Business context and reporting period
Jones Lang LaSalle Incorporated (JLL) provides commercial real estate services through Americas, EMEA and Asia Pacific segments, and global investment management. This unaudited Form 10-Q covers the three and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods. Results are seasonal, with revenue and profit typically stronger in the second half, so interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $708.4 | $595.3 | $1,969.4 | $1,665.7 |
| Operating income | $61.9 | $44.6 | $137.2 | $34.5 |
| Net income (loss) attributable to JLL | $37.1 | $19.8 | $69.3 | $(55.8) |
| Diluted EPS | $0.84 | $0.46 | $1.57 | $(1.50) |
- Revenue increased 19% in Q3 and 18% year to date in U.S. dollars; year-to-date local-currency growth was 17%. Reported operating margins were approximately 8.7% and 7.0% in 2010, versus 7.5% and 2.1% in 2009, respectively. Management’s margins excluding restructuring charges were 8.8% versus 8.2% for Q3 and 7.2% versus 4.3% year to date.
- Q3 growth in Real Estate Services reflected higher Leasing, Capital Markets and Hotels, and Property & Facilities Management activity. Investment Management revenue declined 1% in local currency. For the first nine months, Investment Management operating income recovered to $29.7 million from an $8.8 million loss, helped by substantially lower equity losses.
- Operating cash flow was $108.1 million for the first nine months, compared with $43.9 million in 2009. Investing activities used $160.8 million, largely including $113.3 million of acquisition-related payments; financing activities provided $55.2 million. Cash was $71.7 million at September 30, 2010.
- At quarter-end, total assets were $3.06 billion and total equity was $1.48 billion. Current assets of $927.6 million were below current liabilities of $1.05 billion. Credit-facility borrowings were $253.0 million and short-term borrowings were $29.2 million.
- In September, JLL renewed its unsecured credit facility, increasing capacity to $1.1 billion ($900 million revolving and a $200 million term loan) and extending maturity to September 2015. Pricing was LIBOR plus 225 basis points; the debt carried variable interest, with a 3.9% effective rate in Q3. The company reported compliance with covenants at September 30.
Material changes and unusual items
- Q3 revenue growth was broad across Real Estate Services: Americas revenue rose 29%, EMEA 18% and Asia Pacific 15% in local currency. EMEA returned to Q3 operating profit ($3.2 million) from a $3.9 million loss; year-to-date its operating loss narrowed to $0.5 million from $26.0 million. Asia Pacific and Americas also reported higher Q3 operating income.
- Equity losses from real estate ventures were $10.9 million year to date, versus $56.2 million in 2009. These included $12.6 million of 2010 impairment charges, compared with $47.6 million in 2009. Management warned further impairments are possible if property values continue to decline.
- Q3 compensation expense rose 22%, faster than revenue growth, and compensation was 65.4% of firm revenue versus 63.8% a year earlier. Management cited incentive compensation, transition/start-up costs for new business, and gross presentation of reimbursed payroll for certain new clients.
- JLL paid $113.3 million for acquisition-related matters during the nine months, including $101.4 million of deferred obligations from prior acquisitions. Deferred business acquisition obligations totaled approximately $298.7 million at quarter-end; potential earn-outs on 13 acquisitions had a maximum value of $174.3 million, subject to performance conditions over the next three years.
- Real estate venture investments totaled $178.6 million. Maximum potential unfunded commitments to LIC I and LIC II were $10.2 million and $335.6 million, respectively; other venture commitments were up to $8.7 million. No bridge-financing arrangements were outstanding.
Outlook, risks and contingencies
- No full-year revenue or earnings guidance is provided in the filing. Management estimated a 23% effective tax rate for 2010 and said it expected acquisition opportunities to increase as markets recovered, while continuing to consider acquisitions that support market position and growth.
- Management cited improved transactional activity, but noted that capital-markets revenue, incentive fees and investment gains depend on transaction timing, client performance and asset sales. Real estate values, credit conditions, economic trends, foreign exchange and seasonality can materially affect results. The filing says 56% of nine-month revenue was generated outside the United States.
- Key risks include competition and pricing pressure, client contract cancellations (often on 30–60 days’ notice), acquisition execution, variable interest rates, foreign-currency movements, and potential additional real estate investment impairments. JLL had no interest-rate swaps outstanding at quarter-end.
- JLL is involved in ordinary-course litigation, including matters with substantial claimed damages; management did not expect resolution to materially adversely affect financial position, results or liquidity. The board declared a subsequent semi-annual dividend of $0.10 per share, payable December 15, 2010, subject to the stated terms.
Important facts for investors to verify
- Whether transaction-based revenue growth and higher operating margins persist, and whether start-up costs translate into revenue as expected.
- Cash conversion and liquidity, including the current-liability position, acquisition payments, and covenant headroom under the renewed credit facility.
- Potential additional impairment charges and the performance of JLL’s real estate venture investments.
- The timing and amount of acquisition earn-outs and unfunded co-investment commitments.
- Foreign-exchange, interest-rate and competitive pressures, as well as the sustainability of dividends and acquisition plans.