Newmark Group, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Newmark is a commercial real estate services firm with one reportable segment.
Financial performance
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Revenue | $664.6 million | $788.1 million | $2,098.2 million | $1,922.0 million |
| Income from operations | $58.5 million | $225.6 million | $160.2 million | $1,025.6 million |
| Consolidated net income | $37.9 million | $163.3 million | $100.4 million | $793.0 million |
| Net income available to common stockholders | $28.0 million | $128.5 million | $76.8 million | $601.4 million |
| Basic EPS | $0.16 | $0.64 | $0.42 | $3.14 |
| Fully diluted EPS | $0.15 | $0.63 | $0.41 | $3.06 |
| Operating margin | 8.8% | 28.6% | 7.6% | 53.4% |
Q3 revenue fell 15.7% year over year, as investment sales declined 36.9%, management and servicing revenue fell 9.0% on lower pass-through revenue, leasing commissions declined 5.0%, and commercial mortgage origination revenue declined 12.3%. For the first nine months, revenue rose 9.2%, reflecting growth across all four reported revenue categories.
Q3 operating margin and earnings were lower than the prior year. Nine-month comparisons are especially affected by 2021’s $1.1 billion Nasdaq earn-out recognition and related gains; 2022 recorded a $101.4 million net other loss, primarily from Nasdaq-share losses and mark-to-market losses on non-marketable investments. The filing also identifies a $428.6 million 2021 Equity Event compensation charge, which affected prior-period comparisons.
Cash flow: Operating cash flow was $264.7 million for the first nine months, versus $326.6 million used in the prior-year period. Excluding net loan origination and sale activity, operating cash flow was $209.4 million, versus $213.2 million used. Investing activities provided $330.8 million, largely from Nasdaq-share sales; financing activities used $554.5 million, including $281.2 million of treasury-stock repurchases. Cash, including restricted cash, increased $41.0 million to $307.5 million.
Financial position and capital
- At September 30, 2022, cash and cash equivalents were $229.7 million; restricted cash was $77.9 million. Current assets were $2.03 billion and current liabilities $1.88 billion.
- Long-term debt was $547.1 million, comprising $550 million principal of 6.125% senior notes due November 15, 2023. The $600 million revolving credit facility, extended to March 2025, was undrawn. Warehouse borrowings were $1.02 billion, used to fund mortgage loans held for sale.
- Newmark reported $146.9 million remaining under its $400 million share and unit repurchase authorization at quarter-end. It repurchased 23.2 million Class A shares in the first nine months for $281.2 million, at an average $12.10 per share.
- The Board declared a $0.03-per-share quarterly dividend; dividends declared for the first nine months were $0.09 per share, of which $0.07 was paid.
- Newmark met its GSE capital and liquidity requirements. It exceeded Fannie Mae’s minimum net worth requirement by $415.1 million.
Management outlook, risks and notable items
- Management said rapidly rising global interest rates materially reduced transaction volumes and expected lower volumes well into the following year, until rates stabilize. It nevertheless expected solid Adjusted EBITDA and cash flow, citing diversified revenue and a variable cost structure. No specific numeric earnings or revenue guidance is provided in the supplied filing text.
- Management expects recurring revenue businesses to grow through the cycle and anticipates transaction volumes could rebound relatively quickly after interest rates stabilize. It cited industry capital awaiting investment and substantial commercial real estate debt maturities as potential future activity drivers.
- Management reported double-digit growth in recurring revenue excluding pass-through items. Nine-month growth came from servicing, valuation and advisory, property management, flexible workspace, leasing, and capital markets activity; Q3 investment sales were notably weaker.
- Newmark completed acquisitions of BH2, McCall & Almy, and Open Realty in 2022. Their combined contribution to reported revenue was $8.3 million for the nine months; preliminary acquisition accounting included $50.8 million of goodwill.
- Newmark exercised its option to redeem its 27% Cantor-affiliated Real Estate LP investment and expected to receive approximately $88.4 million by July 20, 2023.
- Credit and market risks include further rate increases, inflation, uncertain commercial real estate values and transaction activity, and exposure under GSE loan-loss-sharing arrangements. The company reported one loan in foreclosure and one delinquent loan in its credit-risk portfolio; no actual losses had been incurred as of quarter-end.
- Two derivative lawsuits filed in 2022 challenge, among other matters, the $50 million 2021 retention award to Chairman and principal executive officer Howard Lutnick and certain partnership-unit exchanges. Newmark says it believes the claims lack merit; outcomes cannot be determined with certainty.
- Other items to monitor include $493.0 million of employee and partner loans, related-party dealings with Cantor, and the dual-class structure. Cantor and CFGM held all Class B shares, representing approximately 58.6% of voting power at September 30, 2022.
Important facts for investors to verify
- Whether transaction volumes and investment sales stabilize as interest rates change, and how that affects revenue and earnings.
- Cash generation excluding mortgage-loan funding and sale activity, and the conversion of servicing and other recurring revenue into cash.
- Refinancing plans and terms for the $550 million senior notes maturing in November 2023, alongside warehouse funding and facility availability.
- Collection and credit quality of employee and partner loans, GSE risk-sharing exposures, and the expected timing of the $88.4 million investment redemption.
- Developments in the derivative lawsuits and any effects of repurchases, dividends, executive compensation, or related-party transactions on capital allocation and governance.