Throughout this document Newmark Group, Inc. is referred to as “Newmark”“Newmark,” and, together with its subsidiaries, as the “Company,” “we,” “us,” or “our.”
We are helping to shape future leaders from a wide variety of backgrounds. Initiatives include membership and active participationWe actively participate in various initiatives, including the following:
We provide leadership training to managers on topics, including management effectiveness, writing and delivering effective performance evaluations, unconscious bias and various other topics. This training is supplemented by a comprehensive library of on-line training courses that managers and employees may access. Finally, our individual business lines offer ongoing learning and development opportunities tied to deepening the subject matter expertise of their professionals.
We also expect Cantor to manage its ownership of us so that it will not be deemed to be an investment company under the Investment Company Act, including by maintaining its voting power in us above a majority absent an applicable exemption from the Investment Company Act. This may result in conflicts with us, including those relating to acquisitions or offerings by us involving issuances of shares of our Class A common stock, or securities convertible or exchangeable into shares of Class A common stock, that would dilute Cantor’s voting power in us.
In addition, Cantor has from time to time in the past and may in the future consider possible strategic realignments of its own businesses and/or of the relationships that exist between and among Cantor and its other affiliates and us. Any future material related-party transaction or arrangement between Cantor and its other affiliates and us is subject to the prior approval by our audit committee,Audit Committee, but generally does not require the separate approval of our stockholders, and if such stockholder approval is required, Cantor may retain sufficient voting power to provide any such requisite approval without the affirmative consent of our other stockholders. Further, our regulators may require the consolidation, for regulatory purposes, of Cantor and/or its other affiliates and us or require other restructuring of the group. There is no assurance that such consolidation or restructuring would not result in a material expense or disruption to our business.
Newmark still receives dividends on the common shares of Nasdaq it owns, including those shares used as collateral.
The Repurchase Agreement and related initial repurchase transaction are on market terms and rates and were approved by Newmark’s Audit Committee.
On June 28, 2021, theour Audit Committee authorized Newmarkus to hire a son of itsour Chairman as a full-time employee of itsour Knotel business with an annual base salary of $125,000 and an annual discretionary bonus of up to 30%. The arrangement includes a potential profit participation consistent with other entrepreneurial arrangements in the event of certain liquidity events related to businesses developed by him.
Referral Fees to Cantor
In September 2021, the Audit Committee approved the payment of a referral fee from Newmark to Cantor Realty Capital Advisors, L.P. (“CRCA”), a subsidiary of Cantor, in relation to CRCA’s referral to Newmark of a sale and lease back transaction for a portfolio of medical office properties. Newmark paid CRCA approximately $0.3 million for the referral of the portfolio sale. Newmark management negotiated the referral arrangement with CRCA in the ordinary course of business and the arrangement is reasonable and consistent with referral arrangements of its type between unrelated parties.
Additionally, in September 2021, the Audit Committee authorized Newmark and its subsidiaries to pay referral fees to Cantor and its subsidiaries (other than Newmark and its subsidiaries) in respect of referred business, pursuant to ordinary course arrangements in circumstances where Newmark would customarily pay referral fees to unrelated third parties and where Newmark is paying a referral fee to Cantor in an amount that is no more than the applicable percentage rate set forth in Newmark’s intra-company referral policies, as then in effect, with such fees to be at referral rates no less favorable to Newmark than would be paid to unrelated third parties.
Key Business Drivers
Key drivers for U.S. commercial real estate services companies include the overall health of the U.S. economy, institutional ownership of commercial real estate as an investible asset class, and the ability to attract and retain talent. In our capital markets business, the availability of credit and certainty of valuations to investors are key drivers. In our multifamily business, demographic and economic factors are driving increased demand for new apartments, with an estimated 4.6 million needed by 2030, according to a 2017 study commissioned by the National Multifamily Housing Council and National Apartment Association. In 2021, the National Association of Realtors said the U.S. has not constructed enough housing to keep up with population growth for many years, and that the country has a deficit of 1.1 million units in buildings with two to four units and of 2.4 million units in buildings of at least five units according to "U.S. Housing Market Needs 5.5 Million More Units, Says New Report" from the Wall Street Journal. This strong demand for new housing should continue to drive growth across our investment sales, GSE/FHA multifamily lending, mortgage brokerage, and servicing business over time.
Our GSE origination business is impacted by the lending caps imposed by the Federal Housing Finance Agency (the “FHFA”). On November 17, 2020, the FHFA announced that the 2021 multifamily loan purchase caps for Fannie Mae and Freddie Mac were $70 billion for each GSE. The cap structure allows the GSEs to offer a combined total of no more than $140 billion in lending support to the multifamily market in 2021, as compared to the $159 billion delivered in 2020. On October 13,
2021, the FHFA announced that the 2022 multifamily loan purchase caps will be $78 billion for each GSE, for a combined total of $156 billion. The 2022 caps are based on FHFA's projections of the overall growth of the multifamily originations market. The 2021 and 2022 caps require at least 50% of the Enterprises' multifamily business to be mission-driven, affordable housing. FHFA will also require at least 25% of the GSE's 2022 multifamily business be affordable to residents at or below 60% of area median income (AMI), up from 20% in 2021. Newmark's multi-family debt origination and mortgage brokerage volumes increased 129.8% to $30.1 billion for the year ended December 31, 2021.
Economic Outlook in the United States
COVID-19 adversely affected the economic outlook beginning in March of 2020. Following a 3.5% contraction in 2020, the U.S. economy expanded by 5.7% in 2021, in contrast to a decrease of 3.4 percent in 2020, according to a preliminary estimate from the U.S. Department of Commerce. The consensus is for U.S. gross domestic product to expand by 3.7% in 2022 and 2.5% in 2023, according to a recent Bloomberg survey of economists.
According to a preliminary report from the Bureau of Labor Statistics, the monthly average of nonfarm payroll employment increased by approximately 550,000 on a net basis during 2021, which was the highest such annual figure since record keeping began. The unemployment rate declined to 3.9% in December 2021 from a high of 14.8 % in April of 2020, but still 40 basis points higher than in February 2020.
The ten-year Treasury yield increased by approximately 60 basis points to 1.51% as of December 31, 2021 versus the year-earlier date. Ten-year Treasury yields have remained well below their 50-year average of approximately 6.07%. On January 25 and 26, 2022 , the Federal Open Market Committee (“FOMC”) decided to maintain the target range for the federal funds rate at 0.0% to 0.25% through the end of 2022. As the U.S. has recorded its fastest pace of price increases since the early 1980s, the committee indicated that it was time to raise interest rates, but also that any decisions would depend on a meeting-by-meeting analysis of inflation and other data. Fed officials said that the strength of the economy and the high current pace of inflation would warrant raising rates quicker than the once-per-quarter pace seen during the tightening cycle that began in 2015.The FOMC also stated that it plans to reduce the nearly $9 trillion portfolio of securities it holds, including agency mortgage-backed securities and U.S. Treasuries. These securities were purchased as part of the Fed's quantitative easing program designed hold down long-term interest rates. Economists therefore generally expect U.S. interest rates to increase versus where they were in 2020 and 2021, but to remain relatively low by historical standards for the foreseeable future. For example, as February 16, 2021, the Bloomberg consensus was for the ten-year Treasury yield to be 2.21% and 2.47% by the end of 2022 and 2023, respectively.
Market Statistics
According to preliminary estimates from CoStar, value-weighted prices for U.S. commercial real estate were up by 16.1% in the year ended December 31, 2021 and were now 25.8% higher than in February 2020, before the onset of the global pandemic. These price increases were across all major property types, particularly multifamily and industrial. Real Capital Analytics (“RCA”) currently estimates that 2021 U.S. investment sales grew by over 88% year-on-year and by 35% versus 2019. In comparison, our annual investment sales volumes were up by 83% year-on-year and by 74% versus 2019.
According to preliminary estimates made on February 14, 2022 by the Mortgage Bankers Association (“MBA”) , originations of commercial/multifamily loans of all types increased by 67% in 2021 and by 17% versus 2019. In comparison, Newmark generated its largest-ever annual volumes from mortgage brokerage and originations (together, "total debt"), which were up by 113% year-on-year and by 64% versus 2019.
Newmark’s loan origination volumes are driven more by the GSE multifamily financing volumes than the activity level of the overall commercial mortgage market. Overall industry GSE multifamily origination volumes decreased by 17% in 2021 compared with 2020, per the MBA. In comparison, Newmark's origination volumes declined by 20.2%. However, its total debt volumes in multifamily were up by 129.8%, as the Company continued its market leading growth while helping clients navigate reduced GSE lending caps. Certain GSE multifamily volume statistics for the industry are based on when loans are sold and/or securitized, and typically lag those reported by Newmark and its competitors by 30 to 45 days.
Regulatory Environment
See “Business—Regulation” in Part I, Item 1 of this Annual Report on Form 10-K for information related to our regulatory environment.
Liquidity
See “—Financial Position, Liquidity and Capital Resources” herein for information related to our liquidity and capital resources.
Financial Overview
Revenues
We derive revenues from the following general four sources:
•Leasing and Other Commissions. We offer a diverse range of commercial real estate brokerage and advisory services, including tenant and agency representation, which includes comprehensive lease negotiations, strategic planning, site selection, lease auditing, and other financial and market analysis.
•Capital Markets. Our real estate capital markets business specializes in the arrangement of acquisitions and dispositions of commercial properties, as well as providing other financial services, including the arrangement of debt and equity financing, and loan sale advisory.
•Gains from Mortgage Banking Activities/Originations, Net. Gains from mortgage banking activities/originations are derived from the origination of loans with borrowers and the sale of those loans to investors.
•Management Services, Servicing Fees and Other. We provide commercial services to tenants and landlords. In this business, we provide property and facilities management services along with project management, valuation and advisory services and other consulting services, as well as technology, to customers who may also utilize our commercial real estate brokerage services, and flexible workspace solutions. Servicing fees are derived from the servicing of loans originated by us as well as loans originated by third parties.
Fees are generally earned when a lease is signed. In many cases, landlords are responsible for paying the fees. In capital markets, fees are earned and recognized when the sale of a property closes, and title passes from seller to buyer for investment sales and when debt or equity is funded to a vehicle for debt and equity transactions. Gains from mortgage banking activities/originations, net are recognized when a derivative asset is recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The derivative is recorded at fair value and includes loan origination fees, sales premiums and the estimated fair value of the expected net servicing cash flows. Gains from mortgage banking activities/originations, net are recognized net of related fees and commissions to affiliates or third-party brokers. For loans we broker, revenues are recognized when the loan is closed. Servicing fees are recognized on an accrual basis over the lives of the related mortgage loans. We typically receive monthly management fees based upon a percentage of monthly rental income generated from the property under management, or in some cases, the greater of such percentage or a minimum agreed upon fee. We are often reimbursed for our administrative and payroll costs, as well as certain out-of-pocket expenses, directly attributable to properties under management. We follow accounting principles generally accepted in the U.S., or “U.S. GAAP”, which provides guidance when accounting for reimbursements from clients and when accounting for certain contingent events for Leasing and Capital Markets transactions. See Note 3 — “Summary of Significant Accounting Policies” to our Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a more detailed discussion.
Expenses
Compensation and Employee Benefits
The majority of our operating costs consist of cash and non-cash compensation expenses, which include base salaries, producer commissions based on production, forgivable loans for term contracts, discretionary and other bonuses and all related employee benefits and taxes. Our employees consist of commissioned producers, executives and other administrative support. Our producers are largely compensated based on the revenue they generate for the firm, keeping these costs variable in nature.
As part of our compensation plans, certain employees have been granted limited partnership units in Newmark Holdings and BGC Holdings, which generally receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders. Certain Newmark employees also hold non-distribution earnings units (e.g. NPSUs and NREUs, collectively “N Units”) that do not participate in quarterly partnership distributions and are not allocated any items of profit or loss. These N Units vest into distribution earnings units over a 4-year period. As prescribed in U.S. GAAP guidance, the quarterly allocations of net income on such limited partnership units are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our accompanying Consolidated statements of operations. During 2019, Newmark simplified its compensation structure when hiring new personnel by issuing restricted stock units in lieu of limited partnership units. Newmark continues to monitor its compensation policy and make changes where necessary to attract industry leading producers to Newmark.
Newmark granted conversion rights on outstanding limited partnership units in Newmark Holdings and BGC Holdings to Newmark employees to convert the limited partnership units to a capital balance within Newmark Holdings or BGC Holdings. Generally, such units are not considered share-equivalent limited partnership units and are not in the fully diluted share count.
Certain of these limited partnership units entitle the holders to receive post-termination payments. These limited partnership units are accounted for as post-termination liability awards under U.S. GAAP guidance, which requires that we
record an expense for such awards based on the change in value at each reporting period and include the expense in our accompanying consolidated statements of operations as part of “Equity-based compensation and allocations of net income to limited partnership units and FPUs”. The liability for limited partnership units with a post-termination payout amount is included in “Other long-term liabilities” on our accompanying consolidated balance sheets.
Certain limited partnership units are granted exchangeability into Class A common stock or may be redeemed in connection with the grant of shares of Class A common stock. At the time exchangeability is granted, or the shares are issued, Newmark recognizes an expense based on the fair value of the award on that date, which is included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our accompanying consolidated statements of operations.
Our employees have been awarded preferred partnership units (“Preferred Units”) in Newmark Holdings and BGC Holdings. Each quarter, the net profits of Newmark Holdings and BGC Holdings are allocated to such units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation (the “Preferred Distribution”), which is deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership units in Newmark Holdings and BGC Holdings, respectively. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into our Class A common stock and are only entitled to the Preferred Distribution, and accordingly they are not included in our fully diluted share count. The quarterly allocations of net income on Preferred Units are also reflected in compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our accompanying consolidated statements of operations. After deduction of the Preferred Distribution, the remaining partnership units generally receive quarterly allocation of net income based on their weighted-average pro rata share of economic ownership of the operating subsidiaries. In addition, Preferred Units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder upon such exchange. This is an acceptable alternative to the common practice among public companies of issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes.
We have entered into various agreements with certain of our employees and partners whereby these individuals receive loans, which may be either wholly or in part repaid from the distribution earnings that the individual receives on their limited partnership interests in BGC Holdings and Newmark Holdings. The forgivable portion of these loans is recognized as compensation expense over the life of the loan.
From time to time, we may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the timeframes outlined in the underlying agreements. In addition, we also enter into deferred compensation agreements with employees providing services to us. The costs associated with such plans are generally amortized over the period in which they vest. (See Note 30 — “Compensation” and Note 31 — “Commitment and Contingencies”, to our accompanying Consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K).
Other Operating Expenses
We have various other operating expenses. We incur leasing, equipment and maintenance expenses. We also incur selling and promotion expenses, which include entertainment, marketing and travel-related expenses. We incur communication expenses, professional and consulting fees for legal, audit and other special projects, and interest expense related to short-term operational funding needs, and notes payable and collateralized borrowings.
We pay fees to Cantor for performing certain administrative and other support, including charges for occupancy of office space, utilization of fixed assets and accounting, operations, human resources, legal services and technology infrastructure support. Management believes that these charges are a reasonable reflection of the utilization of services rendered. However, the expenses for these services are not necessarily indicative of the expenses that would have been incurred if we had not obtained these services from Cantor. In addition, these charges may not reflect the costs of services we may receive from Cantor in the future.
Other Income, Net
Other income, net is comprised of the gains associated with the Earn-out shares related to the Nasdaq Transaction and the movements related to the impact of any realized and unrealized cash and non-cash mark-to-market gains or losses related to the Nasdaq common shares held, and the Nasdaq Forwards. Additionally, other income includes gains (losses) on cost and equity method investments which represent our pro rata share of the net gains (losses) on investments over which we have significant influence but which we do not control, and the mark-to-market gains or losses on the non-marketable investments.
Provision for Income Taxes
We incur income tax expenses based on the location, legal structure, and jurisdictional taxing authorities of each of our subsidiaries. Certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (which we refer to as “UBT”) in New York City. U.S. federal and state income tax liability or benefit related to the partnership income or loss, with the exception of UBT, rests with the partners (see Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings”, to our accompanying consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K) rather than the partnership entity. Our accompanying Consolidated financial statements include U.S. federal, state and local income taxes on Newmark’s allocable share of the U.S. results of operations. Outside of the U.S., we operate principally through subsidiary corporations subject to local income taxes.
Impact of Adopting Lease Guidance
On January 1, 2019, Newmark adopted Accounting Standards Codification 842, Leases (“ASC 842”), which provides guidance on the accounting and disclosure for accounting for leases. Newmark has elected the optional transition method, and pursuant to this transition method, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. Newmark has elected the package of “practical expedients,” which permits Newmark not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Newmark has elected the short-term lease recognition exemption for all leases that qualify, and has elected the practical expedient to not separate lease and non-lease components for all leases other than real estate leases.
The adoption of ASC 842 on January 1, 2019 resulted in the recognition of Right-of-use (“ROU”) assets of approximately $178.8 million and Right-of-use liabilities of approximately $226.7 million, with no effect on beginning retained earnings.
The adoption of the new guidance did not have a significant impact on our accompanying consolidated statements of operations, consolidated statements of changes in equity, and consolidated statements of cash flows.
See Note 3 — “Summary of Significant Accounting Policies” and Note 18 — “Leases” to our accompanying consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K , for further information.
Impact of Adopting Credit Loss Guidance
On January 1, 2020, Newmark adopted Accounting Standards Codification 326, Financial Instrument-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASC 326”), which provides guidance on the accounting and disclosure for accounting for expected credit losses on financial instruments.
The adoption of ASC 326 on January 1, 2020, on a pre-tax basis, resulted in a decrease in assets of $8.0 million, an increase in liabilities of $17.9 million and a decrease in beginning retained earnings of $25.9 million.
See Note 3 — “Summary of Significant Accounting Policies” and Note 23 — ���Financial Guarantee Liability" to our accompanying consolidated financial statements included in Part II, Item 8 of this Annual Report on Form 10-K , for further information.
Results of Operations
The following table sets forth our consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated (in thousands):
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| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
| | | | | | | | | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues |
Revenues: | | | | | | | | | | | | | | | | | | | | |
Leasing and other commissions | | | | | | | | | | $ | 826,942 | | | 28.5 | % | | $ | 513,842 | | | 27.0 | % | | $ | 854,780 | | | 38.5 | % |
Capital markets | | | | | | | | | | 938,305 | | | 32.3 | | | 454,106 | | | 23.8 | | | 541,255 | | | 24.4 | |
Gains from mortgage banking activities/originations, net | | | | | | | | | | 225,481 | | | 7.8 | | | 310,914 | | | 16.3 | | | 198,085 | | | 8.9 | |
Management services, servicing fees and other | | | | | | | | | | 915,715 | | | 31.5 | | | 626,136 | | | 32.9 | | | 624,012 | | | 28.1 | |
Total revenues | | | | | | | | | | 2,906,443 | | | 100.0 | | | 1,904,998 | | | 100.0 | | | 2,218,132 | | | 100.0 | |
Expenses: | | | | | | | | | | | | | | | | | | | | |
Compensation and employee benefits | | | | | | | | | | 1,828,887 | | | 62.9 | | | 1,147,360 | | | 60.2 | | | 1,275,988 | | | 57.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity-based compensation and allocations of net income to limited partnership units and FPUs (1) | | | | | | | | | | 356,345 | | | 12.3 | | | 130,759 | | | 6.9 | | | 258,836 | | | 11.7 | |
Total compensation and employee benefits | | | | | | | | | | 2,185,232 | | | 75.2 | | | 1,278,119 | | | 67.1 | | | 1,534,824 | | | 69.2 | |
Operating, administrative and other | | | | | | | | | | 553,623 | | | 19.0 | | | 294,405 | | | 15.5 | | | 361,857 | | | 16.3 | |
Fees to related parties | | | | | | | | | | 23,789 | | | 0.8 | | | 22,573 | | | 1.2 | | | 25,025 | | | 1.1 | |
Depreciation and amortization | | | | | | | | | | 121,729 | | | 4.2 | | | 141,193 | | | 7.4 | | | 131,144 | | | 5.9 | |
Total operating expenses | | | | | | | | | | 2,884,373 | | | 99.2 | | | 1,736,290 | | | 91.1 | | | 2,052,850 | | | 92.5 | |
Other income/(loss), net | | | | | | | | | | 1,232,495 | | | 42.4 | | | 15,290 | | | 0.8 | | | 80,954 | | | 3.6 | |
Income from operations | | | | | | | | | | 1,254,565 | | | 43.2 | | | 183,998 | | | 9.7 | | | 246,236 | | | 11.1 | |
Interest (expense) income, net | | | | | | | | | | (33,473) | | | (1.2) | | | (37,728) | | | (2.0) | | | (32,088) | | | (1.4) | |
Income before income taxes and noncontrolling interests | | | | | | | | | | 1,221,092 | | | 42.0 | | | 146,270 | | | 7.7 | | | 214,148 | | | 9.7 | |
Provision for income taxes | | | | | | | | | | 242,958 | | | 8.4 | | | 36,993 | | | 1.9 | | | 52,436 | | | 2.4 | |
Consolidated net income | | | | | | | | | | 978,134 | | | 33.7 | | | 109,277 | | | 5.7 | | | 161,712 | | | 7.3 | |
Less: Net income attributable to noncontrolling interests | | | | | | | | | | 227,406 | | | 7.8 | | | 29,217 | | | 1.5 | | | 44,407 | | | 2.0 | |
Net income available to common stockholders | | | | | | | | | | $ | 750,728 | | | 25.8 | % | | $ | 80,060 | | | 4.2 | % | | $ | 117,305 | | | 5.3 | % |
(1)The components of Equity-based compensation and allocations of net income to limited partnership units and FPUs are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
| | | | | | | | | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues |
Issuance of common stock and exchangeability expenses | | | | | | | | | | $ | 312,718 | | | 10.8 | % | | $ | 69,041 | | | 3.6 | % | | $ | 181,714 | | | 8.2 | % |
Allocations of net income to limited partnership units and FPUs | | | | | | | | | | 55,183 | | | 1.9 | | | 30,461 | | | 1.6 | | | 50,410 | | | 2.3 | |
Limited partnership units amortization | | | | | | | | | | (28,351) | | | (1.0) | | | 18,692 | | | 1.0 | | | 21,508 | | | 1.0 | |
RSU amortization | | | | | | | | | | 16,795 | | | 0.6 | | | 12,565 | | | 0.7 | | | 5,204 | | | 0.2 | |
Equity-based compensation and allocations of net income to limited partnership units and FPUs | | | | | | | | | | $ | 356,345 | | | 12.3 | % | | $ | 130,759 | | | 6.9 | % | | $ | 258,836 | | | 11.7 | % |
Year ended December 31, 2021 compared to the year ended December 31, 2020
Revenues
Leasing and Other Commissions
Leasing and other commission revenues increased by $313.1 million, or 60.9%, to $826.9 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020, due to greatly increased demand across all major property types, in particular, strength in office led by life science, and industrial.
Capital Markets
Capital markets revenue increased by $484.2 million, or 106.6%, to $938.3 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. Newmark's overall notional volumes from investment sales, mortgage brokerage, and multifamily originations increased by 92.8% to $138.4 billion.
Gains from Mortgage Banking Activities/Originations, Net
Gains from mortgage banking activities, net decreased by $85.4 million, or 27.5%, to $225.5 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease was primarily due to a $58.4 million decline in non-cash OMSR revenues. The Company helped its clients navigate lower GSE multifamily loan activity by placing a record amount of their multifamily debt with non-agency lenders.
Management Services, Servicing Fees and Other
Management services, servicing fees and other revenue increased $289.6 million, or 46.2%, to $915.7 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The growth was led by strong improvements from Global Corporate Services, Valuation & Advisory, and Servicing Fees, as well as the addition of Knotel, as the Company continued to invest in these recurring and predictable businesses. Valuation and Advisory was up 46.5% to $157.0 million, by productivity gains from our Ngage technology platform.
Expenses
Compensation and Employee Benefits
Compensation and employee benefits expense increased by $681.5 million, or 59.4%, to $1,828.9 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. The increase for the year primarily resulted from variable compensation related to the increase in commission-based revenue and $203.8 million of expense related to the 2021 Equity Event.
Equity-based compensation and allocations of net income to limited partnership units and FPUs
Equity-based compensation and allocations of net income to limited partnership units and FPUs increased by $225.6 million, or 172.5%, to $356.3 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 largely as a result of the 2021 Equity Event.
Operating, Administrative and Other
Operating, administrative and other expenses increased $259.2 million, or 88.0%, to $553.6 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020, primarily due to increased pass-through expenses tied to non-fee revenues, higher expenses related to the resumption of normalized business activity, and the impact of acquisitions.
Fees to Related Parties
Fees to related parties increased by $1.2 million, or 5.4%, to $23.8 million, for the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2021 decreased by $19.5 million, or 13.8%, to $121.7 million as compared to the year ended December 31, 2020 due to a decrease in MSR valuation allowance.
Because Newmark recognizes OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold, it also amortizes MSRs in proportion to the net servicing revenue expected to be earned. Subsequent to the initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value. The MSR valuation allowance decreased by $21.1 million for the year ended December 31, 2021 as compared to a $15.2 million increase for the year ended December 31, 2020. For the year ended December 31, 2021 and 2020 our expenses included $110.9 million and $96.0 million, respectively, of MSR scheduled amortization.
Other Income (loss), Net
Other income (loss), net in the year ended December 31, 2021 was primarily related to $1,203.1 million of gains from the acceleration of the Nasdaq Earn-out and realized and unrealized gains on marketable securities. Additionally, the Company recorded $27.8 million of non-cash gain related to acquisitions during the year ended December 31, 2021, partially offset by a realized loss on the Nasdaq Forward of $12.4 million.
Other income (loss), net of $15.3 million in the year ended December 31, 2020 was primarily related to $121.9 million of income related to the Nasdaq Earn-out, partially offset by losses of $84.2 million relating to non-marketable investments carried under the measurement alternative, $11.6 million of equity losses from Real Estate LP and $13.7 million of mark-to market losses on the Nasdaq Forwards.
Interest (Expense) Income, Net
Interest expense, net decreased by $4.3 million, or 11.3%, to $33.5 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020 due to lower outstanding debt balances.
Provision for Income Taxes
Provision for income taxes increased by $206.0 million, to $243.0 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020. This increase was primarily driven by higher pre-tax earnings. In general, our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests increased by $198.2 million, to $227.4 million for the year ended December 31, 2021 as compared to the year ended December 31, 2020 due to higher earnings.
Year ended December 31, 2020 compared to the year ended December 31, 2019
Revenues
Leasing and Other Commissions
Leasing and other commission revenues decreased by $340.9 million, or 39.9% to $513.8 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Leasing and other commissions volumes fell significantly beginning in March of 2020 due to lower industry-wide leasing resulting from the impact of the COVID-19 pandemic, and in particular, our presence in large, urban markets, such as New York city and the San Francisco Bay Area.
Capital Markets
Capital markets revenue decreased by $87.1 million or 16.1% to $454.1 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Capital market volumes fell significantly beginning in March of 2020 due to lower industry-wide leasing resulting from the impact of the COVID-19 pandemic. However, a low interest rate environment coupled with significant capital available to invest in real estate has led to sequential improvement in capital markets activity since the second quarter of 2020, with investments concentrated in certain asset types, such as multi-family, life sciences and industrial. Our capital markets business was up 15.3% in the fourth quarter of 2020 as compared to the fourth quarter of 2019.
Gains from Mortgage Banking Activities/Originations, Net
Gains from mortgage banking activities, net increased by $112.8 million or 57.0%, to $310.9 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The increase was primarily due to strong GSE originations and a more balanced product mix.
A portion of our gains from mortgage banking activities, net, relate to non-cash gains attributable to OMSRs. We recognize OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold. For the years ended December 31, 2020 and 2019, we recognized $194.8 million and $109.2 million of non-cash gains, respectively, related to OMSRs.
Management Services, Servicing Fees and Other
Management services, servicing fees and other revenue increased $2.1 million, or 0.3%, to $626.1 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The increase was primarily due to an increase in non-fee pass-through revenue and valuation and appraisal, offset by lower interest income on escrow balances, lower interest on loans held for sale, and lower yield maintenance fees.
Expenses
Compensation and Employee Benefits
Compensation and employee benefits expense decreased by $128.6 million, or 10.1%, to $1,147.4 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The decrease in the year ended December 31, 2020 was directly related to lower commission based revenues and our cost savings initiatives, partially offset by non-fee expenses and amortization of hiring costs.
Equity-based compensation and allocations of net income to limited partnership units and FPUs
Equity-based compensation and allocations of net income to limited partnership units and FPUs decreased by $128.1 million, or 49.5%, to $130.8 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 as a result of lower stock compensation charges of $112.7 million and lower income allocation charges of $20.0 million due to lower earnings.
Operating, Administrative and Other
Operating, administrative and other expenses decreased by $67.5 million, or 18.6%, to $294.4 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to our cost savings initiatives.
Fees to Related Parties
Fees to related parties decreased by $2.5 million, or 9.8%, to $22.6 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 2020 increased by $10.0 million, or 7.7%, to $141.2 million as compared to the year ended December 31, 2019. This increase was due to a $9.7 million increase in mortgage servicing rights amortization.
Because Newmark recognizes OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold, it also amortizes MSRs in proportion to the net servicing revenue expected to be earned. Subsequent to the
initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value. For the years ended December 31, 2020 and 2019, our revenue included $194.8 million and $109.2 million, respectively, our expenses included $111.3 million and $101.5 million of MSR amortization, respectively. The MSR amortization increased due to higher scheduled amortization as a result of growth in the book value of the MSRs.
