Business context and reporting period
Jones Lang LaSalle Incorporated (JLL) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. Its businesses comprise Real Estate Services (RES) in the Americas, EMEA and Asia Pacific, and global investment manager LaSalle. JLL notes that results are seasonal: revenue and profits have historically tended to increase as the year progresses, so first-quarter results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $3,555.2 million | $3,117.7 million |
| Revenue before reimbursements | $1,891.1 million | $1,616.3 million |
| Fee revenue (non-GAAP) | $1,281.5 million | $1,124.0 million |
| Operating income | $53.8 million | $15.4 million |
| Net income attributable to JLL common shareholders | $40.3 million | $7.2 million |
| Diluted EPS | $0.88 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $107.7 million | $68.0 million |
| Adjusted EBITDA margin on fee revenue | 8.4% | 6.0% |
| Net cash used in operating activities | $258.6 million | $211.6 million |
Total revenue increased 14% in U.S. dollars and 10% in local currency; revenue before reimbursements rose 17% and 11%, respectively. Fee revenue grew 14% in U.S. dollars and 9% in local currency. The year-over-year improvement in operating income and earnings was substantial, while adjusted EBITDA increased 58% in U.S. dollars and 51% in local currency. The reported net income margin attributable to common shareholders, measured against revenue before reimbursements, was 2.1%, versus 0.4%.
Revenue includes reimbursements presented gross for a larger proportion of service contracts under newly adopted revenue guidance. Fee revenue is a non-GAAP measure that excludes reimbursements, specified gross contract costs and net non-cash mortgage servicing rights and mortgage banking derivative activity; it is not directly comparable to GAAP revenue.
Cash and cash equivalents were $292.8 million at March 31, 2018, and restricted cash was $204.1 million. Total assets were $9.20 billion and current liabilities were $3.84 billion. Operating cash use increased year over year, principally reflecting higher annual incentive compensation payments, partly offset by improved earnings and working-capital management. Investing activities used $60.0 million; financing activities provided $341.8 million, largely reflecting net credit-facility borrowings.
Reported short-term borrowings were $95.1 million; credit-facility borrowings were $325.0 million gross ($310.8 million net of debt issuance costs); and long-term debt was $702.0 million. The separate warehouse facilities balance was $406.4 million, backed by warehouse receivables. JLL had a $2.75 billion revolving facility maturing in June 2021, with $8.6 million of letters of credit outstanding. JLL reported compliance with its debt and warehouse covenants. Average facility borrowings were $202.3 million during the quarter, down from $1.12 billion a year earlier.
The effective tax rate was 24.1%. Net interest expense was $13.8 million, compared with $13.0 million. Equity earnings from real estate ventures rose to $13.6 million from $5.6 million.
Material changes and business drivers
- RES: Fee-revenue growth was led by EMEA and the Americas. EMEA revenue before reimbursements rose 25% in U.S. dollars (10% local currency), with growth in Capital Markets and Project & Development Services; its operating loss narrowed to $20.0 million from $32.0 million. Americas operating income increased to $46.3 million from $32.3 million. Asia Pacific fee revenue rose 8% in U.S. dollars (4% local currency), but adjusted EBITDA declined to $5.0 million from $10.6 million, including $3.5 million of higher-than-anticipated costs on client assignments.
- LaSalle: Fee revenue increased 37% in U.S. dollars (29% local currency), primarily on incentive fees from asset dispositions. Segment income rose to $42.3 million from $19.2 million, including equity earnings of $13.2 million. Assets under management were $59.0 billion, up from $58.1 billion at year-end 2017.
- Accounting change: JLL adopted ASC Topic 606 retrospectively from January 1, 2018. It accelerated recognition for certain brokerage commissions and advisory services, and changed principal-versus-agent assessments so more service-contract activity is reported gross. Comparative periods were recast; this affects reported revenue and expense presentation and makes the non-GAAP fee-revenue measure important context.
- Other items: Restructuring and acquisition charges were $0.7 million, down from $4.5 million, including a $1.2 million net decrease in prior-acquisition earn-out liabilities. Foreign-currency translation adjustments contributed $51.8 million to comprehensive income attributable to JLL.
Outlook, commentary and risks
JLL provided no specific full-year revenue or earnings guidance in the supplied filing text. Management cited strong performance in LaSalle and the Americas and improvement in EMEA, partly offset by a slight decline in Asia Pacific. It also noted continued investment in data, technology, people, platform transformation and client-facing products. Management expects to continue pursuing strategic acquisitions and co-investments.
Key uncertainties include macroeconomic and geopolitical conditions, real estate and credit markets, transaction volumes and timing, interest and foreign-exchange movements, and the variable timing of LaSalle incentive fees and co-investment earnings. The company conducts substantial international business: 48% of quarterly revenue was from outside the U.S. A 50-basis-point increase in short-term interest rates was estimated to increase quarterly net interest expense by $0.3 million, based on March 31 exposures.
Potential obligations include up to $434.6 million of maximum undiscounted earn-out payments across 56 acquisitions, subject to performance conditions, and $209.8 million of unfunded co-investment commitments. JLL also reported $8.2 billion of unpaid principal on loans subject to Fannie Mae DUS loss-sharing arrangements; its share of losses is generally capped at 20% of original principal. Litigation and professional-indemnity claims arise in the ordinary course; management did not expect their ultimate resolution to materially adversely affect financial position, results or liquidity, but claims may exceed insurance or be subject to large deductibles.
After quarter-end, JLL announced a $0.41-per-share cash dividend payable June 15, 2018. The company stated that future dividends remain subject to Board approval. It reported no material changes to previously disclosed risk factors and concluded disclosure controls were effective at quarter-end.
Most important facts for investors to verify
- How much of reported growth reflects underlying service activity versus foreign exchange and ASC 606 gross presentation; assess fee revenue alongside GAAP revenue.
- Whether first-quarter earnings gains persist, given seasonality, transaction timing, incentive compensation and LaSalle’s disposition-related incentive fees.
- Whether Asia Pacific’s lower adjusted EBITDA and higher assignment costs improve, and whether EMEA’s operating loss continues to narrow.
- How working capital and incentive-compensation payments affect operating cash flow, and how facility borrowings and warehouse funding evolve.
- Potential cash requirements from earn-outs, unfunded co-investments, DUS loss-sharing and claims, and the conditions attached to future dividends.