JONES LANG LASALLE INCORPORATED The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto, for the three and six months endedJune 30, 2020 , and our audited Consolidated Financial Statements, including the notes thereto, for the fiscal year endedDecember 31, 2019 , which are included in our 2019 Annual Report on Form 10-K, filed with theSEC and also available on our website (www.jll.com). You should also refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Annual Report on Form 10-K. The following discussion and analysis contains certain forward-looking statements generally identified by the words anticipates, believes, estimates, expects, forecasts, plans, intends and other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may causeJLL 's actual results, performance, achievements, plans and objectives to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. See the Cautionary Note Regarding Forward-Looking Statements included within this section for further information. We present our quarterly Management's Discussion and Analysis in the following sections: (1) A summary of our critical accounting policies and estimates;
(2) Certain items affecting the comparability of results and certain market and
other risks we face;
(3) The results of our operations, first on a consolidated basis and then for
each of our business segments; and
(4) Liquidity and capital resources.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES An understanding of our accounting policies is necessary for a complete analysis of our results, financial position, liquidity and trends. See Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our 2019 Annual Report on Form 10-K for a complete summary of our significant accounting policies. The preparation of our financial statements requires management to make certain critical accounting estimates and judgments that impact (1) the stated amount of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amount of revenue and expenses during the reporting periods. These accounting estimates are based on management's judgment. We consider them to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments or that the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to ensure reasonableness. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material. A discussion of our critical accounting policies and estimates used in the preparation of our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q can be found in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . There have been no material changes to these critical accounting policies and estimates during the six months endedJune 30, 2020 . The following are the critical accounting policies and estimates discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year endedDecember 31, 2019 : • Revenue Recognition;
• Business Combinations,
• Investments in
• Income Taxes.
In addition to the aforementioned critical accounting policies, we believe the
calculation of our quarterly tax provision is critical to understanding the
estimates and assumptions used in preparing the Condensed Consolidated Financial
Statements in Item 1.
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Quarterly Income Tax Provision We base our fiscal year estimated effective tax rate on estimates we update each quarter. Our effective tax rate for the six months endedJune 30, 2020 was 17.1%, resulting in an effective tax rate of 10.0% for the second quarter of 2020. We provide for the effects of income taxes on interim financial statements based on our estimate of the effective tax rate for the full year, which we base on forecasted income by country and expected enacted tax rates; as required, we adjust for the impact of discrete items in the quarters in which they occur. We evaluate our estimated effective tax rate on a quarterly basis to reflect forecast changes in our geographic mix of income and legislative actions on statutory tax rates and other relevant matters effective in the quarter in which the legislation is enacted. Changes in the impact of the COVID-19 pandemic on our forecasted income may affect our forecasted full-year effective tax rate for the remaining interim quarters of 2020. The geographic mix of our income can significantly impact our effective tax rate. Very low tax rate jurisdictions (those with effective national and local combined tax rates of 25% or lower) that provide the most significant contributions to our effective tax rate include:Hong Kong (16.5%),Singapore (17%), theUnited Kingdom (17.5%) andSaudi Arabia (20%). We do not project any other jurisdictions with effective rates of 25% or lower to materially impact our 2020 global effective tax rate. ITEMS AFFECTING COMPARABILITY Macroeconomic Conditions Our results of operations and the variability of these results are significantly influenced by (1) macroeconomic trends, (2) the geopolitical environment, (3) the global and regional real estate markets, and (4) the financial and credit markets. These macroeconomic and other conditions have had, and we expect will continue to have, a significant impact