Good morning. My name is Ursula, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newmark first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star, then the number one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will now turn the call over to Jason Harbes, VP of Investor Relations. Sir, you may begin when you're ready.
Good morning, thanks for joining us. We appreciate your patience as we delayed the call by a few minutes to accommodate a large number of call participants. We issued our first quarter 2020 financial results press release and a presentation summarizing these results this morning. Due to the extraordinary impact of the ongoing pandemic, we created a supplemental COVID-19 slide deck which illustrates Newmark's response to the crisis, and it can be found on our investor relations website at ir.ngkf.com. Unless otherwise stated, the results provided on today's call compare only the first quarter of 2020 with the year earlier period. 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 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 is available on our website and in our investor presentation. Any outlook discussed on today's call assumes no material acquisitions, share repurchases, or meaningful changes in the company's stock price. 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. With that, I'd like to turn the call over to Barry Gosin.
Thank you, Jason. Good morning, and thank you for joining us for Newmark's first quarter 2020 conference call. Joining me virtually 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. We are clearly living through an unprecedented moment in time, and we wish to express our deepest sympathies to everyone who has suffered due to COVID-19. We would like to thank the medical professionals, first responders, and all others putting their own health at risk to help. We would also like to thank our employees, the vast majority of whom are now working from home and living with the challenges of this crisis. While maintaining our focus on the health and well-being of our employees and clients, we have responded quickly and have taken numerous steps to solidify our financial position.
We have reduced our fixed operating and support expenses by over $100 million through the end of 2020. We have reduced our dividend and distributions. Given our highly variable expense structure, coupled with the changes we have implemented, Newmark will maintain its strong financial position during a potentially prolonged downturn and thrive when the crisis abates. Our quarterly performance was adversely impacted by the pandemic as industry transaction volumes fell significantly in the latter part of the quarter. Over the last several years, we have hired some of the most talented brokers in the industry. Many of the leading owners and occupiers of commercial real estate have deep and sustained relationships with our professionals.
While transaction volumes will be lower in the near term, we expect our clients to leverage our expertise and deep market knowledge to help them navigate through these difficult times while preparing them to reenter the market. For example, our GCS teams are providing consulting and advisory services for tenants and owners who need assistance with implementing policies with respect to office repopulating and overall portfolio strategy. We are also providing technology solutions to manage density, provide social distancing solutions, and heat map solutions for location reopening to mitigate the impact of COVID-19 on their global footprints. We are assisting investors by raising capital and helping owners create liquidity. Our Valuation & Advisory business is helping investors to establish values on leveraged debt instruments in this environment. We are also quantifying changes in risk-adjusted returns for investors and assisting investors and banks with distressed assets. We are also selling loans.
We have established a microsite, which is accessible on our main website called COVID-19 Perspectives, to provide insights into the impact of the pandemic. With that, I'm happy to turn the call over to Mike.
Good morning, everyone. I'd like to echo Barry's sentiments about our healthcare and essential workers. I'm also grateful for our dedicated employees who have adapted to working remotely during these unprecedented times. In addition to discussing our Q1 results today, we will also focus on the plans that we have implemented to manage through the pandemic. In the first quarter, our revenues were up by 8.1%, led by growth in Capital Markets, Management Services, and gains from mortgage banking activity. We continued to gain market share in Capital Markets with 25% volume growth.
The improvement in management services was led by Valuation & Advisory and project management, which is part of our GCS platform. Gains from mortgage banking activities increased mainly due to a more balanced mix of GSE originations. Moving on to expenses. The growth in our management services revenues drove higher direct compensation. Separately, compensation also increased due to the hiring of top producers during the past year. Non-compensation expenses increased primarily due to non-cash items, including a $17.2 million COVID-19 related provision for CECL and the net impact of OMSR revenue and MSR amortization. In response to the pandemic, we have reduced our fixed support and operations costs by over $100 million through the balance of 2020. Newmark has a highly variable compensation structure. For every change in our commission-based revenues, our variable expenses move in tandem by approximately 50%.
