Q1 2023 Newmark Group Inc. Earnings Call
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Good day and welcome to the Nu Mark first quarter 23 earnings call. Today's conference is being recorded if you'd like to ask a question today. Please press star one and at this time I'd like to turn the conference over to Jason Mcgruder head of Investor Relations. Please go ahead Sir.
Thank you for your patience as we've dealt with some technical difficulties on the vendor.
But also thank you operator, and good morning, Newmark issued its first quarter 2023 financial results press release and a presentation summarizing. These results. This morning, unless otherwise stated results provided on today's call comparable only the three months ended March 31, 2023, a year earlier period, unless otherwise stated we'll be referring to ourselves.
We had a non-GAAP basis, which terms exclude include adjusted earnings adjusted EBITDA. Please refer to section in today's press release for complete and updated.
Definitions of any non-GAAP terms reconciliations of these terms to the corresponding GAAP results and how when and why management uses them you can find more information with respect to our GAAP and non-GAAP results on today's website in today's press release supplemental tables in our quarterly results presentation, unless otherwise stated any figures discussed today with respect to cash flow from opera.
<unk> refer to net cash provided by operating activities, excluding loan origination and sale as well as the impact of the 2021 equity debt cash from the business is the same cash flow metric excluding boiler.
<unk> the outlook on today's.
<unk> assumes no additional share repurchases material acquisitions or meaningful changes in the companys stock price expectations are subject to change based on various macroeconomic social political and other factors.
While our long term financial operating targets assume no acquisition. They are also subject to change.
These same reasons, none of our long term targets or goals should be consider formal guidance counselor.
I also remind you that information on this call about our business that are not historical facts are forward looking statements within the meaning of section 27, a Securities Act of 1933 as amended and section 21 E Securities Exchange Act of 1934 as amended such statements involve risks and uncertainties, except as required by law Newmark undertakes no obligation.
To update any forward looking statements for complete discussion of additional risks and uncertainties, which could cause actual results differ from those contained in the forward looking statements see Newmark Securities Exchange Commission filings, including but not limited to the risk factors in our most recent Form 10-K Form 10-Q form 8-K filings, which are incorporated by reference now happy to turn the call over to.
The host.
Chief Executive Officer, Newmark, Barry <unk>.
Good morning, and thank you for joining US with me today are <unk>, Chief Financial Officer, Mike Rispoli, Our Chief Strategy Officer, Jeff Day, and our Chief revenue Officer, and Lou Alvarado.
Newmark strategy is to assemble the industry's most talented professionals and armed them with superior data and analytics for our clients.
Since the beginning of the year, we added industry, leading capital markets producers in New York, Dallas, Phoenix, and San Diego focused on industrial multifamily office and life Science.
We continued our global expansion by acquiring a U K based full service real estate advisory firm Geraldine, bringing two new Mark a top three U K industrial capital markets platform now.
Now, we generate nearly $200 million in annual revenues in the U K and plan to expand further across Europe .
Our exclusive FDIC mandate to sell signature banks $60 billion loan portfolio exemplifies our strength in managing large and complex transactions.
Portfolio represents the largest real estate loan sale in U S history and demonstrates the capacity in depth of Newmar.
Loan advisory services are becoming increasingly significant for US 42 trap almost two six trillion dollars of U S commercial and multifamily loans mature over the next five years with 55% owned by banks.
During the quarter, we acquired the remainder of spring 11, increasing the size of our overall servicing portfolio from $71 billion to $169 billion.
Our loan portfolio solutions practice, which provides provides risk assessment and stress testing services for banks has seen a significant increase in activity.
These businesses together with capital markets and GSE FHA origination provide nu mark with tremendous insight into commercial and multifamily lending is.
This combination helps us to better advise our clients across property types and service lines.
<unk> long term prospects remained strong because.
The $400 billion of Uninvested capital and closed end funds, which will drive capital markets. The.
Two six trillion dollars of commercial and multifamily mortgages maturing over the next five years, which will fuel our debt long service leave loan sales and loan advisory businesses and the continuing consolidation of our industry and the ongoing trend of outsourcing of real estate services.
