Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Newmark's Third Quarter 20 19 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' Please be advised that today's conference is being recorded.
I will now turn the call over to Jason Herbst, VP of Investor Relations. Sir, you may begin when you're ready.
Thanks and good morning. We issued our Q3 2019 financial results, press release and a presentation summarizing these results this morning. You can find these documents at ir. Ngkf.com. Unless otherwise stated, the results provided on today's call compare only the 3rd quarter of 2019 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 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.
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. 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 the forward looking statements, see Newmark's Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in our most recent Form 10 ks, Form 10 Q or Form 8 ks filings. I'm now happy to turn the call over to our host, Barry Gosin, CEO of Newmark Group Inc.
Thank you, Jason. Good morning and thank you for joining us for Newmark's Q3 2019 conference call. With me today are Newmark's Chief Financial Officer, Mike Spohle our President of Multifamily Capital Markets, Jeff Day and Lou Alvarado, our Chief Revenue Officer. Newmark generated 13% growth in revenues, showing improvement across all of our major business lines with particular strength, Capital Markets and Mortgage Banking. I'm happy to report that the company's Board of Directors declared a qualified dividend of $0.10 per common share.
At yesterday's closing price, this translates into a yield of 4%. Newmark continues to hire the industry's most talented professionals who are drawn to our entrepreneurial culture, productivity enhancing technology, client focus. This is reflected by Newmark's 6% growth in front office headcount, 5% improvement revenue per producer in the quarter. For the trailing 12 months ended September 30, our revenue per producer was up 7% year on year to 914 $1,000 As we continue to generate higher percentage of our revenues from recurring businesses, we no longer plan to highlight our broker productivity metric on a quarterly basis beginning next year. This is consistent with our full service peers.
Turning to the industry, NKF Research estimates that overall U. S. Investment sales volumes were down 6% year on year in the quarter and down 2% over the 1st 9 months of 2019. According to the Mortgage Bankers Association, overall commercial mortgage originations are expected to increase 14% in 2019. We believe that Newmark continues to gain market share as our volumes across investment sales, mortgage brokerage and originations increased 38% and 32% respectively, 3rd quarter year to date.
Our GSE originations grew 43%, led by a $1,300,000,000 transaction in the 3rd quarter. Our research team estimates that the average vacancy rate per office improved 50 basis points year over year to 12.8%. Industrial was flat at 5.1%, while retail vacancies rose 70 basis points compared with the year earlier. Our leasing revenues increased by 5% in the 3rd quarter and 11% to date as a result of the strong 22% growth we generated in the Q2 of 2019. We remain enthusiastic about the growth prospects for Newmark.
A combination of our top talent, technology and our proven ability to cross sell and collaborate will continue to drive growth across our platform. With that, I'm happy to turn the call over to Mike.
Thank you, Barry, and good morning, everyone. In the Q3, our revenues increased by 13.1% to $586,600,000 Year to date, our revenues are up 12%. Our compensation expenses increased 17% in the 3rd quarter and 12.5% year to date, primarily due to higher revenues continued hiring of leading industry professionals. Non compensation expenses were up 9.4%. As a percentage of revenue, non compensation expenses were 76 basis points lower year over year.
In the past several years, Newmark has acquired approximately 50 companies. We have identified opportunities to streamline our operations and complete the integration of these various businesses. We believe the result of these actions will generate in excess of $15,000,000 of annualized savings by the end of 2020. We will update you on our progress during the coming year. Turning to our quarterly earnings.
Our pre tax adjusted earnings were up 6.5% 12.9% year to date. Adjusted EBITDA improved 4.3% and 8.8% year to date. Our pre tax adjusted earnings margin was 22.1% the 1st 9 months of the year and our adjusted EBITDA margin was 24.8%. Our tax rate for adjusted earnings was 15% versus 13.3% a year earlier. Our fully diluted post tax adjusted earnings per share increased to $0.60 We expect our 4th quarter tax rate to be lower than the Q4 of 2018 rate of 18.1%.
We also expect our 4th quarter fully diluted weighted average share count to be lower than the 267,600,000 last year. During the Q3 of 2019, Newmark repurchased 2,300,000 shares of Class A common stock for $20,100,000 at an average price of $8.81 per share. Our fully diluted period end count was 266,800,000 down from 268,000,000 at year end. Our weighted average fully diluted share count for adjusted earnings was $268,400,000 down 1% sequentially and up 2.2% year over year. Moving on to the balance sheet.
