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Operator
Good day and welcome to the Newmark first quarter 23 earnings call. Today's conference is being recorded. If you'd like to ask a question today, please press star one. And at this time, I'd like to turn the conference over to Jason Magruder, head of investor relations. Please go ahead, sir.
Jason Magruder
Thank you for your patience as we dealt with some technical difficulties on the vendor end.
spk04
But also, thank you, operator, and good morning. Newmark issued its first quarter 2023 financial results press release in a presentation summarizing these results this morning. Unless otherwise stated, the results provided on today's call compare only to three months ending March 31st, 2023, the year earlier period. Unless otherwise stated, we will be referring to our 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 their 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 today's website, in today's press release, the 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 sales, as well as the impact of 2021 equity banks. cash from the business is the same cash flow metric excluding employee loans 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 macroeconomic, social, political, and other factors. While our long-term financial and operating targets assume no acquisitions, they are also subject to change for these same reasons. None of our long-term Targets or goals should be considered formal guidance. I also remind you that information on this call about our business that are not historical facts or forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended, Section 21E of the Security 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 statement. For complete discussion of additional risks and uncertainties, Actual results differ from those contained in the forward-looking statements to see Newmark's securities 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. I'm now happy to turn the call over to host, Chief Executive Officer of Newmark, Barry Gosselin.
Barry Gosselin
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 Eve, 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 U.S. history and demonstrates the capacity and depth of Newmark. Loan advisory services are becoming increasingly significant for us. According to TREP, almost $2.6 trillion of U.S. 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 maturing 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, significant global growth prospects, we expect to remain the preferred destination for industry's top professional. 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 rebound, 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 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 U.S. 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 U.S. 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 for 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 were 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 15 cents compared with 36 cents. These results reflect the impact of the dramatic rise in interest rates on our 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. The 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 investments. 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?
Operator
Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. And our first question is going to come from Shandri Luthra from Goldman Sachs. Please go ahead.
Shandri Luthra
Hi. Good morning. Thank you for taking my question. I'd like to start with the signature bank loan sale. Could you guys talk about the composition of the portfolio in terms of the asset class? What's the geography? What is the age? Are there any restrictions you have to keep in mind as you sell them? And then, Barry, give us a sense of the economics. Perhaps talk about the commission rate. How do you think about the timing of this sale? When do you expect to complete the $60 billion? And what's the impact in 2023?
Barry Gosselin
I apologize, but we can't comment on the loan portfolio. Whatever is public is on the FDIC website, and we're not prepared to comment on anything beyond that.
Shandri Luthra
Okay, noted.
Barry Gosselin
However, in that, you should note that We are doing other loan sales and we are seeing way more activity in that space and advisory and debt. So it serves us very well.
Shandri Luthra
Got it. So let me pivot to a little bit more of a macro question then. How would you say the backdrop for capital markets has changed after the events of the banking industry almost two months ago? And then are you seeing anything different in the market right now? Are there any green shoots in the business currently that you are seeing? Just give us a sense of the broader landscape, please. Thank you.
Barry Gosselin
What has been signaled is the, you know, an opportunity for more certainty in interest rates. So the stabilizing of the interest rates and a pause by the Fed in raising interest rates is a good thing. I mean, it's very hard to trade properties when you can't underwrite what the interest rates will be. So we see that that has shortened the period of time for the uncertainty and will lead to a faster rebound in terms of opportunities to finance. There are green shoots. There are other parts of the world that are financing. The GSE, Freddie Fannie, they're actually financing LIFCOs are, in some cases, under-allocated, and there is new formation of CMBS debt that seems to be coming up. So, you know, we're seeing some things. And then, ultimately, what the banking crisis has made is I think it's speeded up the capitulation in terms of the delta between, you know, buyer and seller on valuation. So once that's established, people start to trade.
Shandri Luthra
Got it. And this one's going to be quick for Mike. In your outlook as we think about adjusted EBITDA, is there any incremental M&A embedded based on the recent deals that you just announced? And is there any impact of the signature bank loan portfolio in there?
Mike Rispoli
So the outlook for the year includes our pipeline, everything we know that's in the pipeline, and includes Gerald Eve for the remainder of the year. It does not include any incremental M&A beyond that. So, you know, as I said, the second quarter, while sequentially better than the first quarter, will be down in similar percentages to the first quarter of last year. But the results should get sequentially better as we move through the year.
Gerald Eve
Thank you so much.
Operator
And our next question will come from Jade Romani from Keith Barrett and Woods. Please go ahead.
Keith Barrett
Thank you very much. Hopefully you can hear this. Just wanted to ask on the local portfolio. Excuse me? We can hear you.
Barry
Oh, great. I wanted to ask on the loan portfolio side, if you could talk to the magnitude of deal flow that you're seeing and maybe general comments around economics. I know that one of your prior competitors, HFF, broke out the commission rates on that business, and I believe they're quite attractive, higher than on the investment sales side and debt placement side. But clearly it's sporadic, and I'm sure very large portfolios you know, there would be caps in place on what the commissions would look like and probably some kind of incentive for execution. But what's the volume you're seeing and the economic impact?
