SECURITIES AND EXCHANGE COMMISSION
(Mark One)
☒
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2018June 30, 2020 OR
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| ☐ | 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 (Exact name of Registrant as specified in its charter)
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Delaware | 6531
| 81-4467492 |
(State or other Jurisdiction of Incorporation or Organization) | (Primary Standard Industrial
Classification Code Number)
| Identification Number) |
New York, New York10017(212)
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
| Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Class A Common Stock, $0.01 par value | | NMRK | | The NASDAQ Stock Market LLC |
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”, “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☐
☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☒
☐ | | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | | |
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 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.
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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Class | | Outstanding at May 11, 2018August 5, 2020 |
Class A Common Stock, par value $0.01 per share | 138,921,532
| 157,970,907 shares |
Class B Common Stock, par value $0.01 per share | 15,840,049
| 21,285,533 shares |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “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:
the impact of the coronavirus (COVID-19) pandemic on our relationship with Cantor, BGC Partnersoperations, including the continued ability of our employees, clients and third-party service providers to perform their respective affiliatesfunctions at normal levels and any related conflicts of interest, competition for and retention of brokersour ability to continue providing on-site commercial property management services;
macroeconomic and other managerschallenges and key employees;
uncertainties resulting from the timingCOVID-19 pandemic, such as the extent and duration of the Distribution (as defined below)impact on public health, the economy, the commercial real estate services industry and whether the Distribution will occur at all;
market conditions, including trading volume and volatility,transaction volumes, possible disruptions in transactions, 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,
risks associatedour relationship and transactions with Cantor Fitzgerald, L.P. (“Cantor”) and its affiliates, Newmark’s structure, including Newmark Holdings, L.P. (“Newmark Holdings”), which is owned by Newmark, Cantor, Newmark’s employee partners and other partners, and our operating partnership, which is owned jointly by us and Newmark Holdings (which we refer to as “Newmark OpCo” ) any related transactions, conflicts of interest, or litigation, any loans to or from Newmark or Cantor, Newmark Holdings or Newmark OpCo, including the balances and interest rates thereof from time to time and any convertible or equity features of any such loans, competition for and retention of brokers and other managers and key employees;
the impact on our stock price on the reduction of our dividend and potential future changes in our dividend policy and in Newmark Holdings distributions to partners and the related impact of such reductions, as well as the effect of layoffs, salary cuts, and expected lower commissions or bonuses on the repayment of partner loans;
market volatility as a result of the effects of COVID-19, which may not be sustainable or predictable in future periods;
our ability to grow in other geographic regions and to manage our recent overseas growth and the impact of the COVID-19 pandemic on these regions and transactions;
the impact of, and limitations on our ability to enter into certain transactions in order to preserve the tax-free treatment of, the November 2018 pro-rata distribution (the “Spin-Off”) by BGC Partners, Inc. (“BGC Partners” or “BGC”) to BGC 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 or affiliated businesses or partners in our business;
our ability to manage and to continue to integrate Berkeley Point Financial LLC (“Berkeley Point” or “BPF” and which operates under the name “Newmark Knight Frank” or “NKF”) which was transferred to us pursuant to the Separation and Distribution Agreement (as defined below);
the impact of the Separation, the Spin-Off and related transactions or any restructuring or similar transactions on our business and financial results in 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;
the integration of acquired businesses with our otherbusiness;
the rebranding of our current businesses or risks related to any potential dispositions of all or any portion of our existing or acquired businesses;
risks related to changes in our relationships with the Government Sponsored Enterprises (“GSEs”) and Housing and Urban Development (“HUD”), including the impact of COVID-19 and related changes in the credit markets, changes in prevailing interest rates and the risk of loss in connection with loan defaults;
economic or geopolitical conditions or uncertainties,risks related to changes in the actionsfuture of governments or central banks,the GSEs, including uncertainty regardingchanges in the U.K. exit from the European Union following the referendumterms of applicable conservatorships and related rulings, 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 power failures, communication and transportation disruptions, and other interruptions of utilities or other essential services (including hurricanes);
changes in their capabilities; | |
| • | economic or geopolitical conditions or uncertainties, the actions of governments or central banks, including the impact of COVID-19 on the global markets, and related government stimulus packages, government ”shelter-in-place” orders and other restrictions on business and commercial activity and timing of reopening of local, national, and world economies, uncertainty regarding the nature, timing and consequences of the United Kingdom (“U.K.”)’s exit from the European Union (“EU”) following the 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 (including U.S. - China trade relations), political and civil unrest in the U.S., including demonstrations, riots, rising tensions with law enforcement, the impact of the U.S. presidential and congressional elections,political and labor unrest in France, Hong Kong, China and other jurisdictions, conflict in the Middle East, the impact of U.S. government shutdowns, impasses other and elections, 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, and the impact of pandemics and other international health incidents, including COVID-19; |
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 future changes to tax policy and other potential political policies resulting from elections and impasses;
the effect on our businessesbusiness of changes in interest rates, changes in benchmarks, including the phase out of the London Interbank Offering Rate (“LIBOR”), the level of worldwide governmental debt issuances, austerity programs, government stimulus packages related to COVID-19, increases or decreases in deficits and the impact of increased government tax rates, 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, remediation, 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, regulatory, and other litigation, proceedings and their related costs, including related to acquisitions and other matters, including judgments, fines, or settlements paid, or receivedreputational risk, 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, reduced cash flow from operations, increased leverage and the need for short- or long-term borrowings, including from Cantor, the ability to refinance our indebtedness, or other sources of cash relating to acquisitions, dispositions, or other matters, potential liquidity and other risks relating to
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• | certain other financial risks, including the possibility of future losses, indemnification obligations, assumed liabilities, reduced cash flows from operations, increased leverage, reduced availability under our Credit Facility (as defined below) resulting from recent borrowings, and the need for short or long-term borrowings, including from Cantor, the ability of Newmark to refinance its indebtedness, including in the credit markets weakened by the impact of COVID-19 and our ability to obtain additionalsatisfy eligibility criteria for government-sponsored loan programsand changes to interest rates and market liquidity or our access to 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 or refinancing of existing debt on terms acceptablenecessary to us, if at all, and risks of 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; |
support ongoing business needs on terms acceptable to us, if at all, and risks associated with the resulting leverage, including potentially causing a reduction in credit ratings and the associated outlooks and increased borrowing costs as well as interest rate and foreign currency exchange rate fluctuations;
risks associated with the temporary or longer-term investment of our available cash, including in Newmark OpCo, defaults or impairments on ourthe Company’s investments, joint venture interests, 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 customersclients to use these products or services and to secure and maintain market share;
our ability to enter into marketing and strategic alliances, and business combinations, restructuring, rebranding 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 other businesses and financial results for current or future periods, the integration of any completed transactions;
our estimates or determinations of potential value with respect to various assets or portions of ourthe Company’s business, including with respect to the accuracy of the assumptions or the valuation models or multiples used;
the impact of layoffs and furloughs on our business, including on 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, including outside of the U.S., 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 ourthe 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 ourthe Company’s 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, increased demands on such systems and on the telecommunications infrastructure from remote working during the COVID-19 pandemic, 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;
the impact of our recent significant reductions to our dividends and distributions and the timing and amounts of any future dividend or distributions, including 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;
the effectiveness of our governance, risks management, and oversight procedures and the impact of any potential transactions or relationships with related parties;
the impact of our environmental, social and governance (“ESG”) or “sustainability” ratings on the decisions by clients, investors, potential clients and other parties with respect to our business, investments in us or the market for and trading price of Newmark Class A common stock or other matters;
the fact that the prices at which shares of our Class A common stock are or may be 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 due to COVID-19 and ofother market factors, as well as on various offerings and other transactions, including offerings of our Class A common stock and convertible or exchangeable debt or other securities, the Separation, the IPO and the proposed Distribution, our repurchases of shares of our Class A common stock and purchases or redemptions of Newmark Holdings limited partnership interests or other equity interests in us or in ourits 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 us or holders of our outstanding shares, debt or other securities, share sales and stock pledge, stock loan,loans, 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,loans, or other financing transactions;transactions, distributions from Cantor pursuant to Cantor’s distribution rights obligations and
other distributions to Cantor partners, including deferred distribution rights shares;the effect of a potential conversion of BGC’s partnership into a corporation on Newmark, including but not limited to, impacts on Newmark’s employees holding BGC Holdings units and on our financial statements; and
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.
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.www.sec.gov. Our website address is www.ngkf.com.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 13D 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.