Combined with our fixed expense reductions, these factors mitigate revenue declines related to the pandemic. Due to elevated market uncertainty related to the pandemic, we are withdrawing our previously issued outlook for 2020. To assist analysts and investors in better understanding our variable compensation model, I'd just like to take a moment and walk you through a hypothetical scenario. Please keep in mind this is just a hypothetical scenario and not guidance. In the scenario in which commission-based revenues decline by $500 million through the balance of the year, Newmark's pre-tax adjusted earnings and Adjusted EBITDA would decline by $150 million as compared to 2019 levels to $415.8 million for 2020. When compared to 2019 and including actual Q1 2020 results, this would result in $378 million in Adjusted EBITDA in 2020. Moving on to our balance sheet.
Newmark continued to have strong liquidity and credit metrics at the end of the first quarter. Total cash and cash equivalents were $291.5 million as compared with $163.6 million at year-end. During the first quarter, Newmark had the following significant uses of cash: $60 million as we continued to invest in revenue producers, $56.5 million for income taxes on 2019 earnings, $54.5 million for previously declared dividends and distributions, and $45 million for year-end compensation to employees. Many of these items typically occur in the first quarter of a given year and are not expected to recur over the remainder of 2020. During the first quarter, the company increased capacity under its revolving credit facility to $465 million from $250 million with increased tenor and lower pricing.
Newmark drew down $180 million of incremental capital on March 17th as a precautionary measure to ensure its strong liquidity position given the macroeconomic uncertainty. The remaining borrowing during the quarter reflects the uses of cash previously discussed. On March 31st, the revolver had a total of $415 million outstanding. The company's net debt to trailing 12-month Adjusted EBITDA was 1.2x , as compared to 0.8x at year-end. Newmark's balance sheet does not reflect the $571 million of additional unmonetized Nasdaq shares that we expect to receive through 2027 based on the closing price as of May 6th. Based on our estimates, the after-tax net present value of these off-balance-sheet Nasdaq shares represent $1.53 per Newmark share as of the end of the first quarter.
Newmark's total equity as of March 31st was $942.3 million, which translates into a book value per fully diluted share of $3.58. As a reminder, this book value includes $412.8 million in marketable mortgage servicing rights. Taken together, the after-tax net present value of the off-balance-sheet Nasdaq shares, plus our fully diluted book value per share was $5.11, which is substantially greater than our stock price as of yesterday's close. Operator, we would now like to open the call for questions.
As a reminder.
Thank you. Oh, sorry. Thank you all for joining us today. Oh, sorry. Barry, let the Q&A go.
As a reminder, if you would like to ask a question, please press star then the number one on your telephone keypad. Again, that's star one to ask a question. We'll pause for a moment to compile the Q&A roster. Your first question comes from Alexander Goldfarb with Piper Sandler.
Hey. Good morning. Morning, Barry. I hope you guys are well. Just a few quick questions here. First, as you think about your business, clearly Capital Markets, transactions, leasing activity, that stuff is pretty variable and obviously is going to ebb and flow with the business. Presumably, the property management business is pretty stable. How do we think about the mortgage servicing business? We saw the CECL, but CECL's accounting. Is the mortgage business, is that a pretty stable recurring revenue source? Is that something that's more, because transaction volumes are down, we would expect to see a bigger impact to the mortgage servicing book?
Alexander, Jeff Day here. We expect there to be some impact on our mortgage originations because we do finance a fair amount of acquisitions. As Capital Markets or investment sales activity goes down, there would be some impact. The activity that we've seen since the end of the first quarter suggests that we have a very stable and significant pipeline going forward.
Yeah. What's happened over the last few weeks, it was hard to predict and determine weeks ago. There's actually a CMBS offering right now that looks like it's going to be oversubscribed. The life cos have established their value of the risk differential, and there's been an adjustment in spreads somewhere between 50 and 100 basis points. They're in the market. The banks are pricing loans, and the Fed is standing guard over the liquidity and lubricating this market. I think all in all, the key to opening up a market is the debt markets. People who have decided not to capitulate on pricing are refinancing, and we're starting to see originations on the financing side open up somewhat. We're also seeing in the areas where there's distress, whether mark-to-market on some repos, which has eased up. We're starting to do loan sales.
We've been very active in that area, and we have an enormous amount of activity in both the restructuring side and the loan sales and note sales that are occurring as we speak.
Okay. Then the second question is. Oh, sorry. Go.
I was going to add that our servicing income, as you know, is highly recurring. The servicing side of that business really will see little to no impact other than maybe some escrow earnings because interest rates are down.