Other Income (loss), Net
Other income (loss), net of $15.3 million in the year ended December 31, 2020 was primarily related to $121.9 million of income related to the 2020 annual Nasdaq Earn-out, partially offset by $84.2 million of mark-to-market losses on non-marketable investments, a mark-to-market loss related to the Nasdaq Forwards of $13.7 million and $11.6 million of equity losses from Real Estate LP.
Other income, net of $81.0 million in the year ended December 31, 2019 was primarily related to the recognition of income from the receipt of Nasdaq shares of $113.9 million, including appreciation of Nasdaq shares held by Newmark, and unrealized gains of $12.2 million relating to non-marketable investments carried under the measurement alternative, partially offset by mark-to-market losses related to the Nasdaq Forwards of $51.1 million.
Interest (Expense) Income, Net
Interest expense, net increased by $5.6 million, or 17.6%, to $37.7 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019 due to borrowings on our Credit Facility.
Provision for Income Taxes
Provision for income taxes decreased by $15.4 million, or 29.5%, to $37.0 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019. This decrease was primarily driven by lower pretax earnings. In general, our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests decreased by $15.2 million, or 34.2%, to $29.2 million for the year ended December 31, 2020.
Financial Position, Liquidity and Capital Resources
Overview
The primary source of liquidity for our business is the cash flow provided by our operations and the Nasdaq shares.
Our future capital requirements will depend on many factors, including our growth, the expansion of our sales and marketing activities, our expansion into other markets and our results of operations. To the extent that existing cash, cash from operations and credit facilities, and Nasdaq shares are insufficient to fund our future activities, we may need to raise additional funds through public equity or debt financing. As of December 31, 2021, our long-term debt consists of our 6.125% Senior Notes with a carrying amount of $545.2 million.
Financial Position
Total assets were $5.2 billion at December 31, 2021 and $4.0 billion at December 31, 2020.
Total liabilities were $3.5 billion at December 31, 2021 and $3.0 billion at December 31, 2020.
Liquidity
At December 31, 2021, we had total liquidity of $575.9 million, which consisted of $191.3 million of Cash and Cash Equivalents, and 2.5 million shares of Nasdaq common stock valued at $524.6 million, net of $140.0 million of borrowings against the Nasdaq shares. We have a $465.0 million undrawn revolving credit facility and no net debt as of December 31, 2021. We expect to generate cash flows from operations to fund our business and to meet our short-term liquidity requirements, which we define as the next twelve months. As of February 25, 2022, we held approximately 1.1 million shares of Nasdaq common stock valued at $187.2 million.
Long-term debt
Long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
6.125% Senior Notes | $ | 545,239 | | | $ | 542,772 | |
Credit Facility | — | | | 137,613 | |
Total | $ | 545,239 | | | $ | 680,385 | |
6.125% Senior Notes
On November 2, 2018, Newmark announced the pricing of an offering of $550.0 million aggregate principal amount of 6.125% Senior Notes due 2023, which closed on November 6, 2018. The 6.125% Senior Notes were offered and sold in a private offering exempt from the registration requirements under the Securities Act. The 6.125% Senior Notes are general senior unsecured obligations of Newmark. These 6.125% Senior Notes were priced at 98.94% to yield 6.375%. The 6.125% Senior Notes bear an interest rate of 6.125% per annum, payable on each May 15 and November 15, beginning on May 15, 2019 and will mature on November 15, 2023. The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act.
Credit Facility
On November 28, 2018, Newmark entered into the Credit Agreement by and among Newmark, the several financial institutions from time to time party thereto, as Lenders, and Bank of America N.A., as administrative agent. The Credit Agreement was amended on February 26, 2020 to increase the size of the facility and extend the maturity date to February 26, 2023. The Amended Credit Agreement provided for a $425.0 million three-year unsecured senior revolving credit facility. The Credit Agreement was again amended on March 16, 2020 to increase the size of the facility. The Amended Credit Agreement provides for a $465.0 million three-year unsecured senior revolving credit facility. As of December 31, 2021, there were no outstanding borrowings under this credit agreement. Borrowings under the Amended Credit Facility will bear an annual interest equal to, at Newmark’s option, either (a) London Interbank Offered Rate (“LIBOR”) for specified periods, or upon the consent of all Lenders, such other period that is 12 months or less, plus an applicable margin, or (b) a base rate equal to the greatest of (i) the federal funds rate plus 0.5%, (ii) the prime rate as established by the administrative agent, and (iii) one-month LIBOR plus 1.0%. The applicable margin is 1.75% with respect to LIBOR borrowings and 0.75% with respect to base rate borrowings, both of which can be up to 0.50% higher depending upon Newmark’s credit rating. The Amended Credit Facility also provides for an unused facility fee. In July of 2021, Newmark paid down the balance of the Credit Facility in the amount of $140.0 million.
Cantor Credit Agreement
On November 30, 2018, Newmark entered into an unsecured credit agreement with Cantor. The Cantor Credit Agreement provides for each party to issue loans to the other party in the lender’s discretion. Pursuant to the Cantor Credit Agreement, the parties and their respective subsidiaries (with respect to CFLP, other than BGC and its subsidiaries) may borrow up to an aggregate principal amount of $250.0 million from each other from time to time at an interest rate which is the higher of CFLP’s or Newmark’s short-term borrowing rate then in effect, plus 1.0%. As of December 31, 2021, and December 31, 2020 there were no borrowings outstanding under the Cantor Credit Agreement.
Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises
As of December 31, 2021, Newmark had $1.5 billion of committed loan funding available through three commercial banks and an uncommitted $700.0 million Fannie Mae loan repurchase facility. Consistent with industry practice, these warehouse facilities are short-term, requiring annual renewal. These warehouse facilities are collateralized by an assignment of the underlying mortgage loans originated under its various lending programs and third-party purchase commitments and are recourse only to our wholly-owned subsidiary, Berkeley Point Capital, LLC. As of December 31, 2021 and December 31, 2020, respectively, we had $1.1 billion and $1.1 billion outstanding under “Warehouse facilities collateralized by U.S. Government Sponsored Enterprises” on our accompanying consolidated balance sheets.
Cash Flows
Cash flows from operations excluding activity from loan originations and sales, net were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | |
| | | | | 2021 | | 2020 | | 2019 | | |
Net cash provided by (used in) operating activities | | | | | $ | (48,709) | | | $ | (777,694) | | | $ | 986,761 | | | |
Add back: | | | | | | | | | | | |
Loan originations - loans held for sale | | | | | 9,142,148 | | | 12,374,231 | | | 8,783,225 | | | |
Loan sales - loans held for sale | | | | | (9,177,733) | | | (11,527,010) | | | (9,563,973) | | | |
Unrealized gains on loans held for sale | | | | | 21,259 | | | 24,295 | | | 5,174 | | | |
Net cash provided by (used in) operating activities excluding activity from loan originations and sales (1)(2)(3) | | | | | $ | (63,035) | | | $ | 93,822 | | | $ | 211,187 | | | |
(1) Includes payments for corporate taxes in the amount of $99.4 million, $80.3 million, and $95.1 million for the years ended December 31, 2021, 2020 and 2019 respectively.
(2) Includes payments for new hires and producers of $17.4 million, $72.7 million, and $157.0 million for the years ended December 31, 2021, 2020 and 2019 , respectively.
(3) Reflects $484.4 million of cash used with respect to the 2021 Equity Event. Of this amount, $203.4 million related to the 16.3 million reduction in fully diluted shares, and $280.9 million related to amounts paid on behalf of, or to partners for withholding taxes related to unit exchanges and/or redemptions, cash paid for redemption of HDUs, and other items. Not including these uses of cash, net cash provided by operating activities excluding loan originations and sales would have been $421.4 million for the year ended December 31, 2021.
Cash Flows for the Year Ended December 31, 2021
For the year ended December 31, 2021, we used $48.7 million of cash from operations. However, excluding activity from loan originations and sales cash used from operating activities for the year ended December 31, 2021 was $63.0 million. The $63.0 million reflects $484.4 million of cash used with respect to the 2021 Equity Event to reduce our fully diluted share count and for amounts paid on behalf of or to partners for withholding taxes related to unit exchanges and/or redemptions, cash paid for redemption of HDUs, and other items. But for these uses of cash, net cash provided by operating activities for the year ended December 31, 2021 would have been $421.4 million. Cash provided by investing activities was $453.1 million, primarily related to $551.1 million of proceeds from the sale of marketable securities, partially offset by $69.8 million of payments for acquisitions, net of cash acquired. Cash used in financing activities of $396.3 million primarily related to $290.5 million of treasury stock repurchases.
Cash Flows for the Year Ended December 31, 2020
For the year ended December 31, 2020, we used $777.7 million of cash for operations. However, excluding activity from loan originations and sales, net cash used by operating activities for the year ended December 31, 2020 was $93.8 million. We had consolidated net income of $109.3 million, $146.6 million of positive adjustments to reconcile net income to net cash used by operating activities (excluding activity from loan originations and sales) and $162.0 million of negative changes in operating assets and liabilities. The negative change in operating assets and liabilities included $127.9 million of increases in loans, forgivable loans and other receivables from employees, a $123.7 million decrease in receivables, net, a $82.4 million decrease in accounts payable, accrued expenses and other liabilities, and a $75.4 million decrease in accrued compensation. Cash used in investing activities was $3.6 million, primarily related to $34.7 million of proceeds from the sale of marketable securities, partially offset by $19.6 million in purchases of fixed assets, $12.8 million for the purchase of a debt security, and $5.9 million of payments for acquisitions, net of cash acquired. Cash provided by financing activities of $817.8 million primarily related to $851.6 million of net borrowings on the warehouse facilities collateralized by U.S. Government Sponsored Enterprises, and $365.0 million borrowing under the Credit Facility, partially offset by $275.0 million repayment on the Credit Facility, $81.9 million in earning distributions to limited partnership interests and other noncontrolling interests, and $23.2 million in dividends to stockholders.
Cash Flows for the Year Ended December 31, 2019
For the year ended December 31, 2019, we generated $986.8 million of cash from operations. Excluding activity from loan originations and sales, net cash provided by operating activities for the year ended December 31, 2019 was $211.2 million. We had consolidated net income of $161.7 million, $222.6 million of positive adjustments to reconcile net income to net cash provided by operating activities (excluding activity from loan originations and sales) and $173.1 million of negative changes in operating assets and liabilities. The negative change in operating assets and liabilities included $161.9 million of increases in loans, forgivable loans and other receivables from employees and partners primarily related to continued hiring and expansion of our business, $113.2 million of increases in other assets, and $52.0 million of increase in receivables, net, offset by an increase of $130.7 million in accounts payable, accrued expenses and other liabilities and an increase of $23.4 million in payables to related parties. Cash used in investing activities was $56.8 million, primarily related to $34.5 million in purchases of fixed assets, $33.9 million of payments for acquisitions, net of cash acquired, $28.0 million in purchases of non-marketable investments, net, partially offset by $32.6 million of proceeds from the sale of marketable securities, and $8.6 million of distributions from Real Estate L.P. We used $895.5 million of cash from financing activities primarily due to net repayments on the warehouse facilities collateralized by U.S. Government Sponsored Enterprises of $762.7 million, distributions to limited
partnership interests and other noncontrolling interests of $140.6 million, dividends to stockholders of $69.2 million and treasury stock repurchases of $37.4 million, partially offset by net borrowings under the Credit Facility of $50.0 million, the settlement of pre-Spin-Off related party receivables of $33.9 million, and proceeds from securities loaned of $36.7 million.
Credit Ratings
As of December 31, 2021, our public long-term credit ratings and associated outlooks are as follows:
| | | | | | | | | | | | | | |
| | Rating | | Outlook |
Fitch Ratings Inc. | | BBB- | | Stable |
JCRA | | BBB+ | | Stable |
Kroll Bond Rating Agency | | BBB- | | Stable |
Standard & Poor's | | BB+ | | Stable |
Credit ratings and associated outlooks are influenced by several factors, including but not limited to: operating environment, earnings and profitability trends, the prudence of funding and liquidity management practices, balance sheet size/composition and resulting leverage, cash flow coverage of interest, composition and size of the capital base, available liquidity, outstanding borrowing levels and the firm’s competitive position in the industry. A credit rating and/or the associated outlook can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change. Any reduction in our credit ratings and/or the associated outlook could adversely affect the availability of debt financing on terms acceptable to us, as well as the cost and other terms upon which we are able to obtain any such financing. In addition, credit ratings and associated outlooks may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions. In connection with certain agreements, interest rates on our notes may incur increases of up to 2% in the event of a credit ratings downgrade.
Regulatory Requirements
Newmark is subject to various capital requirements in connection with seller/servicer agreements that Newmark has entered into with the various GSEs. Failure to maintain minimum capital requirements could result in Newmark’s inability to originate and service loans for the respective GSEs and could have a direct material adverse effect on our accompanying consolidated financial statements. As of December 31, 2021, Newmark has met all capital requirements. As of December 31, 2021, the most restrictive capital requirement was Fannie Mae’s net worth requirement. Newmark exceeded the minimum requirement by $400.5 million.
Certain of Newmark’s agreements with Fannie Mae allow Newmark to originate and service loans under Fannie Mae’s Delegated Underwriting and Servicing (“DUS”) Program. These agreements require Newmark to maintain sufficient collateral to meet Fannie Mae’s restricted and operational liquidity requirements based on a pre-established formula. Certain of Newmark’s agreements with Freddie Mac allow Newmark to service loans under Freddie Mac’s Targeted Affordable Housing (“TAH”) Program. These agreements require Newmark to pledge sufficient collateral to meet Freddie Mac’s liquidity requirement of 8% of the outstanding principal of TAH loans serviced by Newmark. As of December 31, 2021 and December 31, 2020, Newmark has met all liquidity requirements.
In addition, as a servicer for Fannie Mae, the Government National Mortgage Association (“Ginnie Mae”) and FHA, Newmark is required to advance to investors any uncollected principal and interest due from borrowers. As of December 31, 2021 and December 31, 2020, outstanding borrower advances were $0.9 million and $0.8 million, respectively, and are included in “Other assets” in our accompanying consolidated balance sheets.
On September 9, 2019, the U.S. Department of the Treasury issued a Housing Reform Plan (the “Plan”) in response to a March 27, 2019 Presidential Memorandum soliciting reforms in the housing financing system designed to minimize taxpayer exposure to future bailouts. The primary recommendations of the Plan are: (i) that existing government support for the secondary markets should be explicitly defined, tailored and paid for; (ii) that the GSEs’ conservatorship should come to an end; (iii) the implementation of reforms necessary to ensure that the GSEs, and any successors, are appropriately capitalized to withstand a severe economic downturn and that shareholders and unsecured creditors, rather than U.S. taxpayers, bear the losses; (iv) that the GSEs should continue to support affordable housing at a reasonable economic return that may be less than the return earned on other activities; (v) that the FHFA and the U.S. Department of Housing and Urban Development should clearly define the appropriate roles and overlap between the GSEs and the Federal Housing Administration so as to avoid duplication and (vi) that measures should be implemented to “level the playing field” between the GSEs and private sector competitors. Additionally, in September 2019, FHFA announced a cap of $200 billion as the maximum volume for combined Fannie Mae and Freddie Mac multifamily volume through the end of 2020, of which 37.5% must meet certain affordability requirements. The foregoing proposals may have the effect of impacting the volume of business that we may do with Fannie
Mae and Freddie Mac. Additionally, the potential increase in our proportion of affordable business and the potential implementation of a fee to be charged in connection with the government’s offer of a guarantee may alter the economics of the business and, accordingly, may impact our financial results.
See “Business—Regulation” in Part I, Item 1 of this Annual Report on Form 10-K for information related to our regulatory environment.
Equity
Repurchase Program
On February 17, 2021, our Board increased its authorized share repurchases of Newmark Class A Common stock and purchases of limited partnership interests in Newmark's subsidiaries to $400.0 million. This authorization includes repurchases of shares or purchase of units from executive officers, other employees and partners, including of BGC and Cantor, as well as other affiliated persons or entities. From time to time, Newmark may actively continue to repurchase shares and/or purchase units. During the year ended December 31, 2021, Newmark repurchased 20,237,430 shares of Class A common stock, at an average price of $14.37. As of December 31, 2021, Newmark had $165.0 million remaining from its share repurchase and unit purchase authorization.
The following table details Newmark's unit redemptions and share repurchases for cash, under the new program, and does not include unit redemptions and/or cancellations in connection with the grant of shares Newmark's Class A common stock. The gross unit redemptions and share repurchases of Newmark's Class A common stock during the year ended December 31, 2021 were as follows (in thousands except units, shares and per share amounts):
| | | | | | | | | | | | | | | | | |
| Total Number of Shares Repurchased/Purchased | | Average Price Paid per Unit or Share | | Approximate Dollar Value of Units and Shares That May Yet Be Repurchased/ Purchased Under the Program |
Redemptions | | | | | |
January 1, 2021 - March 31, 2021 | — | | | $ | — | | | |
April 1, 2021 - June 30, 2021 | 167,894 | | | $ | 11.91 | | | |
July 1, 2021 - September 30, 2021 | — | | | — | | | |
October 1, 2021 - December 31, 2021 | — | | | $ | — | | | |
| | | | | |
Total Redemptions | 167,894 | | | $ | 11.91 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Repurchases | | | | | |
January 1, 2021 - March 31, 2021 | 879,243 | | | $ | 10.58 | | | |
April 1, 2021 - June 30, 2021 | 3,613,098 | | | $ | 12.81 | | | |
July 1, 2021 - September 30, 2021 | 6,307,802 | | | $ | 13.34 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
October 1, 2021 - October 31, 2021 | 3,064,959 | | | $ | 14.71 | | | |
November 1, 2021 - November 30, 2021 | 2,085,492 | | | $ | 16.20 | | | |
December 1, 2021 - December 31, 2021 | 4,286,836 | | | $ | 16.77 | | | |
Total Repurchases | 20,237,430 | | | $ | 14.37 | | | |
Total Redemptions and Repurchases | 20,405,324 | | | $ | 14.35 | | | $ | 165,017 | |
On February 10, 2022, the Board and Audit Committee authorized the $400.0 million Newmark share repurchase and unit redemption Authorization, which may include purchases from Cantor, its partners or employees or other affiliated persons or entities.
Fully Diluted Share Count
Our fully diluted weighted-average share count follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Common stock outstanding(1) | 190,179 | | | 179,106 | |
Partnership units(2) | 68,142 | | | 85,160 | |
RSUs (Treasury stock method) | 4,309 | | | 355 | |
Newmark exchange shares | 1,324 | | | 230 | |
| | | |
Total(3) | 263,954 | | | 264,851 | |
(1)Common stock consisted of Class A shares and Class B shares. For the year ended December 31, 2021, the weighted-average number of Class A shares was 190.2 million shares and Class B shares was 21.3 million that were included in our fully diluted EPS computation because the conditions for issuance had been met by the end of the period.
(2)Partnership units collectively include FPUs, limited partnership units, and Cantor units,(see Note 2 —“Limited Partnership Interests in Newmark Holdings and BGC Holdings”, to ourConsolidatedFinancialStatements in Part II, Item 8 of this Annual Report on Form 10-K for more information).In general, these partnership units are potentially exchangeable into shares of Newmark Class A common stock. In addition, partnership units held by Cantor are generally exchangeable into shares of Newmark Class A common stock and/or for up to 24.6 million shares of Newmark Class B common stock. These partnership units also generally receive quarterly allocations of net income, after the deduction of the Preferred Distribution, based on their weighted-average pro rata share of economic ownership of the operating subsidiaries. As a result, these partnership units are included in the fully diluted share count calculation shown above.
(3)For the year ended December 31, 2021, the weighted-average share count includes 68.1 million potentially anti-dilutive securities, which were excluded in the computation of fully diluted earnings per share.
Our fully diluted period-end (spot) share count were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Common stock outstanding | 189,558 | | | 182,461 | |
Partnership units | 52,825 | | | 79,666 | |
Newmark RSUs | 5,966 | | | — | |
Newmark exchange shares | 1,957 | | | 226 | |
Other | 378 | | | 363 | |
Total | 250,684 | | | 262,716 | |
Contingent Payments Related to Acquisitions
Newmark completed acquisitions for which there is contingent cash consideration of $12.0 million. The contingent cash liability is recorded at fair value as deferred consideration on our accompanying consolidated balance sheets.
Equity Method Investments
Newmark has an investment in Real Estate LP, a joint venture with Cantor in which Newmark has a less than majority ownership and has the ability to exert significant influence over the operating and financial policies. As of December 31, 2021, Newmark had $88.3 million in this equity method investment, which represents a 27% ownership in Real Estate LP.
Registration Statements
On March 28, 2019, we filed a registration statement on Form S-3 pursuant to which CF&Co may make offers and sales of our 6.125% Senior Notes in connection with ongoing market-making transactions which may occur from time to time. Such market-making transactions in these securities may occur in the open market or may be privately negotiated at prevailing market prices at a time of resale or at related or negotiated prices. Neither CF&Co, nor any of our affiliates, has any obligation to make a market in our securities, and CF&Co or any such other affiliate may discontinue market-making activities at any time without notice. Newmark does not receive any proceeds from market-making activities in these securities by CF&Co (or any of its affiliates).
We have an effective registration statement on Form S-4, with respect to the offer and sale of up to 20.0 million shares of our Class A common stock from time to time in connection with business combination transactions, including acquisitions of other businesses, assets, properties or securities. As of December 31, 2021, we have issued 1.4 million shares of our Class A common stock under this registration statement.
As of December 31, 2021 and December 31, 2020, Newmark was committed to fund approximately $0.3 billion and $0.4 billion, respectively, which is the total remaining draws on construction loans originated by Newmark under the Housing and Urban Development (“HUD”) 221(d)4, 220 and 232 programs, rate locked loans that have not been funded, and forward commitments, as well as the funding for Fannie Mae structured transactions. Newmark also has corresponding commitments to sell these loans to various purchasers as they are funded.
Commitments and Contingencies
(a)Contractual Obligations and Commitments
The following table summarizes certain of Newmark's contractual obligations at December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
Operating leases (1) | | | | | $ | 805,168 | | | $ | 113,822 | | | $ | 218,878 | | | $ | 197,704 | | | $ | 274,764 | |
Warehouse facilities(2) | | | | | 1,050,693 | | | 1,050,693 | | | — | | | — | | | — | |
Long-term debt(3) | | | | | 550,000 | | | — | | | 550,000 | | | — | | | — | |
Interest on long-term debt(4) | | | | | 65,428 | | | 34,949 | | | 30,479 | | | — | | | — | |
Interest on warehouse facilities(5) | | | | | 1,051 | | | 1,051 | | | — | | | — | | | — | |
Total | | | | | $ | 2,472,340 | | | $ | 1,200,515 | | | $ | 799,357 | | | $ | 197,704 | | | $ | 274,764 | |
(1)Operating lease are related to rental payments under various non-cancelable leases principally for office space.
(2)Warehouse facilities are collateralized by $1,050.7 million of loans held for sale, at fair value (See Note 21 - “Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises” to ouraccompanyingConsolidatedFinancialStatements in Part II, Item 8 of this Annual Report on Form 10-K) which loans were either under commitment to be purchased by Freddie Mac or had confirmed forward trade commitments for the issuance of and purchase of Fannie Mae or Ginnie Mae mortgage-backed securities.
(3)Long-term debt reflects long-term borrowings of $550.0 million 6.125% Senior Notes. The carrying amount of these notes was approximately $545.2 million. Long-term debt also includes borrowings under the Credit Facility, which is assumed to be outstanding until the maturity date of the Credit Facility. The carrying amount of the borrowing under the Credit Facility is $0.0 million. (See Note 22 - “Long-Term Debt” to our accompanying Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.)
(4)Reflects interest on the $550.0 million 6.125% Senior Notes until their maturity date of November 15, 2023.
(5)Interest on the warehouse facilities collateralized by U.S. Government Sponsored Enterprises was projected by using the 1-month LIBOR rate plus their respective additional basis points, primarily 130 basis points above LIBOR, or SOFR and 115 basis points above SOFR, applied to their respective outstanding balances as of December 31, 2021, through their respective maturity dates. Their respective maturity dates range from June 2022 to October 2022, while one line has an open maturity date. The notional amount of these committed and uncommitted warehouse facilities was $2.2 billion at December 31, 2021. One of the warehouse lines established a $125.0 million sublimit line of credit to fund potential principal and interest servicing advances on the Company's Fannie Mae portfolio during the forbearance period related to the CARES Act. Advances will have an interest rate of 1-month LIBOR plus 180 bps. There were no outstanding draws on this sublimit at December 31, 2021. Another warehouse line was temporarily increased by $300.0 million to $900.0 million for the period December 1, 2020 to February 1 2021.
Critical Accounting Policies and Estimates
The preparation of our accompanying consolidated financial statements in conformity with U.S. GAAP guidance requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our accompanying consolidated financial statements. These accounting estimates require the use of assumptions about matters, some which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our accompanying consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows could be materially affected. We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and complexity.
Revenue Recognition
We derive our revenues primarily through commissions from brokerage services, gains from mortgage banking activities/originations, net, revenues from real estate management services, servicing fees and other revenues. Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers as determined by when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation as evidenced by the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time when the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we consider consideration promised in a contract that includes a variable amount, referred to as variable consideration, and estimate the amount of consideration due to us. Additionally, variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. In determining when to include variable consideration in the transaction price, we consider all information (historical, current and forecast) that is available, including the range of possible outcomes, the predictive value of past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence.
We also use third-party service providers in the provision of its services to customers. In instances where a third-party service provider is used, we perform an analysis to determine whether we are acting as a principal or an agent with respect to the services provided. To the extent that we are acting as a principal, the revenue and the expenses incurred are recorded on a gross basis. In instances where we are acting as an agent, the revenue and expenses are presented on a net basis within the revenue line item.
In some instances, we perform services for customers and incur out-of-pocket expenses as part of delivering those services. Our customers agree to reimburse us for those expenses, and those reimbursements are part of the contract’s transaction price. Consequently, these expenses and the reimbursements of such expenses from the customer are presented on a gross basis because the services giving rise to the out-of-pocket expenses do not transfer a good or service. The reimbursements are included in the transaction price when the costs are incurred, and the reimbursements are due from the customer.
MSRs, Net
We initially recognize and measure the rights to service mortgage loans at fair value and subsequently measure them using the amortization method. We recognize rights to service mortgage loans as separate assets at the time the underlying originated mortgage loan is sold, and the value of those rights is included in the determination of the gains on loans held for sale. Purchased MSRs, including MSRs purchased from CCRE, are initially recorded at fair value, and subsequently measured using the amortization method.
We receive up to a 3-basis point servicing fee and/or up to a 1-basis point surveillance fee on certain Freddie Mac loans after the loan is securitized in a Freddie Mac pool (“Freddie Mac Strip”). The Freddie Mac Strip is also recognized at fair value and subsequently measured using the amortization method, but is recognized as a MSR at the securitization date.
MSRs are assessed for impairment, at least on an annual basis, based upon the fair value of those rights as compared to the amortized cost. Fair values are estimated using a valuation model that calculates the present value of the future net servicing cash flows. In using this valuation method, we incorporate assumptions that management believes market participants would use in estimating future net servicing income. The fair value estimates are sensitive to significant assumptions used in the valuation model such as prepayment rates, cost of servicing, escrow earnings rates, discount rates and servicing multiples, which are affected by expectations about future market or economic conditions derived, in part, from historical data. It is reasonably possible that such estimates may change. We amortize the MSRs in proportion to, and over the period of, the projected net servicing income. For purposes of impairment evaluation and measurement, we stratify MSRs based on predominant risk characteristics of the underlying loans, primarily by investor type (Fannie Mae/Freddie Mac, FHA/GNMA, CMBS and other). To the extent that the carrying value exceeds the fair value of a specific MSR strata, a valuation allowance is established, which is adjusted in the future as the fair value of MSRs increases or decreases. Reversals of valuation allowances cannot exceed the previously recognized impairment up to the amortized cost.
Equity-Based and Other Compensation
Discretionary Bonus: A portion of our compensation and employee benefits expense comprises discretionary bonuses, which may be paid in cash, equity, partnership awards or a combination thereof. We accrue expense in a period based on revenues in that period and on the expected combination of cash, equity and partnership units. Given the assumptions used in estimating discretionary bonuses, actual results may differ.
Restricted Stock Units: We account for equity-based compensation under the fair value recognition provisions of U.S. GAAP guidance. Restricted stock units (which we refer to as “RSUs”) provided to certain employees are accounted for as equity awards, and in accordance with U.S. GAAP guidance, we are required to record an expense for the portion of the RSUs that is ultimately expected to vest. Further, U.S. GAAP guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because significant assumptions are used in estimating employee turnover and associated forfeiture rates, actual results may differ from our estimates under different assumptions or conditions.
The fair value of RSU awards to employees is determined on the date of grant, based on the fair value of our Class A common stock. Generally, RSUs granted by us as employee compensation do not receive dividend equivalents; as such, we adjust the fair value of the RSUs for the present value of expected forgone dividends, which requires us to include an estimate of expected dividends as a valuation input. This grant-date fair value is amortized to expense ratably over the awards’ vesting periods. For RSUs with graded vesting features, we have made an accounting policy election to recognize compensation cost on a straight-line basis. The amortization is reflected as non-cash equity-based compensation expense in our accompanying consolidated statements of operations.
Restricted Stock: Restricted stock provided to certain employees is accounted for as an equity award, and as per U.S. GAAP guidance, we are required to record an expense for the portion of the restricted stock that is ultimately expected to vest. We have granted restricted stock that is not subject to continued employment or service; however, transferability is subject to compliance with our and our affiliates’ customary non-compete obligations. Such shares of restricted stock are generally saleable by partners in 5 to 10 years. Because the restricted stock is not subject to continued employment or service, the grant-date fair value of the restricted stock is expensed on the date of grant. The expense is reflected as non-cash equity-based compensation expense in our accompanying consolidated statements of operations.
