Earnings Call Transcript
JONES LANG LASALLE INC (JLL)
Earnings Call Transcript - JLL Q1 2023
Scott Einberger, Investor Relations Officer
Thank you, and good morning. Welcome to the first quarter 2023 Earnings Conference Call for Jones Lang LaSalle Incorporated. Earlier this morning, we issued our earnings release, along with a slide presentation and Excel file intended to supplement our prepared remarks. Please note that we are now providing an enhanced version of the supplemental Excel file that includes a historical view of JLL financial results by segment, including a view of fee base compensation and benefits and total operating expenses. In addition, the Excel file now includes a full balance sheet, statement of cash flows and other relevant operating metrics. We hope this enhanced Excel file will make modeling our business easier. These materials are available on the Investor Relations section of our website. Please visit ir.jll.com. During the call and in our slide presentation and accompanying Excel file, we will reference certain non-GAAP financial measures, which we believe provide useful information for investors. We will include reconciliations of non-GAAP financial measures to GAAP in our earnings release and slide presentation. As a reminder, today's call is being webcast live and recorded. A transcript and recording of this conference call will be posted to our website. Any statements made about future results and performance, plans, expectations and objectives are forward-looking statements. Actual results and performance may differ from those forward-looking statements as a result of factors discussed in our annual report on Form 10-K for the fiscal years ended December 31, 2022, and in other reports filed with the SEC. The company disclaims any undertaking to publicly update or revise any forward-looking statements. I will now turn the call over to Christian Ulbrich, our President and Chief Executive Officer, for opening remarks.
Christian Ulbrich, CEO
Thank you, Scott. Hello, and thank you all for joining our first quarter 2023 earnings call. I am pleased with our first quarter as we were able to deliver results broadly in line with our plan despite the further deteriorating operating environment. At the beginning of the quarter, several green shoots emerged in the commercial real estate market, highlighting investors’ willingness to deploy capital when market conditions warrant. Rising interest rates and turmoil in the banking sector had a dampening effect on sentiment in the second half of the quarter. For real estate markets, elevated borrowing costs and a continuation of the tightening lending standards limited investment sales activity in the first quarter. According to JLL research, global commercial real estate investments totaled $128 billion in the first quarter, a year-over-year decline of 54%. Institutional investors remain cautious while private capital has been slightly more active with an increased focus on sponsor sector and asset quality. Although global fundraising has slowed, elevated levels of capital remain on the sidelines with dry powder and closed-end funds now worth $389 billion globally. Looking ahead, it appears that debt costs will become more predictable and bid-ask spreads can begin to compress. This process is already underway with global real estate asset prices declining around 20% on average from their 2022 peak. Additional price adjustments are likely needed to bring bid-ask spreads back to a more normal level. Capital remains available and lenders are active in appropriately priced assets especially in growth sectors, such as industrials and multifamily. Macroeconomic pressures are also being felt in the global office leasing market while volume was down 18% year-over-year in the first quarter, according to JLL research. Returned to office assets are driving an uptick in attendance rates across much of the U.S. But this trend was offset by softening labor markets in certain sectors and delays in decision-making amid macroeconomic uncertainty. Global office vacancy rates ticked up modestly to 15.3% in the first quarter. Most markets’ high-quality, premium assets continue to significantly outperform the rest of the market, as occupiers focus on upgrading space. These types of best-in-class sustainable assets continue to be a focus area for JLL. In the Industrial sector, demand slowed in many markets during the first quarter, with declines in the U.S. and Europe as a result of limited supply and occupiers’ desire to take a more cautious approach given the macroeconomic environment. In Asia Pacific, net absorption was positive compared to both the fourth quarter and prior year. Overall, market fundamentals remain strong in the industrial sector, with low vacancy rates and healthy rental growth in many markets. In the retail and hotel sectors, high-quality retail spaces are in demand from growth-oriented retailers and hotels are benefiting from pent-up leisure travel and growing group and corporate demand. JLL's first quarter financial results reflect the continued slowdown in our capital markets business as the tightening lending standards and rising debt costs impacted the transaction market. Similarly, our leasing business saw declines both in volume and average deal size. In contrast, our resilient business lines collectively delivered positive revenue growth during the quarter despite economic headwinds. Our Work Dynamics business continues to show underlying strengths. We have recently won several new mandates that will take effect later this year. JLL Technologies also demonstrated an acceleration in fee revenue growth in the quarter. As we discussed at our November 2022 investment briefing, JLL uses a built-by-partner invest technology strategy, both for the benefit of our clients and to create a material differentiation for our overall business. For example, our Capital Markets team is now leveraging our new AI-powered platform to identify, analyze, and source pipeline opportunities. In the first quarter, one in five of all capital markets pipeline opportunities globally was enabled by our AI-powered platform. Lastly, LaSalle grew advisory fee revenue during the quarter, highlighting the resilient nature of this revenue stream. I will now turn the call over to Karen, who will provide more detail on our results for the quarter.
