BGC Partners, Inc. — Form 10-Q Summary
The filing identifies the registrant as BGC Partners, Inc. (the request metadata names BGC Group, Inc.). This unaudited report covers the quarter and nine months ended September 30, 2018; comparative results are for 2017. BGC operates Financial Services brokerage and technology businesses and Real Estate Services through its publicly traded subsidiary, Newmark. Prior-period results were recast to include Berkeley Point.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $977.3 million | $827.0 million | $2,894.0 million | $2,459.1 million |
| Income before taxes | $219.1 million | $142.4 million | $418.2 million | $294.5 million |
| Consolidated net income | $162.3 million | $110.5 million | $309.7 million | $239.4 million |
| Net income available to common stockholders | $120.3 million | $81.5 million | $214.3 million | $171.3 million |
| Basic / fully diluted EPS | $0.36 / $0.35 | $0.28 / $0.28 | $0.67 / $0.64 | $0.60 / $0.59 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $(758.1) million | $788.9 million |
- Q3 revenue rose 18.2% year over year; nine-month revenue rose 17.7%. Q3 pretax margin was 22.4%, versus 17.2%; nine-month pretax margin was 14.4%, versus 12.0%.
- Q3 revenue growth reflected Financial Services revenue of $446.7 million (+7.2%) and Real Estate Services revenue of $521.6 million (+30.6%). Real Estate growth was led by leasing, capital markets, management services and acquisitions.
- For the nine months, Financial Services revenue rose 11.9% to $1,443.6 million and Real Estate Services revenue rose 24.9% to $1,422.5 million. Mortgage banking/origination revenue fell 19.2% to $132.8 million.
- Reported Q3 and nine-month other income included material, partly noncash items, including Nasdaq earn-out and related valuation effects and gains on investments. These items increased reported pretax income and make underlying operating performance worth assessing separately.
Cash, liquidity and debt
- At September 30, 2018, total assets were $8.73 billion, total liabilities $6.79 billion and total equity $1.89 billion. Cash and cash equivalents were $364.4 million; restricted cash was $260.6 million and regulatory-segregated cash was $150.4 million.
- Management-defined liquidity was $526.3 million, down from $673.2 million at December 31, 2017. This measure includes cash, marketable securities and securities owned, net of securities loaned and repurchase agreements; it is not the same as unrestricted cash.
- Nine-month operating cash flow was negative $758.1 million, versus positive $788.9 million a year earlier. The filing cites working-capital movements, including receivables and mortgage-loan activity, among the cash-flow drivers. Investing activities provided $40.4 million and financing activities provided $704.1 million.
- At quarter-end, notes payable and other borrowings were $1.323 billion, short-term borrowings were $5.0 million, borrowings from related parties were $80.0 million, and warehouse notes payable were $1.132 billion. Warehouse borrowings fund loans held for sale and are collateralized; they should be considered separately from corporate debt.
- During 2018 BGC issued $450 million of 5.375% senior notes due 2023, repaid $240 million of 8.375% notes at maturity, and redeemed $112.5 million of 8.125% notes. Subsequent to quarter-end, BGC repaid its $125 million revolving-credit borrowing; Newmark refinanced with $550 million of 6.125% notes due 2023 and repaid certain intercompany and term-loan balances.
- The company declared a quarterly dividend of $0.18 per share. Management said it expects to maintain that level until the proposed Newmark spin-off, subject to Board discretion and other restrictions.
Changes, outlook and material matters
- Management expects to complete the Newmark spin-off by the end of 2018, subject to conditions and entirely within BGC’s discretion. Newmark’s refinancing of debt owed to or guaranteed by BGC was a prerequisite described as necessary for the intended tax-free treatment. The filing reports significant post-quarter refinancing and repayments, but the spin-off had not occurred as of the filing.
- Management’s post-spin BGC estimate excludes Newmark and the Nasdaq earn-out: it forecast 2018 revenue growth of 9.5%–11.5% for post-spin BGC. Management also described an expected post-spin quarterly dividend of $0.14 per share; these are outlook statements, not guarantees.
- BGC adopted ASC 606 in 2018. The change accelerated recognition of certain contingent real estate commissions and required gross presentation of some reimbursable management-service revenue and expenses. The gross presentation added about $21.1 million to Q3 revenue and expenses with no earnings impact. Management also said approximately $23 million of previously contingent commission cash receipts would not be recorded as future GAAP income.
- Management cited growth in electronic brokerage: Fenics net revenue rose 12.2% year over year in Q3, and trailing-12-month Fenics net revenue was $249.2 million, up 14.1%. Results remain exposed to market volumes, volatility, rates, competitive conditions, regulation and the ability to retain and recruit producers.
- Key risks include financial-market and commercial-real-estate conditions; regulatory and capital requirements; short-term warehouse funding and liquidity; counterparty and credit exposure; foreign-exchange, interest-rate, technology and cybersecurity risks; and related-party dealings with Cantor. The company reported compliance with regulatory capital and liquidity requirements at quarter-end.
- Two putative derivative lawsuits filed in October and November 2018 challenge the Berkeley Point acquisition and related transactions, alleging unfair price and process and breaches of fiduciary duty. BGC said it intends to defend the claims; management stated it could not estimate possible losses beyond recorded accruals for pending matters.
- The CFO notified the Board of an intended resignation effective December 15, 2018; the company appointed its COO as interim CFO. The filing reported effective disclosure controls as of September 30, 2018 and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth came from recurring brokerage and real-estate operations versus Nasdaq-related gains, investment marks and other noncash items.
- The drivers and sustainability of negative operating cash flow, the composition of management-defined liquidity, and the availability and renewal terms of warehouse facilities.
- Completion and final terms of Newmark’s debt refinancing, repayment of the remaining $300 million intercompany note, and whether and when the spin-off occurs.
- The impact of ASC 606 on year-over-year comparability, including grossed-up revenue and expenses and accelerated commission recognition.
- Developments in the derivative litigation, related-party arrangements and guarantees, regulatory capital requirements, and the CFO transition.