PART I — FINANCIAL INFORMATION
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except
share and per share
data)amounts)
(unaudited) | | March 31, 2018 | | | December 31, 2017 | |
Assets: | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 48,069 | | | $ | 121,027 | |
Restricted cash | | | 243,944 | | | | 52,347 | |
Marketable securities | | | 8,622 | | | | 57,623 | |
Loans held for sale, at fair value | | | 965,639 | | | | 362,635 | |
Receivables, net | | | 293,148 | | | | 210,471 | |
Other current assets (see note 17) | | | 36,499 | | | | 20,994 | |
Total current assets | | | 1,595,921 | | | | 825,097 | |
Goodwill | | | 474,990 | | | | 477,532 | |
Mortgage servicing rights, net | | | 381,526 | | | | 392,626 | |
Loans, forgivable loans and other receivables from employees and partners, net | | | 226,744 | | | | 209,549 | |
Fixed assets, net | | | 64,565 | | | | 64,822 | |
Other intangible assets, net | | | 25,896 | | | | 24,921 | |
Other assets (see note 17) | | | 287,508 | | | | 278,460 | |
Total assets | | $ | 3,057,150 | | | $ | 2,273,007 | |
Liabilities, Redeemable Partnership Interest, and Equity: | | | | | | | | |
Current liabilities: | | | | | | | | |
Warehouse notes payable | | $ | 950,479 | | | $ | 360,440 | |
Accrued compensation | | | 205,732 | | | | 205,395 | |
Current portion of accounts payable, accrued expenses and other liabilities (see note 27) | | | 165,746 | | | | 124,961 | |
Securities loaned | | | 8,622 | | | | 57,623 | |
Current portion of payables to related parties | | | 197,199 | | | | 34,169 | |
Total current liabilities | | | 1,527,778 | | | | 782,588 | |
Long-term debt | | | 400,000 | | | | 670,710 | |
Long-term debt payable to related parties | | | 412,500 | | | | 412,500 | |
Other-long term liabilities (see note 27) | | | 163,190 | | | | 163,795 | |
Total liabilities | | | 2,503,468 | | | | 2,029,593 | |
Commitments and contingencies | | | | | | | | |
Redeemable partnership interests | | | 22,105 | | | | 21,096 | |
Equity: | | | | | | | | |
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 | | | 1,389 | | | | 1,386 | |
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 | | | 158 | | | | 158 | |
Additional paid-in capital | | | 54,474 | | | | 59,374 | |
Retained earnings | | | 238,096 | | | | 199,492 | |
Total stockholders’ equity | | | 294,117 | | | | 260,410 | |
Noncontrolling interests | | | 237,460 | | | | (38,092 | ) |
Total equity | | | 531,577 | | | | 222,318 | |
Total liabilities, redeemable partnership interest, and equity | | $ | 3,057,150 | | | $ | 2,273,007 | |
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Assets: | |
| | |
|
| Current assets: | |
| | |
|
| Cash and cash equivalents | $ | 306,395 |
| | $ | 163,564 |
|
| Restricted cash | 60,743 |
| | 58,308 |
|
| Marketable securities | — |
| | 36,795 |
|
| Loans held for sale, at fair value | 1,089,429 |
| | 215,290 |
|
| Receivables, net | 402,698 |
| | 508,379 |
|
| Receivables from related parties | 1,606 |
| | — |
|
| Other current assets (see Note 19) | 79,010 |
| | 91,194 |
|
| Total current assets | 1,939,881 |
| | 1,073,530 |
|
| Goodwill | 559,903 |
| | 557,914 |
|
| Mortgage servicing rights, net | 423,232 |
| | 413,644 |
|
| Loans, forgivable loans and other receivables from employees and partners, net | 483,806 |
| | 403,710 |
|
| Right-of-use assets | 191,177 |
| | 201,661 |
|
| Fixed assets, net | 102,601 |
| | 98,016 |
|
| Other intangible assets, net | 48,302 |
| | 45,226 |
|
| Other assets (see Note 19) | 383,336 |
| | 407,898 |
|
| Total assets | $ | 4,132,238 |
| | $ | 3,201,599 |
|
| Liabilities, Redeemable Partnership Interests, and Equity: | | | |
| Current liabilities: | |
| | |
| Warehouse facilities collateralized by U.S. Government Sponsored Enterprises | $ | 1,064,096 |
| | $ | 209,648 |
|
| Accrued compensation | 246,292 |
| | 343,845 |
|
| Accounts payable, accrued expenses and other liabilities (see Note 29) | 341,548 |
| | 417,069 |
|
| Securities loaned | — |
| | 36,735 |
|
| Payables to related parties | 3,880 |
| | 38,090 |
|
| Total current liabilities | 1,655,816 |
| | 1,045,387 |
|
| Long-term debt | 953,628 |
| | 589,294 |
|
| Right-of-use liabilities | 215,465 |
| | 227,942 |
|
| Other long-term liabilities (see Note 29) | 401,274 |
| | 376,834 |
|
| Total liabilities | 3,226,183 |
| | 2,239,457 |
|
| Commitments and contingencies (see Note 31) |
|
| |
|
|
| Redeemable partnership interests | 21,243 |
| | 21,517 |
|
| Equity: | | | |
Class A common stock, par value of $0.01 per share: 1,000,000,000 shares authorized; 162,379,438 and
160,833,463 shares issued at June 30, 2020 and December 31, 2019, respectively, and 157,811,436
and 156,265,461 shares outstanding at June 30, 2020 and December 31, 2019, respectively | 1,623 |
| | 1,608 |
|
Class B common stock, par value of $0.01 per share: 500,000,000 shares authorized; 21,285,533 shares issued and outstanding at June 30, 2020 and December 31, 2019, convertible into Class A common stock | 212 |
| | 212 |
|
| Additional paid-in capital | 329,196 |
| | 318,165 |
|
| Retained earnings | 278,130 |
| | 313,112 |
|
| Contingent Class A common stock | 1,050 |
| | 1,461 |
|
| Treasury stock at cost: 4,568,002 shares of Class A common stock at June 30, 2020 and December 31, 2019 | (34,894 | ) | | (34,894 | ) |
| Accumulated other comprehensive income (loss) | (2,604 | ) | | — |
|
| Total stockholders’ equity | 572,713 |
| | 599,664 |
|
| Noncontrolling interests | 312,099 |
| | 340,961 |
|
| Total equity | 884,812 |
| | 940,625 |
|
| Total liabilities, redeemable partnership interests, and equity | $ | 4,132,238 |
| | $ | 3,201,599 |
|
The accompanying Notes to the
unaudited Condensed 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 OPERATIONS
(In thousands, except per share data)
| | | | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | | 2017 | | 2020 | | 2019 | | 2020 | | 2019 |
Revenues: | | | | | | | | | |
| | |
| | | | |
Commissions | | $ | 260,735 | | | $ | 204,958 | | $ | 173,038 |
| | $ | 346,131 |
| | $ | 441,399 |
| | $ | 621,399 |
|
Gains from mortgage banking activities/originations, net | | | 38,914 | | | | 45,262 | | 69,071 |
| | 45,091 |
| | 119,494 |
| | 76,437 |
|
Management services, servicing fees and other | | | 130,811 | | | | 82,362 | | 141,609 |
| | 160,256 |
| | 306,754 |
| | 301,298 |
|
Total revenues | | | 430,460 | | | | 332,582 | | 383,718 |
| | 551,478 |
| | 867,647 |
| | 999,134 |
|
Expenses: | | | | | | | | | | | | | | | |
Compensation and employee benefits | | | 252,695 | | | | 215,145 | | 230,518 |
| | 316,737 |
| | 530,775 |
| | 580,090 |
|
Allocations of net income and grant of exchangeability to limited partnership units | | | 25,809 | | | | 10,649 | | |
Equity-based compensation and allocations of net income to limited partnership units and FPUs | | 10,860 |
| | 39,353 |
| | 23,774 |
| | 53,224 |
|
Total compensation and employee benefits | | | 278,504 | | | | 225,794 | | 241,378 |
| | 356,090 |
| | 554,549 |
| | 633,314 |
|
Operating, administrative and other | | | 75,427 | | | | 47,382 | | 61,012 |
| | 101,749 |
| | 153,293 |
| | 189,642 |
|
Fees to related parties | | | 6,894 | | | | 4,718 | | 5,205 |
| | 7,222 |
| | 11,017 |
| | 13,947 |
|
Depreciation and amortization | | | 22,513 | | | | 18,237 | | 28,946 |
| | 33,425 |
| | 74,986 |
| | 61,729 |
|
Total operating expenses | | | 383,338 | | | | 296,131 | | 336,541 |
| | 498,486 |
| | 793,845 |
| | 898,632 |
|
Other income (losses), net: | | | | | | | | | |
Other income (loss) | | | 5,707 | | | | (593 | ) | |
Total other income (losses), net | | | 5,707 | | | | (593 | ) | |
| Other income (loss), net | | (36,389 | ) | | (3,726 | ) | | (34,951 | ) | | (13,444 | ) |
Income from operations | | | 52,829 | | | | 35,858 | | 10,788 |
| | 49,266 |
| | 38,851 |
| | 87,058 |
|
Interest (expense) income, net | | | (13,409 | ) | | | 1,134 | | |
| Interest expense, net | | (10,056 | ) | | (8,081 | ) | | (19,085 | ) | | (15,780 | ) |
Income before income taxes and noncontrolling interests | | | 39,420 | | | | 36,992 | | 732 |
| | 41,185 |
| | 19,766 |
| | 71,278 |
|
Provision (benefit) for income taxes | | | 6,933 | | | | (15 | ) | |
| Provision for income taxes | | 88 |
| | 9,121 |
| | 4,886 |
| | 15,808 |
|
Consolidated net income | | | 32,487 | | | | 37,007 | | 644 |
| | 32,064 |
| | 14,880 |
| | 55,470 |
|
Less: Net income attributable to noncontrolling interests | | | 12,490 | | | | 296 | | 330 |
| | 9,396 |
| | 6,387 |
| | 15,898 |
|
Net income available to common stockholders | | $ | 19,997 | | | $ | 36,711 | | $ | 314 |
| | $ | 22,668 |
| | $ | 8,493 |
| | $ | 39,572 |
|
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 earnings (loss) per share | | | | | | | | |
Net income (loss) available to common stockholders (1) | | $ | (2,131 | ) | | $ | 19,444 |
| | $ | 3,604 |
| | $ | 33,124 |
|
| Basic earnings (loss) per share | | $ | (0.01 | ) | | $ | 0.11 |
| | $ | 0.02 |
| | $ | 0.19 |
|
Basic weighted-average shares of common stock outstanding | | | 155,694 | | | N/A | | 178,523 |
| | 178,754 |
| | 178,034 |
| | 178,683 |
|
Fully diluted earnings per share | | | | | | | | | |
Net income available to common stockholders | | $ | 30,286 | | | N/A | | |
| Fully diluted earnings (loss) per share | | | | | | | | |
| Net income (loss) for fully diluted shares | | $ | (2,131 | ) | | $ | 23,308 |
| | $ | 3,604 |
| | $ | 33,124 |
|
