Business context and reporting period
Newmark Group, Inc. (NASDAQ: NMRK) filed this unaudited Form 10-Q for the three months ended March 31, 2022. Newmark provides commercial real estate brokerage, property and facilities management, mortgage origination and servicing, and flexible workspace services. It reports one operating segment.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $678.2 million | $504.0 million; up 34.6% |
| Operating expenses | $579.7 million | $437.8 million; up 32.4% |
| Other income (loss), net | $(86.0) million | $(2.2) million |
| Income from operations | $12.6 million; 1.9% of revenue | $64.0 million; 12.7% of revenue |
| Net income attributable to common stockholders | $0.4 million; basic and diluted EPS rounded to $0.00 | $33.1 million; basic EPS $0.17 and diluted EPS $0.16 |
| Net cash from operating activities | $502.2 million | $291.0 million |
| Cash from operating activities excluding loan originations and sales | $2.3 million | $25.3 million |
| Cash and cash equivalents | $442.8 million | $191.3 million at December 31, 2021 |
| Long-term debt, carrying amount | $542.5 million | $545.2 million at December 31, 2021 |
Revenue growth was broad-based: management services, servicing fees and other rose 24.2% to $233.1 million; leasing commissions rose 34.9% to $199.0 million; investment sales rose 49.8% to $152.1 million; and commercial mortgage origination, net rose 39.9% to $94.1 million. Total compensation and employee benefits were $399.5 million, or 58.9% of revenue, versus $303.3 million, or 60.2%.
At March 31, total assets were $4.44 billion and total liabilities were $2.81 billion. Management reported $99.7 million of net debt, a company-presented figure, and a fully undrawn $600 million revolving credit facility. Warehouse borrowings were $571.7 million, down from $1.05 billion at year-end. The $550 million principal amount of 6.125% senior notes matures November 15, 2023.
Material changes versus the prior period
- Reported earnings fell sharply despite revenue growth, primarily because Q1 2022 other income included $87.6 million of realized and unrealized losses related to Nasdaq shares. Newmark sold its remaining 2.5 million Nasdaq shares during the quarter for $437.8 million and held none at quarter-end.
- Revenue growth reflected higher transaction activity and expanded businesses, including acquisitions. Acquired businesses contributed $32.7 million of revenue in Q1 2022.
- Compensation expense increased $93.5 million, largely due to $75.7 million of higher variable compensation associated with commission revenue growth, as well as increased activity and acquisitions. Operating, administrative and other expense rose $30.7 million, with acquired businesses a principal factor.
- Cash and cash equivalents increased from year-end, while marketable securities declined from $524.6 million to zero following the Nasdaq share sales. Investing cash flow was $426.8 million, primarily reflecting those sale proceeds; financing cash outflow was $677.5 million.
- Newmark amended and restated its revolving credit agreement in March, increasing capacity from $465 million to $600 million, extending maturity to March 10, 2025, and setting initial Term SOFR pricing at a 1.50% margin.
Outlook, risks and unusual items
The filing gives no specific company-wide revenue or earnings guidance. Management described U.S. real estate and capital-markets activity as improving and said it anticipated strong improvement in industry GSE multifamily activity during the remainder of 2022, citing higher 2022 lending caps. Newmark’s combined multifamily GSE/FHA and mortgage brokerage volumes increased 105.9% year over year to $7.4 billion, despite a reported industry decline in GSE multifamily origination volume.
Key uncertainties include transaction-volume and valuation cycles, rising interest rates and inflation, changing office-space demand, COVID-related effects, and integration and performance of Knotel and Deskeo. Newmark’s GSE servicing and origination activities also entail credit, liquidity and regulatory requirements. At quarter-end, its GSE credit-risk portfolio had $26.1 billion of outstanding principal and approximately $7.9 billion of maximum potential loss exposure; one loan was in default and one in foreclosure, with estimated Newmark loss shares of approximately $0.1 million and $1.1 million, respectively. No actual losses were incurred in the quarter.
Other items to note: Newmark had approximately $0.5 billion of unfunded loan and transaction commitments. The filing describes ordinary-course litigation but says management does not expect pending matters, based on currently available information, to have a material adverse effect. It also discloses substantial related-party arrangements with Cantor and a $50 million retention award approved for Chairman Howard Lutnick in December 2021, of which $30 million was scheduled to vest in later installments subject to the stated terms. After quarter-end, Newmark declared a $0.03-per-share dividend and completed acquisitions of BH2, McCall & Almy and Open Realty.
Management said it expects operating cash flows to fund the business and short-term liquidity needs. The board’s capital priorities include share and unit repurchases and investment in growth; Newmark repurchased 1.68 million shares in Q1 at an average $18.35 and reported $397.2 million remaining under its $400 million authorization at quarter-end. Subsequent repurchases through April 28 reduced remaining authorization to $317.8 million.
Important facts for investors to verify
- How much of the earnings decline reflects Nasdaq-related mark-to-market and sale losses, and how should recurring operating performance be assessed alongside GAAP results?
- Whether revenue growth and transaction volumes persist, and whether higher compensation and acquisition-related costs translate into improved operating margins.
- Cash generation excluding mortgage loan origination and sale flows, including the reported $2.3 million for Q1, and cash needs associated with working capital and commitments.
- Refinancing plans for the $550 million senior notes due in November 2023, alongside the terms and availability of the revolving and warehouse facilities.
- Credit performance and required liquidity for the GSE servicing portfolio, including the defaulted and foreclosed loans and the approximately $7.9 billion maximum potential loss exposure.
- Future repurchase and dividend levels, post-quarter acquisitions, related-party transactions and executive compensation arrangements; the filing states that future dividends remain at the board’s discretion.