Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 our 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 after Part IV, Item 15. Exhibits and Financial Statement Schedules.
We present our 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;
(3) Certain market and other risks we face;
(4) The results of our operations, first on a consolidated basis and then for each of our business segments; and
(5) Liquidity and capital resources.
In this Item, we discuss results for the years ended December 31, 2020 and 2019 and the comparison between these years. Discussions of results for the year ended December 31, 2018 and comparisons between 2019 and 2018 results 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 .
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. The preparation of our financial statements requires management to make certain critical accounting estimates and judgments that impact (i) the stated amount of assets and liabilities, (ii) disclosure of contingent assets and liabilities as of the date of the financial statements and (iii) the reported amounts 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 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 may differ from such estimated amounts, we believe such differences are not likely to be material. For additional detail regarding our critical accounting policies and estimates discussed below, see Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item 8.
Revenue Recognition
We earn revenue from the following:
• Leasing;
• Capital Markets;
• Property & Facility Management;
• Project & Development Services;
• Advisory, Consulting and Other; and
• LaSalle.
Our services are generally earned and billed in the form of transaction commissions, advisory and management fees, and incentive fees. Some of the contractual terms related to the services we provide, and thus the revenue we recognize, can be complex and so requires us to make judgments about our performance obligations and the timing and extent of revenue to recognize. In addition, a significant portion of our revenue represents the reimbursement of costs we incur on behalf of clients.
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Goodwill and Other Intangible Assets
Consistent with the services nature of the businesses we have acquired, the largest asset on the Consolidated Balance Sheets is goodwill. We do not amortize goodwill; instead, we evaluate goodwill for impairment at least annually, or as events or changes in circumstances indicate the carrying value may be impaired.
In addition, we may record intangible assets as a result of acquisitions, which are primarily composed of customer relationships, management contracts and customer backlog, and are amortized on a straight-line basis over their estimated useful lives. We establish an intangible upon closing on the sale of a mortgage loan we originated, referred to as a warehouse receivable, concurrent with the retention of its servicing rights and amortize the intangible over the estimated period net servicing income is projected to be received. We evaluate our identified intangibles for impairment at least annually, or as events or changes in circumstances indicate the carrying value may be impaired.
Investments in Real Estate Ventures
We invest in certain real estate ventures that primarily own and operate commercial real estate. Historically, these investments have primarily been co-investments in funds that LaSalle establishes in the ordinary course of business for its clients. These investments include non-controlling ownership interests generally ranging from less than 1% to 10% of the respective ventures. We account for these investments at fair value or under the equity method of accounting. Where applicable, we estimate fair value using the net asset value ("NAV") per share (or its equivalent) our investees provide. Critical inputs to NAV estimates include valuations of the underlying real estate assets and borrowings, which incorporate investment-specific assumptions such as discount rates, capitalization rates, rental and expense growth rates, and asset-specific market borrowing rates. In circumstances where the NAV provided by the investee has a reporting date different than ours or when the NAV is not calculated consistent with U.S. GAAP measurement principles, we adjust the NAV accordingly. For Investments in real estate ventures reported at fair value, our investment is increased or decreased each reporting period by the difference between the fair value of the investment and the carrying value as of the balance sheet date. We reflect these fair value adjustments as gains or losses on the Consolidated Statements of Comprehensive Income within Equity earnings.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the expected future tax consequences attributable to (i) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and (ii) operating loss and tax credit carryforwards. We measure deferred tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. We recognize into income the effect on deferred tax assets and liabilities of a change in tax rates in the period including the enactment date.
Because of the global and cross-border nature of our business, our corporate tax position is complex. We generally provide for taxes in each tax jurisdiction in which we operate based on local tax regulations and rules. Such taxes are provided on net earnings and include the provision for taxes on substantively all differences between financial statement amounts and amounts used in tax returns, excluding certain non-deductible items and permanent differences.
Our global effective tax rate is sensitive to the complexity of our operations as well as to changes in the mix of our geographic profitability. Local statutory tax rates range from 0% to 38.1% in the countries in which we have significant operations. 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.
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.
Our effective tax rates are presented in the following table. In addition, we present the rate excluding the subsequent changes to the provisional estimate relating to the transition tax component of the U.S. tax legislation passed in December 2017 commonly known as the Tax Cuts and Jobs Act ("the Act").
For the year ended December 31,
2020 2019 2018
Effective tax rate 20.2 % 22.9 % 30.4 %
Effective tax rate excluding the impact of the transition tax 20.2 % 23.5 % 23.7 %
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Very low tax rate jurisdictions (those with effective national and local combined tax rates of 25% or lower) providing the most significant contributions to our effective tax rate include: Hong Kong (16.5%), Singapore (17%), the United Kingdom (19%) and Saudi Arabia (20%).
Based on our historical experience and future business plans, we do not expect to repatriate our foreign source earnings to the U.S. As of December 31, 2020, we have therefore not provided for withholding tax, dividend distribution tax, capital gains taxes, or other taxes which could arise upon such distribution. We believe our policy of permanently reinvesting earnings of foreign subsidiaries does not significantly impact our liquidity.
We have established valuation allowances against deferred tax assets where expected future taxable income does not support their realization on a more-likely-than-not basis. We formally assess the likelihood of being able to utilize current tax losses in the future on a country-by-country basis, commensurate with the determination of each quarter’s income tax provision. We establish or increase valuation allowances upon specific indications the carrying value of a tax asset may not be recoverable. Alternatively, we reduce valuation allowances upon (i) specific indications the carrying value of the related tax asset is more-likely-than-not recoverable or (ii) the implementation of tax planning strategies which allow an asset we previously determined to be not realizable to be viewed as realizable.
The table below summarizes certain information regarding the gross deferred tax assets and valuation allowance.
December 31,
(in millions) 2020 2019
Gross deferred tax assets $ 584.8 492.4
Valuation allowance 71.4 70.4
The increase in gross deferred tax assets in 2020 was primarily the result of increases in compensation accruals in certain jurisdictions.