Barry Gosselin
We generally don't comment on the specifics of guidance, and we have confidentiality agreements on the things that we do. These are sensitive topics, and we are just not going to comment on, Jade, I apologize.
Barry
That's actually a good answer. Really appreciate that. You mentioned the banking crisis speeding up capitulation on pricing. You know, historically, the banks have played an outsized share in commercial real estate. And you look at the ratios prior to the GFC, it's clear that the CMBS market has declined dramatically post the regulations that Dodd-Frank put in place on risk retention, as well as curtailment of liquidity. And the bank's as well as the debt funds, comprise the difference in terms of market share gain. When you look at the banks today, they probably will shrink their share in commercial real estate. And so how do you think this unfolds? Could it potentially extend the magnitude and length of the downdraft in transaction volumes? Or are you seeing any green shoots that would lead you to believe in the fourth quarter there would be a pickup?
Jason Magruder
Jay, this is Lou.
Jay
We're definitely seeing more activity. During this time, I think most of our clients have been really trying to find out where pricing will shake out, right? Where will things settle? I think now that we've gotten some guidance from the Fed on rates, and I think as we get stability, we definitely believe we're going to see that activity as we get down in the year. It's very similar to what you saw what happened in 21, right? Where once we got over the impact that, you know, the pandemic hit, the activity picked up. I think you're going to see a very similar respond as we get later on into the year.
Keith Barrett
Thank you. And you included the slide. Thank you. You included the slide. Sorry.
Barry Gosselin
The GSE will, you know, in the back end is here, accelerate and get you know get capture some of it up to the closer to the caps we think we'll see more activity they will be a lender of choice and as i said you know the life goes in some respects are under allocated in the you know sweet spot of 50 to 150 million they're out there and and we're starting to see some SASB loans uh which you know and CMBS loans uh uh which there's some activity and discussions. And you'll see it come from, you know, the private markets. And then ultimately, the banks will step back in.
Barry
Thank you. And just lastly, leasing was a bright spot this quarter, significantly stronger than what we had forecast. Your slide nine notes across the platform office comprises 36%. But can you give any color as to what drove the relative strength in leasing, clearly, you know, better than some of your peers that I've reported.
Keith Barrett
Yes, Jay, this is Louis.
Jason Magruder
I think... Go ahead, Louis.
Jay
Do you want me to go there? Yeah. You know, I think what you've seen is, you know, and what we've spoken about, there's been a continuing flight to quality and a flight to the Class A product. We happen to represent a fair amount of Class A product across the markets. We also had some pretty sizable tenant deals of people that did make a commitment to space and did move forward with a plan to return people to the office. I think over time, we still believe that there's going to be an increase in move to bring in people back to the office. It may not be five days a week. It could be three days a week, but whether it's three days or five days, you still need the space. The space will be different, but that's what we're seeing. We were fortunate that we were in the right sector. Industrial was up, retail was up, so it wasn't just all office, but the office sector did very well as well because of the product mix that we have.
Keith Barrett
Thanks very much.
Operator
And once again, if you'd like to ask a question, please press star one. And Alexander Goldfarb from Piper Sandler, please go ahead.
Alexander Goldfarb
Hey, good morning. Good morning. And I appreciate all your efforts with this morning's tactical difficulties. Barry, if we look at the loans that are coming due, when we went back to the GFC, we all remember like GG10, right? Like all these monster peak of the credit boom CMBS that everyone was worried about. And all that stuff basically worked its way out. There was blend and extend. I mean, apart from the chorus condos, there wasn't really any distress that was sold into the market. So looking at the current wave, it doesn't seem so much it's a credit issue. One, it's right sizing of loans. Two, it's no one wants an office loan. But my question is, do you really see that this $1.4 trillion this year and next, or the $2.7 that you guys talked about, is really going to be actionable stuff, or in your view, there may be a few actionable loans, but a lot of this is just going to be blend and extend, and that's the way it's going to be resolved between the servicers and the borrowers.
Barry Gosselin
Well, a blend and extend is actionable. Maturities drive opportunity. In recaps, raising equity, looking for new partners, looking for refinancing. So that they have to be dealt with. There's really no choice. So we're in at every piece of it in every way. So that's going to provide and drive opportunities for us on the advisory side, on the equity raise side, on the loan replacement side, all of those.
Alexander Goldfarb
But if it's blend and extend, that doesn't seem to generate the same amount of fees that If it goes through an auction and a restructuring and sale to new owners, that would be much more lucrative, I would think, fee-wise versus the lenders and borrowers just getting together and recutting the deal. Wouldn't that? I mean, that blend and extend doesn't seem to be the same fee stream that an auction and wholesale restructuring and sale to new owners would be.
Barry Gosselin
Well, there's going to be all of the above. If there's a blend and extend, it's going to be short-term with a recap and probably a sale. So there's a lot of stuff that comes along with loan sales and resales and recaps and resets. In a market of disruption, there are opportunities that rise up that we don't think of, and that's happening. But it is a big market. There are term dates on maturities. And there is still an enormous amount of capital sitting on the sidelines. There's $400 billion of closed-end funds available. There's lots of dry powder around the world. We're seeing foreign investors that are becoming more interested in investing in the United States for a host of different reasons. They'll see an opportunity, and they're jumping in. first time foreign investors in projects where the domestic buyers were out of the market and no one anticipated us finding equity in other parts of the world that were not available even 12 months ago.
