Business context and reporting period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2018. The registrant named in the filing is BGC Partners, Inc., not BGC Group, Inc. BGC operates Financial Services brokerage and technology businesses and Real Estate Services through publicly traded subsidiary Newmark Group, Inc. Comparative 2017 results were retrospectively adjusted to include Berkeley Point, acquired from an affiliate under common control.
Financial results and key metrics
Amounts below are in U.S. dollars; financial statement figures are unaudited.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $960.1 million | $848.9 million | $1,916.7 million | $1,632.1 million |
| Income before taxes | $65.9 million | $94.3 million | $199.1 million | $152.1 million |
| Consolidated net income | $50.0 million | $77.7 million | $147.4 million | $128.8 million |
| Net income available to common stockholders | $35.2 million | $52.9 million | $94.0 million | $89.7 million |
| Diluted EPS | $0.10 | $0.18 | $0.29 | $0.31 |
- Q2 revenue grew 13.1%, but expenses rose 17.8% to $896.2 million. Pretax margin fell to 6.9% from 11.1%; common-stockholder income declined 33.5% and diluted EPS fell to $0.10 from $0.18.
- For the first half, revenue increased 17.4%, pretax income 30.9%, and consolidated net income 14.4%. Common-stockholder income rose 4.7%, while diluted EPS declined to $0.29 from $0.31.
- Q2 Financial Services revenue grew 11.1% to $480.2 million and pretax income rose 27.6% to $108.2 million. Real Estate Services revenue grew 15.5% to $469.0 million and pretax income rose 16.1% to $96.4 million.
- Growth was broad in financial brokerage, including FX (+23.7%), energy and commodities (+16.1%), rates (+8.8%) and credit (+6.8%). Real estate leasing revenue increased 23.1%; mortgage banking revenue fell 43.1%, partly because Q2 2017 included a large loan transaction.
- Cash flow from operations was negative $194.2 million for the first half, versus positive $436.9 million a year earlier. Working-capital movements, including higher broker-dealer receivables, were significant; loan originations and sales also produced large offsetting cash-flow movements.
Balance sheet, liquidity and capital
- At June 30, total assets were $6.85 billion and total liabilities were $5.13 billion. Cash and cash equivalents were $398.5 million; restricted cash was $258.7 million and regulatory-segregated cash was $164.9 million.
- Management-defined liquidity was $453.4 million, down from $673.2 million at December 31, 2017. This measure includes cash, securities owned and certain marketable securities, less securities loaned and repurchase agreements; it excludes restricted and regulatory-segregated cash.
- Notes payable and other borrowings were $1.29 billion. The balance sheet also showed $130.0 million of short-term related-party borrowings, $5.2 million of other short-term borrowings and $540.6 million of warehouse notes payable, largely used to fund mortgage loans. The filing separately cites total indebtedness of $1.42 billion; the precise scope differs from total borrowings including warehouse funding.
- First-half financing included $324.2 million of net proceeds from Class A share issuance, $152.9 million from Newmark’s preferred-unit/Nasdaq-forward transaction, and $430.8 million of repayments of notes and other borrowings. Class A shares outstanding increased from 257.0 million at year-end to 290.9 million at June 30.
- Fitch and S&P affirmed BGC’s BBB- ratings with stable outlooks. The company reported compliance with applicable regulatory capital and liquidity requirements; regulated subsidiaries held $618.0 million of net assets and regulatory capital exceeded requirements by $386.2 million.
Changes, outlook, risks and unusual items
- ASC 606: Adoption increased Q2 revenue by $35.2 million and expenses by $30.7 million, a net pretax benefit of about $4.5 million. Gross presentation of reimbursable real estate management costs increased both revenue and expense without affecting earnings. Earlier recognition of certain leasing commissions also changed timing and comparability.
- Compensation and nonrecurring effects: Compensation and employee benefits rose 8.6% in Q2, while allocations and exchangeability charges for partnership units and FPUs increased by $56.3 million to $106.5 million. The filing attributes much of the latter increase to exchangeability grants. First-half other income included a $20.6 million fair-value gain on an investment; Q2 other income included a $2.8 million non-cash loss on the Newmark forward arrangement.
- Newmark separation: BGC intended to pursue a tax-free spin-off, but completion was discretionary and conditional, including Newmark obtaining its own credit rating and repaying or refinancing debt owed to or guaranteed by BGC and $270.0 million of intercompany borrowings. Management described an intention to complete the necessary steps by the end of 2018; the filing cautions that the spin-off might be delayed or not occur.
- Management outlook: Management projected 7%–10% year-over-year 2018 revenue growth for “post-spin BGC”—an illustrative business excluding Newmark and the Nasdaq earn-out, not consolidated-company guidance. It also cited expectations for growth in electronic brokerage and Real Estate Services and stated a dividend of $0.18 per share was declared for Q2. These statements are forward-looking and depend on market conditions and the proposed separation.
- Subsequent financing: After quarter-end, BGC repaid $240.0 million of 8.375% notes at maturity using short-term borrowings and cash, then issued $450.0 million of 5.375% notes due 2023, part of whose proceeds repaid those borrowings. BGC also announced redemption of $112.5 million of 8.125% notes, scheduled for September 5, 2018.
- Credit, market and legal exposures: The company’s GSE-serviced credit-risk loans totaled $19.2 billion, with a stated maximum potential loss of $5.4 billion; the estimated guarantee liability was $47,000. Legal matters are ongoing; management said currently available information did not indicate a material adverse effect but could not estimate additional losses for specific matters beyond accruals and disclosed amounts. Loan commitments were approximately $1.0 billion, with corresponding commitments to sell loans as funded.
- Other significant risks include volatile transaction-driven revenue, interest and foreign-exchange movements, refinancing and warehouse-facility availability, extensive regulation, cybersecurity and operational disruption, and related-party dealings with Cantor. The company disclosed $7.4 million of unrecognized tax benefits and stated its accounting for certain Tax Act effects remained provisional.
Most important facts for investors to verify
- Confirm the registrant identity and compare reported results with the retrospectively adjusted Berkeley Point and ASC 606 presentation.
- Reconcile operating cash-flow weakness and management-defined liquidity to working-capital movements, restricted cash, regulatory cash and near-term funding needs.
- Review debt maturity, refinancing and interest costs, including post-quarter note repayments and issuance, and distinguish corporate debt from warehouse financing.
- Track Newmark’s credit-rating and debt-refinancing prerequisites, intercompany exposures and whether the proposed tax-free spin-off proceeds.
- Assess dilution from equity issuance and partnership awards, the sustainability of earnings after exchangeability charges and fair-value items, and exposure to GSE loan losses and related-party arrangements.