Fully diluted earnings (loss) per share | | $ | 0.12 | | | N/A | | $ | (0.01 | ) | | $ | 0.11 |
| | $ | 0.02 |
| | $ | 0.18 |
|
Fully diluted weighted-average shares of common stock outstanding | | | 246,834 | | | N/A | | 178,523 |
| | 208,150 |
| | 178,710 |
| | 179,434 |
|
Dividends declared per share of common stock | | $ | 0.09 | | | N/A | | |
Dividends declared and paid per share of common stock | | $ | — | | | N/A | | |
| |
(1) | Includes a reduction for dividends on preferred stock or exchangeable preferred partnership units in the amount of $2.4 million and $4.9 million for the three and six months ended June 30, 2020, respectively, and $3.2 million and $6.4 million for the three and six months ended June 30, 2019, respectively (see Note 1 — “Organization and Basis of Presentation”). |
The accompanying Notes to the
unaudited Condensed 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 COMPREHENSIVE INCOME
(LOSS)
(unaudited) | | Three Months Ended March 31, | |
| | 2018 | | | 2017 | |
Consolidated net income | | $ | 32,487 | | | $ | 37,007 | |
Comprehensive income, net of tax | | | 32,487 | | | | 37,007 | |
Less: Comprehensive income attributable to noncontrolling interests, net of tax | | | 12,490 | | | | 296 | |
Comprehensive income available to common stockholders | | $ | 19,997 | | | $ | 36,711 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Consolidated net income | $ | 644 |
| | $ | 32,064 |
| | $ | 14,880 |
| | $ | 55,470 |
|
| Foreign currency translation adjustments | (1,327 | ) | | — |
| | (2,604 | ) | | — |
|
| Comprehensive income (loss), net of tax | (683 | ) | | 32,064 |
| | 12,276 |
| | 55,470 |
|
Less: Comprehensive income attributable to noncontrolling interests, net of tax | 330 |
| | 9,396 |
| | 6,387 |
| | 15,898 |
|
| Comprehensive income (loss) available to common stockholders | $ | (1,013 | ) | | $ | 22,668 |
| | $ | 5,889 |
| | $ | 39,572 |
|
The accompanying Notes to the
unaudited Condensed 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)
| | 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 | | Accumulated
Other
Comprehensive
Income (Loss) | | Noncontrolling Interests | | Total |
| Balance, April 1, 2020 | $ | 1,612 |
| | $ | 212 |
| | $ | 324,817 |
| | $ | 1,050 |
| | $ | (34,894 | ) | | $ | 282,053 |
| | $ | (1,277 | ) | | $ | 347,360 |
| | $ | 920,933 |
|
| Consolidated net income | — |
| | — |
| | — |
| | — |
| | — |
| | 314 |
| | — |
| | 330 |
| | 644 |
|
| Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,009 | ) | | — |
| | (1,009 | ) |
| Dividends to common stockholders | — |
| | — |
| | — |
| | — |
| | — |
| | (1,790 | ) | | — |
| | — |
| | (1,790 | ) |
Preferred dividends on exchangeable preferred
partnership units | — |
| | — |
| | — |
| | — |
| | — |
| | (2,447 | ) | | — |
| | 2,447 |
| | — |
|
Earnings distributions to limited partnership interests
and other noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (37,130 | ) | | (37,130 | ) |
Grant of exchangeability, redemption and issuance of
Class A common stock, 1,109,690 shares | 11 |
| | — |
| | 2,240 |
| | — |
| | — |
| | — |
| | — |
| | (2,114 | ) | | 137 |
|
Issuance and redemption of limited partnership units
including contingent units | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Restricted stock units compensation | — |
| | — |
| | 1,518 |
| | — |
| | — |
| | — |
| | — |
| | 1,206 |
| | 2,724 |
|
| Other | — |
| | — |
| | 621 |
| | — |
| | — |
| | — |
| | (318 | ) | | — |
| | 303 |
|
| Balance, June 30, 2020 | $ | 1,623 |
| | $ | 212 |
| | $ | 329,196 |
| | $ | 1,050 |
| | $ | (34,894 | ) | | $ | 278,130 |
| | $ | (2,604 | ) | | $ | 312,099 |
| | $ | 884,812 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Stock | | Class B Common Stock | | Additional Paid-in Capital | | Contingent Class A Common Stock | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Noncontrolling Interests | | Total |
| Balance, January 1, 2020 | $ | 1,608 |
| | $ | 212 |
| | $ | 318,165 |
| | $ | 1,461 |
| | $ | (34,894 | ) | | $ | 313,112 |
| | $ | — |
| | $ | 340,961 |
| | $ | 940,625 |
|
| Consolidated net income | — |
| | — |
| | — |
| | — |
| | — |
| | 8,493 |
| | — |
| | 6,387 |
| | 14,880 |
|
| Other comprehensive income (loss), net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,286 | ) | | — |
| | (2,286 | ) |
Cumulative effect of the credit loss standard adoption, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | (19,023 | ) | | — |
| | — |
| | (19,023 | ) |
| Dividends to common stockholders | — |
| | — |
| | — |
| | — |
| | — |
| | (19,563 | ) | | — |
| | — |
| | (19,563 | ) |
Preferred dividends on exchangeable preferred partnership units | — |
| | — |
| | — |
| | — |
| | — |
| | (4,889 | ) | | — |
| | 4,889 |
| | — |
|
Earnings distributions to limited partnership interests and other noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (38,080 | ) | | (38,080 | ) |
Grant of exchangeability, redemption and issuance of
Class A common stock, 1,545,975 shares | 15 |
| | — |
| | 6,663 |
| | — |
| | — |
| | — |
| | — |
| | (4,552 | ) | | 2,126 |
|
Issuance and redemption of limited partnership units including contingent units | — |
| | — |
| | 425 |
| | (411 | ) | | — |
| | — |
| | — |
| | 893 |
| | 907 |
|
| Restricted stock units compensation | — |
| | — |
| | 3,322 |
| | — |
| | — |
| | — |
| | — |
| | 1,601 |
| | 4,923 |
|
| Other | — |
| | — |
| | 621 |
| | — |
| | — |
| | — |
| | (318 | ) | | — |
| | 303 |
|
| Balance, June 30, 2020 | $ | 1,623 |
| | $ | 212 |
| | $ | 329,196 |
| | $ | 1,050 |
| | $ | (34,894 | ) | | $ | 278,130 |
| | $ | (2,604 | ) | | $ | 312,099 |
| | $ | 884,812 |
|
The accompanying Notes to the unaudited Condensed 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
CASH FLOWSCHANGES IN EQUITY (CONTINUED)
(In
thousands)(unaudited)
| | Three Months Ended March 31, | |
| | 2018 | | | 2017 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
Consolidated net income | | $ | 32,487 | | | $ | 37,007 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Gain on originated mortgage servicing rights | | | (6,389 | ) | | | (28,806 | ) |
Depreciation and amortization | | | 22,513 | | | | 18,237 | |
Equity-based compensation and allocations of net income to limited partnership units | | | 25,809 | | | | — | |
Employee loan amortization and impairment | | | 6,009 | | | | 1,974 | |
Change in fair value of contingent consideration | | | 134 | | | | — | |
Unrealized gains on loans held for sale | | | (15,126 | ) | | | (2,102 | ) |
Income from an equity method investment | | | (3,176 | ) | | | — | |
Amortization of deferred financing costs | | | 255 | | | | 259 | |
Provision for uncollectible accounts | | | 1,140 | | | | (211 | ) |
Realized gain on marketable securities | | | (2,400 | ) | | | — | |
Unrealized gain on marketable securities | | | (796 | ) | | | — | |
Loan originations—loans held for sale | | | (1,410,690 | ) | | | (1,842,357 | ) |
Loan sales—loans held for sale | | | 822,811 | | | | 2,139,634 | |
Consolidated net income, adjusted for non-cash and non-operating items | | | (527,419 | ) | | | 323,635 | |
Changes in operating assets and liabilities: | | | | | | | | |
Receivables, net | | | (19,374 | ) | | | 4,340 | |
Loans, forgivable loans and other receivables from employees and partners | | | (24,583 | ) | | | (6,226 | ) |
Other assets | | | (14,063 | ) | | | 10,498 | |
Accrued compensation | | | (35,069 | ) | | | (33,599 | ) |
Accounts payable, accrued expenses and other liabilities | | | 30,114 | | | | (2,237 | ) |
Net cash provided by (used in) operating activities | | | (590,394 | ) | | | 296,411 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Cash acquired, net of purchases of noncontrolling interest | | | — | | | | (997 | ) |
Proceeds from the sale of marketable securities | | | 52,196 | | | | — | |
Investment in cost method investments | | | (7,500 | ) | | | — | |
Purchases of fixed assets | | | (1,714 | ) | | | (3,053 | ) |
Purchase of mortgage servicing rights | | | (509 | ) | | | — | |
Net cash provided (used in) by investing activities | | | 42,473 | | | | (4,050 | ) |
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 | | | | — | |
Payments to related parties | | | (13,000 | ) | | | (578,263 | ) |
Borrowings from related parties | | | 177,016 | | | | 354,493 | |
Repayment of long-term debt | | | (270,710 | ) | | | — | |
Payments for IPO offering costs | | | (8,870 | ) | | | — | |
Secured loans | | | (49,001 | ) | | | — | |
Distributions to noncontrolling interests | | | (100 | ) | | | (71 | ) |
Payments on acquisition earn-outs | | | (758 | ) | | | (10,513 | ) |
Payment of deferred financing costs | | | (16 | ) | | | (9 | ) |
Net cash provided (used in) by financing activities | | | 666,560 | | | | (271,969 | ) |
Net increase (decrease) in cash and cash equivalents | | | 118,639 | | | | 20,392 | |
Cash and cash equivalents and restricted cash at beginning of period | | | 173,374 | | | | 117,554 | |
Cash and cash equivalents and restricted cash at end of period | | $ | 292,013 | | | $ | 137,946 | |
Supplemental disclosures of cash flow information: | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest | | $ | 12,922 | | | $ | 2,969 | |
Taxes | | $ | 19 | | | $ | 18 | |
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 equivalentsthousands, except share and restricted cash by category within the unaudited Condensed Consolidated Balance Sheets:
per share amounts) | | 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 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, April 1, 2019 | $ | 1,574 |
| | $ | 212 |
| | $ | 284,054 |
| | $ | 3,141 |
| | $ | (486 | ) | | $ | 275,589 |
| | $ | 456,714 |
| | $ | 1,020,798 |
|
| Consolidated net income | — |
| | — |
| | — |
| | — |
| | — |
| | 22,668 |
| | 9,396 |
| | 32,064 |
|
| Dividends to common stockholders | — |
| | — |
| | — |
| | — |
| | — |
| | (17,918 | ) | | — |
| | (17,918 | ) |
| Preferred dividends on exchangeable preferred partnership units | — |
| | — |
| | — |
| | — |
| | — |
| | (3,224 | ) | | 3,224 |
| | — |
|
Earnings distributions to limited partnership interests and other noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (14,241 | ) | | (14,241 | ) |
Grant of exchangeability, redemption and issuance of Class A common stock,
949,283 shares | 9 |
| | — |
| | 5,332 |
| | — |
| | — |
| | — |
| | (3,673 | ) | | 1,668 |
|
| Issuance of limited partnership units including contingent units | — |
| | — |
| | 2,363 |
| | — |
| | — |
| | — |
| | 4,658 |
| | 7,021 |
|
Issuance and redemption of limited partnership units including contingent units | — |
| | — |
| | 185 |
| | (185 | ) | | — |
| | — |
| | — |
| | — |
|
| Repurchase of 1,613,032 shares of Class A common stock | — |
| | — |
| | — |
| | — |
| | (13,896 | ) | | — |
| | — |
| | (13,896 | ) |
| Restricted stock units compensation | — |
| | — |
| | 1,195 |
| | — |
| | — |
| | — |
| | — |
| | 1,195 |
|
| Other | — |
| | — |
| | (688 | ) | | — |
| | — |
| | — |
| | — |
| | (688 | ) |
| Balance, June 30, 2019 | $ | 1,583 |
| | $ | 212 |
| | $ | 292,441 |
| | $ | 2,956 |
| | $ | (14,382 | ) | | $ | 277,115 |
| | $ | 456,078 |
| | $ | 1,016,003 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | — |
| | — |
| | — |
| | — |
| | — |
| | 39,572 |
| | 15,898 |
| | 55,470 |
|
| Dividends to common stockholders | — |
| | — |
| | — |
| | — |
| | — |
| | (33,961 | ) | | — |
| | (33,961 | ) |
| Preferred dividends on exchangeable preferred partnership units | — |
| | — |
| | — |
| | — |
| | — |
| | (6,448 | ) | | 6,448 |
| | — |
|
| Earnings distributions to limited partnership interests and other noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (41,521 | ) | | (41,521 | ) |
Grant of exchangeability, redemption and issuance of Class A common stock,
498,129 shares | 13 |
| | — |
| | 4,760 |
| | — |
| | — |
| | — |
| | (18,635 | ) | | (13,862 | ) |
| Issuance of limited partnership units including contingent units | — |
| | — |
| | 2,363 |
| | — |
| | — |
| | — |
| | 4,658 |
| | 7,021 |
|
Issuance and redemption of limited partnership units including contingent units | — |
| | — |
| | 294 |
| | (294 | ) | | — |
| | — |
| | — |
| | — |
|
| Repurchase of 1,613,032 shares of Class A common stock | — |
| | — |
| | — |
| | — |
| | (13,896 | ) | | — |
| | — |
| | (13,896 | ) |
| Restricted stock units compensation | — |
| | — |
| | 1,466 |
| | — |
| | — |
| | — |
| | — |
| | 1,466 |
|
| Other | — |
| | — |
| | (1,513 | ) | | — |
| | — |
| | — |
| | — |
| | (1,513 | ) |
| Balance, June 30, 2019 | $ | 1,583 |
| | $ | 212 |
| | $ | 292,441 |
| | $ | 2,956 |
| | $ | (14,382 | ) | | $ | 277,115 |
| | $ | 456,078 |
| | $ | 1,016,003 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Dividends declared per share of common stock | $ | 0.01 |
| | $ | 0.10 |
| | $ | 0.11 |
| | $ | 0.20 |
|
| Dividends declared and paid per share of common stock | $ | 0.01 |
| | $ | 0.10 |
| | $ | 0.11 |
| | $ | 0.19 |
|
The accompanying Notes to the unaudited Condensed Consolidated Financial Statements are an integral part of these financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(PriorIn thousands)
|
| | | | | | | |
| | Six Months Ended June 30, |
| | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | |
|
| Consolidated net income | $ | 14,880 |
| | $ | 55,470 |
|
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | |
| Gain on originated mortgage servicing rights | (73,565 | ) | | (38,687 | ) |
| Depreciation and amortization | 74,986 |
| | 61,729 |
|
| Provision for credit losses on the financial guarantee liability | 14,702 |
| | — |
|
| Provision for doubtful accounts | 2,948 |
| | 1,645 |
|
| Equity-based compensation and allocation of net income to limited partnership units and FPUs | 23,774 |
| | 53,224 |
|
| Employee loan amortization | 31,926 |
| | 18,504 |
|
| Deferred tax provision (benefit) | (24 | ) | | 956 |
|
| Non-cash changes in acquisition related earnouts | (11,711 | ) | | 431 |
|
| Unrealized loss (gain) on non-marketable investments | 26,837 |
| | (3,927 | ) |
| Unrealized (gains) loss on loans held for sale | (25,158 | ) | | (25,698 | ) |
| (Income) loss from an equity method investment | 4,116 |
| | (4,750 | ) |
| Realized (gains) loss on marketable securities | 2,204 |
| | (1,812 | ) |
| Unrealized (gains) loss on marketable securities | — |
| | (5,110 | ) |
| Change in valuation of derivative asset | 1,339 |
| | 28,967 |
|
| Loan originations—loans held for sale | (5,059,288 | ) | | (3,498,483 | ) |
| Loan sales—loans held for sale | 4,210,307 |
| | 3,696,135 |
|
| Other | 3,022 |
| | 2,045 |
|
| Consolidated net income (loss), adjusted for non-cash and non-operating items | (758,705 | ) | | 340,639 |
|
| Changes in operating assets and liabilities: | | | |
| Receivables, net | 98,188 |
| | (14,877 | ) |
| Loans, forgivable loans and other receivables from employees and partners | (115,783 | ) | | (53,809 | ) |
| Other assets | 21,022 |
| | (43,491 | ) |
| Accrued compensation | (99,807 | ) | | (41,623 | ) |
| Accounts payable, accrued expenses and other liabilities | (73,379 | ) | | 31,771 |
|
| Payables to related parties | (26,631 | ) | | — |
|
| Net cash (used in) provided by operating activities | (955,095 | ) | | 218,610 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Payments for acquisitions, net of cash acquired | (5,850 | ) | | (16,203 | ) |
| Proceeds from the sale of marketable securities | 34,591 |
| | 22,204 |
|
| Purchase of non-marketable investments | — |
| | (20,100 | ) |
| Purchases of fixed assets | (11,977 | ) | | (10,740 | ) |
| Purchase of mortgage servicing rights | (200 | ) | | (722 | ) |
| Net cash (used in) provided by investing activities | 16,564 |
| | (25,561 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Proceeds from warehouse facilities | 5,059,288 |
| | 3,498,483 |
|
| Principal payments on warehouse facilities | (4,204,840 | ) | | (3,677,675 | ) |
| Payments to related parties | — |
| | (3,760 | ) |
| Settlement of pre-Spin-Off related party receivables | — |
| | 33,892 |
|
| Borrowing of debt | 365,000 |
| | 110,000 |
|
| Repayment of debt | — |
| | (65,000 | ) |
| Securities loaned | (36,735 | ) | | 33,660 |
|
| Treasury stock repurchases | — |
| | (13,896 | ) |
| Earnings distributions to limited partnership interests and noncontrolling interests | (74,715 | ) | | (93,868 | ) |
| Dividends to stockholders | (19,563 | ) | | (33,961 | ) |
| Payments on acquisition earn-outs | (1,759 | ) | | (2,917 | ) |
| Payment of deferred financing costs | (2,879 | ) | | (81 | ) |
| Net cash (used in) provided by financing activities | 1,083,797 |
| | (215,123 | ) |
| Net increase (decrease) in cash and cash equivalents and restricted cash | 145,266 |
| | (22,074 | ) |
| Cash and cash equivalents and restricted cash at beginning of period | 221,872 |
| | 187,406 |
|
| Cash and cash equivalents and restricted cash at end of period | $ | 367,138 |
| | $ | 165,332 |
|
|
| | | | | | | |
| Supplemental disclosures of cash flow information: | | | |
| Cash paid during the period for: | |
| | |
|
| Interest | $ | 20,466 |
| | $ | 18,611 |
|
| Taxes | $ | 58,125 |
| | $ | 73,950 |
|
| Supplemental disclosure of non-cash operating, investing and financing activities: | | | |
| Right-of-use assets and liabilities | $ | 13,416 |
| | $ | 32,117 |
|
The accompanying Notes to
December 13, 2017 the
Combined entities of Newmark Knight Frank)Notes to Condensed Consolidated Financial Statements
are an integral part of these financial statements.
NEWMARK GROUP, INC.
Notes to the Condensed Consolidated Financial Statements
(unaudited)
(1)
| |
| (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 salesGovernment Sponsored Enterprise (“GSE”) lending and loan servicing, mortgage brokerage and equity-raising. Newmark’s 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 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 managementForbes Global 2000 companies.
Newmark's Separation and
property and facility management.Spin-Off From BGC Partners, Inc.
Newmark was formed
initially through
the purchase by 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, “Cantor”(“Cantor”)
including Cantor Fitzgerald & Co. which we refer to as “CF&Co.”.
On
September 8,December 13, 2017, BGC,
acquired, from Cantor Commercial Real Estate Company, LP (“CCRE”), 100% of the equity of Berkeley Point Financial LLC (“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. At the closing 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.Concurrently with the Berkeley Point Acquisition, on September 8, 2017 Newmark invested $100 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 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, Newmark’s investment in Real Estate LP is accounted for under the equity method.
