Business context and reporting period
Jones Lang LaSalle Incorporated (JLL) filed this unaudited Form 10-Q for the three months ended March 31, 2017, compared with the three months ended March 31, 2016. JLL operates Real Estate Services (RES) in the Americas, EMEA and Asia Pacific, and global investment management business LaSalle. Results are seasonal: the company says first-quarter results are not fully indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $1,615.2 million | $1,336.8 million; up 21% reported and 25% in local currency |
| Fee revenue | $1,359.9 million | $1,120.8 million; up 21% reported and 25% in local currency |
| Operating income | $22.3 million | $29.4 million; down 24% reported and 40% in local currency |
| Net income attributable to JLL/common shareholders | $10.8 million; $0.24 diluted EPS | $25.7 million; $0.56 diluted EPS |
| Adjusted EBITDA | $73.9 million | $85.0 million; down 13% reported and 17% in local currency |
| Cash flow from operations | $(212.9) million | $(336.9) million |
| Cash and cash equivalents | $223.1 million at March 31 | $258.5 million at December 31, 2016 |
| Total debt, excluding warehouse facilities | $1,491.8 million | $1,267.6 million at December 31, 2016 |
Net interest expense rose to $13.0 million from $8.9 million, reflecting higher average credit-facility borrowings and a higher effective rate. The income tax provision was $3.6 million, at a 24.4% effective rate. The filing reports common-shareholder net income margin of 0.7%, versus 1.9% a year earlier. Adjusted EBITDA margin is reported inconsistently: the table shows 5.0%, while the narrative gives 5.4% in U.S. dollars and 5.0% in local currency.
Operating cash use primarily reflected first-quarter payment of incentive compensation accrued at year-end; the year-over-year improvement also reflected lower incentive payments and better working-capital management. Investing activities used $43.5 million, versus $184.3 million. Financing activities provided $216.9 million, including credit-facility borrowings. JLL had $1,175.0 million outstanding on its $2.75 billion revolving facility and $11.9 million of facility letters of credit at quarter-end; it reported compliance with facility covenants. Warehouse facilities had $237.3 million outstanding.
Material changes and segment results
- RES growth was broad, with all three regions and all service lines reporting higher revenue. Property and Facility Management led growth, substantially reflecting the 2016 Integral UK acquisition; acquisition-related expenses also increased.
- Americas revenue rose 20% and adjusted EBITDA was $63.6 million, up 16%. Growth included strong Leasing and Capital Markets & Hotels activity and contributions from acquisitions.
- EMEA revenue rose 35% reported and 49% in local currency, including $129.3 million of incremental revenue from Integral. The segment operating loss widened to $29.4 million from $15.8 million; adjusted EBITDA loss was $19.2 million versus $7.6 million. Management cited platform investment, delayed revenue, deal timing, receivable-loss provisions and service-mix effects.
- Asia Pacific revenue increased 16% reported; the segment moved to $4.3 million operating income from a $1.2 million loss. Adjusted EBITDA improved to $9.9 million from $3.0 million.
- LaSalle revenue fell 12% reported and 9% in local currency. Adjusted EBITDA declined to $19.6 million from $35.1 million, primarily due to lower transaction and incentive fees and lower equity earnings compared with a prior-year quarter that benefited from the LaSalle Logiport REIT launch and valuation gains. AUM was $58.0 billion, down 1% in local currency from year-end.
At March 31, total assets were $7,236.0 million and total liabilities were $4,334.1 million. Four strategic acquisitions were completed in Q1. Earn-out liabilities had a $232.8 million fair value; potential undiscounted earn-out payments were up to $442.4 million, subject to performance conditions.
Outlook, commentary and risks
JLL provided no specific financial guidance in the supplied filing text. Management expects seasonality, transaction timing, incentive compensation, acquisition activity, foreign exchange and LaSalle performance fees to cause variability. It said it would continue to consider acquisitions and pursue client co-investments. A $0.35-per-share semiannual dividend was announced on May 5, 2017, payable June 15, subject to the stated record date.
Key exposures include macroeconomic and real estate-market conditions, interest rates, foreign exchange, competition, litigation and regulatory changes. A 50-basis-point increase in short-term interest rates during Q1 would have increased interest expense by an estimated $1.4 million. JLL noted potential uncertainty around tax consequences of the U.K.’s eventual EU exit. The company reported no material changes to its previously disclosed risk factors. It said ordinary-course litigation is not expected to materially affect its financial position, results or liquidity, while noting claims may exceed insurance coverage.
Other notable exposures include $217.3 million of maximum unfunded co-investment commitments and $6.4 billion of unpaid principal on loans under Fannie Mae loss-sharing arrangements; the related loan-loss accrual was $13.7 million. JLL adopted new share-based compensation guidance in Q1, recording a $1.3 million reduction to beginning retained earnings. It plans full retrospective adoption of the new revenue standard and anticipates changes to timing of some revenue recognition and a significant increase in property and facility management contracts reported gross; implementation analysis was ongoing.
Important facts for investors to verify
- Reconcile the reported adjusted EBITDA margin: the filing’s table and narrative give different U.S.-dollar figures.
- Assess how much RES growth and expense growth reflect Integral and other acquisitions versus organic performance, particularly in EMEA.
- Review the drivers and sustainability of lower earnings, higher debt and first-quarter operating cash use, considering seasonality and incentive-compensation payments.
- Monitor earn-out obligations, unfunded co-investment commitments, DUS loss-sharing exposure and available revolving-facility capacity.
- Track LaSalle fee and valuation variability, AUM changes, foreign-exchange effects, and the expected effects of adopting the new revenue and lease accounting standards.