Business context and reporting period
Filing: BGC Partners, Inc. (not BGC Group, Inc.), unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company operates Financial Services and Real Estate Services businesses. Comparisons with 2016 reflect retrospective inclusion of Berkeley Point Financial and Lucera, so prior-period figures are recast.
Units: Financial figures below are USD millions unless otherwise stated.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $827.0 | $734.8 | $2,459.1 | $2,152.3 |
| Operating expenses | $775.0 | $689.7 | $2,267.1 | $2,026.9 |
| Income before taxes | $142.4 | $144.6 | $294.5 | $233.2 |
| Consolidated net income | $110.5 | $114.3 | $239.4 | $187.5 |
| Net income available to common stockholders | $81.5 | $87.2 | $171.3 | $140.6 |
| Basic / diluted EPS | $0.28 / $0.28 | $0.31 / $0.31 | $0.60 / $0.59 | $0.51 / $0.50 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $784.5 | $(449.0) |
- Q3 revenue grew 12.5%, but pretax income fell 1.5% and common-stockholder income fell 6.5%. Pretax margin was 17.2%, versus 19.7% a year earlier.
- Nine-month revenue increased 14.2%; pretax income increased 26.3% and common-stockholder income increased 21.9%. Pretax margin rose to 12.0% from 10.8%.
- Q3 revenue growth included Financial Services revenue of $416.7 million, up 17.8%, and Real Estate Services revenue of $399.4 million, up 6.8%. Nine-month segment revenue was $1,290.2 million and $1,139.4 million, respectively.
- Compensation and employee benefits were $543.6 million in Q3, including partnership allocations, and $1,600.0 million for nine months. Interest expense was $24.4 million in Q3 and $69.7 million for nine months.
- Nine-month operating cash flow improved substantially year over year, but was materially affected by working-capital movements, including large increases in both broker/customer receivables and related payables. Investing cash flow was $(250.7) million and financing cash flow was $(527.3) million.
Balance sheet, debt and liquidity
- At September 30, 2017, total assets were $7,253.4 million and total liabilities were $6,320.5 million. Cash and cash equivalents were $546.0 million; an additional $140.0 million was segregated under regulatory requirements.
- Management-defined liquidity was $700.7 million, down from $790.4 million at December 31, 2016. This measure comprises cash, marketable securities, securities owned and reverse repurchase agreements, less securities loaned and repurchase agreements; it excludes restricted cash.
- Long-term debt and collateralized borrowings were $1,955.8 million, with $6.3 million of short-term borrowings. Separately, warehouse notes payable were $659.7 million, secured by mortgage loans and related purchase commitments. The new $400 million revolving facility and $575 million term loan both mature in September 2019 and carried a 3.49% rate at quarter-end.
- Warehouse facilities totaled $950 million committed and $325 million uncommitted; $659.7 million was drawn. The company reported compliance with applicable covenants and regulatory capital requirements. Regulated subsidiaries’ net capital exceeded aggregate minimum requirements by $296.2 million; Fannie Mae’s most restrictive net-worth requirement was exceeded by $368.0 million.
- Credit ratings were BBB- with a stable outlook from Fitch and BBB- on CreditWatch Negative from S&P.
Material changes and unusual items
- On September 8, BGC completed the acquisition of Berkeley Point from Cantor affiliates for a stated $875 million, subject to adjustment, and invested a further $100 million in Cantor-controlled Real Estate LP. Berkeley Point expands commercial real estate lending and servicing. The acquisition was accounted for as a common-control transaction, with prior periods recast; the excess purchase price over historical net assets was treated as an equity transaction.
- The Berkeley Point-related transactions were funded in part with the new $400 million revolving facility and $575 million term loan. The company said proceeds from a planned Newmark public offering are expected to repay the term loan.
- Q3 other income included a $77.0 million Nasdaq earn-out gain recognized in shares, not cash. The filing also reports marketable-security gains; these items materially affect reported earnings and liquidity valuations. The Nasdaq earn-out recognition was assigned to Real Estate Services beginning in Q3, affecting segment comparisons.
- Q3 mortgage-banking gains fell 30.5% to $45.5 million, partly reflecting comparison with record industry originations and large transactions in Q3 2016. For nine months, mortgage-banking gains rose 18.2% to $164.3 million.
- Newmark Group filed an S-1 for a proposed IPO on October 23, 2017. The offering size and price were undetermined; BGC said it may later distribute its retained Newmark shares to stockholders, subject to market and other conditions.
- The board declared a quarterly dividend of $0.18 per share, payable November 29, 2017. Dividends declared for the first nine months were $0.52 per share.
Outlook, commentary and risks
- Management expressed confidence in growth from acquisitions, hiring, real estate services and electronic brokerage, and expected Newmark growth to outpace the industry over time. It also cited potential Berkeley Point cross-selling and acquisition synergies. These are forward-looking expectations, not numeric guidance.
- Management described financial-market volumes as mixed, with persistently low rates and regulatory changes weighing on some products. It cited growth in electronic rates and foreign exchange, while credit and energy/commodities were weaker in parts of the period. FENICS net revenue increased 9.4% in Q3 to $53.4 million.
- Key risks include market-volume and volatility changes; regulatory implementation, including MiFID II; Brexit uncertainty; leverage, refinancing and rating pressure; dependence on warehouse funding; and Cantor-related transactions and potential conflicts.
- Berkeley Point’s GSE lending and servicing expose BGC to loan-loss sharing, servicing, repurchase and indemnification risks. The filing gives $5.2 billion as maximum potential loss exposure on serviced credit-risk loans, with $1.3 billion covered by credit protection; these are maximum exposures, not estimated losses.
- The filing describes pending litigation, regulatory reviews and investigations in the ordinary course. Management said it could not estimate possible losses beyond accruals and did not expect current matters to have a material adverse effect taken as a whole. A $30.7 million charitable-commitment liability and $71.4 million of acquisition contingent consideration were also reported.
Important facts for investors to verify
- Confirm the issuer identity: this is a BGC Partners, Inc. filing, despite the request metadata naming BGC Group, Inc.
- Separate recurring operating performance from the $77.0 million Nasdaq earn-out and other fair-value or acquisition-related items; examine segment results on a comparable basis.
- Assess debt service and refinancing risk, including the 2018 maturity of the 8.375% notes, the 2019 credit facilities, warehouse funding renewal, and S&P’s negative CreditWatch.
- Review the terms, related-party safeguards and expected returns for the Berkeley Point acquisition and the $100 million Cantor-controlled Real Estate LP investment.
- Track Newmark IPO timing, proceeds and use of proceeds; the filing provides no offering price or size.
- Evaluate the sustainability of operating cash flow, the working-capital swings, GSE loss-sharing exposure and the sensitivity of mortgage servicing rights to assumptions.