Newmark Group, Inc. (NASDAQ:NMRK) Q2 2023 Earnings Call Transcript

Newmark Group, Inc. (NASDAQ:NMRK) Q2 2023 Earnings Call Transcript July 28, 2023

Newmark Group, Inc. beats earnings expectations. Reported EPS is $0.46, expectations were $0.22.

Operator: Good day, and welcome to the Newmark Second Quarter 2023 Earnings Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Jason McGruder, Head of Investor Relations. Please go ahead, sir.

Jason McGruder : Thank you, operator, and good morning. Newmark issued its second quarter 2023 financial results press release and presentation this morning. Unless otherwise stated, the results provided on today’s call compare only the three months ended June 30, 2023 with the year earlier period. Except as otherwise specified, we will be referring to our results only on a non-GAAP basis, which include terms such as adjusted earnings and adjusted EBITDA. Please refer to the section of today’s press release for complete and/or updated definition of any non-GAAP terms, reconciliation of these items to corresponding GAAP results and how, when and why management uses them. You can find more information with respect to our GAAP and non-GAAP results on our website in today’s press release, the supplemental Excel tables and the presentation.

Unless otherwise stated, any figures discussed today with respect to cash flow from operations reflected the net cash provided by operating activities, excluding loan origination and sales as well as the impact of the 2021 equity event. Cash from the business is the same cash flow metric, excluding employee loans for producers and new hires. The outlook discussed today assumes no additional share repurchases, material acquisitions or meaningful changes in the company’s stock price. Our expectations are subject to change based on various macroeconomic, social and political and other factors. None of our long-term targets or goals beyond 2023 should be considered formal guidance. Also, I’ll remind you that information on this call about our business that are not historical facts are forward-looking statements within the Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

Such statements involve risks and uncertainties. Except as required by law, Newmark undertakes no obligation to update any forward-looking statements. For a complete discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see Newmark’s Securities and Exchange Commission filings, including, but not limited to the risk factors in our most recent Form 10-K, Form 10-Q, Form 8-K filing, which are incorporated by reference. Now I’m happy to turn the call over to our host, Barry Gosin, Chief Executive Officer of Newmark.

Barry Gosin : Good morning, and thank you for joining us. Despite the industry-wide headwinds, I have never been more excited about our future. We are on the cusp of a new market. The complex dynamics of a dramatically higher interest rates and shifting capital sources across both debt and equity requires a higher level of ingenuity and talent to provide different and creative solutions in this new world. Given the investments we have made, we are uniquely positioned to capitalize on this changing landscape. Market dynamics have changed. The criteria for incumbent lenders is shifting, which is creating a challenging environment for borrowers. The demand and requirement for equity is increasing and the providers of equity are changing.

Our sophisticated market professionals are required to solve the complex problems facing the real estate ownership market. We are the platform of choice for the best and brightest professionals who can develop and execute solutions on behalf of our clients. This is why we are winning an even larger percentage of the most important assignments in the real estate services business. For example, the FDIC recently announced a sale process for approximately $18.5 billion of loans by Newmark, representing a portion of the approximately $60 billion signature loan portfolio we’re handling. We served as a lead adviser to Blackstone’s BREIT on the recently announced agreement to sell their $2.2 billion self-storage portfolio to Public Storage. Newmark originated a $947 million Freddie Mac loan on Park La Brea, the largest single-asset multifamily financing in the U.S. since 2019.

We arranged the recapitalization of a life science building in Boston, one of the largest single building transactions in the U.S. this year. Newmark currently has well over $100 billion of equity and debt mandates. Please remember, Newmark is a real estate services provider. We do not own or invest in real estate. As interest rates stabilize, capital markets activity will begin to rebound towards the end of the year, and we expect there will be a robust back half of 2024. The resurgence of our higher-margin capital markets business, combined with our strong leasing, recurring revenue businesses and the investments we have made in expanding our platform will drive significant revenue and earnings growth. Additionally, our world-class debt platform will drive outsized growth over the intermediate term given the record $1.9 trillion of debt maturities through 2025.

With the sharp increase in interest rates and cap rates and the pullback in lending by banks and other traditional lenders, we believe a large and growing percentage of investors and owners will need to find alternative solutions. Goldman Sachs recently estimated that real estate-focused private credit funds will triple their share of U.S. commercial real estate originations to 30% between 2022 and 2027. We expect a significant portion of debt maturities to be resolved not only through refinancings, which will help our mortgage brokerage and origination businesses, but through more complex and sophisticated restructurings and recapitalization. This process has already begun with Newmark arranging several equity joint ventures and recaps for our clients thus far in 2023, with many other mandates in the pipeline, and we expect a growing number of owners and investors to turn to our best-in-class professionals for innovative financing solutions.

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We anticipate assisting private credit funds and other institutional investors to acquire a significant portion of the loans sold by banks and other lenders. U.S. real estate loan sales volumes were up by over 400% for the first four months of 2023 compared to the 2015 to 2019 average. And we anticipate a significant percentage of the over $3 trillion of outstanding non-GSE commercial mortgages will be — that will become distressed. We therefore expect banks and other lenders to sell an ever-increasing portion of the loans over the next few years. As a clear leader in loan sales, Newmark will generate dramatic growth from this countercyclical business, which partially offsets and replaces near-term declines in the sale of building. Growth in distressed loans and assets will lead to other opportunities for Newmark across its service line.

In addition, we expect to continue to outperform the market in leasing due to the investments we have made in industrial and retail brokerage, which augment our already strong office leasing business. We’re starting to see increased tenant demand in the office markets, led by ongoing return to office plans. With that, I’m happy to turn the call over to our CFO, Mike Rispoli.

