Jones Lang LaSalle Incorporated Q1 2023 Earnings Call
I L. L earnings conference call all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number one on telephone keypad. If you would like to withdraw your question Press Star. One again. Thank you Scott I'd Margory Investor Relations Officer, you May begin your conference.
Thank you and good morning, welcome to the first quarter of 2023 earnings Conference call for Jones Lang Lasalle incorporated.
Earlier. This morning, we issued our earnings release, along with the slide presentation, an excel file intended to supplement our prepared remarks. Please.
Please note that we are now providing an enhanced version of the supplemental excel file that includes a historical view of <unk> financial results by segment.
Including a view of fee based comp and benefits and total operating expenses.
In addition, the excel file now include the 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 <unk> J L L Dot com.
During the call and in our slide presentation and accompanying excel file.
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 year December 31 2022.
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.
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 emerge 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 cost and a continuation of the tightening in lending standards.
Limited investment sales activity in the first quarter.
According to tell our 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 effect on asset quality.
Although global fundraising has slowed.
Elevated levels of capital remain on the sidelines with dry powder and close end funds now at $389 billion globally.
Looking ahead.
It appears that that cost 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.
<unk> needed to bring bid ask spreads back to more normal levels.
Capital remains available and lenders are active in appropriately priced assets.
Especially in growth sectors, such as industrial and multifamily.
Macroeconomic pressures are also being felt in the global office leasing market.
Volume was down 18% year over year in the first quarter call.
<unk> research.
Turn to office assets are driving an uptick in attendance rates across much of the U S.
But this strength was offset by softening labor markets in certain sectors and delays in decision, making amid macroeconomic uncertainty.
Total office vacancy rates ticked up modestly to 15, 3% in the first quarter.
In most markets high quality premium assets continued to significantly outperform the rest of the market as occupiers focus on upgrading space.
These types of best in class sustainable assets continued to be a focus area for <unk>.
In the industrial sector demand slowed in many markets during the first quarter.
As 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 remained strong in the industrial sector with low vacancy rates and healthy rental growth in many markets.
And the retail and hotel sectors high quality retail space in demand from growth oriented hated retailers and hotels are benefiting from pent up leisure travel and growing group and corporate demand.
<unk> first quarter financial results reflect the continued slowdown in our capital markets business as the tightening in lending standards and driving that cost impacted the transaction market.
Similarly, our leasing business saw declines both in volume and average deal size.
In contrast, our resilient business lines collectively deliver positive fee revenue growth during the quarter despite economic headwinds.
Our dynamics business continues to show underlying strengths and we have recently won several new mandates that will take effect later this year.
<unk> technologies also demonstrated an acceleration fee revenue growth in the quarter.
As we talked about.
At our November 2022, Investor briefing.
<unk> uses a build by partner invest technology strategy, both for the benefit of our clients and to create a material differentiation for our overall business.
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.
Thank you Christian.
Before I begin a reminder, that variances are against the prior year period in local currency unless otherwise noted.
The first quarter with generally consistent with the fourth quarter trend, we discussed on our February call.
While the macro environment has presented challenges to growth in certain areas of our business over the past couple of quarters.
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 line.
As well as continued growth of our more cyclically resilient business line.
We remain focused on delivering 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, a total of a 17% increase.
First quarter, adjusted EBITDA was $109 million down, 61% and the adjusted EBITDA margin contracted 780 basis points to six 6%.
The declines were mostly attributable to the drop in fee revenue in our leasing and investment sales debt and equity advisory business line as.
As well as a $21 million adverse change in equity earnings.
Okay.
The lower equity earnings contributed approximately 130 basis points to the margin decline.
Higher fixed compensation expense tied to growth related investments in head count 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 <unk> 65 decline.
<unk> declined to 84% driven in part by higher interest on top of a lower adjusted EBITDA.
<unk> offset by a 5% reduction on the average share count.
Putting our first quarter results in perspective.
Our investment sales and debt and equity advisory fee revenues were the lowest since the second quarter of 2020, the most heavily impacted pandemic carryover.
Additionally over the past six quarters, we have been investing in our capital markets and other businesses, which has an amplified tampa.
On a quarters profitability when combined with the decline in fee revenue.
We expect the investments to help accelerate growth at the 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.
Approximately $15 million of cost savings in the first quarter and anticipate the remaining $110 million to be fairly evenly spread over the last three quarters of the year.
