Good morning. My name is Julianne, I will be your conference operator today. At this time, I would like to welcome everyone to the Newmark First Quarter 2019 Earnings Conference Call. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Jason McGruder, Head of Investor Relations. Sir, you may begin when you're ready.
Good morning. We issued our first quarter 2019 financial results press release and presentation summarizing the results this morning. You can find these documents at ir.nmrk.com. Unless otherwise stated, the results provided on today's call compare only the first quarter of 2019 with the year-earlier period. We'll be referring to results on this call mainly 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 section in the back of today's press release for the complete definitions of any such non-GAAP terms, reconciliation of these terms to the corresponding GAAP results, and how, when, and why management uses them.
I also remind you that the 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, 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 Securities and Exchange Commission filings, including, but not limited to, the risk factors and special note regarding forward-looking statements set forth in our most recent Form 10-K, Form 10-Q, or Form 8-K filings. I now have to turn the call over to our host, Barry Gosin, CEO of Newmark Group, Inc.
Thank you, Jason. Good morning, thank you for joining us for Newmark's first quarter 2019 conference call. With me today are Newmark's Chairman, Howard Lutnick, and our Chief Financial Officer, Mike Rispoli. Newmark generated 4% revenue growth, an 18% improvement in post-tax adjusted earnings per share, and a 9% improvement in adjusted EBITDA. I'm pleased to report that the company's board of directors raised our dividend by $0.01 to $0.10 per common share. At yesterday's closing price, this translates into a yield of 4.9%. We continue to grow across leasing, investment sales, mortgage brokerage, and multifamily during the quarter. We are pleased to reaffirm our full year 2019 revenue and adjusted EBITDA guidance. As we execute on our plan to reduce net share issuance, we are increasing our 2019 adjusted earnings per share guidance by $0.05.
We now expect adjusted earnings per share to improve to between $1.60 and $1.70, which is 7% to 13% higher for the full year. Our results are consistent with normal first quarter seasonality for Newmark and its full service peers. Turning to our business. We continue to attract many leading producers to Newmark. For example, we significantly expanded our healthcare and alternative real estate asset group by adding the top-ranked senior housing capital markets team. We added a top-ranked senior housing debt origination team. In addition, we added a leading senior housing team in Canada. We expect to be the leading senior housing capital markets business in the Americas. We have added leading debt origination teams in Denver and the Carolinas to enhance our existing multifamily and commercial investment sales platform.
We have also added strong industrial teams in Los Angeles, Seattle, Minneapolis, and Vancouver, and over 100 professionals in Latin America during the past year. Newmark's evolution over the past five years has led us to a position of strength and made us the company of choice for many of the most talented real estate professionals, as evidenced by our 11% growth in front office headcount and continued improvement in productivity. We are improving our productivity through the deployment of innovative technology and by leveraging our extensive cross-selling opportunities. We are excited by the progress we are making in our technology investments. Turning to the market, we estimate that overall U.S. investment sales and industry-wide originations were together up approximately 11% in terms of notional volumes. Newmark's 23% increase in full year volumes across investment sales, mortgage brokerage, and origination compares very favorably to the overall market.
Newmark's combined volumes from multifamily originations, investment sales, and non-originated mortgage brokerage increased by 20% year-on-year to $7 billion. This compares to an estimated volumes increase of 7% for the industry across multifamily. We expect to continue to grow and build our multifamily and other businesses over time through cross-selling, innovative use of data and technology, and attracting top producers to our platform. Newmark Research estimates that rents for all property types in the U.S. increased year-on-year, while overall U.S. leasing activity decreased. In comparison, revenues from our leasing commissions business increased by 8.2% year-on-year. I have never been more excited about the prospects for Newmark. We spent the last seven years building and growing our platform. We have established ourselves as the most attractive company for real estate professionals to execute business.
I expect our hiring of top talent will accelerate over the next few years. With that, I'm happy to turn it over to Mike.
Thank you, Barry. Good morning, everybody. In the first quarter, Newmark generated revenues of $447.7 million, an increase of 4%. Our compensation expenses increased 0.9% to $263.4 million and improved by approximately 180 basis points to 58.8% of revenues. Non-compensation expenses increased by 9% to $115.9 million as a result of the impact of recent acquisitions and new hires and increased usage of our GSE warehouse facilities. Turning to our quarterly earnings. Our adjusted EBITDA improved by 8.6% to $79.3 million. Our pre-tax adjusted earnings for the quarter were up by 17.4% to $64.8 million. Our tax rate for adjusted earnings was 14.4%, which is consistent with our previous outlook for non-GAAP tax in the range of 14%-16%. Our post-tax earnings increased 18.2% to $55.6 million. Our post-tax earnings per share increased 10.5% to $0.21.
