Jones Lang LaSalle Inc (JLL) 2005 Q2 法說會逐字稿

Good day, and welcome to the Second Quarter 2005 Earnings Release Conference Call for Jones Lang LaSalle, Incorporated. 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 a forward-looking statement as a result of factors discussed in the Company's annual report on Form 10-K for the year ended 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, Chief Executive Officer, for opening remarks. Please go ahead, sir.

Thank you, operator, and good morning, ladies and gentleman. Now we understand there's been some technical difficulties whilst you've been waiting to get to us. We apologize for that, and we thank you for your patience and perseverance.

So thank you for joining me on this review of our results for the second quarter and the first half of 2005. On the call joining me today is Lauralee Martin, our Chief Operating and Financial Officer, and Lauralee is going to discuss our financial performance in detail in a short while. I will then discuss market conditions and report our continued investments in growth at Jones Lang LaSalle. Finally, Lauralee and I will be happy to take your questions.

To frame the discussion this morning, let's first review several highlights. Second quarter revenue has increased 23% in US dollars, and 20% in local currencies, rising to $325 million, compared to $264 million a year ago. For the first half of the year, revenues increased 17% in US dollars, and 14% in local currencies, totaling $265 million, comparing to $485 million in the first half of 2004.

Net income for the second quarter totaled $24.8 million, or $0.74 US per share of common stock. Net income for the same period in 2004 was $5.1 million, or $0.16 per share, and I should mention that the 2004 figure included $0.26 per share expense related to redemption of our 9% senior loan notes last year.

Now, all regions contributed to these results, and in particular, our ability to capitalize on economic improvements and expand our market share in Asia-Pacific, hope to generate growth in the region across our Investor Occupier services businesses, including hotels and, indeed, at LaSalle Investment Management, our money management business.

So, with that as the starting point, Lauralee will now provide additional comment on our results. Lauralee.

Thank you, Colin. As Colin has just covered, we enjoyed a robust second quarter across both businesses and geographies. I'll start my discussion with our Investor and Occupier Services business, which we organize by geographical region.

In the Americas region, we reported a 16% year-over-year increase in revenues for both the second quarter and the first half of the year. Management Services revenues increased 20% for the quarter, and 19% year-to-date, generated principally by our project and development services businesses within corporate solutions, our real estate occupier and services business.

Transaction revenues grew 11% for both the quarter and the first half, with strong contributions from our capital markets business, specifically in the corporate finance service line. Corporate solutions overall increased 18% for the quarter and 16% for the first half. Within corporate solutions, our Public Institution's business performed well, with revenue increases of 35% for the quarter, and 62% for the first 6 months.

In Europe, revenues for the second quarter increased 17% in US dollars, 14% in local currencies, compared to the same period a year ago. You may remember that in our last call, we reported that several transactions in Europe had slipped from the first to the second quarter, so that the first quarter revenues for the region fell below the 2004 levels. We anticipated that the short fall would be erased by the end of the second quarter, and in fact, year-to-date revenues for Europe were 7% higher in US dollars, compared to the first half of 2004, and 3% higher in local currencies.

A contributor to the second quarter performance in Europe was our German business, where the restructuring effort we conducted last year has begun to generate significant revenue increases. Our English business also had a strong quarter, as did the Europe hotel business.

Second quarter revenues in Asia Pacific were up 32% in US dollars, and 26% in local currencies. Year-to-date, Asia Pacific revenues increased 28% in US dollars, 23% in local currency. Revenue growth in the region came from both transaction activity and management service revenue. The growth markets of China, Japan, and India were particularly strong during the quarter, and we also achieved good revenue increases in Hong Kong, where we had a leading market position. India, capitalizing on corporate outsourcing continued to show healthy growth in its project and development service business, and China is benefiting from our well established best in class property management capabilities. As Colin noted, economic improvement, as well as our ability to grow market share in the region, contributed to the performance.

LaSalle Investment Management, our global money management, business had second quarter revenues, including equity earnings of 32% in US dollars, 30% in local currencies. Year-to-date, LaSalle's revenues increased 22% in US dollars and 20% in local currencies compared to the same period in 2004. LaSalle. with its focus on increasing annuity revenues, continued to generate growth in advisory fees during the quarter. We've made significant progress, as advisory fees accounted for nearly 70% of total revenue in the quarter.

