UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 20182019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Numbers: 001-38329
NEWMARK GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware |
| 81-4467492 |
(State or other Jurisdiction of Incorporation or Organization) 125 Park Avenue New York, New York (Address of principal executive offices) |
| (I.R.S. Employer Identification Number) 10017 (Zip Code) |
125 Park Avenue
New York, New York 10017
(212) 372-2000
(Address, including zip code, andRegistrant’s telephone number, including area code, of Registrant’s principal executive offices)code: (212) 372-2000
Securities registered pursuant to Section 12(b) of the Act:
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”,filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer |
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Non-accelerated filer |
| ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of June 30, 2017, the last business day
Securities registered pursuant to Section 12(b) of the registrant’s most recently completed second fiscal quarter, there was no trading market for the registrant’s Class A common stock. The registrant’s Class A common stock began trading on the NASDAQ Global Select Market on December 15, 2017.Act:
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
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Trading Symbol(s) | Name of Each Exchange on Which Registered |
Class A Common Stock, par value $0.01 per share |
| NASDAQ Global Select Market |
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As of May 6, 2019, the registrant had 157,306,914 shares of Class A common stock, $0.01 par value per share, and 21,285,533 shares of Class B common stock, $0.01 par value per share, outstanding.
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PART I | – FINANCIAL INFORMATION |
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ITEM 1. |
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Condensed |
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Condensed |
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Notes to Condensed |
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 3. |
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ITEM 4. |
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PART II | – OTHER INFORMATION |
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ITEM 1. |
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ITEM |
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ITEM 2. |
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ITEM 3. |
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ITEM 4. |
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ITEM 5. |
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ITEM 6. |
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2
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form(“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act.” Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as “may,” “will,” “should,” “estimates,” “predicts,” “possible,” “potential,” “continue,” “strategy,” “believes,” “anticipates,” “plans,” “expects,” “intends,” and similar expressions are intended to identify forward-looking statements.
Our actual results and the outcome and timing of certain events may differ significantly from the expectations discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, the factors set forth below:
our relationship and transactions with Cantor BGC PartnersFitzgerald, L.P. (“Cantor”) and their respectiveits affiliates, our structure, including Newmark Holdings, L.P. (“Newmark Holdings”), which is owned by us, Cantor, and our employee partners and our operating partnership, which is owned jointly by us and Newmark Holdings and which we refer to as “Newmark OpCo,” any related transactions, conflicts of interest, or litigation, any loans to or from us or Cantor, Newmark Holdings or Newmark OpCo, including the balances and interest rates thereof from time to time, competition for and retention of brokers and other managers and key employees;
limitations on our ability to enter into certain transactions in order to preserve the timingtax-free treatment of the Distributionrecently completed pro rata distribution (the “Spin-Off”) by BGC Partners, Inc. (“BGC Partners” or “BGC”) to its stockholders of all of the shares of our common stock owned by BGC as of immediately prior to the effective time of the Spin-Off;
our ability to maintain or develop relationships with independently owned offices in our Real Estate Service business;
our ability to grow in other geographic regions;
our ability to manage and to continue to integrate the Berkeley Point business (as defined below), which was transferred to us pursuant to the Amended and whether Restated Separation and Distribution Agreement (as defined below);
the Distribution will occur at all;impact of the Spin-Off and related transactions on our business and on our financial results on current or future periods, including with respect to any assumed liabilities or indemnification obligations with respect to such transactions, the integration of any completed acquisitions and the use of proceeds of any completed dispositions;
market conditions, including trading volume and volatility, potential deterioration of equity and debt capital markets for commercial real estate and related services, impact of significant changes in interest rates and our ability to access the capital markets;
pricing, commissions and fees, and market position with respect to any of our products and services and those of our competitors;
the effect of industry concentration and reorganization, reduction of customers and consolidation;
liquidity, regulatory and clearing capital requirements and the impact of credit market events,events;
risks associated with the integration of acquired businesses with our other businesses;business;
risks related to changes in our relationships with the Government Sponsored Enterprises (“GSEs”) and Housing and Urban Development (“HUD”), changes in prevailing interest rates and the risk of loss in connection with loan defaults;
risks related to changes in the future of the GSEs, including changes in the terms of applicable conservatorships and changes in their origination capabilities;
3
economic or geopolitical conditions or uncertainties, the actions of governments or central banks, including uncertainty regarding the nature, timing and consequences of the United Kingdom (“U.K.”)’s exit from the European Union (“EU”) following the referendum, withdrawal process, proposed transition period and related rulings, including potential reduction in investment in the U.K., and the pursuit of trade, border control or other related policies by the U.S. and/or other countries, political and labor unrest in France, the impact of U.S. government shutdowns, and the impact of terrorist acts, acts of war or other violence or political unrest, as well as natural disasters or weather-related or similar events, including hurricanes as well as power failures, communication and transportation disruptions, and other interruptions of utilities or other essential services (including hurricanes);services;
the effect on our business, our clients, the markets in which we operate, and the economy in general of recent changes in the U.S. and foreign tax and other laws, possible shutdownsincluding changes in tax rates, repatriation rules, and deductibility of the U.S. government,interest, potential policy and regulatory changes in Mexico, sequestrations, uncertainties regarding the debt ceiling and the federal budget, and other potential political policies and impasses;
the effect on our businessesbusiness of changes in interest rates, worldwide governmental debt issuances, austerity programs, increases or decreases in deficits, and other changes to monetary policy, and potential political impasses or regulatory requirements, including increased capital requirements for banks and other institutions or changes in legislation, regulations and priorities;
extensive regulation of our businessesbusiness and customers,clients, changes in regulationregulations relating to commercial real estate and other industries, and risks relating to compliance matters, including regulatory examinations, inspections, investigations and enforcement actions, and any resulting costs, increased financial and capital requirements, enhanced oversight, fines, penalties, sanctions, and changes to ouror restrictions or limitations on specific activities, operations, compensatory arrangements, and growth opportunities, including acquisitions, hiring, and new businesses, products, or services, as well as risks related to our taking actionactions to ensure that we and Newmark Holdings are not deemed investment companies under the Investment Company Act of 1940 (the “Investment Company Act”);
factors related to specific transactions or series of transactions as well as counterparty failure;
costs and expenses of developing, maintaining and protecting our intellectual property, as well as employment and other litigation and their related costs, including related to acquisitions and other matters, including judgments or settlements paid or received and the impact thereof on our financial results and cash flow in any given period;
our ability to obtain additionalmaintain continued access to credit and availability of financing necessary to support our ongoing business needs, including to refinance our indebtedness, and the risks ofassociated with the resulting leverage, as well as fluctuations in interest and currency rate fluctuations;rates;
certain other financial risks, including the possibility of future losses, indemnification obligations, assumed liabilities, reduced cash flowflows from operations, increased leverage and the need for short- or long-term borrowings, including from Cantor, the ability of us to refinance our indebtedness, or other sources of cash relating to acquisitions, dispositions, or other matters, potential liquidity and other risks relating to our ability to maintain continued access to credit and availability of financing necessary to support our ongoing business needs on terms acceptable to us, if at all, and risks associated with the resulting leverage, including potentially causing a reduction in our credit ratings and the associated outlooks and increased borrowing costs, including as a result of the Berkeley Point Acquisition (defined below), as well as interest rate and foreign currency exchange rate fluctuations;
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risks associated with the temporary or longer-term investment of our available cash, including in Newmark OpCo, including defaults or impairments on our investments, stock loans or cash management vehicles and collectability of loan balances owed to us by partners, employees, Newmark OpCo or others;
our ability to enter new markets or develop new products or services and to induce customers to use these products or services and to secure and maintain market share;
4
the impact of the Spin-Off and related transactions, our ability to enter into marketing and strategic alliances, and business combinations or other transactions, including acquisitions, dispositions, reorganizations, partnering opportunities and joint ventures, the anticipated benefits of any such transactions, relationships or growth and the future impact of any such transactions, relationships or growth on our other businesses and our financial results for current or future periods, the integration of any completed transactions;acquisitions and the use of proceeds of any completed dispositions, and the value of any hedging entered into in connection with consideration received or to be received in connection with such dispositions and any transfers thereof;
our estimates or determinations of potential value with respect to various assets or portions of our business, including with respect to the accuracy of the assumptions or the valuation models or multiples used;
our ability to hire and retain personnel, including brokers, salespeople, managers, and other professionals;
our ability to effectively manage any growth that may be achieved, while ensuring compliance with all applicable financial reporting, internal control, legal compliance, and regulatory requirements;
our ability to identify and remediate any material weaknesses in our internal controls that could affect our ability to properly maintain books and records, prepare financial statements and reports in a timely manner, control our policies, practices and procedures, operations and assets, assess and manage our operational, regulatory and financial risks, and integrate our acquired businesses and brokers, salespeople, managers and other professionals;
the effectiveness of our risk management policies and procedures, and the impact of unexpected market moves and similar events;
information technology risks, including capacity constraints, failures, or disruptions in our systems or those of the clients, counterparties, or other parties with which we interact, including cybersecuritycyber-security risks and incidents, compliance with regulations requiring data minimization and protection and preservation of records of access and transfers of data, privacy risk and exposure to potential liability and regulatory focus;
our ability to meet expectations with respect to payment of dividends and repurchases of our common stock or purchases of Newmark Holdings limited partnership interests or other equity interests in our subsidiaries, including Newmark OpCo, including from BGC Partners, Cantor or our executive officers, other employees, partners and others and the effect on the market for and trading price of our Class A common stock as a result of any such transactions; and
the fact that the prices at which shares of our Class A common stock are sold in offerings or other transactions may vary significantly, and purchasers of shares in such offerings or other transactions, as well as existing stockholders, may suffer significant dilution if the price they paid for their shares is higher than the price paid by other purchasers in such offerings or transactions;
the effect on the market for and trading price of our Class A common stock and of various offerings and other transactions, including offerings of our Class A common stock and convertible or exchangeable securities, the Separation, the IPO and the proposed Distribution, our repurchases of shares of our Class A common stock and purchases of Newmark Holdings limited partnership interests or other equity interests in us or in our subsidiaries, any exchanges by Cantor of shares of our Class A common stock for shares of our Class B common stock, any exchanges or redemptions of limited partnership units and issuances of shares of Class A common stock in connection therewith, including in corporate or partnership restructurings, our payment of dividends on our Class A common stock and distributions on Newmark Holdings limited partnership interests of Newmark Holdings and Newmark OpCo, convertible arbitrage, hedging, and other transactions engaged in by holders of our outstanding debt or other securities, share sales and stock pledge, stock loan, and other financing transactions by holders of our shares or units (including by BGC Partners, Cantor executive officers, partners, employees or others), including of shares acquired pursuant to our employee benefit plans, unit exchanges and redemptions, corporate or partnership restructurings, acquisitions, conversions of our Class B common stock and our other convertible securities, stock pledge, stock loan, or other financing transactions;transactions, and distributions from Cantor pursuant to Cantor’s distribution rights obligations and other distributions to Cantor partners, including deferred distribution rights shares; and
5
other factors, including those that are discussed under “Risk Factors,” to the extent applicable.
The foregoing risks and uncertainties, as well as those risks and uncertainties set forth in this Quarterly Report on Form 10-Q, may cause actual results and events to differ materially from the forward-looking statements. The information included herein is given as of the filing date of this Form 10-Q with the Securities and Exchange Commission (the “SEC”), and future results or events could differ significantly from these forward-looking statements. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
6
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any document we file at the SEC’s Public Reference Room located at One Station Place, 100 F Street, N.E., Washington, D.C. 20549. You can also request copies of the documents, upon payment of a duplicating fee, by writing the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. These filings are also available to the public from the SEC’s website at www.sec.gov.
Our website address is www.ngkf.com. Through our website, we make available, free of charge, the following documents as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC: our Annual Reports on Form 10-Q;10-K; our proxy statements for our annual and special stockholder meetings; our Quarterly Reports on Form 10-Q; our Current Reports on Form 8-K; Forms 3, 4 and 5 and Schedules 13D13G filed on behalf of Cantor Fitzgerald, L.P., CF Group Management, Inc., BGC Partners, Inc., our directors and our executive officers; and amendments to those documents. Our website also contains additional information with respect to our industry and business. The information contained on, or that may be accessed through, our website is not part of, and is not incorporated into, this Quarterly Report on Form 10-Q.
7
PARPART I-FINANCIALT I – FINANCIAL INFORMATION
NEWMARK GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)thousands)
(unaudited)
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| March 31, 2018 |
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| December 31, 2017 |
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| March 31, 2019 |
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| December 31, 2018 |
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Assets: |
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Current assets: |
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Cash and cash equivalents |
| $ | 48,069 |
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| $ | 121,027 |
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| $ | 72,527 |
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| $ | 122,475 |
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Restricted cash |
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| 243,944 |
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| 52,347 |
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Restricted cash and cash equivalents |
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| 65,306 |
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| 64,931 |
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Marketable securities |
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| 8,622 |
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| 57,623 |
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| 43,745 |
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| 48,942 |
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Loans held for sale, at fair value |
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| 965,639 |
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| 362,635 |
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| 873,021 |
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| 990,864 |
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Receivables, net |
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| 293,148 |
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| 210,471 |
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| 445,941 |
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| 451,605 |
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Other current assets (see note 17) |
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| 36,499 |
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| 20,994 |
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Receivables from related parties |
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| — |
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| 20,498 |
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Other current assets (see Note 19) |
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| 51,527 |
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| 57,739 |
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Total current assets |
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| 1,595,921 |
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| 825,097 |
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| 1,552,067 |
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| 1,757,054 |
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Goodwill |
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| 474,990 |
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| 477,532 |
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| 515,326 |
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| 515,321 |
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Mortgage servicing rights, net |
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| 381,526 |
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| 392,626 |
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| 406,960 |
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| 411,809 |
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Loans, forgivable loans and other receivables from employees and partners, net |
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| 226,744 |
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| 209,549 |
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| 312,985 |
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| 285,532 |
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Fixed assets, net |
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| 64,565 |
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| 64,822 |
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| 81,845 |
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| 78,805 |
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Other intangible assets, net |
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| 25,896 |
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| 24,921 |
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| 34,485 |
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| 35,769 |
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Other assets (see note 17) |
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| 287,508 |
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| 278,460 |
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Other assets (see Note 19) |
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| 549,530 |
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| 369,867 |
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Total assets |
| $ | 3,057,150 |
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| $ | 2,273,007 |
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| $ | 3,453,198 |
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| $ | 3,454,157 |
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Liabilities, Redeemable Partnership Interest, and Equity: |
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Liabilities, Redeemable Partnership Interests, and Equity: |
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Current liabilities: |
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Warehouse notes payable |
| $ | 950,479 |
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| $ | 360,440 |
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Warehouse facilities collateralized by U.S. Government Sponsored Enterprises |
| $ | 859,746 |
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| $ | 972,387 |
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Accrued compensation |
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| 205,732 |
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| 205,395 |
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| 288,804 |
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| 366,506 |
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Current portion of accounts payable, accrued expenses and other liabilities (see note 27) |
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| 165,746 |
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| 124,961 |
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Current portion of accounts payable, accrued expenses and other liabilities (see Note 29) |
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| 302,191 |
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| 312,239 |
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Securities loaned |
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| 8,622 |
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| 57,623 |
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| 43,745 |
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| — |
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Current portion of payables to related parties |
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| 197,199 |
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| 34,169 |
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| 29,273 |
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| 13,507 |
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Total current liabilities |
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| 1,527,778 |
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| 782,588 |
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| 1,523,759 |
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| 1,664,639 |
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Long-term debt |
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| 400,000 |
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| 670,710 |
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| 538,626 |
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| 537,926 |
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Long-term debt payable to related parties |
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| 412,500 |
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| 412,500 |
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Other-long term liabilities (see note 27) |
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| 163,190 |
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| 163,795 |
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Other long-term liabilities (see Note 29) |
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| 343,431 |
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| 168,623 |
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Total liabilities |
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| 2,503,468 |
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| 2,029,593 |
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| 2,405,816 |
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| 2,371,188 |
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Commitments and contingencies |
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Commitments and contingencies (see Note 31) |
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Redeemable partnership interests |
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| 22,105 |
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| 21,096 |
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| 26,584 |
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| 26,170 |
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Equity: |
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Class A common stock, par value of $0.01 per share: 1,000,000 shares authorized; 138,922 and 138,594 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively |
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| 1,389 |
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| 1,386 |
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Class B common stock, par value of $0.01 per share: 500,000 shares authorized; 15,840 shares issued and outstanding at March 31, 2018 and December 31, 2017 |
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| 158 |
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| 158 |
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Class A common stock, par value of $0.01 per share: 1,000,000 shares authorized; 157,473 and 156,966 shares issued at March 31, 2019 and December 31, 2018, respectively, and 157,423 and 156,916 shares outstanding at March 31, 2019 and December 31, 2018, respectively |
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| 1,574 |
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| 1,570 |
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Class B common stock, par value of $0.01 per share: 500,000 shares authorized; 21,285 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively |
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| 212 |
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| 212 |
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Additional paid-in capital |
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| 54,474 |
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| 59,374 |
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| 284,054 |
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| 285,071 |
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Retained earnings |
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| 238,096 |
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| 199,492 |
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| 275,589 |
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| 277,952 |
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Contingent Class A common stock |
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| 3,141 |
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| 3,250 |
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Treasury stock at cost: 50 shares of Class A common stock at March 31, 2019 and December 31, 2018 |
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| (486 | ) |
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| (486 | ) | ||||||||
Total stockholders’ equity |
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| 294,117 |
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| 260,410 |
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| 564,084 |
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| 567,569 |
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Noncontrolling interests |
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| 237,460 |
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| (38,092 | ) |
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| 456,714 |
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| 489,230 |
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Total equity |
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| 531,577 |
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| 222,318 |
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|
| 1,020,798 |
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| 1,056,799 |
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Total liabilities, redeemable partnership interest, and equity |
| $ | 3,057,150 |
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| $ | 2,273,007 |
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| $ | 3,453,198 |
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| $ | 3,454,157 |
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The accompanying Notesnotes to the unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these financial statements.
8
NEWMARK GROUP, INC.
(Prior to December 13, 2017 the Combined entities of Newmark Knight Frank)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
|
| Three Months Ended March 31, |
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| 2018 |
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| 2017 |
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Revenues: |
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Commissions |
| $ | 260,735 |
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| $ | 204,958 |
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Gains from mortgage banking activities/originations, net |
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| 38,914 |
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| 45,262 |
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Management services, servicing fees and other |
|
| 130,811 |
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| 82,362 |
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Total revenues |
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| 430,460 |
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| 332,582 |
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Expenses: |
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Compensation and employee benefits |
|
| 252,695 |
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|
| 215,145 |
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Allocations of net income and grant of exchangeability to limited partnership units |
|
| 25,809 |
|
|
| 10,649 |
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Total compensation and employee benefits |
|
| 278,504 |
|
|
| 225,794 |
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Operating, administrative and other |
|
| 75,427 |
|
|
| 47,382 |
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Fees to related parties |
|
| 6,894 |
|
|
| 4,718 |
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Depreciation and amortization |
|
| 22,513 |
|
|
| 18,237 |
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Total operating expenses |
|
| 383,338 |
|
|
| 296,131 |
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Other income (losses), net: |
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|
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Other income (loss) |
|
| 5,707 |
|
|
| (593 | ) |
Total other income (losses), net |
|
| 5,707 |
|
|
| (593 | ) |
Income from operations |
|
| 52,829 |
|
|
| 35,858 |
|
Interest (expense) income, net |
|
| (13,409 | ) |
|
| 1,134 |
|
Income before income taxes and noncontrolling interests |
|
| 39,420 |
|
|
| 36,992 |
|
Provision (benefit) for income taxes |
|
| 6,933 |
|
|
| (15 | ) |
Consolidated net income |
|
| 32,487 |
|
|
| 37,007 |
|
Less: Net income attributable to noncontrolling interests |
|
| 12,490 |
|
|
| 296 |
|
Net income available to common stockholders |
| $ | 19,997 |
|
| $ | 36,711 |
|
Per share data: |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
Net income available to common stockholders |
| $ | 19,997 |
|
| $ | 36,711 |
|
Basic earnings per share |
| $ | 0.13 |
|
| N/A |
| |
Basic weighted-average shares of common stock outstanding |
|
| 155,694 |
|
| N/A |
| |
Fully diluted earnings per share |
|
|
|
|
|
|
|
|
Net income available to common stockholders |
| $ | 30,286 |
|
| N/A |
| |
Fully diluted earnings (loss) per share |
| $ | 0.12 |
|
| N/A |
| |
Fully diluted weighted-average shares of common stock outstanding |
|
| 246,834 |
|
| N/A |
| |
Dividends declared per share of common stock |
| $ | 0.09 |
|
| N/A |
| |
Dividends declared and paid per share of common stock |
| $ | — |
|
| N/A |
|
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Revenues: |
|
|
|
|
|
|
|
|
Commissions |
| $ | 275,268 |
|
| $ | 260,735 |
|
Gains from mortgage banking activities/originations, net |
|
| 31,346 |
|
|
| 38,914 |
|
Management services, servicing fees and other |
|
| 141,042 |
|
|
| 130,811 |
|
Total revenues |
|
| 447,656 |
|
|
| 430,460 |
|
Expenses: |
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
| 263,353 |
|
|
| 261,088 |
|
Equity-based compensation and allocations of net income to limited partnership units and FPUs |
|
| 13,871 |
|
|
| 17,416 |
|
Total compensation and employee benefits |
|
| 277,224 |
|
|
| 278,504 |
|
Operating, administrative and other |
|
| 87,893 |
|
|
| 75,427 |
|
Fees to related parties |
|
| 6,725 |
|
|
| 6,894 |
|
Depreciation and amortization |
|
| 28,304 |
|
|
| 22,513 |
|
Total operating expenses |
|
| 400,146 |
|
|
| 383,338 |
|
Other income, net: |
|
|
|
|
|
|
|
|
Other income (loss) |
|
| (9,718 | ) |
|
| 5,707 |
|
Total other income (loss), net |
|
| (9,718 | ) |
|
| 5,707 |
|
Income from operations |
|
| 37,792 |
|
|
| 52,829 |
|
Interest expense, net |
|
| (7,699 | ) |
|
| (13,409 | ) |
Income before income taxes and noncontrolling interests |
|
| 30,093 |
|
|
| 39,420 |
|
Provision for income taxes |
|
| 6,687 |
|
|
| 6,933 |
|
Consolidated net income |
|
| 23,406 |
|
|
| 32,487 |
|
Less: Net income attributable to noncontrolling interests |
|
| 6,502 |
|
|
| 12,490 |
|
Net income available to common stockholders |
| $ | 16,904 |
|
| $ | 19,997 |
|
Per share data: |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
Net income available to common stockholders (1) |
| $ | 13,680 |
|
| $ | 19,997 |
|
Basic earnings per share |
| $ | 0.08 |
|
| $ | 0.13 |
|
Basic weighted-average shares of common stock outstanding |
|
| 178,611 |
|
|
| 155,694 |
|
Fully diluted earnings per share |
|
|
|
|
|
|
|
|
Net income for fully diluted shares |
| $ | 21,968 |
|
| $ | 30,286 |
|
Fully diluted earnings per share |
| $ | 0.08 |
|
| $ | 0.12 |
|
Fully diluted weighted-average shares of common stock outstanding |
|
| 269,057 |
|
|
| 246,834 |
|
|
|
|
|
|
|
|
|
|
(1) In accordance with ASC 260, includes a reduction for dividends on preferred stock or units in the amount of $3.2 million for the three months ended March 31, 2019. |
|
The accompanying Notesnotes to the unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these financial statements.
9
NEWMARK GROUP, INC.
(Prior to December 13, 2017 the Combined entities of Newmark Knight Frank)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Consolidated net income |
| $ | 32,487 |
|
| $ | 37,007 |
|
| $ | 23,406 |
|
| $ | 32,487 |
|
Comprehensive income, net of tax |
|
| 32,487 |
|
|
| 37,007 |
|
|
| 23,406 |
|
|
| 32,487 |
|
Less: Comprehensive income attributable to noncontrolling interests, net of tax |
|
| 12,490 |
|
|
| 296 |
|
|
| 6,502 |
|
|
| 12,490 |
|
Comprehensive income available to common stockholders |
| $ | 19,997 |
|
| $ | 36,711 |
|
| $ | 16,904 |
|
| $ | 19,997 |
|
The accompanying Notesnotes to the unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these financial statements.
NEWMARK GROUP, INC.
