Q3 2020 Newmark Group Inc Earnings Call
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Followed by <unk>.
After today's presentation, they will be in off the charity to ask questions.
To ask a question you might <unk> dog and one on your telephone keypad.
To withdraw your question please <unk>.
Please night this is being recorded.
I would now like to turn the conference over to Mister Jason Hot.
Oh, then baster relations. Please go ahead.
Thank you and good morning.
We should go third quarter, 2020th financial results press release kind of presentation summarizing these results. This morning.
The results provided on today's call compare only the third quarter 2020, with a year earlier period.
And he figures with respect to cash flow from operations to stuff on today's call refer to net cash provided by operating activities excluding loan originations themselves.
We will be referring to our results on this call only on and adjusted earnings basis, unless otherwise stated you may also.
Refer to adjusted EBITDA. Please.
So you see today's press release for results on a general accounting.
Accepted accounting principles forget.
Please see the sections in the back of today's press release for the complete definitions of any such vulgar terms reconciliations of these items for the corresponding to up results and how when and why management uses them.
Additional information with respect for gap and non-GAAP results mentioned on today's call is available on our web site and then our investor presentation.
Any outlook discuss on today's call. It seems no material acquisitions share repurchases are meaningful changes in the company's 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 27 at the Securities Act in 1933 as amended infection 21 E of the Securities Exchange after 1934 as amended such.
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, an outlook, which may constitute forward looking statements and are subject to the risks.
But the actual impact my differ perhaps materially from what is currently expected.
Except as required by law Newmark undertakes no obligation to update any forward looking statements.
For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward looking statements C. 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, a form 8-K filings.
I'm not happy to turn the call over to our host very awesome see you on Newmark Group Inc.
Thank you Jason.
Good morning, and thank you for joining us for new March 3rd quarter Twenty-twenty Conference call.
Joining me virtually on the call today are new marks Chief Financial Officer Microspore Lee.
Chief Strategy Officer, Jeff Day and.
And our Chief revenue officer to Lou Alvarado.
I would like to begin by thanking our employees for the dedication and ingenuity they have shown throughout the pandemic.
Our entrepreneurial culture flat organizational structure and efficient decision, making processes have have enabled us to quickly acclimate and to continue to provide best in class service to our clients.
Despite the challenges facing commercial real estate, we saw sequential improvement and market share gains in several key business lines.
Her capital markets and that volumes rebounded by 50% quarter over quarter.
We increase our year to date market share an investment sales and G. S. He originations by 100 basis points and 50 basis points respectively.
Her strength multifamily an industrial will drive the ongoing going recovery and capital markets as investors increasingly allocate capital to these property types.
We are focused on growth in businesses with solid margins and recurring revenue such as global corporate services property management and valuation advisory. These business businesses comprised twenty-five percent of our revenues in the third quarter and our near term objective is to grow these businesses to 33% of our own.
All revenues R.
Our expectation is at the low interest rate environment significant capital available for real estate, improving real estate credit markets and the narrowing bid ASCAP between buyers and sellers in many parts of the market should drive capital markets activity going forward.
[noise] multifamily life Sciences, and industrial should outperform the property types in the fourth quarter and into 2021.
[noise]. These acid classes are a strength of new marks and have historically represented nearly 40% of our revenues on.
On October 19th we unveiled our new brand.
Newmark, which reflects the organization that we've become a world leader in commercial real estate services on the forefront of industry Chen trends, we maintain our global reach to our partnership with Knight, Frank augmented by our international capital markets and Global fund raising capabilities, we can.
Continue to add to our best in class Talon with key hires an industrial leasing medical academics and other attractive property types. The platform. We have built positions us to outperform has the markets recover with that I'm happy to turn the call over to Mike.
We remain committed to achieving permanent reductions in our expense space through technology and process improvements, which will drive margin expansion as the market's recovery.
Turning to our earnings.
Just it earnings per share were 44 cents down 27.2% and adjusted EBITDA was 152.1 million down 25.2%.
Other income for adjusted earnings was 94.5 million and reflects the annual NASDAQ earn out.