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(as amended on November 8, 2018 and amended and restated on November 23, 2018, the “Separation and Distribution Agreement”). TheSee Note 1 — “Organization and Basis of Presentation” to the Newmark financial statements in Part II, Item 8 of the Newmark Annual Report on Form 10-K for the year ended December 31, 2019, for additional information regarding the transactions effected pursuant to the Separation and Distribution Agreement sets forthAgreements, including the agreements among BGC, Cantor,separation and the pro rata distribution (the "Spin-Off") of Newmark, Newmark Holdings and their respective subsidiaries regarding, among other things:
the principal corporate transactions pursuant to whichNewmark OpCo from BGC, BGC Holdings and BGC U.S. OpCo (the “Separation”) and their respective subsidiaries (other than the Newmark Group (defined below)Newmark's initial public offering (“IPO”).
On November 30, 2018 (the “Distribution Date”), the “BGC Group”) transferredBGC completed its previously announced Spin-Off to Newmark, Newmark Holdings and Newmark OpCo and their respective subsidiaries (the “Newmark Group”) the assets and liabilitiesits stockholders of all of the shares of common stock of Newmark owned by BGC Group relatingas of immediately prior 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 assumption and repayment of indebtedness by the BGC Group and the Newmark Group, as further described below; and
��
| •
| the pro rata distributioneffective time of the Spin-Off, with 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 are currently Cantor and another entity controlled by Howard W. Lutnick), which distribution is intended to qualify as generally tax-free for U.S. federal income tax purposes; provided that the determination of whether, when and how to proceed with the distribution shall be entirely within the discretion of BGC (the “Newmark Distribution” or “spin-off”).
|
On December 15, 2017, Newmark announced the pricing of the IPO of 20 million shares of Newmark’s Class A common stock at a pricedistributed to the publicholders of $14.00 pershares 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 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.
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 Spin-Off 0.463895 of a share which was completed on December 19, 2017.of Newmark Class A shares began trading on December 15, 2017 oncommon stock for each share of BGC Class A common stock held as of the NASDAQ Global Select Market underRecord 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 symbol “NMRK.” In addition,Record Date. BGC Partners stockholders received cash in lieu of any fraction of a share of Newmark grantedcommon stock that they otherwise would have received in the underwriters a 30-day optionSpin-Off.
Prior to purchase up to an additional 3and 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, at the IPO price, less underwriting discounts and commissions. On December 26, 2017, the underwriters5.4 million shares of the IPO exercised in full their overallotment option to purchase an additional 3Newmark 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 from Newmark at the IPO price, less underwriting discounts and commission (the “option”). As a result, Newmark received aggregate net proceeds of approximately $295.4 million from the IPO, after deducting underwriting discounts and commissions and estimated offering expenses. Upon the closing of the option, Newmark’s public stockholders owned approximately 16.6% of the shares ofstock. These Newmark Class A and Class B shares of common stock. This is based on 138.6 millionstock were included in the Spin-Off to BGC’s stockholders.
In the aggregate, BGC distributed 131,886,409 shares of Newmark Class A common stock
outstanding followingand 21,285,537 shares of Newmark Class B common stock to BGC’s stockholders in the
closingSpin-Off. These shares of Newmark common stock collectively represented approximately 94% of the
option. Also upon the closingtotal voting power of outstanding common stock and approximately 87% of the
option, Newmark’s public stockholders owned approximately 9.8%total economics of
Newmark’s 234.2 million fully diluted shares outstanding.As partNewmark outstanding common stock, in each case as of the Separation described above, BGC contributed its interests in both BPF and Real Estate LP to Newmark.
Distribution Date.
On March 7, 2018, BGC Partners and its operating subsidiaries
had purchased 16.6 million newly issued exchangeable limited partnership units (the “Newmark
Holdings Units”) of Newmark Holdings
L.P. for approximately $242.0 million (the “Investment in
Newmark”Newmark Holdings”).
These newly-issuedOn November 30, 2018, BGC Partners also caused its subsidiary, BGC Holdings, to distribute pro rata (the “BGC Holdings Distribution”) all of the 1,458,931 Newmark
Holdings Units
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 Record Date. The Newmark Holdings Units distributed to BGC Holdings partners in the BGC Holdings distribution are exchangeable
at BGC’s discretion, into eitherfor shares of
Newmark Class A common stock,
orand in the case of the 449,917 Newmark Holdings Units received by Cantor also into shares of
Newmark Class B common stock,
at the applicable exchange ratio (subject to adjustment). As of
Newmark. BGC and its subsidiaries fundedJune 30, 2020, the
Investment in Newmark using proceeds of its Controlled Equity Offering sales program. See Note 25—Related Party Transactions for additional information.BGC currently expects to pursue a distribution or spin-off to its common stockholders of all the Class A shares and Class Bexchange ratio was 0.9366 shares of Newmark common stock per Newmark Holdings Unit.
Following the Spin-Off and the 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 it or its subsidiaries. Therefore, BGC no longer consolidates Newmark with its financial results subsequent to the Spin-Off. Cantor continues to control Newmark and its subsidiaries following the Spin-Off and the BGC Holdings Distribution.
Nasdaq Monetization Transactions
On June 28, 2013, BGC had sold certain assets of its on-the-run, electronic benchmark U.S. Treasury platform (“eSpeed”) to Nasdaq, Inc. 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 it then ownsNasdaq, as a whole, produces at least $25.0 million in consolidated gross revenues each year (the “Nasdaq Earn-out”). The remaining rights under the Nasdaq Earn-out were transferred to Newmark on September 28, 2017 as part of the transaction (see Note 7 — “Marketable Securities” for additional information).
Exchangeable Preferred Partnership Units and Nasdaq Forward Contracts
On June 18, 2018 and September 26, 2018, Newmark OpCo issued approximately $175.0 million and $150.0 million of exchangeable preferred partnership units (“EPUs”), respectively, in private transactions to the Royal Bank of Canada (“RBC”) (the “Newmark OpCo Preferred Investment”). Newmark received $266.1 million of cash in 2018 with respect to these transactions. The EPUs were issued in 4 tranches and are separately convertible by either RBC or Newmark into a
manner intendedfixed number of shares of Newmark Class A common stock, subject to
qualify as generally tax-freea revenue hurdle in each of the fourth quarters of 2019 through 2022 for
U.S. federal income tax purposes.each of the respective 4 tranches. The
spin-offability to convert the EPUs into Newmark Class A common stock is subject to
the special purpose vehicle's (the "SPV's") option to settle the postpaid forward contracts as described below. As the EPUs represent equity ownership of a
numberconsolidated subsidiary of
conditions, and BGC may determine not to proceed with the spin-off if the BGC board of directors determines,Newmark, they have been included in
its sole discretion that the distribution is not in the best interest of BGC and its stockholders. Accordingly, the spin-off may not occur“Noncontrolling interests” on the
expected timeframe, or at all. Key steps that Newmark plansaccompanying unaudited condensed consolidated balance sheets and unaudited condensed consolidated statements of changes in equity. The EPUs are entitled to
take toward BGC’s tax-free spin-offa preferred payable-in-kind dividend, which is recorded as accretion to the carrying amount of
Newmark include: first, Newmark intendsthe EPUs through Retained earnings on the accompanying unaudited condensed consolidated statements of changes in equity and are reductions to
attain its own credit rating; and second, Newmark expects“Net income (loss) available to
repay or refinance its $812.5 million of long-term debt owed to or guaranteed by BGC. This is necessarycommon stockholders” for the
spin-off to be tax free.On November 22, 2017, BGC and Newmark entered into an amendment to an unsecured senior term loan credit agreement, dated aspurpose 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”), and as of the Separation this entire amount remained outstanding under the term loan credit agreement. Pursuant to the term loan amendment and effective as of the Separation, Newmark assumed the obligations of BGC as borrower under the Term Loan. Newmark used the proceeds, net of underwriting discounts and commissions from the IPO 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 connectioncalculating earnings per share.
Contemporaneously with the issuance of the
8.125% BGC Senior Notes, BGC lent the proceedsEPUs, an SPV that is a consolidated subsidiary 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 4 variable postpaid forward contracts with RBC (together, the “Nasdaq Forwards”). The SPV is an amended and restated credit agreement (the “Intercompany Credit Agreement”) with BGC, which amended and restatedindirect subsidiary of Newmark whose sole assets are the original intercompany credit agreement betweenNasdaq Earn-outs for 2019 through 2022. The Nasdaq Forwards provide the parties in relationSPV the option to settle using up to 992,247 Nasdaq shares, to be received by the SPV pursuant to the Separation, dated asNasdaq Earn-out shares to be received (see Note 7 — “Marketable Securities”), or Newmark Class A common stock, in exchange for either cash or redemption of December 13, 2017.the EPUs, notice of which must be provided to RBC prior to November 1 of each year from 2019 through 2022.
In September 2019, the SPV notified RBC of its decision to settle the first Nasdaq Forward using the Nasdaq shares the SPV received in November 2019 in exchange for the first tranche of the EPUs, which resulted in a payable to RBC that was settled upon receipt of Nasdaq Earn-out shares. The
Intercompany Credit Agreement provides for each partyfair value of the Nasdaq shares that Newmark received was $98.6 million. As a result of Newmark's settlement election, Newmark reclassified $93.5 million of EPUs from “Noncontrolling interest” to
issue revolving loans to the“Accounts payable, accrued expenses and other
party in the lender’s discretion. The interest rateliabilities” 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%. As of March 31, 2018, the amount outstanding under the Intercompany Facility was $202.0 million and is included in “Current portion of payables to related parties” on theits unaudited condensed consolidated balance
sheetssheets. On December 2, 2019, Newmark
recorded interest expensesettled the first Nasdaq Forward with 898,685 Nasdaq shares, with a fair value of
$1.0$93.5 million,
for the three months ended March 31, 2018, which is included in “Interest income, net” in the unaudited condensed consolidated statementand Newmark retained 93,562 Nasdaq shares. As of
operations.June 30, 2020, Newmark held no Nasdaq shares.
Newmark’s
The accompanying 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”). TheFor the year ended December 31, 2019, Newmark changed the line item formerly known as “Allocations of net income and grant of exchangeability to limited partnership units and FPUs and issuance of common stock” to “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the unaudited condensed consolidated financial
statements were prepared on a stand-alone basis derivedof operations and statements of cash flow. The change resulted in the reclassification of amortization charges related to equity-based awards, such as REUs and Restricted Stock Units (“RSUs”), from “Compensation and employee benefits” to “Equity-based compensation and allocations of net income to limited partnership units and FPUs.”