Alexander Goldfarb
So then that leads to my second question. You know, 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 it's much tougher. So, Barry, or Lou, 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?
Jay
I think you're going to have to see some positive leverage return, right, in order to really move the market. I think it also will depend on the quality of the asset, right? The Class A core product, well amenitized and all that, will obviously trade at a much smaller premium. But the Class B and C is where we're going to struggle, right? Those are the areas where I think that the demand out there will be created by the fact that I think some of the market will shrink as these obsolete products no longer are viewed as competitive in the marketplace. And that's where I think you're going to see the shift. Okay. Thank you.
Operator
Hey, good morning.
spk08
Can you speak to the expected revenue contribution this year from Gerald Eve? And absent that acquisition, would you have had to lower your full year revenue outlook?
Mike Rispoli
Morning. So when we announced the acquisition, we said they did about 92 million British pounds of revenue in their prior fiscal year. So we'll get nine months of that. A lot of their revenue is recurring management services type business, more than a majority of it. So, you know, we think it's pretty steady revenue and we'll see that on a pro rata basis in our results this year. And, you know, as we said, We think the market continues to improve. Our results will sequentially get better as we move through the year. And we currently feel comfortable around the low end of our guidance range.
spk08
Okay. Appreciate that. And then, Michael, another question I think for you. You guys have your senior notes coming due this November. How are you thinking about refinancing that? Do you have any kind of preliminary expectations on what the refinancing rate might look like?
Mike Rispoli
It will be higher. than what we currently pay. I'm pretty sure about that. But we have great clean balance sheet, low leverage, and great ratings. And so we think we'll be able to execute on a refinance. We'll certainly go to the market well in advance of the maturity, which is in November. And we don't really see too much issue other than we'll pay a little bit more.
spk08
Okay. And then maybe one last one from me. Can you guys speak to your aspirations with that Spring 11 business and why was now the right time to buy the remainder of it?
Jeff
This is Jeff. The Spring 11 business is a business that crosses a broad spectrum of support services for our clients. but particularly the servicing and asset management businesses and special servicing businesses, we felt were going to increase in need. And we saw an entry point that was important for us. And actually the velocity has pleasantly surprised us to date. So we're expecting because of some of these bank failures, because of these large portfolio sales and some of the resets in the marketplace to grow this business rapidly.
Keith Barrett
Great, thank you. Yep.
Operator
And our next question will come from Jade Romani from Keith, Rouette, and Woods. Please go ahead.
Keith Barrett
Thank you very much.
Barry
Wanted to ask about maybe for Jeff today, multifamily credit. What are your expectations there? Do you think that there'll be, you know, a decent amount of loans going through,
Jeff
uh performance issues given the magnitude of floating rate loans as well as interest rate caps expiring this year well let's level set where we are today versus some of our previous uh downturns and i've had the privilege to build our credit book for the last 23 years along with my team we went through 9 11 we went through the gfc And where we are today in multifamily is nothing compared to those prior periods in terms of distress. Topline revenues are still growing, although a little bit slower. Expenses are increasing a little more rapidly, particularly insurance. But overall, we see very little distress. We, as Barry said, expect the GSEs to, if not approach, certainly hit the caps this year. And our book is pristine. Our performance has always been significantly better than the marketplace and significantly better than any of our competitors. So I don't expect that to even be an issue.
Barry
And in the office sector, I think, you know, a prominent CEO yesterday said, you know, the only lender in the office right now is the current lender. So that opens the door clearly for modifications and extensions as most likely route, the cushion, the downfall. They'll have to be preferred equity brought in and probably loans being carved into A notes, B notes. But what do you expect the office cycle to look like in terms of how the debt and how the capitalization plays out? What's your team seeing in terms of the office transactions that they're involved with? Clearly they've been active.
Barry Gosselin
One of the things, by hiring the best talent in every market, in every category, for multi-office industrial, which is what we've been on a quest to do, we're the go-to firm for complex, complicated recaps, which includes talking to the lenders, talking to the owners, raising equity, restructuring, restructuring notes, recapitalizing MES, doing all of that. And we're seeing an enormous amount of activity with the owners and many of the owners who may have a solid book and are stressed in other parts of their business or selling assets, capitulating a bit. where they may have good assets that are saleable with a good wall, you know, weighted average lease term, and they're raising capital on those other assets to support those that are sort of snorkeling. And so we're seeing activity come from a lot of different places in a lot of different ways that really work well for what we've built.
Keith Barrett
Thank you.
Operator
And I have no further questions in the queue. I will turn the call back over to Barry Gosselin for the closing remarks.
Barry Gosselin
Thank you for joining us today. I am still extremely excited about the company's future and look forward to updating you on our next quarterly call.
Keith Barrett
Thank you.
Gerald Eve
And this concludes today's call. Thank you for your participation. You may now disconnect.
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