We evaluate our segment operating performance before tax, and do not consider it meaningful to allocate tax by segment. Estimations and judgments relevant to the determination of tax expense, assets, and liabilities require analysis of the tax environment and the future profitability, for tax purposes, of local statutory legal entities rather than business segments. Our statutory legal entity structure generally does not mirror the way we organize, manage, and report our business operations. For example, the same legal entity may include both LaSalle and RES businesses in a particular country.
As of December 31, 2020, the amount of unrecognized tax benefits was $75.3 million. We believe it is reasonably possible that matters for which we have recorded $18.7 million of unrecognized tax benefits as of December 31, 2020, will be resolved during 2021. The recognition of tax benefits, and other changes to the amounts of our unrecognized tax benefits, may occur as the result of ongoing operations, the outcomes of audits or other examinations by tax authorities, or the passing of statutes of limitations. We do not expect changes to our unrecognized tax benefits to have a significant impact on net income, the financial position, or the cash flows of JLL. We do not believe we have material tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.
NEW ACCOUNTING STANDARDS
Refer to Note 2, Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements, included in Item 8.
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ITEMS AFFECTING COMPARABILITY
Macroeconomic Conditions
Our results of operations and the variability of these results are significantly influenced by (i) macroeconomic trends, (ii) the geopolitical environment, (iii) the global and regional real estate markets and (iv) 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, macroeconomic conditions influenced by the COVID-19 pandemic impacted our operations.
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 and Equity Earnings
Our investment management business is, in part, compensated through incentive fees where performance of underlying funds' investments exceeds agreed-to return hurdles. 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 (i) gains (losses) on investments reported at fair value, (ii) gains (losses) on asset dispositions and (iii) 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 3, Business Segments, of the Notes to Consolidated Financial Statements, included in Item 8, 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 rate of growth or decline that might not have been consistent with the real underlying rate of growth or decline 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.
Transactional-Based Revenue
Transactional-based fees, that are impacted by the size and timing of our clients' transactions, from capital markets activities, leasing activities and other services within our RES business, 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 segment-to-segment.
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MARKET RISKS
Market Risk
The principal market risks we face due to the risk of loss arising from adverse changes in market rates and prices are:
• Interest rates on our unsecured credit facility (the "Facility"); and
• Foreign exchange risks.
In the normal course of business, we manage these risks through a variety of strategies, including hedging transactions using various derivative financial instruments such as foreign currency forward contracts. We enter into derivative instruments that are short-term in duration with high credit-quality counterparties and diversify our positions across such counterparties in order to reduce our exposure to credit losses. We do not enter into derivative transactions for trading or speculative purposes.
Interest Rates
We centrally manage our debt, considering investment opportunities and risks, tax consequences, and overall financing strategies. Our overall interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. We are primarily exposed to interest rate risk on our Facility, which had a borrowing capacity of $2.75 billion as of December 31, 2020. The Facility consists of revolving credit available for working capital, investments, capital expenditures and acquisitions. Our average outstanding borrowings under the Facility during 2020 were $865.1 million, with an effective interest rate of 1.6%. We had no outstanding borrowings under the Facility as of December 31, 2020. The Facility bears a variable rate of interest that fluctuates based on market rates.
Our Notes, $275.0 million face value due in November 2022, bear interest at an annual rate of 4.4%, subject to adjustment if a credit rating assigned to the Notes is downgraded below an investment grade rating (or subsequently upgraded). Our €350.0 million face value of Euro Notes is split between €175.0 million due in June 2027 and €175.0 million due in June 2029, bearing interest at an annual rate of 1.96% and 2.21%, respectively. The issuance of the Notes and Euro Notes at fixed interest rates has helped to limit our exposure to future movements in interest rates.
We assess interest rate sensitivity to estimate the potential effect of rising interest rates on our variable rate debt. If interest rates were 50 basis points higher during 2020, Interest expense, net of interest income, would have been $4.3 million higher.
Foreign Exchange
Foreign exchange risk is the risk we will incur economic losses due to adverse changes in foreign currency exchange rates. Our revenue from outside of the U.S. approximated 43% and 44% of our total revenue for 2020 and 2019, respectively, as outlined in the table below. Operating in international markets means we are exposed to movements in foreign exchange rates, most significantly the British pound and the euro.
We mitigate our foreign currency exchange risk principally by (i) establishing local operations in the markets we serve and (ii) invoicing customers in the same currency as the source of the costs. The impact of translating expenses incurred in foreign currencies into U.S. dollars reduces the impact of translating revenue earned in foreign currencies into U.S. dollars. In addition, British pound and Singapore dollar expenses incurred as a result of our regional headquarters being located in London and Singapore, respectively, act as ongoing partial operational hedges against our translation exposures to those currencies.
We enter into forward foreign currency exchange contracts to manage currency risks associated with intercompany loan balances. Generally, the maturity of these contracts is less than 60 days. As of December 31, 2020, we had forward exchange contracts in effect with a gross notional value of $2.34 billion ($1.42 billion on a net basis). The corresponding net carrying gain is generally offset by a carrying loss in associated intercompany loans.
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Although we operate globally, we report our results in U.S. dollars. As a result, the strengthening or weakening of the U.S. dollar in relation to currencies we are exposed to may positively or negatively impact our reported results. The following table sets forth the revenue derived from our most significant currencies.
Year Ended December 31,
($ in millions) 2020 % of Total 2019 % of Total
United States dollar $ 9,457.8 57.0 % $ 10,054.9 55.9 %
Euro 1,350.6 8.1 1,507.7 8.4
British pound 1,341.1 8.1 1,514.8 8.4
Australian dollar 876.1 5.3 924.5 5.1
Indian rupee 524.5 3.2 651.8 3.6
Hong Kong dollar 512.2 3.1 533.8 3.0
Chinese yuan 473.1 2.9 505.9 2.8
Canadian dollar 432.6 2.6 435.5 2.4
Japanese yen 257.9 1.6 349.4 1.9
Singapore dollar 246.6 1.5 309.2 1.7
Other currencies 1,117.4 6.6 1,195.7 6.6
Total revenue $ 16,589.9 100.0 % $ 17,983.2 100.0 %
Had the British pound-to-U.S. dollar exchange rates been 10% higher throughout the course of 2020, we estimate our reported operating income would have increased by $5.3 million. Had euro-to-U.S. dollar exchange rates been 10% higher throughout the course of 2020, we estimate our reported operating income would have increased by $10.3 million. These hypothetical calculations estimate the impact of translating results into U.S. dollars and do not include an estimate of the impact a 10% increase in the U.S. dollar against other currencies would have on our foreign operations.
