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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-06 · 244 added, 127 removed, 295 unchanged (56% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto, for the three months ended March 31, 2020 , and our audited Consolidated Financial Statements, including the notes thereto, for the fiscal year ended December 31, 2019 , which are included in our 2019 Annual Report on Form 10-K, filed with the SEC and also available on our website ( www.jll.com ).

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto, for the three and six months ended June 30, 2020 , and our audited Consolidated Financial Statements, including the notes thereto, for the fiscal year ended December 31, 2019 , which are included in our 2019 Annual Report on Form 10-K, filed with the SEC and also available on our website ( www.jll.com ).

You should also refer to Item 7.

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Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2019 .

There have been no material changes to these critical accounting policies and estimates during the three months ended March 31, 2020 .

There have been no material changes to these critical accounting policies and estimates during the six months ended June 30, 2020 .

The following are the critical accounting policies and estimates discussed in Item 7.

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We base our fiscal year estimated effective tax rate on estimates we update each quarter.

Our effective tax rate for the three months ended March 31, 2020 was 22.0%.

Our effective tax rate for the six months ended June 30, 2020 was 17.1%, resulting in an effective tax rate of 10.0% for the second quarter of 2020.

We provide for the effects of income taxes on interim financial statements based on our estimate of the effective tax rate for the full year, which we base on forecasted income by country and expected enacted tax rates;

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We evaluate our estimated effective tax rate on a quarterly basis to reflect forecast changes in our geographic mix of income and legislative actions on statutory tax rates and other relevant matters effective in the quarter in which the legislation is enacted.

Changes in the forecasted income impact of the COVID-19 pandemic may affect our forecasted full-year effective tax rate for the remaining interim quarters of 2020.

Changes in the impact of the COVID-19 pandemic on our forecasted income may affect our forecasted full-year effective tax rate for the remaining interim quarters of 2020.

The geographic mix of our income can significantly impact our effective tax rate.

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These macroeconomic and other conditions have had, and we expect will continue to have, a significant impact on the variability of our results of operations.

Specifically in 2020, we are beginning to experience the macroeconomic impact of the COVID-19 pandemic.

Specifically in 2020, we are experiencing the macroeconomic impact of the COVID-19 pandemic.

The timing of acquisitions may impact the comparability of our results on a year-over-year basis.

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Non-variable operating expenses, which we treat as expenses when incurred during the year, are relatively constant on a quarterly basis.

The COVID-19 pandemic may have a material impact on the historical seasonality of our revenue and profits.

A significant portion of our Compensation and benefits expense is from incentive compensation plans, which we generally accrue throughout the year based on progress toward annual performance targets.

This quarterly estimation can result in significant fluctuations in quarterly Compensation and benefits expense from period to period.

Consequently, the results for the periods ended March 31, 2020 and 2019 , are not fully indicative of the results we expect to realize for the full fiscal year.

Consequently, the results for the periods ended June 30, 2020 and 2019 , are not fully indicative of the results we expect to realize for the full fiscal year.

RESULTS OF OPERATIONS

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Consolidated Operating Results

Three Months Ended March 31,

Three Months Ended June 30,

% Change in Local Currency

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Adjusted EBITDA

Consolidated Operating Results (continued)

Six Months Ended June 30,

% Change in Local Currency

($ in millions)

Capital Markets

Property & Facility Management

Project & Development Services

Advisory, Consulting and Other

Real Estate Services ("RES") revenue

Reimbursements

Revenue before reimbursements

Gross contract costs

Net non-cash MSR and mortgage banking derivative activity

Capital Markets

Property & Facility Management

Project & Development Services

Advisory, Consulting and Other

RES fee revenue

Compensation and benefits excluding gross contract costs

Operating, administrative and other expenses excluding gross contract costs

Depreciation and amortization

Total fee-based operating expenses

Restructuring and acquisition charges

Gross contract costs

Total operating expenses, excluding reimbursed expenses

Operating income

Equity (losses) earnings

Adjusted EBITDA

Non-GAAP Financial Measures

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Restructuring and acquisition charges are excluded from segment operating results and therefore not a line item in the segments’ reconciliation to Adjusted EBITDA.

Gain on Disposition reflects the net gain recognized on the sale of property management businesses in continental Europe.

Given the low frequency of business disposals by the company historically, the gain directly associated with such activity is excluded as it is not considered indicative of core operating performance.

Reconciliation of Non-GAAP Financial Measures

Below are reconciliations of (i) Revenue to fee revenue and (ii) Operating expenses to fee-based operating expenses.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

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Below is (i) a reconciliation of Net income attributable to common shareholders to EBITDA and Adjusted EBITDA, (ii) the Net income margin attributable to common shareholders (measured on Revenue before reimbursements), and (iii) the Adjusted EBITDA margin (measured on fee-revenue and presented on a local currency basis).

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

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Restructuring and acquisition charges

Gain on disposition

Net non-cash MSR and mortgage banking derivative activity

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The following table reflects the reconciliation to local currency amounts for consolidated (i) Revenue, (ii) Fee revenue, (iii) Operating income, and (iv) Adjusted EBITDA.

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

($ in millions)

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COVID-19 Pandemic

Our operations were disrupted by the COVID-19 pandemic (the "pandemic") beginning this quarter.

