Newmark Group, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Figures are unaudited; dollar amounts are in millions unless noted. Newmark provides commercial real estate brokerage, financing, loan servicing, property management and related services. It operates as a single segment and remained majority-controlled by BGC Partners following its 2017 IPO. The financial statements retrospectively include Berkeley Point; 2017 comparison figures were not recast for Newmark’s 2018 adoption of ASC 606.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $466.6 | $405.1 | $897.1 | $737.7 |
| Operating income | $25.7 | $55.2 | $78.5 | $91.1 |
| Consolidated net income | $4.3 | $55.2 | $36.8 | $92.2 |
| Net income available to common stockholders | $0.7 | $55.1 | $20.7 | $91.9 |
| Basic and fully diluted EPS | $0.00 | Not available | $0.13 | Not available |
- Revenue mix: Q2 commissions were $279.8, mortgage banking gains $41.9, and management services, servicing fees and other revenue $144.9. Capital markets revenue was $101.7 of commissions. Q2 operating margin was approximately 5.5%, versus 13.6% a year earlier; first-half operating margin was approximately 8.8%, versus 12.3%.
- Cash flow: First-half operating cash flow was negative $121.0, versus positive $190.8 in 2017. Excluding mortgage loan originations and sales, management reported operating cash flow of $64.3, versus $52.8. Investing cash flow was positive $12.9 and financing cash flow positive $309.9. Ending cash, restricted cash and regulatory-segregated cash totaled $375.3; unrestricted cash and cash equivalents were $60.3.
- Balance sheet and liquidity: Total assets were $2,837.1 and total liabilities $2,058.9 at June 30. Current assets were $1,298.8 and current liabilities $1,230.1. The company reported $258.7 of restricted cash pledged for Fannie Mae, described as excess over the minimum required balance. Its stated liquidity measure—cash and cash equivalents plus marketable securities, less securities loaned—was approximately $60.3.
- Borrowings: Long-term debt was $659.7, including $247.2 under the Converted Term Loan and $412.5 of related-party promissory notes. An additional $270.0 was outstanding under the BGC intercompany credit agreement, classified as current payables to related parties. Warehouse notes payable were $540.6, generally funding loans held for sale. Warehouse facilities had $950.0 in committed lines and a $325.0 uncommitted Fannie Mae facility.
Changes versus comparable periods
- Q2 revenue increased 15.2%; first-half revenue increased 21.6%. Q2 leasing and other commissions rose 23.1%, capital markets revenue rose 6.9%, and management services, servicing fees and other rose 58.1%. Mortgage banking gains declined 43.1%.
- First-half revenue growth reflected increases in leasing and other commissions (+24.0%), capital markets (+17.7%) and management services, servicing fees and other (+58.4%), partly offset by a 32.0% decline in mortgage banking gains.
- Profitability fell despite revenue growth. First-half operating income declined to $78.5 from $91.1; net income available to common stockholders declined to $20.7 from $91.9. Higher compensation, partnership-unit exchangeability charges, operating expenses, interest expense and taxes contributed. Common-stockholder income also reflects the company’s post-separation ownership structure and noncontrolling interests.
- ASC 606 increased reported management-services revenue and operating expenses by $24.5 in Q2 and $42.9 in the first half through gross presentation of reimbursable customer costs; management said this presentation change did not affect net income. Adoption also accelerated recognition of certain contingent leasing commissions and increased opening retained earnings by $16.5.
Outlook, risks and unusual items
- Management expects revenue and earnings to grow over time as hiring, acquisitions and broker productivity develop, and said newer brokers typically become more productive in their second and third years. It gave no specific full-year revenue or earnings forecast. It cited favorable commercial real estate demand and economic conditions, while noting potential effects from interest rates, market activity and transaction timing.
- BGC expected to pursue a tax-free spin-off, with the filing describing an intended end-2018 timeframe, but completion is discretionary and conditional. Newmark said it was pursuing its own credit rating and expected to repay or refinance $659.7 of BGC-related long-term debt and the $270.0 intercompany borrowing as steps toward the spin-off.
- In June, Newmark OpCo issued approximately $175 of exchangeable preferred partnership units to RBC, receiving $152.9 net cash, and entered into related forward contracts tied to future Nasdaq shares. The preferred units carry a payable-in-kind dividend and may convert into a fixed number of Newmark Class A shares, subject to revenue hurdles, in Q4 2019 and Q4 2020. Fair-value changes on the embedded derivative affect reported other income.
- Newmark’s Nasdaq earn-out provides for up to 9.9 million additional shares over approximately ten years, subject to Nasdaq meeting annual revenue conditions. The company sold 650,000 Nasdaq shares in the first half for $51.4 gross proceeds and held 100,000 at June 30. Management estimated more than $725 of future Nasdaq shares using the August 1 share price; this expected value was not recorded on the balance sheet.
- Credit and liquidity risks include variable-rate debt, short-term warehouse facilities requiring renewal, and GSE capital and collateral requirements. Newmark reported compliance with requirements and said it exceeded Fannie Mae’s minimum net-worth requirement by $456.8. Its maximum potential loss exposure on serviced Fannie Mae and Freddie Mac credit-risk loans was approximately $5.4 billion; reported DB Cayman credit protection covered a maximum loss exposure of approximately $0.1 billion at June 30, down from $1.2 billion at year-end.
- Legal proceedings include a trademark dispute over use of the Newmark name. A remaining injunction was under appeal; trial was scheduled for January 2019, and the company said no assurance could be given on the outcome. Management stated pending matters were not expected to have a material adverse effect, while noting outcomes were uncertain.
- After quarter-end, the board declared a $0.09-per-share dividend payable September 5, 2018 and doubled its repurchase authorization to $200.0. The company also extended a warehouse line maturity and announced that a $112.5 BGC promissory note would be repaid using a new BGC intercompany loan bearing 6.5% interest.
Most important facts for investors to verify
- Whether revenue growth translates into stronger operating margins and common-stockholder earnings, given lower mortgage banking gains and rising compensation and partnership-related charges.
- How the $121.0 first-half operating cash outflow reconciles to loan origination and sale activity, and whether reported liquidity is sufficient after distinguishing unrestricted cash from pledged and regulatory cash.
- The refinancing, maturity and interest-rate terms of the Converted Term Loan, BGC promissory notes, intercompany borrowing and warehouse facilities, and the implications for the proposed spin-off.
- The final dilution and economic terms of the RBC preferred units and forward contracts, including conversion hurdles and derivative valuation effects.
- The realizability and timing of future Nasdaq earn-out shares, which depend on annual revenue conditions and are not reflected as future value on the balance sheet.
- Developments in the Newmark trademark litigation and the extent of potential GSE credit losses versus available protection.