Which will drive business towards full service well capitalized companies like Newmark.
Given our strong financial position is a significant global growth prospects, we expect to remain the preferred destination for industries top professional.
With interest rates stabilizing capital markets activity should increase in the fourth quarter and continue growing through 2024 as a result of our strong client relationships and deep pool of talent, we are uniquely positioned to benefit as the industry volumes rebound similar to our success.
Yes in 2021.
With that I'm happy to turn the call over to Mike.
Thank you Barry and good morning.
During the first quarter Nu Mark made significant investments for future growth.
Once our new producers ramp up we expect these investments to add approximately $300 million of annualized revenues.
Okay.
For full year, 2023, we anticipate generating $300 million to $350 million of cash from the business.
And using a portion to pay down our revolver.
Which we used to fund these first quarter investments.
Our first quarter results were down compared to our record performance in the first quarter of 2022, but in line with our expectations.
Total revenues were $528 million.
Down 23, 2%, mainly due to lower industry wide capital markets activity with U S investment sales down 56% according to RCA and origination activity down by as much as 53%. According to Newmark research.
Leasing revenues declined two 8%, but grew 31, 1% versus the first quarter of 2021.
With retail and industrial revenues rising year on year to above pre pandemic levels.
We achieved these results despite U S leasing volumes being down more than 10%.
We produced double digit percentage organic growth in fees from global corporate services.
As well as continued improvement for our high margin servicing business.
Total revenues for management services servicing fees and other declined by eight 9% due to lower pass through revenues and valuation fees.
Total expenses of $461 $9 million were 13% lower largely due to the variable nature of our cost structure.
We remain ahead of schedule with respect to our $50 million annualized fixed cost savings target.
And expect to realize at least $35 million during 2023.
Turning to earnings.
Adjusted EBITDA was $62 $9 million versus $126 5 million.
Our EPS was <unk> 15, compared with 36.
These results reflect the impact of the dramatic rise in interest rates on our higher margin capital markets platform.
Our fully diluted weighted average share count declined by five 1% to $239 9 million.
Moving to the balance sheet.
We ended the quarter with $210 $7 million of cash and cash equivalents and $773 $4 million total corporate debt.
The changes from year end 2022 were primarily related to cash generated by the business offset by normal first quarter movements in working capital and $225 million of borrowings under our revolving credit facility, which were used to fund our first quarter investments.
We remain in a strong financial position with net leverage of one three times.
Moving to our outlook.
We expect to be near the low end of our full year guidance range.
Which was first issued on February 16 2023.
Our full year outlook assumes that the decline in industry wide transactions will begin to rebound in the fourth quarter.
We expect our second quarter results to be up sequentially.
But down year on year by similar percentages to the first quarter of 2023.
The balance of the year, we expect continued sequential improvement.
And with that I would like to open the call for questions operator.
Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.
If you are using a speakerphone make sure. Your mute function is turned off to allow your signal to reach our equipment again press star one to ask a question and our first question is going to come from Sandra <unk> from Goldman Sachs. Please go ahead.
Hi, Good morning, Thank you for taking my question.
I'd like to start with the signature bank loan sale.
Could you guys talk about the composition of the portfolio in terms of the asset class you know, what's the geography, what is the age.
Any restrictions you have to keep in mind as you sell them and then I'm, sorry give us a sense of the economics, you know perhaps talk about the commission rate. How do you think about the timing of the sale you know when do you expect to complete the 60 billion like and what's the impact in 2023.
I apologize, but we can't comment.
On.
On the loan portfolio.
Whatever is public is in the on the FDIC website.
Not prepared to comment on anything beyond that.
Okay noted.
However, you should note that we are in we are doing other loan sales and we are seeing way more activity and that's in that space and advisory and.
And that so it's.
Two serves us very well.
Got it so let me pivot to a little bit more of a macro question then.
How would you say the backdrop for catheter markets.
Has changed after the event.
The banking industry almost two months ago, and then are you seeing anything different in the market right. Now are there any green shoots in the business. Currently that you are seeing just give us a sense of the broader landscape. Please thank you.
