year, including expenses for the quarter as a credit for various nonrecurring items of 1.4 million. During the quarter, we settled outstanding litigation related to the loss we recognized last year on a property management system in Australia. The total settlement is 7.1 million, of which we received and recognized 4.3 million in the third quarter. Nonrecurring expenses include legal costs related to the settlement as well as 600,000 of additional costs for access space as a result of the 2002 restructuring program. The last item in nonrecurring is a net impairment charge related to one of the final assets in our discontinued residential land business of 1.9 million. Consistent with our previous guidance for the year, we are excluding nonrecurring items as we evaluate performance success this year.

Let me now turn to specific strategic financial highlights for each of the regions. In the Americas, we expanded our commitment to the New York region with additions to market staff in New Jersey and by the acquisition of Quartararo & Associates, a 40 percent consultative project management company. We are pleased with the traction being achieved in the marketplace in this region as New York's performance is up 35 percent year-to-date as compared to last year.

In Europe, we further solidified our position of leadership in capital markets in the quarter. Cumulatively for the year, the value of transactions completed was up over 35 percent in local currencies from the prior year. The strength of our on the ground presence and our strong investor relationships in both the UK and across the continent was demonstrated in that almost 60 percent of the business was cross-border transactions.

In Asia, we have been investing in our Property Management capabilities. In our core market of Hong Kong, Property Management has always been one of our more profitable business lines, and we have been successfully growing this capability into China. We currently have over 50 million square feet under management in China alone and see the opportunity for growth to continue at a rapid rate. LaSalle Investment Management continued to execute against its financial strategy of increasing the annuity revenue category of advisory fees, which were up 4 percent for the quarter and 8 percent year-to-date. The major drivers of profit performance came from both the growth in new assets under management as the business has invested over $3 billion in acquisitions year-to-date as well as active sales. LaSalle Investment Management has been selling assets on behalf of clients and its strong performance on their behalf as a result of an equity earnings increase of 1 million for the quarter which related incentive fees up 1.7 million. For the year, equity earnings increased 9.9 million year-to-date with related incentive fees up 2.4 million.

Interest expense for the third quarter was only $1 million down from 4.7 million in the prior year. This is the result of both lower debt levels and that our debt is now financing our bank facility at a rate of LIBOR plus 1 in the quarter. Net debt is down to 166 million, a $29 million reduction from the prior year. Our effective tax rate for the quarter remained at 28 percent as compared to 32 percent in 2003. During the quarter, we continue to repurchase shares under our Board approved 1.5 million share repurchase program. We purchased approximately 500,000 shares in the quarter bringing the year-to-date purchases to over 1.3 million. This repurchase program issues principally to offset dilution from employee compensation plans. We plan to continue the repurchase program in the fourth quarter.

This concludes my discussion of our third-quarter results. The strong momentum I have discussed in our business operations is expected to continue into our seasonally strong fourth quarter. As a result, full-year diluted earnings are expected to exceed $1.60 per share. These results exclude the cost of the early redemptions of the Euro senior notes, which was 26 cents per share, as well as all nonrecurring credits and/or costs. Let me now turn the call back over to Colin.

Thank you, Lauralee. Before we invite your questions, I want to touch briefly on my early impressions of Jones Lang LaSalle, about current conditions in our markets and about some of the recent successes which we have achieved. And finally as we work to build on that success in the closing quarter of 2004 and plan for 2005, I will comment on some of the opportunities which we have before us.

During my first 10 weeks as CEO, I have been meeting clients, investors and colleagues in all three of our business regions, and across all areas, I have been impressed by some consistent strengths which I see in our company. There are three in particular that I want to talk about today. Firstly, our global presence, which provides a consistent service platform for clients throughout the world; next, the uniformly high commitment to excellent client service, which I see throughout the company; and finally the current momentum in five of our major business sectors.

Let's look briefly at each of these items. As you know, we at Jones Lang LaSalle have a global presence with our own offices and teams across the world, servicing client needs from an integrated platform in both traditional established markets but also increasingly in the rapidly growing economies in Asia Pacific where we continue to expand our offices as client demand emerges. This platform clearly shows the great strength and depth which we have. It shows consistency in execution across the world. And it really reflects very well on the steady building process which the Company has had in place over a long period of time.