We have taken and expect to take a number of steps to reduce net share issuance. These include using more cash and less equity with respect to acquisitions and new hires and deferred equity for employee compensation. We now expect our fully diluted share count for 2019 to increase by 0%-1% from the 268 million shares outstanding as of December 31, 2018. Thereafter, for the foreseeable future, our goal is to maintain annual net share count issuance in the 2% range on average. Our fully diluted share count was virtually unchanged in the first quarter of 2019 versus the fourth quarter of 2018. Year-over-year, the share count increased primarily due to the March 2018 sale to BGC of approximately 16.6 million exchangeable limited partnership units of Newmark for $242 million. Moving on to the balance sheet.
Newmark's total liquidity was $72.5 million, down from $171.4 million at December 31, 2018. This change reflects the payment of $59.3 million for corporate taxes, in addition to the impact of year-end bonuses. Our unsecured long-term debt was $538.6 million. Therefore, our net debt was $466.1 million. The company's net debt to trailing 12-month adjusted EBITDA is 0.9 times as of March 31, 2019, versus 1.9 times in the prior year period. Our balance sheet does not yet reflect the approximately $451 million of additional Nasdaq payments expected from 2023 through 2027. Given the strength of on and off-balance sheet assets, our $250 million credit facility, strong cash flow generation from the business, and low leverage, we believe that we are well-positioned to continue to invest for growth. With that, I'm happy to turn the call back over to Barry.
Thank you, Mike. Our full-year outlook for 2019 is as follows. We expect to generate revenues in the range of $2.2 billion-$2.3 billion, up from $2.048 billion in 2018. We estimate our adjusted EBITDA to be in the range of $550 million-$585 million, up from $524 million in 2018. We anticipate our 2018 tax rate for adjusted earnings to be in the range of 14%-16%, compared with 14.8% in 2018. We have raised our earnings per share guidance to be in the range of $1.60-$1.70, up from $1.55-$1.60 previously. This outlook compares to $1.50 in 2018. Our outlook assumes no material acquisitions or meaningful changes in the stock price. Operator, we'd like to open the call for questions.
Certainly. If you would like to ask a question, please press star followed by the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Jade Rahmani from KBW. Your line is open.
Thanks very much. Just in terms of the capital markets outlook, it seems that you were able to outgrow peers and the overall market this quarter. Can you talk to the drivers of that? Secondly, can you comment on what drove the lower average transaction fee rate? Was that due to deal size, some large deals, or anything else?
Exactly right. Larger deals, the commissions are less. We continue to ramp up, and we've hired incredible talent. The talent continues to ramp. They also continue to congeal as a group. Many of these people have come from other companies, as the enterprise communicates, collaborates better and better each day, it just gets better.
Yeah, I'll add to that.
Oh, go ahead.
Jade, I would add to that in the GSE origination business, more than 70% of our notional volumes in the quarter were Freddie, and as you know, Freddie just has a little bit of a lower revenue stream. That's mixed as well.
What percentage of transactions that you are leading would you say there's a team-based effort where you have sales folks from capital markets and leasing or management services teaming up?
Well, for starters, the debt origination team is side by side linked arm in arm on the projects that we sell. There generally is a connection to the leasing team in understanding the market. They're also linked together in valuing and enhancing the understanding of the property for those people that are buyers. The management is the same. Understanding the guts and the bones of a building is important. We bring management together. They're generally linked together, and the ability to have a fully integrated platform with all of the services, all of the knowledge, is a real advantage, in the sales market and in the capturing the management and leasing after the sale.
On the leasing side, some of your peers put up Americas growth north of 20% year-over-year. Wondering if you have any comments as to why Newmark's growth in leasing was less than that, if it has to do with specific subsectors such as technology, flex office, or something else.
Well, the average was about 12. In the Americas, I thought, we were 8.2%. The first quarter of last year, we had a significant amount of large deals. We continue to grow. Some deals slip from one quarter to the next. I expect that we'll have a good year in leasing.
Okay. Lastly, do you have any expectations you could offer for operating cash flow generation or free cash flow for the full year?
