Description

Summary 

Since the start of the year, economic fears and higher interest rates have resulted in a roughly 30% decline in the shares of Cushman & Wakefield (CWK), leaving the stock 20% below its pre-COVID levels.  As a result, CWK now trades below 6x EBITDA and less than 7x earnings, levels that are very attractive compared to peers and the quality (and low capital intensity) of the business and offers shareholders significant return potential.  At 10x EBITDA (14x earnings) on our 2025 estimates, which are slightly above consensus, the stock would be worth close to $50 per share, more than 200% upside from current levels.

Business Overview

Cushman & Wakefield is one of the largest global commercial real estate services firms.  Cushman was formed through a series of mergers in 2014 and 2015, and after integrating the businesses and streamlining the operations, the company went public in 2018.  Cushman’s property and facilities management business, which accounts for roughly half of total revenues and around 35% of EBITDA, provides day-to-day management of client properties.  Revenue from property and facilities management is recurring in nature, driven by multi-year contracts and has relatively high switching costs.  As a result, this segment held up remarkably well through COVID, with revenue actually growing by 1% in 2020 despite a significant decline in real estate occupancy rates.  Prior to 2020, the business averaged double-digit growth and has since resumed its solid trajectory with growth accelerating to 11% in the first half of 2022 following 7% growth for the full year 2021. 

The company’s two other primary business lines are leasing, where it earns fees from advising both owners and tenants on leasing transactions, and capital markets, where it acts as a broker for real estate purchases and sales. These businesses are more sensitive to the commercial real estate cycle and declined in 2020 but quickly recovered to pre-pandemic levels by 2Q21 and have remained above 2019 levels for the past few quarters.

We view commercial real estate services as an attractive market with favorable competitive dynamics and long-term growth tailwinds.  After decades of industry consolidation, Cushman is one of just three large companies with the breadth of offerings and scale to win contracts with large, multinational clients (the other two main competitors being CBRE and JLL).  The market size for property and facilities management is estimated to grow by 6-7% annually as building owners increasingly outsource such functions as client accounting and maintenance and janitorial services.  Institutional ownership of real estate also continues to grow, with asset allocations to the sector improving from about 9% in 2013 to 11% currently, benefiting businesses such as Cushman that work with institutional managers for asset purchases and sales, leasing, and day-to-day property management.  These positive market dynamics have driven high single to low double digit revenue growth for the company.

Why Cushman and Why Now?

The recent rise in interest rates and general economic concerns have caused investor fear that Cushman is set for a material decline in business activity.  However, we believe Cushman is more resilient to a potential downturn than the market appreciates.  We estimate that over 40% of EBITDA is generated by recurring property management and valuation services, with another one-third of earnings from relatively predictable leasing fees, leaving just 25% of profits tied to the more cyclical capital markets business.  Investors might point to the company’s performance in 2020, when leasing revenue declined by 35% and capital markets fell by 25% as evidence of heightened economic sensitivity for the business, but any potential slowdown in commercial real estate markets is likely to be milder for several reasons.  First, Cushman’s leasing business should continue to benefit from a recovery in the office sector (the company’s largest vertical), which has unsurprisingly been slower to recover from the pandemic.  Additionally, a decline in capital markets transaction activity is likely to be less severe than in 2020, with the current slowdown caused mostly by a rise in interest rates rather than an economic shutdown that was particularly acute in commercial real estate.  In fact, Cushman’s peer CBRE recently estimated that in the event of a recession in the second half of 2022, the leasing market would decline by just 1-3% and capital markets activity would fall by 10% compared to 2021 results.

We are also positive on Cushman’s margin improvement opportunity, which has been an important driver of EBITDA growth in recent years and still has significant runway ahead.  From 2015-2021, Cushman’s EBITDA margins expanded from 9.3% to 12.9%, with margins increasing every year other than 2020.  Cushman has completed several corporate-wide cost reduction programs, while also benefiting from operating leverage as the business grows.  We see further opportunities for the company to continue improving its profitability levels as 2021 EBITDA margins were still about 250 bps below CBRE’s (adjusting for CBRE’s higher margin investment management business).  While Cushman’s restructuring programs have been key to driving margins up, they have also been a drag on cash generation historically.  Going forward, we believe margin improvement will be driven largely by increasing scale rather than by additional corporate streamlining, helping to improve the company’s FCF conversion.  We are already seeing evidence of this, with Cushman’s free cash flow conversion improving significantly in 2021 and a further decline in cash restructuring costs in the first half of 2022. 

What We Think It’s Worth

Even if Cushman’s leasing business declines slightly in the second half of 2022, with a more significant fall in capital markets revenue, we estimate the business can earn over $1 billion in 2022 EBITDA.  We would note that this is in line with management’s original guidance from February (which hasn’t been updated since) when the interest rate environment was more benign, as YTD results have significantly exceeded expectations.  At 10x our 2025 EBITDA estimate of $1.2 billion, in line with where CBRE and JLL have traded historically, the stock would be worth almost $50 (equating to 14x EPS of about $3.50), or more than 200% upside from current levels.

Catalyst

Business model resilience as economy slows, continued earnings beats, improving FCF generation, potential initiation of share repurchase program.