Q2 2020 Newmark Group Inc Earnings Call
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Ladies and gentlemen, just a conference call for light truck fleets continue to hold and it comes back in Salt Lake.
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Good morning, and welcome to the New group second quarter 20, Tracy financial results Conference call.
I just go back another since our last night.
You need if it stays pretty signal a comfort, especially I think the stocky.
So you're right.
So today, so I think I'm sure that will be an opportunity cost question.
If you ask the question he might press Star then one on your telephone keypad.
She withdraw your question. Please press Star then carriers.
Please note this event is being recorded.
I'd now like to turn the conference over to Mr. Jason.
'cause it in the Investor Relations.
Go ahead.
Thank you and good morning, Ah, we issued our second quarter 2020 financial results press release, our presentation summarizing these results this morning.
Unless otherwise stated the results provided on today's call compare only the second quarter of 2020 once a year earlier period.
Any figures with respect to cash flow from operations discussed on todays call refer to net cash provided by operating activities.
Excluding activity from loan originations himself.
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 from operations before mining activity.
Please see todays press release for is also under generally accepted accounting accounting principles are gap.
Please see the sections in the back of today's press release for the complete definitions of any such non-GAAP terms right reconciliations of these items to the corresponding GAAP results in how when and why management uses them.
Additional information with respect to our GAAP and non-GAAP results much on todays call is available on our website and in our investor presentation.
Any outlook discussed on todays call assumes no material acquisitions share repurchases are meaningful changes in the company stock price.
Unless otherwise stated the estimated value the NASDAQ earn out as based on the closing price on August 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 27 out of the Securities Act of 1933 as amended and such and 21 you have the Securities Exchange Act and I think 34 as amended such statements involve risks and uncertainties. These include statements about the effects of the cobot 19 pandemic on it.
Company's business results.
Proposition liquidity and outlook, which may constitute forward looking statements that are subject to the risks, but the actual impact may differ perhaps materially from what is currently expected except as required by law Newmark undertakes no obligation to update any forward looking statement.
A discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward looking statements Cinemark 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 hosts very Donaldson CEO of Newmark Group, Inc.
Thank you Jason.
Good morning, and thank you for joining us for Newmark second quarter 2020 conference call.
Joining me virtually on the call today are Newmark, Chief Financial Officer, Mike Rispoli.
Chief Strategy Officer, Jeff Day, and our Chief revenue Officer Lou Alvarado.
The second quarter was challenging for the company in the industry.
We moved rapidly to protect the health and wellbeing of our employees.
While our office is 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.
I'd like to take a moment to Florida, our employees for their tireless work dedication and ingenuity.
I'd also like to thank our clients for the trust take place in new Mark as a strategic real estate advisor.
Despite significantly lower industry transaction volumes, we generated $47 million or cash flow from operations.
Finished the quarter with over $300 million in cash cash equivalents.
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 remark operating earnings potential represent a very attractive investment.
As we wrap referenced in our earnings release, we attribute our results were three competitive advantages our strength in management services are strong growth in GRC originations and our outperformance in investment sale.
We continue to improve our market share in U.S. investment sales in the second quarter. According to our CA data our industry ranking approved to number three in the first half of 2025 number five in the first half from 2019.
We believe that low into 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.
Taking a look at the landscape across our industry, we expect multifamily in industrial to outperform other property type and the second half of the year.
These asset classes, our strength of Numerex platform and have historically represented nearly 40% of our revenue.
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.
Professionals 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 our return to the collaborative environment of the office. We expect lower offers density to large be largely offset the increase the amount of remote working.
Regardless of the environment, we are prepared to seek out create and advise on opportunities for our clients.
We continue to approve that we are adaptable to current and future market conditions.
Strengthen numerex culture and platform attracts and retains highly skilled revenue generators as.
As a company built on talent, we believe that diversity and inclusion makes us stronger and more competitive.
We see this has had time to redouble, our recruiting efforts to further enhance books. This 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 call over to Mike.
Thank you Barry and good morning, everybody.
In the second quarter revenues were down 30.4%.
So the impact dependent.
We things down 44.8%.
And our overall capital markets.
Including originations were down 29.8%.