Yeah, if you look at our business last year, we generated close to $300 million of cash flow from operations. That included about $100 million that we reinvested back into hiring new talent and new producers. If you look at it before that investment, it was about $400 million. We see the business generating a similar amount of cash flow in 2019.
Thanks for taking the questions.
Your next question comes from Alexander Goldfarb from Sandler O'Neill. Your line is open.
Hey, good morning. Just a few questions here. First, Barry, very good to see you guys addressing the share count challenges that we had on the last call. You can see that the adjusted EBITDA, I guess, is the same, adjusted for the footnote from last quarter. Although, in the future, it'd be helpful if that was clarified when you guys are writing out the guidance footnotes so that we can remember all that stuff. Suffice to say, it sounds like the business is going well, and it sounds like you have no problem hiring more teams, but you've made a dramatic adjustment to the way that you're compensating. Can you just walk through, are we to assume that there's been no impact as far as your ability to retain people or grow when you've redone the compensation structure?
Is that what we're to understand, or has there been some effect on your ability maybe either to grow more or grow less based on the revised compensation?
We continue to grow and accelerate with respect to hiring. The platform is so much improved, and as the evolution of the company gets better and more mature, there's no shortage of opportunities to hire people. The compensation has not impacted at all the ability to hire people.
Yeah, I'll add to that, Alex, that when we're going out now and recruiting and hiring people, we simplified the comp structure, and it's just making it easier to recruit.
Okay. Just one thing I think that could be helpful, because you guys provide a lot of information, and obviously, you guys are doing a lot of good things as far as addressing the dilutions to growth, but the releases can be a little bit confusing. I would just say on a release basis, if you guys can simplify and make clear if things are actual changes versus just updates that were previously disclosed that now you're simplifying. This morning when we look, we see lower revenue, but then we see higher earnings per share. As far as guidance, that's a good thing. Unfortunately, it gets lost with the stock being down. Just, it's a suggestion maybe going forward, that I think would be helpful to the stock, and certainly you guys are putting in good performance. You're definitely doing all the right things.
It's just a shame to see the stock be down the way it is this morning. I don't know if that's something that you think is reasonable to do, or if this format, the way you disclose, is something that you guys will be sticking with. Maybe if you could just provide some comment on that.
Alex, as you know, we did have some adjustments and some changes to how we show the numbers and how we provide the information to the public that we talked about on the last earnings call. These numbers are consistent with those changes. As you know, the business is seasonal, and we feel pretty good about the rest of the year and the pipeline that we see for the business. Which is why we were able to reiterate our revenue and top-line growth for the year.
Okay. Thank you.
Your next question comes from Andrew Rosivach from Goldman Sachs. Your line is open.
Hey. Thanks for taking my call. The biggest question I'm getting on your stock is stock comp, my line died for a little bit, sorry if you stated this earlier, but what do you anticipate will be the equity compensation adjustment between your adjusted earnings and GAAP earnings for 2019?
We haven't provided specific guidance on that. If you remember, the company's non-GAAP tax rate gets the benefit from the stock compensation deductions. We still have the units, the LPUs that were issued in the past, that as they get the right to convert those units into stock, will generate stock charges for the company. To maintain our non-GAAP tax rate between 14%-16%, we would have a similar amount of GAAP compensation charges for stock comp. All that said, we are changing the comp structure in a way that will limit the share count issuance between 0%-1% when measured against the 268 million shares, fully diluted, that were outstanding at the end of last year.
If that's the case, because we know what your premium received in the cash was, what your stock comp add back was last year, does that imply that it would be lower this year?
I would think it would be a similar amount or maybe a little bit higher.
Okay. One follow-up on this. If you look at other companies, and this is for multiple companies, for other brokers, they're not necessarily adding back stock comp to their adjusted earnings. What they do, though, is add back merger-related compensation, by the way, whether it is stock or it is cash. My question for you, given Newmark's been doing a ton of M&A, when we look at that equity compensation number, how much of that is just going to go out for the end of time, and how much of it is potentially associated with lockups that you needed to do to bring teams or companies in?
Good question. As we bring on teams, as you know, in the past, we've used equity as part of the upfront compensation. When we buy companies, the equity we give them is really just goodwill that goes onto the balance sheet. Then they get compensated over time, similar to the rest of the population. The compensation that we've paid in the past for hiring will just continue to come through our earnings as they normally have in the past.