Our total liquidity was $121,400,000 at September 30, 2019. Our unsecured long term debt was $598,600,000 net debt was $477,200,000 and our net debt to trailing 12 month adjusted EBITDA remained at 0.9 times. Given the strength of our balance sheet, our $250,000,000 credit facility, strong cash flow generation from the business and low leverage, we remain well positioned to continue our growth. Turning to guidance for 2019, we expect the following: revenues in the range of $2,225,000,000 to $2,275,000,000 up from $2,048,000,000 in 20.18 adjusted EBITDA in the range of $560,000,000 to $580,000,000 up from $524,400,000 last year. Adjusted earnings tax rate between 14% 16% compared with 14.8% in 2018, adjusted earnings per share between $1.62 1.68 versus $1.50 in 2018.
We also expect 2019 fully diluted spot share count to be flat to down 1% from the 268,000,000 shares outstanding as of December 31, 2018. Our outlook assumes no material acquisitions or meaningful changes in the company's stock price. Operator, we would now like to open the call for questions. Thank
you. Your first question comes from the line of Jade Rahmani from KBW. Please go ahead.
Good morning and thank you for taking the questions. Can you talk about what you're seeing on the recruiting front? Which areas you believe hold the most promise in terms of largest competitors such as e still and HFF?
We're doing very well on the recruiting front. In fact, it's really the mainstay of our present growth strategy. As we've continued to elevate the brand and the company's success around a variety of different areas, We are seeing the top level of talent who wants to come to the platform and it's very exciting for us. I look forward to having a very robust recruiting year.
Have you seen any friction points or fallout from the 2 firms I mentioned?
Anytime there is mergers and consolidation, it creates friction. When a company has too many people in a particular space, in a particular category and there's one less player that goes into a beauty contest to win a piece of business, it becomes a bit of an opportunity for all of the peers who remain. And that's so for us, that's been a good thing.
Can you comment on the compensation structure of new hires and if that's changed at all in terms of mix of cash and equity? And specifically on the equity portion, can you comment on the type of security that's being issued and when you would anticipate it being factored into the diluted share count?
Hi Jade, this is Mike. We've historically used around 65% cash and 35 percent equity for our new hires. We are seeing that mix change a little bit, maybe it's closer to seventythirty now. The cash is or maybe even 75, 25. The cash is a forgivable loan, which just expired at the end of the contract and the equity are restricted stock units that just have a vesting period over the contract term.
So that's the current mix.
And the restricted stock, has that changed in terms of how it's structured? Did the prior restricted stock have a set vesting period?
In the past, we used partnership units, which didn't have vesting schedules, but were given exchange rights over time. The restricted stock units just have a straight vesting schedule.
Okay. So the key question is, is there anticipated dilution in the future that we're just not seeing evidently at the present time?
Sure. I think we've spoken in the past and we continue to say that our target going forward is 2 percent on average over the next few years. Okay.
Just on the capital market side, can you comment on where you saw the greatest strength maybe by property type or geography?
There continues to be an enormous amount of interest investing in real estate. It's the best asset class in terms of long term return with negative interest rates, putting money in the U. S, it's a good safe investment across all categories, some more aggressively than others. The core in some markets is pricey, but on the West Coast and the growth markets are still doing incredibly well. Value added opportunity, multifamily still has a good runway, industrial still very active.
And even in retail, we're seeing some green shoots with respect to repricing and discovery. We have a business in selling some of those malls that have been stressed.
Thanks for taking the questions.
Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Please go ahead.
Hey, good morning. Good morning. So just two questions. The first is on the guidance, you guys have reduced your assumption for share count, which obviously a good thing. And yet the guidance range merely narrowed.
So can you just talk about some of the factors that were sort of in there because before it was 0 to plus 1 on share count, now it's 0 to down 1. So it's like a good swing and yet the guidance merely narrowed. So what are some of the offsets that didn't allow guidance to actually increase?
Yes. Good morning, Alex. I think that if you look at our guidance, it's been pretty consistent at the midpoint of the range throughout the year. We continue to see strength in the pipeline in the business. If you look at our adjusted EBITDA guidance, it's pretty consistent, particularly at the midpoint, it hasn't changed much throughout the year.
The share count has changed a little bit, but not enough to really drive change in EPS. And we still feel good about the overall performance of the company for the year.