My second observation concerns our commitment to providing clients consistently with the highest standards of strategic advice and execution; and this really does set us apart from our competition. That commitment allows us to build solid long-term relationships which clients themselves have described to me and told me just how much and how highly they value those relationships.

Our investment into client relationship management is substantial. We have dedicated relationship management responsibilities that extend to the highest levels of our business segment leaders and to their senior teams. Our approach to the evaluation and compensation of our people aligns people who work for Jones Lang LaSalle clearly to the important client service goals, which we identify. And that in turn ensures that our professionals, our shared individual focus and team objectives ensuring the highest standards of performance for clients; and that is particularly useful during complex transactions or tough service challenges.

We saw repeated examples of this commitment, by the way, in our Americas business during the recent hurricanes that hit the Southeastern United States and Caribbean. Our teams there worked around the clock on behalf of several clients to ensure that their facilities were secure and restored to operations as quickly as possible. We worked to source emergency supplies in intensely difficult conditions and we went beyond the requirements and expectations of our clients to deliver that excellent service.

The third area that's impressed me has been the quality of our market conditions and in particular the current robust growth prospects in five of our major business areas. I want to mention five of -- those five in particular. Our Corporate Solutions Business which handles real estate needs of corporations worldwide is well-positioned in the growing market for externally sourced Corporate Services and it's building on a well-established U.S. platform and expertise to expand corporations around the globe.

LaSalle Investment Management is benefiting from a consistent long-term approach to managing our clients' funds. Our Capital Market business leads the market in Europe and it, too, is enjoying continued growth, particularly in the cross border investment market. Our Worldwide Hotels franchise is performing very well; and, finally, our sustained investment in operations in China and India is now paying off with rapid and profitable growth.

Following those headlines on initial impressions, let's just comment on market conditions around the world. It's clear that real estate continues to be a strongly favored asset class. Our record investment levels are expected in 2004 in many major markets as fourth quarter economic conditions appear to show continuing stability, despite some tightening of interest rates. Against that occupier activity has not kept pace with investment levels. There is still encouraging evidence of improvement in key market indicators with rising leasing volumes and slightly positive net absorption in many major European, U.S. and Asian office markets although vacancy rates are likely to hold off rental growth for some time yet.

Against this background of positive market fundamentals, our businesses in all parts of the world as you have heard have enjoyed great success in the third quarter, winning prestigious instructions, delivering excellent client service, and closing major transactions for our clients. As an illustration, I want to highlight a few examples of where we have moved relationships with existing or prospective clients to a higher level by understanding and aligning with our clients' interest.

In the U.S., the world's real estate funds awarded us the leasing and management of the Aion Center in Chicago as we renewed our own head office lease in this building through to 2016. In addition, we were awarded Simons Buy Worlds on seven additional office properties in Chicago, New Jersey and Washington D.C. And, overall, this business covers 4.8 million square feet of office space which we will now be managing for the world's Company.

In a key business win, announced immediately after the third quarter, the public building service of the United States General Service Administration awarded Jones Lang LaSalle and three other firms the National Broker contract for commercial real estate leasing services and at the same time for the exclusive provision of tenant representation and development services throughout the U.S. for five years. This contract will be managed from our growing Washington D.C. office and represents a major success for our ongoing investment in the U.S. public institutions sector.

Moving to Europe, our strategy to pursue exclusive mandates for transaction advice to core clients achieved further success with our appointment by Irish Life Investment managers which is a client of our Dublin office as their sole buyside adviser for Continental Europe. This appointment was secured by a cross-border team based in Dublin, London and Paris and in winning the business, we beat our major competition.

Our Hotels Group, which I mentioned earlier, continues to secure high quality assignments, having notably been retained by the Intercontinental Hotels Group PLC as their strategic profit property adviser on all assets outside the Americas. In addition, we are jointly retained with Citigroup to advise on the disposition of 75 assets in the United Kingdom for Intercontinental and on a sole exclusive basis on one major asset in Paris and the combined book value of those assets is some 1.3 billion pounds sterling.

