Brexit slows Jones Lang LaSalle’s growth

Jones Lang LaSalle headquater building in Chicago. (Zhu Zhu/MEDILL)

By Zhu Zhu

Jones Lang LaSalle Inc. (NASDAQ: LAP) is expected to continue modest growth despite a Brexit-induced slowdown in both commercial and residential real estate needs in its key region, Europe.

Analysts are conservative about the company’s 2017 performance after the company reported lower profits in last year’s fourth quarter that missed their expectation.

Nevertheless, out of 10 analysts covering Jones Lang LaSalle, six rate the stock a buy and four call it a hold. The average 12-month target price on the company’s shares compiled by Bloomberg is $122.25. The stock closed Tuesday at $117.39; the 52-week low was $86.62 and its high $125.31.

Jones Lang LaSalle, with a market cap of $5.3 billion, is a Chicago-based company that provides a multiplicity of real estate services, including commercial leasing, real estate brokerage, management, advisory, and financing, through more than 280 corporate offices in more than 80 countries around the world.

Analysts’ recent ratings have gone downward. J.P. Morgan lowered its price target from $135 to $133 in a research note on Jan. 12. Keefe, Bruyette &Woods reduced its target to $107 from $110 in a research note on Feb.7. William Blair & Company LLC reduced its adjusted earnings per share to $7.49 from $7.72.

“The biggest impact to our downward estimate revisions comes from taking a more cautious view on EMEA [JLL’s European real estate capital markets] investment sales and leasing as a result of the June Brexit decision and the resulting slowdown in investment activity that followed,” Anthony Paolone, an analyst at J.P. Morgan said in a research note.

Brandon Dobell, an analyst at William Blair, also said in an interview that the company will continue to face a weaker global service environment, especially in the EMEA segment as the United Kingdom remains a drag on activity due to Brexit.

“The [Brexit] decision caused, and is still causing property buyers to wonder if they should be buying property in London/UK or not partly because companies are still unsure about whether their London operations may need to move to another city like Munich, Amsterdam, etc.,” Dobell said.

“If a bunch of companies move, office buildings will have lower occupancy and thus be worth less,” Dobell observed.

Any increases in the difficulty of movement of people between the United Kingdom and European Union may reduce sales in student housing and investment in construction projects.

“There may be greater administration in terms of work visas or permits and more complex tax and accounting considerations. This may make the UK a less attractive and available place for people coming to the UK such as the student community which could adversely impact on the student housing sector. It could also increase the cost of employing workers on construction projects,” Jonathan Lewis, a partner in the real estate international practice group at Olswang, an international law firm headquartered in London, said in a report.

The uncertainty given the administration change in the United States is another reason why analysts lowered the estimates on the company.

“It’s more about volatility of all asset classes combined with the move up in interest rates since November that have caused buyers to often reassess their cost of funds, risk profile, etc.,” Dobell said.

The company’s earnings before interest, taxes, depreciation and amortization, or EBITDA, in the fourth quarter ended Dec 31 slumped to $286 million from $310 million in the prior-year period.

While the company delivered good revenue expansion, the profits were lower primarily due to declines in performance or incentive fees and equity earnings and increased technology spending, Christine Ulbrich, CEO of Jones Lang LaSalle, said in a conference call.

Jones Lang LaSalle revenue (Source: Jones Lang LaSalle 2016 Proxy Statement)

“We increased our [technology] investment by nearly $60 million during the year. Over 60 percent of which is in front-end client-facing tools and data management,” said Christie Kelly, chief financial officer of Jones Lang LaSalle, in the call.

“And specifically as it relates to margin performance on tech and data, I think you can expect from a capital allocation perspective as we transform our business for that to remain an important portion of our capital allocation strategy here for the near term,” Kelly said.

“Please everybody, don’t forget the impact of integral. It is an absolute necessary foundational pillar to our business,” Kelly added.

Dobell commented in a research note, “We get the sense that this technology spending is intended to be transformative rather than playing catch-up, but we also believe it will be tough for investors to ‘see’ the impact in the near term.

“The integration of 48 deals/$880 million over the past two years is coupled with a notable increase in technology and human capital investment expected to last through the near future,” Dobell added.

The decline in incentive fees is another factor analysts weighed in their estimates.

“The incentive fees have been a big headwind for earnings/EPS the last two years and will be again in 2017. 2017 should mark the bottom for these incentive fees,” Dobell said in an interview.

However, some analysts are optimistic, sensing that the company has more opportunities to provide services rather than finding buyers, shifting from offering buildings to the management side.

Jade Rahmani, an analyst at Keefe, Bruyette & Woods, said in a research note, “Through-cycle long-term growth potential should be positive driven by the ongoing institutionalization of commercial real estate, which we believe is driving long-term changes in demand for real estate services.”

“Outsourcing remains a secular trend that coupled with more contractual fees should continue to improve JLL’s revenue stability and bolster growth,” Rahmani said.

“Merger and acquisition should be an opportunity to grow market shares,” Rahmani added.

Photo at top: Jones Lang LaSalle headquarters in Chicago.

(Zhu Zhu/MEDILL)

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