Commercial property services company Jones Lang LaSalle Inc (NYSE:JLL) produced a solid set of first-quarter results on Friday and affirmed its full-year guidance. That said, investors will be wondering just how a 21% increase in fee revenue translated into a 12.9% drop in adjusted earnings before interest, tax, depreciation, and amortization (EBITDA), let alone a 45.1% decline in adjusted diluted EPS. Wait no further to find out.
Jones Lang LaSalle Inc first-quarter results
Starting with the headline numbers from the quarter, all comparisons are on a year on year basis:
- Total revenue rose 21%, with total fee revenue also up 21% to $1.36 billion
- Adjusted EBITDA fell 12.9% to $74 million, with adjusted net income down 43% to $21 million
Turning to the specific issue of why profits were lower when revenue surged, CEO Christian Ulbrich put it as follows: "Anticipated declines in LaSalle's incentive and transaction fees, expenses related to the close of a non-core U.K. business, continued investment in technology and data and in our EMEA facility management platform, and provisions for account receivables collections, all contributed to lower profits." For reference, EMEA represents Europe, the Middle East, and Africa.
What happened in the quarter
The best way to look into the matters mentioned by Ulbrich is by breaking out earnings by segment. Jones Lang LaSalle generates revenue from two streams. The first is real estate services (RES), which comprises leasing, property and facility management, capital markets and hotels, and project and development services, while LaSalle Investment Management (LaSalle) is a real estate investment firm.
|Segment||Fee Revenue||Growth||Adjusted EBITDA||Growth|
|LaSalle Investment Management||88.2||(12%)||19.6||(44%)|
As you can see above, LaSalle's EBITA fell notably, but it's not a reason to panic. LaSalle is transitioning to a new series of funds, and as CFO Christie Kelly pointed out on the earnings call the revenue decrease at LaSalle was driven by expected declines in transaction fees related to the launch of a real estate trust last year, as well as "lower incentive fees."
With regard to EMEA, a 37% increase in segment operating expenses to $529.9 million meant that adjusted EBITDA went from a loss of $7.6 million in last year's first quarter to a loss of $19.2 million in the recent first quarter. Contributing to the increased loss this year were a $12.1 million incremental investment in technology as well as the closure of a non-core U.K. market (a business in project and development services within a specific geography) and provisions for losses in France and Germany.
Meanwhile, earnings growth in RES Americas and RES Asia-Pacific looks fine.
In a sign that conditions remain on track as far as management's expectations are concerned, full-year guidance was kept intact. The key operating assumptions remain as follows:
- Full-year fee revenue growth of 8% to 11%
- Adjusted EBITDA margin of 10% to 12%
- Full-year LaSalle incentive fees of around $30 million and equity earnings of around $20 million
- Foreign exchange to impact EPS by around $0.15 either positively or negatively
Moreover, management highlighted a broad range of leading economic indicators that were positive in the first quarter and led to expectations for better economic growth -- as commercial real estate conditions are always going to be tied to growth prospects.
The acquisitions management has been making are also helping to fuel growth. According to Kelly on the earnings call, acquisitions accounted for 60% of the total RES revenue fee growth in the quarter and helped increase annuity revenue.
All told, stockholders will be hoping for stronger economic growth and ongoing low interest rates to help fuel investor sentiment toward commercial property. On a company-specific level, LaSalle is obviously facing near-term headwinds from the transition to new funds, but management expects fees and revenues at LaSalle to normalize in time. Meanwhile, the actions taken in Europe and the company's acquisition strategy are intended to fuel growth in the future.
In short, underlying performance is better than the headline data suggests.