Jones Lang LaSalle Inc (JLL) 2005 Q1 法說會逐字稿

Welcome to the first quarter 2005 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 ending December 31, 2004 and in our other reports filed with the SEC. The company disclaims any undertaking to update or revise any forward-looking statements.

A transcript of this call will be posted and available on the company's website within two days of this call.

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

Good morning ladies and gentleman, and thank you for joining us for this review of our results of this first quarter of 2005. With me today in Chicago is Lauralee Martin, our Chief Operating Officer and Chief Financial Officer, and in a moment Lauralee is going to discuss our performance for the quarter in detail.

To frame those remarks, let me first open with a review of some highlights.

Our revenues for the quarter increased 9% in US dollar terms and 6% in local currencies for the quarter. Revenues were totaled at $240.2 million, up from $220.7 million for the same period in 2004. Strong performance in both corporate property services and project and development services contributed to the revenue improvement. Revenues at LaSalle Investment Management, our money management business, increased 10% in US dollars for the quarter and 7% in local currency terms, leading to an increase in LaSalle’s operating income versus the first quarter 2004 of 35% in US dollars and 30% in local currencies.

We also reported a net loss of $8.6 million or $0.27 per common share for the quarter. And this compares with a loss of $6.1 million or $0.20 per share for the first quarter of 2004. The figure reflects both the seasonal fact loaded nature of our business, as well as the expense associated with the operational investments we are making in our business. Lauralee and I will discuss those later in the call.

Finally, at the end of the quarter, we have reduced our net debt by $69 million compared to the level of a year ago.

Now, after Lauralee discusses our results, I will add comments on current market conditions and talk about the strategic direction our business is taking in 2005 and discuss 2 issues that will be voted at our annual meeting or shareholders on May 26th. Lauralee.

Thank you, Colin, and good morning to everyone. Colin has highlighted the solid revenue performance across our business in the first quarter. With continued performance momentum in our business and service line, we have initiated a number of strategic operating investments to ensure ongoing long term business growth.

As a people service business, we record these strategic investments as operating expense. Despite prime revenue growth as a result, these investments together with the seasonal nature of our business where the majority of our profits are generated in the second half of the year, resulted in a first quarter net loss modestly above the prior year’s figure.

Let me describe our expense initiatives in greater detail. Our bonus plans and performance incentives strongly encouraged careful revenue and expense matching to maximize business operating margins and profits. As a result, and as was reflected in our first quarter expense figures, expense growth is typically closely matched to revenue growth with the service requirements at both client and business ends determining expense totals.

Additionally in 2005, we have also budgeted for more than $12 million of strategic operating investments, expenses that incurred ahead of identified revenues. These investments are going into areas where we anticipate accelerated growth opportunities for building the long term value of our business. Colin will address these strategic directions shortly.

The financial impact of investing to accelerate our leadership positions around the globe by hiring market leaders will account for approximately $10 million of the $12 million planned total year investment spent. We are also upgrading our technology capabilities in Asia Pacific, as well as investing in property management systems to serve Hong Kong and the growing Chinese marketplace. Our strategic investments in China are anticipated to be approximately $2 million.

I would now like to review specific results for our business segment.

In the Americas, revenues increased 16% during the first quarter compared to the same period in 2004. Significant contributors to revenue growth included our New York operations, our corporate focus business with the market as Corporate Solutions, as well as our region businesses in Canada, Mexico, and South America.

During the third quarter of 2004, we acquired the project development business of Quartararo & Associates while continuing to attract additional experienced market leaders to our New York business. The value of these investments has been confirmed, as members of our New York team have focused on the large numbers of multi-national corporations and major investors that are headquartered in New York. As a result, our American project development management revenues have increased by 20% over the previous year. First quarter revenues for our New York operations increased over 70%. And the New York team also made significant contributions to several global Corporate Solutions alliances.

Corporate Solutions continue its growth during the quarter with revenues increasing 14% over the same period a year ago. Particularly strong revenue performance came from our public institutions group, one of whose main activities is to provide services to the US Army and Air Force for housing privatization initiatives.

Expenses in the Americas increased 22%. The impact the staffing additions made in the second half of 2004 continued staffing for client and business wins, as well as major progress in strategic hires to advance our global capital market and global Corporate Solutions investment initiative.

In Europe revenues declined by 5% year over year as several transactions slipped into the second quarter. Our fourth quarter 2004 restructuring efforts in Germany, which included realigning resources and further consolidating the businesses have begun to show positive results. Revenues in Germany increased 20% in local currency during the first quarter of this year.

