Q2 2023 Newmark Group Inc Earnings Call

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Good day and welcome to the Numerex second quarter 2023 earnings call Today's conference is being recorded.

This time I'd like to turn the conference over to Mr. Jason.

Head of Investor Relations. Please go ahead Sir.

Thank you operator, and good morning, Nu Mark issued its second quarter 2023 financial results press release and presentation. This morning, unless otherwise stated the results provided on today's call compare only the three months ended June 32023, with the year earlier period.

Except as otherwise specified will be afraid to results only on a non-GAAP basis, which include terms such as adjusted earnings and adjusted EBITDA.

Please refer to the section of todays press release.

Please Andrew updated definitions of any non-GAAP terms reconciliation of these items 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 our website and today's press release.

Supplemental XL tables, and the presentation unless otherwise stated any figures discussed today with respect to cash flow from operations net cash provided by operating activities, excluding loan origination and sale.

As well as the impact of the 2021 equity right.

Cash from the business at the same cash flow metric, excluding employee laws for producers and new hires.

Outlook discussed today assumes no additional share repurchases material acquisitions or meaningful changes in the company's stock price our expectations are subject to change.

Based on various macroeconomic social political and other factors none of our long term targets or goals beyond 2023 should be considered formal guidance.

Also I'll remind you that information on this call about our business that are not historical facts are forward looking statements within the section.

27, a of the Securities Act of 1933 as amended and section 21 E Securities Exchange Act of 1934 as amended.

Statements involve risks and uncertainties.

Except as required by law Newmark undertakes no obligation to update any forward looking statements.

Please discussion of additional risks and uncertainties, which could cause actual results differ from those contained in the forward looking statements see Numerex Security 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 I'm happy to turn the call over to our host Barry <unk> Chief Executive.

The officer of Newmark.

Good morning, and thank you for joining us.

Despite the industry wide headwinds I've never been more excited about our future. We are on the cusp of a new market. The complex dynamics of a dramatically higher interest rates and shifting capital sources across both debt and equity requires a higher level of ingenuity and talent to provide different and creative solutions in this new world.

L.

Given the investments we've made we are uniquely positioned to capitalize on this changing landscape.

Market dynamics have changed the criteria for incumbent lenders is shifting which is creating a challenging environment for borrowers the demand and requirements for equity is increasing and the providers of equity are changing our sophisticated mark recession holes are required to solve the complex problems facing the real estate ownership Mark.

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We are the platform of choice for the best and brightest professionals, who can develop and execute solutions on behalf of our clients. This is why we are winning an even larger percentage of the most important assignments in the real estate services business for example.

The FDIC recently announced sale process for approximately $18 5 billion of loans by Newmark, representing a portion of the approximately $60 billion six signature loan portfolio, where you're handling.

We served as lead advisor to Blackstone's be read on the recently announced agreement to sell the $2 2 billion dollar self.

Self storage portfolio to public storage.

Newmark originated a $947 million of Freddie Mac loan on park La Brea, the largest single asset multifamily financing in the U S. Since 2019.

We arrange the recapitalization of a life science building in Boston, one of the largest single building transactions in the U S. This year Newmark currently as well over $100 billion of equity and debt mandates.

These remember newmark as a real estate services provider, we do not own or invest in real estate.

As interest rates stabilize capital markets activity will begin to rebound towards the end of the year the year and we expect there will be a robust back half of 2020 for the resurgence of our higher Mark margin capital markets business combined with our strong leasing recurring revenue businesses and the investments we have made.

And expanding our platform will drive significant revenue and earnings growth. Additionally.

Additionally, our world class that platform will drive outsized growth over the intermediate term given the record $1 nine trillion dollars of debt maturities through 2025.

The sharp increase in interest rates and cap rates and the pullback in lending by banks and other traditional lenders, we believe a large and growing percentage of investors and owners will need to find alternative solutions.

Goldman Sachs recently estimated that real estate focused private credit funds will triple their share of U S commercial real estate originations to 30% between 2022 and 2027 we.