Mike Rispoli : Thank you, Barry, and good morning. Newmark’s second quarter results were in line with our previously stated expectations. Total revenues were $585.8 million, down 22.4% year-on-year and up 12.5% sequentially. The year-over-year change was mainly due to a 63% reduction in overall U.S. investment sales and a 52% decline in industry-wide originations. Our leasing revenues were down only 4.3% year-on-year but grew 5.3% sequentially. We continue to benefit from our investments in industrial and retail, which represent nearly 50% of our year-to-date leasing volumes. Our servicing and other related fees grew 19.4%, and we also generated organic growth of 9.7% in GCS fees. Our fees from management services, servicing and other increased by 7.4% year-over-year and 16.2% sequentially.

Total expenses of $507.9 million were down at 11.5%. A decrease in compensation expenses reflect lower variable compensation that correlates with commission-based revenues, partially offset by expenses related to acquire companies and the addition of revenue-generating professionals. The increase in non-compensation expenses was due to acquisitions and higher warehouse interest expense. The latter of which is offset by higher interest income recorded as revenue and tied to the growth of Newmark’s GSE, FHA business. We remain ahead of schedule with respect to our $50 million annualized fixed cost savings target and expect to realize at least $35 million during 2023, of which $25 million will be realized in the second half of the year. Moving to earnings.

Adjusted EBITDA was $72.9 million versus $159.5 million. Our EPS was $0.18 compared with $0.46. Our fully diluted weighted average share count declined by 1.2% to $245 million. Turning to the balance sheet. We ended the quarter with $164.4 million of cash and cash equivalents and $774.1 million of total corporate debt. In July, we used cash from the redemption of a joint venture to repay $100 million of our revolving credit facility. Taking this repayment into account, our net leverage ratio was 1.4 times. Moving to outlook. We continue to expect full year 2023 revenues and adjusted EBITDA of approximately $2.5 billion and $425 million and to generate $300 million to $350 million of cash from the business. We have included a slide in our investor deck, which lays out in more detail our expectations for this year and why we believe revenues and earnings will exceed peak 2021 levels once markets normalize.

Excluding additional hires and acquisitions, over time, we expect our revenues to grow to nearly $3 billion and adjusted EBITDA to be approximately $620 million, both of which would exceed our best ever 2021 results. While our 2023 outlook for adjusted EBITDA is 29% lower compared with 2021, Newmark’s stock has declined over 60% since then or by more than double. We believe our incredibly strong growth prospects and low valuation make Newmark a compelling investment opportunity. And with that, I would like to open the call for questions. Operator?

Operator: Thank you. [Operator Instructions] And we’ll now take a question from Jade Rahmani with KBW.

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Q&A Session

Jason Sabshon : Hi. This is actually Jason Sabshon on for Jade. So there seems to be a steady stream of producers that are leaving their current firms to join Newmark. What do you think is driving that?

Barry Gosin : Well, we’re in a good place for high-earning brokers to work. We’re a talent-based business. We provide the infrastructure resources, the research. It’s just a good place to work. Plus we’ve — plus the best brokers want to be where the other best brokers are. And as we continue to get momentum hiring the best and the brightest, other best and brightest brokers want to be here.

Jason Sabshon : Got it. Thank you. And for my next question, are there any areas of the business where you have a sizable offering gaps that you could specifically point to?

Barry Gosin : Well, we do have white space that we’re expanding into. We’re expanding internationally. We bought three companies in the UK and we’re adding people as well. We have the rest of Europe, which we have a plan to expand there. And we have other — there are specific markets where we have some white space in various verticals that we’re already in, and we — it’s an opportunity for us to grow. So there are many opportunities for us to grow. We can grow significantly in the United States and even more significantly around the globe.

Jason Sabshon : Got it. Thank you. And as a follow-up to that, I guess, what M&A, if any, what M&A opportunities are you targeting? And what size deals do you think you consider?

Barry Gosin : Well, we generally like bolt-ons and tuck-ins. We’re not looking at any significantly large transactions because of the nature of friction when you merge two people with a significant amount of overlap. So it’s worked really well to target really with a laser focus on the things that we might be weak at and where we need additional help and support. And so we’ve been able to do that. And we’re going into markets and we’re adding where we need talent.

Mike Rispoli : We also have a lot of opportunities to grow in businesses that don’t require capital. So examples of that would be property management where it’s the same clients that we do capital markets business with. We have an opportunity to expand our tenant rep business, our GCS business. These are things that as we work better together and as we put our infrastructure better together over time, you’ll just see our management businesses continue to grow because it’s really just more of what we do well and doing more for our clients to help them manage their assets better.

Jason Sabshon : Great. Thank you for taking my questions.

Mike Rispoli : Thank you.

Operator: We’ll now take our next question from Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb : Hey, good morning. So two questions here. The first is, Barry, it definitely feels like the mood in real estate is better than earlier this year. It seems like people are realizing that we’re not going to have this wave of keys being thrown back to everyone, and it does seem like the markets are finding a footing yet still seems like there’s a lot to go through, especially, one, office leasing still remains slow; two, on the lending side, people are having to readjust to the Newmark’s. But that said, there seems to be a lot of equity capital, especially coming out of Japan. So when you put it all together, do you see that more of these loans and especially the stuff that you guys want to get involved in restructuring, do you think that will truly come to fruition?

Or is your view that this pent-up equity capital and the fact that people just realize that they need to blend and extend on their own, that some of that distressed opportunity that you’re hoping to tap into doesn’t materialize because sort of the market takes care of it in normal course?