BGC Partners, Inc. — Q1 2018 Form 10-Q
Entity note: The filing is for BGC Partners, Inc., not BGC Group, Inc. The quarter ended March 31, 2018; financial statements are unaudited. Comparative 2017 results were retrospectively adjusted to include Berkeley Point.
Business context and reporting period
BGC operates Financial Services brokerage and technology businesses and Real Estate Services through publicly traded subsidiary Newmark. The filing covers the three months ended March 31, 2018 and compares results with the three months ended March 31, 2017.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $956.6 million | $783.2 million |
| Income before tax | $133.2 million | $57.8 million |
| Consolidated net income | $97.4 million | $51.1 million |
| Net income available to common stockholders | $58.8 million | $36.8 million |
| Diluted EPS | $0.19 | $0.13 |
| Operating cash flow | $(832.7) million | $424.3 million |
- Revenue increased 22.2% year over year; pretax income more than doubled. Pretax margin was 13.9%, versus 7.4%; common-stockholder net margin was 6.2%, versus 4.7%.
- Financial Services revenue rose 17.1% to $516.6 million and segment pretax income increased 34.6% to $123.7 million. Real Estate Services revenue rose 29.4% to $431.9 million and segment pretax income increased 56.7% to $82.4 million.
- Fenics net revenue increased 15.2% to $68.4 million. Rates, FX, energy and commodities, and equities/insurance/other asset classes grew; credit revenue was approximately flat.
- Real estate leasing revenue increased 24.9%, capital markets revenue 31.0%, and servicing fees 16.5%. Mortgage banking revenue fell 14.0% to $38.9 million, principally reflecting lower loan origination production.
- Expenses rose 18.0% to $863.2 million. Compensation and employee benefits totaled $600.0 million; interest expense rose 44.6% to $27.1 million.
- Operating cash outflow primarily reflected loan originations exceeding loan sales and working-capital movements, including higher broker-dealer receivables. Investing activities provided $96.0 million; financing activities provided $628.8 million, including $246.7 million net proceeds from BGC share issuance and a $180.0 million Cantor borrowing.
- At March 31, total assets were $6.78 billion, liabilities $5.29 billion, and equity $1.44 billion. Cash and cash equivalents were $362.6 million; cash segregated under regulatory requirements was $330.1 million. The company-defined liquidity measure was $454.5 million, down from $673.2 million at year-end.
- Notes payable and other borrowings were $1.38 billion, excluding $950.5 million of warehouse notes payable; short-term borrowings from related parties were $180.0 million. Warehouse funding supports loans held for sale and is secured by the underlying mortgages and related commitments.
Material changes and unusual items
- Newmark used approximately $242 million invested by BGC in exchangeable Newmark partnership units to repay its remaining $270.7 million term-loan balance. BGC retains a guarantee and other exposure related to Newmark debt; the filing identifies $812.5 million of Newmark debt owed to or guaranteed by BGC as a key spin-off prerequisite.
- BGC adopted ASC 606 on January 1, 2018. Earlier recognition of certain real-estate leasing commissions and gross presentation of reimbursable management-service costs increased Q1 reported revenue by about $29.0 million and expenses by about $24.0 million, with no material reported earnings effect from the gross-up. The transition also increased opening equity by approximately $18.7 million net of the stated adoption effects.
- Other income included a $20.6 million fair-value gain on an investment and gains associated with marketable securities and the Nasdaq earn-out. Management cautions that Nasdaq shares expected over time, valued at more than $870 million using a May 2018 share price, are not recorded as an asset on the balance sheet.
- BGC sold approximately 19.9 million newly issued Class A shares during the quarter, with $280.4 million gross proceeds reported in the related-party note; shares were sold through controlled equity offering agreements. Class A shares outstanding increased materially. No Class A share repurchases occurred during the quarter.
Outlook, risks and contingencies
- Management expects continued growth from electronic brokerage and Real Estate Services, and said it anticipates resources for dividends, hiring and acquisitions while maintaining or improving an investment-grade rating. No quantified company-wide revenue or earnings guidance is provided.
- BGC expects to pursue a generally tax-free distribution of its Newmark shares, but timing and completion remain at the board’s discretion and depend on conditions including Newmark obtaining a credit rating and repaying or refinancing debt owed to or guaranteed by BGC.
- The board declared a $0.18-per-share Q1 dividend, payable June 5, 2018. The company stated it expected to maintain the quarterly dividend at that level until the proposed Newmark distribution, while noting future dividends are discretionary.
- Fitch affirmed BGC’s BBB- long-term rating and removed its negative watch on May 8, 2018, assigning a stable outlook. S&P’s BBB- rating remained on CreditWatch Negative as of the filing discussion.
- Key risks include market volumes and volatility, regulation, refinancing and leverage, warehouse-facility renewal, interest and foreign-exchange movements, counterparty and mortgage credit exposure, technology and cybersecurity events, and related-party arrangements with Cantor. The filing reports $5.4 billion maximum potential loss exposure on serviced Fannie Mae/Freddie Mac credit-risk loans before credit enhancement; the estimated guarantee liability was $61,000.
- Legal proceedings and regulatory matters arise in the ordinary course; management said it could not estimate losses beyond recorded accruals and did not expect current matters to materially adversely affect the financial statements taken as a whole. The filing also reports $437 million of remaining loan-funding and related commitments.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing identifies BGC Partners, Inc., not BGC Group, Inc.
- Assess the sustainability of earnings growth after separating recurring operating performance from ASC 606 presentation changes, fair-value gains and Nasdaq-related items.
- Reconcile liquidity and cash-flow movements, including restricted cash, warehouse financing, share issuance proceeds, and the related-party borrowing from Cantor.
- Review debt maturities and refinancing needs, Newmark’s obligations and guarantees, and progress toward any proposed Newmark spin-off.
- Monitor Class A share issuance and dilution, dividend capacity, and the terms and use of proceeds under the controlled equity offering program.
- Evaluate mortgage servicing and risk-sharing exposure, credit enhancements, warehouse-line availability, and the status of legal, regulatory, tax, and other contingencies.