Newmark Group, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Newmark provides commercial real estate brokerage, capital markets, property and facilities management, mortgage origination and servicing. Comparative 2017 results include Berkeley Point retrospectively, but are not recast for the new revenue-recognition standard adopted January 1, 2018.
Financial performance
Amounts are in millions of dollars unless noted.
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $430.5 | $332.6 | +29.4% |
| Operating income | $52.8 | $35.9 | +47.4% |
| Operating margin | 12.3% | 10.8% | +1.5 percentage points |
| Income before taxes and noncontrolling interests | $39.4 | $37.0 | +6.6% |
| Consolidated net income | $32.5 | $37.0 | -12.2% |
| Net income available to common stockholders | $20.0 | $36.7 | -45.5% |
| Common-stockholder net margin | 4.7% | 11.0% | -6.3 percentage points |
| Basic / fully diluted EPS | $0.13 / $0.12 | Not applicable | 2017 EPS not presented |
- Revenue mix: Leasing and other commissions were $159.4 million (+24.9%); capital markets $101.4 million (+31.0%); mortgage banking gains $38.9 million (-14.0%); and management services, servicing fees and other $130.8 million (+58.8%).
- Management services growth included $18.5 million of additional gross pass-through revenue from adopting ASC 606, with a corresponding expense increase and no impact on net income. The new standard also increased Q1 leasing commission revenue by $10.6 million versus the prior accounting method.
- Operating expenses rose 29.4% to $383.3 million. Compensation and employee benefits were $252.7 million; operating, administrative and other costs were $75.4 million. Higher compensation reflected revenue growth, hiring and exchangeability-related charges.
- Other income was $5.7 million, including a $2.4 million gain on Nasdaq securities and $3.2 million of equity-method income. Net interest expense was $13.4 million, compared with $1.1 million of net interest income in Q1 2017.
Cash flow, balance sheet and liquidity
- Operating cash flow was negative $590.4 million, versus positive $296.4 million a year earlier. The change primarily reflected mortgage loan originations exceeding loan sales and the resulting build in loans held for sale; these loans are generally sold within 45 days and financed through warehouse facilities.
- Investing activities provided $42.5 million, principally from marketable-securities sales. Financing activities provided $666.6 million, including warehouse borrowing, BGC’s $242.0 million investment in Newmark units and related-party borrowings, partly offset by repayment of $270.7 million of term debt.
- At March 31, cash and cash equivalents were $48.1 million and restricted cash was $243.9 million. Management defined liquidity as cash and marketable securities less securities loaned and reported approximately $48.1 million of liquidity; this excludes restricted funds pledged for GSE requirements.
- Total assets were $3.06 billion and total liabilities $2.50 billion. Loans held for sale were $965.6 million, funded substantially by $950.5 million of warehouse notes payable. Warehouse facilities are generally short-term and subject to renewal.
- Long-term debt was $400.0 million, plus $412.5 million of promissory notes payable to related parties. Newmark also had $202.0 million outstanding under its intercompany credit facility, classified as a current related-party payable. The filing separately cites approximately $1.01 billion of aggregate principal debt excluding warehouse funding.
- Newmark reported compliance with warehouse covenants, including a minimum $15 million cash requirement, and with GSE capital and liquidity requirements. It exceeded Fannie Mae’s minimum net-worth requirement by approximately $426 million.
Material changes, outlook and risks
- Revenue growth was led by leasing and capital markets. Management cited organic growth, market-share gains, acquisitions and producer hiring; average revenue per producer increased 15% to approximately $192,000.
- Mortgage banking gains declined as GSE lending volume fell. Newmark originated $1.6 billion of GSE loans, down 13.6% year over year; the company noted industry GSE multifamily volume declined 19%.
- Management expects revenue and earnings to grow as recent hires and acquisitions contribute, but provided no specific earnings or revenue guidance. Performance remains exposed to transaction volumes, seasonality, interest rates, hiring and market conditions.
- The board declared a $0.09-per-share Q1 cash dividend on May 2, payable June 5, 2018. Management indicated it expected the quarterly dividend to remain consistent for the year, subject to board discretion and the company’s dividend policy.
- BGC’s proposed tax-free spin-off remains conditional and may be delayed or not occur. Newmark said it intends to obtain its own credit rating and repay or refinance $812.5 million of long-term debt owed to or guaranteed by BGC as steps toward the spin-off.
- Newmark expects to receive up to 9.9 million additional Nasdaq shares over roughly 10 years, conditional on Nasdaq meeting annual revenue thresholds. Management estimated their value at more than $875 million using the May 2 share price; this future earn-out is not recorded on the balance sheet and is not assured.
- Credit risk-sharing obligations relate to $18.9 billion of serviced loans, with a stated maximum potential loss exposure of $5.4 billion; approximately $0.1 billion of that exposure was covered by a credit enhancement agreement at quarter-end. This is a maximum exposure measure, not an estimate of expected loss.
- A trademark dispute over use of the “Newmark” name remains in litigation. A portion of an injunction was reversed, but other restrictions remained subject to appeal; trial was scheduled for January 2019. Management said current litigation was not expected to materially adversely affect the financial statements, while acknowledging outcomes are uncertain.
- Other risks include dependence on BGC and Cantor relationships and services, refinancing and interest-rate exposure, GSE program requirements, legal and regulatory matters, and the sensitivity of transaction-based revenue to real estate markets. The 2017 tax-law accounting and GILTI treatment were still under evaluation.
Investor verification points
- Assess how much reported revenue growth reflects underlying activity versus ASC 606 gross presentation and the prior-period comparability limitation.
- Track operating cash flow and warehouse funding as mortgage originations and loan sales fluctuate; confirm warehouse facilities are renewed on acceptable terms.
- Verify progress on Newmark’s independent credit rating, refinancing of related-party debt and the conditions and timing of any BGC distribution.
- Monitor the $5.4 billion maximum loan-loss exposure, GSE capital and liquidity requirements, and changes in credit-enhancement coverage.
- Review the trademark litigation, Nasdaq earn-out conditions and realized proceeds, and the sustainability of dividends relative to earnings and cash generation.