on the variability of our results of operations. Specifically in 2020, we are experiencing the macroeconomic impact of the COVID-19 pandemic. Acquisitions The timing of acquisitions may impact the comparability of our results on a year-over-year basis. Our results include incremental revenues and expenses following the completion date of an acquisition. In addition, there is generally an initial adverse impact on net income from an acquisition as a result of pre-acquisition due diligence expenditures, transaction/deal costs and post-acquisition integration costs, such as fees from third-party advisors engaged to assist with onboarding and process alignment, retention and severance expense, early lease termination costs, and other integration expenses. LaSalle Revenue Our investment management business is, in part, compensated through incentive fees where performance of underlying funds' investments exceeds agreed-to benchmark levels. Depending upon performance, disposition activity, and the contractual timing of measurement periods with clients, these fees can be significant and vary substantially from period to period. Equity earnings also may vary substantially from period to period for a variety of reasons, including as a result of: (1) gains (losses) on investments reported at fair value, (2) gains (losses) on asset dispositions, and (3) impairment charges. The timing of recognition of these items may impact comparability between quarters, in any one year, or compared to a prior year. The comparability of these items can be seen in Note 4, Business Segments, of the Notes to Condensed Consolidated Financial Statements and is discussed further in Segment Operating Results included herein. Foreign Currency We conduct business using a variety of currencies, but we report our results inU.S. dollars. As a result, the volatility of currencies against theU.S. dollar may positively or negatively impact our results. This volatility can make it more difficult to perform period-to-period comparisons of the reportedU.S. dollar results of operations, because such results may indicate a growth or decline rate that might not have been consistent with the real underlying growth or decline rates in the local operations. Consequently, we provide information about the impact of foreign currencies in the period-to-period comparisons of the reported results of operations in our discussion and analysis of financial condition in the Results of Operations section below. 30
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Transactional-Based Revenue Transactional-based fees, that are impacted by the size and timing of our clients' transactions, from real estate investment banking, capital markets activities and other services within our RES businesses, and LaSalle, increase the variability of the revenue we earn. The timing and the magnitude of these fees can vary significantly from year to year and quarter to quarter, and from region to region. Seasonality Historically, our quarterly revenue and profits have tended to increase from quarter to quarter as the year progresses. This is a result of a general focus in the real estate industry on completing or documenting transactions by calendar year end and the fact that certain expenses are constant through the year. Historically, we have reported a relatively smaller profit in the first quarter and then increasingly larger profits during each of the following three quarters, excluding the recognition of investment-generated performance fees and realized and unrealized co-investment equity earnings and losses (each of which can be unpredictable). Generally, we recognize incentives fees when assets are sold, the timing of which is geared toward the benefit of our clients. In addition, co-investment equity gains and losses are primarily dependent on valuations of underlying investments, the direction and magnitude of changes to such valuations are not predictable. Non-variable operating expenses, which we treat as expenses when incurred during the year, are relatively constant on a quarterly basis. The COVID-19 pandemic may have a material impact on the historical seasonality of our revenue and profits. A significant portion of our Compensation and benefits expense is from incentive compensation plans, which we generally accrue throughout the year based on progress toward annual performance targets. This quarterly estimation can result in significant fluctuations in quarterly Compensation and benefits expense from period to period. Consequently, the results for the periods endedJune 30, 2020 and 2019, are not fully indicative of the results we expect to realize for the full fiscal year. 31
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RESULTS OF OPERATIONS Definitions • We define market volumes for Leasing as gross absorption of office real
estate space in square feet for the
sales transactions globally.
• Assets under management data for LaSalle is reported on a one-quarter lag.
• MENA:
and
• n.m.: not meaningful, represented by a percentage change of greater than
100% favorable or unfavorable.
