Q4 2023 Newmark Group Inc Earnings Call

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Good day and welcome to the new market group for Q and FY 2023 earnings call. Today's conference is being recorded at this time I'd like to turn the conference over to Jason Mcgruder head of Investor Relations. Please go ahead.

Thank you operator, and good morning, Newmark issued its fourth quarter and full year 2023 financial results press release and presentation. This morning, unless otherwise stated the results provided on today's call compare only the three months ending December 31, 2023, with a year earlier period.

Kept as otherwise specified we will be referring to results only on a non-GAAP basis, which includes the term.

Adjusted earnings and adjusted EBITDA. Please refer to the section in today's press release for complete and our updated definitions of any non-GAAP terms reconciliation of these items to the corresponding GAAP results and how when and why management uses them.

Unless otherwise stated any figures discussed today with respect to cash flow from operations referred to net cash provided by operating an operating activities, excluding loan origination and sales.

Cash generated by the business is the latter cash flow metric before the impact of loans forgivable loans and other receivables for employees partners and the impact of the 2021 equity event.

For more information on these cash flow items, our GAAP and non-GAAP results and the industry Statistics mentioned today see our website today's press release.

The supplemental excel tables and the presentation.

Our outlook discussed today assumes no 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 2024 should be considered formal guidance. 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 of the Securities Act of 1933 as amended and section 21 E Securities Exchange Act of 1933 as amended such statements involve risks and uncertainties, except as required by law Newmark undertakes no obligation to update any forward looking statement.

A complete discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in 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 or.

Form 8-K filings, which are incorporated by reference I am now happy to turn the call over to our host Barry <unk>, Chief Executive officer of new market.

Good morning, and thank you for joining us.

New March revenues increased by over 23% in the quarter.

With double digit gains across every revenue category.

We completed more than $50 billion signature portfolio sale, the largest real estate loan sale in U S history.

We also closed the largest industrial occupier leaks, the largest office tenant lease and the largest office building sale in the United States Newmark was successfully executing on our strategy of being the best in each of its service lines.

In addition to completing the largest transactions in the industry, we generated 20% revenue growth for management services servicing fees and other.

This improvement reflected a more than doubling of our high margin asset management and servicing portfolio to 176 billion. The addition of generally.

And continued organic growth from gcs.

Newmark improvements leasing revenues by 20%, while overall industry leasing activity declined by more than 10%.

Our significant outperformance was driven by strong double digit organic growth in office and industrial.

We also gained meaningful market share in capital markets. Newmark question number two broker in U S investment sales for the fourth quarter of 2023 and.

And number three for the full year, which excludes the $22 billion equity portion of the joint venture transaction.

We continue to progress towards our goal of becoming the number one capital markets advisor in the U S.

We attract the best of the best.

Already in 2024, we hired the preeminent affordable housing some.

Some of the most prolific and experienced that in structured finance professional.

As well as one of the most innovative and active U S leasing teams.

We empower our extraordinary talent with World Class research data analytics and technology to bring their best to new marquee clients.

We refused to let complacency impede progress in this rapidly evolving industry and.

And we in champion and we championed the answered the entrepreneurial spirit.

If youre a great you should be at Newmar.

M B, a expect a record $929 billion of commercial and multi family mortgage maturities in 2024, we estimate that about one third are underwater and regionally reasonably likely to be sold one third will need assistance with restructuring or recapitalization and one third will likely re.

Quired adviser to help find new lenders.

As the service provider that does not own real estate. These maturities maturities represent an enormous opportunity for us. This refinancing wave is expected to drive double digit increases in commercial and multifamily originations this year and next.

The difficulties of our clients they.

We will continue to drive them to seek our innovative financing solutions we.

Expect those existing owners as well as lenders, who received properties and foreclosure to turn to new market for the following services.

New sources of capital, including equity recaps, and joint ventures, selling loans selling properties property management valuation and advisory asset management and servicing an agency leasing.

With respect to leasing vacancies remain below long term averages in nearly all property types in the U S and UK.