Offices in China began closing in January and by the end of the March, over 90% of our office-based corporate employees across the globe were working remotely.

Geographies with the longest duration of the pandemic experienced the most significant financial impact, which was primarily to transactional-based service lines.

Specifically, these locations include China, Japan, Korea and southern Europe.

In response to the pandemic's developments, we have implemented cost mitigation plans on discretionary spend.

In addition, the macroeconomic impact of the pandemic resulted in certain non-cash charges this quarter, including a $30.6 million increase to loan loss credit reserves in Americas and $40.3 million of equity losses largely from fair value declines in LaSalle.

The continued impact of the pandemic on transactional-based service lines, possible additional non-cash charges, and potential delays in payments from clients are closely being monitored.

For the first quarter of 2020 compared with 2019, consolidated RES revenue increased 9% to $4.0 billion and consolidated RES fee revenue increased 16% to $1.4 billion .

The increase in consolidated RES revenue was highlighted by Capital Markets, which contributed 48% of the RES increase on a local currency basis, including $144.4 million of revenue from the July 1, 2019 acquisition of HFF, Inc.

Property & Facility Management, which contributed 39% of the RES revenue increase on a local currency basis, was driven by continued Corporate Solutions momentum across the globe.

Consolidated fee revenue growth was achieved within all our RES service lines, led by Capital Markets (77% of the growth on a local currency basis).

Geographically across service lines, Americas contributed over 100% of the RES fee revenue growth for the first quarter.

The following highlights the proportion of RES service line consolidated fee revenue growth, on a local currency basis, compared with the prior-year quarter, by notable segment.

Refer to segment operating results for further discussion.

• Leasing - Americas drove growth, partially offset by Asia Pacific and EMEA

• Capital Markets - Americas (96%) and EMEA (7%), offset by Asia Pacific

• Property & Facility Management - Americas led growth, offset by EMEA

• Project & Development Services - Americas (73%) and EMEA (46%), offset by Asia Pacific

• Advisory, Consulting and Other - Asia Pacific (51%), Americas (38%) and EMEA (11%)

LaSalle had strong growth in advisory fees in the first quarter of 2020, slightly offset by declines in incentive and transaction fees.

The COVID-19 pandemic (the "pandemic") continued to disrupt our operations this quarter as lock-downs and building closures remained in place across the globe.

Transaction-based services lines were most impacted as a result of delays to leasing and capital markets transactions.

At the same time, our professionals across the globe, notably in Corporate Solutions and other annuity businesses, have expanded work with our clients to ensure continuity of critical operations, facilitate the rapid deployment of temporary medical facilities, and develop and implement safe return-to-work measures.

In response to the pandemic's ongoing disruptions to revenue and business operations, we expanded cost mitigation efforts initiated in the first quarter across most operating expense categories.

In addition, various government relief programs around the world provided grants/subsidies (approximately $28 million net benefit this quarter, focused in EMEA and Asia Pacific) as well as payment deferral opportunities for cash obligations such as payroll taxes and other social charges.

These actions enhanced job retention and financial flexibility, positioning us to emerge from the pandemic with strength to capture significant market share.

For the second quarter of 2020 compared with 2019 , consolidated RES revenue decreased 12% to $3.6 billion and consolidated RES fee revenue decreased 22% to $1.2 billion , a result of the pandemic's significant impact, especially on transaction-based service lines.

The revenue and fee revenue declines were across all three geographic segments and in all service lines except Property & Facility Management, which delivered stable fee revenue driven by Corporate Solutions.

Leasing experienced the most significant decrease in revenue ( 42% down year-over-year) against the backdrop of 50%+ declines in office market gross absorption in all three geographies for the second quarter (according to JLL Research).

Capital markets investment sales market volumes fell by 60% globally (according to JLL Research);

our Capital Markets results included $70.8 million of incremental revenue for the second quarter from the July 1, 2019 acquisition of HFF, Inc.

Geographically across service lines, Americas represented 52% of the RES fee revenue decline for the second quarter on a local currency basis;

EMEA represented 31% and Asia Pacific represented 17%.

For the first half of 2020 , consolidated RES revenue decreased 2% to $7.6 billion and consolidated RES fee revenue decreased 5% to $2.6 billion .

Overall, the impact of the pandemic on year-to-date revenue and fee revenue was less significant as many geographies were not meaningfully impacted by the pandemic until March.

In addition, Capital Markets results included $215.2 million of incremental revenue for the first half of 2020 from HFF.

LaSalle delivered another quarter and half year of solid advisory fees, with an overall decline in revenue primarily due to expected lower incentive fees following a near-record 2019.

Refer to the LaSalle segment results discussion for further discussion.

Our consolidated fee revenue increased 14% in U.S.

dollars (“USD”) and 15% in local currency for the first quarter of 2020, compared with 2019.

Our consolidated fee revenue decreased 24% in U.S.

dollars (“USD”) and 22% in local currency for the second quarter of 2020 , compared with 2019 .

The spread was driven by strengthening of the U.S.

dollar against most major currencies, especially the euro, British pound sterling, Australian dollar, Chinese yuan and Indian rupee.

dollar against several major currencies, especially the British pound sterling, Australian dollar, euro, Indian rupee and Chinese yuan.

