Jones Lang LaSalle Incorporated — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited interim results; amounts are in U.S. dollars unless noted. JLL provides commercial real estate services through its Americas, EMEA and Asia Pacific Real Estate Services (RES) segments, and LaSalle Investment Management.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,947.0 million | $1,705.2 million | $5,396.9 million | $4,645.6 million |
| Operating income | $118.1 million | $71.0 million | $244.7 million | $214.3 million |
| Net income attributable to common shareholders | $86.6 million | $48.0 million | $175.6 million | $152.5 million |
| Diluted EPS | $1.89 | $1.05 | $3.84 | $3.35 |
| Adjusted EBITDA (non-GAAP) | $167.9 million | $127.3 million | $400.0 million | $372.1 million |
| Adjusted EBITDA margin on fee revenue (non-GAAP) | 10.3% | 8.8% | 8.6% | 9.5% |
| Operating cash flow | Not separately presented for the quarter | $295.7 million | $(151.9) million |
- Q3 revenue rose 14% in U.S. dollars (13% in local currency); fee revenue rose 12%. Nine-month revenue grew 16% in U.S. dollars (18% in local currency); fee revenue grew 16%.
- Q3 operating margin, calculated as operating income divided by revenue, was approximately 6.1%, versus 4.2% a year earlier. Nine-month operating margin was approximately 4.5%, versus 4.6%.
- At September 30, cash was $277.9 million, current assets $2,986.3 million and current liabilities $2,582.4 million. Total assets were $7,554.3 million; total liabilities were $4,379.0 million; total equity was $3,171.4 million.
- Total debt was $1,182.0 million, compared with $1,267.6 million at year-end 2016. This included $450 million gross borrowings on the revolving credit facility, $64.2 million of short-term borrowings and $684.2 million of long-term debt. The $2.75 billion facility matures in 2021; JLL reported covenant compliance.
- JLL issued €350 million of fixed-rate senior notes in June, with maturities in 2027 and 2029, and used net proceeds of $393.2 million to reduce revolver borrowings. Warehouse facilities outstanding were $331.9 million, supported by warehouse receivables of $337.8 million.
- Year-to-date investing cash outflow was $119.7 million and financing cash outflow was $165.4 million. Cash increased $19.4 million from year-end 2016. Capital expenditures were $98.1 million.
Material changes and segment results
- Q3 operating income increased 66%, and common-shareholder net income rose to $86.6 million from $48.0 million. Management cited stronger RES performance, LaSalle incentive fees and expense-control initiatives. Nine-month operating income increased 14%, while adjusted EBITDA rose 7%.
- RES drove growth: Q3 RES revenue increased 14%. EMEA benefited substantially from the 2016 Integral acquisition; Asia Pacific grew across transaction and management services; Americas growth included advisory services. Property & Facility Management was a leading contributor to consolidated growth.
- LaSalle Q3 revenue increased 27%, principally on incentive fees from client asset dispositions. Nine-month revenue fell 15% as prior-year incentive and transaction fees did not recur to the same extent. Nine-month LaSalle operating income declined 36%.
- EMEA reported a nine-month operating loss of $18.2 million, versus a $1.1 million loss in 2016, despite higher revenue; costs rose with Integral and continued investment. Americas and Asia Pacific nine-month operating income increased 27% and 30%, respectively.
- Operating cash flow improved by $447.6 million year over year, which management attributed mainly to improved working-capital management and lower incentive compensation payments, as well as higher net income.
- Foreign currency translation contributed $174.7 million to nine-month other comprehensive income. Goodwill increased to $2,701.3 million, including $92.4 million from currency movements.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management cautioned that quarterly results are seasonal and not fully indicative of full-year performance: transaction closings and incentive fees vary, while many expenses are incurred more evenly.
- Management expects to continue pursuing acquisitions and client co-investments. Unfunded co-investment commitments totaled up to $222.2 million. Potential earn-out payments on completed acquisitions were up to $436.9 million, subject to performance conditions; $223.5 million was accrued at fair value.
- JLL expects adoption of ASC 606 in 2018 to accelerate recognition of some transaction and advisory revenue, without a material earnings impact. It estimated full-year 2016 revenue and operating expenses would each increase by approximately $5.5–$6.5 billion from gross presentation of certain client-service contracts; the 2017 effect was expected to be generally consistent, but remained under assessment. Balance-sheet assets and liabilities are also expected to increase materially.
- Key exposures include macroeconomic and real estate market conditions, transaction volumes, interest rates, foreign exchange, competition, litigation and regulation. A 50-basis-point increase in short-term rates was estimated to raise 2017 interest expense by $5.2 million. Foreign operations generated 58% of nine-month revenue.
- JLL was involved in ordinary-course litigation and stated that, based on information available, resolution was not expected to materially affect its financial position, results or liquidity. It reported no material changes to previously disclosed risk factors and effective disclosure controls.
- After quarter-end, JLL announced a semi-annual dividend of $0.37 per share, payable December 15, 2017. The Board retains discretion over future dividends.
Important facts for investors to verify
- Whether RES growth and margin performance persist, especially in EMEA after the Integral acquisition and against its year-to-date operating loss.
- How much LaSalle’s quarterly incentive-fee strength recurs, given the significant year-to-date decline and timing-dependent nature of fees.
- Working-capital cash-flow improvement, debt levels and interest costs, including revolver usage and refinancing or covenant terms.
- Potential cash requirements from acquisition earn-outs and unfunded co-investment commitments, and the assumptions underlying their fair values.
- The final ASC 606 effects on reported revenue, expenses, assets and liabilities; the filing’s estimates were preliminary and gross presentation can materially change reported scale without an equivalent change in profit.
- Exposure to DUS mortgage loss-sharing arrangements: covered loans had $7.6 billion of unpaid principal, with a $14.7 million loan-loss accrual; JLL’s share of losses is generally capped at 20% of principal at origination.