Jones Lang LaSalle's (JLL) CEO Colin Dyer on Q4 2015 Results - Earnings Call Transcript

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Jones Lang LaSalle (NYSE:JLL)

Q4 2015 Earnings Conference Call

February 03, 2016 09:00 AM ET

Executives

Colin Dyer - CEO

Christie Kelly - CFO

Analysts

David Gold - Sidoti

Mitch Germain - JMP Securities

Brad Burke - Goldman Sachs

David Ridley-Lane - Bank of America Merrill Lynch

Brandon Dobell - William Blair

Michael Mueller - JP Morgan

Operator

Welcome to the Fourth Quarter 2015 Earnings Conference Call for Jones Lang LaSalle Incorporated. As a reminder, today’s call is being recorded. A transcript will be posted in the Investor Relations section at jll.com.

Any statements made about future results and performance or about plans, expectations and objectives are forward-looking statements. Actual results and performance may differ from those included in the forward-looking statements as a result of factors discussed in the company’s annual report on Form 10-K for the fiscal year ended December 31, 2014 and in our other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statements.

Now we’ll turn to Colin Dyer, Chief Executive Officer, for opening remarks.

Colin Dyer

Thank you. Hello everybody and welcome to this review of our 2015 results for both the fourth quarter and the full year. Christie Kelly, our Chief Financial Officer joins today’s call as usual and we also welcome Grace Chang, our new Managing Director of Corporate Finance and Investor Relations.

Grace comes to JLL from 20 years of U.S. and international experience at GE where she held increasingly senior finance and real estate positions. She will lead our global corporate finance initiatives and serve as principle contact between JLL and the institutional investor community. If you have any difficult questions, please ask Grace.

Christie will review our financial performance in detail in a few minutes. But let me begin by summarizing our results. An excellent fourth quarter helped us complete another record year at JLL and LaSalle.

Fee revenue totaled $1.l7 billion for the quarter, 14% above the fourth quarter at 2014 in local currency terms. For the year, fee revenue increased 17% to $5.2 billion. Adjusted net income was $206 million for the quarter or $4.53 a share, up 14% from last year and that’s after a 42% negative currency impact.

For the year, adjusted net income totaled $455 million or $10.01 per share, 26% higher than in 2014, a gain after a full year currency impact of $0.87. We continue to grow through acquisition activity, closing or announcing 24 transactions during the year. And our investment grade balance sheet will allow us to continue to grow through additional acquisitions and significant technology investments.

So thinking as a whole, we had a very strong quarter and year, with broad-based double digit fee revenue growth across all of our service lines for the year. LaSalle investment management produced annual revenue growth of 16% local currency and also generated significant equity earnings in 2015.

To put the results in the context of market and economic conditions in 2015, the global economy continued to grow at 3%. Our own real estate markets all grew in local currency terms. For the detail, please see the slides that we posted in the investor relation section of jll.com.

Slide 2 shows 2015 activity in capital markets and leasing. Full year investment market volumes were $704 billion, marginally below 214 levels in U.S. dollars. However, at constant currency rates, investment volumes increased $765 billion, 8% ahead of 2014. Fourth quarter volumes were flat in local currency, but down 8% in dollars from the record final quarter of 2014.

The American market also reached a record $314 billion, 4% higher than 2014. Some momentum was lost in Q4, however, down 9% on the prior year. EMEA markets transacted $267 billion which is 4% below 2014, but 14% higher if you translate that in euro currency terms. Fourth quarter volumes were 2% below the prior year quarter in dollars, but up 12% in euros.

Full year volumes in Asia Pacific fell 6% from 2014 to $124 billion, but that was up 3% in local currency terms. And despite the headlines, fourth quarter transaction volumes in China reached $10.5 billion, 49% higher than the same quarter in 2014.

Strong demand for core assets continue to compress yields or cap rates. Prime yields across 21 major global office markets were 4.83% in the fourth quarter, 25 basis point locals in the prior year.

Global office leasing volumes grows 14% in Q4 and 8% for the year. Asia Pacific were bounded with full year volumes, up 19% over 2014 while Europe grows 13%, and the U.S., 2%.

Agency rates headed down with global office agencies across 98 markets, down 20 basis points in the quarter to 12.1% reflecting the vacancy trend, rental growth on prime office accelerated during the second half of 2015, a supply tightened and demand strengthened, grew to 3.7% for the year across 26 major markets matched the 2014 levels.

So to sum up, strong fourth quarter and full year in most real estate markets globally. Demand for lease space was robust and broad-based. There are significant amounts of capital allocated to real estate but not yet invested. So at this point, we see the fourth quarter activity in investment sales as agitation, not the start of a trend. And more on that later in today’s call.

So to discuss our own performance in this market environment, I’ll turn the call over to Christie.

Christie Kelly

Thank you, Colin, and welcome to everyone on our call. I am pleased to report JLL’s record top line and bottom line financial performance for 2015. As Colin mentioned, we delivered record earnings per share for the fourth quarter and full year despite continuing significant foreign exchange headwinds.

