Item 2. Management’s Discussion and Analysis
Item 2. 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 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. Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our 2019 Annual Report on Form 10-K.
The following discussion and analysis contains certain forward-looking statements generally identified by the words anticipates, believes, estimates, expects, forecasts, plans, intends and other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause JLL's actual results, performance, achievements, plans and objectives to be materially different from any future results, performance, achievements, plans and objectives expressed or implied by such forward-looking statements. See the Cautionary Note Regarding Forward-Looking Statements included within this section for further information.
We present our quarterly Management's Discussion and Analysis in the following sections:
(1)
A summary of our critical accounting policies and estimates;
(2)
Certain items affecting the comparability of results and certain market and other risks we face;
(3)
The results of our operations, first on a consolidated basis and then for each of our business segments; and
(4)
Liquidity and capital resources.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
An understanding of our accounting policies is necessary for a complete analysis of our results, financial position, liquidity and trends. See Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our 2019 Annual Report on Form 10-K for a complete summary of our significant accounting policies.
The preparation of our financial statements requires management to make certain critical accounting estimates and judgments that impact (1) the stated amount of assets and liabilities, (2) disclosure of contingent assets and liabilities at the date of the financial statements, and (3) the reported amount of revenue and expenses during the reporting periods. These accounting estimates are based on management's judgment. We consider them to be critical because of their significance to the financial statements and the possibility that future events may differ from current judgments or that the use of different assumptions could result in materially different estimates. We review these estimates on a periodic basis to ensure reasonableness. Although actual amounts likely differ from such estimated amounts, we believe such differences are not likely to be material.
A discussion of our critical accounting policies and estimates used in the preparation of our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q can be found in Item 7. 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 nine months ended September 30, 2020 .
The following are the critical accounting policies and estimates discussed in Item 7. 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 :
•
Revenue Recognition;
•
Business Combinations, Goodwill and Other Intangible Assets;
•
Investments in Real Estate Ventures; and
•
Income Taxes.
In addition to the aforementioned critical accounting policies, we believe the calculation of our quarterly tax provision is critical to understanding the estimates and assumptions used in preparing the Condensed Consolidated Financial Statements in Item 1.
28
Table of Contents
Quarterly Income Tax Provision
We base our fiscal year estimated effective tax rate on estimates we update each quarter. 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; as required, we adjust for the impact of discrete items in the quarters in which they occur. 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 remainder of 2020.
The geographic mix of our income can significantly impact our effective tax rate. Very low tax rate jurisdictions (those with effective national and local combined tax rates of 25% or lower) that provide the most significant contributions to our effective tax rate include: Hong Kong ( 16.5% ), Singapore ( 17% ), the United Kingdom ( 19% ) and Saudi Arabia ( 20% ). We do not project any other jurisdictions with effective rates of 25% or lower to materially impact our 2020 global effective tax rate.
ITEMS AFFECTING COMPARABILITY
Macroeconomic Conditions
Our results of operations and the variability of these results are significantly influenced by (1) macroeconomic trends, (2) the geopolitical environment, (3) the global and regional real estate markets, and (4) the financial and credit markets. 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 experiencing the macroeconomic impact of the COVID-19 pandemic.
Acquisitions
The timing of acquisitions may impact the comparability of our results on a year-over-year basis. Our results include incremental revenues and expenses following the completion date of an acquisition. In addition, there is generally an initial adverse impact on net income from an acquisition as a result of pre-acquisition due diligence expenditures, transaction/deal costs and post-acquisition integration costs, such as fees from third-party advisors engaged to assist with onboarding and process alignment, retention and severance expense, early lease termination costs, and other integration expenses.
LaSalle Revenue
Our investment management business is, in part, compensated through incentive fees where performance of underlying funds' investments exceeds agreed-to benchmark levels. Depending upon performance, disposition activity, and the contractual timing of measurement periods with clients, these fees can be significant and vary substantially from period to period.
Equity earnings also may vary substantially from period to period for a variety of reasons, including as a result of: (1) gains (losses) on investments reported at fair value, (2) gains (losses) on asset dispositions, and (3) impairment charges. The timing of recognition of these items may impact comparability between quarters, in any one year, or compared to a prior year.
The comparability of these items can be seen in Note 4, Business Segments , of the Notes to Condensed Consolidated Financial Statements and is discussed further in Segment Operating Results included herein.
