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Operator
Good morning. My name is Jason. I'll be your conference operator today. At this time, I'd like to welcome everyone to the Newmark first quarter 2021 earnings conference call. Our participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'll now turn the call over to Jason Harbs, Vice President of Investor Relations. Sir, you may begin when you're ready. Thank you, and good morning. We issued our first quarter 2021 financial results press release and a presentation summarizing these results this morning. The results provided on today's call compare only the first quarter of 2021 with the year earlier period, unless otherwise stated. Any figures with respect to cash flow from operations discussed on today's call refer to net cash provided by operating activities excluding loan originations and sales. We will be referring to our results on this call only on an adjusted earnings basis unless otherwise stated. We may also refer to adjusted EBITDA. Please see today's press release for results under generally accepted accounting principles or GAAP. Please see the sections in the back of today's press release for the complete definitions of any such non-GAAP terms, reconciliations of these items, the corresponding GAAP results, and how, when, and why management uses them. Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website and in our investor presentation. Any outlook discussed on today's call assumes no material acquisitions, shareable purchases, or meaningful changes in the company's stock price. These expectations are subject to change based on various macroeconomic, social, political, and other factors, including the COVID-19 pandemic. I also remind you that information on this call regarding our business that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. Such statements involve risks and uncertainties. These include statements about the effects of the COVID-19 pandemic on the company's business results, financial position, liquidity, and outlook, which may constitute forward-looking statements that are subject to the risk that the actual impact may differ, possibly materially, from what is currently expected. Except as required by law, Newmark undertakes no obligation to update any forward-looking statements. for discussion of additional risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements seen in Newmark Securities and Exchange Commission filings, including but not limited to the risk factors set forth in our most recent Form 10-K, Form 10-Q, or Form 8-K filings. With respect to the NASDAQ earn-out, the number of shares received by Newmark will depend On the timing of the closing of NASDAQ sale of its U.S. fixed income business and NASDAQ stock price at the time, NASDAQ has stated that the closing is subject to the satisfaction of customary closing conditions, including the receipt of required regulatory approvals. Newmark can provide no assurance as to when or if the closing will occur. I'm now happy to turn the call over to our host, Barry Gossin, CEO of Newmark Group, Inc.
Jason
Thank you, Jason. Good morning, and thank you for joining us for Newmark's first quarter 2021 conference call. Joining me on the call today are Newmark's Chief Financial Officer, Mike Rispoli, our Chief Strategy Officer, Jeff Day, and our Chief Revenue Officer, Lou Alvarado. Newmark earned 20 cents per share on record first quarter revenues of $504 million, reflecting the value of our preeminent full service platform and the strategic investments we made before the onset of the global pandemic. As of May 5th, more than 41% of the adult American population has been fully vaccinated against COVID-19, and more than 56% have received at least one dose. At the same time, the U.S. economic recovery is accelerating with 6.4% annualized growth in the first quarter. Nationally, the U.S. workforce has recovered approximately 40% of the jobs lost during the pandemic, and the country's unemployment rate has fallen to 6% in March 2021, from 14.8% in April 2020. Businesses are now increasingly more confident and are announcing their plans to return to the office. We will be welcoming all our employees back to our offices on June 1st. Companies have increased their utilization space and are making long-term commitments across all sectors. In the first quarter, our leasing revenues surpassed the first quarter of last year. This outperformance was driven by demand for industrial retail and life science properties as the U.S. recovery gains traction. COVID-19 restrictions are easing across the country. Many states, including New York, plan to fully reopen before the end of the second quarter. We maintain an optimistic view for leasing in the second half of 2021. Our capital markets business modestly declined. However, we gained significant market share during the last 12 months, making Newmark the second largest investment sales platform in the U.S. There is increased confidence among investors and lenders as fundamentals stabilize and record amounts of investment capital are available. Management services and servicing fees contributed to our top-line revenue improvement as we continue to focus on growing our recurring revenues. In March, Newmark acquired the business of Notel, a global flex office provider. We expect the flex market to grow 20% to 30% annually over the next decade as corporate occupiers look to create optionality in their real estate portfolios. The response of our clients to this acquisition has been extremely positive. With that, I'm happy to turn the call over to Mike.