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 throughout 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 underlying valuations, 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. In 2020, macroeconomic conditions influenced by the COVID-19 pandemic impacted the historical seasonality of our revenue and profits.
Inflation
Our operating expenses fluctuate with our revenue and general economic conditions including inflation. However, we do not believe inflation has had a material impact on our results of operations during the three-year period ended December 31, 2020.
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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 select markets in Asia Pacific. We define market volumes for Capital Markets as the U.S. dollar equivalent value of 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.
Year Ended December 31, 2020 compared with Year Ended December 31, 2019
Year Ended December 31, Change in % Change in Local Currency
($ in millions) 2020 2019 U.S. dollars
Leasing $ 1,884.2 2,524.0 (639.8) (25) % (25) %
Capital Markets 1,407.4 1,542.2 (134.8) (9) (9)
Property & Facility Management 9,485.4 9,364.7 120.7 1 2
Project & Development Services 2,530.1 3,121.5 (591.4) (19) (19)
Advisory, Consulting and Other 861.0 904.7 (43.7) (5) (5)
Real Estate Services ("RES") revenue $ 16,168.1 17,457.1 (1,289.0) (7) % (7) %
LaSalle 421.8 526.1 (104.3) (20) (20)
Revenue $ 16,589.9 17,983.2 (1,393.3) (8) % (8) %
Reimbursements 7,689.8 7,952.6 (262.8) (3) (3)
Revenue before reimbursements 8,900.1 10,030.6 (1,130.5) (11) (11)
Gross contract costs (2,703.2) (2,870.2) 167.0 (6) (6)
Net non-cash MSR and mortgage banking derivative activity (66.6) (21.2) (45.4) n.m. n.m.
Fee revenue $ 6,130.3 7,139.2 (1,008.9) (14) % (14) %
Leasing 1,817.8 2,455.7 (637.9) (26) (26)
Capital Markets 1,309.2 1,477.5 (168.3) (11) (12)
Property & Facility Management 1,199.5 1,181.8 17.7 1 2
Project & Development Services 776.1 861.0 (84.9) (10) (10)
Advisory, Consulting and Other 627.0 660.3 (33.3) (5) (5)
RES fee revenue $ 5,729.6 6,636.3 (906.7) (14) % (14) %
LaSalle 400.7 502.9 (102.2) (20) (21)
Compensation and benefits excluding gross contract costs $ 4,277.1 4,922.7 (645.6) (13) % (13) %
Operating, administrative and other expenses excluding gross contract costs 991.9 1,135.5 (143.6) (13) (12)
Depreciation and amortization 226.4 202.4 24.0 12 12
Restructuring and acquisition charges 142.4 184.4 (42.0) (23) (24)
Total fee-based operating expenses 5,637.8 6,445.0 (807.2) (13) (13)
Gross contract costs 2,703.2 2,870.2 (167.0) (6) (6)
Total operating expenses, excluding reimbursed expenses $ 8,341.0 9,315.2 (974.2) (10) % (10) %
Operating income $ 559.1 715.4 (156.3) (22) % (23) %
Equity earnings $ 8.0 36.3 (28.3) (78) % (78) %
Adjusted EBITDA $ 859.6 1,116.1 (256.5) (23) % (24) %
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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 and Adjusted EBITDA margin
(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. GAAP. Any measure that eliminates components of a company’s capital structure, cost of operations or investments, or other results has limitations as a performance measure. In light of these limitations, management also considers U.S. 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 U.S. 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 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 non-cash fair value adjustments to assets and liabilities recorded in purchase accounting such as earn-out liabilities and intangible assets and (iii) 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.
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Reconciliation of Non-GAAP Financial Measures
Below are the reconciliations of (i) Revenue to fee revenue and (ii) Operating expenses to fee-based operating expenses.
Year Ended December 31,
(in millions) 2020 2019
Revenue $ 16,589.9 17,983.2
Less: Reimbursements
(7,689.8) (7,952.6)
Revenue before reimbursements 8,900.1 10,030.6
Adjustments:
Gross contract costs (2,703.2) (2,870.2)
Net non-cash MSR and mortgage banking derivative activity (66.6) (21.2)
Fee revenue $ 6,130.3 7,139.2
Operating expenses $ 16,030.8 17,267.8
Less: Reimbursed expenses
(7,689.8) (7,952.6)
Operating expenses, excluding reimbursed expenses 8,341.0 9,315.2
Less: Gross contract costs
(2,703.2) (2,870.2)
Fee-based operating expenses $ 5,637.8 6,445.0
Operating income $ 559.1 715.4
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).
Year Ended December 31,
($ in millions) 2020 2019
Net income attributable to common shareholders $ 402.5 534.4
Add:
Interest expense, net of interest income 52.8 56.4
Provision for income taxes 106.9 159.7
Depreciation and amortization 226.4 202.4
EBITDA $ 788.6 952.9
Adjustments:
Restructuring and acquisition charges 142.4 184.4
Gain on disposition (4.8) —
Net non-cash MSR and mortgage banking derivative activity (66.6) (21.2)
Adjusted EBITDA $ 859.6 1,116.1
Net income margin attributable to common shareholders 4.5 % 5.3 %
Adjusted EBITDA margin 13.9 % 15.6 %
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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.
