Q2 2022 Newmark Group Inc Earnings Call
Greetings and welcome to the Newmark Group second quarter 2022 financial results call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Jason Mcgruder head of Investor Relations for Newmark Group. Please go ahead.
Thank you operator, and good morning, Newmark issued its second quarter 2022 financial results press release and a presentation summarizing. These results. This morning. The results provided on today's call compare only the second 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 sales as well as the impact of the 2021 equity event will.
We will be referring to our results on this call only on a non-GAAP basis, unless otherwise stated. These non-GAAP terms included adjusted earnings and adjusted EBITDA. Please see the section of todays press release for the complete and updated definitions of any non-GAAP terms reconciliation of these items to the corresponding GAAP results and how when and why management uses them additional.
<unk> with respect to our GAAP and non-GAAP results.
It's available on our website in today's press release, the supplemental tables in our quarterly results presentation and the outlook discussed on today's 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 macroeconomic social political and other factors, including the COVID-19.
Pandemic, while our 2025 financial and operational targets do assume acquisitions. They are also subject to change for these 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 20 <unk>.
Seven of the Securities Act of 1933 as amended and section 21 E of the Securities Exchange Act of banking 34 as amended such.
Such statements involve risks and uncertainties.
Sept as required by law Newmark undertakes no obligation to update any forward looking statements for a complete discussion of additional risks and uncertainties, which could cause actual results differ from those contained in forward looking statements see numerous securities and exchange Commission filings, including but not limited to the risk factors set forth in our most recent 10-K 10.
In Q4.
Or 8-K filings, which are incorporated by reference I'm now happy to turn the call over to our host Barry Gossan, Chief Executive Officer of Newmark Group, Inc.
Good morning, everyone and thank you for joining us.
With me today are <unk>, Chief Financial Officer, Microspore, Our Chief revenue Officer, Lou Alvarado, Our Chief strategy Officer, Jeff Day.
In the second quarter, we achieved record revenues up 20% record adjusted EBITDA up 32% and record earnings per share up 48%.
This is our fifth quarter in a row that we've achieved such quarterly records.
Our average revenue per produced a $1.3 million and our average revenue per all employees.
$538000 at both increased by over 40% since 2019.
That is the definition of organic growth and is the clearest indication of the quality of our business caliber of our people and the strength of our platform.
Our culture of collaboration and use of data and technology enhances our cross selling of services, which in turn has led to superior client experience and increased productivity per employee.
Since the onset of the global pandemic and America has substantially increased its revenues and earnings while gaining market share.
We believe that our clients appreciate the expertise of our professionals, especially in times of uncertainty and we are well positioned for further market share gains we.
We are confident that we will reach our 2025 targets, which include generating $4 5 billion of total revenue and $900 million of adjusted EBITDA.
We also.
Reiterating our 2022 outlook. Despite the near term macro economic headwinds Newmark has been the fastest growing commercial real estate services company for the past decade decade, and we expect to continue to outperform the industry.
I want to highlight some of the areas that are contributing to our growth year.
Year to date, we are the number two U S investment sales company compared to a decade ago. When we were number 25.
10 years ago, we announced that we are going to focus and grow our investment sales and debt debt business and our success speaks for itself.
Using capital markets as the tip of our spear, we will continue to drive growth across agency leasing servicing property management and valuation and advisory.
We are now focused on replicating our growth internationally and recently purchased beach to a leading capital markets firm based in London.
Like our U S strategy, we will leverage our capital markets business to drive growth across our platform globally.
Our full service peers generate an average of 40% of their revenue from outside the U S compared to approximately 5% for us.
Our growth opportunity is massive.
Part of the international strategy will be to replicate U S success and valuation and advisory. We grew this business from less than $20 million of revenue in 2000 $17 million to $179 million for the trailing 12 months.
This dramatic growth was fueled by our proprietary technology, which has driven a 49% year on year increase in average revenue per appraiser.
In addition to international growth, we expect to expand our portfolio and entity investment sales business, which represents approximately 30% of the overall market, we expect to be in the top three.
We are expanding our multifamily business into workforce housing single family rental housing.
And we and we expect our flexible workspace business knows how to grow its revenues by $2 million to $300 million over the next several years.
Obviously with these opportunities you can understand why we are so excited about our future.
With that I'm happy to turn the call over to Mike.
Yeah.
Thank you Barry and good morning.