Foreign Currency
We conduct business using a variety of currencies, but we report our results in U.S. dollars. As a result, the volatility of currencies against the U.S. dollar may positively or negatively impact our results. This volatility can make it more difficult to perform period-to-period comparisons of the reported U.S. dollar results of operations, because such results may indicate a growth or decline rate that might not have been consistent with the real underlying growth or decline rates in the local operations. Consequently, we provide information about the impact of foreign currencies in the period-to-period comparisons of the reported results of operations in our discussion and analysis of financial condition in the Results of Operations section below.
29
Table of Contents
Transactional-Based Revenue
Transactional-based fees, that are impacted by the size and timing of our clients' transactions, from real estate investment banking, capital markets activities and other services within our RES businesses, and LaSalle, increase the variability of the revenue we earn. The timing and the magnitude of these fees can vary significantly from year to year and quarter to quarter, and from region to region.
Seasonality
Historically, our quarterly revenue and profits have tended to increase from quarter to quarter as the year progresses. This is a result of a general focus in the real estate industry on completing or documenting transactions by calendar year end and the fact that certain expenses are constant through the year. Historically, we have reported a relatively smaller profit in the first quarter and then increasingly larger profits during each of the following three quarters, excluding the recognition of investment-generated performance fees and realized and unrealized co-investment equity earnings and losses (each of which can be unpredictable). Generally, we recognize incentives fees when assets are sold, the timing of which is geared toward the benefit of our clients. In addition, co-investment equity gains and losses are primarily dependent on valuations of underlying investments, the direction and magnitude of changes to such valuations are not predictable. 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 September 30, 2020 and 2019 , are not fully indicative of the results we expect to realize for the full fiscal year.
30
Table of Contents
RESULTS OF OPERATIONS
Definitions
•
We define market volumes for Leasing as gross absorption of office real estate space in square feet for the U.S., Europe and selected markets in Asia Pacific. We define market volumes for Capital Markets as investment sales transactions globally.
•
Assets under management data for LaSalle is reported on a one-quarter lag.
•
MENA: Middle East and North Africa. Greater China: China, Hong Kong, Macau and Taiwan.
•
n.m.: not meaningful, represented by a percentage change of greater than 100% favorable or unfavorable.
Consolidated Operating Results
Three Months Ended September 30,
Change in
% Change in Local Currency
($ in millions)
2020
2019
U.S. dollars
Leasing
$
430.3
604.3
(174.0
)
(29
)%
(29
)%
Capital Markets
284.5
480.0
(195.5
)
(41
)
(41
)
Property & Facility Management
2,303.3
2,312.8
(9.5
)
0
(1
)
Project & Development Services
631.5
785.9
(154.4
)
(20
)
(21
)
Advisory, Consulting and Other
218.2
201.0
17.2
9
7
Real Estate Services ("RES") revenue
$
3,867.8
4,384.0
(516.2
)
(12
)%
(12
)%
LaSalle
110.3
111.6
(1.3
)
(1
)
(3
)
Revenue
$
3,978.1
4,495.6
(517.5
)
(12
)%
(12
)%
Reimbursements
(1,886.7
)
(1,949.8
)
(63.1
)
(3
)
(4
)
Revenue before reimbursements
$
2,091.4
2,545.8
(454.4
)
(18
%)
(19
%)
Gross contract costs
(659.1
)
(717.7
)
58.6
(8
)
(9
)
Net non-cash MSR and mortgage banking derivative activity
(14.7
)
(12.7
)
(2.0
)
16
16
Fee revenue
$
1,417.6
1,815.4
(397.8
)
(22
)%
(23
)%
Leasing
412.9
588.3
(175.4
)
(30
)
(30
)
Capital Markets
262.8
458.6
(195.8
)
(43
)
(43
)
Property & Facility Management
302.4
293.1
9.3
3
2
Project & Development Services
188.0
216.1
(28.1
)
(13
)
(14
)
Advisory, Consulting and Other
145.7
153.6
(7.9
