Q1 2020 Earnings Call
Thursday
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Thursday
Good morning. My name is Ursula and I will be your conference operator today at this time. I would like to welcome everyone to the new mark first quarter 2020 earnings conference call at this time. All participants are in a listen-only mode after the speaker's presentation. There will be a question-and-answer session to ask a question during this time. You will need to press start. Then the number 1 on your cellphone. Please be advised that today's conference is being recorded. If you require any further assistance, please press * 0. I will now turn the call over to Jason Harvey VP of investor relations Thursday begin when you're ready.
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Good morning, and thanks for joining us. We appreciate your patience as we delayed The Call by a few minutes to accommodate a large number of call participants. We issued our first quarter 2020 Financial results, press release and a presentation summarizing these results this morning would be extraordinary impact to the ongoing pandemic. We created a supplemental covid-19 slide deck which illustrates new marks response wage prices and it can be found on our investor relations website, unless otherwise stated the results provided on today's call compare only the first quarter of 2020 with the year earlier. 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. 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 to the corresponding gaap results and how when management uses them additional information with respect to our gaap and non-gaap results mention on today's call is available on our website and in our investor presentation any Outlook discuss on today's call as soon as gnome positions Cheryl purchases are meaningful changes in the company stock price. 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
With that I'd like to turn the call over to Barry. Gosin.
Thank you, Jason. Good morning. And thank you for joining us for numerous first quarter 2020 conference call joining me virtually on the call. Today are numerous Chief Financial Officer microphone normally our chief strategy Officer Jeff day and our chief Revenue officer Alvarado. We are clearly living through an unprecedented moment in time and we wish to express our deepest sympathies to everyone who has suffered due to covid-19.
We would like to thank the medical professionals First Responders and all others putting their own health at risk to help.
We would also like to thank our employees the vast majority of whom are now working from home and living with the challenges of this crisis while maintaining our focus on Hell on on the health and well-being of our employees and clients. We have responded quickly and have taken numerous steps to solidify our financial position. We've reduced our fixed operating and support expenses by over $100,000 through the end of 2020 in addition. We have reduced our dividend in the distributions.
Given our highly variable expense structure coupled with the changes. We have implemented new Mark will maintain its strong financial position during a potentially prolonged downturn and Thrive when the crime is a base.
Our quarterly performance was adversely impacted by the pandemic as industry transaction values fell significantly in the latter part of the quarter.
Over the last several years. We have hired some of the most talented brokers in the industry many of the leading owners and occupiers have commercial real estate have deep and sustained relationships with our professional while transaction volumes will be lower in the near-term. We expect our clients to leverage our expertise and deep market knowledge to help them navigate through these difficult times while preparing them to re-enter the market. For example, our teams are providing Consulting and advisory services for tenants and owners who need assistance with implementing policies with respect the office repopulating an overall portfolio strategy.
We were also providing Technology Solutions to manage density provide social distancing Solutions and heatmaps solutions for location reopening to mitigate the impact covid-19 on their Global Footprints. We are assisting investors by raising capital and helping owners create liquidity. Our valuation advisory business is helping investors to establish values and leverage debt instruments in this environment. We are also quantifying changes in risk-adjusted returns for investors and in an assisting investors and banks with distressed assets. We are also selling loans
We have established a microsite which is accessible on our main website called covid-19 perspectives to provide insights into the impact of the pandemic with that. I'm happy to turn the call over to Mike.
Good morning, everyone. I'd like to Echo the sentiments about our health care and essential workers. I'm also grateful for our dedicated employees who've adapted to working remotely during these unprecedented life.
In addition to discussing our q1 results today. We will also focus on the plans that we have implemented to manage through the pandemic.
In the first quarter our revenues were up to 80.1% led by growth in capital markets Management Services and gains for Mortgage Banking activities.
We continue to gain market share in capital markets with 25% volume growth. The Improvement in Management Services was led by valuation and advisory and project management jobs, which is part of our DCS platform.
games for Mortgage Banking activities increased mainly due to more balanced mix of originations
Moving on to expenses the growth that our Management Services revenues drove higher direct compensation separately compensation. Also increased due to the fact is talk to you soon as during the past year.
Non-compensation expenses increased primarily due to non-cash items including a 17.2 million dollar covid-19 related provision for Cecil and the net impact of OMS our revenue and MSR amortization.
In response to the pandemic, we have reduced their fixed support and operations costs by over a hundred million dollars through the balance of 2020.
