Q3 2024 Newmark Group Inc Earnings Call
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Speaker Change: Ladies and gentlemen, thank you for standing by. You are currently on hold for the New Mark Group 3Q 2024 financial results call. At this time we are simling today's audience and plan to be underway shortly. We appreciate your patience and ask that you please remain on the line.
Speaker Change: Ladies and gentlemen, good day and welcome to the newmore group 3Q-2024 Financial Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jason McGruder, head of a Vesta Relations. Please go ahead sir.
Jason Mcgruder: Thank you, operator and good morning. New Markish, in its third quarter 2024, financial results press release this morning. And let's otherwise state as the results provided on today's call compare only the three months and December 30th, 2024 with a year earlier period.
Jason Mcgruder: Except this other way of state is, we will be referring to results only in a non-gap basis, including in terms of adjusted earnings and adjusted EBITDA.
Jason Mcgruder: and Leslie was in the first place in Lasso, we were saying this and you figures today.
with respect to cash flow from operations referred to net cash provided by operating activities, including GSE FHA loan, origination, and sales. We may also use the term cash generated by the business, which is the same operating cash flow method before the impact of cash use for employee loans.
Jason Mcgruder: Please refer to today's press release, supplemental tables, and the Court of Results presentation on our website for completing updated definitions of any non-gapshrooms, reconciliation of these items to the corresponding gap results in how, when and why, man, it could use them.
Jason Mcgruder: for additional information on our cash flow measures, as well as relevant industry and economic statistics.
Jason Mcgruder: The outlook discussed today assumes no meritorial acquisitions or meaningful changes in our stock price. Our expectations are subject to change based on various macroeconomic, social, political, and other factors.
Jason Mcgruder: None of our targets or goals beyond 2024 should be considered formal guidance. I also remind you that information on this call contains forward-looking statements including, without limitation, statements concerning our economic outlook and business.
Jason Mcgruder: Such statements are subject to risks and certainties which could cause actual results to differ from expectations Except as required by law we undertake no obligation to update any forward-looking statement
Jason Mcgruder: For a complete discussion of risks and other factors that may impact these forward-looking statements, see our SEC filings, including but not limited to the risk factors and disclosures regarding forward-looking information in our most recent SEC filings, which are incorporated by reference. I'm now happy to turn the call over to our host, CEO, Barry Gosin.
Barry Gosin: Good morning and thank you for joining us. Newmark's growth accelerated as every major business line improved during the quarter.
Barry Gosin: We increased capital markets revenues by over 18%, the fourth consecutive quarter of double-digit improvement. This performance was fueled by a 77% increase in our mortgage brokerage volumes.
Barry Gosin: With approximately $2 trillion of U.S. commercial and multifamily mortgages maturing in the near term, our professionals are incredibly active finding new sources of debt and equity capital for our clients.
Barry Gosin: including private credit, CMBS, and insurance companies, while still matching borrowers with the GSEs and banks.
Barry Gosin: Newmark's pipeline of capital markets transactions across debt, equity placement, and investment sales is incredibly robust, and we expect this to continue through 2025.
Jason Mcgruder: In addition, we increased our Fannie Mae origination volumes by 58% over the trailing 12 months compared with a year earlier, which will fuel the future growth of our high-margin primary servicing business.
Jason Mcgruder: We generated an 11% revenue increase in management services and servicing. The broad-based organic growth marked the fifth consecutive quarter, a strong improvement for these businesses.
Jason Mcgruder: We expect continued growth of these service lines and targets, doubling them to over $2 billion within five years.
Jason Mcgruder: We increased leasing fees by six percent, led by growth across retail and industrial, which are businesses we have strategically grown over the past several years.
Jason Mcgruder: We remain bullish on the fundamentals of retail leasing, where availability in the U.S. remains at historic lows and asking rents continue to climb.
