As most of my readers know, I usually cover the wonderful world of real estate investment trusts, or REITs. But occasionally, I drift over into alternative asset classes such as MLPs (see my latest article on FUN and LMRK) and utilities (see the latest YieldCos).
Of course, the common thread within all my writing is real estate. And with good reason. To quote President Donald Trump:
“It’s tangible. It's solid. It's beautiful. It's artistic from my standpoint, and I just love real estate.”
It’s the same for me. I simply love commercial real estate… one of the many reasons I continue to pump out hundreds of articles about it every year.
Prior to becoming a writer, I was a real estate broker and developer, positions that are the backbone of what I do today. Those experiences gave me a deep understanding of real estate cycles and valuation… not to mention the power of getting in there and making things happen.
Believe me, there’s nothing quite like rolling up your sleeves and learning how to create value “from the ground up.”
That kind of personal involvement is priceless.
What and Who You Know
Do you know what else is priceless? Professional networking. Being able to utilize research from other industry experts has been a huge benefit over the years, and one I will never take lightly. This includes talking to sell-side analysts, investment bankers, appraisers, and brokers alike.
By maintaining a large rolodex of contacts, I’m able to gain better, smarter insights into just about any real estate property sector in the world.
Over the course of my career, I’ve also relied on many commercial real estate organizations to assist me with various aspects of the value-building process. Like anything in life, success is rooted in a “team effort.” That’s one of the primary ways I was able to generate a net worth in excess of $25 million before I was 35-years-old.
As such, I can’t say I completely agree with the saying that, “It’s not what you know; it’s who you know.” After all, for most people, it has to be the right combination of both.
However, who you know is still a very big deal, hence the reason why I want to bring the following kind of real estate entity to your attention.
One of the most under-covered sectors in commercial real estate is that of service-focused companies. Unlike REITs, these businesses provide customers with a wide range of services such as leasing, consulting, brokerage, investment banking, property management, appraisals, and development.
Over the next few days (or possibly weeks, depending on my schedule), I plan to write a series of reports on publicly traded commercial real estate service companies. Included in the research will be:
- Jones Lang LaSalle (NYSE:JLL)
- CBRE Group (CBRE)
- Kennedy-Wilson Holdings (KW)
- Cushman & Wakefield (CWK)
- Marcus & Millichap (MMI)
- CoStar (CSGP).
If that sounds like an intriguing list, stick with me to learn why that truly is the case. Starting right now with JLL…
The Business Model
Jones Lang LaSalle is a global professional services and investment management firm specializing in real estate. In 2018, its revenue was $6.5 billion, with more than 90,000 employees serving clients in 80 countries.
JLL is the second-largest company of its kind in the world, smaller only than CBRE. And it’s ranked 189 on the Fortune 500 list.
The company is over 250-years old, dating back to 1783, when Richard Winstanley set up an auctioneer firm in London. His grandson, James Winstanley, went on to form a partnership with James Jones, renaming the company Frederick Jones and Co. Fast forward to 1872, and Frederick Jones was retiring, leaving his partner, C.A. Lang, to rename the company Jones Lang and Co. It underwent yet another name switch in 1939 thanks to another merger – this time with Wootton & Son – to form Jones Lang Wooton & Sons.
Next up, offices were set up in Australia (1958), Scotland (1962), Ireland (1965), Brussels (1965), and the U.S. (1975). In 1999, it acquired LaSalle Partners, changing its name one last time to Jones Lang LaSalle. Though it wasn’t done growing and probably isn’t even today.
In 2008, the company purchased Roger Staubach’s The Staubach Co., followed by a number of other acquisitions. Its most recent one (so far) was on July 1, 2019, for HFF – which had record revenue of $650 million last year and an approximate equity value of $2 billion.
Source: JLL Investor Presentation
Today, JLL’s business model consists of leasing, capital markets, property development services, advisory services, and investment management.
Source: JLL Investor Presentation
With that kind of reach, why is it still so intent on growing? After the HFF deal was struck, JLL’s global CEO, Christian Ulbrich, said that:
"Increasing the scale of our Capital Markets business is one of the key priorities in our Beyond strategic vision to drive long-term sustainable and profitable growth. The combination with HFF provides a unique opportunity to accelerate growth and establish JLL as a leading capital markets intermediary with outstanding capabilities."
