Welcome to Newmark's Second Quarter 2021 Financial Results Conference Call. At this time, all participants will be in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Jason McGruder, Interim Head of Investor Relations.
Thank you, and please go ahead.
Thank you. Good morning. Newmark issued a Q2 2021 financial results press release and a presentation summarizing these results this morning. The results provided on today's call compare only the Q2 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 refer
to our results on this call only on a non GAAP basis. These non GAAP turns include adjusted earnings and adjusted EBITDA as well as those terms excluding the impact of NASDAQ and the 2021 equity event. Please see today's press release for more information on the impact of NASDAQ and the 2021 equity event as well as for results under generally accepted accounting principles or GAAP. Please also see the section of today's press release for the complete and updated definitions of any non GAAP terms, reconciliation of these items to 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 are available on our website and in supplemental detail tables and quarterly financial results presentation.
Any outlook discussed on today's call assumes no material acquisitions, share repurchases 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-nineteen 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 COVID-nineteen pandemic on the company's business results, financial position, liquidity and outlook, which may constitute forward looking statements and 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 a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in forward looking statements, the Newmark Securities and Exchange Commission filings, including but not limited to the risk factors set forth in our most recent Form 10Q, 10 ks or Form 8 ks filings. I'm now happy to turn the call over to our host, Barry Dobson, Chief Executive Officer of Newmark Group Inc.
Thank you, Jason. Good morning and thank you for joining us for Newmark's Q2 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. Following a record first quarter, Newmark's revenues increased by 64 percent to $630,000,000 our best ever top line for a second quarter. As the economy continues to recover and vaccination rates rise, our clients are making plans to return to the workplace.
Companies have increased utilization of existing lease space and are making new long term commitments across all sectors. We benefited from a rapidly recovering economy and Newmark's continued market share gains. Revenues reflected greatly increased demand across all major property types. Our growth was led by a nearly 2 50% increase in revenues capital markets driven by the incredible talent and platform we have assembled. Newmark's volume across investment sales, mortgage brokerage and multifamily originations together increased by 2 25%, outperforming the industry.
By comparison, overall U. S. Investment sales and debt volumes increased by approximately 47%. Newmark had record debt volume of over $11,000,000,000 which was an increase of nearly 200% led by multifamily. We leveraged our diverse relationships with non agency lenders to help clients navigate lower GSE loan activity.
While GSE volumes were down in the first half of the year, 57% of their 2021 caps remain. As a result, we expect increased GSE lending activity in the second half of the year. Our leasing and other commissions were up by 54%, which included growth from both tenants and landlords and improved activity level across office, industrial and retail. We also saw improved activity across alternative and specialty property types like land, mixed use and life science. Newmark's total revenues from management services, servicing fees and other sources increased by 55%.
We continue to benefit from our focus on growing these recurring revenue businesses. In addition to our robust operating results, Newmark received approximately $928,000,000 in NASDAQ stock. We expect this accelerated windfall to allow us to buy back shares, reduce our debt, invest in growth and maintain our strong liquidity. As Mike will explain in more detail, we have already used a portion of the proceeds to significantly reduce our fully diluted share count. We have enormous white space to grow our business.
We aim to expand our presence in business lines and geographies where we have already invested in our infrastructure and there is an opportunity to accelerate our growth and increase our market share. With our strong foundation, we expect to outperform the market over time as industry volumes continue their recovery. With that, I'm happy to turn the call over to Mike.
Thank you, Barry, and good morning. At the end of June, we received 6,222,340 shares of NASDAQ worth $1,094,000,000 We used 944,329 shares valued at $166,000,000 to repay the remaining liability on our NASDAQ Forward transaction. As a reminder, the NASDAQ Forward raised capital for our 2017 acquisition of Berkeley Point. Newmark's remaining Nasdaq shares were worth $927,900,000 The receipt of the $1,094,000,000 is included in other income and is ordinary income for tax purposes. In order to offset a significant portion of this taxable income, we accelerated $428,600,000 of tax deductible GAAP compensation charges related to previously issued units and utilized $101,000,000 of deferred tax assets.