Growth for the year was broad-based with double digit increases in fee revenue across all service lines, geographic segments in LaSalle.

For the year, we expanded margin on a local currency basis in all segments for the business and delivered strong results in the fourth quarter against outstanding performance in the fourth quarter of 2014.

We continue to invest in our people, technology, data and acquisitions to position the firm for long-term profitable growth. Our results reflect the benefits of investments we have made in our platform to continuously improve the quality and scope of our services for our clients while building the long-term value of our company.

These results coupled with our long-term perspective translated into further strengthening of our investment grade balance sheet as S&P upgraded our credit ratings to triple B plus in July. And during the last quarter, Moody’s raised their Baa2 ratings outlook to positive.

As Colin said, we finished the year with consolidated fee revenue of $5.2 billion, up 17% over last year and adjusted earnings per share of $10.01, up 26% over last year. For the quarter, we delivered consolidated fee revenue of $1.7 billion, up 14% over last year and adjusted earnings per share of $4.53, up 14% over last year.

Operating margins in the quarter declined approximately 30 basis points to 16.6% at constant rate, primarily due to timing of technology and data investments made in alignment with our strategic plan.

Adjusted operating income margin calculated on a fee revenue basis increased 30 basis points to 11.2% for the year at constant rate. Adjusted EBITDA margin on a fee revenue basis increased 80 basis point to 14.6% for the year at constant rate. Our consolidated results reflect 13% incremental operating income margin to fee revenue for the year and fourth quarter at constant rate.

The increases in margin reflect many factors including the strength of our diverse global platform, high recurring profitable revenues and the productivity focus of our people. These results also reflect our investment discipline including the contributions of transaction professionals who we have added to the firm through acquisition activity and strategic hiring over the last several years.

Additionally, our LaSalle business consistently delivered above benchmark performance for clients which in turn generated incentive fees and equity earnings from transaction activity within fund life cycles.

We remain focused on balancing top line growth, platform investments and productivity to achieve incremental margin and earnings per share growth.

Our 17% consolidated fee revenue growth for the year on a local currency basis was broad-based across our geographic and service segments. Our revenue increase of 26% in projects and development services is the result of increased cross-selling as well as key acquisitions to enhance and expand our successful Tetris offering.

Increased win rates in investment and our people drove a 25% increase in capital markets and hotels revenue and a 13% growth in property and facility management. LaSalle continue to strengthen its base achieving a total of $5 billion in capital rates for 2015 and ending the year with $56.4 billion in assets under management.

Our broad-based growth demonstrates the diversity of our offerings and our ability to serve both investors and occupiers in mixed and challenging markets.

Over the last 12 months, we selectively expanded our business through a combination of key strategic hires and acquisitions. As Colin said, we completed our announced 24 acquisitions in 2015 spanning from the U.S. and Canada to the U.K., Sweden, Poland, Germany, Turkey, South Africa, Australia and Japan. We added to both transaction and annuity-based revenues.

In the case of Corrigo, software and services acquisition, we have also significantly enhanced our ability to connect owners and occupiers with service providers to cutting edge information technology.

Our acquisition pipeline remains solid and contains transactions in alignment with our strategic priorities, financial discipline and culture.

We will begin our look at the segment-specific results from the Americas where fee revenue is up 16% in local currency over 2014 and up 14% for the fourth quarter. We drove growth across virtually all business lines and geographies.

Leasing was up 14% for the year, 13% for the quarter, outperforming the overall market for both periods. Capital markets and hotels was up 25% for the year, 13% for the quarter, led by continued growth and productivity generally, another record year performance in our hotels business and the acquisition of Oak Grove Capital that we completed in the fourth quarter.

Projects and developments services increased 20% over 2014, 21% for the quarter as we continue to cross-sell, drive new project wins and benefit from key strategic acquisitions. The rest of the Americas platform also made meaningful contributions to growth in 2015 with property and facility management up 14% for the year driven by record levels of new business as well as account expansions.

Operating income market for the fourth quarter was 15.2% in local currency compared to 15.6% last year. Excluding the timing of investments, primarily in technology and data, the operating income margin was in line with our strong fourth quarter 2014 performance.

Operating income in the Americas grew 15% to $251 million for the year, up from $219 million a year ago. And operating income margin calculated on a fee revenue basis improved by 30 basis points over the same period to 10.7% in local currency.

The added scale and new services from the 11 acquisitions closed in the past 13 months including the transformative Oak Grove Capital and Corrigo deal together with investments in our platform and the talent of our people places us in a position of strength as our Americas business moves into 2016.

In EMEA, fee revenue across the region was up 20% in local currency over 2014 and up 13% for the fourth quarter, an excellent result against a robust fourth quarter of 2014.

Projects and development services fee revenue was 38% for the year and 57% for the quarter as we continue to win international mandates from European multinationals and expand our Tetris fit-out business both organically and from acquisitions such as Bluu in the U.K.