)
(5
)
(7
)
RES fee revenue
$
1,311.8
1,709.7
(397.9
)
(23
)%
(24
)%
LaSalle
105.8
105.7
0.1
0
(2
)
Compensation and benefits excluding gross contract costs
970.3
1,270.5
(300.2
)
(24
)
(24
)
Operating, administrative and other expenses excluding gross contract costs
218.7
262.4
(43.7
)
(17
)
(17
)
Depreciation and amortization
54.9
53.6
1.3
2
2
Total fee-based operating expenses
1,243.9
1,586.5
(342.6
)
(22
)
(22
)
Restructuring and acquisition charges
33.5
70.0
(36.5
)
(52
)
(53
)
Gross contract costs
659.1
717.7
(58.6
)
(8
)
(9
)
Total operating expenses, excluding reimbursed expenses
$
1,936.5
2,374.2
(437.7
)
(18
)%
(19
)%
Operating income
$
154.9
171.6
(16.7
)
(10
)%
(10
)%
Equity earnings
$
15.0
17.1
(2.1
)
(12
)%
(13
)%
Adjusted EBITDA
$
243.6
299.9
(56.3
)
(19
)%
(19
)%
31
Table of Contents
Consolidated Operating Results (continued)
Nine Months Ended September 30,
Change in
% Change in Local Currency
($ in millions)
2020
2019
U.S. dollars
Leasing
$
1,281.3
1,706.1
(424.8
)
(25
)%
(25
)%
Capital Markets
841.6
930.0
(88.4
)
(10
)
(9
)
Property & Facility Management
6,944.3
6,886.8
57.5
1
2
Project & Development Services
1,772.7
2,119.3
(346.6
)
(16
)
(16
)
Advisory, Consulting and Other
589.5
601.1
(11.6
)
(2
)
(1
)
Real Estate Services ("RES") revenue
$
11,429.4
12,243.3
(813.9
)
(7
)%
(6
)%
LaSalle
315.1
339.4
(24.3
)
(7
)
(7
)
Revenue
$
11,744.5
12,582.7
(838.2
)
(7
)%
(6
)%
Reimbursements
(5,591.6
)
(5,727.1
)
(135.5
)
(2
)
(2
)
Revenue before reimbursements
$
6,152.9
6,855.6
(702.7
)
(10
)%
(10
)%
Gross contract costs
(1,963.5
)
(2,073.7
)
110.2
(5
)
(4
)
Net non-cash MSR and mortgage banking derivative activity
(21.7
)
(17.4
)
(4.3
)
25
25
Fee revenue
$
4,167.7
4,764.5
(596.8
)
(13
)%
(12
)%
Leasing
1,231.9
1,655.5
(423.6
)
(26
)
(25
)
Capital Markets
796.3
884.7
(88.4
)
(10
)
(10
)
Property & Facility Management
870.2
864.6
5.6
1
2
Project & Development Services
554.9
599.5
(44.6
)
(7
)
(7
)
Advisory, Consulting and Other
415.0
437.5
(22.5
)
(5
)
(4
)
RES fee revenue
$
3,868.3
4,441.8
(573.5
)
(13
)%
(12
)%
LaSalle
299.4
322.7
(23.3
)
(7
)
(7
)
Compensation and benefits excluding gross contract costs
2,963.3
3,366.2
(402.9
)
(12
)
(11
)
Operating, administrative and other expenses excluding gross contract costs
753.2
808.7
(55.5
)
(7
)
(6
)
Depreciation and amortization
166.8
145.6
21.2
15
15
Total fee-based operating expenses
3,883.3
4,320.5
(437.2
)
(10
)
(10
)
Restructuring and acquisition charges
75.8
114.3
(38.5
)
(34
)
(34
)
Gross contract costs
1,963.5
2,073.7
(110.2
)
(5
)
(4
)
Total operating expenses, excluding reimbursed expenses
$
5,922.6
6,508.5
(585.9
)
(9
)%
(8
)%
Operating income
$
230.3
347.1
(116.8
)
(34
)%
(34
)%
Equity (losses) earnings
$
1.4
32.3
(30.9
)
(96
)%
(96
)%
Adjusted EBITDA
$
442.5
622.0
(179.5
)
(29
)%
(29
)%
32
Table of Contents
Non-GAAP Financial Measures
Management uses certain non-GAAP financial measures to develop budgets and forecasts, measure and reward performance against those budgets and forecasts, and enhance comparability to prior periods. These measures are believed to be useful to investors and other external stakeholders as supplemental measures of core operating performance and include the following:
(i) Fee revenue and Fee-based operating expenses;
(ii) Adjusted EBITDA attributable to common shareholders ("Adjusted EBITDA") and Adjusted EBITDA margin; and
(iii) Percentage changes against prior periods, presented on a local currency basis.
However, non-GAAP financial measures should not be considered alternatives to measures determined in accordance with U.S. generally accepted accounting principles (“GAAP”). Any measure that eliminates components of a company’s capital structure, cost of operations or investment, or other results has limitations as a performance measure. In light of these limitations, management also considers GAAP financial measures and does not rely solely on non-GAAP financial measures. Because our non-GAAP financial measures are not calculated in accordance with GAAP, they may not be comparable to similarly titled measures used by other companies.
