Newmark Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Newmark is a commercial real estate services firm with brokerage, capital markets, property and facilities management, mortgage origination, and loan servicing businesses. It reports one operating segment.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $586.6 million | $518.8 million | $1,585.8 million | $1,415.9 million |
| Income from operations | $167.5 million | $162.9 million | $254.6 million | $241.5 million |
| Consolidated net income | $122.6 million | $115.6 million | $178.0 million | $152.3 million |
| Net income available to common stockholders | $88.7 million | $68.2 million | $128.3 million | $89.0 million |
| Basic and diluted EPS | $0.48 | $0.43 | $0.67 basic; $0.66 diluted | $0.56 |
| Net cash from (used in) operating activities | Not presented quarterly | $393.4 million | $(636.4) million |
- Q3 revenue grew 13.1%; nine-month revenue grew 12.0%. Q3 growth was reported across major business lines, with more than 85% described as organic.
- Q3 commissions were $357.9 million, mortgage banking gains were $72.3 million, and management, servicing and other revenue was $156.4 million.
- For the first nine months, commissions were $979.3 million, mortgage banking gains were $148.8 million, and management, servicing and other revenue was $457.7 million.
- Q3 total compensation and benefits rose to $397.7 million from $332.2 million; operating expenses rose to $527.8 million from $449.6 million. Income from operations was 28.6% of revenue versus 31.4% in Q3 2018; common-stockholder net income was 15.1% of revenue versus 13.2%.
- Nine-month net cash from operating activities included substantial mortgage loan originations and sales. Excluding those activities and unrealized gains on loans held for sale, operating cash flow was $106.9 million, compared with $133.7 million a year earlier.
Financial position and liquidity
- At September 30, 2019, cash and cash equivalents were $116.3 million, restricted cash was $58.0 million, marketable securities were $123.4 million, and total assets were $3.58 billion.
- Reported liquidity, defined by Newmark as cash and cash equivalents plus marketable securities less securities loaned, was $121.4 million. This measure excludes restricted cash.
- Long-term debt was $598.6 million: $539.8 million carrying value of 6.125% senior notes due 2023 and $58.8 million carrying value of revolving-credit borrowings. The company separately had $680.9 million outstanding under short-term warehouse facilities, generally funding loans held for sale.
- Warehouse borrowings decreased by $291.5 million from December 31, 2018; loans held for sale declined by $286.5 million. Total liabilities increased by $204.7 million, partly reflecting adoption of lease accounting and a $93.5 million EPU-related payable reclassification.
- Newmark reported compliance with its debt covenants and GSE capital and liquidity requirements. It exceeded Fannie Mae’s minimum net-worth requirement by $321.1 million.
Material changes and notable items
- Capital markets revenue rose 25.3% in Q3, including reported increases of 30.6% in investment sales volume and 57.3% in mortgage brokerage volume. Mortgage banking gains increased 39.2%, helped by higher GSE originations, including a $1.3 billion Freddie Mac loan.
- Q3 management, servicing and other revenue grew 6.0%; nine-month growth was 8.1%. Leasing commissions rose 4.6% in Q3 and 11.4% year to date.
- Q3 other income, net, was $108.7 million and included the Nasdaq earn-out, Nasdaq-forward mark-to-market losses, and gains on non-marketable investments. The filing’s notes report a $98.6 million Q3 Nasdaq earn-out gain. These items make reported earnings sensitive to valuation and timing effects.
- Mortgage servicing rights were $406.2 million, net, versus $411.8 million at year-end 2018. Newmark recorded a $15.7 million valuation-allowance increase for the first nine months of 2019, compared with a $5.4 million reversal in the prior-year period.
- Newmark acquired MLG Commercial and ACRES in 2019 for total consideration of approximately $29.0 million; the acquisitions contributed $3.4 million of revenue for the nine-month period. Preliminary acquisition accounting included $24.9 million of goodwill.
- Newmark repurchased 3.9 million Class A shares for $34.0 million year to date, at an average $8.74 per share. Approximately $165.5 million remained under its $200 million repurchase and unit-redemption authorization.
Outlook, risks and contingencies
- Management said it expects more than $15 million of annualized savings from integration and operating-streamlining actions by the end of 2020. It cited a $2.0 trillion commercial mortgage maturity opportunity over 2019–2023 and said 67% of nine-month revenue came from its more predictable businesses.
- The board declared a $0.10-per-share quarterly dividend and management indicated it expected the quarterly amount to remain consistent through 2019. Future dividends remain at the board’s discretion.
- The FHFA set combined Fannie Mae and Freddie Mac multifamily purchase caps of $200 billion through the fourth quarter of 2020, with 37.5% subject to affordability and related requirements. Housing-finance reforms could affect Newmark’s GSE business and its economics.
- Credit and market risks include transaction-volume sensitivity, interest-rate exposure, GSE loan loss-sharing obligations, warehouse-facility renewal and funding needs, and possible volatility in Nasdaq-related securities and derivatives. A 100-basis-point change in 30-day LIBOR was estimated to affect annual earnings by approximately $14.0 million through escrow balances and $6.8 million through warehouse funding, in opposite directions.
- Newmark had approximately $627 million of loan-funding commitments with corresponding sale commitments. It disclosed ordinary-course litigation and regulatory matters, but management did not expect pending matters, based on available information, to have a material adverse effect on the financial statements as a whole.
- Related-party considerations include Cantor’s continuing control, service and financing arrangements, and a $146.6 million commercial real estate loan made by a Cantor-controlled affiliate to a borrower in which Newmark’s CEO held a 19% interest; a third-party bank purchased about 80% of the loan. Newmark received a $0.7 million brokerage fee, approved by its audit committee.
- Management concluded disclosure controls and procedures were effective as of September 30, 2019; no material change in internal control over financial reporting was reported during the quarter.
Important facts for investors to verify
- How much earnings and cash generation depend on Nasdaq earn-out recognition, derivative marks, and other investment valuation changes.
- Whether revenue growth translates into improved operating margins as compensation, hiring, acquisition integration, and servicing-rights amortization costs evolve.
- Liquidity and refinancing capacity after considering warehouse-facility renewals, debt maturities, dividends, repurchases, and loan-funding commitments.
- Potential effects of GSE policy changes, loan losses, and the company’s required capital and collateral on origination and servicing activity.
- The dilution and governance implications of partnership units, exchangeable preferred units, Class B shares with ten votes each, and Cantor’s continuing control.