Jones Lang LaSalle Incorporated — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unaudited results; amounts below are U.S. dollars. JLL provides real estate services across the Americas, EMEA and Asia Pacific, and investment management through LaSalle.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $1,501.3 million | $1,366.0 million | $4,078.3 million | $3,680.6 million |
| Operating income | $120.3 million | $127.5 million | $275.9 million | $203.8 million |
| Net income attributable to JLL | $110.4 million | $104.3 million | $242.6 million | $192.1 million |
| Diluted EPS | $2.43 | $2.30 | $5.34 | $4.24 |
| Adjusted EBITDA | $190.4 million | $166.8 million | $437.7 million | $351.2 million |
Revenue increased 10% in U.S. dollars and 19% in local currency in Q3; for the first nine months it rose 11% and 20%, respectively. Fee revenue grew 17% in local currency in Q3 and 20% year to date. GAAP operating income declined 6% in Q3, although it increased 5% in local currency; nine-month operating income rose 35% in U.S. dollars. Adjusted operating income margins on fee revenue were 10.8% in Q3 versus 10.6%, and 8.5% year to date versus 7.7%. Adjusted EBITDA margins on fee revenue were 14.8% versus 14.1% in Q3 and 12.5% versus 11.2% year to date.
Growth was broad-based. For the first nine months, Capital Markets & Hotels revenue increased 38% in local currency, Project & Development Services 25%, and Leasing 14%. EMEA and Asia Pacific fee revenue grew 24% and 18% in local currency, respectively. LaSalle’s nine-month segment revenue, including equity earnings, increased 21% in local currency; its incentive fees and investment gains are timing-sensitive.
Cash flow, liquidity and debt
- Operating cash flow was an outflow of $18.2 million for the first nine months, compared with a $42.4 million inflow in 2014. JLL cited incentive compensation payments and working capital needs associated with growth.
- Investing cash outflow was $184.5 million, including $102.9 million for acquisitions and $88.5 million of net capital additions. Financing provided $160.2 million. Cash declined $56.9 million from year-end to $193.5 million.
- At September 30, cash was $193.5 million; current assets were $2,094.4 million and current liabilities were $1,861.8 million. Trade receivables were $1,407.4 million.
- Debt included $235.0 million drawn on the revolving credit facility, $275.0 million of senior notes and $30.5 million of short-term borrowings. The facility was expanded to $2.0 billion and extended to February 2020; JLL reported compliance with its covenants. The notes bear 4.4% interest and mature in November 2022.
- JLL had $311.8 million invested in real estate ventures and maximum unfunded co-investment commitments of $167.2 million. Potential acquisition earn-outs were capped at $84.9 million, with $57.9 million accrued.
Changes, outlook and risks
- Compared with the prior year, nine-month earnings and adjusted margins improved, while operating cash flow turned negative and acquisition spending rose. Foreign exchange reduced U.S.-dollar-reported growth relative to local-currency performance.
- Q3 restructuring and acquisition charges were $18.1 million. A $12.8 million indemnification-asset write-off was offset by an equal previously unrecognized tax benefit and had no net-income impact. The filing estimates a 25.4% effective tax rate excluding this item; geographic income mix can affect the rate.
- No specific full-year revenue or earnings guidance is provided. Management cautions that results are seasonal and interim results are not indicative of full-year results. Transaction volumes, incentive fees, co-investment gains and compensation accruals can vary significantly.
- After quarter-end, JLL closed the Oak Grove acquisition on October 30, 2015: $175 million cash consideration at closing, expected total consideration of approximately $260 million and a maximum of $300 million under a five-year earn-out. JLL also acquired Guardian Property Asset Management. The board declared a $0.29-per-share semi-annual dividend payable December 15, 2015.
- Principal risks include macroeconomic, geopolitical and real estate market conditions; transaction activity; foreign exchange and variable interest rates; competition; regulatory changes; and litigation. JLL said ordinary-course litigation was not expected to materially affect its financial position, results or liquidity, while noting outcomes cannot be determined. Foreign operations generated 57% of nine-month revenue; the company uses forward contracts for certain currency exposures and reported a $12.5 million net fair-value loss on those contracts, substantially offset by related intercompany balances.
Investor verification priorities
- Whether revenue growth converts into operating cash flow, given higher receivables, compensation payments and working capital needs.
- Whether adjusted profitability and margins are sustained after excluding restructuring and acquisition charges, and how segment expense growth compares with fee revenue.
- LaSalle’s incentive fees, equity earnings and asset valuations, which can be lumpy and depend on investment performance and realization timing.
- Oak Grove integration, final acquisition costs, earn-out exposure, and the effect of acquisitions on facility borrowings and covenant headroom.
- Exposure to foreign exchange, interest rates, co-investment commitments and potential litigation or insurance claims.