Aim for mortgage banking activities increased by 53.2%.
Due to a higher volume.
In a more balanced mix DSE origination.
Our multifamily mortgage originations were up 23% as compared to 15% or the industry.
And services servicing fee and other declined by 11.6%.
Due to lower non fee pass through revenues.
Unless interest income on escrow balances and yield maintenance season, our servicing business.
Otherwise unaffected by the pandemic.
Pete Thanks management services and servicing fee revenues to be more resilient during the downturn.
Moving onto expense.
Total expenses decreased by 25.4%.
Selecting lower commission based revenues and a 40.8 million dollar reduction.
In operation.
This is part of our effort to reduce approximately $100 million.
Support and operations costs in 2020.
As demonstrated in the earnings presentation.
New Mark has a highly variable compensation structure.
In the quarter, our condition based revenue declined by 43% and our commission based compensation fell by 43%.
The variable nature of our expenses.
Lined with the cost reductions contributed to our profitability despite the challenging environment.
Turning to Ari.
Adjusted earnings per share with 10 cents.
Down 66.7%.
Adjusted EBITDA $45.6 million was down 59%.
We're not providing specific revenue or earnings guidance for 2020.
Due to the ongoing uncertainty related koby 19, and its impact on commercial real estate services.
However.
We expect us industry volumes in the third quarter.
We'll be similar to the second quarter.
Our support and operation cost 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 that.
Which is expected to be approximately $109 million.
The earnings based on Yesterdays closing price.
We received the shared NASDAQ in the fourth quarter of each year and because of the retained upside. We currently expect the earnout will generate $36 million of additional liquidity for us in 2020.
Moving onto 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 up $15 million from March 30, onest 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.
I'd left in 0.3% of our Fannie Mae servicing portfolio.
Despite the very low level of forbearance today.
We established a 125 million dollar Sublimit line of credit.
On potential principal and interest servicing advances at 100%.
Should market conditions fundamentally deteriorate.
As of June Thirtyth, we have approximately half a million dollars about any forbearance advances on our carry on our Fannie Mae loans.
Operator, we would now like to open the call for questions.
Thank you we will now begin question I asked the question.
Okay.
And why.
Thank you Pat.
We think they can find please go ahead.
Okay.
So your question. Please press star one say.
First question outstanding ballpark.
Well.
Go ahead.
Hey, Hey, good morning, good morning down there.
So just a few quick question.
First Mike I'd, just say well we're all the same pace you said third quarter is expected to be similar to second quarter on a trend back to side expense side, and obviously that excluding the NASDAQ. So should we think about you adjusted earnings being similar to the second quarter is that a fair assumption.
Yes, I think that generally there Alex.
Well the NASDAQ income that we discussed.
Mention that while the expense savings year over year are similar.
The expenses in Q3 of 29 team, we're up you know maybe $5 million to $7 million.
Sequentially from Q2 2019.
But otherwise I think you have it pretty pretty fair.
Right, but just on a linked quarter basis third quarter 2020, the second quarter 2020, apart from that that should be sort of similar.
I think that that's fair.
Okay. The second question, you mentioned that comp with down 43%, obviously I think everyone on the call could feel predicts people.
But let me ask your question one of the issue that you guys have Pat is the dilution from increased share count.
So if it second quarter were down 40% third quarter topic, it's going to be similar does that mean that we should be modeling and thinking about fewer shares.
Issued this year interconnects to better a fair assumption or how did that impact the share issuance in the diluted share count.
Sure I think the way to think about it.
Yes, it will be less shares being issued.
Related.
As you see in our supplemental tables in the earnings presentation.
Our comp rate is about 50% of our Commissionable revenue that is the cash component and typically we take 60% on an overall basis. So.
You could think about.
Compensation in equity as about 10% Commissionable revenue.
Thats whats been historically and so is that revenues down the issuance of shares will be down.
We continue to believe that 2% long term growth rate in their share count.
Is what we're expecting managed to and if you look at where we are this year were actually down a little bit.
Year over year in our share count because of some of the actions we took last year.
Right, but but Mike I guess in parent it sounds like this year and that should be below the 2% if you're issuing less shared this year.
I think that there.
Okay and on the final question is.
