Newmark Group, Inc. (NASDAQ:NMRK) Q1 2023 Earnings Call Transcript May 10, 2023

Operator: Good day, and welcome to the Newmark First Quarter 2023 Earnings Call. Today’s conference is being recorded. [Operator Instructions] And at this time, I’d like to turn the conference over to Jason McGruder, Head of Investor Relations. Please go ahead, sir.

Jason McGruder: Thank you for your patience as we dealt with some technical difficulties on the vendor in. 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, the results provided on today’s call compare only to three months ending March 31, 2023 in the year-earlier period. Unless otherwise stated, we will be preparing for results only on a non-GAAP basis, which terms include adjusted earnings adjusted EBITDA. Please refer to the section in today’s press release for complete and/or 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 from today’s website in today’s press release and supplemental Excel tables and the quarterly results presentation. Unless otherwise stated any figures discussed today with respect to cash flow from operations refer to net cash provided by operating activities, excluding loan origination and sale as well as the impact of 2021 equity van. Cash from the business is the same cash flow metric excluding loan or producers. The outlook on today’s call 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 factor economic, social, political and other factors. While our long-term financial and operating targets assume no acquisitions, they are also subject to change with these same reasons.

None of our long-term targeted goal should be considered formal guidance. Last remind you that, information on this call, but our business that are not historical facts are forward-looking statements within the meaning of Section 27A, the Securities Act of 1933 as amended Section 21E of the Security and 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 a complete discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements see Newmark’s Securities and Exchange mission filings, including but not listed to the risk factors in our most recent Form 10-K, Form 10-Q, Form 8-K filing which are incorporated by reference.

I’m now happy to hand the call over your host Chief Executive Officer of Newmark, Barry Gosin.

Barry Gosin: Good morning and thank you for joining us. With me today are Newmark’s Chief Financial Officer, Mike Rispoli; our Chief Strategy Officer, Jeff Day; and our Chief Revenue Officer, Lou Alvarado. Newmark’s strategy is to assemble the industry’s most talented professionals and arm 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 UK-based full-service real estate advisory firm Gerald, bringing to Newmark a top three UK industrial capital markets platform. Now, we generate nearly $200 million in annual revenues in the UK, and plan to expand further across Europe.

Our exclusive FDIC mandate to sell Signature Bank’s $60 billion loan portfolio exemplifies our strength in managing large and complex transactions. This portfolio represents the largest real estate loan sale in US history and demonstrates the capacity and depth of Newmark. Loan advisory services are becoming increasingly significant for us. Trust almost $2.6 trillion in US 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 risk assessment and stress testing services for banks is seeing a significant increase in activity.

These businesses together with Capital Markets and GSE FHA origination provide Newmark with tremendous insight into commercial and multifamily lending. This combination helps us to better advise our clients, across property types and service lines. Newmark’s long-term prospects remain strong because of the $400 billion of uninvested capital in closed-end funds, which will drive capital markets. The $2.6 trillion of commercial and multifamily mortgages maturity over the next five years, which will fuel our debt loan service 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 of significant global growth prospects, we expect to remain the preferred destination for industry’s top professionals. 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 industry volumes are bound similar to our success in 2021. With that, I’m happy to turn the call over to Mike.

Mike Rispoli: Thank you, Barry, and good morning. During the first quarter, Newmark made significant investments for future growth. Once our new producers ramp up, we expect these investments to add approximately $300 million of annualized revenues. 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 $520.8 million, down 23.2%, mainly due to lower industry-wide capital markets activity with US investment sales down 56% according to RCA and origination activity down by as much as 53% according to Newmark Research.

Leasing revenues declined 2.8%, 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 US 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 on our high-margin servicing business. Total revenues for management services, servicing fees and other, declined by 8.9% due to lower pass-through revenues and valuation fees. Total expenses of $461.9 million or 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 $0.15 compared with $0.36. These results reflect the impact of the dramatic rise in interest rates on a higher margin capital markets platform. Our fully diluted weighted average share count, declined by 5.1% 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 of total corporate debt. 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 investors. We remain in a strong financial position with net leverage of 1.3 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. For the balance of the year, we expect continued sequential improvement. And with that, I would like to open the call for questions. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is going to come from Chandni Luthra from Goldman Sachs. Please go ahead.

Operator: And our next question will come from Jade Rahmani from Keefe, Bruyette & Woods. Please go ahead.

Operator: [Operator Instructions] And now is Alexander Goldfarb from Piper Sandler. Please go ahead.

Q – Alexander Goldfarb: So then that leads to my second question. We all talk about negative leverage and certain sectors like industrial, it’s easy to pencil because the growth is there office, I would imagine is much tougher. So Barry, is — or a new, in order for this transaction market to reopen, and let’s talk more about office, do we need to see positive leverage return, or can the office transaction market recover, if it still has negative leverage on trades?

Q – Alexander Goldfarb: Okay. Thank you.

Operator: — And we have — Patrick O’Shaughnessy from Raymond James. Please go ahead.

Operator: And our next question will come from Jade Rahmani from Keefe Bruyette & Woods. Please go ahead.

Operator: And I have no further questions in the queue. I will turn the call back over to Barry Gosin for the closing remarks.

Barry Gosin: Thank you for joining us today. I’m still extremely excited about the company’s future and look forward to updating you on our next quarterly call. Thank you.

Operator: And this concludes today’s call. Thank you for your participation. You may now disconnect.