Newmark Group, Inc. — FY2021 Form 10-K
Business context and period. This annual filing covers the fiscal year ended December 31, 2021, not a standalone fourth quarter. Newmark provides commercial real estate brokerage, capital markets, mortgage origination and servicing, property and facilities management, valuation, consulting, and flexible-workspace services. It reported one operating segment. The business is seasonal: 34% of 2021 revenue was earned in Q4, versus 32% in 2020.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Revenue | $2.906 billion | $1.905 billion |
| Income before taxes and noncontrolling interests | $1.221 billion | $146.3 million |
| Consolidated net income | $978.1 million | $109.3 million |
| Net income available to common stockholders | $750.7 million | $80.1 million |
| Basic / fully diluted EPS | $3.91 / $3.80 | $0.39 / $0.39 |
| Net interest expense | $33.5 million | $37.7 million |
| Cash and cash equivalents | $191.3 million | $191.4 million |
- Revenue rose 52.6%. Leasing and other commissions increased 60.9% to $826.9 million; capital markets revenue rose 106.6% to $938.3 million; management services, servicing fees and other increased 46.2% to $915.7 million. Mortgage banking gains fell 27.5% to $225.5 million, principally due to lower noncash originated mortgage servicing rights (OMSR) gains.
- Reported earnings were heavily affected by $1.232 billion of net other income, primarily reflecting the accelerated Nasdaq earn-out and gains on Nasdaq securities. Accordingly, reported income from operations of $1.255 billion and its 43.2% revenue margin are not representative of recurring operating performance; before other income, the difference between revenue and operating expenses was approximately $22.1 million. Management also uses non-GAAP Adjusted Earnings and Adjusted EBITDA; those measures exclude specified items and should be considered alongside GAAP results.
- Operating cash flow was negative $48.7 million. Excluding cash flows from loan originations and sales, it was negative $63.0 million, including $484.4 million of cash used for the 2021 Equity Event. The filing says this operating-cash-flow measure would have been positive $421.4 million absent those Equity Event cash uses.
- Year-end liquidity was $575.9 million, defined by Newmark as $191.3 million cash plus $524.6 million of Nasdaq shares, less $140.0 million borrowed against pledged shares. The company also had a $465 million undrawn revolving facility and described itself as having no net debt. Long-term debt was $545.2 million, comprising 6.125% senior notes due November 2023; the $1.05 billion of warehouse borrowings financed loans held for sale and is a separate short-term funding arrangement.
- Total assets were $5.216 billion and total liabilities $3.531 billion. Mortgage servicing rights, net, were $550.3 million. The auditor identified MSR valuation as a critical audit matter because fair value depends on estimates including prepayment speeds, servicing costs, discount rates and escrow earnings.
Material changes versus FY2020
- Business activity rebounded from the pandemic-affected prior year. Newmark reported record U.S. investment sales and debt volumes; its overall notional volumes from investment sales, mortgage brokerage and multifamily originations increased 92.8% to $138.4 billion.
- Revenue growth was accompanied by higher expenses: total compensation and employee benefits increased to $2.185 billion from $1.278 billion, and operating, administrative and other expenses rose to $553.6 million from $294.4 million. The company attributed increases to higher transaction-linked compensation, the Equity Event, pass-through costs, resumed activity and acquisitions.
- Net other income increased from $15.3 million to $1.232 billion, mainly due to the accelerated Nasdaq earn-out. Nasdaq’s sale of its U.S. fixed-income business accelerated Newmark’s receipt of 6.222 million Nasdaq shares, valued at $1.094 billion at June 30, 2021. Newmark sold shares and settled forward transactions; it held 2.498 million shares valued at $524.6 million at year-end.
- Newmark acquired Knotel, a flexible-workspace provider, and a majority stake in France-based Deskeo, and also acquired a U.S. property-management business. The acquisitions contributed $75.6 million of 2021 revenue. Newmark ended its Knight Frank affiliation in Q3 and said it was accelerating independent international expansion.
- Newmark repurchased 20.24 million Class A shares at an average $14.37 per share. Its quarterly dividend remained $0.01 per share; dividends declared for 2021 totaled $0.04 per share.
Outlook, commentary and risks
- Management described improving commercial real estate activity and highlighted growth opportunities in capital markets, multifamily, industrial, life sciences, valuation and advisory, loan servicing, and corporate real estate services. It plans to expand internationally, invest in technology and talent, pursue acquisitions, and grow recurring or more predictable revenue streams. The filing does not provide a clear quantified full-year 2022 earnings or revenue forecast.
- Management cautioned that COVID-19, inflation, supply disruptions, rising interest rates, work-from-home patterns and changing demand across property types could affect transaction volumes and client needs. Brokerage and capital-markets revenue is transaction-dependent and can be volatile.
- Mortgage risks include Fannie Mae DUS loss-sharing, servicing advances, loan repurchase or indemnification obligations, and dependence on GSE and HUD approvals and funding facilities. The company reported $25.8 billion of credit-risk loans serviced and a maximum potential loss exposure of $7.8 billion; two loans were in default at year-end, with estimated Newmark loss exposure of approximately $2.3 million if liquidation losses occurred.
- Other risks include the November 2023 senior-note maturity and refinancing, variable-rate funding and LIBOR-to-SOFR transition, Nasdaq share-price and liquidity exposure, acquisitions and integration, litigation and regulatory matters, and cyber and data-security risks. Management said pending legal matters were not expected to have a material adverse effect, based on currently available information.
- Cantor controls approximately 55.8% of voting power through Class B shares, and the filing describes potential conflicts and related-party arrangements. A notable unusual item was a one-time $50 million bonus awarded to Chairman Howard Lutnick in December 2021: $20 million was paid in 2021 and the balance is scheduled in equal payments over three years.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Knotel and Deskeo were excluded from management’s and the auditor’s 2021 internal-control assessment; the filing says they are expected to be included in 2022.
Important facts for investors to verify
- Reconcile GAAP earnings to management’s non-GAAP measures and assess earnings excluding the accelerated Nasdaq earn-out, market-price changes and the 2021 Equity Event.
- Review the cash-flow impact of the Equity Event, the sustainability of operating cash generation, and the cash and share-count effects of repurchases and distributions.
- Track monetization of remaining Nasdaq shares, their market value and liquidity, and the terms and collateral requirements of the related-party repurchase financing.
- Assess MSR valuation sensitivity, including the effect of changes in prepayment, discount-rate and servicing assumptions, and monitor the auditor’s critical audit matter.
- Monitor DUS loss-sharing exposure, delinquent and defaulted loans, GSE eligibility and warehouse-facility renewals, as well as refinancing of the 2023 senior notes.
- Review acquisition integration and flexible-workspace performance, the Lutnick bonus and other related-party dealings, and the implications of Cantor’s voting control.