Jason Mcgruder: We also expect industrial leasing to continue benefiting from the tailwinds provided by growing demand for data centers, as well as reshoring and nearshoring of North American manufacturing.
Jason Mcgruder: Office leasing activity continues to increase as more companies commit to space and mandate returning to the workplace. We anticipate the recapitalization of properties at lower values to further drive leasing activity.
Jason Mcgruder: Newmark continues to be the platform of choice for the industry's most talented professionals as we continue to attract industry leaders across service lines and geographies.
Jason Mcgruder: Following our recent expansions in France and the UK, we are now building Newmark in Germany.
Jason Mcgruder: With improved macroeconomic and monetary environment, sustained growth in demand for our services, and our continued market share gains, we are more excited than ever about Newmark's future. With that, I'm happy to turn the call over to Michael Rispoli.
Michael Rispoli: Thank you, Barry, and good morning.
Michael Rispoli: Newmark's third quarter results once again demonstrated our strong operating leverage. Our total revenues were $685.9 million, up 11.3 percent, which delivered adjusted EPS and EBITDA growth of 22.2 percent and 17 percent respectively.
Jason Mcgruder: Revenues for management services, servicing, and other improved by 11.4%. We generated organic growth across all of our businesses, including strong improvement from GCS, servicing, and property management, as well as higher valuation and advisory fees.
Jason Mcgruder: Leasing revenues increased by 5.6%, led by growth in retail and industrial.
Jason Mcgruder: We improved capital markets revenues by 18.5%.
Jason Mcgruder: Newmark's debt business once again gained considerable market share as we expanded fees from commercial mortgage origination by 45.2 percent.
Jason Mcgruder: This outperformance was broad-based across property types, reflecting volume growth of 76.8% for mortgage brokerage compared with approximately 25% for the U.S. market.
Jason Mcgruder: We also grew volumes from our GSE FHA origination platform by 27.5% compared with a 5% industry decline.
Jason Mcgruder: Our investment sales fees rose by 4.8% which included higher retail and office volumes.
Jason Mcgruder: Turning to expenses. Excluding pass-through items.
Jason Mcgruder: Total expenses were up 7%. Compensation expenses were up 6.3%, reflecting higher variable commissions. Non-compensation expenses were up 9.3%, tied to higher management and servicing fees.
Jason Mcgruder: Our tax rate for adjusted earnings was 13.4% compared with 15.7% last year.
Jason Mcgruder: Moving to earnings. Our adjusted EPS was 33 cents up 22.2 percent. Adjusted EBITDA was 112.6 million dollars up 17 percent.
Jason Mcgruder: with respect to our share count.
Jason Mcgruder: Our fully diluted weighted average share count was $255 million.
Jason Mcgruder: down slightly compared with the second quarter of 2024.
Jason Mcgruder: Newmark's higher stock price accelerated the recognition of 3.7 million RSUs, which was not related to the issuance of new shares. Accordingly, our fully diluted weighted average share count was up 3.1 percent.
Jason Mcgruder: excluding this RSU impact, our share count was only up 1.7 percent.
Jason Mcgruder: During the quarter, we repurchased 7.6 million shares and units for $100.8 million at an average price of $13.30 and year-to-date $193.5 million at an average price of $11.69.
Jason Mcgruder: Yesterday, our board authorized increasing our share buyback program to four hundred million dollars.
Jason Mcgruder: Turning to the balance sheet, we ended the quarter with $178.6 million of cash and cash equivalents and $770.4 million in corporate debt, resulting in 1.4 times net leverage amongst the lowest in the industry.
Jason Mcgruder: The change in cash from year-end reflects $266.2 million of cash generated from the business and $223.1 million of incremental corporate debt.
Jason Mcgruder: This was offset by $209.8 million used primarily for investments and revenue-generating headcount, the return of $241.4 million of capital to shareholders, and normal movements in working capital.
Jason Mcgruder: Turning to guidance. Our updated outlook for the full year 2024 compared with 2023 is as follows.