Jason
Thank you, Barry, and good morning. Good morning. Newmark generated record first quarter revenues of $504 million, up 4.1 percent. Management services and servicing fees rose 13.7 percent, including valuation and advisory fees, which grew 16.3 percent. These recurring revenues increased 312 basis points to 37 percent of total revenues in the first quarter as we maintain our focus on growing these businesses. Our leasing revenues increased 5%, driven by increased demand for industrial, retail, and life science properties. As more companies implement their plans to return to the office, we expect continued improvement in office leasing, particularly in the second half of the year. Capital markets revenues decreased by 5.1%. our investment sales volumes decreased 11% as compared with a 28% industry decline, according to RCA. We gained significant market share in investment sales during the last 12 months, making Newmark the second largest investment sales platform in the U.S. GSE volumes increased by 29%. However, gains from mortgage banking activities net declined 6% due to product mix. Total expenses decreased by 2.5%. Turning to earnings. Earnings per share were $0.20. That's compared to $0.09 in the prior year period. And adjusted EBITDA was $79.3 million, up 81%. Moving on to our balance sheets. Newmark generated $25.3 million of cash flow from operations. We maintained strong liquidity and credit metrics. As of March 31st, we had $146.9 million of liquidity, which declined from year end due to acquisitions, and $325 million of availability on our revolver. Our net leverage ratio remained at 1.4 times. Our balance sheet does not yet reflect the NASDAQ earn out. The value of the NASDAQ earn out increased $102 million in the first quarter and has a total net value to Newmark of approximately $850 million as of yesterday's closing price. We expect to receive this payment prior to the end of the second quarter. Our near-term capital allocation priorities are to return capital to stockholders through share and unit repurchases and to invest in growth and margin expansion at attractive returns. We also intend to pay down our revolving credit facility. Newmark plans to continue its dividend and distributions at or near current levels through the balance of 2021. Turning to our outlook. Newmark expects revenue growth of 37 to 42 percent in the second quarter based on a strong pipeline of activity. Including Notel, the company expects stable adjusted EBITDA margins in the second quarter relative to the first quarter. In addition, Newmark expects approximately $850 million of NASDAQ shares net from the NASDAQ earn out in the second quarter based on yesterday's closing price. For the full year, we are raising our outlook and now expect to generate 20 to 25% revenue growth and 40 to 50% adjusted EBITDA growth. These results will be increased by the additional $850 million of NASDAQ shares net from the NASDAQ earner. These expectations include the acquisition of Notel, which we anticipate will be 3 to 5 cents dilutive to 2021 post-tax adjusted EPS. and break even in 2022. Newmark's fully diluted weighted average share count for adjusted earnings was up 2.9% in the first quarter. In the quarter, Newmark repurchased 900,000 shares of Class A common stock for $9.3 million at an average price of $10.57 per share. Excluding material acquisitions, The company expects to use share buybacks to keep its fully diluted share count flat for 2021. Operator, we would now like to open the call for questions.
Operator
We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question is from Alexander Goldfarb from Piper Sandler.
Alexander Goldfarb
Please go ahead. Hey, good morning.
Operator
Morning.
Alexander Goldfarb
So two questions here, and apologies, the first question is a two-parter. So one, Mike, just if you can let us know if there's any taxable impact of the NASDAQ share settlement. And two, as part of that The $850 million that's coming in, you mentioned keeping the share count flat. Can you just rank prioritize? Because you guys have been heavy in investing and acquiring producers. I'm just curious, now that you have this windfall, is the focus first on keeping the share count flat so that way it improves the earnings growth and then second investing? Or is that not a set firm priority as far as order use of capital?
Jason
Great. Thanks for the questions, Alex. In terms of the tax rate, as we stated last quarter, because of our favorable partnership structure, we believe we can shield most, if not all, of the taxable income from the NASDAQ earn out. So we expect our tax rate to be below our adjusted EBITDA, adjusted earnings tax rate, and I would say significantly below that. You know, in terms of capital allocation, we did say we expect our share count to be flat, and we'll use stock buybacks to do that. And because our share count was up 2.9% in the first quarter, you know, the floor there is at least $100 million of buybacks or more as we move through the year. As the money comes in, we're obviously going to evaluate our opportunities to continue to invest in the business versus share buybacks. and then we'll make decisions on how to allocate the capital then.