Limited Partnership Units: Limited partnership units in Newmark Holdings and BGC Holdings are held by Newmark employees and receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders. As discussed above, preferred units in Newmark Holdings and BGC Holdings are not entitled to participate in partnership distributions other than with respect to a distribution at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. The quarterly allocations of net income to such limited partnership units are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our accompanying consolidated statements of operations.
Certain of these limited partnership units entitle the holders to receive post-termination payments equal to the notional amount in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards under U.S. GAAP guidance, which requires that Newmark record an expense for such awards based on the change in value at each reporting period and include the expense in our accompanying consolidated statements of operations as part of “Equity-based compensation and allocations of net income to limited partnership units and FPUs.” The liability for limited partnership units with a post-termination payout is included in “Other long-term liabilities” on our accompanying consolidated balance sheets.
Certain limited partnership units held by Newmark employees are granted exchangeability into Class A common stock or may be redeemed in connection with the grant of shares of Class A common stock. At the time exchangeability is granted, or the shares are issued, Newmark recognizes an expense based on the fair value of the award on that date, which is included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our accompanying consolidated statements of operations.
Employee Loans: We have entered into various agreements with certain of our employees and partners whereby these individuals receive loans that may be either wholly or in part repaid from distributions that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. Cash advance distribution loans are documented in formal agreements and are repayable in timeframes outlined in the underlying agreements. We intend for these advances to be repaid in full from the future distributions on existing and future awards granted. The allocations of net income to the awards are treated as compensation expense and the proceeds from distributions are used to repay the loan. The forgivable portion of any loans is recognized as compensation expense in our accompanying consolidated statements of operations over the life of the loan. We review the loan balances each reporting period for collectability. If we determine that the collectability of a portion of the loan balances is not expected, we recognize a reserve against the loan balances. Actual collectability of loan balances may differ from our estimates. As of December 31, 2021 and December 31, 2020, the aggregate balance of employee loans, net of reserve, was $453.3 million and $454.3 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners, net” in our accompanying consolidated balance sheets. Compensation expense for the above-mentioned employee loans for the years ended December 31, 2021, 2020 and 2019 were $79.4 million, $73.6 million and $39.0 million, respectively. The compensation expense related to these loans was included as part of “Compensation and employee benefits” in our accompanying consolidated statements of operations.
Goodwill
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. As prescribed in U.S. GAAP guidance, Intangibles – Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is periodically tested for impairment. We review goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or whenever an event occurs, or circumstances change that could reduce the fair value of a reporting unit below its carrying amount.
When reviewing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If the results of the qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we choose to bypass the qualitative assessment, we perform a quantitative goodwill impairment analysis as follows.
The quantitative goodwill impairment test, used to identify both the existence of impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss should be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired. To estimate the fair value of the reporting unit, we use a discounted cash flow model and data regarding market comparables. The valuation process requires significant judgment and involves the use of significant estimates and assumptions. These assumptions include cash flow projections, estimated cost of capital and the selection of peer companies and relevant multiples. Because significant assumptions and estimates are used in projecting future cash flows, choosing peer companies and selecting relevant multiples, actual results may differ from our estimates under different assumptions or conditions.
Credit Losses
The CECL methodology, which became effective on January 1, 2020, requires us to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period beyond the balance sheet date. The adoption of CECL resulted in the recognition of reserves relating to our loss sharing guarantee provided to Fannie Mae under the DUS Program which was previously accounted for under the incurred loss model, which generally required that a loss be incurred before it was recognized. Additional reserves were recognized for our receivables from customers including certain employee receivables carried at amortized cost.
The expected credit loss is modeled based on our historical loss experience adjusted to reflect current conditions. A significant amount of judgment is required in the determination of the appropriate reasonable and supportable period, the methodology used to incorporate current and future macroeconomic conditions, determination of the probability of and exposure at default, all of which are ultimately used in measuring the quantitative components of our reserves. Beyond the reasonable and supportable period, we estimate expected credit losses using our historical loss rates. We also consider whether to adjust the quantitative reserves for certain external and internal qualitative factors, which consequentially may increase or decrease the reserves for credit losses and receivables. In order to estimate credit losses, assumptions about current and future economic conditions are incorporated into the model using multiple economic scenarios that are weighted to reflect the conditions at each measurement date.
During the year ended December 31, 2021, there was a decrease of $0.2 million in our reserves. These reserves were based on macroeconomic forecasts are critical inputs into our model and material movements in variables such as, the U.S. unemployment rate and U.S. GDP growth rate could significantly affect our estimated expected credit losses. These macroeconomic forecasts, under different conditions or using different assumptions or estimates, could result in significantly different changes in reserves for credit losses. It is difficult to estimate how potential changes in specific factors might affect the overall reserves for credit losses and current results may not reflect the potential future impact of macroeconomic forecast changes.
Income Taxes
Newmark accounts for income taxes using the asset and liability method as prescribed in U.S. GAAP guidance, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between our accompanying consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Certain of Newmark’s entities are taxed as U.S. partnerships and are subject to UBT in New York City. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners, rather than the partnership entity. As such, the partners’ tax liability or benefit is not reflected in our accompanying consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included in our accompanying consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in the U.S. or in foreign jurisdictions.
Newmark provides for uncertain tax positions based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from Newmark’s estimates under different assumptions or conditions. Newmark recognizes interest and penalties related to uncertain tax positions in “Provision for income taxes” in our accompanying consolidated statements of operations.
A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. In assessing the need for a valuation allowance, Newmark considers all available evidence, including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies.
The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws and involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. Because Newmark’s interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law.
Derivative Financial Instruments
We have loan commitments to extend credit to third parties. The commitments to extend credit are for mortgage loans at a specific rate (rate lock commitments). These commitments generally have fixed expiration dates or other termination clauses and may require a fee. We are committed to extend credit to the counterparty as long as there is no violation of any condition established in the commitment contracts.
We simultaneously enter into an agreement to deliver such mortgages to third-party investors at a fixed price (“forward sale contracts”).
Both the commitment to extend credit and the forward sale commitment qualify as derivative financial instruments. We recognize all derivatives on our accompanying consolidated balance sheets as assets or liabilities measured at fair value. The change in the derivatives fair value is recognized in current period earnings.
Newmark entered into variable postpaid forward contracts as a result of the Nasdaq Forwards. These contracts qualify as derivative financial instruments. The Nasdaq Forwards provide Newmark with the ability to redeem the EPUs for Nasdaq stock, and as these instruments are not legally detachable, they represent single financial instruments. The financial instruments’ EPU redemption feature for Nasdaq shares is not clearly and closely related to the economic characteristics and risks of Newmark’s EPU equity host instruments, and, therefore, it represents an embedded derivative that is required to be bifurcated and recorded at fair value on our accompanying consolidated balance sheets, with all changes in fair value recorded as a component of “Other income (loss), net” on our accompanying consolidated statements of operations. See Note 11 — “Derivatives”, to our accompanying consolidated financial statements in Part I, Item 8 of this Annual Report on Form 10-K for additional information.
Recent Accounting Pronouncements
See Note 1 — “Organization and Basis of Presentation”, to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K , for information regarding recent accounting pronouncements.
Capital Deployment Priorities, Dividend Policy and Repurchase and Redemption Program
Our near-term capital allocation priorities are to return capital to stockholders through share and unit repurchases and to invest in growth and margin expansion at attractive returns.
Traditionally, our dividend policy provided that we expect to pay a quarterly cash dividend to our common stockholders based on our post-tax Adjusted Earnings per fully diluted share. Please see below for a detailed definition of post-tax Adjusted Earnings per fully diluted share. Beginning in the first quarter of 2020, and for all of the quarterly periods in 2020 and thus far in 2021, the Board reduced the quarterly dividend to $0.01 per share out of an abundance of caution in order to strengthen the Company’s balance sheet as the real estate markets faced difficult and unprecedented macroeconomic conditions due to the COVID-19 pandemic. Additionally, beginning with the first quarter 2020, Newmark Holdings reduced its distributions to or on behalf of its partners. As Newmark’s financial condition has improved substantially year-over-year, and as the economy has rebounded, the Company has repurchased and/or redeemed a meaningful number of shares and/or units thus far in 2021 as part of its overall capital return policy. See Note 6 “Stock Transactions and Unit Redemptions” to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for more information.
Any dividends, if and when declared by our Board, will be paid on a quarterly basis. The dividend to our common stockholders is expected to be calculated based on post-tax Adjusted Earnings allocated to us and generated over the fiscal quarter ending prior to the record date for the dividend. No assurance can be made, however, that a dividend will be paid each quarter. The declaration, payment, timing, and amount of any future dividends payable by us will be at the sole discretion of our Board. With respect to any distributions which are declared, amounts paid to or on behalf of partners will at least cover their related tax payments. Whether any given post-tax amount is equivalent to the amount received by a stockholder also on an after-tax basis depends upon stockholders’ and partners’ domiciles and tax status.
We received 6,222,340 Nasdaq shares worth $1,093.9 million as of June 30, 2021. On July 2, 2021, we settled the third and fourth Nasdaq Forwards with 944,329 Nasdaq shares worth $166.0 million. In connection with the 2021 Equity Event, we used $484.4 million, of which $203.5 million was to reduce our fully diluted share count by 16.3 million.
We are a holding company, with no direct operations, and therefore we are able to pay dividends only from our available cash on hand and funds received from distributions from Newmark OpCo. Our ability to pay dividends may also be limited by regulatory considerations as well as by covenants contained in financing or other agreements. In addition, under Delaware law, dividends may be payable only out of surplus, which is our net assets minus our capital (as defined under Delaware law), or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Accordingly, any unanticipated accounting, tax, regulatory or other charges against net income may adversely affect our ability to declare and pay dividends. While we intend to declare and pay dividends quarterly, there can be no assurance that our Board will declare dividends at all or on a regular basis or that the amount of our dividends will not change.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credit Risk
Our multifamily origination business, under the Fannie Mae DUS program, originates and services multifamily loans for Fannie Mae without having to obtain Fannie Mae’s prior approval for certain loans, as long as the loans meet the underwriting guidelines set forth by Fannie Mae. In return for the delegated authority to make loans and the commitment to purchase loans by Fannie Mae, we must maintain minimum collateral and generally are required to share risk of loss on loans sold through Fannie Mae. With respect to most loans, we are generally required to absorb approximately one-third of any losses on the unpaid principal balance of a loan at the time of loss settlement. Some of the loans that we originate under the Fannie Mae DUS program are subject to reduced levels or no risk-sharing. However, we generally receive lower servicing fees with respect to such loans. Although our Berkeley Point business’s average annual losses from such risk-sharing programs have been a minimal percentage of the aggregate principal amount of such loans, if loan defaults increase, actual risk-sharing obligation payments under the Fannie Mae DUS program could increase, and such defaults could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, a material failure to pay its share of losses under the Fannie Mae DUS program could result in the revocation of Berkeley Point’s license from Fannie Mae and the exercise of various remedies available to Fannie Mae under the Fannie Mae DUS program.
Interest Rate Risk
Newmark had $545.2 million of fixed rate 6.125% Senior Notes outstanding as of December 31, 2021. These debt obligations are not currently subject to fluctuations in interest rates, although in the event of refinancing or issuance of new debt, such debt could be subject to changes in interest rates. Newmark had no amounts outstanding under its Credit Facility as of December 31, 2021. The interest rate on the Credit Facility is based upon LIBOR.
Berkeley Point is an intermediary that originates loans which are generally pre-sold prior to loan closing. Therefore, for loans held for sale to the GSEs and HUD, we are not currently exposed to unhedged interest rate risk. Prior to closing on loans with borrowers, we enter into agreements to sell the loans to investors, and originated loans are typically sold within 45 days of funding. The coupon rate for each loan is set concurrently with the establishment of the interest rate with the investor.
Some of our assets and liabilities are subject to changes in interest rates. Earnings from escrows are generally based on LIBOR or SOFR. 30-day LIBOR as of December 31, 2021 and 2020 was 10 basis points and 14 basis points, respectively. A 100-basis point increase in the 30-day LIBOR would increase our annual earnings by $22.9 million based on our escrow balance as of December 31, 2021 compared to $13.3 million based on our escrow balance as of December 31, 2020. A decrease in 30-day LIBOR to zero would decrease our annual earnings by $2.3 million based on the escrow balances as of December 31, 2021 and by $1.9 million based on our escrow balances as of December 31, 2020.
We use warehouse facilities and a repurchase agreement to fund loans we originate under our various lending programs. The borrowing costs of our warehouse facilities and the repurchase agreement is based on LIBOR. A 100-basis point increase in 30-day LIBOR would decrease our annual earnings by $10.6 million based on our outstanding balances as of December 31, 2021 compared to $10.6 million based on our outstanding balances as of December 31, 2020. A decrease in 30-day LIBOR to zero would increase our annual earnings by approximately $1.1 million based on our outstanding warehouse balance as of December 31, 2021 and by $1.5 million as of December 31, 2020.
Market Risk
We have investments in marketable equity securities, which are publicly-traded, and which had a fair value of $524.6 million and $33.3 million as of December 31, 2021 and December 31, 2020, respectively. These include shares of common stock of Nasdaq. As of February 25, 2022, Newmark held approximately 1.1 million shares of Nasdaq worth approximately $187.2 million
Investments in marketable securities carry a degree of risk, as there can be no assurance that the marketable securities will not lose value and, in general, securities markets can be volatile and unpredictable. As a result of these different market risks, our holdings of marketable securities could be materially and adversely affected. We may seek to minimize the effect of price changes on a portion of our investments in marketable securities through the use of derivative contracts. However, there can be no assurance that our hedging activities will be adequate to protect us against price risks associated with our investments in marketable securities. See Note 7 — “Marketable Securities” and Note 11 — “Derivatives” to our accompanying consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information regarding these investments and related hedging activities. Each $1 change in the price of Nasdaq, will impact the value of shares held by $2.5 million based on the number of shares held as of December 31, 2021. Additionally the 2.5 million shares of Nasdaq equity we held as of December 31, 2021 are more than an average trading days volume and therefore there is additional market risk that we will not be able to liquidate this position in an orderly manner if the market for Nasdaq equity shares is under pressure.
Foreign Currency Risk
We are exposed to risks associated with changes in foreign exchange rates. Changes in foreign exchange rates create volatility in the U.S. Dollar equivalent of our revenues and expenses. While our international results of operations, as measured in U.S. Dollars, are subject to foreign exchange fluctuations, we do not consider the related risk to be material to our results of operations. While our exposure to foreign exchange risk is not currently material to us, we expect to grow our international revenues in the future, and any future potential exposure to foreign exchange fluctuations may present a material risk to our business.
Disaster Recovery
Our processes address disaster recovery concerns. We operate most of our technology from dual-primary data centers at our two different London locations. Either site alone is capable of running all of our essential systems. In addition, we maintain technology operations from data centers in New Jersey and Connecticut. Replicated instances of this technology are maintained in our London data centers. All data centers are built and equipped to best-practice standards of physical security with appropriate environmental monitoring and safeguards. Failover for the majority of our systems is automated.
ITEM 8. FINANCIAL STATEMENTS
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CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2021, 2020 AND 2019 | |
Audited Financial Statements of Newmark Group Inc.: | |
Reports of Independent Registered Public Accounting Firm and Independent Auditors (PCAOB ID 42) | |
Consolidated Balance Sheets | |
Consolidated Statements of Operations | |
Consolidated Statements of Comprehensive Income | |
Consolidated Statements of Changes in Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Newmark Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Newmark Group, Inc (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, cash flows and changes in equity for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), as applicable and our report dated February 28, 2022 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for credit losses in 2020.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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| Mortgage Servicing Rights, net
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Description of the Matter | At December 31, 2021, the Company’s Mortgage Servicing Rights, net (“MSRs”) were $550.3 million. As discussed in Note 3 and Note 15 to the consolidated financial statements, the Company initially recognizes and measures the rights to service mortgage loans at fair value and subsequently measures them using the amortization method. MSRs are assessed for impairment, at least on an annual basis, based upon the fair value of those rights as compared to the amortized cost. Fair values are estimated using a valuation model that calculates the present value of the future net servicing cash flows.
Auditing management’s valuation of MSRs was complex and required significant judgment due to the estimation used by the Company in determining the fair value of the MSRs. In particular, the fair value estimates were sensitive to significant assumptions such as prepayment rates, cost of servicing, escrow earnings rates, discount rates and servicing multiples, which are affected by expectations about future market or economic conditions derived, in part, from historical data.
|
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls related to the Company’s MSRs valuation process, including management’s assessment of the significant assumptions included in the fair value estimates.
To test the estimated fair value of the Company’s MSRs, our audit procedures included, among others, testing the significant assumptions used by the Company to develop the fair value estimates. For example, we compared the significant assumptions to the Company’s historical results and current industry, market and economic trends. We evaluated the Company’s use of the valuation model that calculates the present value of the future net servicing cash flows and validated the completeness and accuracy of selected inputs to the model. We also performed a sensitivity analysis of the significant assumptions to evaluate the changes in fair value resulting from changes in selected assumptions. We utilized an internal valuation specialist to test management’s assumptions and to identify potential sources of contrary information for selected assumptions.
|
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
New York, New York
February 28, 2022
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Newmark Group, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Newmark Group, Inc.’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),(the COSO criteria). In our opinion, Newmark Group, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Knotel, Inc. and Space Management which is included in the 2021 consolidated financial statements of the Company and constituted 5.87% and 5.17% of total assets, 2.36% and 2.38% of net assets, respectively as of December 31, 2021 and 1.91% and 1.62% of revenues and (3.49%)and (0.04%) of net income, respectively for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Knotel, Inc. and Space Management.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows and changes in equity for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 28, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
New York, New York
February 28, 2022
NEWMARK GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Assets: | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 191,332 | | | $ | 191,448 | |
Restricted cash | 75,168 | | | 66,951 | |
Marketable securities | 524,569 | | | 33,283 | |
Loans held for sale, at fair value | 1,072,479 | | | 1,086,805 | |
Receivables, net | 569,206 | | | 376,795 | |
Receivables from related parties | 8,262 | | | — | |
Other current assets (see Note 19) | 83,337 | | | 63,790 | |
Total current assets | 2,524,353 | | | 1,819,072 | |
Goodwill | 657,131 | | | 560,332 | |
Mortgage servicing rights, net | 550,302 | | | 494,729 | |
Loans, forgivable loans and other receivables from employees and partners, net | 453,345 | | | 454,270 | |
Right-of-use assets | 606,634 | | | 190,469 | |
Fixed assets, net | 135,756 | | | 96,367 | |
Other intangible assets, net | 76,199 | | | 44,289 | |
Other assets (see Note 19) | 212,481 | | | 322,922 | |
Total assets | $ | 5,216,201 | | | $ | 3,982,450 | |
Liabilities, Redeemable Partnership Interests, and Equity: | | | |
Current liabilities: | | | |
Warehouse facilities collateralized by U.S. Government Sponsored Enterprises | $ | 1,050,693 | | | $ | 1,061,202 | |
Accrued compensation | 462,533 | | | 279,872 | |
Accounts payable, accrued expenses and other liabilities (see Note 29) | 528,746 | | | 326,548 | |
Repurchase agreements and securities loaned | 140,007 | | | 33,278 | |
Payables to related parties | 10,762 | | | 4,392 | |
Total current liabilities | 2,192,741 | | | 1,705,292 | |
Long-term debt | 545,239 | | | 680,385 | |
Right-of-use liabilities | 586,069 | | | 218,629 | |
Other long-term liabilities (see Note 29) | 207,012 | | | 436,952 | |
Total liabilities | 3,531,061 | | | 3,041,258 | |
Commitments and contingencies (see Note 31) | 0 | | 0 |
Redeemable partnership interests | 20,947 | | | 20,045 | |
Equity: | | | |
Class A common stock, par value of $0.01 per share: 1,000,000,000 shares authorized; 194,046,885 and 167,604,348 shares issued at December 31, 2021 and December 31, 2020, respectively, and 168,272,371 and 161,175,894 shares outstanding at December 31, 2021 and December 31, 2020, respectively | 1,940 | | | 1,676 | |
Class B common stock, par value of $0.01 per share: 500,000,000 shares authorized; 21,285,533 shares issued and outstanding at December 31, 2021 and December 31, 2020, convertible into Class A common stock | 212 | | | 212 | |
Additional paid-in capital | 487,447 | | | 351,450 | |
Retained earnings | 1,079,661 | | | 342,764 | |
Contingent Class A common stock | 1,572 | | | 1,572 | |
Treasury stock at cost: 25,774,514 and 5,498,228 shares of Class A common stock at December 31, 2021 and December 31, 2020, respectively | (290,174) | | | (40,531) | |
Accumulated other comprehensive loss | (2,731) | | | (2,094) | |
Total stockholders’ equity | 1,277,927 | | | 655,049 | |
Noncontrolling interests | 386,266 | | | 266,098 | |
Total equity | 1,664,193 | | | 921,147 | |
Total liabilities, redeemable partnership interests, and equity | $ | 5,216,201 | | | $ | 3,982,450 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
NEWMARK GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Revenues: | | | | | | | | | | |
Commissions | | | | | | $ | 1,765,247 | | | $ | 967,948 | | | $ | 1,396,035 | |
Gains from mortgage banking activities/originations, net | | | | | | 225,481 | | | 310,914 | | | 198,085 | |
Management services, servicing fees and other | | | | | | 915,715 | | | 626,136 | | | 624,012 | |
Total revenues | | | | | | 2,906,443 | | | 1,904,998 | | | 2,218,132 | |
Expenses: | | | | | | | | | | |
Compensation and employee benefits | | | | | | 1,828,887 | | | 1,147,360 | | | 1,275,988 | |
Equity-based compensation and allocations of net income to limited partnership units and FPUs | | | | | | 356,345 | | | 130,759 | | | 258,836 | |
Total compensation and employee benefits | | | | | | 2,185,232 | | | 1,278,119 | | | 1,534,824 | |
Operating, administrative and other | | | | | | 553,623 | | | 294,405 | | | 361,857 | |
Fees to related parties | | | | | | 23,789 | | | 22,573 | | | 25,025 | |
Depreciation and amortization | | | | | | 121,729 | | | 141,193 | | | 131,144 | |
Total operating expenses | | | | | | 2,884,373 | | | 1,736,290 | | | 2,052,850 | |
Other (loss) income, net | | | | | | 1,232,495 | | | 15,290 | | | 80,954 | |
Income from operations | | | | | | 1,254,565 | | | 183,998 | | | 246,236 | |
Interest expense, net | | | | | | (33,473) | | | (37,728) | | | (32,088) | |
Income before income taxes and noncontrolling interests | | | | | | 1,221,092 | | | 146,270 | | | 214,148 | |
Provision for income taxes | | | | | | 242,958 | | | 36,993 | | | 52,436 | |
Consolidated net income | | | | | | 978,134 | | | 109,277 | | | 161,712 | |
Less: Net income attributable to noncontrolling interests | | | | | | 227,406 | | | 29,217 | | | 44,407 | |
Net income available to common stockholders | | | | | | $ | 750,728 | | | $ | 80,060 | | | $ | 117,305 | |
Per share data: | | | | | | | | | | |
Basic earnings per share | | | | | | | | | | |
Net income available to common stockholders (1) | | | | | | $ | 744,528 | | | $ | 70,281 | | | $ | 104,406 | |
Basic earnings per share | | | | | | $ | 3.91 | | | $ | 0.39 | | | $ | 0.59 | |
Basic weighted-average shares of common stock outstanding | | | | | | 190,179 | | | 179,106 | | | 177,774 | |
Fully diluted earnings per share | | | | | | | | | | |
Net income for fully diluted shares | | | | | | $ | 744,528 | | | $ | 70,281 | | | $ | 108,160 | |
Fully diluted earnings per share | | | | | | $ | 3.80 | | | $ | 0.39 | | | $ | 0.58 | |
Fully diluted weighted-average shares of common stock outstanding | | | | | | 195,813 | | | 179,690 | | | 185,016 | |
(1)Includes a reduction for dividends on preferred stock or EPUs in the amount of $6.2 million, $9.8 million and $12.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. (see Note 1 — “Organization and Basis of Presentation”).