These actions, which we refer to as the 2021 equity event, also reduced our fully diluted share count by 16,100,000 at the end of the quarter. Our press release shows adjusted earnings and adjusted EBITDA, both including NASDAQ and the compensation charges related to the 2021 equity event and excluding them. Beginning with the Q3 of 2021, we will only report our non GAAP earnings measures excluding these items. To be consistent, the recap of all historical periods is included in our earnings supplement, which is available on the Investor Relations section of the website. Adjusted EBITDA was $973,900,000 and earnings per share was $2.89 Now I'll present our quarterly earnings as if the receipt of NASDAQ did not occur.
Newmark generated record 2nd quarter revenues of $629,900,000 up 64.1%. Expenses increased $193,000,000 This includes variable compensation related to 91.1% growth in commission based revenues and $54,400,000 of higher pass through expenses. The remaining increase relates to support and operational expenses resulting from accelerated business activity and our acquisition of Knotel. Our adjusted EBITDA was $120,600,000 up 161.8 percent compared to $46,100,000 Our EPS was up 2 10 percent to $0.31 as compared to $0.10 These were record second quarter earnings even without NASDAQ. Turning to our balance sheet.
Newmark had $1,260,000,000 of liquidity as of June 30, which included $1,094,000,000 of Nasdaq. As previously described, on July 2, we settled the Nasdaq forwards with RBC for $166,000,000 We used approximately $201,000,000 to reduce our fully diluted share count by 16,100,000 and we used approximately $327,000,000 primarily for taxes related to NASDAQ in the 2021 equity event. As a result, based on yesterday's NASDAQ closing price, we expect to retain approximately $457,000,000 In July, we also repaid the $140,000,000 outstanding on our revolving credit facility and currently have $465,000,000 available on our revolver. We anticipate using our strong balance sheet and cash flows from operations to invest in growing business at attractive returns, repurchase additional Newmark shares and repay debt. With respect to our fully diluted share count, in addition to the 16,100,000 share count reduction from the 2021 equity event, we repurchased 3,800,000 shares in units during the quarter.
In total, we lowered our stock fully diluted share count by 19,800,000. This will benefit our fully diluted weighted average share count in the second half of twenty twenty one. Moving to guidance for the remainder of the year. We are increasing our outlook for 2021 to reflect improving business conditions and our continued market share gains. All of our guidance excludes NASDAQ and the related 2021 equity matter.
We anticipate 3rd quarter revenues between $610,000,000 $655,000,000 up 40% to 50% and adjusted EBITDA of $110,000,000 to $128,000,000 up 105% to 130%. We expect annual revenues between $2,400,000,000 $2,500,000,000 up 26% to 31%. We anticipate adjusted EBITDA of $415,000,000 to $465,000,000 up 64% to 84%. Going forward, we expect our tax rate to be approximately 18%. Our guidance continues to include the Knotel acquisition, which will be $0.03 to $0.05 dilutive in 2021.
With that, I will turn the call back to
Barry. Thanks, Mike. Steady consolidation has driven growth among commercial real estate intermediaries for nearly 20 years. Newmark is in a unique position to grow at a faster rate than our peers as a result of the investments we have made, brand we have built, the talent we have assembled and the market share we have captured. With the injection of $1,000,000,000 onto our balance sheet and the momentum we have created, we expect to outperform the industry.
Global Corporate Services, property management, debt origination, mortgage brokerage and real estate investment banking are all areas we have enormous white space to grow. We are excited by our unique position and prospects. Operator, we'd like to open for questions.
And our first question will come from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Hey, good morning. And I have to say, great job on the earnings. It's not something I'd say generally, but it's great to see such a strong blowout quarter and rebound of capital markets and leasing, etcetera. So along those lines, first, Mike, on the go forward accounting, the way that you guys are going to present the earnings numbers going forward, sort of on a like for like basis, how much does that impact the growth rate that we think about Newmark? So historically, I think your revenue, your top line grew at like double digits, your bottom line was growing sort of mid single digits, then you guys were trying to enhance that by getting better on stock issuance, etcetera.
