Newmark Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Newmark is a commercial real estate services firm operating in one reportable segment.
Financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $629.9 million | $383.7 million | $1,133.9 million | $867.6 million |
| Net income available to common stockholders | $439.7 million | $0.3 million | $472.8 million | $8.5 million |
| Basic / fully diluted EPS | $2.35 / $2.13 | $(0.01) / $(0.01) | $2.53 / $2.30 | $0.02 / $0.02 |
| Cash from operating activities | Not presented quarterly | $785.1 million | $(955.1) million |
- Revenue mix, Q2: commissions were $369.1 million, mortgage banking gains $41.3 million, and management services, servicing fees and other revenue $219.5 million. Commissions and management services grew strongly; mortgage banking gains declined.
- Expenses and margins: Q2 operating expenses were $980.6 million, including $808.9 million of total compensation and employee benefits. Expenses exceeded revenue before the unusually large other-income gain. Reported operating income was $736.1 million; this is not a representative measure of recurring operating margin.
- Cash flow: Six-month operating cash flow excluding loan origination and sale activity was $114.3 million, versus negative $81.0 million in 2020. Reported cash flow also reflects high-volume mortgage loan funding and sales, so the two measures differ materially.
- Liquidity and debt: At June 30, cash and cash equivalents were $165.7 million, restricted cash $71.9 million, and marketable securities $1,093.9 million. Long-term debt was $682.2 million, including $544.0 million of 6.125% notes due 2023 and $138.2 million drawn on the revolving credit facility. Warehouse borrowings, generally collateralized by mortgage loans, were $410.2 million. The company said it repaid the remaining $140 million revolver balance in July.
Material changes and unusual items
- Q2 revenue increased 64.1%; six-month revenue increased 30.7%. Q2 capital markets revenue rose 248.9%, while leasing and other commissions rose 53.5%. Mortgage banking gains fell 40.3% in Q2 and 25.8% for the first half.
- The close of Nasdaq’s sale of its U.S. fixed-income business accelerated Newmark’s receipt of 6,222,340 Nasdaq shares, valued at $1,093.9 million at June 30. The income statement recorded $1,086.8 million of net other income in Q2, primarily from the Nasdaq earn-out. This nonrecurring item is the principal reason reported GAAP earnings surged.
- The related 2021 Equity Event accelerated compensation expense; the filing cites $428.6 million of charges. Q2 equity-based compensation and allocations were $267.5 million, compared with $10.9 million a year earlier. These items substantially impair year-over-year comparability.
- Newmark acquired flexible-workspace provider Knotel in March for stated total consideration of $67.2 million; Knotel contributed $17.5 million of Q2 revenue. The purchase-price allocation was preliminary.
- Six-month operating cash flow improved substantially versus 2020, but included material noncash and working-capital effects, including the Nasdaq earn-out and equity compensation.
Outlook, risks and contingencies
- Management described commercial real estate activity as rebounding, with particular strength in capital markets, life sciences and industrial properties. It said expense reductions in support and operations functions are expected to improve margins as activity accelerates, and highlighted continued client demand for management and consulting services. The filing provides no specific forward revenue or earnings guidance.
- Management’s capital priorities include share and partnership-unit repurchases, growth investment and debt reduction. It expected to use proceeds for the Equity Event and related taxes, and to retain some Nasdaq-share value; these plans depend in part on market prices and execution.
- On August 2, 2021, Newmark entered into an overnight repurchase transaction with a Cantor affiliate, receiving $260 million at an initial 0.95% rate against 1,818,000 Nasdaq shares. The shares are marked to market; a decline below the 120% maintenance margin threshold can require additional collateral. Newmark said proceeds would help fund Equity Event cash needs and taxes.
- Key risks include continuing or renewed COVID-19 effects on office demand and transaction activity, interest-rate and capital-market changes, Nasdaq share-price volatility, GSE lending and servicing requirements, credit losses, and Knotel integration. The company reported two defaulted loans in its credit-risk portfolio, with estimated Newmark loss exposure of about $1.5 million if a loss event occurs.
- Newmark reported ordinary-course legal matters and said it could not estimate losses beyond current accruals; management did not expect the pending matters, based on available information, to materially adversely affect the consolidated financial statements. It reported $0.7 billion of remaining loan-funding commitments, alongside corresponding commitments to sell the loans as funded.
Investor facts to verify
- Separate recurring operating performance from the Nasdaq earn-out and the unusually high Equity Event compensation charges; review the company’s non-GAAP reconciliations and definitions.
- Track Nasdaq-share value, forward settlements, the August collateralized repurchase financing and any subsequent margin or repayment requirements.
- Reconcile share and unit issuance, repurchases, redemptions and the reported reduction in fully diluted share count; the filing reports materially different weighted-average and period-end counts.
- Monitor post-June debt repayment, warehouse-facility availability and maturities, and cash needed for taxes and Equity Event settlements.
- Assess Knotel’s integration and performance, GSE-related credit exposure, and any changes in office-market demand or transaction volumes.