Q3 2019 Earnings Call
<unk> earnings Conference call.
I'm all participants are in listen only mode. After the speakers presentation, there will be a question and answer session.
The question drink. The section you will need to press star one on your telephone please be advised us to this conference is being recorded actually require any further assistance. Please press star zero.
Well not surgical over to Jason hard VP of Investor Relations, Sir you may begin when you're ready.
Thanks, and good morning.
Third quarter 2019 financial results.
That's what we've done a presentation summarizing these results this morning.
You can find these documents.
Yes dot com.
I'm not going to watch stayed at the results provided on todays call compare only the third quarter 2019 would be your earlier period.
We'll be referring to more results on this call me on an adjusted earnings basis, unless otherwise stated we may also refer to adjusted EBITDA.
Today's press release for results under generally accepted accounting principles.
Huh.
We 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 to the corresponding GAAP results in how when and why medical uses them.
No information with respect for GAAP and non-GAAP results much on today's call is available on our website.
That's a presentation.
Keep in mind, you that information.
Regarding our business that are not historical facts are forward looking statements within the meaning of section 20 Sevena. The Securities Act a 1933 as amended and section 21 Securities Exchange Act to not get 34, as Amanda such statements involve risks and uncertainties, except as required by law Newmark undertakes no obligation to update any forward looking statements.
For discussion of additional risks and uncertainties, which could cause actual results. It ever for most contain forward looking statements CE Mark securities and it seems too much and filings, including but not limited to the risk factors set forth in our most recent Form 10-K Form 10-Q .
Finally.
I'm happy to turn the call over door Whos very golf.
Thank you Jason.
Good morning, and thank you for joining us for new marks third quarter 2019 conference call.
With me today, our new marks Chief Financial Officer, Mike.
Our president of multifamily capital markets Jeff.
And Lou Alvarado, our Chief revenue Officer.
Newmark generated 13% growth in revenues showing improvement across all of our major business lines with particular strength in capital markets and mortgage banking.
I'm happy to report that the company's board of directors declared a qualified dividend of 10 cents per common share.
Since closing price this translates into a yield of 4%.
No more continues to hire the industry's most talented professionals who are drawn to.
But no real culture.
Activity enhancing technology and client focus.
This is reflected by 6% growth in front office headcount and 5% improvement in revenue per producer in the quarter.
For the trailing 12 months ended September Thirtyth, a revenue per producer was up 7%.
Year to $914000.
As we continue to generate higher percentage of our revenues from recurring businesses, we no longer plan to highlight.
Activity metrics on a quarterly basis, beginning next year.
This is consistent with our full service peers.
Turning to the industry and cap research estimates that overall U.S. investment sales volumes were down 6% year on year in the quarter and down 2% over the first nine months of 2019.
According to more the mortgage bankers Association overall commercial mortgage originations are expected to increase 14%.
2009.
We believe that new more continues to gain market share as our volumes across investment sales mortgage brokerage and originations increased 38%, 32%, respectively in the third quarter and year to date.
Our GLC originations grew 43% led by $1.3 billion transaction in the third quarter.
Our research team estimates that the average vacancy rate for office improved 50 basis points.
Points year over year to 12.8%.
Industrial was flat at 5.1%, while retail vacancies rose.
70 basis points compared with the earlier.
Our leasing revenues increased by 5% in the third quarter, an 11% today.
As a result of the strong 22% growth we generated in the second quarter of 2019.
We remain enthusiastic about the growth prospects for Newmark combination of our top talent.
Technology, and our proven ability to cross sell and collaborate we'll continue to drive growth.
Our platform.
With that I'm happy to turn the call over to Mike.
Thank you Barry and good morning, everyone.
In the third quarter revenues increased by 13.1%.
$586.6 million.
Year to date or revenues are up 12%.
Our compensation expenses increased 17% in the third quarter.
12.5% year to date.
Primarily due to higher revenues and continued hiring of leading industry professionals.
Non compensation expenses were up 9.4%.
The percentage of revenue non compensation expenses were 76 basis points lower year over here.