The strengthening of the U.S.

dollar against these currencies also drove the spread on year-to-date percentages.

Operating Expenses

In the first quarter of 2020, consolidated operating expenses, excluding reimbursed expenses, were $2.2 billion , up 14% from 2019, and consolidated fee-based operating expenses, were $1.4 billion, up 13% from the prior-year quarter.

For the first quarter, the increase in expense was primarily attributable to Americas, which represented over 100% of the increase in fee-based operating expenses on a local currency basis, primarily due to incremental expenses from HFF operations as well as a $30.6 million increase to loan loss credit reserves in response to the expected economic impact of the pandemic;

Asia Pacific and EMEA offset this increase in expenses.

In addition, Restructuring and acquisition charges were down compared with the prior-year quarter, refer to following table for further detail.

Three Months Ended March 31,

In the second quarter of 2020 , consolidated operating expenses, excluding reimbursed expenses, were $1.8 billion , down 16% from 2019, and consolidated fee-based operating expenses, were $1.2 billion , down 15% from the prior-year quarter.

For the second quarter, the decrease in fee-based operating expenses was driven by Americas (42% of the reduction on a local currency basis), EMEA (32%), Asia Pacific (22%) and LaSalle (5%).

Restructuring and acquisition charges were up compared with the prior-year quarter, refer to following table for further detail, slightly offsetting the segments' lower expenses.

Three Months Ended June 30,

Six Months Ended June 30,

(in millions)

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Restructuring, pre-acquisition and post-acquisition charges

Fair value adjustments that resulted in a net (decrease) increase to earn-out liabilities from prior-period acquisition activity

Fair value adjustments that resulted in a net increase (decrease) to earn-out liabilities from prior-period acquisition activity

Total restructuring & acquisition charges

Included in the preceding table was $21.3 million and $6.5 million for the first quarter of 2020 and 2019, respectively, of charges relating to the acquisition and integration of HFF.

Charges in 2020 include retention expense, early lease termination costs and other integration expenses, while charges in 2019 included transaction/deal costs.

Included in the preceding table was $20.1 million and $41.1 million for the second quarter and first half of 2020 , respectively, of charges relating to the acquisition and integration of HFF.

In the prior-year periods, such activity was $3.2 million and $9.7 million, respectively.

Charges in 2020 include retention expense, early lease termination costs and other integration expenses, while charges in 2019 primarily included transaction/deal costs.

Refer to Note 11, Restructuring and Acquisition Charges , in the Notes to the Condensed Consolidated Financial Statements for further information on Restructuring and acquisition charges.

Equity Earnings (Losses)

For the first quarter of 2020, we recognized equity losses of $28.3 million , compared with equity earnings of $5.0 million in the prior-year quarter.

LaSalle recognized $40.3 million of equity losses in 2020, compared with $4.9 million of equity earnings in 2019;

For the second quarter of 2020 , we recognized equity earnings of $14.7 million , compared with $10.2 million in the prior-year quarter.

For the first half of 2020 , we recognized equity losses of $13.6 million , compared with earnings of $15.2 million in 2019 .

The majority of the activity in all periods was attributable to LaSalle;

refer to the LaSalle segment results discussion for additional details.

Substantially all of the $12.7 million of equity earnings in the Americas segment were attributable to gains by consolidated variable interest entities in which the company held no equity interest.

These gains are also reflected in net income attributable to noncontrolling interest and, therefore, have no impact to Net income attributable to common shareholders.

The provision for income taxes was $5.0 million for the three months ended March 31, 2020, representing an effective tax rate of 22.0%.

For the three months ended March 31, 2019, the $0.7 million income tax benefit included a $5.7 million discrete benefit due to a reduction to our reserve for uncertain tax positions.

Excluding the impact of this discrete item, the effective tax rate was 24.5% for the three months ended March 31, 2019.

In addition, $12.7 million of equity earnings were recognized in the first quarter of 2020 for the Americas segment and were substantially attributable to gains by consolidated variable interest entities in which the company held no equity interest.

These gains are also reflected in net income attributable to noncontrolling interest and, therefore, had no impact to Net income attributable to common shareholders.

The provision for income taxes was $1.5 million and $6.5 million for the three and six months ended June 30, 2020 , respectively, representing effective tax rates of 10.0% and 17.1%, respectively.

For the three and six months ended June 30, 2019 , the provision was $36.2 million and $35.5 million , respectively, representing effective tax rates of 24.5% and 21.1%, respectively.

The tax provision for the six months ended June 30, 2019 , included a $5.7 million discrete benefit due to a reduction to our reserve for uncertain tax positions during the first quarter of 2019.

The lower effective tax rates in 2020 resulted from changes in the geographic distribution of pretax earnings compared to 2019 .

Net Income and Adjusted EBITDA

Net income attributable to common shareholders for the first quarter of 2020 was $5.3 million , compared with $21.3 million in 2019.

Adjusted EBITDA was $95.6 million for the first quarter of 2020, compared with $95.4 million in 2019.

Net income margin attributable to common shareholders (against Revenue before reimbursements) was 0.2% in the first quarter of 2020, compared with 1.1% in the prior-year quarter.