So the net effect of the changes that you're doing, does this mean that we should think about what does this bottom line mean for earnings
website, we do show all the historical earnings both with and without NASDAQ, so you can see those growth rates. We expect to grow the bottom line of the company as fast, if not faster than the top line, as we continue to focus on becoming better operationally and taking the cost out of the business that, a, we've already taken out the $60,000,000 plus the additional $15,000,000 we expect to take out before the end of the year. So we think our growth rates are going to continue to be better than the industry, and we think it's both top line and bottom line.
Okay. But to be clear, you expect that the bottom line will now grow commensurate with the top line or perhaps even better then?
That's correct.
Okay. Second question. On the buyback that you did, the sort of $20,000,000 year to date, I think you did about $19,000,000 or so in the quarter, is that a number it sounds like that's not a number that we should expect to be recurring. It sounds like the ongoing buyback is maybe something closer to that 3,000,000 or 4,000,000 shares, not the 19,000,000. Is that correct because of the one time way that you handled this NASDAQ with the tax treatment, etcetera?
I just want to make sure I understood that correctly.
Yes. I think the NASDAQ transaction gave us an opportunity to really accelerate the buybacks. You can see we reduced the share count by 16,100,000 as a result of lowering our effective tax rate. And so, yes, I think that's a fair assessment. We'll still continue to buy back our stock, but it certainly wouldn't be as high a rate as
it was in the Q2.
Okay. And then just a final question, appreciate your time. On the tax rate, if my memory serves, I thought originally you guys were like a 13% tax rate and then now you're talking 18%, maybe I'm mistaken, but if you just go over any changes to the tax rate either as a result of NASDAQ or what have you?
Sure. In the 1st part of this year and even the last year, we were around 16% to 16.5 percent on our tax rate. So as a result of accelerating a lot of the unit redemptions, we've now used a lot of our future tax deductions. So we do expect that to go up about 1 point to 1.5 to around 18%.
Is this going to go up again next year or 18% is the new level?
We think 18% is the new level.
Okay. Thank you.
Great. Thanks, Alex.
The next question comes from Jade Rahmani of KBW. Please go ahead.
Great to see Newmark continuing to gain market share in the league tables. I was wondering if you could comment on mix of transactions by property type. I know you mentioned being strong in the alternatives, but are there any numbers that could quantify perhaps on the leasing and the capital market side, how much is coming from office, how much is coming from multifamily, how much is coming from those other alternative sectors?
We don't publish those general data, but what I can tell you is that, as you've seen, obviously, the office market has lagged a little bit. The significant amount of activity has come from both the life science side as well as the industrial side, which were both areas that we invested significantly in prior to the pandemic. Those have paid great dividends for us. And we expect those to continue to be strong at least through the foreseeable future here as office starts to recover. I can tell you that in capital markets, we've seen a significant uptick in people as now we have a better vision for the return to the office of people preparing to take assets to the market later half this year, which we anticipate will continue to drive our growth in capital markets.
Okay. Thank you. And on the multifamily side, I'm starting to hear for the first time some debt funds that correspond with mortgage REITs as well as investors in the space that valuation seems stretched in the multifamily space. Do you anticipate any diminution in multifamily volumes or is that just select cases that I'm hearing?
Well, the multifamily business and the real estate business is a relative value business and with interest rates the way where they are and with the dry powder available and allocated to multifamily, we believe that there are strong tailwinds and expect there to continue to be very good activity certainly through the end of the year.
And on the GSE side, could you characterize what in your view resulted in their lagging lending activities in the first half of the year and your confidence level and growth in the second half?
Multifamily lender and most other lenders pulled back in the face of COVID and the uncertainty around the lack of ability to manage evictions and lack of understanding about what the impact on the economy would be. So there was a lot of dry powder in non GSE lenders coming into the beginning of the year. Also the GSEs had a reduction in caps and so they needed to make sure that they manage that appropriately given that 57% of the cap space is left business to normalize through the end
terms of the fervency we're seeing in capital markets, do you believe it's a short term phenomenon and growth will moderate next year or do
you believe that it's more
of a long term trend?