In the past several years Newmarket acquired approximately 50 companies.
We have identified opportunities to streamline our operations.
The integration of these various businesses.
We believe the result of these actions.
We'll generate in excess of $15 million well the annualized savings by the end of 20 Twond.
We will update you on our progress during the coming here.
Turning to our quarterly earnings.
Our pretax adjusted earnings were up six point bought person.
And 12.9% year to date.
Adjusted EBITDA improved 4.3%.
At 8.8% year to date.
Pre tax adjusted earnings margin was 22.1 person in the first nine months of your and our adjusted EBITDA margin was 24.8%.
Our tax rate for adjusted earnings was 15% versus 13.3% a year earlier.
Fully diluted post tax adjusted earnings per share increased to 60 cents.
We expect our fourth quarter tax rate.
To be lower than the fourth quarter 2018 rate of 18.1%.
We also expect or fourth quarter fully diluted weighted average share count to be lower than the 267.6 million last year.
During the third quarter 2019, Newmark repurchased 2.3 million shares of class a common stock for $20.1 million that an average price of $8.81 per share.
Fully diluted period and count.
Was 266.8 million.
Down from 268 million at year end.
A weighted average fully diluted share count for adjusted earnings.
It was 260.4 billion.
So 1% sequentially and up 2.2% year over here.
Moving onto the balance.
Total liquidity was $121.4 million that's December 32019.
Our unsecured long term debt was $598.6 million.
Did was $477.2 million.
Net debt to trailing 12 month adjusted EBITDA remained at 0.9 times.
Given the strength of our balance sheet.
$50 million credit facility strong cash flow generation from the business and low leverage.
Remain well positioned to continue our group.
Turning to guidance for 2019.
We expect the fall.
Revenue revenues in the range of 2 billion to over 25 million to $2.275 billion.
From 2.048 billion in 2018.
Adjusted EBITDA in the range of $560 million to $580 million.
For bother to 24.4 billion last year.
Adjusted earnings Tacttthree between 14, and 60% compared with 14.8% in 2018.
Adjusted earnings per share between $1.60 to $1.68 versus $1.50 2018.
We also expect 2019 fully diluted spot share count to be flat to down 1% from the 268 million shares outstanding.
Number 31 2018.
[noise] Corral book assumes no material acquisitions are meaningful changes in the company stock price.
Operator, we would now let's open the call for questions.
Thank you to ask a question you want me to press Star one on your telephone to withdraw your question. Please press the pound or Hush Keith. Please standby will be compiled acuity roster [laughter]. Your first question comes from the line of Jade Rahmani from KBW. Please go ahead.
Good morning, and thank you for taking the questions [laughter] can you talk about what you're seeing on the recruiting front.
Which areas you believe hold the most promise in terms of attracting talent and also whether you're seeing any fallout from changes that have happened that a couple of your largest competitor such as eastdil and HFSA.
We are doing very well on the recruiting but.
In fact, it's it's really the mainstay of our president growth strategy.
As we continue to elevate the brand and the.
The company is success around a variety of different areas.
We are seeing a the top level of talent, who wants to come to the platform and it's very exciting for us I.
I look forward to having a very robust recruiting year.
[laughter] have you seen any have you seen any friction points or a fallout from the two firms I mentioned.
Anytime there is mergers.
Consolidation it creates friction.
When winter when a company has too many people in a in a particular space.
You killed category and then one less player that.
Goes into a beauty contests to win a piece of business.
It becomes a swab that a bit of an opportunity for all of the wall of the peers, who remain and that's a so that for US that's been a good thing.
[laughter] can you comment on the compensation structure of new hires and if that's changed at all in terms of mix of cash and equity at specifically on the equity portion can you comment on the type of security that's being issued.
And when you would anticipate it being factored into the diluted share count.
Sure Hi, Jay This is Mike you know, we've historically views around 65% cash and 35% equities.
For our new hires youre seeing that mix change a little bit maybe it's closer to 70 30 now.
The cash is or maybe even 70 525 or the pass through the forgivable loan.
Which is just expires at the end of their contract.