Heading towards year end the tax free spin.
And so you guys will be from a corporate perspective free to do a lot more so can you talk to us what you guys are thinking as far as future stock buybacks.
Maybe on the on the PML side, maybe could read accounting is always the crowd source of questions, maybe simplifying big just going to straight.
Yes, or things that to 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 to that.
Sure, Matt maybe I'll start with.
The share buyback question as you know.
Because we're still in the tax free spin off period, we can't have any sort of plan.
Buyback shares in material way, but however that said.
Stock, we think is very attractively valued.
Investment right now.
More than very attractively.
We have a lot of balance sheet capital.
Have a lot of cash on the balance sheet as well as future value 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 best use of our capital for the return for shareholders I think thats as part of our DNA.
In terms of simplifying.
We continue to try and make our financial statements clear. Thank you see we put out the supplemental tables.
In XL that are on our web site, which break down our financials in a lot of excruciating detail.
We also have put out the.
Table that in the earnings presentation and within that covert supplement.
First quarter, where we show you our Commissionable revenues are pass through revenues, our expenses flow and how you can model 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.
Okay. Thank you.
Thank you yes.
Touching Jade Rahmani KBW. Please go ahead.
Good morning, everyone. This is Ryan on for Jade.
Barry as we look into the second half of the year.
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 cobot cases more recently.
People buy on on onto in anticipation of the future.
Capital is generally long term so there's over $200 billion in dry powder and then in the U.S. and I think Thats Thats look thats actually life, there's more and more behind that.
And.
Certainly the as as we see or have it have a better view of the recovering terms of the coated.
People will buy on anticipation of a vaccine anticipation of therapy in anticipation of just getting on with life.
The pipeline is the pipeline at the same just the same pipeline that we had pre cobot. There. It's all those all those pent up activities are still there.
We're seeing some markets start to clear as clear up and.
And then independent of Covance on someplace in the multistage there already.
What were below these broker opinion of value are now becoming full fledged memorandums.
As the debt market clears.
In terms of Freddie Fannie has been very very active obviously that that business is up as the the CMBS market is starting to clear a clear up a bit.
And as soon as many of the.
On the life goes figure out exactly what the risk.
His failed they'll be more prolific about lending, they're all in giving out money business.
So I think the combinations will be clearer and activity will pick up as people either except this theres a vaccine or there is a recovery, but but but Kevin Kevin and we're feeling that activity is going to is starting to.
Move towards increasing.
Great and then on the multifamily side.
Thanks for the the stats on forbearance, there curious how youre thinking about the risk to that outlook based on the potential for a reduction in government stimulus.
And then also your general outlook for volumes in that in your GFC business in the second half the year.
Sure Ryan this is Jeff.
Global production rates that we've seen in our portfolio has been very steady.
The occupancy just stayed off and the anecdotal evidence that we're getting from our clients is that because you have many.
Units that have to income earners in them, either because of roommates or couples.
We're still.
Bullish on the portfolio. We think the performance is going to continue we do believe that there's going to be some form of stimulus going forward. It's just not prepared 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 now.
Great and then.
If you look across the broader business.
Barry do you think that there's areas of apart from that have a greater potential for reacceleration near term and potential growth opportunities from this environment.
For example, one that comes to mind would be your loan sales business.
Hello pipeline shipped up shaped up there and is that an area you see potential growth and from just the volume of distress.
Well, we have been we happen very active in a note sales many of them have been selling on par the people who need liquidity have been selling the good stuff.
As the as and if distressed continues for an extended period of time, depending on where where the demand side of the business you know office rents and coming back office.
Shows.
You will you will begin to see things that are sold a low car and more noted sales where we're in a good position we have a note sales group.
And we're talking to people and timing, we have billions of dollars or no sales out in the market as we speak that's that's certainly one I think I think the one interesting thing of this this period.
The opportunity for all of the many people that we've recruited over the last few years.
The last three four years whoever they cannot Cape Cod come into the company.
Out of the gate very busy on on it and a robust market. This this few months has given everybody an opportunity to get to know each other and what everybody does and our clients to get to know how extensive.