Transaction fees, earned principally from separate accounts, also increased measurably from the prior year, reflecting both the timing and the size of the deals compared to the same point a year ago. Significant events this quarter included the sale of the [Kaoli] portfolio, and the capital rates for LaSalle Asia Opportunity Fund 2, both of which helped to generate record results for both the quarter and the half-year. These results illustrate the timing lumpiness of certain income categories in this business. In 2004 by comparison, our major transaction events occurred in the fourth quarter, with equity earnings of more than $7 million, and nearly $16 million of incentive fees.

For the total year 2005, we are expecting a normalized level of equity earnings this year in contrast to last year's exceptional performance, while incentive fees are anticipated to be strong in both the third and the fourth quarter with the continued liquidation of the incoming Growth II fund.

LaSalle's overall revenue growth has produced year-on-year operating income improvements of approximately 66% for the first quarter and 58% for the first half compared to 2004.

For the firm as a whole, operating expenses were $295 million for the second quarter, compared to $249 million for the same period in 2004, an increase of 19% in US dollars, and 16% in local currencies. Operating expenses for the first half increased 15% in US dollars, and 12% in local currencies. The increased expense levels reflect investments needed to serve new clients effectively, as well as strategic hiring initiatives designed to expand our market coverage in leasing in capital markets.

Interest expense for the second quarter was $1.4 million, down from the $15.2 million for the second quarter in 2004. Year-to-date interest expense was $1.7 million, compared to $19 million for the same period a year ago. Included in the prior year was the $11.6 million expense incurred in June 2004, to redeem our 9% senior note. As a result of the redemption, our effective interest rate decreased significantly in the first half of this year, which, together with our lower get levels, contributed $0.13 per share year-over-year.

We continued to reduce our net debt during the second quarter. As of June 30, net debt stood at $132 million, a $45 million reduction from the same date last year. We continued to execute our share repurchase program, buying back 684,000 shares of common stock during the quarter, and in the first half of this year, we've purchased approximately a million shares at a cost of $43 million.

Finally, we continue to sustain our effective tax rate at 25.4%, compared to 28% for the same period one year ago. The second quarter was marked by strong performance, amplified by transactional activity that ran ahead of the seasonal pattern of the prior year. While our profits remain concentrated in the fourth quarter, we believe that if the healthy market conditions continue, the current full year analyst consensus expectation of $2.40 should be achievable. We continue to emphasize growth in our annuity revenues to improve our earnings predictability, and we're also working to balance revenue more evenly throughout the year to de-risk our dependence on fourth quarter results.

Looking ahead, we do plan to continue with our strategic investments in 2005, balancing achievement of current performance with our ambitious long-term growth objective. This concludes my discussion of our second quarter and first half results.

Let me turn the call back to Colin.

Thank you, Lauralee. Let's now review market conditions around the world.

Capital flows to real estate remain high. In the US through the end of May, major transactions had increased by 44% over 2004 levels, to reach nearly $87 billion. Europe's real estate investment markets are also robust, with more than $48 million Euro transacted in the year-to-date. In Asia Pacific, the North Asian economies of Japan and Korea continue to dominate investor interests in the region, with increased activity also appearing in Singapore.

In regional office leasing markets, the vacancy rates continued to trend downwards in the US during the second quarter. Rental rates are rising in selected markets, although tenants continue to have more power than landlords in most.

In Europe, leasing volume has recovered from the weakest point in the market in 2002, although Western European leasing volumes still remain well below their 2000 peak. Leasing volumes continue to rise in Central Europe, while in Asia, tight supply coupled with new demand, expansions, and relocations characterize office markets in the second quarter and produced higher rent generally. The main beneficiaries have been the key financial centers in Asia, Hong Kong, Singapore, and Tokyo.

Overall, global economic growth is anticipated to slow somewhat this year to 3% from 4.1% in 2004. Nevertheless, market conditions indicate that opportunities for growth continue to appear across regions and businesses.

Now, I'd like to discuss the progress which we're making in our strategic investments around the globe. To fuel future growth, we continue to invest across our operations, focusing on five key areas. Firstly, we're strengthening our local and regional service operations around the world. We're expanding our three global service delivery lines and they are global corporate solutions, global capital markets, and LaSalle Investment Management, and finally, we are establishing the world standard for client service delivery.

So reviewing each of these in turn, firstly, our local and regional service operations. Our global service capability is the sum of our strengths in each individual local market where we compete. Those strengths are primarily a function of the skills and experience of our people on the ground, so to continue to grow, we continue to invest in talented people. In Europe, our new country manager for Germany joined us at the beginning of the quarter, and as Lauralee observed, is leading our German colleagues to vastly improved results in their markets. We're further growing our already strong English business, and we've invested in senior people in management services and office agency to support growth.

