Business context and reporting period
Jones Lang LaSalle Incorporated (JLL; NYSE: JLL) filed this Form 10-K for the fiscal year ended December 31, 2014. JLL provides global real estate services through the Americas, EMEA and Asia Pacific segments, and investment management through LaSalle. It operated in more than 80 countries, with approximately 58,100 employees and 3.4 billion square feet under management. The filing reports full-year results; fourth-quarter figures are noted separately below.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue | $5.430 billion | $4.462 billion |
| Fee revenue | $4.702 billion; up 18% in local currency | $4.027 billion |
| Operating income | $465.7 million | $368.8 million |
| Net income attributable to common shareholders | $385.7 million | $269.5 million |
| Diluted EPS | $8.52 | $5.98 |
| Operating cash flow | $498.9 million | $295.2 million |
| Cash and cash equivalents | $250.4 million | $152.7 million |
| Total debt | $294.6 million | $454.5 million |
| Total assets | $5.075 billion | $4.597 billion |
Reported revenue increased 22%; management attributed the difference from 23% local-currency growth to foreign exchange. Operating margin was approximately 8.6% of reported revenue. Fee-based operating margin, excluding restructuring and acquisition charges, improved to 10.9% from 9.7%. The effective tax rate fell to 20.1% from 25.2%. EBITDA, a non-GAAP measure, was $606.0 million versus $476.1 million.
Operating cash flow rose substantially, supported by higher net income and improved working-capital management. Investing activities used $187.9 million, including $156.9 million of capital expenditures; financing activities used $203.0 million, primarily reflecting net repayment of credit-facility borrowings. Current assets were $2.118 billion and current liabilities $2.047 billion at year-end.
At December 31, JLL had no borrowings under its $1.2 billion revolving facility, though it had $19.6 million of short-term borrowings and $275.0 million of 4.4% senior notes due 2022. The facility was amended in February 2015, after year-end, increasing capacity to $2.0 billion and extending maturity to February 2020. JLL paid annual dividends of $0.48 per share in 2014; future dividends remain at the Board’s discretion.
Material changes versus 2013
- Fee revenue grew across all four segments. LaSalle segment revenue rose 46% in local currency, chiefly reflecting incentive fees of $105.3 million versus $13.6 million a year earlier, alongside higher equity earnings.
- Real Estate Services fee revenue increased 18% in the Americas, 17% in EMEA and 11% in Asia Pacific, all in local currency. Asia Pacific Capital Markets & Hotels revenue declined 10% in local currency, partly offset by stronger leasing and property and facility management.
- Equity earnings from real estate ventures increased to $48.3 million from $31.3 million, primarily reflecting asset dispositions and improved investment performance.
- Operating income increased 26%, while operating expenses excluding gross contract costs increased 16% in local currency. JLL reported $42.5 million of restructuring and acquisition charges, versus $18.3 million; a $34.5 million indemnification-asset write-off was offset by recognition of a related tax benefit and had no net-income impact.
- Assets under LaSalle management grew to $53.6 billion from $47.6 billion. JLL completed ten acquisitions and increased its ownership of its Indian operations from 90% to 95%.
- Foreign currency translation contributed to a $138.0 million loss in 2014 other comprehensive income, and accumulated other comprehensive loss widened to $200.2 million.
Outlook, commentary, risks and unusual items
Management described continued growth opportunities in global real estate outsourcing, cross-border investment, capital markets and industry consolidation, and expects to continue investing in technology, talent, acquisitions and its integrated platform. The filing does not provide specific numerical earnings or revenue guidance. Management cautioned that LaSalle’s unusually high 2014 incentive fees and equity earnings are expected to moderate in future years, and that transaction-driven revenue, margins and quarterly results can be volatile. Real Estate Services earnings are typically seasonally weighted toward the second half of the year.
Key risks include cyclical real estate markets and transaction volumes, client fee pressure and contract cancellations, competition, foreign exchange movements, geopolitical and economic uncertainty (including Europe, Russia, the Middle East and parts of Asia), acquisition integration, cybersecurity and data privacy, regulatory and licensing compliance, and professional liability. JLL reported that it was in compliance with credit-facility covenants at year-end. It had $176.2 million of maximum unfunded co-investment commitments and up to $43.5 million of potential acquisition earn-outs; the latter depend on performance conditions. The contractual-obligations table totals $1.522 billion, including lease obligations of $671.5 million.
The company disclosed ordinary-course litigation and claims, some substantial and potentially exceeding insurance coverage, but said their resolution was not expected to materially adversely affect financial position, results or liquidity based on information then available. It also reported a voluntary disclosure to U.S. authorities concerning a U.K. subsidiary’s inadvertent, immaterial 2013 property-rating valuation services for National Iranian Oil Company affiliates; the services were terminated.
Important facts for investors to verify
- How sustainable 2014’s LaSalle incentive fees and investment-related equity earnings are, given management’s expectation that this exceptional contribution will moderate.
- Whether working-capital improvement and operating cash flow remain strong as receivables and business volumes grow.
- The effect of currency movements on reported results, especially given 59% of 2014 revenue was generated outside the United States.
- Integration, earn-out and co-investment exposure from acquisitions and the disclosed unfunded commitments.
- Terms and covenant capacity under the post-year-end $2.0 billion credit facility, and the company’s ability to sustain dividends.
- Developments in litigation, tax examinations, regulatory compliance and cybersecurity risks; the filing does not quantify a clear potential loss for pending legal matters.