Newmark Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018. Newmark provides commercial real estate brokerage, property and facilities management, valuation, mortgage lending and loan servicing. It reports one operating segment. BGC completed the Spin-Off of Newmark in November 2018; Cantor continues to control Newmark.
Financial results
Amounts are in millions, except per-share data. Margins are calculated from reported figures.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $447.7 | $430.5 | +4.0% |
| Income before taxes and noncontrolling interests | $30.1 | $39.4 | -23.7% |
| Consolidated net income | $23.4 | $32.5 | -28.0% |
| Net income available to common stockholders | $16.9 | $20.0 | -15.5% |
| Basic / diluted EPS | $0.08 / $0.08 | $0.13 / $0.12 | Down |
| Income before tax margin | 6.7% | 9.2% | Down 2.5 points |
| Net cash from operating activities | $39.4 | $(590.4) | Improved |
- Revenue mix: Leasing and other commissions rose 8.2% to $172.5 million; capital markets revenue rose 1.4% to $102.8 million; mortgage banking gains fell 19.4% to $31.3 million; management services, servicing fees and other revenue rose 7.8% to $141.0 million.
- Costs and margins: Total compensation was $277.2 million, or 61.9% of revenue, versus $278.5 million, or 64.7%. Operating, administrative and other expenses increased 16.5% to $87.9 million; depreciation and amortization increased 25.7% to $28.3 million.
- Cash flow: Operating cash flow was positive $39.4 million, but excluding loan originations and sales it was negative $78.4 million, compared with positive $12.6 million in Q1 2018. Lending activity materially affects reported operating cash flow.
- Liquidity and debt: Cash and cash equivalents were $72.5 million; restricted cash was $65.3 million; marketable securities were $43.7 million. Company-defined liquidity, calculated as cash and cash equivalents plus marketable securities less securities loaned, was $72.5 million. Long-term debt was $538.6 million, consisting of 6.125% senior notes due 2023. Warehouse borrowings were $859.7 million, backed by loans held for sale. The $250 million revolving credit facility and separate $250 million Cantor credit agreement had no borrowings outstanding.
- Balance sheet: Total assets were $3.45 billion and total liabilities $2.41 billion at March 31. Adoption of lease accounting added $182.2 million of right-of-use assets and $232.0 million of lease liabilities at quarter-end.
Changes, outlook and risks
- Management attributed commission growth primarily to prior acquisitions; higher capital markets volumes (up 22%) and management-services revenue also supported growth. Mortgage banking revenue declined mainly due to lower originated mortgage servicing rights and origination fees associated with loan mix.
- Reported pretax income was affected by a $13.3 million noncash loss on Nasdaq forward contracts, partly offset by $4.0 million of unrealized gains on Nasdaq shares. The filing says pretax income would have increased approximately 10% year over year absent the decrease in this noncash other-income item.
- Newmark reported that 69% of Q1 revenue came from sources management considers more predictable, including leasing, valuation, management services and loan servicing. Management described normal first-quarter seasonality and cited continued producer hiring, acquisitions and cross-selling. It gave no formal revenue or earnings forecast. The board declared a $0.10-per-share dividend for payment in June and said it expected the quarterly dividend to remain consistent for 2019; future dividends remain at board discretion.
- Management expected operating cash, cash on hand, the revolving facility and Nasdaq shares to support operations, growth and dividends. Newmark had $657 million of loan-funding commitments, with corresponding commitments to sell loans as funded. Warehouse facilities are short-term and require renewal; the company reported covenant compliance.
- Key risks include transaction-volume and interest-rate sensitivity; GSE capital, liquidity and servicing requirements; credit losses on loans serviced under Fannie Mae and Freddie Mac programs; access to refinancing; and market-value volatility in Nasdaq securities and related derivatives. Newmark disclosed approximately $5.6 billion of maximum potential loss exposure on $20.0 billion of credit-risk loans, with only $12.8 million covered by the cited credit-enhancement agreement. It also has legal matters in the ordinary course; management said it could not estimate possible losses beyond accrued amounts and did not expect pending matters, taken as a whole, to have a material adverse effect.
- Related-party considerations remain significant: Cantor controls Newmark, provides services and has lending arrangements with the company. The filing also describes executive compensation and equity transactions involving affiliated entities. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Reconcile GAAP earnings with the noncash Nasdaq forward and securities valuation effects, and review how those amounts affect reported and adjusted performance.
- Assess the quality and sustainability of operating cash flow after separating mortgage-loan originations and sales from core operations.
- Review warehouse-facility renewal dates, available borrowing capacity, and the company’s ability to meet debt and lease obligations.
- Examine GSE servicing credit exposure, collateral and liquidity requirements, and the limited credit-enhancement coverage disclosed.
- Evaluate the impact of Cantor control, related-party services and credit arrangements, and the dual-class voting structure on governance and minority shareholders.
- Confirm the assumptions underlying management’s dividend expectations, acquisition-related commitments and loan-funding obligations.