Newmark Group, Inc. — 2019 Form 10-K
Business context and period. This is the annual report for the fiscal year ended December 31, 2019, not a standalone quarterly filing. Newmark is a commercial real estate services company spanning leasing, capital markets, property and facilities management, valuation, consulting, mortgage origination and loan servicing. It reported one operating segment. BGC completed Newmark’s spin-off in November 2018; Cantor Fitzgerald continued to control Newmark at year-end 2019.
Financial results and position
Amounts are in U.S. dollars. FY 2019 comparisons are with FY 2018 unless otherwise indicated.
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Total revenue | $2,218.1 million | $2,047.6 million |
| Operating income | $246.2 million | $332.6 million |
| Income before tax and noncontrolling interests | $214.1 million | $282.4 million |
| Consolidated net income | $161.7 million | $191.9 million |
| Net income available to common stockholders | $117.3 million | $106.7 million |
| Fully diluted GAAP EPS | $0.58 | $0.64 |
| Cash and cash equivalents | $163.6 million | $122.5 million |
| Total assets | $3,201.6 million | $3,454.2 million |
| Long-term debt | $589.3 million | $537.9 million |
- Revenue mix and growth: Leasing and other commissions were $854.8 million, capital markets $541.3 million, mortgage banking gains $198.1 million, and management services, servicing fees and other revenue $624.0 million. Management reported 8.3% total revenue growth, with more than 85% of growth organic.
- Margins and earnings: Operating margin was approximately 11.1%, down from 16.2%; consolidated net margin was 7.3%, down from 9.4%. Common-stockholder net income increased despite lower consolidated income, partly because net income attributable to noncontrolling interests fell to $44.4 million from $85.2 million. Fully diluted EPS declined to $0.58 from $0.64.
- Cash flow: GAAP operating cash flow was $986.8 million, but included substantial mortgage loan originations and sales. Management’s adjusted presentation excluding that activity showed $211.2 million of operating cash flow, versus $295.9 million in 2018. Investing activities used $56.8 million; financing activities used $895.5 million, including warehouse-facility repayments, distributions, dividends and share repurchases.
- Liquidity and debt: The company-defined liquidity measure was $163.6 million at year-end, comprising cash and marketable securities less securities loaned; it excludes $58.3 million of restricted cash. Long-term debt included $550 million principal amount of 6.125% senior notes due November 2023 and $48.9 million drawn on a $250 million revolving facility. Separately, warehouse borrowings were $209.6 million, generally collateralized by loans held for sale and short term. In February 2020, the revolving facility was increased to $425 million and extended to February 2023.
- Capital returns: Newmark declared $0.40 per share in dividends for 2019. It repurchased 4.6 million shares during the year at an average $9.32 per share; $157.4 million remained under its $200 million authorization at year-end.
Material changes and unusual items
- Capital markets revenue rose 15.4%, supported by 47.6% growth in mortgage brokerage volume and 19.9% growth in investment sales volume. Mortgage banking gains rose 8.7%, with GSE loan originations increasing 16.1% to $9.9 billion. Management services, servicing fees and other revenue rose 7.8%.
- Expenses increased: total compensation and employee benefits rose 10.7% to $1,534.8 million, and depreciation and amortization rose 34.2% to $131.1 million. The latter included $17.1 million of additional MSR impairment amortization following lower interest rates, plus a $5.0 million internally developed software impairment.
- Other income declined to $81.0 million from $127.3 million. FY 2019 included $113.9 million of gains associated with Nasdaq shares, partly offset by $51.1 million of Nasdaq-forward mark-to-market losses. Results also included gains on certain non-marketable investments. These items make reported earnings less indicative of recurring operating performance.
- Fourth-quarter revenue was $632.4 million, compared with $631.7 million in fourth-quarter 2018. Fourth-quarter 2019 common-stockholder net loss was $11.0 million, versus income of $17.8 million a year earlier; the quarter included $149.0 million of equity-based compensation and allocation expense and a $14.3 million net other loss.
- Newmark acquired MLG Commercial, ACRES and London-based Harper Dennis Hobbs in 2019. The acquired businesses contributed $18.4 million of revenue after acquisition dates. Management reported $15 million of annualized integration savings achieved in the fourth quarter and targeted more than $20 million by the end of 2020.
- Adoption of lease accounting in 2019 added $201.7 million of right-of-use assets and $227.9 million of right-of-use liabilities at year-end. The filing says adoption did not materially affect operating results or cash flows.
Outlook, risks and contingencies
- The filing provides no specific numerical revenue or earnings guidance for 2020. Management cited a favorable commercial real estate backdrop, low interest rates, projected mortgage maturities and multifamily demand, while noting transaction-based revenue remains cyclical and market-sensitive. Approximately 67% of 2019 revenue came from management’s more predictable sources; the remaining 33% was more transactional.
- Management expected operating cash flow, cash on hand and the revolving facility to support near- and long-term needs, while also planning to repay debt, hire producers, pursue acquisitions, pay dividends and repurchase shares or units. These are expectations, not assurances.
- Newmark expected to receive up to approximately 7.9 million additional Nasdaq shares through 2027, subject to the earn-out terms. Management cited an estimated $638 million value for shares expected from 2020–2027 using the February 12, 2020 closing price; actual value and receipts may differ. The forward agreements can also require alternative funding in certain circumstances.
- Important risks include commercial real estate and capital-market downturns; dependence on U.S. operations; competition and retention of producers; leverage and refinancing; annual renewal of warehouse facilities; LIBOR transition; GSE/HUD program or policy changes; Fannie Mae DUS loss-sharing obligations; acquisition integration; cybersecurity; and related-party conflicts. Fannie Mae DUS arrangements generally expose Newmark to about one-third of covered loan losses.
- Newmark disclosed approximately $1.5 billion of loan-funding commitments at year-end, with corresponding commitments to sell the loans as funded. It also reported $29.3 million of contingent acquisition cash consideration and potential issuance of 0.4 million partnership units through 2022. Ordinary-course legal matters were described; management did not expect currently pending matters to have a material adverse effect, while noting outcomes are uncertain.
- The company expected adoption of the new credit-loss accounting standard in 2020 to affect its financial statements by an estimated $18–$28 million. Ernst & Young gave unqualified opinions on the consolidated financial statements and internal control over financial reporting. Controls at the three 2019 acquisitions were excluded from management’s and the auditor’s internal-control assessment for that year.
Important facts for investors to verify
- Reconcile GAAP earnings with management’s non-GAAP Adjusted Earnings and Adjusted EBITDA, especially the treatment of equity compensation, mortgage servicing rights and Nasdaq-related gains and losses.
- Assess underlying cash generation using operating cash flow excluding loan-origination and sale activity, and distinguish unrestricted liquidity from restricted cash and mortgage warehouse funding.
- Review the valuation, timing, remaining earn-out conditions and forward-agreement obligations associated with Nasdaq shares, including the effect of market-price changes.
- Track producer hiring and retention, acquisition integration, and whether the targeted annualized cost savings are achieved without impairing revenue growth.
- Evaluate debt maturities, variable-rate exposure, warehouse-line renewal and capacity, and the effect of the February 2020 credit-facility amendment and LIBOR transition.
- Review potential dilution from partnership-unit exchanges and equity awards, Cantor’s voting control and related-party arrangements, and the company’s GSE risk-sharing and loan-funding commitments.