We received the shares from NASDAQ in the fourth quarter of each year and because we retain the upside the ear now will generate $28 million of additional liquidity based on NASDAQ September 30th closing price.
Moving onto the balance sheet.
We maintain strong liquidity and credit metrics.
Total cash and cash equivalents for 273 million during.
During the third quarter the company repaid 75 million on a revolving credit facility and subsequent a quarter and we repaid an additional $100 million.
This brings us back to our pre pandemic that level.
The company's net that the trailing 12 month adjusted EBITDA was 1.5 times.
Turning to our expectations for the fourth quarter.
While we're not providing specific revenue our earnings guidance for 2022 to continuing market uncertainty week.
We expect U S capital markets volumes to continue their sequential improvement.
Led by strengthened multifamily and GSE originations.
We expect our support and operational expenses to increase sequentially consistent with an overall increase in activity.
We expect continuing sequential improvement in our earnings exclusive of other income.
Additionally for the full year 2020, we expect gap equity based compensation and allocations of net income to decrease by approximately 50 per cent.
I would now like to turn the call back to bird.
Thank you Mike.
With respect to a capital return policy, we plan to update you on our next quarterly conference call.
We have built a company that has remained strongly profitable during the quarter.
We knew mark generated substantial cash flow and we continue to pay down debt.
We have captured marketshare in a number of business lives during a period of extraordinary difficulty.
I am extremely proud of our team.
Operator, we would now like to open the call for questions.
Thank you we will now begin the question and answer station to ask the question you May Prairie Dog, then one on your telephone keypad.
If you're using a speaker fine please take off your hands before placing the case.
Install you'll question please pray star theme K.
[noise], you'll say it's question comes from Alexander goes up with Sandler O'neill. Please go ahead.
Hey, good morning first thank you for the improved disclosure of the owners and the breakout. So that is that's helpful. For a go forward just a few questions here first very just maybe start with the capital return that you just mentioned on the next call I guess, you're gonna <unk>.
Outlined some some things that you may do what should we be thinking about is this more buyback is is more dividend and then is this something that would be more on a recurring basis, meaning it would be sustainable quarter after quarter or the some one time measures that you're contemplating.
[laughter].
All of the above.
I think that squares work were considering and and internally discussing how we're gonna how we're going to best serve our shareholders with respect to the use of or a capital which could could include all of the above.
Okay. The second question is might appreciate the comments on the $62 million cash flow in the quarter and it sounds like things are you know as you said getting better as far as it certainly capital markets, everyone loves industrial multifamily sort of 62 million is that a good level to think.
Out on a run rate basis or is that a level you or is that is are there. Some adjustments that we should think about as we think forward on the company.
Sure you know obviously the cash flow from operations will will depend on the earnings we think earnings will be sequentially better in the fourth quarter. Once you take out the other income in the third quarter. We've done a really good job around are working capital management, you know I think you'll see.
See it in our deck, we have a lot of cash flow improvements from really focusing on collection of receivables are dsos are down here.
Year to date over 10 days, so we really stay focused on that.
And given sequential improvement and earnings we do expect continued cashflow generation in the fourth quarter. In addition to that will get the NASDAQ shares, which it September 30th are worth an additional $28 million.
And so going forward, we'll just continue to stay focused on our working capital and generating cash flow from our business.
And using it to do all the things very talked about.
But Mike just on that point the balance sheet improvements that you took in the quarter. Then group Cashflow are there was all sustainable and that 62, a millionaire that 62 million was enhanced by those measures in which case, we'd want to start with the lower run right.
No I think we can continue to generate cash flows from the business as we stay focused on our working capital. We we think that we continue to generate significant cashflow from the business.
And you know as you can see we've doing.
Really good job, maintaining our leverage <unk>, mainly because we started from a very low leverage coming into the pandemic. So.
So I think it's great and then.
Okay, and then Bury just one final question on the office are down to the office on the leasing side on the brokerage side leasing sides of the business often yeah, we speak to to brokers will hear about.
The commission sharing where you get a big tenants, who does a big deal at adult Yeah. They say, hey, I want X percent of the leasing Commission in your view that the amount that these tenants are are you, claiming reclined back. However, you wanted permit have those been pretty consistent over the years or you're seeing tenants clawback.