Jason Mcgruder: We expect total revenues of between $2,620,000,000 and $2,680,000,000, an increase of 6-9%.
Jason Mcgruder: We anticipate adjusted EPS of between $1.11 and $1.17, up 6-11%.
Jason Mcgruder: We expect our adjusted earnings tax rate to be between 13 and 15 percent, and we anticipate adjusted EBITDA in the range of $410 to $430 million, an increase of 3 to 8 percent.
Jason Mcgruder: We've included more detail on our guidance in today's press release and investor presentation. And with that, I would like to open the call for questions.
Jason Mcgruder: Thank you.
Speaker Change: Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. And again, please press star 1 to ask a question.
Jason Mcgruder: Our first question comes from Connor Mitchell with Piper Sandler.
Connor Mitchell: Hey, good morning. Thanks for taking my question.
Connor Mitchell: You guys touched on it a little bit in your opening remarks. The leasing was up 5.6 percent, just lower growth than some of the other revenue line items. And the leasing was driven by retail and industrial. It just seems that recently we've seen some pretty healthy leasing numbers coming from some recent office.
Connor Mitchell: reported earnings.
Jason Mcgruder: So, the first question I was just wondering is, is how should we think about Dubarff's office leasing commission's contribution to the quarter? And then how should we think about the potential upside for leasing commission contribution for office along with, I guess, the strong performance of retail and industrial, too?
Jason Mcgruder: Thank you.
Speaker Change: Sure, good morning, Conor.
Speaker Change: You know our office leasing pipeline continues to be strong. We're winning a lot of big mandates.
Speaker Change: and I think, you know, year over year, we'll have good leasing performance. If you remember last year, we outperformed the market in leasing and we're up more than the average market, particularly in the fourth quarter.
Jason Mcgruder: But we see office mandates coming back, we see strong leasing pipeline, and we think that's going to continue into 2025.
Speaker Change: Okay, and then just to follow up on that, for retail and industrial it seems like it was a pretty good quarter for leasing and those property types. Do you also see some continued tailwinds for them as well and maybe on the data center side too?
Jason Mcgruder: Yeah, hey Connor, this is Lou Alvarado. Look, we're seeing, you know, on the industrial and the retail, significant activity. Data center is definitely a big active sector of the market as well as is cold storage.
Jason Mcgruder: We expect that activity to continue. You know the demand for that doesn't seem to be slowing down at all and I think that we've got some talented people working in those sectors and I think we'll benefit from that business.
Connor Mitchell: Okay, I appreciate the color there and then maybe just switching gears. The updated guidance, it looks like pretty pretty healthy increase in revenue, adjusted EPS. I think if you guys could just
Speaker Change: helped me reconcile the change to adjusted EBITDA. It looks like the year-over-year change came down slightly versus the revenue and EPS.
Speaker Change: was increased for the year-over-year change from the prior outlook. Just if there's anything you guys could help me reconcile there. I know there's the legal settlement that is treated differently between EPS and EBITDA, but if there's something else that might be...
Speaker Change: you know, changing the outlook for one versus the other and the divergence there.
Speaker Change: Sure, Connor, I'll take that. This is Mike. You're correct. Our increased revenue and adjusted EPS guidance is a result of our strong performance year-to-date and the growing pipeline of capital markets activity and leasing mandates. The adjusted EBITDA is really just a function of how we treat legal settlements and related costs.
Speaker Change: for Adjusted EPS versus how we treat it for Adjusted EBITDA. And if you remember in the fourth quarter last year we had a very large favorable litigation settlement for about twelve point eight million dollars.
Connor Mitchell: Okay, and then if I could just squeeze one more in. You guys continue to grow overseas. I think the revenue was about less than 1% in 2017 versus now it's 13%. I'm just curious what lessons have you guys learned so far about maybe continued growth? Are you kind of looking at deepening investments in the current countries and markets regions that you're currently operating in or is the focus a little bit more on continuing to expand to other regions and markets that your market hasn't really set up shop yet?