Alexander Goldfarb
Okay. Okay. No, hopefully it goes to the buybacks as far as improving the growth profile. So that hopefully we see that. The second question is a lot of discussion on 1031. On one hand, you know, a lot of the big institutions that I believe are, you know, sort of traffic in your brokerage space are tax deferred or not really tax affected, whereas My guess is that a lot of the 1031 units are sort of a mom and pops with a smaller time. So maybe just thoughts on your view of what would happen. Would we see sort of a suspension of sales at the low end but unaffected at the bigger size? Or do you think that this could have broader implications? Just curious your take.
Jason
Well, first of all, I don't think we can count on anything being passed. There's still a lot of things up in the air. The 1031, when analyzed properly in Washington, with changing the 1031 rule, The amount of income capture by the federal government will be a lot less because people won't be doing transactions, smaller transactions. That's an assumption that's being evaluated by Washington. Having said that, our business is mostly institutional, private equity and institutional. It doesn't really have an impact on those buyers, and it's not a large part of our business.
Alexander Goldfarb
Okay, thank you, Barry.
Operator
The next question comes from Jade Ramani from KBW. Please go ahead.
Lou
Hi, this is Sarah Obeidi on for Jade. Congrats on the strong quarter. My first question is, what were the main drivers of outperformance? Any color by business line, geography, and property type would be helpful.
Sarah Obeidi
Yeah, sure. This is Lou Alvarado. um but we had obviously the strong sectors that have outperformed our multi-family and capital markets life science industrial and retail had a pickup in in this last quarter you know as as people are seeing the end and the ability to return to the office decisions are being made and and and as a result it's driving more activity Those markets that reflect those uses, life science, industrial, multifamily, did better. But across all markets, we saw improvements. But the heavier results were driven in markets that had those sectors as key sectors that are active there.
Jason
To add to that is in 18, 19, and 20, the first quarter of 20, we hired a great deal of talent And that talent came on board at the onset of the pandemic. So in addition to the normalization of the market itself, we are beginning to ramp up the gestation period for that talent will organically impact the growth of the company. And we're seeing that come into play.
Lou
And thanks. And any color on geography?
Sarah Obeidi
Yeah, I think as I stated, I think across all the geographies, we saw improvement in the quarter. Markets that have life science, like Boston was one of the key driver in that, and in Northern California, those areas did better as a result of those business lines that were the favorite poop of investors right now.
Lou
Thanks very much. And my second question is, what are the main drivers of strong revenue growth in the second quarter and for your increased expectations for the full year?
Jason
Sure, I'll take that one. You know, we're seeing growth, continued growth in leasing. We're seeing the pipelines build in capital markets in a lot of the sectors that Lou discussed. We continue to win management services business, and our servicing book, which is now over $70 billion, continues to grow as we continue to originate debt. So, you know, in short, we're seeing growth across the board in many of our businesses and in many of the geographies.
Lou
Great. Thank you so much for taking my questions.
Operator
The next question comes from Henry Coffey from Wedbush. Please go ahead.
Henry Coffey
Yeah, excuse me. Good morning. First, on the buyback issue, I think if we had listened to some of the discussions last year or in 2019, the expectation was pretty high that once you got past the tax-related issues tied to the spin, that it'd be a more aggressive, a, quote, very aggressive buyback program. You've got this $800 million program which is a lot of money coming your way, what's the holdback? What's the thought about using that money and just driving it to either pay down corporate debt or buy back stock or both in a big, very grand way?
Jason
Yeah, good morning, Henry. This is Mike. We're not backing off any of those statements. I think, you know, the money will be coming in, we believe, in the second quarter. we've set a floor for what the buybacks will be for the year. And you can see that's a pretty material number. And, you know, as we get the money and we look at our opportunities, we'll decide whether to increase that or invest in the business or do both. We see a lot of opportunities.
Jason
Henry, you should also note that we have spent the last five, six years building out infrastructure into markets that have matured. with fixed cost and infrastructure that support those markets, with an enormous amount of runway and white space in those markets that will allow for incredible incremental margin benefits by acquiring talent to those mature markets.
Henry Coffey
So the idea is either using the capital to acquire, hire, build out, productive teams or a buyback, and that's sort of the decision you have to weigh each time you think about those issues.
Jason
There are three pieces to it. One, pay down our debt. Two, buy back our stock. Three, go for the businesses that are performing the best and pile on. and benefit from the gearing and scaling that occurs where you acquire talent in a mature infrastructure market.
Henry Coffey
Good, thank you. And then looking at no-tell, and I think I would ask this question about no-tell as well as the office space in general. You know, have you seen any green shoots, you know, signs of early activity that reinforce your optimism here?
