JONES LANG LASALLE INC quarterly report, Q2 FY2020

Jones Lang LaSalle Incorporated (JLL) — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020; interim financial statements are unaudited. JLL provides commercial real estate services and investment management through Americas, EMEA, Asia Pacific and LaSalle. Results were materially affected by the COVID-19 pandemic.

Financial performance and position

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$3,670.4 million	$4,266.5 million	$7,766.4 million	$8,087.1 million
Revenue before reimbursements	$1,828.5 million	$2,348.2 million	$4,061.5 million	$4,309.8 million
Fee revenue (non-GAAP)	$1,244.9 million	$1,630.0 million	$2,750.1 million	$2,949.1 million
Operating income	$10.8 million	$150.1 million	$75.4 million	$175.5 million
Net income attributable to JLL common shareholders	$15.2 million	$110.5 million	$20.5 million	$131.8 million
Adjusted EBITDA (non-GAAP)	$103.3 million	$226.7 million	$198.9 million	$322.1 million

Q2 fee revenue fell 24% in U.S. dollars (22% in local currency); first-half fee revenue fell 7% (5% in local currency). Q2 GAAP operating income declined 93% and common-shareholder net income declined 86% year over year.
Q2 net income margin attributable to common shareholders was 0.8% of revenue before reimbursements, versus 4.7% a year earlier. Adjusted EBITDA margin was 8.3% in U.S. dollars (8.1% in local currency), versus 13.9% a year earlier. First-half Adjusted EBITDA fell 38%.
Operating cash flow was a use of $44.7 million in the first half, compared with a use of $483.1 million in 2019. Investing activities used $109.4 million; financing activities provided $114.1 million. Cash, cash equivalents and restricted cash totaled $597.0 million at June 30, including $413.5 million of unrestricted cash.
Total debt was $1,470.0 million at June 30, up from $1,297.4 million at year-end 2019. This includes $689.5 million outstanding under the revolving credit facility, $665.4 million of long-term debt and $115.1 million of short-term borrowings. Warehouse facilities, separately reported, were $789.1 million and were supported by warehouse receivables.
The $2.75 billion unsecured revolving facility matures in May 2023; JLL reported $700.0 million of borrowings and $0.7 million of letters of credit at June 30. The company was in compliance with debt and warehouse covenants and reported investment-grade ratings.
Total assets were $12.81 billion and total liabilities were $7.69 billion at June 30. Investments in real estate ventures were $393.6 million; maximum unfunded investment commitments were $338.5 million.

Material changes and segment results

COVID-19 restrictions and building closures sharply reduced transaction activity. Q2 leasing revenue declined 43% and capital markets revenue declined 16% overall. Property and facility management fee revenue was comparatively resilient.
Americas Q2 fee revenue fell 21%; segment operating income was $39.6 million versus $120.5 million. HFF, acquired in 2019, contributed $70.6 million of incremental Q2 revenue to Americas Capital Markets.
EMEA Q2 fee revenue fell 29%; segment operating loss was $33.4 million versus a $1.3 million loss. Management cited shutdowns, transaction declines and losses on three contracts nearing completion or termination.
Asia Pacific Q2 fee revenue fell 24%; segment operating income was $18.7 million versus $26.6 million. Property and facility management held up better than transaction-based services.
LaSalle Q2 revenue fell 23%, chiefly from lower incentive and transaction fees; advisory fees were broadly stable. First-half LaSalle equity losses were $29.0 million, associated with lower estimated values of co-investments. Assets under management were $65.0 billion at June 30, down 6% from March 31 in U.S. dollars.
First-half equity results shifted to a loss of $13.6 million from earnings of $15.2 million a year earlier, largely reflecting LaSalle co-investment valuation changes. Foreign currency translation reduced equity by $109.6 million in the first half.

Outlook, commentary, risks and unusual items

Management did not provide numerical full-year guidance. It cautioned that pandemic disruption could alter normal seasonality and that first-half results are not indicative of full-year performance. Transaction timing, market conditions, incentive fees, investment valuations and foreign exchange remain sources of volatility.
JLL expanded cost-mitigation efforts and received approximately $28 million of net government grants and subsidies in Q2, concentrated in EMEA and Asia Pacific; relief and deferred payroll-related payments supported liquidity and job retention. Management described these measures as positioning the company to capture market share as conditions recover.
The expected credit-loss standard adopted January 1, 2020 reduced opening retained earnings by $14.9 million. The loan-loss guarantee reserve for mortgage loans was $45.7 million at June 30, reflecting pandemic-related economic assumptions.
JLL identified an impairment-triggering event for its EMEA reporting unit, but its goodwill test estimated fair value more than 30% above carrying value; no impairment was recorded. Fair-value investments declined by $21.4 million in the first half.
HFF-related restructuring and acquisition charges were $20.1 million in Q2 and $41.4 million in the first half. JLL expects approximately $100 million of HFF retention-award expense over the two-year integration period; additional integration costs are possible but not estimable.
Professional-indemnity accruals were $38.1 million. DUS mortgage loans subject to loss-sharing arrangements had $10.5 billion of unpaid principal; the guarantee obligation was $20.9 million, with no loan losses reported in the period. Litigation claims may be substantial, though management did not expect their resolution to materially affect financial position, results or liquidity.
On June 30, JLL disclosed the CFO’s planned departure, effective July 15, and the appointment of Karen Brennan as CFO effective that date. The former CFO’s separation agreement includes severance and transition compensation. The Chief Administrative Officer retired July 3 under a consulting agreement.

Important facts for investors to verify

Whether transaction markets, leasing volumes and client activity recover, and how persistent pandemic-related restrictions affect revenues, margins and cash collection.
Whether cost reductions and government support can offset lower fee revenue, including when temporary relief and payment deferrals end.
Debt and liquidity trends, including facility usage, warehouse financing, working-capital movements and the timing of deferred obligations.
LaSalle co-investment valuations, assets under management, incentive-fee realization and potential additional valuation losses.
Credit-loss reserves, DUS loss-sharing exposure, unfunded investment commitments, earn-out obligations and HFF integration costs.
Effects of foreign exchange, executive transitions and any developments in litigation or other contingencies.