Newmark Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022; unaudited. Newmark is a commercial real estate services firm with one reportable segment.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $755.4 million | $629.9 million | $1,433.6 million | $1,133.9 million |
| Income from operations, as reported | $89.1 million | $736.1 million | $101.7 million | $800.1 million |
| Net income available to common stockholders | $48.5 million | $439.7 million | $48.9 million | $472.8 million |
| Basic / fully diluted EPS | $0.26 / $0.26 | $2.35 / $2.13 | $0.26 / $0.25 | $2.53 / $2.30 |
- Revenue increased 19.9% year over year in Q2 and 26.4% for the first half. Q2 gains included investment sales (+47.0%), commercial mortgage origination (+19.1%), leasing commissions (+15.4%) and management, servicing and other (+6.5%).
- Q2 consolidated net income was $61.8 million, versus $585.2 million a year earlier. The prior-year comparison included a $1.1 billion Nasdaq earn-out gain; 2021 also included $428.6 million of compensation charges related to the 2021 Equity Event. These unusual items materially distort year-over-year profit and margin comparisons.
- Q2 2022 other loss was $15.3 million; first-half other loss was $101.3 million, primarily reflecting Nasdaq share-related losses and mark-to-market losses on non-marketable investments. Newmark had sold all its Nasdaq shares by March 2022.
- Six-month operating cash flow was $339.0 million, compared with $785.1 million in 2021. Excluding loan originations and sales, operating cash flow was $115.7 million versus $114.3 million. Investing activities provided $353.3 million, including $437.8 million of Nasdaq share-sale proceeds; financing activities used $603.7 million, including $175.9 million of share repurchases.
Financial position, debt and liquidity
- At June 30, 2022, cash and cash equivalents were $280.5 million and restricted cash was $74.7 million. Total assets were $4.6 billion and total liabilities were $3.1 billion.
- Long-term debt was $546.5 million, consisting of 6.125% senior notes due November 2023. The $600 million revolving credit facility, extended to March 2025, was undrawn. Management said it expects operating cash flow to fund the business and near-term liquidity needs.
- Warehouse borrowings were $834.6 million, down from $1.05 billion at year-end 2021; these short-term facilities fund mortgage loans held for sale. Newmark reported $1.5 billion of committed warehouse capacity, plus uncommitted facilities, and compliance with facility covenants.
- Newmark exceeded Fannie Mae’s minimum net-worth requirement by $411.1 million and reported compliance with GSE liquidity requirements. Its GSE/Freddie Mac credit-risk servicing portfolio had $26.7 billion of principal and $8.1 billion of maximum potential loss; the recorded financial guarantee liability was $25.9 million.
Material changes and capital allocation
- Newmark acquired BH2, McCall & Almy, and Open Realty in April and May 2022. The acquisitions had $77.7 million of preliminary consideration, including $12.2 million of contingent consideration, and contributed $4.5 million of revenue in the first half. Preliminary goodwill recorded was $51.0 million.
- The company repurchased 13.1 million Class A shares in the first half at an average price of $13.47, for $175.9 million in cash. At June 30, $252.2 million remained under the $400 million share and unit repurchase authorization.
- The quarterly dividend had been increased to $0.03 per share in Q1 2022. On July 28, the company declared another $0.03 dividend, payable August 31, 2022.
- Class B shares carry 10 votes each. Cantor and CFGM held all 21.3 million Class B shares, representing approximately 57.1% of total voting power at June 30.
Outlook, risks and unusual items
- No specific company revenue or earnings guidance is provided in the filing. Management anticipated solid improvement in industry GSE multifamily activity for the rest of 2022, citing higher lending caps, but noted there is no assurance the GSEs will reach those caps.
- Management warned that investment sales and mortgage brokerage face difficult comparisons with strong second-half 2021 volumes, and that interest-rate and credit-spread volatility and buyer-seller pricing gaps could affect activity. It also noted uncertainty from inflation, a slowing economy, remote-work trends and ongoing pandemic effects.
- On August 5, 2022, a shareholder filed a derivative suit challenging the $50 million 2021 retention award to Chairman Howard Lutnick and seeking rescission, damages and other relief. The company disputes the allegations and says it believes the suit lacks merit; the outcome is uncertain.
- Other risks include transaction-dependent revenues, GSE lending and servicing requirements, loan-loss sharing, refinancing the notes due in 2023, foreign-exchange exposure as international operations grow, and the company’s related-party arrangements with Cantor. Ordinary-course legal matters were also disclosed; management did not expect pending matters, based on available information, to materially adversely affect the company’s financial statements as a whole.
- After quarter-end, Newmark exercised its option to redeem its 27% investment in a Cantor-controlled joint venture and expects approximately $88.4 million from Cantor on or before July 20, 2023.
Investor verification points
- Review the underlying revenue and cash-flow trends separately from the prior-year Nasdaq earn-out and 2021 Equity Event effects; compare GAAP results with the company’s non-GAAP measures and reconciliations.
- Assess refinancing plans for the $550 million principal amount of senior notes due November 2023, and the availability and renewal terms of warehouse funding.
- Verify the status and potential financial consequences of the Lutnick award litigation and the company’s related-party transactions and governance arrangements.
- Track acquisition integration, contingent consideration and goodwill, and whether the expected joint-venture redemption proceeds are received.
- Monitor repurchases, dividends, GSE loan performance and guarantee exposure, and whether transaction volumes remain resilient amid higher interest rates and economic uncertainty.