Consolidated Operating Results
Three Months Ended June 30, Change in % Change in
Local
($ in millions) 2020 2019 U.S. dollars Currency
Leasing $ 358.6 623.9 (265.3 ) (43 )% (42 )%
Capital Markets 214.8 256.5 (41.7 ) (16 ) (15 )
Property & Facility Management 2,275.2 2,304.9 (29.7 ) (1 ) -
Project & Development Services 536.8 733.3 (196.5 ) (27 ) (25 )
Advisory, Consulting and Other 185.1 218.5 (33.4 ) (15 ) (13 )
Real Estate Services ("RES") revenue $ 3,570.5 4,137.1 (566.6 ) (14 )% (12 )%
LaSalle 99.9 129.4 (29.5 ) (23 ) (22 )
Revenue $ 3,670.4 4,266.5 (596.1 ) (14 )% (13 )%
Reimbursements (1,841.9 ) (1,918.3 ) (76.4 ) (4 ) (3 )
Revenue before reimbursements $ 1,828.5 2,348.2 (519.7 ) (22 %) (21 %)
Gross contract costs (575.0 ) (713.4 ) 138.4 (19 ) (17 )
Net non-cash MSR and mortgage banking
derivative activity (8.6 ) (4.8 ) (3.8 ) 79 79
Fee revenue $ 1,244.9 1,630.0 (385.1 ) (24 )% (22 )%
Leasing 343.8 605.8 (262.0 ) (43 ) (43 )
Capital Markets 199.4 241.3 (41.9 ) (17 ) (16 )
Property & Facility Management 287.9 290.8 (2.9 ) (1 ) 1
Project & Development Services 178.6 210.0 (31.4 ) (15 ) (13 )
Advisory, Consulting and Other 140.2 158.8 (18.6 ) (12 ) (9 )
RES fee revenue $ 1,149.9 1,506.7 (356.8 ) (24 )% (22 )%
LaSalle 95.0 123.3 (28.3 ) (23 ) (22 )
Compensation and benefits excluding gross
contract costs 928.7 1,137.7 (209.0 ) (18 ) (17 )
Operating, administrative and other
expenses excluding gross contract costs 228.9 275.8 (46.9 ) (17 ) (15 )
Depreciation and amortization 56.9 45.5 11.4 25 27
Total fee-based operating expenses 1,214.5 1,459.0 (244.5 ) (17 ) (15 )
Restructuring and acquisition charges 28.2 25.7 2.5 10 10
Gross contract costs 575.0 713.4 (138.4 ) (19 ) (17 )
Total operating expenses, excluding
reimbursed expenses $ 1,817.7 2,198.1 (380.4 ) (17 )% (16 )%
Operating income $ 10.8 150.1 (139.3 ) (93 )% (94 )%
Equity earnings $ 14.7 10.2 4.5 44 % 44 %
Adjusted EBITDA $ 103.3 226.7 (123.4 ) (54 )% (55 )%
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Consolidated Operating Results (continued)
Six Months Ended June 30, Change in % Change in
Local
($ in millions) 2020 2019 U.S. dollars Currency
Leasing $ 851.0 1,101.8 (250.8 ) (23 )% (22 )%
Capital Markets 557.1 450.0 107.1 24 25
Property & Facility Management 4,641.0 4,574.0 67.0 1 3
Project & Development Services 1,141.2 1,333.4 (192.2 ) (14 ) (13 )
Advisory, Consulting and Other 371.3 400.1 (28.8 ) (7 ) (5 )
Real Estate Services ("RES") revenue $ 7,561.6 7,859.3 (297.7 ) (4 )% (2 )%
LaSalle 204.8 227.8 (23.0 ) (10 ) (9 )
Revenue $ 7,766.4 8,087.1 (320.7 ) (4 )% (3 )%
Reimbursements (3,704.9 ) (3,777.3 ) (72.4 ) (2 ) (1 )
Revenue before reimbursements $ 4,061.5 4,309.8 (248.3 ) (6 )% (4 )%
Gross contract costs (1,304.4 ) (1,356.0 ) 51.6 (4 ) (2 )
Net non-cash MSR and mortgage banking
derivative activity (7.0 ) (4.7 ) (2.3 ) 49 49
Fee revenue $ 2,750.1 2,949.1 (199.0 ) (7 )% (5 )%
Leasing 819.0 1,067.2 (248.2 ) (23 ) (23 )
Capital Markets 533.5 426.1 107.4 25 26
Property & Facility Management 567.8 571.5 (3.7 ) (1 ) 1
Project & Development Services 366.9 383.4 (16.5 ) (4 ) (3 )
Advisory, Consulting and Other 269.3 283.9 (14.6 ) (5 ) (3 )
RES fee revenue $ 2,556.5 2,732.1 (175.6 ) (6 )% (5 )%
LaSalle 193.6 217.0 (23.4 ) (11 ) (10 )
Compensation and benefits excluding gross
contract costs 1,993.0 2,095.7 (102.7 ) (5 ) (4 )
Operating, administrative and other
expenses excluding gross contract costs 534.5 546.3 (11.8 ) (2 ) -
Depreciation and amortization 111.9 92.0 19.9 22 23
Total fee-based operating expenses 2,639.4 2,734.0 (94.6 ) (3 ) (2 )
Restructuring and acquisition charges 42.3 44.3 (2.0 ) (5 ) (5 )
Gross contract costs 1,304.4 1,356.0 (51.6 ) (4 ) (2 )
Total operating expenses, excluding
reimbursed expenses $ 3,986.1 4,134.3 (148.2 ) (4 )% (2 )%
Operating income $ 75.4 175.5 (100.1 ) (57 )% (57 )%
Equity (losses) earnings $ (13.6 ) 15.2 (28.8 ) n.m. n.m.