Karen Brennan, CFO
Thank you, Christian. Before I begin a reminder that variances are against the prior year period and local currency unless otherwise noted. The first quarter was generally consistent with the fourth quarter trends we discussed in our February call. While the macroenvironment has presented challenges to growth in certain areas of our business over the past couple of quarters, we see strong underlying momentum building across our entire business. Our growth-oriented investments in our people and platform over the past several years provide a strong foundation for the eventual rebound in our transactional business lines, as well as continued growth of our more cyclically resilient business lines. We remain focused on delivering a high level of client service and capturing the significant market opportunities to drive both near-term and long-term growth, profitability, and cash flow. At the consolidated level, first quarter fee revenue was $1.6 billion, a 15% decline from a particularly strong first quarter of 2022. Looking at the two periods on a stacked year-over-year growth basis in USD, they totaled a 17% increase. First quarter adjusted EBITDA was $109 million, down 61% and the adjusted EBITDA margin contracted 780 basis points to 6.6%. The declines are mostly attributable to the drop in fee revenue in our leasing and investment sales, debt and equity advisory business lines, as well as a $21 million adverse change in equity earnings. The lower equity earnings contributed approximately 130 basis points to the margin decline. Higher fixed compensation expenses tied to growth-related investments and headcount during the first nine months of 2022 was also a headwind to profitability, partially offset by the ongoing cost reduction actions we discussed last quarter. Adjusted EPS of $0.65 declined 84% driven in part by higher interest combined with the lower adjusted EBITDA, partially offset by a 5% reduction in the average share count. Putting the first quarter results in perspective, our investment sales, debt, and equity advisory fee revenues were the lowest since the second quarter of 2020, the most heavily impacted pandemic period. Additionally, over the past six quarters, we have been investing in our capital markets and other businesses, which has amplified headwind effects on the quarters’ profitability when combined with the decline in fee revenue. We expect the investments to help accelerate growth as a recovery unfolds. We continue to actively manage our business to drive further long-term improvements in efficiency. Of the $125 million of cost savings we discussed last quarter, we achieved approximately $15 million of cost savings in the first quarter, and anticipate the remaining $110 million to be fairly evenly split over the last three quarters of the year. In other words, the full run-rate effect of the $140 million in annualized cost savings we previously announced is expected to commence in the second quarter. The cost actions are largely focused on non-revenue generating roles that we identified as part of our global realignment of our business lines last year. We continue to opportunistically invest in areas that we believe have attractive growth and return prospects. Moving to a detailed review of our operating performance by segment, beginning with Markets Advisory. First quarter leasing fee revenue declined 18% following a 46% growth rate in the prior year quarter for a two-year stacked USD growth rate of 26%. As macro conditions varied across regions, so too did our leasing fee revenue, with the Americas down 21% and EMEA falling 12% while Asia Pacific grew 23%. The strength in Asia Pacific was largely driven by the recovery in Greater China. Globally, all primary asset classes saw transaction volume decline, along with lower average deal size, but this was most pronounced in the office sector. Our first quarter office sector fee revenue fell 17%, slightly better than the 18% contraction in global office fee volume according to JLL research. In the industrial sector, the revenue declined 14%, which compares favorably with a 37% decrease in global industrial market activity, according to JLL research. The contraction in industrial sector leasing activity is directionally consistent with expectations given a tight supply and significant growth seen over the past several years. As Christian described, we're seeing more sustained leasing demand for high-quality assets despite softer demand more broadly. Our global growth leasing pipeline continues to show resilience, giving cause for cautious optimism for the full year 2023. However, near-term activity is likely to be subdued considering the economic backdrop. Also within markets advisory, property management fee revenue for the first quarter grew 12% attributable in part to portfolio expansions in the Americas, an incremental fee from interest rate sensitive contracts in the UK. The decline in advisory consulting and other fee revenue was primarily due to the absence of revenues associated with the exit of a business that we previously announced in the fourth quarter of last year. The markets advisory first quarter adjusted EBITDA margin declined 380 basis points from a year ago to 11.2%, primarily due to lower leasing fee revenue. Shifting to our Capital Markets segments, the market conditions Christian described were a key factor in the 39% decline in segment fee revenue. The contraction is off a very strong first quarter 2022 growth rate of 54%, resulting in a two-year stacked USD growth rate of 10%. Our global investment sales fee revenue, which accounted for approximately 