We expect a significant portion of debt maturities to be resolved not only through refinancings, which will help our mortgage brokerage and origination businesses, but through more complex and sophisticated restructurings and recapitalization.

This process has already begun with newmark arranging several equity joint ventures, and recaps for our clients. Thus far in 2023 with many other mandates in the pipeline and we expect a growing number of owners and investors to turn to our best in class professionals for innovative financing solutions.

We anticipate assisting private credit funds and other institutional investors to acquire a significant portion of the loans sold by bags the lenders.

<unk> real estate loan sales volumes were up by over 400% for the first four months of 2023 compared to the 2015 to 2019 average and we anticipate a significant percentage of the over three trillion dollars of outstanding non GSE commercial mortgages.

<unk> will be that will become distressed we therefore expect banks and other lenders to sell an ever increasing portion of the loans over the next few years.

As a clear leader in loan sales Nu Mark will generate dramatic growth from this counter cyclical business, which partially offsets that replaces near term declines in the sale of buildings.

Growth in distressed loans and assets will lead the lead to other opportunities for Newmark requested service line in.

In addition, we expect to continue to outperform the market and leasing due to the investments we have made in industrial and retail brokerage, which augment our already strong office leasing business where.

We're starting to see increased tenant demand in the office markets led by.

Ongoing return to office plans.

With that I'm happy to turn the call over to our CFO micro slowly.

Thank you Barry and good morning.

Newmark second quarter results were in line with our previously stated expectations.

Total revenues were $585 $8 million.

22, 4% year on year and up 12, 5% sequentially.

The year over year change was mainly due to a 63% reduction in overall U S investment sales and a 52% decline in industry wide originations.

Our leasing revenues were down only four 3% year on year, but grew five 3% sequentially.

We continue to benefit from our investments in industrial and retail, which represent nearly 50% of our year to date leasing volumes.

Okay.

Our servicing and other related fees grew 19, 4% and we also generated organic growth of nine 7% and gcs fees.

Our fees for management services servicing and other increased by seven 4% year over year and 16, 2% sequentially.

Total expenses of $507 $9 million were down 11, 5% the.

The decrease in compensation expenses reflect lower variable compensation that correlates with commission based revenues, partially offset by expenses related to acquired companies and the addition of revenue generating professionals.

The increase in non compensation expenses was due to acquisitions and higher warehouse interest expense.

The latter of which is offset by higher interest income recorded as revenue and tied to the growth of new marks GSE and FHA business.

We remain ahead of schedule with respect to our $50 million annualized fixed cost savings target and.

We expect to realize at least $35 million during 2023 of which $25 million will be realized in the second half of the year.

Moving to earnings.

Adjusted EBITDA was $72 9 million versus $159 5 million.

Our EPS was <unk> 18, compared with 46%.

Our fully diluted weighted average share count declined by one 2% to $245 million.

Turning to the balance sheet.

We ended the quarter with $164 $4 million of cash and cash equivalents and $774 $1 million of total corporate debt.

In July we used cash from the redemption of a joint venture to repay $100 million of our.

<unk> credit facility.

Taking this repayment into account.

Our net leverage ratio was one four times.

Moving to outlook.

We continue to expect full year 2023 revenues and adjusted EBITDA of approximately $2 5 billion and $425 million and to generate 300.

The $350 million of cash from the business.

We've included a slide in our investor deck, which lays out in more detail our expectations for this year and why we believe revenues and earnings will exceed peak 2021 levels once markets normalize.

Excluding additional hires and acquisitions over time, we expect our revenues to grow to nearly $3 billion in.

And adjusted EBITDA to be approximately $620 million.

Both of which would exceed our best ever 2021 results.

While our 2023 outlook for adjusted EBITDA is 29% lower compared with 2021 Newmark stock has declined over 60% since then or by more than double.

We believe our incredibly strong growth prospects and low valuation make new market compelling investment opportunity.

And with that I would like to open the call for questions operator.

Yes, Sir Thank you and if you would like to ask a question. Please signal by pressing star one on your telephone keypad.