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
NEWMARK GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Consolidated net income | | | | | | $ | 978,134 | | | $ | 109,277 | | | $ | 161,712 | |
Foreign currency translation adjustments | | | | | | (832) | | | (2,178) | | | — | |
Comprehensive income, net of tax | | | | | | 977,302 | | | 107,099 | | | 161,712 | |
Less: Comprehensive income attributable to noncontrolling interests, net of tax | | | | | | 227,406 | | | 29,217 | | | 44,407 | |
Comprehensive income available to common stockholders | | | | | | $ | 749,896 | | | $ | 77,882 | | | $ | 117,305 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
NEWMARK GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Contingent Class A Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total | |
January 1, 2019 | $ | 1,570 | | | $ | 212 | | | $ | 285,071 | | | $ | 3,250 | | | $ | (486) | | | $ | 277,952 | | | $ | — | | | $ | 489,230 | | | $ | 1,056,799 | | |
Consolidated net income | — | | | — | | | — | | | — | | | — | | | 117,305 | | | — | | | 44,407 | | | 161,712 | | |
Dividends to common stockholders | — | | | — | | | — | | | — | | | — | | | (69,245) | | | — | | | — | | | (69,245) | | |
Preferred dividend on exchangeable preferred partnership units | — | | | — | | | — | | | — | | | — | | | (12,900) | | | — | | | 12,900 | | | — | | |
Earnings distributions to limited partnership interests and other noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (73,646) | | | (73,646) | | |
Grant of exchangeability, redemption and issuance of Class A common stock, 3,867,127 shares | 38 | | | — | | | 30,607 | | | (1,789) | | | — | | | — | | | — | | | (30,758) | | | (1,902) | | |
Repurchase of 4,518,002 shares of Class A Common Stock | — | | | — | | | — | | | — | | | (34,408) | | | — | | | — | | | (7,692) | | | (42,100) | | |
Redemption of EPU's | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (93,480) | | | (93,480) | | |
Other | — | | | — | | | 2,487 | | | — | | | — | | | — | | | — | | | — | | | 2,487 | | |
December 31, 2019 | $ | 1,608 | | | $ | 212 | | | $ | 318,165 | | | $ | 1,461 | | | $ | (34,894) | | | $ | 313,112 | | | $ | — | | | $ | 340,961 | | | $ | 940,625 | | |
Consolidated net income | — | | | — | | | — | | | — | | | — | | | 80,060 | | | — | | | 29,217 | | | 109,277 | | |
Foreign currency transaction adjustments | — | | | — | | | — | | | — | | | — | | | — | | | (1,776) | | | (402) | | | (2,178) | | |
Cumulative effect of credit loss standard adoption | — | | | — | | | — | | | — | | | — | | | (17,458) | | | — | | | (3,655) | | | (21,113) | | |
Dividends to common stockholders | — | | | — | | | — | | | — | | | — | | | (23,171) | | | — | | | — | | | (23,171) | | |
Preferred dividend on exchangeable preferred partnership units | — | | | — | | | — | | | — | | | — | | | (9,779) | | | — | | | 9,779 | | | — | | |
Earnings distributions to limited partnership interests and other noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (22,365) | | | (22,365) | | |
Grant of exchangeability, redemption and issuance of Class A common stock, 5,840,659 shares | 68 | | | — | | | 24,747 | | | — | | | — | | | — | | | — | | | 3,958 | | | 28,773 | | |
Repurchase of 930,226 shares of Class A Common Stock | — | | | — | | | — | | | — | | | (5,637) | | | — | | | — | | | (1,180) | | | (6,817) | | |
Issuance and redemption of limited partnership units including contingent units | — | | | — | | | 266 | | | 111 | | | — | | | — | | | — | | | (377) | | | — | | |
Restricted stock units compensation | — | | | — | | | 7,648 | | | — | | | — | | | — | | | — | | | 3,642 | | | 11,290 | | |
Redemption of EPU's | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (93,480) | | | (93,480) | | |
Other | — | | | — | | | 624 | | | — | | | — | | | — | | | (318) | | | — | | | 306 | | |
December 31, 2020 | $ | 1,676 | | | $ | 212 | | | $ | 351,450 | | | $ | 1,572 | | | $ | (40,531) | | | $ | 342,764 | | | $ | (2,094) | | | $ | 266,098 | | | $ | 921,147 | | |
Consolidated net income | — | | | — | | | — | | | — | | | — | | | 750,728 | | | — | | | 227,406 | | | 978,134 | | |
Foreign currency translation adjustments | — | | | — | | | — | | | — | | | — | | | — | | | (637) | | | (195) | | | (832) | | |
Cantor purchase of Cantor units from Newmark Holdings upon redemption/ exchange of FPU's, 1,831,924 units | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 6,898 | | | 6,898 | | |
Dividends to common stockholders | — | | | — | | | — | | | — | | | — | | | (7,631) | | | — | | | — | | | (7,631) | | |
Non-Controlling interest in Deskeo | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 13,464 | | | 13,464 | | |
Issuance of Class A common stock for acquisition | — | | | — | | | 2,577 | | | — | | | — | | | — | | | — | | | 423 | | | 3,000 | | |
Preferred dividend on EPUs | — | | | — | | | — | | | — | | | — | | | (6,200) | | | — | | | 6,200 | | | — | | |
Earnings distributions to limited partnership interests and other noncontrolling interests | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,805 | | | 1,805 | | |
Grant of exchangeability, redemption and issuance of Class A common stock, 27,333,907 shares | 264 | | | — | | | 104,121 | | | — | | | — | | | — | | | — | | | 61,259 | | | 165,644 | | |
Contributions of capital to and from Cantor for equity-based compensation | — | | | — | | | 19,348 | | | — | | | — | | | — | | | — | | | 8,664 | | | 28,012 | | |
Repurchase of 20,237,430 shares of Class A Common Stock | — | | | — | | | — | | | — | | | (249,643) | | | — | | | — | | | (40,541) | | | (290,184) | | |
| | | | | | | | | | | | | | | | | | |
Restricted stock units compensation | — | | | — | | | 9,951 | | | — | | | — | | | — | | | — | | | 2,181 | | | 12,132 | | |
Redemption of EPU's | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (167,396) | | | (167,396) | | |
Balance, December 31, 2021 | $ | 1,940 | | | $ | 212 | | | $ | 487,447 | | | $ | 1,572 | | | $ | (290,174) | | | $ | 1,079,661 | | | $ | (2,731) | | | $ | 386,266 | | | $ | 1,664,193 | | |
NEWMARK GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
Dividends declared per share of common stock | | | | | $ | 0.04 | | | $ | 0.13 | | | $ | 0.40 | |
Dividends declared and paid per share of common stock | | | | | $ | 0.04 | | | $ | 0.13 | | | $ | 0.39 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
NEWMARK GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Consolidated net income | $ | 978,134 | | | $ | 109,277 | | | $ | 161,712 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | |
Gain on originated mortgage servicing rights | (147,789) | | | (193,913) | | | (103,160) | |
Depreciation and amortization | 121,729 | | | 141,193 | | | 131,144 | |
Nasdaq earn-out recognition | (1,108,012) | | | (121,906) | | | (98,580) | |
Provision/(reversals) for/of credit losses on the financial guarantee liability | (3,592) | | | 11,632 | | | — | |
Provision for doubtful accounts | 6,338 | | | 4,668 | | | 1,817 | |
Equity-based compensation and allocation of net income to limited partnership units and FPUs | 356,345 | | | 130,759 | | | 258,836 | |
Employee loan amortization | 79,418 | | | 73,596 | | | 38,987 | |
Deferred tax (benefit) provision | 118,649 | | | 419 | | | (27,852) | |
Non-cash changes in acquisition related earn-outs | 415 | | | (9,916) | | | 728 | |
| | | | | |
Unrealized (gains) on loans held for sale | (21,259) | | | (24,295) | | | (5,174) | |
Unrealized gain on investment | (27,825) | | | — | | | — | |
(Gains) Loss from an equity method investment | — | | | 11,562 | | | (7,250) | |
| | | | | |
Realized (gain) loss on marketable securities | (24,468) | | | 2,204 | | | (4,056) | |
Unrealized gain on marketable securities | (77,266) | | | (5,004) | | | (11,303) | |
Realized loss (gains) on non-marketable investments | (1,590) | | | 84,186 | | | (12,159) | |
Change in valuation of derivative asset | 12,475 | | | 13,680 | | | 51,117 | |
Loan originations—loans held for sale | (9,142,148) | | | (12,374,231) | | | (8,783,225) | |
Loan sales—loans held for sale | 9,177,733 | | | 11,527,010 | | | 9,563,973 | |
Other | 3,610 | | | 3,405 | | | 4,260 | |
Consolidated net income, adjusted for non-cash and non-operating items | 300,897 | | | (615,674) | | | 1,159,815 | |
Changes in operating assets and liabilities: | | | | | |
Receivables, net | (191,271) | | | 123,743 | | | (52,021) | |
Loans, forgivable loans and other receivables from employees and partners | (78,493) | | | (127,917) | | | (161,897) | |
Right of use asset | 41,508 | | | 11,192 | | | (19,481) | |
Receivable from related parties | (8,262) | | | — | | | — | |
Other assets | 8,858 | | | 21,764 | | | (93,823) | |
Accrued compensation | (83,237) | | | (75,369) | | | 39,959 | |
Right of use liability | (34,676) | | | (7,029) | | | 72,947 | |
Accounts payable, accrued expenses and other liabilities | (4,399) | | | (82,415) | | | 17,829 | |
Payables to related parties | 366 | | | (25,989) | | | 23,433 | |
Net cash (used in) provided by operating activities | (48,709) | | | (777,694) | | | 986,761 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Payments for acquisitions, net of cash acquired | (69,755) | | | (5,850) | | | (33,939) | |
Distributions from equity method investment | — | | | 90 | | | 8,560 | |
Proceeds from the sale of marketable securities | 551,064 | | | 34,738 | | | 32,606 | |
Purchase of non-marketable investments | (8,500) | | | — | | | (28,000) | |
Purchase of debt securities | — | | | (12,754) | | | — | |
| | | | | |
Purchases of fixed assets | (19,721) | | | (19,626) | | | (34,526) | |
| | | | | |
| | | | | |
Purchase of MSRs | — | | | (200) | | | (1,489) | |
Net cash (used in) provided by investing activities | 453,088 | | | (3,602) | | | (56,788) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Proceeds from warehouse facilities | 9,142,148 | | | 12,374,231 | | | 8,783,225 | |
Principal payments on warehouse facilities | (9,152,656) | | | (11,522,677) | | | (9,545,964) | |
Proceeds from the sale of limited partnership interests | 6,898 | | | — | | | — | |
| | | | | |
| | | | | |
| | | | | |
Settlement of pre-Spin-Off related party receivables | — | | | — | | | 33,892 | |
Borrowing of debt | 55,000 | | | 365,000 | | | 155,000 | |
Repayment of debt | (195,000) | | | (275,000) | | | (105,000) | |
| | | | | |
| | | | | |
Repurchase agreements and securities loaned | 106,729 | | | (3,457) | | | 36,735 | |
Redemption and repurchase of limited partnership interests | (2,000) | | | — | | | — | |
Treasury stock repurchases | (290,538) | | | (6,364) | | | (37,368) | |
Earnings distributions to limited partnership interests and other noncontrolling interests | (14,907) | | | (81,879) | | | (140,576) | |
Dividends to stockholders | (7,631) | | | (23,171) | | | (69,245) | |
Payments on acquisition earn-outs | (42,842) | | | (4,793) | | | (4,837) | |
Deferred financing costs | (1,479) | | | (4,067) | | | (1,368) | |
Net cash (used in) provided by financing activities | (396,278) | | | 817,823 | | | (895,506) | |
| | | | | | | | | | | | | | | | | |
Net increase in cash and cash equivalents and restricted cash | 8,101 | | | 36,527 | | | 34,466 | |
Cash and cash equivalents and restricted cash at beginning of period | 258,399 | | | 221,872 | | | 187,406 | |
Cash and cash equivalents and restricted cash at end of period | $ | 266,500 | | | $ | 258,399 | | | $ | 221,872 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
Supplemental disclosures of cash flow information: | 2021 | | 2020 | | 2019 |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid during the period for: | | | | | |
Interest | $ | 36,271 | | | $ | 40,640 | | | $ | 36,959 | |
Taxes | $ | 99,381 | | | $ | 80,288 | | | $ | 95,089 | |
Supplemental disclosure of non-cash operating, investing and financing activities: | | | | | |
Right-of-use assets and liabilities | $ | 497,865 | | | $ | 37,808 | | | $ | 182,180 | |
Treasury stock repurchase | $ | — | | | $ | 453 | | | $ | 4,732 | |
The accompanying Notes to the Consolidated Financial Statements are an integral part of these financial statements.
NEWMARK GROUP, INC.
Notes to the Consolidated Financial Statements
(1) Organization and Basis of Presentation
Newmark Group, Inc., formerly known as Newmark Knight Frank (together with its subsidiaries, “Newmark” or the “Company”), a Delaware corporation, was formed as NRE Delaware, Inc. on November 18, 2016. Newmark changed its name to Newmark Group, Inc. on October 18, 2017. Newmark Holdings, L.P. (“Newmark Holdings”) is a consolidated subsidiary of Newmark for which Newmark is the general partner. Newmark and Newmark Holdings jointly own Newmark Partners, L.P. (“Newmark OpCo”), the operating partnership. Newmark is a leading commercial real estate services firm. Newmark offers a diverse array of integrated services and products designed to meet the full needs of both real estate investors/owners and occupiers. Newmark’s investor/owner services and products include capital markets, which consists of investment sales, debt and structured finance and loan sales, agency leasing, property management, valuation and advisory, commercial real estate due diligence consulting and advisory services and Government Sponsored Enterprise (“GSE”) lending and loan servicing, mortgage brokerage and equity-raising. Newmark’s occupier services and products include tenant representation, real estate management technology systems, workplace and occupancy strategy, global corporate consulting services, project management, lease administration and facilities management. Newmark enhances these services and products through innovative real estate technology solutions and data analytics that enable clients to increase their efficiency and profits by optimizing their real estate portfolio. Newmark has relationships with many of the world’s largest commercial property owners, real estate developers and investors, as well as Fortune 500 and Forbes Global 2000 companies.
Nasdaq Monetization Transactions
On June 28, 2013, BGC Partners, Inc. ("BGC") had sold certain assets of its on-the-run, electronic benchmark U.S. Treasury platform (“eSpeed”) to Nasdaq, Inc. ("Nasdaq"). The total consideration received in the transaction included $750.0 million in cash paid upon closing and an earn-out of up to 14,883,705 shares of Nasdaq shares to be paid ratably over 15 years, provided that Nasdaq, as a whole, produces at least $25.0 million in consolidated gross revenues each year (the “Nasdaq Earn-out”). The remaining rights under the Nasdaq Earn-out were transferred to Newmark on September 28, 2017 as part of the transaction (see below for further discussion and Note 7 — “Marketable Securities” for additional information).
Exchangeable Preferred Partnership Units and Nasdaq Forward Contracts
On June 18, 2018 and September 26, 2018, Newmark OpCo issued approximately 175.0 million and 150.0 million of exchangeable preferred partnership units (“EPUs”), respectively, in private transactions to the Royal Bank of Canada (“RBC”) (the “Newmark OpCo Preferred Investment”). Newmark received $266.1 million of cash in 2018 with respect to these transactions. The EPUs were issued in 4 tranches and are separately convertible by either RBC or Newmark into a fixed number of shares of Newmark Class A common stock, subject to a revenue hurdle in each of the fourth quarters of 2019 through 2022 for each of the respective 4 tranches. The ability to convert the EPUs into Newmark Class A common stock is subject to the special purpose vehicle's (the “SPVs”) option to settle the postpaid forward contracts as described below. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in “Noncontrolling interests” on the accompanying consolidated balance sheets and consolidated statements of changes in equity. The EPUs are entitled to a preferred payable-in-kind dividend, which is recorded as accretion to the carrying amount of the EPUs through Retained earnings on the accompanying consolidated statements of changes in equity and are reductions to “Net income (loss) available to common stockholders” for the purpose of calculating earnings per share.
Contemporaneously with the issuance of the EPUs, an SPV that is a consolidated subsidiary of Newmark entered into variable postpaid forward contracts with RBC (together, the “Nasdaq Forwards”). The SPV is an indirect subsidiary of Newmark whose sole assets are the Nasdaq Earn-outs for 2019 through 2022. The Nasdaq Forwards provide the SPV the option to settle using up to 992,247 Nasdaq shares, to be received by the SPV pursuant to the Nasdaq Earn-out shares to be received (see Note 7 — “Marketable Securities”), or Newmark Class A common stock, in exchange for either cash or redemption of the EPUs, notice of which must be provided to RBC prior to November 1 of each year from 2019 through 2022.
In September 2020, the SPV notified RBC of its decision to settle the second Nasdaq Forward using the Nasdaq shares the SPV received in November 2020 in exchange for the second tranche of the EPUs, which resulted in a payable to RBC that was settled upon receipt of Nasdaq Earn-out shares. The fair value of the Nasdaq common shares that Newmark received was $121.9 million. On November 30, 2020, Newmark settled the second Nasdaq Forward 741,505 Nasdaq shares, with a fair value of $93.5 million and Newmark retained 250,742 Nasdaq shares.
In September 2019, the SPV notified RBC of its decision to settle the first Nasdaq Forward using the Nasdaq shares the SPV received in November 2019 in exchange for the first tranche of the EPUs, which resulted in a payable to RBC that was settled upon receipt of Nasdaq Earn-out shares. The fair value of the Nasdaq shares that Newmark received was $98.6 million.
On December 2, 2019, Newmark settled the first Nasdaq forward contract with 898,685 Nasdaq shares, with a fair value of $93.5 million and Newmark retained 93,562 Nasdaq shares.
Acceleration of Nasdaq Earn-out
On February 2, 2021, Nasdaq announced that it entered into a definitive agreement to sell its U.S. fixed income business to Tradeweb. On June 25, 2021, Nasdaq announced the close of the sale of its U.S. fixed income business, which accelerated Newmark’s receipt of Nasdaq shares. Newmark received 6,222,340 Nasdaq shares, with a fair value of $1,093.9 million based on the closing price on June 30, 2021 included in “Other (loss) income, net” for the year ended December 31, 2021 on the accompanying consolidated statement of operations. As of December 31, 2021, Newmark has 2,497,831 Nasdaq shares, with a fair value of $524.6 million.
On June 25, 2021, the SPV notified RBC of its decision to settle the third and fourth Nasdaq Forwards using the Nasdaq shares the SPV received on June 25, 2021. On July 2, 2021, Newmark settled the third and the fourth Nasdaq Forwards with 944,329 Nasdaq shares, with a fair value of $166.0 million based on the closing price of June 30, 2021.
2021 Equity Event and Share Count Reduction
In connection with the acceleration of the Nasdaq Earn-out, on June 28, 2021, the Compensation Committee of Newmark’s Board of Directors (the "Compensation Committee") approved a plan to expedite the tax deductible exchange and redemption of a substantial number of limited partnership units held by partners of the Company (the "2021 Equity Event"). The 2021 Equity Event also accelerated certain compensation expenses resulting in $428.6 million of compensation charges. These charges, along with the use of $101.0 million of net deferred tax assets, are expected to offset a significant percentage of the Company's taxes related to the 2021 Equity Event. These partnership units were settled using a $12.50 share price. In July 2021, the Compensation Committee approved increasing to $13.01 the price to settle certain units.
Some of the key components of the 2021 Equity Event are as follows:
•8.3 million and 8.0 million compensatory limited partnership units, respectively, of Newmark Holdings and BGC Holdings, L.P. ("BGC Holdings") held by the Company's partners who are employees were redeemed or exchanged.
•23.2 million and 17.4 million compensatory limited partnership units, respectively, of Newmark Holdings. and BGC Holdings. held by the Company's partners who are independent contractors were redeemed or exchanged. The Company also accelerated the payment of related withholding taxes to them with respect to their Newmark units. Independent contractors received one BGC Class A common share for each redeemed non-preferred BGC unit or cash and are responsible for paying any related withholding taxes.
•Partners with nonexchangeable non-preferred compensatory units exchanged or redeemed in connection with the 2021 Equity Event generally received restricted Class A common shares of Newmark and/or BGC to the extent tax deductible. A portion of the BGC Class A common shares received by independent contractors were unrestricted to facilitate their payment of withholding taxes.
•The issuance of Newmark Class A common stock related to the 2021 Equity Event reflected the June 30, 2021 exchange ratio of 0.9403.
•Newmark Holdings and BGC Holdings limited partnership interests with rights to convert into HDUs for cash were also redeemed in connection with the 2021 Equity Event.
See Note 27 — "Related Party Transactions" for the transactions with the Company's executive officers in connection with the 2021 Equity Event.
(a)Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission and in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). For the year ended December 31, 2019, Newmark changed the line item formerly known as “Allocations of net income and grant of exchangeability to limited partnership units and FPUs and issuance of common stock” to “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations and statements of cash flow. The change resulted in the reclassification of amortization charges related to equity-based awards, such as REUs and Restricted Stock Units (“RSUs”), from “Compensation and employee benefits” to
“Equity-based compensation and allocations of net income to limited partnership units and FPUs.”
“Equity-based compensation and allocations of net income to limited partnership units and FPUs” reflect the following items related to cash and equity-based compensation:
•Charges with respect to the grant of shares of common stock or limited partnership units, such as HDUs, including in connection with the redemption of non-exchangeable limited partnership units, including PSUs;
•Charges with respect to grants of exchangeability, such as the right of holders of limited partnership units with no capital accounts, such as PSUs, to exchange the units into shares of common stock, or HDUs, as well as the cash paid in the settlement of the related exchangeable preferred units to pay withholding taxes owed by the unit holder upon such exchange;
•Preferred units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder, rather than issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes;
•Charges related to the amortization of RSUs and REUs; and
•Allocations of net income to limited partnership units and founding/working partner units (“FPUs”), including the Preferred Distribution (as hereinafter defined).
Intercompany balances and transactions within Newmark have been eliminated. Transactions between Cantor Fitzgerald, L.P. ("Cantor") and Newmark pursuant to service agreements with Cantor (see Note 27 — “Related Party Transactions”), representing valid receivables and liabilities of Newmark which are periodically cash settled, have been included on the accompanying consolidated financial statements as either receivables from or payables to related parties.
Newmark receives administrative services to support its operations, and in return, Cantor allocates certain of its expenses to Newmark. Such expenses represent costs related, but not limited to, treasury, legal, accounting, information technology, payroll administration, human resources, incentive compensation plans and other services. These costs, together with an allocation of Cantor's overhead costs, are included as expenses on the accompanying consolidated statements of operations. Where it is possible to specifically attribute such expenses to activities of Newmark, these amounts have been expensed directly to Newmark. Allocation of all other such expenses is based on a services agreement between Cantor which reflects the utilization of service provided or benefits received by Newmark during the periods presented on a consistent basis, such as headcount, square footage, revenue, etc. Management believes the assumptions underlying the stand-alone financial statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by Newmark during the periods presented. However, these shared expenses may not represent the amounts that would have been incurred had Newmark operated independently from Cantor. Actual costs that would have been incurred if Newmark had performed the services itself would depend on multiple factors, including organizational structure and strategic decisions in various areas, including information technology and infrastructure (see Note 27 — “Related Party Transactions” for an additional discussion of expense allocations).
Transfers of cash, both to and from Cantor, as well as amounts due to Newmark from BGC are included in “Receivables from related parties or Payables to related parties” on the accompanying consolidated balance sheets and as part of the change in payments to and borrowings from related parties in the financing section prior to the Spin-Off and in the operating section after the Spin-Off on the accompanying consolidated statements of cash flows.
The income tax provision on the accompanying consolidated statements of operations and consolidated statements of comprehensive income has been calculated as if Newmark had been operating on a stand-alone basis and filed separate tax returns in the jurisdictions in which it operates. Prior to the Spin-Off, Newmark’s operations had been included in the BGC U.S. federal and state tax returns or separate non-U.S. jurisdictions tax returns. As Newmark operations in many jurisdictions were unincorporated commercial units of BGC and its subsidiaries, stand-alone tax returns have not been filed for the operations in these jurisdictions.
The accompanying consolidated financial statements contain all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the accompanying consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of changes in equity of Newmark for the periods presented.
(b)Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to recognize a Right-of-use (“ROU”) asset and lease liability for all leases with terms of more
than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is mostly unchanged. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other issues. In addition, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provided an additional (and optional) transition method to adopt the new leases standard. Under the new transition method, a reporting entity would initially apply the new lease requirements at the effective date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption; continue to report comparative periods presented in the financial statements in the period of adoption in accordance with legacy U.S. GAAP (i.e., ASC 840, Leases); and provide the required disclosures under ASC 840 for all periods presented under legacy U.S. GAAP. Further, ASU No. 2018-11 contains a practical expedient that allows lessors to avoid separating lease and associated non-lease components within a contract if certain criteria are met. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors, to clarify guidance for lessors on sales taxes and other similar taxes collected from lessees, certain lessor costs and recognition of variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842),Codification Improvements, to clarify certain application and transitional disclosure aspects of the new leases standard. The amendments address determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers and clarify interim period transition disclosure requirements, among other issues. The guidance in ASUs No. 2016-02, 2018-10, 2018-11 and 2018-20 was effective beginning January 1, 2019, with early adoption permitted; whereas the guidance in ASU No. 2019-01 is effective beginning January 1, 2020, with early adoption permitted. Newmark adopted the above mentioned standards on January 1, 2019 using the effective date as the date of initial application. Therefore, pursuant to this transition method, financial information was not updated, and the disclosures required under the new leases standards were not provided for dates and periods before January 1, 2019. The guidance provides a number of optional practical expedients to be utilized by lessees upon transition. Accordingly, Newmark elected the “package of practical expedients,” which permitted Newmark not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Newmark did not elect the use-of-hindsight or the practical expedient pertaining to land easements, with the latter not being applicable to Newmark. The new standard also provides practical expedients for an entity’s ongoing accounting as a lessee. Newmark elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, Newmark will not recognize ROU assets and lease liabilities, and this includes not recognizing ROU assets and lease liabilities for existing short-term leases of those assets upon transition. Newmark also elected the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate. The primary non-lease component that is combined with a lease component represents operating expenses such as utilities, maintenance or management fees. As a result, upon adoption, acting primarily as a lessee, Newmark recognized a $178.8 million ROU asset, net of tenant improvements, and a $226.7 million lease liability on the accompanying consolidated balance sheets for its real estate operating leases. The adoption of the guidance did not have a material impact on the accompanying consolidated statements of operations, consolidated statements of changes in equity and consolidated statements of cash flows. See Note 18 — “Leases” for additional information on Newmark’s leasing arrangements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires financial assets that are measured at amortized cost to be presented, net of an allowance for credit losses, at the amount expected to be collected over their estimated life. Expected credit losses for newly recognized financial assets, as well as changes to credit losses during the period, are recognized in earnings. For certain purchased financial assets with deterioration in credit quality since origination (“PCD assets”), the initial allowance for expected credit losses will be recorded as an increase to the purchase price. Expected credit losses, including losses on off-balance-sheet exposures, such as lending commitments, will be measured based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, to clarify that operating lease receivables accounted for under ASC 842, Leases, are not in the scope of the new credit losses guidance, and, instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The ASU makes changes to the guidance introduced or amended by ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments. See below for the description of the amendments stipulated in ASU No. 2019-04. In addition, in May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU allow entities, upon adoption of ASU No. 2016-13, to irrevocably elect the fair value option for financial instruments that were previously carried at amortized cost and are eligible for the fair value option under ASC 825-10, Financial Instruments: Overall. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The amendments in this ASU require entities to include certain expected recoveries of the amortized cost basis previously written off, or expected to be written off, in the allowance for credit losses for PCD assets; provide transition relief related to troubled debt restructurings; allow entities to exclude accrued interest amounts from
certain required disclosures; and clarify the requirements for applying the collateral maintenance practical expedient. The amendments in ASUs No. 2018-19, 2019-04, 2019-05 and 2019-11 are required to be adopted concurrently with the guidance in ASU No. 2016-13. Newmark adopted the standards on their required effective date beginning January 1, 2020. The primary effect of adoption, on a pre-tax basis, resulted in a decrease in assets of $8.0 million, an increase in liabilities of $17.9 million and a decrease in retained earnings of $25.9 million, respectively.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Newmark adopted the standard on its required effective date beginning January 1, 2020, and the guidance was applied on a prospective basis starting with the goodwill impairment test during the year ended December 31, 2020. The adoption of the new guidance did not have a material impact on the accompanying consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The guidance intends to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. Based on concerns about the sustainability of LIBOR, in 2017, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York identified a broad Treasury repurchase agreement (repo) financing rate referred to as the SOFR as its preferred alternative reference rate. The guidance in ASU No. 2018-16 adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments in this ASU were required to be adopted concurrently with the guidance in ASU No. 2017-12. The guidance became effective beginning January 1, 2019 and was required to be applied on a prospective and modified retrospective basis. As Newmark currently does not designate any derivative contracts as hedges for accounting purposes, the adoption of this new guidance did not have a material impact on the accompanying consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance helps organizations address certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act by providing an option to reclassify these stranded tax effects to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The standard became effective for Newmark on January 1, 2019. The guidance was required to be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of the new guidance did not have a material impact on the accompanying consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance largely aligns the accounting for share-based payment awards issued to employees and nonemployees, whereby the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The standard became effective for Newmark on January 1, 2019. The ASU was required to be applied on a prospective basis to all new awards granted after the date of adoption. In addition, any liability-classified awards that were not settled and equity-classified awards for which a measurement date had not been established by the adoption date were remeasured at fair value as of the adoption date with a cumulative effect adjustment to opening retained earnings in the year of adoption. Newmark adopted this standard on its effective date. The adoption of the new guidance did not have a material impact on the accompanying consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The guidance is part of the FASB’s disclosure framework project, whose objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements. The ASU eliminates, amends and adds certain disclosure requirements for fair value measurements. The FASB
concluded that these changes improve the overall usefulness of the footnote disclosures for financial statement users and reduce costs for preparers. Certain disclosures are required to be applied prospectively and other disclosures need to be adopted retrospectively in the period of adoption. As permitted by the transition guidance in the ASU, Newmark early adopted eliminated and modified disclosure requirements as of September 30, 2018. The early adoption of this standard did not have an impact on the accompanying consolidated financial statements. The additional disclosure requirements were adopted by Newmark beginning January 1, 2020, and the adoption of these fair value measurement disclosures did not have an impact on Newmark’s accompanying consolidated financial statements. See Note 26 — “Fair Value of Financial Assets and Liabilities” for additional information.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The guidance on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) applies to entities that are a customer in a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the guidance in this ASU. The new standard became effective beginning January 1, 2020. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance was issued in response to stakeholders’ observations that Topic 810, Consolidation, could be improved in the areas of applying the variable interest entity guidance to private companies under common control and in considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The new standard became effective beginning January 1, 2020, with early adoption permitted, and must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Newmark adopted the standard on its effective date beginning January 1, 2020. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The ASU amends guidance introduced or amended by ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments to ASU No. 2016-13 clarify the scope of the credit losses standard and address guidance related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other issues. With respect to amendments to ASU No. 2017-12, the guidance addresses partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, along with other issues. The clarifying guidance pertaining to ASU No. 2016-01 requires an entity to remeasure an equity security without a readily determinable fair value accounted for under the measurement alternative at fair value in accordance with guidance in ASC 820, Fair Value Measurement; specifies that equity securities without a readily determinable fair value denominated in nonfunctional currency must be remeasured at historical exchange rates; and provides fair value measurement disclosure guidance. Newmark adopted this standard on the required effective date beginning January 1, 2020. The adoption of the hedge accounting and the recognition and measurement guidance amendments did not have a material impact on the accompanying consolidated financial statements. See above for the impact of adoption of the amendments related to the credit losses standard.
In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. The guidance clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with already effective SEC final rules, thereby eliminating redundancies and making the codification easier to apply. This ASU was effective upon issuance and did not have a material impact on the accompanying consolidated financial statements and related disclosures.
In November 2019, the FASB issued ASU No. 2019-08, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements-Share-Based Consideration Payable to a Customer. The ASU simplifies and increases comparability of accounting for nonemployee share-based payments, specifically those made to customers. Under the new guidance, such awards will be accounted for as a reduction of the transaction price in revenue, but should be measured and classified following the stock compensation guidance in ASC 718, Compensation-Stock Compensation.
Newmark adopted standard on the required effective date beginning January 1, 2020. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. This ASU makes narrow-scope amendments related to various aspects pertaining to financial instruments and related disclosures by clarifying or improving the Codification. For the most part, the guidance was effective upon issuance, and the adoption of the standard did not have a material impact on the accompanying consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740):Simplifying the Accounting for Income Taxes. The ASU is part of the FASB’s simplification initiative, and it is expected to reduce cost and complexity related to accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740, Income Taxes related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. Newmark adopted the standard on the required effective date beginning January 1, 2021 and, with certain exceptions, it was applied prospectively. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force). These amendments improve previous guidance by reducing diversity in practice and increasing comparability of the accounting for the interactions between these codification topics as they pertain to certain equity securities, investments under the equity method of accounting and forward contracts or purchased options to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option. Newmark adopted the standard on the required effective date beginning January 1, 2021 on a prospective basis. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The standard amends the Codification by moving existing disclosure requirements to (or adding appropriate references in) the relevant disclosure sections. The ASU also clarifies various provisions of the Codification by amending and adding new headings, cross-referencing, and refining or correcting terminology. Newmark adopted the standard on the required effective date beginning January 1, 2021 and was applied using a modified retrospective method of transition. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
(c)New Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, and borrowings) necessitated by reference rate reform as entities transition away from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This ASU also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. Application of the guidance is optional and only available in certain situations. The ASU is effective upon issuance and generally can be applied through December 31, 2022. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope. The amendments in this standard are elective and principally apply to entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform (referred to as the “discounting transition”). The standard expands the scope of ASC 848, Reference Rate Reform and allows entities to elect optional expedients to derivative contracts impacted by the discounting transition. Similar to ASU No. 2020-04, provisions of this ASU are effective upon issuance and generally can be applied through December 31, 2022. Management is evaluating and planning for adoption of the new guidance, including forming a cross-functional LIBOR transition team to determine Newmark’s transition plan and facilitate an orderly transition to alternative reference rates, and continuing its assessment on the accompanying consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The standard is expected to reduce complexity and improve comparability of financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The ASU also enhances information transparency by making targeted improvements to the related disclosures guidance. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for
convertible instruments. The new standard became effective for Newmark beginning January 1, 2022 and can be applied using either a modified retrospective or a fully retrospective method of transition. The adoption of this guidance is not expected to have a material impact on the accompanying consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability, as well as payment terms and their effect on subsequent revenue recognized by the acquirer. The ASU requires companies to apply guidance in ASC 606, Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination, and, thus, creates an exception to the general recognition and measurement principle in ASC 805, Business Combinations. The new standard will become effective for Newmark beginning January 1, 2023, can be applied prospectively for business combinations occurring on or after the effective date, and early adoption is permitted. Management is currently evaluating the impact of the new standard on the accompanying consolidated financial statements.
