Newmark Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 9, 2023. Newmark is a commercial real estate services firm operating in one reportable segment, with services spanning leasing, investment sales, mortgage origination and servicing, property management, advisory and flexible workspace.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $520.8 million | $678.2 million |
| Operating income (loss) | $(11.8) million | $12.6 million |
| Net income (loss) available to common stockholders | $(10.4) million | $0.4 million |
| Basic and diluted EPS | $(0.06) | Approximately $0.00 |
| Operating cash flow | $(398.8) million | $502.2 million |
- Revenue fell 23.2% year over year. Management services, servicing fees and other were $212.3 million; leasing commissions $193.3 million; investment sales $72.0 million; and commercial mortgage origination, net $43.2 million.
- Operating margin was approximately negative 2.3%, versus positive 1.9% in Q1 2022. Total operating expenses were $529.6 million, or 101.7% of revenue, compared with $579.7 million, or 85.5% of revenue, a year earlier.
- Cash and cash equivalents were $210.7 million; restricted cash was $84.0 million. The company reported $773.4 million of debt, comprising $548.4 million of 6.125% Senior Notes and $225.0 million drawn under its revolver. The notes mature November 15, 2023; management said it intends to refinance them or repay them using cash, operating cash flow and the credit facility.
- The $600 million revolving facility matures in March 2025. Warehouse borrowings, used to fund mortgage loans, were $427.7 million, supported by warehouse and repurchase facilities.
- Operating cash use included $290.3 million of net loan-origination and sale activity and $128.9 million of loans for new hires and producers. Excluding mortgage origination and sale activity, operating cash flow was $(108.5) million; excluding producer loans as well, it was $20.4 million.
- Total assets were $4.45 billion and total liabilities $2.93 billion at quarter-end. Lease liabilities were approximately $751 million; $198.5 million related to flexible workspace subsidiaries, with $36.6 million of guarantees or letters of credit exposure to Newmark.
Material changes and notable items
- Investment sales revenue declined 52.7%, and commercial mortgage origination revenue declined 54.1%, reflecting sharply lower transaction and lending volumes amid higher interest rates. Leasing commissions fell 2.8%; management and servicing revenue fell 8.9%.
- Management said U.S. investment sales volumes fell 56% industry-wide and Newmark’s total debt volumes fell 67.8% year over year. Newmark’s GSE/FHA originations declined 46.1%.
- Compensation and employee benefits declined 14.2% to $328.4 million, partly offsetting lower revenue. Equity-based compensation and partnership allocations rose 111% to $35.6 million, including charges associated with CEO Barry Gosin’s employment agreement and exchange rights.
- Other loss was $3.0 million, compared with an $86.0 million loss in Q1 2022, which largely reflected realized and unrealized losses on Nasdaq shares. Newmark held no Nasdaq shares at March 31, 2023.
- Newmark acquired U.K. advisory firm Gerald Eve on March 10 for total consideration of $114.8 million; it contributed $9.3 million of Q1 revenue after acquisition. Newmark also acquired the remaining Spring11 ownership interest and reported approximately $168.8 billion of total servicing portfolio at quarter-end.
- The quarterly dividend was $0.03 per share. No Class A shares were repurchased during the quarter; $392.3 million remained under the $400 million share and unit repurchase authorization.
Outlook, risks and contingencies
- Management expects U.S. investment sales and mortgage brokerage volumes to decline year over year at least through Q4 2023, with a possible industry rebound beginning in Q4 if interest rates stabilize or decline. This is management’s expectation, not a quantified company earnings forecast.
- Management highlighted near-term pressure from elevated interest rates, tighter bank lending, buyer-seller pricing gaps and subdued office activity. It cited loan advisory, servicing, asset management and a new bank credit risk advisory practice as potential offsets to capital-markets weakness.
- After quarter-end, Newmark announced an exclusive mandate to sell Signature Bank’s approximately $60 billion loan portfolio. This is a prospective assignment, not reported Q1 revenue.
- Fannie Mae and Freddie Mac risk-sharing exposure covered serviced loans with $27.8 billion of principal and approximately $8.4 billion of maximum potential loss. The recorded financial guarantee liability was $29.3 million. One delinquent loan remained at quarter-end; management estimated Newmark’s share of its loss at approximately $0.5 million.
- Construction, rate-lock and other loan funding commitments totaled approximately $0.5 billion, with corresponding commitments to sell loans as funded. Legal matters include shareholder derivative claims concerning executive compensation and a purported class action by former limited partners; the company says it believes the claims lack merit, but outcomes are uncertain.
- Related-party arrangements with Cantor include allocated services, joint ventures, and partnership interests. Cantor and CFGM held all Class B shares, representing approximately 58.2% of voting power at March 31, 2023.
Important facts for investors to verify
- Progress and terms for refinancing or repaying the $550 million principal amount of Senior Notes due November 2023.
- Whether cash use from lending activity and producer loans reverses, and how much operating cash flow is generated excluding mortgage warehouse flows.
- Future transaction volumes, especially investment sales, mortgage brokerage, GSE/FHA originations and office leasing, against management’s expected timing of a recovery.
- Realization of expected benefits from Gerald Eve and Spring11, and any further acquisition, contingent consideration or integration costs.
- Changes in Fannie Mae/Freddie Mac credit losses, the financial guarantee reserve, employee and partner loan balances, and flexible-workspace lease exposure.
- Developments in the executive compensation and former-partner litigation, related-party governance, and the company’s dividend and repurchase decisions.