Adjustments to GAAP Financial Measures Used to Calculate non-GAAP Financial Measures
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 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. Non-cash derivative gains/losses resulting from mortgage banking loan commitment and warehousing activity are calculated as the estimated fair value of loan commitments and subsequent changes thereof, primarily represented by the estimated net cash flows associated with future servicing rights. MSR gains and corresponding MSR intangible assets are calculated as the present value of estimated net cash flows over the estimated mortgage servicing periods. The above activity is reported entirely within Revenue of the Capital Markets service line of the Americas segment. Excluding net non-cash MSR and mortgage banking derivative activity reflects how we manage and evaluate performance because the excluded activity is non-cash in nature.
Restructuring and acquisition charges primarily consist of: (i) severance and employment-related charges, including those related to external service providers, incurred in conjunction with a structural business shift, which can be represented by a notable change in headcount, change in leadership or transformation of business processes; (ii) acquisition, transaction and integration-related charges, including fair value adjustments, which are generally non-cash in the periods such adjustments are made, to assets and liabilities recorded in purchase accounting such as earn-out liabilities and intangible assets; and (iii) other restructuring, including lease exit charges. Such activity is excluded as the amounts are generally either non-cash in nature or the anticipated benefits from the expenditures would not likely be fully realized until future periods. 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.
33
Table of Contents
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 September 30,
Nine Months Ended September 30,
(in millions)
2020
2019
2020
2019
Revenue
$
3,978.1
4,495.6
$
11,744.5
12,582.7
Less: Reimbursements
(1,886.7
)
(1,949.8
)
(5,591.6
)
(5,727.1
)
Revenue before reimbursements
2,091.4
2,545.8
6,152.9
6,855.6
Adjustments:
Gross contract costs
(659.1
)
(717.7
)
(1,963.5
)
(2,073.7
)
Net non-cash MSR and mortgage banking derivative activity
(14.7
)
(12.7
)
(21.7
)
(17.4
)
Fee revenue
$
1,417.6
1,815.4
$
4,167.7
4,764.5
Operating expenses
$
3,823.2
4,324.0
$
11,514.2
12,235.6
Less: Reimbursed expenses
(1,886.7
)
(1,949.8
)
(5,591.6
)
(5,727.1
)
Operating expenses, excluding reimbursed expenses
1,936.5
2,374.2
5,922.6
6,508.5
Less: Gross contract costs
(659.1
)
(717.7
)
(1,963.5
)
(2,073.7
)
Fee-based operating expenses
$
1,277.4
1,656.5
$
3,959.1
4,434.8
Operating income
$
154.9
171.6
$
230.3
347.1
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 September 30,
Nine Months Ended September 30,
(in millions)
2020
2019
2020
2019
Net income attributable to common shareholders
$
131.9
128.9
$
152.4
260.7
Add:
Interest expense, net of interest income
12.3
18.0
41.8
41.2
Provision for income taxes
25.7
42.1
32.2
77.6
Depreciation and amortization
54.9
53.6
166.8
145.6
EBITDA
$
224.8
242.6
$
393.2
525.1
Adjustments:
Restructuring and acquisition charges
33.5
70.0
75.8
114.3
Gain on disposition
—
—
(4.8
)
—
Net non-cash MSR and mortgage banking derivative activity
(14.7
)
(12.7
)
(21.7
)
(17.4
)
Adjusted EBITDA
$
243.6
299.9
$
442.5
622.0
Net income margin attributable to common shareholders
6.3
%
5.1
%
2.5
%
3.8
%
Adjusted EBITDA margin
17.4
%
16.5
%
10.6
%
13.1
%
34
Table of Contents
In discussing our operating results, we report Adjusted EBITDA margins and refer to percentage changes in local currency, unless otherwise noted. Amounts presented on a local currency basis are calculated by translating the current period results of our foreign operations to U.S. dollars using the foreign currency exchange rates from the comparative period. We believe this methodology provides a framework for assessing performance and operations excluding the effect of foreign currency fluctuations.
