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Intangible Assets
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Registrant's telephone number, including area code:
i(312)
i782-5800
Former
name, former address and former fiscal year, if changed since last report: Not Applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
iCommon
Stock, par value $0.01
iJLL
iThe New York Stock Exchange
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑ No ☐
Indicate by check mark whether the registrant
has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☑
The number of shares outstanding of the registrant's common stock (par value $0.01) as of the close of business on April 29, 2021 was i51,307,170.
Trade
receivables, net of allowance of $i70.2 and $i66.5
i1,477.4
i1,636.1
Notes
and other receivables
i399.9
i469.9
Reimbursable
receivables
i1,430.1
i1,461.3
Warehouse
receivables
i832.1
i1,529.2
Short-term
contract assets, net of allowance of $i2.1 and $i1.8
i264.7
i265.8
Prepaid
& other
i412.9
i517.1
Total
current assets
i5,273.7
i6,453.7
Property
and equipment, net of accumulated depreciation of $i834.9 and $i806.2
i682.0
i663.9
Operating
lease right-of-use assets
i706.5
i707.4
Goodwill
i4,201.7
i4,224.7
Identified
intangibles, net of accumulated amortization of $i312.3 and $i295.3
i687.0
i679.8
Investments
in real estate ventures, including $i435.4 and $i340.3 at fair value
i545.1
i430.8
Long-term
receivables
i249.7
i231.1
Deferred
tax assets, net
i293.9
i296.5
Deferred
compensation plan
i480.2
i446.3
Other
i186.6
i182.3
Total
assets
$
i13,306.4
i14,316.5
Liabilities
and Equity
Current liabilities:
Accounts payable and accrued liabilities
$
i1,108.7
i1,229.8
Reimbursable
payables
i1,016.6
i1,154.5
Accrued
compensation & benefits
i1,031.4
i1,433.2
Short-term
borrowings
i90.6
i62.0
Short-term contract
liabilities and deferred income
i181.0
i192.9
Short-term
acquisition-related obligations
i72.4
i91.7
Warehouse
facilities
i833.5
i1,498.4
Short-term
operating lease liabilities
i159.1
i165.7
Other
i198.5
i299.6
Total
current liabilities
i4,691.8
i6,127.8
Credit
facility, net of debt issuance costs of $i7.7 and $i8.7
i342.3
(i8.7)
Long-term
debt, net of debt issuance costs of $i2.3 and $i2.5
i684.0
i702.0
Deferred
tax liabilities, net
i114.6
i120.0
Deferred
compensation
i461.8
i450.0
Long-term
acquisition-related obligations
i22.7
i26.2
Long-term
operating lease liabilities
i692.4
i683.9
Other
i582.1
i597.5
Total
liabilities
i7,591.7
i8,698.7
Redeemable
noncontrolling interest
i7.8
i7.8
Company
shareholders' equity:
Common stock, $i0.01 par value per share, i100,000,000
shares authorized; i52,073,440 and i51,970,307 shares issued; i51,306,200
and i51,105,417 outstanding
i0.5
i0.5
Additional
paid-in capital
i2,015.5
i2,023.3
Retained
earnings
i4,078.9
i3,975.9
Treasury
stock, at cost, i767,240 and i864,890 shares
(i85.7)
(i96.1)
Shares
held in trust
(i5.4)
(i5.6)
Accumulated other comprehensive loss
(i383.6)
(i377.2)
Total
Company shareholders’ equity
i5,620.2
i5,520.8
Noncontrolling
interest
i86.7
i89.2
Total equity
i5,706.9
i5,610.0
Total
liabilities, redeemable noncontrolling interest and equity
$
i13,306.4
i14,316.5
See
accompanying notes to Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.iINTERIM
INFORMATION
Readers of this quarterly report should refer to the audited financial statements of Jones Lang LaSalle Incorporated ("JLL," which may also be referred to as "the Company" or as "we,""us" or "our") for the year ended December 31, 2020, which are included in our 2020 Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission ("SEC") and also available on our website (www.jll.com), since we have omitted from this quarterly
report certain footnote disclosures which would substantially duplicate those contained in such audited financial statements. You should also refer to the "Summary of Critical Accounting Policies and Estimates" section within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and to Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements in our 2020 Annual Report on Form 10-K for further discussion of our significant accounting policies and estimates.
Our Condensed Consolidated Financial Statements as of March 31, 2021, and for the three months ended March 31, 2021 and 2020, are unaudited. In the opinion of management, we have included all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of the Condensed Consolidated Financial Statements for these interim periods.
Historically, our quarterly revenue and profits have tended to increase from quarter to quarter as the year progresses. This is the result of a general focus in the real estate industry on completing transactions by calendar year end, while certain expenses are recognized evenly throughout the year. Our LaSalle Investment Management ("LaSalle") segment generally earns investment-generated performance fees on clients' real estate investment returns when assets are sold, the timing of which is geared toward the benefit of our clients, as well as co-investment equity gains and losses, primarily dependent on underlying valuations. Within our Real Estate Services ("RES") segments, revenue from transaction-based activities (e.g. leasing and capital markets) is driven by the size and timing of
our clients' transactions and can fluctuate significantly from period to period. In 2020 and the three months ended March 31, 2021, macroeconomic conditions influenced by the COVID-19 pandemic impacted the historical seasonality of our revenue and profits and may continue to do so during the remainder of 2021.
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 process can result in significant fluctuations in quarterly compensation and benefits expense from period to period. Non-variable operating expenses, which we recognize when incurred during the year, are relatively constant on a quarterly basis.
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. Changes in the geographic mix of income can impact our estimated effective tax rate.
As a result of the items mentioned above, the results for the periods ended March 31 are not fully indicative of what our results will be for the full fiscal year.
In January 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020‑01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which, among other things, clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323 and clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted
for under the equity method or fair value option. This ASU is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. The adoption of this guidance did not impact our financial statements and related disclosures.
3.iREVENUE RECOGNITION
Revenue
excluded from the scope of ASC Topic 606 - Our mortgage banking and servicing operations - such as Mortgage Servicing Rights ("MSR")-related activity, loan origination fees, and servicing income - are excluded from the scope of ASC Topic 606. iSuch revenue was included entirely within Americas Capital Markets and is presented below.
Three
months Ended March 31,
(in millions)
2021
2020
Revenue excluded from scope of ASC Topic 606
$
i70.2
i49.3
Contract
assets and liabilities - Our contract assets, net of allowance, are included in Short-term contract assets and Other assets and our contract liabilities are included in Short-term contract liabilities and deferred income on our Condensed Consolidated Balance Sheets. The majority of contract liabilities are recognized as revenue within 90 days. iSuch
contract assets and liabilities are presented below.