What what has been signaled is the you know.
An opportunity for more certainty into and interest rates. So the stabilizing of the interest rates and a pause by the fed in raising interest rates is a good thing.
I mean, it's very hard to trade properties. When when you can underwrite what the interest rates will be so we see that that has shortened the period of time for the uncertainty and will lead to a faster rebound in terms of opportunities to finance. There are green shoots there are other parts of the world that are financing.
Yes, the GSE Freddie Fannie.
They're at they're actually financing.
<unk> COSE or in some cases under allocated and there's new formation of.
See MBS that that seems to be.
Coming up so we're seeing some things.
And then ultimately what what the banking.
Crisis has has made us I think it's speeded up the capitulation in terms of the delta between.
Buyer and seller on valuation so once that is established people start to trade.
Got it and this one is going to be quick for Mike.
Your outlook as we think about adjusted EBITDA.
Is there any incremental M&A embedded based on the recent deals that you just announced and is there any impact of the signature bank loan portfolio in there.
So the outlook for the year.
<unk> includes our pipeline everything we know Thats in the pipeline includes Geraldine for the remainder of the year it.
Does not include any incremental M&A beyond that.
So.
As I said.
The second quarter, while sequentially better than the first quarter will be down in a similar percentages to the first quarter of last year.
But the results should get sequentially better as we move through the year.
Thank you so much.
And our next question will come from Jade Rahmani from Keefe Bruyette <unk> Woods. Please go ahead.
Thank you very much hopefully you can hear this.
Just wanted to ask on the way.
Excuse me.
We can hear you.
Oh great.
I wanted to ask on the loan portfolio outside if you could talk to the magnitude of deal flow that youre seeing.
Maybe general comments around economics.
I know that.
One of your private competitors HFF broke out the commission rates on that business and I believe there they are quite attractive higher than on the investment sales side and debt placement side, but clearly, it's sporadic and I'm sure very large portfolios.
There would be caps in place on what the commissions would look like and probably some kind of incentive for execution, but what's the volume you're seeing and the economic impact.
We generally don't comment on the specifics of guidance and we have confidentiality agreements on the things that we do.
These are sensitive topics that we are just not going to comment on Jade I apologize.
That's actually a good answer really appreciate that.
Mentioned, the banking crisis speeding up capitulation on pricing historically, the banks have played an outsized share in commercial real estate and you look at the ratios prior to the Dfc, it's clear that the MBS market has declined dramatically post the regulations that Dodd Frank put in place on risk retention.
As well as curtailment of liquidity and the banks as well as the debt funds.
<unk> comprises the difference in terms of market share gain.
When you look at the banks today, they probably will shrink their share in commercial real estate.
So how do you think this unfolds.
Could it potentially extend.
The magnitude and length of the downdraft in transaction volumes or are you seeing any green shoots that would lead you to believe in the fourth quarter, there would be a pickup.
Jay This is Lou.
We're definitely seeing more activity there as well.
During this time I think most of our clients have been really trying to find out where pricing will shake out where we'll think settle I think now that we've gotten some guidance from the fed on rates and I think as we get stability. We definitely believe we're going to see that activity as we get down in the year.
Very similar to what you saw what happened in 'twenty, one right, where once we had we got over the impact.
The <unk>.
Pandemic hit the activity picked up I think youre going to see a very similar respond as we get later on into the year.
Thank you and you included a slide.
Thanks Jay.
Yes.
Sorry.
The the GSE will.
In the back end of this year.
Accelerate and get you know get to capture some of it up to the closer to the caps. We think we'll see more activity there will be a lender of choice and as I said you know the life goes in some respects are under allocated in the sweet spot of 50 to 150 million thereof.
Out there and we're starting to see some SaaS b loans.
Which you now see MBS loans.
There's some activity and discussions.
And Youll see Youll see it come from the.
The private markets and then ultimately the banks will step back in.
Thank you and just lastly, leasing was a bright spot this quarter significantly stronger than what we had forecast.
Slide nine notes across the platform office comprises 36%, but can you give any color as to what drove the relative strength in leasing clearly.