In the US, we continue to strengthen our market positions in California, having hired eight senior professionals in northern and southern California by the end of June, and we remain on-track to bring another five top caliber people in by the year-end. We are also expanding our global presence by opening new offices in promising markets.

In Asia Pacific, in addition to the new offices opened in Osaka and Macau during the first quarter, we more recently opened an office in Pune in India. In China, we've recently opened ten branch offices, six of which will move to full service offices in the next 6 months. Where appropriate, we're also building market presence through acquisition. During the second quarter for example, our US hotels business acquired ThompsonCalhounFair, a leading mid-market hotel broker and advisory firm. This extends the Americas region service delivery capabilities decline active in the select service hotel sector.

While our local and regional operations support our global service lines, it goes without saying that our financial performance depends, in great part, on the business they source and execute locally, so let's just take a look at a few local examples of that. The Whirlpool Corporation named us as preferred service provider for its $2.5 million square foot portfolio in Asia. We already serve Whirlpool in the Americas and Europe, so the relationship is being extended. In Tokyo, Simplex Investment Advisors have retained us to provide asset management, project management, and property management services for the [Mihams] hotel project located adjacent to Tokyo's Disney resort.

Our Swedish capital markets team, joined by Pan European Capital Markets Group, have advised resolution property PLC on the sale of a portfolio of five retail parks and a factory outlet in Sweden. This is the largest retail-warehousing portfolio ever sold in Continental Europe.

In London in turn, we sold 33 Grosvenor Place, a 2,000 square foot grade-A office building on behalf of DB Real Estate.

In the Americas, MetLife awarded us projects and development services, tenant representation and lease administration responsibilities for approximately 600 locations in the region, totaling 11 million square feet. We've also established an agency leasing relationship with MetLife in June.

Our US capital markets team played a central role in a complex series of linked transactions. First, the acquisition of a portfolio and office properties totaling nearly 1.8 million square feet, then the subsequent resale of seven of the assets and finally, the debt structure for the buyer on seven of those assets. [Wallace] and Company retained us to acquire the portfolio and sell the properties and we secured debt financing for England Westin, who was the purchaser, so a few examples of our local activity on the [inaudible].

In global corporate solutions, the accelerating trend of globalization and global outsourcing support our decision to build a truly global corporate solutions business. On the one hand, this service delivery capability helps us create new client relationships. At the same time however, current corporate plans are demanding multi-regional capabilities. Of the seven new multi-regional client contacts, which we've won to date this year, two represent expanded relationships with existing clients. Motorola outsourced its 3.9 million square feet DNEA portfolio, and we also provide services to portfolio -- to Motorola in the Americas for their portfolio there.

Selectron expanded its relationship with us, outsourcing the management of its 2.6 million square foot European portfolio, and we now serve as the global provider of electronics manufacturing and supply chain services in both Europe and in the Americas. Now to strengthen our service capabilities globally in the corporate solutions market, we've hired executives in Paris, Shanghai, Holland and Luxembourg, with additional searches continuing in London and Tokyo. Finally, we continue to invest to strengthen our global plan relationship management platform.

Turning now to global capital markets, our decision to develop the global capital markets business was stalled by increasingly international money flows in real estate, and by the accelerated global marketing of assets that have resulted, so we may reform the International Capital Group. This is a dedicated team of international directors across three continents, who will focus exclusively on servicing the international portfolio needs of our clients, with large investment allocations and global investment horizons.

Team members have already participated in five cross-border new business presentations and were closely involve in three recent transactions. Those are in Shanghai, where we represented a private institutional investor in the acquisition of the [Demko] Tower, a 52,000 square meter class-A office building in Shanghai's central business district. In London, on behalf of [Dorfay] Development Corporation of Canada, we purchased a 45 % interest in [Concasting] house in central London, a 17,000 square meter landmark office building, and in the US, we were retained by Davis Street Properties to market a 50% joint venture interest in a 1.6 billion square foot portfolio for retail assets located in Illinois, California, Tennessee and Missouri. In each of these cases, we believe that our cross-border distribution capability secured the instruction.

LaSalle investment management is our third global service line. LaSalle is already a successful global business, and as you heard earlier in today's call from Lauralee, have achieved very good results to date this year. LaSalle's priorities are to invest successfully on behalf of existing vehicles and launch new products planned for 2005. At the end of the second quarter, total new investment by LaSalle stood at $3.7 billion, and total capital raised had reached $2.3 billion, both well above our original expectations. Assets on the management in this business area now total $28 billion.