In other words, the full run rate impact of the $140 million in annualized cost savings, we previously announced and expected tenant in the second quarter.
The cost actions are largely focus 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 market advisory.
First quarter leasing fee revenue declined 18% following a 46% growth rate in the prior year quarter.
A two year stack USD growth rate of 26%.
As macro conditions varied across regions.
Two that our leasing fee revenue with the Americas down 21% in EMEA following 12%.
Asia Pacific grew 23%.
The strength in Asia Pacific was largely driven by the recovery in greater China.
Globally, our primary asset classes thought transaction volume decline.
Along with lower average deal size.
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 leasing volume According to javelin research.
And the industrial sector, the revenue declined 14%, which compares favorably with a 37% decrease in global industrial market activity. According to javelin research.
The contraction in industrial sector leasing activity is directionally consistent with expectations, given the tight supply and significant growth theme over the past several years.
As Christian described we're seeing more sustained leasing demand for high quality assets.
Softer demand more blocking.
Our global growth leasing pipeline continues to show resilience, giving cause for cautious optimism for the full year of 2023. However.
However, near term activity is likely to be subdued considering the economic backdrop.
Also with end markets Advisory property management fee revenue for the first quarter. It grew 12% attributable in part to portfolio expansion in the Americas and incremental fees from interest rate sensitive contract in the UK.
The decline in the 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 market's 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 market segment.
The market condition Christian described were a key factor and a 39% decline in segment treat ethanol.
The contraction is off a very strong first quarter of 2022% growth rate of 54%, resulting in a two year stacked USD growth rate of 10%.
Our global investment sales, Steve Avenue, which accounted for approximately 35% of segment revenue fell 56%.
The decline was broad based across nearly all geographies and asset classes and compares with 54% decline in our global sales volume Christian referenced.
For perspective, the first quarter market volume decline with the sharpest since the first quarter of 2009.
And in terms of dollar with the lowest overall market volume in the first quarter of 2012.
Growth in EMEA evaluation advisory fee revenue, mostly offset declines in Asia Pacific and the Americas.
Leading to a 3% reduction in the total valuation advisory fees anymore.
Our loan servicing fee revenues fell 6% on approximately $5 million of lower prepayment fee.
<unk> asked about 5% growth of recurring servicing team.
The decline in prepayment income.
With the rise in interest rates, which dampened in refinancing activity.
The underlying growth of the servicing fees was driven by the growth in our Fannie Mae cortisol.
Okay.
The capital markets adjusted EBITDA margin contraction was predominantly driven by lower fee revenue.
And the impact of the growth oriented head count additions, we made in early to mid 2022.
With our investments and our capital markets talent in 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 and 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 deal timing and closing rates that Christian described.
Moving next to work dynamic.
Fee revenue growth of 11% was consistent with the prior quarter.
The growth was led by 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.
One 3% on the back of a strong growth in your 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 investment in sustainability and technology, partially offset by the higher fee revenue.
Overall, we are pleased with the underlying performance of our work dynamics business and are confident in the segment's growth trajectory.
First quarter with 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 remains 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 jail technology fee.
<unk> revenue grew 29% an acceleration from fourth quarter 2022 organic growth of 21% at.
As existing large enterprise clients continue to increase their utilization of our platform, particularly our solutions and services offerings.
As a reminder, the majority of JL 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 shale technologies fee based operating expenses, excluding carried interest grew just 7%.
The combination of with fee revenue growth and operating efficiency gains drove an improvement in jail technologies adjusted EBITDA margin tempered by an $8 million adverse Duane and 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.
Okay.
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 a quarter open end fund.
Given the evolving market environment, New capital deployment is to David and impacting transaction revenues compared to the prior year.
The pace of capital deployment May also impact how quickly growth with new mandates will offset the loss of the UK separate account mentioned last year.
Moderating asset valuations broadly girl that $7 million decline in equity earnings from the prior year.
A lower equity earnings were 640 basis point headwind to Lasalle 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 lift in profitability.
Shifting to free cash flow.
Net outflow in the quarter with $766 million consistent with a year earlier.
$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.
The 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 additional pay period in the current quarter and incremental cash outflow and not reimbursable tied to growth of the workplace management business line within work dynamics.
Cash flow conversion as 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 loss ratio of one nine times below the high end of our target range and up from <unk> eight times, 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.
Shifting to free cash flow.
Our history of deleveraging as the year progresses.
Our liquidity totaled $1 7 billion at the end of the first quarter <unk>.
