The following is my investment thesis for Jones Lang LaSalle
). It in no way constitutes investment advice. It is for
educational and informational purposes only. Nothing contained here
should be construed by anyone as an invitation or solicitation to
buy or sell any security. It does not contain personalized legal,
tax, investment, or financial advice.
Chicago based Jones Lang LaSalle (
) is a financial and professional services firm specializing in
commercial real estate. Jones Lang LaSalle, LaSalle at that time,
had its IPO in 1997 and merged with Jones Lang Wootton of London in
1999 to become the current version of the company. The parent
companies have a long history prior to becoming a public
corporation - LaSalle was founded in the US in 1968 and Jones Lang
Wootton has been in the real estate business in the UK since 1783.
Since the late 90s, JLL has been consolidating the highly
fragmented commercial real estate services market. In just the last
seven years from 2005 to 2012, JLL has acquired 45 companies.
Industry Trends and Catalysts: What are the catalysts for
The real estate market is emerging from the depths of the 2008
financial crisis and real estate bubble. With interest rates at
historic low levels and improved perception of the global macro
outlook, investor activity in the real estate market has increased
in early 2013 and investment volume is expected to grow 10-15% in
2013. However, the office leasing markets are still subdued and
leasing volume is expected to grow by less than 5% in 2013. Most
traditional office space using sectors are still focusing on
efficiency and productivity gains to contain cost. Overall, on a
global level, both capital value stock and rental prime offices are
in the growth phase of the business cycle.
The Business: What do they do?
JLL provides real estate and investment management services for
owner, renters, property companies, and investors. The wide array
of real estate services provided by the company include agency
leasing services, tenant representation, property and facilities
management, project management, property sales and acquisitions,
real estate financings, private equity placements, property
valuation, and managing money for institutions and individuals.
In the highly fragmented real estate services industry, JLL is
the second-largest firm. Only one competitor, CBRE Group (
), has the comparable global footprint as Jones Lang. To put the
size of the firm in perspective: JLL employs more than 48,000
employees across 200 offices in 70 countries and provides services
to half of the Fortune 500 companies. JLL's one key competitive
advantage is the combination of local knowledge, which is an
important factor in real estate business, and global footprint. So,
the company is able to service large multinational firms and at the
same time leverage their local knowledge of the real estate market
across the world.
Segments: JLL's business can be divided into two buckets:
1. Real Estate Services ((
)) that includes five categories:
- Property and Facilities Management
- Capital Markets and Hotels
- Project and Development Services
- Advisory, Consulting and Other Services
2. LaSalle Investment Management: As of December 31, 2012,
LaSalle Investment Management managed $47.0 billion of public real
estate securities and private real estate assets.
- Reliance on major customers or suppliers:
. Due to a wide range of services, geographical diversification,
and nature of real estate business, JLL doesn't have a significant
exposure to any single customer. So, concentration risk in customer
or supplier base of the firm is low.
- Threat of substitutes: For real estate services segment, there
aren't many substitutes for the services that the company and its
competitors provide. In the investment management segment, the
business dynamics might change if asset allocation of large
institutional players changes in response to market conditions.
Competition: Barrier to entry:
: Though JLL has many local competitors, the barrier to entry for
any new comer to reach the global scale is pretty high. It takes
decades to build a wide network similar to that of JLL.
: Given the duopolistic structure of the global commercial real
estate market, both JLL and CBG have significant competitive
advantage for integrated global transactions. However, the
advantage is tampered a bit in local transactions, as there are a
lot of competitors in every local market.
Related companies: At the top end, CBRE Group is the only
competitor in this duopolistic industry. However, at the local
level there are numerous small competitors.
Experience in the industry:
: Both the parent companies that formed JLL have a long history in
real estate. LaSalle has been in business since the 1960s and Jones
Lang Wootton has been in business for more than two centuries.
: Pricing power is limited in real estate markets due to
significant competitions. However, in case of complex global
transactions, JLL has the advantage of scale that can be a source
of pricing power.
: employees are not members of any labor unions with the exception
of less than 3% of total employees who are directly reimbursable
property maintenance employees in the United States.
Financials: How is the financial health?
In 2012, total revenue was $3.93 billion - a 10% increase from
prior year. International operations were responsible for 57% of
the revenue. On a global basis, leasing and property and facilities
management contributed to almost 60% of the revenue.