Numark has a highly variable compensation structure for every change in our commission-based revenues are variable expenses move in tandem by approximately 50%
Combined with our fixed expense reductions. Each factors mitigate Revenue declines related to the pandemic.
Elevated Market uncertainty related to the pandemic. We are withdrawing or previously issued outlook for 2020.
To assist analysts and investors and better understanding are variable compensation model. I just like to take a moment and walk you through a hypothetical scenario.
However, please keep in mind this is just the hypothetical scenario and not guidance.
In this scenario in which commission-based revenues decline by five hundred million dollars through the balance of the Year newmark's pre-tax adjusted off and adjust even with declined by $150 million dollars as compared to 2019 levels to 415.8 million dollars for twenty years.
When compared to 2019 and including actual q120 results this would result in 378 million in adjusted ebitda in 2020.
moving on to our balance sheet
Numark continue to have strong liquidity and credit metrics at the end of the first quarter total cash and cash equivalents or two hundred ninety one point five million dollars as compared with sixty three point six million at year end.
During the first quarter you Mark has the following significant use of the cash.
$60 as we continue to invest in Revenue producers fifty six point five million dollars for income taxes on 2019 earnings fifty four point five million dollars a month for previously declare dividends and distributions and 45 million dollars for year-end compensation to employees.
Many of these items typically occur in the first quarter of a given year and are not expected to recur over the remainder of twenty-twenty.
during the first quarter the company increased capacity under its revolving credit facility the $465 from $250 with increased tenor and I'm saying
new
Turn down a hundred eighty million dollars. I think mental capital on March 17th as a precautionary measure to ensure its strong liquidity position given the macroeconomic uncertainty.
The remaining borrowing during the quarter reflects the use of cash previously discussed.
On March 31st revolver had a total of $415 outstanding and Company's net debt a trailing 12-month adjusted. Ebitda was 1.2 time as compared to point eight times at your end.
Numerics balance sheet does not reflect the $571 of additional unmonetized NASDAQ shares that we expect to receive through 2027 based on the closing price that make sense.
Based on our estimates the after-tax net present value of these off-balance-sheet NASDAQ shares represent $1.53 per new market share as of the end of the first quarter.
In addition you marks total Equity as of March 31st was 942.3 million dollars which translates into a book value per fully diluted share of $3 and fifteen cents.
As a reminder this book value includes 412.8 million dollars in marketable mortgage servicing rights.
Taken together the after-tax net present value of the off-balance-sheet. NASDAQ shares plus are fully diluted book value per share was $5.11, which is substantially greater off their stock price as of yesterday is closed.
Operator now like to open the call for questions.
as if you if you
Oh, sorry. Thank you all for joining us today. And oh sorry, it's a as a reminder. If you would like to ask a question, please press star then the number one on your telephone keypad. Again, that's star one to ask a question will pause for a moment to compile the Q&A roster.
Your first question comes from Alexander Goldfarb with Piper Sandler.
Hey, good morning. Good morning, Barry. I hope you guys are well. So just you know a few quick questions here first as you think about your own business, you know, clearly Capital markets, you know transactions leasing activity that stuff is pretty you know, variable and obviously is going to ebb and flow with the business presumably the property management business is pretty stable. How do we think about the mortgage servicing business is that I mean we saw the Cecil but Cecil's accounting is the mortgage business is at a pretty stable recurring Revenue Source, or is that something that's more, you know, because transaction volumes are down we would expect to see a bigger impact to the mortgage servicing book.
Alexander Jeff. Here we expect there to be some impact on our mortgage origination because we do finance a fair amount of Acquisitions and so long as capital markets or investment sales activity goes down there would be some impact but the activity that we've seen since the end of the first quarter suggest that we have a very nice table and significant pipeline going forward.
Yeah, we also what's happened over the last few weeks. It was hard to predict and determine weeks ago, but there's there's actually a p b s offering right now that that looks like it's going to be over subscribe. The life goes have established their value of the of the risk differential and there's been an adjustment in spreads somewhere between fifty and one hundred basis points. So they're they're in the market the banks offer pricing loans and the FED is standing guard over the liquidity and the lubricating this market. So I think all in all the key to opening up a market is is the the debt markets people who have decided not to capitulate on pricing are refinancing and we're
Starting to see origination on the financing Side open up some what we're also seeing in the areas where there's distress weather Mark Mark Market on on some Repose which has eased up we're starting to do loan sales. We've been very active in that area and we have an enormous amount of activity in both the restructuring side and the loan sales and notes sales that are occurring as we speak.
