The message from Jones Lang LaSalle's (JLL +1.37%) second-quarter results was one of optimism despite weakening end markets. Credit market turbulence in January, followed by a slowing in the global growth environment and the political and economic uncertainty created by the Brexit vote in June, have all hit commercial property markets in 2016. However, both companies' managements remain convinced that the market fundamentals are still in place in order to make progress. Let's take a closer look at Jones Lang LaSalle's earnings and outlook.
THE BREXIT VOTE HURT JONES LANG LASALLE'S OPERATIONS IN THE SECOND QUARTER. IMAGE SOURCE: GETTY IMAGES.
Jones Lang LaSalle's second-quarter earnings: The raw numbers
It's a good idea to separate the company's investment management business -- the LaSalle bit -- from its real estate services (RES) operations and look at RES by geographic region. RES contains a mix of revenue streams that relies on property transactions (for example capital markets and leasing) and other services that don't directly depend on transactions (property and facility management, project and development services, etc.).
As you can see in the following table Europe got hit by the impact of political uncertainty surrounding Brexit on capital markets and leasing in the U.K. -- interestingly Jones Lang LaSalle management are arguing the impact is only significantly being seen in the U.K. Meanwhile investment management continues to do well in a low interest rate environment.
| Metric |
Adjusted EBITDA (millions) |
Growth |
|---|---|---|
|
RES Americas |
62.8 |
3.3% |
|
RES Europe, Middle East, Africa |
27.6 |
(26.6%) |
|
RES Asia-Pacific |
22.5 |
14.2% |
|
LaSalle Investment Management |
47 |
23.7% |
|
Total |
159.8 |
2.4% |
DATA SOURCE: JONES LANG LASALLE PRESENTATIONS.
While credit markets are notably better than at the start of the year and the economy remains in growth mode -- albeit slow -- Brexit has clearly had an impact. For example, Jones Lang LaSalle generated 15% of its global fee revenue from the U.K. in 2015. The company reported decreases in adjusted EBITDA as the result of lower leasing volumes and a hit to the UK capital markets as the result of "political uncertainty related to Brexit."
Market outlook
Jones Lang LaSalle's management doesn't give forward guidance, but its earnings presentations give good color on the overall industry outlook. In particular, its research arm's forecasts for market volume -- a useful indicator of property transactions and its gross absorption ratio -- are widely followed. (Gross absorption is simply the share of commercial real estate space leased during a specific period -- a higher number is better and implies demand for leasing is increasing.)
Here is how the full-year 2016 growth (compared to 2015) predictions have changed as the year has progressed. The following table shows how the company has reduced its outlook for capital market volumes in successive quarters -- in every region.
|
Q1 2016 |
Q2 2016 | |
|
Americas | (5%) to flat | (10%) to (15%) |
|
EMEA | (10%) | (15%) to (20%) |
|
Asia-Pacific | (10%) to (5%) | (10%) to (15%) |
|
Total | (5%) | (10%) to (15%) |
DATA SOURCE: JONES LANG LASALLE PRESENTATIONS.
Moreover, the leasing environment has also worsened. Here's a look at JLL Research's forecast for gross absorption in the full-year 2016 compared to 2015. Remember: An increasing number is better. Just as with capital market volumes, the outlook for leasing has worsened as the year has progressed.
|
Q4 2015 |
Q1 2016 | Q2 2016 | |
|
Americas | 0 to 5% | (5%) to flat | (5%) |
|
EMEA | flat | (5%) | (5%) to (10%) |
|
Asia-Pacific | 15% | 10% to 15% | flat to 5% |
|
Total | 5% | flat to 5% | flat to 5% |
DATA SOURCE: JONES LANG LASALLE PRESENTATIONS.
In other words, the market outlook is getting worse. It's a fact that Jones Lang LaSalle CEO Colin Dyer mentioned during his earnings call presentation:
Even with lower capital markets and leasing market activity, our own pipelines are active and healthy, beating the trend of the overall markets. We continue to monitor market conditions and new developments for the year near to medium term translating the information into superior advice for our clients.
Looking ahead
All told, Jones Lang LaSalle outperformed their end markets in their respective second quarters. Going forward, both companies are likely to emphasize their ability to generate revenue operations that don't require transactional volume. Meanwhile, both managements reiterated their view that, despite the turbulence from Brexit, the commercial property market fundamentals are still positive.