Better than some of your peers that have reported.
Yes.
We've had I think.
So I had Luke do you want me to go there.
I think what you've seen is.
And what we've spoken about this been a continuing flight to quality in a flight to the class a product we happen to represent a fair amount of class a product across the markets. We also had some pretty sizable tenant deals with people that did make a commitment to space and did move forward with our plan to return people to.
The office I think over time, we still believe that theres going to be at an increase in move to peak, bringing people back to the office. It may not be five days a week it could be three days a week, but whether it's three days or five days you still need the space. This space will be different but thats what were seeing we were fortunate that we were in the REIT sector.
Industrial was up retail what's up so it wasn't just all office, but the office sector did very well as well because of the product mix that we have.
Thanks very much.
And once again, if you'd like to ask a question. Please press star one and Alexander Goldfarb from Piper Sandler. Please go ahead.
Okay.
Hey, good morning, good morning.
But understand all I appreciate all your efforts with this morning's tactical difficulties.
Barry.
We look at the loans that are coming due.
When we went back to the GSA, yes, we all remember like <unk> 10, right like all these monster peak of the credit boom see MBS that everyone was worried about and all that stuff basically worked its way way out there was blend and extend I mean apart from the chorus condos there wasn't really any distress that was sold into the market.
So looking at the current wave it doesn't seem so much its a credit issue. It's one it's right sizing of loans to its no. One wants an office loan but my question is do you really see that this one four trillion this year and the extra the $2 seven that you guys talked about is really going to be.
Actionable stuff or in your view there may be a few actionable loans, but a lot of this is just going to be blend and extend and thats the way its going to be resolved between the servicers and the borrowers.
Well, a blend and extend is actionable.
There were.
Maturities drive opportunity.
And recaps raising equity looking for new partners looking for refinancing.
So that they have to be dealt with.
There's really no choice. So we're in we're in it every piece of it in every way so that that's going to provide and drive opportunities for us on the advisory side on the equity raise side on the loan replacement side all of the all of those.
But if it is blend and extend that doesn't seem to generate the same amount of fees that if it goes through.
Option in our restructuring and sale of the new owners like that would be much more lucrative I would think fee wise versus the.
The lenders and borrowers just getting together and re cutting the deal.
Wouldn't that mean that blend and extend doesn't seem to be the same fee stream that.
Auction and wholesale restructuring and sale to new owners would be.
Well this is going to be all of the above if theres a blend and extend is going to be short term with a recap and probably a sale and.
So there are just there's a lot of stuff that comes along with loan sales and resales.
Recaps and resets.
In a market of disruption. There are there are there are opportunities that rise up that we did we don't think of it.
That's happening.
But it is a big market there.
There are term dates on maturities.
And there is still an enormous amount of capital sitting on the sidelines.
$400 billion of.
Closed end funds available theres lots of dry powder around the world, We're seeing foreign investors that are becoming more interested in investing in United States.
Host of different reasons.
They'll see an opportunity.
They're jumping and we've done some recent equity raises from first time foreign investors in projects, whereas the domestic buyers who are out of the market and no one would anticipate us.
Finding.
Equity in the other parts of the world that were not available even 12 months ago.
So then that leads to my second question, Yes, we all talk about negative leverage and certain sectors like industrial it's easy to pencil because of the growth as their office I would imagine it's much tougher.
Barry.
Or.
In order for this transaction market to reopen and let's talk more about office do we need to see positive leverage return or Ken the office transaction market recover if it still has negative leverage on trades.
Thank you.
Some positive leverage return right.
In order to really move the market I think it also will depend on the quality of the asset class a core product.
Well and then it ties in all of that will obviously trade at.
Smaller premium, but the <unk>.
Our class B and C is where we're going to struggle right. Those are the areas, where I think that the demand out there will be created by the fact that I think some of the market will shrink at least obsolete products no longer are viewed as competitive in the marketplace, and that's where I think youre going to see the shift.
Okay. Thank you.
Okay.
Okay.
I'm Patrick O'shaughnessy from Raymond James Please go ahead.
Hey, good morning.