Year Ended December 31,
($ in millions) 2020 % Change
Revenue:
At current period exchange rates $ 16,589.9 (8) %
Impact of change in exchange rates 10.7 n/a
At comparative period exchange rates $ 16,600.6 (8) %
Fee revenue:
At current period exchange rates $ 6,130.3 (14) %
Impact of change in exchange rates (10.3) n/a
At comparative period exchange rates $ 6,120.0 (14) %
Operating income:
At current period exchange rates $ 559.1 (22) %
Impact of change in exchange rates (10.2) n/a
At comparative period exchange rates $ 548.9 (23) %
Adjusted EBITDA:
At current period exchange rates $ 859.6 (23) %
Impact of change in exchange rates (10.1) n/a
At comparative period exchange rates $ 849.5 (24) %
COVID-19 Pandemic
The COVID-19 pandemic (the "pandemic") disrupted our operations in 2020, most significantly in transaction-based service lines. Offices in China began closing in January and by the end of March, over 90% of JLL's office-based employees across the globe were working remotely. At the same time, 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 implemented various cost mitigation actions. Specifically, our expense management actions delivered nearly $330 million of non-permanent cost savings this year, including $80 million from various government programs implemented around the world in response to the challenging conditions created by the pandemic. These non-permanent savings represent costs likely to return in future periods as the macroeconomic environment recovers.
In addition, the macroeconomic impact of the pandemic resulted in certain non-cash charges in 2020, including a net $21.6 million increase to loan loss credit reserves in Americas and a $45.7 million year-over-year decline in LaSalle's equity earnings.
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Revenue
Consolidated RES revenue decreased 7% to $16.2 billion and consolidated RES fee revenue decreased 14% to $5.7 billion, compared with 2019, a result of the pandemic's significant impact, especially on transaction-based service lines. The declines were across all geographic segments and all service lines except Property & Facility Management, which grew modestly in 2020, primarily attributable to strength in the U.S. offsetting declines in EMEA while Asia Pacific was stable year over year. Leasing experienced the most significant year-over-year decrease in revenue (25%) and fee revenue (26%), against the backdrop of an over 40% decline in global office market gross absorption for the year, according to JLL Research. Capital Markets included $215.2 million of incremental revenue from HFF in the first half of 2020 ($220.2 million of fee revenue) due to the July 1, 2019, timing of our acquisition. HFF contributions are almost entirely within the Americas segment. Organic Capital Markets fee revenue was down 27% compared with 2020, reflecting the sharp year-over-year drop in global market volumes.
Geographically across service lines, Americas represented nearly half of the year-over-year RES fee revenue decline on a local currency basis; EMEA represented 32% and Asia Pacific 20%. Refer to segment operating results discussion for further detail.
The decline in LaSalle revenue was substantially due to expected lower incentive fees compared to an exceptional 2019. Solid advisory fee performance reflected strong capital raising during the year. Refer to the LaSalle segment results discussion for further detail.
Our consolidated revenue and fee revenue decreased 8% and 14%, respectively, in both U.S. dollars and on a local currency basis for 2020, compared with 2019. The absence of a spread between U.S. dollars and local currency was driven by a strengthening of the U.S. dollar against the Indian rupee, Australian dollar and Canadian dollar, offset by a modest weakening of the U.S. dollar against the British pound sterling and euro.
Operating Expenses
In 2020, consolidated operating expenses, excluding reimbursed expenses, decreased 10% to $8.3 billion. Consolidated fee-based operating expenses, were $5.6 billion in 2020, down 13% from prior year. The lower expenses were primarily attributable to Americas, which represented 39% of the decrease in fee-based operating expenses on a local currency basis - Asia Pacific represented 28%, EMEA 21%, and LaSalle 7%. Amounts received from government COVID-related programs were presented as reductions to Compensation and benefits expense. In addition, Restructuring and acquisition charges represented 5% of the overall decrease; refer to the following table and commentary below for additional detail.
Year ended December 31,
(in millions) 2020 2019
Severance and other employment-related charges $ 69.0 31.1
Restructuring, pre-acquisition and post-acquisition charges 88.2 124.9
Fair value adjustments that resulted in a net (decrease) increase to earn-out liabilities from prior-period acquisition activity (14.8) 28.4
Total restructuring & acquisition charges $ 142.4 184.4
Portion of total restructuring & acquisition charges related to the acquisition and integration of HFF $ 75.9 115.1
Charges associated with the acquisition and integration of HFF included transaction/deal costs, retention and severance expense, early lease termination costs, and other integration expenses.
The increase in severance and other employment-related charges, compared with 2019, reflected notable cost mitigation actions taken across the globe in response to the pandemic.
Interest Expense
Interest expense, net of interest income, for 2020 was $52.8 million, down from $56.4 million in 2019. The decrease was driven by a lower effective interest rate on our Facility. The average outstanding borrowings under our Facility increased slightly from $851.6 million, with an average effective interest rate of 3.0%, during 2019, to $865.1 million, with an average effective interest rate of 1.6%, in 2020.
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Equity Earnings
Equity earnings decreased from $36.3 million in 2019 to $8.0 million in 2020. LaSalle is a key driver of activity in both years; refer to the LaSalle segment results discussion for additional detail. In addition, $12.7 million of equity earnings were recognized in the first quarter of 2020 for the Americas segment, substantially attributable to gains by consolidated variable interest entities in which JLL 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.
Income Taxes
The provision for income taxes was $106.9 million and $159.7 million for the years ended December 31, 2020 and 2019, respectively, representing effective tax rates ("ETR") of 20.2% and 22.9%, respectively. In 2019, there was a change in the estimated liability associated with the transition tax from the Act; excluding the $4.3 million benefit from this change in estimate, the ETR was 23.5%. Refer to the Income Tax discussion in the Summary of Critical Accounting Policies and Estimates and Note 8, Income Taxes, of the Notes to Consolidated Financial Statements, included in Item 8, for a further discussion of our ETR.
