JLL - Jones Lang Lasalle

[DCG]

Stock was crushed pretty hard around Brexit, and it seems like it could be a pretty good deal.

 

 

Their services include sales and leasing, property management, and project management and development, as well as managing $58B in real estate investments for institutional clients. Expected to generate over $8/share in FCF this year.

Around 17% of their earnings come from the UK. Analysts are projecting their earnings to decline in 2017 due to expected weakness in the commercial real estate market, but still selling for only around 11x projected earnings.

Insiders were buying it back in February around the current price, but that of course didn't reflect any potential issues with Brexit.

Morningstar writeup: http://analysisreport.morningstar.com/stock/research/c-report?t=XNYS:JLL&region=usa&culture=en-US&productcode=MLE&cur=

Thoughts?

[Phaceliacapital]

Kerrisdale did a writeup a couple of years ago, some extra info for you to get started:

 

http://www.valuewalk.com/2014/01/kerrisdale-capital-2013-letter-jll-iaci/

 

http://www.valueconferences.com/wp-content/uploads/2014/06/ideas14-presentations.pdf

 

[whiterose]

The price is getting interesting again at 10 P/E(2016e), what do you guys think?

They bought some facility-management company in britain just before brexit, but overall top-line contribution from GBP is not that high.

 

Medium amount of recurring revenue, some AM-operations. Overall trend in outsourcing CRE(activities) is still intact. Respected global Brand. Ridiculous dividend though (just scrap it or buy back stock?) Majority of capex is growth-capex, should they decide to not aquire some smaller players: FCF = high single digits %.

[tombgrt]

Anyone got access to the 2013 letter that is on Valuewalk? Behind a paywall it seems.

[whiterose]

It's just like the best ideas pdf.

 

Jones Lang LaSalle (JLL) is currently our third largest position. JLL is a global commercial real estate (“CRE”) brokerage firm with operations in 1,000 locations across 70 countries. The JLL brand name, recognized worldwide, is synonymous with high-quality commercial real estate advisory work, corporate lease advice, valuation consulting, and property management services. Alongside CB Richard Ellis, JLL is one of only two CRE brokers with global scale and a fully-integrated product suite. A customer like Proctor & Gamble can sell a building in New York, acquire office space in India, and receive development consulting on a project in Germany using solely Jones Lang LaSalle. Clients are generally risk-averse and prefer to rely on top-notch service providers. Just like a Board can’t get fired for hiring Goldman Sachs or Morgan Stanley as their investment bankers or one of the top four auditors to complete financial audits, clients often lean on the brand names of Jones Lang LaSalle and CBRE to handle important commercial real estate transactions.

We began acquiring shares of JLL in August 2013 after a quarterly miss caused great consternation amongst the sellside and shares fell from $95 to the low $80s. The earnings miss allowed us to acquire a growing,world-class business that had temporarily re-rated on a non-recurring event. Currently, JLL trades at 15x next year’s earnings, roughly in-line with the market, but we believe JLL can grow earnings per share at 20%+ annually for the foreseeable future due to its superior roll-up platform, margin expansion, and continued recovery in the global real estate market. JLL currently trades at $106/share, but we believe JLL’s embedded earnings growth warrants a price closer to $150.

Proper historical context is helpful to fully explain the opportunity. After the bursting of the credit bubble in late 2008, commercial real estate transaction volume cratered by more than 70%. This caused havoc amongst less diversified regional brokerages and even caused formerly prominent firms like Grubb & Ellis to declare bankruptcy. Owing to its aversion to principal risk and affinity for recurring property management contracts, JLL benefited from a speedy recovery and has since positioned itself as a market consolidator. JLL generally pays just 7 to 8x EBITDA for bolt-on deals, thereby earning double-digit returns on M&A. Regional brokerages are attracted to JLL’s platform thanks to cross-selling opportunities, such as property management and valuation work. The ability to continually reinvest cash flows into a steady stream of bolt-on deals and international expansion allows JLL to compound value much more effectively than a business focused on deploying capital through share buybacks or dividends.

