CWK - Cushman & Wakefield: Challenging Outlook

Summary

• Recent real estate industry metrics relating to leasing and investment sales have been poor.
• Cushman & Wakefield has a larger debt burden than peers, which is a concern, and I am also worried that future top line contribution from its PM/FM business might also come in lower than expectations.
• I lower my rating for CWK's stock from a Hold to a Sell, as the challenging outlook for the company has yet to be fully factored into consensus numbers.

Elevator Pitch

My investment rating for Cushman & Wakefield plc's ( CWK ) shares is a Sell.

I assessed Cushman & Wakefield's strategy pertaining to acquisitions and its financial performance for the third quarter of the previous year with my earlier October 27, 2022 write-up .

I decide to downgrade my rating for CWK from a Hold previously to a Sell now with this new article. My analysis suggests that Cushman & Wakefield's 2023 results might not be as good as what the market's current consensus numbers imply. This explains my bearish view of CWK.

Real Estate Industry Metrics Point To A Dim Outlook

Companies operating in the real estate services space such as Cushman & Wakefield are going to have a difficult time, judging by recent property industry metrics.

Based on Jones Lang LaSalle's ( JLL ) Q4 2022 US Office Outlook research report , office space leased in the US decreased by -8.3% YoY and -10.3% QoQ to 40.9 million square feet in the final quarter of the prior year. The sublease vacancies for US office properties expanded by 4.9% QoQ to 136.6 million square feet as of end-2022; while the 42 major US office leasing transactions (100,000 square feet and larger) completed for Q4 2022 was as low as it got for the past eight quarters.

Separately, data taken from Colliers International Group's ( CIGI ) January 5, 2023 research update suggests that US real estate investment sales volume fell by a substantial -72% YoY in November 2022. It probably won't be a surprise that US office property investment sales volume dropped by -64% in November last year on a YoY basis, which is seen as a relatively more cyclical property segment. But it came as a shock to know that the industrial and multi-family segments, which have been perceived to be relatively more defensive, also witnessed YoY volume declines of -80% YoY and -74% YoY, respectively. Colliers' research highlights that US property investment sales volume for December 2022 is also likely to be inferior to that of December 2021.

The property industry metrics presented above are largely consistent with Cushman & Wakefield's management commentary at its most recent quarterly results briefing. At the company's Q3 2022 earnings call in early-November last year, CWK noted its expectations of Q4 2022 brokerage (leasing and capital markets) revenue "being down materially", and "tougher comparisons" for its brokerage business in 1H 2023.

CWK's Debt Burden And PM/FM Revenue Are In The Spotlight

Investors with an interest in considering Cushman & Wakefield as a potential investment candidate need to focus on two key company-specific factors.

The first key factor is concerning CWK's PM/FM (Property Management and Facility Management) business.

Cushman & Wakefield guided at its Q3 2022 results call that its top line growth for its PM/FM segment will be "flat" YoY for Q4 2022. At its recent quarterly investor briefing, CWK attributed this to "the timing of new contracts in balanced against exiting contracts" and "contracts that roll on and roll off."

As highlighted in the preceding section, the outlook for CWK's brokerage business is poor taking into account recent leasing and investment sales data. This makes it more important for CWK to grow its revenue from the PM/FM business to offset the weakness related to its brokerage segment. The PM/FM business is expected to do well in the current economic environment because of increased outsourcing demand driven by cost cutting considerations.

However, competition for PM/FM services will also intensify, as Cushman & Wakefield's rivals also place a stronger emphasis on PM/FM services in tough times like these. CWK is a relatively smaller player as compared to its larger competitors, CBRE and JLL, so there is a risk that Cushman & Wakefield could cede market share in this segment to its bigger peers. Notably, CWK highlighted at its Q3 investor call that the growth outlook for its PM/FM business is dependent on "continued market share capture."

Considering CWK's guidance on Q4 2022 PM/FM revenue, it is reasonable to be concerned that the future performance of the company's PM/FM business might fall short of the market's expectations.

The second key factor relates to Cushman & Wakefield's credit risk profile.

CWK's net debt-to-EBITDA ratio was 2.8 times as of September 30, 2022. As a comparison, the net debt-to-EBITDA metrics for Cushman & Wakefield's key peers and competitors, JLL and CBRE ( CBRE ), were much lower at 1.1 times and 0.2 times, respectively.

This implies that Cushman & Wakefield is relatively more vulnerable to a spike in interest rates as compared to the company's peers; higher rates will likely translate to an increase in interest rate costs. Also, the reasonably high net debt-to-EBITDA ratio and the need to service interest payments might make it difficult for CWK to allocate excess capital to either new investments to drive future growth or increase shareholder capital returns to satisfy its shareholders.

CWK's credit profile is an issue that investors are really worried about. At the recent quarterly results call, an attendee questioned how Cushman & Wakefield could "get comfortable around your leverage" considering the "trajectory of interest rates."

2023 Guidance Could Possibly Disappoint The Market

The market's Q4 2022 consensus financial forecasts for CWK appear to have factored in the challenging market conditions to a large degree, but the 2023 consensus financial projections seem to be too optimistic.

As per S&P Capital IQ's consensus data, Cushman & Wakefield's revenue and EBITDA are estimated to decrease by -15.3% YoY and -38.0% YoY to $2,444 million and $216 million, respectively in Q4 2022. On the other hand, analysts also see CWK's top line and EBITDA declining by -2.0% and -5.1% to $9,788 million and $872 million, respectively in YoY terms for full-year fiscal 2023.

I am of the view that CWK's 2023 guidance, which is likely to be issued when it reports Q4 and FY 2022 results in late-February , might be a de-rating catalyst for the stock. Based on the analysis presented in this article, it seems likely that Cushman & Wakefield's financial performance for the current year could turn out to be worse what the market is currently expecting.

Closing Thoughts

My rating for Cushman & Wakefield is a Sell now. My opinion is that the current sell-side analysts' consensus financial figures are not fully reflective of Cushman & Wakefield's challenging outlook, which translates into further potential share price downside for CWK.

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