Scepter office, which remains challenged outside of premium class a properties quality office assets continue to command a disproportionate share of the market activity class a properties accounted for 53% of all U S office leasing in the fourth quarter 2023.

New construction pipelines have fallen significantly from their first quarter of 2020, and a small but growing percentage of office buildings are being converted to other uses in addition to in addition owners and lenders are reaching the end of their ability to extend and pretend with respect to mortgages. The recapitalization of these properties will lead to a reset.

And values and strong re leasing activity.

We continue to expect solid fundamentals with respect to industrial and retail leasing, which together represented over 40% of new marks leasing revenue in 2023, compared with just over 25% in 2019.

We expect transaction volumes to accelerate in the second half of 2024, which coupled with new market investments in talent will drive our industry, leading revenue growth with that I'm happy to turn the call over to our CFO micro slowly.

Thank you Barry and good morning.

We increased total revenues by 23, 1% to $747 4 million.

Producing double digit growth in every revenue category.

Eastern management services servicing and other grew by 19, 4%. This improvement reflected the addition of generally an increase in our high margin asset management and servicing portfolio to $175 9 billion.

And continued organic growth for gcs.

We improved our leasing revenues by 19, 6% driven by strong double digit organic growth in office and industrial.

This was the fourth consecutive quarter of leasing market share gains for newmark as overall industry leasing activity was down by over 10%.

We improved our investment sales and origination revenues by 27% and 45, 9%, respectively and outpaced the market in each of these categories industry.

Industry wide investment sales activity was down by over 40% in the U S and Europe, while U S commercial and multifamily originations decreased by 25%.

We also gained market share in GSE origination as our volumes declined by approximately 11% compared with 42% reduction in industry wide activity.

Turning to expenses.

Compensation expenses were up 23, 6%, mainly due to higher commissions tied to revenue as well as expenses related to acquired companies and the hiring and revenue generating professionals under long term contracts.

Non compensation expenses were up 8% due to a $10 $3 million increase in pass through expenses.

Total expenses were up by 19, 2%.

With respect to the company's $75 million cost reduction initiative.

Newmark recognized approximately $35 million in savings in 2023, and expect to realize an incremental $25 million in 2024 with the balance of the savings realized in 2025.

Turning to.

Our adjusted earnings per share grew by 43, 8% to <unk> 46.

And our adjusted EBITDA improved to $166 2 million up 62, 6%.

Our quarterly adjusted earnings tax rate was 14, 8% compared with nine 3% a year earlier, our full year 2023 adjusted earnings tax rate was 15, 1% as compared to 17, 1% in 2022.

Our fully diluted weighted average share count was consistent with our previous guidance of approximately $250 million for the quarter and $246 million for the full year.

Turning to the balance sheet.

We ended the year with $164 $9 million of cash and cash equivalents the.

The change from year end 2022 reflects $341 2 million.

Cash generated by the business and $105 5 million.

From the redemption of the joint venture.

These receipts of cash were partially offset by a $325 $8 million of.

Our cash invested for acquisitions and producers.

Other uses of cash included capital expenditures and return of capital to shareholders.

Our net leverage ratio was 1.0 as of year end 2023.

Last month, we successfully completed the refinancing of our long term debt by issuing $600 million.

Five year senior notes at seven 5%.

Moving to our outlook for the full year 2024 compared to 2023.

We expect total revenues to grow between 3% and 7%.

We anticipate both adjusted EBITDA and earnings per share to grow between 5% to 9%.

We expect our fully diluted weighted average share count to increase by approximately 2% and.

And we expect our adjusted earnings tax rate to be between 16 and 18%.

Due to the scale of our hiring and our significant outperformance in the fourth quarter of 2023, we expect the majority of our year over year improvement in earnings to occur in the second and third quarters of 2024.

As Barry discussed, we expect industry volumes to pick up in the back half of 2024 and into 2025.

Once volumes fully normalized which we expect to be around the middle of 2025, and given our substantial investments we expect our business to generate on an annual basis over $3 billion in revenue and over $630 million and adjusted EBITDA.

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

Thank you.

I would like to signal with questions. Please press star one on your Touchtone telephone.

