Newmark Group, Inc.

Q1 2024 Earnings Conference Call

5/3/2024

spk00: Good day and welcome to the Newmark Group first quarter 2024 financial results call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jason McGruder, head of investor relations. Please go ahead.
spk02: Thank you, operator, and good morning. Newmark issued its first quarter 2024 financial results press release this morning. Unless otherwise stated, the results provided on today's call compare only the three months ending March 31st, 2024 with a year earlier period. except as otherwise stated, we will be referring to results only on a non-GAAP basis, which includes the terms adjusted earnings and adjusted EBITDA. 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. Please refer to today's press release, the supplemental tables, and the quarterly results presentation on our website for complete and updated definitions of any non-GAAP terms, reconciliation of these terms to the corresponding GAAP results, and how, when, and why management uses them, as well as relevant industry or economic statistics. Our outlook discussed today assumes no material acquisitions or meaningful changes in our stock price. Our expectations are subject to change based on various macroeconomic, social, political, and other factors. 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. Such statements are subject to risks and uncertainties, which could cause our actual results to differ from expectations. Except as required by law, we undertake no obligation to update any forward-looking statements. For 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 the disclosures require regarding forward looking information in our most recent SEC filings, which are incorporated by reference. I am now happy to turn the call over to our host and Chief Executive Officer Barry Gossett.
spk04: Good morning and thank you for joining us. We are at the beginning of a once in a generation opportunity for Newmark to grow its business. There is a record $929 billion of U.S. commercial and multifamily mortgage maturities due in 2024. and $2 trillion over the next three years. We estimate that approximately one-third of these maturing loans are likely to result in a loan sale or property sale. One-third will need assistance with restructurings and or recapitalizations. And one-third will likely require an advisor to help find new lenders. Our substantial investments in data, analytics, and talent uniquely position us to capitalize on these macroeconomic trends and to continue outperforming the industry. Newmark's nearly 14% increase in capital markets revenues outpaced the industry for the third consecutive quarter. This strong performance was led by a 51% improvement in debt origination fees, multiple times greater than the industry. Our leading presence in capital markets will drive business across Newmark's other servicing lines, including leasing, management, and servicing. We are making considerable gains toward a goal of becoming the number one capital markets advisor in the U.S., while also expanding internationally across all service lines. During the quarter, Newmark opened a flagship office in France, continental Europe's second largest transaction market. We attracted some of the most talented leasing and capital markets professionals in the industry, which further demonstrates the strength of our brand. Newmark's leasing results were impacted by industry-wide activity declines of more than 10% in the U.S. and over 20% in the U.K. We expect office leasing fundamentals to improve as the recapitalization of properties at lower values leads to a more attractive leasing market. We continue to expect solid fundamentals in industrial and retail leasing, which together represent 41% of Newmark's leasing revenues over our last 12 months. We increased revenues from management services, servicing fees, and other by 21%, the third consecutive quarter of double-digit growth. This reflected the addition of Gerald Eve as well as strong organic growth from our high-margin servicing and asset management platform. Due to substantial investments in talent and the improving environment, Our target is to generate over $3 billion in revenue and more than $630 million of adjusted EBITDA in 2026. With that, I'm happy to turn the call over to our CFO, Mike Rispoli.
spk05: Thank you, Barry, and good morning. Total revenues grew 4.9% to $546.5 million. Fees for management services, servicing, and other grew by 22.7%. This improvement includes the addition of Gerald Eve, as well as 21.4% organic growth from our high-margin servicing and asset management platform. Our leasing revenues declined by 17.9%, reflecting double-digit industry declines. For the full year, we expect leasing to be down modestly. Our investment sales revenues were down 1.6% compared to a 16% U.S. industry decline. We grew our debt origination fees by 50.5%, outperforming U.S. industry volumes, which were up by approximately 5%. Turning to expenses. Our compensation expenses were flat on higher revenues, but were down by 1.1%, excluding pass-through items, largely due to lower variable commissions and our cost savings initiatives. These expenses were partially offset by acquisitions and the recent hiring of revenue-generating professionals. Non-compensation expenses excluding pass-through items were up $10.6 million due to a $6 million increase in interest expense on our GSE warehouse lines, which was offset with interest income on the GSE loans held for sale. Non-compensation expenses also include the addition of Gerald Eve. We remain on track to complete our $75 million cost savings plan by the end of the second quarter. Turning to earnings. Adjusted earnings per share were 15 cents, and our adjusted EBITDA was $63.5 million. Our fully diluted weighted average share count was $255.4 million, compared with $249.8 million in the fourth quarter of 2023. 1.9 million shares of this increase relates to the accelerated recognition under GAAP of RSUs due to the 38.5% increase in our average share price per share quarter on quarter. We expect our fully diluted weighted average share count to decline for the balance of the year and to grow by approximately 2% as compared to our 2023 weighted average of 246.3 million. Turning to the balance sheet. The company has no near-term debt maturities. In January, we issued $600 million of 7.5% senior notes through January, 2029. And last week, we extended our $600 million credit facility through April of 2027. We ended the quarter with $140.9 million of cash and cash equivalents. The change from year end included $59.8 million of cash generated by the business and $125 million of incremental corporate debt, offset by $161.1 million, primarily related to the hiring of revenue-generating professionals. Moving to guidance. Our outlook for full year 2024 remains largely unchanged. We continue to expect sequential and year-over-year improvement in earnings in the second and third quarters. And with that, I would like to open the call for questions.
spk00: Thank you. If you would like to ask a question, you may signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. And we'll pause for just a moment to allow everyone an opportunity to signal. And our first question will come from Alexander Goldfarb with Piper Sandler.
