Q1 2021 Newmark Group Inc Earnings Call
Pardon me the conference will begin in two minutes and thank you for your patience.
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Good morning, My name is Jason and I'll be your conference operator today at this time I would like to welcome everyone to the new Mark first quarter 2021 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note. This event is being recorded and I'll now turn the call over to Jason Hart, Vice President of Investor Relations. Sir you may begin when you're ready.
Thank you and good morning.
We issued our first quarter 2021 financial results press release, and a presentation summarizing these results this morning.
And the results provided on today's call compare only the first quarter of 2021 with the year earlier period, unless otherwise stated any figures with respect to cash flow from operations discussed on today's call reported net cash provided by operating activities, excluding loan originations and sales.
Yeah.
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 and the back on today's press release for the complete definitions of any such non-GAAP terms reconciliations on both these items and the corresponding GAAP results and how when and why management uses them.
Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website and in our investor presentation.
And the outlook discussed on today's call assumes no material acquisitions share repurchases or meaningful changes and the company's stock price.
These expectations are subject to change based on various macroeconomic social political and other factors and putting the COVID-19 pandemic.
And 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 Day Ethics Securities Act and 1933 as amended and section 21 E of the Securities Exchange Act, and 19, and 34 as amended and 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 and outlook, which may constitute forward looking statements and are subject to the rest of the actual impact may differ possibly materially from what is currently expected.
Except as required by law and Newmark undertakes no obligation.
To update any forward looking statements.
And for a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained and the forward looking statements and Newmark Securities and exchange.
And it commission filings, including but not limited to the risk factors set forth and our most recent form 10-K form 10-Q or form 8-K filings.
With respect to the NASDAQ earn out the number of shares received by Newmark will depend.
On the timing of the closing of NASDAQ sale of its U S fixed income business and NASDAQ stock price at the time and it's like I stated I think the closing is subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals and mark can provide no assurance as to when or if the closing will occur I'm now happy to turn the call over to our host very Dallas and CEO of Newmark group.
And.
Yeah.
Thank you Jason Good morning, and thank you for joining us for Nu Mark's first quarter 2021 conference call.
Joining me on the call today are Newmark, Chief Financial Officer, Mike Rispoli, Our Chief Strategy Officer, Jeff Day, and our Chief revenue Officer Lou Alvarado.
Newmark earned <unk> 20 per share on record first quarter revenues of $504 million, reflecting the value of our preeminent and full service platform and the strategic investments we made before the onset of the global pandemic.
As it may fit more than 41% of the adult American population has been fully vaccinated against COVID-19, and more than 56% and have received at least one dose at the same time the U S. Economic recovery is accelerating with six 4% annualized growth and the first quarter.
Nationally the U S workforce has recovered approximately 40% of the jobs lost during the pandemic.
And the countries unemployment rate has fallen to 6% and March 2021 from 14.8% April 2020.
Businesses are now increasingly more confident and are announcing their plans to return to the office.
We will be welcoming all our employees back to our offices on June 1st.
Companies have increased their utilization of space and are making long term commitments across all sectors and the first quarter, our leasing revenue surpassed the first quarter of last year. This outperformance was driven by demand for industrial retail and life science properties as the U S recovery gains traction.
COVID-19 restrictions are easing across the country, many states, including New York plant to fully reopened and before the end of the second quarter.
We maintain an optimistic view for leasing and the second half of 2021.
Our capital markets business modestly decline. However, we gained significant market share during the last 12 months, making newmark the second largest investment sales platform and the U S.
There is increased confidence among investors and lenders as fundamentals stabilize and record amounts of investment capital are available.
Management services and servicing fees contributed to our topline revenue improvement as we continue to focus on growing our recurring revenues.
And March Newmark acquired the business have no Tao global Flex office provider, we expect the flex market to grow 20% to 30% annually over the next decade as corporate occupiers look to create optionality and their real estate portfolios and the response of our clients to this acquisition has been extremely positive with that.
And I'm happy to turn the call over to Mike.
Thank you Barry and good morning.
Newmark generated record first quarter revenues of $504 million up four 1%.
Management services and servicing fees rose 13, 7%, including valuation and advisory fees, which grew 16, 3%.
These recurring revenues increased 312 basis points to 37% of total revenues in the first quarter as we.
And our focus on growing these businesses.
Our leasing revenues increased 5% driven by increased demand for industrial retail and life science properties.
As more companies implement their plans to return to the office, we expect continued improvement and office leasing, particularly in the second half of the year.
Capital markets revenues decreased by five 1%.
Our investment sales volumes decreased 11% as compared with a 28% industry decline according to RCA.
We gained significant market share and investment sales during the last 12 months, making newmark the second largest investment sales platform in the U S.
GSE volumes increased by 29%.
However gains from mortgage banking activities origination net declined 6% due to product mix.
Total expenses decreased by two 5%.
Turning to earnings.
Earnings per share were <unk> 20 <unk>.
Compared to nine cents in the prior year period.
And adjusted EBITDA was $79 $3 million up 81%.
Moving onto our balance sheet.
Newmark generated $25 $3 million of cash flow from operations.
We maintained maintained strong liquidity and credit metrics.
As of March 31, we had $146 $9 million of liquidity.
Which declined from year end due to acquisitions and.
$325 million of availability on our revolver.
Our net leverage ratio remained at one four times.
Our balance sheet does not yet reflect the NASDAQ earn out.
The value of the NASDAQ earn out increased $102 million and the first quarter and.
And has a total net value to nu mark of approximately $850 million as of yesterday's closing price.
We expect to receive this payment prior to the end of the second quarter.
Our near term capital allocation priorities.
And to return capital to stockholders through share and unit repurchases and to invest and growth and margin expansion at attractive returns.
We also intend to pay down our revolving credit facility.
Newmark plans to continue its dividend and distributions at or near current levels through the balance of 2021.
Turning to our outlook.
Newmark expects revenue growth of 37% to 42% in the second quarter.
Based on a strong pipeline of activity.
Including no tell.
The company expects stable adjusted EBITDA margins and the second quarter relative to the first quarter.
In addition, newmark expects approximately $850 million of NASDAQ shares net from the NASDAQ earn out and the second quarter based on yesterday's closing price.
For the full year.
We are raising our outlook and now expect to generate 20% to 25% revenue growth and 40% to 50% adjusted EBITDA growth.
These results will be increased by the additional $850 million of NASDAQ shares net from the NASDAQ earn out.
These expectations include the acquisition of <unk>, which we anticipate will be three to five cents dilutive to 2021 post tax adjusted EPS and.
And breakeven in 2022.
Newmark fully diluted weighted average share count for adjusted earnings was up two 9% and the first quarter.
In the quarter Newmark repurchased 900000 shares of class a common stock for $9 $3 million at an average price of $10 and 57 per share.
Excluding material acquisitions, the company expects to use share buybacks to keep its fully diluted share count flat for 2021.
Operator, we would now like to open the call for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
And if youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press star and two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question is from Alexander Goldfarb from Piper Sandler. Please go ahead.
Hey.
Good morning, good morning.
So two questions here and apologies, but first the first questions and Chicago, So one Mike.
Just if you can let us know the taxable if theres any taxable impact of the NASDAQ share settlement and two as part of debt. The 850 million debt coming in you mentioned keeping the share count flat can you just rank prioritize because you guys have been heavy and investing and acquiring producers.
But just curious now that you have this windfall.
<unk> first on keeping the share count flat.
You know it improves the earnings growth and then second investing or is that not debt firm.
Firm priority as far as order use of capital.
Great. Thanks, Thanks for the questions Alex and <unk>.
Terms of the tax rate is as we stated last quarter because of our favorable partnership structure. We believe we can shield most if not all of the taxable income.
And from the from the NASDAQ earn out so we expect our tax rate to be below our adjusted EBITDA adjusted earnings tax rate and I would say significantly below that.
In terms of capital allocation, we did say, we expect our share count to be flat and we'll use stock buybacks to do that.
And because our share count was up two 9% and the first quarter.
You know the floor, there is at least $100 million of buybacks or more.
As we move through the year.
As the money comes in and we're obviously going to evaluate our opportunities to continue to invest and the business versus share buybacks and then we will make decisions on how to allocate the capital then.
Okay. Okay.
It goes to the buybacks as far as improving the growth profile. So that hopefully we see that the <unk>.
Second question is a lot of discussion on 10 and 31 on one hand, you know a lot of the big institutions that I believe are sort of traffic and and your brokerage space, our tax deferred or not really tax affected whereas.
My guess is that a lot of the 10 and 31 theatres are sort of the mom and Pops, where the smaller privates and maybe just thoughts on your view of what would happen would we see sort of.
Our suspension of sales at the low end, but unaffected.
At the bigger size or do you think that this could have broader implications just curious your day.
Yeah.
Okay.
Well I don't think we can count on anything being passed.
There's still a lot a lot of things up and the air at the 10 31, when I went and analyzed.
<unk> and Washington realized with with changing the 10 31 rule the amount of income capture by the federal government will be a lot less because people won't be doing transactions smaller transactions. That's that's on assumption, that's being evaluated by Washington, having said that and R. R.
Our business is mostly institutional.
Private equity and institutional and it does.
Doesn't really have an impact on on those and those buyers and it's not a large part of our part of our business.
Okay. Thank you Barry.
Yeah.
The next question comes from Jade Ramani from Kb Adobe and please go ahead.
Hi, This is Sarah Obeidi on for Jade and <unk>.
On the strong quarter. My first question is what were the main drivers of outperformance.
Any color by business line geography, and property type would be helpful.
Yes, sure, it's just a little off our auto.
Look we had obviously the strong sectors that have outperformed on our multifamily and capital markets life Science, industrial and retail had a pickup and in this last quarter and.
As people are seeing the and and the ability to return to the office decisions are being made and and and.
And as a result, it's driving more activity.
Those markets that reflect those uses life science industrial and multifamily did better but across all markets. We saw improvements by day.
But the heavier results were driven and markets that had those sectors and its key sectors.
And that are active there.
And just to add to that to add to that is in and.
And 1918 19 and.
And 'twenty first quarter 'twenty, we hired a great deal of talent.
And that talent and came on board at the onset of the pandemic.
So in addition to the normalization of the market itself, we are beginning to ramp up.
Just station period for those for that talent.
As we will organically impact the growth of the company and we're seeing that.
And we come into play.
Mhm and things and any color on geography.
And I think I'd say as I stated I think across all the geographies, we saw improvement in the quarter.
Markets that have life science like Boston was one of the key driver and that and.
In southern and Northern California, those areas did better as it results from those business lines debt debt, where the favorite proof of investors right now.
Thanks, very much and my second question is what are the main driver and that strong revenue growth and the second quarter and for your increased expectations for the full year.
Sure I'll take that one.
Seeing growth.
<unk> growth and leasing were.
And we're seeing the pipelines build and capital markets and a lot of the sectors that Louis discussed.
We continue to win management services business and.
Our servicing book, which is now over $70 billion.
Continues to grow as we continue to originate debt so.
In short, we're seeing growth across the board.
And in many of our businesses and in many of the geographies.
Great. Thank you so much for taking my questions.
The next question comes from Henry Coffey from Wedbush. Please go ahead.
Oh, Yeah excuse me good morning.
First on the buyback issue I think if we get and listen to some of the discussions.
The last year or and 2019, the expectation was pretty high that.
Once you.
Got passed the tax related issues tied to the spin that they'd be more aggressive.
Very aggressive buyback program, you've got this $800 million.
Which is a lot of money coming your way.
What's what's the hold back what what's the thought about using that money and just driving it to either pay down corporate debt or buy.
Buyback stock or both.
And a big very Grand way.
Yes, good morning, Henry this is Mike.
We're not backing off any of those statements I think.
The money will be coming in we believe and the second quarter.
And we've set a floor for what the buybacks will be for the year and you can see that's pretty material number and.
You know as we get the money and we look at our opportunities.
We'll decide whether to increase that or invest in the business or do both we see a lot of opportunities.
Yeah. Henry you should also note that we have spent the last five six years building out infrastructure and.
Into markets that have matured.
With fixed cost and infrastructure that support those markets with a enormous amount of runway and white space and those markets that will allow for.
And incredible incremental margin benefits by acquiring talent to those mature markets.
So the idea is either.
Using the capital to acquire higher build out.
Productive teams.
Or.
For a buyback and that's sort of the decision you have to weigh each each time, you think about those issues and there are three pieces to it.
One pay down our debt to buyback our stock three go for the businesses that are performing the best and pile on.
And and benefit from the gearing and scaling that occurs where you acquire talent and a mature infrastructure market.
Yes.
Good Thank you and then.
Looking at no tail of.
Heavily and and I think I would ask this question about novatel as well as the office space in general.
Have you seen any green shoots signs of early activity that debt reinforce your optimism here.
Yes, we've we've had very good reception from the community we were a believer in flexible enterprise work workspace from the very beginning post.
Post pandemic, we believe that activity will accelerate based on the combination of hybrid work and need for optionality flexibility and agility by large users.
And and a requirement by owners to amend it ties their space for the purposes of attracting employees back to their hubs and flex.
Flex work will be a part of the conversation as well as any narrative around hybrid work. It will be part of the hybrid work that allows for poor agility, both on the corporate level and amenities on the owner level.
What has been the reception to the idea of you offering this as a managed product.
As opposed to the Wee works model of buying and sub leasing and and actually having capital at risk and the assets.
So firstly that the business is more durable and sustainable as a manager flag business. If you followed the reliefs that people. We hired are all hospitality related one ran Morgans hotel. The other was a senior executive and Marriott So.
The combination of of of Flex work.
Co working.
And the hotel hospitality aspect of it brings a new flavor to that business. We think it's the right one and and going forward, we think that and not only will it will appeal to the owners as a managed solution.
On the structure of it will be very favorable for owners and very favorable for us with with minimal risk on our part. So it is our plan to be a management business not to be a lease release heavy craft capital. This is this will be a capital light business.
What are sort of changing gears.
And of our associates competitors Zelman and associates.
No. They are really good and calling them a competitor is the only and upgrade to us but.
And they've been talking about.
Converting the conversion of a lot of this sort of dead mall space debt retail space and.
Single family build for rent multifamily.
Et cetera.
Is that something that you see as an ongoing activity and the real estate markets and.
And how does that opportunity impact newmark.
And so.
On the flex work.
Part of it.
We're a hub and spoke.
On a strategy.
And you'll have the urban core and the three rings around it we think that some element of and the hybrid environment. The combination of having the ability for whether it's one or two days a week working from home and driving 15 minutes to spend some time and are more local office in and <unk> will be a solution.
And it could certainly be a.
Attractive firms for the malls.
And the question of you know.
The.
Making the malls more experiential and more diversified is going to continue to be part of the conversation not even dimension and the last mile solution for some of the E. Commerce Lou did you have something to add.
Yes, I think Henry the what we're seeing is and a lot of cash not just malls, but other type of assets being repurposed life sciences become a big player and that medical medical academics has become a big player and that as well as the multifamily.
So those I think youll see some of those and garner.
You know somewhat obsolete being repurposed and and we play a significant role and that with our investment and sales teams.
So it's really beyond just these are great places for houses the potential to repurpose.
This seemingly debt real estate.
And I think we all have one and our neighborhood, we could point out.
Is it is an opportunity on the brokerage side.
Absolutely.
Great. Thank you.
Okay.
The next question comes from Michael Funk from Bank of America. Please go ahead.
Yeah, Hi, good morning, guys. Thank you for the questions.
Good morning.
Yeah. So a couple if I could just thinking.
And thinking about return to office I think you've mentioned that you're fully returning and June we're hearing.
Similar comments from a number of large companies and.
And hosted a call with with Lou a month, a month or so ago and and he was noting that.
A lot of your a lot of your clients are.
Trying to think about how to allocate their real estate and maybe pushing off some decisions until after return to office units in terms of larger leasing decisions.
So now that we're approaching that point with a turned to office, maybe an update there on the conversations that you're having with clients about on about office leasing plans.
Okay.
Yeah. So we are definitely seeing an uptick and tours and uptick in activity.
And more and more as we speak with folks.
And our plants are actually being put in place and similar to the plants that we have in place to return to the office, we believe that by the end of this summer.
Certainly in September that there'll be a significant increase and the number of people that are back in offices and companies that are back operational and that as a result of that we've also seen an uptick and retail retail which was.
Pretty much you know kind of stagnant to non active and all the sudden become very active as a result of that people are realizing that the return and so on the way the vaccine is rolled out and people and more comfortable returning back to the office and and the employers believes the office environment is going to be here and he is necessary. So.
And from the last time, you and I spoke the uptick has been even greater than I anticipated at that time.
No that's great that's great to hear and then last question that I had with on the on the gross capital and investment and I heard your earlier comments, maybe this conditional and detail.
And on property types and that.
That could be maybe attractive maybe data centers. For example has obviously been a very hot property type.
And we're thinking about expanding and property types and then even if even regionally I'm thinking about expanding some of those teams outside of New York, maybe into some of the faster growing regions that'd be helpful. Thank you.
Yeah, Michael so.
We continue to have a lot of white space on our platform to add talent.
And a lot of geographies and a lot of different product types.
Gary mentioned that we added a significant amount of talent leading up to the pandemic.
And we spent the last four or five years built.
And building out the platform, but we're not by any means done.
And I think we have a long way to go so Barry I don't you may want to expand on it.
So.
And we've been we've been mature interest first.
For six years I mean.
We've gone from a two.
And 2% market share and capital markets to 16% and the U S.
We've gone from virtually no capital markets to number two and the U S last year.
And number two and multifamily number one and alternatives I mean literally senior housing self storage student housing and manufactured housing.
Life Science number one so.
And in the alternative space, we dominate the market and that's all part of the plan to two.
To be very.
Friendly and partner with institutions that have $250 billion and dry powder to spend.
And.
So we we're the we're the only firm one of the only firms.
One of the few that has the ability to provide local expertise and global reach.
And that when I say that zone.
And come in as an institutional firm more like an investment bank and provide a solution I'll sell you ask your portfolio of assets, but you can only rely on our portfolio of premium meaning that you'll go to the world buyers, but it it forsakes the domestic buyers and the local buyers.
And in most asset classes, yeah, there are cycles, and who the who the appropriate buyers for and asset class or type of property and.
Different types and so when somebody wants to put a portfolio on the market. We have the ability to have we have and international des we reach all of the sovereign wealth funds all the private equity investors and we understand the local market and the local investors and.
And the domestic buyers so we can offer the.
Traction of global premium pricing or local and break it up and get the best price and.
And what we've been doing now is and.
And building out that geographic capability and elevating our institutional relationships to the point, where we're viewed as the place to go if you have a portfolio to sell and you want a complicated and structured finance for a complicated structure and sale.
Thank you for the questions.
Again, if you have a question. Please press Star then one.
The next question comes from Patrick O'shaughnessy from Raymond James. Please go ahead.
Hey, good morning, so the topic de jour seems to be inflation and these days can you remind me how inflation would typically impact the industry.
And historically I've been doing this for quite a few years inflation is generally real estate friendly.
You have fewer fixed financing and you have increased value and rents youre going to youre going to do well.
You could have inflation without interest rates going up I mean, the amount of.
On the balance sheet and the U S will make it hard to continually raise beyond this certain set amount of interest rates I think you'll have low interest rates.
For a long while if you have inflation it would actually be very good for real estate low interest rates and inflation is spectacular.
Got it very helpful.
And what's the environment like right now in terms of talking.
Talking to teams of brokers that are looking at potentially joined Newmark.
Oh well.
You know as we as our brand continues to elevate as we continue to have bigger market share as our presence is felt at the institutional level and <unk>.
Every respect we continue to be way more attractive to recruits and.
And so we will continue to hire where we're very selective and we're looking for people who are high Rev. Per capita we're looking for people that are game changers and and.
And large producers. So we are selective on that and that regard.
And and it only seems to be getting better and and as we continue to improve every area and we started with basically one appraiser we have 500.
So once once you.
<unk> critical mass and you're safe choice and.
And it just gets better and better.
Got it and then maybe to dig in on that.
How much of your recruiting efforts as you identifying teams that you think would be a good fit for new Mark and your profitably reaching out to them versus folks reaching out to you guys unsolicited.
I think it's I mean.
It's not hard to find who the right players are who the real people and every market.
I think it goes both ways.
But where we target people.
And we're not looking to hire people, who are miserable where they are.
I mean generally people that produce and are doing well.
Probably happy so it's not.
Some people don't fully understand our company and it's our job to reach out to them to explain.
Who we are but but it's both.
Got it thank you very much.
There are no more questions and the queue. This concludes our question and answer session I would like to turn the conference back over to Barry Johnston for any closing remarks.
Hi.
Where we're extremely excited about 2021.
And.
And not the least of which is next quarter and $966 million of income from the NASDAQ trade and $850 million and net cash.
This gives us an opportunity to focus on our core objectives.
Buying back shares.
Paying down our debt.
And focusing on those mature markets that we grow.
So we're in a good position and we are extremely optimistic about the rest of the year.
Uh huh.
And I look forward to speaking to you and the next quarter and.
And enjoy the day.
Okay.
The conference has now concluded thank.
Thank you for attending today's presentation you may now disconnect.
Okay.
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And then.
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