Jones Lang LaSalle Incorporated — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; interim financial statements are unaudited. The company provides commercial real estate services and investment management through Real Estate Services (RES) across the Americas, EMEA and Asia Pacific, and LaSalle.
Financial performance
| Metric | Q2 2018 | Six months 2018 | Comparison with 2017 |
|---|---|---|---|
| Total revenue | $3.904 billion | $7.459 billion | +12% and +13% in U.S. dollars; +11% and +10% in local currency |
| Revenue before reimbursements | $2.163 billion | $4.054 billion | +15% and +16% in U.S. dollars |
| Fee revenue (non-GAAP) | $1.494 billion | $2.775 billion | +13% in U.S. dollars in both periods; +11% and +10% in local currency |
| Operating income | $149.8 million | $203.6 million | +15% and +39% |
| Net income attributable to common shareholders | $107.8 million | $148.1 million | Versus $94.3 million and $101.5 million |
| Diluted EPS | $2.35 | $3.23 | Versus $2.06 and $2.22 |
| Adjusted EBITDA (non-GAAP) | $193.6 million | $301.3 million | +5% and +19% in U.S. dollars |
| Adjusted EBITDA margin on fee revenue | 13.1% local currency | 11.1% | Q2: 13.9% in 2017; first half: 10.3% in 2017 |
Q2 net income margin attributable to common shareholders, measured against revenue before reimbursements, was 5.0%, unchanged year over year. The first-half effective tax rate was 25.1%. Dividends declared were $0.41 per share, compared with $0.35 in the prior-year periods.
Cash flow and balance sheet: Operating activities used $267.9 million in the first half, versus $38.6 million used in 2017, principally due to higher incentive compensation payments and receivable collection timing. Investing activities used $83.7 million; financing activities provided $383.2 million. Cash and cash equivalents were $292.8 million at June 30, with restricted cash of $196.1 million. Total assets were $9.188 billion and equity was $3.466 billion.
Total debt was $1.170 billion, including $397.2 million net carrying value of credit-facility borrowings, $679.7 million of long-term debt and $93.4 million of short-term borrowings. Separate warehouse facilities totaled $444.5 million, supported by warehouse receivables. The $2.75 billion revolving facility was amended in May, improving pricing and extending maturity to May 2023; $415 million was outstanding at June 30. JLL reported compliance with debt covenants. Its investment-grade rating was upgraded by S&P to BBB+ in July 2018; Moody’s was Baa1, stable.
Material changes and management commentary
- Growth was broad-based across RES service lines and segments. Property & Facility Management was the largest contributor to RES revenue growth. LaSalle benefited from higher incentive fees related to asset dispositions.
- Americas operating income rose 5% in Q2 and 14% in the first half. EMEA reported a Q2 operating loss of $1.4 million and a first-half operating loss of $21.4 million; management cited service mix, transaction and compensation timing, and investment in its platform and people. Asia Pacific first-half operating income declined 15% to $22.5 million.
- Q2 Adjusted EBITDA margin weakened year over year, which management attributed to EMEA performance, increased investment and the impact of ASC 606 comparative-period accounting. Management reported approximately 20 basis points of net operational margin reduction.
- Cash generation is seasonal: incentive compensation and receivable timing weighed on first-half operating cash flow. The company notes that results generally tend to increase as the year progresses, but quarterly results are affected by transaction timing, incentive compensation and LaSalle performance fees.
Outlook, accounting, risks and contingencies
- The filing provides no specific numerical earnings or revenue guidance. Management expects to continue investing in technology, data and people and to consider strategic acquisitions and client co-investments.
- ASC 606 was adopted retrospectively from January 1, 2018. It accelerated recognition of certain commissions and advisory revenue and increased gross presentation of some service-contract revenue and related expenses. Therefore, reported total revenue growth includes reimbursement activity; revenue before reimbursements and non-GAAP fee revenue provide additional context and are not GAAP measures.
- Restructuring and acquisition items included credits of $11.1 million for Q2 and $10.4 million for the first half, largely from reductions in estimated earn-out liabilities. The first-half $14.8 million net decrease in earn-out liabilities was non-cash.
- Potential earn-out payments across 54 acquisitions totaled a maximum undiscounted $393.7 million, subject to performance conditions over as long as six years. Unfunded real estate investment commitments were $197.5 million.
- JLL is exposed to macroeconomic, geopolitical, real estate-market, interest-rate and foreign-exchange risks. International operations generated 48% of first-half revenue. Litigation claims may exceed insurance coverage, although management did not expect their resolution to materially affect financial position, results or liquidity. DUS loan-loss sharing covered loans with $8.2 billion of unpaid principal; JLL generally bears up to 20% of principal at origination.
- Adoption of the new lease accounting standard was expected to increase reported assets and liabilities, primarily for real estate leases; the company had not quantified the impact. No material risk-factor changes were reported from the 2017 Form 10-K.
Important facts for investors to verify
- Assess underlying growth and margins using revenue before reimbursements and fee revenue, accounting for the retrospective ASC 606 changes and expanded gross presentation.
- Track whether EMEA profitability improves and whether growth in Americas and LaSalle can offset margin pressure and investment costs.
- Monitor operating cash flow, receivable collections, seasonal incentive-compensation payments and the use of revolving-credit borrowings.
- Review exposure from acquisition earn-outs, unfunded co-investment commitments, DUS loan guarantees and litigation as conditions change.
- Check subsequent disclosures for the quantified balance-sheet impact of lease accounting and for any changes in guidance, dividend policy or credit ratings.