And the equity or restricted stock units to travel.
That's been period over the contract Huh.
That's that's the current mix.
And the restricted stock has has that changed in terms of how it's structured.
Did the prior restricted stock have a set vesting period.
In the past, we use partnership units, which.
Didn't help vesting schedule, but were given exchange rates over time.
There was put to talking it's just how the street dosing schedule.
Okay. So did I mean, the key question is is there anticipated dilution in the future that we're just not.
Seeing it you know evidently at the present time.
Sure I think we've spoken in the past them, we continue to say that our target going forward is two person.
On average over the next.
Yes.
Okay.
Just on the capital market side can you comment on where you saw the greatest strength.
Maybe by property type or geography.
They're continued continues to be an enormous amount of interest investing in real estate.
The.
The best asset class in terms as long term return.
With negative interest rates, you know, putting putting money in the U.S.. It's it's a good safe investment.
Across all categories some more.
Aggressively than others.
The core in some markets is pricey, but on the west coast and the growth markets are still doing incredibly well.
Value added opportunity.
Multifamily is still has a good runway industrial skilled still very active.
And.
Even in retail we're seeing some green shoots with respect to repricing and discovery we have.
No we have a business in selling some of those malls that have been stress.
Thanks for taking the questions.
Your next question comes from a line of Alexander Goldfarb from Sandler O'neil. Please go ahead.
Hey, good morning, good morning.
Just two questions.
The first is on the on the guidance you guys have reduced your assumption for for share count, which obviously good thing and yet the guidance range merely narrowed. So can you just talked about some of the factors that we're sort of in there because before was zero the plus one out of share count now with zero debt.
And one so ticket yeah.
Yeah, good swing and yet they are the guidance merely narrowed so what are some of the offset that didn't allow guidance actually increase.
Good morning, Wallets I think that you look at all guidance, it's been pretty consistent.
Points.
Well, yes.
We.
Did you see splits in the pipeline in the business.
Looking at our adjusted EBITDA guidance, it's pretty consistent.
Thank you at the midpoint it hasn't changed much too often you.
Share counts changed a little bit, but not enough to really drive.
Chains and yes.
And we still feel good about the overall.
As a company for you.
Okay, and then just sort of big picture I mean, you guys have made some tremendous steps. This year you have proven communication, obviously delivering good results you still have another year of rich toward the tax free spin period expires.
What are your thoughts on you know as you over the next year seeking to simplify the corporate structure, maybe you know with the with.
The BDC yeah, the Howard let nextshares that the majority what are some of your thoughts Barry I'm trying to simplify nu mark to try and unlock the value that I think is depressing the shares but obviously you guys have good underlying growth. So maybe you could just talk about your thoughts.
For what you could do from a corporate structure over the next year to try and improve the value.
You know we've had this conversation that's just a few times Alex.
Oh, I know, but you're you're putting down really solid results Bury it show and so it's sort of the next level right.
I sold a business to too.
BGC.
One of the the things that was attractive for me and I think is attractive to the people that sell the Companys das is knowing who's running the company and whose committed to building an enterprise.
It's just an enterprise to go quarter to quarter or is this an enterprise to build real value long term by.
Domination in the marketplace.
And that requires vision and commitment in the long term and generally all of the actions in activities that have occurred over the last seven years has been a result of a view that is out there to create a great company and it's all coming together and so I personally I think.
Having the structure we have is it works.
Much of the investors in our company our investors who are here for the short duration those people, who believe in our company and want to invest for the long term should invest in this company for the long term. So I'm not I don't Theres no I don't think there's any plans to do changes structure. It's I think it's a structure that actually works.
Better for people, whose interest so mining.
Because the commitment to being a shareholder for the long duration is there has been as didn't exhibited by one our investment in the company and to.
The steadiness of ours are.
Our ownership of that stuff.
Okay. Thank you Barry.
Your next question comes the line of Jason Weaver with Compass point. Please go ahead.
Hey, good morning, Thanks for taking my question just touching once more on the capital markets results. I know you mentioned, you're not disclosing productivity metrics any longer but can you just bifurcate a little bit whether this is due to headcount growth or or or whether that's you know organically within.
