What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-02 compared with 2020-08-06 · 138 added, 137 removed, 402 unchanged (41% 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 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 ).

The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements, including the notes thereto, for the three and nine months ended September 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 six months ended June 30, 2020 .

There have been no material changes to these critical accounting policies and estimates during the nine months ended September 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 six months ended June 30, 2020 was 17.1%, resulting in an effective tax rate of 10.0% for the second quarter of 2020.

Our effective tax rate for the nine months ended September 30, 2020 was 16.2% , resulting in an effective tax rate of 16.0% for the third 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 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.

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

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

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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 June 30, 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 September 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 June 30,

Three Months Ended September 30,

% Change in Local Currency

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Consolidated Operating Results (continued)

Six Months Ended June 30,

Nine Months Ended September 30,

% Change in Local Currency

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Gross contract costs represent certain costs associated with client-dedicated employees and third-party vendors and subcontractors and are indirectly reimbursed through the fees we receive.

These costs are presented on a gross basis in Operating expenses with the corresponding fees in Revenue before reimbursements.

However, as we generally earn little to no margin on such costs, excluding gross contract costs from both Fee revenue and Fee-based operating expenses more accurately reflects how we manage our expense base and operating margins and also enables a more consistent performance assessment across a portfolio of contracts with varying payment terms and structures, including those with direct versus indirect reimbursement of such costs.

These costs are presented on a gross basis in Operating expenses with the equal amount of corresponding fees in Revenue before reimbursements.

Consistent with our treatment of directly reimbursed expenses, excluding gross contract costs from both Fee revenue and Fee-based operating expenses more accurately reflects how we manage our expense base and operating margins and also enables a more consistent performance assessment across a portfolio of contracts with varying payment terms and structures, including those with direct versus indirect reimbursement of such costs.

Net non-cash mortgage servicing rights ("MSR") and mortgage banking derivative activity consists of the balances presented within Revenue composed of (i) derivative gains/losses resulting from mortgage banking loan commitment and warehousing activity and (ii) gains recognized from the retention of MSR upon origination and sale of mortgage loans, offset by (iii) amortization of MSR intangible assets over the period that net servicing income is projected to be received.

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions)

14 unchanged sentences

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 June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

($ in millions)

14 unchanged sentences

COVID-19 Pandemic

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.

The COVID-19 pandemic (the "pandemic") continued to disrupt our operations, most significantly in transaction-based service lines.

As with the second quarter, our personnel across the globe, notably in Corporate Solutions and other annuity businesses, partnered with clients to ensure continuity of operations in response to the evolving conditions as well as develop and implement safe return-to-work measures.

In response to the pandemic's sustained disruptions to revenue and business operations, we meaningfully expanded both fixed and variable cost mitigation efforts.

With actions taken through October, we reduced fixed costs by approximately $135 million on an annualized basis, primarily compensation and benefits expense.

In addition, our expense management actions delivered nearly $120 million of non-permanent cost savings this quarter (over $240 million year-to-date), including $34 million related to various government relief programs around the world ($67 million year-to-date).

These non-permanent savings represent costs likely to return in future periods as business volumes recover.

For the third quarter of 2020 compared with 2019 , consolidated RES revenue decreased 12% to $3.9 billion and consolidated RES fee revenue decreased 24% to $1.3 billion , a result of the pandemic's significant impact, especially on transaction-based service lines.

For the first nine months of 2020 , consolidated RES revenue decreased 6% to $11.4 billion and consolidated RES fee revenue decreased 12% to $3.9 billion .

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

Capital Markets experienced the most significant decrease in third-quarter revenue, down 43% over the prior-year quarter, in line with the decline in investment sales market volumes globally according to JLL Research.

Capital Markets year-to-date results included $215.2 million of incremental revenue from the first six months of 2020 related to HFF compared with the prior-year period due to the July 1, 2019, timing of the acquisition.

Leasing was down 30% for the quarter and 25% for the first nine months, compared with the prior-year periods, against the backdrop of an over 45% decline in global office market gross absorption for the third quarter (over 40% year-to-date) according to JLL Research.

Geographically across service lines, Americas represented 65% of the RES fee revenue decline for the second quarter on a local currency basis;

EMEA represented 22% and Asia Pacific represented 13%.

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 segment results discussion for further details.

LaSalle achieved solid advisory fee growth for the quarter and year-to-date, compared with 2019.

