Jones Lang LaSalle Incorporated (JLL) — Q3 2019 Form 10-Q
Unaudited results for the quarter and nine months ended September 30, 2019. Amounts are in U.S. dollars unless stated otherwise. JLL provides commercial real estate services through Real Estate Services (RES) and LaSalle Investment Management. Total revenue includes reimbursable costs; revenue before reimbursements and fee revenue are useful supplemental measures of underlying activity.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $4.496B | $3.970B | $12.583B | $11.429B |
| Revenue before reimbursements | $2.546B | $2.214B | $6.856B | $6.268B |
| Fee revenue | $1.815B | $1.591B | $4.765B | $4.366B |
| Operating income | $171.6M | $190.9M | $347.1M | $394.5M |
| Net income attributable to common shareholders | $128.9M | $134.9M | $260.7M | $283.0M |
| Diluted EPS | $2.47 | $2.93 | $5.42 | $6.16 |
| Adjusted EBITDA | $299.9M | $233.9M | $622.0M | $535.2M |
- Revenue grew 13% in U.S. dollars in Q3 and 10% year to date; fee revenue rose 14% and 9%, respectively. Local-currency fee-revenue growth was 16% in Q3 and 12% year to date.
- Q3 net income margin was 5.1% of revenue before reimbursements, compared with 6.1% a year earlier. Adjusted EBITDA margin was 16.5% on a U.S.-dollar basis (16.3% local currency), versus 14.7%. Year-to-date adjusted EBITDA margin was 12.8%, versus 12.3%.
- Operating cash flow was negative $251.5M for the first nine months, compared with negative $0.3M in 2018. Investing cash flow was negative $994.1M, principally reflecting acquisitions; financing cash flow was positive $1.195B.
- Cash and cash equivalents were $402.2M at September 30; cash, cash equivalents and restricted cash totaled $573.8M, including $171.6M restricted cash.
- Reported debt was $1.865B, including $1.125B outstanding under the revolving credit facility and $653.3M of long-term debt. Warehouse facilities of $786.4M were reported separately. The $2.75B facility matures in May 2023; JLL said it was in compliance with debt covenants and held investment-grade ratings.
Changes versus prior period
- HFF acquisition, completed July 1, materially expanded Capital Markets and increased reported revenue and expenses. HFF contributed $184.5M revenue and $36.7M operating income after acquisition during the reported periods.
- RES drove growth, particularly Americas Capital Markets, Leasing, and Property & Facility Management. Q3 RES fee revenue increased 22% in local currency; Americas supplied most of that growth.
- LaSalle revenue declined 35% in Q3 and 12% year to date in U.S. dollars, mainly because incentive fees fell from unusually strong 2018 comparisons. Advisory fees increased.
- Operating income declined despite revenue growth, reflecting higher expenses and $70.0M of Q3 restructuring and acquisition charges, compared with $3.7M in Q3 2018. Nine-month charges were $114.3M versus a $6.7M credit.
- Debt increased substantially to fund the HFF cash consideration. Cash from operations also weakened amid higher incentive compensation and tax payments, as well as acquisition and integration costs.
Outlook, commentary and risks
- The filing gives no specific full-year earnings or revenue guidance. Management cautions that results are seasonal and quarterly results are not necessarily indicative of full-year performance; transaction activity, incentive fees, investment valuations, currency movements and incentive compensation can cause volatility.
- Management expects significant HFF integration costs over the two years following acquisition, including approximately $100M of expense for retention awards already paid or granted. Additional integration costs may occur but were not quantifiable; substantially all cumulative costs other than RSU retention awards are expected to require cash.
- JLL identifies macroeconomic and geopolitical conditions, real estate and credit markets, interest rates, foreign exchange, competition, litigation and regulation as risks. It also highlights acquisition integration, employee and client retention, assumed liabilities, added debt and potential goodwill or intangible-asset impairment.
- Maximum unfunded commitments for real estate investments were $267.0M. JLL also had $9.5B of loans subject to Fannie Mae risk-sharing arrangements; the related loan-loss accrual was $19.0M.
- Management stated ordinary-course litigation was not expected to have a material adverse effect, while noting claims may be substantial and insurance may not cover all losses. Disclosure controls were deemed effective; HFF was excluded from the quarter-end internal-control assessment under SEC rules.
- After quarter-end, JLL announced a $0.43-per-share dividend and authorized a new $200M share-repurchase program. It also completed the Peloton Commercial Real Estate acquisition.
Key facts investors should verify
- Whether HFF integration costs, synergies and acquired-business performance develop as expected, and whether preliminary purchase-price allocations change.
- Whether operating cash flow improves after the reported working-capital, incentive-compensation and tax outflows, and how facility borrowings and total leverage evolve.
- Whether RES growth can offset weaker or variable LaSalle incentive fees and any slowdown in transaction-based real estate activity.
- The timing and amount of remaining acquisition earn-outs and co-investment commitments, and any material litigation, loan-loss or investment-valuation developments.
- The sustainability of adjusted EBITDA margin improvement, considering that it is a non-GAAP measure and Q3 results included HFF and substantial acquisition charges.