Just to throw it out, it might be worth segregating. If you look at other companies, Cushman now, JLL, I believe, with HFF, they're taking lockups, if you will, they are adding that back. If some of this equity comp that people are worried about is essentially lockups, it might mitigate it in some of the concern of the market.
Yeah. Right now, all of the compensation that we pay to our producers to join the company is coming through the company's income statement. It's part of our earnings.
Right. The question is the stock comp just recurring, or is some of the stock comp one time?
With all of the companies that we acquire, the principals sign non-competes, non-solicit, non-reconstitutes. They can't do business for a significant period of time after their contracts. They generally sign long-term contracts to begin with. There is a significant amount of control in respect of their being able to compete and actually be in the business. It's unlikely that they can.
It's cool. We could follow up later. Thanks for taking my call.
Your next question comes from Jade Rahmani from KBW. Your line is open.
Thanks very much. I wanted to ask a follow-up related to your guidance. The flat to up 1% for the share count on the 268 million shares outstanding, I think your prior guidance implied around 16 million shares of issuance. Now you're flat to up 1%. That would have equated to about $130 million of value. My question is that amount being expensed anywhere? Is it going to show up as employee loans that are amortized? Where does that value go in terms of how it's either a cash item or an expense item?
To the extent it's a cash item, of course, it will come through our income statement over time, over the course of the length of the contracts that we sign with our producers. If we're giving them stock compensation, it will come through our income statement over time as well.
Essentially, that $130 million of value. Previously, you anticipated it to be issued in the form of shares, and now it's going to be issued likely in the form of cash.
No. What happened is we were issuing units in the form of current, fully diluted equity, and now we're issuing deferred equity. It will come over a long time. Instead of going into our share count today, it just comes in slowly over a long time, but it is just mathematically less shares, we expect virtually no net issuance now, 0%-1%. It's not just been converted to cash, it's actually less issuance of shares. That's why Mike was able to say that we expect our fully diluted share count target to be 2% growth of shares for the foreseeable future after this year, which is 0%-1%. It's not more cash. It's not going to hurt our earnings. It's just we are giving less shares and deferring them.
Does that imply that your net hiring growth expectations have been curtailed?
Absolutely not.
You've just restructured the hiring agreements to have deferred equity over a longer term than previously?
Yes. Effectively.
Okay. That makes sense. We were wondering why there was no impact to the adjusted EBITDA guidance as a result of the lower share count. Thanks very much.
Your next question comes from Patrick O'Shaughnessy from Raymond James. Your line is open.
Hey, good morning. Curious what your take is on some of the conversations that have been taking place around GSE reform, whether it's things that Calabria have said or the Senate Banking Committee hearing that took place. Any change in your long-term optimism about the multifamily business?
No, we're pretty comfortable with it.
Okay. With the JLL acquisition of HFF, seems like they did a pretty good job of locking up their key talent. Is that kind of your sense as well, or do you think there might be some talent that might be available as a result of that deal?
Anytime there's a player that's taken out of the market, it's good for everybody. We're happy about a merger and there's one less company in a beauty contest to get business.
Okay. For that 2% share count growth outlook going forward, I think in response to a previous question, you said that does take into account any hiring you might do. Does that also reflect any acquisitions that you might do? If you do a particularly large deal, might we see that share dilution be greater than that 2% level?
Yeah, I think we said our target excludes material acquisitions. It could change if we do a big transaction over time.
Okay, great. That's all I've got. Thank you.
Again, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Your next question comes from Henry Coffey from Wedbush. Your line is open.
Good morning. Tough day. If I can summarize, you've made some changes sort of below the line that are good for EPS. You don't see any real impediment to your recruiting or your hiring, which is obviously a key way that people like you and Walker & Dunlop are growing. The business seems fine. When I look at Treasuries down today, if you are a residential mortgage REIT or a residential mortgage company, I'd say, well, this is all good. Can I make the same observation on the commercial side of the business that lower rates are good for you?
Absolutely. Lower rates are good for us, and we're pretty encouraged in the multi, in the commercial, and all of our businesses. We're pretty optimistic.
Business is good. A major competitor is going to leave the building six months from now. Either the JLL guy in Philadelphia or the HFF guy in Philadelphia are going to lose their jobs, and they're probably going to come work for you or one of the other companies. That's going to be great. Let's talk about the important fundamentals. What is the key variable that drives your ability to increase your dividend and pay down debt?
