Business context and reporting period
Jones Lang LaSalle Incorporated (NYSE: JLL) filed this Form 10-K for the fiscal year ended December 31, 2012. It provides real estate services across the Americas, EMEA and Asia Pacific, and global investment management through LaSalle Investment Management. The company reported approximately 48,000 employees, operations in 70 countries and $47.0 billion of assets under management (AUM).
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total revenue | $3.933 billion | $3.585 billion |
| Fee revenue | $3.640 billion | $3.374 billion |
| Operating income | $289.4 million | $251.2 million |
| Net income attributable to JLL | $208.1 million | $164.4 million |
| Diluted EPS | $4.63 | $3.70 |
| Operating cash flow | $327.7 million | $211.3 million |
| Cash and cash equivalents, year-end | $152.2 million | $184.5 million |
| Total debt | $476.2 million | $528.1 million |
Total revenue rose 10% (12% in local currency); fee revenue increased 8% (10% in local currency). Operating income margin was approximately 7.4%, versus 7.0% in 2011. Net income available to common shareholders grew 27%. Operating cash flow improved as earnings rose and working-capital needs declined. Capital expenditures were $94.8 million; operating cash flow less capital expenditures was approximately $232.9 million.
Fourth-quarter 2012 revenue was $1.249 billion, operating income was $150.9 million, net income available to common shareholders was $106.8 million, and diluted EPS was $2.38. Results are seasonal, with revenue and profits typically strongest in the second half, particularly the fourth quarter.
Material changes versus the prior period
- Revenue growth came from all three RES regions; Property and Facility Management and Leasing were important contributors. LaSalle’s advisory fees declined 6% in local currency, partly offset by incentive fees and equity earnings.
- Equity earnings from real estate ventures increased to $23.9 million from $6.4 million, principally due to property-sale gains; the 2012 amount included $7.9 million of impairment charges.
- Operating expenses increased 9%, including $45.4 million of restructuring and acquisition charges. These included King Sturge integration and retention costs, severance and lease exits. Ending the Stock Ownership Program accelerated approximately $11.2 million of compensation expense.
- JLL issued $275 million of 4.4% senior notes due 2022 and used the proceeds to reduce revolving-credit borrowings. Year-end facility borrowings declined to $169 million from $463 million.
- Cash used for investing fell to $151.3 million from $389.3 million, largely because 2011 included the King Sturge acquisition. AUM was $47.0 billion, down from $47.7 billion.
Outlook, risks and unusual items
The filing gives no formal revenue or earnings guidance. Management described continued opportunities from outsourcing, global client demand, cross-border investment and industry consolidation, while noting that market recovery remained uneven. JLL expected net co-investment funding of $40–$50 million in 2013 and said it would continue to consider acquisitions.
Key risks include economic and real estate market weakness, European financial and political uncertainty, fee and pricing pressure, transaction volatility, foreign-exchange movements, client cancellations and collections, acquisition integration, regulatory compliance, cyber and systems disruptions, and litigation or professional-liability claims. The company also identified seasonality and unpredictable investment-management incentive fees and co-investment gains as sources of earnings volatility. Pending claims were not expected by management, based on information available, to materially affect financial position, results or liquidity.
Liquidity included $913.9 million of remaining availability under the $1.1 billion revolving facility at year-end; JLL reported compliance with debt covenants. Contractual obligations totaled $1.607 billion, including lease and acquisition obligations. Separately, unfunded co-investment commitments were disclosed, including a maximum $211.3 million under specified arrangements. The financial statements and internal controls received unqualified audit opinions; management and KPMG concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Reconcile reported gross revenue of $3.933 billion with fee revenue of $3.640 billion; gross contract costs increase reported revenue and expenses but do not affect operating income.
- Assess the sustainability of earnings growth, including the contribution from real estate venture gains, incentive fees and seasonal fourth-quarter results.
- Review debt, available revolver capacity, deferred acquisition obligations, contingent earn-outs and unfunded co-investment commitments together.
- Monitor AUM, advisory-fee trends, client capital flows and the performance of co-investments.
- Evaluate exposure to currency movements, regional real estate conditions, receivable collection, litigation and integration of acquisitions.