(Prior to December 13, 2017 the Combined entities of Newmark Knight Frank)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(In thousands, except share and per share amounts)
(unaudited)
|
| Class A Common Stock |
|
| Class B Common Stock |
|
| Additional Paid-in Capital |
|
| Retained Earnings |
|
| BGC’s Net Investment in Newmark |
|
| Noncontrolling Interests in Subsidiaries |
|
| Total |
| |||||||
Balance, January 1, 2017 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 245,877 |
|
| $ | 735,899 |
|
| $ | 2,007 |
|
| $ | 983,783 |
|
Consolidated net income (loss) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 144,492 |
|
|
| — |
|
|
| 604 |
|
|
| 145,096 |
|
Distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (190,877 | ) |
|
| — |
|
|
| (71 | ) |
|
| (190,948 | ) |
Purchase of noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,092 |
|
|
| (1,092 | ) |
|
| — |
|
Noncontrolling interests in an entity acquired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19,146 |
|
|
| 19,146 |
|
Debt assumed from BGC |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,387,500 | ) |
|
| — |
|
|
| (1,387,500 | ) |
Contributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 368,418 |
|
|
| — |
|
|
| 368,418 |
|
Transfer of pre initial public offering (“IPO”) capital to redeemable partnership interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,096 | ) |
|
| — |
|
|
| (21,096 | ) |
Issuance of shares in the Separation (Class A common stock, 115,593,787 shares); (Class B common stock, 15,840,049 shares) |
|
| 1,156 |
|
|
| 158 |
|
|
| (245,815 | ) |
|
| — |
|
|
| 303,187 |
|
|
| (58,686 | ) |
|
| — |
|
Proceeds from IPO, net of underwriting discounts and other expenses (Class A common stock, 23,000,000 shares) |
|
| 230 |
|
|
| — |
|
|
| 295,189 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 295,419 |
|
Equity-based compensation (Class A common stock, 600,000 shares) |
|
| — |
|
|
| — |
|
|
| 10,000 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,000 |
|
Balance, December 31, 2017 |
| $ | 1,386 |
|
| $ | 158 |
|
| $ | 59,374 |
|
| $ | 199,492 |
|
| $ | — |
|
| $ | (38,092 | ) |
| $ | 222,318 |
|
Consolidated net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19,997 |
|
|
| — |
|
|
| 12,490 |
|
|
| 32,487 |
|
Cumulative effect of revenue standard adoption |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,463 |
|
|
| — |
|
|
| 2,342 |
|
|
| 18,805 |
|
Reduction of earnings distributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,144 |
|
|
| — |
|
|
| — |
|
|
| 2,144 |
|
Distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (100 | ) |
|
| (100 | ) |
Equity-based compensation and related issuance of (Class A common stock, 327,746 shares) |
|
| 3 |
|
|
| — |
|
|
| (4,900 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,897 | ) |
BGC's purchase of 16,600,000 exchangeable limited partnership units in Newmark Holdings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 241,960 |
|
|
| 241,960 |
|
Grant of exchangeability and redemption of limited partnership interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19,869 |
|
|
| 19,869 |
|
Allocation of net income to redeemable partnership interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,009 | ) |
|
| (1,009 | ) |
Balance, March 31, 2018 |
| $ | 1,389 |
|
| $ | 158 |
|
| $ | 54,474 |
|
| $ | 238,096 |
|
| $ | — |
|
| $ | 237,460 |
|
| $ | 531,577 |
|
|
| Class A Common Stock |
|
| Class B Common Stock |
|
| Additional Paid-in Capital |
|
| Contingent Class A Common Stock |
|
| Treasury Stock |
|
| Retained Earnings |
|
| Noncontrolling Interests |
|
| Total |
| ||||||||
Balance, January 1, 2018 |
| $ | 1,386 |
|
| $ | 158 |
|
| $ | 59,374 |
|
| $ | — |
|
| $ | — |
|
| $ | 199,492 |
|
| $ | (38,092 | ) |
| $ | 222,318 |
|
Consolidated net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19,997 |
|
|
| 12,490 |
|
|
| 32,487 |
|
Cumulative effect of revenue standard adoption |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,463 |
|
|
| 2,342 |
|
|
| 18,805 |
|
Distributions |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (100 | ) |
|
| (100 | ) |
BGC's purchase of 16,606,726 exchangeable limited partnership units in Newmark Holdings |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 241,960 |
|
|
| 241,960 |
|
Grant of exchangeability and redemption of limited partnership interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 19,869 |
|
|
| 19,869 |
|
Allocation of net income to redeemable partnership interests |
|
| — |
|
|
| ��� |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,009 | ) |
|
| (1,009 | ) |
Equity-based compensation and related issuance of (Class A common stock 327,746 shares) |
|
| 3 |
|
|
| — |
|
|
| (4,900 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,897 | ) |
Other |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,144 |
|
|
| — |
|
|
| 2,144 |
|
Balance, March 31, 2018 |
| $ | 1,389 |
|
| $ | 158 |
|
| $ | 54,474 |
|
| $ | — |
|
| $ | — |
|
| $ | 238,096 |
|
| $ | 237,460 |
|
| $ | 531,577 |
|
|
| Class A Common Stock |
|
| Class B Common Stock |
|
| Additional Paid-in Capital |
|
| Contingent Class A Common Stock |
|
| Treasury Stock |
|
| Retained Earnings |
|
| Noncontrolling Interests |
|
| Total |
| ||||||||
Balance, January 1, 2019 |
| $ | 1,570 |
|
| $ | 212 |
|
| $ | 285,071 |
|
| $ | 3,250 |
|
| $ | (486 | ) |
| $ | 277,952 |
|
| $ | 489,230 |
|
| $ | 1,056,799 |
|
Consolidated net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 16,904 |
|
|
| 6,502 |
|
|
| 23,406 |
|
Dividends to common stockholders |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16,043 | ) |
|
| — |
|
|
| (16,043 | ) |
Preferred dividend on exchangeable preferred partnership units |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,224 | ) |
|
| 3,224 |
|
|
| — |
|
Earnings distributions to limited partnership interests and other noncontrolling interests |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (27,280 | ) |
|
| (27,280 | ) |
Grant of exchangeability, redemption and issuance of 498,129 shares |
|
| 4 |
|
|
| — |
|
|
| (572 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,962 | ) |
|
| (15,530 | ) |
Issuance of Class A common stock, 8,451 shares |
|
| — |
|
|
| — |
|
|
| 109 |
|
|
| (109 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other |
|
| — |
|
|
| — |
|
|
| (554 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (554 | ) |
Balance, March 31, 2019 |
| $ | 1,574 |
|
| $ | 212 |
|
| $ | 284,054 |
|
| $ | 3,141 |
|
| $ | (486 | ) |
| $ | 275,589 |
|
| $ | 456,714 |
|
| $ | 1,020,798 |
|
|
| For the Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Dividends declared per share of common stock |
| $ | 0.10 |
|
| $ | 0.09 |
|
Dividends paid per share of common stock |
| $ | 0.09 |
|
| N/A |
|
The accompanying Notesnotes to the unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these financial statements.
11
NEWMARK GROUP INC.
(Prior to December 13, 2017 the Combined entities of Newmark Knight Frank)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income |
| $ | 32,487 |
|
| $ | 37,007 |
|
| $ | 23,406 |
|
| $ | 32,487 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on originated mortgage servicing rights |
|
| (6,389 | ) |
|
| (28,806 | ) |
|
| (17,254 | ) |
|
| (6,389 | ) |
Depreciation and amortization |
|
| 22,513 |
|
|
| 18,237 |
|
|
| 28,304 |
|
|
| 22,513 |
|
Equity-based compensation and allocations of net income to limited partnership units |
|
| 25,809 |
|
|
| — |
| ||||||||
Employee loan amortization and impairment |
|
| 6,009 |
|
|
| 1,974 |
| ||||||||
Equity-based compensation and allocation of net income to limited partnership units and FPUs |
|
| 13,871 |
|
|
| 17,416 |
| ||||||||
Employee loan amortization |
|
| 7,437 |
|
|
| 6,009 |
| ||||||||
Change in fair value of contingent consideration |
|
| 134 |
|
|
| — |
|
|
| 193 |
|
|
| 134 |
|
Unrealized gains on loans held for sale |
|
| (15,126 | ) |
|
| (2,102 | ) |
|
| (13,276 | ) |
|
| (15,126 | ) |
Income from an equity method investment |
|
| (3,176 | ) |
|
| — |
|
| — |
|
|
| (3,176 | ) | |
Amortization of deferred financing costs |
|
| 255 |
|
|
| 259 |
| ||||||||
Provision for uncollectible accounts |
|
| 1,140 |
|
|
| (211 | ) |
|
| 956 |
|
|
| 1,140 |
|
Realized gain on marketable securities |
|
| (2,400 | ) |
|
| — |
| ||||||||
Unrealized gain on marketable securities |
|
| (796 | ) |
|
| — |
| ||||||||
Realized (gain) loss on marketable securities |
|
| 51 |
|
|
| (2,400 | ) | ||||||||
Unrealized gains on marketable securities |
|
| (3,960 | ) |
|
| (796 | ) | ||||||||
Valuation of derivative asset |
|
| 13,329 |
|
|
| — |
| ||||||||
Loan originations—loans held for sale |
|
| (1,410,690 | ) |
|
| (1,842,357 | ) |
|
| (1,554,443 | ) |
|
| (1,410,690 | ) |
Loan sales—loans held for sale |
|
| 822,811 |
|
|
| 2,139,634 |
|
|
| 1,685,561 |
|
|
| 822,811 |
|
Consolidated net income, adjusted for non-cash and non-operating items |
|
| (527,419 | ) |
|
| 323,635 |
| ||||||||
Other |
|
| 1,167 |
|
|
| 255 |
| ||||||||
Consolidated net income (loss), adjusted for non-cash and non-operating items |
|
| 185,342 |
|
|
| (535,812 | ) | ||||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
| (19,374 | ) |
|
| 4,340 |
|
|
| 4,709 |
|
|
| (19,374 | ) |
Loans, forgivable loans and other receivables from employees and partners |
|
| (24,583 | ) |
|
| (6,226 | ) |
|
| (39,995 | ) |
|
| (24,583 | ) |
Other assets |
|
| (14,063 | ) |
|
| 10,498 |
|
|
| (18,602 | ) |
|
| (14,063 | ) |
Accrued compensation |
|
| (35,069 | ) |
|
| (33,599 | ) |
|
| (62,051 | ) |
|
| (26,676 | ) |
Accounts payable, accrued expenses and other liabilities |
|
| 30,114 |
|
|
| (2,237 | ) |
|
| (29,970 | ) |
|
| 30,114 |
|
Net cash provided by (used in) operating activities |
|
| (590,394 | ) |
|
| 296,411 |
|
|
| 39,433 |
|
|
| (590,394 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired, net of purchases of noncontrolling interest |
|
| — |
|
|
| (997 | ) | ||||||||
Proceeds from the sale of marketable securities |
|
| 52,196 |
|
|
| — |
|
|
| 9,106 |
|
|
| 52,196 |
|
Investment in cost method investments |
|
| (7,500 | ) |
|
| — |
|
| — |
|
|
| (7,500 | ) | |
Purchases of fixed assets |
|
| (1,714 | ) |
|
| (3,053 | ) |
|
| (5,936 | ) |
|
| (1,714 | ) |
Purchase of mortgage servicing rights |
|
| (509 | ) |
|
| — |
|
|
| (298 | ) |
|
| (509 | ) |
Net cash provided (used in) by investing activities |
|
| 42,473 |
|
|
| (4,050 | ) | ||||||||
Net cash provided by investing activities |
|
| 2,872 |
|
|
| 42,473 |
| ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from warehouse notes payable |
|
| 1,410,690 |
|
|
| 1,842,357 |
| ||||||||
Principal payments on warehouse notes payable |
|
| (820,651 | ) |
|
| (1,879,963 | ) | ||||||||
Proceeds from BGC's purchase of exchangeability limited partnership units in Newmark Holdings |
|
| 241,960 |
|
|
| — |
| ||||||||
Proceeds from warehouse facilities |
|
| 1,554,443 |
|
|
| 1,410,690 |
| ||||||||
Principal payments on warehouse facilities |
|
| (1,667,084 | ) |
|
| (820,651 | ) | ||||||||
Proceeds from BGC's purchase of exchangeable limited partnership units in Newmark Holdings |
| — |
|
|
| 241,960 |
| |||||||||
Payments to related parties |
|
| (13,000 | ) |
|
| (578,263 | ) |
| — |
|
|
| (13,000 | ) | |
Borrowings from related parties |
|
| 177,016 |
|
|
| 354,493 |
|
| — |
|
|
| 177,016 |
| |
Repayment of long-term debt |
|
| (270,710 | ) |
|
| — |
| ||||||||
Payments for IPO offering costs |
|
| (8,870 | ) |
|
| — |
| ||||||||
Secured loans |
|
| (49,001 | ) |
|
| — |
| ||||||||
Distributions to noncontrolling interests |
|
| (100 | ) |
|
| (71 | ) | ||||||||
Settlement of pre-Spin-Off related party receivables |
|
| 27,044 |
|
| — |
| |||||||||
Fees relating to the IPO |
| — |
|
|
| (8,870 | ) | |||||||||
Repayment of debt |
|
| (50,000 | ) |
|
| (270,710 | ) | ||||||||
Borrowings of debt |
|
| 50,000 |
|
| — |
| |||||||||
Securities loaned |
|
| 43,745 |
|
|
| (49,001 | ) | ||||||||
Earnings distributions to limited partnership interests and noncontrolling interests |
|
| (33,951 | ) |
|
| (100 | ) | ||||||||
Distributions to stockholders |
|
| (16,043 | ) |
|
| — |
| ||||||||
Payments on acquisition earn-outs |
|
| (758 | ) |
|
| (10,513 | ) |
| — |
|
|
| (758 | ) | |
Payment of deferred financing costs |
|
| (16 | ) |
|
| (9 | ) |
|
| (32 | ) |
|
| (16 | ) |
Net cash provided (used in) by financing activities |
|
| 666,560 |
|
|
| (271,969 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| 118,639 |
|
|
| 20,392 |
| ||||||||
Net cash (used in) provided by financing activities |
|
| (91,878 | ) |
|
| 666,560 |
| ||||||||
Net increase (decrease) in cash and cash equivalents and restricted cash |
|
| (49,573 | ) |
|
| 118,639 |
| ||||||||
Cash and cash equivalents and restricted cash at beginning of period |
|
| 173,374 |
|
|
| 117,554 |
|
|
| 187,406 |
|
|
| 173,374 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 292,013 |
|
| $ | 137,946 |
|
| $ | 137,833 |
|
| $ | 292,013 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
| ||||||||
Cash paid during the period for: |
|
|
|
|
|
|
|
| ||||||||
Interest |
| $ | 12,922 |
|
| $ | 2,969 |
| ||||||||
Taxes |
| $ | 19 |
|
| $ | 18 |
|
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these financial statements.
12
NEWMARK GROUP INC.
(Prior to December 13, 2017 the Combined entities of Newmark Knight Frank)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(In thousands)
(unaudited)
The following presents our cash, cash equivalents and restricted cash by category within the unaudited Condensed Consolidated Balance Sheets:
|
| March 31, 2018 |
|
| December 31, 2017 |
| ||
Cash and cash equivalents |
| $ | 48,069 |
|
| $ | 121,027 |
|
Restricted cash |
|
| 243,944 |
|
|
| 52,347 |
|
Total cash and cash equivalents and restricted cash |
| $ | 292,013 |
|
| $ | 173,374 |
|
| Three Months Ended March 31, |
| ||||||
|
| 2019 |
|
| 2018 |
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
| $ | 288 |
|
| $ | 12,922 |
|
Taxes |
| $ | 59,279 |
|
| $ | 19 |
|
The accompanying Notesnotes to the unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements are an integral part of these financial statements.
13
NEWMARK GROUP, INC.
(Prior to December 13, 2017 the Combined entities of Newmark Knight Frank)
Notes to Condensed Consolidated Financial Statements
(unaudited)
(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 tenants, owner-occupiers, investorsdue diligence consulting and developers a wide range ofadvisory services including leasing and corporate advisory, investment salesGSE lending and loan servicing, mortgage broking and equity-raising. Our occupier services and products include tenant representation, real estate finance, originationmanagement 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 our 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 servicing of commercial mortgage loans, valuation, projectinvestors, as well as Fortune 500 and development management and property and facility management.Forbes Global 2000 companies.
Newmark was formed through BGC Partners, Inc.’s (“BGC Partners” or “BGC”) purchase of Newmark & Company Real Estate, Inc. and certain of its affiliates in 2011. A majority of the voting power of BGC Partners is held by Cantor Fitzgerald, L.P. and its affiliates (together,(“CFLP” or “Cantor”), including Cantor Fitzgerald & Co. which we referCo (“CF&Co”). Subsequent to the Spin-Off, as “CF&Co.”defined below, the majority of the voting power of Newmark is held by Cantor.
On November 30, 2018 (the “Distribution Date”), BGC completed its previously announced pro-rata distribution (the “Spin-Off”) to its stockholders of all of the shares of common stock of Newmark owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of Newmark Class A common stock distributed to the holders of shares of BGC Class A common stock (including directors and executive officers of BGC Partners) of record as of the close of business on November 23, 2018 (the “Record Date”), and shares of Newmark Class B common stock distributed to the holders of shares of BGC Partners Class B common stock (consisting of Cantor and CF Group Management, Inc. (“CFGM”)) of record as of the close of business on the Record Date. The Spin-Off was effective as of 12:01 a.m., New York City time, on the Distribution Date.
See Note 1 – Organization and Basis of Presentation to our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K as of December 31, 2018, for further information regarding the transactions related to the IPO and Spin-Off of Newmark. A summary of the key transactions is provided below.
Acquisition of Berkeley Point and Investment in Real Estate LP
On September 8, 2017, BGC acquired, from Cantor Commercial Real Estate Company, LP (“CCRE”), 100% of the equity of Berkeley Point Financial LLC (“Berkeley(the “Berkeley Point Acquisition”). Berkeley Point Financial LLC (“Berkeley Point” or “BPF”) is a leading commercial real estate finance company focused on the origination and sale of multifamily and other commercial real estate loans through government-sponsored and government-funded loan programs, as well as the servicing of commercial real estate loans. AtOn December 13, 2017, in connection with the closingSeparation from BGC, the assets and liabilities of the Berkeley Point Acquisition, BGC purchased and acquired from CCRE all of the outstanding membership interests of BPF, a wholly owned subsidiary of CCRE, for an acquisition price of $875.0 million, subject to a post-closing upward or downward adjustment to the extent that the net assets, inclusive of certain fair value adjustments, of BPF as of the closing were greater than or less than $508.6 million. BGC paid $3.2 million of the $875.0 million acquisition price with 247,099 limited partnership units of BGC Holdings, L.P. (“BGC Holdings”), which may be exchanged over time for shares of Class A common stock of BGC, with each BGC Holdings unit valued for these purposes at the volume weighted-average price of a share of BGC Class A common stock for the three trading days prior to the closing. The Berkeley Point Acquisition did not include the Special Asset Servicing Group of BPF; however, BPF will continue to hold the Special Asset Servicing Group’s assets until the servicing group is transferred to CCRE at a later date in a separate transaction. Accordingly, CCRE will continue to bear the benefits and burdens of the Special Asset Servicing Group from and after the closing.Newmark (See Note 27 – Related Party Transactions).
Concurrently with the Berkeley Point Acquisition, on September 8, 2017 Newmark invested $100$100.0 million in a newly formed commercial real estate-related financial and investment business, CF Real Estate Finance Holdings, L.P. (“Real Estate LP”), which is controlled and managed by Cantor. Real Estate LP may conduct activities in any real estate relatedestate-related business or asset backed securities-related business or any extensions thereof and ancillary activities thereto. In addition, Real Estate LP may provide short-term loans to related parties from time to time when funds in excess of amounts needed for investment are available. As of March 31, 2018,2019, Newmark’s investment in Real Estate LP iswas accounted for under the equity method.
14
Separation and Distribution Agreement and IPO
On December 13, 2017, prior to the closing of Newmark’s initial public offering (“IPO”), BGC, BGC Holdings, BGC Partners, L.P. (“BGC U.S. OpCo”), Newmark, Newmark Holdings, Newmark OpCo and, solely for the provisions listed therein, Cantor and BGC Global Holdings, L.P. (“BGC Global OpCo”) entered into a Separation and Distribution Agreement (the “Separation“Original Separation and Distribution Agreement”). The Original Separation and Distribution Agreement setsset forth the agreements among BGC, Cantor, Newmark and their respective subsidiaries regarding, among other things:
•the principal corporate transactions pursuant to which BGC, BGC Holdings and BGC U.S. OpCo and their respective subsidiaries (other than the Newmark Group (defined below), the “BGC Group”) transferred to Newmark, Newmark Holdings and Newmark OpCo and their respective subsidiaries (the “Newmark Group”) the assets and liabilities of the BGC Group relating to BGC’s Real Estate Services business, including BGC’s interests in both BPF and Real Estate LP (the “Separation”);
•the proportional distribution of interests in Newmark Holdings to holders of interests in BGC Holdings;
•the IPO;
•the assumption and repayment of indebtedness by the BGC Group and the Newmark Group, as further described below; and
•the pro rata distribution of the shares of Newmark Class A common stock and the shares of Newmark Class B common stock held by BGC, pursuant to which shares of Newmark Class A common stock held by BGC would be distributed to the holders of shares of BGC Class A common stock and shares of Newmark Class B common stock held by BGC would be distributed to the holders of shares of BGC Class B common stock, which distribution is intended to qualify as generally tax-free for U.S. federal income tax purposes. Initial Public Offering |
|
|
On December 15, 2017, Newmark announced the pricing of the IPO of 20 million shares of Newmark’s Class A common stock at a price to the public of $14.00 per share, which was completed on December 19, 2017. Newmark Class A shares began trading on December 15, 2017 on the NASDAQ Global Select Market under the symbol “NMRK.”“NMRK” (See Note 27 – Related Party Transactions for additional information). In addition, Newmark granted the underwriters a 30-day option to purchase up to an additional 3 million shares of Newmark Class A common stock at the IPO price, less underwriting discounts and commissions. On December 26, 2017, the underwriters of the IPO exercised in full their overallotment option to purchase an additional 3 million shares of Newmark Class A common stock from Newmark at the IPO price, less underwriting discounts and commission (the “option”). As a result,commission.
Debt
In connection with the Separation, on December 13, 2017, Newmark received aggregate net proceedsOpCo assumed all of approximately $295.4BGC U.S. OpCo’s rights and obligations under the 2042 Promissory Note in relation to the 8.125% Senior Notes and the 2019 Promissory Note in relation to the 5.375% Senior Notes. Newmark repaid the $112.5 million fromoutstanding principal amount under the IPO, after deducting underwriting discounts2042 Promissory Note on September 5, 2018, and commissions and estimated offering expenses. Uponrepaid the closing of$300.0 million outstanding principal amount under the option, Newmark’s public stockholders owned approximately 16.6% of the shares of Newmark Class A common stock. This is based2019 Promissory Note on 138.6 million shares of Newmark Class A common stock outstanding following the closing of the option. Also upon the closing of the option, Newmark’s public stockholders owned approximately 9.8% of Newmark’s 234.2 million fully diluted shares outstanding.
AsNovember 23, 2018. In addition, as part of the Separation, described above,Newmark assumed the obligations of BGC contributed its interestsas borrower under the Term Loan and Converted Term Loan. Newmark repaid the outstanding balance of the Term Loan as of March 31, 2018, and repaid the outstanding balance of the Converted Term Loan as of November 6, 2018. In addition, on March 19, 2018, BGC loaned Newmark $150.0 million under the “Intercompany Credit Agreement” on the same day. All borrowings outstanding under the Intercompany Credit Agreement were repaid as of November 7, 2018 (See Note 22 — Long-term Debt for defined terms and more information on Newmark’s long-term debt).
15
BGC’s Investment in both BPF and Real Estate LP to Newmark.Newmark Holdings
On March 7, 2018, BGC Partners and its operating subsidiaries purchased 16.6 million newly issued exchangeable limited partnership units (the “Newmark Units”) of Newmark Holdings L.P. for approximately $242.0 million (the “Investment in Newmark”). These newly-issued Newmark Units are exchangeable, at BGC’s discretion, into either shares of Class A common stock or shares of Class B common stock of Newmark. BGC and its subsidiaries funded the Investment in Newmark using proceeds of its Controlled Equity Offering sales program. SeeHoldings”) (See Note 25—27 – Related Party Transactions for additional information.information).
Nasdaq Monetization Transactions
On June 28, 2013, BGC currently expectssold certain assets of its on-the-run, electronic benchmark U.S. Treasury platform (“eSpeed”) to pursueNasdaq. 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 common stock to be paid ratably over 15 years, provided that Nasdaq, as a distributionwhole, produces at least $25.0 million in consolidated gross revenues each year. The remaining rights under the Nasdaq Earn-out were transferred to Newmark on September 28, 2017 (See Note 7 – Marketable Securities for additional information).
Exchangeable Preferred Partnership Units and Forward Contracts
On June 18, 2018 and September 26, 2018, Newmark’s principal operating subsidiary, Newmark OpCo, issued approximately $175.0 million and $150.0 million of exchangeable partnership units (“EPUs”), respectively, in private transactions to the Royal Bank of Canada (“RBC”) (the “Newmark OpCo Preferred Investment”). Newmark received $152.9 million and $113.2 million of cash in the second and third quarter, respectively, of 2018 with respect to these transactions. The EPUs were issued in four tranches and are separately convertible by either RBC or spin-offNewmark 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 respective four tranches. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in Noncontrolling interests on the unaudited condensed 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 unaudited condensed 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, the newly formed special purpose vehicle entities (the “SPVs”) that are consolidated subsidiaries of Newmark, entered into four variable postpaid forward contracts with RBC (together, the "RBC Forwards"). The SPVs are indirect subsidiaries of Newmark whose sole asset is the Nasdaq share Earn-Outs for 2019 through 2022.The RBC Forwards provide the option to both Newmark and RBC for RBC to receive up to 992,247 shares of Nasdaq common stock, received by Newmark pursuant to the Nasdaq earn-out (See Note 7 — Marketable Securities), in each of the fourth quarters of 2019 through 2022 in exchange for either cash or redemption of the EPUs, solely at Newmark’s option.
The Spin-Off
On November 30, 2018, BGC completed the Spin-Off to its common stockholders of all of the shares of Newmark’s common stock owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of Newmark’s Class A common stock distributed to the holders of shares of BGC’s Class A common stock (including directors and executive officers of BGC Partners) of record as of the close of business on (the Record Date, and shares of Newmark’s Class B common stock distributed to the holders of shares of BGC’s Class B common stock (consisting of Cantor and CFGM) of record as of the close of business on the Record Date. Based on the number of shares of BGC common stock outstanding as of the close of business on the Record Date, BGC’s stockholders as of the Record Date received in the Distribution 0.463895 of a share of Newmark Class A common stock for each share of BGC Class A common stock held as of the Record Date, and 0.463895 of a share of Newmark Class B common stock for each share of BGC Class B common stock held as of the Record Date. BGC Partners stockholders received cash in lieu of any fraction of a share of Newmark common stock that they otherwise would have received in the Distribution.