Capital markets and hotels revenue is up 29% for the year, 11% for the quarter, with the most significant contributions from Germany, France, the U.K., Sweden, Switzerland and Poland, as we continue to perform in a buoyant yet increasingly complex market environment. During the quarter, we did begin to see a moderation in investment sales activity particularly in the U.K.

Overall, performance was strong throughout the region both in larger markets like the U.K., Germany and France and also across the continent and MENA. Adjusted operating income in the region increased 21% year-over-year to $146 million, up from $121 million. Adjusted income margin calculated on a fee revenue basis improved 140 basis points to 10.6% in local currency year-over-year.

Our performance reflect a capital markets incentive fees, continued strengthening of business lines through profitable organic growth supplemented by acquisitions and a focus on technology as a key enabler of growth and productivity.

In summary, we had an outstanding year in EMEA where all countries delivered growth over the last year in terms of revenues and profits positioning us well throughout the region for 2016.

In Asia Pacific, fee revenue across the region was up 17% in local currency over 2014 and up 14% for the fourth quarter against a market where China’s economic slowdown rippled across the region.

Leasing was up 13% for the year and 11% for the quarter, with strong performance in Australia, China, Hong Kong and India offset by subdued performance in Singapore, Japan and Indonesia.

Asia Pacific’s capital markets and hotels revenue was up 15% but down 12% in the quarter which was slightly better than the overall market.

Our China and Australia capital markets business experienced weakness in the quarter given uncertain market conditions and timing of transaction. But we are pleased that our APAC team nevertheless delivered significant outperformance in capital markets for the year driven by Japan, Australia and Southeast Asia.

Our business is naturally hedged to weather uncertainty in the investment sales market since we generate more than 50% of our fee revenue in the region from our annuity businesses.

Property and facility management revenue was up 17% for the year and 23% for the quarter with demand for these services growing steadily as we see increases in both the quality of property stock and the growing propensity of regional and local agent companies to outsource.

Geographically, India performed well taking advantage of an improved business environment and reinforcing our leading market share. Asia Pacific’s operating income margin grew 4%, 18% in local currency, to $87 million for the year, up from $84 million a year ago.

And operating income margin increased by 10 basis points to 9.4% in local currency calculated on a fee revenue basis demonstrating the strength of our platform in navigating the region to deliver another excellent year versus record performance in 2014.

In sum, our Asia Pacific business delivered robust 2015 performance while confronting a mixed economic environment and continuing to profitably invest for the long term positioning us to enter 2016 as an even stronger business.

LaSalle had a strong year delivering operating revenue increases at 16% for the year and 10% for the quarter over a tough 2014 comparable. LaSalle’s results were driven by incentive fee performance in the second half of the year and also by the growth of its advisory fees which were up 10% for the year and 9% for the quarter.

LaSalle continued to focus on productivity as it generated a year-over-year increase of 4% in assets under management per employee.

Further, LaSalle raised $1.2 billion of new capital in the fourth quarter and grew assets under management by $2.8 billion during the year to $56.4 billion total that I mentioned a moment ago.

LaSalle’s incentive fees of $24 million in the fourth quarter brought the full year total to $124 million, the second highest annual total in LaSalle’s history.

After two years of outsized results, the mature funds generating these strong incentive fees are nearing the end of their fund life. As a result, we expect incentive fees to moderate and equity earnings to reflect fair value movements and revert to a historical average.

With respect to our balance sheet and the strength of our financial position, total net debt was $461 million at the end of the year, an increase of $298 million in the year reflecting the pace of our continued investments in acquisition.

We benefitted from the lower average borrowings on our credit facility with $28.1 million in interest expense for the full year.

So sum up, we had an excellent quarter and year. We remain well-positioned for future growth in 2016 as we look to build on a successful 2015. I would like to thank our colleagues around the world for the extraordinary work they delivered daily for our clients and our investors.

I’ll now turn the call back over to Colin.

Colin Dyer

Thank you, Christie. So to give you a sense of how we achieved these results, Slide 3 offers a sample recent business wins across service lines and geographies. In 2015, our corporate services businesses won 137 new assignments, expanding existing relationships with another 75 clients and renewing 35 further contracts. These 247 wins total nearly 905 million square feet of space across all regions. Our 2015 average win rate was 60% for new business, 79% for expansions and 83% for renewals.

A highlight of the year came in December with the early renewal of our contract with HSBC, one of the world’s largest banking and financial services institutions. We are now the bank’s sole global outsourcing provider of integrated facility management services and 97% of their 55 million square foot portfolio across 42 countries.

We have also been appointed to provide management services globally for the Australian Department of Foreign Affairs and Trade with more than 1,000 properties in 76 countries. This brings the combined Australian government portfolio under our management to nearly 26 million square feet.

Turning to the capital markets, you’ll see major transactions from Chicago to Hong Kong. Focusing on the deals we’ve highlighted in Europe, we’re seeing a shift in business as investor appetite builds for large portfolio transactions. Examples of this includes a €1 billion Aqua portfolio which was a sale of 17 office assets across six countries and the traction portfolio sale of 30 office properties across the continent.