Adjusted EBITDA margin, calculated on a fee-revenue basis, for the first quarter of 2020 was 6.4% in USD and local currency, compared with 7.2% last year.

The 80 basis-point net contraction of consolidated margin was primarily due to the non-cash charges noted above (430 basis points of margin dilution), partially offset by contributions from recent RES acquisitions (+170 basis points), driven by HFF, and organic RES (+170 basis points).

Net income attributable to common shareholders for the three and six months ended June 30, 2020 was $15.2 million and $20.5 million , respectively, compared with $110.5 million and $131.8 million in the respective prior-year periods.

Adjusted EBITDA was $103.3 million and $198.9 million for the second quarter and first half of 2020 , respectively, decreases of 55% and 38% from the prior-year periods.

Net income margin attributable to common shareholders for the second quarter (against Revenue before reimbursements) was 0.8% , compared with 4.7% in the prior-year quarter.

Adjusted EBITDA margin for the second quarter , calculated on a fee-revenue basis, was 8.3% in USD ( 8.1% in local currency), compared with 13.9% in 2019 .

The consolidated margin contraction was primarily due to the decline fee revenue, especially within transaction-based service lines, partially offset by the cost reduction initiatives and government relief programs noted above.

Segment Operating Results

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Americas - Real Estate Services

Three Months Ended March 31,

Three Months Ended June 30,

($ in millions)

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Segment operating income

Equity earnings (loss)

Equity earnings

Adjusted EBITDA

Americas continued its strong momentum through the first quarter of 2020 with all service lines delivering increased revenue and fee revenue.

The growth was led by Capital Markets, reflecting $140.9 million of incremental revenue contributions from HFF ($143.4 million of fee revenue).

Leasing performed exceptionally well in the U.S., outpacing a very strong prior-year quarter (Q1 2019 was up 29% over 2018).

Corporate Solutions achieved double-digit fee revenue growth due to net new wins and existing client expansions, primarily reflected in Property & Facility Management and Project & Development Services.

The increase in operating expenses and fee-based operating expenses for the first quarter of 2020 compared with 2019 primarily reflected revenue-related expense growth, including incremental expenses associated with the first quarter of post-acquisition HFF operations.

In addition, the current quarter included a non-cash $30.6 million increase to credit reserves for potential future losses on sold loans with loss-sharing provisions and was attributable to the pandemic.

Substantially all of the equity earnings were attributable to gains by consolidated variable interest entities in which the company held no equity interest.

Therefore, there is no impact to Adjusted EBITDA.

Adjusted EBITDA margin, calculated on a fee-revenue basis, was 13.2% in USD and local currency for the quarter, compared with 12.4% in 2019.

The margin expansion reflects strong revenue performance, largely split between organic and HFF, and the implementation of cost mitigation plans.

This was partially offset by the non-cash $30.6 million charge noted above.

Americas - Real Estate Services (continued)

Six Months Ended June 30,

($ in millions)

Reimbursements

Revenue before reimbursements

Gross contract costs

Net non-cash MSR and mortgage banking derivative activity

Capital Markets

Property & Facility Management

Project & Development Services

Advisory, Consulting and Other

Compensation, operating and administrative expenses excluding gross contract costs

Depreciation and amortization

Segment fee-based operating expenses (excluding restructuring and acquisition charges)

Gross contract costs

Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity earnings

Adjusted EBITDA

The pandemic acutely affected the Americas transaction-based service lines in the second quarter of 2020.

Leasing revenue reflected substantial declines in office, however, JLL outperformed market declines in second-quarter gross absorption.

Strong growth in industrial partially offset the lower office leasing activity.

For the first half of 2020, the decline in Leasing revenue was less significant as a result of our strong first quarter performance.

Notably reduced investment sales and debt placement activity impacted Capital Markets second-quarter revenue.

In addition, Capital Markets included $70.6 million of incremental revenue contributions from HFF for the second quarter ($73.2 million of fee revenue) and $211.5 million of incremental revenue contributions from HFF for the first half of 2020 ($216.6 million of fee revenue).

Property & Facility Management achieved significant second-quarter and first half fee revenue growth driven by new client wins, Corporate Solutions client expansions and pandemic-response facility management projects.

The decrease in operating expenses and fee-based operating expenses for the second quarter of 2020 compared with 2019 primarily reflected lower variable expenses, partially offset by incremental expenses associated with HFF operations.

For the first half of 2020, the increase in expenses compared with the prior year was primarily due to the incremental expenses associated with HFF operations, partially offset by the lower second-quarter variable expenses.

Substantially all of the $12.7 million in first-quarter 2020 equity earnings were attributable to gains by consolidated variable interest entities in which the company held no equity interest.

Therefore, there was no impact to Adjusted EBITDA.

Adjusted EBITDA margin for the quarter, calculated on a fee-revenue basis, was 10.8% in USD and local currency, compared with 16.5% in 2019.

The decline in profitability was primarily attributable to transaction-based service lines and the timing of incentive compensation expense accruals, partially offset by Property & Facility Management fee revenue growth.

The current -quarter margin also reflected a strategic focus on job retention, positioning us to emerge from the pandemic with strength.