Prior to and in connection with the Spin-Off, 14.8 million Newmark Holdings Units held by BGC were exchanged into 9.4 million shares of Newmark Class A common stock and 5.4 million shares of Newmark Class B
16
common stock, and 7.0 million Newmark OpCo Units held by BGC were exchanged into 6.9 million shares of Newmark Class A common stock. These Newmark Class A and Class B shares of Newmark common stock that it then owns in a manner intended to qualify as generally tax-free for U.S. federal income tax purposes. The spin-off is subject to a number of conditions, and BGC may determine not to proceed with the spin-off if the BGC board of directors determines, in its sole discretion that the distribution is notwere included in the best interestSpin-Off to BGC’s stockholders.
In the aggregate, BGC distributed 131,886,409 shares of BGCNewmark’s Class A common stock and its stockholders. Accordingly,21,285,537 shares of our Newmark’s Class B common stock to BGC’s stockholders in the spin-off may not occur onDistribution. These shares of our Newmark’s common stock collectively represented approximately 94% of the expected timeframe, or at all. Key steps that Newmark plans to take toward BGC’s tax-free spin-offtotal voting power of our outstanding common stock and approximately 87% of the total economics of Newmark include: first, Newmark intends to attain its own credit rating; and second, Newmark expects to repay or refinance its $812.5 millionoutstanding common stock in each case as of long-term debt owed to or guaranteed by BGC. This is necessary for the spin-off to be tax free.Distribution Date.
On November 22, 2017,30, 2018, BGC and Newmark entered into an amendment to an unsecured senior term loan credit agreement, dated as of September 8, 2017, with Bank of America, N.A., as administrative agent and a syndicate of lenders. The agreement provides for a term loan of up to $575.0 million (the “Term Loan”Partners also caused its subsidiary, BGC Holdings, L.P. (“BGC Holdings”), to distribute pro rata (the “BGC Holdings distribution”) all of the 1,458,931 exchangeable limited partnership units of Newmark Holdings held by BGC Holdings immediately prior to the effective time of the BGC Holdings distribution to its limited partners entitled to receive distributions on their BGC Holdings units (including Cantor and executive officers of BGC) who were holders of record of such units as of the Separation this entire amount remained outstanding underRecord Date. The Newmark Holdings units distributed to BGC Holdings partners in the term loan credit agreement. Pursuant toBGC Holdings distribution are exchangeable for shares of Newmark Class A common stock, and in the term loan amendment and effective ascase of the Separation,449,917 Newmark assumedHoldings units received by Cantor also into shares of Newmark Class B common stock, at the obligations of BGC as borrower under the Term Loan. Newmark used the proceeds, net of underwriting discounts and commissions from the IPOapplicable exchange ratio (subject to partially repay $304.3 million of the Term Loan. During the three months ended March 31, 2018, Newmark repaid the outstanding balance of $270.7 million on the Term Loan. As of March 31, 2018, there were no borrowings outstanding under the Term Loan.
Also on November 22, 2017, BGC and Newmark entered into an amendment to the unsecured senior revolving credit agreement, dated as of September 8, 2017, with the administrative agent and a syndicate of lenders. The revolving credit agreement provides for revolving loans of up to $400.0 million. As of the Separation, $400.0 million of borrowings were outstanding under the revolving credit facility. Pursuant to the revolver amendment, the then-outstanding borrowings of BGC under the revolving credit facility were converted into a term loan (the “Converted Term Loan”) and, effective upon the Separation, Newmark assumed the obligations of BGC as borrower under the Converted Term Loan.
On June 26, 2012, BGC issued an aggregate of $112.5 million principal amount of its 8.125% Senior Notes due 2042 (the “8.125% BGC Senior Notes”). In connection with the issuance of the 8.125% BGC Senior Notes, BGC lent the proceeds of the 8.125% BGC Senior Notes to BGC U.S. OpCo, and BGC U.S. OpCo issued an amended and restated promissory note, effective as of June 26, 2012, with an aggregate principal amount of $112.5 million payable to BGC (the “2042 Promissory Note”). In connection with the Separation, on December 13, 2017 Newmark OpCo assumed all of BGC U.S. OpCo’s rights and obligations under the 2042 Promissory Note.
On December 9, 2014, BGC issued an aggregate of $300.0 million principal amount of its 5.375% Senior Notes due 2019 (the “5.375% BGC Senior Notes”). In connection with the issuance of the 5.375% BGC Senior Notes, BGC lent the proceeds of the 5.375% BGC Senior Notes to BGC U.S. OpCo, and BGC U.S. OpCo issued an amended and restated promissory note, effective as of December 9, 2014, with an aggregate principal amount of $300.0 million payable to BGC (the “2019 Promissory Note” and, together with the 2042 Promissory Note, the “BGC Notes”). In connection with the Separation, on December 13, 2017 Newmark OpCo assumed all of BGC U.S. OpCo’s rights and obligations under the 2019 Promissory Note.
On March 19, 2018, Newmark entered into an amended and restated credit agreement (the “Intercompany Credit Agreement”) with BGC, which amended and restated the original intercompany credit agreement between the parties in relation to the Separation, dated as of December 13, 2017. The Intercompany Credit Agreement provides for each party to issue revolving loans to the other party in the lender’s discretion. The interest rate on the Intercompany Credit Agreement can be the higher of BGC’s or Newmark’s short term borrowings rate in effect at such time plus 100 basis points, or such other interest rate as may be mutually agreed between BGC and Newmark. The interest rate as of March 31, 2018 was 4.99%adjustment). As of March 31, 2018,2019, the amount outstanding underexchange ratio was 0.9558 shares of Newmark common stock per Newmark Holdings unit.
Following the Intercompany Facility was $202.0 millionSpin-Off and is includedthe BGC Holdings distribution, BGC Partners ceased to be Newmark’s controlling stockholder, and BGC and its subsidiaries no longer held any shares of Newmark common stock or other equity interests in “Current portion of payablesit or its subsidiaries. Cantor continues to related parties” oncontrol Newmark and its subsidiaries following the unaudited condensed consolidated balance sheets Newmark recorded interest expense of $1.0 million forDistribution and the three months ended March 31, 2018, which is included in “Interest income, net” in the unaudited condensed consolidated statement of operations.BGC Holdings distribution.
(a) | Basis of Presentation |
Newmark’s unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) and in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). The Newmark unaudited condensed consolidated financial statements were prepared on a stand-alone basis derived from the financial statements and accounting records of BGC. ForDuring the periods presented, prioryear ended December 31, 2018, Newmark changed the line item formerly known as “Allocations of net income and grant of exchangeability to the IPO, Newmark was an unincorporated reportable segmentlimited partnership units and FPUs” to “Allocations of BGC. These unaudited condensed consolidated financial statements reflect the historical resultsnet income and grant of operations, financial positionexchangeability to limited partnership units and cash flowsFPUs and issuance of Newmark as it was historically managed and adjusted to conform with U.S. GAAP. These unaudited condensed consolidated financial statements are presented as if Newmark had operated on a stand-alone basis for all periods presented. Newmark’s unaudited condensed consolidated financial statements include all of the BGC subsidiaries that comprise its real estate segment, all of which are controlled by BGC.
This Berkeley Point Acquisition has been determined to be a combination of entities under common control that resultedstock” in a change in the reporting entity. Accordingly, the financial results of Newmark have been retrospectively adjusted to include the financial results of BPF in the current and prior periods as if BPF had always been consolidated. On December 13, 2017, in connection with the Separation, the assets and liabilities of BPF were transferred to Newmark.
The following tables summarize the impact of the Berkeley Point Acquisition to Newmark’s consolidated statementsstatement of operations foroperations. For the three months ended March 31, 2017:2019 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” in Newmark’s condensed consolidated statements of operations. The change resulted in the reclassification of amortization charges related to equity-based awards such as REUs and 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:
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| Three Months Ended March 31, 2017 |
| |||||||||
|
| As Previously Reported |
|
| Retrospective Adjustments |
|
| As Retrospectively Adjusted |
| |||
Income before income taxes and noncontrolling interests |
| $ | 7,946 |
|
|
| 29,046 |
|
| $ | 36,992 |
|
Net income |
|
| 7,980 |
|
|
| 29,027 |
|
|
| 37,007 |
|
Net income attributable to noncontrolling interests |
|
| 296 |
|
|
| — |
|
|
| 296 |
|
Net income available to common stockholders |
| $ | 7,684 |
|
| $ | 29,027 |
|
| $ | 36,711 |
|
Charges with respect to grants of exchangeability, which reflect the right of holders of limited partnership units with no capital accounts, such as LPUs and PSUs, to exchange these units into shares of common stock, or into partnership units with capital accounts, such as HDUs, as well as cash paid with respect to taxes withheld or expected to be owed by the unit holder upon such exchange. The withholding taxes related to the exchange of certain non-exchangeable units without a capital account into either common shares or units with a capital account may be funded by the redemption of preferred units such as PPSUs.
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Charges with respect to preferred unit redemption. Any preferred units would not be included in Newmark’s fully diluted share count because they cannot be made exchangeable into shares of common stock and are entitled only to a fixed distribution. Preferred units are granted in connection with the grant of certain limited partnership units that may be granted exchangeability at ratios designed to cover any withholding taxes expected to be paid by the unit holder upon exchange. This is an 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.
Equity-based compensation charges with respect to the grant of an offsetting amount of common stock or partnership units with capital accounts in connection with the redemption of non-exchangeable units, including PSUs and LPUs.
Charges related to amortization of RSUs and limited partnership units.
Charges related to grants of equity awards, including common stock and partnership units with capital accounts.
Allocations of net income to limited partnership units and FPUs. Such allocations represent the pro-rata portion of post-tax GAAP earnings available to such unit holders.
Newmark also changed “Gains from mortgage banking activities, net” to “Gains from mortgage banking activities/orginations, net” during the year ended December 31, 2018. The line item “Warehouse notes payable” was changed to “Warehouse facilities collateralized by U.S. Government Sponsored Enterprises” during the year ended December 31, 2018. Reclassifications have been made to previously reported amounts to conform to the current presentation.
Intercompany balances and transactions within Newmark have been eliminated. Transactions between Cantor or BGC and Newmark pursuant to service agreements between Cantor and BGC (see(See Note 25—27 — Related Party Transactions), representrepresenting valid receivables and liabilities of Newmark, which are periodically cash settled, have been included in the unaudited condensed consolidated financial statements as either receivables to or payables from related parties. Additionally, certain other transactions between BGC and Newmark are contributions of BGC’s net investment in Newmark including acquisitions prior to the IPO (Note 4—Acquisitions).
Newmark receives administrative services to support its operations, and in return, Cantor andand/or BGC allocate certain of their 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 andand/or BGC overhead costs, are included as expenses in the unaudited condensed 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 andand/or BGC 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 andand/or BGC. Actual costs that would have been incurred if Newmark had been a stand-alone company would depend on multiple factors, including organizational structure and strategic decisions in various areas, including information technology and infrastructure. Forinfrastructure (See Note 27 — Related Party Transactions for an additional discussion of expense allocations, (see Note 25—Related Party Transactions)allocations).
Prior to the Separation, BGC used a centralized approach to cash management. Accordingly, excess cash and cash equivalents were held by BGC at the corporate level and were not attributed to Newmark for any of the periods presented. Transfers of cash, both to and from BGC’s centralized cash management system,Cantor and/or BGC, are reflected as aincluded in “Current portion of payables to related party receivable or payableparties” on the unaudited condensed consolidated balance sheetsheets and as part of the change in payments to and borrowings from related parties in the financing section within the accompanying unaudited condensed consolidated statements of cash flows.
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The income tax provision in the unaudited condensed consolidated statements of operations and comprehensive income has been calculated as if Newmark was operating on a stand-alone basis and filed separate tax returns in the jurisdictions in which it operates. Newmark’s operations have historically 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 arewere unincorporated commercial units of BGC and its subsidiaries, stand-alone tax returns have not been filed for the operations in these jurisdictions.
Newmark’s unaudited condensed consolidated financial statements contain all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the unaudited condensed consolidated balance sheets, the unaudited condensed consolidated statements of operations, the unaudited condensed consolidated statements of comprehensive income, the unaudited condensed consolidated statements of cash flows and the unaudited condensed consolidated statements of changes in equity of Newmark for the periods presented.
| (b) | Recently Adopted Accounting Pronouncements |
In AugustMay 2014, the Financial Accounting Standards Board (the “FASB”(“FASB”) issued an Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements—Going Concern, which relates to disclosure of uncertainties about an entity’s ability to continue as a going concern. The ASU provides additional guidance on management’s responsibility to evaluate the condition of an entity and the required disclosures based on this assessment. The amendments in this update were effective for the annual period ending after December 15, 2016. The adoption of this standard did not impact Newmark’s unaudited condensed consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The new standard was effective for Newmark beginning January 1, 2017, and early adoption was permitted. The adoption of this standard did not have a material impact on Newmark’s unaudited condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which relates to how an entity recognizes the revenue it expects to be entitled to for the transfer of promised goods and services to customers. Newmark adopted the standard as of its effective date of January 1, 2018 and recognized an increase in assets, liabilities, beginning retained earnings and non-controllingnoncontrolling interests of $64.4 million, $45.6 million, $16.5 million and $2.3 million, , respectively, as the cumulative effect of adoption of this accounting change. The impact of adoption is primarily related to Newmark’s brokerage revenues from leasing commissions where revenue recognition was previously deferred when future contingencies exist under the previous revenue recognition guidance. The adoption of the new revenue recognition guidance accelerated these commission revenues that were based, in part, on future contingent events. For example, a portion of certain brokerage revenues from leasing commissions were deferred until a future contingency was resolved (e.g., tenant move-in or payment of first month’s rent). Under the new revenue recognition model, Newmark’s performance obligation will be typically satisfied at lease signing, and, therefore, the portion of the commission that is contingent on a future event will likely be recognized earlier, if it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
Further, Newmark previously presented expenses incurred on behalf of customers for certain management services subject to reimbursement on a net basis within expenses. Under the new revenue recognition model, Newmark concluded that it controls the services provided by a third partythird-party on behalf of customers and, therefore, acts as a principal under those contracts. As a result, for these service contracts Newmark will present expenses incurred on behalf of customers along with corresponding reimbursement revenue
on a gross basis in Newmark’s unaudited condensed consolidated statements of operations, with no impact on net income available to common stockholders.
Newmark elected to adopt the new guidance using a modified retrospective approach applied to contracts that were not completed as of January 1, 2018. Accordingly, the new revenue standard is applied prospectively in Newmark’s financial statements from January 1, 2018 onward, and reported financial information for historical comparable periods is not revised and continues to be reported under the accounting standards in effect during those historical periods.onward.
The new revenue recognition guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, and as a result did not have an impact on the elements of Newmark’s unaudited condensed consolidated statements of operations most closely associated with financial instruments, including revenues from Capital markets commissions, Gains from mortgage banking activities/origination, net, and Servicing fees.
There was no significant impact as a result of applying the new revenue standard to Newmark’s unaudited condensed consolidated financial statements for the three months ended March 31, 2018, except as it relates to the revenue recognition of certain brokerage revenues from leasing commissions that were based, in part, on future contingent events and the presentation of expenses incurred on behalf of customers for certain management services subject to reimbursement.
Seereimbursement (See Note 3 — Summary of Significant Accounting Policies and Note 12, Revenue13 — Revenues from Contracts with Customers.Customers).
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In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.Liabilities. This ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. Entities willmeasurement alternative. The guidance also haverequires entities to record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. In addition, entities will be required to present enhanced disclosures of financial assets and financial liabilities. The guidance became effective beginning January 1, 2018. In September 2017,February 2018, the FASB issued a Proposed ASU No. 2018-03, Technical Corrections and Improvements to Recently Issued Standards: Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities that clarified certain, to clarify transition and subsequent accounting for equity investments without a readily determinable fair value, among other aspects of the guidance.guidance issued in ASU 2016-01. The amendments in ASU 2018-03 were effective for fiscal years beginning January 1, 2018 and interim periods beginning July 1, 2018. The amendments and technical corrections provided in ASU 2018-03 could be adopted concurrently with ASU 2016-01, which was effective for Newmark on January 1, 2018. Newmark adopted both ASUs on January 1, 2018 using the modified retrospective approach for equity securities with a readily determinable fair value and the prospective method for equity investments without a readily determinable fair value. The adoption of this guidance did not have a material impact on Newmark’s unaudited condensed consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230)—Classification of Certain Cash Receipts and Cash Payments, which makes changes to how cash receipts and cash payments are presented and classified in the statements of cash flows. The new standard became effective beginning with the first quarter of 2018 and required adoption on a retrospective basis. The adoption of this guidance did not have a material impact on Newmark’s unaudited condensed consolidated statements of cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash, which requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The new standard became effective beginning January 1, 2018 and required adoption on a retrospective basis. The effect of this guidance resulted in the inclusion of restricted cash in the cash and cash equivalents balance on Newmark’s unaudited condensed consolidated statements of cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805)—Clarifying the definition of Business, which clarifies the definition of a business with the objective of providing additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard became effective beginning January 1, 2018 on a prospective basis. The adoption of this U.S. GAAP guidance did not have a material impact on Newmark’s unaudited condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): —Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Under this guidance, an entity would not apply modification accounting if the fair value, the vesting conditions, and the classification of the awards (as equity or liability) are the same immediately before and after the modification. The new standard became effective beginning January 1, 2018, on a prospective basis for awards modified on or after the adoption date. The adoption of this guidance did not have a material impact on Newmark’s unaudited condensed consolidated financial statements.
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In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASUstandard 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 largelymostly unchanged. In July 2018, the FASB issued ASU 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 2018-11, Leases (Topic 842), Targeted Improvements, which provided an additional (and optional) transition method to adopt the new leases
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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 current U.S. GAAP (i.e., ASC 840, Leases); and provide the required disclosures under ASC 840 for all periods presented under current U.S. GAAP. Further, ASU 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 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 2019-01, Leases (Topic 842), Codification Improvements, to clarify certain application and transitional disclosure aspectsofthenewleasesstandard.Theamendmentsaddressdeterminationofthefairvalueoftheunderlyingassetbylessorsthatarenot manufacturersordealersandclarifyinterimperiodtransitiondisclosurerequirements,amongotherissues.The guidance in ASUs 2016-02, 2018-10, 2018-11 and 2018-20 was effective beginning January 1, 2019, with early adoption permitted; whereas the guidance in ASU 2019-01 is effective beginning January 1, 2020, with early adoption permitted. Newmark adopted the 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 new 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. As a result upon adoption, acting primarily as a lessee, Newmark recognized an approximately $178.8 million ROU asset and an approximately $226.7 million ROU liability on its unaudited condensed consolidated balance sheets for its real estate operating leases. The adoption of the new guidance did not have a significant impact on Newmark’s unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of changes in equity and unaudited condensed consolidated statements of cash flows (See Note 18 — Leases for additional information on Newmark’s leasing arrangements).
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. The new standard became effective beginning January 1, 2019 on a prospective basis and modified retrospective basis. 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 are required to be adopted concurrently with the guidance in ASU No. 2017-12. As Newmark currently does not designate any derivative contracts as hedges for accounting purposes, the adoption of this new guidance did not have an impact on Newmark’s unaudited condensed consolidated financial statements.
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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 of 2017 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 new standard will become effective beginning January 1, 2019, with early adoption permitted. Management is currently evaluatingNewmark adopted the impactnew standard on its required effective date and elected to reclassify the stranded income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. However, the adoption of the new guidance did not have a material effect on Newmark’s unaudited condensed consolidated financial statements.
In June 2018, the FASB issued ASU 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 non-employee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance relate 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 non-employee awards. The new standard became effective beginning January 1, 2019. The ASU is 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 have not been settled and equity-classified awards for which a measurement date has not been established by the adoption date should be remeasured at fair value as of the adoption date with cumulative effect adjustment to opening retained earnings in the year of adoption. Management adopted this standard on its effective date. The adoption of this guidance did not have a material impact on Newmark’s unaudited condensed consolidated financial statements.
(c) | New Accounting Pronouncements |
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, 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. The new standard will become effective for Newmark beginning January 1, 2020, under a modified retrospective approach, and early adoption is permitted. Management is currently evaluating the impact of the new guidance on Newmark’s unaudited condensed consolidated financial statements.
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. The new standard will become effective beginning January 1, 2020 and will be applied on a prospective basis, and early adoption is permitted. The adoption of this guidance will not have a material impact on Newmark’s unaudited condensed 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. The new standard will become effective beginning January 1, 2019, with early adoption permitted, and will be applied on a prospective basis and modified retrospective basis. Management is currently evaluating the impact of the new guidance on Newmark’s unaudited condensed 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 of 2017 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 new standard will become effective beginning January 1, 2019, with early adoption permitted. The guidance should 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. Management is currently evaluating the transition method andHowever, the adoption of the new guidance is not expected to have a material effect on Newmark’s unaudited condensed consolidated financial statements.
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In August 2018, the FASB issued ASU 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. The new standard will become effective for Newmark beginning January 1, 2020 and early adoption is permitted for eliminated and modified fair value measurement disclosures. 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’s early adoption eliminated and modified disclosure requirements as of December 31, 2018 and Newmark plans to adopt the remaining disclosure requirements effective January 1, 2020. The adoption of this standard did not impact Newmark’s unaudited condensed consolidated financial statements (See Note 26 — Fair Value of Financial Assets and Liabilities for additional information).
In August 2018, the FASB issued ASU 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 will become effective for Newmark beginning January 1, 2020, should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption, and early adoption is permitted. Management is currently evaluating the impact of the new guidance on Newmark’s unaudited condensed 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 (“VIE”). 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 will become effective for Newmark 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. Management is currently evaluating the impact of the new guidance on determining whether a decision-making fee is a variable interest on Newmark’s unaudited condensed consolidated financial statements.
(2) | Limited Partnership |
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. Listed below are the limited partnership interests in Newmark Holdings. In addition, Newmark OpCo issued approximately $325 million of exchangeable preferred limited partnership units in private transactions to RBC (See Note 1 — Organization and Basis of Presentation). The founding/working partner units, limited partnership units, limited partnership interests held by Cantor (“Cantor units”) and, prior to the Spin-Off, limited partnership interests held by BGC (“BGC units”), each as described below. In addition, prior to the Spin-Off, BGC Partners and its operating subsidiaries holdheld limited partnership interest in Newmark Holdings due to the Investment in Newmark (see(See Note 25—27 — Related Party Transactions). These collectively represent all of the “limited partnership interests” in BGC Holdings and Newmark Holdings.
Immediately prior to the completion of the IPO, Newmark entered into the Original Separation and Distribution Agreement with Cantor, BGC, BGC Holdings is a consolidated subsidiary of BGC, which along with BGC jointly own BGC U.S. OpCo and BGC Global OpCo, the two BCG operating partnerships.OpCo. As a result of the Original Separation and Distribution Agreement, the limited partnership interests
in Newmark Holdings were distributed to the holders
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of limited partnership interests in BGC Holdings, whereby each holder of BGC Holdings limited partnership interests at that time holdsheld a BGC Holdings limited partnership interest and a corresponding Newmark Holdings limited partnership interest, which iswas 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 Newmark Class A common stock)stock (the “exchange ratio”)). As of March 31, 2018,Initially, the exchange ratio equaled one, so that each Newmark Holdings limited partnership interest iswas exchangeable for one 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 cash that it received from Newmark OpCo. In such circumstances, the Original 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 March 31, 2019, the exchange ratio equaled 0.9558.
Founding/Working Partner UnitsRedeemable Partnership Interest
Founding/working partners have a limited partnership interest in BGC Holdings and Newmark Holdings. Newmark accounts for founding/working partner units (“FPUs”) outside of permanent capital as “Redeemable partnership interests,interest,” in Newmark’s unaudited condensed consolidated statements balance sheets. This classification is applicable to founding/working partner unitsFPUs 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.
Founding/working partner unitsFPUs 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 founding/working partner units are generally redeemed, and the unit holders are no longer entitled to participate in the quarterly allocations of net income. Since these allocations of net income are cash distributed on a quarterly basis and are contingent upon services being provided by the unit holder, they are reflected as a component of “Netcompensation expense under “Equity-based compensation and allocations of net income (loss) attributable to non-controlling interests”limited partnership units and FPUs” in Newmark’s unaudited condensed consolidated statements of operations to the extent they related to Newmark employees.
Limited Partnership Units
Certain Newmark employees hold limited partnership interests in Newmark Holdings and BGC Holdings (e.g., REUs, RPUs, PSUs, PSIs, and LPUs, collectively the “limited partnership units”).
Prior to the Original Separation and Distribution Agreement, certain employees of both BGC and Newmark received limited partnership units in BGC Holdings. As a result of the Original Separation and Distribution Agreement, these employees were distributed limited partnership units in Newmark Holdings equal to a BGC Holdings limited partnership unit multiplied by the contribution ratio. Subsequent to the Original Separation and Distribution Agreement, BGC employees only receive limited partnership units in BGC Holdings and Newmark employees only receive limited partnership units in Newmark Holdings.
Generally, such limited partnership units receive quarterly allocations of net income, which are cash distributed and generally are contingent upon services being provided by the unit holders. 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 “Allocations“Equity-based compensation and allocations of net income and grant of exchangeability to limited partnership units”units and FPUs” in Newmark’s unaudited condensed 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” in Newmark’s unaudited condensed 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” in Newmark’s unaudited condensed consolidated statements of operations. From time to time, Newmark issues limited partnership units as part of the consideration for acquisitions.
24
Certain of these limited partnership units 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 in accordance with U.S. GAAP guidance, Newmark records compensation expense for the awards based on the change in value at each reporting date in the Newmark’s unaudited condensed consolidated statements of operations as part of “Compensation and employee benefits.”