I don't understand the question, Jade.
Well, we're seeing
in multi or are you talking about generally?
Generally, the amount of real estate and volumes in capital markets has surged. All of the CRE brokers have beat estimates by north of 50% to 100% on the revenue growth projections. Do you think that it's a trend that's going to wane as we go into next year or it's sustainable?
We've come out of an uncertain time. Just had a pandemic. So the borrower said relatively low. There's an enormous amount of liquidity in the market. Interest rates will likely remain low for a long period of time.
I think there's still lots of room and the metrics look good in many of the categories of investment for continuous period going forward.
And our next question will come from Patrick O'Shaughnessy of Raymond James. Please go ahead.
Hey, good morning. I'm curious if you can give an update on your deal pipeline. Like what sort of things are you looking at right now and what evaluations look like?
As far as are you talking about capital markets, leasing or any
Potential acquisitions for Newmark Group, I apologize.
Yes, I mean the market is still pretty fragmented. There's lots of companies out there and that are good candidates to consolidate with and buy. So we have a pretty robust pipeline of acquisitions and hires for going forward.
And would you see that the receipt of these NASDAQ shares as a catalyst for an acceleration of some of that activity?
Well, look, we not only are in a good liquidity position, we have really good cash NASDAQ and post NASDAQ. So I mean, we have a plan to continue to grow and fill in the white space that will make us a better company and we'll continue that. I mean, it does certainly does give us more liquidity to do more of it. But we are pretty much viewing the market and growth the same way we did prior to the NASDAQ equity event.
Got it. Makes sense. Your servicing portfolio, I think it's at $69,000,000,000 at the end of June, that's down slightly quarter over quarter. Can you speak to the kind of dynamics going on in that portfolio?
Sure. Obviously, we have the preponderance of the servicing book is the GSE business. And so with GSE production being down and having roll off in the book, you're going to see a different kind of growth rate than we expect to see going forward. We also have a fairly decent amount of CMBS and life company servicing and we had some run up in the CMBS through the COVID period and into the Q1 of this year, which is reflected in the June numbers. But we think this is temporary and we expect the growth to go back to a positive rate consistent with the past.
Got it. Thank you. How much of the NASDAQ shares have you guys liquidated up to this point versus how much remains on the balance sheet?
Sure. I think the way to think about that is we'll liquidate enough to pay off the 2021 equity event for now. So that's fully funded. And then we'll look at what we need going forward and decide what we want to do with the remaining shares. NASDAQ has been a great asset for the company.
We're not in a rush to sell off the remaining shares. It's I think up $10 plus since the end of the quarter. And we think it will continue to be a great asset for us. So that's where we currently stand.
Okay, got it. And then Michael, question about taxes. There's language in the press release today. Let me just read it for it. Newmark believes that the 2021 equity event will result in the total amount of cash paid with respect to both withholding taxes and corporate taxes to be less than the total amount of such taxes that would have been paid had the 2021 equity event not occurred.
Sorry, I feel like Magruder reading a long script here. But just kind of curious, it seems like there's negative tax rate arbitrage where you're paying withholding taxes at something approximating 50% to avoid corporate taxes at 18% or maybe mid-20s. So how does the net cash outflow for Newmark actually lower under that arrangement?
Sure. I think this is when you can really see the benefit of our corporate structure. If we didn't have that structure, we would have paid, call it, dollars 360,000,000 of corporate taxes on $1,100,000,000 of income. What we were able to do is accelerate the unit redemptions, which generate compensation and related payroll taxes that otherwise would have been paid over time. So basically the way to think about it is we paid or we accelerated the payment of the withholding and payroll taxes now, and we won't have to pay that significant amount of corporate tax.