If you are joining us today as a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again that is star. One if you would like to signal with questions Star One and our first question will come from Connor Mitchell with Piper Sandler.

Hey, good morning, Thanks for taking my question.

Thinking about the revenue outlook you guys outlined can you just share a little bit more about how youre thinking you each line items growth over the year.

In order to achieve total revenue growth of 3% to 7% I know Barry touched on it a few of them. Maybe you guys could provide some numbers or just some further outline undertaking to reach that that total growth number.

Sure good morning.

Yes, I would say that.

Certainly we had great leasing performance in 'twenty three.

Our expectation is that.

Because we gained so much market share this year that line item can be.

And the growth will come from our management businesses as we continue to grow those businesses and our capital markets businesses.

Larry mentioned.

That industry wide will be up probably 20% or more.

And we think we'll see some more sales activity because of the debt maturity walnuts that's coming.

Okay. That's helpful and then.

Barry touched on.

Opening remarks.

<unk> brought in a lot of great talent.

The top affordable advisory Affordable housing advisory team.

Structured finance is there.

Anywhere that you guys are kind of eyeing. The next moves maybe some product lines or geographies.

It's sector specialties et cetera that maybe you guys want to increase your bench or.

I would just add some more depth in that area.

I mean, we're always adding talent that is really our strategy.

Adding talent.

We added affordable, which has implications with Freddie and Fannie It's mission critical to the GSE business. So we're excited about that opportunity.

<unk> broaden and strengthen our debt and structured finance certainly with two six trillion.

<unk> debt maturing over the next few years.

These loans are going to need help.

Offer up as opportunities so we strengthen that bench.

There are some white spaces in the U S. And then we're growing across Europe, but we always we always continue to look for talent build the spot.

Okay I appreciate the color. Thank you.

And as a reminder, if you would like to signal with question. Please press star one on your Touchtone telephone.

Star one for questions. Our next question will come from Jade Rahmani with K B W.

Thank you very much.

Realize theres not too much you can disclose but on signature.

I wanted to confirm Theres no revenue expectation in 2024.

Good morning, J D I can confirm that.

And do you know roughly speaking where investment sales commission percentage rates and debt brokerage commission percentage rates would be ex signature in the fourth quarter.

Okay.

I would say that there are within historical averages without the signature transaction.

Okay, well, thank you very much market share without this we gain market share without the signature transactions.

Yes, It certainly appears that way based on the data that we've seen.

Wanted to ask about.

The outlook again, and the phone was a bit difficult to hear did you say that capital markets volumes would be up 20% or more there would be growth in investment sales and leasing would be down a little bit.

Okay.

Okay.

Yes, that's generally correct I said.

Because of our leasing outperformance in 'twenty, three our expectation going into the year somewhat flat for 2004, it could be down a little.

We expect to continue to see growth in management services and our management business is generally our servicing business.

The MBA expects that to be up around 20%.

Year over year and 24.

We would expect to maintain or grow our market share. There and then we would expect sales activity to be up year over year as well.

Yes.

Thanks, very much and then the GSE is.

Walker and Dunlop and I think cushman Wakefield, both expect volumes to be relatively flat in 2024, I mean that does go against their historical counter cyclical role in the market, but they're being much more judicious in terms of.

You know what they except for.

Origination do you expect GSE volumes.

And your business to be flattish.

We disagree with Walker and Dunlop, we think.

The GSE business will.

Which adds.

We are now building out a private client part of our business some of the some of the some of the smaller institutional quality deals will offer up more mission critical for Freddie and Fannie.

And just lastly on the recruitment front, there's been some high profile departures of late.

So called superstar producers.

Does that characterize the types of folks who are looking to recruit or would you be looking to recruit smaller infill teams that are more niche focused.

Yes.

So a little of both we are always looking for great talent.

As exceptional people brings exceptional results.

Thanks very much.

Thank you and that does conclude the question and answer session I will now hand, the conference back over to you.

I want to thank everybody for joining for joining us today and look forward to next quarter. Thanks.

Okay.

Thank you that does conclude today's conference. We do thank you for your participation and have an excellent day.

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