This multi asset, multi-currency country deals are complex and few firms can compete them effectively. Clients know that they need the best and most trusted advisors to succeed playing to our strength and driving our market share growth.

Our hotels business also had an excellent year with revenue up 15% in U.S. dollars and 23% in local currency. Highlights included advising on the year’s largest hotel transaction in San Francisco. And in Hong Kong, on the largest single asset transaction ever in Asia Pacific.

Fourth quarter leasing highlights included an assignment from Blackstone Equity office properties for 2 million square feet of class A space in Dallas, Fort Worth and leasing 215,000 square for E&Y in Madrid. We also won a 1.3 million square foot asset management and leasing appointment for a retail asset in Chengdu called Cannes Bay Impression.

As I said earlier, LaSalle investment management had an excellent year with double digit revenue growth and healthy equity earnings from both valuation increases and asset dispositions. We’re also seeing robust monthly flows into LaSalle’s retail investment fund with Jones Lang LaSalle income property trust whose gross asset value rose from $921 million to $1.5 billion over the course of the year.

As Christie highlighted, throughout the year, we continued to invest in businesses that expand our competitive reach and position globally. Adding to the 24 acquisitions closed or announced last year, we’ve completed three more in 2016 bringing the total investments in the 27 deals to $640 million.

Our acquisitions cover all regions and service lines in areas ranging from U.S. transactions and from the facilities management, technology to Japanese retail to fit-out services in the U.K. and Germany and Poland.

As I noted on past calls, we acquire selectively, completing rigorous due diligence on finances, operating risk and strategic and cultural and client fit. We focus on high margin opportunities, minimizing operational overlap that destroys value and we plan and manage integration very carefully.

And thanks to our strong balance sheet, ample and used borrowing capacity and the full confidence of our partner banks, we can move quickly when we identify opportunities that meet our criteria. We are planning for continued M&A activity during the course of 2016.

Looking forward, despite the noise about oil, the Chinese economy, the range of other issues, the IMF recently raised its 2016 global growth forecast to 3.4% which matches the Oxford Economics’ figures which we consistently quote.

So looking at our markets, JLL research projects investment sales and leasing volumes to maintain a healthy pace throughout 2016. The noise in the news flow has produced more cautious investment sentiment at this point, but the amount of capitals that continues to be allocated to real estate indicates there’ll be no reduction in underlying investment flows. So we anticipate global volumes of around $725 billion or more, up 5% over 2015 levels in the global investment sales markets.

Leasing markets continue to gain momentum and we expect global office volumes to increase by 5% over the 2015 levels. LaSalle is also positioned for continued growth in 2016. Strong competitors such as LaSalle with good investment performance will continue to attract and invest significant amounts of capital.

And we’re encouraged too by the continued corporate trend to outsourcing real estate services and by our outstanding success rates which I quoted earlier.

So one month in, we are positive on prospects for the year with underlying global growth outweighing recent concerns on the Chinese economy, stock market volatility, oil or security challenges.

Just supporting on China and given our leading market position, we have a good perspective on what’s going on there.

The slow decline in manufacturing sector contrasts with continuing double-digit growth in the consumer and service sectors. The move to services is benefitting our business as it tends to drive demand for office, retail and warehouse space, particularly in tier one cities. The effect is less pronounced in our tier two city business, but overall, our revenues in China continue to grow in 2015 and we expect the same in 2016.

Finally, the actions we’ve taken in recent years reinforce the resilience of our business. Along with double-digit revenue growth, we have steadily expanded in margins, we have pursued strategic acquisitions to aggressively support our 2020 growth strategy, we’ve made significant investments in technology with 5% of fee revenue being invested in that area in 2015. And we’ve made it a firm-wide priority to improve productivity in all parts of our business. We’ve continued to attract top professionals and teams to JLL and we’ve maintained the strongest investment grade balance sheet in our industry. So we’re very well-positioned to continue building the long-term power of our operating platform and the long-term value of our company.

So before Christie and I take your questions, I’d like to mention just a few of the awards that our colleagues at JLL and LaSalle earned last year. They affirm our industry-leading position in real estate services and funds management.

We remain the world’s best property consultancy at the International Property Awards. LaSalle was named Global Real Estate Company of the Year by the English Estates Gazette. We joined the list of World’s Most Ethical Companies for the eighth consecutive year. We repeated as a member of the Global Outsourcing’s 100 list for the seventh consecutive year. We were named one of 100 Best Corporate Citizens in the U.S. by the Corporate Responsibility Magazine. We earned a perfect score on the Human Rights Campaign Foundation’s 2015 Corporate Equality Index. The U.S. Environmental Protection Agency gave us its 2015 ENERGY STAR Sustained Excellence Award. And finally, we were named to the Fortune World’s Most Admired Companies list and joined the Fortune 500.

So with that, we will take your questions. Howard, could you please explain the Q&A process?

Question-and-Answer Session

Operator

Yes, sir. [Operator Instructions] Our first question or comment comes from the line of David Gold from Sidoti. Your line is open.

David Gold

Hi, good morning.