Remaining
performance obligations - Remaining performance obligations represent the aggregate transaction price for contracts where our performance obligations have not yet been satisfied. As of March 31, 2021, the aggregate amount of transaction price allocated to remaining performance obligations represented less than i5% of our total revenue. In accordance with ASC Topic 606, excluded from the aforementioned
remaining performance obligations are (i) amounts attributable to contracts expected to be completed within 12 months and (ii) variable consideration for services performed as a series of daily performance obligations, such as facilities management, property management, and LaSalle contracts. Contracts within these businesses represent a significant portion of our contracts with customers not expected to be completed within 12 months.
We manage and report our operations as four business segments:
The three geographic regions of RES including:
(1) Americas,
(2) Europe, Middle East and Africa ("EMEA"), and
(3) Asia Pacific;
and
(4) LaSalle.
Each
geographic region offers our full range of real estate services, including agency leasing and tenant representation, capital markets, property and facility management, project and development management, energy management and sustainability, construction management, and advisory, consulting and valuation services. LaSalle provides investment management services on a global basis to institutional investors and high-net-worth individuals.
We allocate all indirect expenses to our segments, other than interest and income taxes, as nearly all expenses incurred benefit one or more of the segments. Allocated expenses primarily consist of corporate global overhead, which we allocate to the business segments based on the budgeted operating expenses of each segment.
Segment income does not include (i) restructuring and acquisition charges, (ii) interest expense, net of interest income, (iii)
other income, and (iv) provision for income tax, which are otherwise included in Net income on the Consolidated Statements of Comprehensive Income.
The Chief Operating Decision Maker of JLL measures and evaluates the segment results based on Segment income for purposes of making decisions about allocating resources and assessing performance.
The following table is a reconciliation of Segment income to consolidated Operating income.
Three Months Ended March 31,
(in millions)
2021
2020
Segment income - Americas
$
i145.0
i94.6
Segment
loss - EMEA
(i35.8)
(i20.5)
Segment
income - APAC
i17.8
i2.4
Segment
income (loss) - LaSalle
i19.4
(i26.1)
Less:
Equity (earnings) losses
(i48.5)
i28.3
Add:
Restructuring and acquisition charges
(i17.2)
(i14.1)
Operating
income
$
i80.7
i64.6
5.iBUSINESS
COMBINATIONS, GOODWILL AND OTHER INTANGIBLE ASSETS
2021 Business Combinations Activity
During the three months ended March 31, 2021, we paid $i26.2 million for deferred business acquisition and earn-out obligations for acquisitions completed in prior years.
2020 Business Combinations Activity
During
the year ended December 31, 2020 we completed no new acquisitions.
Number of acquisitions with earn-out payments subject to the achievement of certain performance criteria
i24
i35
Maximum
earn-out payments (undiscounted)
$
i157.8
$
i199.2
Short-term
earn-out liabilities (fair value)(1)
i59.9
i77.2
Long-term
earn-out liabilities (fair value)(1)
i8.3
i8.5
(1)Included in Short-term and Long-term acquisition-related obligations on the Condensed Consolidated Balance Sheets.
/
Assuming the achievement of the applicable performance criteria, we anticipate making these earn-out payments over the next five years. Refer to Note 8, Fair Value Measurements, and Note 11, Restructuring and Acquisition Charges, for additional discussion of our earn-out liabilities.
Goodwill and Other Intangible Assets
Goodwill and unamortized intangibles as of March 31, 2021 consisted of: (1) goodwill of $i4,201.7
million, (2) identifiable intangibles of $i634.9 million amortized over their remaining finite useful lives, and (3) $i52.1 million
of identifiable intangibles with indefinite useful lives that are not amortized. Notable portions of our goodwill and unamortized intangibles are denominated in currencies other than the U.S. dollar, which means a portion of the movements in the reported book value of these balances is attributable to movements in foreign currency exchange rates.
The
following tables detail, by reporting segment, movements in the gross carrying amount and accumulated amortization of our identifiable intangibles.
(1)
Included in this amount for MSRs was (i) $i3.1 million relating to prepayments/write-offs due to prepayments of the underlying obligation for which we assumed, acquired or retained the servicing rights.
(2) Amortization of MSRs is included in Revenue before reimbursements within the Condensed Consolidated Statements of Comprehensive Income.
(1)
Included in this amount for MSRs was $i5.9 million relating to prepayments/write-offs due to prepayments of the underlying obligation for which we assumed, acquired or retained the servicing rights.
(2) Amortization of MSRs is included in Revenue before reimbursements within the Condensed Consolidated Statements of Comprehensive Income.
6.iINVESTMENTS
IN REAL ESTATE VENTURES
As of March 31, 2021 and December 31, 2020, we had Investments in real estate ventures of $i545.1 million and $i430.8
million, respectively.
Approximately 90% of our investments, as of March 31, 2021, are primarily (i) direct investments in i50 separate property or commingled funds, where we co-invest alongside our clients and for which we also have an advisory agreement and (ii) investments by JLL Technologies in early-stage proptech companies. The remaining 10% of our Investments in real estate ventures, as of March 31, 2021, were attributable
to investment vehicles that use our capital and outside capital primarily provided by institutional investors to invest, generally, in certain real estate ventures that own and operate real estate. Of our investments attributable to investment vehicles, the majority was invested in LaSalle Investment Company II ("LIC II"), in which we held an effective ownership interest of i48.78%.
We have maximum potential unfunded commitments to direct investments or investment vehicles of $i309.9
million as of March 31, 2021. Of this amount, while we remain contractually obligated, we do not expect a call on the $i60.4 million relating to our investment in LIC II as its fund life terminated in January 2020.
We evaluate our less-than-wholly-owned investments to determine whether the underlying entities are classified as variable interest entities ("VIEs"); we assess each identified VIE to determine whether we are the primary beneficiary. We have determined
that we are the primary beneficiary of certain VIEs and accordingly, we have consolidated such entities. The assets of the consolidated VIEs are available only for the settlement of the obligations of the respective entities and the mortgage loans of the consolidated VIEs are non-recourse to JLL.
Mortgage
indebtedness (included in Other liabilities)
i89.6
i60.3
Total
liabilities
i91.4
i62.2
Members' equity (included in Noncontrolling interest)
i83.0
i85.2
Total
liabilities and members' equity
$
i174.4
i147.4
/
i
Three
Months Ended March 31,
(in millions)
2021
2020
Revenue
$
i2.6
i4.3
Operating
and other expenses
(i3.2)
(i4.3)
Net
gains on sale of investments(1)
i—
i12.2
Net
(loss) income
$
(i0.6)
i12.2
/
(1)
The 2020 gain was included in Equity earnings.