“Equity-based compensation and allocations of net income to limited partnership units and FPUs” reflect the financial statementsfollowing items related to cash and accounting records of BGC. For the periods presented, priorequity-based compensation:
Charges with respect to the
IPO, Newmark was an unincorporated reportable segmentgrant of
BGC. These unaudited condensed consolidated financial statements reflect the historical resultsshares of
operations, financial position and cash flows of Newmarkcommon stock or limited partnership units, such 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 resulted 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,HDUs, including in connection with the Separation,redemption of non-exchangeable limited partnership units, including PSUs;
Charges with respect to grants of exchangeability, such as the
assets and liabilitiesright of
BPF were transferredholders of limited partnership units with no capital accounts, such as PSUs, to
Newmark.The following tables summarizeexchange the impactunits into shares of common stock, or HDUs, as well as the cash paid in the settlement of the Berkeley Point Acquisitionrelated preferred units to Newmark’s consolidated statementspay withholding taxes owed by the unit holder upon such exchange;
Preferred units are granted in connection with the grant of
operations forcertain limited partnership units, such as PSUs, that may be granted exchangeability to cover the
three months ended March 31, 2017:withholding taxes owed by the unit holder, rather than issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes; | | 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 | |
Allocations of net income to limited partnership units and founding/working partner units (“FPUs”), including the Preferred Distribution (as hereinafter defined).
Intercompany balances and transactions within Newmark have been eliminated. Transactions between Cantor or BGC and Newmark pursuant to service agreements between Cantor and BGC (see Note
25—Related27 — “Related Party
Transactions)Transactions”),
representrepresenting valid receivables and liabilities of Newmark which are periodically cash settled, have been included
inon the
accompanying unaudited condensed consolidated financial statements as either receivables
tofrom or payables
fromto 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
allocateallocates certain of
theirits 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
inon the
accompanying 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 and or BGC. Actual costs that would have been incurred if Newmark had been a stand-alone companyperformed the services itself 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 “Receivables from related
party receivableparties or
payablePayables to related parties” 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
withinprior to the Spin-Off and in the operating section after the Spin-Off on the accompanying unaudited condensed consolidated statements of cash flows.
The income tax provision
inon the
accompanying unaudited condensed consolidated statements of operations and
unaudited condensed consolidated statements of comprehensive income has been calculated as if Newmark
washad been operating on a stand-alone basis and filed separate tax returns in the jurisdictions in which it operates.
Prior to the Spin-Off, Newmark’s operations
have historicallyhad 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
The accompanying 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 accompanying 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”) 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. The ASU replaced certain previously existing revenue recognition guidance. The FASB has subsequently issued several additional amendments to the standard, including ASU No. 2016-08, Revenue fromContracts with Customers (Topic 606):Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the guidance on principal versus agent analysis based on the notion of control and affects recognition of revenue on a gross or net basis. Newmark adopted the standardstandards as of itstheir 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’son the accompanying unaudited condensed consolidated statements of operations, with no material 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
standards, and as a result did not have
ana material impact on the elements of
Newmark’sthe accompanying 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 See Note 13 — “Revenues from Contracts with Customers” for additional information.
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to recognize a resultRight-of-use (“ROU”) asset and lease liability for all leases with terms of applying the new revenue standard to Newmark’s 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 eventsmore than 12 months. Recognition, measurement and the presentation of expenses incurredwill depend on behalfclassification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is mostly unchanged. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of customersthe new leases standard. The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other issues. In addition, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provided an additional (and optional) transition method to adopt the new leases standard. Under the new transition method, a reporting entity would initially apply the new lease requirements at the effective date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption; continue to report comparative periods presented in the financial statements in the period of adoption in accordance with legacy U.S. GAAP (i.e., ASC 840, Leases); and provide the required disclosures under ASC 840 for all periods presented under legacy U.S. GAAP. Further, ASU No. 2018-11 contains a practical expedient that allows lessors to avoid separating lease and associated non-lease components within a contract if certain management services subjectcriteria are met. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors, to reimbursement.clarify guidance for lessors on sales taxes and other similar taxes collected from lessees, certain lessor costs and recognition of variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU No. 2019-01,
Leases (Topic 842), Codification Improvements, to clarify certain application and transitional disclosure aspects of the new leases standard. The amendments address determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers and clarify interim period transition disclosure requirements, among other issues. The guidance in ASUs 2016-02, 2018-10, 2018-11 and 2018-20 was effective beginning January 1, 2019, with early adoption permitted; whereas the guidance in ASU No. 2019-01 is effective beginning January 1, 2020, with early adoption permitted. Newmark adopted the above mentioned standards on January 1, 2019 using the effective date as the date of initial application. Therefore, pursuant to this transition method, financial information was not updated and the disclosures required
under the new leases standards were not provided for dates and periods before January 1, 2019. The guidance provides a number of optional practical expedients to be utilized by lessees upon transition. Accordingly, Newmark elected the “package of practical expedients,” which permitted Newmark not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Newmark did not elect the use-of-hindsight or the practical expedient pertaining to land easements, with the latter not being applicable to Newmark. The new standard also provides practical expedients for an entity’s ongoing accounting as a lessee. Newmark elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, Newmark will not recognize ROU assets and lease liabilities, and this includes not recognizing ROU assets and lease liabilities for existing short-term leases of those assets upon transition. Newmark also elected the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate. As a result, upon adoption, acting primarily as a lessee, Newmark recognized a $178.8 million ROU asset, net of tenant improvements, and a $226.7 million lease liability on the accompanying unaudited condensed consolidated balance sheets for its real estate operating leases. The adoption of the guidance did not have a material impact on the accompanying unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of changes in equity and unaudited condensed consolidated statements of cash flows. See Note
3, Summary of Significant Accounting Policies and Note 12, Revenue from Contracts with Customers.18 — “Leases” for additional information on Newmark’s leasing arrangements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—OverallInstruments-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—OverallInstruments-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 No. 2016-01. The amendments in ASU No. 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 No. 2018-03 could be adopted concurrently with ASU No. 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’sthe accompanying unaudited condensed consolidated financial statements.
In AugustJune 2016, the FASB issued ASU No. 2016-15, Statement2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Cash Flows (Topic 230)—ClassificationCredit Losses on Financial Instruments, which requires financial assets that are measured at amortized cost to be presented, net of Certain Cash Receipts and Cash Payments, which makesan 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 how cash receiptscredit losses during the period, are recognized in earnings. For certain purchased financial assets with deterioration in credit quality since origination (“PCD assets”), the initial allowance for expected credit losses will be recorded as an increase to the purchase price. Expected credit losses, including losses on off-balance-sheet exposures, such as lending commitments, will be measured based on historical experience, current conditions, and cash payments are presentedreasonable and classified insupportable forecasts that affect the statementscollectability 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.reported amount. In November 2016,2018, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230)—Restricted Cash, which requires2018-19,
Codification Improvements to Topic 326, Financial Instruments-Credit Losses, to clarify that the statements of cash flows explain the change during the periodoperating lease receivables accounted for under ASC 842, Leases, are not in the totalscope of cash, cash equivalentsthe new credit losses guidance, and, instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The ASU makes changes to the guidance introduced or amended by ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments. See below for the description of the amendments stipulated in ASU No. 2019-04. In addition, in May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU allow entities, upon adoption of ASU No. 2016-13, to irrevocably elect the fair value option for financial instruments that were previously carried at amortized cost and are eligible for the fair value option under ASC 825-10, Financial Instruments: Overall. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The amendments in this ASU require entities to include certain expected recoveries of the amortized cost basis previously written off, or expected to be written off, in the allowance for credit losses for PCD assets; provide transition relief related to troubled debt restructurings; allow entities to exclude accrued interest amounts generally described as restricted cash or restricted cash equivalents.from certain required disclosures; and clarify the requirements for applying the collateral maintenance practical expedient. The new standard becameamendments in ASUs No. 2018-19, 2019-04, 2019-05 and 2019-11 are required to be adopted concurrently with the guidance in ASU No. 2016-13. Newmark adopted the standards on their required effective date beginning January 1, 2018 and required2020. The primary effect of adoption, on a retrospective basis. The effect of this guidancepre-tax basis, resulted in the inclusiona decrease in assets of restricted cash$8.0 million, an increase in the cashliabilities of $17.9 million and cash equivalents balance on Newmark’s unaudited condensed consolidated statementsa decrease in retained earnings of cash flows.$25.9 million, respectively.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) Clarifying-Clarifying the definitionDefinition 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’sthe accompanying 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. Newmark adopted the standard on its required effective date beginning January 1, 2020. The new guidance will be applied on a prospective basis. The adoption of the new guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of ASC 610-20, Other Income-Gains and Losses from Derecognition of Nonfinancial Assets, and defines in substance nonfinancial assets. The ASU also impacts the accounting for partial sales of nonfinancial assets (including in substance real estate). Under this guidance, when an entity transfers its controlling interest in a nonfinancial asset but retains a noncontrolling ownership interest, the entity is required to measure the retained interest at fair value, which results in a full gain or loss recognition upon the sale of a controlling interest in a nonfinancial asset. Newmark adopted the standard on its required effective date of January 1, 2018. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation—StockCompensation-Stock Compensation (Topic 718): Scope-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 for Newmark 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’sthe accompanying unaudited condensed consolidated financial statements.
| (c)
| New Accounting Pronouncements
|
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a right-of-use 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 finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is largely unchanged. The guidance is effective beginning January 1, 2019, with early adoption permitted. Management is currently evaluating the impact of the new guidance on Newmark’s unaudited condensed consolidated financial statements.