Christie Kelly

Hi, there, David.

David Gold

Two questions for you. First one is sort of broader. Colin, in both your commentary and maybe some other conversations, there’s been talk about your view of how, let’s say, the length of the cycle has pushed out. And I was curious if you might be up to give us an update on that and sort of current thinking of what’s the potential for this cycle and how long do you think it runs.

Colin Dyer

You have one question or two, David?

David Gold

Oh, that’s the first.

Colin Dyer

Give us the second one and we’ll -

David Gold

Okay. The second one sort of ties in, although it’s probably a little easier. And that is, as we think about your commentary on equity earnings and incentive fees, we’d love to gain a little more clarity there with also the backdrop that if we think about the commentary a year ago, at that point it was - you also used the word moderate, yet on a combined basis, were up almost 30% year to year. So I just want to get a sense there for, as you were thinking about it a year ago, what was, let’s say, that much more different this year and then how we should think about next year.

Colin Dyer

Okay, well I’ll take the first half which, as you say, will lead neatly into the question on my statement.

David Gold

Right. It’s probably really six questions but -

Colin Dyer

Yes. Let’s just talk around it. We’ve been thinking in terms of a cycle which will begin to peak in ‘17 or ‘18 for some time. So this puts us in the sort of third to fourth quarter of a four-quarter game. Nothing has changed that point of view.

We talked about, in this commentary, about some slowing of the investment sales activities across most regions in quarter four of last year. We also said that our perspective at this stage is that given the weight of money of both equity and debt that’s available to invest in real estate and given the appetite for real estate, there’s a relatively safe investment harbor given the problems of the fixed income and equity sectors. We would anticipate continued strong activity in the investment sales markets globally.

Whether this Q4 activity is an early warning of a moderation, we don’t know yet. We’ll judge that as we go through this year. But the underlying activity levels are strong in the investment sales markets.

The same comments apply in the leasing markets. We’ve talked about sort of double-digit increases globally in volumes transacted last year. And for projections from both the IMS and our own forecast is around underlying global economic growth in the mid-3% across the world for this year, suggests that the economic cycle has got some way to run and that our own experience of our clients seem and continue to take more space for expansion of their businesses. But that trend is solid and we’ll continue steadily into next year.

So that’s the way we see things at the moment. Our crystal ball is as clear as usual. But we are anticipating a further growth in our business this year and we’re certainly investing behind that.

Christie, perhaps you’d take the question on -

Christie Kelly

Equity earnings and incentive fees, sure. David, so as you know, it’s tough to predict incentive fees and equity earnings. And where we are right now in the cycle in terms of the fund lives that are driving incentive fees, our expectation is that incentive fees, as I mentioned in my prepared remarks, will moderate in 2016. And I think probably the best gauge is to look at the performance for this year and based on what we’re seeing, would probably be 60% of what we brought in this year based on what we view towards. We don’t have view towards everything. And we do expect that it will be more front end loaded this year.

As it relates to equity earnings, and again, based on what we see, our expectation is that equity earnings will really revert more to our historical average which is quite strong. But again, not to the tune of what we experienced in 2015. And the team is just doing an exceptional job - acquisitions, dispositions, investments and the like, on behalf of our investors.

David Gold

And just remind us where you see the historical average.

Christie Kelly

Of equity earnings?

David Gold

Yes.

Christie Kelly

Yes, we’re kind of in that $25 million, $30 million range.

David Gold

Perfect. Thank you both.

Christie Kelly

Thank you, David.

Operator

Thank you. Our next question or comment comes from the line of Mitch Germain from JMP Securities. Your line is open.

Mitch Germain

Good morning. Colin, just trying to follow up with your comments on China and appreciate the color. Maybe just talk about revenue mix in the region. Is it similar to broader Asia where it’s 50-ish percent contractual and then the rest is tied to transactions? Is that a good indication of where you guys get your revenues in that region?

Colin Dyer

In China?

Mitch Germain

Yes.

Colin Dyer

Yes, the regional numbers you quote are slightly different in China where the balance is a bit less on annuity and a bit more on transactions.

Mitch Germain

And just your commentary suggesting that nothing is really slowing on the transaction side, correct?

Colin Dyer

No. As I said, I mean, we’re concentrated in the tier one cities and tier two cities. And what we’ve seen is that the, I mean, the switch that’s going on away from the traditional industrial base and towards services and technology companies. And the services and technology companies are intending to focus in the largest cities as I made the comments about the demand for retail, logistics and office space in those major cities actually being quite robust.

Where there’s stress in China is in the peripheral tier two cities and in the tier three cities where the industrial base was focused and where you see a clear decline in activity. But it’s working so far in our favor and of course we’re the market leaders there. We are strongly profitable in the region and we’re continuing to grow and expand our teams.

Mitch Germain

Is there any change in availability of capital from either the equity or lending side in that region?

Colin Dyer

No, there’s been steady demand for investment group probably in China. It’s tending to switch more to local buyers because insurance companies in particular are beginning to ramp up their purchases of investment grade property and there’s been a bit less interest in the international buyers in China. But the markets have been solid and as we said, the fourth quarter numbers were actually up 50% on the prior year.

