Newmark Group (NASDAQ:NMRK) Q2 2020 Earnings Call

0:00 and the Newmark Group Second Quarter 2020 Financial Results Conference Call. All participants will be in the listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Jason Hargs, Vice President of Investor Relations. Please go ahead.

0:40 Thank you and good morning. We issued our second quarter 2020 financial results press release and a presentation summarizing these results this morning. Unless otherwise stated, the results provided on today's call compare only the second quarter of 2020 with the year earlier period. Any figures with respect to cash flow from operations discussed on today's call refer to net cash provided by operating activities excluding activity from loan originations and sales. We will be referring to our results on this call only on an adjusted earnings basis unless otherwise stated. We may also refer to adjusted EBITDA and cash flow from operations before lending activities. Please see today's press release for results under generally accepted accounting principles or GAAP. Please see the sections in the back of today's press release for the complete definitions of any such non-GAAP terms, reconciliations of these items for the corresponding GAAP results, and how, when, and why management uses them.

1:33 Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website and in our investor presentation. Any outlook discussed on today's call assumes no material acquisitions, share or purchases, or meaningful changes in the company's stock price. unless otherwise stated, the estimated value of the NASDAQ earn-out is based on the closing price on August 5, 2020. I also remind you that information on this call regarding our business that are not historical facts are forward-looking statements within the meaning of 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. These include statements about the effects of the COVID-19 pandemic on the company's business, results, Financial position, liquidity, and outlook, which may constitute forward-looking statements and are subject to the risk, but the actual impact may differ, perhaps materially, from what is currently expected. Excess is required by law.

2:28 Newmark undertakes no obligation to update any forward-looking statements. for discussion of additional risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements. See Newmark Securities and Exchange Commission filings including but not limited to the risk factors set forth in our most recent Form 10-K, Form 10-Q, or Form 8-K filings. I'm now happy to turn the call over to our host, Barry Gosin, CEO of Newmark Group, Inc.

2:53 Thank you, Jason. Good morning and thank you for joining us for Newmark's second quarter 2020 conference call. Joining me virtually on the call today are Newmark's Chief Financial Officer, Michael Rispoli, our Chief Strategy Officer, Jeff Gay, and our Chief Revenue Officer, Luis Alvarado. The second quarter was challenging for the company and the industry. We moved rapidly to protect the health and well-being of our employees. While our offices slowly begin to reopen, we continue to support remote working. Our professionals remain focused on the needs of our clients, providing strategic advice, consulting service, and market-leading analytics to help them navigate the current environment.

3:42 I'd like to take a moment to applaud our employees for their tireless work, dedication, and ingenuity. I would also like to thank our clients for the trust they've placed in Newmark as a strategic real estate advisor. Despite significantly lower industry transaction volumes, we generated $47 million of cash flow from operations. We finished the quarter with over $300 million in cash and a cash equivalent. Nearly $450 million in mortgage servicing rights and approximately $680 million of expected proceeds from NASDAQ that are not yet reflected on our balance sheet. These significant assets, taken together with Numark's operating earnings potential, represent a very attractive investment.

4:32 As we referenced in our earnings release, we attribute our results to three competitive advantages. Our strength in management services, our strong growth in GSE originations, and our outperformance in investment sales. We continue to improve our market share in U.S. investment sales in the second quarter. According to RCA data, our industry ranking improved to number three in the first half of 2020 from number five in the first half of 2019. We believe that the low interest rate environment, the significant available investment capital for real estate, and improving real estate credit markets coupled with the occurrence of price discovery will drive capital markets activity going forward.

5:20 Taking a look at the landscape across our industry, we expect multifamily and industrial to outperform other property types in the second half of the year. These asset classes are a strength of NMARC's platform and have historically represented nearly 40% of our revenues. Newmark is well-positioned to benefit from periods of market disruption and its recovery due to the strength of our platform and the significant amount of talented professionals that have joined the firm over the past several years. A professional's creativity, inventiveness, and drive provide us with a competitive advantage as economic activity accelerates. Remote working is likely to be more prevalent in the future, but our research shows that most companies' employees favor a return to the collaborative environment of the office. We expect lower office density to largely offset the increased amount of remote working. Regardless of the environment, we are prepared to seek out, create, and advise on opportunities for our clients.

