JLL reported a strong start to 2024, with both Resilient and Transactional revenue growth contributing to profit increases.
Global commercial real estate investments totaled $135 billion in Q1 2024, reflecting a 4% year-over-year decline.
Office leasing volumes globally increased by 7% year-over-year, while industrial leasing activity declined due to geopolitical and economic uncertainties.
Consumer spending and international tourism remained resilient, supporting demand in the retail sector.
Financial Highlights
Revenue increased 9% to $5.1 billion, driven by growth in Resilient revenues and a return to growth in Transactional revenues.
Adjusted EBITDA surged 70% to $187 million, and adjusted diluted EPS increased 168% to $1.78.
The company achieved a 6% year-over-year improvement in free cash flow and reduced leverage.
Segment Performance
Markets Advisory saw a 5% revenue growth, primarily driven by Property Management, which grew by 8%.
Capital Markets segment revenue increased by 6%, with global investment sales revenue growing by 20%.
Work Dynamics experienced an 11% revenue growth, led by a 15% increase in Workplace Management revenue.
JLL Technologies reported a 12% decline in revenue due to lower bookings and delays in client decisions.
Strategic Initiatives and Outlook
JLL continues to focus on cost management and efficiency improvements to position the business for future growth.
The company remains cautiously optimistic about a pickup in transaction activity in the latter part of 2024.
For full year 2024, JLL targets an adjusted EBITDA range of $950 million to $1.15 billion.
Long-term targets include revenue and gross contract cost ranges of $25 billion to $30 billion and $15 billion to $19 billion, respectively, with an adjusted EBITDA range of $1.6 billion to $2.1 billion.
Management Commentary
Despite higher-than-expected inflation and interest rate outlook adjustments, JLL has managed to maintain positive momentum in its business.
The company continues to invest in growth opportunities and operating leverage, aiming to capitalize on nearand long-term opportunities.
JLL’s leadership is optimistic about the company’s prospects for 2025 and beyond, highlighting the strength of its platform and commitment to client service.
Question and Answer
Capacity and Investment in Capital Markets
Question
How is JLL thinking about its capacity and potential investments in the Capital Markets segment, considering the positive signs in lease and sales activity?
Answer
JLL has not significantly reduced producer capacity and has ample resources to drive higher revenues if the market improves.
The company is using the current market environment to assess and potentially reallocate a few brokers within teams to optimize capacity.
Work Dynamics Profit Improvement
Question
Can you provide more details on the factors contributing to the step-up in profit for the Work Dynamics segment, including the impact of the Tetris contract and cost containment efforts?
Answer
The improvement in profit is primarily due to the absence of a drag from the Tetris contract compared to the previous year.
Additionally, the company has experienced significant wins and increased productivity within the service lines, leading to margin expansion.
Margin Outlook with Adjusted EBITDA Reporting
Question
With the shift to adjusted EBITDA reporting, can you provide an outlook or range for margin expectations on a total revenue basis?
Answer
The company will now communicate targets in terms of adjusted EBITDA dollars rather than margin.
The adjusted EBITDA dollar targets for 2024 are equivalent to the previously communicated margin targets of 12.5% to 14.5%.
U.S. Office Leasing Trends and Tenant Behavior
Question
Can you elaborate on the strength in U.S. office leasing, particularly regarding tenant behavior and the types of properties experiencing the most activity?
Answer
The improvement in office leasing is primarily driven by the highest quality, best-available space, with rents increasing in that segment.
Large lease deals are returning to the market but are still below pre-pandemic levels.
There is an increase in new tenant requirements, approximately at 30% of pre-pandemic levels, and a decrease in sublease vacancy rates, with notable backfill activity in the Bay Area and New York.
Midterm Financial Targets and Recovery Timing
Question
Does the expectation of rent cuts in the back half of the year and a pickup in transaction activity imply that the midterm targets can be achieved by 2026? And if the recovery is delayed into 2025, would that push the targets to 2027?
Answer
The company is still categorizing the targets as midterm and will assess the recovery of transactional markets before committing to a specific calendar year for achieving the targets.
The focus is on achieving accelerated growth in adjusted EBITDA relative to revenue trends, regardless of the timing of the recovery.
Free Cash Flow Drivers and Outlook
Question
How should we think about the cadence of free cash flow going forward, and is there a target percentage for free cash flow conversion for the year?
Answer
The drivers of free cash flow in the quarter included an outflow of $721 million, primarily due to working capital headwinds offset by cash flow improvement from earnings.
The key drivers for the full year will be overall earnings levels and the business mix, with some headwinds from Workplace Management growth and potential tailwinds from strong Capital Markets performance.
The company will continue to focus on timely receivables collection and expects some lumpiness in cash tax payments compared to the previous year.
Work Dynamics Organic Revenue Growth
Question
Can you provide an estimate of organic revenue growth for the Work Dynamics business in the next few years, considering the impact of Project Management and recent wins?
Answer
All the growth in the Work Dynamics business is organic, with no recent M&A activity.
The Workplace Management business is expected to show good growth but may moderate from the recent double-digit rates, settling into a high-single-digit growth range.
Project Management business growth is expected to pick up as leasing activity increases, with the delay typically being 2 to 3 quarters.
Overall, the company is optimistic about the Work Dynamics business over the next few years.
EBITDA Guidance and Pressure Points
Question
Can you discuss the pressure points on the EBITDA guidance for the full year, both on the upside and downside? And should we expect progression from 1Q to 2Q?
Answer
The main uncertainty in the guidance comes from the Transactional side, particularly the Capital Markets segment.
The company is comfortable forecasting its annuity-type businesses but finds it challenging to predict the Transactional business due to the unusual correlation with daily interest rate movements.
The progression from 1Q to 2Q is expected to follow typical seasonality trends, with similar patterns anticipated throughout the year.
Impact of Interest Rates on Guidance
Question
Given the comment about the marketplace adjusting to a higher interest rate environment, does the guidance for this year imply any rate cuts? Or can the company perform as outlined even if markets stabilize and rates remain at current levels?
Answer
The company did not anticipate interest rates coming down as quickly as the broader market, and its planning does not require any rate cuts.
However, support from the Transactional side, particularly Capital Markets, would be helpful for achieving the upper end of the guidance range.
Full-Year Leasing Growth Outlook
Question
Does the 2% growth outlook for leasing in 2024 imply a better environment than previously expected, or is the low single-digit range still a good estimate?
Answer
The company expects modest growth in leasing throughout the year, with continued pickup in the office sector and potential softness in industrial that is expected to stabilize towards the end of the year.
The ultimate growth rate will depend on the pace of acceleration in the market.
Business confidence, as indicated by the OECD business confidence index, is a key factor influencing market volumes, with a typical lag of 2 to 3 quarters.
The recent uptick in the business confidence index is a positive signal, and the company is monitoring its impact on market recovery.
Opportunity in Private Credit Market
Question
Do you see a significant opportunity in private credit, driven by banks’ pullback, and how might this manifest in the business, such as through acquisitions or realignment of brokers?
Answer
The company acknowledges the opportunity in private credit due to traditional lenders’ reduced activity.
JLL is agnostic about the source of financing and is focused on arranging the best debt opportunities for clients, leveraging its market insights and relationships.
The company does not anticipate the need for M&A to tap into the private credit market.
GSE Multifamily Business and Market Share
Question
Does the pullback in GSE multifamily lending by certain banks present an opportunity for JLL to gain market share?
Answer
JLL already has a strong market share in the GSE multifamily business and believes there is room for further growth.
The company is more optimistic about the lending environment in the multifamily sector compared to the commercial space, given the favorable demographics and the asset class’s historical resilience.
JLL Technologies Sales Trends and Outlook
Question
The slowdown in JLL Technologies sales was somewhat surprising. Was this different from your prior outlook, and when do you expect this trend to reverse?
Answer
The slowdown in JLL Technologies sales was anticipated and is a result of actions taken to reduce sales and marketing expenses, as previously discussed.
Additionally, there were delays in client decisions for new assignments.
The SaaS business within JLL Technologies performed relatively well, and the company expects the sales trend to continue for one or two more quarters before seeing a pickup.
The company prioritizes profitability over top-line growth in the current environment and will consider increasing sales and marketing expenses once the business reaches a breakeven point.
Average Office Lease Duration and Impact of Sublease Activity
Question
What are the current trends in average office lease duration, and are companies more willing to sign longer leases at this point in the cycle?
Answer
In the U.S. office market, the weighted average lease term for the first quarter remained relatively stable compared to the previous year, with a slight decrease due to increased sublease activity.
The overall weighted average lease term is still below pre-pandemic levels.
The company expects the sublease activity to continue impacting the overall lease term as the market works through the excess space.
Impact of Financial Reporting Changes on Business Management
Question
Have the changes in financial reporting methodology, specifically the shift to adjusted EBITDA, impacted how the business is managed internally or how margins are considered?
Answer
The changes in financial reporting have not altered how the business is managed internally or how margins are viewed.
The company continues to use fee revenue and adjusted EBITDA margin metrics, along with other KPIs, for internal management and compensation purposes.
All the necessary information to calculate these metrics is still provided in the earnings release information.
JLL Technologies Revenue Composition and Performance
Question
Can you clarify the revenue composition of JLL Technologies and the factors contributing to the decline, particularly in the Building Engines and Technology Solutions businesses?
Answer
The JLL Technologies revenue primarily consists of SaaS products, such as Building Engines and Corrigo, as well as the Technology Solutions business, which involves implementing third-party software for clients.
The decline in the Technology Solutions business is attributed to the previously mentioned reduction in sales and marketing expenses and delays in client decisions.
The SaaS business within JLL Technologies has been relatively steady.
Building Engines, in particular, is often connected to transactions, and the current muted transaction market has impacted its performance.
However, the company is optimistic about the medium to long-term growth potential for Building Engines, especially with successful implementations in Asia.