We anticipate a stronger second quarter in our European business, and believe we will have a year over year increase in revenues in the region by the end of this first half of the year. Expenses continue to be tightly managed.

In Asia, revenues increased 20% in local currencies confirming the value of the investments we have made in the region during the past few years. The growth markets of China and Japan continued their strong 2004 performance during the first quarter of this year, with revenues increasing approximately 60% and 30% respectively in local currency.

In Hong Kong, where we occupy a leading market position, revenue has increased 25% in local currency over the prior year.

The Asian hotel business, particularly in the core market of Australia, had another very strong quarter generating revenues almost 3 times greater than in the first quarter of 2004.

Hotel Investment Management ended the quarter with improvements in both revenue and operating income. Revenues were up 10% in US dollars compared to the first quarter of 2004; 7% in local currencies, specifically in the annuities revenue category of advisory fees.

Capital flutters into real estate remains stronger in the quarter with transaction fees increasing 23% from 2004. Asset sales and portfolio performance produced strong investment returns for the firm’s clients generating incentive fees of $2.3 million.

As noted in our last call, our press release Corporate Financial no longer categorizes equity earnings as revenue. They are now reported below interested as equity in earnings for non-consolidated ventures. Given the integral roll co-investment plays in the growth of assets under management, we will continue to provide this information in the segment discussion for investment management.

Impairment charges were taken against 2 clients in the firm’s co-investment portfolio during the quarter resulting in a declining in equity earnings from 2004. For the year, we expect solid revenue contributions from the co-investment portfolio as additional assets are sold.

During the quarter, LaSalle’s overall revenue strength produced operating income improvements of more than 35% in US dollars and 30% in local currency. At the corporate levels, including in non-recurring charges, is a pre-tax benefit of $1.6 million. This benefit represents cash received as part of a settlement related to the abandonment of a property management software system in our Australian business. To date, we have received and recognized approximately $5.9 million of the $7.3 million settlement total. Interest expense for the first quarter was $300,000 compared to $3.8 million in the first quarter a year ago. This resulted from lower debt level and from the fact that our debt is now financed by our bank facility at a rate of LIBOR plus 1%. Net debt is down to $121 million, a decrease of $69 million from a year ago. As expected debt increased during the first quarter compared to the fourth quarter of 2004 as annual bonuses are typically paid at the beginning of the year.

During the first quarter, we also re-purchased 340,000.00 shares of our stock, using approximately $15.2 million. And we have sustained our affected tax rate from 2004, which remains at 25.4% today. This concludes my discussion of our 2005 first quarter results. Looking ahead to the remainder of the year, we will continue to make investments in China and in our global corporate solutions in capital market businesses. We will also emphasis growth in our annuity revenues and profit margins across all products and service lines. Let me now turn the call back to Colin.

Before we take your questions I want to spend a few minutes reviewing market conditions around the world, then I’ll talk about activities and progress related to our strategic direction. Finally, I’ll discuss 2 matters that will be put to a vote of our annual meeting of shareholders in May.

Firstly, market conditions. Global real estate and capital markets continue to provide a stable and indeed positive environment for growth in our business. Capital flows remain strong with continued high demand for real estate investments in markets around the world. As a result, sales volume is robust a trend that we anticipate to continue throughout 2005. Leasing marketing in turn continue to strengthen. During the first quarter, European leasing volumes appeared stabilized at stronger levels seen in the second half of 2004. In the US, vacancy rates continue to trend downward although at a generally slow rate. Asian office markets have also strengthened. The demand for primal office space rising on the fact of improved Asian economies. So with market conditions at a stable or positive in the 3 regions where we conduct business the outlook for continued growth remains good.

Let me now discuss strategic investments and our foreign strategic priorities. Early this week we began to distribute our 2004 Annual Report. It’s titled -- Plans First Reflects Our Culture of Client Service. In a letter to shareholders included in the report we discuss the 5 areas, which I introduced in our last call, in which we are focusing as we continue to develop our business and improve our ability to generate value for our clients and for our shareholders. To reiterate those 5 areas are strengthening our global network of offices, explaining the 3 global service lines, which we have: Global Corporate Solutions, Global Capital Markets and LaSalle Investment Managements and finally establishing a world standard for client service infrastructure. Let me offer now a few comments about each of these.