Our capital markets business and our other tech our tech leasing business and other aspects of our business and they're getting to know us and they're getting to know each other we think we come out of this has a much better company.
Really prime to take advantage of the acceleration of market going forward.
Yeah right. Thanks for taking plateau I also want to add if you look at it falling on our business lines the opportunity for our corporate service and property management has been significant is as people come out of this and everybody's looking to reduce costs I was looking for expertise that has been an area of growth for us It will continue to be.
An area of growth for us and it is and is an area that.
Frankly in the past we had been smaller competitors, but we believe we'll be right there with them as as this pandemic grows and as we come out of this into into the and solving problems for our clients.
Thanks for taking the questions.
Okay.
Hello.
Bush.
So.
Me sound stupid in front of a large audience. The exact I know, it's called the exact gate.
On when you're past the two year anniversary of the distribution is.
Sure sure Henry This is Mike it's the end of November of this year.
And so we'll call it December 1st and then the.
But I look at your balance sheet.
The the principal use those of us of any assets or investments or capital and told me if I'm thinking about this the wrong way. It is is freely.
Either mortgage servicing rights, which go up a little bit, but then there is.
Offsetting gain there that that could be financed.
In one fashion or another and then forgivable loans.
Rich.
There's a big part of which is essentially a recruiting tool and so.
Everything else seems to have it's kind of and again correct me if I'm wrong everything else seems to have is it's it's it's offsetting liability.
Loans held for sale will that's easily funded.
Does that the right way to be thinking about your your capacity your needs for capital versus your ability to buy back stock.
Yeah, the paint a fair characterization of the balance sheet, Henry but remember we have.
Now at today's yesterday's value.
775 million.
Of potential cash flow, we could tap into related to our NASDAQ shares.
Okay. So often so so it's 300 million to cash plus 700 million a Nasdaq stocks.
I think Thats fair, yes.
That's a big numbers, what or Paul.
Getting too we have.
We are very we're very comfortable with where add on the balance sheet right now and our capital capacity.
And.
Well certainly be thinking a lot about allocation of capital.
As the business starts to come back in activity resumes.
As we passed the two year period it'll be a.
Something we'll focus a lot on.
How much how much cash.
Right right right.
So I was going to say how much cash do you actually think you need to retained on the balance sheet.
Two six to comfortably operate the business. It's you went from 163 million to 306 million.
During what is obviously a very difficult period.
And.
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Okay.
That's a lot of excess cash how much of that cash do you need.
Certainly $300 million, a lot and thats one of the reasons, we paid down part of the revolver.
At the ended the quarter or after the ended the quarter. So I think if you look at.
The cash left will continue to look for ways to pay down revolver as we generate cash flow through the back half year.
Historically, Q3, and particularly Q4 has been our biggest cash flow generation quarters.
We still have $125 million capacity on a revolver, even after the pay down.
Any off balance sheet assets that we've discussed so we feel pretty good about the financial position on the balance sheet at the company.
Great. Thank you this is very helpful.
Welcome.
Thank you Sir your next question comes from Michael Frank and Bank of America English.
Okay go ahead.
Yes. Good morning, guys. Thank you. Thank you for the questions. So just.
First one if I could one of your competitors said earlier that.
I didn't expect to see property sales recover in shareholders recovery and leasing occupancy.
And visibility into ramps.
For sequencing of revenue recovery curious you if you agree with that.
Well it depends how far the recovery.
No as I mean in Boston, we're selling properties.
People.
Investors with $200 billion.
In cash to invest our thinking long term, they're not thinking they're not thinking.
Tomorrow, there thinking once once there is a level of price discovery, whether in depending on what the what the particular food group is.
We'll determine and to make that value for themselves. Yes, there has to be some visibility into.
What the rents will be.
A lot of markets there have been some resetting of.
Sense and those markets have reset the rent where they no. This is the market and this is demand the those markets will accelerate their back to normal much faster than other markets, but we're already seeing that we there are there are people now with touring touring properties.
Did the whole concept of remote remote working there was a.
Grand Pronouncement by many Ceos about not coming back to work.
I am getting more and more calls from Ceos, who.
Realize that they're living off of as the CEO of Microsoft call. This social capital or I would say the reservoir of goodwill is 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 two and.