Okay. The second question is, clearly here in New York, everything's basically at a standstill. You speak to people in other parts of the country, and it seems like it's been a lot less impacted by COVID-19. We're hearing about leasing resuming, parts of the Sun Belt or even in West Coast. It sounds like it's a lot of virtual, a lot of brokers walking, facetiming their clients. As you see the market in the country, do you feel that things should be picking up pretty soon elsewhere apart from New York? Your sense is that the leasing is going to take longer to come back, whether it's people facetiming or in person versus what's going on in New York?
It's our view that Capital Markets, this was a health crisis and not a financial crisis. The banks are in much better shape. There's far more liquidity. There's enormous amount of dry powder in the market still sitting on the sidelines. For those who invested over the last year or two, they might not achieve the kind of returns they had anticipated, but the new money that's entered the market, which is significant, will start to look for some market capitulation from sellers and step back in and start buying particular assets. Change their assets, looking at maybe core, more industrial, multi-family first, and then obviously the harder ones are retail and hotel. On the leasing side, a lot of the companies across the globe are thinking about what is the new normal, what's post-corona? How do I occupy space? Am I working more remotely?
Do I have more of a distributed workforce? Am I changing the way I operate? Am I de-densifying? It's still in a period of flux. What we are doing, as you may look at the site, I think in the last month, we've been hired by a million square feet of clients a day to advise them on how to repopulate their space. What does the new environment look like? How do they work remotely? What are the trigger points? What are the activities? How do you manage and monitor and provide space? Should they be in the suburbs? Should they be in other markets? Should they be in one building? I think some of this is still in a state of evolution, and we won't know this for a few weeks or maybe a few months. The rest of the country is certainly less impacted.
The technology markets are certainly doing better. Some of the tertiary cities that are up and coming may offer an alternative for companies to move to, the Austins, the Nashvilles. Pittsburghs, Denvers may benefit to a certain degree from companies looking at having a much more distributed workforce.
Thank you, Barry.
Your next question comes from Jade Rahmani with KBW.
Thank you very much. Good to hear from everyone, and hope you're all safe and doing well. Just starting on the liquidity front, wanted to ask if the current cash position that you disclosed you believe is sufficient, or you anticipate drawing down the full remaining available balance on the revolver.
Sure. Hi, Jade, it's Mike. We drew down $415 out of $465 million. We have close to $300 million on the balance sheet at the end of the first quarter. As we have sort of demonstrated and talked through our business model, we think that's sufficient cash for now. We'll obviously keep an eye on how things progress in the future, but I don't see a need at the moment to pull down the extra $50 million, and at some point we may decide we want to take some of it back. We'll keep a close eye on it and continue to monitor it.
Thank you. On the Nasdaq stake, the future earn-out. Is there any potential to accelerate the monetization of that perhaps by selling that interest back to Nasdaq directly?
That's an interesting concept. It's not something I think we've explored in the past. Obviously, you've seen we've been able to monetize those shares historically through the forward structure. I think that structure still exists. If we felt we needed the cash more near term, we could certainly look at that again and potentially explore other ways. It's obviously a very valuable asset for us. If and when we need the capital, we think it'll be there for us.
There's been a lot of pressure on specialty finance companies based on margin call risk. I just wanted to confirm there is no margin call risk at Newmark, either directly within Berkeley Point or the debt placement business, as well as indirectly, potentially through the equity stake in CCRE.
No. The way the Berkeley Point process works is that all securities and loans are pre-sold, Jade. We have no margin risk there. The CCRE position, we think, is in very good shape, and we don't anticipate any exposure there for Newmark as well. None of our other debt businesses lever any of the originations that we do. It's really pure brokerage.
Thank you. In terms of cash flow from operations, historically, the first quarter is the most significant use. You noted some of the main drivers of that this quarter. Do you expect on a full-year basis cash flow from operations to be positive?
I think if you look through the balance of the year, we would expect to make money, and therefore we would expect to generate cash from the business, yeah.
Okay. Thanks for that. Turning to the loan portfolio sales, you mentioned the pickup in either distressed sales or perhaps debt funds looking to sell loans. Could you quantify perhaps the magnitude of that, of the pipeline that you mentioned is significant?
It's still early, but we've garnered a good chunk of the market. We have several billion dollars in the market for sale. I think we've contacted 450 investors in those loans. We have a very active targeted response to this market. We're very encouraged by what we're seeing in respect of loans and note sales.