Including $1 3 billion of Undrawn credit facility capacity.
Although 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 share 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 the softness in our more transaction oriented fee revenues.
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 macro environment that create short term headwinds for certain areas of our business.
The industry tailwind, we previously highlighted remain intact and we do not expect the current macro pressures to undermine growth trends over the medium and long term okay.
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.
Kristian back to you.
Thank you Karen.
The commercial real estate market is in a much stronger position today than it was following the global financial crisis.
Of 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 setup debt sources.
While there will be pockets of distress due to declining property values and the rising cost of debt will likely be contained to lower quality assets in select markets.
These mature model in the banking sector has created an opportunity for our industry, leading debt and equity advisory business slides.
As banks pulled 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 broker Association.
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 sideline.
<unk> has a clear path for recovery interest action activity.
Today, you have heard about our resilient business lines as well as on our ongoing commitment to improving margins and free cash flow and returning capital to shareholders. We.
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 rules, which we would need to rehire when the markets recover.
Clients put huge trust into our <unk>, our global platform as well in our data and technology capabilities to help them navigate the current macroeconomic environment. This trust as demonstrated by the new client engagements. We have won since the beginning of the year.
I'm confident that we are well positioned to accelerate growth as the commercial real estate industry comes out of the current downcycle.
Before I close I would like to thank all our employees across the world for their commitment and hard work.
Which has positioned <unk> to take advantage of becoming recovery in the commercial real estate market.
Operator, please explain the Q&A process.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Anthony <unk> with Jpmorgan.
Alright, great. Thank you.
My first question relates to the margin guidance that you kept at 14% to 16% for the year and I was wondering if you can talk to how much reliance you need on the say the second half of the year showing some improvement to get into that range just trying to understand.
If sort of the trajectory we started the year on year, which still allow you to get that get to that range.
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 sale of LTE.
We are very confident that they will deliver according to our own plans. The same is true for work dynamics, where we are very confident.
But then move to markets or split up markets between property management and leasing we are again very confident that we deliver on our property management plan.
And we are confident that we deliver on that leasing plan. Obviously that is very much driven by transactional revenues and so there is some risk in it but still we are confident that we deliver against our plan.
Move to Lasalle, that's all we have the advisory side again, we are very confident that we'll deliver on our advisory plan. There is some risk around the trunk excellent fees and the incentive fees, we're getting within Lasalle business, but that is.
Reasonably small.
Risk to the overall result of Lasalle.
And then we come to capital markets. The easy part of a couple of markets overall performance as the valuation advisory business, where we are confident that they will deliver.
On the debt equity side, we should be fine so the major risk in our capital markets business is clearly the investment sales side.
And and then before I explain that.
More deeply just wanted quickly briefly touch on the equity earnings site.
Which is.
Fairly hard to predict on a quarter by quarter basis.
We made a very thorough review of our.
<unk> business in the portfolio, where we have equity in there.
The vast majority of that looks good.
And even if we have to take some write downs on a quarter basis.
Very confident that we will recover that over the coming years.
And so that is obviously noncash and.
And on the Taylor T side, it's a pretty similar picture there may be some smaller investments, which will face some challenges over the coming quarters, but more importantly, some of our very large investments.
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.
Absolutely confident that we get substantial appreciation in the years to come so we would like to ignore those movements on the equity earnings side in the next couple of quarters, because it's very hard to predict for us.
So going back to what were our assumptions, which led to our plan for this year and why we are still confident that we deliver.
Our in our margin guidance between 14 and 16%.
We expect it.
A very slow for us in a very slow second quarter in our own plants.
And then we assume a substantial recovery for our capital markets business, starting in September leading to a really vibrant fourth quarter.
And.
What we delivered in the first quarter was.
Fully in line with our own internal plans and I said, that's a positive one because when we get those plans. We didn't know that SCB would go down and that we would have those prices in the.
Small and medium sized banking sector and so that's why we are.
Happy with the performance in the first quarter.
Now the risk to our plan for this year.
Sure.
Obviously, the geopolitical situation if this further geopolitical disruption.
Beyond what we already see that can be a risk to our assumption for this year.
But then on top of that.
If the crisis of the smaller and regional banks get out of control, which we don't believe is going to happen, but I'll leave that to you to make your own.
Risk assumption there.
And then second if the political program offered to all of us around the necessary agreements for the debt ceiling.