Though the CRE market has recovered from its 2009 trough, transaction volume remains 35% below itspre-recession level. Europe, in particular, has been slowest to recover. But early signs of resuscitation have emerged: JLL’s European revenue grew by 30% in the third quarter; opportunistic private equity funds are directing capital to European real estate; and consumer confidence in the region has begun to expand. Longer term, we are attracted to JLL’s growing emerging markets business, now representing about 15-20% of revenue. CRE investment in the Asia Pacific region grew by 29% in 2013, the strongest year on record. JLL could also benefit from last year’s hiring of Christie Kelly, a 25-year veteran of GE, into the CFO position. JLL’s EBITDA margin has stubbornly remained 300bps below CBRE’s since the recession, partially due to business mix but also due to inefficiencies that Ms. Kelly hopes to remedy. This combination of macro tailwinds and micro cost management should be a powerful driver of earnings growth over the next few years.

[Sunrider]

Silly question (perhaps) - how is JLL different from Colliers? I understand that one is run by a guy with a pretty long track record of growing successfully through roll-ups?

 

Thanks!

 

It's just like the best ideas pdf.

 

Jones Lang LaSalle (JLL) is currently our third largest position. JLL is a global commercial real estate (“CRE”) brokerage firm with operations in 1,000 locations across 70 countries. The JLL brand name, recognized worldwide, is synonymous with high-quality commercial real estate advisory work, corporate lease advice, valuation consulting, and property management services. Alongside CB Richard Ellis, JLL is one of only two CRE brokers with global scale and a fully-integrated product suite. A customer like Proctor & Gamble can sell a building in New York, acquire office space in India, and receive development consulting on a project in Germany using solely Jones Lang LaSalle. Clients are generally risk-averse and prefer to rely on top-notch service providers. Just like a Board can’t get fired for hiring Goldman Sachs or Morgan Stanley as their investment bankers or one of the top four auditors to complete financial audits, clients often lean on the brand names of Jones Lang LaSalle and CBRE to handle important commercial real estate transactions.

We began acquiring shares of JLL in August 2013 after a quarterly miss caused great consternation amongst the sellside and shares fell from $95 to the low $80s. The earnings miss allowed us to acquire a growing,world-class business that had temporarily re-rated on a non-recurring event. Currently, JLL trades at 15x next year’s earnings, roughly in-line with the market, but we believe JLL can grow earnings per share at 20%+ annually for the foreseeable future due to its superior roll-up platform, margin expansion, and continued recovery in the global real estate market. JLL currently trades at $106/share, but we believe JLL’s embedded earnings growth warrants a price closer to $150.

Proper historical context is helpful to fully explain the opportunity. After the bursting of the credit bubble in late 2008, commercial real estate transaction volume cratered by more than 70%. This caused havoc amongst less diversified regional brokerages and even caused formerly prominent firms like Grubb & Ellis to declare bankruptcy. Owing to its aversion to principal risk and affinity for recurring property management contracts, JLL benefited from a speedy recovery and has since positioned itself as a market consolidator. JLL generally pays just 7 to 8x EBITDA for bolt-on deals, thereby earning double-digit returns on M&A. Regional brokerages are attracted to JLL’s platform thanks to cross-selling opportunities, such as property management and valuation work. The ability to continually reinvest cash flows into a steady stream of bolt-on deals and international expansion allows JLL to compound value much more effectively than a business focused on deploying capital through share buybacks or dividends.

Though the CRE market has recovered from its 2009 trough, transaction volume remains 35% below itspre-recession level. Europe, in particular, has been slowest to recover. But early signs of resuscitation have emerged: JLL’s European revenue grew by 30% in the third quarter; opportunistic private equity funds are directing capital to European real estate; and consumer confidence in the region has begun to expand. Longer term, we are attracted to JLL’s growing emerging markets business, now representing about 15-20% of revenue. CRE investment in the Asia Pacific region grew by 29% in 2013, the strongest year on record. JLL could also benefit from last year’s hiring of Christie Kelly, a 25-year veteran of GE, into the CFO position. JLL’s EBITDA margin has stubbornly remained 300bps below CBRE’s since the recession, partially due to business mix but also due to inefficiencies that Ms. Kelly hopes to remedy. This combination of macro tailwinds and micro cost management should be a powerful driver of earnings growth over the next few years.

[Phaceliacapital]

Anyone here who has done some work recently?