And he added:
“… we believe the combination with JLL will create a superior platform for our shareholders, clients, and employees than either company would have independent of the other and will significantly accelerate our firm's strategic plan. JLL's team-oriented culture, with the additional standards of high character and integrity, are an excellent match with the HFF culture, which has been HFF's fundamental differentiator since its inception."
The Fundamentals
In Q1 2019, JLL’s consolidated revenue and fee revenue increased by 11% and 6%, respectively. Meanwhile, adjusted diluted earnings per share was $0.89.
Here are some other figures to take in:
- Real estate service fee revenue saw 10% growth due to recent acquisitions.
- Consolidated leasing fee revenue rose significantly by 22%.
- Property and facility management fee revenue came in 10% higher.
- Project and development services rose 4%.
- Advisory and consulting was hiked up by 6%.
Plus, the company raised $1.8 billion in new private equity capital. Compare that with $700 million in the first quarter of 2018!
JLL is now targeting to raise revenue by around 9% per year… with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in the range of 14% to 16%.
Source: JLL Investor Presentation
Strong Balance Sheet
As of Q1 2019, JLL had a total net debt of $980 million. This reflected an increase of $70 million since Q1-18 and $690 million from year-end 2018. According to the company itself, that quarterly increase “reflects both the annual timing of variable compensation paid… and an acceleration of certain trade payables.”
Here’s some more of what it had to say:
“For the quarter, net debt to trailing 12-month adjusted EBITDA was 1x, the leverage profile that maintains our investment-grade balance sheet (Moody’s: Baa1, S&P: BBB) while providing liquidity to achieve our growth priorities, including strategic M&A (mergers and acquisitions).”
Source: JLL Investor Presentation
As I pointed out earlier, JLL is not a REIT. So the company has no obligation to pay out a dividend. However, as shown in our next graphic, its history of capital allocation has been driven by improved cash flow. And that improved cash flow has come with a focus on technology and innovation expenses, as well as M&A.
Source: JLL Investor Presentation
As you can see below, JLL generated significant revenue since the last recession. And I consider the HFF deal to be one of its best since Staubach. I also want to point out that JLL has an exceptionally diverse board of directors (see here). Plus, CEO Ulbrich appears to be well positioned to lead the company for quite some time. He’s already been with it for 14 years, having started in 2005 as managing director for Germany, then becoming CEO for the Europe, Middle East and Africa region in 2009.
Source: JLL Investor Presentation
Strategy Session
Now let’s take a look at JLL using F.A.S.T. Graphs. As you can see, it generated impressive growth through 2009 and clawed back considerably over the last decade.
Source: F.A.S.T. Graphs
The company is now trading at $138.59 per share. That’s a cheap current valuation in my book, considering JLL’s 7% growth forecast for 2020. The HFF transaction should provide attractive synergies. And JLL itself is on track to deliver its previously stated 2025 long-term growth targets.
For this year, it expects 6% to 8% organic fee revenue growth in its real estate services business and an overall consolidated adjusted EBITDA margin profile of 12.5 to 14.5%.
Source: F.A.S.T. Graphs
After careful thought on the matter, I’ve decided to provide two targets for this stock. Let’s start with the more conservative of the two for year-end 2020 target of $168.35:
Source: F.A.S.T. Graphs
And here's the optimistic target for year-end 2020 of $183.39:
Source: F.A.S.T. Graphs
In closing, I like what I see. So I’m initiating a Buy recommendation on JLL with a target annualized return of 17%. The dividend yield is less than 1%, admittedly.
But that’s why there’s another way to play JLL, by looking into JLL Income Property Trust, a non-traded REIT that owns and manages a diversified portfolio of office, retail, industrial and apartment properties located primarily in the US.
The minimum investment is $10,000 and suitability standards include either (1) a minimum net worth of at least $250,000 or (2) a minimum gross annual income of at least $70,000 and a minimum net worth of at least $100,000. Please see the prospectus for state-specific suitability standards and more information. At the end of Q1 2019 the REIT had $2.6 billion in assets and owned 69 properties.
Author's note: Brad Thomas is a Wall Street writer, and that means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.
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