Newmark Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Newmark is a commercial real estate services firm operating as one reportable segment. The comparison period is the corresponding 2018 period. Unless noted, amounts below are in millions of dollars.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $551.5 | $466.6 | $999.1 | $897.1 |
| Income from operations | $49.3 | $25.7 | $87.1 | $78.5 |
| Operating margin | 8.9% | 5.5% | 8.7% | 8.8% |
| Consolidated net income | $32.1 | $4.3 | $55.5 | $36.8 |
| Net income available to common stockholders | $22.7 | $0.7 | $39.6 | $20.7 |
| Basic / fully diluted EPS | $0.11 / $0.11 | $0.00 / $0.00 | $0.19 / $0.18 | $0.13 / $0.13 |
- Q2 revenue rose 18.2%; six-month revenue rose 11.4%. Q2 growth included leasing and other commissions of $217.4 million (+22.0%), capital markets revenue of $128.8 million (+26.6%), mortgage banking gains of $45.1 million (+7.7%), and management services, servicing fees and other of $160.3 million (+10.6%).
- Six-month capital markets revenue increased 14.0% and management services, servicing fees and other increased 9.3%; mortgage banking gains declined 5.4%, mainly due to origination mix and lower originated mortgage servicing rights gains.
- Q2 total operating expenses increased 13.2% to $498.5 million, slower than revenue growth. Six-month operating expenses increased 9.1% to $898.6 million. Depreciation and amortization rose notably, including mortgage servicing rights amortization and impairment.
- Six-month net cash provided by operating activities was $218.6 million, versus cash used of $121.0 million in 2018. Excluding loan originations and sales, operating cash flow was $46.7 million, down from $64.3 million. Investing cash use was $25.6 million and financing cash use was $215.1 million.
- At June 30, cash and cash equivalents were $107.7 million, restricted cash $57.7 million and marketable securities $33.7 million. Company-defined liquidity—cash and cash equivalents plus marketable securities, less securities loaned—was $107.7 million.
- Long-term debt carrying value was $582.8 million: $539.2 million of 6.125% senior notes due 2023 and $43.6 million under the revolving credit facility. Warehouse facilities, used to fund loans held for sale, had $793.2 million outstanding; related loans held for sale were $818.9 million. These facilities are short-term and collateralized.
- Total assets were $3.51 billion and total liabilities $2.46 billion. Adoption of lease accounting added $192.5 million of right-of-use assets and $243.7 million of lease liabilities at June 30.
Material changes and management commentary
- Management attributed Q2 growth to organic activity and acquisitions; it estimated approximately 76% of Q2 revenue growth was organic. Capital markets and origination volumes combined increased 33.8% year over year to $18.1 billion. Producer headcount increased 15.3% year over year to more than 1,800.
- Newmark acquired MLG Commercial and ACRES during the first half of 2019. Preliminary acquisition goodwill was approximately $27.8 million; combined acquired businesses contributed $1.7 million of revenue in the period.
- Q2 other loss, net was $3.7 million, including a $15.6 million mark-to-market loss on Nasdaq forwards, partly offset by equity income from a Cantor-controlled investment, gains on certain non-marketable investments, and Nasdaq share income. Six-month other loss was $13.4 million, including a $29.0 million Nasdaq-forward mark-to-market loss. These valuation changes can be volatile and are not necessarily cash losses in the period.
- Six-month mortgage servicing rights amortization was $49.9 million, including an $8.2 million impairment; Q2 included $6.6 million of impairment. Newmark also recorded $41.2 million of non-cash originated servicing-rights gains for the first half.
- Management cited a generally supportive commercial real estate environment and expected cash from operations, cash on hand and the $250 million revolving facility to support operations, growth and dividends. It did not provide specific revenue or earnings guidance in the supplied filing text. Management said it expected the quarterly dividend to remain $0.10 per share for 2019; the board declared a $0.10 dividend in July, payable September 5, 2019.
- Newmark reported compliance with its GSE capital and liquidity requirements and debt covenants. It exceeded Fannie Mae’s minimum net worth requirement by $329.2 million. Disclosure controls were deemed effective, with no material quarterly change in internal control over financial reporting.
Risks, contingencies and unusual items
- Revenue depends in part on transaction volumes and can fluctuate with commercial real estate markets, financing availability and interest rates. Management also highlighted competition for producers, acquisitions and integration, and GSE/HUD relationships and requirements.
- Newmark shares risk of loss on Fannie Mae DUS and Freddie Mac TAH loans. At June 30, serviced credit-risk loans totaled about $20.3 billion, with maximum potential loss of about $5.7 billion; only $9.9 million of that exposure was covered under the disclosed credit-enhancement agreement.
- The company had approximately $694 million of commitments to fund construction, rate-locked and other loans, with corresponding commitments to sell loans as funded. Acquisition-related contingent consideration and earn-outs also remain outstanding.
- Newmark is controlled by Cantor; related-party service charges, financing arrangements, investment relationships and transactions are disclosed. The dual-class structure gives Class B shares 10 votes each; Cantor and CFGM held all outstanding Class B shares, representing approximately 57.6% of voting power at June 30.
- In July 2019, a Cantor affiliate’s investment vehicle made a $146.6 million loan to a company in which Newmark’s CEO held a 19% interest. Newmark brokered the loan and received a $0.7 million fee; the audit committee approved the brokerage services and fee.
- Legal proceedings and regulatory matters arise in the ordinary course. Management said it could not estimate losses beyond accruals and did not expect pending matters, based on information then available, to have a material adverse effect. This is not assurance of outcomes.
Important facts for investors to verify
- Whether revenue growth and improved Q2 operating margin persist, and how much is organic versus acquisition-driven.
- Cash generation excluding mortgage-loan origination and sale activity, and the liquidity available after restricted cash and securities lending.
- Debt service and refinancing capacity, including the 2023 notes, revolver usage and renewal of short-term warehouse facilities.
- Future changes in Nasdaq-forward valuations and mortgage servicing rights assumptions, impairments and amortization.
- Credit exposure, funding commitments and continued compliance with GSE capital, collateral and liquidity requirements.
- Related-party governance, Cantor’s voting control, contingent acquisition payments, and the implications of the CEO-related loan disclosed after quarter-end.
- The basis for the stated dividend expectation and the distinction between GAAP results and management’s non-GAAP Adjusted Earnings measures.