Newmark Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; filed November 6, 2020. Newmark provides commercial real estate brokerage, capital markets, property management, mortgage origination and loan servicing services. Results reflect one operating segment.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $435.9 million | $586.6 million | $1,303.6 million | $1,585.8 million |
| Income from operations | $142.3 million | $167.5 million | $181.2 million | $254.6 million |
| Consolidated net income | $99.5 million | $122.6 million | $114.4 million | $178.0 million |
| Net income available to common stockholders | $75.3 million | $88.7 million | $83.8 million | $128.3 million |
| Basic / fully diluted EPS | $0.40 / $0.39 | $0.48 / $0.48 | $0.42 / $0.42 | $0.67 / $0.66 |
- Revenue mix: Q3 commissions were $197.9 million, down 44.7%; mortgage banking gains were $91.2 million, up 26.1%; management services, servicing fees and other revenue were $146.8 million, down 6.1%. Nine-month revenue declined 17.8%.
- Expenses and margins: Q3 operating expenses were $402.2 million, 92.3% of revenue, versus $527.8 million, 90.0%, a year earlier. Q3 income from operations was 32.6% of revenue, but included substantial Nasdaq earn-out income; it should not be read as an underlying operating margin without considering that item.
- Cash flow: Nine-month operating cash flow was negative $1.34 billion, principally reflecting the high-volume loan origination and sale cycle. Excluding loan originations and sales, management reported operating cash flow of negative $18.6 million, versus positive $106.9 million in 2019. Investing cash flow was positive $12.5 million and financing cash flow positive $1.44 billion.
- Liquidity: September 30 cash and cash equivalents were $273.0 million; marketable securities were $121.8 million. Management cited $273.0 million of liquidity and separately described expected Nasdaq stock and retained upside, with estimates varying within the filing (approximately $678 million to $706 million). The filing does not provide a clear reconciliation of those Nasdaq amounts.
- Debt: Long-term debt was $879.5 million: $542.2 million carrying value of 6.125% senior notes due 2023 and $337.3 million under the revolving credit facility. The company also had $1.51 billion outstanding under short-term warehouse facilities, largely funding loans held for sale. Credit-facility availability was $125 million at quarter-end; Newmark paid down another $100 million on October 14, increasing stated availability to $225 million. No debt maturities were due before 2023, apart from warehouse facilities that require renewal.
- Balance sheet: Total assets were $4.68 billion and total liabilities $3.77 billion at September 30, 2020. Loans held for sale rose to $1.54 billion from $215.3 million at year-end 2019, alongside higher warehouse borrowings.
Changes versus the prior comparable period
- COVID-19-related weakness in leasing and capital markets drove Q3 revenue down 25.7% and nine-month revenue down 17.8%. Q3 leasing commissions fell 46.1% and capital markets revenue fell 42.7%.
- Higher GSE mortgage originations partly offset those declines: mortgage banking gains increased 26.1% in Q3 and 41.6% over nine months.
- Q3 common-stockholder income fell 15.0%; nine-month common-stockholder income fell 34.6%. Expense reductions partly cushioned lower revenue.
- Cash and cash equivalents increased from $163.6 million at December 31, 2019 to $273.0 million at September 30, 2020; long-term debt increased from $589.3 million to $879.5 million.
- Newmark reduced its quarterly dividend from $0.10 to $0.01 per share beginning in Q1 2020. No share repurchases occurred in the first nine months of 2020.
Outlook, risks and unusual items
- Management outlook: Newmark expected leasing volumes to decline year over year in Q4 2020, while anticipating sequential improvement in capital markets activity in some asset classes and continued healthy GSE lending volumes. No formal numerical earnings or revenue guidance is provided.
- COVID-19 exposure: Management cited deferred lease decisions, reduced transaction volumes and uncertainty around office and retail demand, reopening restrictions, remote work, and future economic conditions. Industrial, life sciences, e-commerce and technology clients were described as relatively active.
- Nasdaq earn-out: Q3 other income, net was $108.6 million and included $121.9 million of Nasdaq earn-out income, offset in part by a $5.8 million loss on Nasdaq forwards and other items. This non-recurring and market-linked income materially affects comparisons of reported operating results.
- Credit losses: Adoption of CECL reduced opening retained earnings by $25.9 million. Newmark reported $44.1 million of CECL reserves at September 30, including reserves related to its Fannie Mae loss-sharing exposure; further increases or realized losses remain possible.
- Mortgage guarantee and servicing: Newmark shared credit risk on a $22.7 billion Fannie Mae/Freddie Mac servicing portfolio, with maximum potential loss exposure reported at $6.7 billion. Four delinquent loans had $53.5 million of principal and estimated Newmark loss exposure of approximately $6.0 million if all resulted in loss events. Servicing advances were $1.3 million at quarter-end.
- Other items: The filing reports a $26.8 million nine-month unrealized loss on non-marketable investments and $11.6 million of equity-method investment losses. It also describes approximately $479.8 million of employee and partner loans, subject to repayment and collectability risks, and approximately $0.5 billion of loan funding commitments with corresponding sale commitments.
- Capital return: The board declared a $0.01-per-share Q3 dividend, payable December 14, 2020. Future dividends are discretionary and may change.
- Contingencies and controls: Newmark described ordinary-course litigation and regulatory matters, but said it could not estimate losses beyond recorded accruals and did not expect the matters, based on information available, to have a material adverse effect. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and operating income is attributable to Nasdaq earn-out income, and how should it be separated from recurring business performance?
- Whether leasing and capital markets volumes recover, and how COVID-19 developments affect office, retail and other commercial property demand.
- Cash generation excluding mortgage loan origination and sale activity, and the company’s liquidity after the October 2020 credit-facility repayment.
- The assumptions behind CECL reserves, future Fannie Mae loss-sharing exposure, delinquent loans and servicing advances.
- The level, collectability and compensation implications of employee and partner loans, as well as the terms and renewal of short-term warehouse funding.
- The calculation and timing of expected Nasdaq stock and retained upside; the filing cites differing approximate totals.
- Future dividend decisions, leverage and credit ratings, and the potential effects of LIBOR transition and GSE regulatory changes.