So most of the taxes that are in that line item are really related to just payroll taxes and they would have been paid over a number of years and we just pulled them into the current period. Net net, it's a significantly less amount of taxes than otherwise because we would have otherwise paid the corporate taxes now and the payroll taxes over time. It also allowed us to significantly reduce the share count as we've discussed. I think the only small negative to the way we've handled this is the tax rate going forward goes up about a point to a point 0.5 like we said to about 18
percent. The next question comes from Henry Coffey of Wedbush. Please go
ahead. Yes. Good morning and thanks for taking my question. First, more of a technical question. With the NASDAQ proceeds, you accelerated realizations on the stock and then reduced your diluted shares.
Was that can you talk through that? Was that you bought shares, you bought back shares in the open marketplace? Can you kind of walk through that transaction or that series of transactions with us?
Sure. Hi, Henry, it's Mike. So there's really 2 things in the quarter. We bought we did buy back shares on the open market, about 3,800,000 dollars And then specific to the NASDAQ
$3,800,000 or shares? 3,800,000 shares
on the open market. Right.
That's what I thought.
And then another 16,100,000 shares or units related to the equity event. What that really entailed was redeeming units for both shares and cash. And as a result of doing that, we were able to significantly reduce the share count.
$40,000,000 or so. You then redeemed units for stock in cash As of, say, August 15th or whatever date you want to choose, what is the specific amount of shares outstanding and what is the diluted share count that we should be using for the rest of the Q3 and the rest of the year?
Sure. If you look in the press release, we give you the spot share count at the end of the quarter, and that number is 251,900,000 fully diluted shares. That number that will be plus whatever we buy back sorry, less whatever we buy back, plus whatever shares normally come into the share count for compensation. But that's the number that goes forward into Q3 and Q4. And you get about half of the buyback, so half of the $19,800,000 that we bought back in the quarter will impact the fully diluted weighted average share count for the year.
But in Q3 and Q4, it'll be the $251,900,000 plus or minus those other things I discussed.
Why doesn't that reduction come out?
Well, it's just weighted average. It came out comes out on June 30. So you get about $10,000,000 to benefit the full year in 2021 and the rest will benefit 2022.
So in 2022 that we could take the 251 and basically reduce it by 20,000,000
Well, the $251,000,000 is the current spot.
Okay. That shares outstanding today or fully diluted shares today?
Fully diluted shares outstanding today.
Okay. And then we should reduce that by anything? Or is that if you don't buy back any more stock, we're at 251.9 diluted shares for the rest of the year, August forward, correct? Correct.
Plus whatever normal activity for
compensation. Right, exactly. Good. Thank you. On the NASDAQ remaining shares, have all the taxes been paid or accrued?
Paid is probably not as relevant as accrued.
Yes, everything is accrued at the end of June. So the payments for the most part happen in early July and corporate taxes, whatever small amount of corporate taxes would be probably towards the end of the year.
You have $900,000,000 of essentially cash if you so chose to convert those securities to cash?
Yes, I think there's a table in the press release, Henry, which you can walk which kind of walks through the $928,000,000 we received and what we've used the capital for. And related to the $928,000,000 after all the taxes and the share buybacks, we net about $457,000,000
Okay. And I know you had mentioned that. So we're now at $450,000,000 ish and you haven't really indicated where that's going to go in terms of paying down secured debt, I mean term debt, paying down senior notes, paying down buying back stock, investing in new teams. Can you sort of give us some sort of sense of how that remaining cash would
put forward? Well, remember, so you take the money, the $457,000,000 net that we received from NASDAQ, we still had $165,000,000 of cash on the balance sheet. We used some of that to pay down the remainder on our revolver. So we paid down $140,000,000 in July. So what you're left with is about $500,000,000 $480,000,000 or so.
We generate a significant amount of cash flow through the back half of the year. I think you could see that in our EBITDA guidance. And we haven't specifically said how much we're going to use for acquisitions and how much we're going to use for buybacks and how much for debt, but we will use that capital for all of the above.
What is the current status of your buyback authorization? How big is it? How much is left to go?
Sure. The Board authorized $400,000,000 So that's what's left on our share buyback program.