More of those commissions, yeah, I'm trying to think about the business going forward. You know are we going to see brokers sort of earning Alaska. The tenants are taking more of it or those trends I've been pretty consistent and therefore, you know we shouldn't really expect any change.
I don't expect any change.
Okay, Okay pretty consistent.
Okay. Thank you.
Your next question comes from Jane.
<unk> the money with Katie definitely a please go ahead.
Thank you very much it's looking like investment sales for the air can be down 40% to 50% from the average over the last five years, which would imply a strong double digit cake or in the business. Once growth resumes question is do you expect capital markets growth to turn positive in 2021 and can you give a range.
Or maybe what might be reasonable to expect in terms of gross parameters and secondly over what time period do you think of recovery and volumes might take place getting back to you know the average north of 500 billion that we've seen over the past five years.
[laughter] well the fun just depending on the particular area food group.
I think you know and low interest rates generally historically have been.
Ah Ah Ah unimportant and aspect of activities. So there is a significant amount of low interest rates. There is we're already seeing in in you know in Ah north amount of activity on the multi space industrial the data data centers life science et cetera. So so some of that is coming back.
Invest as we as I've sat on other calls there's $200 billion, a dry powder 300, plus billion dollars a dry powder globally, they're still an enormous amount of capital available to invest I think there'll be some level of price capitulation and certain other categories where people access.
You know the the relationship of the market to values and we'll start repricing some of their assets, but but surprisingly you know the pricing on multi has been good and contends can consistently looks looks good and I'm encouraged into 21.
So I I, it's hard to you know this is a very fluid situation, but I think we'll be moving in the direction I'm getting back to the volumes that we were at.
And faster I think that that segment of the market capital markets piece of the business will probably come back sooner than some of the you know the confusion and obviously, saying who will take a little longer.
Thank you very much and you look at a new marks overall valuation it's market capitalization, it's total enterprise value and think about potential opportunities to enhance value for all stakeholders and what are the biggest opportunities can you comment on M&A in the space are there increased.
Trinity is there do you have any thoughts around larger scale M&A or merger of equal type transactions do you think those create value.
Sure. It's in terms of Ah, how you're thinking strategically about the business and the best opportunities to grow shareholder value.
[noise] Oh, we've we've kind of viewed ourselves in many respects O as well, where we've acquired 50 50 companies smaller companies, we kind of consider yourself more than a navy seal category. We we've looked at specific areas to fill in white space to put members of a team on the field and thing.
Is that that help us on a holistic basis and create a multiplier. So we we built we believe we we believe in talent that is without question and that is not gonna change. So we will continue to look for talent.
We will look for fill ins in and where opportunities for creative acquisitions will will occur, but we've done fairly well by doing acquisitions of the right people that filled the right space in our company and we think we have a really still very good runway to.
Do that.
And J I.
Oh yeah.
Gatland.
This this little Albright a J I think you know we also have a significant amount of ability to grow in our services lines property management Global corporate services. Those are as we mentioned those are areas that we feel we can grow from 25 per cent of I was having either 33 per cent of those avenue and that's that that is a significant impact.
To us because it is a it is the area, where there's significant focus by our occupiers today and it's a critical piece of getting people back to the offices and back to what we were before.
Ah. Thank you Lou that's that and just to add to that that that's that's an area. That's you know recall all of the foundational work that we've done to build a platform puts us in a position to be to be in a place where we can weakening stack all of those businesses without.
Without a lot of acquisitions.
Just by winning more business.
Okay, Yeah I know.
The last thing I would point out there is that because of the strength of our balance sheet. We do have the ability both the return capital to shareholders and invest in the business over the near term.
So that's that's a really positive aspect for us.
Thank you very much and just lastly, they common around equity compensation on a GAAP basis, including allocations of net income you said for the full year 2020 at will be down 50% Sorta make sure. That's for the full year 2020, and not the fourth quarter and what would you expect for 2021.
[noise] sure for the comment was around the full year 2022.
So that would imply you know a significant reduction in that line item you are over here in the fourth quarter Uhm.
