Newmark Group, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 10, 2024. Newmark is a commercial real estate advisory and services firm operating as one reportable segment.
Financial results
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Revenue | $546.5 million | $520.8 million |
| Operating loss | $22.6 million | $11.8 million |
| Consolidated net loss | $26.3 million | $16.3 million |
| Net loss available to common stockholders | $16.3 million; $0.09 per share | $10.4 million; $0.06 per share |
| Operating margin | -4.1% | -2.3% |
| Cash used in operating activities | $68.8 million | $398.8 million |
Revenue increased 4.9%. Management services, servicing fees and other rose 21.0% to $256.9 million; leasing and other commissions fell 17.9% to $158.8 million; investment sales declined 1.6% to $70.8 million; and commercial mortgage origination, net increased 38.7% to $59.9 million. Management attributed growth in management and servicing revenue partly to Gerald Eve and organic growth in servicing and asset management.
Operating expenses increased 7.5% to $569.1 million, exceeding revenue growth. Equity-based compensation rose 44.3% to $51.4 million, primarily reflecting the timing of exchangeability grants and a higher share price. Operating, administrative and other expenses increased 15.9% to $137.9 million, including higher pass-through costs, warehouse-line interest costs and Gerald Eve expenses. Compensation and employee benefits, excluding equity-based compensation, were broadly flat.
Operating cash flow improved year over year, but remained negative. Excluding loan origination and sale activity, management reported operating cash use of $101.3 million versus $108.5 million a year earlier. Excluding both that activity and employee/partner loans, the corresponding measure was positive $59.8 million versus $21.9 million. Employee and partner loans and receivables increased to $787.9 million from $651.2 million at year-end, with $161.1 million of related cash use in the quarter.
Balance sheet, debt and liquidity
At March 31, 2024, cash and cash equivalents were $140.9 million and restricted cash was $97.8 million. The company reported $525.0 million available under its $600 million revolving credit facility at quarter-end. Total assets were $4.42 billion and total liabilities were $2.86 billion.
Corporate debt had a $670.2 million carrying amount: $600 million principal of 7.500% senior notes due 2029 and $75 million drawn on the revolving credit facility. The notes were issued in January 2024, with net proceeds used to repay the $420 million delayed-draw term loan and $130 million of revolving debt, including Cantor borrowing. Warehouse borrowings, collateralized by mortgage loans, were $493.4 million. The revolving facility was amended on April 26, 2024, extending maturity to April 26, 2027; the borrowing rates and covenants were substantially consistent with the prior agreement. A warehouse line was renewed on May 7, 2024, extending its maturity to May 6, 2025.
Newmark reported compliance with its debt covenants and GSE capital and liquidity requirements. It exceeded Fannie Mae’s minimum net-worth requirement by $406.0 million. The board declared a $0.03-per-share quarterly dividend on May 2, payable June 3, 2024. The company repurchased 3.46 million Class A shares for $37.2 million during the quarter, at an average $10.73 per share.
Outlook, risks and unusual items
Management said commercial real estate transaction activity remains pressured by elevated and uncertain interest rates, lower property values, reduced lending and buyer-seller pricing gaps. It expects U.S. investment sales activity to remain muted through at least the first half of 2024, while anticipating industry volumes may rebound as rates stabilize. Management emphasized that timing is uncertain and cited market-share gains, producer hiring and growth in recurring or contractual services as priorities. The filing provides no specific company revenue or earnings guidance.
Key exposures include transaction-sensitive revenues, interest-rate and financing conditions, foreign exchange as international business grows, and competition for producers. Newmark’s Fannie Mae and Freddie Mac risk-sharing loans had $29.8 billion of outstanding principal and approximately $9.2 billion of maximum potential loss at quarter-end; the recorded financial guarantee liability was $29.8 million. One loan was in foreclosure, with estimated Newmark loss exposure of approximately $0.5 million. Servicing-right fair values are sensitive to assumptions including discount rates and prepayments; a 100-basis-point discount-rate increase would reduce estimated MSR fair value by $17.1 million.
Pending litigation includes consolidated Delaware derivative claims concerning the executive chairman’s 2021 $50 million retention award and partnership-unit exchanges; trial is scheduled for July 2025. The company says it believes the claims lack merit, but outcomes are uncertain. A separate former-partner class action includes contract and antitrust allegations; the company also says it believes that matter lacks merit. Management stated that ordinary-course legal matters are not expected to materially adversely affect the financial statements, while noting outcomes cannot be determined with certainty.
Related-party matters warrant attention: Cantor purchased $125 million of the 2029 notes and still held them as of May 10, 2024; Cantor affiliates provide services and Newmark has other commercial arrangements with affiliates. Disclosure controls were assessed as effective as of March 31, 2024, and no material changes in internal control were reported.
Most important facts for investors to verify
- Whether revenue growth can translate into improved profitability after the quarter’s wider operating loss and higher equity-based compensation.
- Whether servicing and management growth can offset weaker leasing and still-muted investment sales activity.
- Cash conversion and collectability of employee and partner loans, which rose materially and contributed to operating cash use.
- Debt-service capacity under the 7.500% notes, revolver borrowings and warehouse facilities, including the effects of interest rates and facility renewals.
- Performance and valuation of MSRs, and potential losses under the GSE risk-sharing guarantees.
- Developments in the executive-compensation litigation and the former-partner class action, including any changes to estimated exposure.
- Related-party financing, service and compensation arrangements, and the potential dilution from partnership interests and equity awards.