The firm generated $328 million in operating cash flows and $233
millions in free cash flows in the last 12 months. Total debt of
the company stands at $476 million and it ended 2012 with $152
million in cash on balance sheet. With EBITDA of $391 million for
the year, servicing of the outstanding debt is not an issue. The
company pays a dividend of $0.40 per share.
Valuation: What's it worth?
Earnings per share for 2012 was $4.63 and analysts expect the
company to earn $6.24 per share in 2013. At the current price, that
works out to be a P/E ratio of 15, which is not cheap but not too
expensive either. Most of the revenues in property management and
investment management are recurring in nature, which tend to be
less volatile from year to year. Prior to the real estate bust and
financial crisis, the earnings per share in 2007 was $7.64. Since
that year total square feet under management has more than doubled
from 1.2 million to 2.6 million. So, we have a much larger JLL now
and the earnings hasn't caught up to the pre-crisis levels yet.
Analysts expect the company to grow at the rate of 13.5% for the
next five years. So, for patient long-term investors, at 2013 P/E
of around 15, the stock doesn't seem to be too expensive and the
company has a long runway ahead for years to come as the real
estate market and global economy continues its slow recovery.
Discounted Cash Flow: JLL is not an easy company to value in a
discounted cash flow model. The commercial real estate in each area
across the world follows a different business cycle and, therefore,
it is simply too complex to create realistic projections.
Additionally, JLL doesn't fit into a typical industry category - it
is more of a service company with recurring revenue and cost and
not a typical financial or real estate company.
However, a simple DCF model using the 2012 FCF of $233 millions
spit out an intrinsic value of $128 per share. For the DCF, I
assumed the following:
: Started with 15% and gradually drop it to 2% by year 10.
: 10% for first five years and 9% for the rest of the years. I
could have used beta, risk free rate, cost of equity, and cost of
debt to come up with a cost of capital and use that for
discounting. But, given the low level of risk free rate (10-year
treasury is around 1.7%) these days, that approach typically leads
a very low discount rate and, as a result, an inflated intrinsic
value. With the size of JLL and state of their balance sheet, I am
comfortable using the 10% rate for the first few years and 9% as
they grow bigger.
Of course, the trouble with DCF models is that you can make it
show any value by tinkering with the input parameters. So, the DCF
valuation is just indicative at best to get a sense of the margin
of safety and what kind of expectation is baked into the stock
(click to enlarge)
Some of the catalysts working in JLL's favor are as follows:
Clients are moving towards centralized, sophisticated global
: As one of the only two companies that have a global footprint,
JLL is poised to benefit from this trend.
: The global market is still in recovery mode from the global
financial crisis of 2008. With a global footprint JLL will benefit
from the recovery of the different markets across the globe.
Market share trending to established player
: As a long established company, JLL is benefiting from the trend
towards established players in the market.
Increased cross-border capital flows
: Over the last few years, capital flow across the border has
increased to capture real estate investment opportunities. As a
global player, JLL is well positioned to benefit from this
Risks: What can go wrong?
Global economic and real estate market downturn
: If the global markets slide back to recession or more severe
downturn like we saw in 2008 then JLL will be impacted from the
lower demand for its services and the reduced assets under
management in its investment management unit.
Overpaying for acquisitions
: In the last seven years, the company completed 45 acquisitions.
In a highly fragmented industry like commercial real estate,
consolidation and market share gain by acquisitions seems like a
good strategy for the company. However, it carries the typical risk
of acquisitions: potential overpayment and integration issues etc.
We haven't seen any sign of those issues yet.
: Given the wide geographical footprint of the firm, currency
fluctuations are going to have some impact on the earnings in USD.
However, over a long period of time, currency changes tend to
neutralize each other.
Low insider ownership
: Insider ownership in this company is miniscule. I would have
preferred to see more insider ownership in a company to make sure
incentives are properly aligned between managers and
Conclusion: What's the bottom line?
I like service companies with a significant moat around their
business. Unlike software or other technology companies, it is very
difficult for any new company to build a competing business at the
geographical scale of JLL. Business cycles will come and go. But,
with a significant moat like that JLL is likely to thrive for years
and decades to come and well worth the consideration for a place in
the long-term core holding of any equity portfolio.
: Accounts managed by The Free Investors have a long position in
I am long [[JLL]]. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
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