EMEA - Real Estate Services

Three Months Ended March 31,

Three Months Ended June 30,

($ in millions)

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Segment operating loss

Equity earnings

Equity losses

Adjusted EBITDA

EMEA’s first-quarter 2020 revenue and fee revenue was highlighted by strong performance in Capital Markets and Project & Development Services.

The UK and Germany drove growth in Capital Markets;

the prior-year quarter reflected a sharp decline in volumes in the UK impacted by Brexit uncertainty.

Project & Development Services growth was led by continued strong project execution in MENA.

A majority of the decline in Property & Facility Management fee revenue reflects the sale of certain property management businesses in continental Europe in late 2019.

The increase in operating expenses, excluding reimbursed expenses, and fee-based operating expenses, excluding restructuring and acquisition charges, for the first three months of 2020 compared with prior-year, correlated with the revenue growth but reflected the implementation of cost mitigation plans in response to the pandemic.

Adjusted EBITDA margin, calculated on a fee-revenue basis, was negative 3.4% in USD for the quarter (negative 2.9% in local currency), compared with negative 5.8% last year.

The margin improvement reflected an increase in higher-margin transactional revenues as well as the implementation of cost mitigation plans.

EMEA - Real Estate Services (continued)

Six Months Ended June 30,

($ in millions)

Reimbursements

Revenue before reimbursements

Gross contract costs

Capital Markets

Property & Facility Management

Project & Development Services

Advisory, Consulting and Other

Compensation, operating and administrative expenses excluding gross contract costs

Depreciation and amortization

Segment fee-based operating expenses (excluding restructuring and acquisition charges)

Gross contract costs

Segment operating expenses (excluding reimbursed expenses)

Segment operating loss

Equity losses

Adjusted EBITDA

EMEA’s second-quarter 2020 revenue and fee revenue were meaningfully impacted by pandemic-related mandatory country shut-downs.

Transaction-based revenues were significantly lower, especially in the UK and France.

The decline in Property & Facility Management fee revenue was primarily due to (i) an approximately $20 million fee revenue decrease for the quarter in the UK mobile engineering business, a result of work delays from client office closures, and (ii) the absence of approximately $9 million of second-quarter 2019 fee revenue relating to property management businesses in continental Europe that were sold in late 2019 ($18 million for the first half of the year).

Pandemic-driven work stoppages across EMEA more than offset continued growth in MENA within Project & Development Services fee revenue for the second quarter.

The significant impact of the pandemic in the second quarter overshadowed our positive first-quarter performances in Project & Development Services and Capital Markets.

The decrease in operating expenses, excluding reimbursed expenses, and fee-based operating expenses, excluding restructuring and acquisition charges, for the second quarter of 2020 compared with prior-year quarter were primarily due to lower variable and revenue-related expenses as well as the impact of government relief programs (nearly $14 million).

Adjusted EBITDA margin for the quarter, calculated on a fee-revenue basis, was negative 8.8% in USD (negative 8.9% in local currency), compared with 2.5% last year.

The decline in profitability resulted primarily from transaction-based revenue declines and losses recognized on three discrete contracts nearing completion or termination, partially offset by the impact of the government relief programs.

These relief programs, many of which involved temporary furloughs that reduced costs while preserving jobs, helped us retain our ability to efficiently restore operations to pre-pandemic levels.

Asia Pacific - Real Estate Services

Three Months Ended March 31,

Three Months Ended June 30,

($ in millions)

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Adjusted EBITDA

Asia Pacific realized the most notable impact this quarter from the pandemic.

Office closures and work stoppages began in January in China and continued across the region in order to minimize the human impact of the pandemic.

This is reflected in the revenue and fee revenue declines, which were largely attributable to Greater China and to a lesser extent Japan, primarily in transactions-based services lines.

Despite this backdrop, Corporate Solutions was largely flat year-over-year as growth in integrated facilities management and advisory services was largely offset by the impact of temporary work stoppages to Project & Development Services mandates.

Segment operating expenses, excluding reimbursed expenses, for the first quarter of 2020 included an offset of $5.4 million from grants and subsidies from certain government relief programs established in response to the pandemic.

The subsidies have been used in the receiving countries to retain employees and offset their compensation expense.

Adjusted EBITDA margin, calculated on a fee-revenue basis, was 5.3% in USD for the quarter ( 5.2% in local currency), compared with 3.7% last year.

The net margin improvement reflected the government grants and subsidies noted above as well as the impact of cost mitigation plans.

These items were partially offset by the revenue drivers noted above.

Three Months Ended March 31,

Asia Pacific - Real Estate Services (continued)

Six Months Ended June 30,

($ in millions)

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Gross contract costs

Capital Markets

Property & Facility Management

Project & Development Services

Advisory, Consulting and Other

Compensation, operating and administrative expenses excluding gross contract costs

Depreciation and amortization

Segment fee-based operating expenses (excluding restructuring and acquisition charges)

Gross contract costs

Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity (losses) earnings

Adjusted EBITDA

Asia Pacific's transaction-based revenue was substantially impacted by the pandemic.

In particular, office leasing revenue was significantly lower, most notably in India, Australia and Greater China for both the second quarter and first six months of 2020.