Okay. And then just sort of big picture, I mean, you guys have made some tremendous steps this year, improving communication, obviously delivering good results. You still have another year before the tax free spin period expires. What are your thoughts on as you over the next year seeking to simplify the corporate structure maybe with the BGC, the Howard Lutnick shares, the majority. What are some of your thoughts Barry on trying to simplify Newmark to try and unlock the value that I think is depressing the shares, but obviously you guys have good underlying growth.
So maybe you could just talk about your thoughts for what you could do from a corporate structure over the next year to try and improve the value?
We've had this conversation just a few times, Alex.
No, I know, but you're putting down really solid results, Barry, it's showing. So it's sort of the next level, right?
When I sold the business to BGC, one of the things that was attractive for me and I think it's attractive to the people that sell their companies to us is knowing who's running the company, who's committed to building an enterprise. Is this just an enterprise to go quarter to quarter or is this an enterprise to build real value long term by domination in the marketplace and that requires vision and activities that have occurred over the last 7 years has been a result of a view that is out there to create a great company and it's all coming together. And so I personally, I think that having the structure we have is it works. Much of the investors in our company are investors who are here for the short duration. Those people who believe in our company and want to invest for the long term would invest in this company for the long term.
So I'm not I don't think there's any plans to change the structure. I think it's a structure that actually works better for people whose interests are aligned because the commitment to being a shareholder for the long duration is there, has been exhibited by, 1, our investment in the company and 2, the steadiness of our ownership of that stock.
Okay. Thank you, Barry.
Your next question comes from the line of Jason Weaver with Compass Point. Please go ahead.
Hey, good morning. Thanks for taking my question. Just touching once more on the capital markets results. I know you mentioned you're not disclosing productivity metrics any longer, but can you just bifurcate a little bit whether this is due to headcount growth or whether that's organically within individual broker productivity?
Well, Jason, I think as you've seen in the results, we're growing both our headcount and we're growing our broker productivity. We did add significant amount of talent starting in the Q4 of last year and all the way through the Q3 of this year. And I think we've talked about 6 to 12 month ramp up of that talent. So we're just starting to see some of the production from that talent now. We think that will continue to drive earnings growth as we move forward.
Got you. Thank you. And then one more. On the balance sheet, we saw an S and P headline expecting you to run the company between 1.5x and 2x leverage compared that's compared to your 0.9x today. Can you just talk a little bit about your appetite for leverage and or M and A at this point in the cycle?
Yes. I think S and P has a little bit of a different metric in the way they measure it. But I think overall, they reaffirm their rating outlook and with a stable guidance. But I think we have always said we want to maintain our metric within 1.5x or less. We're at 0.9 times on the way we measure it now.
We could leverage up for the right deal, but we're not going to overpay for deals in the market. We'll pay an appropriate price if we see the right deal. We think it's going to help us grow the company long term.
All right. Thank you.
Your next question comes from the line of Michael Funk with Bank of America. Please go ahead.
Hey, good morning guys. Thank you for taking the questions. Maybe just kind of pull back to a bit higher level commentary here as well. Very strong investment sales during the quarter, better than we were expecting. So just maybe some more color on where you're seeing strength there kind of regionally, maybe the visibility into that metric for 4Q and 2020 to start?
Sales have been very active on both coasts, all the coastal markets and for different reasons. So we're continuing to see a lot of activity in the multifamily space, a lot of activity in good solid cash flowing even core assets. Again, there's $200,000,000,000 of dry powder in the marketplace. There's another $100,000,000,000 around the globe. It makes for a very fertile market.
And then on the productivity, I appreciate you don't want to keep giving this kind of into perpetuity. It's been a special metric you've been giving, but helping us think about modeling longer term. Where do you think you can take that metric as you kind of fully ramp your employees?
We've always said our target has been to get that number to $1,000,000 or more and we'll continue to strive to get to that number and eventually grow beyond that.
Great. And then just on Fannie and Freddie, also relatively strong numbers this quarter. Can you give some commentary on what you think the proposed caps of $100,000,000,000 might do or mean to that business going forward?
Sure. This is Jeff Day.
Hey, Jeff. How are
you doing?
Doing great. We obviously have great visibility through the end of 2020. And if you look at the caps as articulated relative to past volumes, we think that got some good runway, both Fannie Mae and Freddie Mac are very active and the pipeline is very strong. So we're very optimistic that this is a resolution that's good for the taxpayer and also good for the business.