6:28 We continue to prove that we are adaptable to current and future market conditions. The strength of Numark's culture and platform attracts and retains highly skilled revenue generators. As a company built on talent, we believe that diversity and inclusion makes us stronger and more competitive. We see this as a time to redouble our recruiting efforts to further enhance both the specialization and the diversity of our workforce. We are committed to broadening and expanding programs and initiatives to train, support, and advance our employees. We believe this creates sustainable organic growth for the company and its shareholders. With that, I'm happy to turn the call over to Mike.

7:16 Thank you, Barry, and good morning, everybody. In the second quarter, our revenues were down 30.4% due to the impact of the pandemic. Leasing was down 44.8%, and our overall capital markets business, including originations, was down 29.8%. Gains from mortgage banking activities increased by 53.2% due to a higher volume and a more balanced mix of GSE originations. Our multifamily mortgage originations were up 23% as compared to 14% for the industry. Management services, servicing fees, and other declined by 11.6% due to lower non-fee pass-through revenues and less interest income on escrow balances and yield maintenance fees in our servicing business, but were otherwise unaffected by the pandemic.

8:14 We expect management services and servicing fee revenues to be more resilient during the downturn. Moving on to expenses. Total expenses decreased by 25.4%, reflecting lower commission-based revenues and a $40.8 million reduction in support and operations costs. This is part of our effort to reduce approximately $100 million in support and operations costs in 2020. As demonstrated in the earnings presentation, Newmark has a highly variable compensation structure. In the quarter, our commission-based revenues declined by 43% and our commission-based compensation fell by 43%.

8:59 The variable nature of our expenses, combined with the cost reductions, contributed to our profitability despite the challenging environment. Turning to our earnings. Adjusted earnings per share were 10 cents, down 66.7%. Adjusted EBITDA of $45.6 million was down 59%. We are not providing specific revenue or earnings guidance for 2020 due to the ongoing uncertainty related to COVID-19 and its impact on commercial real estate services. However, we expect U.S. industry volumes in the third quarter will be similar to the second quarter.

9:45 Our support and operations costs will be approximately $40 million lower in the third quarter as compared to the year-ago period and similar to the second quarter expense savings. In the third quarter of each year, we record our income from NASDAQ, which is expected to be approximately $109 million for adjusted earnings based on yesterday's closing price. We received the shares of NASDAQ in the fourth quarter of each year, and because of the retained upside, we currently expect the earn-out will generate $36 million of additional liquidity for us in 2020. Moving on to the balance sheet. We maintained strong liquidity and credit metrics at the end of the second quarter. Total cash and cash equivalents were $306 million.

10:39 up $15 million from March 31st and compared to $164 million at year end. The company's net debt to trailing 12-month adjusted EBITDA was 1.4 times. Subsequent to the end of the second quarter, we repaid $75 million on our revolving credit facility. In our multifamily mortgage business, forbearance and serious delinquencies remain modest, at less than 0.3% of our Fannie Mae servicing portfolio. Despite the very low level of forbearance to date, we established a $125 million sublimit line of credit to fund potential principal and interest servicing advances at 100% should market conditions fundamentally deteriorate.

11:31 As of June 30th, we have approximately a half a million dollars of outstanding forbearance on our Fannie Mae loans. Operator, we would now like to open the call for questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your questions, please press star then 2. Your first question comes from Alexander Goldharb from Type of Sandler. Please go ahead.

12:10 Hey, good morning. So just a few quick questions. First, Mike, just so we're all on the same page, you said third quarter is expected to be similar to second quarter on a transaction side, expense side, and obviously that's excluding the NASDAQ. So should we think about the adjusted earnings being similar to second quarter? Is that a fair assumption?

12:38 Yeah, I think that's generally fair, Alex, plus the NASDAQ income that we discussed. I would mention that while the expense savings here over here are similar, the expenses in Q3 of 2019 were up, you know, maybe $5 to $7 million sequentially from Q2 of 2019. But otherwise, I think you have it pretty fair.

13:05 Right, but just on a late quarter basis, third quarter 2020 to second quarter 2020, apart from that, that should be sort of similar.

13:13 I think that's fair.

13:15 Okay, the second question is, you mentioned that comp was down 43%, and obviously, I think everyone on the call can feel for those people. But let me ask you a question. One of the issues that you guys have had is the dilution from increased share count. So if second quarter was down 40%, third quarter sounds like it's going to be similar, does that mean that we should be modeling and thinking about fewer shares issued this year into next? Is that a fair assumption, or how does this impact Thank you. Thank you.