Today, New Mark reported its best ever second quarter revenues and earnings.
We increased our revenues by 19, 9% to $755 $4 million compared with $629 9 million.
We grew adjusted EBITDA by 32, 2% to $159 $5 million versus $126 million.
We improved EPS by 48, 4% to 46.
Compared with 31.
During the quarter, we repurchased 11 4 million shares at an average price of $12 75 per share.
We expanded our adjusted EBITDA margin by 196 basis points to 21, 1% versus 19, 1%.
Expenses increased by $84 3 million of which $61 million with variable compensation, primarily related to growth and commission based revenues.
$17 9 million was related to acquisitions.
We remain vigilant on expenses given the current macroeconomic conditions.
Moving to the balance sheet.
We ended the second quarter with $285 million of cash and cash equivalents.
This reflected strong cash flow from operations.
Offset by $175 9 million for share repurchases cash.
Cash used for acquisitions of $64 2 million.
And normal first half uses of working capital.
Our net leverage is four times.
Our cash on hand, Undrawn credit facility and seasonally strong cash generation in the second half of the year will provide us with well over $1 billion of available capital.
Before I turn outlook.
I want to highlight our long term track record of growth.
Since 2011, we've had an industry, leading 29% annual growth rate and more than doubled our revenues and our adjusted EBITDA since our year end 2017 IPO.
Now turning to guidance.
We remain confident in our 2022 revenue and adjusted EBITDA outlook, which we initially published in February .
We expect to grow total revenues between 3% and 7% compared with 2 billion $906 $4 million we.
To grow adjusted EBITDA between four and 9% versus $597 5 million.
We expect our adjusted earnings tax rate to be between 17, and 19% compared with 18, 9%.
And we expect weighted average share count to decline by 4% to 5% compared with $264 million.
Now I'd like to open the call for questions operator.
Thank you.
At this time well be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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First question comes from the line of.
<unk> <unk> with Goldman Sachs. Please proceed with your question.
Hi, Good morning. Thank you for taking my question and congrats on a strong quarter.
As we think about the second quarter and how strong investment sales were could you perhaps throw some light on how much of that was any pull forward.
In activity or uneven did you from one Qs investors, perhaps base for higher rates and maybe.
Expedited anything.
Just trying to understand you know how should we think about <unk> given you've kept guidance unchanged.
Such a strong first half.
Good.
It was a combination of the market. The market is still good interest rates are still low because there was a certain amount of people that were looking to get in front of any potential interest interest change.
But.
It was consistent.
And that was a good quarter.
Yeah that would I would add to that I mean, we're in an environment, where the fed just raise interest rates 75 basis points two times in a row.
<unk>.
There is a period, where there's going to be.
Some price discovery between buyers and sellers.
And I think thats reflected in our guidance for the back half of the year.
Alright. Thank you. Thank you for that could you perhaps talk about how much have asset values changed since the beginning of this year and how much more recalibration as needed.
For sure.
Perhaps a little bit more optimism on the back half.
There are still there's still has the same amount of liquidity.
And the market worldwide this $400 billion of available capital and $215 billion.
In the United States.
So so there is certainly still a desire to acquire there is there is an element there is a period in any change where there is there is an element of discovery.
That has to be determined between the buyer.
Expectations on the seller expectations and that's that's that's the period will be in her.
A couple of quarters. So some assets have repriced already some there's some repricing that has occurred.
So there are some aspects of the market and some markets where.
There has been a reset and things are trading.
So I think it will.
So unlike in some markets, where it could last three four quarters I think this could be actually quicker.
And reset quicker and we're in a business of trading and.
And the people who invest in the business of buying and the people who invest in funds.
Funds do are in the business of selling their assets.
Okay.
Thank you for that color.
Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, good morning, good morning down there.
So just a few questions.
From for me.
The first is.
Barry on the office REIT calls.
Over the past.
This earning season, they have all talked about slowdown in leasing whether it was actual slowdown to be recorded in the quarter or their conversations with their tenant yellow clearly, indicating a slowdown on the capital market side, whether it.
Office retail that retail while retail slow apartments like all the sectors.
Buyers are pulled back so transaction volumes that they're seeing are way down and the mortgage market has really come to a standstill. If you will save for a few deals your outlook and your comments are are fairly upbeat how do I reconcile what you guys are.
We're seeing versus the rate commentary, both on the leasing side and the transaction slash mortgage market side.