Net Income and Adjusted EBITDA
Net income attributable to common shareholders was $402.5 million for the year, or $7.70 per diluted common share, compared with $534.4 million for 2019, or $10.87 per diluted common share. The July 2019 issuance of 5.7 million shares in conjunction with the HFF acquisition increased the weighted average shares outstanding in 2020, compared with 2019, impacting earnings per share. Adjusted EBITDA decreased 24% from the prior year to $859.6 million in 2020. Net income margin attributable to common shareholders was 4.5% in 2020, down from 5.3% in the prior year. Adjusted EBITDA margin, calculated on a fee revenue basis, was 14.0% in USD for 2020 (13.9% in local currency), compared with 15.6% last year. The 160 basis-point net reduction was driven by (i) lower transaction-based revenues in RES, (ii) the year-over-year differential in LaSalle incentive fees and equity earnings and (iii) the non-cash charge to increase loan loss credit reserves, partially offset by savings from cost mitigation actions.
Segment Operating Results
We manage and report our operations as four business segments. Our three geographic RES segments include Americas, EMEA and Asia Pacific. Our fourth segment, LaSalle, offers investment management services on a global basis.
Each geographic region offers our full range of real estate services, including agency leasing and tenant representation, capital markets, property management, facility management, project and development services, and advisory, consulting and valuation services, including digital solutions. We define "property management" to be services we provide to non-occupying property investors and "facility management" to be services we provide to owner-occupiers.
For segment reporting, (i) gross contract costs and (ii) net non-cash MSR and mortgage banking derivative activity are both excluded from revenue in determining "fee revenue". Gross contract costs are excluded from operating expenses in determining "fee-based operating expenses". In addition, our measure of segment results, Segment income, excludes Restructuring and acquisition charges.
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Americas - Real Estate Services
% Change
Year Ended December 31, Change in in Local
($ in millions) 2020 2019 U.S. dollars Currency
Revenue $ 10,005.2 10,578.9 (573.7) (5) % (5) %
Reimbursements (5,643.5) (5,857.8) 214.3 (4) (3)
Revenue before reimbursements $ 4,361.7 4,721.1 (359.4) (8 %) (7 %)
Gross contract costs (842.5) (800.2) (42.3) 5 7
Net non-cash MSR and mortgage banking derivative activity (66.6) (21.2) (45.4) n.m. n.m.
Fee revenue $ 3,452.6 3,899.7 (447.1) (11) % (11) %
Leasing 1,403.7 1,912.1 (508.4) (27) (26)
Capital Markets 881.3 888.7 (7.4) (1) (1)
Property & Facility Management 592.5 484.2 108.3 22 23
Project & Development Services 376.4 412.0 (35.6) (9) (8)
Advisory, Consulting and Other 198.7 202.7 (4.0) (2) (1)
Compensation, operating and administrative expenses excluding gross contract costs 2,831.9 3,183.0 (351.1) (11) (11)
Depreciation and amortization 151.4 126.5 24.9 20 20
Segment fee-based operating expenses (excluding restructuring & acquisition charges) 2,983.3 3,309.5 (326.2) (10) (9)
Gross contract costs 842.5 800.2 42.3 5 7
Segment operating expenses, excluding reimbursed expenses $ 3,825.8 4,109.7 (283.9) (7) % (6) %
Equity earnings $ 19.0 1.7 17.3 n.m. n.m.
Segment income $ 554.9 613.1 (58.2) (9) % (9) %
Adjusted EBITDA $ 626.6 719.4 (92.8) (13) % (13) %
Americas transaction-based service lines were negatively affected by the pandemic. While U.S. Leasing revenue reflected a substantial decrease in office volumes (office gross absorption down 47% compared with 2019, according to JLL Research), the industrial sector achieved significant growth. Full-year Capital Markets included $211.5 million of incremental revenue contributions in the first half of 2020 from HFF ($216.6 million of fee revenue) with organic fee revenue down 25% for the year. Lower investment sales and debt placement activity drove this organic decline, partially offset by notable growth in multifamily origination and servicing fees. Property & Facility Management achieved significant revenue and fee revenue growth for the year driven by new property management and Corporate Solutions clients as well as expansions of existing Corporate Solutions client relationships.
The decrease in segment operating expenses, excluding reimbursed expenses, and segment fee-based operating expenses, compared with 2019, was primarily due to the decline in revenue-related expenses and an estimated $153 million of non-permanent cost savings achieved in 2020.
Adjusted EBITDA margin, calculated on a fee revenue basis, was 18.1% in USD and local currency in 2020, compared with 18.4% in 2019. The modest margin contraction was attributable to the decline in transaction-based revenue, largely offset by cost mitigation actions and growth in Property & Facility Management fee revenue.
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EMEA - Real Estate Services
% Change
Year Ended December 31, Change in in Local
($ in millions) 2020 2019 U.S. dollars Currency
Revenue $ 3,092.8 3,470.7 (377.9) (11) % (12) %
Reimbursements (708.3) (709.7) 1.4 — (1)
Revenue before reimbursements $ 2,384.5 2,761.0 (376.5) (14 %) (15 %)
Gross contract costs (1,005.0) (1,104.2) 99.2 (9) (10)
Fee revenue $ 1,379.5 1,656.8 (277.3) (17) % (18) %
Leasing 239.2 295.7 (56.5) (19) (21)
Capital Markets 313.7 391.5 (77.8) (20) (22)
Property & Facility Management 302.8 393.1 (90.3) (23) (23)
Project & Development Services 276.0 297.2 (21.2) (7) (8)
Advisory, Consulting and Other 247.8 279.3 (31.5) (11) (12)
Compensation, operating and administrative expenses excluding gross contract costs 1,355.5 1,566.7 (211.2) (13) (14)
Depreciation and amortization 40.0 43.1 (3.1) (7) (8)
Segment fee-based operating expenses (excluding restructuring & acquisition charges) 1,395.5 1,609.8 (214.3) (13) (14)
Gross contract costs 1,005.0 1,104.2 (99.2) (9) (10)
Segment operating expenses, excluding reimbursed expenses $ 2,400.5 2,714.0 (313.5) (12) % (12) %
Equity losses $ — (1.0) 1.0 n.m. n.m.
Segment (loss) income $ (16.0) 46.0 (62.0) n.m. n.m.