35% of segment fee revenue, fell 56%. The decline was broad-based across nearly all geographies and asset classes and compares with a 54% decline in the global sales volume Christian referenced. For perspective, the first quarter market volume decline was the sharpest since the first quarter of 2009, and in terms of dollars, with the lowest overall market volume since the first quarter of 2012. Growth in EMEA valuation advisory fee revenue mostly offset declines in Asia Pacific and the Americas, leading to a 3% reduction in the total valuation advisory fee revenue. Our loan servicing fee revenue fell 6% on approximately $5 million of lower prepayment fees, which masked about 5% growth of recurring servicing fees. The decline in prepayment is coinciding with the rise in interest rates, which dampens financing activity. The underlying growth of the servicing fees was driven by the growth in our Fannie Mae portfolio. The Capital Markets adjusted EBITDA margin contraction was predominantly driven by lower fee revenue, and the impact of the growth-oriented headcount additions we made in early to mid-2022. With our investments and our capital markets talent and platform over the past several years, we are well prepared for a strong recovery when transaction volumes return. Looking ahead, the global capital markets investment sales, debt, and equity advisory pipeline is building at a slower rate than historical trends in a typical year and is down mid-teens compared with this time last year. While we do see early signs of improving pipeline activity, particularly within the U.S., the amount and pace of revenue growth throughout the year will be heavily influenced by the factors impacting field timing and closing rates that Christian described. Moving next to Work Dynamics. Fee revenue growth of 11% was consistent with the prior quarter. The growth was led by a 24% increase in project management mostly attributable to continued project demand, particularly in the U.S., France, and the Middle East. Workplace management exhibited continued resilience, growing 3% on the back of a strong growth year earlier. The slowdown in leasing activity, particularly in the Americas, adversely impacted portfolio services fee revenue growth in the quarter. The Work Dynamics adjusted EBITDA margin contracted 350 basis points from a year ago, driven by $9 million of losses on Tetris contracts in Europe, as well as incremental investments in sustainability and technology, partially offset by the higher fee revenue. Overall, we are pleased with the underlying performance of the Work Dynamics business and are confident in the segment's growth trajectory. The first quarter was one of the strongest on record for new sales, as measured by contract wins and expansion, and had a 98% contract renewal rate, supporting growing momentum for the rest of the year and into 2024. The near-term project management pipeline remained solid, and we are focused on securing mandates for the latter part of the year. As Christian mentioned, within workplace management, we secured several new contracts from Fortune 100 companies, which will begin in the latter part of the year, and our pipeline continues to build as the demand for professional management of corporate real estate increases. Turning to JLL Technologies. Fee revenue grew 29% and acceleration from fourth quarter 2022 organic growth of 21%. Existing large enterprise clients continue to increase their utilization of our platform, particularly our solutions and services offerings. As a reminder, the majority of JLL Technologies revenue is recurring in nature, and we continue to see strong retention. The path to segment profitability remains a priority. Indicative of our focus, JLL Technologies fee-based operating expenses excluding carried interest grew just 7%. The combination of the fee revenue growth and operating efficiency gains drove an improvement in JLL Technologies adjusted EBITDA margin, tempered by an $8 million adverse change in equity earnings net of carried interest. Equity earnings in the quarter were driven by a handful of valuation increases, largely reflecting subsequent financing rounds at increased valuations. Now to LaSalle. Assets under management rose 8% from strong capital deployment and valuation increases over the prior 12 months, which translated to a 9% rise in advisory fee revenue, mostly within our core open-end fund. Given the evolving market environment, new capital deployment is subdued and impacting transaction revenues compared to the prior year. The pace of capital deployment may also impact how quickly growth for new mandates will offset the loss of the UK separate account mentioned last year. Moderating asset valuations broadly drove the $7 million decline in equity earnings from the prior year. The lower equity earnings were a 640 basis point headwind to sales adjusted EBITDA margin, which contracted 570 basis points. The increase in advisory fee revenue and platform scale benefits were offset by lower transaction fee revenue. Cost mitigation actions over the past few quarters lifted profitability. Shifting to free cash flow. Net outflow in the quarter was $766 million consistent with a year earlier, as a $130 million improvement in net working capital was offset by $130 million and lower cash from earnings. The lower cash from earnings was in part due to the decline in capital markets and markets advisory business performance. Better working capital was driven by lower annual incentive compensation and commission payments in 2023 compared to 2022, and incremental cash inflow from trade receivables, partly