Business context and reporting period
Newmark Group, Inc. is a commercial real estate services firm spanning leasing, investment sales, mortgage origination and servicing, property management, valuation, and advisory services. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. The company reports one operating segment.
Financial performance and position
Amounts are in millions of dollars except per-share data. Revenue mix and results reflect sharply weaker capital markets activity.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $585.8 | $755.4 | $1,106.6 | $1,433.6 |
| Operating income | $27.5 | $89.1 | $15.7 | $101.7 |
| Operating margin | 4.7% | 11.8% | 1.4% | 7.1% |
| Consolidated net income (loss) | $11.2 | $61.8 | $(5.1) | $62.5 |
| Net income (loss) available to common stockholders | $6.4 | $48.5 | $(3.9) | $48.9 |
| Basic and fully diluted EPS | $0.04 | $0.26 | $(0.02) | $0.26 basic; $0.25 diluted |
- Q2 revenue declined 22.4%; six-month revenue declined 22.8%. Investment sales fell 62.9% in Q2 and 58.6% year to date. Commercial mortgage origination revenue fell 35.9% and 44.7%, respectively. Leasing commissions declined 4.3% and 3.6%.
- Management services, servicing fees and other revenue increased 3.0% in Q2, but declined 3.0% for the half year; excluding pass-through revenue, the six-month category increased 1.8%.
- Cash and cash equivalents were $164.4 at June 30, versus $233.0 at year-end 2022; restricted cash was $87.3. Six-month operating cash flow was $(899.5), including mortgage-loan origination and sale activity. Excluding that activity, operating cash flow was $(96.4), or $71.7 excluding $168.1 of producer and new-hire loans.
- Debt totaled $774.1: $549.1 carrying value of 6.125% senior notes due November 15, 2023, and $225.0 drawn on the $600.0 revolving credit facility. On July 20, the company repaid $100.0 of the facility using proceeds from its investment redemption. Warehouse borrowings were $931.5, primarily funding loans held for sale; corresponding loans held for sale were $937.0.
- Total lease liability was reported as approximately $739.8. The flexible-workspace business accounted for $196.6, with $36.6 of Newmark guarantee or letter-of-credit exposure; contracted customer revenue and sublease income were approximately $176.2.
- Six-month dividends were $0.06 per share. The board declared a further $0.03 quarterly dividend payable August 31, 2023. The company repurchased 2.4 million shares during the first half at an average $5.68 per share; $378.9 remained under its $400 million share and unit repurchase authorization.
Material changes and unusual items
- Revenue weakness was concentrated in investment sales and mortgage brokerage amid higher interest rates, reduced lending, and lower transaction volumes. Compensation expense declined with lower commission revenue, but operating expenses as a share of revenue rose, compressing margins.
- Other income was $3.9 in Q2 2023, primarily from equity-method investment gains, versus a $15.3 loss in Q2 2022, largely from non-marketable investment mark-to-market losses. For the first half, other income was $0.9 versus a $101.3 loss in 2022, which included Nasdaq-share and investment losses. Newmark no longer held Nasdaq shares in 2023.
- Acquisitions included Gerald Eve, completed March 10 for total consideration of $113.0, and the purchase of the remaining Spring11 ownership interest. Gerald Eve contributed $33.4 of first-half revenue. The company also recorded a $9.2 goodwill write-off related to a disposition.
- Employee and partner loans, net, increased to $628.3 from $500.8 at year-end. Six-month cash used for these loans was a significant factor in operating cash flow excluding mortgage-loan activity.
- On July 1, 2023, Newmark redeemed its 27% interest in a Cantor-controlled joint venture and received $104.7 in July. This is a post-quarter event, not June 30 cash.
Outlook, commentary, and risks
- Management expects U.S. investment sales and mortgage brokerage volumes to decline year over year through at least Q4 2023, with volumes beginning to rebound near year-end. It expects stabilized interest rates and a capital-markets recovery to support growth, but gives no quantified company revenue or earnings guidance in the provided filing text.
- Management cited subdued near-term activity but ongoing client engagement, substantial investor dry powder, and significant commercial real estate debt maturities as potential longer-term opportunities. It emphasized growing recurring or more predictable revenue and reducing near-term buybacks to prioritize hiring and acquisitions.
- Key risks include persistently high or volatile interest rates, weak commercial property transaction and lending markets, office-sector demand and property-value declines, refinancing availability, and credit-market disruption. The business is transaction-sensitive and seasonal, typically strongest in Q4.
- Newmark shares loss risk on Fannie Mae and Freddie Mac loans: serviced credit-risk loans had $28.2 billion principal outstanding and approximately $8.6 billion maximum potential loss at June 30. The recorded financial guarantee liability was $28.5; one delinquent loan had an estimated Newmark loss share of approximately $0.5.
- Two derivative actions challenge the 2021 partnership-unit exchange and $50 million executive retention bonus; the company says the claims lack merit, but outcomes are uncertain. A separate former-partner class action alleges contract and antitrust violations and seeks at least $5 million in damages. Management says pending matters are not expected to materially affect the financial statements, but cannot estimate losses beyond accruals.
- Related-party and governance considerations include Cantor’s control (Class B shares represented approximately 58.2% of voting power), shared services, and transactions with Cantor affiliates. The filing reports effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- How the company plans to refinance or repay the $550 million senior notes maturing November 15, 2023, and the resulting financing cost and liquidity impact.
- Whether capital-markets transaction volumes stabilize as management anticipates, and whether Newmark sustains leasing and GSE/FHA origination performance against industry trends.
- The drivers, collectability, and future cash requirements of the $628.3 million employee and partner loan balance, and the effect of producer hiring investments on cash flow.
- Credit exposure and reserve adequacy for GSE risk-sharing guarantees, alongside warehouse funding levels and covenants.
- Developments in the executive-compensation and former-partner litigation, and the implications of Cantor control and other related-party arrangements.
- Actual post-quarter use of the $104.7 million joint-venture redemption proceeds, including the $100 million credit-facility repayment and any remaining liquidity or capital deployment.