Jones Lang LaSalle Incorporated — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. JLL provides commercial real estate services through its Americas, EMEA and Asia Pacific Real Estate Services (RES) segments, and global LaSalle Investment Management. Results are seasonal and can vary with transaction timing, incentive fees, acquisitions and foreign exchange.
Financial results and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1,705.2 million | $1,501.3 million | $4,645.6 million | $4,078.2 million |
| Fee revenue, excluding gross contract costs | $1,447.2 million | $1,287.3 million | $3,910.1 million | $3,498.2 million |
| Operating income | $71.0 million | $120.3 million | $214.3 million | $275.9 million |
| Net income attributable to common shareholders | $48.0 million | $110.5 million | $152.5 million | $242.5 million |
| Diluted EPS | $1.05 | $2.43 | $3.35 | $5.34 |
| Adjusted EBITDA | $127.3 million | $187.9 million | $372.1 million | $432.3 million |
| Adjusted EBITDA margin on fee revenue | 8.4% | 14.6% | 9.1% | 12.4% |
| Net interest expense | $12.4 million | $6.8 million | $32.2 million | $20.4 million |
| Equity earnings from real estate ventures | $5.5 million | $25.4 million | $27.7 million | $63.9 million |
Revenue grew 14% in reported U.S. dollars and 17% in local currency for both the quarter and year to date. Fee revenue increased 12% and 15%, respectively, on those bases. Operating income declined 41% for the quarter and 22% year to date; Adjusted EBITDA declined 32% and 14%. Management cited weaker LaSalle incentive fees and investment gains, lower transactional activity in parts of EMEA, shifts toward lower-margin annuity revenue and continued technology and data investment.
Cash flow and liquidity. Nine-month operating cash flow was a use of $151.9 million, versus a use of $18.2 million in 2015; management attributed the outflow primarily to payment of prior-year incentive compensation and lower net income. Investing cash outflow was $617.4 million, including $418.6 million of acquisition payments and $139.4 million of net capital additions. Financing cash inflow was $779.3 million, principally reflecting increased net borrowings. Cash was $228.4 million at September 30, 2016, compared with $216.6 million at year-end 2015.
Total debt was $1,412.6 million, including $1,084.3 million net carrying value under the credit facility, $272.6 million of senior notes and $55.7 million of short-term borrowings. The facility was expanded to $2.75 billion and extended to June 2021; $1,105.0 million was drawn and $18.2 million of letters of credit were outstanding at quarter-end. JLL reported compliance with its debt covenants. Senior notes have a 4.4% coupon and mature in November 2022; facility borrowings bear variable rates.
Material changes and segment performance
- Americas: Nine-month revenue rose 16% and fee revenue 17%; operating income was essentially flat at $138.4 million. Growth across service lines included acquisition contributions and organic expansion.
- EMEA: Nine-month revenue increased 22%, but operating income fell 80% to $11.2 million and Adjusted EBITDA fell 53% to $34.7 million. Property and facility management and project services grew, while leasing and capital markets weakened; management also cited lower-margin mix and UK contract wind-down costs.
- Asia Pacific: Nine-month revenue grew 17%; operating income decreased 1% to $32.9 million and Adjusted EBITDA was $45.8 million, broadly flat year over year.
- LaSalle: Nine-month revenue increased 3%, but operating income declined 4%, Adjusted EBITDA declined 27% and equity earnings declined 54%. The quarter’s revenue fell 39%, largely because prior-year incentive fees did not recur. Assets under management were $59.7 billion at September 30, up $0.6 billion from June 30.
JLL completed 22 acquisitions during the first nine months, paying $418.6 million at closing; the Integral UK acquisition strengthened EMEA property maintenance services. Preliminary acquisition accounting recorded $440.4 million of goodwill and $96.0 million of identifiable intangibles. Goodwill rose to $2,546.8 million. The company reported $210.1 million of accrued acquisition earn-out liabilities and a maximum potential undiscounted earn-out obligation of $417.0 million across 47 acquisitions. Quarter and year-to-date restructuring and acquisition charges were $18.0 million and $35.9 million; the quarter included a $6.5 million write-off of an indefinite-lived intangible asset.
Outlook, commentary and risks
- No quantitative earnings or revenue guidance is provided in the filing. Management cautions that interim results are not fully indicative of full-year results, citing seasonality, incentive compensation accruals, transaction timing and variable LaSalle performance fees.
- Management expects to continue pursuing acquisitions and strategic co-investments. Unfunded co-investment commitments totaled up to $213.2 million; the company also disclosed potential acquisition earn-outs and deferred acquisition obligations.
- Management identifies macroeconomic, geopolitical, real estate and credit-market conditions, competition, interest and currency movements, litigation and regulation as risks. Brexit was added as a risk, including possible market volatility, currency effects and future regulatory divergence.
- Revenue outside the U.S. represented 56% of nine-month revenue. JLL reported foreign currency translation losses of $50.9 million in other comprehensive income for the period. The credit facility is primarily variable-rate debt.
- JLL stated that ordinary-course litigation is not expected, based on information available, to materially adversely affect its financial position, results or liquidity; claims may exceed insurance or be subject to significant deductibles.
- A $0.33-per-share semi-annual dividend was declared after quarter-end, payable December 15, 2016. Christian Ulbrich succeeded Colin Dyer as CEO effective October 1, 2016.
Important facts for investors to verify
- Whether revenue growth translates into improved profitability, given falling operating income and Adjusted EBITDA margins.
- Whether EMEA margins recover and whether LaSalle incentive fees and real estate venture gains remain volatile.
- Acquisition integration, realized returns on acquired businesses, purchase-price allocation revisions and the timing and size of earn-out payments.
- Cash conversion and borrowing needs as acquisition spending, co-investments, capital expenditures and incentive compensation payments continue.
- Exposure to Brexit-related developments, foreign exchange movements and variable interest rates, as well as continued compliance with credit-facility covenants.
- The assumptions behind non-GAAP measures, including Adjusted EBITDA and fee revenue, and the effect of gross contract cost presentation on reported revenue growth.