Do you have any sense for what kind of discounts to par bids are coming in at?
We're selling loans at par. There are loans that are good loans. Some are slightly discounted. It really depends on the category of the food group.
Yeah.
Okay.
Chip in there quickly. What you see, Jade, when you have leveraged finance and you reference the repo lines, you sell what you can sell, and most often those that are on repo lines that need liquidity will sell the best loans in their portfolios, and those are going to trade closest to par or at par. Conversely, there might be situations where you're experiencing distress, and in a distress situation you're going to see discounts. Every trade that we're looking at right now is slightly different, and there's no real consistent pattern because as Barry said, it's still a little bit early.
Thanks. Just lastly, there's been a lot of speculation about how gateway cities like New York, L.A., San Francisco perform relative to secondary markets, the Austins you mentioned. I was wondering if you could quantify the mix of business that New York and some of those top gateway cities represents.
Historically, we've had maybe 15% or so of our business in New York and maybe 15%-20% in all of California, which includes northern, southern, all the way down to San Diego, all the way up to Silicon Valley. Over time, that continues to decrease as we build out the rest of our geographies around the country and as we start to build out internationally.
Thanks for taking the question.
Let me just add that a big part of our business is restructuring and advising tenants in place in their leases. Despite the fact there's quite a bit of talk about getting accustomed to working remotely, I think that's mixed from company to company. Companies are de-densifying, some companies are actually, in some cases, going as much as doubling the square foot per employee. Whether they go to a more distributed workforce or working remote or working in shifts, they'll require more space in the locations they are presently leasing to accomplish a home for less people. In the down markets, the talented and best professionals have good success going out longer and renewing and restructuring leases with landlords who are willing, and in particular, in a low interest rate environment, solidifying their tenant base.
Thank you for taking the questions.
Your next question comes from Andrew Kim with Paulson.
Hey, gentlemen. Good morning. Just a quick question on the cash flow impact of forbearance on your servicing portfolio. I know you gave some helpful commentary in your supplement. I think it was $4.4 million for every 1%. Can you just give more color on that? It's all commercial, no residential, but if it's 20%, does that mean there's $88 million of advances you'd have to make in terms of cash flow? Can you just talk about that?
That would be the math, yes. As with others of our competitors, we're right now working with and have term sheets from three of our various lenders, two of which are our warehouse lenders, to finance that should we need it. We would expect our forbearance rate to likely be below what Fannie Mae is projecting for their book. To date, we, through April 30th, have not granted any forbearance requests that required us to advance, although it still is early. As we've tracked April payments through last night, the payment velocity in our book is actually better than February, March, or April. We remain fairly optimistic about the forbearance situation, and it does end in August. We think we're well positioned for that, and we believe we'll have financing available.
When would you expect to be paid for any advances you make? Sorry, go ahead, Barry.
No, this was Mike. I was just going to say, these are highly financiable assets. They have a guaranteed repayment from the GSEs. As Jeff mentioned, we are fairly confident that we'll have a credit facility available.
You have no residential exposure. It's all multi-family, correct?
That's correct. No single family.
When would you be repaid on any advances? Would it be the following 12 months after the last forbearance?
The way that it works with the Fannie Mae agreement is that we're required to advance for four months, then within 60 days after the end of four months, Fannie Mae reimburses us for those four months. To the extent that forbearance and advances for whatever reason continue, they would reimburse us on a monthly basis trailing.
I see.
That $88 million calculation contemplates the six months weighted average outstanding on 20% of the book. In practice, we believe the reimbursements will come in more quickly than that, but that would be the calculation that we use since it's the outside allowable timeframe.
Got it. Thank you.
Sure.
There are no further questions at this time. I will now turn the call back over to VP of Investor Relations, Jason Harbes.
Thank you all for joining us today, and we look forward to speaking to you again next quarter. We hope that everyone remains healthy and safe, and this will end, and we will get through this. Thank you.
Thank you, Barry. Actually, I just wanted to make a few additional comments. Just so everybody on the call is aware, the statements that we made on the call 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 and are subject to risk. The actual impact may differ, possibly material from what is currently expected. Except as required by law, Newmark undertakes no obligation to update any forward-looking statements or discussion of additional risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements. See 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. Thank you very much for joining.
Have a great day.
Thank you for participating in today's conference. You may now disconnect.