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The standard requires business entities to make annual disclosures about transactions with a government they account for by analogizing to a grant or contribution accounting model. The guidance is aimed at increasing transparency about government assistance transactions that are not in the scope of other U.S. GAAP guidance. The ASU requires disclosure of the nature and significant terms and considerations of the transactions, the accounting policies used and the effects of those transactions on an entity’s financial statements. The new standard will become effective for Newmark’s financial statements issued for annual reporting periods beginning on January 1, 2022, can be applied prospectively or retrospectively, and early adoption is permitted. Management is currently evaluating the impact of the new standard on the accompanying consolidated financial statements.
(2) Limited Partnership Interests in Newmark Holdings and BGC Holdings
Newmark is a holding company with no direct operations and conducts substantially all of its operations through its operating subsidiaries. Virtually all of Newmark’s consolidated net assets and net income are those of consolidated variable interest entities. Newmark Holdings is a consolidated subsidiary of Newmark for which Newmark is the general partner. Newmark and Newmark Holdings jointly own Newmark OpCo, the operating partnership. In connection with the Separation and BGC Holdings Distribution, holders of BGC Holdings partnership interests received partnership interests in Newmark Holdings, described below (see Note 27 — “Related Party Transactions”). These collectively represent all of the “limited partnership interests” in BGC Holdings and Newmark Holdings.
As a result of the Separation, the limited partnership interests in Newmark Holdings were distributed to the holders of limited partnership interests in BGC Holdings, whereby each holder of BGC Holdings limited partnership interests at that time received a corresponding Newmark Holdings limited partnership interest, determined by the contribution ratio (as hereafter defined), which was equal to a BGC Holdings limited partnership interest multiplied by one divided by 2.2 (the “contribution ratio”), divided by the exchange ratio (which is the ratio by which a Newmark Holdings limited partnership interest can be exchanged for a number of shares of Newmark Class A common stock (the “exchange ratio”)). Initially, the exchange ratio equaled 1, so that each Newmark Holdings limited partnership interest was exchangeable for 1 share of Newmark Class A common stock; however, such exchange ratio is subject to adjustment. For reinvestment, acquisition or other purposes, Newmark may determine on a quarterly basis to distribute to its stockholders a smaller percentage of its income than Newmark Holdings distributes to its equity holders (excluding tax distributions from Newmark Holdings) of the cash that it received from Newmark OpCo. In such circumstances, the Separation and Distribution Agreement provides that the exchange ratio will be reduced to reflect the amount of additional cash retained by Newmark as a result of the distribution of such smaller percentage, after the payment of taxes. As of December 31, 2021, the exchange ratio equaled 0.9444.
Redeemable Partnership Interests
Founding/working partners have limited partnership interests (“FPUs”) in BGC Holdings and Newmark Holdings. Newmark accounts for FPUs outside of permanent capital as “Redeemable partnership interests,” on the accompanying consolidated balance sheets. This classification is applicable to FPUs because these units are redeemable upon termination of a partner, including a termination of employment, which can be at the option of the partner and not within the control of the issuer.
FPUs are held by limited partners who are primarily employees of BGC and generally receive quarterly allocations of net income. Upon termination of employment or otherwise ceasing to provide substantive services, the FPUs are generally
redeemed, and the unit holders are no longer entitled to participate in the quarterly allocations of net income. These quarterly allocations of net income are contingent upon services being provided by the unit holder and are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations to the extent they relate to FPUs held by Newmark employees.
Limited Partnership Units
Certain employees of Newmark hold limited partnership interests in Newmark Holdings and BGC Holdings (e.g., REUs, RPUs, PSUs, PSIs, HDUs, and LPUs, collectively the “limited partnership units”).
Prior to the Separation, certain employees of both BGC and Newmark generally received limited partnership units in BGC Holdings. As a result of the Separation, these employees were distributed limited partnership units in Newmark Holdings equal to a BGC Holdings limited partnership unit multiplied by the contribution ratio. In addition, in the BGC Holdings Distribution, these employees also received additional limited partnership units in Newmark Holdings. Subsequent to the Separation, Newmark employees generally have been granted limited partnership units in Newmark Holdings.
Generally, such limited partnership units receive quarterly allocations of net income and generally are contingent upon services being provided by the unit holders. As prescribed in U.S. GAAP guidance, prior to the Spin-Off, the quarterly allocations of net income on such limited partnership units were reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations. Following the Spin-Off, the quarterly allocations of net income on BGC Holdings and Newmark Holdings limited partnership units held by Newmark employees are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations, and the quarterly allocations of net income on Newmark Holdings limited partnership units held by BGC employees are reflected as a component of “Net income (loss) attributable to noncontrolling interests” on the accompanying consolidated statements of operations. From time to time, Newmark issues limited partnership units as part of the consideration for acquisitions.
Certain of these limited partnership units held by Newmark and BGC employees entitle the holders to receive post-termination payments equal to the notional amount of the units in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards and are included on the accompanyting consolidated balance sheets as part of "Accrued compensation",, and in accordance with U.S. GAAP guidance, Newmark records compensation expense for the awards based on the change in value at each reporting date on the accompanying consolidated statements of operations as part of “Equity-based compensation and allocations of net income to limited partnership units and FPUs.”
Certain Newmark employees hold preferred partnership units (“Preferred Units”). Each quarter, the net profits of Newmark Holdings are allocated to such units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation (the “Preferred Distribution”). These allocations are deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership units and are generally contingent upon services being provided by the unit holder. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into Newmark’s Class A common stock and are only entitled to the Preferred Distribution, and accordingly are not included in Newmark’s fully diluted share count. The quarterly allocations of net income on Preferred Units are reflected in compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations. After deduction of the Preferred Distribution, the remaining partnership units generally receive quarterly allocation of net income based on their weighted-average pro rata share of economic ownership of the operating subsidiaries. In addition, Preferred Units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder, rather than issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes.
Certain Newmark employees hold non-distribution earning units (e.g. NPSUs and NREUs, collectively “N Units”) that do not participate in quarterly partnership distributions and are not allocated any items of profit or loss. N Units become distribution earning limited partnership units, ratably over a four-year vesting term, if certain revenue thresholds are met at the end of each vesting term.
Cantor Units
Cantor holds limited partnership interests in Newmark Holdings (“Cantor units”). Cantor units are reflected as a component of “Noncontrolling interests” on the accompanying consolidated balance sheets. Cantor receives quarterly allocations of net income (loss) and are reflected as a component of “Net income (loss) attributable to noncontrolling interests” on the accompanying consolidated statements of operations.
Exchangeable Preferred Limited Partnership Units
The EPUs were issued in 4 tranches and are separately convertible by either RBC or Newmark into a fixed number of Newmark’s Class A common stock, subject to a revenue hurdle for Newmark in each of the fourth quarters of 2019 through 2022 for each of the 4 tranches, respectively. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in “Noncontrolling interests” on the consolidated statements of changes in equity. The EPUs are entitled to a preferred payable-in-kind dividend, which is recorded as accretion to the carrying amount of the EPUs through retained earnings on the accompanying consolidated statements of changes in equity and are reductions to “Net income available to common stockholders” for the purpose of calculating earnings per share. (See Note 1 — “Organization and Basis of Presentation” for additional information). As of December 31, 2021, there were no EPUs outstanding.
General
Certain of the limited partnership interests, described above, have been granted exchangeability into BGC and/or Newmark Class A common stock, and additional limited partnership interests may become exchangeable for BGC and/or Newmark Class A common stock. At the time exchangeability is granted, Newmark recognizes an expense based on the fair value of the award on that date, which is included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations. In addition, certain limited partnership interests have been granted the right to exchange into a Newmark partnership unit with a capital account, such as HDUs. HDUs have a stated capital account which is initially based on the closing trading price of Newmark Class A common stock at the time the HDU is granted and are included in “Accrued Compensation” on the accompanying consolidated balance sheets. HDUs participate in quarterly partnership distributions and are not exchangeable into shares of Class A common stock. Limited partnership interests held by Cantor in Newmark Holdings as of December 31, 2021 are exchangeable for 24.6 million shares of Newmark Class B common stock. Subsequent to the Spin-Off, limited partnership interests in BGC Holdings held by a partner or Cantor may become exchangeable for BGC Class A or Class B common stock on a 1-for-one basis, and limited partnership interests in Newmark Holdings held by a partner or Cantor may become exchangeable for a number of shares of Newmark Class A or Class B common stock equal to the number of limited partnership interests multiplied by the exchange ratio at that time. As of December 31, 2021, the exchange ratio equaled 0.9444.
Each quarter, net income (loss) is allocated between the limited partnership interests and the common stockholders. In quarterly periods in which Newmark has a net loss, the loss is allocated to Cantor and reflected as a component of “Net income (loss) attributable to noncontrolling interests” on the accompanying consolidated statements of operations. In subsequent quarters in which Newmark has net income, the initial allocation of income to the limited partnership interests is allocated to Cantor, and reflected in, “Net income (loss) attributable to noncontrolling interests,” to recover any losses taken in earlier quarters, with the remaining income allocated to the limited partnership interests. This loss allocation process between limited partners and Cantor has no material impact on the net income (loss) allocated to common stockholders.
(3) Summary of Significant Accounting Policies
Use of Estimates:
The preparation of Newmark’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities on the accompanying consolidated financial statements. Management believes that the estimates utilized in preparing these consolidated financial statements are reasonable. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from the estimates included on the accompanying consolidated financial statements.
Equity Investments and Marketable Securities:
In accordance with the guidance on recognition and measurement of equity investments, Newmark carries its marketable equity securities at fair value and recognizes any changes in fair value in consolidated net income (loss). Further, Newmark has elected to use a measurement alternative for its equity investments without a readily determinable fair value, pursuant to which these investments are initially recognized at cost and remeasured through earnings when there is an observable transaction involving the same or similar investment of the same issuer, or due to an impairment. Newmark’s
investments, in which it has significant influence but not a controlling financial interest and of which it is not the primary beneficiary, are accounted for under the equity method. (See Note 8 — “Investments” for additional information).
Revenue Recognition:
The accounting policies described below were updated pursuant to the adoption of the U.S. GAAP standard on Revenue from Contracts with Customers and related amendments on January 1, 2018. These revenue recognition policy updates have been applied prospectively in the accompanying consolidated financial statements from January 1, 2018 onward.
Commissions:
Commissions from real estate lease brokerage transactions are typically recognized at a point in time on the date the lease is signed, if deemed not subject to significant reversal. The date the lease is signed represents the transfer of control and satisfaction of the performance obligation as the tenant has been secured. Commission payments may be due entirely upon lease execution or may be paid in installments upon the resolution of a future contingency (e.g. tenant move-in or payment of first month’s rent).
Commission revenues from real estate sales brokerage transactions are recognized at the time the service has been provided and the commission becomes legally due, except when future contingencies exist. In most cases, close of escrow or transfer of title is a future contingency, and revenue recognition is deferred until all contingencies are satisfied.
Gains from Mortgage Banking Activities/Originations, net:
Gains from mortgage banking activities/originations, net are recognized when a derivative asset or liability is recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The derivative is recorded at fair value and includes loan origination fees, sales premiums and the estimated fair value of the expected net servicing cash flows. Gains from mortgage banking activities/originations, net are recognized net of related fees and commissions to third-party brokers.
Management Services, Servicing Fees and Other:
Management services revenues include property management, facilities management, project management and valuation and appraisal. Management fees are recognized at the time the related services have been performed, unless future contingencies exist. In addition, in regard to management and facility service contracts, the owner of the property will typically reimburse Newmark for certain expenses that are incurred on behalf of the owner, which comprise primarily on-site employee salaries and related benefit costs. The amounts which are to be reimbursed per the terms of the services contract are recognized as revenue in the same period as the related expenses are incurred. In certain instances, Newmark subcontracts property management services to independent property managers, in which case Newmark passes a portion of its property management fee on to the subcontractor, and Newmark retains the balance. Accordingly, Newmark records these fees gross of the amounts paid to subcontractors, and the amounts paid to subcontractors are recognized as expenses in the same period.
Newmark also uses third party service providers in the provision of its services to customers. In instances where a third-party service provider is used, Newmark performs an analysis to determine whether it is acting as a principal or an agent with respect to the services provided. To the extent that Newmark determines that it is acting as a principal, the revenue and the expenses incurred are recorded on a gross basis. In instances where Newmark has determined that it is acting as an agent, the revenue and expenses are presented on a net basis within the revenue line item.
In some instances, Newmark performs services for customers and incurs out-of-pocket expenses as part of delivering those services. Newmark’s customers agree to reimburse Newmark for those expenses, and those reimbursements are part of the contract’s transaction price. Consequently, these expenses and the reimbursements of such expenses from the customer are presented on a gross basis because the services giving rise to the out-of-pocket expenses do not transfer a good or service. The reimbursements are included in the transaction price when the costs are incurred, and the reimbursements are due from the customer.
Servicing fees are earned for servicing mortgage loans and are recognized on an accrual basis over the lives of the related mortgage loans. Also included in servicing fees are the fees earned on prepayments, interest and placement fees on borrowers’ escrow accounts and other ancillary fees.
Other revenues include interest income on warehouse notes receivable.
Fees to Related Parties:
Newmark is allocated costs from Cantor for back-office services provided by Cantor and their affiliates, including occupancy of office space, utilization of fixed assets, accounting, operations, human resources and legal services and information technology. Fees are expensed as they are incurred.
Other Income, net:
Other income, net comprises of gains or losses recorded in connection with changes in fair value of contingent consideration (See Note 26 — “Fair Value of Financial Assets and Liabilities”) in connection with entities acquired, gains and losses associated with the Nasdaq monetization transactions and the movement of mark-to-market and/or hedge on marketable securities that are classified as trading securities (See Note 7 — “Marketable Securities”), Newmark’s pro rata share for equity method investments and unrealized gains or losses relating to investments carried under the measurement alternative (See Note 8 — “Investments” and Note 19 — “Other assets”) and movements related to the impact of any unrealized mark-to-market gains or losses related to the Nasdaq Forwards.
Restricted Cash:
Represents cash set aside for amounts pledged for the benefit of Fannie Mae in excess of the required cash to secure Newmark’s financial guarantee liability (See Note 12 — “Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit”).
Leases:
Newmark enters into leasing arrangements in the ordinary course of business, as a lessee and has leases primarily relating to office space.
The accounting policies described below were updated pursuant to the adoption of ASC 842, Leases and related amendments on January 1, 2019. These policy updates have been applied using the modified retrospective approach in the accompanying consolidated financial statements from January 1, 2019, onward. Financial information for the year ended December 31, 2018 was not revised and continues to be reported under the previous accounting guidance on leases in effect during that historical period.
Newmark determines whether an arrangement is a lease or includes a lease at the contract inception. ROU lease assets represent the Newmark’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Other than for leases with an initial term of twelve months or less, operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease payments may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. Lease expense pertaining to operating leases is recognized on a straight-line basis over the lease term (See Note 18 — “Leases” for additional information).
Current Expected Credit Losses ("CECL"):
The accounting policy changes described below were updated pursuant to the adoption of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments and related amendments on January 1, 2020. These policy updates have been applied using the modified retrospective approach in the accompanying consolidated financial statements from January 1, 2020 onward. Financial information for the historical comparable periods was not revised and continues to be reported under the accounting standards in effect during those historical periods. In accordance with the guidance in ASC Topic 326, Newmark presents its financial assets that are measured at amortized cost, net of an allowance for credit losses, which represents the amount expected to be collected over their estimated life. Expected credit losses for newly recognized financial assets carried at amortized cost and credit exposures on off-balance sheet financial guarantees, as well as changes to expected lifetime credit losses during the period, are recognized in earnings. The CECL methodology represents a significant change from prior U.S. GAAP and replaced the prior multiple impairment methods, which generally required that a loss be incurred before it was recognized. Within the life cycle of a loan or other financial asset in scope, the CECL methodology generally results in the earlier recognition of the provision for credit losses and the related allowance for credit losses than under prior U.S. GAAP. The CECL methodology’s impact on expected credit losses, among other things, reflects Newmark’s view of the current state of the economy, forecasted macroeconomic conditions and Newmark’s portfolios.
Financial guarantee liability:
Newmark's adoption of ASC 326 impacted the expected credit loss reserving methodology for the financial guarantee liability provided to Fannie Mae under the Delegated Underwriting and Servicing (“DUS”) Program and Freddie Mac’s Targeted Affordable Housing Program “TAH”). The expected credit loss is modeled based on Newmark's historical loss
experience adjusted to reflect current economic conditions. A significant amount of judgment is required in the determination of the appropriate reasonable and supportable period, the methodology used to incorporate current and future macroeconomic conditions, determination of the probability of and exposure at default or non-payment, current delinquency status, loan size, terms, amortization types, and the forward-looking view of the primary risk drivers (debt-service coverage ratio and loan-to-value), all of which are ultimately used in measuring the quantitative components of the reserve. Beyond the reasonable and supportable period, Newmark estimates expected credit losses using its historical loss rates. In addition, Newmark reviews the reserves periodically and makes adjustments for certain external and internal qualitative factors, which may increase or decrease the reserves for credit losses. In order to estimate credit losses, assumptions about current and future economic conditions are incorporated into the model using multiple economic scenarios that are weighted to reflect the conditions at each measurement date. As a result of the adoption of ASC 326, Newmark recorded a pre-tax increase to the financial guarantee liability of $17.9 million through beginning stockholders' equity on January 1, 2020. During the years ended December 31, 2021 and 2020, there was reduction in the CECL provision of $3.6 million and an increase in the CECL provision of $11.6 million, respectively. The balance of the financial guarantee liabilities was $26.0 million and $29.6 million as of December 31, 2021 and December 31, 2020, respectively, and is included in “Other long-term liabilities” on the accompanying consolidated balance sheets.
Receivables, net:
Newmark has accrued commissions receivable from real estate brokerage transactions, management services and other receivables from contractual management assignments. Receivables are presented net of the CECL allowance as discussed above and are included in “Receivables, net” on the accompanying consolidated balance sheets. For its CECL reserve, Newmark segregated its receivables into certain pools based on similar risk characteristics and further defined a range of potential loss rates for each pool based on aging. Newmark designed its methodology to allow for a range of loss rates in each pool such that changes in forward-looking conditions can be incorporated into the estimate. Each pool is assigned a loss rate that incorporates management’s view of current conditions and forward-looking conditions that inform the level of expected credit losses in each pool. The credit loss estimate includes specifically identified amounts for which payment has become unlikely. As a result of the adoption of ASC 326. As a result of the adoption of ASC 326, Newmark recorded a pre-tax increase to the reserves of $4.2 million through beginning stockholder's equity on January 1, 2020. The balance of the reserve was $16.7 million and $13.4 million as of December 31, 2021 and 2020, respectively, and is included in "Receivables, net" on the accompany consolidated balance sheets.
Loans, Forgivable Loans and Other Receivables from Employees and Partners, net:
Newmark has entered into various agreements with certain of its employees and partners, whereby these individuals receive loans which may be either wholly or in part repaid from the distribution earnings that the individual receives on some or all of their limited partnership units or may be forgiven over a period of time. The forgivable portion of these loans is not included in Newmark’s estimate of expected credit losses when employees meet the conditions for forgiveness through their continued employment over the specified time period and is recognized as compensation expense over the life of the loan. The amounts due from terminated employees that Newmark does not expect to collect are included in the allowance for credit losses. As a result of the adoption of ASC 326, Newmark recorded a pre-tax reserve of $3.7 million through beginning stockholders' equity on January 1, 2020. As of December 31, 2021 and 2020, the balance of this reserve was $3.8 million and $3.7 million, respectively, and is included in “Loans, forgivable loans and other receivables from employees and partners, net” on the accompanying consolidated balance sheets.
From time to time, Newmark may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the time frame outlined in the underlying agreements. Newmark reviews loan balances each reporting period for collectability. If Newmark determines that the collectability of a portion of the loan balances is not expected, Newmark recognizes a reserve against the loan balances as compensation expense.
Segment:
Newmark has a single operating segment. Newmark is a real estate services firm offering services to commercial real estate tenants, investors, owners, occupiers, developers, leasing and corporate advisory, investment sales and real estate finance, consulting, origination and servicing of commercial mortgage loans, valuation, project and development management and property and facility management. The chief operating decision-maker regardless of geographic location evaluates the operating results of Newmark as total real estate services and allocates resources accordingly. Newmark recognized revenues as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2021 | | 2020 | | 2019 |
Leasing and other commissions | | | | | $ | 826,942 | | | $ | 513,842 | | | $ | 854,780 | |
Capital markets commissions | | | | | 938,305 | | | 454,106 | | | 541,255 | |
Gains from mortgage banking activities/origination, net | | | | | 225,481 | | | 310,914 | | | 198,085 | |
Management services, servicing fees and other | | | | | 915,715 | | | 626,136 | | | 624,012 | |
Revenues | | | | | $ | 2,906,443 | | | $ | 1,904,998 | | | $ | 2,218,132 | |
Fair Value:
U.S. GAAP guidance defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and further expands disclosures about such fair value measurements.
The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 measurements—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
•Level 2 measurements—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
•Level 3 measurements—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Cash and Cash Equivalents:
Newmark considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents are held with banks as deposits.
Principles of Consolidation:
Newmark’s consolidated financial statements include the accounts of Newmark and its wholly owned and majority owned subsidiaries. Newmark’s policy is to consolidate all entities of which it owns more than 50% unless it does not have control over the entity. In accordance with U.S. GAAP guidance, Consolidation of Variable Interest Entities, Newmark also consolidates any variable interest entities of which it is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Loans Held for Sale, at Fair Value (“LHFS”):
Newmark maintains multifamily and commercial mortgage loans for the purpose of sale to GSEs. Prior to funding, Newmark enters into an agreement to sell the loans to third-party investors at a fixed price. During the period prior to sale, interest income is calculated and recognized in accordance with the terms of the individual loan. LHFS are carried at fair value, as Newmark has elected the fair value option. The primary reasons Newmark has elected to account for loans backed by commercial real estate under the fair value option are to better offset the change in fair value of the loan and the change in fair value of the derivative instruments used as economic hedges.
Derivative Financial Instruments:
Newmark has loan commitments to extend credit to third parties. The commitments to extend credit are for mortgage loans at a specific rate (rate lock commitments). These commitments generally have fixed expiration dates or other termination clauses and may require a fee. Newmark is committed to extend credit to the counterparty as long as there is no violation of any condition established in the commitment contracts.
Newmark simultaneously enters into a commitment to deliver such mortgages to third-party investors at a fixed price (forward sale contracts).
Newmark entered into variable postpaid forward contracts as a result of the Nasdaq Forwards. These contracts qualify as derivative financial instruments.
The commitment to extend credit, the forward sale commitment and Nasdaq Forwards qualify as derivative financial instruments. Newmark recognizes all derivatives on the accompanying consolidated balance sheets as assets or liabilities measured at fair value. The change in the derivatives fair value is recognized in included in “Other income” on the accompanying consolidated statements of operations.
Mortgage Servicing Rights, Net (“MSRs”):
Newmark initially recognizes and measures the rights to service mortgage loans at fair value and subsequently measures them using the amortization method. Newmark recognizes rights to service mortgage loans as separate assets at the time the underlying originated mortgage loan is sold, and the value of those rights is included in the determination of the gains on loans held for sale.
Purchased MSRs, including MSRs purchased from Cantor Commercial Real Estate ("CCRE"), are initially recorded at fair value, and subsequently measured using the amortization method.
Newmark receives up to a 3-basis point servicing fee and/or up to a 1-basis point surveillance fee on certain Freddie Mac loans after the loan is securitized in a Freddie Mac pool (Freddie Mac Strip). The Freddie Mac Strip is also recognized at fair value and subsequently measured using the amortization method, but is recognized as a MSR at the securitization date.
MSRs are assessed for impairment, at least on an annual basis, based upon the fair value of those rights as compared to the amortized cost. Fair values are estimated using a valuation model that calculates the present value of the future net servicing cash flows. In using this valuation method, Newmark incorporates assumptions that management believes market participants would use in estimating future net servicing income. It is reasonably possible that such estimates may change. Newmark amortizes the mortgage servicing rights in proportion to, and over the period of, the projected net servicing income. For purposes of impairment evaluation and measurement, Newmark stratifies MSRs based on predominant risk characteristics of the underlying loans, primarily by investor type (Fannie Mae/Freddie Mac, FHA/GNMA, CMBS and other). To the extent that the carrying value exceeds the fair value of a specific MSR strata, a valuation allowance is established, which is adjusted in the future as the fair value of MSRs increases or decreases. Reversals of valuation allowances cannot exceed the previously recognized impairment up to the amortized cost.
Fixed Assets, net:
Fixed assets are carried at cost net of accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The costs of additions and improvements are capitalized, while maintenance and repairs are expensed as incurred. Fixed assets are depreciated over their estimated useful lives as follows:
| | | | | | | | |
Leasehold improvements and other fixed assets | | shorter of the remaining term of lease or useful life |
| | |
Software, including software development costs | | 3-5 years straight-line |
| | |
Computer and communications equipment | | 3-5 years straight-line |
Long-Lived Assets:
Newmark periodically evaluates potential impairment of long-lived assets and amortizable intangible assets, when a change in circumstances occurs, by applying the U.S. GAAP guidance, Accounting for the Impairment or Disposal of Long-Lived Assets, and assessing whether the unamortized carrying amount can be recovered over the remaining life through undiscounted future expected cash flows generated by the underlying assets. If the undiscounted future cash flows were less than the carrying value of the asset, an impairment charge would be recorded. The impairment charge would be measured as the excess of the carrying value of the asset over the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.
Goodwill and Other Intangible Assets, net:
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. As prescribed in U.S. GAAP guidance, Intangibles—Goodwill and Other, goodwill and other indefinite-lived intangible assets are not amortized, but instead are periodically tested for impairment. Newmark reviews goodwill and other indefinite-lived intangible assets for impairment on an annual basis during the fourth quarter of each fiscal year or whenever an event occurs or circumstances change that could reduce the fair value of a reporting unit below its carrying amount. When reviewing goodwill for impairment, Newmark first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Newmark did not recognize any impairment for the years ended December 31, 2021, 2020 and 2019.
Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Definite-lived intangible assets arising from business combinations include trademarks and trade names, contractual and non-contractual customers, non-compete agreements and brokerage backlog.
Transfer of Financial Assets:
Newmark originates its commercial mortgage loans primarily for the GSEs’ distribution channels, which generally involve (a) Freddie Mac purchasing Newmark’s loans for cash, (b) Fannie Mae securitizing Newmark’s loans into a mortgage-backed security (“MBS”) guaranteed by Fannie Mae, (c) FHA guaranteeing the credit risk of Newmark’s loans or (d) Ginnie Mae securitizing Newmark’s loans into an MBS. MBS are collateralized by the loan and Ginnie Mae selling the MBS for cash. As part of its origination activities, Newmark accounts for the transfer of financial assets in accordance with U.S. GAAP guidance on Transfers and Servicing. In accordance with this guidance, the transfer of financial assets between two entities must meet the following criteria for derecognition and sale accounting:
•The transfer must involve a financial asset, group of financial assets or a participating interest;
•The financial assets must be isolated from the transferor and its consolidated affiliates as well as its creditors;
•The transferee or beneficial interest holders must have the right to pledge or exchange the transferred financial assets; and;
•The transferor may not maintain effective control of the transferred assets.
Newmark determined that all loans sold during the periods presented met these specific conditions and accounted for all transfers of loans held for sale as completed sales.
Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises:
Warehouse facilities collateralized by U.S. Government Sponsored Enterprises are borrowings under warehouse line agreements. The carrying amounts approximate fair value due to the short-term maturity of these instruments. Outstanding borrowings against these lines are collateralized by an assignment of the underlying mortgages, reflected as loans held for sale, at fair value on Newmark’s consolidated balance sheets and third-party purchase commitments. The borrowing rates on the warehouse lines are based on short-term LIBOR plus applicable margins. Accordingly, the warehouse facilities collateralized by U.S. Government Sponsored Enterprises are typically classified within Level 2 of the fair value hierarchy. The facilities are generally repaid within a 45-day period when Freddie Mac buys the loans or upon settlement of the Fannie Mae or Ginnie Mae mortgage-backed securities, while Newmark retains servicing rights.
Income Taxes:
Newmark accounts for income taxes using the asset and liability method as prescribed in U.S. GAAP guidance on Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Certain of Newmark’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (“UBT”) in New York City. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners, rather than the partnership entity. As such, the partners’ tax liability or benefit is not reflected on the accompanying consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included on the accompanying consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in the U.S. or in foreign jurisdictions.
Newmark’s income taxes as presented are calculated on a separate return basis for the periods prior to the Spin-Off and have historically been included in BGC’s U.S. federal and state tax returns or separate non-U.S. jurisdictions tax returns. Subsequent to the Spin-Off, Newmark files its own stand-alone tax returns for its operations within these jurisdictions. The 2018 tax results reflect both the pre and post spin periods and, as such, Newmark’s tax results as presented are not necessarily reflective of the results that Newmark would have generated on a stand-alone basis.
Newmark provides for uncertain tax positions based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from Newmark’s estimates under different assumptions or conditions. Newmark recognizes interest and penalties related to uncertain tax positions in “Provision for income taxes” on the accompanying consolidated statements of operations.
A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. In assessing the need for a valuation allowance, Newmark considers all available evidence, including past
operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies.
The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws and involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. Because Newmark’s interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law.
Equity-Based and Other Compensation:
Equity-based compensation expense recognized during the period is based on the fair value of the portion of equity-based payment awards that is ultimately expected to vest. The grant-date fair value of equity-based awards is amortized to expense ratably over the awards’ vesting periods. As equity-based compensation expense recognized in the Newmark’s consolidated statements of operations is based on awards ultimately expected to vest, it has been reviewed for estimated forfeitures. Further, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Restricted Stock Units:
RSUs are accounted for as equity awards and in accordance with U.S. GAAP, Newmark is required to record an expense for the portion of the RSUs that is ultimately expected to vest. The grant-date fair value of RSUs is amortized to expense ratably over the awards’ expected vesting periods. The amortization is reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in the accompanying consolidated statements of operations.