spk01: Hey, morning down there. Just a few questions. First off, if you could just give a little bit more color about the leasing and maybe you know, in REIT land were clouded by, you know, a small subset. But, you know, a number of the companies had, you know, some really good leasing metrics. And just curious, you know, how your leasing compares to what we're seeing on the REIT side, you know, which would be accounting for the significant drop-off.
spk07: Mostly timing. Go ahead, Luke.
spk03: So Alex, this is Lou Alvarado. Look, a lot of this is timing, right? We had a really solid fourth quarter. We closed a lot of large transactions in that quarter. First quarter, we had fewer transactions and some slipped. We expect sequential improvement as we go throughout the year. And our pipeline and activity is solid. So I just see this as a timing issue for us for the first quarter.
spk01: Okay. No, that's helpful, Lou. The second question is, Barry, you know, we always, it seems like, you know, you have to go back to the RTC days to see, like, you know, a deluge of distressed products strewn on the street for people to transact in. And since the GFC, you know, we haven't really seen, you know, large-scale distress in the market. It's, you know, a transaction here or there. And lately, at least from what the REITs are talking about, the transaction market's been really thin. because a lot of banks, it seems, aren't forcing owners to transact. And with all the money on the sideline, it seems like those who may want to transact realize that there's a strong bid for their product, even if it's a negative leverage. So how do you envision the world playing out on the transaction front? Do you think it's the regulators that really are going easy on the owners, on the banks, and therefore they're not forcing deals to come to market? Or What do you think has to happen that we start to see more transactions come about?
spk04: Well, every cycle is different. This one is different. The playbook of the Fed has been uniquely designed for each cycle. At the bank level, there's a concern inside banks as to whether they want to open up the hood. and say, okay, we want to sell these loans because if there is a focus or a magnifying glass on some of their riskier loans, they're concerned about deposits. So it's sort of a little bit of a kabuki dance around that, but ultimately it all plays out. There is, as I said, $929 billion of maturities and $2 trillion over the next few years. And all those are going to play into, you'll see the special servicers continue to pick up business. As maturities come due, the question for any owner in the world that is either underwater, he considers how much money is he going to invest. and re-tenanting and growing, keeping the building versus how much, whether he should give the keys back or refinance or sell. And that's going to all play out. We're seeing it. We're seeing more loan sales. We're seeing more discussions about properties that are distressed on creative ways and creative solutions for the borrowers to be able to live and extend. and for the lenders to keep their properties from hitting the open market. You know, there are many ways to do that, and we're seeing all of it. So there is no one fix, but the volume of business is there. The opportunity is there, and it is, you know, it's just a question of exactly when and how, but it will happen.
spk01: So let me just follow up on that. Is there, and I'm assuming you're going to tell me the answer is yes, Alex. You guys are positioned not only in absolute transactions, whether it's property or loans, but you're also in the advisory of help of working with the banks, working with the owners, that even if there's not a transaction, you're getting in there and helping to advise on restructuring, even if nothing comes about, meaning the loan or the building doesn't trade. But you have a team that helps that sort of internal advisory stuff, correct? Yeah.
spk04: Absolutely. We have a team that specializes in looking at risk assessment and stress testing within banks. We have lots of different parts of our business, servicing, loan screening, asset management that could help institutions that are lending money to flex up and flex down. We built this company for this moment and a lot of that requires uh infrastructure and people who are experts at being able to navigate that so it's a combination of more bespoke unique creative solutions to from the borrower's perspective to avoid recapture keep the building get new fresh money and for the lenders to be able to restructure their deals get get new money into the equation There are some, you know, some indications, you know, the CMBS market on a floating rate is opening up, which indicates there is, and it's more in the private sector, that there is money. Once there is money available and you hit a place where maybe it's not negative leverage, but even with the opportunity for interest rates to decline and cap rates to rise, you know, there are so many triggers and levers that create moments of opportunity, but there also is that wall of money on the positive side that is ready and sitting there looking for the moment when the opportunity is to strike.
spk07: Thank you, Barry. Thank you.
spk00: And before we head to our next question, as a reminder to our audience, that is star one to join the queue. Our next question comes from Jade Romani with KBW.
spk06: Hi, this is actually Jason Sapshon. I'm for Jade. It would be great to hear you touch on interesting growth areas that you're looking at beyond capital markets.
spk04: Well, we've hired some great leasing talent in the last six months. I mean, if you saw in the report, we've spent $161 million in the quarter, our largest ever in the acquisition of talent, and it's not all capital markets. There was a reason we pivoted to capital markets. The follow-on halo business that comes along with it in every aspect will bring leasing business, will bring financing business. We have had some really good wins in corporate services. We are adding to our global footprint, which then makes it more accessible to the large global corporate Uh, clients, so, you know, we're doing all the things as we, as we focused on capital markets to build that with a with a determined intentional goal to be number 1, we have the same goal with with leasing and. And kind of rep and multi market occupiers advisory business. So, you know, it's like, everything we've done is basically a work in progress. We continue to elevate the brand. It's a good place for the talented brokers. We know the interest around the system. We're seeing a lot of people who are interested in coming to us. As the brand elevates, it actually is easier and better and less costly for us to bring in talent. So it's all a work in progress.
spk07: Great. Thank you for the call. Thank you.
spk00: And it does appear that there are no further questions at this time. Mr. Gossin, I will turn the conference back to you for any closing or additional remarks.
spk04: Thank you all for joining us this quarter. I'm very excited about the prospects of our future and look forward to seeing you at the next quarter.
spk07: This concludes today's call. Thank you for your participation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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