Availability of debt, again, for local transactions as we find it, Chinese buyers tend to buy with more equity and not as much debt as western investors.

Mitch Germain

Great. Your outlook, your market buying and outlook for 2016, just curious about EMEA. Is the flat capital markets and absorption, is that a function of maybe a slowing in the U.K. or what’s really kind of driving that because we’re hearing indications are that region storming [ph] is pretty robust from an investment and leasing perspective?

Colin Dyer

Yes, the U.K. was a bit slower in the fourth quarter last year but it was more than balanced by Germany in particular, also France. And leasing in Paris was very robust in the fourth quarter. The prospects for this year, I mean, Europe is continuing to pick up slightly in its growth rates, Britain has been solid for a while but the continental Europe numbers are beginning to pick up a bit more. And we’re seeing just solid activity across the markets across the whole of the Western Europe. Eastern Europe has been fairly strong. Russia remains a problem. We actually made a profit in each of the last two years in Russia but it’s, obviously given the economic environment there, that’s a challenge.

But Europe as a whole, we’ve been very pleasantly surprised by the continuing robustness of our business there, driven by actually the business community is continuing to invest and continuing to gradually expand despite the kind of flattish top line growth numbers in the economies as a whole. And we’ve been continuing to take market share, we believe, across the region.

Christie Kelly

And to that point, Mitch, when we look at our New York capital markets results, just as a point of reference, we were up 29% year-on-year versus a market that was up 14%. And that’s against the backdrop of outstanding performance in 2014.

Mitch Germain

Got you. And then last one for me. Your willingness to invest in this market either from an M&A perspective or from a recruiting perspective, could we see the similar numbers that we approached in 2015 or is there likely going to be a bit of a slowdown here?

Colin Dyer

No, our mindset today is as confident and as robust with respect to hiring, with respect to M&A work as it was a year ago. So as you can’t predict how it’ll come up because you tend to be responding to opportunities that you manage to unearth, we would expect a similar sort of picture for the full year.

Mitch Germain

Thank you.

Christie Kelly

Thanks, Mitch.

Operator

Thank you. Our next question or comment comes from the line of Brad Burke from Goldman Sachs. Your line is open.

Brad Burke

Hey, good morning.

Christie Kelly

Hi there, Brad.

Brad Burke

Good morning, Christie. I wanted to ask in the capital markets outlook and then I appreciate the detail on your outlook, but just how much variability do you think you have around the forecast that you’re given for 2016 and whether any of the weakness that we’re seeing in the same U.S. markets in the U.S., whether that started to translate to weakness in appetite to complete new transactions.

Colin Dyer

Well, we’ve made the comment about Q4 last year being - investors being slightly a little more hesitant than they had in prior quarters. We’ve also underpinned our thinking for markets that will basically be at or slightly above 2015 levels in 2016. So I won’t repeat that. I think we’ll just watch this during the first quarter and a half of the year. We see underlying interest in real estate from all sources. We talk to institutional investors, any specific pension funds, for example, who are still raising the percentage allocation to real estate.

And for the amount of money that’s available to invest in real estate is undiminished. We’ll see how sentiment behaves in the first quarter and whether the point you make about the CMBS markets or other factors begin to weigh on investors’ confidence. But at this point, the fundamental point to continued robust market, it’s similar levels to 2015.

Brad Burke

And in terms of the willingness to invest incrementally in CRE, with the energy-sensitive economy, specifically Canada, Norway and Middle East, are you sensing any change in sentiment there in terms of how they’re thinking about incremental investments in 2016?

Colin Dyer

I’m not close enough to be able to answer that question with respect to the investment funds in those countries. What indications you’ve had, you’ve read probably that Saudi Arabia is disinvesting $60 billion to $80 billion from equity markets globally. So where they are selling, it’s tending to be in areas where they can get rapid liquidity. And that wouldn’t include real estate because the times to yield investments or to liquidate investments are obviously much longer.

What I’d say is we’ve noticed across the energy centers like Houston and Calgary, for example, within the North American continent, clear reduction in demand for leasing space and with that, a reduction in appetite for investment sales in those markets simply because the level of demand has come off so rapidly.

Brad Burke

Okay. I appreciate that. And then just a follow-up on M&A. Christie, I think last time you had said that you would be willing to eventually take the leverage on the balance sheet up to two times EBITDA, so just wanted to get an update of whether that is still a level that you would eventually target. And then also, considering the weakness that we’ve seen in the public markets, whether you’re starting to see any of that translate into lower multiples in the private markets when you’re looking at incremental M&A opportunities.

Christie Kelly

In terms of leverage, Brad, we’re committed to maintaining our investment grade balance sheet and focused on structuring our transactions with sound financial discipline. So to that point, we will stay within the swim lanes of being investment grade. And so from the perspective of our net debt leverage right now to where we may be, suffice it to say that we’re very focused on investment grade.