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 September 30,
Nine Months Ended September 30,
($ in millions)
2020
% Change
2020
% Change
Revenue:
At current period exchange rates
$
3,978.1
(12
)%
$
11,744.5
(7
)%
Impact of change in exchange rates
(28.5
)
n/a
81.4
n/a
At comparative period exchange rates
$
3,949.6
(12
)%
$
11,825.9
(6
)%
Fee Revenue:
At current period exchange rates
$
1,417.6
(22
)%
$
4,167.7
(13
)%
Impact of change in exchange rates
(14.5
)
n/a
23.3
n/a
At comparative period exchange rates
$
1,403.1
(23
)%
$
4,191.0
(12
)%
Operating Income:
At current period exchange rates
$
154.9
(10
)%
$
230.3
(34
)%
Impact of change in exchange rates
(1.2
)
n/a
(1.5
)
n/a
At comparative period exchange rates
$
153.7
(10
)%
$
228.8
(34
)%
Adjusted EBITDA:
At current period exchange rates
$
243.6
(19
)%
$
442.5
(29
)%
Impact of change in exchange rates
(0.1
)
n/a
0.3
n/a
At comparative period exchange rates
$
243.5
(19
)%
$
442.8
(29
)%
35
Table of Contents
COVID-19 Pandemic
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.
Revenue
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%. 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 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 the Indian rupee, Australian dollar and Chinese yuan drove the spread on year-to-date percentages.
Operating Expenses
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)
2020
2019
2020
2019
Severance and other employment-related charges
$
19.3
7.2
$
27.6
17.6
Restructuring, pre-acquisition and post-acquisition charges
14.8
62.1
56.4
76.0
Fair value adjustments that resulted in a net increase (decrease) to earn-out liabilities from prior-period acquisition activity
(0.6
)
0.7
(8.2
)
20.7
Total restructuring & acquisition charges
$
33.5
70.0
$
75.8
114.3
36
Table of Contents
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 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
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 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.
Income Taxes
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 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 $442.5 million for the third quarter and first nine months of 2020 , respectively, decreases of 19% and 29% from the prior-year periods. Net income margin attributable to common shareholders for the third quarter (against Revenue before reimbursements) was 6.3% , compared with 5.1% in the prior-year quarter. Adjusted EBITDA margin for the third quarter , calculated on a fee-revenue basis, was 17.2% in USD ( 17.4% in local currency), compared with 16.5% in 2019 . The net margin expansion was primarily driven by cost mitigation efforts, including government relief programs, partially offset by net dilution from RES, reflecting the decline in fee revenue, specifically transactional service lines.
37
Table of Contents
Segment Operating Results
We manage and report our operations as four business segments. Our three geographic RES segments include Americas, EMEA and Asia Pacific. Our fourth segment is LaSalle, our investment management business.
Each geographic region offers our full range of real estate services, including tenant representation and agency leasing, capital markets, property management, facility management, project and development services, and advisory, consulting and valuation services. We consider "property management" to be services provided to non-occupying property investors and "facility management" to be services provided to owner-occupiers. LaSalle provides investment management services to institutional investors and high-net-worth individuals.
For segment reporting, (i) gross contract costs and (ii) net non-cash MSR and mortgage banking derivative activity are both excluded from revenue in determining "fee revenue". Gross contract costs are excluded from operating expenses in determining "fee-based operating expenses." In addition, our measure of segment results also excludes Restructuring and acquisition charges.
Americas - Real Estate Services
% Change
Three Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
2,380.8
2,687.6
(306.8
)
(11
)%
(11
)%
Reimbursements
(1,389.6
)
(1,430.3
)
40.7
(3
)
(3
)
Revenue before reimbursements
$
991.2
1,257.3
(266.1
)
(21
%)
(21
%)
Gross contract costs
(202.8
)
(200.8
)
(2.0
)
1
3
Net non-cash MSR and mortgage banking derivative activity
(14.7
)
(12.7
)
(2.0
)
16
16
Fee Revenue
$
773.7
1,043.8
(270.1
)
(26
)%
(26
)%
Leasing
313.6
460.9
(147.3
)
(32
)
(32
)
Capital Markets
175.5
308.8
(133.3
)
(43
)
(43
)
Property & Facility Management
149.6
121.7
27.9
23
24
Project & Development Services
88.7
103.3
(14.6
)
(14
)
(13
)
Advisory, Consulting and Other
46.3
49.1
(2.8
)
(6
)
(5
)
Compensation, operating and administrative expenses excluding gross contract costs
616.8
844.8
(228.0
)
(27
)
(27
)
Depreciation and amortization
36.4
35.3
1.1
3
4
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
653.2
880.1
(226.9
)
(26
)
(25
)
Gross contract costs
202.8
200.8
2.0
1
3
Segment operating expenses (excluding reimbursed expenses)
$
856.0
1,080.9
(224.9
)
(21
)%
(20
)%
Equity earnings
$
4.8
1.5
3.3
n.m.
n.m.