We allocate the members' equity and net income of the consolidated VIEs to the noncontrolling interest holders as Noncontrolling interest on our Condensed Consolidated Balance Sheets and as Net income attributable to noncontrolling interest in our Condensed Consolidated Statements of Comprehensive Income, respectively.
Impairment
There were no significant other-than-temporary impairment charges on Investments in real estate ventures for the three months ended March 31, 2021 and 2020.
Fair Value
We report a majority of our investments in real estate ventures at fair value. For such investments, we increase or decrease
our investment each reporting period by the change in the fair value and we report these fair value adjustments in our Condensed Consolidated Statements of Comprehensive Income within Equity earnings. iThe table below shows the movement in our investments in real estate ventures reported at fair value.
(in
millions)
2021
2020
Fair value investments as of January 1,
$
i340.3
i328.6
Investments
i55.8
i28.9
Distributions
(i3.3)
(i16.0)
Change
in fair value, net
i45.7
(i35.2)
Foreign
currency translation adjustments, net
(i3.1)
(i4.3)
Fair
value investments as of March 31,
$
i435.4
i302.0
See
Note 8, Fair Value Measurements, for additional discussion of our investments in real estate ventures reported at fair value.
As
of March 31, 2021, we had $i74.2 million of unamortized deferred compensation related to unvested RSUs and PSUs, which we anticipate recognizing over varying periods into 2026; $i24.1
million relates to the awards issued in conjunction with the HFF acquisition.
8.iFAIR VALUE MEASUREMENTS
We measure certain assets and liabilities in accordance with ASC 820, Fair Value Measurements and Disclosures, which defines fair value as the price that would be received for an asset, or paid to transfer
a liability, in an orderly transaction between market participants on the measurement date. In addition, it establishes a framework for measuring fair value according to the following three-tier fair value hierarchy:
•Level 1 - Quoted prices for identical assets or liabilities in active markets accessible as of the measurement date;
•Level 2 - Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•Level 3 - Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Financial Instruments
Our financial instruments include Cash and cash equivalents, Trade
receivables, Notes and other receivables, Reimbursable receivables, Warehouse receivables, restricted cash, contract assets, Accounts payable, Reimbursable payables, Short-term borrowings, contract liabilities, Warehouse facilities, Credit facility, Long-term debt, and foreign currency forward contracts. The carrying amounts of Cash and cash equivalents, Trade receivables, Notes and other receivables, Reimbursable receivables, restricted cash, contract assets, Accounts payable, Reimbursable payables, contract liabilities,
and the Warehouse facilities approximate their estimated fair values due to the short-term nature of these instruments. The carrying values of our Credit facility and Short-term borrowings approximate their estimated fair values given the variable interest rate terms and market spreads.
We estimated the fair value of our Long-term debt as $i704.8 million and $i723.7
million as of March 31, 2021 and December 31, 2020, respectively, using dealer quotes that are Level 2 inputs in the fair value hierarchy. The carrying value of our Long-term debt was $i684.0 million and $i702.0
million as of March 31, 2021 and December 31, 2020, respectively, and included debt issuance costs of $i2.3 million and $i2.5
million, respectively.
Investments in Real Estate Ventures at Fair Value - Net Asset Value ("NAV")
We report a significant portion of our investments in real estate ventures at fair value. For such investments, we increase or decrease our investment each reporting period by the change in the fair value and we report these fair value adjustments in our Condensed Consolidated Statements of Comprehensive Income within Equity earnings.
For the majority of our investments reported at fair value, we estimate the fair value using the NAV
per share (or its equivalent) our investees provide. Critical inputs to NAV estimates included valuations of the underlying real estate assets and borrowings, which incorporate investment-specific assumptions such as discount rates, capitalization rates, rental and expense growth rates, and asset-specific market borrowing rates. In instances where the reported NAV per share did not fully incorporate the COVID-19 pandemic’s impact on the fair value of underlying investments, we recognized an adjustment to decrease the reported NAV. As of March 31, 2021, such adjustments totaled $9.3 million. We did not consider any other adjustments to NAV estimates provided by investees, including adjustments for any restrictions to the transferability of ownership interests embedded within investment agreements to which we are a party, to be necessary based upon (i) our understanding of the methodology utilized and inputs incorporated
to estimate NAV at the investee level, (ii) consideration of market demand for the specific types of real estate assets held by each venture and (iii) contemplation of real estate and capital markets conditions in the localities in which these ventures operate. As of March 31, 2021 and December 31, 2020, investments in real estate ventures at fair value using NAV were $i222.7 million and $i203.8
million, respectively. As these investments are not required to be classified in the fair value hierarchy, they have been excluded from the following table.
Recurring Fair Value Measurements
i
The following table categorizes by level in the fair value hierarchy the estimated fair value of our assets and liabilities measured at fair value on a recurring basis.
We classify one investment as Level 1 in the fair value hierarchy as a quoted price is readily available. We increase or decrease our investment each reporting period by the change in the fair value of the investment. We report these fair value adjustments in our Condensed Consolidated Statements of Comprehensive Income within Equity earnings.
Investments classified as Level 3 in the fair value hierarchy represent investments in early-stage non-public entities where we elected the fair value option. The carrying value was deemed to approximate fair value for the majority of these investments due to the proximity of the investment date or date of most recent financing raise to the balance sheet date as well as consideration of investee-level performance updates. To the extent there are changes in fair value, a result of pricing in subsequent funding rounds
or changes in business strategy, for example, we recognize such changes through Equity earnings.
We regularly use foreign currency forward contracts to manage our currency exchange rate risk related to intercompany lending and cash management practices. We determine the fair values of these contracts
based on current market rates. The inputs for these valuations are Level 2 inputs in the fair value hierarchy. As of March 31, 2021 and December 31, 2020, these contracts had a gross notional value of $i2.22 billion ($i1.22
billion on a net basis) and $i2.34 billion ($i1.42 billion on a net basis), respectively.
We record the asset
and liability positions for our foreign currency forward contracts based on the net payable or net receivable position with the financial institutions from which we purchase these contracts. The $i6.9 million asset as of March 31, 2021, was composed of gross contracts
with receivable positions of $i8.4 million and payable positions of $i1.5 million. The $i9.4
million liability as of March 31, 2021, was composed of gross contracts with receivable positions of $i0.7 million and payable positions of $i10.1
million. As of December 31, 2020, the $i13.1 million asset was composed of gross contracts with receivable positions of $i13.5
million and payable positions of $i0.4 million. The $i3.4 million liability as of December
31, 2020, was composed of gross contracts with receivable positions of $i2.7 million and payable positions of $i6.1
million.
