Investors Too Pessimistic About JLL's Prospects

Jones Lang LaSalle’s JLL second-quarter results demonstrate the dramatic nature of investment volume declines in the commercial real estate industry. Companywide fee revenue for the quarter was $1.2 billion, a 22% decline from the second quarter of 2019. The decline was driven by weak performance from the capital markets and leasing businesses, with outsourced corporate solutions displaying resilience.

The current environment presents significant uncertainty for Jones Lang LaSalle, with the transaction-based nature of many of its business lines amplifying risk. But despite the deterioration in performance, we are maintaining our $168 fair value estimate for the narrow-moat-rated company, as we have already incorporated a period of near-term weakness into our valuation model.

We recognize that the coronavirus crisis has provided considerable risk to Jones Lang LaSalle and its peer commercial real estate brokers. Although such companies are typically quite cyclical, the cyclicality of results is even greater in this crisis because of the magnitude of the slowdown in the commercial real estate markets. Nevertheless, we think investors are too pessimistic regarding JLL’s prospects, with the shares having cratered since the outbreak of the coronavirus pandemic. We currently view the stock as undervalued.

During the second quarter, JLL’s adjusted EBITDA came in at $103 million, a 54% decline from the second quarter of 2019. The adjusted EBITDA margin likewise took a hit in the quarter, falling to 8.3% from 13.9% a year prior. These figures put into perspective the scale of the investment activity decline in the commercial real estate markets, especially in the office sector. In this market, leasing volume was down 60% for the quarter, with all regions showing significant decreases. The property and facility management business was a relative bright spot, eking out 1% growth, demonstrating the resilience of this business.