offset by an additional pay period in the current quarter, and incremental cash outflow and net reimbursable tied to the growth of the workplace management business line within work dynamics. Cash flow conversion is a high priority, and we remain focused on improving our working capital efficiency. Now for an update on our balance sheet and capital allocation. As of March 31, reported net leverage was 1.9x below the high end of our target range and up from 0.8x a year earlier, primarily due to net investment activity and share repurchases, together with lower free cash flow over the trailing 12 months. As a reminder, our leverage ratio typically peaks in the first part of the year, and we have a history of deleveraging as the year progresses. Our liquidity totaled $1.7 billion at the end of the first quarter, including $1.3 billion of undrawn credit facility capacity. Though we did not repurchase any shares in the first quarter, our period-end share count was down about 4% from a year earlier as a result of our approximate $450 million of share repurchases over the past 12 months. We have reinstated our share repurchase program beginning in the second quarter and expect to repurchase a modest amount of shares in the quarter. The amount of share repurchases over the full year will be dependent on the evolution of the market recovery and the performance of our business, particularly cash generation. Approximately $1.2 billion remained on our share repurchase authorization as of March 31, 2023. Over the past two to three months, we've seen general stability in a number of key market indicators and business trends, even considering the recent bank stresses. So the prevailing economic conditions lead us to expect softness in our more transaction-oriented revenues will persist into the second half of the year. All considered, we remain focused on achieving our full year 2023 target adjusted EBITDA margin range of 14% to 16%. We are navigating a shifting macroenvironment that creates short-term headwinds for certain areas of our business. The industry tailwinds we previously highlighted remain intact. We do not expect the current macro pressures to undermine growth trends over the medium and long term. Accordingly, we continue to proactively position our people and our platform to both emerge stronger through the market recovery and enhance the growth of our cyclically resilient business line.
Christian Ulbrich, CEO
Thank you, Karen. The commercial real estate market is in a much stronger position today than it was following the global financial crisis. All banks are well capitalized, balance sheets are strong, and lending standards in recent years have been much more conservative. In addition, borrowers have a more diverse set of debt sources. While there will be pockets of distress due to declining property values, the rising cost of debt will likely be contained to lower quality assets in select markets. Recent turmoil in the banking sector has created an opportunity for our industry-leading debt and equity advisory business loans. As banks pull back on lending to commercial real estate, we are well positioned to help clients find alternative sources of capital. With an estimated 15% to 20% of commercial real estate debt maturing over the next 12 months, our debt and equity advisory services will be needed more than ever. According to the Mortgage Brokers Association, JLL has the top U.S. debt origination platform by a factor of two, as well as the leading equity placement platform, which makes us uniquely positioned to manage this upcoming wave of debt maturities. Meanwhile, inflation is moderating across continental Europe and the U.S., which will likely result in an end to the current rate hiking cycle that many central banks have been operating under. Our pipelines have been growing as clients prepare for a more stable interest rate environment and a narrowing of the bid-ask spread. These factors, in addition to the significant amount of dry powder sitting on the sidelines, provides a clear path for recovery in transaction activity. Today, you have heard about our resilient business lines, as well as our ongoing commitment to improving margins, free cash flow, and returning capital to shareholders. We continue to benefit from the platform investments and organizational changes we have put in place over the last couple of years. Our actions have been targeted, and we are not reducing roles which we would need to rehire when the markets recover. Our clients put huge trust into our one JLL global platform as well in our data and technology capabilities to help them navigate the current macroeconomic environment. This trust is demonstrated by the new client engagements we have won since the beginning of the year. I am confident that we are well positioned to accelerate growth as the commercial real estate industry comes out of the current down cycle. Before I close, I would like to thank all our employees across the world for their commitment and hard work, which has positioned JLL to take advantage of the coming recovery in the commercial real estate market. Operator, please explain the Q&A process.
Operator, Operator
And your first question comes from Anthony Paolone with JPMorgan.
Anthony Paolone, Analyst
Great, thank you. My first question relates to the margin guidance that you kept at 14% to 16% for the year. I was wondering if you can talk to how much reliance you need on the second half of the year showing some improvement to get into that range just trying to understand if the trajectory we started the year on here would still allow you to get that range.