In Asia Pacific, we built upon our well-established relationship with Convergys, securing further substantial call center assignments in the Philippines and in India, covering tenant representation, product project and development services and facility management.

Finally, LaSalle Investment Management has developed a new product in conjunction with an existing important Middle Eastern client; and this product is focused on acquiring core office property in the United Kingdom. The product harnesses the market knowledge of both our investment management and capital markets teams based in London.

So with these examples of success in the third quarter, it's clear that we at Jones Lang LaSalle are achieving competitive differentiation and meeting our goal of being the chosen strategic adviser to the leading real estate owners, investors and occupiers around the world. And I must say that, as I have visited people internationally, the level of pride which they show in their work for clients is really a pleasure to see. So, too, is the respect and appreciation which our clients have expressed to me for that same work well done.

Looking forward now, our immediate focus is to ensure that we achieve a strong finish to 2004. Of course. And to build on that performance in 2005 to create further competitive differentiation. Our earnings picture, as we have described, is very positive and our balance sheet is also solid. Following the refinancing of our debt this summer we have significantly lowered the debt service costs of the business; and the combination leaves us in a position to make choices about deployment of our strong cash generation to drive further growth.

Our integrated global platform gives us clear sight investment and growth potential around the world. This potential includes new market opportunities, the expansion of existing services across regions, targeted hiring of market-leading talent, and the use of our capital to position ourselves as participants as well as advisors in major market opportunities. We have already made some initial resource commitments for 2005. We intend to appraise other opportunities vigorously with the aim of harnessing our balance sheet strength and our intellectual capital to secure superior returns for our shareholders, for our clients and for the people who work for the Company. And I look forward to talking to our investors and clients about these opportunities in future months.

With that, I would like to open to call for questions. Operator, would you please explain the process of taking questions to everybody?

(OPERATOR INSTRUCTIONS) David Gold. Sidoti and Company.

Laura Lee, can you give a little bit more color on the incentive (indiscernible) presumably the bonus accruals. For one, I presume last year the accrual there started later, started fourth quarter and not third. Could you give some sense of that AMD assertive, how much more significant it could be this year versus last?

First of all, David, we do accrue bonus every quarter; and it's done with a consistent methodology. I think Europe would be a good example of the difference year-over-year. Last year, as we started out we thought Europe was going to perform with certain expectations and a number of the markets deteriorated throughout that period of time, such that they were less than expectations, which meant on our formulate basis we accrued a lower level of bonus. So this year it's actually been the reverse dynamic. So when you put year-over-year, it's a differential that you see in the margins. And, clearly, as you look at the performance in Europe and the margin that has dropped to the bottom-line, that is one of the factors.

It does correct in the total year and it will correct in the fourth quarter and so I just wanted to clarify that the profitability, particularly in a place like Europe, where that dynamic has been more noticeable that their margins will be more profitable in the fourth quarter and therefore lift it for the total year.

Okay, so presumably you're making that adjustment through the year. Is that right?

Yes, but it's always done on a lag and so, therefore, really the big change has happened with the third quarter performance and so you really don't get it until the fourth quarter.

I see. Also you made a comment on insurance reserves. I'm just curious how significant that was in the quarter.

They're about $1.6 million and they do relate to prior-year claims. What we do is we have a -- it's an independent operation with the captive, and the Board meets quarterly and reviews all insurance claims. And there are also outside independent directors on that, and they review any changes that have been made in the claims during that period, and then we need to adjust. Sometimes they're up, sometimes they are down. It just so happened that in this particular quarter there was a couple of claims that had deteriorating events and we had to increase the reserves.

And you said it was 1.6 million?

Correct.

Lastly, accounts on all fronts, like -- things are certainly in proving both on a macro and on a -- from micro perspective. Yet as you look at the guidance and the implied guidance for fourth quarter, presumably it's lower than last year. The only thing I can think of where there could be a big shift in is the equity earnings that you have already booked through this year. And I was just curious if that's sort of where the swing is in your guidance or how we should be looking at things?

We did say we expect to exceed $1.60, but we feel comfortable with $1.60.