We reiterated our guidance for for the year.
We've obviously had.
Two great quarters, and our back end as reflected in some change in the market and a reflection of the change in interest rates and exit caps.
So we're aware of that.
So the real question, what always happens in a cycle is just how long that period.
Buyer seller examination.
So there's already some capitulation in the market from sellers, we have seen that.
And.
As soon as that occurs there will also there'll just be <unk>.
Back to business and things will start trading again.
So.
<unk>.
Yes, sorry go.
Yes, I mean with respect to the leasing market. There has been some slowdown in the leasing market remember in our occupancy is 45% and.
We're up 15%.
People people, who want a sublease space people, who want to renew their leases.
I think some of the some of what you've read in terms of the companies had that have stopped there.
Recent leases has been just the expansion and that's that's a function of the market and where <unk> Tec is right now but.
If you look at the historically at San Francisco and other markets when the tech market.
Goes down they stop acquiring there's lots of empty space and it goes down quick and then it comes up just as quick. So this is just the only question that we all have to face is how long the period of reconciliation will be.
Okay, and then that brings up a good point on your notes how.
Business what is your maybe just an update on that what the occupancy is.
You know how the trends have been.
As far as.
Occupancy rates in.
<unk>.
Growth of U S versus international just maybe some comments around that.
Yeah, Hi, Alex it's Mike.
Incredibly strong demand in our in our flex office products.
Our portfolio is nearly 90% occupied in our biggest problem is getting enough product out into the market to meet the demand.
We think this is a market that's going to grow mid to high teens for the next several years and we think we're going to meaningfully outgrow. It we have a great business in Europe .
And we have a growing business in the U S and we just think it's a growing category.
We're in that as you know a very low price point, and we think it's going to be a great outcome for for Newmark and for our shareholders.
And Mike when you say the 90% occupied for no doubt is that the same whether it's Europe international or U S or are there a bunch of them.
Yes, it's the same remember we don't have a lot of product in North America today.
We're building it out and I think as we head into next year towards the end of this year beginning of next year, we will have more product in the U S. And then we will be able to compare occupancy rates I think U S versus Europe and the rest of the world.
Okay, and then just a final comment you guys mentioned getting into the.
Portfolio advisory business, if I understood that correctly. So does that mean like you want to expand your like real estate banking like youre going to get involved in REIT M&A or some of these large portfolios that are trading or how.
Like just like an I'm just trying to figure out how.
How far like that comment goes versus traditional capital markets investment sales.
So it's yes, yes and yes.
Sure.
Yeah.
We're one of the largest aggregators of property for investors across the country and many categories with a number we were the number two investment sales company in the U S.
That's.
That's the hard work building going through five years of trench warfare to create the geographic distribution in the capability and expertise in the market for single assets and some smaller portfolios.
The amount of knowledge, we have in those categories you could boil the ocean.
So.
This is a function of focus and we've made the same way we made the determination to go into capital markets and you see the results.
Is the same approach that we will have with portfolios in banking and yes banking.
There is a disconnect between NAV and market.
We understand the inside out of real estate, we are in a great position to advise rights on what they should do with their portfolio and how to exit. We also have very good access to money around the globe. We have an incredible international team that raises money for real estate around the globe. So.
To access new sources of capital more patient sources of capital. We've been we've demonstrated really good success over the last few years. So so the answer to your question is yes, yes, yes and yes.
Okay. Thank you.
Okay.
Thank you. Our next question comes from the line of Jade Rahmani with Keith VW. Please proceed with your question.
Yeah.
Thank you very much.
You have any range of capital markets expectations, you're thinking about it.
Back half of the year.
Just looking at your guidance.
And also recognizing the challenging comps now there's something like down in the mid teens on a percentage basis year on year makes sense or is there something else.
That you are thinking and then on the leasing side.
You mentioned.
Some large leasing transactions potentially in 2022 still as well as next year, just wondering if theres any expectations.
Expectations, you could maybe provide some color on in the back half and assuming you are expecting positive year on year growth in leasing in the back half.
So Jade I think you rightly point out that the second half of last year is a difficult comp.
The business our business was up 45% if you compare it to 2019 back half of last year the back half of 2019.
Certainly, it's our view that the capital markets transaction activity will be down more.
Then say leasing.
We also have some great businesses recurring businesses that will continue to grow our servicing book continues to grow well.