Can you speak to the expected revenue contribution this year from Gerald <unk>.
Absent that acquisition would you have had to lower your full year revenue outlook.
Good morning.
So when we announced the acquisition we said they did about 92 million.
<unk> pounds of revenue in the prior fiscal year. So we will get nine months of that.
A lot of their revenue is recurring management services type business.
More than a majority of it.
So we think it's pretty steady revenue and we will see that.
On a pro rata basis, and our results this year.
And as we said we think the market continues to improve our results will sequentially get better as we move through the year and we currently feel comfortable around the low end of our guidance range.
Okay I appreciate that.
And then Michael on the other question I think for you you guys have your senior notes coming due this November how are you thinking about refinancing that and do you have any kind of preliminary expectations on what the refinancing rate might look like.
It will be higher than what we currently pay pretty sure about that but look we have great clean balance sheet.
Our low leverage and.
Great ratings and.
So we think we'll be able to execute on our refinance we'll certainly go to the market well in advance of the maturity, which is in November and.
We don't really see too much issue other than we'll pay a little bit more.
Okay, and then maybe one last one from me can you guys speak to your aspirations are with that spring 11 business and why was now the right time to buy the remainder of it.
Yes.
The spring this is Jeff.
11 business.
It is a business that crosses a broad spectrum of support services.
For our clients, but particularly the servicing and asset management businesses and special servicing businesses. We felt we're going to increase in need and we saw an entry point that was important for us and actually the velocity has pleasantly surprised us today. So.
We're expecting because of some of these bank failures because of these large portfolio sales and some of the resets in the marketplace to grow this business rapidly.
Great. Thank you.
Yep.
And our next question will come from Jade Rahmani from Keefe Bruyette <unk> Woods. Please go ahead.
Okay.
Thank you very much wanted to ask about.
Maybe for Jeff stay around multifamily credit what are your expectations, there and we think that there'll be no gene to the amount of loans going through.
Performance issues, given the magnitude of floating rate loans as well as interest rate caps expiring this year.
Well.
Let's level set where we are today versus some of our previous.
Downturns.
Yes, Ed.
Privilege to build our credit books for the last 23 years, along with my team. We went through 911, we went through the GSC and.
Where we are today in multifamily is nothing compared to those prior periods in terms of distress topline revenues are still growing although a little bit slower expenses are increasing a little more rapidly, particularly insurance, but overall, we see very little distress, we as Barry said.
Expect the Gse's too.
Not approach certainly hit the caps this year and our book is pristine our performance has always been significantly better than the marketplace and significantly better than any of our competitors. So I don't expect that to even be an issue.
And in the office sector.
Thank you.
Providence.
They said.
You know the only lender in the office right now is the current lender.
So that opens the door clearly for modifications.
Modifications and extensions as most likely route to <unk>.
The downfall there'll have to be preferred equity brought in and probably loans being carved into a notes b notes, but what do you expect.
The office.
Cycle to look like in terms of how the debt.
And how are you know the capitalization plays out what's your team is seeing in terms of the office transactions that theyre involved with clearly they've been assets.
Okay.
One of the things by by hiring the best talent in every market and every category from multi office industrial which is what we've.
<unk> been on a quest to do.
We're the go to firm for.
For a complex complicated recaps, which includes.
Talking to the lenders talking to the owners raising equity restructuring.
Restructuring notes recapitalizing mezz doing all of that.
And we're seeing an enormous amount of activity in the with the owners and many of the owners.
You may have.
<unk> book.
And are stressed and in other parts of their business or selling assets perpetuating a bit.
There. They may have good assets that are saleable with a good wall weighted average lease term.
And they are raising capital on those other assets to support the those that are sort of snorkeling.
And.
So we're.
We're seeing we're seeing activity come from a lot of different places and a lot of different ways.
That are really work well for what we built.
Thank you.
And I have no further questions in the queue I will turn the call back over to Barry Goldstein for closing remarks.
Thank you for joining us today.
I am still extremely excited about the company's future and look forward to updating you on our next quarterly call. Thank you.
Okay.
And this concludes today's call. Thank you for your participation you may now disconnect.
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