Jason
Yes, we've had very good reception from the community. We were a believer in flexible enterprise workspace from the very beginning. Post pandemic, we believe that activity will accelerate based on the combination of hybrid work, a need for optionality, flexibility, and agility by large users. and a requirement by owners to amenitize their space for the purposes of attracting employees back to their hubs. And flex work will be a part of the conversation as well as any narrative around hybrid work. It will be part of the hybrid work that allows for agility both on the corporate level and amenities on the owner level.
Henry Coffey
What has been the reception to the idea of you offering this as a managed product as opposed to, you know, the WeWorks model of buying and subleasing and actually having capital at risk in the assets?
Jason
So firstly, the business is more durable and sustainable as a managed business. flag business. If you follow the release, the people we hired are all hospitality related. One ran Morgan's Hotel, the other was a senior executive of Marriott. So the combination of flex work, co-working, and the hotel hospitality aspect of it brings a new flavor to that business. We think it's the right one. And going forward, we think that not only will it appeal to the owners as a managed solution, the structure of it will be very favorable for owners and very favorable for us with minimal risk on our part. So it is our plan to be a management solution business, not to be a lease-release heavy capital. This will be a capital-light business.
Henry Coffey
Now, just sort of changing gears, one of our associates, competitors, Zellman Associates, you know, they're really good, and calling them a competitor is only an upgrade to us. But they've been talking about the conversion of a lot of this sort of dead mall space, dead retail space, into single-family, built-for-rent, multifamily, et cetera. Is that something that you see as an ongoing activity in the real estate markets? And, you know, how does that opportunity impact Newmark?
Jason
Well, so on the Flex work, part of it. We're a hub and spoke strategy. You'll have the urban core and the three rings around it. We think that some element of in the hybrid environment, the combination of having the ability for whether it's one or two days a week working from home and driving 15 minutes to spend some time in a more local office in a notel will be a solution, and it could certainly be attractive for the malls. The question of, you know, making the malls more experiential and more diversified is going to continue to be part of the conversation, not even to mention the last mile solution for some of the e-commerce. Lou, did you have something to add?
Sarah Obeidi
Yeah, I think, Henry, what we're seeing is in a lot of cases, not just malls, but other types of assets being repurposed. Life science has become a big player in that. Medical academics has become a big player in that, as well as the multifamily. So I think you'll see some of those that are somewhat obsolete being repurposed, and we play a significant role in that with our investment sales team.
Henry Coffey
So it's really beyond just, oops, these are great places for houses, the potential to repurpose this seemingly dead real estate, and I think we all have one in our neighborhood we could point to, is an opportunity on the brokerage side.
Sarah Obeidi
Absolutely.
Operator
Absolutely.
Henry Coffey
Great. Thank you.
Operator
The next question comes from Michael Funk from Bank of America. Please go ahead.
Michael Funk
Yeah, hi. Good morning, guys. Thank you for the questions.
Jason
Good morning.
Michael Funk
Yeah, so a couple, if I could, just, you know, thinking about return to office, I think you mentioned that you're fully returning in June. We're hearing similar comments from a number of large companies. And, you know, I hosted a call with Lou a month or so ago, and he was noting that, you know, a lot of your clients are you know, trying to think about how to allocate their real estate and maybe pushing off some decisions until after return to office, you know, some terms of larger leasing decisions. So, you know, now that we're approaching that point with return to office, maybe an update there on the conversations that you're having with clients about about office leasing plans.
Sarah Obeidi
Yeah, so We are definitely seeing an uptick in tours, an uptick in activity, and more and more as we speak with folks, plans are actually being put in place similar to the plans that we have in place to return to the office. We believe that by the end of the summer, certainly in September, that there'll be a significant increase in the number of people that are back in offices and companies that are back operationally in that. As a result of that, we've also seen an uptick in retail. You know, retail, which was pretty much, you know, kind of stagnant to non-active, has all of a sudden become very active as a result that people are realizing that the return is on the way, the vaccine is rolled out, and people are more comfortable returning back to the office. And the employers believe the office environment is going to be here and is necessary. So from the last time you and I spoke, the uptick has been even greater than I anticipated at that time.
Michael Funk
No, it's great to hear. And then the last question that I had was on the growth capital investment. I heard your earlier comments. Maybe just some additional detail on property types. You know, that could be maybe attractive. Maybe data centers, for example, has obviously been a very hot property type. You know, we're thinking about expanding in property types. And then even regionally, you know, thinking about expanding some of those teams outside of New York, maybe into some of the faster-growing regions. That would be helpful. Thank you.
