Newmark Group, Inc. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2020, compared with the same period in 2019. Newmark is a commercial real estate services firm operating in one reportable segment. All amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 or prior date |
|---|---|---|
| Total revenue | $483.9 | $447.7; up 8.1% |
| Operating income | $28.1 | $37.8 |
| Operating margin | 5.8% | 8.4% |
| Consolidated net income | $14.2 | $23.4 |
| Net income available to common stockholders | $8.2 | $16.9 |
| Basic and fully diluted EPS | $0.03 | $0.08 |
| Net cash used in operating activities | $(652.4) | Net cash provided of $39.4 |
| Cash and cash equivalents | $291.5 | $163.6 at Dec. 31, 2019 |
| Long-term debt | $952.8 | $589.3 at Dec. 31, 2019 |
- Revenue mix: Leasing and other commissions were $140.4 million, down 18.6%; capital markets revenue was $127.9 million, up 24.4%; mortgage banking gains were $50.4 million, up 60.9%; and management services, servicing fees and other revenue were $165.1 million, up 17.1%.
- Costs and profitability: Total operating expenses rose to $457.3 million from $400.1 million. Compensation and benefits increased 14.0% to $313.2 million; depreciation and amortization rose 62.7% to $46.0 million, principally due to higher mortgage servicing rights amortization.
- Cash flow: Operating cash use was heavily affected by mortgage loan originations and sales. Excluding those activities and related adjustments, operating cash use was $128.3 million, versus $78.4 million in Q1 2019. Investing activities provided $18.8 million; financing activities provided $763.3 million, including increased borrowings.
- Balance sheet and liquidity: Total assets were $3,886.2 million and total liabilities $2,943.9 million at quarter-end. Management reported liquidity of $291.5 million; this measure excludes approximately $571 million of expected future Nasdaq shares, valued using the May 6 closing price. Current assets were $1,661.7 million and current liabilities $1,375.7 million.
- Debt and facilities: Debt comprised $541.0 million carrying value of 6.125% senior notes due 2023 and $411.8 million carrying value under the revolving credit facility. The revolver had $415.0 million principal outstanding and $50.0 million available. Separately, warehouse facilities had $703.3 million outstanding, generally funding loans held for sale.
Material changes and unusual items
- Revenue increased overall, but leasing commissions fell as activity weakened late in the quarter. Capital markets and mortgage banking gains grew, while higher expenses and financing costs contributed to lower operating income and common-stockholder earnings.
- Newmark adopted the current expected credit loss standard (CECL) on January 1, 2020. Adoption reduced beginning retained earnings by $25.9 million; the company also recorded a $14.5 million Q1 provision for expected losses on its Fannie Mae risk-sharing guarantee. The guarantee liability was $32.4 million at March 31.
- The company recorded a $16.8 million impairment on non-marketable investments. A $21.2 million gain on Nasdaq forward contracts largely offset this and $2.2 million of realized losses on Nasdaq share sales within other income.
- Mortgage servicing rights included $29.3 million of non-cash gains on originated servicing rights and $39.5 million of amortization. The MSR valuation allowance increased by $17.6 million during the quarter.
- Newmark acquired certain HVS, Inc. assets in January for total consideration of approximately $9.8 million, including contingent consideration; the acquired business contributed $1.9 million of Q1 revenue.
Outlook, management commentary and risks
- Management said COVID-19 caused a sharp contraction in business volumes in the second half of March. It expected leasing and capital markets volumes to be severely negatively affected in the near term and valuation and advisory revenue to decline near term. Management services and consulting continued operating, with opportunities to assist clients.
- The filing provides no numerical revenue or earnings guidance. Newmark said it was taking actions intended to reduce 2020 support and operations expenses by at least $100 million. Executives and independent directors also volunteered temporary salary or retainer reductions effective April 27 through year-end.
- To strengthen liquidity, Newmark drew an additional $180 million under its revolver in March, reduced the Q1 dividend to $0.01 per share from $0.10 previously, reduced partner distributions comparably, and paused share repurchases. The board declared a further $0.01-per-share dividend on May 6, payable June 15, 2020.
- Management highlighted uncertainty around the duration and economic effects of the pandemic, including lower leasing and transaction activity, tenant distress, loan defaults and forbearance, credit losses, and possible impairment or restructuring charges. The company also cited risks from remote work and cybersecurity, dependence on GSE programs, and access to financing.
- Newmark shared losses on its Fannie Mae and Freddie Mac servicing portfolio; the credit-risk portfolio was approximately $20.9 billion, with maximum potential loss of approximately $6.1 billion before applicable protections. There were no delinquent loans in that portfolio at March 31. Management said it met GSE capital and liquidity requirements and exceeded Fannie Mae’s minimum net-worth requirement by $282.6 million.
- Legal matters were described as arising in the ordinary course; management said currently available information did not indicate a material adverse effect from pending matters, but the filing stated that outcomes could not be determined with certainty.
Important facts for investors to verify
- Whether COVID-19 materially reduced subsequent-quarter leasing, capital markets and valuation activity, and whether the planned expense reductions were achieved.
- How cash use, revolver availability, warehouse funding and total debt changed after March 31, 2020.
- Whether CECL reserves, guarantee losses, loan forbearance advances or MSR valuation adjustments increased as economic conditions developed.
- Whether the $0.01 dividend and reduced partner distributions continued, and how those changes affected liquidity and employee-loan collectability.
- The assumptions and valuation inputs supporting Nasdaq forwards, non-marketable investments, contingent acquisition consideration and mortgage servicing rights.
- Related-party arrangements and Cantor’s continuing control, including the potential effects of transactions with affiliates.