Warehouse Receivables
As of March 31, 2021 and December 31, 2020, all of our Warehouse receivables were under commitment to be purchased by government-sponsored enterprises ("GSEs") or by a qualifying investor as part of a U.S. government or GSE mortgage-backed security program.
Deferred Compensation Plan
We maintain a deferred compensation plan for certain of our U.S. employees that allows them to defer portions of their compensation. We recorded this plan on our Condensed Consolidated Balance Sheet as of March 31, 2021, as Deferred compensation plan assets of $i480.2
million, long-term deferred compensation plan liabilities of $i452.0 million, included in Deferred compensation, and as a reduction of equity, Shares held in trust, of $i5.4
million. We recorded this plan on our Condensed Consolidated Balance Sheet as of December 31, 2020, as Deferred compensation plan assets of $i446.3 million, long-term deferred compensation plan liabilities of $i427.6
million, included in Deferred compensation, and as a reduction of equity, Shares held in trust, of $i5.6 million.
Earn-Out Liabilities
We classify our earn-out liabilities within Level 3 in the fair value hierarchy because the inputs we use to develop the estimated fair value include unobservable inputs. See Note 5, Business Combinations, Goodwill and Other Intangible Assets, for additional discussion of our earn-out liabilities.
Mortgage
Banking Derivatives
Both our interest rate lock commitments to prospective borrowers and forward sale contracts with prospective investors are undesignated derivatives and considered Level 3 valuations due to significant unobservable inputs related to counterparty credit risk. An increase in counterparty credit risk assumptions would result in a lower fair value measurement.
iThe
tables below present a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3).
Mortgage
banking derivative assets and liabilities, net
i10.2
(i75.2)
i—
i26.2
(i25.2)
(i64.0)
Earn-out
liabilities
i148.5
(i8.2)
(i2.0)
i—
(i8.3)
i130.0
(1)
CTA: Currency translation adjustments
i
Net change in fair value, included in the tables above, is reported in Net income as follows.
Category of Assets/Liabilities using Unobservable Inputs
Condensed Consolidated Statements of Comprehensive Income Account Caption
Earn-out
liabilities (Short-term and Long-term)
Restructuring and acquisition charges
Investments in real estate ventures
Equity earnings
Other current assets - Mortgage banking derivative assets
Revenue before reimbursements
Other current liabilities - Mortgage banking derivative liabilities
Revenue before reimbursements
Non-Recurring Fair Value Measurements
We review our investments in real estate ventures, except those investments otherwise reported at fair value, on a
quarterly basis, or as otherwise deemed necessary, for indications of whether we may be unable to recover the carrying value of our investments and whether such investments are other-than-temporarily impaired. When the carrying amount of the investment is in excess of the estimated future undiscounted cash flows, we use a discounted cash flow approach or other acceptable method to determine the fair value of the investment in computing the amount of the impairment. Our determination of fair value primarily relies on Level 3 inputs. We did not recognize any significant investment-level impairment losses during either of the three months ended March 31, 2021 or 2020. See Note 6, Investments in Real Estate Ventures, for additional information, including information related to impairment charges recorded at the investee level.
Credit facility, net of
debt issuance costs of $i7.7 and $i8.7
i342.3
(i8.7)
Long-term
senior notes, i4.4%, face amount of $i275.0, due November 2022, net of debt issuance costs of $i0.6
and $i0.8
i274.4
i274.2
Long-term
senior notes, i1.96%, face amount of €i175.0, due June 2027, net of debt issuance costs of $i0.8
and $i0.8
i204.8
i213.9
Long-term
senior notes, i2.21%, face amount of €i175.0, due June 2029, net of debt issuance costs of $i0.9
and $i0.9
i204.8
i213.9
Total
debt
$
i1,116.9
i755.3
/
Credit
Facility
Our $i2.75 billion unsecured revolving credit facility (the "Facility") matures on May 17, 2023. Pricing on the Facility ranges from three-month iLIBOR
plus 0.875% to 1.35%, with pricing as of March 31, 2021, at iLIBOR plus i0.95%. In addition to outstanding borrowings under the Facility presented in the above table, we
had outstanding letters of credit under the Facility of $ii0.7/
million as of both March 31, 2021 and December 31, 2020.
On April 14, 2021, we renewed the Facility, which included the extension of the maturity date to April 2026. Refer to Note 13, Subsequent Events for further detail.
i
The following tables provides additional information on our Facility.
Three
Months Ended March 31,
($ in millions)
2021
2020
Average outstanding borrowings under the Facility
$
i184.4
i935.2
Effective
interest rate on the Facility
i1.0
%
i2.4
%
/
We
will continue to use the Facility for, but not limited to, business acquisitions, working capital needs (including payment of accrued incentive compensation), co-investment activities, share repurchases and capital expenditures.
Short-Term Borrowings and Long-Term Debt
In addition to our Facility, we have the capacity to borrow up to an additional $i63.4 million under local overdraft facilities. Amounts outstanding are presented in the debt table
above.
As of March 31, 2021, our issuer and senior unsecured ratings are investment grade: Baa1 from Moody’s Investors Service, Inc. and BBB+ from Standard & Poor’s Ratings Services.
Covenants
Our Facility and senior notes are subject to customary financial and other covenants, including cash interest coverage ratios and leverage ratios, as well as event of default conditions. We remained in compliance with all covenants as of March 31, 2021.
(1)
The temporary maximum capacity increase to $1,600.0 million expired on January 31, 2021; thereafter, the maximum capacity reverted to its original contractual amount.
(2) The temporary maximum capacity increase to $900.0 million expired on January 6, 2021; thereafter, the maximum capacity reverted to its original contractual amount.
(3) As Soon As Pooled ("ASAP") funding program.
/
We have lines of credit established for the sole purpose of funding our Warehouse receivables. These lines of credit exist with financial institutions and are secured by the related warehouse receivables. Pursuant
to these warehouse facilities, we are required to comply with certain financial covenants regarding (i) minimum net worth, (ii) minimum servicing-related loans and (iii) minimum adjusted leverage ratios. We remained in compliance with all covenants under our Warehouse facilities as of March 31, 2021.
We are a defendant in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount.
Professional Indemnity Insurance
When a potential loss event occurs, we estimate the ultimate cost of the claim and accrue the amount in Other current and long-term liabilities on our Condensed Consolidated Balance Sheets when probable and estimable. In addition, we have established receivables from third-party insurance providers for claim amounts in excess of the risk retained by our captive insurance company. In total, these receivables were $i14.5
million and $i44.0 million as of March 31, 2021 and December 31, 2020, respectively, and are included in Notes and other receivables and Long-term receivables on our Condensed Consolidated Balance Sheets.
i
The
following table shows the professional indemnity accrual activity and related payments.