Individual broker productivity.
Well, Jason I think as you've seen in the results were growing both on head count and we're drilling a broker productivity.
We did a.
Significant amount of telling.
Starting in the fourth quarter of last year.
All the way through the third quarter this year and.
I think we've talked about.
Six to 12 month ramp up of that pelon.
So we're just starting to see some of the production from that so now.
We think that will continue to drive earnings growth isn't muscle.
Got it. Thank you and then one more on on the balance sheet. We saw an S&P headline expecting you to run the company between one and half two times leveraged compared you know that's compared to your 0.9 ex today can you talk a little bit about your appetite for leverage and or M&A at this point in the cycle.
Yeah, I think S&P as a little bit of a different metric in the way they measure it but I think overall the all you know reaffirmed the leading out working with a stable guidance, but you know I think we have always said, we want to maintain our metric within one they have time to less.
Good 0.9 times on the way we measure it now.
We could libre dealt with the right field, but we're not going to overpay for.
The deals in the market will pay in appropriate place, we see the like deal.
I think it's going to help us grow the company's long term.
Alright, thank you.
Your next question comes online as Michael Fox with Bank of America. Please go ahead.
Hey, good morning, guys. Thank you for taking the questions Amit I mean, it's got pulled back a little bit higher level commentary here as well you know very strong investment sales during the quarter I'm better than we were expecting so just maybe some more color on you know where you're seeing strength there kind of regionally you made the visibility into 'em that metric for us.
For Q and on 2020 to start.
Sales have been very active on both coasts all the coastal markets and for different reasons. So.
We're continuing continuing to see.
A lot of activity the multifamily space a lot of activity and a good solid cash flowing even core assets.
$200 billion.
Dried powder in the marketplace. There was 100, another 100 billion around the globe.
It makes for a very fertile market.
And they don't me I'm on the productivity Mike I. Appreciate you don't want to keep giving this kind of into perpetuity.
On a special metro keeping given but.
Helping us thinking about modeling longer term and where do you think you can take out that metric you ask you kind of fully ramped pure employees.
We've always said our target has been to get to get that number $2 million anymore.
And we'll continue to strive to get to that number and eventually grow beyond that.
Okay.
Great and then just on the eat on Fannie and Freddie you know also relatively strong numbers this quarter.
Okay can you give some commentary on what do you think the proposed caps of 100 billion.
Might do where means that business going forward.
Sure. This is Jeff day, Hey, Jeff how are you doing.
Right.
We obviously have great visibility city into 2020, and if you got the caps as articulated relative to past volumes.
Good.
You've got some good runway, both Fannie Mae Freddie Mac of area.
And the pipeline is very strong. So we're very optimistic that this is a resolution that that's good for the taxpayer and also good for the business.
[laughter] Green just one final one kind of you know two separate but related topics are question. Obviously, we work and the changes should have been going on there any kind of the impact that co working head to head office absorption last year.
You know and then some of the recent headlines I'm for example, with JP Morgan thinking about moving.
For use out of New York City.
And then the Texas you know so if you can discuss and thoughts on you know what those types of activities might mean for leasing and some of the larger markets like like New York City.
People have been moving outside of New York City since I've been in the business.
If you remember after the Americas Celanese building the Burlington building so that.
Single best.
Plays for talent.
In America and that will continue to too.
For as long as I remain in this business certainly and beyond.
It's different than <unk>.
Difference is it's more of its very talented focused millennial coding.
Front office and ER for four or more back office employees, which are the less paid.
Commodity type a employees there will always be continue to be a movement to save money, but New York is a is actually doing really well.
I'll have a life science has.
Green shoots in New York.
And as you know and then it now there's an opportunity in Texas, where we are all these markets are we represent lots of companies. We've looked at a their site selection, we have a business that consult for them invoke workplace site selection labor analytics and we provide the advice.
In council to help them make those kinds of decisions.
We're in the mix.
I think it's all good.
Great. Thank you guys so much of the timing.
