Jones Lang LaSalle Incorporated — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. JLL provides real estate services through its Americas, EMEA and Asia Pacific Real Estate Services segments and LaSalle Investment Management.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $3,969.8 | $3,522.2 | $11,428.7 | $10,110.2 |
| Revenue before reimbursements | $2,213.7 | $1,980.7 | $6,268.1 | $5,471.5 |
| Fee revenue (non-GAAP) | $1,591.4 | $1,419.5 | $4,366.4 | $3,867.8 |
| Operating income | $190.9 | $137.8 | $394.5 | $284.0 |
| Net income attributable to common shareholders | $134.9 | $98.3 | $283.0 | $199.8 |
| Diluted EPS | $2.93 | $2.15 | $6.16 | $4.37 |
| Adjusted EBITDA (non-GAAP) | $233.9 | $187.3 | $535.2 | $439.9 |
- Q3 revenue increased 13% in reported dollars (15% in local currency); revenue before reimbursements rose 12% (14% local currency). Fee revenue increased 12% (14% local currency). For the first nine months, total revenue rose 13% reported (12% local currency), revenue before reimbursements 15% (13% local currency), and fee revenue 13% (11% local currency).
- Operating income increased 39% in both Q3 and the nine-month period. Adjusted EBITDA rose 25% in Q3 and 22% year to date in reported dollars. Q3 adjusted EBITDA margin on fee revenue was 14.7%, up from 13.2%; nine-month margin was 12.4%, up from 11.4%.
- Q3 net income margin attributable to common shareholders, measured against revenue before reimbursements, was 6.1%, versus 5.0%. The nine-month effective tax rate was 25.1%; management said the full-year rate could differ.
- Reimbursements were $1,756.1 million in Q3 and $5,160.6 million year to date, with equal reimbursed expenses. JLL cautions that adoption of ASC 606 increased gross presentation of certain service-contract revenue and costs; total revenue growth therefore should be considered alongside revenue before reimbursements and fee revenue.
Segments and drivers
- Americas RES: Q3 fee revenue rose 12% and operating income rose 14%. Broad-based growth included Leasing and facilities-management wins; adjusted EBITDA margin was 16.0%.
- EMEA RES: Q3 fee revenue rose 4%; operating income was $11.1 million versus $4.0 million. Year-to-date operating loss narrowed to $10.3 million from $18.0 million.
- Asia Pacific RES: Q3 fee revenue rose 2%, but operating income fell 10% to $21.8 million. Capital Markets fee revenue declined 33%; margin pressure reflected mix shift from higher-margin Capital Markets to annuity-based revenue.
- LaSalle: Q3 fee revenue rose 75%, largely from strong incentive fees on client asset dispositions. Operating income was $57.3 million versus $21.7 million; equity earnings fell to $2.3 million from $11.6 million. AUM was $59.5 billion at quarter-end, down 1% in U.S. dollars from June 30 but up 2% in local currency.
Cash flow, balance sheet and capital
- Cash from operating activities was a use of $0.3 million for the first nine months, compared with $277.7 million provided in 2017. Management attributed the change mainly to higher incentive-compensation payments and the timing of receivables collections; net income increased $86.7 million.
- Investing activities used $147.2 million, including $110.1 million of net capital additions and $31.7 million for 2018 acquisitions. Financing activities provided $172.5 million. Cash, cash equivalents and restricted cash totaled $475.8 million at September 30, including $148.8 million of restricted cash; balance-sheet cash and cash equivalents were $327.0 million.
- Total assets were $9,619.1 million and total liabilities $6,046.3 million. Current assets were $4,861.3 million and current liabilities $4,334.7 million. Total equity was $3,572.8 million.
- Debt table total was $984.2 million, including $223.2 million carrying value of the credit facility and $677.3 million long-term debt; short-term borrowings were $83.7 million. Separately, warehouse facilities were $611.9 million, supported by $617.7 million of warehouse receivables. The $2.75 billion revolving facility was extended to May 2023 and repriced; $240.0 million was outstanding at quarter-end. JLL reported compliance with debt covenants and investment-grade ratings with stable outlooks.
- JLL declared a $0.41-per-share dividend on November 6, payable December 14, 2018. No shares were repurchased under the current authorization during the first nine months.
Outlook, risks and unusual items
- No specific financial guidance was provided. Management noted the typical real estate seasonality of profits increasing through the year, with transactional activity, incentive fees, co-investment valuations and incentive compensation creating period-to-period variability; interim results are not necessarily indicative of full-year results.
- JLL expected adoption of the new lease standard on January 1, 2019 to add approximately $500 million to $750 million of right-of-use assets and lease liabilities; the estimate remained subject to change.
- Q3 restructuring and acquisition charges were $3.7 million; the nine-month period recorded a $6.7 million credit, including a $17.5 million net decrease in prior-acquisition earn-out liabilities. Maximum potential earn-out payments were $382.9 million across 55 acquisitions, subject to performance conditions and anticipated over the next six years.
- Unfunded co-investment commitments totaled up to $212.5 million. JLL had $8.4 billion of unpaid principal in loans subject to Fannie Mae DUS loss-sharing arrangements; the related loan-loss accrual was $17.2 million.
- Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity, while noting claims may exceed insurance coverage. Principal cited risks include economic and geopolitical conditions, real estate and credit-market volatility, interest and currency movements, competition, litigation and regulation.
- The CFO resigned effective September 18, 2018, without a stated disagreement with JLL. Patricia Maxson became interim CFO. The departing CFO’s agreement included a $4.36 million lump-sum payment and transition services through December 31, 2018.
- JLL adopted ASC 606 retrospectively, accelerating recognition of some commissions and changing principal-versus-agent presentation for certain contracts. Management also expanded its definition of gross contract costs used in non-GAAP fee revenue reporting; comparative periods were recast.
Investor verification priorities
- Assess underlying growth using fee revenue and revenue before reimbursements, considering ASC 606’s gross-presentation effects and foreign-exchange impacts.
- Monitor operating cash conversion and working-capital movements, particularly incentive-compensation payments and receivables collection timing.
- Review the composition and funding of debt, including revolving-facility utilization, warehouse financing and associated receivables.
- Evaluate the repeatability of LaSalle’s unusually strong incentive-fee contribution and changes in AUM and investment valuations.
- Track lease-standard implementation, acquisition earn-outs, co-investment commitments, DUS exposure and CFO succession.