Cushman & Wakefield Earnings: Lower Transactional Activity Continues To Weigh on Profitability

No-moat-rated Cushman & Wakefield’s CWK second-quarter results continue to be affected by declines in commercial real estate transaction volumes. We think that the brokerage business will continue to remain under pressure in the near term, given our macroeconomic outlook and rising interest rates. The company reported adjusted EPS of $0.22 in the second quarter, down from $0.63 per share of adjusted earnings in the second quarter of 2022. Companywide fee revenue was down 14% in the current quarter on a local-currency basis compared with the previous year as it was reported at $1.63 billion. Adjusted EBITDA came in at $146 million, 44% lower than the second quarter of 2022 on a local-currency basis. This resulted in an adjusted EBITDA margin of 8.9% for the quarter, down 480 basis points compared with the same quarter last year. The operating leverage in the brokerage business is the main reason behind the sharp fall in the company’s overall profitability during the quarter. We are maintaining our $19 fair value estimate for the firm after incorporating second-quarter results.

Capital markets fee revenue declined by approximately 48% due to lower investment sales transactions, whereas lower demand for offices resulted in a 20% decline in leasing fee revenue on a local-currency basis when compared with the second quarter of 2022. The company guided for about a 20% decline in brokerage revenue for the full year. Management has also guided for the 2023 adjusted EBITDA margin to be in the 9%-10% range, which is in line with our expectations. Management’s expectation is that brokerage revenue and margins will start to recover strongly in 2024 as transaction volume recovers. We believe that the recovery in transaction volumes and the company’s margins can take more time than management suggests, given our macroeconomic outlook and our view that interest rates will remain higher for longer.