Christian Ulbrich, CEO
Hi, Anthony, it's Christian. Let me answer that question with a bit more detail. I want to kick it off going through the different business lines we have. Starting off with JLL Technologies, we are very confident that they will deliver according to our own plans. The same is true for Work Dynamics, where we are also very confident, but then we move to markets or split up markets between property management and leasing. We are again very confident that we will deliver on our property management plan. We are confident that we will deliver on that leasing plan. Obviously, that is very much driven by transactional revenues. There is some risk in it, but still we are confident that we will deliver against our own plan. When I move to LaSalle, we have the advisory side again, we are very confident that we will deliver on our advisory plan. There is some risk around the transaction fees and the incentive fees we’re receiving within the LaSalle business, but that is a reasonably small risk to the overall result of LaSalle. Then we come to capital markets. The easy part of our capital markets performance is the valuation advisory business where we are confident that they will deliver. On the debt equity side, we should be fine. The major risk in our capital markets business is clearly the investment sales side. Before I explain that more deeply, I want to quickly touch on the equity earning side, which is fairly hard to predict on a quarter-by-quarter basis. We made a thorough review of our LaSalle business and the portfolio where we have equity in there, and the vast majority of that looks good. Even if we have to take some write-downs on a quarter basis, we are confident that we will recover that over the coming years. This is obviously non-cash. On the JLL Technology side, it’s a pretty similar picture. There may be some smaller investments which will face some challenges in the coming quarters. But more importantly, some of our very large investments have a really strong medium-term outlook. So even if we have to take some write-downs in the coming quarters, due to some capital events, which we don't know about yet, we are confident that we will have substantial appreciations in the years to come. So we would like to ignore those movements on the equity earnings side in the next couple of quarters. Going back to what were our assumptions which led to our plan for this year, and why we are still confident that we can deliver in our margin guidance between 14% and 16%. We expected a very slow first and a very slow second quarter in our own plans. Then we assume a substantial recovery in our capital markets business starting in September, leading to a vibrant first quarter. What we delivered in the first quarter was fully in line with our internal plans. That's a positive one because when we did those plans, we didn't know that SVB would go down, and that we would have those crises in the small and medium-sized banking sector. That's why we are fairly happy with the performance in the first quarter. Now, the risks to our plan for this year. The geopolitical situation, if there's further geopolitical disruption beyond what we already see, that can be a risk to our assumption for this year. Additionally, if the crisis of the small and regional banks gets out of control, which we don't believe is going to happen, but I'll leave that to you to make your own risk assumptions there. Then, if the political program offered to all of us around the necessary agreement for the debt ceiling doesn't meet expectations. Again, I don't want to predict that; I leave that to you to make your own predictions. But if those things do not go in the wrong direction, we continue to be confident about the 14% to 16% margin guidance for the reasons I described.
Anthony Paolone, Analyst
Thank you for all that color, Christian. Just maybe a follow-up on that with Karen. Can you put a bit more detail or some brackets around the cost side, like was there much actually realized in Q1 or some of the initiatives there like, we'll see it in the run rate in Q2, or just maybe how to think about that a bit more.
Karen Brennan, CFO
Sure. Of the $125 million of cost savings that we referenced last quarter, approximately $15 million of that came through in the first quarter, and the remainder will be fairly evenly spread in the remaining three quarters. I do want to also highlight that in the face of continued uncertainty in our multi-year transformation program, we're continuing to drive further cost out of the business as we go through; we have more to update on that will provide further color.
Anthony Paolone, Analyst
If I just asked one more in Work Dynamics, in Workplace Management, I was under the impression that that's kind of the more recurring fee stream in that business. It sounds like you all had a lot of contract wins, but it was a pretty flat growth rate year-over-year. How should we think about that piece of the business?
Christian Ulbrich, CEO
Yes, listen, they had a very strong start, as you can see on the top line, slightly ahead of our own expectations, and as Karen alluded to, we had some significant contract wins over the last couple of weeks. We are very confident about our Work Dynamics business for the year. We used the outperformance which we had against our internal budget in the first quarter to clean up within our Tetris business on three contracts, which were unprotected against inflation-driven cost increases. That was substantial, about $9 million. As I said, we decided that this is a good moment to take that risk out. Going forward, we are pretty confident not only around our Tetris business but around the overall performance of our Work Dynamics business for this year.