Adjusted EBITDA $ 27.3 91.7 (64.4) (70) % (79) %
EMEA's revenue and fee revenue were significantly impacted by the pandemic in 2020. Capital Markets revenue declines were most pronounced in the second and third quarters of 2020, compared with the prior-year quarters; several geographies, including the UK, reflected resiliency and some recovery during the fourth quarter. While depressed office market volumes drove lower Leasing revenue, strength in the industrial sector partially offset this impact. The year-over-year decline in Property & Facility Management fee revenue was primarily driven by (i) approximately $52 million of lower fee revenue in our UK mobile engineering business, largely the result of pandemic-driven work delays from client office closures, and (ii) the absence of approximately $30 million of prior-year fee revenue relating to property management businesses in continental Europe that were sold in late 2019. Geographically across service lines, lower fee revenue was most notable in the UK, Germany and France.
The decrease in segment operating expenses, excluding reimbursed expenses, and segment fee-based operating expenses was primarily due to lower revenue-related expenses and nearly $70 million of non-permanent cost savings, including benefits recognized as reductions to operating expenses from various government COVID-related programs.
Adjusted EBITDA margin, calculated on a fee revenue basis, was 2.0% in USD for the year (1.4% in local currency), compared with 5.5% in 2019. The decline in Segment income and Adjusted EBITDA as well as the margin contraction were driven by lower transaction-based revenue and losses on certain contracts, partially offset by cost mitigation actions and a net reduction to the allowance for bad debts.
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Asia Pacific - Real Estate Services
% Change
Year Ended December 31, Change in in Local
($ in millions) 2020 2019 U.S. dollars Currency
Revenue $ 3,070.1 3,407.5 (337.4) (10) % (10) %
Reimbursements (1,333.2) (1,377.2) 44.0 (3) (3)
Revenue before reimbursements $ 1,736.9 2,030.3 (293.4) (14 %) (14 %)
Gross contract costs (839.4) (950.5) 111.1 (12) (11)
Fee revenue $ 897.5 1,079.8 (182.3) (17) % (17) %
Leasing 174.9 247.9 (73.0) (29) (30)
Capital Markets 114.2 197.3 (83.1) (42) (43)
Property & Facility Management 304.2 304.5 (0.3) — —
Project & Development Services 123.7 151.8 (28.1) (19) (18)
Advisory, Consulting and Other 180.5 178.3 2.2 1 1
Compensation, operating and administrative expenses excluding gross contract costs 754.7 926.1 (171.4) (19) (18)
Depreciation and amortization 27.8 26.4 1.4 5 6
Segment fee-based operating expenses (excluding restructuring & acquisition charges) 782.5 952.5 (170.0) (18) (18)
Gross contract costs 839.4 950.5 (111.1) (12) (11)
Segment operating expenses, excluding reimbursed expenses $ 1,621.9 1,903.0 (281.1) (15) % (14) %
Equity earnings $ 1.4 2.3 (0.9) (39) % (38) %
Segment income $ 116.4 129.6 (13.2) (10) % (12) %
Adjusted EBITDA $ 144.9 155.5 (10.6) (7) % (9) %
Consistent with the other geographic segments, Asia Pacific's transaction-based revenue was meaningfully impacted by the pandemic. Capital Markets revenue declines were most prominent in Singapore, Greater China and Japan, reflecting a significant decline in market volumes and shift in deal activity away from large transactions. Lower Leasing fee revenue was largely due to declines in office leasing volumes, notably in Greater China, Australia and India. Pandemic-driven office closures and work stoppages throughout 2020 resulted in delays to project activity within Project & Development Services. By contrast, resiliency in Property & Facility Management was driven by property management and Corporate Solutions teams, who partnered with new and existing clients to execute on enhanced facilities management in an increasingly complex environment brought on by the pandemic.
The decrease in segment operating expenses, excluding reimbursed expenses, and segment fee-based operating expenses was primarily attributable to lower revenue-related expenses and approximately $96 million of non-permanent cost savings, including over $50 million from government COVID-related programs.
Adjusted EBITDA margin, calculated on a fee revenue basis, was 16.1% in USD for 2020 (15.9% in local currency), compared with 14.4% in 2019. The margin expansion reflected the non-permanent cost savings noted above partially offset by the decline in transaction-based revenue.
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LaSalle
% Change
Year Ended December 31, Change in in Local
($ in millions) 2020 2019 U.S. dollars Currency
Revenue $ 421.8 526.1 (104.3) (20) % (20) %
Reimbursements (4.8) (7.9) 3.1 (39) (40)
Revenue before reimbursements $ 417.0 518.2 (101.2) (20) % (20) %
Gross contract costs (16.3) (15.3) (1.0) 7 7
Fee revenue $ 400.7 502.9 (102.2) (20) % (21) %
Advisory fees 320.7 314.2 6.5 2 1
Transaction fees & other 38.5 50.3 (11.8) (23) (24)
Incentive fees 41.5 138.4 (96.9) (70) (70)
Compensation, operating and administrative expenses excluding gross contract costs 326.9 382.4 (55.5) (15) (15)
Depreciation and amortization 7.2 6.4 0.8 13 13
Segment fee-based operating expenses (excluding restructuring & acquisition charges) 334.1 388.8 (54.7) (14) (15)
Gross contract costs 16.3 15.3 1.0 7 7
Segment operating expenses, excluding reimbursed expenses $ 350.4 404.1 (53.7) (13) % (14) %
Equity (losses) earnings $ (12.4) 33.3 (45.7) n.m. n.m.
Segment income $ 54.2 147.4 (93.2) (63) % (64) %
Adjusted EBITDA $ 60.8 150.4 (89.6) (60) % (60) %
Compared with 2019, expected lower incentive fees substantially drove the decline in LaSalle revenue and fee revenue. The prior year achieved the second highest incentive fee performance of the previous decade, following only 2018. Incentive fees in both years were driven by real estate dispositions on behalf of clients, primarily in Asia Pacific and North America. Stable advisory fee performance reflected strong private equity capital raising over the year, which more than offset limited valuation declines in assets under management ("AUM").