Limited Partnership Units:
Limited partnership units in BGC Holdings and Newmark Holdings are held by Newmark employees and receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders. The quarterly allocations of net income on such limited partnership units are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in the accompanying consolidated statements of operations.
Certain of these limited partnership units in Newmark Holdings and BGC Holdings, such as REUs, entitle the holders to receive post-termination payments equal to the notional amount in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards under U.S. GAAP guidance, which requires that Newmark record an expense for such awards based on the change in value at each reporting period and include the expense in the Newmark’s consolidated statements of operations as part of “Equity-based compensation and allocations of net income to limited partnership units and FPUs.” The liability for limited partnership units held by Newmark employees with a post-termination payout amount is included in “Other long-term liabilities” on the Newmark’s consolidated balance sheets.
Certain limited partnership units held by Newmark employees are granted exchangeability into Class A common stock or may be redeemed in connection with the grant of shares of Class A common stock. At the time exchangeability is granted, or the shares are issued, Newmark recognizes an expense based on the fair value of the award on that date, which is included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in the accompanying consolidated statements of operations.
In addition, Preferred Units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder upon such exchange. Each quarter, the net profits of BGC Holdings and Newmark Holdings are allocated to such units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the Preferred Distribution, which is deducted before the calculation and distribution of the quarterly partnership distribution for the remaining limited partnership interests. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into BGC or Newmark Class A common stock and are only entitled to the Preferred Distribution, and accordingly they are not included in Newmark’s fully diluted share count. The quarterly allocations of net income on Preferred Units are reflected in compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in the accompanying consolidated statements of operations.
Redeemable Partnership Interests:
Redeemable partnership interest represents limited partnership interests in Newmark Holdings held by founding/working partners. (See Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings” for additional information related to redeemable partnership interest).
Noncontrolling Interests:
Noncontrolling interests represent third-party, Cantor’s and BGC’s (prior to the Spin-Off) ownership interests on the accompanying consolidated subsidiaries and EPUs (See Note 1 — “Organization and Basis of Presentation”) and are included on Newmark’s consolidated balance sheets. Prior to the Spin-Off, Cantor and BGC units received allocations of net income (loss). Subsequent to the Spin-Off, Cantor units received allocations of net income (loss). Allocations of net income (loss) are reflected as a component of “Net income (loss) attributable to noncontrolling interests” in the accompanying consolidated statements of operations.
(4) Acquisitions
Newmark acquired the first lien debt of Knotel, Inc. (“Knotel”), a global flexible workspace provider, in December of 2020. Newmark subsequently acquired Knotel's second lien debt in January of 2021. On January 31, 2021, Newmark agreed to provide approximately $19.8 million of debtor-in-possession financing to Knotel and to acquire the business, as part of Knotel's Chapter 11 sales process. On March 18, 2021, Newmark received approval from the U.S. Bankruptcy Court for the District of Delaware to acquire the business of Knotel. On March 24, 2021, Newmark acquired the business of Knotel. The Knotel acquisition has been determined to be a business combination with an acquisition date of March 31, 2021, for accounting purposes. The assets and liabilities of Knotel have been recorded in Newmark’s consolidated balance sheets at fair market value.
On September 6, 2021, Newmark acquired a majority stake in the start-up Space Management (DBA"Deskeo"), France's leader in flexible and serviced office space for enterprise clients. Based in Paris, France Deskeo adds over 50 locations to Newmark's international flexible office portfolio.
In November 2021, Newmark completed the acquisition of a U.S. based real estate property management services firm.
For the year ended December 31, 2021, the following table summarizes the components of the purchase consideration transferred, and the preliminary allocation of the assets acquired, and liabilities assumed, for the acquisition. Newmark expects to finalize its analysis of the assets acquired and liabilities assumed within the first year of the acquisition, and therefore adjustments to assets and liabilities may occur (in thousands):
| | | | | |
| As of the Acquisition Date |
Purchase Price | |
First and second lien debt | $ | 39,584 | |
Debtor-in-possession financing | 19,788 | |
Assumed liability | 6,574 | |
Cash and stock issued at closing | 44,492 | |
Total | $ | 110,438 | |
| |
Allocations | |
Cash | $ | 21,641 | |
Goodwill | 97,168 | |
Other intangible assets, net | 41,332 | |
Receivables, net | 7,478 | |
Fixed Assets, net | 40,605 | |
Other assets | 62,710 | |
Right-of-use Assets | 434,315 | |
Right-of-use Liabilities | (434,315) | |
Accrued Compensation | (2,076) | |
Accounts payable, accrued expenses and other liabilities | (103,300) | |
Unrealized gain on investment | (27,825) | |
Initial investment (recorded at cost) | (13,832) | |
Non-controlling interest | (13,463) | |
Total | $ | 110,438 | |
The total consideration for the acquisitions during the year ended December 31, 2021 was $110.4 million in total fair value, comprising of the extinguishment of first and second lien debt of $39.6 million, debtor-in-possession financing of $19.8 million, an assumed liability of $6.5 million, and $41.5 million in cash and 3.0 million of restricted Class A common stock. The excess of the consideration over the fair value of the net assets acquired was recorded as goodwill of $97.2 million, of which approximately $78.3 million is deductible by Newmark for tax purposes.
These acquisitions were accounted for using the purchase method of accounting. The results of operations of the acquisitions have been included on the accompanying consolidated financial statements subsequent to the date of acquisition, which in aggregate contributed $75.6 million to Newmark’s revenues for the year ended December 31, 2021. Deskeo was previously recorded as an alternative method investment on Newmark’s consolidated balance sheet and amounted to $13.8 million. Pursuant to acquiring a majority interest in Deskeo and valuing its previously held non-controlling interest, Newmark recorded an unrealized gain of $27.8 million on the investment during the year ended December 31, 2021.
In January 2020, Newmark completed the acquisition of certain assets of Hopkins Appraisal Services, a national leader in the valuation of restaurants and retail petroleum facilities.
For the year ended December 31, 2020, the following table summarizes the components of the purchase consideration transferred, and the preliminary allocation of the assets acquired, and liabilities assumed, for the acquisition. Newmark expects to finalize its analysis of the assets acquired and liabilities assumed within the first year of the acquisition, and therefore adjustments to assets and liabilities may occur (in thousands):
| | | | | |
| As of the Acquisition Date |
Purchase Price | |
Cash, stock and units issued at closing | $ | 6,249 | |
Contingent consideration | 3,590 | |
Total | $ | 9,839 | |
| |
Allocations | |
Goodwill | $ | 6,294 | |
Other intangible assets, net | 2,700 | |
Receivables, net | 796 | |
Fixed Assets, net | 134 | |
Other assets | 29 | |
Accounts payable, accrued expenses and other liabilities | (114) | |
Total | $ | 9,839 | |
The total consideration for the acquisition during the year ended December 31, 2020 was $9.8 million in total fair value, comprising cash of $5.9 million and $0.4 million of RSUs. The total consideration included contingent consideration of 104,653 RSUs (with an acquisition date fair value of $1.3 million), and $2.2 million in cash that may be issued contingent on certain targets being met through 2022. The excess of the consideration over the fair value of the net assets acquired was recorded as goodwill of $6.3 million, of which $2.4 million is deductible by Newmark for tax purposes.
This acquisition was accounted for using the purchase method of accounting. The results of operations of the acquisition have been included on the accompanying consolidated financial statements subsequent to the date of acquisition.which in aggregate contributed $7.5 million to Newmark’s revenues for the year ended December 31, 2020 .
(5) Earnings Per Share and Weighted-Average Shares Outstanding
U.S. GAAP guidance — Earnings (Loss) Per Share provides guidance on the computation and presentation of earnings (loss) per share (“EPS”). Basic EPS excludes dilution and is computed by dividing Net income available to common stockholders by the weighted-average number of shares of common stock outstanding and contingent shares for which all necessary conditions have been satisfied except for the passage of time. Net income (loss) is allocated to Newmark’s outstanding common stock, FPUs, limited partnership units and Cantor units (see Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings”). In addition, in relation to the Newmark OpCo Preferred Investment, the EPUs issued in June 2018 and September 2018 are entitled to a preferred payable-in-kind dividend which is recorded as accretion to the
carrying amount of the EPUs and is a reduction to net income available to common stockholders for the calculation of Newmark’s basic earnings per share and fully diluted earnings per share.
The following is the calculation of Newmark’s basic EPS (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Basic earnings per share: | | | | | | | | | | |
Net income available to common stockholders (1) | | | | | | $ | 744,528 | | | $ | 70,281 | | | $ | 104,406 | |
Basic weighted-average shares of common stock outstanding | | | | | | 190,179 | | | 179,106 | | | 177,774 | |
Basic earnings per share | | | | | | $ | 3.91 | | | $ | 0.39 | | | $ | 0.59 | |
(1)Includes a reduction for dividends on preferred stock or EPUs in the amount of $6.2 million, $9.8 million and $12.9 million for the years ended December 31, 2021, 2020 and 2019, respectively. (see Note 1 — “Organization and Basis of Presentation”).
Fully diluted EPS is calculated utilizing net income available to common stockholders plus net income allocations to the limited partnership interests in Newmark Holdings as the numerator. The denominator comprises Newmark’s weighted-average number of outstanding shares of Newmark common stock to the extent the related units are dilutive and, if dilutive, the weighted-average number of limited partnership interests and other contracts to issue shares of common stock, stock options and RSUs. The limited partnership interests generally are potentially exchangeable into shares of Newmark Class A common stock and are entitled to remaining earnings after the deduction for the Preferred Distribution; as a result, they are included in the fully diluted EPS computation to the extent that the effect would be dilutive.
The following is the calculation of Newmark’s fully diluted EPS (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | 2019 |
Fully diluted earnings per share: | | | | | | | | | |
Net income available to common stockholders | | | | | | $ | 744,528 | | | $ | 70,281 | | $ | 104,406 | |
Allocations of net income to limited partnership interests in Newmark Holdings, net of tax | | | | | | — | | | — | | 3,754 | |
Net income for fully diluted shares | | | | | | $ | 744,528 | | | $ | 70,281 | | $ | 108,160 | |
Weighted-average shares: | | | | | | | | | |
Common stock outstanding | | | | | | 190,179 | | | 179,106 | | 177,774 | |
| | | | | | | | | |
Cantor units | | | | | | — | | | — | | — | |
Partnership units (1) | | | | | | — | | | — | | 5,583 | |
RSUs (Treasury stock method) | | | | | | 4,310 | | | 355 | | 1,290 | |
Newmark exchange shares | | | | | | 1,324 | | | 229 | | 369 | |
Fully diluted weighted-average shares of common stock outstanding | | | | | | 195,813 | | | 179,690 | | 185,016 | |
Fully diluted earnings per share | | | | | | $ | 3.80 | | | $ | 0.39 | | $ | 0.58 | |
(1)Partnership units collectively include FPUs, limited partnership units, and Cantor and BGC units (see Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings” for more information).
For the years ended December 31, 2021, 2020 and 2019, 68.1 million, 85.2 million and 84.5 million potentially dilutive securities, respectively, were excluded from the computation of fully diluted EPS because their effect would have been anti-dilutive.
(6) Stock Transactions and Unit Redemptions
As of December 31, 2021, Newmark has 2 classes of authorized common stock: Class A common stock and Class B common stock.
Class A Common Stock
Each share of Class A common stock is entitled to 1 vote. Newmark has 1.0 billion authorized shares of Class A common stock at $0.01 par value per share.
Changes in shares of Newmark’s Class A common stock outstanding were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Year Ended December 31, |
| | | | | | | | | | 2021 | | 2020 | | 2019 |
Shares outstanding at beginning of period | | | | | | | | | | 161,175,894 | | | 156,265,461 | | | 156,916,336 | |
Share issuances: | | | | | | | | | | | | | | |
LPU redemption/exchange (1) | | | | | | | | | | 6,591,462 | | | 4,868,169 | | | 2,052,416 | |
Issuance of Class A common stock for Newmark RSUs | | | | | | | | | | 1,851,786 | | | 972,490 | | | 1,536,530 | |
Other(2) | | | | | | | | | | 18,890,659 | | | — | | | 278,181 | |
Treasury stock repurchases | | | | | | | | | | (20,237,430) | | | (930,226) | | | (4,518,002) | |
Shares outstanding at end of period | | | | | | | | | | 168,272,371 | | | 161,175,894 | | | 156,265,461 | |
(1)Because they were included in the Newmark’s fully diluted share count, if dilutive, any exchange of LPUs into Class A common stock would not impact the fully diluted number of shares and units outstanding.
(2)For information, refer to the section titled "2021 Equity Event and Share Count Reduction" in Note 1 "Organization and Basis of Presentation"
Class B Common Stock
Each share of Class B common stock is entitled to 10 votes and is convertible at any time into 1 share of Class A common stock.
As of December 31, 2021 and 2020, there were 21.3 million shares of Newmark Class B common stock outstanding.
Share Repurchases
On February 17, 2021, our Board increased its authorized share repurchases of Newmark Class A Common stock and purchases of limited partnership interests in Newmark's subsidiaries to $400.0 million. This authorization includes repurchases of shares or purchase of units from executive officers, other employees and partners, including of BGC and Cantor, as well as other affiliated persons or entities. From time to time, Newmark may actively continue to repurchase shares and/or purchase units. During the year ended December 31, 2021, Newmark repurchased 20,237,430 shares of Class A common stock, respectively, at an average price of $14.37. As of December 31, 2021, Newmark had $165.0 million remaining from its share repurchase and unit purchase authorization.
On August 5, 2021, the Board and Audit Committee reauthorized the $400.0 million Newmark share repurchase and unit redemption authorization, which may include purchases from Cantor, its partners or employees or other affiliated persons or entities.
The following table details Newmark's unit redemptions and share repurchases for cash, under the new program, and does not include unit redemptions and/or cancellations in connection with the grant of shares of Newmark's Class A common stock. The gross unit redemptions and share repurchases of Newmark's Class A common stock during the year ended December 31, 2021 were as follows (in thousands except units, shares and per share amounts):
| | | | | | | | | | | | | | | | | |
| Total Number of Shares Repurchased/Purchased | | Average Price Paid per Unit or Share | | Approximate Dollar Value of Units and Shares That May Yet Be Repurchased/ Purchased Under the Program |
Redemptions | | | | | |
January 1, 2021 - March 31, 2021 | — | | | $ | — | | | |
April 1, 2021 - June 30, 2021 | 167,894 | | | $ | 11.91 | | | |
July 1, 2021 - September 30, 2021 | — | | | $ | — | | | |
October 1, 2021 - December 31, 2021 | — | | | $ | — | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Total Redemptions | 167,894 | | | $ | 11.91 | | | |
| | | | | |
Repurchases | | | | | |
January 1, 2021 - March 31, 2021 | 879,243 | | | $ | 10.58 | | | |
April 1, 2021 - June 30, 2021 | 3,613,098 | | | $ | 12.81 | | | |
July 1, 2021 - September 30, 2021 | 6,307,802 | | | $ | 13.34 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
October 1, 2021 - October 31, 2021 | 3,064,959 | | | $ | 14.71 | | | |
November 1, 2021 - November 30, 2021 | 2,085,492 | | | $ | 16.20 | | | |
December 1, 2021 - December 31, 2021 | 4,286,836 | | | $ | 16.77 | | | |
Total Repurchases | 20,237,430 | | | $ | 14.37 | | | |
Total Redemptions and Repurchases | 20,405,324 | | | $ | 14.35 | | | $ | 165,017 | |
Redeemable Partnership Interests
The changes in the carrying amount of FPUs follow (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Balance at beginning of period: | $ | 20,045 | | | $ | 21,517 | |
Income allocation | 4,532 | | | 1,740 | |
Distributions of income | (1,215) | | | (1,740) | |
Redemptions | (2,169) | | | (1,472) | |
Issuance and other | (246) | | | — | |
Balance at end of period | $ | 20,947 | | | $ | 20,045 | |
(7) Marketable Securities
On June 28, 2013, BGC sold certain assets of eSpeed, its on-the-run business, to Nasdaq. The total consideration received by BGC in the transaction included the Nasdaq Earn-out of up to 14,883,705 shares of Nasdaq shares to be paid ratably over 15 years, provided that Nasdaq, as a whole, produces at least $25.0 million in consolidated gross revenues each year. The Nasdaq Earn-out was excluded from the initial gain on the divestiture and is recognized in income as it is realized and earned when these contingent events have occurred, consistent with the accounting guidance for gain contingencies. BGC transferred the remaining rights under the Nasdaq Earn-out to Newmark on September 28, 2017. Any Nasdaq shares that were received by BGC prior to September 28, 2017 were not transferred to Newmark.
In connection with the Nasdaq Earn-out, Newmark received 992,247 shares during each of the years ended December 31, 2020 and 2019. In accordance with the terms of the agreement, Newmark would recognize the remaining Nasdaq Earn-out of up to 6,945,729 shares of Nasdaq shares ratably over approximately the next 7 years, provided that Nasdaq, as a whole, produces at least $25.0 million in gross revenues each year. On February 2, 2021, Nasdaq announced that it entered into a definitive agreement to sell its U.S. fixed income business to Tradeweb. On June 25, 2021, Nasdaq announced the close of the sale of its U.S. fixed income business, which accelerated Newmark’s receipt of Nasdaq shares. Newmark received 6,222,340 Nasdaq shares, with a fair value of $1,093.9 million based on the closing price on June 30, 2021 included in “Other (loss) income, net” for the year ended December 31, 2021 on the accompanying consolidated statement of operations. As of December 31, 2021, Newmark has 2,497,831 Nasdaq shares, with a fair value of $524.6 million.
On June 25, 2021, the SPV notified RBC of its decision to settle the third and fourth Nasdaq Forwards using the Nasdaq shares the SPV received on June 25, 2021. On July 2, 2021, Newmark settled the Nasdaq Forwards with 944,329 Nasdaq shares, with a fair value of $166.0 million based on the closing price of June 30, 2021, and retained 5,278,011 Nasdaq shares.
Newmark sold 3,030,922, 343,562 and 350,000 of the Nasdaq shares for the years ended December 31, 2021, 2020 and 2019, respectively. As of the years ended December 31, 2021, 2020 and 2019 Newmark had 2,497,831, 250,742 and 343,562 shares remaining in connection with Nasdaq Earn-out. The gross proceeds of the Nasdaq shares sold were $551.1 million, $34.7 million, and $32.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. Newmark recorded realized gains (loss) on the mark-to-market of these securities of $24.5 million, $2.2 million and $4.1 million for the years ended December 31, 2021, 2020 and 2019, respectively. Newmark recorded unrealized gains (loss) on the mark-to-market of these securities of $77.3 million, $5.0 million and $11.3 million for the years ended December 31, 2021, 2020 and 2019, respectively. Realized and unrealized gains on the mark-to-market of these shares are included in “Other income, net” on the accompanying consolidated statements of operations. As of December 31, 2021 and 2020, Newmark had $524.6 million and $33.3 million, respectively, included in “Marketable securities” on the accompanying consolidated balance sheets (see Note 20 — “Collateralized Transactions”).
On August 2, 2021, a subsidiary of Newmark, Newmark OpCo, entered into a Master Repurchase Agreement (the “Repurchase Agreement”) with CF Secured, LLC (“CF Secured”), an affiliate of Cantor, pursuant to which Newmark may seek, from time-to-time, to execute short-term secured financing transactions. The Company, under the Repurchase Agreement, may seek to sell securities, in this case common shares of Nasdaq, owned by the Company, to CF Secured, under the Repurchase Agreement, and agrees to repurchase those securities on a date certain at a repurchase price generally equal to the original purchase price plus interest. Pursuant to the Repurchase Agreement, as of December 31, 2021 the Company had 866,791 Nasdaq shares pledged in the amount of $182.0 million, against which Newmark received $140.0 million. The $140.0 million amount received from CF Secured is included in "Repurchase agreements and securities loaned" on the accompanying consolidated balance sheets (see Note 20 — "Collateralized Transactions" and Note 27 — “Related Party Transactions”).
(8) Investments
Newmark has a 27% ownership in Real Estate LP, a joint venture with Cantor in which Newmark has the ability to exert significant influence over the operating and financial policies. Accordingly, Newmark accounts for this investment under the equity method of accounting. Newmark recognized equity (loss) income of $(11.6) million and $7.3 million for the years ended December 31, 2020 and 2019, respectively. Newmark did not recognize any equity (loss) or income for the year ended December 31, 2021. Equity (loss) income are included in "Other income, net" on the accompanying consolidated statements of operations. Newmark did not receive any distributions for the year ended December 31, 2021. Newmark received distribution of $0.1 million for the year ended December 31, 2020. The carrying value of these investments were $88.3 million and $88.3 million as of December 31, 2021 and 2020, respectively, included in “Other assets” on the accompanying consolidated balance sheets.
Investments Carried Under Measurement Alternatives
Newmark has acquired investments in entities for which it does not have the ability to exert significant influence over operating and financial policies (see Note 4 — “Acquisitions”).
For the years ended December 31, 2021, 2020 and 2019, Newmark recorded realized gains (losses) related to these investments of $1.6 million, $(84.2) million and $12.6 million, respectively. The changes in value are included as a part of “Other income (loss), net” on the accompanying consolidated statements of operations. The carrying value of these investments were $20.0 million and $9.9 million as of December 31, 2021 and 2020, respectively, and are included in “Other assets” on the accompanying consolidated balance sheets.
(9) Capital and Liquidity Requirements
Newmark is subject to various capital requirements in connection with seller/servicer agreements that Newmark has entered into with the various GSEs. Failure to maintain minimum capital requirements could result in Newmark’s inability to originate and service loans for the respective GSEs and could have a direct material adverse effect on the accompanying consolidated financial statements. Management believes that, as of December 31, 2021 and 2020, Newmark had met all capital requirements. As of December 31, 2021, the most restrictive capital requirement was the net worth requirement of the Federal National Mortgage Association (“Fannie Mae”). Newmark exceeded the minimum requirement by $400.5 million.
Certain of Newmark’s agreements with Fannie Mae allow Newmark to originate and service loans under Fannie Mae’s DUS Program. These agreements require Newmark to maintain sufficient collateral to meet Fannie Mae’s restricted and operational liquidity requirements based on a pre-established formula. Certain of Newmark’s agreements with the Federal Home Loan Mortgage Corporation (“Freddie Mac”) allow Newmark to service loans under TAH. These agreements require Newmark to pledge sufficient collateral to meet Freddie Mac’s liquidity requirement of 8% of the outstanding principal of TAH loans serviced by Newmark. Management believes that, as of December 31, 2021 and 2020, Newmark had met all liquidity requirements.
In addition, as a servicer for Fannie Mae, the Government National Mortgage Association (“Ginnie Mae”) and Federal Housing Administration, Newmark is required to advance to investors any uncollected principal and interest due from borrowers. Outstanding borrower advances were $0.9 million and $0.8 million as of December 31, 2021 and 2020, respectively, and are included in “Other assets” on the accompanying consolidated balance sheets.
(10) Loans Held for Sale, at Fair Value
Loans held for sale, at fair value represent originated loans that are typically financed by short-term warehouse facilities (see Note 21 — “Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises”) and sold within 45 days from the date the mortgage loan is funded. Newmark initially and subsequently measures all loans held for sale at fair value on the accompanying consolidated balance sheets. The fair value measurement falls within the definition of a Level 2 measurement (significant other observable inputs) within the fair value hierarchy. Electing to use fair value allows a better offset of the change in the fair value of the loans and the change in fair value of the derivative instruments used as economic hedges. Loans held for sale had a cost basis and fair value as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Cost Basis | $ | 1,051,220 | | | $ | 1,062,511 | |
Fair Value | 1,072,479 | | | 1,086,805 | |
As of December 31, 2021 and 2020, all of the loans held for sale were either under commitment to be purchased by Freddie Mac or had confirmed forward trade commitments for the issuance and purchase of Fannie Mae or Ginnie Mae mortgage-backed securities that will be secured by the underlying loans. As of December 31, 2021 and 2020, there were no loans held for sale that were 90 days or more past due or in nonaccrual status.
Newmark records interest income on loans held for sale, in accordance with the terms of the individual loans, during the period prior to sale. Interest income on loans held for sale is included in “Management services, servicing fees and other” on the accompanying consolidated statements of operations. Gains (losses) for fair value adjustments on loans held for sale is included in “Gains from mortgage banking activities/originations, net” on the accompanying consolidated statements of operations. Interest income and gains (losses) for fair value adjustments on loans held for sale were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Interest income on loans held for sale | | | | | | $ | 20,287 | | | $ | 27,560 | | | $ | 34,239 | |
Gains (loss) recognized on change in fair value on loans held for sale | | | | | | 21,259 | | | 24,294 | | | 5,174 | |
(11) Derivatives
Newmark accounts for its derivatives at fair value and recognizes all derivatives as either assets or liabilities on the accompanying consolidated balance sheets. In its normal course of business, Newmark enters into commitments to extend credit for mortgage loans at a specific rate (rate lock commitments) and commitments to deliver these loans to third-party investors at a fixed price (forward sale contracts). In addition, Newmark has entered into the Nasdaq Forwards (see Note 1 — “Organization and Basis of Presentation”) that are accounted for as derivatives.
The fair value of derivative contracts, computed in accordance with Newmark’s netting policy, is set forth below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
Derivative contract | | Assets | | Liabilities | | Notional Amounts(1) | | Assets | | Liabilities | | Notional Amounts(1) |
Rate lock commitments | | $ | 3,957 | | | $ | 2,836 | | | $ | 174,787 | | | $ | 21,034 | | | $ | 2,977 | | | $ | 296,972 | |
Nasdaq Forwards | | — | | | — | | | — | | | 12,822 | | | — | | | 174,000 | |
Forward sale contracts | | 4,544 | | | 2,180 | | | 1,226,007 | | | 7,632 | | | 14,971 | | | 1,359,482 | |
Total | | $ | 8,501 | | | $ | 5,016 | | | $ | 1,400,794 | | | $ | 41,488 | | | $ | 17,948 | | | $ | 1,830,454 | |
(1)Notional amounts represent the sum of gross long and short derivative contracts, an indication of the volume of Newmark’s derivative activity, and do not represent anticipated losses.
The change in fair value of rate lock commitments and forward sale contracts related to mortgage loans are reported as part of “Gains from mortgage banking activities/originations, net” on the accompanying consolidated statements of operations. The change in fair value of rate lock commitments are disclosed net of $1.0 million, $2.1 million and $2.0 million of expenses for the years ended December 31, 2021, 2020 and 2019, respectively. The changes in fair value of rate lock commitments are reported as part of “Compensation and employee benefits” on the accompanying consolidated statements of operations.
Gains and losses on derivative contracts, which are included on the accompanying consolidated statements of operations were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Location of gain (loss) recognized in income for derivatives | | | | Year Ended December 31, |
| | | | | | | 2021 | | 2020 | | 2019 |
Derivatives not designed as hedging instruments: | | | | | | | | | | | | |
Nasdaq Forwards | | Other income (loss), net | | | | | | $ | (12,475) | | | $ | (13,680) | | | $ | (51,117) | |
Rate lock commitments | | Gains (loss) from mortgage banking activities/originations, net | | | | | | 2,162 | | | 20,125 | | | 21,916 | |
Rate lock commitments | | Compensation and employee benefits | | | | | | (1,043) | | | (2,068) | | | (2,004) | |
Forward sale contracts | | Gains (loss) from mortgage banking activities/originations, net | | | | | | 2,365 | | | (7,339) | | | 851 | |
Total | | | | | | | | $ | (8,991) | | | $ | (2,962) | | | $ | (30,354) | |
Derivative assets and derivative liabilities are included in “Other current assets”, “Other assets” and the “Accounts payable, accrued expenses and other liabilities”, on the accompanying consolidated balance sheets.
(12) Credit Enhancement Receivable, Credit Enhancement Deposit and Contingent Liability
Newmark was a party to a Credit Enhancement Agreement (“CEA”), dated March 9, 2012, with German American Capital Corporation and Deutsche Bank Americas Holding Corporation (together, the “DB Entities”). On October 20, 2016, the DB Entities assigned the CEA to Deutsche Bank AG Cayman Island Branch, a Cayman Island Branch of Deutsche Bank AG (“DB Cayman”). Under the terms of these agreements, DB Cayman provided Newmark with varying levels of ongoing credit protection, subject to certain limits, for Fannie Mae and Freddie Mac loans subject to loss-sharing (see Note 23 — “Financial Guarantee Liability”) in Newmark’s servicing portfolio as of March 9, 2012. DB Cayman also reimbursed Newmark for any losses incurred due to violation of underwriting and servicing agreements that occurred prior to March 9, 2012. In accordance within the terms of the CEA, Newmark paid all amounts due to the DB Entities on March 23, 2021 fulfilling the Company's obligations under the agreement. For the years ended December 31, 2021 and 2020, there were no reimbursements under the CEA.
Newmark's servicing portfolio consisted of the following loss-sharing components (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Total credit risk loan portfolio | $ | 25,764,721 | | | $ | 24,048,754 | |
Maximum DB Cayman credit protection | — | | | 18,689 | |
| | | |
Maximum pre-credit enhancement loss exposure | $ | 7,785,850 | | | $ | 7,172,509 | |
Maximum DB Cayman credit protection | — | | | 6,230 | |
Maximum loss exposure without any form of credit protection | $ | 7,785,850 | | | $ | 7,166,279 | |
Credit enhancement receivable
As of December 31, 2021 and 2020, there were no credit enhancement receivables.
Credit enhancement deposit
The CEA required the DB Entities to deposit $25.0 million into Newmark’s Fannie Mae restricted liquidity account (see Note 9 — “Capital and Liquidity Requirements”). On of March 23, 2021, Newmark returned the credit enhancement deposit of $25.0 million to the DB Entities.
