Cushman & Wakefield, which is under water on its $3.2 billion debt load, could be headed toward a default if its Covid-battered earnings continue to decline.
The Chicago-based real estate services firm is the most highly leveraged company among its major competitors, thanks to a pile of debt loaded on by the private equity firm TPG Capital in the lead-up to Cushman’s 2018 initial public offering.
A big part of that financing — Cushman’s $2.7 billion first-lien term loan — is currently about 4.5 times the size of the company’s earnings, according to analysts at William Blair. If that figure climbs to 5.8 times, it could be considered in default under the terms of its credit agreement with lender JPMorgan.
“If they get above that, that’s a conversation they’ll have to have with their bankers,” said Moody’s analyst Thuy Nguyen, who covers Cushman’s debt.
Nguyen added that there are a few significant steps before default becomes an issue, and that Cushman has a sizable cash reserve it can use.
“We think they have ample cushion,” she said.
A spokesperson for Cushman, headed by CEO Brett White, said the company started 2020 with a “robust balance sheet and strong cash position.”
“We are facing this period of economic uncertainty in strong financial shape — with significant liquidity of $1.8 billion and a service line mix that generates nearly half of our revenue from recurring streams like property and facilities management,” the spokesperson said.
Cushman’s earnings were down 32 percent in the second quarter to $118.8 million, according to its most recent financial disclosures. And analysts expect things to be worse for the industry when CRE firms begin reporting third quarter earnings in the coming weeks.
How much longer the pandemic plays out and how much deeper it hits the CRE sector will determine how many of those firms fare.
Wiggle room
Cushman’s debt has what’s known as a springing financial covenant — an agreement that gets triggered if the company draws down about $400 million of its $1 billion credit revolver with JPMorgan.
As of the end of the second quarter, Cushman hadn’t drawn down anything on the revolver. And the company has a pile of cash it can use totaling $875.5 million, after it issued $650 million of new corporate bonds in May.
There’s also some accounting wiggle room that muddies the picture a bit. The EBITDA figure Cushman and its bank use to measure the financial covenant is different from the figure the company reports publicly each quarter.
The former includes things like deductions from earnings and expense savings the company can include to help improve its debt ratio.
“They have plenty of add backs on top of EBITDA,” explained S&P Global analyst Dio Mejia.
One expert called that kind of accounting the “private equity special,” referring to the terms companies like TPG negotiate when leveraging up companies. In fact, Cushman’s debt sets it apart from its CRE peers like CBRE, JLL and Colliers International — both in the form of its financing and its sheer size.
Cushman’s overall debt of $3.8 billion eclipses its market capitalization of $2.56 billion and gives the firm a net leverage ratio of 3.7 times, according to equity analysts at William Blair. That’s much higher than CBRE (.6 times), JLL (1.1 times) and Colliers (1.5 times).
And those firms use more conventional financing like credit revolvers and long-term corporate bonds. None have first-lien loans — essentially a mortgage — on the books like Cushman has.
Real estate services firms in general usually don’t carry large debt loads, because they have few if any physical assets to serve as collateral. Cushman, though, has paid off a significant amount of the debt TPG placed on it through proceeds from the IPO, and improved its fiscal position. And experts said companies don’t usually get caught off guard by financial covenants; they’re something firms can plan for ahead of time and negotiate with their lenders.
Still, Cushman and others face a big unknown when it comes to the pandemic. With revenues from leasing and sales commissions declining, the big CRE firms are relying on steady revenue from streams such as their property management contracts. But even those may be in jeopardy.
Vornado Realty Trust, for example, disclosed earlier this month that it is laying off 72 building service workers at three office buildings around Penn Station and on Park Avenue in New York.
Cushman was recently reported to be in talks to acquire Newmark, and possibly do a merger with JLL.
William Blair analysts in August noted that Cushman’s debt load often comes up when the talk turns to potential mergers and acquisitions.
“Management continued to say that Cushman’s current leverage is not prohibitive in getting incremental deals completed in this environment, although it will likely remain disciplined and complete only deals with valuations that are highly attractive,” the analysts wrote.