Capital Markets revenue declines were primarily realized in Australia and Singapore during the second quarter and Greater China for the first half of the year, reflecting the pause on deal activity, especially large transactions.

Resiliency in Property & Facility Management fee revenue was driven by new client wins and expansion of existing mandates for Corporate Solutions as the business continued to deliver services to clients.

Delays in project activity within Project & Development Services continued from the first quarter as a result of pandemic-driven office closures and work stoppages.

Segment operating expenses, excluding reimbursed expenses, and fee-based operating expenses, excluding restructuring and acquisition charges, for the second quarter first half of 2020 were lower compared with the prior-year periods due to reduced fixed and variable costs as well as the impact of grants and subsidies from certain government relief programs established in response to the pandemic.

Adjusted EBITDA margin for the quarter, calculated on a fee-revenue basis, was 13.1% in USD ( 12.6% in local currency), compared with 12.8% last year.

The decline in transaction-based revenue was more than offset by lower operating expenses, which included nearly $14 million of net benefit from government relief programs.

These programs required or supported the retention of employees which helped position us to emerge from the pandemic with strength.

Three Months Ended June 30,

($ in millions)

Reimbursements

Revenue before reimbursements

Gross contract costs

Advisory fees

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Segment operating income

Equity earnings

Adjusted EBITDA

LaSalle (continued)

Six Months Ended June 30,

($ in millions)

Reimbursements

Revenue before reimbursements

Gross contract costs

Advisory fees

Transaction fees & other

Incentive fees

Compensation, operating and administrative expenses excluding gross contract costs

Depreciation and amortization

Segment fee-based operating expenses (excluding restructuring and acquisition charges)

Gross contract costs

Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity (losses) earnings

Adjusted EBITDA

LaSalle's strong advisory fee growth across all geographies followed exceptional private equity capital raising over the trailing twelve months.

As a direct result of the pandemic's expected impact on real estate prices, we recognized Equity losses this quarter to reflect decreases to the estimated fair value of underlying real estate investments within LaSalle's co-investment portfolio.

Segment operating income was up 19% compared with 2019.

Adjusted EBITDA margin was negative 24.8% in USD for the quarter (negative 24.3% local currency), compared with 19.5% last year.

The change in equity (losses) earnings represented over 100% of the margin decline and decrease in Adjusted EBITDA.

The advisory fee growth partially offset these equity losses.

AUM was $69.5 billion as of March 31, 2020 , an increase of 3% in USD ( 1% in local currency) from $67.6 billion as of December 31, 2019 .

The AUM increase resulted from (i) $3.7 billion of acquisitions, (ii) $1.2 billion of net valuation increases, and (iii) $1.4 billion of foreign currency increases, partially offset by (iv) $4.4 billion of dispositions and withdrawals.

LaSalle's solid advisory fees for the second quarter and first half of 2020 reflected strong private equity capital raising over the trailing twelve months partially offset by valuation declines in assets under management ("AUM") during the second quarter.

An outsized 2019 performance drove the expected decline in incentive fees.

Equity earnings in the second quarter of 2020 were substantially attributable to an increased share price of a co-investment in a LaSalle-managed publicly traded REIT in Japan.

Equity losses for the first six months of 2020 were driven by decreases to the estimated fair value of underlying real estate investments within LaSalle's co-investment portfolio, a direct result of the pandemic's expected impact on real estate prices.

This decrease was partially offset by the net year-to-date increase in the share price of the aforementioned co-investment in Japan.

Adjusted EBITDA margin for the quarter was 28.2% in USD ( 27.9% local currency), compared with 33.7% last year.

The margin decline was largely attributable to the lower incentive fees.

AUM was $65.0 billion as of June 30, 2020 , a decrease of 6% in USD (down 4% in local currency) from $69.5 billion as of March 31, 2020 .

The AUM decrease resulted from (i) $3.1 billion of dispositions and withdrawals, (ii) $1.9 billion of net valuation decreases, and (iii) $1.6 billion of foreign currency decreases, partially offset by (iv) $2.1 billion of acquisitions.

LIQUIDITY AND CAPITAL RESOURCES

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Cash Flows from Operating Activities

Operating activities used $546.1 million of cash in the first three months of 2020 , compared with $551.5 million of cash used during the same period in 2019 .

The decrease in cash used by operating activities is driven by increased cash provided by earnings, offset by increased annual incentive compensation paid to employees, reflecting our stronger full-year 2019 performance compared with the full-year 2018.

Operating activities used $44.7 million of cash in the first six months of 2020 , compared with $483.1 million of cash used during the same period in 2019 .

The substantial decrease in cash used by operating activities is driven by strong cash collection on trade receivables in the second quarter of 2020 and our participation in government relief programs this year (including deferral of payments to governments for payroll tax and other social charges).

These items were partially offset by lower year-to-date net income as well as increased annual incentive compensation paid in the first quarter of 2020 compared with 2019.

Cash Flows from Investing Activities

We used $90.5 million of cash for investing activities during the first three months of 2020 , as compared to $91.0 million used during the same period in 2019 .

The slight decrease in cash used was driven by an absence of business acquisitions this quarter, offset by an increase in net capital contribution activity related to co-investments in real estate ventures and JLL Spark investments.