Anthony Paolone, Analyst
Okay, so those Tetris contracts, those were both like those coming out affected both the top line and EBITDA for that business line in the quarter, just trying to see where that works.
Christian Ulbrich, CEO
No, they didn't affect the top line; we just checked provisions because those three contracts were not protected against inflation. So the cost increases which we faced on those contracts, we couldn't pass on to the clients. This meant we had to absorb those costs, and we took some substantial provisions on those contracts. Therefore, we should be fine going forward.
Operator, Operator
Your next question comes from a line of Michael Griffin with Citi.
Michael Griffin, Analyst
Great, thanks. Christian, in your prepared remarks, you highlighted green shoots that you're seeing regarding transaction activity. It seems like maybe rates are becoming more predictable. You talked about bid-ask spreads narrowing. Can you quantify maybe the second derivative change and where those spreads have come in?
Christian Ulbrich, CEO
Well, you almost answered the question yourself. We have seen real appetite from various sorts of lenders, the majority of whom are non-banking lenders. Over the last couple of weeks, we also saw the banks coming back in. In the last two weeks, we have closed a deal where a couple of things were competing quite hard for the debt side. It depends very much on the underlying assets. We have seen spreads going below 200 basis points on industrial, for example, on multifamily and some retail assets, while hesitancy still remains around the majority of the office products, where spreads are still above 200 and where the LTV ratios are still fairly low. Overall, the moment we have calmness and predictability in what happened this week around the Fed in the U.S. and the European Central Bank today, this is all within the range of what was predicted. This will provide confidence to the market and will lead to transactions. If that continues, we would support our case for this year because there’s debt available and enough product to trade, which will then lead to the closure of those deals.
Michael Griffin, Analyst
And just on the banks that are lending, I mean, what kind of size are those? If we’ve seen some softness and issues in the mid-size regional bank market? I mean, are they larger institutions, smaller, international, any color around who the banks are is helpful.
Christian Ulbrich, CEO
What we have seen over the last two to three weeks is we were able to close quite a significant deal. We saw those banks, coming back which were more or less absent in the first quarter. I take that as a sign that the banks seem to believe that the overall need to devalue the commercial real estate assets is coming close to a point where it has to be addressed. I’m not saying that everything is done, but we have seen significant devaluation already. They also believe the crisis of the small and mid-sized banks is under control, which seems to provide them the confidence to return to the market. So we are not dependent on all those deals now on alternative lenders or on international lenders; it is domestic banks, as well as the large major banks in the U.S. who are back in the market, providing competitive bids on deals. For us, the most encouraging sign was on some of those larger transactions, which we were able to do over the last two to three weeks, where we received numerous bids from banks. This is exactly what we want to achieve; to have a competitive environment once again.
Michael Griffin, Analyst
And then just one on office, if I may. I think you talked about our return to office, maybe improving in some of the U.S. but I think it lags EMEA and certainly APAC. Do you have a sense, of maybe your portfolio, maybe you have some prior year data of where return to office is across the U.S. as a whole? How that compares? I'd imagine that EMEA is sort of above where the U.S. is, and then the APAC is above that as well. So a color around that would be helpful.
Christian Ulbrich, CEO
Sure, let's start with APAC. Generally speaking, APAC is back to pre-COVID levels. In fact, in our own offices in China, where I was just spending some time, we don't have assigned desks. We predicted when we arranged those offices many years ago, a certain ratio of desks per number of employees. At the moment, we have more employees in the office than our desk ratio offers us because they're also keen to return. In Europe, it depends country by country, and even within countries, it's city by city; it's very cultural. I would say we are roughly at a level—this is really hard to generalize across Europe but we are roughly at about 65% to 70% of pre-COVID levels. In the U.S., we are again very cultural; great occupancy in Texas, pretty good in New York, still pretty bad in the San Francisco Bay Area, and also pretty low in the Chicago area. Overall, I would say we are sitting around 50% to 60% of pre-COVID levels. But as I said, that can vary dramatically; it can be absolutely like pre-COVID levels in Texas, and really low, still in the 30-40% range in the San Francisco Bay Area. What’s important to reiterate is that we see a strong trend from the most successful companies, where we have a high market share, to try to offer their people stunning office space. This means they need to enhance their offices significantly, among other changes. So there’s a lot of activity taking place, and we need to be careful not to assume, just because we see 50-60% occupancy rates, that transaction levels will stay that low.