Segment income
$
140.0
177.9
(37.9
)
(21
)%
(21
)%
Adjusted EBITDA
$
161.9
201.0
(39.1
)
(19
)%
(19
)%
38
Table of Contents
Americas - Real Estate Services (continued)
% Change
Nine Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
7,132.9
7,401.3
(268.4
)
(4
)%
(3
)%
Reimbursements
(4,128.1
)
(4,184.8
)
56.7
(1
)
(1
)
Revenue before reimbursements
$
3,004.8
3,216.5
(211.7
)
(7
)%
(6
)%
Gross contract costs
(607.9
)
(580.3
)
(27.6
)
5
7
Net non-cash MSR and mortgage banking derivative activity
(21.7
)
(17.4
)
(4.3
)
25
25
Fee Revenue
$
2,375.2
2,618.8
(243.6
)
(9
)%
(9
)%
Leasing
986.2
1,318.0
(331.8
)
(25
)
(25
)
Capital Markets
553.6
533.0
20.6
4
4
Property & Facility Management
425.6
348.9
76.7
22
23
Project & Development Services
273.2
283.7
(10.5
)
(4
)
(3
)
Advisory, Consulting and Other
136.6
135.2
1.4
1
2
Compensation, operating and administrative expenses excluding gross contract costs
2,027.3
2,189.8
(162.5
)
(7
)
(7
)
Depreciation and amortization
112.9
88.9
24.0
27
27
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
2,140.2
2,278.7
(138.5
)
(6
)
(6
)
Gross contract costs
607.9
580.3
27.6
5
7
Segment operating expenses (excluding reimbursed expenses)
$
2,748.1
2,859.0
(110.9
)
(4
)%
(3
)%
Equity earnings
$
20.4
1.6
18.8
n.m.
n.m.
Segment income
$
277.1
359.1
(82.0
)
(23
)%
(23
)%
Adjusted EBITDA
$
357.2
431.1
(73.9
)
(17
)%
(17
)%
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 $56 million of non-permanent cost savings, including government relief programs, coupled with growth in Property & Facility Management more than offset the decline attributable to transaction-based service lines.
39
Table of Contents
EMEA - Real Estate Services
% Change
Three Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
743.8
862.6
(118.8
)
(14
)%
(17
)%
Reimbursements
(149.1
)
(174.1
)
25.0
(14
)
(18
)
Revenue before reimbursements
$
594.7
688.5
(93.8
)
(14
)%
(17
)%
Gross contract costs
(270.1
)
(287.5
)
17.4
(6
)
(10
)
Fee Revenue
$
324.6
401.0
(76.4
)
(19
)%
(22
)%
Leasing
56.6
71.0
(14.4
)
(20
)
(24
)
Capital Markets
69.1
102.0
(32.9
)
(32
)
(35
)
Property & Facility Management
76.9
95.3
(18.4
)
(19
)
(23
)
Project & Development Services
68.1
72.4
(4.3
)
(6
)
(9
)
Advisory, Consulting and Other
53.9
60.3
(6.4
)
(11
)
(14
)
Compensation, operating and administrative expenses excluding gross contract costs
317.5
377.1
(59.6
)
(16
)
(19
)
Depreciation and amortization
9.8
10.1
(0.3
)
(3
)
(7
)
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
327.3
387.2
(59.9
)
(15
)
(18
)
Gross contract costs
270.1
287.5
(17.4
)
(6
)
(10
)
Segment operating expenses (excluding reimbursed expenses)
$
597.4
674.7
(77.3
)
(11
)%
(15
)%
Equity earnings
$
0.8
—
0.8
n.m.
n.m.
Segment (loss) income
$
(1.9
)
13.8
(15.7
)
n.m.
n.m.
Adjusted EBITDA
$
7.7
24.6
(16.9
)
(69
)%
(66
)%
40
Table of Contents
EMEA - Real Estate Services (continued)
% Change
Nine Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
2,125.9
2,404.3
(278.4
)
(12
)%
(11
)%
Reimbursements
(500.7
)
(492.4
)
(8.3
)
2
2
Revenue before reimbursements
$
1,625.2
1,911.9
(286.7
)
(15
)%
(15
)%
Gross contract costs
(722.1
)
(814.9
)
92.8
(11
)
(11
)
Fee Revenue
$
903.1
1,097.0
(193.9
)
(18
)%
(17
)%
Leasing
149.1
185.5
(36.4
)
(20
)
(19
)
Capital Markets
184.2
235.0
(50.8
)
(22
)
(21
)
Property & Facility Management
221.0
291.6
(70.6
)
(24
)
(24
)
Project & Development Services
193.0
205.3
(12.3
)
(6
)
(6
)
Advisory, Consulting and Other
155.8
179.6
(23.8
)
(13
)
(13
)
Compensation, operating and administrative expenses excluding gross contract costs
931.7
1,081.2
(149.5
)
(14
)
(13
)
Depreciation and amortization
28.0
32.7
(4.7
)
(14
)
(14
)
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
959.7
1,113.9
(154.2
)
(14
)
(13
)
Gross contract costs
722.1
814.9
(92.8
)
(11
)
(11
)
Segment operating expenses (excluding reimbursed expenses)
$
1,681.8
1,928.8
(247.0
)
(13
)%
(13
)%
Equity earnings (losses)
$
0.8
(1.0
)
1.8
n.m.