Meet expectations and again I don't want to predict that I'll leave that to you to make your own predictions, but.
If those things are now.
Not growing.
In the wrong direction.
Continue to be confident about the 14% to 16% for the reasons I described.
Okay. Thank you for all that color Christian and then just.
Maybe 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 <unk> or some of the initiatives there.
You will see it in the run rate in Q2, or just maybe how to think about that a bit more.
Sure so 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 malls.
<unk> transformation program, we're continuing to drive further cost out in the business.
As we go through the <unk>.
More to update on that well, we will provide further for the color.
Okay, if I could just ask one more and work dynamics.
In workplace management.
The impression that that's kind of the more recurring fee.
Fee stream in that business and it sounds like you all have had a lot of contract wins, but it was pretty flattish growth rate year over year.
How should we think about that piece of the business.
Yes listen.
They had a very strong start as you can see on the top line slightly ahead of our own expectations and as Kevin alluded to we had some significant contract wins over the last couple of weeks. So thats why I just said a moment ago, we are very confident about or what dynamics business for the year.
We used the outperformance, which we have 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 the $9 million.
As I said, we decided that this is a good moment to take that risk out.
And going forward.
We are pretty confident not only around our tetris business.
Around the overall performance of our dynamics business for this year.
Okay. So those tetris contracts those both those coming out affected both the topline and.
EBITDA for that business line in the quarter, just trying to see where there were no. They didn't they didn't affect the topline. We just took provisions because those three contracts were not protected against inflation. So the cost increases, which we faced on those contracts, we couldnt leave that over to decline.
And so we had to eat it and so we took some substantial provisions on those contracts. So that we should be fine going forward.
Okay. Thank you.
Yeah.
Your next question comes from the line of Michael Griffin with CD.
Great. Thanks Christian in your prepared remarks, you highlighted green shoots that you're seeing I think of a transaction activity.
It seems like maybe rates are becoming more predictable you talked about bid ask spreads narrowing the process being underway.
Say for a hypothetical that bid ask spreads are at 200 basis points, maybe a bit more narrow for industrial multi maybe a bit wider for office you can quantify maybe the second derivative change and where those spreads have come in.
Okay.
Well.
You almost answered the question yourself, we we have seen.
A real appetite from <unk>.
Various sorts of lenders, which.
The majority is non banking lenders, but over the last couple of weeks. We also saw the banks now coming back in and also those banks, which have been very absence for the.
First three months have come back now and Thats just in the last two weeks, we closed the deal a couple of things, we're competing quite hard for the debt side okay.
And so it depends very much on the underlying assets, we have seen spreads going below 200 basis points on on industrial for example on multifamily alltel retail assets, where we still see some hesitancy is clearly around.
The majority of the office products, where spreads are still.
About 200, and where just the LTV ratios are still fairly low.
But overall.
The moment, we have <unk>.
Amnesty and predictability.
And what happened this week around the fed in the U S. But also the ECB. Today. This is all within the range of what was predicted and that will provide confidence to the market and that will lead to transactions and if that continues that would support our case for this year.
Because there is debt available there is enough product available, which wants to trade and that will then lead also to the closure of those deals.
And just on the banks that are lending I mean, what kind of size are those if we have seen some softness and issues in the mid sized regional bank market. I mean are they larger institutions smaller international any color around who the banks are is helpful.
Well, what we have seen over the last two to three weeks is we were able to close.
A significant deal and we saw kind of as I said, those banks coming back which were more or less ups in the first quarter.
So I just take that and I don't want to speculate here, but from a personal view I take that as a sign that.
The banks seem to believe that both the overall need to devalue.
The commercial real estate assets is coming close to the point, where it has to kind of get to I'm.
Im not saying that everything is done, but we have seen overall quite a significant devaluation already.
That they also believe that the crisis of the small and midsized banks regional banks in the U S is under control.
And that seems to provide them the confidence that that back into the market.
So we are not dependent on on all those deals now on alternative lenders on international lenders, but it is domestic banks as well as the <unk>.
Large major banks in the U S were up back into the market and providing competitive bids on deals and caused the most encouraging sign was on on some of those larger transactions, which we were able to do over the last two to three weeks that we had numerous bids coming in from banks. So that is exactly what you want to.
<unk> that you have a competitive environment and then not only one or two who are offering.
Proposal.
And then just one on office if I may I think you talked about <unk>.
Return to office, maybe improving some of the U S, but I think it lags.