Which I guess implies that that's 98 cents for the fourth quarter, at a minimum?

Depending on how you're taking the credits. I think it might actually be -- yes, that is correct. I guess the big difference, as you know, the fourth quarter is just a big quarter across the board for us. And it means that a lot of things get into the last month of December. And if there is slippage we certainly don't want to disappoint a marketplace in what is an absolutely phenomenal year.

But is there anything to -- because presumably you've already booked some pretty significant equity gains versus let's say fourth quarter last year. Is there anything there or is it more, let's say, we're being conservative?

We did have some large equity gains with LaSalle Investment Management in the fourth quarter of last year. We still have the potential for equity gains with them, but they would be some of the expected transactions that could or could not occur in the fourth quarter.

Okay. Fair.

I believe it was about an 8 cents impact of those in the fourth quarter of last year.

Just lastly if you can, do you have the average price you paid for the shares you repurchased during the quarter?

I can get back to you with that, David. It will be in our Q., I just don't have it with me at the moment.

Matt Ostrower, Morgan Stanley.

I want to understand the impact of -- I guess you guys call it capital markets or asset sales transactions on the growth rate versus traditional leasing business, the leasing transactions. It sounded to me like from your comments that leasing was by far the primary driver of growth in U.S. revenues, and in Europe it was more of a capital markets phenomenon. I just wanted to make sure I understood that statement to be true, and then ask if there was any way you could sort of better fine-tune for us to what degree the growth rate was influenced by asset sales, and what your view is for asset sales going forward into the next year.

Let me take those in pieces. First of all, I think, yes, you are correct. The primary driver in the United States was leasing activity, tenant representation for corporates in particular was up on a quarterly basis. So yes, I would say that is true. Capital markets in Europe has been strong and has stayed very strong. And capital markets is both in our core products as well as in our hotel products. So yes, we have improvement. The actual transactions were up significantly year-to-date. 35 percent is what I talked about in local currency. That may or may not translate to the fees that actually fall down because it depends on the specific transaction. Leasing did pick up in parts of Europe, but not -- I would not say that is yet a major driver in terms of change. And leasing did also pick up in Asia Pacific, and so I would say it's a nice balance in Asia Pacific between the two.

In terms of looking forward, Matt, to the final part of your question which was the prospect of asset sales, yes, clearly that has been strong this year, not only across the U.S. but Europe and Asia, too. It's a worldwide phenomenon, and it's around the amount of capital which is seeking out real estate, move away from portfolio balances, away from stocks and bonds and into the real estate market. It's been a trend for the last two years. And as we look forward, we see no reason at this point that that trend should change. There is still significant money looking for a home in real estate. We're seeing it in our investment management business, which of course assembles funds from investment organizations and institutions around the world, and places it through the funds into real estate worldwide. So we're seeing a continuing trend of money flowing into those funds, and we're seeing it in our, as you mentioned, capital markets business, which is the purchase and sale of real estate, where the transaction levels are high and the prices being paid for property are similarly high by historical standards. So no reason at this point to see a change in that trend.

I know you haven't obviously given any kind of guidance for '05, but just thinking about growth in '05 overall, if I said to you the markets were going -- the real estate market -- there was going to be some kind of a dislocation in the sort of asset market, and it was going to make it very difficult to complete transactions. Based on the trajectory you see for the leasing business, to what degree would you feel comfortable saying your business could continue to grow in '05, your earnings could continue to grow in '05, if we saw a real sort of pickup in the asset sales market?

As we said during the discussion, Matt, we are looking currently at good earnings growth in this fourth quarter of '04, and we are planning working for continuation of strong earnings into the course of next year. We have not yet ourselves assembled a forecast for next year, and we certainly haven't published them to the market. So we won't go there today. But it's very -- projecting a discontinuity, which is, I think, what you're implying there, is always a dangerous thing to be doing. All we can see at the moment is as I just described, a continued trend of strong sales in the asset markets. And as we mentioned in both mine and Lauralee's presentation, leasing is -- we're seeing signs of leasing markets firming across the U.S. and Europe and parts of Asia. That trend is gentle at this stage, it's isolated. It tends to be in particular markets rather than all spread across all continents, but we do see some signs of firming in leasing markets.