As it relates to transactions and multiples, we’ve been pretty consistent in terms of the transactions that we’ve executed and really sticking to the guiding principles that Colin and the team have been executing for 10 years as JLL. And to that point, our multiple range is within the 6 to 8. And we’re pretty consistent in that regard. We’ve got some transactions that are a little lower, some that are a little higher.

And then further to that, we always look to structure our transactions with, on average, two-thirds upfront and at least a third deferred. And that deferral is tied to performance, both from a revenue and profitability perspective. We’re really focused on culture and doing integration well, as Colin noted. And so from the perspective of what we see in the private markets, we’re not seeing that, but again, we’re very consistent about what we look to acquire.

Brad Burke

Okay, I appreciate it. Thank you.

Christie Kelly

Thanks, Brad.

Operator

Thank you. Our next question or comment comes from the line of David Ridley-Lane from Bank of America Merrill Lynch. Your line is open.

David Ridley-Lane

Sure. I was just curious on your thoughts around your real estate services business adjusted EBITDA margin as you go into 2016, especially as some of the property and service management revenue sounds like it could exceed the growth rate of, say, the capital markets business and sort of a little bit of a negative mix shift there that could be weighing on margin expansion in 2016.

Christie Kelly

Sure, David. First of all, when we look at adjusted EBITDA margin, the performance and the robustness of the underlying revenues is exceedingly strong. And where we look at the annuity businesses and the response from the lack of volatility, while it is a lower margin business in the transaction businesses, it’s actually a good mix, if you will. So we’re looking to really lead our business to over 60% annuity-based income streams. And you can see that in the M&A transactions that we did.

So I think we’ll see a leveling, yes, but I think it will also generate an even more robust recurring income platform for our firm and for our investors.

David Ridley-Lane

Got it. Colin, did I hear you right that 5% of fee revenue was invested in IT spending in 2015? I’m just wondering, is that operating cost?

Colin Dyer

Yes, it’s a mixture of operating cost, capital investment and acquisitions.

David Ridley-Lane

Got it. And then sort of on the IT operating costs, as you look forward into ‘16, was 2015 a unusually high year and we should expect the IT spending to come down or this is not the right pace for you to be focused on your long-term goals?

Colin Dyer

Well, our underlying spend in operating cost, we set a target of doubling that between 2012 and 2016. And we are on track to do that. We’re actually proud of that because that’s a real clear indication of our commitment to invest in what’s strategically a very important new aspect to our business which is driving the way in which basic business processes are being supported by technology, be it back office processes or indeed our interaction with our clients in the transactions and in the facilities business. It’s right across the piece. We’re adding technology into our business mix.

And so that drive to spend more is a drive to add more technology to our basic business processes. The M&A work, we bought a couple of businesses last year, in particular, Corrigo, which our pure play technology encompasses [ph]. And that’s new for us. But what we’re seeing across our markets is the fact that it’s technology impinging in the way which we are operating our business for our clients and in the way in which our clients want to interact with the markets. And Corrigo is a platform which brings subcontractors in a sort of semi-automated way into contact with ourselves and our clients and we can use the preapproved suppliers on that platform to service our medium and small-sized corporate clients more efficiently.

So you’ve got a lot going on in technology and data management. We’ve invested in a team of several dozen people whose sole role is to go around our business globally and over more of our service lines and organize and clean and filter our data so that it’s on a uniform basis, and therefore can form a uniform and consistent information feed for the sorts of technology tools which we’ve been developing which I described a moment ago. So we’ve got a broad-based level of activity in both operational spend, acquisition and capital expenditure in and around the technology sphere.

David Ridley-Lane

Got it. And then maybe last one for me. I think the last quarter you talked about watching closely the speed of transactions, the number of bidders on capital market transactions and this quarter you did see some hesitations and pause. Was there any particular theme around that and was that pause more around, say, obtaining debt financing, general placing concerns or bid-ask spreads? Any color that you could place on that will be very helpful. Thank you.

Colin Dyer

Yes, you can take the debt piece out of the equation. Debt is freely available and it’s still fairly conservatively underwritten my lending institutions. So no issue there. What we did see is something of a cooling in demand at the high-end, in particular, our investment sales markets, a bit more selective purchasing, buyers not chasing risk as much as they might have done earlier in the cycle. We saw transactions indeed tending to slow and that’s one of the reasons why Q4 was a little weaker because we believe that a lot of transactions went through the year end and we’ll continue to complete in Q1 of this year. Certainly that will be the case for us.

And your point about the bid-ask spread is an interesting one as well because sellers’ expectations of price have continued to kind of push upwards whilst buyers’ willingness to pay those continuing increased prices have become slightly more hesitant. So when you put all that together and that’s sort of the demand mix that’s swirling around out there.

Come back to our other statement, the amount of money, equity in particular, seeking to find its way into real estate is still robust. If you take our own LaSalle business, the 56 billion of assets under management and over $10 billion of funds available to invest in real estate. So they won’t invest that foolishly but it’s going to get invested over the next two, three years selectively in markets around the world. And that’s typical of what you see in other institutions and investment funds.