 

We're at 10x earnings..

 

From VIC:

 

Jones Lang Lasalle is the second largest multi-national real estate services firm behind CBRE Group.  This is an asset lite, high quality franchise with strong returns on capital that is misunderstood by the market to be a cyclical and fragile business.  Recently, market fears of a slowdown in CRE transaction volumes, Brexit, and an overreaction in the investment management business has created a buying opportunity for this stock.

 

The Company is commonly thought of as a "commercial real estate broker" to most people, but in reality, JLL operates a diverse set of CRE services businesses.  Investors are overly concerned about a slowdown in transaction volumes in the brokerage business despite the fact that JLL's property sales (capital markets) division represents only 15-20% of revenue.  Over the years, JLL has shifted towards more recurring revenue streams across multiple businesses in Properties & Facilities Management (20-25% revenue), Investment Management (5-10%), and Leasing (30-35%).  Today, these recurring revenue streams represent ~60% of total revenue compared to ~50% back in 2006.  The bigger picture to focus on is that in the long run, JLL (and CBRE) will likely be a share gainer in the fragmented CRE market as this asset class becomes increasingly institutionally owned (by REITs, PE Funds, Open End Funds, etc.).  These institutionalized owners transact much more frequently than owner-operators or individual owners, and beyond property sales, higher institutionalized ownership drives demand for additional services such as property management, consulting, appraisal, and leasing, thereby benefiting large established incumbents with diversified franchises (i.e. JLL/CBRE).  And even if capital markets activity remains constant, JLL should be able to grow through share gains and business diversity.

 

Let's talk about Brexit.  Roughly a third of LaSalle's AUM is based in the UK, and it has appeared in the news that several open-ended UK real estate funds have suspended redemptions as they seek to manage liquidity appropriately for investors.  Based upon disclosures, I do not believe that JLL's investment management business has any material AUM exposure to any UK focused open end investment funds.  As for the other non LaSalle businesses, I estimate that UK macro sensitive capital markets and leasing divisions represent ~10% of EBITDA.  Investors fear that Brexit uncertainties could weigh on these businesses over the next couple of quarters, but on the contrary, JLL is well positioned to broker upcoming transactions as these funds conduct property sales to provide investor liquidity.  As for the broader EMEA region, the Company is similarly diversified across multiple business lines with recurring revenues representing nearly 35-40% of the region's revenues (capital markets being only 30-35%). 

 

The Investment Management business is currently over-earning after having delivered significant gains from investments made previously in the cycle.  Equity income and incentive/transaction fees will likely normalize and decline through 2017.  However, I believe the street already recognizes this risk following the ~40% decline in share price from the Company's 52 week high of $180 back in August 2015.

 

Overall, despite these near term headwinds, I believe the market has overreacted and JLL is an attractive long term stock to own.  In addition to the being a share gainer, JLL has many positive things going for it: a large property and facility mgmt operation well positioned to grow as corporations outsource their real estate mgmt functions, a highly fragmented market with M&A consolidation opportunities, new GICS classification sector for real estate, FIRPTA tailwinds, low leverage, and a healthy leasing environment.  The shares currently trade at 10.7x 2017 adjusted EPS of $10.22.  This is near the low end of the Company's historical P/E range of 10-20x, and I believe JLL should converge towards its historical long term average as fundamentals improve and normalize going forward.  My target price for this stock is ~$153, or 40% upside, which is based on a 15x multiple, in line with JLL's 10-year average forward P/E of 15x.

 

& comments:

 

Maz3D8/03/16 Some Heresay reply

I have not dug into either of these two names in detail, but have done business with both extensively. A couple of thoughts:

 

1) Appraisal is a terrible business. The fees have been roughly stagnant in nominal dollars for the past 20 years (only growth comes from market share). CBG is by far the dominant player is the appraisal space (honestly wasn't even aware JLL appraised unless through a sub), but it's an extremely fee sensitive business that remains somewhat fragmented with little to no brand loyalty. Additionally, recurring business from investment managers is less sticky considering the need for 3 year appraisal rotation which is great for the smaller guys - Cush Wake, Colliers, USRC, etc.