2021, I need a little too early to to really project at at this point, but we'll try and give you more color as we get into 2021.
Thank you for taking the questions.
Thanks <unk>.
[laughter].
Your next question comes from Michael Fun with Bank of America. Please go ahead.
Yeah. Thank thank you for the questions I hope, you're all well I I have a couple of the standard if I could.
So I'm thinking about fourth quarter in time back to your comment on the expectation for transaction based activity do you expect similar incremental merrigan to what you laid out been detrimental margin a few quarters ago on the deck.
So you know I think the the improvement.
Revenue line items will come primarily capital markets as we move into the fourth quarter Michael.
That will come with some level of expenses sequentially.
You know go into <unk> three to queue for.
And we do expect our earnings overall to to improve somewhat although our margins will remain challenged as we as we move through 2020.
Through the fourth quarter, just given the dramatic change in the volume of activity well, we've done a good job and we have a very variable expense structure and we've done a good job on fixed expenses.
We do see some decline in margin for the full year.
Okay, and then on the strength in multifamily industrial can you call out maybe some of the.
Some of the regions, where where you're seeing particular strengthened multifamily an industrial or was that pretty broad based across the entire foot perhaps.
I'll take the multi and and look and comment on industrial.
On the multifamily side.
We're we're seeing the strength predominantly sunbelt states in suburban markets.
We have seen a little bit of stress in New York for instance, San Francisco, but the preponderance of our portfolio actually matches very nicely with the performance of the market right now and we're very pleased with the velocity of the sale transactions and the contribution of low interest rates has really helped us there.
HM.
Yeah, and I mean.
Oh, sorry, sorry, yeah on the industrial side I would say, it's pretty consistent across the country. You know companies would ecommerce are growing and they're looking for distribution centers and so forth in in areas, where we typically for example in the Boston market, there's been substantial growth in the industrial where in the past that wasn't a heavy food group.
Area and so that that's just been very very consistent across all markets across the country.
We've also in the last quarter we've hired.
30, industrial brokers and that's.
You know that and and we've you know we have a pretty good industrial team that we inherited going for as far back as Grubb, and Ellis, which had a big industrial base.
Base certainly on the West coast. So we we feel really really confident uncomfortable. We were also yeah. We're also there's there's you know lots of people want to you know jump on the bandwagon.
Got it and then just you know keeping the multifamily industrial theme.
Is there enough inventory either doesn't broadly an industrial or you know I'm kind of in the sunbelt more suburban markets and multifamily.
To maintain the velocity.
And those business lines or do we need to see a pickup and some of the other more traditional property types like office.
And can either maintain or show her show improving revenue and failed in 2021.
We have a we haven't been runway real good runway and industrial we have a good runway and many of the other categories as well as multi so we think there's there's we can ride that we we think where we are now is where office. It's gonna get better we were in a trough and I've I've actually.
This this is for the rest for the whole country. This has not been particularly fun.
But the opportunity to design your business or in in the midst of a trough as he was one of those opportunities that you can take advantage of and use it for the long term benefit of the company and I think that we will be one of those windows. It comes through this.
To the other side and and and all of the categories and do do better.
Okay, guys. Thank you very much nice quarter Duran tough time.
Okay. Thank you.
Once again, if you went to ask a question. Please pray starred in one on your telephone.
Your next question comes on that Henry Coffee with me, but it's.
He's gone ahead.
Good morning, and and let me add my congratulations.
You're hitting all the right strokes doing all the right thing. So it's it's it's <unk> courage to watch.
When we talk about capital markets recovery is it multifamily industrial and nothing else or is that just you know, we we know and talking to multiple parties that those are you know the too hot buttons, but.
Yeah.
Henry I would tell you definitely multifamily an industrial are are happened all along with that is life Science life Sciences had a tremendous uptick, particularly as you know.
What happened with the pandemic I think that retail.
People are gonna rehearse and we're working with clients now that is a repurpose, we're gonna be doing transactions, but but it may not be retail it could be conversion to industrial it could be a conversion. The medical you could be a conversion of multifamily, but you're seeing a lot of people now looking at their assets and saying, Okay. If office is gonna be slow for awhile what's.