Certain Newmark employees hold preferred partnership units (“Preferred Units.Units”). 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 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 “Allocations“Equity-based compensation and allocations of net income and grant of exchangeability to limited partnership units”units and FPUs” in Newmark’s unaudited condensed 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 ratepro-rata share of economic ownership of the operating subsidiaries.
Cantor Units
Cantor holds limited partnership interests in Newmark Holdings. Cantor units are reflected as a component of “Noncontrolling interest”interests” in the Newmark’s unaudited condensed consolidated balance sheets. Cantor receives allocations of net income (loss), which
are cash distributed on a quarterly basis and are reflected as a component of “Net income (loss) attributable to noncontrolling interest”interests” in Newmark’s unaudited condensed consolidated statements of operations.
BGC Units
Prior to the Spin-Off, BGC and its operating subsidiaries holdheld limited partnership interests in Newmark Holdings. Such BGC units have beenwere reflected as a component of “Noncontrolling interest”interests” in the Newmark’s unaudited condensed consolidated balance sheets. BGC and its operating subsidiaries received allocations of net income (loss), which will bewere cash distributed on a quarterly basis and will bewere reflected as a component of “NetNet income (loss) attributable to noncontrolling interest”interests in Newmark’s unaudited condensed consolidated statements of operations. In conjunction with the Spin-Off, such units were either exchanged for shares of Newmark Class A and Class B shares that were distributed to BGC Stockholders in the Spin-Off, or distributed to the partners of BGC Holdings in the BGC Holdings distribution (See Note 1 — Organization and Basis of Presentation).
Exchangeable Preferred Limited Partnership Units
RBC holds approximately $325.0 million of EPUs in Newmark OpCo, as a result of the Newmark OpCo Preferred Investment. The EPUs were issued in four 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 four tranches, respectively. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in “Noncontrolling interests” on the unaudited condensed consolidated statement 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 unaudited condensed consolidated statement of changes in equity and are included in “Net income available to common stockholders” for the purpose of calculating earnings per share.
25
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. In addition, certain limited partnership interests have been granted the limitedright to exchange into another partnership unit with a capital account (HDUs). HDUs have a stated capital account which is initially based on the closing trading price of Class A common stock at the time the HDU is issued. HDUs participate in quarterly partnership distributions and are not exchangeable into shares of Class A common stock unless such exchange rights are granted. Limited partnership interests held by Cantor in BGCNewmark Holdings and Newmark Holdingsas of March 31, 2019 are generally exchangeable for up to 34.623.2 million shares of BGC Class B common stock and/or up to the authorized amount of Newmark Class B common stock. InFollowing the IPO and prior to the Spin-Off, in order for a partner or Cantor to exchange a limited partnership interest in BGC Holdings or Newmark Holdings into a Class A or Class B common stock of BGC, such partner or Cantor mustwas required to exchange both one BGC Holdings limited partnership interests and a number of Newmark Holdings limited partnership interests equal to a BGC Holdings limited partnership interest multiplied by the quotient obtained by dividing Newmark Class A and Class B common stock, Newmark OpCo interests, and Newmark Holdings limited partnership interests held by BGC as of such time by the number of BGC Class A and Class B common stock outstanding as of such time (the “distribution ratio”), divided by the exchange ratio. Initially the distribution ratio was equivalent to the contribution ratio (one divided by 2.2 or 0.4545).4545), and as of immediately followingat the closetime of the first quarter of 2018 is equal to 0.4702.Spin-Off, the distribution ratio equaled 0.463895. As a result of the change in the distribution ratio, certain BGC Holdings limited partnership interests no longer have a corresponding Newmark Holdings limited partnership interest. The exchangeability of these BGC Holdings limited partnership interests along with any new BGC Holdings limited partnership interests issued after the Original Separation and Distribution Agreement (together referred to as “standalone”) into BGC Class A or Class B common stock iswas contingent upon the Spin-Off. Following the Spin-Off, a partner or Cantor is no longer required to have paired BGC Holdings and Newmark spin-off. After the spin-off, these standalone BGCHoldings limited partnership interests can thento exchange into Newmark Class A or Class B common stock. Subsequent to the Spin-Off, limited partnership interests in BGC Holdings held by a partner or Cantor may become exchangeable intofor BGC Class A or Class B common stock.stock on a one-for-one basis, and limited partnership interests in Newmark Holdings held by a partner or Cantor may become exchangeable for a number of Newmark Class A or Class B common stock equal to the number of limited partnership interests multiplied by the then exchange ratio.
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 allocation for FPUs, limited partnership units (including BGC units and Cantor units) is allocated to Cantor and reflected as a component of “Net income (loss) attributable to noncontrolling interest”interests” in Newmark’s unaudited condensed consolidated statements of operations. In subsequent quarters in which Newmark has net income, the initial allocation of income to the limited partnership interests is to “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 income (loss) allocation process has no impact on the net income (loss) allocated to common stockholders. In addition, in quarterly periods in which Newmark has a net loss, the loss allocation for FPUs, limited partnership units and Cantor units in Newmark Holdings is allocated to Cantor. In subsequent quarters in which Newmark has net income, the initial allocation of income to limited partnership interests in Newmark Holdings is allocated to Cantor to recover any losses taken in earlier quarters, with the remaining income allocated to the limited partnership interests.
(3) | Summary of Significant Accounting Policies |
For a detailed discussion about Newmark’s significant accounting policies, seeSee Note 3 — Summary of Significant Accounting Policies, in our consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017.2018. Other than the following, during the three months ended March 31, 2018,2019, there were no significant changes made to Newmark’s significant accounting policies.
Equity Investments:
Effective January26
Leases:
Newmark, acting as a lessee, has operating leases primarily relating to office space. The leases have remaining lease terms of 1 2018,year to 13 years, some of which include options to extend the leases in accordance5 to 10 year 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 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. Newmark 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 (“CPI”). Payments for leases in place before the date of adoption of ASC 842, Leases were determined based on previous leases guidance. Newmark 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 March 31, 2019.
Pursuant to the accounting policy election, leases with an initial term of twelve months or less are not recognized on the newbalance sheet. The short-term lease expense over the period reasonably reflects Newmark’s short-term lease commitments.
ASC 842, Leases requires Newmark to make certain assumptions and judgements in applying the guidance, on recognitionincluding determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or cancelation provisions, and measurementdetermining the discount rate.
Newmark determines whether an arrangement is a lease or includes a lease at the contract inception by evaluating whether the contract conveys the right to the control the use of equity investments,an identified asset for a period of time in exchange for consideration. If Newmark carries its marketable equity securities at fair valuehas the right to obtain substantially all of the economic benefits from, and recognizes any changes in fair value in net income (loss). Further,can direct the use of, the identified asset for a period of time, Newmark accounts for the identified asset as a lease. Newmark has elected the practical expedient to usenot separate lease and non-lease components for all leases other than real estate leases. The primary non-lease component that is combined with a measurement alternative for its equity investments without a readily determinable fair value, pursuant to which these investments are initially recognizedlease component represents operating expenses such as utilities, maintenance or management fees.
As the rate implicit in the lease is not usually available, Newmark used an incremental borrowing rate based on the information available at cost and remeasured through earnings when there is an observable transaction involving the same or similar investmentadoption date of the same issuer, or duenew leases standard in determining the present value of lease payments for existing leases. Newmark will use information available at the lease commencement date to an impairment. See Note 6—Marketable Securities and Note 7—Cost and Equity Method Investmentsdetermine the discount rate for additional information. Newmark had unrealized gains of $2.6 million related to Marketable securities and Investments carried under the measurement alternative for the three months ended March 31, 2018.any new leases.
Revenue Recognition:
The accounting policy changes are attributable to the adoption of ASU No. 2014-09, Revenue from contracts with Customers and related amendments on January 1, 2018. These revenue recognition policy updates are applied prospectively in Newmark’s
unaudited condensed consolidated financial statements from January 1, 2018 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.
Management Services, Servicing Fees and Other
For certain revenues based, in part, on future contingent events (e.g., tenant move-in or payment of first month’s rent), Newmark’s performance obligation is typically satisfied at lease signing and, therefore, the portion of the commission that is contingent on a future event is recognized as revenue, if deemed not subject to significant reversal.
Segment:
Newmark has a single operating segment. Newmark is a real estate services firm offering services to commercial real estate tenants, owner occupiers, investors and 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. For the three months ended March 31, 20182019 and 2017,2018, Newmark recognized revenues as follows (in thousands):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Leasing and other commissions |
| $ | 159,371 |
|
| $ | 127,567 |
|
| $ | 172,471 |
|
| $ | 159,371 |
|
Capital markets |
|
| 101,364 |
|
|
| 77,391 |
|
|
| 102,797 |
|
|
| 101,364 |
|
Gains from mortgage banking activities/origination, net |
|
| 38,914 |
|
|
| 45,262 |
|
|
| 31,346 |
|
|
| 38,914 |
|
Management services, servicing fees and other |
|
| 130,811 |
|
|
| 82,362 |
|
|
| 141,042 |
|
|
| 130,811 |
|
Revenues |
| $ | 430,460 |
|
| $ | 332,582 |
|
| $ | 447,656 |
|
| $ | 430,460 |
|
(4) | Acquisitions |
There were no acquisitions during the three months ended March 31, 2018.2019.
On September 8, 2017,During April of 2018, Newmark acquired from CCRE 100%completed the acquisition of the equity of BPF. The Berkeley Point Acquisition has been determined to be a combination of entities under common control that resulted in a change in the reporting entity (see Note 1—Organizationtwo former Integra Realty Resources (“IRR”) offices (Boston and Basis of Presentation).
The assets and liabilities of BPF have been recorded in Newmark’s unaudited condensed consolidated balance sheets at the seller’s historical carrying value. The excess of the purchase price over BPF’s net assets was accounted for as an equity transaction for the year ended December 31, 2017 (the period in which the transaction occurred)Pittsburgh). (See Note 1—Organization and Basis of Presentation for additional information.)
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between the carrying amounts of existing assets and liabilities and their respective tax basis. Accordingly, a deferred tax asset of $108.6 million has been contributed to Newmark for the period ended December 31, 2017 for the basis difference between BPF’s net assets and its tax basis.
On January 13, 2017, Newmark acquired a San Francisco based advisory firm, Regency Capital Partners (“Regency”). Regency specializes in structured debt and equity for large office and multi-family developments.
On July 26, 2017, Newmark acquired an approximately 50% controlling interest in a joint venture. Cantor owns a noncontrolling interest of 25% of the company, which is headquartered in New York, NY andIRR specializes in commercial real estate due diligence.
In September 2017, Newmark completed the acquisition of six former Integra Realty Resources offices (Washington DC, Baltimore, Willmington, DE, New York/New Jersey, Philadelphiavaluation and Atlanta offices). These firms specialize in valuationadvisory services, and the acquisition provides Newmark with greater geographic coverage.
In July 2018, Newmark completed the acquisition of two additional IRR offices (Denver and Pasadena) as well as Dallas based Jackson & Cooksey, Inc., a nationally known corporate tenant representation real estate business.
In September 2018, Newmark completed the acquisition of RKF Retail Holdings, LLC (“RKF”). RKF is a leading independent real estate firm in North America specializing in retail leasing, investment sales and consulting services.
In December 2018, Newmark completed the acquisition of New York-based MiT National Land Services, LLC, a national title agency.
For the year ended December 31, 2017,2018, the following tables summarize the components of the purchase consideration transferred, and the preliminary allocation of the assets acquired and liabilities assumed, for all acquisitions other than the Berkeley
Point Acquisition, based on the fair values of the acquisition date.assumed. 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.
|
| As of the Acquisition Date |
|
| As of the Acquisition Date |
| ||
Assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 3,903 |
|
| $ | 1,110 |
|
Goodwill |
|
| 64,291 |
|
|
| 42,188 |
|
Intangibles assets, net |
|
| 3,188 |
| ||||
Receivables, net |
|
| 50,731 |
| ||||
Fixed Assets, net |
|
| 1,276 |
| ||||
Other intangible assets, net |
|
| 4,677 |
| ||||
Other assets |
|
| 9,234 |
|
|
| 2,894 |
|
Total Assets |
|
| 80,616 |
| ||||
Total assets |
|
| 102,876 |
| ||||
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities |
|
| 7,119 |
| ||||
Total Liabilities |
|
| 7,119 |
| ||||
Noncontrolling interest |
|
| 19,145 |
| ||||
Current portion of accounts payable, accrued expenses and other liabilities |
|
| 15,937 |
| ||||
Accrued compensation |
|
| 26,765 |
| ||||
Total liabilities |
|
| 42,702 |
| ||||
Net assets acquired |
| $ | 54,352 |
|
| $ | 60,174 |
|
The total consideration for acquisitions during the year ended December 31, 20172018 was approximately $55.6$62.9 million in total fair value, comprised of cash and BGCNewmark Holdings limited partnership units. The total consideration included contingent consideration of approximately 477,169 BGC’s465,316 Newmark’s Holding partnership units (with an acquisition date fair value of approximately $5.0$6.2 million), restricted stock of approximately 216,900 (with an acquisition date fair value of approximately $3.1 million) and $1.3$8.6 million in cash that may be issued contingent on certain targets being met through 2020.2021. The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill of approximately $64.3$42.2 million, of which $45.4$28.6 million is deductible by Newmark for tax purposes.
These acquisitions are accounted for using the purchase method of accounting. The results of operations of these acquisitions have been included in Newmark’s unaudited condensed consolidated financial statements subsequent to their respective dates of acquisition, which in aggregate contributed $13.1$28.5 million to Newmark’s revenue for the year ended December 31, 2017.2018.
28
(5) | Earnings Per Share and Weighted-Average Shares Outstanding |
U.S. GAAP guidance—Earnings Per Share provides guidance on the computation and presentation of earnings per share (“EPS”). Basic EPS excludes dilution and is computed by dividing Net income (loss) 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 the Newmark’s outstanding common stock, FPUs, limited partnership units, and Cantor units and BGC units (see(See Note 2—2 - Limited Partnership InterestInterests). In addition, in relation to the Newmark Holdings).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):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
| $ | 19,997 |
|
| $ | 36,711 |
| ||||||||
Net income available to common stockholders (1) |
| $ | 13,680 |
|
| $ | 19,997 |
| ||||||||
Basic weighted-average shares of common stock outstanding |
|
| 155,694 |
|
| N/A |
|
|
| 178,611 |
|
|
| 155,694 |
| |
Basic earnings per share |
|
| 0.13 |
|
| N/A |
|
| $ | 0.08 |
|
| $ | 0.13 |
|
(1) | In accordance with ASC 260, includes a reduction for dividends on preferred stock or units in the amount of $3.2 million for the three months ended March 31, 2019. |
Fully diluted EPS is calculated utilizing netNet income (loss) 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.
29
The following is the calculation of Newmark’s fully diluted EPS (in thousands, except per share data):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Fully diluted earnings per share |
|
|
|
|
|
|
|
| ||||||||
Fully diluted earnings per share: |
|
|
|
|
|
|
|
| ||||||||
Net income available to common stockholders |
| $ | 19,997 |
|
| $ | 36,711 |
|
| $ | 13,680 |
|
| $ | 19,997 |
|
Allocations of net income to limited partnership interests in BGC Holdings and Newmark Holdings, net of tax |
|
| 10,289 |
|
| N/A |
| |||||||||
Allocations of net income to limited partnership interests in Newmark Holdings, net of tax |
|
| 8,288 |
|
|
| 10,289 |
| ||||||||
Net income for fully diluted shares |
| $ | 30,286 |
|
| N/A |
|
| $ | 21,968 |
|
| $ | 30,286 |
| |
Weighted-average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding |
|
| 155,694 |
|
| N/A |
|
|
| 178,611 |
|
|
| 155,694 |
| |
Partnership units1 |
|
| 90,222 |
|
| N/A |
| |||||||||
Partnership units (1) |
|
| 89,991 |
|
|
| 90,222 |
| ||||||||
Other |
|
| 918 |
|
| N/A |
|
|
| 455 |
|
|
| 918 |
| |
Fully diluted weighted-average shares of common stock outstanding |
|
| 246,834 |
|
| N/A |
|
|
| 269,057 |
|
|
| 246,834 |
| |
Fully diluted earnings per share |
|
| 0.12 |
|
| N/A |
|
| $ | 0.08 |
|
| $ | 0.12 |
|
|
| Partnership units collectively include founding/working partner units, limited partnership units, and Cantor units |
For the quarterthree months ended March 31, 2019 and 2018, there were no potentially dilutive securities that would have had an anti-dilutive effect.
(6) | Stock Transactions and Unit Redemptions |
Class A Common Stock
As of March 31, 2019, Newmark has two classes of authorized common stock: Class A common stock and Class B common stock. Each share of Class A common stock is entitled to one 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 for the three months ended March 31, 2019 and 2018, were as follows:
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Shares outstanding at beginning of period |
|
| 156,916,336 |
|
|
| 138,593,787 |
|
LPU redemption/exchange (1) |
|
| 374,930 |
|
|
| — |
|
Other issuances of Class A common stock |
|
| 8,451 |
|
|
| 327,746 |
|
Issuance of Class A common stock for Newmark RSUs |
|
| 123,199 |
|
|
| — |
|
Shares outstanding at end of period |
|
| 157,422,916 |
|
|
| 138,921,533 |
|
(1) | Because they were included in the Newmark’s fully diluted share count, if dilutive, any exchange of limited partnership interests into Class A common shares would not impact the fully diluted number of shares and units outstanding. |
Class B Common Stock
Each share of Class B common stock is entitled to 10 votes and is convertible at any time into one share of Class A common stock. Newmark has 500.0 million authorized shares of Class B common stock at $0.01 par value per share.
30
As of March 31, 2019, and December 31, 2018, there were 21.3 million shares of Newmark’s Class B common stock outstanding.
Share Repurchases
On August 1, 2018, the Newmark Board of Directors and Audit Committee authorized repurchases of shares of Newmark’s Class A common stock and redemptions or repurchases of limited partnership interests or other equity interests in Newmark’s subsidiaries up to $200.0 million, increased from the $100.0 million that had been authorized on March 12, 2018. This authorization includes repurchases of stock or 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, we may actively continue to repurchase shares and/or redeem units. In December 2018, we repurchased 50,000 shares of Newmark’s Class A common stock for $0.5 million. As of March 31, 2019, Newmark had approximately $199.5 million remaining from its share repurchase and unit redemption authorization.
Redeemable Partnership Interests
The changes in the carrying amount of redeemable partnership interest as of March 31, 2019, and as of December 31, 2018, were as follows (in thousands):
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||
Balance at beginning of period |
| $ | 26,170 |
|
| $ | 21,096 |
|
Income allocation |
|
| 706 |
|
|
| 6,779 |
|
Distributions of income |
|
| (14 | ) |
|
| (2,843 | ) |
FPU redemptions |
|
| (297 | ) |
|
| (1,101 | ) |
Issuance |
|
| — |
|
|
| 2,239 |
|
Other |
|
| 19 |
|
|
| — |
|
Balance at end of period |
| $ | 26,584 |
|
| $ | 26,170 |
|
(7) | Marketable Securities |
On June 28, 2013, BGC sold certain assets of its on-the-run electronic benchmark U.S. Treasury platform (“eSpeed”)business, eSpeed, to Nasdaq. The total consideration received by BGC in the transaction included an earn-out of up to 14,883,705 shares of Nasdaq common stock 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.year (the “Nasdaq Earn-Out”). The earn-outNasdaq 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 (the “Nasdaq Earn-Out”).contingencies. The remaining rights under the Nasdaq Earn-Out were transferred 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 the year ended December 31, 2017.2018. Newmark will receive arecognize the remaining Nasdaq Earn-Out of up to 9,922,4708,930,223 shares of Nasdaq common stock ratably over the next approximately 109 years, provided that Nasdaq, as a whole, produces at least $25.0 million in gross revenues each year. For further information, refer to the section titled “Exchangeable Preferred Partnership Units and Forward Contract” in Note 1 — Organization and Basis of Presentation, See Note 11 — Derivatives and See Note 26 — Fair Value of Financial Assets and Liabilities.
Newmark sold 100,000 of the Nasdaq shares during the three months ended March 31, 2019. As of March 31, 2019, Newmark had 500,000 shares remaining in connection with the Nasdaq Earn-Out. During the three months ended March 31, 2019 and 2018, Newmark sold 650,000 sharesthe gross proceeds of the Nasdaq shares received. In November of 2017, Newmark sold 242,247 shares and has 100,000 remaining shares as of March 31, 2018. During the three months ended March 31, 2018, the market value of the securities sold was $9.1 million and $52.2 million.million, respectively. For the three months ended March 31, 2019 and 2018, Newmark recognized a gaingain/(loss) on the sale of these securities of $(0.1) million and $2.4 million.million, respectively. For the three months ended March 31, 2019 and 2018, Newmark also recorded an unrealized gaingains of $4.0 million and $0.8 million on the mark to marketmark-to-market of these securities, respectively, which is included in “Other income (loss), net” in Newmark’s unaudited condensed consolidated statement of operations. As of March 31, 20182019 and December 31, 2017,2018, Newmark had $8.6$43.7 million
31
and $57.6$48.9 million, respectively, included in “Marketable securities” on its unaudited condensed consolidated balance sheet (see(See Note 18—20 — Securities Loans)Loaned).
|
|
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. For the three months ended March 31, 2019, Newmark did not recognize any equity income. For the three months ended March 31, 2018, Newmark recognized $3.2 million of equity incomeincome. This amount was included in “Other income, net” in itsNewmark’s unaudited condensed consolidated statements of operations. Newmark did not receive any distributions as of March 31, 2019. Newmark received distributions of $3.0 million for the year ended December 31, 2018. As of March 31, 20182019 and December 31, 2017,2018, Newmark had $104.7$101.3 million and $101.6 million, respectively in an equity method investment, and is included in “Other assets” in Newmark’s unaudited condensed consolidated balance sheets.
Investments Carried Under Measurements AlternativeAlternatives
Newmark had previously acquired investments for which it diddoes not have the ability to exert significant influence over operating and financial policies of the investees. Prior to January 1, 2018, thesepolicies. The investments wereare generally accounted for using the cost method of accounting in accordance with U.S. GAAP guidance, Investments—Other. The carrying value of the cost methodThese investments was $6.0 million and
isare included in “Other assets” in the Newmark’s unaudited condensed consolidated balance sheets as of December 31, 2017. Newmark did not recognize any gain or loss relating to cost method investments for the three months ended March 31, 2017.sheets.
Effective January 1, 2018, these investments are accounted for using the measurement alternative in accordance with the new guidance on recognition and measurement. The carrying value of these investments was $13.6$53.5 million and is included in “Other assets” in the Newmark’s unaudited condensed statementsconsolidated balance sheets as of March 31, 2019 and December 31, 2018. During the three months ended March 31, 2019, there were no observable transactions to trigger an adjustment to the fair value of these shares. Accordingly, Newmark did not recognize any gains, losses or impairments relating to investments carried under the measurement alternativeimpairment charges on these shares for the three months ended March 31, 2018.2019.
| 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 Newmark’s unaudited condensed consolidated financial statements. Management believes that, as of March 31, 20182019 and December 31, 2017,2018, Newmark has met all capital requirements. As of March 31, 2018,2019, the most restrictive capital requirement was Fannie Mae’s net worth requirement. Newmark exceeded the minimum requirement by $426.0$326.8 million.
Certain of Newmark’s agreements with Fannie Mae allow Newmark to originate and service loans under Fannie Mae’s DUSDelegated 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 Program (“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. Management believes that, as of March 31, 20182019 and December 31, 2017,2018, Newmark has met all liquidity requirements.
In addition, as a servicer for Fannie Mae, GNMAGinnie Mae and FHA,Federal Housing Administration, Newmark is required to advance to investors any uncollected principal and interest due from borrowers. At eachAs of March 31, 20182019 and December 31, 2017,2018, outstanding borrower advances were approximately $0.1 million and $0.2 million, respectively and are included in “Other assets” in Newmark’s unaudited condensed consolidated balance sheets.
32
| 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 of the mortgage loan is funded. Newmark initially and subsequently measures all loans held for sale at fair value on the accompanying unaudited condensed 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 loan 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):
|
| Cost Basis |
|
| Fair Value |
| ||
March 31, 2018 |
| $ | 950,514 |
|
| $ | 965,639 |
|
December 31, 2017 |
| $ | 360,440 |
|
| $ | 362,635 |
|
|
| Cost Basis |
|
| Fair Value |
| ||
March 31, 2019 |
| $ | 859,746 |
|
| $ | 873,021 |
|
December 31, 2018 |
|
| 972,434 |
|
|
| 990,864 |
|
As of March 31, 20182019 and December 31, 2017,2018, 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 March 31, 2019 and December 31, 2018, there were no loans held for sale that were 90 days or more past due or in nonaccrual status.
During the period prior to its sale, interest income on a loan held for sale is calculated in accordance with the terms of the individual loan. Interest income on loans held for sale was $4.7$8.6 million and $6.5$4.7 million for the three months ended March 31, 20182019 and 2017,2018, respectively. Interest income on loans held for sale inis included in “Management services, servicing fees and other” in Newmark’s unaudited condensed consolidated statements of operations. DuringNewmark recognized gains of $13.3 million and $15.1 million for the three months ended March 31, 20182019 and 2017, Newmark also recognized gains of $15.1 and $2.1 million,2018, respectively, for the change in fair value adjustments on loans held for sale. These gainsgains/losses were included in “Gains from mortgage banking activity/activities/originations, net” in Newmark’s unaudited condensed consolidated statements of operations.
| Derivatives |
Newmark accounts for its derivatives at fair value, and recognized all derivatives as either assets or liabilities in its unaudited condensed 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). These transactions are accounted for as derivatives.