Total company they need to come to a place to work 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 although the you know the realization of productivity.
Fine.
I will be more visibility into two that fact.
Buildings will be sold.
Yeah.
Great.
Generally agree with that I could ask one more just hypothetically if I assume that cap rates in office due.
Due to pick back up so you have lower like for like sales prices.
How should I think about that at that potential headwind to recovery in that net revenue stream for you.
Okay, just something I failed to mention is multi.
And industrial I mean people need to play that work I mean, we were live and.
We think that thats going to bounce back relatively quickly.
And industrial has has just really hasn't missed a beat I mean, there our industrial brokers are doing very active and they're doing business.
Now and those markets you know, there's certain market and take longer to come back.
Cap rates.
You can do in the multi space. If you have you buy a property today you can you can borrow long term and 2.5%.
So if you have a five cap.
And by with two and a half a cent money I think thats, a pretty good investment considering 12 trillion dollars or negative.
Yields around the globe.
Just still offers a great opportunity to invest long term in a country that is still growing.
And if you you look there was a times article about the 1918 pandemic. If you remember we had a war. We then had a pandemic and then we have the Roaring twentys. So from 1920 to 29, we had to add that had nine years of boom after.
Way more people died and as as a proportion of the population and 1918 and we had just come off a war, where I think of the devastation for Europeans et cetera, but we came back the one thing that all these crisis is and disruptions in downturns haven't commented that they end.
Okay and did you about do you have a comment on just the.
Chantix so.
Lower relevant relative to sales prices and the impact on.
On revenue.
With interest rates as low as they are there is some direct we're seeing cases, where the prices are actually going up in certain categories.
Okay, great. Thank you guys the timing wise to shift the on site.
Thank you once again.
Good question. Thanks.
Hello.
Thank you Danielle.
Yes.
Patrick O'shaughnessy from Raymond James Please go ahead.
Hey, good morning.
How patient can that dry powder, that's waiting on the sidelines be could it be years before those proceeds or put to work or are there generally constraints on how long the capital remains committed before being invested.
Okay. So a lot of these can be these investments have some timeframe upon which they have to be returned to the investor.
It depends on where whether its pension funds or our 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 a year or even with some segment of the investment community.
The question is whether they do both the amount of human 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 theyre going to get in a market that they can see.
Going forward, So one fund and this and a new funds starts. So there's six there is 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.
The new normal and we're going to go on with lives.
Got it.
Curious at the current environment in terms of attracting talent is now the time to try to pick up market share by taking off some talent from maybe smaller brokers that are in a bad way right now.
I mean this is this is a good time too.
Two it's always a good time to recruit talent, we are talent base business as we discussed.
By getting the best people you should have the best company and that's that's our fundamental DNA.
It doesn't have to be small companies thats all companies I mean it.
We are we are the platform of choice for high revenue generators stabilized they want to be at the company.
And it is for US it's really the aspect of being a good custodian of our passion and capital and doing it the right way, considering where the world is and.
But we're we're encouraged by what we see.
Great.
And then I think also on a strategic dimension you guys have spoken to past about global expansion plans.
With those generally be on holes in this environment or do you think about maybe getting more aggressive in progressing with international expansion due to maybe market disruptions and more attractive potential purchase prices.
We're always looking at opportunities.
There's a there's a great opportunity for us in Europe Middle East in Asia, where we're we're conscious of that we talk about it quite often.
Interested in it it's a great opportunity.
We also have great opportunities in the in the Americas to grow our platforms and to fill in the white space and build on what we've created so.
It is an opportunity for us.
Great and then last one from me.
What's the near term outlook for valuation appraisal and the advisory type of revenue streams.
And our DNA Davis, we've actually seen or very steady lower revenue for the mix has shifted a little bit existing portfolio valuations and.
Larger institutional assignments correct.
We haven't seen a drop off relative to last year.
Thank you.
Thank you.
Great question.
So I would like to hand back for any closing remark.
So I'd like to thank you all for joining us.
And we look forward to speaking there again next quarter.
And we hope that everyone here on this call remains safe and healthy.
Thanks.
Thank you that does conclude.
Okay. Thank you participating.
Yeah.
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