Business context and reporting period
Jones Lang LaSalle Incorporated (JLL) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. Its businesses comprise Real Estate Services (RES), reported across the Americas, EMEA and Asia Pacific, and LaSalle Investment Management. Results were materially affected by the COVID-19 pandemic, particularly in transaction-based services.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $3,978.1m | $4,495.6m | $11,744.5m | $12,582.7m |
| Revenue before reimbursements | $2,091.4m | $2,545.8m | $6,152.9m | $6,855.6m |
| Operating income | $154.9m | $171.6m | $230.3m | $347.1m |
| Net income attributable to common shareholders | $131.9m | $128.9m | $152.4m | $260.7m |
| Diluted EPS | $2.52 | $2.47 | $2.92 | $5.42 |
| Adjusted EBITDA | $243.6m | $299.9m | $442.5m | $622.0m |
| Adjusted EBITDA margin | 17.2% USD; 17.4% local currency | 16.5% | 10.6% | 13.1% |
Q3 total revenue fell 12% and operating income fell 10% year over year; nine-month revenue fell 7% and operating income fell 34%. Q3 common-shareholder income rose slightly despite lower operating income, supported in part by a lower tax provision: the effective tax rate was 16.0%, versus 24.5% a year earlier. Nine-month common-shareholder income declined 42%.
Q3 fee revenue, a non-GAAP measure, was $1,417.6m, down 22% in U.S. dollars; nine-month fee revenue was $4,167.7m, down 13%. Management reported that Q3 fee-based operating expense reductions and cost mitigation helped expand the adjusted EBITDA margin, while weaker RES transaction activity weighed on profitability.
Operating activities generated $363.1m of cash in the first nine months of 2020, versus $251.5m used in the prior-year period. Investing activities used $124.2m and financing activities used $243.8m. Ending cash, cash equivalents and restricted cash totaled $642.9m, including $202.9m of restricted cash; balance-sheet cash and cash equivalents were $440.0m.
At September 30, 2020, total assets were $13.9bn, total liabilities $8.6bn and total equity $5.3bn. Total debt was $1,179.7m, comprising $106.4m of short-term borrowings, $390.4m net under the credit facility and $682.9m of long-term debt. The $2.75bn revolving facility had $400m of borrowings outstanding before debt issuance costs; JLL said it was in compliance with debt covenants. Separately, warehouse facilities of $1,723.8m funded warehouse receivables of $1,750.6m. Current assets were $6,168.5m and current liabilities $5,802.1m.
Material changes and segment results
- Americas: Q3 segment income was $140.0m, down from $177.9m. Fee revenue fell 26% in local currency, led by leasing and capital markets declines; property and facility management fee revenue grew 24%. Nine-month segment income was $277.1m versus $359.1m.
- EMEA: Q3 segment reported a $1.9m loss versus $13.8m income; nine-month loss was $55.8m versus $17.9m. Transaction-based revenue and property and facility management were pressured. Q3 adjusted EBITDA margin was 2.4% in USD, compared with 6.1%.
- Asia Pacific: Q3 segment income increased to $35.8m from $31.5m despite a 20% local-currency decline in fee revenue; lower costs supported results. Nine-month segment income was $57.4m versus $59.5m.
- LaSalle: Q3 segment income was $29.5m versus $35.5m; nine-month income fell to $28.8m from $93.0m. Advisory fees grew, but lower incentive fees and year-to-date co-investment valuation losses weighed on results. Assets under management were $65.7bn at quarter-end.
Property and facility management was comparatively resilient, while leasing and capital markets were most affected by pandemic-related declines in client activity. Year-to-date comparisons also reflect HFF, acquired in July 2019, which contributed incremental revenue in the first half of 2020.
Outlook, risks, contingencies and unusual items
The filing provides no numerical earnings or revenue guidance. Management said pandemic effects could disrupt historical seasonality and continued to describe uncertainty around market activity and real estate valuations. Through October, JLL had reduced fixed costs by approximately $135m on an annualized basis. Q3 non-permanent cost savings were nearly $120m, including $34m from government relief programs; year-to-date savings exceeded $240m, including $67m from relief programs. Management cautioned that non-permanent savings may return as business volumes recover.
JLL recorded a $45.7m loan-loss guarantee reserve under the Fannie Mae DUS program, increased to reflect pandemic-related economic conditions. DUS loans subject to loss-sharing arrangements had $11.0bn of unpaid principal; the separate non-contingent guarantee obligation was $20.7m. No loan losses were incurred in the periods presented. Unfunded investment commitments were a maximum $338.8m, although JLL did not expect a call on $60.4m associated with a terminated fund.
Professional indemnity accruals were $44.7m at September 30, 2020. JLL is involved in ordinary-course litigation, some with substantial claims; it said ultimate resolution was not expected to materially adversely affect its financial position, results or liquidity. HFF integration and other restructuring and acquisition charges were $33.5m in Q3 and $75.8m year to date. The company expected approximately $100m of expense over the two-year HFF integration period for retention awards, with other integration costs not estimable. The annual goodwill impairment review identified no indicated impairment for the reporting units assessed.
JLL adopted the expected-credit-loss accounting standard on January 1, 2020, reducing opening retained earnings by $14.9m. Its risk-factor disclosures had no material changes from the 2019 Form 10-K. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether transaction-based leasing and capital markets activity recovers, and how continued pandemic disruption affects fee revenue, margins and seasonality.
- How much of the cost savings is temporary, when related costs may return, and the remaining cash and non-cash costs of HFF integration.
- LaSalle co-investment valuations, incentive-fee timing and the drivers of its year-to-date equity losses.
- Credit quality and reserve adequacy for receivables, DUS loss-sharing exposures and real estate investments; track the $45.7m loan-loss guarantee reserve.
- Liquidity and funding conditions, including warehouse facility renewals, debt maturities, covenant compliance and the $338.8m maximum unfunded investment commitments.
- Changes in litigation and insurance recoveries, acquisition earn-out obligations, and foreign-exchange and interest-rate exposures.