We will benefit from a rise in interest rates on.
The escrow interest on our portfolio.
And I think you see overall the business is up 26% revenue in the first half and up 3% to 7% for the full year, but that's our thinking as we reaffirmed the guidance and we'll just have to wait and see what happens we think we're being pretty prudent by keeping the guidance where it is.
Thank you very much in terms of the market share gains that <unk> been able to achieve particularly in capital markets.
I'm on a couple of the email list and I see it.
Every week every day also clearly evidenced what do you think spin the main driver of that.
Talent.
I mean, we have great people, we have the best people.
We have the deepest bench.
We have great and improving coverage.
We still have white space and opportunities.
Yes, we're not crowded so we've got to do we are a perfect formula for really talented people to to come join us to be part of the best most creative innovative capital markets business and the fastest growing globally.
Okay.
Thanks very much.
In terms of the.
M&A outlook and also in your comments regarding international.
Do you think that at this point of size large scale M&A makes sense.
Principally speaking or candidly speaking the track record and the sector has been underwhelmed ing.
There's a lot of just value destruction that takes place there's a lot of friction.
And I know that <unk> had a very strong track record of gaining market share through bolt on M&A and through recruitment rather than large scale M&A do you think that.
There is a strong rationale for large scale M&A in the space.
You mean, you mean mergers for real estate firms is that what you're talking about.
Yes mergers of equals kinds of transactions.
No I don't.
I think the enormity of this enormity of friction.
And the conflicts and the coverage and the crowd. The crowded nature is makes it very difficult for large companies to merge.
Has to be a perfect synergy and fit.
And.
There is a point of no return or.
Or indifference makes it really really hard to do.
So there is lots of ways to do it and we've been doing both lots of bolt ons.
Acquiring teams talent.
And we think thats, an incredibly efficient way to do it it's much harder to do it takes a lot of more work to do that.
But we see that as the.
Pathway for us.
Thanks, I appreciate the comments there.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Patrick O'shaughnessy with Raymond James. Please proceed with your question.
Hey, Good morning can you talk about the state of deal financing and investment sales space. It sounds like the <unk> market is really really tough right now. Thanks, So maybe pulling back on the line a little bit what are you guys seeing out there.
Okay.
Well, what <unk> guided this is Jeff classroom.
And see MBS space is actually showing some signs of life and we're seeing a little bit of a recovery. There last year was a year, where we saw a lot of relatively high leverage floating rate financing on acquisitions.
Much of which was executed through CLO.
That business as interest rates started rising and we had more volatility in the capital markets started to fall off earlier this year and still really hasn't recovered, but theres actually a very good supply of capital debt capital coming from life companies banks still from some debt funds.
Certainly Fannie and Freddie have been very active and so there isn't that.
Sure.
The financing liquidity that you might infer from some of the headlines.
Got it that's helpful. Thank you.
And then what are you seeing out there in terms of property values right now across property types, obviously multifamily industrial have been going up a lot are there any signs that that is cooling and then on the office side.
Are there any signs that the high vacancy rates are set and drive office Val.
Values lower.
Well there is still an enormous demand for multifamily.
In the U S for a hub for a host of reasons and the reasons Hasnt changed.
Offices has been stress because.
Mark.
Most of the conversation.
The confusion about what occupancy is going to look like what hybrid is going to look like but.
But.
But the reality is that.
Ceos are committed to office.
And companies has to be in the office at some point.
Theres less hotels than you might think.
So it's just a minute, but there hasnt been there has been some reset in pricing and it depends on the product.
There is a flight to.
Quality.
Quality property is still maintaining and retaining the rents that they get and we're in the trading business. So.
Companies need advice, we're actually doing some very large transactions for our clients in co working or flex, where we're taking five year leases and flexible work environments.
So theres no theres always it always needs for space and we're still committed to the office market, but there has been adjustment in certain end markets. Although if you look at.
Florida.
There hasnt been much of an adjustment it really depends on the market.
Got it thank you and lastly from me.
What is embedded within your full year share count outlook in terms of share repurchases in the back half of the year.
Sure I think.
Our guidance at the moment assumes when we share repurchases, we did through the second quarter.
The price remains very attractive for repurchases.
That share count could get better than what we've put out today.
Great. Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I will turn the floor back to Mr. Goldman for any final comments.
I'd like to thank everybody for joining us today and I look forward to the next quarter.
Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.