Matt, I guess the other thing I would add to that, and I'm not quite sure if I completely understand whether you're talking about an asset sales disruption in the U.S. or you actually think this would be a global phenomena.

It does seem like flows -- real estate flows internationally have been huge. They've been a huge driver of earnings growth for most property service companies, you know. And I just want to -- it seems to me the market -- there's many market (indiscernible) who view this as part of just a fundamental recovery, where part of it's clearly a different sort of change in the investment markets. And I'd like to understand to what degree the markets may or may not be disappointed in '05 if the asset markets don't remain as robust as they have been.

I think that your comment about capital flows is the valid answer to that, because I think one of the reasons that the capital markets have -- there's a couple of reasons the capital markets have stayed robust. One is performance of the assets principally because of interest rates. But the other factor is that money has been able to move from a non favorable place to be in real estate to a favorable place to be around the globe. And I think the positioning that we have to be able to take that money to where the favorable conditions are -- the weight of money that needs to be invested is not going to go away. And so then it's going to have to find the best home and the best place. And having a strong position in Asia right now, where there is growth and dynamics around those marketplaces is, I think, a contra to if there was to be a change or shift in the U.S.

It's just like we're seeing in Europe. German money is not necessarily comfortable at home but it's very comfortable in Sweden or it's very comfortable in the UK. So I think it's the ability to be flexible and nimble around the capital markets space that is going to make the difference in the performance, though there is probably no question that there could be some markets in the world that don't perform as robustly next year as they did this year.

(OPERATOR INSTRUCTIONS). Will Marks, JMP Securities.

This is not very clear connection, is it?

We can hear you.

I'll be fairly brief. Actually taking that question a step further, but one thing I wanted to find out is what percent of your business typically is transactions -- I'm sorry -- sales versus leasing in the U.S. and maybe Europe and Asia?

We don't, as you know, publish those statistics. Both of those get reported in our implementation fees. However, we have said that in the U.S. our larger position is with the corporate marketplace; however, we do provide them corporate finance backing. We have said that we have a very dominant position in Europe in capital markets and we have a marketplace that is pretty well split in Asia. So that is probably the best that I can give you. The other thing I would say is we did advise you of how much the drop in leasing, the agency fees, which is for investors, fell in Europe, and what an impact that made on the margins of that business because of those falling activity levels.

Leo Harmon, Fiduciary Management.

Could you guys talk a little bit quantitatively about what you're seeing from a lease pricing standpoint or from a (indiscernible) lease standpoint relative to last year?

I don't think we're probably, Leo, the appropriate ones to comment on that, only because we look at the world and we have experts in every single market that are going to answer to that differently. However, if you would like specific answers on specific markets, we can definitely get you that. And our research which is very robust around all those things is available on our website.

The second question is of the 70 million square feet that you all saw improvement on the outsourcing side, what percentage of that was from existing customers and what percentage of that was from new customers, if you have that data?

The majority of that would be new customers and. We're going to have a modest amount of increase in that, but typically what a corporate will do is give us all of their space in a geography. And then what will happen is they may add another geography, but it's typically going to be new customers.

(OPERATOR INSTRUCTIONS). Will Marks, JMP Securities.

I think I was cut off earlier. Just one other question. Lauralee, the guidance of $1.60 -- can you give me some sense of what that means in EBITDA?

Why don't we get back to you on that, Matt. You could do a high level on that. We've get a 28 percent tax rate. We've given you what our interest is, so you can back into the net income on that.

I realize that. I can work that way, I just thought maybe there was a more exact number. I will talk to you soon. Thanks.

At this time there are no further questions. Do you have any closing remarks?

Operator, thank you. As there are no more questions we will draw this call to a close. I would like to thank everybody for listening and participating today, and thank you all for your interest in Jones Lang LaSalle. We look forward to talking to you again following our fourth-quarter earnings. Goodbye.

Ladies and gentlemen, this concludes today's third quarter 2004 earnings release conference call for Jones Lang LaSalle, Incorporated. You may now disconnect.