We used $109.4 million of cash for investing activities during the first six months of 2020 , as compared to $141.7 million used during the same period in 2019 .

The decrease in cash used was driven by an absence of business acquisitions and a decrease in acquisitions of investment properties (less than wholly-owned) this year, partially offset by net contributions to co-investments made in the first quarter of 2020.

We discuss these key drivers individually below in further detail.

Cash Flows from Financing Activities

Financing activities provided $883.3 million of cash during the first three months of 2020 , as compared to $592.8 million provided by financing activities during the same period in 2019 .

The net increase of $290.5 million in cash flows from financing activities is substantially driven by the increase in the outstanding borrowings on our Facility to fund seasonal liquidity, including annual incentive payments as discussed in the cash flows from operating activities.

Financing activities provided $114.1 million of cash during the first six months of 2020 , as compared to $547.5 million provided by financing activities during the same period in 2019 .

The net decrease of $433.4 million in cash flows from financing activities is substantially driven by greater net repayments on our Facility, the result of strong operating cash inflows during the second quarter of 2020.

Our $2.75 billion Facility matures on May 17, 2023 .

As of March 31, 2020 , we had outstanding borrowings under the Facility of $1,450.0 million and outstanding letters of credit of $0.7 million .

As of June 30, 2020 , we had outstanding borrowings under the Facility of $700.0 million and outstanding letters of credit of $0.7 million .

As of December 31, 2019 , we had $525.0 million of outstanding borrowings under the Facility and outstanding letters of credit of $0.8 million .

The average outstanding borrowings under the Facility were $935.2 million and $209.0 million during the three months ended March 31, 2020 and 2019 , respectively.

In addition to our Facility, we had the capacity to borrow up to $86.0 million under local overdraft facilities as of March 31, 2020 .

We had Short-term borrowings (including capital lease obligations, overdrawn bank accounts and local overdraft facilities) of $125.2 million and $120.1 million as of March 31, 2020 and December 31, 2019 , respectively, of which $35.8 million and $44.8 million , respectively, were attributable to local overdraft facilities.

The average outstanding borrowings under the Facility were $1,351.5 million and $661.1 million during the three months ended June 30, 2020 and 2019 , respectively, and $1,143.4 million and $436.3 million during the six months ended June 30, 2020 and 2019 .

In addition to our Facility, we had the capacity to borrow up to $81.2 million under local overdraft facilities as of June 30, 2020 .

We had Short-term borrowings (including financing lease obligations, overdrawn bank accounts and local overdraft facilities) of $115.1 million and $120.1 million as of June 30, 2020 and December 31, 2019 , respectively, of which $14.7 million and $44.8 million , respectively, were attributable to local overdraft facilities.

We will continue to use the Facility for working capital needs (including payment of accrued incentive compensation), co-investment activities, dividend payments, share repurchases, capital expenditures and business acquisitions.

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Investment Activity

As of March 31, 2020 , we had total investments of $390.8 million in investments, primarily related to LaSalle co-investments.

For the three months ended March 31, 2020 , and 2019, funding of investments exceeded return of capital by $40.6 million , and $3.4 million , respectively.

As of June 30, 2020 , we had a carrying value of $393.6 million in investments, primarily related to LaSalle co-investments in real estate ventures.

For the six months ended June 30, 2020 , and 2019, funding of investments exceeded return of capital by $30.2 million , and $15.8 million , respectively.

We expect to continue to pursue strategic co-investment opportunities with our investment management clients globally as co-investment remains an important foundation to the continued growth of LaSalle's business.

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On October 31, 2019, our Board of Directors approved a new share repurchase program (the "Program") authorizing the repurchase of up to $200 million of our common stock in the open market and privately negotiated transactions.

During the three months ended March 31, 2020 we repurchased nearly 188 thousand shares for $25.0 million.

As of March 31, 2020 , $175.0 million remained authorized for repurchases under the Program.

There were no shares repurchased during the three months ended March 31, 2019.

During the three months ended June 30, 2020 we did not repurchase any shares;

during the six months ended June 30, 2020 we repurchased nearly 188 thousand shares for $25.0 million.

As of June 30, 2020 , $175.0 million remained authorized for repurchases under the Program.

There were no shares repurchased in 2019 .

Capital Expenditures

Net capital additions for the three months ended March 31, 2020 and 2019 , were $44.4 million and $44.6 million , respectively.

Net capital additions for the six months ended June 30, 2020 and 2019 , were $77.3 million and $83.8 million , respectively.

Our capital expenditures in 2020 were primarily for software, computer-related hardware, and improvements to leased office spaces.

In addition, net capital additions made by consolidated VIEs in which we held no equity interest for the three months ended March 31, 2020 and 2019 , were $3.2 million and $15.6 million , respectively, primarily to acquire real estate (net of real estate sales).

In addition, net capital additions made by consolidated VIEs in which we held no equity interest for the six months ended June 30, 2020 and 2019 , were $7.7 million and $19.2 million , respectively, primarily to acquire real estate (net of real estate sales).

Business Acquisitions

During the three months ended March 31, 2020 , we paid $12.9 million for deferred business acquisition and earn-out obligations related to acquisitions completed in prior years.