And then certainly APAC do you have a sense one of maybe your portfolio, maybe with some proprietary data of where RTL is cross the U S. As a whole and then how that compares I would imagine that EMEA is sort of above where the U S isn't the APAC is it was above that as well so some color around that would be helpful.
Sure, let's start with APAC APAC.
Yes.
Generally speaking back to pre Covid levels in fact in our own offices in China, where it was just spending some time.
We don't have assigned seats, there and so we have predicted when we arrange those offices many many years ago a certain.
Our ratio on desk, we need for the numbers of employees and at the moment, we have more employees in the office and our desk ratio offers us because they are also keen to be back into the office that will hopefully.
Go back to the normal numbers of occupancy, which we had pre COVID-19, but generally APAC. This is a non issue in APAC. The question of return to office and.
In Europe , it depends SME U S very much country by country and even within countries. It city by city literally it's very cultural.
I'd say, we are roughly at.
Level and this is really being in the air when you generalize across Europe , but we are roughly at about.
65% to 70% of pre Covid levels.
And then the U S. We have thoughts.
<unk> very very cultural.
Great occupancy in Texas.
Pretty good in New York.
Still really really bet in the San Francisco Bay area, and also pretty bad kind of in the Chicago area. So overall I would say we are sitting at around 50% to 60% of pre COVID-19 levels, but as I said that can be absolutely like pre COVID-19 levels in Texas.
And really low still in that 30 35, 40%.
And the simpler Cisco Bay area.
But.
Again, what is important to reiterate we see a very strong trend from the most successful companies, where we have a very high market share to try to offer the people standing office space and that means that they need to do a lot within the existing space, which we got.
To upgrade their existing space, but also move into other locations move into other buildings, especially when they don't meet the green credentials, the well being credentials. So there is quite a bit of activity taking place pre planning taking place.
And so.
We shouldn't run into the mistake that we think allow it's only 50% to 60% of pre COVID-19 levels and that means that transaction levels will stay that low lock in the area, where we are today.
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 thats a bigger M&A opportunity maybe it's a tuck in acquisition has your underwriting criteria and sources of uses of capital changed at all.
Well, let me pick that up on M&A, and then Karen can talk about share repurchases on the M&A front honestly we.
We don't have anything to change what we said in the last two protocols.
We look at our own.
Our opportunity to grow organically, we look at our own share price and what return we can achieve when we when we buy our own stock and then we look at the opportunities which are in the market and the risk of integration.
And so we don't find unlike some of our competitors comment we don't see that much opportunity in the M&A environment.
And so we are keeping our underwriting.
Disciplined.
As we have said over the last couple of quarters, and so don't expect us to aggressively change that.
Philosophy over the coming months or quarters, but Kevin do you want to give some highlights on the share repurchasing.
Sure so on share repurchases.
I mentioned that we are reinstating our share repurchase program beginning in the second quarter, we certainly find our current valuation and attractive price at which to repurchase our shares and as we've mentioned on prior calls you certainly look at the.
Return available for repurchase your own your own shares relative to that with potential M&A transactions and think about that overall mix and.
Long term growth for the business. So we continue to.
Share repurchases attractive and we'll just tell are those based on.
Overall cash flow expectations, and as our business evolves over the course of the year.
Great. That's it for me thanks for the time.
Your next question comes from the line.
Jamie look terrific with Goldman Sachs.
Hi, Good morning. Thank you for taking my question. This one for Karen could you give us some fee cash flow thoughts for the rest of the what are the moving pieces and how should we think about the free cash conversion rate.
For 2023, thank you.
So first let's just recap what happened in the first quarter on the positive we had improvements in our working capital.
That work primarily from improvements in trade receivables collections, and then also lower accrued comp because we had lower bonus and commission payments in the first quarter.
Getting to the prior year.
We also had some headwinds in our working capital out.
<unk>.
An extra pay period, and then some growth in the work dynamics.
Business impacting the Reimbursable is in the timing of that Reimbursable cycle.
Also had lower earnings kind of offsetting some of the gains we made in the working capital side of things from an overall full year perspective, we are planning to be cash flow positive.
Looking at the levers we can pull over the course of the year, while we are managing for growth.
Certainly closely tracking our DSL, managing our capex and relationships.
I have a strong cash flow conversion ratio as we can.
Yeah.
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. Since these leases are coming too because data points would suggest that office vacancy rates continue to clients would love to hear your thoughts on what's going on.