If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.

Once again that is star one if you would like to ask a question.

And we'll now take a question from Jade Rahmani with K B W.

Okay.

Hi, This is actually Jason <unk> on for Jade.

There seems to be a steady stream of producers that are leaving their current firms to join the new Mark.

What do you think is driving that.

Well, we are a good place for high earning brokers to work.

We are a talent base business, we provide the infrastructure resource resources the research.

This is a good place to work plus plus.

Plus the best brokers want to be where the other best brokers are and as we continue to get momentum.

Hiring the best and the brightest.

Other best and brightest brokers want to be here.

Got it got it thank you.

Our next question are there any areas of the business, where you have sizable offering gaps that you could specifically point to.

Well, we do have white space that we're expanding into we're expanding internationally.

We.

We opened we bought three companies in the U K and we're adding people as well.

We have the rest of Europe , which we have we have a plan to expand there and we have other you know there are there are specific markets, where we have some white space in various verticals that we're already in and we and it's an opportunity for us to grow.

So there are many opportunities for us to grow we can we can grow significantly in the United States.

And even more significantly around the globe.

Got it thank you and as a follow up to that.

I guess, what what M&A, if any what M&A opportunities are you targeting and what size deals.

And consider.

Well, we generally like bolt ons and tuck ins, where we're not looking at any significantly large transactions because.

Because of the nature of friction when you merged two people with a significant amount of overlap. So it's worked really well to target.

Really with a laser focus on the things that we might be weak at and where we need additional.

Help and support.

And so we've been able to do that.

We're going into markets, and we're adding where we where we need the talent.

We also have a lot of opportunities to grow in businesses that don't require capital. So examples of that would be property management, where.

It's the same.

At the same clients that we do capital markets business with we have an opportunity to expand our.

Tenant rep business.

<unk> business.

These are things that as we work better together and as we put our infrastructure better together over time Youll, just see our management businesses continued to grow.

Because it's really just.

More of what we do well and doing more for our clients to help them manage.

Manage their assets better.

Great. Thank you for taking my questions.

Thank you.

We will now take our next question from Alexander Goldfarb with Piper Sandler.

Hey, good morning.

Good morning.

So two questions here the first is Barry.

These deals like the mood in real estate is better than earlier this year.

It seems like people are realizing that we're not going to have this wave of.

Keys being thrown back to everyone and it does seem like.

The markets are finding our footing yet.

Still seems like Theres, a lot to go through especially one office leasing still remains slow.

On the lending side people are having to readjust to the new to the new marks but that said there seems to be a lot of equity capital, especially coming out of Japan. So when you put it all together do you.

See that more of these loans and especially the stuff that you guys want to get involved in restructuring do you think that will truly come to fruition or is your view that this pent up equity capital and the fact that people just realize that they need to blend and extend on their own that some of that distressed opportunity that youre, hoping to tap into does.

Materialize, because sort of the market takes care of it.

In normal course.

There is still going to be enormous amount of equity requirements. The banks are going to try to.

A different a different level of coverage.

Interest rates go up 300 basis points in theory there is.

20%, 25% reduction in value.

And if you wanted to retain a 65% loan to value you are going to provide less less debt financing. So as these loans come due people are going to need more equity.

And if they want to blend and extend there they're not only going to need that which will be temporary from their existing lenders, but theyre also going to need new sources of capital new sources of debt.

<unk>.

Some of it will be given back some of the keys will be given back, but but I think the banks as they learned nine.

To a great degree that eventually if they are allowed to make money back in the spreads.

All of the onto the real estate, but theyre going to work with the existing borrowers and Thats a good place for us to be you'll still need more capital. The lenders will eventually get out it will be new lenders, taking their place and there will be new opportunities.

Once once cap rates stabilized at once interest interest rates actually normalize too.

To a specific level as soon as you think it's coming back and the fed raises 25 basis points and another 25 basis points.

Just it's shuts down for a moment till till it till its its going to settle in.

We know it's going to stop.