Great. And just one final one, kind of 2 separate but related kind of topics or questions. Obviously, WeWork and the changes have been going on there and kind of the impact that co working had to net office absorption last year. And then some of the recent headlines, for example, JPMorgan thinking about moving employees out of New York City and into Texas. So if you can just give some thoughts on what those types of activities might mean for leasing in some of the larger markets like New York City?
People have been moving outside out of New York City that have been in the business. Remember, Avenue in America is the Belenese Building, the Brooklyn Building. So that's not changed. New York is the single best place for talent in America. And that will continue to be the best place for as long as I remain in this business certainly and beyond.
It's different. The difference is it's more of a very talent focused millennial, coding, front office and for more back office employees, which are the less paid, more commodity type employees, there will always be continue to be a movement to save money. But New York is actually doing really well. Now have life science as they're beginning to grow green shoots in New York. And then now there's an opportunity in Texas.
We are in all these markets. We in Texas. We are in all these markets. We represent lots of companies. We look at their site selection.
We have a business that consults for them in both workplace site selection, labor analytics and we provide the advice and counsel to help them make those kind of decisions. So we're in the mix. I think it's all good.
Great. Thank you guys so much for the time.
Your next question comes from the line of Henry Coffey with Wedbush. Please go ahead.
Good morning. I'll save all my advertising for Southern markets and no tax rate no state tax rates for when like you got 6 feet of snow out there. Great quarter. Thank you for taking my question. The market obviously likes what's going on today, stocks up a lot, great quarter.
And going back to a couple of callers, I think it's just fair to say that if you pulled a bunch of investors, there are things they like and there are things they don't. They like buybacks and they like people beating earnings. There are probably other things they don't like. And maybe over time you guys could sort of examine those because they do hold back value. On sort of a big picture basis, you're obviously touching all you're involved in all the touch points about around real estate and capital markets.
Have you heard anything not so much from the FHFA, which has been very vocal about wanting to develop capital opportunities outside of the GSEs. But have you heard anything from The Street about likely programs in the multifamily area that might mimic what's going on in commercial that could sort of move that ball forward?
I think this is Jeff Day again.
Clearly, CMBS execution is something that works very well for multifamily and it's an execution that we use regularly in addition to the GSEs and life companies and pension funds. But I wouldn't say that there is any new concept or theory of note that's being discussed on The Street that would impact the business as it stands today.
So I mean, nobody's moving that ball forward is I guess the way I'm hearing your answer. There's a lot of discussion coming out of the GSEs and out of the FHFA about changing the market. Is it just discussion? Is Calabria just talking and writing great proposals? Or is The Street looking at this and saying, look, there's a real opportunity somewhere between the GSE market for multifamily and what the insurance companies want?
Well, if you look at
the history of conservatorship, there's been a series of discussions and proposals about GSE reform, with little to no change. And so while I think everyone has their theories about what they might do until there are more concrete and visible proposals that people can react to, I think think it's really just conjecture right now.
In terms of financing multifamily, can you give us some comparison between the cost of the various alternatives? Whether it's CMBS, whether it's insurance company placement or something with the agencies?
We clear the market for our clients. Remember, we are in the debt business advising clients from a 3rd party point of view. So, there are part of the platform does clear the market through insurance companies through CMBS, other sources financing. So we're well positioned to provide a solution regardless of where it goes. The investors prefer Freddie and Fannie if they can get it.
And the pricing equal, they would prefer to do Freddie Fannie for a host of reasons, but we do it all.
But the client preference is for the GSE kind of product?
That's generally correct, yes.
Great. That's very helpful. Thank you.
Your next question comes from the line of Patrick O'Shaughnessy with Raymond James. Please go ahead.
Hey, good morning. On your second quarter earnings call, you guys provided a 4th quarter revenue guide of $693,000,000 of revenue at the midpoint. By my math, your updated full year revenue guidance implies for Q4 revenue of $664,000,000 at the midpoint. So to what extent was your strength in revenue, particularly in Capital Markets in the 3rd quarter, a pull forward of activity that you would have otherwise expected in the Q4?
Hi. I think we did see some pull forward of activity into the 3rd quarter. Pipeline for the Q4 still remains pretty healthy. We just provided guidance based on our historical close rates of that type activity. So your number is correct in terms of the midpoint.
Okay. But you haven't necessarily noticed any deterioration in the environment since you put out that initial guidance?
No. Not seeing any deterioration in either capital markets or leases.