The overall decline in revenue for the first nine months was 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 decreased 22% 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 several major currencies, especially the British pound sterling, Australian dollar, euro, Indian rupee and Chinese yuan.

dollars (“USD”) and 23% in local currency for the third quarter of 2020 , compared with 2019 .

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

dollar against several major currencies, especially the British pound sterling, euro and Australian dollar.

Our consolidated fee revenue decreased 13% in USD and 12% in local currency for the nine months ended September 30, 2020, compared with the prior year.

The strengthening of the U.S.

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

dollar against the Indian rupee, Australian dollar and Chinese yuan drove the spread on year-to-date percentages.

Operating Expenses

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 the third quarter of 2020 , consolidated operating expenses, excluding reimbursed expenses, were $1.9 billion , down 19% from 2019, and consolidated fee-based operating expenses, were $1.3 billion , down 24% from the prior-year quarter.

For the third quarter, the decrease in fee-based operating expenses was driven by Americas (64% of the reduction on a local currency basis), EMEA (20%) and Asia Pacific (16%).

Restructuring and acquisition charges were down compared with the prior-year periods;

refer to following table for further detail.

Three Months Ended September 30,

Nine Months Ended September 30,

(in millions)

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Total restructuring & acquisition charges

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.

Included in the preceding table was $13.8 million and $55.2 million for the third quarter and first nine months of 2020 , respectively, of acquisition and integration charges relating to HFF.

In the prior-year periods, such activity was $60.1 million and $69.8 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.

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

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 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;

Equity Earnings

For the third quarter of 2020 , we recognized equity earnings of $15.0 million , compared with $17.1 million in the prior-year quarter.

For the first nine months of 2020 , we recognized equity earnings of $1.4 million , compared with earnings of $32.3 million in 2019 .

LaSalle was a key driver of activity in all periods;

refer to the LaSalle segment results discussion for additional details.

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.

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

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

The provision for income taxes was $25.7 million and $32.2 million for the three and nine months ended September 30, 2020 , respectively, representing effective tax rates of 16.0% and 16.2% , respectively.

For the three and nine months ended September 30, 2019 , the provision was $42.1 million and $77.6 million , respectively, representing effective tax rates of 24.5% and 22.9%, respectively.

The tax provision for the nine months ended September 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 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.

Net income attributable to common shareholders for the three and nine months ended September 30, 2020 was $131.9 million and $152.4 million , respectively, compared with $128.9 million and $260.7 million in the respective prior-year periods.

Adjusted EBITDA was $243.6 million and $442.5 million for the third quarter and first nine months of 2020 , respectively, decreases of 19% and 29% from the prior-year periods.

Net income margin attributable to common shareholders for the third quarter (against Revenue before reimbursements) was 6.3% , compared with 5.1% in the prior-year quarter.

Adjusted EBITDA margin for the third quarter , calculated on a fee-revenue basis, was 17.2% in USD ( 17.4% in local currency), compared with 16.5% in 2019 .

The net margin expansion was primarily driven by cost mitigation efforts, including government relief programs, partially offset by net dilution from RES, reflecting the decline in fee revenue, specifically transactional service lines.

Segment Operating Results

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Americas - Real Estate Services

Three Months Ended June 30,

Three Months Ended September 30,

($ in millions)

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Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity earnings

Segment income

Adjusted EBITDA

Americas - Real Estate Services (continued)

Six Months Ended June 30,

Nine Months Ended September 30,

($ in millions)

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Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity earnings

Segment income

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.

Similar to the second quarter, the pandemic negatively affected the Americas transaction-based service lines this quarter.

Although U.S.

Leasing revenue for the quarter reflected a notable decrease in office leasing activity, we again outperformed substantial market declines in gross absorption.

Continued strong growth in industrial partially offset the reduced activity in office.

For the first nine months of 2020, Leasing fee revenue reflected factors largely consistent with the third-quarter drivers and also included our strong first-quarter performance.

Notably lower investment sales and debt placement activity led to a decline in Capital Markets revenue for the quarter.

Year-to-date, Capital Markets included $211.5 million of incremental revenue contributions from HFF from the first six months of 2020 ($216.6 million of fee revenue).

Property & Facility Management achieved significant revenue and fee revenue growth for the third quarter and first nine months of 2020 driven by new property management and CS clients as well as expansions of existing CS client relationships.

The decrease in operating expenses and fee-based operating expenses for the third quarter of 2020 compared with 2019 primarily reflected lower fixed and variable expenses associated with both cost mitigation actions taken in 2020.

