Most real estate stocks may seem like bad investments right now with rising interest rates, hybrid work schedules, high inflation and a looming recession. Jones Lang LaSalle Inc. (JLL, Financial) is an exception. Despite the company’s growth across the top line, bottom line and book value in the last decade, its market value has not followed suit.
Jones Lang LaSalle is one of the largest and most comprehensive commercial real estate companies on the planet with a history that dates back to 1760. Currently, it is a Fortune 500 company with operations in 80 countries and more than 5 billion square feet of space managed. The company will release its annual numbers tomorrow and, with the stock priced at 11 times forward earnings, could be offering good value currently.
Since the financial crisis of 2008, the commercial real estate services industry has experienced a period of rapid re-expansion. Low interest rates, improved access to capital, robust real estate valuations and a positive economic climate has helped the industry rebound quickly after the initial stages of the pandemic, achieving record profitability in 2021. Looking beyond current market conditions, the industry's growth potential in the long term remains high and that bodes well for Jones Lang LaSalle even if the 2022 numbers fall short of expectations.
Jones Lang LaSalle keeps getting more valuable
In his 2022 letter released over the weekend, Warren Buffett (Trades, Portfolio) wrote, “If you keep making something more valuable, then some wise person is going to notice it and start buying.”
This seems to be the case with Jones Lang LaSalle - the company continues to build value. In the last decade, the stock price has risen just 75% while the company itself has done much better financially, building up its retained earnings from $1 billion to $5.4 billion in that time. Jones Lang LaSalle has seen its revenue increase from $3.9 billion in 2012 to more than $21 billion in the last 12 months and its net income grow from $207 million to more than $900 million.
With that in mind, there seems to be a huge disconnection from the actual value of the company, which is now priced at 40% of sales, 1.4 times book and 11 times forward earnings. It is only a matter of time before more smart people start buying.
Growth drivers
Aside from an intrinsically undervalued stock, there are a number of long-term growth drivers for the company. The first is a post-pandemic trend toward hybrid work models, which have led organizations to entice employees back to the office and improve workplace environment, which means in most cases outsourcing real estate needs, thus growing demand for advisory services - Jones Lang LaSalle’s speciality.
Another consideration is sustainability. The majority of existing buildings are going to require renovations over the coming decades in order to adhere to the increasingly strict carbon emission laws, representing a large growth opportunity that should help Jones Lang LaSalle as well.
A final consideration is the commercial real estate industry as a whole may benefit from consolidation and increased capital spending. For Jones Lang LaSalle, these factors should contribute to solid growth across the board throughout the remainder of the decade. This, along with increased urbanization and a need for property technology, means corporate spending will increase for all CRE services.
2022 earnings
Tomorrow, the company is expected to release its annual earnings report. The numbers are not going to be great, but competitor CBRE Group Inc. (CBRE, Financial) came out with its numbers today and beat expectations. This could bode well for Jones Lang LaSalle. Margins likely got squeezed even more and the company’s capital markets unit probably had lower volumes. So while Jones Lang LaSalle had record profits in 2021, the 2022 profit will be closer to $700 million. All that has been baked into the current valuation.
Along with CBRE, Colliers International (CIGI, Financial) and Cushman & Wakefield (CWK, Financial), the company is an industry heavyweight. All four companies have been profitable despite the challenges during the Covid-19 pandemic. Jones Lang LaSalle is amongst the leaders in all five business segments; therefore, regardless of how the revenue breaks down, investors should be able to trust the company will continue to find the best way to build value.
Thoughts on value
Jones Lang LaSalle is looking to grow fees at 9% through 2025, targeting $1 billion in cash from operations. Even though the company does not generate a lot of revenue or income per employee, it has maintained a solid 4% net profit margin and 15% return on equity. With the sector median price-earnings ratio close to 30, even the market re-evaluating the stock to 15 times earnings would take the price up nearly 100 points. After this year, Jones Lang LaSalle is expected to steadily grow once again, as it has over the last decade, which will eventually warrant a higher valuation. Regardless of what happens in the short term, the company offers good value over the long term.