Adjusted EBITDA $ 198.9 322.1 (123.2 ) (38 )% (38 )%
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Non-GAAP Financial Measures
Management uses certain non-GAAP financial measures to develop budgets and
forecasts, measure and reward performance against those budgets and forecasts,
and enhance comparability to prior periods. These measures are believed to be
useful to investors and other external stakeholders as supplemental measures of
core operating performance and include the following:
(i)Fee revenue and Fee-based operating expenses;
(ii)Adjusted EBITDA attributable to common shareholders ("Adjusted EBITDA") and
Adjusted EBITDA margin; and
(iii)Percentage changes against prior periods, presented on a local currency
basis.
However, non-GAAP financial measures should not be considered alternatives to
measures determined in accordance with U.S. generally accepted accounting
principles ("GAAP"). Any measure that eliminates components of a company's
capital structure, cost of operations or investment, or other results has
limitations as a performance measure. In light of these limitations, management
also considers GAAP financial measures and does not rely solely on non-GAAP
financial measures. Because our non-GAAP financial measures are not calculated
in accordance with GAAP, they may not be comparable to similarly titled measures
used by other companies.
Adjustments to GAAP Financial Measures Used to Calculate non-GAAP Financial
Measures
Gross contract costs represent certain costs associated with client-dedicated
employees and third-party vendors and subcontractors and are indirectly
reimbursed through the fees we receive. These costs are presented on a gross
basis in Operating expenses with the corresponding fees in Revenue before
reimbursements. However, as we generally earn little to no margin on such costs,
excluding gross contract costs from both Fee revenue and Fee-based operating
expenses more accurately reflects how we manage our expense base and operating
margins and also enables a more consistent performance assessment across a
portfolio of contracts with varying payment terms and structures, including
those with direct versus indirect reimbursement of such costs.
Net non-cash mortgage servicing rights ("MSR") and mortgage banking derivative
activity consists of the balances presented within Revenue composed of (i)
derivative gains/losses resulting from mortgage banking loan commitment and
warehousing activity and (ii) gains recognized from the retention of MSR upon
origination and sale of mortgage loans, offset by (iii) amortization of MSR
intangible assets over the period that net servicing income is projected to be
received. Non-cash derivative gains/losses resulting from mortgage banking loan
commitment and warehousing activity are calculated as the estimated fair value
of loan commitments and subsequent changes thereof, primarily represented by the
estimated net cash flows associated with future servicing rights. MSR gains and
corresponding MSR intangible assets are calculated as the present value of
estimated net cash flows over the estimated mortgage servicing periods. The
above activity is reported entirely within Revenue of the Capital Markets
service line of the Americas segment. Excluding net non-cash MSR and mortgage
banking derivative activity reflects how we manage and evaluate performance
because the excluded activity is non-cash in nature.