Jason
Yeah, Michael. So, you know, we continue to have a lot of white space in our platform to add talent. in a lot of geographies, in a lot of different product types. You know, Barry mentioned that we added a significant amount of talent leading up to the pandemic, and we spent the last four or five years building out the platform, but we're not by any means done. I think we have a long way to go.
Jason
So, Barry, you may want to expand on that. So, we've been maturing for six years. I mean... We've gone from 2% market share in capital markets to 16% in the U.S. We've gone from virtually no capital markets to number two in the U.S. last year, number two in multifamily, number one in alternatives. I mean, literally senior housing, self-storage, student housing, manufactured housing. life science, number one. So in the alternative space, we dominate the market, and that's all part of the plan to be very friendly and partner with institutions that have $250 billion of dry powder to spend. And so we're the only firm, one of the only firms, and one of a few, that has the ability to provide local expertise and global reach. And when I say that, you could come in as an institutional firm, more like an investment bank, and provide a solution. I'll sell your portfolio of assets. But you can only rely on a portfolio premium. meaning that you'll go to the world buyers, but it forsakes the domestic buyers and the local buyers. And in most asset classes, there are cycles in who the appropriate buyer is for an asset class or type of property at different times. So when somebody wants to put a portfolio on the market, we have the ability to have an international desk. We reach all of the sovereign wealth funds, all the private equity investors, and we understand the local market and the local investors and the domestic buyers. So we can offer the traction of global premium pricing or local break it up, get the best price. And what we've been doing now is is building out that geographic capability and elevating our institutional relationships to the point where we're viewed as the place to go if you have a portfolio to sell and you want a complicated structured finance or a complicated structured sale.
Michael Funk
Thank you for the questions.
Operator
Again, if you have a question, please press star then 1. The next question comes from Patrick O'Shaughnessy from Raymond James. Please go ahead.
Patrick O'Shaughnessy
Hey, good morning. So the topic du jour seems to be inflation these days. Can you remind me how inflation would typically impact the industry?
Jason
You know, historically, I've been doing this for quite a few years. Inflation is generally real estate friendly. If you have fixed financing and you have increased value and rents, you're going to do well. You could have inflation without interest rates going up. I mean, the amount of the balance sheet of the U.S. will make it hard to continually raise beyond a certain set amount of interest rates. I think you'll have low interest rates for a long while. If you have inflation, it would actually be very good for real estate. Low interest rates and inflation is spectacular.
Patrick O'Shaughnessy
Got it. Very helpful. What's the environment like right now in terms of talking to teams of brokers that are looking to potentially join Newmark?
Jason
Well, you know, as our brand continues to elevate, as we continue to have bigger market share, as our presence is felt at the institutional level, in every respect, we continue to be way more attractive to recruits And so we'll continue to hire. We're very selective. We're looking for people who are high-rev per capita. We're looking for people that are game changers and large producers. So we are selective in that regard. And it only seems to be getting better. And as we continue to improve every area, we started with basically one appraiser. We have 500. So once you... Achieve critical mass and you're a safe choice. And it just gets better and better.
Patrick O'Shaughnessy
Got it. And then maybe to dig in on that, how much of your recruiting efforts is you identifying teams that you think would be a good fit for Newmark and you're proactively reaching out to them versus folks reaching out to you guys unsolicited?
Jason
I mean, it's not hard to find who the right players are, who the real people in every market are. I think it goes both ways. But we target people. We're not looking to hire people who are miserable where they are. I mean, generally people that produce and are doing well are probably happy, so it's not – Some people don't fully understand our company, and it's our job to reach out to them to explain who we are. But, you know, but it's both.
Patrick O'Shaughnessy
Got it. Thank you very much.
Operator
There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Barry Gossin for any closing remarks.
Jason
We're extremely excited about 2021, and not the least of which is next quarter $966 million of income from the NASDAQ trade and $850 million in net cash. This gives us an opportunity to focus on our core objectives, buying back shares, paying down our debt, and focusing on those mature markets that we grow. So we're in a good position. and we are extremely optimistic about the rest of the year. I look forward to speaking to you in the next quarter, and enjoy the day.
Operator
The conference is now concluded. Thank you for attending today's presentation.
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