For the first nine months of 2020, the decrease in expenses was less in magnitude compared with the third quarter alone primarily due to the incremental expenses in the first six months of 2020 associated with HFF operations (HFF was acquired July 1, 2019).

Adjusted EBITDA margin for the quarter, calculated on a fee-revenue basis, was 20.9% in USD and in local currency, compared with 19.3% in 2019.

An estimated $56 million of non-permanent cost savings, including government relief programs, coupled with growth in Property & Facility Management more than offset the decline attributable to transaction-based service lines.

EMEA - Real Estate Services

Three Months Ended June 30,

Three Months Ended September 30,

($ in millions)

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Segment operating expenses (excluding reimbursed expenses)

Segment operating loss

Equity losses

Equity earnings

Segment (loss) income

Adjusted EBITDA

EMEA - Real Estate Services (continued)

Six Months Ended June 30,

Nine Months Ended September 30,

($ in millions)

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Segment operating expenses (excluding reimbursed expenses)

Segment operating loss

Equity losses

Equity earnings (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.

EMEA’s revenue and fee revenue continued to be impacted by the pandemic this quarter.

Transaction-based revenues for the third quarter were meaningfully lower, especially in Germany, the UK and France;

however, our Leasing outperformed the drop in market gross absorption.

The declines in Property & Facility Management fee revenue, compared with the prior-year periods, were primarily due to (i) approximately $11 million lower fee revenue this quarter in our UK mobile engineering business ($31 million year-to-date) and (ii) the absence of approximately $9 million of prior-year fee revenue relating to property management businesses in continental Europe that were sold in late 2019 ($27 million year-to-date).

The decreases in operating expenses, excluding reimbursed expenses, and fee-based operating expenses, excluding restructuring and acquisition charges, compared with the prior-year periods were primarily due to lower variable and revenue-related expenses as well as the benefit from government relief programs ($4 million for the third quarter and $18 million year-to-date).

In addition, the impact of cost mitigation actions taken in 2020 was more prominent this quarter.

Adjusted EBITDA margin for the third quarter, calculated on a fee-revenue basis, was 2.4% in USD ( 2.7% in local currency), compared with 6.1% in the prior-year quarter.

The decline in profitability resulted primarily from transaction-based revenue declines, partially offset by an estimated $23 million of non-permanent cost savings, including government relief programs.

Asia Pacific - Real Estate Services

Three Months Ended June 30,

Three Months Ended September 30,

($ in millions)

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Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity earnings

Segment income

Adjusted EBITDA

Asia Pacific - Real Estate Services (continued)

Six Months Ended June 30,

Nine Months Ended September 30,

($ in millions)

11 unchanged sentences

Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity (losses) earnings

Equity earnings

Segment income

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.

Consistent with the second quarter, Asia Pacific's transaction-based revenue was meaningfully impacted by the pandemic this quarter.

Capital Markets third-quarter revenue reflected a shift in deal activity away from large transactions.

For the quarter, the declines were most notable in Japan and Greater China;

year-to-date, Singapore also experienced a notable decline.

Leasing fee revenue improved from the second quarter as office leasing activity increased.

Property & Facility Management revenue and fee revenue demonstrated continued resiliency as property management and CS teams partnered with clients to execute on enhanced facilities management and reentry plans.

Segment operating expenses, excluding reimbursed expenses, and fee-based operating expenses, excluding restructuring and acquisition charges, for the third quarter and first nine months 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 (approximately $15 million for the third quarter and $35 million year-to-date).

Adjusted EBITDA margin for the quarter, calculated on a fee-revenue basis, was 20.0% in USD ( 20.2% in local currency), compared with 14.2% 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,

Asia Pacific's margin expansion was driven by an estimated $35 million of non-permanent cost savings, including government relief programs, which more than offset the decline attributable to transaction-based revenue.

Three Months Ended September 30,

($ in millions)

10 unchanged sentences

Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity earnings

Segment income

Adjusted EBITDA

LaSalle (continued)

Six Months Ended June 30,

Nine Months Ended September 30,

($ in millions)

10 unchanged sentences

Segment operating expenses (excluding reimbursed expenses)

Segment operating income

Equity (losses) earnings

Segment income

Adjusted EBITDA

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.

LaSalle achieved solid advisory fee growth for the third quarter and first nine months of 2020, driven by strong private equity capital raising over the trailing twelve months.

An outsized 2019 performance drove the expected decline in incentive fees during the first nine months of 2020.

Equity earnings in the third 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 nine 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 29.5% in USD ( 29.3% local currency), compared with 34.5% 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.