The fair value of derivative contracts, computed in accordance with the Newmark’s netting policy, is set forth below (in thousands):
|
| March 31, 2018 |
|
| December 31, 2017 |
| |||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Notional |
|
|
|
|
|
|
|
|
|
| Notional |
|
| As of March 31, 2019 |
|
| As of December 31, 2018 |
|
| ||||||||||||||||||||
Derivative contract |
| Assets |
|
| Liabilities |
|
| Amounts (1) |
|
| Assets |
|
| Liabilities |
|
| Amounts(1) |
|
| Assets |
|
| Liabilities |
|
| Notional Amounts |
|
| Assets |
|
| Liabilities |
|
| Notional Amounts |
|
| ||||||||||||
Forwards |
| $ | 9,687 |
|
| $ | 2,421 |
|
| $ | 1,324,711 |
|
| $ | 3,753 |
|
| $ | 657 |
|
| $ | 541,359 |
|
| $ | 70,254 |
| (1) | $ | 9,596 |
|
| $ | 1,825,291 |
| (2) | $ | 85,796 |
| (1) | $ | 9,208 |
|
| $ | 1,574,114 |
| (2) |
Rate lock commitments |
|
| 8,750 |
|
|
| 8,980 |
|
|
| 374,197 |
|
|
| 2,923 |
|
|
| 2,390 |
|
|
| 180,918 |
|
|
| 10,210 |
|
|
| 5,190 |
|
|
| 604,586 |
|
|
| 6,732 |
|
|
| 7,470 |
|
|
| 240,720 |
|
|
Total |
| $ | 18,437 |
|
| $ | 11,401 |
|
|
|
|
|
| $ | 6,676 |
|
| $ | 3,047 |
|
|
|
|
|
| $ | 80,464 |
|
| $ | 14,786 |
|
| $ | 2,429,877 |
|
| $ | 92,528 |
|
| $ | 16,678 |
|
| $ | 1,814,834 |
|
|
(1) | Included in Forwards is $64.3 million and $77.6 million of the RBC Forwards as of March 31, 2019 and December 31, 2018, respectively (See Note 1 — Organization and Basis of Presentation). Newmark recorded $13.3 million and $(19.0) million of unrealized (gains)/losses for a change in the fair value of the RBC Forwards as of March 31, 2019 and December 31, 2018, respectively. |
33
(2) | Notional amounts represent the sum of gross long and short derivative contracts, an indication of the volume of Newmark’s derivative activity, and does not represent anticipated losses. Included in the notional amounts of forwards is $361.0 million for the RBC Forwards as of March 31, 2019 and December 31, 2018. |
The change in fair value of rate lock commitments and forward sale contracts related to mortgage loans are reported as part of “Gain“Gains from mortgage banking activities/originations,activities, net” in Newmark’s unaudited condensed consolidated statements of operations. The change in fair value of rate lock commitments are disclosed net of expenses of$2.1 million and $2.5 million and $0.8 millionof expenses for the three months ended March 31, 2019 and 2018, and 2017,respectively, which are reported as part of “Compensation and employee benefits” in the Newmark’s unaudited condensed consolidated statements of operations.
The fair value of Newmark’s derivatives for rate lock commitmentstable below summarizes gains and forward salelosses on derivative contracts are as follows (in thousands) andwhich are included in “Gain from mortgage banking activities/originations, net” and “Compensation and employee benefits” in the unaudited condensed consolidated statements of operations:operations for the three months ended March 31, 2019 and 2018 (in thousands):
|
| Location of gain (loss) recognized |
| Three Months Ended March 31, |
|
| Location of gain (loss) recognized |
| Three Months Ended March 31, |
| ||||||||||
|
| in income for derivatives |
| 2018 |
|
| 2017 |
|
| in income for derivatives |
| 2019 |
|
| 2018 |
| ||||
Derivatives not designed as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBC Forwards |
| Other income (loss) |
| $ | (13,329 | ) |
| $ | — |
| ||||||||||
Rate lock commitments |
| Gains from mortgage banking activities/originations, net |
| $ | 2,269 |
|
| $ | 132 |
|
| Gains from mortgage banking activities/originations, net |
|
| 7,087 |
|
|
| 2,269 |
|
Rate lock commitments |
| Compensation and employee benefits |
|
| (2,500 | ) |
|
| (807 | ) |
| Compensation and employee benefits |
|
| (2,067 | ) |
|
| (2,500 | ) |
Forward sale contracts |
| Gains from mortgage banking activities/originations, net |
|
| 7,266 |
|
|
| 3,317 |
|
| Gains from mortgage banking activities/originations, net |
|
| (3,632 | ) |
|
| 7,266 |
|
|
|
|
| $ | 7,035 |
|
| $ | 2,642 |
|
|
|
| $ | (11,941 | ) |
| $ | 7,035 |
|
Derivative assets and derivative liabilities are included in “Other current assets”, “Other assets” and the current portion of “Accounts payable, accrued expenses and other liabilities,” respectively.in Newmark’s unaudited condensed consolidated balance sheets.
| Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit |
Newmark is 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 provides Newmark with varying levels of ongoing credit protection, subject to certain limits, for Fannie Mae and Freddie Mac loans subject to loss sharing (see(See Note 21—23 — Financial Guarantee Liability) in Newmark’s servicing portfolio as of March 9, 2012. DB Cayman will also reimburse Newmark for any losses incurred due to violation of underwriting and serving agreements that occurred prior to March 9, 2012. For the three months ended March 31, 20182019 and 20172018, there were no reimbursements under this agreement.the CEA.
Credit enhancement receivable
AtAs of March 31, 2018,2019, Newmark had $18.9$20.0 billion of credit risk loans in its servicing portfolio with a maximum pre-credit enhancement loss exposure of $5.4$5.6 billion. Newmark had a form of credit protection from DB Cayman on $0.4 billion$38.5 million of credit risk loans with a maximum loss exposure coverage of $0.1 billion.$12.8 million. The amount of the maximum loss exposure without any form of credit protection from DB Cayman was $5.3$5.6 billion.
AtAs of December 31, 2017,2018, Newmark had $18.8$20.6 billion of credit risk loans in its servicing portfolio with a maximum pre-credit enhancement loss exposure of $5.3$5.8 billion. Newmark had a form of credit protection from DB
34
Cayman on $4.2 billion$230.7 million of credit risk loans with a maximum loss exposure coverage of $1.2 billion.$76.2 million. The amount of the maximum loss exposure without any form of credit protection from DB Cayman was $4.1$5.7 billion.
As of March 31, 2019 and December 31, 2018, there was no creditCredit enhancement receivable. Credit enhancement receivables as December 31, 2017 were $10 thousand are included in “Other assets” in Newmark’s unaudited condensed consolidated balance sheets.
Credit enhancement deposit
The CEA required the DB Entities to deposit $25 million into Newmark’s Fannie Mae restricted liquidity account (see(See Note 8—9 — Capital and Liquidity Requirements), which Newmark is required to return to DB Cayman, less any outstanding claims, on March 9, 2021. The $25 million deposit is included in “Restricted cash” and the offsetting liability in “Other long-term liabilities” in Newmark’s unaudited condensed consolidated balance sheets.
Contingent liability
Under the CEA, Newmark is required to pay DB Cayman, on March 9, 2021, an amount equal to 50% of the positive difference, if any, between (a) $25 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.
Contingent liabilities as of March 31, 20182019 and December 31, 20172018 were $10.7$11.3 million and $10.7$11.1 million, respectively and are included in “Other liabilities” in Newmark’s unaudited condensed consolidated balance sheets.
(13)Revenues from Contracts with Customers |
|
The following table presents Newmark’s total revenues separately for its revenues from contracts with customers and our other sources of revenues (in thousands):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| |||||
|
| 2018 |
|
| 2019 |
| 2018 |
| |||
Revenues from contracts with customers: |
|
|
|
|
|
|
|
|
|
|
|
Leasing and other commissions |
| $ | 159,371 |
|
| $ | 172,471 |
| $ | 159,371 |
|
Capital markets |
|
| 101,364 |
|
|
| 102,797 |
| 101,364 |
| |
Management services |
|
| 96,933 |
|
|
| 98,089 |
|
| 96,933 |
|
Revenues |
|
| 357,668 |
|
|
| 373,357 |
|
| 357,668 |
|
Other sources of revenue: |
|
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities/originations, net(1) |
|
| 38,914 |
|
|
| 31,346 |
| 38,914 |
| |
Servicing fees and other(1) |
|
| 33,878 |
|
|
| 42,953 |
|
| 33,878 |
|
Revenues |
| $ | 430,460 |
|
| $ | 447,656 |
| $ | 430,460 |
|
|
|
|
|
|
|
|
|
(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. 2014-09. |
The table below presents the impact to the Newmark’s condensed consolidated balance sheets and condensed consolidated statement of operations as a result of applying the new revenue recognition standard, as codified within ASC 606 (in thousands):
|
| For the Three Months Ended March 31, 2018 |
| |||||||||
|
| As Reported |
|
| Under Previous U.S. GAAP |
|
| Effect of Change Higher/(Lower) (1) |
| |||
Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Leasing and other commissions |
| $ | 159,371 |
|
|
| 148,754 |
|
| $ | 10,617 |
|
Capital Markets |
|
| 101,364 |
|
|
| 101,364 |
|
|
| — |
|
Gains from mortgage banking activities/originations, net |
|
| 38,914 |
|
|
| 38,914 |
|
|
| — |
|
Management services, servicing fees and other |
|
| 130,811 |
|
|
| 112,424 |
|
|
| 18,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits |
|
| 252,695 |
|
|
| 247,053 |
|
|
| 5,642 |
|
Operating, administrative and other |
| $ | 75,427 |
|
|
| 57,040 |
|
| $ | 18,387 |
|
|
|
|
| March 31, 2018 |
| |||||||||
|
| As Reported |
|
| Under Previous U.S. GAAP |
|
| Effect of Change Higher/(Lower) (1) |
| |||
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
| $ | 293,148 |
|
|
| 214,695 |
|
| $ | 78,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation |
|
| 205,732 |
|
|
| 168,338 |
|
|
| 37,394 |
|
Current portion of accounts payable, accrued expenses and other liabilities |
| $ | 165,746 |
|
|
| 148,466 |
|
| $ | 17,280 |
|
|
|
Revenue from contracts with customers is recognized when, or as, Newmark satisfies its 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 Newmark’s 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 Newmark expects to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, Newmark must consider consideration promised in a contract that includes a variable amount, referred to as variable consideration, and estimate the amount of consideration due Newmark. 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, Newmark considers 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 Newmark’s influence, such as market volatility or the judgment and actions of third parties.
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 Newmark 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 (such as travel, meals and lodging). 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.
The following provides detailed information on the recognition of Newmark’s revenues from contracts with customers:
Leasing and other commissions. Newmark offers a diverse range of commercial real estate brokerage and advisory services, including tenant and agency representation. Newmark’s performance obligation is to match a qualified tenant with available landlord property. Commissions from real estate brokerage transactions are typically recognized at a point in time on the date the lease is signed. The date the lease is signed represents the transfer of control and satisfaction of the performance obligation as the tenant has been secured. The commission fees are either a fixed or variable based on a percentage of the aggregate rental fee payable over the lease term. Commission payments may be due entirely upon lease execution or may be paid in installments upon the resolution of a future contingency. In those cases, Newmark does not provide any further services after the first contingency has been met. Therefore, the performance obligation of securing a tenant has been fulfilled upon reaching the first contingency. Newmark records a receivable for future installments of the commission revenue subject to any constraints that may exist in instances where the commission is considered variable consideration.
Capital markets. Newmark provides investment sales and mortgage brokerage services to property owners to identify qualified purchasers or debt placement for an owner’s property in exchange for a commission. Newmark is compensated for its services of finding a qualified purchaser or lender for the owner’s property, the one performance obligation, as evidenced by the closing of the sale of the property. In some cases, the consideration is payable in separate installments upon reaching two separate contingencies, such as the closing of a construction loan and the subsequent consummation of the sale of the property. In those cases, Newmark does not provide any further services after the first contingency has been met. The transfer of control and satisfaction of the performance obligation occurs when Newmark obtains a qualified purchaser or lender, as evidenced by the closing of the sale of or loans to the property. Therefore, revenue is recognized at a point in time. Commission fees may be fixed or variable based on a percentage of the transaction amount. Commission payments may be due entirely upon closing, either through escrow or upon recordation of the deed. Consideration is variable if the payment is contingent on an event that may or may not occur after Newmark has satisfied its performance obligation. For example, if Newmark’s obligations are fulfilled upon execution of a purchase and sale agreement, but the commission is not payable until closing of the transaction, there would exist an element of variable consideration. In those instances, Newmark assesses whether the amount of variable consideration is constrained and, if so, the source of the uncertainty and expected resolution of that uncertainty. Accordingly, the variable consideration adjusted for any constraints, if any, should be recognized upon the sale of the property.
Management services, servicing fees and other. In this business, Newmark provides property and facilities management services along with project management and other consulting services (collectively, “management services”), to customers who may also utilize Newmark’s commercial real estate brokerage services. As previously noted, servicing fees are not within the scope of the new revenue standard and a description of these services can be found in Note 3 Summary of Significant Accounting Policies.
Each type of management service (property, facility and project) generally represents a single performance obligation composed of a series of distinct services that are substantially the same and have the same pattern of transfer. Each task is an activity to fulfill the management service and are not separate promises that are distinct in the context of the contract. To meet the same pattern of transfer criterion, Newmark determined each distinct day of service represents a performance obligation that would be satisfied over time and has the same measure of progress. The customer simultaneously receives and consumes the benefits provided by Newmark’s performance as Newmark performs. Therefore, revenue is recognized over time using a time-elapsed method to measure progress.
Consideration received may be fixed or variable. Fixed consideration is included in the transaction price whereas variable consideration is subject to the revenue constraint and included in the transaction price only to the extent it is probable a significant reversal in the amount of cumulative revenue recognized will not occur in the future. For example, management fees subject to key performance indicators for an annual period are considered variable consideration due to the future contingency that performance indicators would not be met and Newmark would be required to return a portion of management fees already received. Accordingly, the entire transaction price, including the element of variable consideration adjusted for any constraints, is recognized over the term of the contracts. In some cases, Newmark has determined that it has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of Newmark’s performance completed to date (for example, a service contract in which Newmark bills a fixed amount for each hour of service provided). Newmark has elected to use the practical expedient whereby an entity may recognize revenue in the amount to which the entity has a right to invoice.
In some instances, because project management services can cover many different types of projects and even include phases for a single project that vary in the services delivered, the performance obligation is the completion of a deliverable. In those instances, the satisfaction of the performance obligation occurs at a point in time (upon completion of the deliverable when the customer obtains control). Generally, the fee is due upon completion and delivery and, accordingly, is recognized at that time.
For 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 reimbursement amounts 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 incurs expenses on behalf of customers for certain management services subject to reimbursement. Newmark concluded that it controls the services provided by a third party on behalf of customers and, therefore, acts as a principal under those contracts. For these service contracts, Newmark presents expenses incurred on behalf of customers along with corresponding reimbursement revenue on a gross basis in Newmark’s consolidated statement of operations.
Disaggregation of Revenue
Newmark’s chief operating decision maker regardless of geographic location evaluates the operating results of Newmark as total real estate. Seeestate (See Note 3 — Summary of Significant Accounting Policies for further discussion.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 March 31, 20182019 and January 1,December 31, 2018 was $3.9
35
$3.8 million and $4.6$4.2 million, respectively. During the three months ended March 31, 2018,2019, Newmark recognized revenue of $1.8$0.8 million that was recorded as deferred revenue at the beginning of the period.
Contract Costs
Newmark capitalizes costs to fulfill contracts associated with different lines of its business where the revenue is recognized at a point in time and the costs are determined to be recoverable. Capitalized costs to fulfill a contract are recognized at the point in time that the related revenue is recognized.
At March 31, 2018, there were no capitalized costs recorded to fulfill a contract.
| Gains from Mortgage Banking Activities/Originations, Net |
Gains from mortgage banking activities/originations, net consists of the following activity (in thousands):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Loan originations related fees and sales premiums, net |
| $ | 17,817 |
|
| $ | 15,952 |
|
| $ | 14,968 |
|
| $ | 17,817 |
|
Fair value of expected net future cash flows from servicing recognized at commitment, net |
|
| 21,097 |
|
|
| 29,310 |
|
|
| 16,378 |
|
|
| 21,097 |
|
Gains from mortgage banking activities/originations, net |
| $ | 38,914 |
|
| $ | 45,262 |
|
| $ | 31,346 |
|
| $ | 38,914 |
|
| Mortgage Servicing Rights, Net (MSR) |
A summaryThe changes in the carrying amount of the activity in mortgage servicing rights by class for the three months ended March 31, 2019 and 2018 and 2017 isare as follows (in thousands):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
Mortgage Servicing Rights |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Beginning Balance |
| $ | 399,349 |
|
| $ | 347,558 |
|
| $ | 416,131 |
|
| $ | 399,349 |
|
Additions |
|
| 6,389 |
|
|
| 28,806 |
|
|
| 17,254 |
|
|
| 6,389 |
|
Purchases from an affiliate |
|
| 509 |
|
|
| — |
|
|
| 298 |
|
|
| 509 |
|
Amortization |
|
| (19,294 | ) |
|
| (17,175 | ) |
|
| (20,679 | ) |
|
| (19,294 | ) |
Ending Balance |
| $ | 386,953 |
|
| $ | 359,189 |
|
| $ | 413,004 |
|
| $ | 386,953 |
|
|
|
|
|
|
|
|
|
| ||||||||
Valuation Allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance |
| $ | (6,723 | ) |
| $ | (7,742 | ) |
| $ | (4,322 | ) |
| $ | (6,723 | ) |
Decrease |
|
| 1,296 |
|
|
| 3,168 |
|
|
| (1,722 | ) |
|
| 1,296 |
|
Ending Balance |
| $ | (5,427 | ) |
| $ | (4,574 | ) |
| $ | (6,044 | ) |
| $ | (5,427 | ) |
Net balance |
| $ | 381,526 |
|
| $ | 354,615 |
|
| $ | 406,960 |
|
| $ | 381,526 |
|
Servicing fees are included in “Management services, servicing fees and other” in Newmark’s unaudited condensed consolidated statements of operations and are as follows (in thousands):
|
| Three Months Ended March 31, |
|
| Three Months Ended March 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Servicing fees |
| $ | 25,132 |
|
| $ | 22,050 |
|
| $ | 25,631 |
|
| $ | 25,132 |
|
Escrow interest and placement fees |
|
| 2,967 |
|
|
| 1,459 |
|
|
| 5,363 |
|
|
| 2,967 |
|
Ancillary fees |
|
| 827 |
|
|
| 1,323 |
|
|
| 3,184 |
|
|
| 827 |
|
Total servicing fees and escrow interest |
| $ | 28,926 |
|
| $ | 24,832 |
|
| $ | 34,178 |
|
| $ | 28,926 |
|
36
Newmark’s primary servicing portfolio at March 31, 20182019 and December 31, 20172018 was approximately $55.1$57.3 billion and $54.2$57.1 billion, respectively. Also, Newmark is the named special servicer for a number of commercial mortgage backedmortgage-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 at March 31, 20182019 and December 31, 20172018 was $3.6$2.7 billion and $3.8$2.9 billion, respectively.
The estimated fair value of the MSRs at March 31, 20182019 and December 31, 20172018 was $ 422.2$442.3 million and $418.1$451.9 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 three months ended March 31, 20182019 and for the year ended December 31, 2017 was2018 were between 3.0% and 13.5% and varied based on investor type. An increase in discount rate of 100 bps or 200 bps would result in a decrease in fair value by $13.7$11.4 million and $25.0$22.9 million, respectively, at March 31, 2018.2019. An increase in discount rate of 100 bps or 200 bps would result in a decrease in fair value by $11.8$12.4 million and $23.0$24.4 million, respectively, at December 31, 2017.2018.
| Goodwill and Other Intangible Assets, Net of Accumulated Amortization |
The changes in the carrying amount of goodwill for the three months ended March 31, 20182019 and the year ended December 31, 20172018 were as follows (in thousands):
Balance at December 31, 2016 |
| $ | 412,846 |
| ||||
Acquisitions |
|
| 64,291 |
| ||||
Measurement period adjustments |
|
| 395 |
| ||||
Balance at December 31, 2017 |
|
| 477,532 |
|
| $ | 477,532 |
|
Acquisitions |
|
| — |
|
|
| 40,157 |
|
Measurement period adjustments |
|
| (2,542 | ) |
|
| (2,368 | ) |
Balance at March 31, 2018 |
| $ | 474,990 |
| ||||
Balance at December 31, 2018 |
|
| 515,321 |
| ||||
Measurement period adjustments |
|
| 5 |
| ||||
Balance at March 31, 2019 |
| $ | 515,326 |
|
During the three months ended March 31, 2018,2019, Newmark recognized measurement period adjustments of approximately $(2.5) million.$5 thousand. Newmark did not have any additions to goodwill as a result of acquisitions for the three months ended March 31, 2018.2019. During the yearsyear ended December 31, 2017,2018, Newmark recognized additional goodwill and measurement period adjustments of approximately $64.3$40.2 million and $0.4$(2.4) million, respectively. Seerespectively (See Note 4—4 — Acquisitions for more information.information).
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 during the fourth quarter of 2017,2018, which did not result in any goodwill impairment.
37
Other intangible assets consisted of the following at March 31, 20182019 and December 31, 20172018 (in thousands, except weighted average life):
|
| March 31, 2018 |
|
| March 31, 2019 |
| ||||||||||||||||||||||||||
|
| Gross Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
|
| Weighted- Average Remaining Life (Years) |
|
| Gross Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
|
| Weighted- Average Remaining Life (Years) |
| ||||||||
Indefinite life: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade names |
| $ | 4,400 |
|
| $ | — |
|
| $ | 4,400 |
|
| N/A |
|
| $ | 11,350 |
|
| $ | — |
|
| $ | 11,350 |
|
| N/A |
| ||
License agreements (GSE) |
|
| 5,390 |
|
|
| — |
|
|
| 5,390 |
|
| N/A |
|
|
| 5,390 |
|
|
| — |
|
|
| 5,390 |
|
| N/A |
| ||
Definite life: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade names |
|
| 7,061 |
|
|
| (6,183 | ) |
|
| 878 |
|
|
| 0.1 |
|
|
| 9,316 |
|
|
| (6,914 | ) |
|
| 2,402 |
|
|
| 0.6 |
|
Non-contractual customers |
|
| 10,447 |
|
|
| (2,407 | ) |
|
| 8,040 |
|
|
| 2.5 |
|
|
| 11,325 |
|
|
| (4,395 | ) |
|
| 6,930 |
|
|
| 1.7 |
|
License agreements |
|
| 4,981 |
|
|
| (1,548 | ) |
|
| 3,433 |
|
|
| 0.7 |
|
|
| 4,981 |
|
|
| (2,540 | ) |
|
| 2,441 |
|
|
| 0.3 |
|
Non-compete agreements |
|
| 3,608 |
|
|
| (642 | ) |
|
| 2,966 |
|
|
| 1.1 |
|
|
| 6,267 |
|
|
| (1,709 | ) |
|
| 4,558 |
|
|
| 1.4 |
|
Contractual customers |
|
| 1,452 |
|
|
| (664 | ) |
|
| 788 |
|
|
| 0.2 |
|
|
| 1,452 |
|
|
| (911 | ) |
|
| 541 |
|
|
| 0.1 |
|
Below market leases |
|
| 15 |
|
|
| (14 | ) |
|
| 1 |
|
|
| — |
|
|
| 941 |
|
|
| (68 | ) |
|
| 873 |
|
|
| 0.6 |
|
|
| $ | 37,354 |
|
| $ | (11,458 | ) |
| $ | 25,896 |
|
|
| 4.6 |
|
| $ | 51,022 |
|
| $ | (16,537 | ) |
| $ | 34,485 |
|
|
| 4.7 |
|
|
| December 31, 2017 |
|
| December 31, 2018 |
| ||||||||||||||||||||||||||
|
| Gross Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
|
| Weighted- Average Remaining Life (Years) |
|
| Gross Amount |
|
| Accumulated Amortization |
|
| Net Carrying Amount |
|
| Weighted- Average Remaining Life (Years) |
| ||||||||
Indefinite life: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade names |
| $ | 4,400 |
|
| $ | — |
|
| $ | 4,400 |
|
| N/A |
|
| $ | 11,350 |
|
| $ | — |
|
| $ | 11,350 |
|
| N/A |
| ||
License agreements (GSE) |
|
| 5,390 |
|
|
| — |
|
|
| 5,390 |
|
| N/A |
|
|
| 5,390 |
|
|
| — |
|
|
| 5,390 |
|
| N/A |
| ||
Definite life: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademark and trade names |
|
| 7,061 |
|
|
| (6,030 | ) |
|
| 1,031 |
|
|
| 0.2 |
|
|
| 9,316 |
|
|
| (6,706 | ) |
|
| 2,610 |
|
|
| 0.5 |
|
Non-contractual customers |
|
| 7,950 |
|
|
| (1,495 | ) |
|
| 6,455 |
|
|
| 2.5 |
|
|
| 11,323 |
|
|
| (3,890 | ) |
|
| 7,433 |
|
|
| 1.8 |
|
License agreements |
|
| 4,981 |
|
|
| (1,298 | ) |
|
| 3,683 |
|
|
| 0.9 |
|
|
| 4,981 |
|
|
| (2,292 | ) |
|
| 2,689 |
|
|
| 0.4 |
|
Non-compete agreements |
|
| 3,606 |
|
|
| (496 | ) |
|
| 3,110 |
|
|
| 1.2 |
|
|
| 6,267 |
|
|
| (1,469 | ) |
|
| 4,798 |
|
|
| 1.4 |
|
Contractual customers |
|
| 1,452 |
|
|
| (602 | ) |
|
| 850 |
|
|
| 0.2 |
|
|
| 1,452 |
|
|
| (849 | ) |
|
| 603 |
|
|
| 0.1 |
|
Below market leases |
|
| 15 |
|
|
| (13 | ) |
|
| 2 |
|
|
| — |
|
|
| 941 |
|
|
| (45 | ) |
|
| 896 |
|
|
| 0.5 |
|
|
| $ | 34,855 |
|
| $ | (9,934 | ) |
| $ | 24,921 |
|
|
| 5.0 |
|
| $ | 51,020 |
|
| $ | (15,251 | ) |
| $ | 35,769 |
|
|
| 4.7 |
|
Intangible amortization expense for the three months ended March 31, 2019 and 2018 and 2017 was $1.5$1.3 million and $1.3$1.5 million, respectively. Intangible amortization is included as a part of “Depreciation and amortization” in Newmark’s unaudited condensed consolidated statements of operations.
