Newmark Group, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. Newmark provides commercial real estate brokerage, property and facilities management, valuation, mortgage origination and loan servicing services. The company reports one operating segment.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $383.7m | $551.5m | $867.6m | $999.1m |
| Operating income | $10.8m | $49.3m | $38.9m | $87.1m |
| Income before taxes and noncontrolling interests | $0.7m | $41.2m | $19.8m | $71.3m |
| Consolidated net income | $0.6m | $32.1m | $14.9m | $55.5m |
| Net income available to common stockholders | $0.3m | $22.7m | $8.5m | $39.6m |
| GAAP diluted EPS | $(0.01) | $0.11 | $0.02 | $0.18 |
Q2 operating margin was approximately 2.8%, down from 8.9% a year earlier; first-half operating margin was approximately 4.5%, versus 8.7%. Q2 GAAP diluted EPS was a loss despite positive reported net income available to common stockholders; the filing’s EPS calculation deducts preferred-unit dividends.
- Revenue mix: Q2 leasing and other commissions fell 44.8% to $120.1m and capital markets revenue fell 58.9% to $53.0m. Mortgage banking gains rose 53.2% to $69.1m, largely on stronger GSE originations and product mix. Management services, servicing fees and other revenue declined 11.6% to $141.6m.
- Expenses and other items: Q2 total operating expenses fell 32.5% to $336.5m, reflecting lower compensation and cost reductions. Other income was a $36.4m loss, primarily from Nasdaq forward mark-to-market losses, non-marketable investment losses and equity-method investment losses. Interest expense rose to $10.1m, mainly due to increased credit-facility borrowings.
- Balance sheet at June 30: Cash and cash equivalents were $306.4m; restricted cash was $60.7m. Total assets were $4.13bn and total equity was $884.8m. Long-term debt was $953.6m, comprising $541.6m of 6.125% senior notes due 2023 and $412.1m drawn on the revolving credit facility. Warehouse borrowings were a further $1.064bn, primarily funding loans held for sale.
- Cash flow: First-half operating cash flow was $(955.1)m, including substantial mortgage loan originations and sales activity. Excluding loan origination and sale activity, management reported operating cash flow of $(81.0)m, compared with $46.7m in the prior-year period. Investing cash flow was $16.6m and financing cash flow was $1.084bn. The filing describes liquidity as $306.4m at quarter-end; the $465m credit facility had $50m available. Newmark subsequently repaid $75m of that facility.
Changes versus prior period
- COVID-19-related market disruption drove substantial declines in leasing and capital markets activity, with Q2 revenue down 30.4% year over year. Management said both businesses were expected to remain muted at least through the end of Q3 2020.
- GSE mortgage banking gains increased, partially offsetting weaker brokerage results. Newmark’s combined GSE and FHA multifamily origination volume rose 23% year over year in Q2, while reported industry GSE multifamily originations rose approximately 14%.
- Newmark drew heavily on its revolving credit facility: the balance increased from $48.9m at year-end 2019 to $412.1m at June 30, 2020. The facility was expanded to $465m and its maturity extended to February 2023.
- Adoption of CECL on January 1, 2020 reduced beginning retained earnings by $25.9m pre-tax, including an increase to the Fannie Mae loss-sharing guarantee liability. Newmark also recorded a further $17.2m non-cash CECL charge during Q1 as economic forecasts deteriorated.
- The quarterly dividend was reduced from $0.10 to $0.01 per share. No shares were repurchased in the first half of 2020.
Outlook, risks and contingencies
- Management cited a target of at least $100m in 2020 expense reductions for support and operations functions. It also reported salary reductions volunteered by senior executives and independent directors through year-end.
- Management expected GSE mortgage origination volumes to remain healthy through the rest of 2020; management and consulting performed well, while valuation and advisory revenues declined in Q2 but demand and pipelines were reportedly improving into Q3. These expectations were subject to significant pandemic-related uncertainty; the filing provides no formal full-year earnings or revenue guidance.
- COVID-19 risks include prolonged weakness in leasing and investment transactions, lower property demand and valuations, client and counterparty defaults, operational disruption and remote-work cybersecurity risks. Management warned that downturns could also increase credit reserves, impair assets and constrain liquidity.
- Newmark shared losses on certain GSE-serviced loans. At June 30, the related credit-risk portfolio was $21.5bn, with maximum potential loss exposure of approximately $6.3bn before limited credit protection; the recorded financial guarantee liability was $32.7m. Newmark reported no delinquent loans in this portfolio at quarter-end. Servicing advances may rise if forbearance increases, although the company stated it has contractual reimbursement rights from the GSEs.
- Other exposures include approximately $0.5bn of loan funding commitments, acquisition-related contingent consideration, and ordinary-course litigation and regulatory matters. Management said it could not estimate losses beyond accruals for specific legal matters and did not expect currently pending matters, in aggregate, to materially adversely affect the financial statements.
- Related-party arrangements and Cantor’s continuing control warrant attention. Newmark also has substantial employee and partner loans, totaling $483.8m net at quarter-end, whose collectability and repayment can be affected by lower partner distributions.
Important facts for investors to verify
- Whether leasing and capital markets activity recovered after the expected Q3 weakness, and whether GSE origination gains can offset brokerage declines.
- Actual cash generation excluding mortgage loan funding turnover, available revolving-credit capacity, and the impact of subsequent debt repayments or further borrowing.
- Changes in CECL reserves, GSE loss-sharing exposure, forbearance-related advances and recoverability of employee and partner loans.
- MSR valuation assumptions and impairment sensitivity, and the effect of non-cash mortgage servicing gains and amortization on reported earnings.
- Dividend policy, cost-saving delivery, dilution from partnership units and equity awards, and material related-party transactions.