Restructuring and acquisition charges primarily consist of: (i) severance and
employment-related charges, including those related to external service
providers, incurred in conjunction with a structural business shift, which can
be represented by a notable change in headcount, change in leadership or
transformation of business processes; (ii) acquisition, transaction and
integration-related charges, including fair value adjustments, which are
generally non-cash in the periods such adjustments are made, to assets and
liabilities recorded in purchase accounting such as earn-out liabilities and
intangible assets; and (iii) other restructuring, including lease exit charges.
Such activity is excluded as the amounts are generally either non-cash in nature
or the anticipated benefits from the expenditures would not likely be fully
realized until future periods. Restructuring and acquisition charges are
excluded from segment operating results and therefore not a line item in the
segments' reconciliation to Adjusted EBITDA.
Gain on Disposition reflects the net gain recognized on the sale of property
management businesses in continental Europe . Given the low frequency of business
disposals by the company historically, the gain directly associated with such
activity is excluded as it is not considered indicative of core operating
performance.
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Reconciliation of Non-GAAP Financial Measures Below are reconciliations of (i) Revenue to fee revenue and (ii) Operating expenses to fee-based operating expenses.
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2020 2019 2020 2019
Revenue $ 3,670.4 4,266.5 $ 7,766.4 8,087.1
Reimbursements (1,841.9 ) (1,918.3 ) (3,704.9 ) (3,777.3 )
Revenue before reimbursements 1,828.5 2,348.2 4,061.5 4,309.8
Adjustments:
Gross contract costs (575.0 ) (713.4 ) (1,304.4 ) (1,356.0 )
Net non-cash MSR and mortgage banking
derivative activity (8.6 ) (4.8 ) (7.0 ) (4.7 )
Fee revenue $ 1,244.9 1,630.0 $ 2,750.1 2,949.1
Operating expenses $ 3,659.6 4,116.4 $ 7,691.0 7,911.6
Reimbursed expenses (1,841.9 ) (1,918.3 ) (3,704.9 ) (3,777.3 )
Operating expenses, excluding
reimbursed expenses 1,817.7 2,198.1 3,986.1 4,134.3
Less: Gross contract costs (575.0 ) (713.4 ) (1,304.4 ) (1,356.0 )
Fee-based operating expenses $ 1,242.7 1,484.7 $ 2,681.7 2,778.3
Operating income $ 10.8 150.1 $ 75.4 175.5
Below is (i) a reconciliation of Net income attributable to common shareholders
to EBITDA and Adjusted EBITDA, (ii) the Net income margin attributable to common
shareholders (measured on Revenue before reimbursements), and (iii) the Adjusted
EBITDA margin (measured on fee-revenue and presented on a local currency basis).
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2020 2019 2020 2019
Net income attributable to common
shareholders $ 15.2 110.5 $ 20.5 131.8
Add:
Interest expense, net of interest
income 14.9 13.6 29.5 23.2
Provision for income taxes 1.5 36.2 6.5 35.5
Depreciation and amortization 56.9 45.5 111.9 92.0
EBITDA $ 88.5 205.8 $ 168.4 282.5
Adjustments:
Restructuring and acquisition charges 28.2 25.7 42.3 44.3
Gain on disposition (4.8 ) - (4.8 ) -
Net non-cash MSR and mortgage banking
derivative activity (8.6 ) (4.8 ) (7.0 ) (4.7 )
Adjusted EBITDA $ 103.3 226.7 $ 198.9 322.1
Net income margin attributable to
common shareholders 0.8 % 4.7 % 0.5 % 3.1 %
Adjusted EBITDA margin 8.1 % 13.9 % 7.2 % 10.9 %
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In discussing our operating results, we report Adjusted EBITDA margins and refer to percentage changes in local currency, unless otherwise noted. Amounts presented on a local currency basis are calculated by translating the current period results of our foreign operations toU.S. dollars using the foreign currency exchange rates from the comparative period. We believe this methodology provides a framework for assessing performance and operations excluding the effect of foreign currency fluctuations. The following table reflects the reconciliation to local currency amounts for consolidated (i) Revenue, (ii) Fee revenue, (iii) Operating income, and (iv) Adjusted EBITDA.
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