Okay, and then the second question is oh sorry go.
No else. I was going to add that our servicing income, as you know is highly recurring so the servicing side of that business really will see a little to no impact other than maybe a squirrel learning because interest rates are down.
Okay, and then the second question is, you know clearly here in New York, you know, everything's basically at a standstill but you speak to people in other parts of the country and you know, it seems like it's been a lot less impacted by covid-19.
So it's it's our view that Capital markets. They this was this was a Health crisis and not a financial crisis. The banks are in much better shape is far more liquidity. There's enormous amount of dry powder in the market still sitting on the sidelines for those who invested over the last year or two. There might be they might not achieve the kind of returns. They had anticipated but the new money that's entered the market which is significant will start to look for some Market capitulation and from from Sellers and and step back in and start buying particular access change their assets looking at maybe core birth dustrial multi-family first, and then obviously the the harder ones are retail and hotel on the leasing side lot of lot of the company. Yep.
Across the globe are thinking about what is the new normal? What's post Corona? How do I occupy space? Am I working more remotely. Do I have it more of a distributed Workforce? Am I change the way I operate and my identifying so there are it is still is still in a period of flux and what we are doing as you you may look out at the south. I mean, we we literally we we and I think in the last month, we've been hired by a million square feet of clients a day to advise them on how to repopulate their spam. What is the new environment look like, how do they work remotely? What are the trigger points? What are the what are the activities? How do you manage and monitor and am provide space? Should they be in the suburbs? Should they be in other markets? Should they be in one building? So I think some of this is still in a state of evolution dead?
And we won't know this for a few weeks or maybe a few months, but the rest of the country is is certainly less impacted. The technology markets are certainly doing doing better and some of the some of the first Harry cities that are up-and-coming may offer an alternative for companies to move to the Austin's the Nationals Pittsburgh's Denver's May benefit to a certain degree from companies looking at having a much more distributed Workforce.
thank you, very
Your next question comes from Jade rahmani with KBW. Thank you very much. Good to hear from everyone and hope you're all safe and doing well just starting on the liquidity front. One of them asked if the current cash position that you disclosed you believe is sufficient or your anticipate drawing down the full remaining available balance on the revolt.
Sure, it's Mike. You know, we drew down 415 out of $465 million. We have close to three hundred million on the balance sheet at the end of the first quarter and you know, as we sort of demonstrate it and talked to her a business model. We think that's sufficient cash for now. Well, obviously keep an eye on them how things progressed in the future. But you know, I don't see any of the moment to pull down the extra fifty million and at some point we may decide you want to page some of the bats will keep a close eye on it and continue to monitor it
Thank you on the NASDAQ stake. Is there the future now? Is there any potential to accelerate the monetization of that perhaps by Cake selling that interest back to NASDAQ directly?
It's an interesting concept. It's not something I think we've explored in the past. Obviously you've seen we've been able to monetize them shares historically through the forward structure. I think that structure still exist if we felt we needed the cash more near-term we could certainly look at that again and potential explore other ways. It's it's it's obviously a very valuable asset for us. And if and when we need the capital, I think it'll be there for us.
There's been a lot of pressure on specialty finance companies based on Margin Call risk, and I just wanted to confirm there is no Margin Call risk Jeff Newmark either directly with in Berkeley point or the that placement business as well as indirectly potentially through the equity stake in see Siri.
No appointment process works. Is it all security the loans or object? So we have no margin risk their life, and she she got reposition. We think is in very good shape and we don't anticipate any exposure there for Numark as well. And none of our other home business is never any of the origination that we do it's really curious to encourage.
Thank you in terms of cash flow from operations historically. The first quarter is the most significant use you. You know that some of the main drivers of that page this quarter do you expect for on a full year basis cash flow from operations to be positive?
I think if you look through the balance of the year, we would expect to make money and therefore we would expect to generate cash from the from the business. Yeah.
Okay, thanks for that turning to the loan portfolio sales. You mentioned the pickup in either distress sales or perhaps that funds looking to sell loans. Could you quantify perhaps the magnitude of that of the of the pipeline that you mentioned is significant?
Well, we I mean it's it's still early but we've we've we've garnered a good chunk of the market. We we we have several billion dollars in in the market for sale. So we're and and and we have
you know, we're told we're we're we're putting those loans out to I mean, I think we've contacted 450 investors in those those loans. And so we have a very active, uh,
Targeted response to this Market. We're we're very encouraged by what we're seeing in respect of loans and notes sales. Do you have any sense for them or what kind of discounts to par bids are coming in at?