Firstly, our global network of offices. Our global capabilities are the sum of our strength in local markets throughout the world. Our ability to deliver value clients begins as a result with positions in key local markets. Those positions are determined in turn by the skills and experience of our people on the ground. In the first quarter, we made significant investments in people, in our network of offices. In the US for example where one of our 2005 priorities is to strengthen or market position in California, we completed hiring for several key positions targeted for this year. We also strengthened our operations in Northern New Jersey. In Europe -- to build our market presence in Sweden as well as our capital market presence throughout the European region, we added senior level director’s to the Swedish capital market seat. In Asia, we have opened offices in Macau and Osaka. Looking to the future in China and recognizing the need to develop and attract skilled Chinese Nationals to our business, we also launched the Jones Lang LaSalle Real Estate Scholarship with [Syn Wu] University to support outstanding students of this top institution.

Our commitment to expand the first of our global service lines corporate solutions is promoted by the dual trends of globalization and global outsourcing. The impact of those trends was evident during the first quarter as major corporate occupies turns to Jones Lang LaSalle to deliver services seamlessly and consistently across countries and continents. Some examples of that are- [Innoveen] is a new $15 billion [inaudible] chemical products company which is a wholly owned subsidiary of PB. During this first quarter, we were selected to provide transaction, project management, facility management and consulting services to Innoveen and its 8,500 employees. Computer Associates, the leading provider of software, information security and storage solutions awarded our company a tenant of representation and lease administration global alliance were in 7 million square feet office portfolio which includes facilities in 46 countries around the world.

The Whirlpool Corporation expanded its relationship with our firm during the quarter. We had been providing services in the Americas and Europe for the worlds leading manufacturer and marketer of major home appliances. We’ve now been retained to deliver tenant representation and project and development services in Asia Pacific as well. Our decision to globalize our capital market business has been spurred by increased international money flows to real estate and by the accelerated global marketing of assets that have resulted. In Europe during the first quarter, for example about 40% of all transactions represented cross boarder activities. Again a couple of examples to illustrate this trend. Our Polish capital markets team represented (inaudible) in the German open-ended funds first acquisition in Poland the purchase of two office buildings in Warsaw.

In England, we advised the Morgan Stanley lead Song Bird Estates on its second sale from the Canary Warf Estate. The Canary Warf Group, which is the main subsidiary of Song Bird, sold 15 Westbury [inaudible] to two private Irish investors. In the US, we advised [Princess] Properties on the acquisition from a German owner of Presidents Plaza One and Two in the suburbs of Washington. We also completed contracts for two distributions on behalf of US sellers and off shore buyers the sale of 1425 New York Avenue in the District of Columbia to a Mid-East investor and 1552 Broadway in New York to an Irish buyer. Our third level service line is the LaSalle Investment Management. It’s already the only real estate money management firm with a truly integrated global platform. LaSalle is ideally positioned is to serve real estate investors looking for attractive opportunities around the world.

In the first quarter LaSalle secured capital earnings totaling $1.17 billion, which was nearly half of the total capital raised, planned for the whole year of 2005. In April, our US Income and Growth IV fund had its final close with commitments of around $500 million from greater from the total equity raised for Income and Growth I, II, and III combined, and with leverage, this equates to $1.4 billion of total investment value. We were also awarded a new separate account mandate from a major institution in the UK. The total capital raised on behalf of LaSalle plants in the first quarter was $1.7 billion. The pace of new investments exceeded our expectations in all major segments and most noticeably total capital invested in Asia exceeded $800 million for the quarter, about the amount they invested in the region during the whole of 2004. Now to support growth in the LaSalle Investment Management we hired 30 professionals worldwide during the first quarter, strengthening our active management, acquisitions and finance teams in all regions as a result.

Our fifth global strategic priority is to develop world-class service delivery platform. Our goal is to equip our people with the processes, systems and resources they need to create sustainable value for our clients worldwide. One of the many efforts currently underway is a global initiative to integrate our finance and human resource systems and to develop a single global platform for all HR and Finance activities.

Before opening the call to your questions, I first want to discuss 2 issues that will be put to a vote to our shareholders at our annual general meeting on the 26th of May. A proposal to declassify our Board of Directors and a request for the authorization of 3 million additional shares of stock, allowing employees stock award and incentive plan

Currently our Board is divided into 3 classes of Directors each serving staggered 3-day terms. The Board has voted to approve and to recommend that our shareholders approve a proposal to declassify the Board providing instead for the annual election of Board Directors. The evolution of this issue was a matter corporate governance. The fact that the majority of our shareholders voting in favor of declassification last year and our own commitment to corporate democracy have convinced our Board to support this proposal this year.

We are also requesting shareholder approval for a new 3 million share authorization for our employee stock award and incentive plan. We believe the use of equity-based incentive contributes to our financial success for shareholders by continuing to motivate and award key employees and aligning their interests with those of our shareholders. Stock-based programs are essential part of our salary and bonus based compensation system, a system that differentiates our company from real estate industry practice, which is typically driven by commissions.