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.Activities. The guidance intends to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. Based on concerns about the sustainability of LIBOR, in 2017, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York identified a broad Treasury repurchase agreement (repo) financing rate referred to as the SOFR as its preferred alternative reference rate. The new standard will becomeguidance in ASU No. 2018-16 adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments in this ASU were required to be adopted concurrently with the guidance in ASU No. 2017-12. The guidance became effective beginning January 1, 2019 with early adoption permitted, and willwas required to be applied on a prospective basis and modified retrospective basis. Management isAs Newmark currently evaluatingdoes not designate any derivative contracts as hedges for accounting purposes, the impactadoption of thethis new guidance did not have a material impact on Newmark’sthe accompanying unaudited condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—ReportingStatement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.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 becomebecame effective beginningon January 1, 2019, with early adoption permitted.2019. The guidance shouldwas required to be applied to either in the period of adoption or retrospectivelyretrospective 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. ManagementNewmark adopted the new 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 the accompanying unaudited condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation--Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance largely aligns the accounting for share-based payment awards issued to employees and nonemployees, whereby the existing employee guidance will apply to non-employee share-based transactions (as long as the transaction is currently evaluatingnot 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 was required to be applied on a prospective basis to all new awards granted after the date of adoption. In addition, any liability-classified awards that were not been settled and equity-classified awards for which a measurement date had not been established by the adoption date were remeasured at fair value as of the adoption date with cumulative effect adjustment to opening retained earnings in the year of adoption. Newmark adopted this standard on its effective date. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The guidance is part of the FASB’s disclosure framework project, whose objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements. The ASU eliminates, amends and adds certain disclosure requirements for fair value measurements. The FASB concluded that these changes improve the overall usefulness of the footnote disclosures for financial statement users and reduce costs for preparers. Certain disclosures are required to be applied prospectively and other disclosures need to be adopted retrospectively in the period of adoption. As permitted by the transition methodguidance in the ASU, Newmark early adopted eliminated and modified disclosure requirements as of September 30, 2018. The early adoption of this standard did not have an impact on the accompanying unaudited condensed consolidated financial statements. The additional disclosure requirements were adopted by Newmark beginning January 1, 2020, and the adoption of the new guidance isthese fair value measurement disclosures did not expected to have a material effectan impact on 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 No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The guidance on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) applies to entities that are a customer in a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the guidance in this ASU. The new standard became effective beginning January 1, 2020. The adoption of this guidance did not have a material impact on the accompanying 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 became effective beginning January 1, 2020, with early adoption permitted, and must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Newmark adopted the standard on its effective date beginning January 1, 2020. The adoption of this guidance did not have a material impact on the accompanying unaudited condensed consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The ASU amends guidance introduced or amended by ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments to ASU No. 2016-13 clarify the scope of the credit losses standard and address guidance related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other issues. With respect to amendments to ASU No. 2017-12, the guidance addresses partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, along with other issues. The clarifying guidance pertaining to ASU No. 2016-01 requires an entity to remeasure an equity security without a readily determinable fair value accounted for under the measurement alternative at fair value in accordance with guidance in ASC 820, Fair Value Measurement; specifies that equity securities without a readily
determinable fair value denominated in nonfunctional currency must be remeasured at historical exchange rates; and provides fair value measurement disclosure guidance. Newmark adopted this standard on the required effective date beginning January 1, 2020. The adoption of the hedge accounting and the recognition and measurement guidance amendments did not have a material impact on Newmark’s unaudited condensed consolidated financial statements. See above for the impact of adoption of the amendments related to the credit losses standard.
In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. The guidance clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with already effective SEC final rules, thereby eliminating redundancies and making the codification easier to apply. This ASU was effective upon issuance and did not have a material impact on Newmark's unaudited condensed consolidated financial statements and related disclosures.
In November 2019, the FASB issued ASU No. 2019-08, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements-Share-Based Consideration Payable to a Customer. The ASU simplifies and increases comparability of accounting for nonemployee share-based payments, specifically those made to customers. Under the new guidance, such awards will be accounted for as a reduction of the transaction price in revenue, but should be measured and classified following the stock compensation guidance in ASC 718, Compensation-Stock Compensation. Newmark adopted standard on the required effective date beginning January 1, 2020. The adoption of this guidance did not have a material impact on Newmark’s unaudited condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. This ASU makes narrow-scope amendments related to various aspects pertaining to financial instruments and related disclosures by clarifying or improving the Codification. For the most part, the guidance was effective upon issuance, and the adoption of the standard did not have a material impact on Newmark’s unaudited condensed consolidated financial statements.
(2)
| Limited Partnership Interest in Newmark Holdings
|
| (c) | New Accounting Pronouncements |
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU is part of the FASB’s simplification initiative, and it is expected to reduce costs and complexity related to accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740, Income Taxes related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The new standard will become effective for Newmark beginning January 1, 2021 and, with certain exceptions, will be applied prospectively. Early adoption is permitted. Management is currently evaluating the impact of the new guidance on Newmark’s unaudited condensed consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force). These amendments improve current guidance by reducing diversity in practice and increasing comparability of the accounting for the interactions between these codification topics as they pertain to certain equity securities, investments under the equity method of accounting and forward contracts or purchased options to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option. The new standard will become effective for Newmark beginning January 1, 2021 and will be applied prospectively. Early adoption is permitted. Management is currently evaluating the impact of the new guidance on Newmark's unaudited condensed consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, and borrowings) necessitated by reference rate reform as entities transition away from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This ASU also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. Application of the guidance is optional and only available in certain situations. The ASU is effective upon issuance and generally can be applied through December 31, 2022. Management is currently evaluating the impact of the new guidance on the Newmark’s unaudited condensed consolidated financial statements.
(2) Limited Partnership Interests in Newmark Holdings and BGC Holdings
Newmark is a holding company with no direct operations and conducts substantially all of its operations through its operating subsidiaries. Virtually all of Newmark’s
condensed consolidated net assets and net income are those of
condensed consolidated variable interest entities. Newmark Holdings is a
condensed consolidated subsidiary of Newmark for which Newmark is the general partner. Newmark and Newmark Holdings jointly own Newmark OpCo, the operating partnership.
Listed below areIn connection with the
limitedSeparation and BGC Holdings Distribution, holders of BGC Holdings partnership interests received partnership interests in Newmark
Holdings. The founding/working partner units, limited partnership units, limited partnership interests held by Cantor (“Cantor units”) and limited partnership interests held by BGC (“BGC units”), each asHoldings, described
below. In addition, BGC Partners and its operating subsidiaries hold limited partnership interest in Newmark Holdings due to the Investment in Newmarkbelow (see Note
25—Related27 — “Related Party
Transactions)Transactions”). These collectively
represent all of the “limited partnership interests” in BGC Holdings and Newmark Holdings.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.
As a result of the Separation,
and Distribution Agreement, the limited partnership interests
in Newmark Holdings were distributed to the holders of limited partnership interests in BGC Holdings, whereby each holder of BGC Holdings limited partnership interests at that time holds a BGC Holdings limited partnership interest andreceived a corresponding Newmark Holdings limited partnership interest, determined by the contribution ratio (as hereafter defined), 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 shares of Newmark Class A common stock)stock (the “exchange ratio”)). As of March 31, 2018,Initially, the exchange ratio equaled one,1, so that each Newmark Holdings limited partnership interest iswas exchangeable for one1 share of Newmark Class A common stock,stock; however, such exchange ratio is subject to adjustment. For reinvestment, acquisition or other purposes, Newmark may determine on a quarterly basis to distribute to its stockholders a smaller percentage of its income than Newmark Holdings distributes to its equity holders (excluding tax distributions from Newmark Holdings) of the cash that it received from Newmark OpCo. In such circumstances, the Separation and Distribution Agreement provides that the exchange ratio will be reduced to reflect the amount of additional cash retained by Newmark as a result of the distribution of such smaller percentage, after the payment of taxes.
Founding/Working Partner Units
As of June 30, 2020, the exchange ratio equaled 0.9366.
Redeemable Partnership Interests
Founding/working partners have
a limited partnership
interestinterests (“FPUs”) in
BGC Holdings and Newmark Holdings. Newmark accounts for
founding/working partner units (“FPUs”)FPUs outside of permanent capital as “Redeemable partnership interests,”
in Newmark’son the accompanying 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 units
FPUs are held by limited partners who are primarily employees of BGC and generally receive quarterly allocations of net income. Upon termination of employment or otherwise ceasing to provide substantive services, the
founding/working partner unitsFPUs are generally redeemed, and the unit holders are no longer entitled to participate in the quarterly allocations of net income.
Since theseThese quarterly allocations of net income
are cash distributed on a quarterly basis and are contingent upon services being provided by the unit holder
theyand are reflected as a component of
“Netcompensation expense under “Equity-based compensation and allocations of net income
(loss) attributable to
non-controlling interests” in Newmark’slimited partnership units and FPUs” on the accompanying unaudited condensed consolidated statements of operations to the extent they
relatedrelate to
FPUs held by Newmark employees.
Limited Partnership Units
Certain employees of Newmark employees hold limited partnership interests in Newmark Holdings and BGC Holdings (e.g., REUs, RPUs, PSUs, PSIs, HDUs, and LPUs, collectively the “limited partnership units”).
Prior to the Separation, certain employees of both BGC and Newmark generally received limited partnership units in BGC Holdings. As a result of the Separation, these employees were distributed limited partnership units in Newmark Holdings equal to a BGC Holdings limited partnership unit multiplied by the contribution ratio. In addition, in the BGC Holdings Distribution, these employees also received additional limited partnership units in Newmark Holdings. Subsequent to the Separation, Newmark employees generally have been granted limited partnership units in Newmark Holdings.
Generally, such limited partnership units receive quarterly allocations of net income which are cash distributed and generally are contingent upon services being provided by the unit holders. As prescribed in U.S. GAAP guidance, prior to the Spin-Off, the quarterly allocations of net income on such limited partnership units were reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the 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 “Allocations“Equity-based compensation and allocations of net income and grant of exchangeability to limited partnership units” in Newmark’sunits and FPUs” on the accompanying 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” on the
accompanying unaudited condensed consolidated statements of operations. From time to time, Newmark issues limited partnership units as part of the consideration for acquisitions.
Certain of these limited partnership units
held by Newmark employees entitle the holders to receive post-termination payments equal to the notional amount of the units in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards, and in accordance with U.S. GAAP guidance, Newmark records compensation expense for the awards based on the change in value at each reporting date
inon the
Newmark’saccompanying unaudited condensed consolidated statements of operations as part of
“Compensation“Equity-based compensation and
employee benefits.allocations of net income to limited partnership units and FPUs.”
