Newmark Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the periods ended September 30, 2020. Newmark is a commercial real estate services firm operating in one reportable segment.
Financial performance
Amounts below are in millions of dollars, except per-share data. Quarter and nine-month figures are unaudited.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $788.1 | $435.9 | $1,922.0 | $1,303.6 |
| Income from operations | $225.6 | $142.3 | $1,025.6 | $181.2 |
| Net income available to common stockholders | $128.5 | $75.3 | $601.4 | $83.8 |
| Basic / diluted EPS | $0.64 / $0.63 | $0.40 / $0.39 | $3.14 / $3.06 | $0.42 / $0.42 |
| Net cash from (used in) operating activities | Not provided by quarter in the supplied filing text | $(326.6) | $(1,341.1) |
- Revenue mix: Q3 leasing and other commissions were $231.5 million, capital markets $252.1 million, mortgage banking gains $60.0 million, and management services, servicing fees and other $244.5 million. For the nine months, the corresponding amounts were $563.3 million, $558.3 million, $148.7 million and $651.7 million.
- Margins: GAAP operating margin was 28.6% in Q3 2021 versus 32.6% in Q3 2020, and 53.4% for the nine months versus 13.9%. The nine-month 2021 margin is substantially affected by the Nasdaq earn-out and related gains; it is not a straightforward measure of recurring operating performance.
- Balance sheet and liquidity: At September 30, cash and cash equivalents were $170.8 million, restricted cash $74.5 million, and marketable securities $536.2 million. Reported liquidity was $566.9 million, calculated as cash plus Nasdaq securities less $140.0 million borrowed against pledged securities. The company also reported an undrawn $465.0 million revolving credit facility; warehouse borrowings were $1,184.3 million.
- Debt: Long-term debt was $544.6 million, consisting of 6.125% senior notes due November 2023; the $140.0 million revolving-credit balance outstanding at year-end 2020 was repaid in July 2021. Total liabilities were $3.69 billion, including $618.1 million of long-term lease liabilities.
- Cash flow: Management said operating cash flow excluding mortgage loan originations and sales was $(213.2) million for the nine months. It attributed $484.4 million of cash use to the 2021 Equity Event; excluding those uses, management stated that operating cash flow on that adjusted basis would have been $271.2 million. These are management-adjusted figures, not GAAP cash flow.
Material changes versus prior periods
- Q3 revenue increased 80.8% year over year. Leasing commissions rose 101.4% and capital markets revenue rose 203.9%, reflecting stronger transaction activity. Management reported record quarterly U.S. investment sales of $22.9 billion and record combined debt placement and origination volume of $11.9 billion.
- Management services, servicing fees and other revenue grew 66.5% in Q3, supported by Global Corporate Services, Valuation & Advisory, servicing fees and Knotel; the increase included $61.1 million of pass-through revenue. Mortgage banking gains declined 34.2%, mainly due to lower non-cash originated mortgage servicing rights revenue.
- Nine-month revenue increased 47.5%. Commission growth was partly offset by a 29.4% decline in mortgage banking gains. Compensation and employee benefits rose to $1.27 billion, while equity-based compensation and partnership-unit allocations rose to $315.7 million, principally reflecting the 2021 Equity Event.
- Nine-month other income, net, was $1.19 billion versus $73.7 million in 2020. It principally included recognition associated with acceleration of the Nasdaq earn-out and gains on Nasdaq securities. The filing reports $1.108 billion of Nasdaq earn-out recognition in the cash-flow reconciliation and describes $1.167 billion of Nasdaq-related gains in its results discussion.
- Class A share repurchases totaled 10.8 million shares in the nine months at an average $13.00 per share; $315.9 million remained under the $400 million repurchase and unit-purchase authorization at September 30. The quarterly dividend remained $0.01 per share; a $0.01 dividend for Q4 was declared on November 4, 2021.
Outlook, commentary and risks
- The filing provides no specific company revenue or earnings guidance for the next quarter or full year. Management described a recovering U.S. economy, improving capital-markets activity and continued demand for real estate portfolio consulting, while noting ongoing uncertainty from COVID-19 and changing workplace needs.
- Newmark acquired Knotel in March 2021 and a majority stake in Deskeo in September 2021 to expand its flexible-office business. The acquisitions contributed $23.8 million of Q3 revenue and $41.3 million for the nine-month period; integration and execution remain risks.
- The Nasdaq earn-out acceleration generated a large, unusual gain and increased marketable securities. Newmark held 2.8 million Nasdaq shares worth $536.2 million at quarter-end; each $1 change in Nasdaq’s share price changes their value by approximately $2.8 million. The company also warned that its position exceeds average daily trading volume and may be difficult to liquidate in an orderly manner during market stress.
- Newmark shares credit losses on its GSE servicing portfolio. At September 30, the covered credit-risk portfolio was $25.5 billion, with maximum potential loss exposure of $7.6 billion. Two loans totaling $33.6 million were in default; management estimated Newmark’s share of loss at approximately $1.7 million if those loans result in a loss event.
- Other important risks include transaction-volume and commercial real estate market volatility, interest-rate and financing risks, GSE lending requirements, COVID-19 impacts, and dependence on key producers. Cantor is a significant related party and majority voting-power holder; the filing describes related-party financing, services, referrals and compensation transactions.
- Management reported compliance with applicable GSE capital and liquidity requirements and warehouse-facility covenants. Fannie Mae’s minimum net-worth requirement was exceeded by $346.7 million. The filing says ordinary-course legal matters are not expected to have a material adverse effect, although losses beyond existing accruals could not be estimated. Disclosure controls were deemed effective, with no material changes in internal control reported for the quarter.
Most important facts for investors to verify
- How much of reported earnings and the nine-month margin reflects the accelerated Nasdaq earn-out, Nasdaq share-price movements and the Deskeo remeasurement gain, rather than recurring services operations.
- The cash and dilution consequences of the 2021 Equity Event, including the reported $428.6 million of accelerated compensation charges, substantial partner-unit redemptions and repurchases, and management’s non-GAAP adjustments.
- Liquidity after the additional $260 million Cantor-affiliate repurchase-agreement borrowing disclosed for October 2021, including collateral coverage, margin-call exposure and Nasdaq share-price risk.
- Cash conversion and working-capital needs, distinguishing GAAP operating cash flow from management’s exclusions for mortgage lending flows and the Equity Event.
- GSE credit-loss exposure, warehouse-facility availability and refinancing needs, including the senior notes’ 2023 maturity and the concentration of voting power and related-party arrangements.