Terms for our acquisitions have typically included cash paid at closing with provisions for additional deferred consideration and earn-out payments subject to certain contract requirements, including the passage of time and performance, respectively.

Deferred business acquisition obligations totaled $45.2 million as of March 31, 2020 .

During the six months ended June 30, 2020 , we paid $47.7 million for deferred business acquisition and earn-out obligations related to acquisitions completed in prior years, which are primarily reflected in cash flows from financing activities.

Terms for many of our past acquisitions have typically included cash paid at closing with provisions for additional deferred consideration and earn-out payments subject to certain contract requirements, including the passage of time and performance, respectively.

Deferred business acquisition obligations totaled $44.7 million as of June 30, 2020 .

These obligations represent the current discounted values of payments due to sellers of businesses for which our acquisition had been completed as of the balance sheet date and for which the only remaining condition on those payments is the passage of time.

As of March 31, 2020 , we had the potential to make earn-out payments for a maximum of $254.0 million on 44 completed acquisitions subject to the achievement of certain performance conditions.

As of June 30, 2020 , we had the potential to make earn-out payments for a maximum of $221.1 million on 44 completed acquisitions subject to the achievement of certain performance conditions.

Refer to Note 5, Business Combinations, Goodwill and Other Intangible Assets , in the Notes to the Condensed Consolidated Financial Statements for further information on Business Acquisitions.

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We believe our policy of permanently investing earnings of foreign subsidiaries does not significantly impact our liquidity.

As of March 31, 2020 and December 31, 2019 , we had total cash and cash equivalents of $720.7 million and $451.9 million , respectively, of which approximately $350.1 million and $385.4 million, respectively, was held by foreign subsidiaries.

As of June 30, 2020 and December 31, 2019 , we had total cash and cash equivalents of $413.5 million and $451.9 million , respectively, of which approximately $324.9 million and $385.4 million, respectively, was held by foreign subsidiaries.

Restricted Net Assets

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However, we generally face no such restrictions with regard to the use or application of funds for ordinary course business activities within such countries.

The assets of these countries aggregated to approximately 4% and 5% of our total assets as of March 31, 2020 and December 31, 2019 , respectively.

The assets of these countries aggregated to approximately 4% and 5% of our total assets as of June 30, 2020 and December 31, 2019 , respectively.

Off-Balance Sheet Arrangements

We have unfunded capital commitments to investment vehicles and direct investments for future co-investments, totaling a maximum of $309.0 million as of March 31, 2020 .

We have unfunded capital commitments to investment vehicles and direct investments for future co-investments, totaling a maximum of $338.5 million as of June 30, 2020 .

See our discussion of unfunded commitments in Note 6, Investments in Real Estate Ventures , in the Notes to Condensed Consolidated Financial Statements.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report, our Annual Report to Shareholders and our other filings with the Securities and Exchange Commission (“SEC”) contain certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.

This report, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains “forward-looking statements” within the meaning of the federal securities laws.

All such statements are qualified by this cautionary note, which is provided pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-looking statements may also be included in our other public filings, press releases, our website, and oral and written presentations by management.

Statements in the future tense, and all statements accompanied by terms such as “believe,” “project,” “expect,” “estimate,” “assume,” “intend,” “anticipate,” “target,” “plan” and variations thereof and similar terms, are intended to be forward-looking statements.

Forward-looking statements are made subject to the safe harbor protections of the federal securities laws pursuant to Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

From time to time, we also include written or oral forward-looking statements in other publicly disclosed materials (including, but not limited to other filings with the SEC, press releases, presentations and communications by JLL or its management).

Such statements relate to our intent, belief and current expectations about our strategic direction prospects and future results, and give our current expectations or forecasts of future events, including, but not limited to the Company's expectations regarding the potential impact of the COVID-19 outbreak and global pandemic;

Such statements relate to our intent, belief and current expectations about our strategic direction, prospects and future results, and give our current expectations or forecasts of future events, including, but not limited to, our expectations regarding the potential impact of the COVID-19 outbreak and global pandemic;

they do not relate strictly to historical or current facts.

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However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results.

These risks and uncertainties are described in our Annual Report on Form 10-K for the year ended December 31, 2019 in Part I, Item 1A.

Risk Factors and may also be described from time to time in our future reports filed with the SEC.

Forward-looking statements are subject to certain risks, uncertainties, assumptions, and other factors that could cause actual results to differ materially from our historical experience and our present expectations or anticipated results.

Some of these risks, uncertainties, assumptions, and other factors are described in our Annual Report on Form 10-K for the year ended December 31, 2019 in Part I, Item 1A.

Risk Factors and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and may also be described from time to time in our subsequent filings with the Securities and Exchange Commission .

You should consider the limitations on, and risks associated with, forward-looking statements and not unduly rely on the accuracy of predictions contained in such forward-looking statements.

We do not undertake any obligation to update forward-looking statements to reflect events, circumstances, changes in expectations or the occurrence of unanticipated events after the date of those statements.

We do not undertake to update any forward-looking statements to reflect events, circumstances, developments, changes in expectations or the occurrence of unanticipated events after the date of those statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis