Q1 2022 Newmark Group Inc Earnings Call

Thank you for your patience, we will begin in just a few minutes.

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Good morning, and welcome to Nu Mark's first quarter 2022 financial results conference call.

At this time, all participants will be in a listen only mode.

After the speaker presentation there'll be a question and answer session.

Please be advised that today's conference is being recorded.

I would now like to turn the call over to Jason Mcgruder head of Investor Relations. Thank you and please go ahead.

Thank you operator and good morning.

Mark issued its first quarter 2022 financial results press release and a presentation summarizing. These results. This morning. The results provided on today's call compare only the first quarter of 2022 with a year earlier period, unless otherwise stated.

Any figures with respect to cash flow from operations discussed on today's call refer to net cash provided by operating activities, excluding loan origination and sale.

We will be referring to our results on this call only on a non-GAAP basis, unless otherwise stated earlier, we've adjusted earnings and adjusted EBITDA. Please see the section.

In today's press release for a completed <unk> updated definitions of any non-GAAP terms reconciliations of these items to 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.

It's available on our website.

Supplemental excel tables and in our quarterly financial results presentation.

Well discuss on todays call assumes no material acquisitions share repurchases or meaningful changes in the company's stock price. These expectations are subject to change based on various macro economic social political and other factors, including the COVID-19, pandemic and the Russia, Ukraine conflict.

Our 2025 financial operational targets do not.

Do assume acquisitions do assume acquisitions. They are also subject to change for the same reasons, none of our targets or goals through 2025 should be considered formal guidance. 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, a but just curious at 1933 as amended and section 21 E of the Securities Exchange Act.

Okay.

934 as amended such statements involve risks and uncertainties. These include statements about the effect 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 risks there.

That the actual impact may differ 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 differ from those contained in the forward looking statements see 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 or form 8-K filings I'm now happy to turn the call over to our host Barry <unk>, Chief Executive Officer of Newmark Group, Inc.

Good morning, everyone and thank you all for joining us.

With me today are <unk>, Chief financial Officer microscopy achieved.

Our Chief strategy Officer, Jeff Day, and our Chief revenue Officer Lou Alvarado.

I'm proud to report that our revenues increased 35%, resulting in our fourth consecutive quarter of record revenues.

This included a record first quarter for management services, serving servicing fees and other.

These businesses increased by 24%.

We're on track for a recurring revenue business businesses to represent over 40% of our total revenue by 2025.

Paired with 31% currently.

We had our best ever first quarter in leasing revenues, which improved by 35%.

This reflected significant increases in office transactions as tenants continue with their plans to return to the workplace.

Newmark generated 50% growth in revenues from investment sales and a 40% increase from commercial mortgage origination including multifamily.

After the ended the quarter, we acquired two companies the H two a well known firm in London, and the London market that specializes in investment sales on the sell side and buy side.

Leasing and occupier advisory and Mccall and army, which strengthens our multimarket tenant representation business.

These firms strategically enhance our business, adding best in class talent and client relationships.

Historically the companies, we have acquired benefited from our platform and growing their top line by more than 50%.

In addition, we launched operations in Hong Kong This month, where we hired some of the industry's leading capital markets and leasing professionals. We remain confident that we will meet our goal of generating over 10% of our revenues from the from outside the U S well before our prior target.

Of 2025.

Despite the current macroeconomic conditions.

We believe that the fundamentals of our business and our industry leading growth remains strong.

And that we will meet our previously issued guidance we.

We are in a very strong financial position with virtually no net debt and remain confident and on track to achieve our 2025 goal of $900 million of adjusted EBITDA with that I'm happy to turn the call over to Mike.

Thank you Barry and good morning.

Today, New Mark reported its best ever first quarter revenues and earnings.

Revenues were $678 2 million up 34, 6% compared with $504 million.

Adjusted EBITDA was up 64, 5% to $126 $5 million versus $76 $9 million.

Adjusted EPS was up 80% to 36.

Compared with 20.

Our adjusted EBITA margin improved by 339 basis points to 18, 7%.

<unk> 15, 3%.

Expenses increased by $126 million of which $77 1 million was variable compensation primarily related to growth in commission based revenues.

$35 $8 million was related to acquisitions and the remainder was due to increased business activity.

Moving to the balance sheet.

We had $442 $8 million of cash at quarter end.

And our net leverage ratio was one five times.

During the quarter, we sold the remaining NASDAQ shares that were held on our balance sheet at year end.

From July one of 2021 through March 31, 2022, we realized $32 million of additional GAAP income from these shares as compared to the 1 billion $93 $9 million, we recognized in the second quarter of last year.

Since 2017.

New Mark received nearly $1 $5 billion from the NASDAQ asset, including hedging and dividends.

Our liquidity decreased by $133 1 million from yearend, which includes the $87 6 million decline related to the sale of NASDAQ shares.

$39 million for repurchases of $1 7 million shares of Newmark stock and normal first quarter changes in working capital.

This year through Yesterdays close we repurchased seven 4 million shares of new Mark for $110 4 million at an average price of $15 <unk> per share.

Turning to our guidance.

Despite the current macroeconomic environment.

Given our strong first quarter performance and revenue visibility for the second quarter, we continue to have confidence in our full year outlook and we are confirming our guidance.

We expect revenues to grow between three and 7% compared with 2 billion $906 $4 million.

We anticipate adjusted EBITDA to increase between 4% and 9% versus $597 $5 million we.

We expect our adjusted earnings tax rate to be between 17, and 19% compared with 18, 9%.

We expect weighted average share count to decline between 2% to 3% compared with $264 million.

And now I'd like to turn the call back over to Barry.

Based on the analysts' consensus we will have increased our EPS by 40% between 2019 in 2022 with a large majority of this growth being organic.

While our stock is up only 2% since 2019 as of yesterday that.

That is why we continued to buy back shares.

Operator, we're now ready to take calls questions.

Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad.

Any reason that you'd like to remove that question. Please press star followed by two.

Again to ask a question it is star one.

As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question.

We will pause here briefly ask questions you registered.

Our first question is from Alexander Goldfarb from Piper Sandler Alexander You May proceed.

Great.

Hey, good morning down there.

Sue can you hear me questions first.

<unk> the commentary on the on the record.

Volumes and record revenues in the first quarter.

So two parts about that one.

The <unk> NASDAQ gain was that what drove the overage I guess the outperformance in the in the stock I've been talking to and the results and then the second is just given the overall strong commentary there was no change in the full year outlook. So are you guys expecting.

Sort of a weaker back half or are there other things that work such that you did raise the EBITDA or revenue expectations, just given the strength of the first quarter.

Good morning, Alex so on the NASDAQ.

We had received the shares back in the second quarter of last year at about $175.

And over the course of that time through March.

We were able to exit the stock at an average of $180 66.

So about two 5% to 3% above the the value, which we received at the $30 million is the.

Gain over that period of time.

None of that of course is in our non-GAAP results such as all in GAAP.

With respect to EBITDA guidance and earnings guidance.

Over since 2019 will be up 37%.

In earnings.

And I think people like to get a little credit for that performance.

We had a great first quarter, our Q2 pipeline continue to be strong.

And I think as long as soon as we have some more visibility into the back half of the year will consider revisiting guidance.

Okay. So Mike if I understood you correctly.

Yes.

Strong first quarter, you are hopeful that the second quarter follows suit, but right now just given everything in the macro backdrop.

You guys don't want to be adjusting the outlook right now is that that's correct.

I think the little too early in the year two to start changing our guidance.

Okay. The second question is on the NASDAQ previously you guys had indicated that you were in no rush to exit you were going to retain it.

For flexibility I think also.

You, obviously accelerated that with that again due to changes in the macro backdrop or was there something else either youre planning on accelerating stock buybacks or something else that works.

Our intent was always to exit the <unk>.

Stock gradually over time, certainly the macro conditions changed as we got into the first quarter and we wanted to make sure we maximize the value from those shares.

Over time put 1 billion close to a $1 five.

On our balance sheet because of that so we think it was.

The right time to do it as you saw we continue to buy back stock into the second quarter.

Fairly aggressively and.

As long as the stock.

<unk> trade below where we think is a fair value.

We will continue to consider that for use of capital.

Okay. Thank you.

Yeah.

Our next question is from Chandni <unk> from Goldman Sachs Chandni. Your line is open.

Hi, Good morning, everybody and thank you for taking my question So Hudson.

Judy will sneak in you know a lot of companies talked about seeing some pharma falls in transaction opportunities.

Basically how a lot of leverage buyers are getting priced out.

<unk>.

Perhaps to boot.

What are you seeing from your standpoint, how do you think about <unk> transaction volumes are holding deal.

Hi, This is Jeff day.

We've seen.

A decrease in the total number of buyers which were.

Thanks huge group in in every transaction last year.

There is still significant liquidity in the marketplace. We saw very good flow in the first quarter, where we've seen very good flow going into the second quarter.

So we're cautious but we're still optimistic that there is a sufficient supply.

Supply of capital out there still very interested in getting into the multifamily space.

Certainly through the second quarter, we're not expecting a material slowdown.

On industrial you then if I could kind of continue with that transaction.

Transaction Craig. So this morning, I mean last night, Amazon just bought it and maybe if you can be talked about.

Getting in perhaps a bit too aggressive at their supply still going to be a bit more.

You know.

Just that if I mean, how do you think about basically transactions on the industrial side looking ahead into 2022.

Hi, This is Luis Alvarado.

We have seen the issue on industrial really the activity has been they would spend more of their supply.

A lot of the supply has been absorbed in it. So it's really the new construction, that's coming online and yet the demand still seems to be there, yes, there's been a slowdown from Amazon, but there's been others that have been taken up that space and Theres also been some repurposing of space as well so we're.

We're still seeing a fair amount of volume, we're not seeing a significant slowdown in particularly in those larger cities I'd say moving closer.

That last mile distribution the activity is still strong.

Got it and if I may take one more.

You guys, obviously have outlined outline these plans can be explained in Egypt, it didn't global market.

But given the geopolitical situation.

Right now we have Covid lockdowns in China.

How do you think about your ability to scale in some of the.

Businesses. These newer businesses that you just expanded it.

Okay.

Great.

Our next question is from Jade Rahmani from K B W.

Jay Your line is open.

Yes. Thank you very much can you hear me.

Yes Hello.

Okay, Great just want to make sure Theres no technical issues.

Are you seeing any changes in investor behavior, thus far given the move in rates just in the last few weeks.

This is Jay this is Lou Alberto.

So definitely the rates it had some impact.

Jeff said, what Youre seeing is a reduction in the number of bidders, but not.

Not really.

A real slowdown in the activity there is plenty of.

Cash out there still looking for deals and properties that are well positioned are still transact.

And <unk>.

And those kinds of deals that are still in process.

Our folks changing pricing right now.

I suspect that if there's a rate lock.

In place they move they perhaps would not be changing in pricing, assuming its fixed rate debt, but if it's floating rate debt, where there isn't a rate lock in place.

Are we seeing deals re trade are we seeing any price concessions.

We are seeing some impact of the rates.

Either re pricing or just delays in the closing.

But deals are still moving forward and theres still a connection between the two.

Okay do you think that investors I was looking at <unk>.

Single family for rent and multifamily rental.

Our models and it seems that over the last couple of years IRR or actually several hundred basis points above normal target hurdle rates for buyers of those asset classes, especially if there's some kind of development.

Component, so there's cushion already to absorb a slightly lower IRR and still hit hurdle rates.

Do you think investors are in in the beginning part of this rate cycle going to just accept several hundred basis points lower IRR and go forward with the deal because of the capital needing to be deployed or are they more likely to.

Get more conservative and you know start closing deals that are much much lower pace than what we were seeing.

My apologies, we do need to interrupt. This question. It seems like we're having technical difficulties with some of the speaker lines.

No actually patient, while we get through this one.

Operator, we don't need to interrupt this one I can.

Hmm Oh hang on.

Yes, we do have a technical issue here.

Okay. Thank you for your patience, while we get this sorted.

Okay.

Yeah.

Yeah.

Okay.

Yeah.

Yeah.

Okay.

Okay.

Thank you for your patience. Please continue to hold while we get this sorted.

Okay.

Yeah.

Okay, we're back.

You May now proceed.

Alright can you hear now.

Yes can hear you loud and clear.

Alright, let's go back to Jason Jason question, I think we are on Jade.

Yes.

Really that Oh go ahead.

This is Jeff J I remember your question. So we won't make you repeat it.

So what I would say that so far in BTR have had great returns over the last few years that just regular way of multifamily for that matter.

So.

I believe your question was two pieces. One is are there going to be re trades now into our people going to accept.

Lower yields going forward, so let's start with the first piece any transaction that's in process right now when you're in the middle of a transaction at a price that set and there is a material.

Material movement in rates or otherwise certainly a bidder is going to try to find a way to take advantage of that by reducing the price sometimes that will work sometimes it won't work there is still a tremendous amount of capital available for at Fr ETR in multifamily.

But on a going forward basis, because the returns have been so significant over the past few years I do believe that even if they fall off due to an increase in rates.

Or risk there is still quite a bit of return built into these business models and that it's not going to necessarily impact well.

Okay.

So it sounds like there is some cushion for.

Investors to absorb higher rates without necessarily there being a price correction.

I think so.

Is it an enormous amount of demand for housing.

In this country.

And although their spreads have widened rates rates are higher it it opens up some other opportunities.

Some some of the debt funds and some of the SaaS market.

He will be replaced in some respects by Fannie and Freddie being more active.

And.

Which which is good for our business since in some respects.

And.

If interest rates are higher on more speculative opportunities like development, if development slows a bit.

It will increase value and subsequently reduced supply.

There'll be some some moments of time, when there was less supply, which will increase value in certain market. So.

There is always a yen to the Yang.

Yes.

Great and then one other question is I've seen that the non traded REIT.

Ah raising capital at such a phenomenal clip.

Raising 3 billion per month.

And I'm wondering if you could remind us whether new mark has investment banking capabilities that would be advising on such.

Deals as B REIT acquiring.

It seems that the non traded Reits are going to happen.

Do read.

Commissions in order to deploy their capital.

So is that an opportunity for a new mark.

Going forward. This year, we see we see Jade, we see that as an enormous opportunity for newmark.

And we're really excited about it we think will play really well in that area.

And.

On all aspects of it.

Also the amount of liquidity in those markets, it's going to it's going to drive values as well they need to invest.

Thanks, very much for taking the questions.

Okay.

Our next question is from Patrick O'shaughnessy from Raymond James Patrick.

Patrick Your line is open.

Hey, good morning.

I guess, maybe digging into the topic of interest rates a little bit more.

How do you see that impacting the mortgage brokerage and debt placement business of yours if at all.

Look obviously.

When theyre in a moment when there isn't.

<unk> security and what the spreads will be there is there is a little bit of disruption, but but we're doing more equity recaps and were doing.

Other forms of data as I just said.

So people always need to refinance.

Regardless of where the interest rates are.

Okay got it.

Now that you guys have sold your remaining NASDAQ shares your net debt to EBITDA is a rounding error at this point how are you thinking about your long term capital structure and what level of net debt is appropriate for your business.

We've always said that.

Use of capital.

Certainly we're going to continue to use the capital to grow the company.

We're going to return capital to shareholders.

Operating at one five times net debt leverage or below.

Long term it is our target. So we think we can operate the business.

And EBITDA targets, we discussed $900 million.

And maintained really low leverage so we're in a great position.

Got it thank you.

And then maybe lastly from me can you speak to some of the drivers behind your management services fee revenue growth and what is really leading to the strength there.

Yes.

So Patrick on the management.

Matt It recurring revenue really it's really our valuation business, our corporate service business on the consulting side and our property management. Those are areas that we've invested in and have had a focus in growth. We have a targeted amount of what we want that to continue to expand and we're really happy at the way it's been worked.

Al.

Yes, we also have the blackout, there, which we didn't have last year and in the first quarter than we have in the first quarter of this year. So.

That's also contributing.

Okay.

Great. Thank you.

There are no further questions at this time so as a reminder, it is star one on your telephone keypad.

Thank you for joining us today, and we look forward to updating you on the business next quarter.

Okay.

As there are no further questions. This concludes our question and answer session.

I would now like to turn the conference back over to Mr. Gostin for any closing remarks.

Thank you all for joining us today, and we look forward to updating you on them.

Next quarter.

Yeah.

That concludes the conference call. Thank you for your participation you may now disconnect your line.

Yeah.

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Sure.

Thank you.

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