Business context and reporting period
Newmark Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company provides commercial real estate brokerage, capital markets, property and facilities management, mortgage origination, and loan servicing services. Its results include Berkeley Point, retrospectively consolidated following its 2017 acquisition.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $518.8 million | $398.2 million | $1,415.9 million | $1,135.9 million |
| Income from operations | $162.9 million | $98.7 million | $241.5 million | $189.8 million |
| Consolidated net income | $115.6 million | $98.5 million | $152.3 million | $190.6 million |
| Net income available to common stockholders | $68.2 million | $98.8 million | $89.0 million | $190.7 million |
| Basic EPS | $0.43 | Not applicable | $0.56 | Not applicable |
- Revenue mix: Q3 leasing and other commissions were $203.9 million; capital markets $115.4 million; mortgage banking gains $52.0 million; and management services, servicing fees and other $147.5 million.
- Cash flow: Nine-month operating cash flow was negative $636.4 million, largely reflecting mortgage loan originations and sales. Excluding those activities, management reported operating cash flow of $133.7 million, compared with $99.5 million in the prior-year period. Investing cash outflow was $16.5 million; financing cash inflow was $866.6 million.
- Liquidity: At September 30, cash and cash equivalents were $70.6 million, restricted cash $260.6 million, and marketable securities $93.7 million. The company’s defined liquidity measure—cash and cash equivalents plus marketable securities, less securities loaned—was $155.7 million. It reported compliance with its covenants and GSE capital and liquidity requirements; Fannie Mae net worth exceeded the minimum by $475.1 million.
- Debt and funding: Warehouse notes payable were $1,131.8 million, backed by loans held for sale of $1,132.7 million. Long-term debt was $434.0 million, and borrowings under the BGC intercompany credit agreement were $382.5 million. The filing also describes $300.0 million owed under the 2019 Promissory Note. These balances are distinct from warehouse financing.
- Margins: Reported income from operations was 31.4% of revenue in Q3 and 17.1% for the nine-month period. These figures include other income, notably Nasdaq earn-out income, and should not be read as recurring operating margins.
Material changes versus prior comparable periods
- Q3 revenue rose 30.3%; nine-month revenue rose 24.7%. Leasing commissions increased 28.6% in Q3 and 25.7% year to date; capital markets revenue rose 17.4% and 17.6%, respectively.
- Management services, servicing fees and other increased 53.9% in Q3 and 56.8% year to date. A significant portion—$21.1 million in Q3 and $63.9 million year to date—came from gross presentation of reimbursable pass-through revenue under the newly adopted revenue standard, with corresponding expenses and no stated net-income effect.
- Nine-month mortgage banking gains fell 19.2%, mainly reflecting lower GSE and FHA originations against a prior-year period that included a $2.2 billion transaction. Excluding that transaction, the company said origination volume increased approximately 24.5% year over year.
- Common-stockholder net income declined despite higher revenue and consolidated operating income. The filing cites higher income taxes after the separation, increased allocations to noncontrolling interests, and higher compensation and partnership-unit costs. Nine-month interest expense also increased substantially versus the prior-year period.
- Q3 other income included approximately $84.9 million related to Nasdaq shares earned and $9.1 million from fair-value changes in the RBC forward arrangement. Nine-month other income also included Nasdaq earn-out income, derivative gains, and $5.0 million of equity-method investment income.
Outlook, commentary, risks and unusual items
- Management expects revenue and earnings to grow over time as recent hires and acquisitions mature, and says producer headcount increased 13% year over year to 1,727 at September 30. It provided no specific numerical earnings or revenue guidance.
- Management described the commercial real estate environment as supportive, citing economic and employment growth, demand for office, industrial and multifamily property, and strong investment activity. It cautioned that transactional capital-markets revenue is less predictable and seasonal.
- The company adopted ASC 606 on January 1, 2018. Adoption increased opening retained earnings by $16.5 million and noncontrolling interests by $2.3 million; it accelerated recognition of certain leasing commissions and changed some reimbursable management-service revenue and expense presentation to gross.
- After quarter-end, Newmark issued $550 million of 6.125% senior notes due 2023, receiving approximately $537.9 million net proceeds. It repaid the remaining $134.0 million Converted Term Loan and intercompany borrowings; it stated that it planned to repay the $300.0 million 2019 Promissory Note before the planned spin-off. The stated coupon is higher than the 5.375% rate on that related-party note.
- BGC announced approval of a tax-intended spin-off, targeted for November 30, 2018, with an estimated distribution of approximately 0.4613 Newmark share per BGC share based on then-current share counts. Completion remained subject to conditions and BGC’s discretion.
- Key risks include transaction-volume and interest-rate sensitivity; renewal or availability of short-term warehouse funding; GSE capital, liquidity and loan-guarantee obligations; reliance on relationships and services involving BGC and Cantor; tax and spin-off execution; and litigation over use of the Newmark name. The company reported that the trademark case remained pending, with trial scheduled for January 2019 (the filing text gives inconsistent trial-date details).
- The company reported no material changes in internal control over financial reporting and concluded disclosure controls were effective as of September 30, 2018. It said pending legal matters were not expected to have a material adverse effect, while noting outcomes could not be determined with certainty.
Most important facts for investors to verify
- Whether the planned spin-off occurred as scheduled, its final distribution ratio, and any resulting changes in control, ownership, or exchangeable units.
- Completion and terms of the planned repayment of the $300.0 million 2019 Promissory Note, and the resulting total debt, interest cost, maturities, and liquidity after the senior-note refinancing.
- How much revenue growth reflects underlying activity versus ASC 606 gross pass-through presentation, and the recurring contribution of Nasdaq earn-out and derivative fair-value income.
- Trends in GSE/FHA loan originations, servicing portfolio performance, warehouse-facility renewals, and exposure under loan guarantees.
- Developments in the Newmark trademark litigation, tax accounting under the Tax Cuts and Jobs Act, and the RBC exchangeable preferred units and forward contracts.