As a direct result of the pandemic's expected impact on real estate prices, we recognized equity losses this year to reflect decreases to the estimated fair value of underlying real estate investments within LaSalle's co-investment portfolio. This drove the majority of the decline in equity earnings, compared with 2019. In addition, over 40% of the decline was attributable to a lower year-over-year increase in the share price of a co-investment in a LaSalle publicly traded real estate investment trust in Japan.
The year-over-year decrease in segment operating expenses, excluding reimbursed expenses, and segment fee-based operating expenses, was driven by (i) a decrease in the current portion of variable compensation expense related to the decline in incentive fees and (ii) the impact of cost mitigation actions, partially offset by higher deferred compensation expense related to the exceptional incentive fee performance in prior years.
Adjusted EBITDA margin, calculated on a fee revenue basis, was 15.2% in USD (15.1% in local currency) for 2020, compared with 29.9% in 2019. The margin decline was primarily attributable to the change in equity earnings (approximately three-quarters of the margin contraction) and expected lower incentive fees.
As of December 31, 2020, LaSalle had $68.9 billion of AUM, an increase of 2% in USD (down 1% in local currency) from $67.6 billion as of December 31, 2019. The net increase in AUM during the year resulted from (i) $10.1 billion of acquisitions and (ii) $1.8 billion of foreign currency increases, partially offset by (iii) $10.2 billion of dispositions and withdrawals and (iv) $0.4 billion of net valuation decreases.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
Operating activities provided a record $1,114.7 million of cash in 2020, compared with $483.8 million in 2019. The substantial increase in cash flows from operating activities was driven by strong cash collection on receivables, participation in government COVID-related programs this year (including payment deferral opportunities for government cash obligations) and lower cash taxes paid in 2020, compared with 2019. These items were partially offset by lower net income this year as well as increased annual incentive compensation paid in the first quarter of 2020 compared with 2019.
Cash Flows from Investing Activities
We used $170.6 million of cash for investing activities during 2020, compared with $1,049.7 million used in 2019. The significant decrease in cash used was primarily driven by an absence of business acquisitions in 2020 (HFF, Inc. was acquired in July 2019) and a decrease in net 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 $771.2 million of cash during 2020, compared with $584.6 million provided by financing activities during 2019. The significant year-over-year change in cash flows from financing activities is substantially driven by $525.0 million of net repayments on our Facility this year, compared with $525.0 million of net borrowings in 2019, reflecting outstanding operating cash flows generated during 2020 and cash consideration needs in 2019 for acquisitions, respectively.
Debt
Our $2.75 billion Facility matures on May 17, 2023. As of December 31, 2020, we had no outstanding borrowings under the Facility 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 $865.1 million and $851.6 million during the years ended December 31, 2020 and 2019, respectively.
In addition to our Facility, we had the capacity to borrow up to an additional $64.7 million under local overdraft facilities as of December 31, 2020. We had Short-term borrowings (including capital lease obligations, overdrawn bank accounts and local overdraft facilities) of $62.0 million and $120.1 million as of December 31, 2020 and 2019, respectively, of which $12.0 million and $44.8 million as of December 31, 2020 and 2019, 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, share repurchases, capital expenditures and acquisitions. See Note 10, Debt, of the Notes to Consolidated Financial Statements, included in Item 8, for additional information on our Facility, Short-term borrowings and Long-term debt.
Investment Activity
As of December 31, 2020, we had $430.8 million of total Investments in real estate ventures, primarily related to LaSalle co-investments. In addition, since 2018, we have invested in a number of early-stage proptech (property technology) companies through our JLL Spark Global Venture funds. In 2020 and 2019, funding of investments exceeded returns of capital by $38.8 million and $23.9 million, respectively. We expect to continue to pursue strategic co-investment opportunities with our investment management clients across the globe as co-investment remains an important foundation to the continued growth of LaSalle's business. In addition, we expect continued investments by our JLL Spark funds.
See Note 5, Investments in Real Estate Ventures, of the Notes to Consolidated Financial Statements, included in Item 8, for additional information on our co-investment activity.
Share Repurchases
On October 31, 2019, our Board of Directors approved a new share repurchase program (the "Program") authorizing the repurchase of up to $200.0 million of our common stock in the open market and privately negotiated transactions. During the year ended December 31, 2020 we repurchased nearly 897,000 shares for $100.0 million. As of December 31, 2020, $100.0 million remained authorized for repurchases under the Program. There were no shares repurchased in 2019.
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Capital Expenditures
Capital expenditures, excluding those made by a consolidated VIE in which we held no equity interest, were $149.4 million and $187.8 million in 2020 and 2019, respectively. Our capital expenditures are primarily for purchased and developed software, computer hardware and improvements to leased office space. The decrease of capital expenditures compared with 2019 is primarily due to lower computer hardware and software expenditures, reflecting cash preservation decisions we made during the pandemic.
In addition, property acquisitions and capital expenditures, net of proceeds from distributions, made by consolidated VIEs in which we hold no direct equity interest were net proceeds of $1.0 million in 2020 and net acquisitions of $79.2 million in 2019, primarily to acquire real estate. Refer to Note 5, Investments in Real Estate Ventures, of the Notes to the Consolidated Financial Statements, included in Item 8, for further information on our consolidated VIE investments.
Business Acquisitions
In 2020, we paid $67.7 million for deferred business acquisition and earn-out obligations related to acquisitions completed in prior years. This activity is included in cash flows from operating and financing activities. The net cash paid for acquisitions compares with $906.0 million paid in 2019, predominantly for the HFF acquisition.