14:15 Compensation and equity is about 10% of commissionable revenue. That's what it's been historically. And so if that revenue is down, the issuance of shares will be down. We continue to believe that a 2% long-term growth rate in our share count is what we're expecting to manage to. And if you look at where we are this year, we're actually down a little bit year over year in our share count because of some of the actions we took last year.

14:41 Right, but Mike, I guess in fairness, it sounds like this year and next should be below the 2% if you're issuing less shares this year.

14:50 I think that's fair.

14:52 Okay. And then the final question is, heading towards year end, you know, the tax-free spin ends, so you guys will be, from a corporate perspective, free to do a lot more. So can you just talk to us what you guys are thinking as far as future stock buybacks, Maybe on the P&L side, maybe because the accounting is always a source of questions, maybe simplifying, maybe just going to straight EPS or things that can simplify that. Given that you'll be out of the tax-free period, you'll have a lot more flexibility in your corporate activities. So maybe you could just talk to that.

15:29 Sure. Maybe I'll start with the share buyback question. As you know, Because we're still in the tax-free spinoff period, we can't have any sort of plan to buy back shares in a material way. But however that's said, the stock we think is very attractively valued as an investment right now, more than very attractively. We have a lot of balance sheet capital. We have a lot of cash on the balance sheet as well as future value in NASDAQ shares. I think we've proven in the past we can monetize that value. And if we think there's an opportunity to do that, we certainly will. So we're always going to look at the best use of our capital for the return to our shareholders. I think that's part of our DNA.

16:16 In terms of simplifying, we continue to try and make our financial statements clearer. I think you see we put out the supplemental tables in Excel that are on our website, which break down Our financial is in a lot of excruciating detail. We also have put out the table that's in the earnings presentation and within the COVID supplement for the first quarter, where we show you our commissionable revenues, our pass-through revenues, our expenses flow, and how you can model the business very simply for us going forward. So we will continue to take steps to make things simpler and easier. and, of course, we value your input as we go through that process.

17:00 Okay. Thank you. Thank you. Your next question comes from Jade Romani from KBW. Please go ahead. Good morning, everyone. This is Ryan for Jade. Barry, as we look into the second half of the year, you know, what are the key factors in your mind that will drive a pickup in transaction pipelines? and any color you can provide on how pipelines have performed through the second quarter and into July and if you're seeing any noticeable differences among markets, particularly those that have seen a pickup in COVID cases more recently.

17:45 People buy in anticipation of the future. Capital is generally long term, so there's Over $200 billion of dry powder in the U.S. I think that's actually life is more behind that. And certainly, you know, as we see or have a better view of the recovery in terms of the COVID, people will buy on anticipation of a vaccine, anticipation of therapy, and anticipation of just getting on with life. The pipeline is the pipeline. It's the same pipeline that we had pre-COVID. All those pent-up activities are still there.

18:33 We're seeing some markets start to clear up and independent of COVID. Some places in the multi-space, they're already are now becoming full-fledged memorandums. As the debt market clears, In terms of, you know, Freddie Fannie has been very, very active. Obviously, that business is up as the CMBS market is starting to clear up a little bit. And as soon as, you know, many of the, you know, the LIFOs figure out exactly what the risk is, they'll be more prolific about lending. They're all in the giving out money business.

19:20 So I think the combinations will be clearer and activity will pick up as people either accept this, there's a vaccine or there's a recovery, but we're feeling that activity is starting to move towards increasing. Great. And then on the multifamily side, Thanks for the stats on forbearance there. Curious how you're thinking about, you know, the risk to that outlook based on the potential for a reduction in government stimulus and then also, you know, your general outlook for volumes in your GSE business in the second half of the year.

20:04 Sure. Ryan, this is Jeff. The collection rates that we've seen in our portfolio has been very steady. The occupancy has stayed up and the anecdotal evidence that we're getting from our clients is that because you have many units that have two income earners in them, either because of roommates or couples, we're still and many others. We do believe that there is going to be some form of stimulus going forward. It's just not apparent exactly what that looks like. But our opinion is that the business remains robust and we should expect to see a similar pipeline in the second half that we saw in the first half.

20:52 Great. You know, if you look across the broader business, Barry, do you think that there's areas of the platform that have a greater potential for reacceleration in the near term and potential growth opportunities from this environment? You know, for example, one that comes to mind would be, you know, your loan sales business. You know, how have pipelines shaped up there? And, you know, is that an area you see potential growth in from just the volume of distressed businesses?