At the ground level. Thanks.
Sure.
To be clear our office.
Can see rates, especially in some of the.
Major U S markets will continue to climb.
But it is predominantly.
Around those b to C office buildings and on.
Unfortunately, the the grading of.
Space.
Evolve and so what was former be perceived as a miners will linger into the <unk> space because it doesn't meet going forward the expectations of tenants anymore and so on those buildings you will see an increase in vacancy rates, but at the same time, we see good.
Demand.
On the best space in all of those markets.
And that's why we still have that very unusual situation, which we saw around the world in every major market in 'twenty two that vacancy rates went up and and the top rents. When also opposite we had an increase of the highest rents in all major markets around the world.
With also the vacancy rates went up we haven't seen that before but that will continue to be a trend in 'twenty, three and probably in 'twenty call that youll see top rents move up and vacancy rates moving up.
Great. That's it for me thank you.
Your next question comes from the line of Stephen Sheldon with William Blair.
Okay.
Hey, Thanks for taking my questions.
First one here and then probably for Christian if capital markets activity doesn't start to pick back up.
This year, what do you think that could mean looking into two.
<unk> 2024, again, barring any major macro changes and what's your level of optimism about capital markets activity recovery and maybe benefiting from some pent up demand next year with all the dry powder that's on the sidelines.
So we don't see a fundamental shift in the interest to invest into real estate as an asset class.
Su.
Hooks earlier from us that dry powder.
Is still near record levels, we have amazing amounts of money waiting on the sidelines to get invested into real estate as an asset class. So whenever there is a delay in the recovery of the transaction volumes. It will only be a delay from today's perspective, it will not be a fundamental shift so.
<unk> your point, if everything moves two quarters out into 2024, then we will have a pretty stunning 24, because you will have the pent up demand as you call. It plus what would have happened in 2000 and for anyway.
So we cannot see today any fundamental shift in the underlying interest to invest into real estate and as you know a lot of those investments fit in and funds, which have a tongue and so.
They want to transact at some point they want to liquidate those funds and so something will happen eventually and that's what we already see despite the pretty rapid decline in values we have.
Quite a large number of willing sellers.
Which is very important in the U S has adopted first to that that you have enough willing sellers.
In country to that in Europe , we still have a couple of countries, where we don't have enough willing sellers, who are accepting the new price levels and that is a reason why those markets are also still very muted it's more on the on the seller side and not so much on the debt side in the U S that was that issue.
That we didn't have enough data available and the combination of the other two sectors, but now the debt market as I alluded to earlier is coming back we have enough willing sellers. So we expect transaction volumes to improve now.
<unk> by months and as we said earlier and really picking up in September .
Yes.
Got it that's incredibly helpful.
And then as a follow up and kind of looking at segment level profit trends.
Typically in work dynamics I guess, how should we think about the profit progression and work dynamics over the rest of the year.
Especially with the visibility you might have in new contracts ramping and then we'd also love some more detail on some of the investments I think sustainability and technology investments that you're making in that business that you mentioned what are those any way to roughly quantify the impact of those.
I can't get off from a high level, and then I'll hand, it over to Karen for more detail.
As we said we had a couple of pretty significant wins over the weeks and the usual pattern is when you onboard those contracts you will have a lot of costs.
And then over the time of the contract which is usually five years.
You kind of.
We own those losses of the beginning two on both of those contracts and so if you have significantly more wins than you would've expected in your budget at the beginning of the year that may have a slightly muted impact.
On on the overall year's performance.
We made quite a significant.
Improvement of our options next year and we are planning for more margin improvement. This year, we have to look at that now because we had so many wins. The last couple of weeks that this is what I just described could impact it but generally speaking as I said earlier, we are very confident for dot work dynamics.
<unk> and that is not only for this year. This is for the coming years, where we expect that trend to prevail that we take.
Higher market share and that we can expand our option will give detail I hand, it over to Kevin now.
Now I'll, just talk a little bit more about specific quarter. So first just a reminder, that historically the first quarter of the year is a relatively smaller portion of the work dynamics for the full year in any event. So these investments that we have made and are making in anticipation of the growth that we have in a latter part of the year.
Certainly have a disproportionate impact.
So the contract timing in terms of when certain wins will come on right 30 stage over a number of quarters, but there'll be largely in this year in the third quarter and fourth quarter. So second half of the year. So the dynamics for the first half of the year in terms of the profit margin expectations had reflect what Christian and I have just talked about in terms of investments.