The estimated future amortization of definite life intangible assets as of March 31, 20182019 was as follows (in thousands):
2018 |
| $ | 3,047 |
| ||||
2019 |
|
| 3,934 |
|
| $ | 3,801 |
|
2020 |
|
| 3,691 |
|
|
| 4,823 |
|
2021 |
|
| 2,709 |
|
|
| 3,814 |
|
2022 and thereafter |
|
| 2,725 |
| ||||
2022 |
|
| 1,908 |
| ||||
2023 |
|
| 1,602 |
| ||||
Thereafter |
|
| 1,797 |
| ||||
Total |
| $ | 16,106 |
|
| $ | 17,745 |
|
38
| Fixed Assets, Net |
Fixed assets, net consisted of the following (in thousands):
|
| March 31, 2018 |
|
| December 31, 2017 |
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||||
Leasehold improvements and other fixed assets |
| $ | 79,121 |
|
| $ | 77,313 |
|
| $ | 98,118 |
|
| $ | 99,207 |
|
Software, including software development costs |
|
| 17,827 |
|
|
| 17,395 |
|
|
| 26,546 |
|
|
| 21,417 |
|
Computer and communications equipment |
|
| 16,450 |
|
|
| 15,878 |
|
|
| 19,627 |
|
|
| 16,605 |
|
|
|
| 113,398 |
|
|
| 110,586 |
|
|
| 144,291 |
|
|
| 137,229 |
|
Accumulated depreciation and amortization |
|
| (48,833 | ) |
|
| (45,764 | ) |
|
| (62,446 | ) |
|
| (58,424 | ) |
|
| $ | 64,565 |
|
| $ | 64,822 |
|
| $ | 81,845 |
|
| $ | 78,805 |
|
Depreciation expense for the three months ended March 31, 2019 and 2018 and 2017, was $3.2$4.9 million and $3.0$3.2 million, respectively. Depreciation expense is included as a part of “Depreciation and amortization” in Newmark’s unaudited condensed consolidated statementstatements of operations.
For the three months ended March 31, 2019 and 2018, and 2017, $0.5$0.6 million and $0.1$0.5 million of software development costs were capitalized, respectively. Amortization of software development costs totaled $0.2$0.6 million and $0.1million$0.2 million for the three months ended March 31, 20182019 and 2017,2018, respectively. Amortization of software development costs is included as part of “Depreciation and amortization” in Newmark’s unaudited condensed consolidated statements of operations.
(18) | Leases |
Newmark has operating leases for real estate and equipment. These leases have remaining lease terms of 1 year to 13 years, some of which include options to extend the leases in 5 to 10 year 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 judgement 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.
Operating lease cost was $10.9 million for the three months ended March 31, 2019 and is included in “Operating, administrative and other” in the unaudited condensed consolidated statement of operations. Operating cash flows for the three months ended March 31, 2019 included payments of $10.4 million for operating lease liabilities. As of March 31, 2019, Newmark does not have any leases that have not yet commenced but that create significant rights and obligations. For the three months ended March 31, 2019, Newmark had short-term lease expense of $0.6 million and sublease income of $0.2 million.
The weighted average discount rate is 7.49% and the remaining weighted average lease term is 9.1 years.
As of March 31, 2019, Newmark has operating lease ROU assets of $182.2 million recorded in “Other assets”, and operating lease ROU liabilities of $23.3 million recorded in “Current portion of accounts payable, accrued expenses and other liabilities” and $208.7 million recorded in “Other long-term liabilities” on its unaudited condensed consolidated balance sheets.
Rent expense for the three months ended March 31, 2019 and 2018 was $11.7 million and $10.2 million, respectively. Rent expense is reported in “Operating, administrative and other” in Newmark’s unaudited condensed 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 2031. Certain of these leases contain escalation clauses that require payment of additional rent to the extent of increases in certain operating or other costs.
39
As of March 31, 2019, minimum lease payments under these arrangements were as follows (in thousands):
2019 |
| $ | 29,522 |
|
2020 |
|
| 40,141 |
|
2021 |
|
| 36,758 |
|
2022 |
|
| 33,950 |
|
2023 |
|
| 32,539 |
|
Thereafter |
|
| 149,769 |
|
Total lease payments |
|
| 322,679 |
|
Less: Interest |
|
| 90,653 |
|
Present value of lease liability |
| $ | 232,026 |
|
Under ASC 840, Leases undiscounted minimum lease payments as of December 31, 2018 were as follows (in thousands):
2019 |
| $ | 42,870 |
|
2020 |
|
| 41,497 |
|
2021 |
|
| 38,287 |
|
2022 |
|
| 35,738 |
|
2023 |
|
| 34,290 |
|
Thereafter |
|
| 158,907 |
|
Total |
| $ | 351,589 |
|
| Other Assets |
Other current assets consisted of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||||
Prepaid expenses |
| $ | 16,108 |
|
| $ | 12,708 |
|
| $ | 14,071 |
|
| $ | 15,570 |
|
Derivative assets |
|
| 18,437 |
|
|
| 6,676 |
|
|
| 28,549 |
|
|
| 30,796 |
|
Prepaid taxes |
|
| 7,576 |
|
|
| 9,992 |
| ||||||||
Rent and other deposits |
|
| 1,279 |
|
|
| 1,479 |
|
|
| 1,312 |
|
|
| 1,192 |
|
Other |
|
| 675 |
|
|
| 131 |
|
|
| 19 |
|
|
| 189 |
|
|
| $ | 36,499 |
|
| $ | 20,994 |
|
| $ | 51,527 |
|
| $ | 57,739 |
|
Non-current other assets consisted of the following (in thousands):
|
| March 31, |
|
| December 31, |
| ||||||||||
|
| 2018 |
|
| 2017 |
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||||
Equity method investment |
| $ | 104,718 |
|
| $ | 101,562 |
|
| $ | 101,275 |
|
| $ | 101,275 |
|
Deferred tax assets(a) |
|
| 166,804 |
|
|
| 168,594 |
| ||||||||
Deferred tax assets(1) |
|
| 154,881 |
|
|
| 149,938 |
| ||||||||
Cost method investments |
|
| 13,580 |
|
|
| 6,005 |
|
|
| 53,470 |
|
|
| 53,470 |
|
Derivative assets related to the RBC Forward |
|
| 52,951 |
|
|
| 61,732 |
| ||||||||
ROU assets |
|
| 182,180 |
|
| — |
| |||||||||
Other |
|
| 2,406 |
|
|
| 2,299 |
|
|
| 4,773 |
|
|
| 3,452 |
|
|
| $ | 287,508 |
|
| $ | 278,460 |
|
| $ | 549,530 |
|
| $ | 369,867 |
|
40
|
|
| Securities Loaned |
As of March 31, 2018 and December 31, 2017,2019, Newmark had securities loaned transactions with Cantor of $8.6 million and $57.6 million, respectively.$43.7 million. The marketfair value of the securities lentloaned was $8.6 million and $57.6 million as of March 31, 2018 and December 31, 2017, respectively.$43.7 million. As of March 31, 2018,2019, the cash collateral received from Cantor bore an interest rate of 2.18%2.97%. As of December 31, 2017, the cash collateral received from Cantor bore interest rates ranging from 3.1% to 3.25%.2018, Newmark did not have any securities loaned transactions with Cantor. Securities loaned transactions are included in “Securities loaned” in Newmark’s unaudited condensed consolidated balance sheets.sheets (See Note 7 — Marketable Securities).
| Warehouse |
Newmark uses its warehouse linesfacilities 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. commitments and are recourse only to Berkeley Point Capital, LLC.
As of March 31, 2019, Newmark had the following lines available and borrowings outstanding (in thousands):
|
| Committed Lines |
|
| Uncommitted Lines |
|
| Balance at March 31, 2019 |
|
| Stated Spread to One Month LIBOR |
| Rate Type | |||
Warehouse facility due June 19, 2019 |
| $ | 450,000 |
|
| $ | — |
|
| $ | 324,281 |
|
| 120 bps |
| Variable |
Warehouse facility due June 19, 2019 |
| — |
|
|
| 200,000 |
|
|
| 135,383 |
|
| 115 bps |
| Variable | |
Warehouse facility due September 25, 2019 |
|
| 200,000 |
|
|
| — |
|
|
| 180,038 |
|
| 120 bps |
| Variable |
Warehouse facility due October 10, 2019(1) |
|
| 600,000 |
|
|
| — |
|
|
| 220,044 |
|
| 120 bps |
| Variable |
Fannie Mae repurchase agreement, open maturity |
|
| — |
|
|
| 325,000 |
|
|
| — |
|
| 115 bps |
| Variable |
|
| $ | 1,250,000 |
|
| $ | 525,000 |
|
| $ | 859,746 |
|
|
|
|
|
(1) | The warehouse facility was temporarily increased by $300.0 million to $600.0 million for the period of January 29, 2019 to April 1, 2019. |
As of December 31, 2018, Newmark had the following lines available and borrowings outstanding (in thousands):
|
| Committed Lines |
|
| Uncommitted Lines |
|
| Balance at March 31, 2018 |
|
| Stated Spread to One Month LIBOR |
| Rate Type | |||
Warehouse line due June 20, 2018 |
| $ | 450,000 |
|
| $ | — |
|
| $ | 390,295 |
|
| 130 bps |
| Variable |
Warehouse line due September 25, 2018 |
|
| 200,000 |
|
|
| — |
|
|
| 166,480 |
|
| 130 bps |
| Variable |
Warehouse line due October 11, 2018(1) |
|
| 400,000 |
|
|
| — |
|
|
| 361,739 |
|
| 130 bps |
| Variable |
Fannie Mae repurchase agreement, open maturity |
|
| — |
|
|
| 325,000 |
|
|
| 31,965 |
|
| 120 bps |
| Variable |
|
| $ | 1,050,000 |
|
| $ | 325,000 |
|
| $ | 950,479 |
|
|
|
|
|
|
| Committed Lines |
|
| Uncommitted Lines |
|
| Balance at December 31, 2018 |
|
| Stated Spread to One Month LIBOR |
| Rate Type | |||
Warehouse facility due June 19, 2019 |
| $ | 450,000 |
|
| $ | — |
|
| $ | 413,063 |
|
| 120 bps |
| Variable |
Warehouse facility due September 25, 2019 |
|
| 200,000 |
|
|
| — |
|
|
| 113,452 |
|
| 120 bps |
| Variable |
Warehouse facility due October 10, 2019(1) |
|
| 1,000,000 |
|
|
| — |
|
|
| 416,373 |
|
| 120 bps |
| Variable |
Fannie Mae repurchase agreement, open maturity |
|
| — |
|
|
| 325,000 |
|
|
| 29,499 |
|
| 115 bps |
| Variable |
|
| $ | 1,650,000 |
|
| $ | 325,000 |
|
| $ | 972,387 |
|
|
|
|
|
(1) | The warehouse |
As of December 31, 2017, Newmark had the following lines available and borrowings outstanding (in thousands):
|
| Committed Lines |
|
| Uncommitted Lines |
|
| Balance at December 31, 2017 |
|
| Stated Spread to One Month LIBOR |
| Rate Type | |||
Warehouse line due June 20, 2018 |
| $ | 450,000 |
|
| $ | — |
|
| $ | 60,715 |
|
| 130 bps |
| Variable |
Warehouse line due September 25, 2018 |
|
| 200,000 |
|
|
| — |
|
|
| 107,383 |
|
| 130 bps |
| Variable |
Warehouse line due October 11, 2018 |
|
| 300,000 |
|
|
| — |
|
|
| 174,102 |
|
| 130 bps |
| Variable |
Fannie Mae repurchase agreement, open maturity |
|
| — |
|
|
| 325,000 |
|
|
| 18,240 |
|
| 120 bps |
| Variable |
|
| $ | 950,000 |
|
| $ | 325,000 |
|
| $ | 360,440 |
|
|
|
|
|
Newmark is required to meet a number of financial covenants, including maintaining a minimum of $15.0 million of cash and cash equivalents.covenants. Newmark was in compliance with all covenants on March 31, 20182019 and December 31, 20172018 and for the three months ended March 31, 20182019 and the year ended December 31, 2017.2018.
The borrowing rates on the warehouse linesfacilities are based on short termshort-term London Interbank Offered Rate (LIBOR) plus applicable margins. Due to the short termshort-term maturity of these instruments, the carrying amounts approximate fair value.
41
| Long-Term Debt |
Long-term debt and long-term debt payable to related parties consisted of the following (in thousands):
|
| March 31, 2018 |
|
| December 31, 2017 |
| ||
Converted Term Loan |
| $ | 400,000 |
|
| $ | 400,000 |
|
Term Loan |
|
| — |
|
|
| 270,710 |
|
Long-term debt |
|
| 400,000 |
|
|
| 670,710 |
|
2019 Promissory Notes |
|
| 300,000 |
|
|
| 300,000 |
|
2042 Promissory Notes |
|
| 112,500 |
|
|
| 112,500 |
|
Total long-term debt |
| $ | 812,500 |
|
| $ | 1,083,210 |
|
|
| March 31, 2019 |
|
| December 31, 2018 |
| ||
6.125% Senior Notes |
| $ | 538,626 |
|
| $ | 537,926 |
|
Total long-term debt |
| $ | 538,626 |
|
| $ | 537,926 |
|
|
|
|
|
|
|
|
|
|
Converted Term Loan6.125% Senior Notes
On September 8, 2017, BGCNovember 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 at 98.937% to yield 6.375%. The 6.125% Senior Notes, which were priced on November 1, 2018, were offered and sold by Newmark in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended. 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 as of March 31, 2019 was $538.6 million, net of debt issue costs of $5.9 million and net of debt discount of $5.4 million. Newmark uses the effective interest rate method to amortize the debt discount over the life of the loan. Newmark amortized $0.3 million of debt discount for the three months ended March 31, 2019. Newmark uses the straight-line method to amortize these debt issue costs over the life of the loan. Newmark amortized $0.3 million for the three months ended March 31, 2019. Newmark recorded interest expense related to the 6.125% Senior Notes of $8.7 million for the three months ended March 31, 2019. These amounts are included in “Interest expense, net” in Newmark’s unaudited condensed consolidated statement of operations.
Credit Facility
On November 28, 2018, Newmark entered into a committed unsecured senior revolving credit agreement withby and among Newmark, the several financial institutions from time to time party thereto, as Lenders, and Bank of America N.A., as administrative agent and a syndicate of lenders.(the “Credit Agreement”). The revolving credit agreementCredit Agreement provides for revolving loans of up to $400.0 million. The maturity date of the facility is September 8, 2019. Borrowings under the Converted Term Loan bear interest at either LIBOR or a defined base rate plus an additional margin, which ranges from 50 basis points to 325 basis points depending on BGC’s debt rating as determined by S&P and Fitch and whether such loan is a LIBOR loan or a base rate loan. Since there were amounts outstanding under the term loan facility as of December 31, 2017, the pricing increased by 50 basis points until the term loan facility is paid in full, and if there are any amounts outstanding under the term loan facility as of June 30, 2018, the pricing shall increase by an additional 75 basis points (125 basis points in the aggregate) until the term loan facility is paid in full. From and after
the repayment in full of the term loan facility, the pricing shall return to the levels previously described. On November 22, 2017, BGC and Newmark entered into an amendment to the$250.0 million three-year unsecured senior revolving credit agreement. Pursuant tofacility, the amendment, the then-outstanding borrowings of the BGC under the revolving credit facility were converted into a term loan. There was no change in the maturity date or interest rate. As of December 13, 2017, Newmark assumed the obligations of BGC as borrower under the Converted Term Loan (the “Converted Term Loan”). BGC remains a borrower under, and retains access to, the revolving credit facility for any future draws, subject to availability which increases as Newmark repays the Converted Term Loan.Credit Facility. As of March 31, 20182019, Newmark had a balance of deferred debt costs of $0.6 million and December 31, 2017, there were $400.0$0.9 million which are included in “Other current assets” and “Other assets”, respectively, in Newmark’s unaudited condensed consolidated balance sheets. Newmark uses the straight-line method to amortize these debt issue costs over the life of the loan. Newmark amortized $0.1 million of borrowings outstanding underdebt issue costs for the Converted Term Loan. As ofthree months ended March 31, 2018, the interest rate on the Converted Term Loan was 3.99%.2019. Newmark recorded interest expense related to the Converted Term Loan of $4.6$0.3 million for the three months ended March 31, 2018. There2019. These amounts are included in “Interest expense, net” in Newmark’s unaudited condensed consolidated statement of operations. As of March 31, 2019, there was no outstanding balance under the credit agreement. Borrowings under the Credit Facility will bear an annual interest expense recordedequal to, at Newmark’s option, either (a) LIBOR for specified periods, or upon the threeconsent of all Lenders, such other period that is 12 months ended March 31, 2017.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 200 basis points with respect to LIBOR borrowings in (a) above and can range from 0.25% to 1.25%, depending upon Newmark’s credit rating. The Credit Facility also provides for an unused facility fee.
Term Loan
On September 8, 2017, BGC entered into a committed unsecured senior term loan credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders. The term loan credit agreement provides for loans of up to $575.0 million.million (the “Term Loan”). The maturity date of the agreement is September 8, 2019. Borrowings under the Term Loan bearbore interest at either LIBOR or a defined base rate plus an additional margin which rangesranged from 50 basis points to 325 basis points depending on BGC’s debt rating as determined by S&P and Fitch and whether such loan iswas a LIBOR loan or a base rate loan. Since there were amounts outstanding under the term loan facility as of December 31, 2017, the pricing increased by 50 basis points until the term loan facility is paid in full and if there are any amounts outstanding under the term loan facility as of June 30, 2018, the pricing shall increase by an additional 75 basis points (125 basis points in the aggregate) until the term loan facility is paid in full. From and after the repayment in full of the term loan facility, the pricing shall return to the levels previously described. On November 22, 2017, BGC and Newmark entered into an amendment to the unsecured senior term loan credit agreement. Pursuant to the term loan amendment and effective as of December 13, 2017, Newmark assumed the obligations of the BGC as borrower under
42
the senior term loan (the “Term Loan”).Term Loan. The Term Loan is also subject to mandatory prepayment from 100% of net cash proceeds of all material asset sales and debt and equity issuances (subject to certain customary exceptions, including sales under the BGC’s CEO sales program). The proceeds from the IPO net of underwriting discounts of approximately $304.3 million have beenwere used to partially repay the Term Loan. The proceeds from the exercise by the underwriters$304.3 million of their option to purchase additional shares of Newmark Class A Common Stock in the IPO were also used to partially repay the Term Loan. During the three monthsyear ended MarchDecember 31, 2018, Newmark repaid the outstanding balance of $270.7 million on the Term Loan. As of March 31, 2018, there were no borrowings outstanding underLoan, at which point the Term Loan.facility was terminated. Newmark recorded interest expense related to the Term Loan of $2.6 million for the three months ended March 31, 2018. Prior to the Spin-Off, the Term Loan was repaid in full.
AsConverted Term Loan
On September 8, 2017, BGC entered into a committed unsecured senior revolving credit agreement with Bank of March 31, 2018America, N.A., as administrative agent, and a syndicate of lenders (the “Converted Term Loan”). The revolving credit agreement provides for revolving loans of up to $400.0 million. The maturity date of the carrying value offacility was September 8, 2019. Borrowings under the Converted Term Loan approximatedbore interest at either LIBOR or a defined base rate plus an additional margin, which ranged from 50 basis points to 325 basis points depending on BGC’s debt rating as determined by S&P and Fitch and whether such loan was a LIBOR loan or a base rate loan. The Term Loan was paid in full on March 9, 2018. Since the fair value. As of December 31, 2017Term Loan was repaid in full, the carrying valuepricing of the Converted Term Loan returned to the levels previously described. On November 22, 2017, BGC and Newmark entered into an amendment to the unsecured senior revolving credit agreement. Pursuant to the amendment, the then-outstanding borrowings of BGC under the revolving credit facility were converted into a term loan. There was no change in the maturity date or interest rate. As of December 13, 2017, Newmark assumed the obligations of BGC as borrower under the Converted Term Loan. On June 19, 2018, Newmark repaid $152.9 million, and on September 26, 2018, Newmark repaid $113.2 million of the Converted Term Loan approximatedusing proceeds from the fair value.Newmark OpCo Preferred Investment. On November 6, 2018, Newmark repaid the remaining $134.0 million outstanding principal amount of the Converted Term Loan using the proceeds from the sale of its 6.125% Senior Notes. Therefore, there were no borrowings outstanding as of December 31, 2018. Newmark recorded interest expense related to the Converted Term Loan of $4.6 million for the three months ended March 31, 2018. Prior to the Spin-Off, the outstanding amount under the Converted Term Loan was repaid in full.
2019 Promissory Note and 2042 Promissory Note
On December 13, 2017, in connection with the Separation, Newmark assumed from BGC an aggregate of $300.0 million principal amount of its 2019 Promissory Note due December 9, 2019 (the “2019 Promissory Note”) and $112.5 million principal amount due June 26, 2042 (the “2042 Promissory Note”). On September 4, 2018, Newmark OpCo borrowed $112.5 million from BGC pursuant to the Intercompany Credit Agreement which loan bore interest at an annual rate equal to 6.5%. Newmark OpCo used the proceeds of itsthe Intercompany Credit Agreement loan to repay the $112.5 million of the 2042 Promissory Note. The 2019 Promissory Note bore interest at 5.375% and the 2042 Promissory Note due June 26, 2042. Newmark’s Seniorbore interest at 8.125%. Newmark repaid the $300 million outstanding principal amount under the 2019 Promissory Note on November 23, 2018. Upon repayment of the 2019 Promissory Note, Newmark no longer has debt obligations owed to BGC. In connection with the repayment of the 2019 Promissory Note, Newmark incurred a prepayment penalty of $7.0 million.
In 2018, the 2019 and 2042 Promissory Notes arewere recorded at amortized cost. As of March 31, 2018 and December 31, 2017, the carrying amounts and estimated fair values of the Senior Notes were as follows (in thousands):
|
| March 31, 2018 |
|
| December 31, 2017 |
| ||||||||||
|
| Carrying Amount |
|
| Fair Value |
|
| Carrying Amount |
|
| Fair Value |
| ||||
2019 Promissory Notes |
| $ | 300,000 |
|
| $ | 309,750 |
|
| $ | 300,000 |
|
| $ | 313,125 |
|
2042 Promissory Notes |
|
| 112,500 |
|
|
| 115,650 |
|
|
| 112,500 |
|
|
| 116,550 |
|
|
| $ | 412,500 |
|
| $ | 425,400 |
|
| $ | 412,500 |
|
| $ | 429,675 |
|
The fair value of the 2042 Promissory NotesNote was determined using observable market prices as these securities are traded and arethe 8.125% BGC Senior Notes were considered Level 1 within the fair value hierarchy as they arewere deemed to be actively traded and the 2019 Promissory NotesNote are considered Level 2 within the fair value hierarchy.
For the three months ended March 31, 2018, Newmark recorded interest expense on its 2019 Promissory Note and 2042 Promissory Note in the amount of $4.3 million and $2.3 million, respectively For the year ended December 31, 2017, Newmark recorded interest expense on its 2019 Promissory Note and 2042 Promissory Note in the amount of $0.8 million and $0.5 million, respectively. These Senior Notes are included in “Long-term debt payable to related parties” on Newmark’s unaudited condensed consolidated balance sheets.
43
| 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 guarantee, Newmark’s maximum contingent 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 March 31, 2019, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of approximately $20.0 billion with a maximum potential loss of approximately $5.6 billion, of which $12.8 million is covered by the Credit Enhancement Agreement (See Note 12 — Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit).
At December 31, 2018, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of approximately $18.9$20.6 billion with a maximum potential loss of approximately $5.4$5.8 billion, of which $0.1 billion$76.2 million is covered by the Credit Enhancement Agreement (see(See Note 11—Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit).
At December 31, 2017, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of approximately $18.8 billion with a maximum potential loss of approximately $5.3 billion, of which $1.2 billion is covered by the Credit Enhancement Agreement (see Note 11—12 — Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit).
At March 31, 20182019 and the year ended December 31, 2017,2018, changes on the estimated liability under the guarantee liability were as follows:
Financial guarantee liability (in thousands) |
|
|
|
|
|
|
|
|
Balance at December 31, 2016 |
| $ | (413 | ) | ||||
Balance at December 31, 2017 |
| $ | (54 | ) | ||||
Reversal of provision |
|
| 359 |
|
|
| 22 |
|
Balance at December 31, 2017 |
| $ | (54 | ) | ||||
Balance at December 31, 2018 |
|
| (32 | ) | ||||
Increase to provision |
|
| (7 | ) |
|
| (41 | ) |
Balance at March 31, 2018 |
| $ | (61 | ) | ||||
Balance at March 31, 2019 |
| $ | (73 | ) |
In order to monitor and mitigate potential losses, Newmark uses an internally developed loan rating scorecard for determining which loans meet Newmark’s criteria to be placed on a watch list. Newmark also calculates default probabilities based on internal ratings and expected losses on a loan-by-loan basis. This methodology uses a number of factors including, but not limited to, debt service coverage ratios, collateral valuation, the condition of the underlying assets, borrower strength and market conditions.