n.m.
Segment loss
$
(55.8
)
(17.9
)
(37.9
)
n.m.
n.m.
Adjusted EBITDA
$
(26.6
)
16.0
(42.6
)
n.m.
n.m.
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 $23 million of non-permanent cost savings, including government relief programs.
41
Table of Contents
Asia Pacific - Real Estate Services
% Change
Three Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
743.2
833.8
(90.6
)
(11
)%
(12
)%
Reimbursements
(347.2
)
(343.6
)
(3.6
)
1
(1
)
Revenue before reimbursements
$
396.0
490.2
(94.2
)
(19
)%
(20
)%
Gross contract costs
(182.5
)
(225.3
)
42.8
(19
)
(19
)
Fee Revenue
$
213.5
264.9
(51.4
)
(19
)%
(20
)%
Leasing
42.7
56.4
(13.7
)
(24
)
(25
)
Capital Markets
18.2
47.8
(29.6
)
(62
)
(63
)
Property & Facility Management
75.9
76.1
(0.2
)
—
(2
)
Project & Development Services
31.2
40.4
(9.2
)
(23
)
(23
)
Advisory, Consulting and Other
45.5
44.2
1.3
3
1
Compensation, operating and administrative expenses excluding gross contract costs
171.7
227.6
(55.9
)
(25
)
(26
)
Depreciation and amortization
6.9
6.5
0.4
6
5
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
178.6
234.1
(55.5
)
(24
)
(25
)
Gross contract costs
182.5
225.3
(42.8
)
(19
)
(19
)
Segment operating expenses (excluding reimbursed expenses)
$
361.1
459.4
(98.3
)
(21
)%
(22
)%
Equity earnings
$
0.9
0.7
0.2
29
%
36
%
Segment income
$
35.8
31.5
4.3
14
%
14
%
Adjusted EBITDA
$
42.7
37.7
5.0
13
%
13
%
42
Table of Contents
Asia Pacific - Real Estate Services (continued)
% Change
Nine Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
2,170.6
2,437.7
(267.1
)
(11
)%
(9
)%
Reimbursements
(959.1
)
(1,044.3
)
85.2
(8
)
(6
)
Revenue before reimbursements
$
1,211.5
1,393.4
(181.9
)
(13
)%
(11
)%
Gross contract costs
(621.5
)
(667.4
)
45.9
(7
)
(5
)
Fee Revenue
$
590.0
726.0
(136.0
)
(19
)%
(17
)%
Leasing
96.6
152.0
(55.4
)
(36
)
(36
)
Capital Markets
58.5
116.7
(58.2
)
(50
)
(49
)
Property & Facility Management
223.6
224.1
(0.5
)
—
1
Project & Development Services
88.7
110.5
(21.8
)
(20
)
(18
)
Advisory, Consulting and Other
122.6
122.7
(0.1
)
—
2
Compensation, operating and administrative expenses excluding gross contract costs
512.8
648.6
(135.8
)
(21
)
(19
)
Depreciation and amortization
20.5
19.3
1.2
6
8
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
533.3
667.9
(134.6
)
(20
)
(19
)
Gross contract costs
621.5
667.4
(45.9
)
(7
)
(5
)
Segment operating expenses (excluding reimbursed expenses)
$
1,154.8
1,335.3
(180.5
)
(14
)%
(12
)%
Equity earnings
$
0.7
1.4
(0.7
)
(50
)%
(47
)%
Segment income
$
57.4
59.5
(2.1
)
(4
)%
(5
)%
Adjusted EBITDA
$
78.2
78.6
(0.4
)
(1
)%
(1
)%
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. Asia Pacific's margin expansion was driven by an estimated $35 million of non-permanent cost savings, including government relief programs, which more than offset the decline attributable to transaction-based revenue.