My alternative method and if the alternative method itself then they're gonna go to the market with that and so that's what we're seeing where office is gonna be slow until we can define what's gonna happen with tenants tenants are still trying to figure out what this space is gonna be <unk> look like.
But as soon as that discoveries per se is there I think we will also have movement in the office sector as well.
Let me just let me add to that thanks Lou.
For starters weird, we we made a conscious effort to be a leader and they alternatives. So we have we have a very very strong.
Bench in the alternative senior housing self-storage student housing manufactured housing odd data side died in life Science, So where you know where where the number one in senior housing number one in student housing number one and self stores, we just sit down some you saw.
A billion and a half dollar sale for a portfolio of self storage and and so there are alternatives and some of the investors who been radisson, an office or turning to other forms of investing.
And there was a lot of development and industrial which will create way more and and Ah Ah Ah way more inventory coming on line for US both on the leasing side and then ultimately the finance side and it has a sale side. So you know so we're we're sufficiently diverse and very focused.
<unk> you know getting people who are talented in the business. So that will with them, but the increase will continue to increase her marketshare, which is really important and so we're we're encouraged by that as far as office goes there's been a lot of talk a lot of discussion about office has to watch what is what's the meaning of office what is what's the impact of.
[noise] remote working where there is a crowd a wide spectrum of views on that we we don't we were not as pessimistic Osama some of our peers. We believe that the that the office is going to be here and that that the the remote working will be a part of it.
But I mean, it usually when you look at office in a in the in a in a normalized world a typical occupancy of an office building is generally around 64, 65% of employees and at any one time. So it's not we're not too it's not too distance be before we see 40% to 50% and.
And and those those numbers are all over the lot because C E o's or confused about what the impact of remote working has certainly C. E. O's if they can reduce their costs in real estate of course. They will the question is what's the impact on and what's the what what is the productivity slippage in respect of not being in the office and relying on.
Wrote remote working and all of those there is no definitive answer on that but we believe that ultimately the that we that the business was moving towards a densification that overshot the mark So there will be some day densification there will be some more remote working.
The question of whether people have their own desk their own bench is still open but we believe that C. E. O's are gonna want to which to bring their office workers back to the office better monitor my monitoring and more productivity. There there are certain aspects of the office.
Of the office workers that that has to be in the office and some more perfect perfunctory contract workers that will work more remotely, but they'll also be more collaborative and team spaces in in their their headquarters to support that effort and to create the kind of collaboration.
Culture, a culture that is necessary to have that create that goodwill for a company and the brand.
Oh I agree you you you can't build culture.
With everybody sitting at home and without a culture, you don't really have a business Ah Ah Ah on a completely different topic.
What is the in this world obviously, you an important part of the book value calculation, what what what is your estimate of the current sort of additional gain that you could realize on your NASDAQ shares not captured in book value right now.
I know, there's you know there's always a does not only the shares you haven't contracted to sell at a rate plus there's the upside on the contracted right. So.
Yeah. So I wonder if you remember other than the 2020 tranche, which is now on our balance sheet.
The remaining tranches through 2027 is off balance sheet.
And at the September 30th NASDAQ prices.
And even giving some of the monetization we've done 220 22.
It's close to $700 million of incremental capital T.
Thank you Mark so it remains to be a pretty substantial off balance sheet asset for us.
Okay.
So that takes you tangible book value up to 375 or $4 a share it's to be precise it's 377.
What are your thoughts about buying back stock if if if you if you buy back stock, it's obviously gonna be incremental to earnings given where your your your shares are valued.
But it it it will erode tangible book value, how does that factor into the equation.
Sure well I think is Barry mentioned, we're gonna get into a little bit more detail on her thoughts around the Capitol distribution policy.
Next earnings call, but certainly with the stock trading where it is now it isn't attractive choice with respect and returning capital to investors. So we're continuing to look at that.
The to your window for the spinoff ends in November 30th.
And and then we'll let you know where we're at on the next call.
Thank you very much.
Your next question comes from Patrick O'shaughnessy with Raymond James. Please go ahead.
Hey, good morning, So give me your decision to pay down your credit facility by further hundred million dollars. So far this quarter.