Speaker Change: Well, we bought three companies in the UK.
Speaker Change: We now have a significant presence in the UK. We've opened five months ago in France and we have
Jason Mcgruder: 45 people in our Paris office and growing. We launched Germany two weeks ago, three weeks ago, and we, you know, seem to be in an incredible, there is an enormous amount of interest of people wanting to join.
Jason Mcgruder: join us. And then, you know, our goal is to to be throughout Europe and we're doing it in an intentional, thoughtful, careful way.
Speaker Change: The same plan that we had in the United States, hire the best people in the verticals in every geography and we're going to continue along that plan. It seems to be working. We've learned that lesson. You hire great people and you will have great results.
Speaker Change: Okay. Thanks, everyone.
Speaker Change: Thank you very much.
Speaker Change: In the quarter, investment sales came in slightly below my estimate, while commercial mortgage came in above, and I think that reflects the dynamic in the marketplace.
Speaker Change: around where we are in the cycle and investors more interested in debt or perhaps that piece of the market coming back first. Can you give any color on how you are viewing capital markets and what you anticipate going forward?
Speaker Change: We see a very active pipeline of sales.
Speaker Change: Our debt market, we've just been fortunate enough to hire a significant amount of really great people. We're a winning market share in more complex, larger transactions. So we have a significant piece of the market in that area, and that is serving us really well.
Speaker Change: On the sales side, you know, you've had four years of headwinds.
Speaker Change: We, you know, once the pricing and discovery of pricing and the appropriate amount of capitulation on values, there will be a lot of trades, and we're seeing that now. We think that...
Speaker Change: It started over a couple months ago, but the move in short-term interest rates always puts a little bit of a damper on activity.
Speaker Change: So it's hard to predict exactly when, but we see a lot of activity.
Speaker Change: Thanks. Two follow-ups. First, they would be, when might you expect...
Speaker Change: growth in investment sales, new acquisitions to eclipse growth in the commercial mortgage business, or maybe you don't. And then secondly, you know, aside from cold storage data centers, you know, are you seeing an increase in demand for traditional asset classes, multifamily, and even office?
Speaker Change: Yeah, I mean we're seeing in every category. I mean multi-family...
Speaker Change: There is going to be a shortage of multi-family housing.
Speaker Change: depends on the specific market.
Speaker Change: That category is interest rate driven, industrial, the continued near-shoring, that will continue, data centers, etc., retail.
Speaker Change: you know, all those activities seem to be fine. The only complicated...
Speaker Change: segment has been office which certainly on a quality top-of-the-line properties
Speaker Change: are doing fine. Vacancy rate is almost at equilibrium in most of the gateway cities.
And a bunch of these cities are starting to do conversions. You know, in New York alone, we have probably 19 million square feet in the queue of office buildings that are being converted to residential, so that will remove inventory.
Speaker Change: bring us closer to the right kind of vacancy rate. And nothing is gonna be put on the market for the next, certainly for the next three, four years. So I think the same thing is happening all over the country, so.
Speaker Change: So we're seeing every one of the categories start to create interest. People are investing in the United States.
Speaker Change: and there is still the same, you know, there's a lot of liquidity and a lot of demand to acquire.
Speaker Change: within the
Speaker Change: commercial mortgage debt business on the multifamily side you had really strong growth with the GSE Fannie Mae and Freddie Mac. Are you seeing them pick up their volumes and get more active or were there any specific you know transactions particular to Newmark that drove the growth?
Speaker Change: We continue to have a fairly robust multifamily investment sales business. We continue to hire people as we will continue over the next year.
Speaker Change: We've won more market share. We capture a lot of the sales that we do for debt. Our capture rate has increased.
Speaker Change: So, we're a beneficiary of that kind of business.