David Ridley-Lane

Thank you very much.

Christie Kelly

Thanks, David.

Operator

Thank you. Our next question or comment comes from the line of Brandon Dobell from William Blair. Your line is open.

Brandon Dobell

Thanks. Good morning, Colin. Good morning, Christie.

Christie Kelly

Hi, Brandon.

Brandon Dobell

I wanted to focus a bit on incremental margins in the Americas and EMEA. Maybe, Christie, if you could give some color on your level of satisfaction with how the year progressed and how we should think about incrementals looking out ‘16, ‘17 as well?

Christie Kelly

Sure. I think first of all, Brandon, in the Americas, incremental margin performance for the year was outstanding. If we look at the positive incremental margin drivers in terms of volume across leasing, ISM business, capital markets, I mean we highlighted the outperformance and as well as the hotels business. So absolutely outstanding.

When we take a look at the timing of the incremental investments and align it with our strategic plans that Colin, for example, was highlighting, investments in areas such as spread [ph], which is a real enabler and value-add contributor to our clients, I am exceedingly pleased with the market performance in the business. So all in all, positive incremental margin drivers, reinvesting in the platform consistent with our strategic plan, coupled with some slight FX impacts, great job.

Brandon Dobell

Okay.

Christie Kelly

As it relates to EMEA, EMEA was substantially year-over-year, from an incremental margin perspective, we delivered, as I mentioned in my comments, outstanding performance including the impact of exchange. We’ve had significant productivity gains, nice volume mix, we’ve executed exceedingly well on capital markets transactions, driving incentive performance fees. And all the like, again, consistent with our strategic plan invested in the platform in areas of technology and our people to really drive productivity for the future.

As it relates to future performance, we’ve got an excellent base going into 2016. And we’ve got excellent people behind us who are all working to drive performance on behalf of our clients and investors.

Brandon Dobell

Is it a relief to see the same kind of, I guess, headcount additions this year, excluding M&A, I recognize it’s a little bit difficult to predict on a forward basis for how it adds to headcount but across the transaction businesses and maybe should we continue to see you guys pick up people or is there a plan to act differently in ‘16 versus ‘15?

Christie Kelly

We are always welcoming exceptional performers around the globe. And to that point, our leasing and capital markets businesses consistently have added 5% to 10% around the globe, consistent with what we’ve done in years past. And as well, while bringing those folks in, we’re driving incremental revenue per head of 5% to 10% as well. So fantastic performance as we welcome new producers into our business.

Brandon Dobell

Okay. And then final one for me. As you think about capital spending, recognizing there’s a lot of components in that in ‘16 versus ‘15, or any kind of color on what we should think about for free cash flow ‘16 versus ‘15 would be helpful. Thanks.

Christie Kelly

Sure, Brandon. Consistent with the last five years of our performance, our capital allocation strategy is centered around $0.50 to $0.55 on the dollar being allocated towards M&A, $0.27 to $0.30 allocated towards CapEx, another 10% to 11% in co-investments to support our investors in our LaSalle business, 5% dividends. For example, this year we had an 18% year-over-year increase in our dividends, reflecting the confidence in our cash flow. And I think you can expect more of the same from us in the future.

Brandon Dobell

Okay, good. Thanks a lot.

Christie Kelly

Thanks, Brandon.

Operator

Thank you. Our next question or comment comes from the line of Michael Mueller from JP Morgan. Your line is open. Just a second. Your line is open, sir.

Michael Mueller

Okay, great. Thanks. Just a few quick questions. First, for 2015 -

Christie Kelly

Hey there, Michael.

Michael Mueller

Hello, good morning. What was the total acquisition volume in terms of dollars for 2015 first? And then secondly, thinking about EBITDA margins, do you think you’re going to be able to improve those in 2016 on a year-over-year basis just given the outlook laid out in the slide deck for cap markets and leasing, and then just what the expectation is with incentive fees and gains relative to last year?

Colin Dyer

The sum spent last year was $604 million for our M&A. That’s as referred to in our prepared remarks. As to the EBITDA margins, I mean, the market dynamics will be what they’ll be and we’ve made comments on those earlier on. There’s continued predictable strong growth in leasing and we’re expecting capital markets to be at or around the same levels as 2015.

But in addition to that, as we grow all of our business, but as we grow in particular in our annuities business, we’re also driving productivity gains across the platform. Christie referred to those. We’ve instilled the culture of productivity improvements across the business. And so, that covers a vast array of types of projects. Christie cared to have mentioned a few of them as a follow-up here. But that will also help to continue this pace of this drive to build our margins down through the years.

Michael Mueller

Got it. Okay, that’s helpful. Thank you.

Christie Kelly

Thanks, Michael.

Operator

Thank you. Right now, I’d like to turn the conference back over to management for any closing remarks.

Colin Dyer

Well, thank you, operator. With no further questions, we will end today’s call. Thanks to everyone for participating and for your continued interest in JLL. And we look forward to speaking with you again at the end of the first quarter. Have a good day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.

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