NEWMARK GROUP, INC. quarterly report, Q1 FY2023

Newmark Group, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; filed May 9, 2023. Newmark is a commercial real estate services firm operating in one reportable segment, with services spanning leasing, investment sales, mortgage origination and servicing, property management, advisory and flexible workspace.

Financial results and liquidity

Metric	Q1 2023	Q1 2022
Revenue	$520.8 million	$678.2 million
Operating income (loss)	$(11.8) million	$12.6 million
Net income (loss) available to common stockholders	$(10.4) million	$0.4 million
Basic and diluted EPS	$(0.06)	Approximately $0.00
Operating cash flow	$(398.8) million	$502.2 million

Revenue fell 23.2% year over year. Management services, servicing fees and other were $212.3 million; leasing commissions $193.3 million; investment sales $72.0 million; and commercial mortgage origination, net $43.2 million.
Operating margin was approximately negative 2.3%, versus positive 1.9% in Q1 2022. Total operating expenses were $529.6 million, or 101.7% of revenue, compared with $579.7 million, or 85.5% of revenue, a year earlier.
Cash and cash equivalents were $210.7 million; restricted cash was $84.0 million. The company reported $773.4 million of debt, comprising $548.4 million of 6.125% Senior Notes and $225.0 million drawn under its revolver. The notes mature November 15, 2023; management said it intends to refinance them or repay them using cash, operating cash flow and the credit facility.
The $600 million revolving facility matures in March 2025. Warehouse borrowings, used to fund mortgage loans, were $427.7 million, supported by warehouse and repurchase facilities.
Operating cash use included $290.3 million of net loan-origination and sale activity and $128.9 million of loans for new hires and producers. Excluding mortgage origination and sale activity, operating cash flow was $(108.5) million; excluding producer loans as well, it was $20.4 million.
Total assets were $4.45 billion and total liabilities $2.93 billion at quarter-end. Lease liabilities were approximately $751 million; $198.5 million related to flexible workspace subsidiaries, with $36.6 million of guarantees or letters of credit exposure to Newmark.

Material changes and notable items

Investment sales revenue declined 52.7%, and commercial mortgage origination revenue declined 54.1%, reflecting sharply lower transaction and lending volumes amid higher interest rates. Leasing commissions fell 2.8%; management and servicing revenue fell 8.9%.
Management said U.S. investment sales volumes fell 56% industry-wide and Newmark’s total debt volumes fell 67.8% year over year. Newmark’s GSE/FHA originations declined 46.1%.
Compensation and employee benefits declined 14.2% to $328.4 million, partly offsetting lower revenue. Equity-based compensation and partnership allocations rose 111% to $35.6 million, including charges associated with CEO Barry Gosin’s employment agreement and exchange rights.
Other loss was $3.0 million, compared with an $86.0 million loss in Q1 2022, which largely reflected realized and unrealized losses on Nasdaq shares. Newmark held no Nasdaq shares at March 31, 2023.
Newmark acquired U.K. advisory firm Gerald Eve on March 10 for total consideration of $114.8 million; it contributed $9.3 million of Q1 revenue after acquisition. Newmark also acquired the remaining Spring11 ownership interest and reported approximately $168.8 billion of total servicing portfolio at quarter-end.
The quarterly dividend was $0.03 per share. No Class A shares were repurchased during the quarter; $392.3 million remained under the $400 million share and unit repurchase authorization.

Outlook, risks and contingencies

Management expects U.S. investment sales and mortgage brokerage volumes to decline year over year at least through Q4 2023, with a possible industry rebound beginning in Q4 if interest rates stabilize or decline. This is management’s expectation, not a quantified company earnings forecast.
Management highlighted near-term pressure from elevated interest rates, tighter bank lending, buyer-seller pricing gaps and subdued office activity. It cited loan advisory, servicing, asset management and a new bank credit risk advisory practice as potential offsets to capital-markets weakness.
After quarter-end, Newmark announced an exclusive mandate to sell Signature Bank’s approximately $60 billion loan portfolio. This is a prospective assignment, not reported Q1 revenue.
Fannie Mae and Freddie Mac risk-sharing exposure covered serviced loans with $27.8 billion of principal and approximately $8.4 billion of maximum potential loss. The recorded financial guarantee liability was $29.3 million. One delinquent loan remained at quarter-end; management estimated Newmark’s share of its loss at approximately $0.5 million.
Construction, rate-lock and other loan funding commitments totaled approximately $0.5 billion, with corresponding commitments to sell loans as funded. Legal matters include shareholder derivative claims concerning executive compensation and a purported class action by former limited partners; the company says it believes the claims lack merit, but outcomes are uncertain.
Related-party arrangements with Cantor include allocated services, joint ventures, and partnership interests. Cantor and CFGM held all Class B shares, representing approximately 58.2% of voting power at March 31, 2023.

Important facts for investors to verify

Progress and terms for refinancing or repaying the $550 million principal amount of Senior Notes due November 2023.
Whether cash use from lending activity and producer loans reverses, and how much operating cash flow is generated excluding mortgage warehouse flows.
Future transaction volumes, especially investment sales, mortgage brokerage, GSE/FHA originations and office leasing, against management’s expected timing of a recovery.
Realization of expected benefits from Gerald Eve and Spring11, and any further acquisition, contingent consideration or integration costs.
Changes in Fannie Mae/Freddie Mac credit losses, the financial guarantee reserve, employee and partner loan balances, and flexible-workspace lease exposure.
Developments in the executive compensation and former-partner litigation, related-party governance, and the company’s dividend and repurchase decisions.