Our growth ahead of the growth coming through.
Great. Thank you.
Again as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad again star one.
Your next question comes from the line.
Of Jade Rahmani with <unk>.
Thank you very much.
You talked about record dry powder, and commercial real estate and investors eager to get into.
The sector.
Just wanted to ask some follow ups on that what what are you really hearing from institutional investors I think your own slides to show.
Quite a substantial decline.
In Global fund raising for closed end funds I believe down around 50%.
And then dry powder as it stands as of <unk> 23 down around 7% from the peak.
At the same time.
As one of the first years as opposed to 2022 was.
Which allocations to commercial real estate.
Too high because of the pressure on equities.
And that continues with what's going on now so curious if you still think that thesis holds.
Okay.
Yes, I mean, all of you said, what you said is correct, but you have to put it into perspective.
Fund raising is significantly down.
This 390 billion of dry powder sitting up the sideline and there is a very muted transaction volume and so why would you assign more money to funds, who can't invest your money because theres nothing going on.
So that it is down at the moment by by 50% frankly means nothing going forward because things have to be invested which are already sitting up the sidelines.
Secondly, yes, you are right for some investors the allocations to real estate.
What they would like to see not because they invested so much into real estate, but the pricing of equities went down and so the relativity has shifted that would change very quickly again, because we have at the moment a devaluation of of their real estate assets and in some countries. They they incur.
That faster than in others, but if we see the same kind of devaluation, which we have roughly seen in the U S. In the portfolios of those investors of 20% they will be in line without selling a single asset, but then if equities are picking up again then in relative terms they are back to square one.
But they have an under allocation to real estate, which is generally globally. The case that they have a higher percentage pin down for real estate than they had invested in the past now we have these.
Short term shifts, which we just discussed but once we are back to to normality around that then they are still under invested and then you will see fundraising being.
<unk> again, and and you know they are still exceptions to the rule you have seen what blackstone's ability raws to raising new record number for the new private equity fund in real estate and so frankly this is not a concern for us that we don't see enough interest of money being invested into real estate.
Yeah.
Thank you very much second question would be just on the margin trajectory looking back historically periods such as 2014.
Through 2017.
You did have margins.
Similar to this level in the first quarter.
And to achieve your margin guidance of 14% to 16%, even the low end I think would require.
Margins in the 13% 14% range for the next two quarters and then very strong performance in the fourth quarter, 18% plus that would be to achieve something close to a 14% margin. So really I think the premise is stability.
Sequential improvement in the next two quarters, and then a strong year on year growth in the fourth quarter do you disagree with that and my main question would be if anything in the last few weeks and the bank sector and what's unfolding.
Generally globally, the case that they have a higher percentage pinned down for real estate than they had invested in the past now we have these short term shifts, which we just discuss but once we are back to to normality around that then they are still under invest it and then you will see fundraise.
It causes you to be more cautious and changed that thinking.
Well first of all we tend to be very conservative and we wouldnt reinstate our 14% to 16% margin guidance.
Well, believing in it.
We clearly have looked at all of our assumptions, we made various scenario plannings what could happen.
Along those lines, obviously, which was much more detail.
Hawaii kind of explains it to earlier business line by business line within the business line by segment what type of risks do we see if something goes wrong. This year and we came out of that assessment that we can hold up to the margin guidance for the rest of this year.
Under the assumptions I have made earlier.
What you said with regards to how products has to come in I would caution you on the second quarter I said earlier, we expected a very slow first quarter in a very slow second quarter and that is still the case.
But we do expect a significant uptick in our performance in the third quarter and then.
Very very strong fourth quarter, we have always been a business, which has the cyclicality around the year with a weak first quarter, a slightly better second quarter third quarter, even better and then a pretty stunning fourth quarter that wasn't the case last year for the reasons you all know.
This year will be particularly pronounced on relying on that fourth quarter performance.
But for the time being we have no reason to believe that it will not come because our working hand in the different business lines gives us the confidence that we can still hold up to the 14% to 16%.
Yes.
Thank you.
There are no further questions at this time I would like to turn the call back over to Christian for closing remarks.
Sure. Thank you operator with no further questions. We will close today's call on behalf of the entire gel L. Team. We thank you all for participating on the call today, Kevin and I look forward to speaking with you again following the second quarter.
Yes.
This concludes today's conference call you may now disconnect.