Cushman: One hand free? A case study in financial handcuffs...
Two seemingly unrelated (but directly correlated) recent statements from Cushman's CEO:
"Since I took over as CEO, we have repaid $230 million in debt and have successfully refinanced and repriced our debt five times, reducing our annual cash interest burden."
"We hired 10 capital markets teams in the Americas in late 2024, and we’ve added an additional eight capital markets teams since our last call. We haven’t taken our foot off the gas in leasing either. We’ve hired another 20 leasing teams already in the US this year. We’re full steam ahead."
---- Background ----
About two years ago we said...
C&W's new CEO Michelle Mackay seems to be trying to take a page out of Bob Sulentic's playbook. Sulentic substantially deleveraged CBRE over the last ten years and turned CBRE into a cash flow machine (CBRE is sitting on about $1.4B of cash*). But Mackay is working with a very different hand.
C&W issued $400M of senior debt last month at 8.875%. Despite borrowing less than its maturing senior debt, its cost of borrowing increased by more than 30%. C&W simultaneously refinanced a $1B term loan at 9.3%, which represented a 3x increase in relative borrowing cost.
C&W is handcuffed by its lack of free cash flow."
[Cushman's margin sank substantially in subsequent months as deal activity suffered.]
Then, a year and a half ago we asked...
"Did Cushman’s largest owner just throw in the towel?"
TPG combined three firms—C&W, DTZ, and Cassidy Turley—for ~$3.5B and IPO’d the new Cushman & Wakefield in 2018, initially netting a $300M gain.
While the IPO hinted at a $1B potential profit, the stock dropped by 50%. Revenues, EBITDA, and margins were are all down with $2.5B+ of near-term debt maturities. TPG bailed.
---- Historical summary ----
A giant private equity firm aggregated brokers with a lot of cheap debt, then spun it all into a public company.
That company, C&W, has substantially underperformed its peers and broader stock market indexes since.
---- Our take ----
We think big brokerages are relatively simple businesses: they essentially buy and sell brokers' time, while riding transaction waves.
Executives only have a few levers to pull:
1. Which service lines do we bet on?
2. In which markets do we make our bets?
3. How much do w borrow to make these bets.
TPG saddled C&W with a ton of debt that has magnified performance, which wasn't great when the real estate market stalled.
---- Performance update: A ray of sunshine? ----
Last week, C&W reported Q1 results. Fee revenue up 3% YoY and adjusted EBITDA up 23%. Margin expansion rebounded to 6.2%. Leasing and services outperformed, while capital markets and valuation lagged. Strong office leasing trends and a doubling of the U.S. capital markets pipeline year-over-year.
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