 

2) JLL runs a tight ship with thier property management operation. Likely not much opportunity for margin growth as 2-3% EGI standard has been prevalent for some time. This again will be a market share play if projecting growth in my opinion.

 

3) As far as leasing many companies are reducing overhead by cutting their square footage/employee, encouraging telecommuting, collaborative space, etc. I don't see this trend going away which is a negative for LCs. On the upside here rents in gateway markets where JLL has a lot of concentration have been strong.

 

4) Hit the nail on the head on the reduced cyclical incentive fees. Real estate has reached a point where I cap rates are pushing property valuations to replacement cost, so at a point where we're just stripping AMF until the next market correction.

 

For what it's worth I think there is upside here, but maybe not enough. I also look at disruptors like CoStar (a company both JLL and CBRE already rely on by the way) and Auction.com which may not seem scary today, but could substantially disrupt the appraisal, research and brokerage sides of the business in the next 10 years.

 

 

1

jso11237/30/16 Questions reply

LuckyDog - thanks for the posting, we have been spending time on JLL and CBG as well.  The biggest struggle we are having is with cyclicality - how much are earnings/EBITDA above cycle once you isolate the cyclical portions of the business and what is the risk to the consensus earnings trajectory?  Also why not CBG over JLL?  With CBG you have less international exposure (esp Asia where who knows on property markets there). 

[KJP]

Anyone here who has done some work recently?

 

We're at 10x earnings..

 

 

I have looked at this briefly from time to time and then put it aside because of the likely cyclicality and where I think we are in the real estate cycle.  Given the historic cyclicality, I don't think a low trailing P/E is necessarily a good sign -- it's often a signal of a peak.

 

I've never dug in enough to have firm views.  Instead, I've always been at the point where what I know only generates questions, rather than answers.  But in case it's useful, here's some of the questions I have that I haven't had the time or interest yet to answer:

 

1.  How cyclical is the current business?  Management has spent alot of money trying to build up (really buy) lower margin, but less cyclical businesses, such as property management/maintenance.  For example, they've done over 20 acquisitions in the last year, and management repeatedly touts what it refers to as its larger "recurring" or "annuity" revenues.  Is this a good strategy, or is it just pandering to the current analyst infatuation with purportedly "recurring" revenue.  In other words, are they trading higher, but lumpier returns for steadier, but lower returns?  And have they paid fair prices for all of the acquisitions?

 

2.  Will shareholders get diluted again at the worst time?  In 2009, JLL did a significant equity offering a 1/3 of the 2007 highs.  Will they be forced into something similar in the next downturn?  The answer to this question is related to the question above.

 

3.  Does putting at these different businesses together make sense?  JLL now has several different businesses operating under the same roof -- they've got a $60 billion AUM alternative asset manager ("AAM"), a commercial real estate broker, and a property maintenance/management services business, along with various other real estate related services businesses.  So, you have to wrap your head around alot of different businesses to understand JLL.  And if you find that you like one of the businesses better than the others, should you just invest in a pure play in that business, e.g., if you really like the alternative asset manager, why not buy Apollo, Blackstone, etc.  instead?  Put a different way, what's the real value in housing all of these different businesses under one roof?  I don't think making the overall business less cyclical is a particularly compelling rationale from a long-term investment perspective. 

 

4. Trailing earnings overstate normalized earnings for the AAM business  Management has acknowledged this point,  which comes from the fact that AAM has recently earned higher than normal incentive fees because several funds entered the realization phases.  Incentive fees will go down over the next few years as the company transitions to new funds.  In addition, will funds raising capital and invested today at current cap rates do anywhere near as well as funds that were investing in say, 2009 - 2011? More broadly, is there a trend toward declining fees for AAMs that focus on real estate.  I believe many other AAMs are trying to grow their real estate (and credit) businesses to combat a slow down in their hedge fund and PE businesses, but I haven't looked into this enough to say so definitively.   

 

5.  Is now the right time in the real estate cycle to buy this?  More of an overarching question that turns on, among other things, your views on the questions above.

 

In short, I don't find this a particularly easy company to get understand, nor an easy investment to understand.

[Phaceliacapital]

http://www.punchcardresearch.com/cbre-using-an-industry-deep-dive-to-detect-an-emerging-moat/