Michael Griffin, Analyst
And then just maybe one for Karen on capital allocation. You talked about reauthorizing or putting back into play the share repurchase program in the second quarter. But as you think about other opportunities, maybe it's a bigger M&A opportunity, maybe it's a tuck-in acquisition. Has your underwriting criteria and sources of uses and capital changed at all?
Christian Ulbrich, CEO
On the M&A front, honestly, we don't have anything to change what we said in the last two-quarter calls. We look at our own opportunity to grow organically. We look at our own share price and what return we can achieve when we buy our own stock. Then we evaluate the opportunities that are in the market and the risk of integration involved. We don't see as much opportunity in the M&A environment unlike some of our competitors' comments. We are keeping our underwriting discipline as we have said over the last couple of quarters and do not expect to aggressively change that philosophy over the coming months or quarters. But Karen, would you like to highlight share repurchases?
Karen Brennan, CFO
Sure, so on share repurchases. I mentioned that we are reinstating our share repurchase program beginning in the second quarter. We find our current valuation at an attractive price to repurchase our shares. As we've mentioned on prior calls, we look at the return available from repurchasing our own shares relative to that with potential M&A transactions and think about that overall mix and long-term growth for the business. Share repurchase continues to be attractive, and we will tailor those based on overall cash flow expectations as the business evolves over the course of the year.
Operator, Operator
Your next question comes from the line of Chandni Luthra from Goldman Sachs.
Chandni Luthra, Analyst
Hi. Good morning. Thank you for taking my question. This one's for Karen; could you give us some free cash flow thoughts for the rest of the year? What are the moving pieces? How should we think about the free cash conversion rate for 2023? Thank you.
Karen Brennan, CFO
First, let's recap what happened in the first quarter. On the positive side, we had improvements in our working capital, primarily from improvements in trade receivables collections, and also lower accrued compensation, because we had lower bonus and commission payments in the first quarter relating to the prior year. We also faced some headwinds in our working capital: an extra pay period and growth of the work dynamics business impacting the reimbursable and the timing of that reimbursable cycle. The lower cash from earnings was, in part, due to the decline in capital markets and markets advisory business performance. We are planning to be cash flow positive by looking at the levers we can pull over the course of the year while managing for growth, certainly closely tracking our DSO, managing our CapEx, and driving a strong cash flow conversion ratio.
Chandni Luthra, Analyst
Got it. As a follow-up, I think Christian, you mentioned this last quarter. You talked about record office leases expiring in the near term. Could you discuss what you're seeing with respect to discussions between landlords and tenants as these leases are coming to an end? Because data points would suggest that office vacancy rates continue to climb. I would love to hear your thoughts on what's going on at the ground level, thanks.
Christian Ulbrich, CEO
Just to be clear, office vacancy rates, especially in some of the major U.S. markets, will continue to climb. This is predominantly around those B2C office buildings. Unfortunately, the grading of space will evolve, where what was formerly perceived as AA minus will move into that B space, because it doesn't meet the expectations of tenants anymore. On those buildings, you will see an increase in vacancy rates. However, at the same time, we see good demand for the best spaces in all of those markets. This explains the unusual situation in ‘22 where, globally and in every major market, vacancy rates went up while the top rents also increased. We haven't seen that before, but this trend will continue into ‘23 and probably into ‘24 where you see top rents increase even as vacancy rates rise.
Operator, Operator
Our next question comes from the line of Stephen Sheldon with William Blair.
Stephen Sheldon, Analyst
Hey, thanks for taking my questions. First one here, and probably for Christian: if capital markets activity doesn't start to pick back up later this year, what do you think that could mean looking into 2024? Barring any major macro changes, what’s your level of optimism about capital markets activity recovering and potentially benefiting from some pent-up demand next year with all the dry powder sitting on the sidelines?
Christian Ulbrich, CEO
We don't see a fundamental shift in the interest to invest in real estate as an asset class. The dry powder is still near record levels, and we have an amazing amount of money waiting on the sidelines to be invested in real estate. So whenever there is a delay in the recovery of transaction volumes, it will only be a delay, not a fundamental shift. If everything moves two quarters out into 2024, then we will have a pretty stunning ‘24 because we will have the pent-up demand along with whatever will happen in ‘24 anyway. There are no fundamental shifts in the underlying interest to invest in real estate, and as you know, a lot of those investments sit in funds which have a term. They want to transact at some point, and they want to liquidate those funds. Something will happen eventually. That’s what we see despite a rapid decline in values: quite a large number of willing sellers, which is very important. The U.S. has adapted quicker to that, with enough willing sellers, while in Europe, we still have several countries where we don’t have enough willing sellers who accept the new price levels, leading to a muted market there.