Terms for our acquisitions have typically included cash paid at closing with provisions for additional consideration and earn-out payments subject to certain contract provisions and performance. Deferred business acquisition obligations totaled $32.2 million and $50.1 million on the Consolidated Balance Sheets as of December 31, 2020 and 2019, respectively. These obligations represent the current discounted values of payments to sellers of businesses for which our acquisition has closed as of the balance sheet dates and for which the only remaining condition on those payments is the passage of time. As of December 31, 2020, we had $85.7 million accrued for potential earn-out payments, of a potential maximum of $199.2 million (undiscounted), subject to the achievement of certain performance conditions. These earn-outs will come due at various times over the next five years, assuming the achievement of the applicable performance conditions.
We will continue to consider acquisitions we believe will strengthen our market position, increase our profitability and supplement our organic growth. Refer to Note 4, Business Combinations, Goodwill and Other Intangible Assets, of the Notes to the Consolidated Financial Statements, included in Item 8, for further information on business acquisitions.
Repatriation of Foreign Earnings
Based on our historical experience and future business plans, we do not expect to repatriate our foreign source earnings to the U.S. We believe our policy of permanently reinvesting earnings of foreign subsidiaries does not significantly impact our liquidity. As of December 31, 2020 and 2019, we had total Cash and cash equivalents of $574.3 million and $451.9 million, respectively, of which approximately $445.2 million and $385.4 million, respectively, was held by our 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 total assets of these countries in aggregate totaled approximately 4% and 5% of our total assets as of December 31, 2020 and 2019, respectively.
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Contractual Obligations
We have obligations and commitments to make future payments under contracts in the normal course of business. The following table summarizes our minimum contractual obligations as of December 31, 2020.
(in millions) PAYMENTS DUE BY PERIOD
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1 YEAR 1-3 YEARS 3-5 YEARS MORE THAN 5 YEARS
1. Debt obligations $ 761.2 56.8 275.0 — 429.4
2. Interest on debt obligations 90.6 21.3 28.5 17.9 22.9
3. Business acquisition obligations 32.2 14.6 13.0 4.6 —
4. Lease obligations 963.0 191.6 284.3 193.4 293.7
5. Deferred compensation 54.3 15.2 28.9 10.2 —
6. Defined benefit plan obligations 162.0 14.7 30.6 32.1 84.6
7. Vendor and other purchase obligations 187.6 82.6 87.7 17.3 —
Total $ 2,250.9 396.8 748.0 275.5 830.6
1. Debt Obligations. As of December 31, 2020, we had no outstanding borrowings under our Facility; we had outstanding borrowings of $12.0 million under our local overdraft facilities and $44.8 million related to overdrawn bank accounts. We had the ability to borrow up to $2.75 billion on the Facility with a maturity date in 2023. We had the capacity to borrow up to an additional $64.7 million under local overdraft facilities. In addition, we had $275.0 million of Notes due November 2022 and €350.0 million of Euro Notes, with €175.0 million of the Euro Notes due June 2027 and June 2029, respectively.
2. Interest on Debt Obligations. Our debt obligations incur interest charges primarily at variable rates. For purposes of preparing an estimated projection of interest on debt obligations for this table, we have estimated our future interest payments based on our borrowing rates and amounts outstanding as of December 31, 2020 and assuming each of our debt obligations is held to maturity. As of December 31, 2020, the annual interest rate on our Notes was 4.4%. As of December 31, 2020, the annual interest rates on our Euro Notes were 1.96% and 2.21% for the 10-year and 12-year notes, respectively.
3. Business Acquisition Obligations . Our business acquisition obligations represent payments to sellers of businesses for acquisitions closed as of December 31, 2020, with the only condition on those payments being the passage of time.
The contractual obligations table above does not include possible contingent earn-out payments associated with our acquisitions. As of December 31, 2020, we had the potential to make earn-out payments on 35 acquisitions subject to the achievement of certain performance conditions. The maximum amount of the potential earn-out payments was $199.2 million as of December 31, 2020. We anticipate these earn-out payments will come due at various times over the next five years assuming the achievement of the applicable performance conditions.
4. Lease Obligations . Our lease obligations primarily consist of operating leases of office space in various buildings for our own use as well as operating leases for equipment. The total minimum rentals to be received in the future as sublessor under noncancelable operating subleases as of December 31, 2020 was $19.4 million.
5. Deferred Compensation . Deferred compensation obligations in the table above represent payments expected to be made pursuant to long-term deferred compensation plans and are inclusive of amounts attributable to service conditions satisfied as of December 31, 2020, as well as service conditions expected to be satisfied in future periods.
The contractual obligations table above does not include a provision for deferred compensation plans, predominantly in the U.S., that allow employees to defer portions of their compensation. Generally, we invest directly in insurance contracts which yield returns to fund these deferred compensation obligations. We recognize an asset for the amount that could be realized under these insurance contracts at the balance sheet date, and the deferred compensation obligation is adjusted to reflect the changes in the fair value of the amount owed to the employees. Such plans are recorded on the Consolidated Balance Sheets as of December 31, 2020 as Deferred compensation plan assets of $446.3 million and long-term deferred compensation liabilities, included in Deferred compensation, of $427.6 million.
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6. Defined Benefit Plan Obligations . The defined benefit plan obligations represent estimates of the expected benefits to be paid out by our defined benefit plans over the next ten years. We will fund these obligations from the assets held by these plans. If the assets these plans hold are not sufficient to fund these payments, JLL will fund the remaining obligations. We have historically funded pension costs as actuarially determined and as applicable laws and regulations require. We expect to contribute $8.4 million to our defined benefit pension plans in 2021.
7. Vendor and Other Purchase Obligations . Our other purchase obligations primarily relate to various information technology servicing agreements, telephone communications and other administrative support functions.
Other/Off-Balance Sheet Arrangements
We have unfunded capital commitments to investment vehicles and direct investments totaling a maximum of $320.7 million as of December 31, 2020. We are not able to predict if, when, or in what amounts such capital calls will be made, and therefore we exclude such commitments from the above table.
For additional information on the contractual obligations presented above, see our discussion in Note 4, Business Combinations, Goodwill and Other Intangible Assets, Note 5, Investments in Real Estate Ventures, Note 7, Retirement Plans, Note 10, Debt and Note 11, Leases, in the Notes to Consolidated Financial Statements, included in Item 8.