Speaker Change: and Jade I would add we're seeing a big pickup in demand for the GSE business across the whole market as well as at Newmark. I think the biggest challenge is going to be how much can get closed this year and how much is going to get pushed out to next year.
Speaker Change: Okay, but you all recognize revenue at rate lock rather than close, so that potentially could be a positive fourth quarter driver.
Speaker Change: Yeah, it could be, but again, you know, getting the rate lock, there's just huge demand in the market, and how much can Fannie and Freddie push through the pipeline before year-end remains to be seen.
Speaker Change: Okay. Well, certainly it does sound like that business has picked up, so thanks very much.
Speaker Change: Thank you.
Speaker Change: And our next question comes from Patrick O'Shaughnessy with Raymond James.
Patrick O'Shaughnessy: Hey, good morning. I want to follow up on the question with your updated adjusted EBITDA guidance. So I get the, you know, peculiarities of the year-over-year
Speaker Change: math with the settlement in the ergo period but you know on the absolute dollar basis your just EBITDA guidance fell I think 4 to 8 million versus your prior guidance it used it was 418 to 434 now it's 410 or 30
Speaker Change: And so that implies that your margins are going to be around 15.5 to 16% versus the prior at 16.4%. So what are you seeing in terms of this incremental revenue leading to a lower margin profile?
Speaker Change: Sure, the first thing I'll point out is
Speaker Change: The 16 plus percent last year included the 12.8 million favorable legal settlement. If you take that out, you know, you're probably in the 15.5% range, maybe a little higher. So year over year, we would expect margins to improve. And then this year, year to date, and you could see it in the gap to non-gap recs for adjusted EPS.
Speaker Change: There was favorable legal settlements last year for a few million dollars and unfavorable for a few million dollars this year nothing too material, but just Moving the guidance on adjusted EBITDA for the full year
Speaker Change: Okay, thank you. And then I guess maybe bigger picture, as we're looking ahead to the fourth quarter and next year, how are you thinking about incremental margins for the business?
Speaker Change: You know, a lot relies on capital markets. You know, we have, we have the athletes on the field.
Speaker Change: To the bottom line, so we we expect our Marla
Speaker Change: 40 to 45 percent.
Speaker Change: set $0.40 to $0.45 to the bottom line. We expect...
Speaker Change: that to happen when the market opens up.
Speaker Change: We've also stated that these are going to be sequentially improving over the next couple of years until the moment in time when the market stabilizes, normalizes, they're back in the ecosystem of selling and buying property.
Speaker Change: in a general robust market, which we think is happening between 25 and 26. That's why we gave you the guidance for 26.
Speaker Change: because we think it's going to come back and we think it's going to improve our margin and get us back to an earnings position where we had projected.
Speaker Change: Great, thanks Barry. And then last one from me, how do you characterize that financing availability right now and has there been a shift in sources of lending?
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Speaker Change: are concerned as to the size of their CRE books.
Speaker Change: So, the debt funds are proliferating and many of the private equity firms
Speaker Change: are building captive insurance companies, which gives them the opportunity to have long-term capital to invest in real estate. So that's replacing some of the older debt players.
Speaker Change: fortunately for us it came back about a year ago.
Speaker Change: and we're not having a problem finding money in those markets for good quality real estate.
Speaker Change: Great, thank you.
Speaker Change: And ladies and gentlemen, it appears there are no further questions at this time. I'd like to turn the conference back over for any additional or closing remarks.
Speaker Change: Thank you for joining us today. I still remain excited about the company's future and look forward to updating you on the next quarterly call.
Speaker Change: Yeah.
Speaker Change: and Robert D. Thank you. Bye-bye. Bye.
Speaker Change: [music]
Speaker Change: and Michael Rispoli. Thank you for watching. Please subscribe to my YouTube channel. I hope you enjoyed this video. If you have any questions or other problems, please post them in the comments. I will try my best to answer them. Thank you for watching. Please like, share this video, and subscribe to my YouTube channel. See you in the next video.