Newmark Group, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Newmark is a commercial real estate services firm with one reportable segment.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $504.0 million | $483.9 million | +4.1% |
| Operating income | $64.0 million | $28.1 million | +128% |
| Operating margin | 12.7% | 5.8% | +6.9 percentage points |
| Consolidated net income | $44.6 million | $14.2 million | +213% |
| Net income available to common stockholders | $33.1 million | $8.2 million | +305% |
| Basic / fully diluted EPS | $0.17 / $0.16 | $0.03 / $0.03 | Higher |
| Net cash from operating activities | $291.0 million | $(652.4) million | Improved |
Revenue mix: leasing and other commissions were $147.4 million (+5.0%); capital markets commissions were $121.4 million (-5.1%); mortgage banking gains were $47.4 million (-6.0%); management services, servicing fees and other revenue were $187.8 million (+13.7%).
Operating cash flow excluding loan originations and sales was $25.3 million, versus cash use of $128.3 million in Q1 2020. The large reported cash-flow swings principally reflect mortgage loan origination and sale activity. Investing activities used $9.8 million; financing activities used $328.4 million. Cash and cash equivalents were $142.9 million at quarter-end, with restricted cash of $68.3 million.
Financial position and liquidity
- Total assets were $4.00 billion and total liabilities were $3.01 billion at March 31, 2021. Current assets were $1.50 billion and current liabilities were $1.47 billion.
- Long-term debt was $681.3 million: $543.4 million carrying value of 6.125% senior notes due 2023 and $137.9 million under the revolving credit facility. The company reported $325 million of revolver availability.
- Warehouse borrowings, used to fund mortgage loans held for sale, were $817.0 million, down from $1.06 billion at year-end. Newmark reported $1.5 billion of committed warehouse funding capacity, plus an uncommitted $400 million repurchase facility.
- Management said the company met applicable GSE capital and liquidity requirements; it exceeded Fannie Mae’s minimum net worth requirement by $371.9 million. Warehouse facility covenants were also met.
- Newmark’s $24.6 billion GSE credit-risk servicing portfolio carried a recorded financial guarantee liability of $27.9 million. One loan was in default; the company estimated its share of a potential loss at approximately $1.4 million.
Material changes and notable items
- Profitability rose substantially year over year, supported by revenue growth, cost savings and a $25.0 million decline in depreciation and amortization. The filing attributes most of that decline to lower mortgage servicing rights (MSR) amortization, which fell to $15.1 million from $39.5 million. Operating and administrative expense nevertheless increased 16.1%, partly from higher pass-through costs.
- Newmark acquired flexible-workspace provider Knotel on March 24. Preliminary purchase consideration was $66.0 million, including acquired debt and debtor-in-possession financing; $33.0 million of goodwill was recorded. Purchase accounting remains preliminary.
- Other loss was $2.2 million, including a $5.6 million mark-to-market loss on Nasdaq forward contracts, partly offset by Nasdaq-share sale gains and equity-method income. Nasdaq securities held fell to $4.0 million from $33.3 million at year-end.
- Newmark paid Deutsche Bank-related amounts under a credit enhancement agreement in March, including return of a $25.0 million deposit and payment of the outstanding contingent amount. The agreement obligations were thereby fulfilled.
- The board increased the share and unit repurchase authorization to $400 million. In Q1, Newmark repurchased 879,243 Class A shares at an average $10.57 per share; $390.4 million remained authorized at quarter-end.
- The quarterly dividend was $0.01 per share, compared with $0.10 in Q1 2020. A further $0.01 dividend was declared in May for payment in June.
Outlook, management commentary and risks
- Management described Q1 revenue as a record and cited improving U.S. economic activity, continued strength in management and consulting work, and cost-saving actions. It also noted that COVID-19 continued to weigh on parts of commercial real estate, particularly leasing in large urban markets.
- Management’s stated capital priorities are share and unit repurchases, investment in growth and margin expansion, and repayment of the revolving credit facility. It expects dividends and distributions to remain at or near current levels through the rest of 2021; future dividends remain at board discretion. No specific earnings or revenue guidance is provided in the filing text.
- Nasdaq’s planned sale of its U.S. fixed-income business to Tradeweb could accelerate Newmark’s 2021–2022 Nasdaq share receipts and related forward settlements. After forward settlement, Newmark estimated approximately 5.2 million shares worth about $850 million using the May 5 share price. Closing was expected in Q2 2021 but remained subject to conditions; timing and value are uncertain.
- Key risks include prolonged or renewed pandemic effects and changing demand for office and other property types; transaction-volume and capital-market swings; GSE program and loss-sharing exposure; interest-rate and Nasdaq-share volatility; refinancing and liquidity needs; Knotel integration; and related-party arrangements. The company reported ongoing legal and regulatory matters but could not estimate possible losses beyond recorded accruals.
Important facts for investors to verify
- Whether reported earnings improvement persists after accounting for the unusually large year-over-year reduction in MSR amortization and other non-cash or market-driven items.
- The final Knotel purchase-price allocation, integration costs and operating contribution.
- The timing, final share count and proceeds from the potential accelerated Nasdaq earn-out, including settlement of the Nasdaq forwards.
- Liquidity and refinancing capacity, including warehouse facility renewals, revolver repayment plans and the 2023 senior-note maturity.
- Developments in GSE loan delinquencies, forbearance advances and Newmark’s loss-sharing exposure.
- Capital returns and dilution, including repurchases, dividends, partnership-unit exchanges and the company’s dual-class voting structure.