The margin decline was attributable to lower Equity earnings (approximately a 600 basis point impact on margin), partially offset by improved profitability of LaSalle's annuity revenues (Advisory fees plus Transaction fees).

AUM was $65.7 billion as of September 30, 2020 , an increase of 1% in USD and local currency from $65.0 billion as of June 30, 2020 .

The AUM increase resulted from (i) $1.4 billion of acquisitions and (ii) $0.5 billion of foreign currency increases, partially offset by (iii) $1.0 billion dispositions and withdrawals and (iv) $0.2 billion of net valuation decreases.

LIQUIDITY AND CAPITAL RESOURCES

1 unchanged sentence

Cash Flows from Operating Activities

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.

Operating activities provided $363.1 million of cash in the first nine months of 2020 , compared with $251.5 million of cash used during the same period in 2019 .

The substantial change in cash flows from operating activities is driven by strong cash collection on trade receivables in the last six months 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 in 2020 as well as increased annual incentive compensation paid in the first quarter of 2020 compared with 2019.

Cash Flows from Investing Activities

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 used $124.2 million of cash for investing activities during the first nine months of 2020 , as compared to $994.1 million used during the same period in 2019 .

The decrease in cash used was driven by an absence of business acquisitions (HFF, Inc.

was acquired in July 2019) and a decrease in acquisitions of investment properties (less than wholly-owned) this year.

We discuss these key drivers individually below in further detail.

Cash Flows from Financing 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.

Financing activities used $243.8 million of cash during the first nine months of 2020 , as compared to $1,194.6 million provided by financing activities during the same period in 2019 .

The net decrease of $1,438.4 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 and third quarter of 2020.

In 2019, financing activities was substantially driven by the increase in the outstanding borrowings on our Facility to fund the cash consideration for acquisitions.

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

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 September 30, 2020 , we had outstanding borrowings under the Facility of $400.0 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 $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.

The average outstanding borrowings under the Facility were $758.9 million and $1,408.5 million during the three months ended September 30, 2020 and 2019 , respectively, and $1,014.3 million and $763.9 million during the nine months ended September 30, 2020 and 2019 .

In addition to our Facility, we had the capacity to borrow up to $85.9 million under local overdraft facilities as of September 30, 2020 .

We had Short-term borrowings (including financing lease obligations, overdrawn bank accounts and local overdraft facilities) of $106.4 million and $120.1 million as of September 30, 2020 and December 31, 2019 , respectively, of which $12.2 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 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.

As of September 30, 2020 , we had a carrying value of $389.6 million in investments, primarily related to LaSalle co-investments in real estate ventures.

For the nine months ended September 30, 2020 , and 2019, funding of investments exceeded return of capital by $32.7 million , and $41.2 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 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.

During the three months ended September 30, 2020 we repurchased approximately 258,000 shares for $25.0 million;

during the nine months ended September 30, 2020 we repurchased nearly 446,000 shares for $50.0 million.

As of September 30, 2020 , $150.0 million remained authorized for repurchases under the Program.

There were no shares repurchased in 2019 .

Capital Expenditures

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

Net capital additions for the nine months ended September 30, 2020 and 2019 , were $112.5 million and $131.1 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 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).

In addition, net capital additions made by consolidated VIEs in which we held no equity interest for the nine months ended September 30, 2020 and 2019 , were $10.2 million and $67.6 million , respectively, primarily to acquire real estate (net of real estate sales).

Business Acquisitions

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.

During the nine months ended September 30, 2020 , we completed no new acquisitions and paid $58.5 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.

During the nine months ended September 30, 2019, we paid $789.2 million for business acquisitions, predominantly relating to the acquisition of HFF in the third quarter of 2019, and $59.9 million for deferred business acquisition and earn-out obligations related to acquisitions completed in prior years.

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 .

Deferred business acquisition obligations totaled $37.2 million as of September 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 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.

As of September 30, 2020 , we had the potential to make earn-out payments for a maximum of $221.3 million on 42 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 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.

As of September 30, 2020 and December 31, 2019 , we had total cash and cash equivalents of $440.0 million and $451.9 million , respectively, of which approximately $351.7 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 June 30, 2020 and December 31, 2019 , respectively.

The assets of these countries aggregated to approximately 4% and 5% of our total assets as of September 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 $338.5 million as of June 30, 2020 .

We have unfunded capital commitments to investment vehicles and direct investments for future co-investments, totaling a maximum of $338.8 million as of September 30, 2020 .

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

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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 .

Risk Factors and in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 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.

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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