As a participant in the DUS program, we retain a portion of the risk of loss for loans that are originated and sold under the DUS program. Net losses on defaulted loans
are shared with Fannie Mae based upon established loss-sharing ratios. Generally, we share approximately one-third of incurred losses, subject to a cap of 20% of the principal balance of the mortgage at origination. As of March 31, 2021 and December 31, 2020, we had loans subject to such loss-sharing arrangements with an aggregate unpaid principal balance of $i12.9 billion and $i12.2
billion, respectively.
For all DUS program loans with loss-sharing obligations, we record a non-contingent liability equal to the estimated fair value of the guarantee obligations undertaken upon sale of the loan, which reduces our gain on sale of the loan. Subsequently, this liability is amortized over the estimated life of the loan and recognized as Revenue on the Condensed Consolidated Statements of Comprehensive Income. As of March 31, 2021 and December 31, 2020, the loss-sharing guarantee obligations were $i23.5
million and $i22.1 million, respectively, and are included in Other liabilities on our Condensed Consolidated Balance Sheets. There were no loan losses incurred for the three months ended March 31, 2021 and 2020.
The loss-sharing aspect of the program represents an off-balance sheet credit exposure. We record a separate contingent reserve for this risk calculated on an individual loan level. As of March 31, 2021 and December
31, 2020, the loan loss guarantee reserve was $28.6 million and $36.7 million, respectively, and are included within Other liabilities on our Condensed Consolidated Balance Sheets.
Restructuring and acquisition charges include cash and non-cash expenses. Cash-based charges primarily consist of (1) 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, (2) acquisition, transaction and integration-related charges, and (3) other restructuring including lease exit charges. Non-cash charges include (1) stock-based compensation expense for retention awards issued in conjunction with the HFF acquisition and (2) fair value adjustments to earn-out liabilities relating to prior-period acquisition activity. iRestructuring
and acquisition charges are presented in table below.
Three Months Ended March 31,
(in millions)
2021
2020
Severance and other employment-related charges
$
i1.8
i1.3
Restructuring,
pre-acquisition and post-acquisition charges
i9.5
i9.8
Stock-based
compensation expense for HFF retention awards
i6.0
i11.2
Fair
value adjustments to earn-out liabilities
(i0.1)
(i8.2)
Restructuring
and acquisition charges
$
i17.2
i14.1
i
The
following tables show the accrual activity and payments relating to cash-based Restructuring and acquisition charges.
We
expect the majority of accrued severance and other accrued acquisition costs as of March 31, 2021 will be paid during the next twelve months. Lease exit payments depend on the terms of various leases, which extend as far out as 2026.
HFF Acquisition
Included in Restructuring and acquisition charges were $i11.5 million for the three months ended March 31,
2021 compared to $i21.3 million for the three months ended March 31, 2020 of charges relating to the acquisition and integration of HFF (including retention and severance expense, early lease termination costs, and other integration expenses).
During the integration of HFF, we expect to incur significant charges over the two years following the acquisition in an effort to maximize the value of the combined organization. We expect to recognize
approximately $i100 million of expense over this two-year window relating to retention awards which have already been paid or granted (in the case of RSUs). In addition, we may incur other costs in connection with the integration including, but not limited to, lease termination charges and other employee-related costs, but are unable to estimate these amounts. We anticipate that other than RSU retention awards granted, substantially all of these cumulative charges will result in cash expenditures.
For
pension and postretirement benefits, we report amounts reclassified from AOCI relating to employer service cost in Compensation and benefits within the Condensed Consolidated Statements of Comprehensive Income. All other reclassifications relating to pension and postretirement benefits are reported within Other income.
13. iSUBSEQUENT EVENTS
On April
14, 2021, we executed Amendment No. 2 ("Amendment No. 2") to the Second Amended and Restated Multicurrency Credit Agreement dated as of June 21, 2016 (as amended, the "Credit Agreement") with a syndicate of lenders. The borrowing capacity under the Credit Agreement remains at $i2.75 billion. The features to the Credit Agreement, as amended, provide for (i) an extension of the maturity date from May 2023 to April 2026, (ii) incremental flexibility of cash add-backs, all
capped at the greater of $175.0 million or 20% of Bank Adjusted EBITDA for any twelve-month period, (iii) incorporating non-cash add-backs to Bank Adjusted EBITDA, (iv) certain sustainability-linked metrics incorporating KPI's with incentive pricing, and (v) auto-adjustment to new benchmark interest rates.
Refer to Note 9, Debt for further information on our Facility.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto, for the three months ended March 31, 2021, and our audited Consolidated Financial Statements, including the notes thereto, for the fiscal year ended December 31, 2020, which are included in our 2020 Annual Report on Form 10-K, filed with the SEC 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 2020 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 cause JLL'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 2020 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 ended December 31, 2020. There have been no material changes to these critical accounting policies and estimates during the three months ended March 31, 2021.
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 2020 and the three months ended March 31, 2021, macroeconomic conditions influenced by the COVID-19 pandemic impacted the historical seasonality of our revenue and profits and may continue to do so during the remainder of 2021.
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 in U.S. dollars. As a result, the volatility of currencies
against the U.S. dollar may positively or negatively impact our results. This volatility can make it more difficult to perform period-to-period comparisons of the reported U.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.
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. In 2020 and the three months ended March 31, 2021, macroeconomic conditions influenced by the COVID-19 pandemic impacted the historical seasonality of our revenue and profits and may continue to do so during the remainder of 2021.
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 ended March 31, 2021 and 2020, are not fully indicative of the results we expect to realize for the full fiscal year.
•We define market volumes for Leasing as
gross absorption of office real estate space in square feet for the U.S., Europe and selected markets in Asia Pacific. We define market volumes for Capital Markets as investment sales transactions globally.
•Assets under management data for LaSalle is reported on a one-quarter lag.
•MENA: Middle East and North Africa. Greater China: China, Hong Kong, Macau and Taiwan.
•n.m.: not meaningful, represented by a percentage change of greater than 100% favorable or unfavorable.
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:
a.Fee revenue and Fee-based operating expenses;
b.Adjusted EBITDA attributable to common shareholders ("Adjusted EBITDA") and Adjusted EBITDA margin; and
c.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 equal amount of corresponding fees in Revenue before reimbursements. Consistent with our treatment of directly reimbursed expenses, 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 gain recognized on the sale of a business within Americas. 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.
