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May 4, 2014
Jones Lang LaSalle (JLL) is one the world’s leading commercial real estate (CRE) services firms. It provides the full gamut of specialized CRE services (e.g., advisory, development, investment, leasing, management, transaction brokerage) to corporate clients seeking increased value from owning, occupying and investing in real estate. JLL has an unparalleled global footprint. It operates in over 10,000 locations and 200 offices spanning 75 countries.
- Industry leadership: JLL enjoys a leading competitive position in an oligopoly industry. It is one of only two CRE service firms (C.B. Richard Ellis (CBRE) is the other) with global scale and a comprehensive product suite, and deep expertise in all aspects of commercial real estate services.
- Favorable secular trends: JLL benefits from secular CRE industry trends including
a.) Industry consolidation triggered by the 2008-09 financial crisis;
b.) Customer demand for comprehensive CRE service offerings;
c.) Increased CRE service outsourcing;
d.) Growing customer focus on "green energy" buildings and energy efficiency/sustainability.
- Asset-light business: JLL's service-based business model requires modest operating capital expenditures. The lack of capital intensity results in low debt requirements and produces attractive financials characterized by strong margins and healthy free cash flows.
- Strong brand: JLL's deep client relationships, experienced management team, and high ethical standards have created a prestigious brand with global recognition that can attract and retain employee talent and customer loyalty. CRE customers tend to be risk-averse and it is "hard to be fired" for hiring a top-tier brand like JLL to provide important CRE services.
- Solid revenue visibility: ~40% of JLL's revenue is recurring (fees from property management, advisory valuation and consulting, and investment management services) and provides significant predictability. The other ~60% of JLL's revenue is transaction-based (leasing, capital markets, and project development services).
- Diversified revenues: JLL is well-diversified across regions, services, and customers. By region, the Americas accounted for 45% of sales in 2013, followed by Europe, Middle East and Africa (EMEA) at 32%, and Asia Pacific (APAC) at 23%. By service offering, JLL generates sales across six key market segments, with no one segment accounting for over a third of the total: Leasing 33%, Property Facility & Management 24%, Capital Markets 18%, Advisory Consulting & Other 10%, Project & Development Services 9%, LaSalle Investment Management 6%. By customer, JLL services over 1,000 locations encompassing a wide range of commercial and industrial properties.
- Strong growth track record: JLL has a long history of profitable growth. JLL has delivered a 13% compounded annual growth rate (CAGR) in sales since its 1999 listing on NYSE through 2013. Since 2003, JLL has grown its sales ~4x (to ~$4B), its operating income ~7x (to ~$0.4B), and its equity market capitalization ~8x (to ~$5.5B).
- Healthy growth prospects: JLL is focused on delivering superior long-term growth organically and via mergers and acquisitions (M&A). Organic growth should be driven by a continued recovery in global CRE transaction volumes and related market share gains. Global CRE transaction volume has gradually improved since the 2009 trough but remains ~30% below pre-recession levels. A European real estate recovery, a strengthening US economy, and emerging market growth should lead to 10%+ sales CAGR and 15%+ earnings CAGR over the next several years.
- Attractive valuation: Gator Capital Management believes JLL's valuation is appealing given its industry leadership, business strength, and growth expectations. JLL currently trades at a price/earnings (P/E) multiple of only ~16x 2014 earnings and ~14x anticipated 2015 earnings, about a 10% discount to peer CBRE and on parity with the broader US equity market. This is despite JLL's more attractive mid-single digit free cash flow yield and superior projected earnings CAGR prospects of 15%+ over the next several years. Assigning reasonable P/E multiples of 19x to 2014 earnings and 17x to 2015 earnings suggests a 12-month fair value of $150 or ~25% upside.
- Sustained market recovery: The global CRE market continues to recover from the 2008-09 financial crisis as indicated by key industry metrics (e.g., rental rates, building values, architectural billings, and pent-up demand for new construction projects). This creates a favorable macro environment for industry leader JLL, in our view.
- Continued margin expansion: JLL’s operating profit margin is ~130 basis points and its EBITDA margin is ~300 basis points below its closest peer CBRE, partially due to product mix but also due to business inefficiencies. Margin leverage opportunities include exiting less profitable operations, improving corporate infrastructure and productivity, increasing occupancy rates, and investing in information technology.
- Potential accretive acquisitions: JLL has completed 50+ M&A transactions since 2003 to accelerate growth and has leveraged the recent global financial crisis to drive industry consolidation. Overall, JLL delivered a 16% sales CAGR over the past 10 years, of which 12% was organic and 4% was M&A-driven. The ability to continually reinvest cash flows into a steady stream of "tuck-in" deals and international expansion at attractive returns allows JLL to compound value more effectively than deploying capital through share buybacks or dividends.
- Increased investor coverage: JLL is not widely followed by Wall Street. Despite its $5 billion market capitalization, JLL is covered by only 7 sell-side research analysts, many from small regional boutique firms. Many of these sell-side analysts also primarily cover the Real Estate Investment Trust (REIT) industry, leading to a business model coverage mismatch with a real estate brokerage firm like JLL. The sell-side also often focuses on relative rather than absolute valuation for JLL, but relative valuation is less applicable when the entire CRE industry is cheap. Moreover, a direct comparison to CBRE fails to capture JLL’s greater exposure to a European recovery, long-term Asian growth, and margin expansion opportunity.
- Interest-rate sensitivity: Rising global interests might reduce the attractiveness of CRE returns relative to other asset classes. However, this risk seems overstated. For example, average US CRE capitalization rates are currently ~6.5-7.0%, representing ~400bps spread to 10-year treasuries. This wide spread reflects a broad expectation of higher future interest rates.
- Economic sensitivity: Transaction activity (~60% of sales) is dependent on a strengthening economy. Leasing revenue, in particular, is highly correlated to unemployment. However, global macro-economic Indicators such as GDP growth, unemployment rates, and capital market activity suggest transaction volumes should improve. Furthermore, JLL seeks to increase its proportion of sales derived from recurring, non-transaction sources (~40%).
- International exposure: JLL has less exposure to US property sales and more exposure to EMEA and APAC versus rival CBRE. Nevertheless, JLL has demonstrated an ability to gain share, including within the US property sales market. JLL is relatively overweight in US leasing, and would benefit in the event of sustained improvement in US job growth and business certainty. Despite recent weakness in emerging market economies, JLL’s businesses there have performed relatively well. But future international economic weakness or geopolitical pressures (e.g., Russia) could pressure shares.
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