You know there were selling loans at par. I mean there are loans that are good loans and we're summer slightly discounted. It really depends on the the category of the food group.
Yeah, maybe in there quickly what you see Jade when you have leveraged finance and and you reference the repo lines, you sell what you can sell and most often those that are on repo lines that need liquidity will sell the best ones in their portfolios. And those are going to trade closest to par. We wrap our conversely there might be situations where you're experiencing distress distress situation, you're going to see discounts. So every trade that we're looking at right now is slightly different and there's no real consistent pattern because it's very said it's still a little bit early.
Thanks, and just lastly there's been a lot of speculation about how Gateway cities like New York San Francisco perform relative to Thursday. It's you know, the Austin's you mentioned was wondering if you could quantify the mix of business that New York and some of those top Gateway cities represents.
So historically we've had you know, maybe fifteen or so percent of our business in New York and maybe fifteen to twenty percent in all of California, which is northern southern all the way down to San Diego all the way up to Silicon Valley in overtime that continues to decrease as we build out the rest of our geographies around the country and and as wage to build out internationally
Thanks for taking the question. Let me let me just add that a big part of our business is restructuring and devising tenants in place and their leases month and despite the fact there's a quite a bit of talk about getting accustomed to working remotely. I think that's mixed from company company companies are identifying so some companies are actually in some cases going as much as doubling the square foot per employee. So whether they go to a more distributed Workforce or working remote or working in shifts, they'll require more space in the locations. They are presently leasing to accomplish them home for less people. So in the down markets the the talented and best professionals have good success off.
Going out longer and renew.
Doing and restructuring leases with landlords who are willing in a in a particularly low interest rate environment solidifying their tenant base.
Thank you for taking the questions.
Your next question comes from Andrew Kim with Paulson.
Hey gentleman. Good morning. Just a quick question on the cash flow impact of forbearance on your servicing portfolio. I know you gave some a helpful commentary in your supplement. I think it was off or point four million for every 1% So, can you just give more color on that? It's all commercial no residential. But if it's 20% does that mean that 88 million of advances you'd have to make in terms of cash flow. Can you just talk about that?
That would be the math. Yes. And as with others of our competitors, we're right now working with and have term sheets from three of our various lenders to of wage Warehouse lenders to finance that should we need it? We would expect our forbearance right to likely be below what Fannie Mae is projecting for their for their book today. We through April 30th have not granted any four parents requested required us to advance. Although it's still is early but as we've tracked April payments through last night off the payment velocity in our book is actually better than February March or April. So we remain fairly optimistic about the forbearance situation and it does end in August. So we thinking of opposition for that and we believe will have financing available.
as long as you got together and
No. No, this was Mike. I was just going to say these are highly Financial assets. They have a guaranteed repayment from the GSA you so this Jeff mentioned are fairly confident that we'll have a credit facility that
and you have no residential exposure at all. Multi-family, correct?
That's correct. No single camera.
And when would you get paid on any advances? Would it be the following twelve months after the last four bands?
The way that it works with the Fannie Mae agreement, is that were required to advance for four months?
And then within 60 days after the end of four months.
Fannie Mae reimburses us for those four months and then to the extent that forbearance and advances or whatever reason continue. They would reimburse us on a monthly basis trailing.
I see so that $88 million dollar calculation contemplates six months weighted average outstanding on 20% of the book.
In practice, we believe the reimbursements will come in more quickly than that, but that would be the calculation that we use as the outside allowable time frame.
Got it. Thank you.
Sure.
There are no further questions at this time. I will now turn the call back over to VP of an investor relations Jason harp.
Thank you all for joining us today, and we look forward to speaking to you again next quarter. We hope that everyone remains healthy and safe and this will end and we will get through this month. Thank you.
Thank you Berry. Actually, I just wanted to make a few additional comments. We had a little bit of a technical glitch. So just so everybody on the call is where the the statements that we made on the page all about the effects of the covid-19 demek on the company's business results financial position liquidity in Outlook, which may constitute forward-looking statements and are subject to the to to risk the actual Impact May differ off possibly material from what is currently expected 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 to differ from those contained in the forward-looking statements the new Mark Securities and Exchange Commission filings, including but not limited to the risk factors set forth that are most recent form 10-K form 10-q or form 8-k filing.
Thank you very much for joining. Have a great day.
Thank you for participating in today's conference. You may now disconnect.