All right. Obviously, a big revenue quarter as well, mainly in the Capital Markets area. Was that more property sales or debt placements or both?
Both. Certainly property sales were up compared to the quarter of last year. And a lot of drive in the office alternative uses, conversions of buildings to less science or properties that have opportunities for that, as well as the industrial side. And then same thing, debt volumes were up significant.
That's what I was going
to ask Nick. It seems like if I ask someone about the real estate market, they go multifamily industrial, multifamily industrial, and I can say what else is going on and they'll say multifamily and industrial. So it really was a continuation of that trend.
I think that's true, but I think that we've seen a resurgence in the other food groups as well. So no diminishment in the level of interest in multifamily and industrial growth. We've seen a lot of activity in retail, office, life sciences, we said, seniors in health care, etcetera.
And I think what you've seen what you saw in the quarter for us, Henry, was we had a record volume for any quarter in the history of the company in terms of debt placement at $11,000,000,000 So as we continue to grow our capital markets business, it's both the investment sales side and the capital placement on the debt business. They're both growing really rapidly for us. Great. Thank you.
The next question comes from Michael Funk of Bank of America. Please go ahead.
Yes. Thank you for the questions this morning. A few if I could. So just on the return of capital, I think last quarter you said at least 100,000,000 dollars in share repurchases. I understand the equity event is separate from that.
So is that still the target for 2021? I think earlier someone asked about 3,000,000 shares a quarter, which would seem to tie relatively well with that. So is that $100,000,000 plus, is that still the target for the year?
I don't know that we have a target, Michael. I think that when we said the $100,000,000 that was really minimum amount through the balance of the year when we said that back in May. We've certainly exceeded that by repurchasing close to $250,000,000 in second quarter. The equity event and the NASDAQ received gave us an opportunity to do that and take some shares out pretty rapidly, which was really good for everybody at the company, including the shareholders. We don't have a target for the back half of the year, but we certainly continue to believe that these prices, the stock is undervalued and we'll continue to buy it back.
Understood. And then should we anticipate future equity events similar to this quarter? Is that seen as the best use of the cash? Or would there be more allocation towards buying back common stock? What is the thought there?
Well, certainly the equity event we did in the quarter was specific to the excuse me, specific to the receipt of the NASDAQ shares. It's sort of a one time opportunity. Could that happen again in the future? We hope we can generate another $1,000,000,000 in some transaction that would be great. But other than that, it would just be typical share buybacks on the open
market. Understood. And then I think at least one of your peers commented that the leasing funnel is building very well, It's looking strong relative to the last 12 months. Are you seeing a similar trend with your own leasing funnel?
Yes. I mean, look, across all our markets, activities weigh up. As companies are getting closer to making the decisions of the return, they're making their plans. And so decisions are being made, longer term commitments are being made and activity in general just is across particularly in office, which was down the most. I mean, we're not 100% back to what were the pre pandemic rates, but certainly the activity is there and we anticipate that to continue to go stronger as we get further down in this year.
Understood. And I guess that comment implies that the leases that are being contemplated would be more back to a normal term versus some of the shorter term renewals we've been seeing recently. Is that correct?
Yes. I mean, look, you're seeing a combination of both, right? You have some companies that are understanding they have to be back. They still don't uncomfortable as to what that future office space needs to be. So they're making some short term commitments.
And then you have others who have already determined what their plan is and are making the longer term commitment because they're also taking advantage
of a good net effective market right now where they can make those long term plans. Understood. And then one last one is an accounting question. I think I understand it, but I want to make sure. So with the permissive unit reduction in the quarter, should we think of a proportionate reduction in future period partnership distribution?
Is that how it's working? Or is there something else in the math that I need to think about as I model that?
I think that's fair. If you look at the ownership for the partnership, it went down from about 33% to about 20% or 21%. And so therefore, the allocation to the partnership would go down over time.
Understood. Okay. Thank you guys very much. Appreciate it.
Thank you.
As there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to Mr. Gosin for any closing remarks.
Thank you all for joining in this call and I look forward to speaking to everybody in
next quarter.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.