[noise] again, if you like to ask the question Press Star one on your telephone. Your next question comes on line of Henry Coffey Wet weather bus. Please go ahead.
Good morning.
I'll save all my advertising for southern markets and no tax rate no state tax rates for one like you've got six feet of snow out there.
Great quarter. Thank you for taking my question.
The market, obviously likes what's going on today stocks up a lot great quarter, and you know going back.
To a couple of callers.
I I think it's it's fair to say that if you you know you polled a bunch of investors.
There are things they like and there are things they don't they like buybacks the like.
People competing earnings they they're probably other things they don't like and maybe overtime you guys could sort of examine those because if they do they do hold back value I know I'm sort of a big picture basis.
You are obviously touching all youre involved at all the touch points about around real estate in capital markets have you heard anything not so much from the F. HFSA, which has been very vocal about wanting to develop you know.
Capital our opportunities outside of the Gses.
Have you heard anything from the street about.
Likely programs in the multifamily area that might mimic what's going on in commercial that could sort of move that ball forward.
This is Jeff day again.
Clearly that's CMBS sector.
Something that works very well for multifamily in it.
And that we use regularly in addition to the geographies and companies and pension fund, but I wouldn't say that there is any new concept or theory is no. It's being discussed on the streets that would impact the business as it stands today.
So so I mean nobody's moving that ball forward is I guess the way I mean I'm hearing your answer.
There's a lot of discussion coming out of the Gses and out of the FHLB say about changing the market.
Is it just discussion is coli Calabria, just just talking and writing gray proposals or or is the street looking at this and saying look at there's a there's a real opportunity somewhere between the G. I see market for multifamily.
And what the insurance companies one.
Well if you look at the history of Conservatorship, there's been a series of discussions and proposals about GST was one.
No change and so well I think everyone has their theories about what they might do until there are more concrete.
And visible proposals that people can react too I think it's religious conjecture right now.
In terms of financing multifamily can you give us some comparison between the cost of the various alternatives.
Yes.
I mean, whether it's a CMBS whether it's <unk>.
Insurance company placement or or something with the agencies.
We clear the market for for our clients remember we are in the.
Business advising clients from a third party point of view.
So there are part of the the platform does clear the market through insurance companies.
Yes.
Other sources financing.
We're well positioned to provide a solution regardless of where it goes to the investors prefer.
Freddie and Fannie thing.
If they if they could get it.
And the pricing.
Pricing equal they would prefer to do Freddie Fannie.
Hoekstra reasons, but.
But we do we do at all.
But but the client preferences for the GRC kind of product.
That's generally correct yes.
Great. That's very helpful. Thank you.
Your next question comes finest Patrick O'shaughnessy, but Raymond James. Please go ahead.
Hey, good morning on your second quarter earnings call you guys provided a fourth quarter revenue guide.
Of $693 million of revenue at the midpoint by my math your updated full year revenue guidance implies for fourth quarter revenue of 664 million at the midpoint.
So to what extent was your strengths in driving in particular in capital markets in the third quarter. It pull forward of activity that you would've otherwise expected in the fourth quarter.
Hi, I think we did see some pull forward of activity.
Sure.
For the fourth quarter.
Still remains pretty healthy.
And we just provided guidance based on our historical close rates.
So.
Your numbers correct.
Okay, but you haven't necessarily noticed any deterioration in the environment since you put up that initial guidance.
No.
No we're not seeing any deterioration in.
Hi, there capital markets or leasing.
Okay. Thank you and then speaking of leasing.
Leasing revenue growth did decelerate in the quarter I think it was 5% you ever your revenue growth in the third quarter down from 22% and then the June quarter I realize that the comps are definitely more difficult, but it's pretty unusual to see a quarter over quarter decline in leasing revenue in threeq versus Twoq. So can you talk about what you see.
We're not there in the leasing environment.
I think the leasing environment bras remains.
Really healthy we're seeing a lot of technology companies financial services companies.
Continued activity in the co working space.
We're not seeing any slowdown in on the leasing side and I think that.
Were up 11% year to date, Oh, we were up 20 plus percent in the second quarter, which I think it's just timing of when some deals close.