For LaSalle Asia Opportunity Fund II, we raised $1 billion in equity, the largest single capital raised in the firm's history, and we've leveraged the total investment funds available will be approximately $4 billion. Investors in the Asia Opportunity Fund II include pension funds, endowments, foundations and private individuals from the US, Europe, Middle East and Asia Pacific. The fund intends to acquire and manage office, retail, residential, logistics, luxury resorts, and other commercial properties throughout the Asia Pacific region. Approximately 20% of the fund has already been committed to properties, chiefly in Japan and Korea, and LaSalle is in negotiations actively for additional investments comprising another 20%.

To support this rapid growth, LaSalle has hired 45 new people so far this year, including a new Head of Private Equity in Europe -- in the UK, sorry, and significant numbers in our Tokyo office, as well as a Senior Client Services Executive for Asia Pacific.

Our final strategic investment priority is our world standard infrastructure, and creating a world standard infrastructure for the firm. This is perhaps the least glamorous, but ultimately, the most important of our five priorities. To achieve our other priorities, we must have superior operating procedures and support systems throughout the firm, and processes in place to support our clients. We're starting this year by consolidating our finance and our HR systems globally onto single platforms.

So, in conclusion this morning, at the end of the first quarter of this year, we asked our people to redouble their commitment to continued growth in our business, and our second quarter results demonstrate that they had accepted that challenge and, indeed, delivered royally on it. And I want to thank here all of our colleagues around the world for the significant contributions they've made to this second quarter for the results.

However, at the same time, we are only halfway through the year, and securing the lion's share of our revenues and profits is a task which still lies ahead of us. So during the third quarter and on through to the end of the year, we will be staying focused on serving our clients and on generating shareholder value by maintaining the right balance between current performance and future growth.

So with that, we'd like to close our presentation and take your questions. Operator, would you please explain the process to our listeners.

[OPERATOR INSTRUCTIONS] Our first question comes from Joel Gomberg, with William Blair.

Thank you. Just wondered if you could talk about the margin expectations, especially in the Asia Pacific region. You've had a nice rebound there, noted as operating margin 3% last year. Looks like you're having a 7 or 8% this year. I mean, given the pickup in revenues, what are some of your targets there, and then maybe you can go into a little more detail in terms of what are the biggest regions ther? I recall it's Australia, Hong Kong, Singapore How are those more mature markets doing and just give a little more detail on that region. Thanks.

Joel, as you know, our long-term margin for Asia Pacific, we've articulated 8 to 10%, principally because we think that the revenue growth opportunities are so significant there that we will continue to invest, and that will keep the margin slightly lower than what we've targeted in other parts of the world. And clearly, that revenue growth is not disappointing us, so I think that will continue to be the case. So at this point, we're not deviating from those long-term targets. I will tell you we were pleased that we actually are starting to get there faster than we anticipated. We had paced it out further when we first started articulating that message, but the combination of market share increases and the investments are clearly paying off.

Your comment on markets, Australia is still our largest market in the Asia Pacific region, and a more mature market. We've done a lot of activity there, including a new Country Head, and significant investments and are starting top see the ability there to gain market share in that market. So part of the performance has been the contribution of that business, despite the fact that it's not a high growth market. It's a stable growth market.

The highest growth markets have been for us, Japan, as well as a very strong recovery in Hong Kong, and then continuous performance in India and China, and we do not see that abating at this time, and I think that the combination of what you're seeing in LaSalle Investment Management, and the potential in that region, and then what you see in our delivery system in Jones Lang LaSalle, all indicate that the potential of that part of the world is going to be a significant contributor for us, not just this year, but in the next couple years ahead.

Thanks. And then can you give an update? You had -- the initiatives or strategic [cutters] for this year. Was it 50 overall -- where you are on that?

Yes, just in general across the business, Joel, we have targeted hundreds of hires, though it was the 50 we were relating to one specific sector. In general, what we try to do is bring people in early in the year, so that they can become productive during the course of the year and start contributing strongly during the heavy third and fourth quarters. But we're on-target for our for our hiring processes delay in Corporate Solutions, where we have strategic hires around Europe, in Capital Markets, where we have both European and specifically some aggressive American targets.

And, if I could add some numbers to that, Joel, because we did articulate that we were targeting at investments of about $12 million. Of that $12 million, with the hires that Colin had mentioned, we've spent about 25% of that number, so we would be anticipating that the balance of that would be in our balance of the year results as additional investment expense, which, as you know, is part of our opt-back, because of the way the accounting works on people and staffing and so forth.