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 March 31,
(in millions)
2021
2020
Net
income attributable to common shareholders
$
103.0
5.3
Add:
Interest expense, net of interest income
10.4
14.6
Provision for income taxes
28.2
5.0
Depreciation
and amortization
53.0
55.0
EBITDA
$
194.6
79.9
Adjustments:
Restructuring and acquisition charges
17.2
14.1
Gain
on disposition
(12.0)
—
Net non-cash MSR and mortgage banking derivative activity
(9.7)
1.6
Adjusted EBITDA
$
190.1
95.6
Net
income margin attributable to common shareholders
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 to U.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.
The continued impact of the COVID-19 pandemic (the "pandemic") contributed to lower consolidated RES revenue, down 4% to $3.9 billion, and fee revenue, down 6% to $1.4 billion, compared with the prior-year quarter, as strong growth in Asia Pacific was more than offset by declines in Americas and EMEA. Notably, the consolidated RES revenue decreases in transaction-based service lines were less significant than the trailing three quarters, with encouraging economic indicators present in many geographies. Corporate Solutions continued to deliver stable fee revenue performance as strength in facilities management offset a decrease in Project & Development Services.
Geographically across service lines, EMEA represented 60% of the RES revenue decline for the first quarter on a local currency basis, Americas represented
54% and Asia Pacific partially offset these decreases. With respect to RES fee revenue, Americas represented nearly all of the decline for the first quarter on a local currency basis, as growth in Asia Pacific offset the decline in EMEA. Refer to the segment results discussion for further detail.
LaSalle revenue decreased 16% compared with the prior-year quarter. Refer to the LaSalle segment discussion for further detail.
Our consolidated fee revenue decreased 4% in U.S. dollars (“USD”) and 7% in local currency for the first quarter of 2021, compared with 2020. The spread was driven by the weakening of the U.S. dollar against several major currencies, especially the British pound sterling, euro and Australian dollar.
Operating Expenses
In the first quarter of 2021, consolidated operating
expenses, excluding reimbursed expenses, were $2.0 billion, down 9% from 2020, and consolidated fee-based operating expenses, were $1.4 billion, down 7% from the prior-year quarter. For the first quarter, the decrease in fee-based operating expenses was driven by Americas (97% of the reduction on a local currency basis).
Americas results reflected an $8.1 million non-cash reduction to loan loss credit reserves, compared with a $30.6 million increase in reserves during the prior-year quarter.
Restructuring and acquisition charges increased compared with the prior year; refer to following table for further detail.
Three
Months Ended March 31,
(in millions)
2021
2020
Severance and other employment-related charges
$
1.8
1.3
Restructuring, pre-acquisition and post-acquisition charges
15.5
21.0
Fair
value adjustments that resulted in a net decrease to earn-out liabilities from prior-period acquisition activity
(0.1)
(8.2)
Total restructuring & acquisition charges
$
17.2
14.1
Portion of total restructuring & acquisition charges related to the acquisition and integration of HFF
$
11.5
21.3
Charges
associated with the acquisition and integration of HFF included retention and severance expense, early lease termination costs, and other integration expenses.
Equity Earnings
For the first quarter of 2021, we recognized equity earnings of $48.5 million, compared with equity losses of $28.3 million in the prior-year quarter.
Valuation increases of JLL Technologies' investments contributed $34.7 million this quarter, reflecting progress in the strategy to invest in early-stage proptech companies; refer to the Americas segment discussion for additional detail. In addition, substantially all of the $12.7 million of equity earnings in the Americas segment in 2020 were attributable to gains by consolidated variable interest entities in which we held no equity interest; these gains are also reflected in net income attributable to noncontrolling
interest and, therefore, have no impact to net income attributable to common shareholders.
LaSalle recognized $13.0 million of equity earnings in 2021, compared with $40.3 million of equity losses last year. Refer to the LaSalle segment discussion for additional detail.
The provision for income taxes was $28.2 million for the three months ended March 31, 2021, representing an effective tax rate of 21.6%. For the three months ended March
31, 2020, the provision was $5.0 million, representing an effective tax rate of 22.0%.
Net Income and Adjusted EBITDA
Net income attributable to common shareholders for the three months ended March 31, 2021 was $103.0 million, compared with $5.3 million in 2020. Adjusted EBITDA was $190.1 million for the first quarter of 2021, an increase of 96% from the prior-year period. Net income attributable to common shareholders in 2021 included a $12.0 million gain recognized on the sale of a business as part of a broader investment made in Roofstock, a marketplace for investing in the dynamic single-family rental sector. This gain on sale is excluded from adjusted measures.
Net income margin attributable to common shareholders for the first quarter (against Revenue before reimbursements) was
4.8%, compared with 0.2% in the prior-year quarter. Adjusted EBITDA margin for the first quarter, calculated on a fee-revenue basis, was 13.2% in USD (13.4% in local currency), compared with 6.4% in 2020. The net margin expansion was primarily due to the year-over-year non-cash changes in LaSalle equity earnings and loan loss credit reserves discussed above. Remaining margin expansion was driven by JLL Technologies' investments as well as strong contributions from Asia Pacific, partially offset by a decline in EMEA. Refer to the segment operating results discussions for additional detail.
Segment Operating Results
We manage and report our operations as four business segments. Our three geographic RES segments include Americas, EMEA and Asia Pacific. Our fourth segment is LaSalle, our investment management business.
Each geographic region
offers our full range of real estate services, including tenant representation and agency leasing, capital markets, property management, facility management, project and development services, and advisory, consulting and valuation services. We consider "property management" to be services provided to non-occupying property investors and "facility management" to be services provided to owner-occupiers. LaSalle provides investment management services to institutional investors and high-net-worth individuals.
For segment reporting, (i) gross contract costs and (ii) net non-cash MSR and mortgage banking derivative activity are both excluded from revenue in determining "fee revenue". Gross contract costs are excluded from operating
expenses in determining "fee-based operating expenses." In addition, our measure of segment results also excludes Restructuring and acquisition charges.
The pandemic continued to negatively impact the Americas transaction-based service lines, although the decline in U.S. Leasing was notably less significant than recent quarters. Continued growth in industrial partially offset a decline in office leasing activity, however, U.S. office leasing again outperformed market gross absorption,
which was down 45% according to JLL Research. Lower investment sales and debt placement activity drove the decline in Capital Markets revenue while our multifamily business continued to deliver stable revenue performance. Strong revenue and fee revenue growth in Property & Facility Management was attributable to new client wins and expansions of existing Corporate Solutions client relationships.
Equity earnings were entirely driven by valuation increases to JLL Technologies' investments, a reflection of subsequent financing rounds at increased per-share values for certain investments. In the prior year, equity earnings were largely attributable to gains by consolidated variable interest entities in which the company held no equity interest, and therefore, these gains had no net impact to Adjusted EBITDA.
