Newmark Group, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and nine months ended September 30, 2023, compared with the same periods in 2022. Newmark provides commercial real estate brokerage, advisory, property and facilities management, mortgage origination, and loan servicing services. It reports one operating segment.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $616.3 million | $664.6 million | $1,722.9 million | $2,098.2 million |
| Operating income | $30.1 million | $58.5 million | $45.8 million | $160.2 million |
| Consolidated net income | $14.2 million | $37.9 million | $9.0 million | $100.4 million |
| Net income available to common stockholders | $9.9 million | $28.0 million | $6.0 million | $76.8 million |
| Basic EPS | $0.06 | $0.16 | $0.03 | $0.42 |
- Revenue declined 7.3% in Q3 and 17.9% year to date. Q3 management services, servicing fees and other revenue rose 14.1% to $253.7 million; leasing commissions fell 7.6% to $203.3 million; investment sales fell 28.1% to $94.7 million; and commercial mortgage origination revenue fell 28.8% to $64.6 million.
- Year-to-date, management services and servicing revenue increased 2.5% to $706.7 million, while leasing declined 5.0% to $600.2 million, investment sales declined 50.4% to $244.3 million, and commercial mortgage origination declined 39.6% to $171.7 million.
- Operating margin, calculated from reported figures, was 4.9% in Q3 versus 8.8% a year earlier; year-to-date it was 2.7% versus 7.6%. Common-stockholder net margin was 1.6% versus 4.2% in Q3 and 0.3% versus 3.7% year to date.
- Cash and cash equivalents were $143.3 million at September 30, 2023; restricted cash was $89.9 million. Operating cash flow was negative $485.9 million for the first nine months, versus positive $264.7 million in 2022. Excluding loan origination and sale activity, operating cash flow was negative $7.3 million versus positive $209.4 million; excluding employee and partner loans as well, it was positive $202.3 million versus $310.0 million.
- Total debt was $604.7 million, including $55.0 million drawn on the revolving credit facility. The $550.0 million face amount of 6.125% senior notes was due November 15, 2023; the balance sheet classified $420.0 million as long-term based on the company’s stated intent and ability to refinance it. Separately, warehouse borrowings collateralized by GSE loans were $609.5 million.
- Total assets were $4.43 billion and total liabilities $2.92 billion. Employee and partner loans receivable, net, rose to $631.8 million from $500.8 million at year-end 2022. Net mortgage servicing rights were $540.2 million.
Material changes versus the prior comparable period
- Lower investment sales and mortgage origination activity drove most of the revenue and earnings decline amid sharply reduced commercial real estate transaction volumes and higher interest rates.
- Lower commission-related compensation partly offset the revenue decline. Total operating expenses fell 2.7% in Q3, but increased as a proportion of revenue; operating, administrative and other costs rose 16.1% in Q3, including higher pass-through costs and acquisition-related expenses.
- Year-to-date other income was positive $4.1 million, compared with a $101.4 million loss in 2022. The prior-year amount primarily reflected losses on Nasdaq shares and non-marketable investments; Newmark had no Nasdaq shares at September 30, 2023.
- Newmark acquired U.K. advisory firm Gerald Eve in March 2023 for $113.0 million of total consideration. Acquisitions contributed $64.4 million of revenue in the first nine months of 2023. Newmark also acquired the remaining Spring11 ownership interest and received $105.5 million from Cantor when it redeemed its Real Estate LP investment.
- Class A share repurchases totaled 5.1 million shares for $32.3 million in the first nine months, at an average price of $6.28. $360.0 million remained under the $400.0 million share and unit repurchase authorization.
Outlook, risks and notable items
- Management said transaction and investment volumes had declined significantly year over year, but Newmark gained U.S. market share in Q3. It cited relative resilience in leasing, investment sales and GSE/FHA origination compared with industry declines.
- Management expects U.S. investment sales and mortgage brokerage volumes to decline year over year through at least the first half of 2024, with recovery dependent on interest rates stabilizing. It expects capital markets activity to support longer-term revenue and earnings growth. The filing provides no specific company revenue or EPS guidance.
- After quarter-end, Newmark gave notice to draw $420.0 million under its delayed-draw term loan and $130.0 million under its revolving facility, with funds expected around November 14, to repay the maturing notes. These were notices to borrow, not completed funding as of the filing’s November 9 date. The term loan matures by November 2026 or three years after initial funding and has floating-rate pricing and financial covenants.
- Key exposures include interest-rate and commercial real estate market conditions, refinancing and financing access, potential losses on GSE risk-sharing guarantees, and the collectability of employee and partner loans. GSE-serviced credit-risk loans had $28.6 billion of principal and approximately $8.7 billion of maximum potential loss; the recorded financial guarantee liability was $29.3 million. Management reported compliance with GSE capital and liquidity requirements.
- Two Delaware matters challenge executive compensation and partnership-unit transactions, including the Chairman’s $50 million retention bonus; the company says the claims lack merit. A separate former-partner lawsuit seeks class treatment, injunctive relief and at least $5 million in damages; trial was scheduled for July 2025. Management stated it could not determine outcomes with certainty and did not expect pending matters to have a material adverse effect based on information available.
- The filing highlights related-party dealings with Cantor, including service allocations, the Real Estate LP redemption, and authorization to use Cantor’s broker-dealer as a non-exclusive placement agent on terms no less favorable than third-party terms. Cantor and CFGM held all Class B shares, representing approximately 58.4% of voting power at September 30.
- The board declared a $0.03-per-share quarterly dividend after quarter-end. Management said near-term share repurchases may decline as it prioritizes hiring and acquisitions. Disclosure controls were assessed as effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether the announced $420.0 million term-loan and $130.0 million revolver draws were completed as planned, how the November 2023 notes were repaid, and the resulting borrowing costs, maturities and covenant headroom.
- Whether weak transaction volumes persist beyond management’s stated expectation of declines through at least the first half of 2024, and how Newmark’s market-share gains translate into revenue and margins.
- The quality, repayment terms and collectability of the $631.8 million employee and partner loan balance, as well as the cash flow impact of further advances.
- Changes in GSE guarantee exposure, loan delinquencies and foreclosures, and the adequacy of the $29.3 million guarantee liability against potential losses.
- Developments in the executive compensation and former-partner litigation, related-party transactions, and the effect of the dual-class voting structure on shareholder oversight.