21:22 Well, we have been very active in the note sales. Many of them have been selling on par. The people who need liquidity have been selling the good stuff. As and if the stress continues for an extended period of time, depending on where the demand side of the business, office rents and coming back to office shows, you will begin to see things that are sold below par and more note sales. We're in a good position. We have a note sale group. and we're talking to people all the time and we have billions of dollars of note sales out in the market as we speak. That's certainly one. I think the one interesting thing of this period, the opportunity for all of the many people that we've recruited over the last few years, the last three, four years, who have come into the company out of the gate, Thank you for joining us.

22:48 as a much better company, really primed to take advantage of the acceleration of the market going forward.

22:57 Yeah, Ryan, I also want to add, you know, if you look at following on our business lines, the opportunity for our corporate service and property management has been significant. As people come out of this and everybody's looking to reduce costs and is looking for expertise, that has been an area of growth for us. and will continue to be an area of growth for us. And it is an area that, frankly, in the past, we have been smaller than our competitors, but we believe we'll be right there with them as this pandemic grows and as we come out of this into solving problems for our clients. Thanks for taking the questions. Thank you. The next question comes from Henry Coffey from Redbush.

23:47 Please go ahead.

23:49 So let me sound stupid in front of a large audience. I know it's this fall. The exact date on when you're past the two-year anniversary of the distribution is?

24:04 Sure, Henry. This is Mike. It's the end of November of this year.

24:09 And so we'll call it December 1st. And then When I look at your balance sheet, the principal use of any assets or investments or capital, and tell me if I'm thinking about this the wrong way, is really either mortgage servicing rights, which go up a little bit, but then there's an offsetting gain there, and that could be financed in one fashion or another. and then forgivable loans, which is a big part of, which is essentially a recruiting tool. And so everything else seems to have its kind of, and again, correct me if I'm wrong, everything else seems to have its offsetting liability.

25:01 Loans held for sale, well, that's easily funded. Is that the right way to be thinking about your capacity, your needs for capital versus your ability to buy back stock?

25:14 Yeah, I think that's a fair characterization of the balance sheet, Henry. But remember, we have now at today's or yesterday's value about $775 million of potential cash flow we could tap into related to our NASDAQ shares.

25:33 Okay, so it's $300 million of cash plus $700 million of NASDAQ stock.

25:39 I think that's fair, yeah.

25:41 Yeah, it's a big number is what we're all...

25:46 We're very comfortable with where we're at on the balance sheet right now in our capital capacity. And we'll certainly be thinking a lot about allocation of capital as the business starts to come back and activity resumes. And as we pass the two-year period, it'll be something we'll focus a lot on.

26:06 Right, right, right. So I was going to say, how much cash do you actually think you need to retain on the balance sheet to comfortably operate the business. You went from 163 million to 306 million during what is obviously a very difficult period and that's a lot of excess cash. How much of that cash do you need?

26:37 Certainly 300 million is a lot and that's one of the reasons we paid down part of the revolver at the end of the quarter. Thank you for joining us. The balance sheet of the company.

27:16 Great. Thank you. This is very helpful.

27:19 You're welcome. Thank you. Your next question comes from Michael Funk from Bank of America, Maryland. Please go ahead.

27:31 Yes. Good morning, guys. Thank you. Thank you for the questions. So just a quick question, if I could. One of your competitors said earlier that they didn't expect to see property sales recover until there was a recovery in leasing occupancy and visibility into rents. So this is the sequencing of revenue recovery. Curious if you agree with that.

27:58 Well, it depends how far the recovery goes. I mean, in Boston, we're selling properties. People, investors with $200 billion debt are thinking long-term. They're not thinking tomorrow. They're thinking once there's a level of price discovery, depending on what the particular food group is, They'll determine and make that value for themselves. Yes, there has to be some visibility into what the rents will be. In a lot of markets, there have been some resetting of rents. and those markets that reset the rent where they know this is the market and this is demand, those markets will accelerate their back to normal much faster than other markets.

28:54 But we're already seeing that. There are people now touring properties. The whole concept of remote working, there was a grand pronouncement by many CEOs about not coming back to work. I'm getting more and more calls from CEOs who realize that they're living off of, as the CEO of Microsoft called it, social capital, or I would say the reservoir of goodwill. It doesn't work. Productivity is down. People can't be trained. They need to be mentored. Recruiting, people don't want to be recruited to a virtual company. They need to come to a place to work.