As I said at the end of my conversation, I have never, and I couldn't say this more emphatically, never been more optimistic about our ability to hire. The level of people that are interested in our company is accelerating. The level of productivity per broker, the profile of the broker, the profile of the team, the people that may not have talked to us three years ago, everyone is talking to us. Everyone is talking about us. The platform couldn't be in better shape. We continue to have really good cash flow. Very good momentum. If you look in our statement, we hired the number 1 team in senior housing. Literally, we will own the market. Every private equity firm, every investor in the country is interested in senior housing because of the demographics. We continue to expand in various disciplines and expand every aspect of our business.
Let me go back to my question. Okay. We got that. If you took out your number 2 pencil and said, "All right, we're going to circle a couple of numbers here." This is a very complex company from some perspectives, and then from others, a very simple company. Which of those line items are going to really positively affect the ability for you to either, A, raise your dividend or pay down debt or both? I'm not interested in a stock buyback, obviously, at these levels. I think you're better off reducing your interest expense and increasing your dividends. What are the key items that really drive that we should focus on?
As you saw, we did increase our dividend from $0.09 to $0.10 in the first quarter. That's as a result of our comfort level with our guidance for the year. We'll continue to grow the top line, as Barry talked about, with our ability to recruit and hire talented professionals and give them the ability to cross-sell with the technology that we have and the tools that we've put together on our platform. We just feel good about the business and our ability to perform within the range of guidance that we provided this year.
Super. Thank you very much.
Your next question comes from Patrick O'Shaughnessy from Raymond James. Your line is open.
Hey, just a quick follow-up from me. As we think about the liquidity that you have, the cash in your balance sheet, your pretty minimal leverage at this point, the Nasdaq shares that you still have coming, how do you think about potentially doing a special dividend or some other big capital return versus trying to apply that capital to growing the company?
We have so many opportunities to grow the company. We'll continue to use the cash in hiring and acquiring, hiring great brokers and professionals and acquiring companies. We see an enormous amount of opportunity in the market. We'll use that money wisely.
Of course, we target 15%+ returns on the money that we invest, and with our ability to grow the revenues of the companies we've acquired and the professionals that we put on our platform, that only makes that return on cash investment better.
Great. Thanks.
Your next question comes through from Andrew Rosivach from Goldman Sachs. Your line is open.
Hey. Sorry, I thought I would ask the buyback question, because if you really do think adjusted earnings is the right way to value you guys, you're at four and a half times now. As other callers have highlighted, you did a nice job shoring up the balance sheet last year. You have an announced buyback program in place. By the way, the four and a half times would be better than a 15% return, right? Is the issue here just because it's a tax-free spin and it makes it too difficult to do share repurchases? Is there another factor here we should be thinking about?
Yes. That's the primary factor. We're still early in a two-year process post-spin, so we'll continue to look at and evaluate that.
We've figured
Yeah, sorry
We figured out a variety of tools that have allowed us to reduce our net share issuance to 0%-1% for this year and to constrain it to our goal of 2% for the foreseeable future. We're using those tools that are available to us during this period of time after the spin, until two years has lapsed. For the two years, I think share buybacks would be very high on our priority list at these levels. The company has operated very well. We had always expected about 20% of our revenues in the first quarter. I have no idea why anyone else would have thought other than 20% of our revenues were in the first quarter. All of our peers do about 20% of their revenue in the first quarter. We are exactly doing what we expected to do for our guidance.
I just don't understand how these things got misaligned, They won't be misaligned in the future. We do expect to do between $2.2 billion and $2.3 billion in revenues, increase our earnings, constrain our share count, listen to a whole variety of things. A variety of you have suggested we take out employee loans from the EBITDA, We took that out. I think we've tried to hit all of the right tones, and our business is performing well.
To summarize, thank you for that, the prior pieces is if you were in the same position today in terms of liquidity and a $7.40 price target a year from now, you would be repurchasing shares. A year and a half from now, excuse me, you would be repurchasing shares if people can hang in there.
Given our view of the stock right now, if you could change the calendar, it would certainly change our outlook to buying shares. I, for one, and everyone around me in the management would be for buying back our shares at these levels, for sure.
Great. Thanks a lot, guys.
We have no further questions. I'd like to turn the call over to Barry Gosin, CEO of Newmark Group, for closing remarks.
Thank you all for joining us today. We look forward to speaking to you again next quarter.
This concludes today's conference call. You may now disconnect.