It kind of seems like you guys already internally have a view as to new marks Catholic turned philosophy and then as you just mentioned the two year post spin restriction on repurchases does expire at the end of this month. So why are you not in a position to communicate your Kappa term plans to investors this quarter as opposed to the next quarter.
[noise] Yeah, Patrick that's a great question, we we're obviously thinking about it a lot internally there are continued restrictions around the to your window.
And you know, we'll we'll see how things play out over the next month or so and we will provide a lot more detail on our capital return policy, whether it's dividends or stock buybacks and how we think about allocation of capital in general.
We'll get into some more details on that.
Is there any consideration being given to accelerating the monetization other remaining NASDAQ chairs to fund share repurchases.
Well you know we have $273 million cash on the balance sheet at the end of the quarter, even with the debt pay down in the fourth quarter. That's 173 million will continue to generate cash flow from the business through the end of the year plus we'll get you know close to 30 million out of the NASDAQ sure. So we have sufficient.
Little on the balance sheet, we have sufficient ability to borrow under the revolver, we need to another 225 million, where we can where we currently stand NASDAQ monetization to always an option, it's just what price or what cost.
And if we think we needed the capital we could certainly go that route at this time I think we have sufficient capital on the balance sheet draw availability.
Both the return capital to investors and continue to invest in a business that should we need more NASDAQ monetization is always an option.
Got it.
So how are you guys thinking about the impact of urban flights and the resulting boom and single family housing under multifamily business I think in response to a previous question and kind of give them. The geographic dispersion of your multifamily business. It sounds like you're not really concerned about urban flight as a structural headwind, but what are you thinking about.
That right now.
Well clearly we're seeing.
I wouldn't call it urban flight, but we are seeing some migration from urban areas that suburban areas, but it's as much renters, making that transition as it is homeowners and as we said before because we have a disproportionate concentration in sunbelt states in suburban markets, we're actually seeing.
Some markets word occupancies are increasing in rents are going up so right now we don't view that as a head wound or a structural challenge for the multifamily business.
Well, we're likely she she suburban office come back quicker.
But.
But still you know at the end of the day. This is we're in the middle of the pandemic, whereas whereas sort of at a second wave of this pandemic. So.
I don't think anyone can make a final determination of what happens I think we're pretty well positioned for either.
And we.
We will adjust to or whatever.
Happened.
Gotcha.
Can you provide some color on your non transactional revenue during the quarter, so areas like valuation an advisory and the management services. The revenue Uhm, what what are you guys seen like right now and what are your expectations as we move forward in those areas.
So on the.
Property management side, we have had.
Pretty significant growth so far year to date, and we have had a lot of clients that have.
Previously Theirself performed look for this as well as we picked up some market share as we have.
Continuing our focus in that area.
Jeff I'd like new address on valuations.
Sure evaluation, an advisory has continued to performed quite well.
We see a lot of velocity from lenders that have portfolios it needed to be revalued, we have a very active.
Clients and your investment sales space into that space that are keeping them busy and by virtue of the expense constant some restructuring that we've done and we've improved margins as well.
Great. Thank you and then last one for me so you're leasing revenues, we're down I think it was 46% year over year, but that's a little bit worse than some of your probably traded competitors have already reported.
Is that you know just a function of geographic mix is it sure losses, what he's seen right now and leasing that would've maybe that you would attribute that under performance too.
I I would say, it's it's a little it's just really.
Some timing some geographic mixed I mean, we we do have a large leasing in both the bay area and and the West Coast.
And Ah and New York and some of the other urban areas. So I think that was probably.
Heard a little bit more and those things again with those things are are dressel, and where we continue to dress and a continued effort to diversify the geographic distribution of all of our.
Food groups.
Great. Thank you.
This concludes that question and answer station I would like to turn the conference back Guy that to Mister Barry Goffin for any closing remarks.
So I Wanna, thank everybody for being honest call, where despite I I wish everybody health.
Safety and and.
And look forward to speaking to you in the next quarter.
Thank you.
[noise] I conference with now can play dead. Thank you for attending today presentation you may now disconnect.
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