Newmark Group, Inc. — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 1, 2021. The filing reports full-year results, not a standalone Q4 filing. Newmark provides commercial real estate brokerage, capital markets, mortgage origination and servicing, valuation, property management, and corporate occupier services.
Financial performance
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Total revenue | $1.905 billion | $2.218 billion | Down 14.1% |
| Operating income | $184.0 million | $246.2 million | Down 25.3%; margin 9.7% vs. 11.1% |
| Income before taxes and noncontrolling interests | $146.3 million | $214.1 million | Down 31.7% |
| Consolidated net income | $109.3 million | $161.7 million | Down 32.4% |
| Net income available to common stockholders | $80.1 million | $117.3 million | Down 31.8% |
| Diluted EPS | $0.39 | $0.58 | Down $0.19 |
| Cash and cash equivalents | $191.4 million | $163.6 million | Up $27.9 million |
| Long-term debt | $680.4 million | $589.3 million | Up $91.1 million |
- Revenue mix: Leasing commissions were $513.8 million, down 39.9%; capital markets revenue was $454.1 million, down 16.1%; mortgage banking gains were $310.9 million, up 57.0%; management services, servicing fees and other revenue were $626.1 million, up 0.3%.
- Cash flow: GAAP operating cash flow was negative $777.7 million, largely reflecting the timing and scale of mortgage loan originations and sales. Excluding those activities, operating cash flow was positive $93.8 million, versus $211.2 million in 2019. Investing cash flow was negative $3.6 million; financing cash flow was positive $817.8 million.
- Liquidity and borrowings: At year-end, cash was $191.4 million and $325.0 million remained available on the $465 million revolving credit facility. Warehouse borrowings were $1.061 billion, primarily funding $1.087 billion of loans held for sale that were committed for sale. These short-term warehouse facilities generally require renewal.
- Other balance-sheet measures: Total assets were $3.982 billion, total liabilities $3.041 billion, and total equity $921.1 million. Net mortgage servicing rights were $494.7 million. The filing does not provide a conventional current ratio or a single consolidated liquidity measure in the supplied text.
Material changes and unusual items
- COVID-19 drove substantial declines in leasing and capital markets activity, particularly in urban office markets. Fourth-quarter capital markets revenue increased 15.3% year over year, supported by multifamily, industrial and life sciences transactions; full-year capital markets revenue still declined.
- GSE mortgage originations partly offset brokerage weakness. Mortgage banking gains included $194.8 million of noncash gains on originated mortgage servicing rights, compared with $109.2 million in 2019; servicing rights are subsequently amortized and valuation-sensitive.
- Other income was $15.3 million, versus $81.0 million in 2019. FY 2020 results included $84.2 million of noncash losses on non-marketable investments, primarily the write-off of Newmark’s $50 million Knotel equity investment, as well as $13.7 million of Nasdaq-forward mark-to-market losses. Newmark recognized $121.9 million of Nasdaq earn-out income.
- Operating expenses fell 15.4% to $1.736 billion, reflecting lower revenue-linked compensation and cost reductions. Reported expenses included $22.6 million of cost-savings charges and $16.3 million of charges associated with credit-loss reserves and pandemic-related economic changes.
- Newmark adopted CECL in 2020, recording a $25.9 million opening pre-tax reserve adjustment to equity. Year-end CECL reserves were $46.7 million; management reported a further $16.3 million noncash charge during the year related to adverse macroeconomic changes.
- Q4 revenue was $601.4 million versus $632.4 million a year earlier. Q4 net loss available to common stockholders was $3.8 million, compared with a $11.0 million loss in Q4 2019; quarterly results included material mark-to-market movements.
Outlook, risks and contingencies
- Management expected leasing to remain challenged until greater clarity on office returns, while anticipating improving capital markets activity in multifamily, industrial and life sciences and strong GSE lending volumes in 2021. The filing does not provide clear numerical 2021 revenue or earnings guidance.
- Nasdaq announced a proposed sale of its U.S. fixed-income business to Tradeweb. If completed, this could accelerate Newmark’s receipt of Nasdaq shares and settlement of related forward transactions. Newmark estimated approximately 5 million net shares, valued at about $723.5 million using the February 17, 2021 closing price; timing, completion, share price, taxes and monetization remain uncertain.
- In January 2021, Newmark agreed to provide approximately $20 million of debtor-in-possession financing and acquire certain Knotel assets through its bankruptcy process, subject to court approval. The value and recoverability of its Knotel debt and the benefits of a potential acquisition are uncertain.
- Fannie Mae loss-sharing exposure, changing property values, loan delinquencies and forbearance could affect results. Newmark reported 0.4% of its combined Fannie Mae and FHA/HUD book in forbearance at year-end and less than 0.22% of its Fannie Mae multifamily portfolio delinquent. The company shares losses on much of its Fannie Mae portfolio.
- Other risks include the pandemic and structural shifts in office and retail demand; dependence on GSE and HUD programs; warehouse-facility renewal and credit access; LIBOR transition; employee-loan collectability; and the valuation of servicing rights. Newmark reported approximately $454.3 million of employee loans, net of reserves.
- Capital allocation: the quarterly dividend was reduced to $0.01 per share in 2020 and management expected dividends and partner distributions to remain near current levels through 2021. In February 2021, the board raised the share and unit repurchase authorization to $400 million and stated priorities included repurchases, growth investment and paying down the revolver.
- Governance: Cantor controlled approximately 56.9% of voting power at year-end through Class B shares carrying 10 votes each. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor facts to verify
- Whether brokerage activity and margins recover as office leasing and commercial property transaction markets adjust after the pandemic.
- Actual timing, net proceeds, tax impact and hedging or sale arrangements for any accelerated Nasdaq share receipt.
- Terms, court approval, funding requirements and recoveries related to Knotel, including the $50 million equity write-off and debt exposure.
- Warehouse facility renewals, available revolver capacity, debt service and any changes in credit ratings or covenants.
- Mortgage servicing rights valuation assumptions, CECL reserve adequacy, and potential Fannie Mae loss-sharing or servicing advances.
- Dividend and repurchase execution, potential dilution from equity compensation or exchanges, and related-party transactions under Cantor’s voting control.