29:39 And I think More and more, the realization that companies are going to have to come back to the office and the acceptance of that as the realization of productivity decline. There'll be more visibility into that fact. Buildings will be sold.

29:59 It's all great, Colin. I would generally agree with that. If I could ask one more, just hypothetically, let's assume that cap rates in the office do do tick back up, so you have lower like-for-like sales prices. How should I think about that as a potential headwind to recovery in that revenue stream for you?

30:22 Something I failed to mention is, you know, multi and industrial. I mean, people need a place to work. I mean, we live and, you know, we think that that's going to bounce back relatively quickly. And industrial hasn't missed a beat. I mean, our industrial brokers are doing very active and they're doing business relatively Thank you for watching. and buy with 2.5% money, I think that's a pretty good investment.

31:13 Considering $12 trillion of negative yield around the globe, it still offers a great opportunity to invest long-term in a country that is still growing. There was a Times article about the 1918 pandemic. If you remember, we had a war, we then had a pandemic, and then we had the Roaring Twenties. So from 1920 to 29, we had nine years of boom after way more people died as a proportion of the population in 1918. And we had just come off a war where think of the devastation for Europeans, et cetera. But we came back. The one thing that all these crises and disruptions and downturns have in common that they end.

32:09 Okay, and did you have a comment on just the mechanics of lower relevant or relative sales prices and the impact on revenue?

32:22 With interest rates as low as they are, we're seeing cases where the prices are actually going up in certain categories.

32:31 Great. Hey, thank you guys for the time. I really appreciate the insight. Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. Your next question comes from Patrick O'Shaughnessy from Raymond James. Please go ahead.

32:52 Hey, good morning. How patient can that dry powder that's waiting on the sidelines be? Could it be years before those proceeds are put to work or are there generally constraints on how long the capital remains committed before being invested?

33:09 You know, a lot of these investments have some time frame upon which they have to be returned to the investor. It depends on where, whether it's pension funds or private equity firms or sovereign wealth. Sovereign wealth, obviously, long term. But it's the job of the people that work there to put out money. And Even with some segment of the investment community, The question is whether they devote the amount of human resources to the funds that have already been put out. They come to a realization on price discovery. They sell those portfolios and then focus on buying for the new opportunities that they're going to get in the market that they can see going forward. So the one fund ends and a new fund starts.

34:09 So there's a regeneration of that activity, which we'll see as people have either visibility into where the cure is, visibility into where the economy goes, or acceptance of this is the new normal and we're going to go on with life.

34:29 Got it. Curious about the current environment in terms of attracting talent. Is now the time to try to pick up market share by trading? I mean, this is a good time to...

34:49 It's always a good time to recruit talent. We are a talent-based business, as we discussed. By getting the best people, you should have the best company, and that's our fundamental DNA. It doesn't have to be small companies. It's all companies. I mean, you know, the... We are the platform of choice for high-revenue generators. They want to be at the company. For us, it's really the aspect of being a good custodian of our cash and capital and doing it the right way considering where the world is. But we're encouraged by what we see.

35:32 Great. And then I think also on a strategic dimension, you guys have spoken in the past about global expansion plans. Would those generally be on hold in this environment? Or do you think about maybe getting more aggressive and progressing with international expansion due to maybe market disruptions and more attractive potential purchase prices?

35:58 We're always looking at opportunities. There's a great opportunity for us in Europe, Middle East, and Asia. We're conscious of that. We talk about it quite often. We're interested in it. It's a great opportunity. We also have great opportunities in the Americas to grow our platform and to fill in the white space and build on what we've created. So, you know, it is an opportunity for us.

36:27 Great. And the last one for me. What's the near-term outlook for valuation, appraisal, and the advisor type of revenue streams?

36:39 In our V&A business, we've actually seen a very steady flow of revenue. The mix has shifted a little bit. It's existing portfolio valuations and larger institutional assignments, but we haven't seen a drop-off relative to last year.

36:59 Thank you. Thank you. That does conclude our question and answer session. I would like to head back for any closing remarks.

37:13 So I'd like to thank you all for joining us, and we look forward to speaking to you again next quarter. And we hope that everyone here on this call remains safe and healthy. Thank you. Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.