Stephen Sheldon, Analyst
Got it, that's incredibly helpful. As a follow up and kind of looking at segment level profit trends, and specifically in Work Dynamics, how should we think about the profit progression in Work Dynamics over the rest of the year, especially with the visibility you might have on upcoming contracts ramping? I'd also love some detail on some of the sustainability and technology investments you mentioned making in that business. What are those anyway, and could you roughly quantify the impact of those?
Christian Ulbrich, CEO
I will address that at a high level, and then I'll hand it over to Karen for more detail. As we mentioned, we had some significant wins over the last weeks. As we onboard these contracts, you have a lot of costs. Over time, which is usually five years, you re-earn those initial losses from onboarding these contracts. If you have significantly more wins than anticipated in your budget at the beginning of the year, this could slightly mute the overall year's performance. Generally speaking, we are confident about the Work Dynamics business, and this trend is expected to persist as we take higher market share over coming years while expanding our margins. Now for the details, I will turn it over to Karen.
Karen Brennan, CFO
I just want to clarify for specific quarters: traditionally, the first quarter of the year is relatively smaller for Work Dynamics for the full year. Therefore, these investments we have made in anticipation of growth in the latter part of the year have a disproportionate impact on our first half profit margin expectations. Contract timing for certain wins will be staged over several quarters, but will largely come through in the second half of the year. The dynamic for the first half of the year in terms of profit margin expectations should reflect our investments for growth ahead of the anticipated growth.
Operator, Operator
Your next question comes from Jade Rahmani with KBW.
Jade Rahmani, Analyst
Thank you very much. You talked about record dry powder in commercial real estate and investors eager to get into the sector. I wanted to ask some follow-ups on that. What are you hearing from institutional investors? I think your own slides show a substantial decline in global fundraising for closed-end funds, down around 50%. At the same time, this is one of the first years, i.e., 2022, where allocations to commercial real estate are too high because of the pressure on equities, leading to 2023. So I'm curious if you still think that thesis holds?
Christian Ulbrich, CEO
Yes, you are correct in your observations. Fundraising is down significantly, but you have to put it into perspective. There's $390 billion of dry powder sitting on the sidelines, and transaction volumes are very muted. Why would you assign more money to funds that can't invest your money because there's little going on? Dropping 50% really means little at this moment because first things must be invested that are already waiting on the sidelines. For some investors, allocations to real estate are above what they'd prefer due to the drop in equity pricing, but that will rapidly balance out. If we see a similar devaluation in their real estate assets' portfolios as seen in the U.S., they will align their allocations without selling assets. When equities recover, they will quickly realize that they remain under-invested in real estate comparatively. Overall, there are still significant interests and record levels of dry powder ready to be injected into the sector.
Jade Rahmani, Analyst
Thank you very much. Regarding the margin trajectory: looking back historically, periods such as 2014 through 2017, we did have margins similar to this level in the first quarter. To achieve your margin guidance of 14% to 16%, even the low end would require margins in the 13% to 14% range for the next two quarters and strong performance in the fourth quarter above 18%. Would you agree that quite a bit of the sequencing requires improvement over the next two quarters, leading to a strong year-on-year growth in the fourth quarter? If there’s been anything in the last few weeks within the banking sector that has you feeling more cautious?
Christian Ulbrich, CEO
We tend to be very conservative, and we would not reinstate our 14% to 16% margin guidance if we didn’t believe in it. We clearly have looked at all of our assumptions, made various scenario planning, and assessed risks business line by business line, including specific potential risks. We concluded we could still hold up to that margin guidance for the remainder of the year because we expected a very slow first and second quarter. We then anticipate that substantial recovery, particularly in our capital markets business starting in September, which would lead to a strong first quarter. What we delivered in Q1 was fully aligned with our internal plans and our confidence level remains high. Risks include the geopolitical landscape and the potential for further crises in the small and regional banks, which we do not believe will exacerbate. However, as long as there isn’t a significant shift in these areas, we hold firm to our initial guidance.
Operator, Operator
There are no further questions at this time. I'd like to turn the call back over to Christian for closing remarks.
Christian Ulbrich, CEO
Thank you, operator. With no further questions, we will close today's call. On behalf of the entire JLL team, we thank you all for participating in the call today. Karen and I look forward to speaking with you again following the second quarter.
Operator, Operator
This concludes today's conference call. You may now disconnect.