We are convinced that our model provides a stronger, long-term value proposition to our shareholders, clients and employees. We encourage our shareholders to approve both of these proposals since the declassification proposal in particular, requires that at least 80% of total outstanding shares be voted affirmatively and because of that, it is important that all of our shareholders vote their proxy. To sum up then on future calls Lauralee and I look forward to reporting back to you about our long-term commitments to and continued progress towards achieving our 5 global priorities. Our strategy has the full backing of our Board and the full support of our senior leadership and our people are working very hard to implement it everyday. We would now like to open the call to questions. So operator would you please explain the process?

[OPERATOR INSTRUCTIONS] Your first question comes from David Gold with Sidoti & Co.

Just wanted to follow up a little more on the investments in people. Lauralee, you commented a number of about $10 million -- I guess $12 million including the technology and was curious there number one, on the $10 million if that includes some of the investment that was done in the first quarter?

Yes, that is an annual number.

Okay, can you give us an idea of let’s say how much of that you contributed to the first quarter?

We don’t disclose that, but what I can tell you David, is we targeted to add about 50 key market leaders around the globe for the initiatives that Colin described and we are almost 50% either having hired or reached agreements. So we feel like we’re getting robustly into that process. Now clearly as people come on board that’s when you start to see that amount of expense hit more still but there are some search firms, fees, etc., that you are going to have just to get those people on board.

Okay, can you give us a firmer since there on the climate that you’re seeing for bringing people on presumably in this environment and one would guess it would be a little bit tougher than it would have been maybe a year or so?

Yes it is competitive, David your right. But that’s the way the market is at the moment. We are generally not losing people. We are picking people up. Sometimes teams sometimes individuals. But the process of finding and hiring individuals in this sort of market is typically an attractive one.

Okay, All right and so it sounds like you’ve been pretty active and maybe you can get to the 100 % market say in the first half of the year?

Well we’re aiming to move quickly and pull these people in as quickly as we can so they can begin to be productive. And I would say that in general were we approach people, we generally have positive responses, people respect our firm in the grand and generally our reputation as an employer is just outstanding in the Americas in Europe and Asia Pacific throughoutthe world.

David one of the logics of what were doing is typically, when we bring market spacing people on, it’s about 18 months until they’re producing at our target margin levels for their positions. So the sooner we get them on board in a year and particularly productive into our system for the fourth quarter, which is such an important quarter for us; it means that we can attempt to get as much of that cost covered with revenue production and that’s really the goal. So we accelerated it have -- try to get those investment dollars back in an optimum manner. But that’s always the difference in hiring between when you’ve got the client revenues right in front of you and you’re staffing up versus in this particular case there is a degree in speculative nature to it.

Aside from I guess the angle of gross year. Are there areas that you feel that you’re and I hate to use the word but under-staffed sort of speak you’re significantly under-staffed bases on the strong momentum that you’re seeing this quarter on last?

I think understaffed suggests stress and stretch. I think we’re pretty well staffed up everywhere. The areas we are attempting to grow -- you heard our references to the 30 people we’ve employed in the LaSalle Investment Management. We are seeing as you can see from the numbers, very strong flows are coming into our LaSalle Investment Management business and so we are staffing up to handle the investor side of those flows and also to seek out and secure to our unusual very high standards good assets in which to invest those funds. So the growth in LaSalle Investment Management reflects the very strong interest we invested in putting that fund into the real estate market. So the growth there has been strong in Asia. And I think if there is anywhere were we are chasing hard to find people it’s in that Asia LaSalle Investment Management business. Across Europe and the US, we are looking to staff up in our Capital Markets business. That’s the business that advises investors on the sales and purchase of real estate and as we mentioned we are seeing strong growth in international capital flows and it’s that piece of the market that we’re staffing up to in particular to service.

Your next question comes from Matt Ostrower with Morgan Stanley.

Tom, on this $12 million is there anything that you can portion of that, that can be capitalized?

That is operating expense, Matt. Separately we are going to have a modestly higher capital expense activity this year. We are saying probably between $30-$35 million, so it is up modestly, but that is principally in the technology areas.

Okay, and then, Colin, I think you referred to a robust sales volume for assets. Is there any additional detail you can give us without that in terms of -- I guess as one example -- would you say that sales volumes as a percentage of your revenues, see revenues this quarter were higher than they were in the year-ago period? Do you see revenues picking up through the first quarter, and then into the second quarter? Is there any change at all, or is it just simply ongoing robust volume?