The
decreases in segment operating expenses and segment fee-based operating expenses for the first quarter of 2021 compared with 2020 were driven by savings resulting from cost mitigation efforts during the trailing twelve months and lower revenue-related expenses.
Adjusted EBITDA margin for the quarter, calculated on a fee-revenue basis, was 20.3% in USD and in local currency, compared with 13.2% in 2020. The equity earnings noted above and year-over-year change in loan loss credit reserves substantially drove the margin expansion. The residual nominal improvement reflected cost mitigation savings noted above which offset the impact of lower revenue.
EMEA’s revenue and fee revenue in 2021 continued to be affected by the pandemic, compared with the prior-year quarter which had not yet been meaningfully impacted. Transaction-based revenues were largely stable as significant growth in certain geographies, highlighted by Switzerland, was offset by geographies that experienced more restrictive lock-down measures, such as Germany and the UK. Lower activity in our fit-out business and significant prior-year project activity in MENA that did not recur this quarter primarily
drove the decline in Project & Development Services. A decrease in fee revenue from the UK mobile engineering business impacted Property & Facility Management.
The decreases (in local currency) in segment operating expenses and segment fee-based operating expenses, compared with the prior-year quarter, were primarily due to savings resulting from cost mitigation efforts during the trailing twelve months and lower revenue-related expenses, partially offset by a contract loss in our UK mobile engineering business.
Adjusted EBITDA margin for the first quarter, calculated on a fee-revenue basis, was negative 8.0% in USD (negative 8.4% in local currency), compared with negative 3.4% in the prior-year quarter. The decline in revenue as well as the above-noted contract
loss contributed to the lower margin performance, more than offsetting the cost mitigation expense savings.
Asia Pacific's double-digit fee revenue increase reflected strong growth in transaction-based revenue along with continued stability in Corporate Solutions. An increase in large-deal transactions, particularly in Singapore and Australia, drove revenue expansion in Capital Markets. Growth in Leasing was led by a pick-up in office volumes, especially in Greater China. Significant growth in valuations services, notably in Greater China and Australia, led Advisory, Consulting
and Other.
Higher segment fee-based operating expenses, compared with 2020, was primarily attributable to revenue-related expense increases, partially offset by savings resulting from cost mitigation efforts during the trailing twelve months. Lower segment operating expenses, compared with last year, was due to a decrease in gross contract costs.
Adjusted EBITDA margin for the quarter, calculated on a fee-revenue basis, was 11.7% in USD (11.3% in local currency), compared with 5.3% last year. The significant margin expansion was attributable to growth in transaction-based revenue and expense savings noted above.
Lower LaSalle advisory fees were largely attributable to pandemic-driven valuation declines in assets under management over the trailing twelve months. Transaction and Incentive fees reflected decreased acquisition/transaction activity in 2021.
Equity earnings in the current quarter were substantially driven by increases to the estimated fair value of underlying real estate investments within LaSalle's co-investment portfolio.
In the prior year, equity losses were largely driven by the pandemic's impact on real estate prices which drove lower estimated fair values within the portfolio.
The decreases in segment operating expenses and segment fee-based operating expenses, compared with the prior-year quarter, was driven by lower revenue-related variable expenses.
Adjusted EBITDA margin for the quarter was 24.5% in USD (24.7% local currency), compared with negative 24.8% last year. Margin improvement was attributable to the year-over-year change in equity earnings, partially offset by lower revenue.
AUM was $70.9 billion as of March 31, 2021, an increase of 3% in USD (no change in local currency) from $68.9 billion as of December 31, 2020. The AUM increase resulted
from (i) $1.9 billion of foreign currency increases, (ii) $1.1 billion of acquisitions, and (iii) $0.9 billion of net valuation increases, partially offset by $1.9 billion dispositions and withdrawals.
We finance our operations, co-investment activity, share repurchases and dividend payments, capital expenditures and business acquisitions with internally generated funds, borrowings on our Facility, and through issuance of Long-term
debt.
Cash Flows from Operating Activities
Operating activities used $461.8 million of cash in the first three months of 2021, compared with $546.1 million of cash used during the same period in 2020. The decrease in cash used was primarily due to less incentive compensation paid in 2021, compared with 2020, a result of 2020 business performance compared with 2019. This was partially offset by lower collections of trade receivables, reflecting higher revenue in 2019 compared with 2020.
Cash Flows from Investing Activities
We used $97.8 million of cash for investing activities during the first three months of 2021, as compared to $90.5 million used during the same period in 2020. The slight increase in cash used was driven by an increase in acquisitions in investment properties (less than wholly-owned),
partially offset by a decrease in net capital contributions to real estate ventures and lower capital expenditures in 2021. We discuss these key drivers individually below in further detail.
Cash Flows from Financing Activities
Financing activities provided $376.7 million of cash during the first three months of 2021, as compared to $883.3 million provided by financing activities during the same period in 2020. The net decrease of $506.6 million in cash flows from financing activities is substantially driven by a decrease in borrowings on our Facility. The borrowings on our Facility in the first quarter fund seasonal liquidity needs, specifically annual incentive compensation payments made in the first quarter, which were notably lower in 2021 as discussed in the cash flows from operating activities section above.
Debt
Our
$2.75 billion Facility matures on May 17, 2023. As of March 31, 2021, we had outstanding borrowings under the Facility of $350.0 million and outstanding letters of credit of $0.7 million. As of December 31, 2020, we had no outstanding borrowings under the Facility and outstanding letters of credit of $0.7 million. The average outstanding borrowings under the Facility were $184.4 million and $935.2 million during the three months ended March 31, 2021 and 2020.
In addition to our Facility, we had the capacity to borrow up to $63.4 million under local overdraft facilities as of March 31, 2021. We had Short-term borrowings (including
financing lease obligations, overdrawn bank accounts and local overdraft facilities) of $90.6 million and $62.0 million as of March 31, 2021 and December 31, 2020, respectively, of which $16.0 million and $12.0 million, respectively, were attributable to local overdraft facilities.
We will continue to use the Facility for working capital needs (including payment of accrued incentive compensation), co-investment activities, share repurchases, capital expenditures and acquisitions. See Note 9, Debt, in the Notes to Condensed Consolidated Financial Statements for additional information on our Facility, Long-term debt and Short-term borrowings.
On April 14, 2021, we renewed our Facility and extend its maturity date to April 2026. See Note
13, Subsequent Events, in the Notes to Condensed Consolidated Financial Statement for additional information about the Amendment.