And I think it's very shortly and once once you can you can you have certainty in the debt and equity markets. You can you can start trading again.

Okay and then the second question is.

On your investments.

Acquisitions of different teams in such a number of years ago.

I think pre Covid you guys restructured the amortization of the share of the equity issuance that you gave to people for purposes of the P&L. So instead of all the shares vesting.

Day, one and the brokers getting that coupon along the way I think <unk> staggered. It. So it was like a four year vest so im guessing now.

Yes, we're sort of all the way into all four years vesting.

Three year, so as you guys buy new teams and.

Prepare for the up cycle that hopefully is coming.

Do you how do you ensure what are you looking at doing is such that this time around there is more of a direct correlation from the top line growth to the bottom line, whereas before there was there was definitely some dilution that was going on.

Yes, so we have a stated target to keep our share count growth within 2% year over year.

And this year on a weighted average basis, we expect to be flat.

From from where we are today so.

We have a plan we know we can manage it to the 2%.

And we're watching it all the time, so we expect to be able to manage within that expectation.

Thank you.

As a final reminder, that is star one if you would like to ask a question.

We'll now take our next question from Patrick O'shaughnessy with Raymond James.

Hey, good morning.

Your earnings release called out customer wins and property and facilities management are these wins more on the property owner side or the occupancy occupier side, nor are they generally competitive wins.

They are both we're winning on the property management side, and we're winning on the facility side as well.

We generally win win facilities, where it's matched up with.

With opportunities to make it to earn money and other aspects of the business. We don't generally do pure play facility management.

Assignments.

Got it.

And how do we think about the margin implications of growing the proppant facilities management business.

Certainly growing faster than the commission side of things.

If you continue to grow that part of your business at a faster rate does that way.

Weigh on the company's overall margin profile.

I mean are offered the opportunity for margin if you the incremental margin for every dollar in capital markets is 50.

But when the market normalizes, we're going to we're going to have a disproportionate amount of it.

High margin increase in our earnings.

Capital markets. So we have a lot of opportunity a lot of a lot of growth in that area property management is a relatively reasonably good margin business facility management has a lower margin business, but unless it usually comes with other aspects of the business leasing tenant rep.

And other kinds of businesses in that core corporations need consulting workplace project management. So that's why I say when when it's a pure facility management play, it's a very low margin.

It's a facility management opportunity with a significant amount of brokerage business, that's where we play.

Companies hire us when they want a much more bespoke innovative creative.

Solution driven represent representation when it's a pure commodity.

Facility management on a global on a fully integrated basis, where they are just looking to outsource it completely.

That is not where we are best suited to be hired.

Yes, I would add to that.

As we continue to get better operationally more operationally efficient.

We will continue to take costs out of the business some of the fixed costs.

And.

Our expectations are that we can keep margins flat to grow it over time.

Even given the mix changes.

Got it that's helpful. Thank you.

Can you provide the revenue contribution from Gerald ease in the second quarter.

I think what we've announced is it's around.

$110 million to $120 million on an annual basis.

And the large majority of their business is recurring so it comes in.

Evenly.

They do have some businesses that are more transactional for example, they have a really great industrial capital markets business in the UK, which we.

Have a great opportunity to grow over time, so but generally comes in evenly throughout the year.

Got it thank you.

And then last from me you guys do have the senior notes that are coming due in the fourth quarter.

Curious about your current expectations in terms of timing of refinancing that and.

What coupon you might have to pay.

We expect to refinance it well in advance of the maturity.

And.

If you just look at five year treasuries.

From when we initially did the transaction till now I think they're up 140 basis points or so spreads probably widened a bit so.

The rate will be higher, but nothing that we can't handle within our financial situation.

Okay, great. Thank you.

That will conclude our question and answer session for today I'd like to hand, the conference back over to our presenters for any additional or closing comments.

I want to thank everybody for joining us today and I look forward to updating you in the next quarter.

Thanks.

And once again that does conclude today's conference. We thank you all for your participation you may now disconnect.

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