The $25.0 million deposit was included in “Accounts payable, accrued expenses and other liabilities” and "Other long-term liabilities", respectively, on the accompanying consolidated balance sheets as of December 31, 2020.
Contingent liability
Under the CEA, Newmark was required to pay DB Cayman, on March 9, 2021, an amount equal to 50% of the positive difference, if any, between (a) $25.0 million, and (b) Newmark’s unreimbursed loss-sharing payments from March 9, 2012 through March 9, 2021 on Newmark’s servicing portfolio as of March 9, 2012. On March 23, 2021, Newmark paid DB Cayman the entire outstanding amount. As of December 31, 2020, contingent liabilities were $12.3 million, and was included in “Accounts payable, accrued expenses and other liabilities” on the accompanying consolidated balance sheets. There was no liability as of December 31, 2021.
(13) Revenues from Contracts with Customers
The following table presents Newmark’s total revenues separately for its revenues from contracts with customers and other sources of revenues (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Revenues from contracts with customers: | | | | | | | | | | |
Leasing and other commissions | | | | | | $ | 826,942 | | | $ | 513,842 | | | $ | 854,780 | |
Capital markets commissions | | | | | | 938,305 | | | 454,106 | | | 541,255 | |
Management services | | | | | | 733,761 | | | 467,453 | | | 446,367 | |
Total | | | | | | 2,499,008 | | | 1,435,401 | | | 1,842,402 | |
Other sources of revenue(1): | | | | | | | | | | |
Gains from mortgage banking activities/originations, net | | | | | | 225,481 | | | 310,914 | | | 198,085 | |
Servicing fees and other | | | | | | 181,954 | | | 158,683 | | | 177,645 | |
Total | | | | | | $ | 2,906,443 | | | $ | 1,904,998 | | | $ | 2,218,132 | |
(1)Although these items have customers under contract, they were recorded as other sources of revenue as they were excluded from the scope of ASU No. 2014-9.
Disaggregation of revenues
Newmark’s chief operating decision-maker, regardless of geographic location, evaluates the operating results, including revenues, of Newmark as total real estate (see Note 3 — “Summary of Significant Accounting Policies” for further discussion).
Contract balances
The timing of Newmark’s revenue recognition may differ from the timing of payment by its customers. Newmark records a receivable when revenue is recognized prior to payment and Newmark has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, Newmark records deferred revenue until the performance obligations are satisfied.
Newmark’s deferred revenue primarily relates to customers paying in advance or billed in advance where the performance obligation has not yet been satisfied. Deferred revenue at December 31, 2021 and 2020 was $3.7 million and $2.9 million, respectively. During the years ended December 31, 2021 and 2020, Newmark recognized revenue of $2.1 million and $2.8 million, respectively, that was recorded as deferred revenue at the beginning of the period.
For Knotel and Deskeo, the aggregate amount of the transaction price allocated to the Company’s remaining performance obligations that represent contracted customer revenues that have not yet been recognized as revenue as of December 31, 2021, that will be recognized as revenue in future periods over the life of the customer contracts, in accordance with ASC 606, is approximately $180.4 million. Over half of the remaining performance obligation as of December 31, 2021 is scheduled to be recognized as revenue within the next twelve months, with the remaining to be recognized over the remaining life of the customer contracts, which extends through 2028.
Approximate future cash flows to be received over the next five years at December 31, 2021 are as follows (in thousands):
| | | | | |
2022 | $ | 93,352 | |
2023 | 53,580 | |
2024 | 21,927 | |
2025 | 7,305 | |
2026 | 3,072 | |
Thereafter | 1,125 | |
Total | $ | 180,361 | |
(14) Gains from Mortgage Banking Activities/Originations, Net
Gains from mortgage banking activities/originations, net consists of the following activity (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Fair value of expected net future cash flows from servicing recognized at commitment, net | | | | | | $ | 136,406 | | $ | 194,814 | | $ | 109,249 |
Loan originations related fees and sales premiums, net | | | | | | 89,075 | | | 116,100 | | | 88,836 | |
Total | | | | | | $ | 225,481 | | | $ | 310,914 | | | $ | 198,085 | |
(15) Mortgage Servicing Rights,Net
The changes in the carrying amount of MSRs were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
Mortgage Servicing Rights | | | | | | 2021 | | 2020 | | | | 2019 | | |
Beginning Balance | | | | | | $ | 528,983 | | | $ | 432,666 | | | | | $ | 416,131 | | | |
Additions | | | | | | 147,789 | | | 193,913 | | | | | 103,160 | | | |
Purchases from an affiliate | | | | | | — | | | 200 | | | | | 1,489 | | | |
| | | | | | | | | | | | | | |
Amortization | | | | | | (113,284) | | | (97,796) | | | | | (88,114) | | | |
Ending Balance | | | | | | $ | 563,488 | | | $ | 528,983 | | | | | $ | 432,666 | | | |
| | | | | | | | | | | | | | |
Valuation Allowance | | | | | | | | | | | | | | |
Beginning Balance | | | | | | $ | (34,254) | | | $ | (19,022) | | | | | $ | (4,322) | | | |
Decrease (increase) | | | | | | 21,068 | | | (15,232) | | | | | (14,700) | | | |
Ending Balance | | | | | | $ | (13,186) | | | $ | (34,254) | | | | | $ | (19,022) | | | |
Net Balance | | | | | | $ | 550,302 | | | $ | 494,729 | | | | | $ | 413,644 | | | |
Servicing fees are included in “Management services, servicing fees and other” on the accompanying consolidated statements of operations and were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Year Ended December 31, |
| | | | | | | | | | 2021 | | 2020 | | 2019 |
Servicing fees | | | | | | | | | | $ | 138,495 | | | $ | 116,005 | | | $ | 104,305 | |
Escrow interest and placement fees | | | | | | | | | | 4,415 | | | 6,140 | | | 22,417 | |
Ancillary fees | | | | | | | | | | 16,932 | | | 7,353 | | | 13,671 | |
Total | | | | | | | | | | $ | 159,842 | | | $ | 129,498 | | | $ | 140,393 | |
Newmark’s primary servicing portfolio at December 31, 2021 and 2020 was $68.4 billion and $66.3 billion, respectively. Also, Newmark is the named special servicer for a number of commercial mortgage-backed securitizations. Upon certain specified events (such as, but not limited to, loan defaults and loans assumptions), the administration of the loan is transferred to Newmark. Newmark’s special servicing portfolio was $2.0 billion and $2.3 billion at December 31, 2021 and 2020, respectively.
The estimated fair value of the MSRs at December 31, 2021 and 2020 was $608.0 million and $527.1 million, respectively.
Fair values are estimated using a valuation model that calculates the present value of the future net servicing cash flows. The cash flows assumptions used are based on assumptions Newmark believes market participants would use to value the portfolio. Significant assumptions include estimates of the cost of servicing per loan, discount rate, earnings rate on escrow deposits and prepayment speeds.
The discount rates used in measuring fair value for the years ended December 31, 2021 and 2020 were between 6.1% and 13.5% and varied based on investor type. An increase in discount rate of 100 basis points or 200 basis points would result in a decrease in fair value by $18.0 million and $35.1 million, respectively, at December 31, 2021 and by $14.8 million and $28.9 million, respectively, at December 31, 2020.
(16) Goodwill and Other Intangible Assets, Net
The changes in the carrying amount of goodwill were as follows (in thousands):
| | | | | |
Balance, January 1, 2020 | $ | 557,914 | |
Acquisitions | 6,294 | |
Measurement period adjustments | (3,876) | |
Balance, December 31, 2020 | 560,332 | |
Acquisitions | 97,168 | |
Measurement period adjustments | (369) | |
Balance, December 31, 2021 | $ | 657,131 | |
Goodwill is not amortized and is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with U.S. GAAP guidance on Goodwill and Other Intangible Assets. Newmark completed its annual goodwill impairment testing for the years ended December 31, 2021 and 2020, which did not result in a goodwill impairment (see Note 4 — “Acquisitions” for more information).
Other intangible assets consisted of the following (in thousands, except weighted-average life):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Gross Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted- Average Remaining Life (Years) |
Indefinite life: | | | | | | | |
Trademark and trade names | $ | 11,350 | | | $ | — | | | $ | 11,350 | | | N/A |
License agreements (GSE) | 5,390 | | | — | | | 5,390 | | | N/A |
Definite life: | | | | | | | |
Trademark and trade names | 12,765 | | | (6,021) | | | 6,744 | | | 3.7 |
Non-contractual customers | 30,131 | | | (12,815) | | | 17,316 | | | 9.4 |
License agreements | 4,981 | | | (4,981) | | | — | | | 0.0 |
Non-compete agreements | 6,558 | | | (3,898) | | | 2,660 | | | 3.5 |
Contractual customers | 33,731 | | | (3,822) | | | 29,909 | | | 7.0 |
Other | 4,552 | | | (1,722) | | | 2,830 | | | 5.3 |
Total | $ | 109,458 | | | $ | (33,259) | | | $ | 76,199 | | | 7.1 |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted- Average Remaining Life (Years) |
Indefinite life: | | | | | | | |
Trademark and trade names | $ | 11,350 | | | $ | — | | | $ | 11,350 | | | N/A |
License agreements (GSE) | 5,390 | | | — | | | 5,390 | | | N/A |
Definite life: | | | | | | | |
Trademark and trade names | 5,704 | | | (4,519) | | | 1,185 | | | 0.1 |
Non-contractual customers | 30,131 | | | (9,729) | | | 20,402 | | | 7.2 |
License agreements | 4,981 | | | (4,266) | | | 715 | | | 0.0 |
Non-compete agreements | 6,557 | | | (2,920) | | | 3,637 | | | 0.6 |
Contractual customers | 3,052 | | | (1,584) | | | 1,468 | | | 0.4 |
Other | 350 | | | (208) | | | 142 | | | 0.0 |
Total | $ | 67,515 | | | $ | (23,226) | | | $ | 44,289 | | | 5.5 |
Intangible amortization expense for the years ended December 31, 2021, 2020 and 2019 was $8.9 million, $6.7 million and $6.9 million, respectively. Intangible amortization is included as a part of “Depreciation and amortization” on the accompanying consolidated statements of operations. Impairment charges are included in intangible amortization expense.
The estimated future amortization of definite life intangible assets as of December 31, 2021 was as follows (in thousands):
| | | | | |
2022 | $ | 10,196 | |
2023 | 9,836 | |
2024 | 9,282 | |
2025 | 7,929 | |
2026 | 6,820 | |
Thereafter | 15,396 | |
Total | $ | 59,459 | |
(17) Fixed Assets, Net
Fixed assets, net consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Leasehold improvements, furniture and fixtures, and other fixed assets | $ | 184,704 | | | $ | 126,428 | |
Software, including software development costs | 32,851 | | | 30,928 | |
Computer and communications equipment | 27,382 | | | 26,168 | |
Total, cost | 244,937 | | | 183,524 | |
Accumulated depreciation and amortization | (109,181) | | | (87,157) | |
Total, net | $ | 135,756 | | | $ | 96,367 | |
Depreciation expense for the years ended December 31, 2021, 2020 and 2019 was $22.0 million, $22.9 million and $22.7 million, respectively. Newmark recorded an impairment charge of $6.0 million and $5.0 million for internally developed software for the years ended December 31, 2020 and 2019, respectively. The impairment charge was included as a part of "Depreciation and amortization" on the accompanying consolidated statements of operations. There is no impairment recorded for the year ended December 31, 2021.
Capitalized software development costs for the years ended December 31, 2021, 2020 and 2019 were $0.7 million, $2.0 million and $5.9 million, respectively. Amortization of software development costs totaled $1.3 million, $1.3 million and $2.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. Amortization of software development costs is included as part of “Depreciation and amortization” on the accompanying consolidated statements of operations.
(18) Leases
Newmark has operating leases for real estate and equipment. These leases have remaining lease terms ranging from 1 to 16 years, some of which include options to extend the leases in 5 to 10 years increments for up to 10 years. Renewal periods are included in the lease term only when renewal is reasonably certain, which is a high threshold and requires management to apply the judgment to determine the appropriate lease term. Certain leases also include periods covered by an option to terminate the lease if Newmark is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and, where relevant, variable rental payments tied to an index, such as the Consumer Price Index. Payments for leases in place before the date of adoption of ASC 842, Leases were determined based on previous leases guidance. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement is recognized as incurred. All leases were classified as operating leases as of December 31, 2021.
Pursuant to the accounting policy election, leases with an initial term of twelve months or less are not recognized on the balance sheet. The short-term lease expense over the period reasonably reflects the Company’s short-term lease commitments.
ASC 842, Leases requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or cancellation provisions, and determining the discount rate.
The Company determines whether an arrangement is a lease or includes a lease at the contract inception by evaluating whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from, and can direct the use of, the identified asset for a period of time, the Company accounts for the identified asset as a lease. The Company has elected the practical expedient to not separate lease and non-lease components for all leases other than real estate leases. The primary non-lease component that is combined with a lease component represents operating expenses such as utilities, maintenance or management fees.
As the rate implicit in the lease is not usually available, the Company used an incremental borrowing rate based on the information available at the adoption date of the new Leases standard in determining the present value of lease payments for existing leases. The Company has elected to use a portfolio approach for the incremental borrowing rate, applying corporate bond rates to the leases. The Company calculated the appropriate rates with reference to the lease term and lease currency. The Company uses information available at the lease commencement date to determine the discount rate for any new leases.
Operating lease costs were $75.5 million, $50.4 million and $47.1 million for the years ended December 31, 2021, 2020 and 2019, respectively, and are included in “Operating, administrative and other” on the accompanying consolidated statements of operations. Operating cash flows for the years ended December 31, 2021, 2020 and 2019, included payments of $81.7 million, $49.0 million and $44.4 million for operating lease liabilities, respectively. As of December 31, 2021 and 2020, Newmark did not have any leases that have not yet commenced but that create significant rights and obligations. For the years ended December 31, 2021, 2020 and 2019, respectively, Newmark had short-term lease expense of $1.1 million, $0.8 million and $2.3 million. For the years ended December 31, 2021, 2020 and 2019, respectively, Newmark had sublease income of $0.6 million, $1.3 million and $0.7 million. During 2020 Newmark recorded a lease impairment charge of $5.1 million to "Operating administrative and other" on the accompanying consolidated statements of operations.
The weighted-average discount rate as of December 31, 2021 and 2020 was 3.95% and 7.11% and the remaining weighted-average lease term was 7.4 years and 8.2 years, respectively.
As of December 31, 2021 and 2020, Newmark had operating lease Right-of-use assets of $606.6 million and $190.5 million, respectively, and operating lease Right-of-use liabilities of $82.0 million and $29.5 million, respectively, recorded in “Accounts payable, and accrued expenses and other liabilities” and $586.1 million and $218.6 million, respectively, recorded in “Right-of-use liabilities”, on the accompanying consolidated balance sheets.
Rent expense, including the operating lease costs above, for the years ended December 31, 2021, 2020 and 2019 was $105.2 million, $49.9 million and $49.4 million, respectively. Rent expense is included in “Operating, administrative and other” on the accompanying consolidated statements of operations.
Newmark is obligated for minimum rental payments under various non-cancelable operating leases, principally for office space, expiring at various dates through 2032. Certain of these leases contain escalation clauses that require payment of additional rent to the extent of increases in certain operating or other costs.
Minimum lease payments under these arrangements were as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
2022 | $ | 113,822 | | | $ | 45,701 | |
2023 | 112,840 | | | 42,072 | |
2024 | 106,038 | | | 40,507 | |
2025 | 101,211 | | | 37,866 | |
2026 | 96,493 | | | 36,520 | |
Thereafter | 274,764 | | | 126,668 | |
Total lease payments | 805,168 | | | 329,334 | |
Less: Interest | 137,141 | | | 81,237 | |
Present value of lease liability | $ | 668,027 | | | $ | 248,097 | |
(19) Other Current Assets and Other Assets
Other current assets consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Derivative assets | $ | 8,501 | | | $ | 32,259 | |
Prepaid expenses | 36,422 | | | 18,900 | |
Other taxes | 17,383 | | | 9,204 | |
Rent and other deposits | 20,471 | | | 1,539 | |
Other | 560 | | | 1,888 | |
Total | $ | 83,337 | | | $ | 63,790 | |
Other assets consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Deferred tax assets | $ | 70,191 | | | $ | 187,526 | |
Equity method investment | 88,308 | | | 88,315 | |
Debt securities | — | | | 12,754 | |
Non-marketable investments | 20,017 | | | 9,927 | |
Derivative assets | — | | | 9,229 | |
Other | 33,965 | | | 15,171 | |
Total | $ | 212,481 | | | $ | 322,922 | |
(20) Repurchase Agreements and Securities Loaned
Securities sold under Repurchase Agreements are accounted for as collateralized financing transactions and are recorded at the contractual amount for which the securities will be repurchase, including accrued interest. As of December 31, 2021, Cantor facilitated Repurchase Agreements between the Company and Cantor in the amount of $140.0 million. The market value of the securities pledged as of December 31, 2021, were $182.0 million (see Note 7 — "Marketable Securities" and Note 27 — “Related Party Transactions”). The cash collateral received from Cantor bore an interest rate of 0.95%. As of December 31, 2020, Newmark had securities loaned with Cantor of $33.3 million. The market value of the securities loaned was $32.6 million as of December 31, 2020. The cash collateral received from Cantor bore an interest rate of 0.85% as of December 31, 2020.
(21) Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises
Newmark uses its warehouse facilities and repurchase agreements to fund mortgage loans originated under its various lending programs. Outstanding borrowings against these lines are collateralized by an assignment of the underlying mortgages and third-party purchase commitments and are recourse only to Berkeley Point Capital, LLC.
Newmark had the following lines available and borrowings outstanding (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Committed Lines | | Uncommitted Lines | | Balance at December 31, 2021 | | Balance at December 31, 2020 | | Stated Spread to One-Month LIBOR/SOFR(3) | | Rate Type |
Warehouse facility due October 7, 2022(1)(2) | $ | 600,000 | | | $ | — | | | $ | 384,571 | | | $ | 358,247 | | | 130 bps - 140 bps | | Variable |
Warehouse facility due June 15, 2022 | 450,000 | | | — | | | 243,659 | | | 292,040 | | | 130 bps -140 bps | | Variable |
Warehouse facility due June 15, 2022 | — | | | 300,000 | | | 135,601 | | | — | | | 130 bps | | Variable |
Warehouse facility due September 25, 2022 | 400,000 | | | — | | | 193,091 | | | 146,380 | | | 130 bps - 140 bps | | Variable |
Fannie Mae repurchase agreement, open maturity(3) | — | | | 400,000 | | | 93,771 | | | 264,535 | | | 115 bps | | Variable |
Total | $ | 1,450,000 | | | $ | 700,000 | | | $ | 1,050,693 | | | $ | 1,061,202 | | | | | |
(1)The warehouse line established a $125.0 million sublimit line of credit to fund potential principal and interest servicing advances on the Company's Fannie Mae portfolio during the forbearance period related to the CARES Act. Advances will have an interest rate of 1-month LIBOR plus 180 bps. There were no outstanding under this sublimit as of December 31, 2021.
(2)The warehouse line was temporarily increased by $300 million to $900 million for the period December 1, 2020 to February 1, 2021.
(3)The spread for the Fannie Mae repurchase agreement is to SOFR. The warehouse facilities are to LIBOR.
Pursuant to the terms of the warehouse facilities, Newmark is required to meet several financial covenants. Newmark was in compliance with all covenants as of December 31, 2021 and 2020, respectively.
The borrowing rates on the warehouse facilities are based on short-term LIBOR or SOFR plus applicable margins. Due to the short-term maturity of these instruments, the carrying amounts approximate fair value.
(22) Long-Term Debt
Long-term debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
6.125% Senior Notes | $ | 545,239 | | | $ | 542,772 | |
Credit Facility | — | | | 137,613 | |
Total | $ | 545,239 | | | $ | 680,385 | |
6.125% Senior Notes
On November 6, 2018, Newmark closed its offering of $550.0 million aggregate principal amount of 6.125% Senior Notes due 2023 (the “6.125% Senior Notes”). The 6.125% Senior Notes were priced on November 1, 2018 at 98.94% to yield 6.375%. The 6.125% Senior Notes were offered and sold by Newmark in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended (“Securities Act”). The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act. The 6.125% Senior Notes bear an interest rate of 6.125% per annum, payable on each May 15 and November 15, beginning on May 15, 2019, and will mature on November 15, 2023.
The carrying amount of the 6.125% Senior Notes was determined as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Principal balance | $ | 550,000 | | | $ | 550,000 | |
Less: debt issue cost | 2,404 | | | 3,688 | |
Less: debt discount | 2,357 | | | 3,540 | |
Total | $ | 545,239 | | | $ | 542,772 | |
Newmark uses the effective interest rate method to amortize debt discounts and uses the straight-line method to amortize debt issue costs over the life of the notes. Interest expense, amortization of debt issue costs and amortization of the
debt discount of the 6.125% Senior Notes, included in “Interest (expense) income, net” on the accompanying consolidated statements of operations, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Interest expense | | | | | | $ | 33,687 | | | $ | 33,687 | | | $ | 34,730 | |
Debt issue cost amortization | | | | | | 1,284 | | | 1,284 | | | 1,282 | |
Debt discount amortization | | | | | | 1,183 | | | 1,183 | | | 565 | |
Total | | | | | | $ | 36,154 | | | $ | 36,154 | | | $ | 36,577 | |
Debt Repurchase Program
On June 16, 2020, the Newmark Board of Directors and its Audit Committee authorized a debt repurchase program for the repurchase by Newmark of up to $50.0 million of Newmark’s 6.125% Senior Notes and any future debt securities issued by the Company.
As of December 31, 2021, Newmark had $50.0 million remaining under its debt repurchase authorization.
Credit Facility
On November 28, 2018, Newmark entered into a credit agreement by and among Newmark, the several financial institutions from time to time party thereto, as Lenders, and Bank of America N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement provided for a $250.0 million three-year unsecured senior revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility bore an annual interest rate equal to, at Newmark’s option, either (a) LIBOR for specified periods, or upon the consent of all Lenders, such other period that is 12 months or less, plus an applicable margin, or (b) a base rate equal to the greatest of (i) the federal funds rate plus 0.5%, (ii) the prime rate as established by the administrative agent, and (iii) one-month LIBOR plus 1.0%, plus an applicable margin. The applicable margin is 2.0% with respect to LIBOR borrowings and can range from 1.25% to 2.25% in (a) above and was 1.00% with respect to base rate borrowings and can range from 0.25% to 1.25% in (b) above, depending upon Newmark’s credit rating. The Credit Facility also provides for an unused facility fee.
On February 26, 2020, Newmark entered into an amendment to the Credit Agreement, increasing the size of the Credit Facility to $425.0 million (the “Amended Credit Facility”) and extending the maturity date to February 26, 2023. The annual interest rate on the Amended Credit Facility was reduced to LIBOR plus 1.75%, subject to a pricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch.
On March 16, 2020, Newmark entered into a second amendment to the Credit Agreement, increasing the size of the Amended Credit Facility to $465.0 million (the "Second Amended Credit Facility"). The annual interest rate on the Second Amended Credit Facility is LIBOR plus 1.75%, subject to a pricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch. In July 2021, Newmark paid the $140.0 million outstanding on the Credit Facility.
Details of the Credit Facility are as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
Principal balance | $ | — | | | $ | 140,000 | |
Less: Debt issue cost | — | | | 2,387 | |
Total | $ | — | | | $ | 137,613 | |
As of December 31, 2021 and 2020, borrowings under the Credit Facility carried an interest rate of 0.00% and 1.90%, with a weighted-average interest rate of 1.03% and 2.37%, respectively. Newmark uses the straight-line method to amortize debt issue costs over the life of the notes. Interest expense and amortization of debt issue costs of the Credit Facility, included in “Interest (expense) income, net” on the accompanying consolidated statements of operations, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
Interest expense | | | | | | $ | 1,623 | | | $ | 6,618 | | | $ | 1,865 | |
Debt issue cost amortization | | | | | | 826 | | | 1,101 | | | 565 | |
Unused facility fee | | | | | | 972 | | | 354 | | | 627 | |
Total | | | | | | $ | 3,421 | | | $ | 8,073 | | | $ | 3,057 | |
On November 30, 2018, Newmark entered into an unsecured credit agreement (the “Cantor Credit Agreement”) with Cantor (see Note 27 — “Related Party Transactions” for a more detailed discussion).
(23) Financial Guarantee Liability
Newmark shares risk of loss for loans originated under the Fannie Mae DUS and Freddie TAH programs and could incur losses in the event of defaults under or foreclosure of these loans. Under the loss-share guarantee, Newmark’s maximum liability to the extent of actual losses incurred is approximately 33% of the outstanding principal balance on Fannie Mae DUS or Freddie TAH loans. Risk-sharing percentages are established on a loan-by-loan basis when originated, with most loans at 33% and “modified” loans at lower percentages. Under certain circumstances, risk-sharing percentages can be revised subsequent to origination or Newmark could be required to repurchase the loan. In the event of a loss resulting from a catastrophic event that is not required to be covered by borrowers’ insurance policies, Newmark can recover the loss under its mortgage impairment insurance policy. Any potential recovery is subject to the policy’s deductibles and limits.
At December 31, 2021, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of $25.8 billion with a maximum potential loss of $7.8 billion. At December 31, 2020, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of approximately $24.0 billion with a maximum potential loss of approximately $7.2 billion, of which $6.2 million was covered by the Credit Enhancement Agreement (see Note 12 — “Credit Enhancement Receivable, Credit Enhancement Deposit and Contingent Liability”). As of December 31, 2021, there were no loans covered by the Credit Enhancement Agreement.
Newmark’s current estimate of expected credit losses considers various factors, including, without being limited to, historical default and losses, current delinquency status, loan size, terms, amortization types, the forward-looking view of the primary risk drivers (debt-service coverage ratio and loan-to-value) based on forecasts in economic conditions and local market performance. During the years ended December 31, 2021 and 2020, there was a decrease to the reserve by $3.6 million and an increase to the reserve by $11.6 million, respectively. A loan is considered to be delinquent once it is 60 days past due. As of December 31, 2021, there were 2 loans in the credit risk portfolio with an outstanding principal balance of $33.6 million, with a maximum loss exposure of $11.2 million, that were in default. If the 2 loans in default resulted in a loss event, proceeds from the liquidation of the assets are estimated to be approximately $28.4 million based on current estimates of fair value. Newmark’s share of the loss would approximate $2.3 million. As of December 31, 2020, there were 4 loans in the credit risk portfolio with outstanding principal balances of $53.5 million, with a maximum loss exposure of $17.8 million, that were delinquent. If all 4 delinquent loans resulted in a loss event, proceeds from the liquidation of the assets are estimated to be approximately $39.0 million based on estimates of fair value at December 31, 2020. Newmark's share of the loss would approximate $5.3 million. As of December 31, 2021, no actual losses were incurred.
The provisions for risk-sharing were included in “Operating, administrative and other” on the accompanying consolidated statements of operations as follows (in thousands):
| | | | | |
Balance, January 1, 2020 | $ | 15 | |
Impact of adopting ASC 326 | 17,935 | |
Provision for expected credit losses | 11,631 | |
Balance, December 31, 2020 | 29,581 | |
Provision for expected credit losses | (3,592) | |
Balance, December 31, 2021 | $ | 25,989 | |
(24) Concentrations of Credit Risk
The lending activities of Newmark create credit risk in the event that counterparties do not fulfill their contractual payment obligations. In particular, Newmark is exposed to credit risk related to the Fannie Mae DUS and Freddie Mac TAH loans (see Note 23 — “Financial Guarantee Liability”). As of December 31, 2021, 20% and 13% of $7.8 billion of the maximum loss was for properties located in California and Texas, respectively. As of December 31, 2020, 21% and 14% of $7.2 billion of the maximum loss was for properties located in California and Texas, respectively.
(25) Escrow and Custodial Funds
In conjunction with the servicing of multifamily and commercial loans, Newmark holds escrow and other custodial funds. Escrow funds are held at unaffiliated financial institutions generally in the form of cash and cash equivalents. These funds amounted to $2.3 billion and $1.3 billion, as of December 31, 2021 and 2020, respectively. These funds are held for the
benefit of Newmark’s borrowers and are segregated in custodial bank accounts. These amounts are excluded from the assets and liabilities of Newmark.
