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 months endedMarch 31, 2022 , and our audited Consolidated Financial Statements, including the notes thereto, for the fiscal year endedDecember 31, 2021 , which are included in our 2021 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 2021 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 2021 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, 2021 . There have been no material changes to these critical accounting policies and estimates during the three months endedMarch 31, 2022 .
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. In 2021, macroeconomic conditions influenced by the COVID-19
pandemic more notably impacted our operations compared with the current year.
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Acquisitions and Dispositions
The timing of acquisitions and dispositions 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. Relating to dispositions, comparable results will include the revenues and expenses of recent dispositions and results may also include gains (losses) on the disposition. 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. For dispositions, we may also incur such incremental costs during the disposition process and these costs could have an adverse impact on net income.
Equity Earnings and Incentive Fees
Equity earnings 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. LaSalle, our investment management business, is in part compensated through incentive fees where performance of underlying funds' investments exceeds agreed-to return hurdles. Depending upon performance, disposition activity and the contractual timing of measurement periods with clients, these fees can be significant and may vary substantially from period to period.
The comparability of these items can be seen in Note 3, 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.
Transaction-Based Revenue
Transaction-based fees, which are impacted by the size and timing of our clients' transactions, from real estate investment banking, capital markets activities and other services within our segments, increase the variability of the revenue we earn. Specifically for LaSalle, we are 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. 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. In addition, this seasonality excludes the recognition of investment-generated performance fees as well as realized and unrealized co-investment equity earnings and losses (the timing of each of these can fluctuate based on a variety of factors). Generally, we recognize incentive 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 fluctuate based on a variety of factors. Non-variable operating expenses, which we treat as expenses when incurred during the year, are relatively constant on a quarterly basis. 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 endedMarch 31, 2022 and 2021, are not fully indicative of the results we expect to realize for the full fiscal year. 26
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RESULTS OF OPERATIONS
In conjunction with our change in reporting segments, effective
Definitions
•Assets under management data for LaSalle is reported on a one-quarter lag.
•n.m.: not meaningful, represented by a percentage change of greater than 1,000% favorable or unfavorable.
Consolidated Operating Results
Three Months Ended March 31, Change in % Change in Local
($ in millions) 2022 2021 U.S. dollars Currency
Markets Advisory $ 999.5 792.7 206.8 26 % 28 %
Capital Markets 600.6 411.7 188.9 46 49
Work Dynamics 3,033.6 2,698.1 335.5 12 14
JLL Technologies 49.4 43.4 6.0 14 14
LaSalle 118.3 91.2 27.1 30 34
Revenue $ 4,801.4 4,037.1 764.3 19 % 21 %
Gross contract costs (2,904.5) (2,602.9) (301.6) 12 13
Net non-cash MSR and mortgage banking derivative
activity 3.6 (9.7) 13.3 (137) (137)
Fee revenue $ 1,900.5 1,424.5 476.0 33 % 36 %
Markets Advisory 741.2 552.6 188.6 34 36
Capital Markets 591.5 393.2 198.3 50 54
Work Dynamics 410.5 363.5 47.0 13 15
JLL Technologies 45.3 29.9 15.4 52 52
LaSalle 112.0 85.3 26.7 31 36
Compensation and benefits, excluding gross contract costs
$ 1,377.8 1,055.4 322.4 31 % 33 %
Operating, administrative and other expenses, excluding gross contract costs
269.5 227.9 41.6 18 20
Depreciation and amortization 54.4 53.0 1.4 3 4
Restructuring and acquisition charges 19.5 17.2 2.3 13 19
Total fee-based operating expenses 1,721.2 1,353.5 367.7 27 29
Gross contract costs 2,904.5 2,602.9 301.6 12 13
Total operating expenses $ 4,625.7 3,956.4 669.3 17 % 19 %
Operating income $ 175.7 80.7 95.0 118 % 122 %
Equity earnings $ 18.5 48.5 (30.0) (62) % (62) %
Adjusted EBITDA $ 273.6 190.1 83.5 44 % 47 %
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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:
•Fee revenue and Fee-based operating expenses;
•Adjusted EBITDA attributable to common shareholders ("Adjusted EBITDA") and Adjusted EBITDA margin; and
•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 withU.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 directly or indirectly reimbursed through the fees we receive. These costs are presented on a gross basis in Operating expenses with the equal amount of corresponding fees in Revenue. 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. Net non-cash 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 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 gain recognized on the sale of businesses. 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. In 2021, the activity related to a business disposition withinJLL Technologies. 28
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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
March 31,
(in millions) 2022 2021
Revenue $ 4,801.4 4,037.1
Adjustments:
Gross contract costs (2,904.5) (2,602.9)
Net non-cash MSR and mortgage banking derivative activity 3.6 (9.7)
Fee revenue $ 1,900.5 1,424.5
Operating expenses $ 4,625.7 3,956.4
Less: Gross contract costs (2,904.5) (2,602.9)
Fee-based operating expenses $ 1,721.2 1,353.5
Operating income $ 175.7 80.7
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), and (iii) the Adjusted EBITDA margin
(measured on fee-revenue and presented on a local currency basis).
Three Months Ended
March 31,
($ in millions) 2022 2021
Net income attributable to common shareholders $ 145.6 103.0
Add:
Interest expense, net of interest income 10.2 10.4 Provision for income taxes 40.3 28.2 Depreciation and amortization 54.4 53.0 EBITDA$ 250.5 194.6
Adjustments:
Restructuring and acquisition charges 19.5 17.2 Gain on disposition - (12.0) Net non-cash MSR and mortgage banking derivative activity 3.6 (9.7) Adjusted EBITDA$ 273.6 190.1 Net income margin attributable to common shareholders 3.0 % 2.6 % Adjusted EBITDA margin 14.4 % 13.3 % 29
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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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