July 29, 2016 - 10:01pm EST by
2016 2017
Price: 109.47 EPS 9.54 10.22
Shares Out. (in M): 45 P/E 11.5 10.7
Market Cap (in $M): 4,939 P/FCF 25.8 13.4
Net Debt (in $M): 906 EBIT 592 596
TEV ($): 5,845 TEV/EBIT 9.9 9.8

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  • Real Estate


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.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


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