$12 million is tied to employee costs, right?

Correct

Okay.

But the combination of hiring costs or compensation to bring those people in, yes.

And then, of the 100 hires, 45 is LaSalle Investment Management; the rest is spread out. Is that fair to say?

Yes, and there's a combination. When we talk about the $12 million, that's not additive staff to serve client business. We consider clients, as much of LaSalle Investment Management's would be, as organic growth. When we talk about investment growth, its really where we need to step out and build something ahead of the revenues, such as we talked about with our Global Capital Market capability, and some of the investments we've made into expanding, for example, our hotel platform into parts of the world we're not currently in. But I want to make it clear that there's clearly adds where there's revenues because it's at the client, and then there's investment dollars where they go there before we can see the revenues, but we believe that we know the revenues are there to capture in a time period that might not be in the first 12 months, but definitely in the second 12 months.

And then finally, could you talk about the Asian Opportunity Fund. You had a strong capital raise. What do you have in the pipeline in terms of rolling out new funds?

We have started this year five funds, Joel, including a German office for a German retail shopping center fund, a French Office fund, a Canadian Office Fund, and we have a pipeline of plans for the course of late '05 and '06, which steers launching between three and five funds a year.

Okay, thank you.

Our next question comes from David Gold with Sidoti and Company.

Hi, good morning. Just a little bit of a follow-up on the fund question, Colin and Lauralee. In the wake of the accelerated closing of the Asia Fund, what are your thoughts there -- or have you thought about another one there, and if not, is the constraint the people in your view, or the investment opportunities?

You mean another one in Asia Pacific?

Right.

Well, as you have heard from the common [inaudible], we are only 20% invested in the Asia Recovery Fund II at this stage, and you'll also have heard us talking about adding people on quickly, so for the short term, the next 12 months or so, we are going to be busy and we'll have our hands full doing a professional job in disbursing those funds from the Asian Opportunity Fund II. The issue is partly stock. We obviously are well established in the region, but at the rate in which we're growing our investment activities, we do need to hire new people. That continues to be a challenge, but one we're able to meet. And the second issue is finding attractive real estate to invest in. We're at markets everywhere seeking out real estate. Prices have been up, and there's a lot of competition for good assets, so the two limiting factors put together are people and finding good product to invest in. In general, and you'll see that from the speed at which we raised a billion dollars for Asia Opportunity Fund II, in general, capital is seeking us out and certainly seeking our skills in Asia Pacific.

Do we have any funds expected to close in the next quarter, or by year-end, say, the newere ones?

Are you talking about additional capital rate that -- ?

Yes.

Yes, some of that finds that Colin spoke about earlier would potentially close this year. Just one more comment on Asia, David. The billion dollar capital raise gives us buying power of $4 billion, so it is a significant growth potential to funds under management, which drives the advisory feeds, and also we still are investing on behalf of investors there with our Logistics Fund, so we actually have two funds going in the Asian market.

Okay, all right, interesting. And then one other, Lauralee, on the $12 million that you mentioned, and I think you talked about that also on the last call, two questions there. One, on the remaining 75% to go, if you could give us some sense of how you think about that geographically, and then two, I think at the time of the last call, you commented that you had commitments, not necessarily 50% of the money spent, but with the commitments in place as far as people having signed and what-not for about 50%. And if so, I was just curious how did the two jelled?

Okay. First of all, on the commitments, we are now pretty well at the point where that -- and that's why it'll be spent in the second half of the year, that those people, as Colin mentioned, we got the people identified, they're coming on board, and so now those monies in fact will be flowing through in compensation.

In regards to geography, it's fairly well dispersed in each of the markets because we made commitments to capital markets and leasing in the Americas, and they actually were probably the more robust in getting those on board early. We've made commitments to capital markets in Europe. Our Global Capital Markets just spread between the three regions. Our hotels is spread between the regions, and then obviously, we have a fair commitment into China, and that's really the mix of where they go, so relatively diversified around the globe.

Okay, alright, perfect. Thank so much.

[OPERATOR INSTRUCTIONS]. At this time, there are no further questions.

Good, operator. Well, thank you for that. If there are no further questions, we'll conclude today's call at just one hour. Thank you to everyone who was patient enough to sit through the technical issues at the beginning and participated, and we thank you also for your continued interest in Jones Lang LaSalle. We look forward to speaking to you again after the third quarter. Have a good day, everyone.

This concludes today's conference call. You may now disconnect.