You won't get a prize for guessing that commercial real estate services company Jones Lang LaSalle's (NYSE: JLL) latest earnings results would have been much stronger had the U.S. dollar not been so strong in recent months. Nevertheless, the company reported a whopping 25% increase in fee revenue in the quarter, while adjusted net income rose by $26 million to $43 million. Moreover on the earnings call, CEO Colin Dyer talked of the company being in "a very positive environment with no signs of anything that will disrupt it at this time". . Let's take a more detailed look at earnings and trends at Jones Lang LaSalle
What make Jones Lang LaSalle tick
The company reports out of two business activities: real estate services and investment management. Real estate services produce the bulk of company profits, with the Americas being the most important segment.
Although, real estate services comprise a range of activities including commercial property leasing, property and facility management, and capital market activities, they all tend to follow the fortunes of the commercial real estate market. For example, if more office space is leased then companies should demand more facilities management. In turn, leasing market activity tends to follow office vacancy rates. The lower vacancy rates go, the more advantageous conditions should be for Jones Lang LaSalle.
The story is similar when it comes to investment management, which primarily encompasses advisory fees and incentive fees. When commercial property values are rising, Jones Lang LaSalle should find it easier to grow its assets under management , or AUM. For example, here is how Dyer outlined the subject on the earnings call:
"In funds management, we see sustained strong capital flows and deal velocity as low interest rates and low inflation attract global investors." and " Strong performers like LaSalle are going to continue to attract investment capital in this healthy environment."
In other words, both of the company's segments are dependent on increases in commercial property rents and capital values (more on that subject later). For now, here is a chart of adjusted earnings before interest, taxes, depreciation, and amortization, or EBITDA, in the quarter. Clearly, the Americas are where the action is for Jones Lang LaSalle.
Currency, as usual
It's a good thing the Americas region dominates the company's earnings, because strength in the U.S. dollar hurt revenue and earnings growth in the other three segments.
|Segment||Fee Revenue ($ millions)||Year on Year % Change in U.S. Dollars||Year on Year % Change in Local Currency|
|Americas Real Estate Services||501.6||23%||25%|
|EMEA Real Estate Services||253.5||8%||25%|
|Asia-Pacific Real Estate Services||188.1||8%||16%|
Turning to the all-important outlook, the company reported mixed data regarding investment volume and leasing activity. Investment market volumes in the quarter were in line with, or better than, the full-year forecasts from Jones Lang LaSalle. For example, the Americas investment volume increased 18% in the quarter versus a 20% full-year forecast, Asia-Pacific recorded a 7% increase in investment volume versus a 5%-10% forecast for the full year, and Europe only declined 1% versus a 15% forecast decline for the full year
However, it was a different story with leasing market activity. This is measured by something called gross absorption,an industry term that refers to percentage of total space leased during a specific period.
As you can see in the following table, the company's gross absorption declined by 6% in its Americas region. That means the total leased space during the period actually fell by 6% -- not usually a good sign. However, on discussing the matter on the earnings call, Dyer stressed that this was 'probably an anomaly'.
|Gross Absorption||Q1 2015 vs. Q1 2014||FY 2015 Forecast|
Other than the impact of currency, gross absorption is probably the most negative aspect of a broadly strong earnings report. Given that, it's definitely something to monitor in future quarters, particularly as management's outlook remains positive.
All told, Jones Lang LaSalle delivered a relatively strong set of earnings numbers that confirmed the ongoing recovery in the commercial property market. As long as that recovery continues, investors can expect the stock's earnings to improve. Moreover, any weakness in the U.S. dollar could lead to a boost to earnings, because the company's underlying growth remains favorable.