It is ongoing robust business, Matt. It is difficult to [inaudible] to find good quality assets. Not only as far as our investment business, but also on the advisory side for our client’s worldwide, there is a tremendous interest in investment in real estate. We anticipate, there is seasonality in our business, and that is quite across the board in the investment business too. We see that, as last year, the volume is in the capital market part of our business will continue to grow seasonally through the year, as we do each year.

Is there -- is there-- any way to sort of at least qualitatively talk about the first quarter and whether it was sort of a more important component in 1 Q’05 versus 1 Q’04?

What I would say is, in the US we were up, and we were also very strong in Asia, and the place that we were down was in Europe, as reflected in the down revenues, and that we believe is just transaction slipping. We feel very good about the pipeline.

Okay, and then just one last question on the services business in the US, the leasing business. Can you describe in a little more detail any of the trends you see there? Again 1 Q’05 versus 1 Q’04, are things still stronger yet in the US for leasing?

Yes.

They are firming gradually. I think we made that comment in the text already. It is across the piece gradually improving in sentiment, a gradual reduction in vacancy rates, but in particular, banks were in the lead last year. The regional centers around New York City, the DC area, San Francisco, and Los Angeles, those are the areas of particular strength and particularly robust market activities currently.

If you had to guess about the remainder of the year, not necessarily in terms of number, would you just sort of estimate that gradual improvement in the leasing business in the US continues through the rest of the year? Is there any kind of acceleration that you would expect?

Well, it is driven by economic growth and economic growth in the US has been firm, and it continues to be firm. I think the outlook, there are some wobbles in people’s expectation, but the outlook as far as we are concerned, the US economic growth in general remains good at 3% plus levels on an annualized basis. That ought to mean a continuation of the same trend in uptake in the leasing market, so exactly as implied, we really expect that trend on the steady of business we do in that market to continue to improve through the year.

Your next question comes from Will Marks, JMP Securities.

I really have just 1 question. That is, you touched on this on Europe and a obviously a [inaudible], but can you just do a little bit more to make me comfortable that, that is going to turn around, I guess as early as the second quarter you are saying the first half will be above last years first half.

It is a real subtly, but in Europe it does matter. The Easter holidays occurred in the first quarter of this year, and last year they were in the second quarter. Because of the timing that they get, that really what caused our clients, our people, the whole market sort of took a shift back. So, we look at pipeline, and pipeline give our people confidence that this is a matter of timing.

[OPERATOR INSTRUCTIONS]. Your next question comes from Jerry [Heffernan] with Lord Abbott.

If this was discussed in your preliminary statements, I apologize for missing it. The figs, which in some possibilities of loss in the equity earnings among consolidated ventures, did you give a description of that? If I could beg your patience to repeat it?

I’d be happy to and actually elaborate on it. What I mentioned was that we had two impairments in some funds that had a modest amount of impact in the quarter. Just to refresh you on the way the accounting works, we on a quarterly basis look at every single asset held in our core investment portfolio and are required to mark any impairments down if they are there.

If there is any value increase in the portfolio, we need to wait until assets are sold. So, because the selling activity really wasn’t the robust part of the first quarter for LaSalle Investment Management, and will be as they go through the year. We are not at all uncomfortable with the fact that we did have a modest amount down in the first quarter, and that we do expect it solid for the year.

Okay. Thanks Lauralee. I lost you a little bit there. I understand that you review each and every asset for impairment or the need to downwardly mark to market. Gains are only taken upon sale. Are you saying that there were some markdowns that were not offset by gains because of the reduced volume sales?

That’s correct. We had markdowns in 2 funds, which is why you see the negative, and we didn’t have the asset sales that would normally produce revenues that would make that positive.

Can you tell us anything about the markdowns? Were they in areas in similar areas, similar real estate types, anything consistent about it?

They were in Europe. So, there have been a few tougher markets like in Germany, but nothing significant.

Were they office-building types?

I believe one was a hotel. I’m not positive about the other.

Okay. But, it was only two assets. You mentioned two funds, but was it one asset in each fund?

You know Jerry, can we get back to you. I think is that there are two funds. What I can’t tell you is was it one asset in each of the two funds.

Fair enough.

But we would be happy to get back to you with that.

At this time there are no further questions. Are there any closing remarks?

Yes, operator. Thank you for handling that. We will conclude this call by thanking everybody who participated. We would like to thank you in particular for your interest in Jones Lang LaSalle, and we look forward to speaking to you again after the second quarter. Thank you everybody.

This concludes today’s conference call.