(26) Fair Value of Financial Assets and Liabilities
U.S. GAAP guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 measurements—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•Level 2 measurements—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
•Level 3 measurements—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As required by U.S. GAAP guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth by level within the fair value hierarchy financial assets and liabilities accounted for at fair value under U.S. GAAP guidance (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Marketable securities | $ | 524,569 | | | $ | — | | | $ | — | | | $ | 524,569 | |
Loans held for sale, at fair value | — | | | 1,072,479 | | | — | | | 1,072,479 | |
| | | | | | | |
Rate lock commitments | — | | | — | | | 3,957 | | | 3,957 | |
Nasdaq Forwards | — | | | — | | | — | | | — | |
Forward sale contracts | — | | | — | | | 4,544 | | | 4,544 | |
Total | $ | 524,569 | | | $ | 1,072,479 | | | $ | 8,501 | | | $ | 1,605,549 | |
Liabilities: | | | | | | | |
| | | | | | | |
Contingent consideration | — | | | — | | | 12,338 | | | 12,338 | |
Rate lock commitments | — | | | — | | | 2,836 | | | 2,836 | |
Forward sale contracts | — | | | — | | | 2,180 | | | 2,180 | |
Total | $ | — | | | $ | — | | | $ | 17,354 | | | $ | 17,354 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Marketable securities | $ | 33,283 | | | $ | — | | | $ | — | | | $ | 33,283 | |
Loans held for sale, at fair value | — | | | 1,086,805 | | | — | | | 1,086,805 | |
Debt securities | — | | | 12,754 | | | — | | | 12,754 | |
Rate lock commitments | — | | | — | | | 21,034 | | | 21,034 | |
Nasdaq Forwards | — | | | — | | | 12,822 | | | 12,822 | |
Forward sale contracts | — | | | — | | | 7,632 | | | 7,632 | |
Total | $ | 33,283 | | | $ | 1,099,559 | | | $ | 41,488 | | | $ | 1,174,330 | |
Liabilities: | | | | | | | |
Contingent consideration | $ | — | | | $ | — | | | $ | 31,481 | | | $ | 31,481 | |
Rate lock commitments | — | | | — | | | 2,977 | | | 2,977 | |
Forwards sale contracts | — | | | — | | | 14,971 | | | 14,971 | |
Total | $ | — | | | $ | — | | | $ | 49,429 | | | $ | 49,429 | |
There were no transfers among Level 1, Level 2 and Level 3 for the years ended December 31, 2021 and 2020, respectively
Level 3 Financial Assets and Liabilities: Changes in Level 3 Nasdaq Forwards, rate lock commitments, forward sale contracts and contingent consideration measured at fair value on recurring basis were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 |
| Opening Balance | | Total realized and unrealized gains (losses) included in Net income | | Issuances | | Settlements | | Closing Balance | | Unrealized gains (losses) outstanding |
Assets: | | | | | | | | | | | |
Rate lock commitments | $ | 21,034 | | | $ | 3,957 | | | $ | — | | | $ | (21,034) | | | $ | 3,957 | | | $ | 3,957 | |
Forward sale contracts | 7,632 | | | 4,544 | | | — | | | (7,632) | | | 4,544 | | | 4,544 | |
Nasdaq Forwards | 12,822 | | | (12,822) | | | — | | | — | | | — | | | — | |
Total | $ | 41,488 | | | $ | (4,321) | | | $ | — | | | $ | (28,666) | | | $ | 8,501 | | | $ | 8,501 | |
| | | | | | | | | | | |
| Opening Balance | | Total realized and unrealized gains (losses) included in Net income | | Issuances | | Settlements | | Closing Balance | | Unrealized gains (losses) outstanding |
Liabilities: | | | | | | | | | | | |
Contingent consideration | $ | 31,481 | | | $ | (1,351) | | | $ | — | | | $ | (17,792) | | | $ | 12,338 | | | $ | 12,338 | |
Rate lock commitments | 2,977 | | | 2,836 | | | — | | | (2,977) | | | 2,836 | | | 2,836 | |
Forward sale contracts | 14,971 | | | 2,180 | | | — | | | (14,971) | | | 2,180 | | | 2,180 | |
Total | $ | 49,429 | | | $ | 3,665 | | | $ | — | | | $ | (35,740) | | | $ | 17,354 | | | $ | 17,354 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Opening Balance | | Total realized and unrealized gains (losses) included in Net income | | Issuances | | Settlements | | Closing Balance | | Unrealized gains (losses) outstanding |
Assets: | | | | | | | | | | | |
Rate lock commitments | $ | 32,035 | | | $ | 21,034 | | | $ | — | | | $ | (32,035) | | | $ | 21,034 | | | $ | 21,034 | |
Forward sale contracts | 14,389 | | | 7,632 | | | — | | | (14,389) | | | 7,632 | | | 7,632 | |
Nasdaq Forwards | 26,502 | | | (13,680) | | | — | | | — | | | 12,822 | | | 12,822 | |
Total | $ | 72,926 | | | $ | 14,986 | | | $ | — | | | $ | (46,424) | | | $ | 41,488 | | | $ | 41,488 | |
| | | | | | | | | | | |
| Opening Balance | | Total realized and unrealized gains (losses) included in Net income | | Issuances | | Settlements | | Closing Balance | | Unrealized gains (losses) outstanding |
Liabilities: | | | | | | | | | | | |
Contingent consideration | $ | 45,172 | | | $ | (11,063) | | | $ | 2,221 | | | $ | (4,849) | | | $ | 31,481 | | | $ | (408) | |
Rate lock commitments | 12,124 | | | 2,977 | | | 0 | | (12,124) | | | 2,977 | | | 2,977 | |
Forward sale contracts | 13,537 | | | 14,971 | | | 0 | | (13,537) | | | 14,971 | | | 14,971 | |
Total | $ | 70,833 | | | $ | 6,885 | | | $ | 2,221 | | | $ | (30,510) | | | $ | 49,429 | | | $ | 17,540 | |
Quantitative Information About Level 3 Fair Value Measurements
The following tables present quantitative information about the significant unobservable inputs utilized by Newmark in the fair value measurement of Level 3 assets and liabilities measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2021 |
Level 3 assets and liabilities | | Assets | | Liabilities | | Significant Unobservable Inputs | | Range | | Weighted Average |
Accounts payable, accrued expenses and other liabilities: | | | | | | | | | | |
Contingent consideration | | $ | — | | | $ | 12,338 | | | Discount rate | | 4.0% - 10.2% | (1) | 8.1% |
| | | | | | Probability of meeting earnout and contingencies | | 0.0%- 99.0% | (1) | 91.6% |
| | | | | | Financial forecast information | | | | |
Derivative assets and liabilities: | | | | | | | | | | |
Nasdaq Forwards | | $ | — | | | $ | — | | | Implied volatility | | N/A | | N/A |
Forward sale contracts | | $ | 4,544 | | | $ | 2,180 | | | Counterparty credit risk | | N/A | | N/A |
Rate lock commitments | | $ | 3,957 | | | $ | 2,836 | | | Counterparty credit risk | | N/A | | N/A |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 |
Level 3 assets and liabilities | | Assets | | Liabilities | | Significant Unobservable Inputs | | Range | | Weighted Average |
Accounts payable, accrued expenses and other liabilities: | | | | | | | | | | |
Contingent consideration | | $ | — | | | $ | 31,481 | | | Discount rate | | 0.3% - 10.4% | | 7.1% |
| | | | | | Probability of meeting earnout and contingencies | | 0% - 100% | (1) | 93.9% |
| | | | | | Financial forecast information | | | | |
Derivative assets and liabilities: | | | | | | | | | | |
Nasdaq Forwards | | $ | 12,822 | | | $ | — | | | Implied volatility | | 42.4% - 42.6% | (2) | 42.5% |
Forward sale contracts | | $ | 7,632 | | | $ | 14,971 | | | Counterparty credit risk | | N/A | | N/A |
Rate lock commitments | | $ | 21,034 | | | $ | 2,977 | | | Counterparty credit risk | | N/A | | N/A |
(1)Newmark’s estimate of contingent consideration as of December 31, 2021 and 2020 was based on the acquired business’ projected future financial performance, including revenues.
(2)The volatility of Newmark’s Nasdaq Forwards is primarily based on the volatility of the underlying Nasdaq stock price.
Valuation Processes - Level 3 Measurements
Both the rate lock commitments to borrowers and the forward sale contracts to investors are derivatives and, accordingly, are marked to fair value on the accompanying consolidated statements of operations. The fair value of Newmark’s rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:
•The assumed gain loss of the expected loan sale to the investor, net of employee benefits;
•The expected net future cash flows associated with servicing the loan;
•The effects of interest rate movements between the date of the rate lock and the balance sheet date; and
•The nonperformance risk of both the counterparty and Newmark.
The fair value of Newmark’s forward sales contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date. The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
The fair value of Newmark’s rate lock commitments and forward sale contracts is adjusted to reflect the risk that the agreement will not be fulfilled. Newmark’s exposure to nonperformance in rate lock and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of Newmark’s counterparties, the short duration of rate lock commitments and forward sales contracts, and Newmark’s historical experience with the agreements, management does not believe the risk of nonperformance by Newmark’s counterparties to be significant.
The Nasdaq Forwards are derivatives and, accordingly, are marked to fair value on the accompanying consolidated statements of operations. The fair value of the Nasdaq Forwards are determined utilizing the following inputs, as applicable:
•The underlying number of shares and the related strike price;
•The maturity date; and
•The implied volatility of Nasdaq’s stock price.
The fair value of Newmark’s Nasdaq Forwards considers the effects of Nasdaq’s stock price volatility between the balance sheet date and the maturity date. The fair value is determined by the use of a Black-Scholes put option valuation model.
Information About Uncertainty of Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value of Newmark’s contingent consideration are the discount rate and forecasted financial information. Significant increases (decreases) in the discount rate would have resulted in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a significantly higher (lower) fair value measurement. As of December 31, 2021 and 2020, the present value of expected payments related to Newmark’s contingent consideration was $12.3 million and $31.5 million, respectively (see Note 31 — “Commitments and Contingencies”). As of December 31, 2021 and 2020, the undiscounted value of the payments, assuming that all contingencies are met, would be $13.2 million and $51.3 million, respectively.
Fair Value Measurements on a Non-Recurring Basis
Equity investments carried under the measurement alternative are remeasured at fair value on a non-recurring basis to reflect observable transactions which occurred during the period. Newmark applied the measurement alternative to equity securities with the fair value of $20.0 million and $9.9 million, which was included in “Other assets” on the accompanying consolidated balance sheets as of December 31, 2021 and 2020, respectively. These investments are classified within Level 2 in the fair value hierarchy, because their estimated fair value is based on valuation methods using the observable transaction price at the transaction date.
(27) Related Party Transactions
(a)Service Agreements
Newmark receives administrative services, including but not limited to, treasury, legal, accounting, information technology, payroll administration, human resources, incentive compensation plans and other support, provided by Cantor. Allocated expenses were $23.8 million, $22.6 million and $25.0 million for the years ended December 31, 2021, 2020 and 2019, respectively. These expenses are included as part of “Fees to related parties” on the accompanying consolidated statements of operations.
(b)Loans, Forgivable Loans and Other Receivables from Employees and Partners
Newmark has entered into various agreements with certain employees and partners whereby these individuals receive loans which may be either wholly or in part repaid from the distribution of earnings that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. The forgivable portion of these loans is recognized as compensation expense over the life of the loans. From time to time, Newmark may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the timeframes outlined in the underlying agreements.
As of December 31, 2021 and 2020, the aggregate balance of employee loans was $453.3 million and $454.3 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners, net” on the accompanying consolidated balance sheets. Compensation expense for the above-mentioned employee loans for the years ended December 31, 2021, 2020 and 2019 was $79.4 million, $73.6 million and $39.0 million, respectively. The compensation expense related to these employee loans is included as part of “Compensation and employee benefits” on the accompanying consolidated statements of operations.
Transfer of Employees to Newmark and Other Related Party Transactions
In connection with the expansion of the mortgage brokerage and lending activities, Newmark has entered into an agreement with Cantor pursuant to which 5 former employees of Cantor's affiliate, Cantor Commercial Real Estate ("CCRE"), transferred to Newmark, effective as of May 1, 2018. In connection with this transfer of employees, Cantor paid $6.9 million to Newmark in October 2018, and Newmark Holdings issued $6.7 million of limited partnership units and $0.2 million of cash in the form of a cash distribution agreement to the employees. In addition, Newmark Holdings issued $2.2 million of Newmark Holdings partnership units with a capital account and $0.5 million of limited partnership units in exchange
for the cash payment from Cantor to Newmark of $2.2 million. Newmark recorded $6.9 million and $2.2 million as “Stockholders’ equity” and “Redeemable partnership interests”, respectively, on the consolidated balance sheets.
In consideration for the Cantor payment, Newmark agreed to return up to a maximum of $3.3 million to Cantor based on the employees’ production during their first two years of employment with Newmark. In July 2020, Newmark paid $3.3 million to Cantor based on the employees’ production, satisfying this liability. As of December 31, 2021, Newmark did not have an outstanding balance to Cantor related to this transaction. Newmark has agreed to allow certain of these employees to continue to provide consulting services to Cantor in exchange for a forgivable loan which was directly paid by Cantor to these employees.
In February 2019, Newmark's Audit Committee authorized Newmark and its subsidiaries to originate and service GSE loans for Cantor and its affiliates (other than BGC) and service loans originated by Cantor and its affiliates (other than BGC) on prices, rates and terms no less favorable to Newmark and its subsidiaries than those charged by third parties. The authorization is subject to certain terms and conditions, including but not limited to: (i) a maximum amount up to $100.0 million per loan, (ii) a $250.0 million limit on loans that have not yet been acquired or sold to a GSE at any given time, and (iii) a separate $250.0 million limit on originated Fannie Mae Loans outstanding to Cantor at any given time.
On November 30, 2020, we entered into an arrangement to assist View, Inc. (“View”) in the sale of its products and services to real estate clients in exchange for commissions. View, Inc. is a Silicon Valley-based producer of high-efficiency dynamic glass that controls light, heat, and glare, providing unobstructed views and privacy using a low voltage control system. In connection with the arrangement, View also agreed to engage us as its exclusive provider of real estate services for a period of at least five years. While View is not under common control with us, it was, at the time that the agreement was executed, the target of a merger with CF Finance Acquisition Corp. II, a special purpose acquisition company sponsored by Cantor.
(c)Transactions with CCRE
Newmark has a revenue-share agreement with CCRE, in which Newmark pays CCRE for referrals for leasing or other services. Newmark did not make any payments under this agreement to CCRE for the years ended December 31, 2021, 2020 and 2019, respectively.
In addition, Newmark has a loan referral agreement in place with CCRE, in which either party can refer a loan to the other. Newmark did not have any revenues from these referrals for the years ended December 31, 2021 and 2020. Such revenues are recognized in “Gains from mortgage banking activities/originations, net” on the accompanying consolidated statements of operations. These referral fees are net of the broker fees and commissions paid to CCRE.
Newmark did not purchase any primary servicing rights during the year ended December 31, 2021. Newmark purchased the primary servicing rights of loans originated by CCRE for $227.0 million of loans originated by CCRE for $0.2 million for the year ended December 31, 2020. Newmark also services loans for CCRE on a “fee for service” basis, generally prior to a loan’s sale or securitization, and for which no MSR is recognized. Newmark recognized servicing revenues (excluding interest and placement fees) from servicing rights purchased from CCRE on a “fee for service” basis of $3.6 million, $3.8 million and $3.8 million for the years ended December 31, 2021, 2020 and 2019, respectively, which was included as part of “Management services, servicing fee and other” on the accompanying consolidated statements of operations.
On July 22, 2019, Cantor Commercial Real Estate Lending, L.P. (“CCRE Lending”), a wholly owned subsidiary of Real Estate LP, made a $146.6 million commercial real estate loan (the “Loan”) to a single-purpose company (the “Borrower”) in which Barry Gosin, Newmark’s Chief Executive Officer, owns a 19% interest. The Loan is secured by the Borrower’s interest in property in Pennsylvania that is subject to a ground lease. While CCRE Lending initially provided the full loan amount, on August 16, 2019, a third-party bank purchased approximately 80% of the Loan value from CCRE Lending, with CCRE Lending retaining approximately 20%. The Loan matures on August 6, 2029, and is payable monthly at a fixed interest rate of 4.38% per annum. Newmark provided certain commercial loan brokerage services to the Borrower in the ordinary course of its business, and the Borrower paid Newmark a fee, as the broker of the Loan, of $0.7 million. The Newmark Audit Committee approved the commercial loan brokerage services and the related fee amount received.
Transactions with Executive Officers and Directors
Executive Compensation
On December 21, 2021, the Compensation Committee approved: (i) the redemption of all of Mr. Gosin’s remaining 838,996 non-exchangeable Newmark PPSUs for $8,339,980 in cash and (ii) compensation of approximately $7,357,329 by way of the Company causing 478,328 of Mr. Gosin’s non-exchangeable Newmark PSUs to be redeemed for zero and issuing 446,711 shares of Newmark Class A Common Stock, based upon the closing price on the date the Committee approved the
transaction (which was $16.47) and an exchange ratio of 0.9339. The estimated pre-tax value of this transaction is $15,697,309, less applicable taxes and withholdings, using a 53.13% tax rate for Mr. Gosin.
On December 21, 2021, Mr. Lutnick elected to redeem all of his 193,530 currently exchangeable Newmark PPSUs for a cash payment of $1,465,873. In addition, upon the Compensation Committee’s approval of the monetization of Mr. Gosin’s remaining non-exchangeable Newmark PPSUs and a number of Mr. Gosin’s non-exchangeable PSUs on December 21, 2021, Mr. Lutnick (i)elected to redeem 188,883 non-exchangeable Newmark PPSUs for a cash payment of $1,954,728, and 127,799 non-exchangeable Newmark NPPSUs for a cash payment of $1,284,376, both for which he previously waived, but now accepted under the Company’s standing policy for Mr. Lutnick; and (ii) received the right to monetize, and accepted the monetization of, his remaining 122,201 non-exchangeable Newmark NPPSUs for a cash payment of $1,228,124, under such standing policy.
In connection with the foregoing, Mr. Lutnick accepted the right to monetize approximately $4,406,915 by way of the Company causing 286,511 of Mr. Lutnick’s non-exchangeable Newmark PSUs to be redeemed for zero and issuing 267,572 shares of Newmark Class A Common Stock based upon the closing price on the date the Committee approved the transaction (which was $16.47) and a .9339 exchange ratio, under the Company’s standing policy applying to Mr. Lutnick, with such acceptance of rights granted in reference to Mr. Gosin’s December 2021 transactions to the extent necessary to effectuate the foregoing (and otherwise Mr. Lutnick waived all remaining rights, which shall be cumulative). The aggregate estimated pre-tax value of these transactions is $10,340,015, less applicable taxes and withholdings, using a 57.38% tax rate for Mr. Lutnick.
On March 16, 2021, the Company redeemed 30,926 non-exchangeable Newmark Holdings PSUs held by Mr. Merkel for zero and in connection therewith issued 28,962 shares of our Class A common stock. On the same day, the Company repurchased these shares from Mr. Merkel at the closing price of our Class A common stock of $11.09 per share under our stock buyback program. The total payment delivered to Mr. Merkel was $0.3 million, less applicable taxes and withholdings. The Compensation Committee approved these transactions.
On March 16, 2021, pursuant to the Newmark standing policy for Mr. Lutnick, the Compensation Committee granted exchange rights and/or monetization rights with respect to rights available to Mr. Lutnick. Mr. Lutnick elected to waive such rights one-time with such future opportunities to be cumulative. The aggregate number of Mr. Lutnick’s units for which he waived exchange rights or other monetization rights is 4,423,457 non-exchangeable Newmark Holdings PSUs/NPSUs, inclusive of the PSUs receiving an HDU conversion right and 1,770,016 non-exchangeable Newmark Holdings PPSUs with an aggregate determination amount of $21.6 million at that time, inclusive of the PPSUs receiving an HDU conversion right.
On March 16, 2021, the Compensation Committee granted Mr. Gosin exchange rights into shares of Class A common stock with respect to 526,828 previously awarded non-exchangeable Newmark Holdings PSUs and 30,871 non-exchangeable Newmark Holdings APSUs held by Mr. Gosin (which, based on the closing price of the Class A common stock of $11.09 per share on such date and using the exchange ratio of 0.9365, had a value of $5.8 million in the aggregate). In addition, on March 16, 2021, the Compensation Committee approved removing the sale restrictions on Mr. Gosin’s remaining 178,232 restricted shares of Class A common stock in BGC (which were originally issued in 2013) and associated 82,680 remaining restricted shares of Newmark Class A common stock (issued as a result of the Company spin-off in November 2018).
On March 16, 2021, the Compensation Committee granted Mr. Rispoli (i) exchange rights into shares of Class A common stock with respect to 6,043 previously awarded non-exchangeable Newmark Holdings PSUs held by Mr. Rispoli (which, based on the closing price of the Class A common stock of $11.09 per share on such date and using the exchange ratio of 0.9365, had a value of $0.1 million); and (ii) exchange rights into cash with respect to 4,907 previously awarded non-exchangeable Newmark Holdings PPSUs held by Mr. Rispoli (which had an average determination price of $15.57 per unit, for a total of $0.1 million in the aggregate to be paid for taxes when (i) is exchanged).
On April 27, 2021, the Compensation Committee approved an additional monetization opportunity for Mr. Merkel: (i) 73,387 of Mr. Merkel’s 145,384 non-exchangeable Newmark Holdings PSUs were redeemed for zero, (ii) 19,426 of Mr. Merkel’s 86,649 non-exchangeable Newmark Holdings PPSUs were redeemed for a cash payment of $0.2 million, and (iii) 68,727 shares of our Class A common stock were issued to Mr. Merkel. On the same day, the 68,727 shares of our Class A common stock were repurchased from Mr. Merkel at $10.67 per share, the closing price of our Class A common stock on that date, under our stock buyback program. The total payment delivered to Mr. Merkel was $0.8 million, less applicable taxes and withholdings.
On June 28, 2021, in connections with the 2021 Equity Event, the Compensation Committee approved the specific transactions with respect to the Company’s executive officers set forth below. All of the transactions included in the 2021 Equity Event, with respect to Messrs. Lutnick, Gosin and Rispoli, were based on (i) the price for Newmark Class A common
stock of $12.50 per share, as approved by the Compensation Committee; (ii) the price of BGC Partners Class A common stock of $5.86; and (iii) the price of Nasdaq common stock of $177.11.
Howard W. Lutnick, Chairman
On June 28, 2021, the Compensation Committee approved the following for Howard W. Lutnick, the Company’s Chairman: (i) the exchange of 279,725 exchangeable Newmark Holdings PSUs (currently in the share count) into 263,025 shares of Newmark Class A common stock based on the current exchange ratio of 0.9403; (ii) the redemption of 193,530 exchangeable Newmark Holdings PPSUs for a cash payment of $2.5 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the Newmark Class A common stock in (i) above; (iii) the redemption of 2,909,819 non-exchangeable Newmark Holdings PSUs, pursuant to Mr. Lutnick’s rights under his existing standing policy and issuance of 2,736,103 shares of Newmark Class A common stock to him based upon the current exchange ratio of 0.9403; (iv) the redemption of 793,398 non-exchangeable Newmark Holdings PPSUs pursuant to Mr. Lutnick’s rights under his existing standing policy for a cash payment of $22.9 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the above Newmark Class A common stock in (iii) above; (v) the conversion of 552,482.62 non-exchangeable Newmark Holdings PSUs with the right to exchange PSUs into HDUs (“H-Rights”) into 552,482.62 non-exchangeable HDUs and redemption of such HDUs for their Capital Account, paid in the form of Nasdaq Shares; (vi) the redemption of 602,462.94 non-exchangeable PPSUs for a cash payment of $8.0 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of above Newmark Holdings HDU cash payment; (vii) the exchange of 520,380 exchangeable BGC Holdings PSUs into 520,380 shares of BGC Class A common stock; (viii) the redemption of 425,766 exchangeable BGC Holdings PPSUs for a cash payment of $2.4 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the above BGC shares in (viii); (ix) the redemption of 88,636 non-exchangeable BGC Holdings PSUs pursuant to Mr. Lutnick’s rights under his existing standing policy, and the issuance of 88,636 shares of BGC Class A common stock; (x) the conversion of 1,131,774 non-exchangeable BGC Holdings PSUs with H-Rights into 1,131,774 non-exchangeable BGC Holdings HDUs; (xi) the redemption of 1,018,390 non-exchangeable BGC Holdings PPSUs with rights to redeem for cash in connection with the exercise of above BGC Holdings HDUs for a cash payment of $0.3 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of above BGC Holdings HDU cash payment; and (xii) the issuance of 29,059 shares of Newmark Class A common stock.
On December 28, 2021 (the “Effective Date”), the Compensation Committee awarded to Howard W. Lutnick, the Company’s Chairman and principal executive officer, a one-time $50 million bonus award in consideration of his efforts in delivering superior financial results. These efforts included his management of the Company and success in creating value for the Company’s stockholders in connection with structuring, hedging, and monetizing the Nasdaq, Inc. common stock (the “Nasdaq Shares”) held by the Company and the significant amount of income earned by the Company related to these activities and the significant increase in value of such Nasdaq Shares over time.
Barry M. Gosin, Chief Executive Officer
On September 20, 2021, the Compensation Committee approved a monetization opportunity for Mr. Gosin: all of Mr. Gosin’s 2,114,546 non-exchangeable BGC Holdings PSUs were redeemed for zero and 2,114,456 shares of BGC Class A common stock were issued to Mr. Gosin.
On June 28, 2021, the Compensation Committee approved the following for Barry M. Gosin, the Company’s Chief Executive Officer: (i) the exchange of 1,531,061.84 exchangeable Newmark Holdings units (comprised of 1,438,597.37 exchangeable Newmark Holdings PSUs and 92,464.47 exchangeable Newmark Holdings APSUs) into 1,439,658 shares of Newmark Class A common stock based upon the current exchange ratio of 0.9403; (ii) the redemption of 60,753.97 exchangeable Newmark Holdings PPSUs for a cash payment of $9.2 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the Newmark shares in (i) above; (iii) the conversion of 443,871.60 non-exchangeable Newmark Holdings PSUs with H-Rights into 443,871.60 non-exchangeable Newmark Holdings HDUs, less any taxes and withholdings in excess of $5.4 million, and redemption of such HDUs for their Capital Account, paid in the form of Nasdaq Shares; (iv) the redemption of 539,080.23 non-exchangeable Newmark Holdings PPSUs for cash in connection with the delivery of the Newmark Holdings HDU cash payment in (iii) above; (v) the exchange of 3,348,706 exchangeable BGC Holdings units (comprised of 3,147,085 exchangeable BGC Holdings PSUs and 201,621 Exchangeable BGC Holdings APSUs) into 3,348,706 shares of BGC Class A common stock; (vi) the redemption of 80,891 exchangeable BGC Holdings PPSUs for a cash payment of $9.8 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the BGC shares in (v) above; (vii) the conversion of 1,592,016 non-exchangeable BGC Holdings PSUs with H-Rights to into 1,592,016 non-exchangeable BGC Holdings HDUs, less applicable taxes and withholdings in excess of the BGC Holdings PPSU value in (viii) below; (viii) the redemption of 264,985 non-exchangeable BGC Holdings PPSUs with rights to redeem for cash in connection with exercise of above BGC Holdings HDUs
for a cash payment of $0.0 million, to be remitted to the applicable tax authorities in connection with the delivery of the BGC Holdings HDU cash payment in (vii) above; and (ix) the issuance of 12,500 Newmark Class A common stock.
Michael J. Rispoli, Chief Financial Officer
On June 28, 2021, the Compensation Committee approved the following for Mr. Michael Rispoli, the Company’s Chief Financial Officer: (i) the exchange of 23,124 exchangeable Newmark Holdings PSUs into 21,744 shares of Newmark Class A common stock based on the current exchange ratio of 0.9403; (ii) the redemption of 18,668.77 exchangeable Newmark Holdings PPSUs for a cash payment of $0.2 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the Newmark shares in (i) above; (iii) the redemption of 6,000 non-exchangeable Newmark Holdings PSUs and the issuance of 5,642 Restricted Shares of Newmark Class A common stock based upon the current exchange ratio of 0.9403; (iv) the conversion of 5,846 non-exchangeable Newmark Holdings PSUs with H-Rights into 5,846 non-exchangeable Newmark Holdings HDUs and the redemption of such HDUs for their Capital Account, paid in the form of Nasdaq Shares; (v) the redemption of 4,917 non-exchangeable Newmark Holdings PPSUs with rights to redeem for cash in connection with the exercise of above Newmark Holdings HDUs for a cash payment of $0.1 million, to be remitted to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the HDU cash payment in (iv) above; (vi) the exchange of 36,985 exchangeable BGC Holdings PSUs into 36,985 shares of BGC Class A common stock; (vii) the redemption of 29,791 exchangeable BGC Holdings PPSUs for a cash payment of $0.1 million to the applicable tax authorities to the extent necessary for payment in connection with the delivery of the BGC shares in (vi) above; and (viii) the issuance of 383 Newmark Class A Common Stock.
Stephen M. Merkel, Chief Legal Officer
On June 28, 2021 the Compensation Committee also approved the following for Stephen M. Merkel, the Company’s Chief Legal Officer: (i) the redemption of 51,124.28 non-exchangeable Newmark Holdings PSUs and issuance of 48,072 shares of Newmark Class A common stock based upon the current exchange ratio of 0.9403; and (ii) the redemption of 46,349.87 non-exchangeable Newmark Holdings PPSUs for a cash payment of $0.5 million, to be remitted to the applicable tax authorities to the extent necessary in connection with the issuance of the shares above.
Retirement Fund PurchaseSpecial Purpose Acquisition Company
As previously reported, in April 2021, Newmark OpCo and Cantor entered into various arrangements pursuant to which they agreed to co-sponsor a special purpose acquisition company, named Newmark Acquisition Corp. (the “SPAC”), in which certain of the Company'sour executive officers are executive officers and are expected to be directors. Pursuant to a purchase agreement, Newmark OpCo purchased from Cantor a 75% equity interest in an entity now known as Newmark Acquisition Holdings, LLC, the sponsor of the SPAC (the “Sponsor”), for $18.8 thousand, with Cantor retaining the remaining 25% equity interest in the Sponsor. Pursuant to an amended and restated limited liability company agreement of the Sponsor, Newmark OpCo is the managing member of the Sponsor, and Newmark OpCo and Cantor have agreed to make additional equity contributions to the Sponsor in order to fund the obligations of the Sponsor with respect to the SPAC in proportion to their equity ownership in the Sponsor. Also, in April 2021, the Sponsor agreed to lend to the SPAC up to $0.3 million without interest in order to cover expenses related to any initial public offering of the SPAC; the maturity date of the loans is the earlier of the consummation of the initial public offering of the SPAC orand December 31, 2022. As of December 31, 2021, there was no outstanding balance on this Pre-IPO loan.
The following Exhibits are filed as part of this Report as required by Regulation S-K. The Exhibits designated by an asterisk (*) are management contracts and compensation plans and arrangements required to be filed as Exhibits to this Report.