Really not seen in changing activity.
Yeah.
Okay. Thank you I'm expense side your comp ratio was little bit higher this quarter than what we had expected and higher than it wasn't a year ago period. Despite the pretty strong revenues is there anything that you would call out in terms of compensation expenses that were maybe unusual or we should think of that is.
The run rate going forward.
Sure I think through the year, it'll be pretty comparable copper here over here, maybe up a little bit.
In particular in the third quarter I think we've talked about the fact that we've hired a lot of talent.
First couple of quarters. This year not continued into the third quarter.
And what happens when you hire these really large teams as you bring on all the expenses.
But none of the revenue for the first six to 12 months.
So that puts a little bit of pressure on your expenses.
Got to work itself through the productivity some pickup.
Okay.
One last one from me can you guys to provide some additional color on what capabilities. Your recent acquisition work frame provides and how that solution might be differentiated from what else that's out there.
Well, it's one of a variety of things that weve invested in and we're building internally, but work frame as a collaboration and communication tool.
It combines.
Work being work flow improving communication the ability to keep all of up of projects.
Documentation in real time in the cloud available to the clients.
There there was no actually no need for email.
Very good for a host of things we're doing we just did a very large portfolio appraisal.
<unk> billion dollar a group of properties and all of the all of the lenders.
Owners.
Good could get online and see the or the you know the.
Relative.
Changes in the process during the appraisal period and a seamless. So we think it can help our brokers who can help all of our businesses. We're also tie it together with several other of our technologies to provide a comprehensive integrated technological and holistic assist.
For enhancing and Weaponizing, the brokers to be better what they do.
Great. Thank you very much.
Your next question comes fine that's Jade Rahmani with KBW. Please go ahead.
Thanks, very much but.
Just back on the GRC multifamily did you see during the quarter Fannie Mae meaningfully pulled back from the market and then once the new caps were announced.
Re enter the market.
I think both Fannie Mae and Freddie Mac.
Let's just say.
For a moment as they were working through those issues, but.
We've seen the pipeline and their activity come back in a real robust way.
And you have any concerns about the constraint that's that's a target of 37.5% and affordable.
And the affordable product, which is less institutional.
No. The if you look at the way that they define affordable and the fact that the mission has been a critical component of the Fannie Mae Freddie Mac business model for an extended period.
We're very focused on that piece and we're committed to delivering that ratio and we don't believe that that's going to be a challenge for us.
And turning to leasing could you comment on.
How you view the outlook for the leasing markets are there any pockets of softness I think colliers yesterday reported.
One of the half percent decline in Americas leasing revenue growth and it had been running in that 15% to 23%.
Growth rates clearly co working has been a meaningful driver of leasing absorption.
The overall you know how would you characterize outlook for leasing and do you expect positive growth going forward.
Yeah. This is libretto we still see.
When we look at our offices, we look at our pipeline, we still see a strong growth can still continued activity in the leasing nothing that we see that is pointing to a slowdown certainly rates are higher but that drive is particularly in markets for talent and the focus for people to find space, where they can run their business and recruit the town.
That's still continues.
The activities there so nothing that we've seen that leads us to have a concern about the volume of activity that we've seen from the leasing front.
And I think that new marks.
Research showed rent growth.
Up about.
Close to 3% year over year, and asking rent some of the other brokers from subsided around 4% do you know do you have any data on what the effective rent growth has been net of concessions.
I don't have any really from data I can tell you that certainly in the markets, where you're seeing the strength, you're seeing concessions get reduced and where concession does still being given your you see more term.
Kind of washes, so certainly where it's not it is a landlord mark no question about it and that's what's driving the deals but tended to have the appetite and when you when you really look at it.
They're trying to really make their money on salaries not the right. So the Randy.
Big impact to them as it is the location and their ability to attract the talent.
Thanks very much.
[noise] there no further question at this time I will send to call back over to the presenters for closing remarks.
Thank you all for joining us today, and we look forward speaking to you again next quarter.
This concludes today's conference call you may now disconnect.