Seeconditions (See Note 11—12—Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit for further explanation of credit protection provided by DB Cayman.Cayman). The provisions for risk sharing were includeare included in “Operating, administrative and other” in Newmark’s unaudited condensed consolidated statements of operations was as follows (in thousands):
|
| Three Months Ended March 31, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Increase (decrease) to financial guarantee liability |
| $ | 7 |
|
| $ | (5 | ) |
Decrease to credit enhancement asset |
|
| 10 |
|
|
| 4 |
|
Total expense |
| $ | 17 |
|
| $ | (1 | ) |
|
| Three Months Ended March 31, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Increase (decrease) to financial guarantee liability |
| $ | 41 |
|
| $ | 7 |
|
Decrease (increase) to credit enhancement asset |
| — |
|
|
| 10 |
| |
Total expense |
| $ | 41 |
|
| $ | 17 |
|
44
| 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(See Note 21—23 — Financial Guarantee Liability). As of March 31, 2018, 26%2019, 24% and 16% of $5.4$5.6 billion of the maximum loss (see(See Note 21—23 — Financial Guarantee Liability) was for properties located in California.California and Texas, respectively. As of December 31, 2017, 26%2018, 25% and 16% of $5.3$5.8 billion of the maximum loss (see(See Note 21—23 — Financial Guarantee Liability) was for properties located in California.California and Texas, respectively.
| 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 approximately $0.8$1.0 billion and $0.8$1.3 billion, as of March 31, 20182019 and December 31, 2017,2018, 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.
| 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 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 at March 31, 20182019 and December 31, 20172018 (in thousands):
|
| As of March 31, 2018 |
|
| As of March 31, 2019 |
| ||||||||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
|
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Marketable securities |
| $ | 8,622 |
|
| $ | — |
|
| $ | — |
|
|
| $ | 8,622 |
|
| $ | 43,745 |
|
| $ | — |
|
| $ | — |
|
| $ | 43,745 |
| |
Loans held for sale |
|
| — |
|
|
| 965,639 |
|
|
| — |
|
|
| 965,639 |
| ||||||||||||||||||
RBC Forwards |
|
| — |
|
|
| — |
|
|
| 64,290 |
|
|
| 64,290 |
| ||||||||||||||||||
Loans held for sale, at fair value |
|
| — |
|
|
| 873,021 |
|
|
| — |
|
|
| 873,021 |
| ||||||||||||||||||
Rate lock commitments |
|
| — |
|
|
| — |
|
|
| 8,750 |
|
|
| 8,750 |
|
|
| — |
|
|
| — |
|
|
| 10,210 |
|
|
| 10,210 |
| ||
Forwards |
|
| — |
|
|
| — |
|
|
| 9,687 |
|
|
|
| 9,687 |
|
|
| — |
|
|
| — |
|
|
| 5,964 |
|
|
| 5,964 |
| |
Total assets |
| $ | 8,622 |
|
| $ | 965,639 |
|
| $ | 18,437 |
| # |
| $ | 992,698 |
|
| $ | 43,745 |
|
| $ | 873,021 |
|
| $ | 80,464 |
|
| $ | 997,230 |
| |
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts payable, accrued expenses and other liabilities—contingent consideration |
| $ | — |
|
| $ | — |
|
| $ | 23,087 |
|
|
| $ | 23,087 |
|
| $ | — |
|
| $ | — |
|
| $ | 31,357 |
|
| $ | 31,357 |
| |
Rate lock commitments |
|
| — |
|
|
| — |
|
|
| 8,980 |
|
|
| 8,980 |
|
|
| — |
|
|
| — |
|
|
| 5,190 |
|
|
| 5,190 |
| ||
Forwards |
|
| — |
|
|
| — |
|
|
| 2,421 |
|
|
|
| 2,421 |
|
|
| — |
|
|
| — |
|
|
| 9,596 |
|
|
| 9,596 |
| |
Total Liabilities |
| $ | — |
|
| $ | — |
|
| $ | 34,488 |
|
|
| $ | 34,488 |
|
| $ | — |
|
| $ | — |
|
| $ | 46,143 |
|
| $ | 46,143 |
|
|
| As of December 31, 2017 |
|
| As of December 31, 2018 |
| ||||||||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities |
| $ | 57,623 |
|
| $ | — |
|
| $ | — |
|
| $ | 57,623 |
|
| $ | 48,942 |
|
| $ | — |
|
| $ | — |
|
| $ | 48,942 |
|
Loans held for sale |
|
| — |
|
|
| 362,635 |
|
|
| — |
|
|
| 362,635 |
| ||||||||||||||||
RBC Forwards |
|
| — |
|
|
| — |
|
|
| 77,619 |
|
|
| 77,619 |
| ||||||||||||||||
Loans held for sale, at fair value |
|
| — |
|
|
| 990,864 |
|
|
| — |
|
|
| 990,864 |
| ||||||||||||||||
Rate lock commitments |
|
| — |
|
|
| — |
|
|
| 2,923 |
|
|
| 2,923 |
|
|
| — |
|
|
| — |
|
|
| 6,732 |
|
|
| 6,732 |
|
Forwards |
|
| — |
|
|
| — |
|
|
| 3,753 |
|
|
| 3,753 |
|
|
| — |
|
|
| — |
|
|
| 8,177 |
|
|
| 8,177 |
|
Total assets |
| $ | 57,623 |
|
| $ | 362,635 |
|
| $ | 6,676 |
|
| $ | 426,934 |
|
| $ | 48,942 |
|
| $ | 990,864 |
|
| $ | 92,528 |
|
| $ | 1,132,334 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities—contingent consideration |
| $ | — |
|
| $ | — |
|
| $ | 23,711 |
|
| $ | 23,711 |
|
| $ | — |
|
| $ | — |
|
| $ | 32,552 |
|
| $ | 32,552 |
|
Rate lock commitments |
|
| — |
|
|
| — |
|
|
| 2,390 |
|
|
| 2,390 |
|
|
| — |
|
|
| — |
|
|
| 7,470 |
|
|
| 7,470 |
|
Forwards |
|
| — |
|
|
| — |
|
|
| 657 |
|
|
| 657 |
|
|
| — |
|
|
| — |
|
|
| 9,208 |
|
|
| 9,208 |
|
Total Liabilities |
| $ | — |
|
| $ | — |
|
| $ | 26,758 |
|
| $ | 26,758 |
|
| $ | — |
|
| $ | — |
|
| $ | 49,230 |
|
| $ | 49,230 |
|
There were no transfers among level 1, 2 and level 3 for the three months ended March 31, 20182019 and the year ended December 31, 2017.2018.
Derivative instruments are outstanding for short periods of time (generally less than 60 days). A roll forward of derivative instrumentsLevel 3 Financial Assets and Liabilities: Changes in Level 3 RBC Forwards, rate lock commitments, forwards and contingent consideration (level 3) that require valuation based upon significant unobservable inputs is presented belowmeasured at fair value on recurring basis for the three months ended March 31, 2019 were as follows (in thousands):
|
| As of March 31, 2018 |
| |||||||||||||||||||||
|
| Opening Balance |
|
| Total realized and unrealized (gains) losses included in Net income(1) |
|
| Issuances |
|
| Settlements |
|
| Closing Balance |
|
| Unrealized (gains) losses outstanding as of March 31, 2018 |
| ||||||
Accounts payable, accrued expenses and other liabilities—contingent consideration |
| $ | 23,711 |
|
| $ | 134 |
|
| $ | — |
|
| $ | (758 | ) |
| $ | 23,087 |
|
| $ | 134 |
|
Rate lock commitments and forwards, net |
|
| 3,629 |
|
|
| 7,036 |
|
|
| — |
|
|
| (3,629 | ) |
|
| 7,036 |
|
|
| 7,036 |
|
|
| $ | 27,340 |
|
| $ | 7,170 |
|
| $ | — |
|
| $ | (4,387 | ) |
| $ | 30,123 |
|
| $ | 7,170 |
|
|
| As of March 31, 2017 |
| |||||||||||||||||||||
|
| Opening Balance |
|
| Total realized and unrealized (gains) losses included in Net income(1) |
|
| Issuances |
|
| Settlements |
|
| Closing Balance |
|
| Unrealized (gains) losses outstanding as of March 31, 2017 |
| ||||||
Accounts payable, accrued expenses and other liabilities—contingent consideration |
| $ | 38,713 |
|
| $ | 438 |
|
| $ | — |
|
| $ | (10,153 | ) |
| $ | 28,998 |
|
| $ | 438 |
|
Rate lock commitments and forwards, net |
|
| 10,254 |
|
|
| 2,462 |
|
|
| — |
|
|
| (10,254 | ) |
|
| 2,462 |
|
|
| 2,462 |
|
|
| $ | 48,967 |
|
| $ | 2,900 |
|
| $ | — |
|
| $ | (20,407 | ) |
| $ | 31,460 |
|
| $ | 2,900 |
|
|
| As of March 31, 2019 |
| |||||||||||||||||||||
|
| Opening Balance |
|
| Total realized and unrealized gains (losses) included in Net income(1) |
|
| Issuances |
|
| Settlements |
|
| Closing Balance |
|
| Unrealized gains (losses) outstanding as of March 31, 2019 |
| ||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Lock Commitments |
| $ | 6,732 |
|
| $ | 10,210 |
|
| $ | — |
|
| $ | (6,732 | ) |
| $ | 10,210 |
|
| $ | 10,210 |
|
Forwards |
|
| 8,177 |
|
|
| 5,964 |
|
|
| — |
|
|
| (8,177 | ) |
|
| 5,964 |
|
|
| 5,964 |
|
RBC Forwards |
|
| 77,619 |
|
|
| (13,329 | ) |
|
| — |
|
|
| — |
|
|
| 64,290 |
|
|
| (13,329 | ) |
Total Assets |
| $ | 92,528 |
|
| $ | 2,845 |
|
| $ | — |
|
| $ | (14,909 | ) |
| $ | 80,464 |
|
| $ | 2,845 |
|
|
| Opening Balance |
|
| Total realized and unrealized (gains) losses included in Net income(1) |
|
| Issuances |
|
| Settlements |
|
| Closing Balance |
|
| Unrealized (gains) losses outstanding as of March 31, 2019 |
| ||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities – contingent consideration(1) |
| $ | 32,552 |
|
| $ | 1,384 |
|
| $ | — |
|
| $ | (2,579 | ) |
| $ | 31,357 |
|
| $ | 1,384 |
|
Rate Lock Commitments |
|
| 7,470 |
|
|
| 5,190 |
|
|
| — |
|
|
| (7,470 | ) |
|
| 5,190 |
|
|
| 5,190 |
|
Forwards |
|
| 9,208 |
|
|
| 9,596 |
|
|
| — |
|
|
| (9,208 | ) |
|
| 9,596 |
|
|
| 9,596 |
|
Total Liabilities |
| $ | 49,230 |
|
| $ | 16,170 |
|
| $ | — |
|
| $ | (19,257 | ) |
| $ | 46,143 |
|
| $ | 16,170 |
|
(1) | Realized and unrealized losses are reported in “Other income (loss), net” in Newmark’s unaudited condensed consolidated statements of operations. |
Changes in Level 3 RBC Forwards, rate lock commitments, forwards and contingent consideration measured at fair value on recurring basis for the year ended December 31, 2018 were as follows (in thousands):
|
| As of December 31, 2018 |
| |||||||||||||||||||||
|
| Opening Balance |
|
| Total realized and unrealized gains (losses) included in Net income(1) |
|
| Issuances |
|
| Settlements |
|
| Closing Balance |
|
| Unrealized gains (losses) outstanding as of December 31, 2018 |
| ||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Lock Commitments |
| $ | 2,923 |
|
| $ | 6,732 |
|
| $ | — |
|
| $ | (2,923 | ) |
| $ | 6,732 |
|
| $ | 6,732 |
|
Forwards |
|
| 3,753 |
|
|
| 8,177 |
|
|
| — |
|
|
| (3,753 | ) |
|
| 8,177 |
|
|
| 8,177 |
|
RBC Forwards |
|
| — |
|
|
| 19,002 |
|
|
| 58,617 |
|
|
| — |
|
|
| 77,619 |
|
|
| (19,002 | ) |
Total Assets |
| $ | 6,676 |
|
| $ | 33,911 |
|
| $ | 58,617 |
|
| $ | (6,676 | ) |
| $ | 92,528 |
|
| $ | (4,093 | ) |
|
| Opening Balance |
|
| Total realized and unrealized (gains) losses included in Net income(1) |
|
| Issuances |
|
| Settlements |
|
| Closing Balance |
|
| Unrealized (gains) losses outstanding as of December 31, 2018 |
| ||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other liabilities – contingent consideration(1) |
| $ | 23,711 |
|
| $ | 700 |
|
| $ | 12,616 |
|
| $ | (4,475 | ) |
| $ | 32,552 |
|
| $ | 839 |
|
Rate Lock Commitments |
|
| 2,390 |
|
|
| 7,470 |
|
|
| — |
|
|
| (2,390 | ) |
|
| 7,470 |
|
|
| 7,470 |
|
Forwards |
|
| 657 |
|
|
| 9,208 |
|
|
| — |
|
|
| (657 | ) |
|
| 9,208 |
|
|
| 9,208 |
|
Total Liabilities |
| $ | 26,758 |
|
| $ | 17,378 |
|
| $ | 12,616 |
|
| $ | (7,522 | ) |
| $ | 49,230 |
|
| $ | 17,517 |
|
(1) | Realized and unrealized losses are reported in “Other income (loss), net” in Newmark’s unaudited condensed consolidated statements of operations. |
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:
March 31, 2018 | ||||||||||||||||||||||||||
March 31, 2019 | March 31, 2019 |
| ||||||||||||||||||||||||
Level 3 assets and liabilities |
| Assets |
|
| Liabilities |
|
| Significant Unobservable Inputs |
| Assets |
|
| Liabilities |
|
| Significant Unobservable Inputs |
| Range |
| Weighted Average |
| |||||
Accounts payable, accrued expenses and other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
| $ | — |
|
| $ | 23,087 |
|
| Discount rate—6.6% weighted average rate(a) |
| $ | — |
|
| $ | 31,357 |
|
| Discount rate |
| 0.3%-10.4% |
| 7.9% |
| |
|
|
|
|
|
|
|
|
|
| Probability of meeting earnout and contingencies |
| 99%-100%(1) |
| 99.6% |
| |||||||||||
|
|
|
|
|
|
|
|
|
| Financial forecast information |
|
|
|
|
|
| ||||||||||
Derivative assets and liabilities: |
|
|
|
|
|
|
|
|
| Financial forecast information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBC Forwards |
| $ | 64,290 |
|
| $ | — |
|
| Volatility |
| 27.0%-35.0%(2) |
| 31.5% |
| |||||||||||
Forward sale contracts |
| $ | 9,687 |
|
| $ | 2,421 |
|
| Counterparty credit risk |
| $ | 5,964 |
|
| $ | 9,596 |
|
| Counterparty credit risk |
| N/A |
| N/A |
| |
Rate lock commitments |
| $ | 8,750 |
|
| $ | 8,980 |
|
| Counterparty credit risk |
| $ | 10,210 |
|
| $ | 5,190 |
|
| Counterparty credit risk |
| N/A |
| N/A |
|
December 31, 2017 | ||||||||||||||||||||||||||
December 31, 2018 | December 31, 2018 |
| ||||||||||||||||||||||||
Level 3 assets and liabilities |
| Assets |
|
| Liabilities |
|
| Significant Unobservable Inputs |
| Assets |
|
| Liabilities |
|
| Significant Unobservable Inputs |
| Range |
| Weighted Average |
| |||||
Accounts payable, accrued expenses and other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration |
| $ | — |
|
| $ | 23,711 |
|
| Discount rate—6.43% weighted average rate(a) |
| $ | — |
|
| $ | 32,552 |
|
| Discount rate |
| 0.3%-10.4% |
| 8.2% |
| |
|
|
|
|
|
|
|
|
|
| Probability of meeting earnout and contingencies |
| 99%-100%(1) |
| 99.6% |
| |||||||||||
|
|
|
|
|
|
|
|
|
| Financial forecast information |
|
|
|
|
|
| ||||||||||
Derivative assets and liabilities: |
|
|
|
|
|
|
|
|
| Financial forecast information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RBC Forwards |
| $ | 77,619 |
|
| $ | — |
|
| Volatility |
| 23.7%-34.8%(2) |
| 30.2% |
| |||||||||||
Forward sale contracts |
| $ | 3,753 |
|
| $ | 657 |
|
| Counterparty credit risk |
| $ | 8,177 |
|
| $ | 9,208 |
|
| Counterparty credit risk |
| N/A |
| N/A |
| |
Rate lock commitments |
| $ | 2,923 |
|
| $ | 2,390 |
|
| Counterparty credit risk |
| $ | 6,732 |
|
| $ | 7,470 |
|
| Counterparty credit risk |
| N/A |
| N/A |
|
| (1) | Newmark’s estimate of contingent consideration as of March 31, |
(2) | The volatility of Newmark’s RBC Forwards is primarily based on 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 through Newmark’s unaudited condensed 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 associate 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.
Sensitivity Analysis -The RBC Forwards are derivatives and, accordingly, are marked to fair value through Newmark’s unaudited condensed consolidated statements of operations. The fair value of the RBC Forwards is 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 RBC Forwards considers the effects of Nasdaq’s stock price volatility between the balance sheet date and the maturity date. The fair value is determined through the use of a Black-Scholes put option valuation model.
48
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 March 31, 20182019 and December 31, 2017,2018, the present value of expected payments related to Newmark’s contingent consideration was $26.7$31.4 million and $23.7$32.6 million, respectively (Note 28-(See Note 31 — Commitments and Contingencies). The undiscounted value of the payments, assuming that all contingencies are met, would be $37.2 million and $39.6 million, respectively. Valuations for contingent consideration, RBC Forwards, forward sales contracts, and rate lock commitments are conducted by Newmark. Each reporting period, Newmark updates unobservable inputs. Newmark has a formal process to review changes in fair value for satisfactory explanation.
Fair Value Measurements on a Non-Recurring Basis
Pursuant to the new recognition and measurement guidance for equity investments, effective January 1, 2018, 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 approximately $53.5 million, which were included in “Other assets” in Newmark’s unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018. 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.
| 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 and BGC. For the three months ended March 31, 20182019 and 2017,2018, allocated expenses were $6.9$6.7 million and $4.7$6.9 million, respectively. These expenses are included as part of “Fees to related parties” in Newmark’s unaudited condensed 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 March 31, 20182019 and December 31, 2017,2018, the aggregate balance of employee loans was $226.7$313.0 million and $209.6$285.5 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners, net” in Newmark’s unaudited condensed consolidated balance sheets. Compensation expense for the above mentioned employee loans for the three months ended March 31, 2019 and 2018 and 2017 was $6.0$7.4 million and $2.0$6.0 million, respectively. The compensation expense related to these employee loans is included as part of “Compensation and employee benefits” in Newmark’s unaudited condensed consolidated statements of operations.
Transactions49
Transfer of CCRE Employees to Newmark
In connection with the expansion of our mortgage brokerage and lending activities, Newmark has entered into an agreement with Cantor Commercial Real Estate Company, L.P.pursuant to which five former employees of its affiliate, CCRE, have 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, in Newmark’s unaudited condensed consolidated balance sheets.
In consideration for the Cantor payment, Newmark alsohas 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. 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.
(c) | Transactions with CCRE |
Newmark has a referral agreement in place with CCRE, in which Newmark’s brokers are incentivized to refer business to CCRE through a revenue-share agreement. In connection with this revenue-share agreement, In connection with this revenue share agreement, Newmark recognized revenues$0.2 million of $60.9 thousand millionrevenues for the three months ended March 31, 2017.2019. In connection with this revenue-share agreement, Newmark did not recognize any revenue related to this agreement duringrevenues for the three months ended March 31, 2018. This revenue was recorded as part of “Commissions” in Newmark’s unaudited condensed consolidated statements of operations.
Newmark also 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 three months ended March 31, 20182019 and 2017, respectively. 2018.
In addition, Newmark has a loan referral agreement in place with CCRE, in which either party can refer a loan to the other. Revenue from these referrals were $3.7$0.7 million and $0.3$3.7 million for the three months ended March 31, 20182019 and 2017,2018, respectively, and was recognized in “Gain“Gains from mortgage banking activities/originations, net” in Newmark’s unaudited condensed consolidated statements of operations. These referrals fees are net of the broker fees and commissions to CCRE of $0.7$0.1 million and $0.2$0.7 million for the three months ended March 31, 20182019 and 2017,2018, respectively.
On September 8, 2017, BGC completed the Berkeley Point Acquisition, for an acquisition price of $875.0 million with $3.2 million of the acquisition price paid in units of BGC Holdings, pursuant to a Transaction Agreement, dated as of July 17, 2017, with Cantor and certain of Cantor’s affiliates, including CCRE and Cantor Commercial Real Estate Sponsor, L.P., the general partner of CCRE. In accordance with this Transaction Agreement, BPF made a distribution of $89.1 million to CCRE, for the amount that BPF’s net assets exceeded $508.6 million.
On March 11, 2015, Newmark and CCRE entered into a note receivable/payable that allows for advances to or from CCRE at an interest rate of 1-month LIBOR plus 1.0%. On September 8, 2017, the note receivable/payable was terminated, and all outstanding advances due were paid off. Newmark recognized interest expense of $2.1 forFor the three months ended March 31, 2017.
2019, Newmark purchased the primary servicing rights for $0.1 billion of loans originated by CCRE for $0.3 million. For the three months ended March 31, 2018, Newmark purchased the primary servicing rights for $0.3 billion of loans originated by CCRE for $0.5 million. Newmark did not purchase any servicing rights from CCRE for the three months ended March 31, 2017. Newmark also services loans for CCRE on a “Fee“fee for service” basis, generally prior to a loan’s sale or securitization, and for which no mortgage servicing rightMSR is recognized. Newmark recognized $0.9 million and $1.0 million for the three months ended March 31, 20182019 and 2017, respectively,2018, of servicing revenues from (excludes(excluding interest and placement fees) from loans purchased from CCRE on a “fee for service” basis, which was included as part of “Management services, servicing fee and other” in Newmark’s unaudited condensed consolidated statements of operations.
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Transactions with Executive Officers and Directors
In connection with Newmarks’s 2018 executive compensation process, Newmark’s executive officers received certain monetization of prior awards as compensation at Newmark, as set forth below:
On December 31, 2018, the Compensation Committee approved the monetization of 898,080 BGC Holdings PPSUs held by Mr. Lutnick (which had an average determination price of $7.65 per unit), and 592,721 Newmark Holdings PPSUs (which had an average determination price of $13.715 per unit), which transactions had an aggregate value of $15,000,000. On February 6, 2019, the Compensation Committee approved a modification which consisted of the following: (i) the right to exchange 1,131,774 non-exchangeable BGC Holdings PSUs held by Mr. Lutnick into 1,131,774 non-exchangeable BGC Holdings partnership units with a capital account (HDUs) (which, based on the closing price of the BGC Class A common stock of $6.20 per share on such date, had a value of $7,017,000); and (ii) the right to exchange for cash 1,018,390 BGC Holdings non-exchangeable PPSUs held by Mr. Lutnick, (which had an average determination price of $7.8388 per unit), for a payment of $7,983,000 for taxes when (i) is exchanged.
On December 31, 2018, the Compensation Committee approved the monetization of 1,909,188 BGC Holdings PSUs held by Mr. Gosin and 264,985 BGC Holdings PPSUs (which had an average determination price of $4.2625 per unit), which transactions had an aggregate value of $11,000,000. On February 6, 2019, the Compensation Committee approved a modification which consisted of the following: (i) the right to exchange 1,592,016 non-exchangeable (HDUs) (which, based on the closing price of the BGC Class A common stock of $6.20 per share on such date, had a value of $9,870,501); and (ii) the right to exchange for cash 264,985 BGC Holdings non-exchangeable PPSUs held by Mr. Gosin, (which had an average determination price of $4.2625 per unit), for a payment of $1,129,499 for taxes when (i) is exchanged. On February 22, 2019, the Compensation Committee initially approved for Mr. Gosin grants in Newmark Holdings NPSUs and NPPSUs. On April 25, 2019, the Compensation Committee modified Mr. Gosin’s awards by cancelling the grant of the previously mentioned Newmark Holdings NPSUs and NPPSUs and by granting non-exchangeable Newmark Holdings PSUs and PPSUs. The Committee approved this modification in order to reflect an annual compensation structure rather than a long-term NPSU/NPPSU structure.
On December 31, 2018, the Compensation Committee approved the cancellation of 13,552 non-exchangeable PSUs in BGC Holdings held by Mr. Rispoli and the cancelation of 11,089 BGC Holdings PPSUs (which had an average determination price of $5.814 per unit). In connection with the transaction, BGC issued $134,535 in shares of Class A common stock, less applicable taxes and withholdings, resulting in 13,552 net shares of BGC Class A common stock at a price of $5.17 per share and the payment of $64,471 for taxes. On February 22, 2019, the Compensation Committee removed the sale restrictions on 4,229 shares of BGC Class A common stock and 1,961 shares of Newmark Class A common stock held by Mr. Rispoli.
CF Real Estate Finance Holdings, LP.
Contemporaneously with the Berkeley Point Acquisition, on September 8, 2017, Newmark invested $100.0 million in a newly formed commercial real estate-related financial and investment business, Real Estate LP, which is controlled and managed by Cantor. Real Estate LP may conduct activities in any real estate related business or asset backed securities related business or any extensions thereof and ancillary activities thereto. In addition, Real Estate LP may provide short-term loans to related parties from time to time when funds in excess of amounts needed for investment opportunities are available. As of March 31, 2018, $339.2 million had been loaned to related parties. As of March2019 and December 31, 2018, Newmark’s investment is accounted for under the equity method.method (See Note 8 — Investments).
