Description

Jones Lang LaSalle - JLL
We think JLL is undervalued. JLL is the largest real estate brokerage and service company in the world. JLL's business can be broadly divided into: (1) services to owners/occupants (these include leasing, consulting, and management of facilities) and (2) investment management (JLL manages in excess of $22 Billion in real estate investments for institutions). There are 3 legs to our investment thesis:
(1) Changing industry structure: global real estate firms such as JLL and TCC should see better margins and returns on capital in the coming cycle. Transaction revenues (brokerage and development) are most profitable. In the past, however, these services have been competed upon aggressively at the local level. JLL and TCC are in the process of "locking up" relationships with large corporates through providing outsourced facilities mgmt services at low margins. Conversations with these clients reveal that all the transactions business will go to the outsourced real estate service provider when demand for real estate comes back. There are only 3-4 global providers and we expect better economics for them going forward. Further from the investor side of the business, real estate as an asset class is perhaps the last one to globalize and this will again improve the competitive position for providers such as JLL. It is almost reminiscent of the increase in market share for the top 4 investment banks as the investment management industry globalized.
(2) Significant potential for improving operations: there are going to be two revenues drivers: (a) cross selling of services to large corporate clients or "strategic" relationships for which JLL might be providing either facilities management or tenant representation and (b) capital market revenues (such as fees for sales leaseback). For instance, JLL's market share in Europe is 40% plus while it is negligible in the US. This is an area of focus and a reasonably large opportunity. We think JLL presents a margin opportunity too. Its G&A costs are over 5% higher than TCC's primarily due to duplication of selling overheads to service global clients. A new CFO is on board - from Heller Financial. He has a very good reputation and is focused on improving margins.
(3) Valuation: JLL's managing well through the downturn and generated about $1.90/share in unlevered free cash last year. In 2002 JLL expects to lower costs by about $50 mill which would actually translate into about $20 mill lower costs with last year revenue levels after considering new expenditures to grow the investment management business. At below 6x ebitda the stock is attractive.
The peak free cash flow per share has been in excess of $3.50. Further we think any improvement in yield on AUM in the investment management business (presently really low at 42 bp) presents further upside. I feel we consider the pvt mkt valuation of the investment mgmt business the real estate broker is even cheaper. On a conservative cash flow valuation with a 5x ebitda exit multiple we see a 15 percent plus unlevered return from these levels.

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