Investment Activity
As of March 31, 2021, we had a carrying value of $545.1 million in investments, primarily related to LaSalle co-investments in real estate ventures and investments by JLL Technologies in early-stage proptech companies. For the three months ended March 31, 2021, and 2020, funding of investments exceeded return of capital by $29.8 million, and $40.6 million, respectively. We expect to continue to pursue strategic co-investment opportunities with our investment management clients globally as co-investment remains an important foundation to the continued growth of LaSalle's business. In addition,
we expect continued investments by JLL Technologies.
See Note 6, Investments in Real Estate Ventures, in the Notes to Condensed Consolidated Financial Statements for additional information on our investment activity.
On February 21, 2021, our Board of Directors authorized an additional $500.0 million for the repurchase of our common stock in the open market and privately negotiated transactions. During the three months ended March
31, 2021 we did not repurchase any shares. During the three months ended March 31, 2020 we repurchased nearly 188,000 shares for $25.0 million. As of March 31, 2021, $600.0 million remained authorized for repurchases under our share repurchase program.
Capital Expenditures
Net capital additions for the three months ended March 31, 2021 and 2020, were $34.6 million and $44.4 million, respectively. Our capital expenditures in 2021 were primarily for leased office spaces improvements and purchased/developed software.
Investment Asset Activity of Less Than Wholly-Owned Entities
Net
capital additions made by consolidated VIEs in which we held no equity interest for the three months ended March 31, 2021 and 2020, were $37.2 million and $3.2 million, respectively, primarily to acquire real estate (net of real estate sales).
Business Acquisitions
During the three months ended March 31, 2021, we paid $26.4 million for business acquisitions. This included $0.2 million of payments relating to acquisitions in 2021 and $26.2 million for deferred business acquisition and earn-out obligations related to acquisitions completed in prior years, which are primarily reflected in cash flows from financing activities.
Terms for many of our past acquisitions have typically included
cash paid at closing with provisions for additional deferred consideration and earn-out payments subject to certain contract requirements, including the passage of time and performance, respectively. Deferred business acquisition obligations totaled $26.9 million as of March 31, 2021. These obligations represent the current discounted values of payments due to sellers of businesses for which our acquisition had been completed as of the balance sheet date and for which the only remaining condition on those payments is the passage of time. As of March 31, 2021, we had the potential to make earn-out payments for a maximum of $157.8 million on 24 completed acquisitions subject to the achievement of certain performance conditions. Refer to Note 5, Business Combinations, Goodwill and
Other Intangible Assets, in the Notes to the Condensed Consolidated Financial Statements for further information on Business Acquisitions.
We will continue to consider acquisitions that we believe will strengthen our market position, increase our profitability, and supplement our organic growth.
Repatriation of Foreign Earnings
Based on our historical experience and future business plans, we do not expect to repatriate our foreign-sourced earnings to the United States. We believe our policy of permanently investing earnings of foreign subsidiaries does not significantly impact our liquidity. As of March 31, 2021 and December 31, 2020, we had total
cash and cash equivalents of $456.6 million and $574.3 million, respectively, of which approximately $375.4 million and $445.2 million, respectively, was held by foreign subsidiaries.
Restricted Net Assets
We face regulatory restrictions in certain countries that limit or prevent the transfer of funds to other countries or the exchange of the local currency to other currencies. However, we generally face no such restrictions with regard to the use or application of funds for ordinary course business activities within such countries. The assets of these countries aggregated to approximately 4% of our total assets as of March 31, 2021 and December 31, 2020.
Off-Balance
Sheet Arrangements
We have unfunded capital commitments to investment vehicles and direct investments for future co-investments, totaling a maximum of $309.9 million as of March 31, 2021. See our discussion of unfunded commitments in Note 6, Investments in Real Estate Ventures, in the Notes to Condensed Consolidated Financial Statements.
This report, including this Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains “forward-looking statements” within the meaning of the federal securities laws. All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may also be included in our other public filings, press releases, our website, and oral and written presentations by management.
Statements in the future tense, and all statements accompanied by terms such as “believe,”“project,”“expect,”“estimate,”“assume,”“intend,”“anticipate,”“target,”“plan” and variations thereof and similar terms, are intended to be forward-looking statements. Such statements do not relate strictly to historical or current facts as they relate to our intent, belief and current expectations about our strategic direction, prospects and future results, and give our current expectations or forecasts of future events. This includes, but is not limited to, our expectations regarding the potential impact of the COVID-19 outbreak and the efficacy of vaccines and therapeutics on reducing the spread of the virus, as well as any further impacts to us, the economy as a whole, and/or related government and regulatory restrictions issued to combat the global pandemic, including any adverse changes in such restrictions that may impact us. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such
statements speak only as of the date when made.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results. These risks and uncertainties are described in our Annual Report on Form 10-K for the year ended December 31, 2020 in Part I, Item 1A. Risk Factors and may also be described from time to time in our subsequent filings with the Securities and Exchange Commission. You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements. We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations or the occurrence of unanticipated events after
the date of those statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
MARKET AND OTHER RISK FACTORS
Interest Rates
We assess interest rate sensitivity to estimate the potential effect of rising short-term interest rates on our variable-rate debt. If short-term interest rates were 50 basis points higher during 2021 on our variable-rate debt, our results
would reflect an increase of $0.2 million to Interest expense, net of interest income, for the three months ended March 31, 2021.
Foreign Exchange
The following outlines the significant functional currencies of our revenue, highlighting where exposure to movements in foreign exchange impact our operations in international markets.
To
show the impact foreign currencies have on our results of operations, we present the change in local currency for revenue and operating expenses on a consolidated basis and by operating segment in Management's Discussion and Analysis of Financial Condition and Results of Operations included herein. For additional detail of the impact of foreign exchange rates on our results of operations, see Management's Discussion and Analysis of Financial Condition and Results of Operations included herein.
We enter into forward foreign currency exchange contracts to manage currency risks associated with intercompany lending and cash management practices. See Note 8, Fair Value Measurements, for further discussion of our forward contracts.
Item
4. Controls and Procedures
The Company has established disclosure controls and procedures to ensure material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company's financial reports and to the other members of senior management and the Board of Directors.
Under the supervision and with the participation of the Company's management, including our Chief Executive Officer
and Chief Financial Officer, we conducted an evaluation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes in the Company's internal control over financial reporting during the quarter ended March 31, 2021, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
We are a defendant or plaintiff in various litigation matters arising in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Many of these litigation matters are covered by insurance (including insurance provided through a captive insurance company), although they may nevertheless be subject to large deductibles and the amounts being claimed may exceed the available insurance. Although we cannot determine the ultimate liability for these matters based upon information currently available, we believe the ultimate resolution of such claims and litigation will not have
a material adverse effect on our financial position, results of operations or liquidity.
Item 1A. Risk Factors
There have been no material changes to our risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 6th day of May, 2021.