IPO and Spin-Off
On December 13, 2017, prior to the closing of the IPO, BGC, BGC Holdings, BGC U.S. OpCo, Newmark, Newmark Holdings, Newmark OpCo, Cantor, and BGC Global OpCo entered into the Original Separation and Distribution Agreement. The Original Separation and Distribution Agreement sets forth the agreements among BGC, Cantor, Newmark and their respective subsidiaries with respect to the Separation and related matters. For additional information, seematters (See Note 1 — Organization and Basis of Presentation. In addition, in connection with the Separation and Newmark IPO, on December 13, 2017 a Registration Rights Agreement by and among Cantor, BGC and Newmark, an Amended and Restated Tax Receivable Agreement by and between Cantor and BGC, an Exchange Agreement
by and among Cantor, BGC and Newmark, and Administrative Services Agreement by and between Cantor and Newmark (see “Service Agreements” above), and a Tax Receivable Agreement by and between Cantor and Newmark were entered into.Presentation for additional information).
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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, including Cantor, whereby each holder of BGC Holdings limited partnership interests at that time now holds a BGC Holdings limited partnership interest and a corresponding Newmark Holdings limited partnership interest, which is equal to a BGC Holdings limited partnership interest multiplied by the contribution ratio, divided by the current exchange ratio. The exchange ratio is subject to adjustment, in accordance with the terms of the separation agreement (For additional information, see(See Note 2 — Limited Partnership Interests in Newmark Holdings.)for additional information).
In addition CF&Co, a wholly owned subsidiary of Cantor, was an underwriter of the IPO. Pursuant to the underwriting agreement, Newmark paid CF&Co 5.5% of the gross proceeds from the sale of shares of Newmark Class A common stock sold by CF&Co. in connection with the IPO.
On November 30, 2018, BGC completed the Spin-Off of Newmark. BGC Partners’ stockholders, including Cantor, as of the Record Date, received in the Spin-Off 0.463895 of a share of Newmark Class B common stock for each share of BGC Class B common stock held as of the Record Date. In the aggregate, BGC distributed 131.9 million shares of Newmark Class A common stock and 21.3 million shares of Newmark Class B common stock to BGC’s stockholders in the Spin-Off. As Cantor and CFGM held 100% of the shares of BGC Class B common stock as of the Record Date, Cantor and CFGM were distributed 100% of the shares of Newmark Class B common stock in the Spin-Off (see BGC’s 2018 Investment in Newmark below).
Following the Spin-Off and the BGC Holdings distribution, BGC Partners ceased to be a controlling stockholder of Newmark, and BGC and its subsidiaries no longer held any shares of Newmark common stock or equity interests in Newmark or its subsidiaries. Cantor continues to control Newmark and its subsidiaries following the Spin-Off and the BGC Holdings distribution (See Note 1 — Organization and Basis of Presentation for additional information).
Subsequent to the Spin-Off, there are remaining partners who hold limited partnership interests in Newmark Holdings that are BGC employees, and there are remaining partners who hold limited partnership interests in BGC Holdings that are Newmark employees. These limited partnership interests represent interests that were held prior to the Newmark IPO or were distributed as part of the Separation and Distribution Agreement. Following the Newmark IPO, employees of Newmark and BGC only receive limited partnership interests in Newmark Holdings and BGC Holdings, respectively. As a result of the Spin-Off of Newmark, as the existing limited partnership interests in Newmark Holdings held by BGC employees and the existing limited partnership interests in BGC Holdings held by Newmark employees are exchanged/redeemed, the related capital can be contributed to and from Cantor, respectively.
BGC’s 2018 Investment in Newmark Holdings
On March 7, 2018, BGC Partners L.P. and its operating subsidiaries purchased 16.6 million Newmark Units of Newmark Holdings for approximately $242.0 million. The price per Newmark Unit was based on the $14.57 closing price of Newmark’s Class A common stock on March 6, 2018 as reported on the NASDAQ Global Select Market. These newly-issued Newmark Units arewere exchangeable, at BGC’s discretion, into either shares of Class A common stock or shares of Class B common stock of Newmark. BGC made the Investment in Newmark pursuant to an Investment Agreement dated as of March 6, 2018 by and among BGC, BGC Holdings, BGC Partners, L.P.,U.S. OpCo, BGC Global Holdings, L.P.,OpCo, Newmark, Newmark Holdings and Newmark Partners, L.P.OpCo. BGC’s investment2018 Investment in Newmark Holdings and related transactions were approved by the Audit Committees and Boards of Directors of BGC and Newmark. BGC and its subsidiaries funded the Investment in Newmark using the proceeds of its CEO sales program. Newmark used the proceeds to repay the balance of the outstanding principal amount under its Term Loanunsecured senior term loan credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders.lenders that was guaranteed by BGC. In addition, in accordance with the Separation and Distribution Agreement, BGC owned 7.0 million limited partnership interests in the Newmark OpCo (“Newmark OpCo Units”) immediately prior to the Spin-Off, as a result of other issuances of BGC Class A common stock primarily related to the redemption of limited partnership units in BGC Holdings and Newmark Holdings.
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Prior to and in connection with the Spin-Off, 14.8 million Newmark Holdings Units held by BGC were exchanged into 9.4 million shares of Newmark Class A common stock and 5.4 million shares of Newmark Class B common stock, and 7.0 million Newmark OpCo Units held by BGC were exchanged into 6.9 million shares of Newmark Class A common stock. These Newmark Class A and Class B shares of common stock were included in the Spin-Off to BGC’s stockholders. On November 30, 2018, BGC Holdings distributed pro rata all of the 1.5 million exchangeable limited partnership units of Newmark Holdings held by BGC Holdings immediately prior to the effective time of the Spin-Off to its limited partners entitled to receive distributions on their BGC Holdings units who were holders of record of such units as of November 23, 2018 (including Cantor and executive officers of BGC). The Newmark Holdings Units distributed to BGC Holdings partners in the BGC Holdings Distribution are exchangeable for shares of Newmark Class A common stock, and in the case of the 0.4 million Newmark Holdings Units received by Cantor also into shares of Newmark Class B common stock, at the exchange ratio of 0.9793 shares of Newmark common stock per Newmark Holdings unit (subject to adjustment). As of March 31, 2019, the exchange ratio equaled 0.9558 (See Note 1 — Organization and Basis of Presentation for additional information).
(d) | Payables to Related Parties |
On March 19, 2018, Newmark entered into the Intercompany Credit Agreement with BGC, which amended and restated the original intercompany credit agreement between the parties in relation to the Separation, dated as of December 13, 2017. The Intercompany Credit Agreement provides for each party to issue revolving loans to the other party in the lender’s discretion. The interest rate on the Intercompany Credit Agreement was the higher of BGC’s or Newmark’s short-term borrowings rate in effect at such time, plus 100 basis points, or such other interest rate as may be mutually agreed between BGC and Newmark. As of November 7, 2018, all borrowings outstanding under the Intercompany Credit Agreement had been repaid. Newmark recorded interest expense of $1.0 million for the three months ended March 31, 2018, which is included in “Interest income, net” in the unaudited condensed consolidated statement of operations.
On November 30, 2018, Newmark entered into an unsecured credit agreement (the “Cantor Credit Agreement”) with CFLP. The Cantor Credit Agreement provides for each party to issue loans to the other party at 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 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%.
As of March 31, 2019, Newmark did not have any receivables from related parties. As of March 31, 2019, current portion of payables to related parties was $29.3 million.
As of December 31, 2018, the related party receivables and current portion of payables to related parties were $20.5 million and $13.5 million, respectively.
(See Note 1 — Organization and Basis of Presentation, Note 2 — Limited Partnership Interests, and Note 22 — Long-Term Debt, for additional information on transactions with related parties.)
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Newmark’s unaudited condensed consolidated financial statements include U.S. federal, state and local income taxes on Newmark’s allocable share of its U.S. results of operations, as well as taxes payable to jurisdictions outside the U.S. In addition, 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 (see Note 2— Limited Partnership Interests, for discussion of partnership interests) rather than the partnership entity. Income taxes are accounted for using the asset and liability method, as prescribed in U.S. GAAP guidance for Income Taxes.
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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized.
The Tax Cut and Jobs Act (the “Tax Act”), enacted on December 22, 2017, includes the global intangible low-taxed income (“GILTI”) provision. This provision requires inclusion in the Company’s U.S. income tax return the earnings of certain foreign subsidiaries. The Company has elected to treat taxes associated with the GILTI provision as a current period expense when incurred and thus has not recorded deferred taxes, if any, for basis differences under this regime.
Pursuant to U.S. GAAP guidance, Accounting for Uncertainty in Income Taxes, 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. As of March 31, 2019, Newmark had $0.2 million of unrecognized tax benefits which, if recognized, would affect the effective tax rate. As of December 31, 2018, Newmark’s unrecognized tax benefits, excluding related interest and penalties, were $0.2 million, all of which, if recognized, would affect the effective tax rate. Newmark recognizes interest and penalties related to income tax matters in “Provision for income taxes”, in Newmark’s unaudited condensed consolidated statements of operations. As of March 31, 2019 and December 31, 2018, Newmark had approximately $45 thousand of accrued interest and penalties related to uncertain tax positions. As of December 31, 2017, there were $45 thousand of accrued interest and penalties related to uncertain tax positions.
(29) | Accounts Payable, Accrued Expenses and Other Liabilities |
The current portion of accounts payable, accrued expenses and other liabilities consisted of the following:
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March 31, 2019 December 31, 2018 Accounts payable and accrued expenses $ 130,277 $ 113,713 Payroll taxes payable 41,143 39,620 Outside broker payable 59,327 59,918 Corporate and other taxes payable 30,196 77,858 Contingent consideration 3,160 4,452 Derivative liability 14,786 16,678 ROU liabilities 23,302 — $ 302,191 $ 312,239 The current portion of accounts payable, accrued expenses and other
Other long-term liabilities consisted of the following:
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| March 31, |
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| December 31, |
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| 2018 |
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| 2017 |
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Accounts payable and accrued expenses |
| $ | 85,571 |
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| $ | 79,376 |
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Payroll taxes payable |
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| 20,416 |
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| 12,673 |
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Outside broker payable |
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| 41,242 |
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| 23,361 |
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Contingent consideration |
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| 7,116 |
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| 6,504 |
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Derivative liability |
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| 11,401 |
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| 3,047 |
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| $ | 165,746 |
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| $ | 124,961 |
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Other liabilities consisted of the following:
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| March 31, |
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| December 31, |
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| 2018 |
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| 2017 |
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Deferred rent |
| $ | 41,841 |
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| $ | 41,875 |
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Payroll taxes payable |
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| 47,777 |
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| 48,248 |
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Accrued compensation |
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| 32,540 |
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| 31,411 |
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Credit enhancement deposit |
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| 25,000 |
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| 25,000 |
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Contingent consideration |
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| 15,971 |
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| 17,207 |
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Financial guarantee liability |
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| 61 |
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| 54 |
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| $ | 163,190 |
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| $ | 163,795 |
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March 31, 2019 December 31, 2018 Deferred rent $ — $ 49,334 Payroll taxes payable 50,883 31,055 Accrued compensation 33,887 35,103 Credit enhancement deposit 25,000 25,000 Contingent consideration 24,863 28,099 Financial guarantee liability 73 32 ROU liabilities 208,725 — $ 343,431 $ 168,623 54
Newmark’s Compensation Committee may grant various equity-based awards to employees of Newmark, including restricted stock units, limited partnership units and exchange rights for shares of Newmark’s Class A common stock upon exchange of Newmark limited partnership units (See Note 2 — Limited Partnership Interests). On December 13, 2017, as part of the Separation, the Newmark Group, Inc. Long Term Incentive Plan (the “Newmark Equity Plan”) was approved by Newmark’s sole stockholder, BGC, for Newmark to issue up to 400.0 million aggregate number of shares of Class A common stock of Newmark, of which 50.0 million are registered, that may be delivered or cash-settled pursuant to awards granted during the life of the Newmark Equity Plan. As of March 31, 2019, 13.3 million units have been granted and 386.7 million are available for future issuances. Prior to the Separation, BGC’s Compensation Committee granted various equity-based awards to employees of Newmark, including restricted stock units, limited partnership units and exchange rights for shares of BGC’s Class A common stock upon exchange of BGC’s limited partnership units (See Note 2 — Limited Partnership Interests).
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As a result of the Separation, limited partnership interests in Newmark Holdings were distributed to the holders of limited partnership interests in BGC Holdings. Each holder of BGC Holdings limited partnership interests at that time held a BGC Holdings limited partnership interest and a corresponding Newmark Holdings limited partnership interest, which is equal to a BGC Holdings limited partnership interest multiplied by an amount calculated in accordance with the BGC Holdings limited partnership agreement, the contribution ratio, divided by an amount, as of March 31, 2019, was 0.9558 (the exchange ratio), by which a Newmark Holdings limited partnership interest can be exchanged for a number of shares of Newmark Class A common stock.
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As a result of the Separation, 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 held a BGC Holdings limited partnership interest and a corresponding Newmark Holdings limited partnership interest, which is equal to a BGC Holdings limited partnership interest multiplied by an amount calculated in accordance with the BGC Holdings limited partnership agreement the distribution ratio, divided by an amount, as of March 31, 2018, is one-for-one, subject to adjustment, 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”).
A summary of the activity associated with limited partnership units held by Newmark employees in BGC Holdings is as follows:
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| Number of Units | ||
Balance at December 31, 2017 | 64,708,915 | |||
Granted | 2,872,825 | |||
Redeemed/exchanged units | (5,650,292 | ) | ||
Forfeited units | (60,479 | ) | ||
Balance at December 31, 2018 | 61,870,969 | |||
Granted | 171,202 | |||
Redeemed/exchanged units | (1,524,368 | ) | ||
Forfeited units | (2,082,138 | ) | ||
Balance at March 31, 2019 | 58,435,665 |
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A summary of the activity of the number of share-equivalent limited partnership units and post IPO grants of Newmark LPUs held by Newmark employees in Newmark Holdings is as follows:
Number of Units | ||||
Balance at December 31, 2017 | 29,413,143 | |||
Granted | 19,141,943 | |||
Redeemed/exchanged units | (3,793,351 | ) | ||
Forfeited units | (28,248 | ) | ||
Balance at December 31, 2018 | 44,733,487 | |||
Granted | 5,099,815 | |||
Redeemed/exchanged units | (388,980 | ) | ||
Forfeited units/Other | 4,849,694 | |||
Balance at March 31, 2019 | 54,294,016 |
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A summary of the activity of the number of share-equivalent limited partnership units and post IPO grants of Newmark LPU’s held by Newmark employees in Newmark Holdings is as follows:
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As of March 31, 2018 and December 31, 2017, Newmark employees had 64.3 million and 64.7 million BGC Holdings limited partnership units outstanding, respectively. In addition, there were 33.0 million and 29.4 million limited partnership units in Newmark Holdings outstanding as of March 31, 2018 and December 31, 2017, respectively. As a result of the Newmark IPO and the related Separation and Distribution Agreement, BGC Holdings limited partnership units can only be exchanged into BGC Class A common stock with a number of Newmark Holdings limited partnership units equal to a BGC Holdings limited partnership unit multiplied by the distribution ratio and divided by the exchange ratio. Certain standalone BGC Holdings limited partnership units that do not have corresponding Newmark Holdings limited partnership units, may only become exchangeable into Class A common stock once the Distribution has occurred (see Note 2—Limited Partnership Interests in BGC Holdings and Newmark Holdings for further details on the Separation and Distribution Agreement Additionally, during the three months ended March 31, 2018, Newmark also has issued 3.8 million Newmark Holdings limited partnership units that are redeemable for Newmark Class A common stock.
During the three months ended March 31, 2018, BGC granted exchangeability on 1.5 million and 0.7 million limited partnership units in BGC Holdings and Newmark Holdings, respectively. During the three months ended March 31, 2017 BGC granted exchangeability on 0.6 million limited partnership units in BGC Holdings to Newmark employees. For the three months ended March 31, 2018 and 2017 Newmark incurred compensation expense of $21.7 million and $6.0 million, respectively related to the exchangeability granted in each period. For the three months ended March 31, 2018, there was no expense related to grants of exchangeability on limited partnership units in Newmark Holdings.
As of March 31, 2018 and December 31, 2017, the number of share-equivalent limited partnership units exchangeable into shares of BGC’s Class A common stock at the discretion of the unit holder was 17.2 million and 12.3 million, respectively. The number of share-equivalent limited partnership units exchangeable into shares of BGC Class A common stock as of March 31, 2018 represent 17.2 million limited partnership units in BGC Holdings and 8.1 million limited partnership units in Newmark Holdings exchangeable together into 17.2 million shares of BGC Class A common stock. Due to the change in the exchange ratio during the first quarter of 2018 there are 0.7 million standalone BGC units as of March 31, 2018 that are exchangeable into BGC Class A common stock contingent upon the Newmark spinoff. The number of share-equivalent limited partnership units exchangeable into shares of BGC Class A common stock as of December 31, 2017 represented 12.3 million and 5.6 million of limited partnership units in BGC Holdings and Newmark Holdings, respectively, exchangeable together into 12.3 million shares of BGC Class A common stock.
As of March 31, 2018, the notional value of the limited partnership units with a post-termination pay-out amount held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses, was approximately $139.2 million. The number of outstanding limited partnership units with a post-termination pay-out represent 13.8 million limited partnership units in BGC Holdings and 6.3 million limited partnership units in Newmark Holdings, of which approximately 6.6 million units in BGC Holdings and 3.0 million units in Newmark Holdings were unvested. As of March 31, 2018, the aggregate estimated fair value of these limited partnership units was approximately $28.6 million. In addition, beginning January 1, 2018, the Company began granting standalone limited partnership units in Newmark Holdings to Newmark employees. As of March 31, 2018, the notional value of the limited partnership units with a post-termination pay-out amount held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses, was approximately $21.6 million. The number of outstanding limited partnership units with a post-termination pay-out represent 1.5 million limited partnership units in Newmark Holdings, of which approximately 1.1 million units in Newmark Holdings were unvested. As of March 31, 2018, the aggregate estimated fair value of these limited partnership units was approximately $2.1 million. As of December 31, 2017, the notional value of the limited partnership units with a post-termination pay-out amount held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses, was approximately $232.9 million. The number of outstanding limited partnership units with a post-termination pay-out as of December 31, 2017 was approximately 23.4 million, of which approximately 13.2 million were unvested. As of December 31, 2017, the number of outstanding limited partnership units with a post-termination pay-out represent 23.4 million and 10.6 million of limited partnership units in BGC Holdings and Newmark Holdings, respectively, of which approximately 13.2 million and 6.0 million units in BGC Holdings and Newmark Holdings, respectively, were unvested. As of December 31, 2017, the aggregate estimated fair value of these limited partnership units was approximately $39.2 million.
Certain of the limited partnership units with a post-termination pay-out have been granted in connection with Newmark’s acquisitions. As of March 31, 2018 and December 31, 2017, the aggregate estimated fair value of these acquisition related limited partnership units was $6.7 million and $14.3 million, respectively. The liability for such acquisition-related limited partnership units is included in “Other long term liabilities” on Newmark’s unaudited condensed consolidated balance sheets.
Compensation expense related to limited partnership units with a post-termination pay-out amount is recognized over the stated service period. These units generally vest between three and five years from the date of grant. Newmark recognized compensation expense (benefit), before associated income taxes, related to these limited partnership units that were not redeemed of $(8.7) million and $5.8 million three months ended March 31, 2018 and 2017, respectively. These are included in “Compensation and employee benefits” in Newmark’s unaudited condensed consolidated statements of operations.
Certain limited partnership units generally receive quarterly allocations of net income, which are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. The allocation of income to limited partnership units was $4.1 million and $4.6 million for the three months ended March 31, 2018 and 2017, respectively. This expense is included within “Allocations of net income and grant of exchangeability to limited partnership units”
As of March 31, 2019, and December 31, 2018, Newmark employees had 58.4 million and 61.9 million BGC Holdings limited partnership units outstanding, respectively. In addition, there were 54.3 million and 44.7 million limited partnership units in Newmark Holdings outstanding as of March 31, 2019, and December 31, 2018, respectively. The 29.4 million limited partnership units outstanding as of December 31, 2017, represent the share equivalent of BGC Holdings held by Newmark employees.
During the three months ended March 31, 2019, BGC granted exchangeability on 59 thousand and 30 thousand limited partnership units in BGC Holdings and Newmark Holdings held by Newmark employees, respectively. During the three months ended March 31, 2018, BGC granted exchangeability on 1.5 million and 0.7 million limited partnership units in BGC Holdings and Newmark Holdings held by Newmark employees, respectively. For the three months ended March 31, 2019 and 2018, Newmark incurred compensation expense of $0.7 million and $21.7 million, respectively related to the exchangeability granted in each period.
In addition, during the three months ended March 31, 2019 and 2018, Newmark did not redeem any units in BGC Holdings and Newmark Holdings. Accordingly, Newmark did not incur any expense related to unit redemptions for the three months ended March 31, 2019 and 2018.
As of March 31, 2019, and December 31, 2018, the number of share-equivalent BGC limited partnership units exchangeable into shares of BGC’s Class A common stock at the discretion of the unit holder was 25.3 million and 26.0 million, respectively. The number of share-equivalent Newmark limited partnership units exchangeable into shares of Newmark’s Class A common stock at the discretion of the unit holder was 9.9 million and 9.3 million for the three months ended March 31, 2019, and year ended December 31, 2018, respectively.
As of March 31, 2019, the notional value of the BGC limited partnership units with a post-termination pay-out amount held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses was approximately $84.1 million. The number of outstanding limited partnership units with a post-termination pay-out represented 7.6 million limited partnership units in BGC Holdings and 4.8 million limited partnership units in Newmark Holdings, of which approximately 2.6 million units in BGC Holdings and 2.4 million units in Newmark Holdings were unvested. As of March 31, 2019, the aggregate estimated fair value of these limited partnership units was approximately $25.7 million. As of December 31, 2018, the notional value of the limited partnership units with a post-termination pay-out amount held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses, was approximately $92.7 million. As of December 31, 2018, the number of outstanding limited partnership units with a post-termination pay-out represented 8.4 million and 3.8 million of limited partnership units in BGC Holdings and Newmark Holdings, respectively, of which approximately 3.3 million and 1.5 million units in BGC Holdings and Newmark Holdings were unvested, respectively. As of December 31, 2018, the aggregate estimated fair value of these limited partnership units was approximately $22.6 million.
In addition, beginning January 1, 2018, Newmark began granting standalone limited partnership units in Newmark Holdings to Newmark employees. As of March 31, 2019, the notional value of the limited partnership units with a post-termination pay-out amount held by executives and non-executive employees, awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses, was approximately $88.0 million. The number of outstanding limited partnership units with a post-termination pay-out represent 6.4 million limited partnership units in Newmark Holdings, of which approximately 4.5 million units in Newmark Holdings were unvested. As of March 31, 2019, the aggregate estimated fair value of these limited partnership units was approximately $10.5 million.
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Compensation expense related to limited partnership units with a post-termination pay-out amount is recognized over the stated service period. These units generally vest between three and five years from the date of grant. Newmark recognized compensation expense/(benefit), before associated income taxes, related to these limited partnership units that were not redeemed of $6.3 million and $(8.7) million for the three months ended March 31, 2019, and 2018, respectively. These are included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in Newmark’s unaudited condensed consolidated statements of operations.
Certain limited partnership units generally receive quarterly allocations of net income, which are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. The allocation of income to limited partnership units was $6.3 million and $4.1 million for the three months ended March 31, 2019 and 2018, respectively. This expense is included within “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in Newmark’s unaudited condensed consolidated statements of operations.
|
|
A summary of the activity associated with RSUs in BGC is as follows:
Balance at December 31, 2017 |
|
| 346,538 |
|
| $ | 9.56 |
|
|
| 1.85 |
|
Delivered units |
|
| (95,773 | ) |
|
| 9.17 |
|
|
|
|
|
Forfeited units |
|
| (9,470 | ) |
|
| 9.95 |
|
|
|
|
|
Balance at March 31, 2018 |
|
| 241,295 |
|
| $ | 9.67 |
|
|
| 1.69 |
|
(b)
Restricted Stock Units
A summary of the activity associated with RSUs in BGC is as follows:
The fair value of RSUs awarded to employees and directors is determined on the date of grant based on the market value of BGC’s Class A common stock (adjusted if appropriate based upon the award’s eligibility to receive dividends), and is recognized, net of the effect of estimated forfeitures, ratably over the vesting period. Newmark uses historical data, including historical forfeitures and turnover rates, to estimate expected forfeiture rates for both employees and directors RSUs. Each RSU is settled in one share of BGC’s Class A common stock upon completion of the vesting period. Future RSU awards will be settled in one share of Newmark Class A common stock upon completion of the vesting period.
During the three months ended March 31, 2017, BGC granted 0.3 million, of RSUs with aggregate estimated grant date fair values of $2.8 million to employees and directors of Newmark. These RSUs were awarded in lieu of cash compensation for salaries, commissions and/or discretionary or guaranteed bonuses. RSUs granted to these individuals generally vest over a two- to four-year period.
As of March 31, 2018 and December 31, 2017, the aggregate estimated grant date fair value of outstanding RSUs was $2.3 million and $3.3 million, respectively.
Compensation expense related to RSUs, before associated income taxes, was approximately $0.3 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018 there was approximately $2.5 million total unrecognized compensation expense related to unvested RSUs.
Newmark may pay certain bonuses in the form of deferred cash compensation awards, which generally vest over a future service period. The total compensation expense recognized in relation to the deferred cash compensation awards for the three months March 31, 2018 and 2017 were $1.1 million and $0.2 million, respectively. As of March 31, 2018 and December 31, 2017, the total liability for the deferred cash compensation awards was $0.6 million and $0.4 million, respectively, and is included in “Accounts payable and accrued expenses” in Newmark’s unaudited condensed consolidated balance sheets.