Thank you. And then speaking of leasing, leasing revenue growth did decelerate in the quarter. I think it 5% year over year revenue growth in the 3rd quarter, down from 22% in the June quarter. I realize that the comps were definitely more difficult, but it's pretty unusual to see a quarter over quarter decline in leasing revenue in 3Q versus 2Q. So can you talk about what you've seen out there in the leasing environment?
I think the leasing environment for us remains really healthy. We're seeing a lot of technology companies, financial services companies, continued activity in the co working space. We're not seeing any slowdown on the leasing side. And I think that we're up 11% year to date. We were up 20% plus in the Q2, which I think was just timing of when some deals closed.
Really not seeing any change in activity though in the market, still very healthy.
Okay. Thank you. On the expense side, your comp ratio was a little bit higher this quarter than what we had expected and higher than it was in the year ago period, despite the pretty strong revenues. Is there anything that you would call out in terms of compensation expenses that were maybe unusual or we shouldn't think of that as kind of the run rate going forward?
Sure. I think for the year, it will be pretty comparable, our comp rate year over year, maybe up a little bit. In particular in the Q3, I think we've talked about the fact that we've hired a lot of talent in the 1st couple of quarters of this year and that continued into the Q3. And what happens when you hire these really large teams is you bring out all their expenses, but none of the revenue for the 1st 6 to 12 months. So that puts a little bit of pressure on your expenses.
We think that will work itself through as the productivity starts to pick up.
Okay. And then last one for me. Can you guys provide some additional color on what capabilities your recent acquisition of Workframe provides and how that solution might be differentiated from what else that's out there?
It's one of a variety of things that we've invested in and we're building internally. But Workframe is a collaboration and communication tool. It finds work improving workflow, improving communication, the ability to keep all of a project's documentation in real time in cloud available to the clients. There's no actually no need for email. It's very good for a host of things we're doing.
We just did a very large portfolio appraisal with $18,000,000,000 group of properties and all of the lenders, owners that could get online and see the relative changes in the process during the appraisal period and it seems like we think it could help our brokers, it could help all of our businesses. We're also tying it together with several other of our technologies to provide a comprehensive integrated technological holistic system for enhancing and weaponizing the brokers to be better with
Great. Thank you very much.
Your next question comes from the line of Jade Rahmani with KBW. Please go ahead.
Thanks very much. But back on the GSE multifamily, did you see during the quarter Fannie Mae meaningfully pull back from the market and then once the new caps were announced, reenter the market?
I think both Fannie Mae and Freddie Mac,
let's just say, pause for
a moment as they were working through those issues, but we've seen the pipeline and their activity come back in a real robust way.
And do you have any concerns about the constraint that sets a target of 37.5% in the affordable product, which is less institutional?
No. If you look at the way that they define affordable and the fact that the mission has been a critical component of the Fannie Mae and Freddie Mac business model for an extended period. We're very focused on that piece and we're committed to delivering that ratio and we don't believe that that's going to be a challenge for us.
And turning to leasing, could you comment on how you view the outlook for the leasing market? Are there any pockets of softness? I think Colliers yesterday reported 1.5% decline in Americas leasing revenue growth and it had been running in the 15% to 23% growth rates. Clearly, co working has been a meaningful driver of leasing absorption. So overall, how would you characterize the outlook for leasing and do you expect positive growth going forward?
Yes, this is Lou Alvarado. We still see when we look at our offices, we look at our pipeline, we still see a strong growth and still continued activity in the leasing, nothing that we see that is pointing to a slowdown. Certainly, rates are higher, but that drive is particularly in markets for talent and the focus for people to find space where they can run their business and recruit the talent they have still continues and the activity is there. So nothing that we've seen that leads us to have a concern about the volume of activity that we'll be seeing from the leasing front.
And I think that Newmark's research showed rent growth up about close to 3% year over year in asking rent. Some of the other brokers' firms subsided around 4%. Do you know do you have any data on what the effective rent growth has been, net of concessions?
I don't have any really firm data. I can tell you that certainly in the markets where you're seeing the strength, you're seeing concessions get reduced and where concessions are still being given, you're seeing more term. So it kind of washes. So certainly, we're it's not it is a landlord market, no question about it. And that's what's driving the deals.
But tenants still have the appetite and when you really look at it, they're trying to really make their money on salaries, not the rent. So the rent is not as big an impact to them as it is the location and their ability to attract the talent.
Thanks very much.
There are no further questions at this time. I will turn the call back over to the presenters for closing remarks.
Thank you all for joining us today and we look forward to speaking to you again next quarter.
This concludes today's conference call. You may now disconnect.