43
Table of Contents
LaSalle
% Change
Three Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
110.3
111.6
(1.3
)
(1
)%
(3
)%
Reimbursements
(0.8
)
(1.8
)
1.0
(56
)
(57
)
Revenue before reimbursements
$
109.5
109.8
(0.3
)
—
%
(2
)%
Gross contract costs
(3.7
)
(4.1
)
0.4
(10
)
(9
)
Fee Revenue
$
105.8
105.7
0.1
—
%
(2
)%
Advisory fees
81.0
76.6
4.4
6
4
Transaction fees & other
16.8
11.7
5.1
44
41
Incentive fees
8.0
17.4
(9.4
)
(54
)
(55
)
Compensation, operating and administrative expenses excluding gross contract costs
83.0
83.4
(0.4
)
—
(2
)
Depreciation and amortization
1.8
1.7
0.1
6
7
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
84.8
85.1
(0.3
)
—
(2
)
Gross contract costs
3.7
4.1
(0.4
)
(10
)
(9
)
Segment operating expenses (excluding reimbursed expenses)
$
88.5
89.2
(0.7
)
(1
)%
(2
)%
Equity earnings
$
8.5
14.9
(6.4
)
(43
)%
(43
)%
Segment income
$
29.5
35.5
(6.0
)
(17
)%
(19
)%
Adjusted EBITDA
$
31.3
36.5
(5.2
)
(14
)%
(17
)%
44
Table of Contents
LaSalle (continued)
% Change
Nine Months Ended September 30,
Change in
in Local
($ in millions)
2020
2019
U.S. dollars
Currency
Revenue
$
315.1
339.4
(24.3
)
(7
)%
(7
)%
Reimbursements
(3.7
)
(5.6
)
1.9
(34
)
(33
)
Revenue before reimbursements
$
311.4
333.8
(22.4
)
(7
)%
(7
)%
Gross contract costs
(12.0
)
(11.1
)
(0.9
)
8
8
Fee Revenue
$
299.4
322.7
(23.3
)
(7
)%
(7
)%
Advisory fees
239.5
227.2
12.3
5
5
Transaction fees & other
32.0
36.9
(4.9
)
(13
)
(14
)
Incentive fees
27.9
58.6
(30.7
)
(52
)
(53
)
Compensation, operating and administrative expenses excluding gross contract costs
244.7
255.3
(10.6
)
(4
)
(4
)
Depreciation and amortization
5.4
4.7
0.7
15
15
Segment fee-based operating expenses (excluding restructuring and acquisition charges)
250.1
260.0
(9.9
)
(4
)
(4
)
Gross contract costs
12.0
11.1
0.9
8
8
Segment operating expenses (excluding reimbursed expenses)
$
262.1
271.1
(9.0
)
(3
)%
(3
)%
Equity (losses) earnings
$
(20.5
)
30.3
(50.8
)
n.m.
n.m.
Segment income
$
28.8
93.0
(64.2
)
(69
)%
(70
)%
Adjusted EBITDA
$
33.7
96.4
(62.7
)
(65
)%
(66
)%
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 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.
45
Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations, co-investment activity, share repurchases and dividend payments, capital expenditures and business acquisitions with internally generated funds, borrowings on our Facility, and through issuance of Long-term debt.
Cash Flows from Operating Activities
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 $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 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.
Debt
Our $2.75 billion Facility matures on May 17, 2023 . 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 $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. See Note 9, Debt , in the Notes to Condensed Consolidated Financial Statements for additional information on our Facility, Long-term debt and Short-term borrowings.
Investment Activity
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. In addition, we expect continued investments by JLL Spark venture funds.
See Note 6, Investments in Real Estate Ventures , in the Notes to Condensed Consolidated Financial Statements for additional information on our investment activity.
46
Table of Contents
Share Repurchase and Dividend Programs
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 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 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 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 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 $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 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.
We will continue to consider acquisitions that we believe will strengthen our market position, increase our profitability, and supplement our organic growth.
Repatriation of Foreign Earnings
Based on our historical experience and future business plans, we do not expect to repatriate our foreign-sourced earnings to the United States. We believe our policy of permanently investing earnings of foreign subsidiaries does not significantly impact our liquidity. 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
We face regulatory restrictions in certain countries that limit or prevent the transfer of funds to other countries or the exchange of the local currency to other currencies. 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 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 $338.8 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.
47
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
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. 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. Management believes that these forward-looking statements are reasonable as and when made. 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, 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 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. 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.
48
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.