Newmark Group, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; includes fourth-quarter results. The filing was signed March 15, 2019. Unless noted, financial amounts below are in U.S. dollars and millions. Berkeley Point results are included retrospectively in the comparative periods.
Business context
Newmark provides commercial real estate brokerage, capital markets, property and facilities management, valuation, consulting, mortgage origination and loan servicing. On November 30, 2018, BGC Partners completed the pro rata spin-off; BGC ceased to own Newmark equity, but Cantor Fitzgerald remained in control. Newmark reports one operating segment.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $2,047.6 | $1,596.5 |
| Operating income | $332.6 | $199.8 |
| Operating margin | 16.2% | 12.5% |
| Income before taxes and noncontrolling interests | $282.4 | $202.6 |
| Consolidated net income | $191.9 | $145.1 |
| Net income available to common stockholders | $106.7 | $144.5 |
| GAAP diluted EPS | $0.64 | $0.85 |
| Cash and cash equivalents at year-end | $122.5 | $121.0 |
Revenue increased 28.3%. Leasing and other commissions rose 32.5% to $817.4; capital markets revenue increased 17.9% to $468.9; and management services, servicing fees and other revenue increased 54.1% to $579.0. Mortgage banking gains declined 11.5% to $182.3. Revenue growth reflected organic expansion, hiring and acquisitions, as well as gross presentation of reimbursed client expenses under ASC 606.
Common-stockholder earnings fell despite higher operating income, principally reflecting increased income allocated to noncontrolling interests, higher interest expense and taxes. Other income included $87.2 million from Nasdaq earn-out shares, a $19.0 million mark-to-market gain on the RBC forward arrangement and a $17.9 million gain on investments carried under the measurement alternative. Nasdaq-related gains and derivative marks are not equivalent to recurring operating earnings.
Fourth-quarter revenue was $631.7 million versus $460.6 million in Q4 2017. Q4 2018 net income available to common stockholders was $17.8 million, compared with a $46.2 million loss in Q4 2017. The filing identifies seasonality: historically, revenue tends to be strongest in Q4.
Net cash used in operating activities was $332.4 million, mainly reflecting the timing and scale of mortgage loan originations and sales. Excluding those activities, management reported operating cash flow of $295.9 million. Investing activities provided $7.7 million; financing activities provided $336.7 million. Year-end liquidity, as defined by Newmark, was $171.4 million.
Year-end debt comprised $537.9 million carrying value of 6.125% senior notes due 2023 and $972.4 million of warehouse borrowings used to fund loans held for sale. The warehouse lines are short-term and collateralized by those loans. Newmark had no borrowings under its $250 million revolving credit facility or its separate $250 million Cantor credit agreement. Cash alone should not be compared with total debt without considering the corresponding warehouse-funded loans and restricted cash.
Material changes and unusual items
- Newmark issued $550 million principal amount of 6.125% senior notes in November 2018 and used proceeds, together with other funds, to repay prior term loans and debt owed to BGC. The carrying value of the notes was $537.9 million at year-end; stated interest is 6.125%, with maturity in November 2023.
- ASC 606 adoption increased opening assets by $64.4 million and opening retained earnings by $16.5 million, among other adjustments. It accelerated recognition of certain leasing commissions and led to gross presentation of certain reimbursable management expenses. The filing reports $86.2 million of additional pass-through revenue and expense; this presentation change did not affect net income for those pass-through amounts.
- Newmark completed acquisitions including valuation offices, Jackson & Cooksey, RKF and MiT National Land Services. The 2018 acquisitions contributed $28.5 million of revenue after their respective acquisition dates.
- Newmark issued approximately $325 million of exchangeable preferred partnership units to RBC and entered into related Nasdaq-share forward contracts. The instruments create potential dilution, preferred distributions and fair-value volatility.
- Newmark declared $0.36 per common share in 2018 dividends, of which $0.27 was declared and paid during the year. The board declared a further $0.09 quarterly dividend in February 2019.
Outlook, risks and contingencies
Management described continued growth plans through hiring, acquisitions, technology investment, cross-selling and expansion of multifamily capital markets. It said 68% of 2018 revenue came from comparatively predictable or visible businesses and expects its multifamily capital markets business to grow faster than the overall market. The filing provides no quantified 2019 revenue or earnings guidance in the supplied text.
Principal risks include exposure to U.S. commercial real estate cycles and transaction volumes; dependence on retaining producers; access to and renewal of short-term warehouse funding; GSE and HUD approvals, capital and liquidity requirements; Fannie Mae loan-loss sharing and loan repurchase or indemnification obligations; interest-rate and Nasdaq-share volatility; acquisition integration; and the company’s related-party and control arrangements with Cantor. Cantor held all Class B shares, representing approximately 57.6% of voting power at December 31, 2018.
Newmark reported compliance with applicable GSE capital and liquidity requirements at year-end and exceeded Fannie Mae’s most restrictive net-worth minimum by $322.3 million. Management said pending litigation and proceedings, based on currently available information, were not expected to have a material adverse effect, while noting outcomes cannot be determined with certainty. The filing also notes $294 million of commitments to fund loans and $351.6 million of future operating lease payments. Management and the auditor reported effective internal control over financial reporting; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Reconcile the $106.7 million of 2018 common earnings with consolidated net income, noncontrolling interests, preferred-unit distributions and diluted EPS; assess the impact of equity compensation and potential dilution.
- Separate recurring operating performance from Nasdaq earn-out income, RBC forward fair-value changes, investment gains and noncash mortgage servicing-rights gains and amortization.
- Review operating cash generation excluding mortgage originations and sales, warehouse-facility renewal terms, collateral requirements and post-year-end changes to temporary warehouse capacity.
- Assess the sustainability of mortgage servicing revenue and the associated Fannie Mae risk-sharing, repurchase, servicing and GSE/HUD approval exposures.
- Examine the terms and potential dilution of the RBC preferred units and forward contracts, including their revenue hurdles and settlement mechanics.
- Review Cantor’s voting control, related-party agreements, tax matters and potential post-spin tax indemnification obligations, as well as constraints on certain transactions intended to preserve tax-free spin-off treatment.