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” in Newmark’sunits and FPUs” on the accompanying 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
raterata share of economic ownership of the operating subsidiaries.
In addition, Preferred Units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder, rather than issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes.
Certain Newmark employees hold non-distribution earning units (e.g. NPSUs and NREUs, collectively “N Units”) that do not participate in quarterly partnership distributions and are not allocated any items of profit or loss. N Units become distribution earning limited partnership units, ratably over a four-year vesting term, if certain revenue thresholds are met at the end of each vesting term.
Cantor holds limited partnership interests in Newmark
Holdings.Holdings (“Cantor units”). Cantor units are reflected as a component of “Noncontrolling
interest” ininterests” on the
Newmark’saccompanying unaudited condensed consolidated balance sheets. Cantor receives
quarterly 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” in Newmark’sinterests” on the accompanying unaudited condensed consolidated statements of operations.
Prior to the Spin-Off, BGC and its operating subsidiaries
holdheld limited partnership interests in Newmark
Holdings.Holdings (“BGC Units”). Such BGC
units have beenUnits were reflected as a component of “Noncontrolling
interest” ininterests” on the
Newmark’saccompanying unaudited condensed consolidated balance sheets. BGC
and its operating subsidiaries received
quarterly allocations of net income (loss)
, on BGC Units, which
will be cash distributed on a quarterly basis and will bewere reflected as a component of “Net income (loss) attributable to noncontrolling
interest” in Newmark’sinterests” on the accompanying 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
The EPUs were issued in 4 tranches and are separately convertible by either RBC or Newmark into a fixed number of Newmark’s Class A common stock, subject to a revenue hurdle for Newmark in each of the fourth quarters of 2019 through 2022 for each of the 4 tranches, respectively. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in “Noncontrolling interests” on the 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 available to common stockholders” for the purpose of calculating earnings per share. (See Note 1 — “Organization and Basis of Presentation” for additional information).
Certain of the limited partnership interests, described above, have been granted exchangeability into BGC and/or Newmark Class A common stock, and additional limited partnership interests may become exchangeable for BGC and/or Newmark Class A common stock. At the time exchangeability is granted, Newmark recognizes an expense based on the fair value of the award on
that date, which is included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying unaudited condensed consolidated statements of operations. In addition,
certain limited partnership interests have been granted the
limitedright to exchange into a Newmark partnership unit with a capital account, such as HDUs. HDUs have a stated capital account which is initially based on the closing trading price of Newmark Class A common stock at the time the HDU is granted and are included in “Other long-term liabilities” on the accompanying unaudited condensed consolidated balance sheets. HDUs participate in quarterly partnership distributions and are not exchangeable into shares of Class A common stock. Limited partnership interests held by Cantor in
BGC Holdings and Newmark Holdings
as of June 30, 2020 are
generally exchangeable for
up to 34.622.7 million shares
of BGC Class B common stock and/or up to the authorized amount of Newmark Class B common stock.
In order forSubsequent to the Spin-Off, limited partnership interests in BGC Holdings held by 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 must 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), and as of immediately following the close of the first quarter of 2018 is equal to 0.4702. 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 Separation and Distribution Agreement (together referred to as “standalone”) intomay become exchangeable for BGC Class A or Class B common stock
is contingent upon the Newmark spin-off. After the spin-off, these standalone BGCon a one-for-one basis, and limited partnership interests
can thenin Newmark Holdings held by a partner or Cantor may become exchangeable
into BGCfor a number of shares of Newmark Class A or Class B common
stock.stock equal to the number of limited partnership interests multiplied by the exchange ratio at that time. As of June 30, 2020, the exchange ratio equaled 0.9366.
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” in Newmark’sinterests” on the accompanying 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 allocated to Cantor, and reflected in, “Net income (loss) attributable to noncontrolling interests,” to recover any losses taken in earlier quarters, with the remaining income allocated to the limited partnership interests. This income (loss) allocation process has no material impact on the net income (loss) allocated to common stockholders.
(3)
| Summary of Significant Accounting Policies
|
(3) Summary of Significant Accounting Policies
For a detailed discussion about Newmark’s significant accounting policies, see Note 3
Summary— “Summary of Significant Accounting Policies,
” in
ourNewmark’s consolidated financial statements included in Part II, Item 8 of
ourNewmark’s Annual Report on Form 10-K for the year ended December 31,
2017.2019. Other than the following,
during the three months ended March 31, 2018, there were no significant changes made to Newmark’s significant accounting
policies.Equity Investments:
Effectivepolicies during the three and six months ended June 30, 2020.
Current Expected Credit Losses ("CECL"):
Newmark adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments ("ASC 326"), and related amendments on January 1, 2018,2020, which created a new framework to evaluate credit losses arising from certain financial instruments. The CECL methodology represents a significant change from prior U.S. GAAP and replaced the prior impairment methods, which generally required that a loss be incurred before it was recognized. For financial instruments in accordance withscope, the new guidancemethodology generally results in the earlier recognition of the provision for credit losses and the related allowance for credit losses than under prior U.S. GAAP. Expected credit losses for newly recognized financial assets carried at amortized cost and credit exposures on recognitionoff-balance sheet financial guarantees, as well as changes to expected lifetime credit losses during the period, are recognized in earnings.
Financial guarantee liability
Newmark's adoption of ASC 326 impacted the reserving methodology for the loss-sharing guarantee provided to Fannie Mae under the DUS Program. The expected credit loss is modeled based on Newmark's historical loss experience adjusted to reflect current economic conditions. A significant amount of judgment is required in the determination of the appropriate reasonable and supportable period, the methodology used to incorporate current and future macroeconomic conditions, determination of the probability of and exposure at default or non-payment, current delinquency status, loan size, terms, amortization types, and the forward-looking view of the primary risk drivers (debt-service coverage ratio and loan-to-value), all of which are ultimately used in measuring the quantitative components of the reserve. Beyond the reasonable and supportable period, Newmark estimates expected credit losses using its historical loss rates. In addition, Newmark reviews the reserves periodically and makes adjustments for certain external and internal qualitative factors, which may increase or decrease the reserves for credit losses. In order to estimate credit losses, assumptions about current and future economic conditions are incorporated into the model using multiple economic scenarios that are weighted to reflect the conditions at each measurement date. As a result of the adoption of ASC 326, Newmark recorded a pre-tax increase to the loss sharing guarantee liability of $17.9 million through beginning stockholders' equity investments, on January 1, 2020.
Receivables
Newmark carrieshas accrued commissions receivable from real estate brokerage transactions, management services and other receivables from its marketable equity securities at fair valuecustomers. For its CECL reserve, Newmark segregated its receivables into certain pools based on similar risk characteristics and recognizes anyfurther defined a range of potential loss rates for each pool based on aging. Newmark designed its methodology to allow for a range of loss rates in each pool such that changes in fair valueforward-looking conditions can be incorporated into the estimate. Each pool is assigned a loss rate that incorporates management’s view of current conditions and forward-looking conditions that
inform the level of expected credit losses in
net income (loss). Further, Newmarkeach pool. The credit loss estimate includes specifically identified amounts for which payment has
elected to usebecome unlikely. As a
measurement alternative for its equity investments without a readily determinable fair value, pursuant to which these investments are initially recognized at cost and remeasured through earnings when there is an observable transaction involving the same or similar investmentresult of the
same issuer, or dueadoption of ASC 326, Newmark recorded a pre-tax increase to
an impairment. See Note 6—Marketable Securities and Note 7—Cost and Equity Method Investments for additional information. Newmark had unrealized gainsthe reserves of
$2.6$4.3 million
related to Marketable securities and Investments carried underthrough beginning stockholder's equity. During the
measurement alternative forduring the three months ended March 31,
2018.Revenue Recognition:
2020, there was an increase in the reserve by $2.8 million.
Loans, Forgivable Loans and Other Receivables from Employees and Partners
Newmark has entered into various agreements with certain of its employees and partners, whereby these individuals receive loans which may be either wholly or in part repaid from the distribution earnings that the individual receives on some or all of their limited partnership units or may be forgiven over a period of time. The accounting policy changesforgivable portion of these loans is not included in Newmark’s estimate of expected credit losses when employees meet the conditions for forgiveness through their continued employment over the specified time period, and is recognized as compensation expense over the life of the loan. The amounts due from terminated employees that Newmark does not expect to collect are attributable toincluded in the allowance for credit losses. As a result of the adoption of ASU No. 2014-09, Revenue from contracts with Customers and related amendmentsASC 326, Newmark recorded a pre-tax reserves of $3.7 million through beginning stockholders' equity on January 1, 2018.2020. No additional reserves were recorded during the three and six months ended June 30, 2020.
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
revenue recognition policy updatesadvances and loans are
applied prospectivelyrepayable in
Newmark’s
unaudited condensed consolidated financial statements from January 1, 2018 onward. Financial informationthe time frame outlined in the underlying agreements. Newmark reviews loan balances each reporting period for collectability. If Newmark determines that 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 paymentcollectability of first month’s rent), Newmark’s performance obligation is typically satisfied at lease signing and, therefore, thea portion of the commission thatloan balances is contingent onnot expected, Newmark recognizes a future event is recognizedreserve against the loan balances as revenue, if deemed not subject to significant reversal.
compensation expense.
Newmark has a single operating segment. Newmark is a real estate services firm offering services to commercial real estate tenants,
ownerinvestors, owners, 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 makerdecision-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, 2018 and 2017, Newmark recognized revenues as follows (in thousands):
| | | | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | | 2017 | | 2020 | | 2019 | | 2020 | | 2019 |
Leasing and other commissions | | $ | 159,371 | | | $ | 127,567 | | $ | 120,079 |
| | $ | 217,381 |
| | $ | 260,517 |
| | $ | 389,852 |
|
Capital markets | | | 101,364 | | | | 77,391 | | |
| Capital markets commissions | | 52,959 |
| | 128,750 |
| | 180,882 |
| | 231,547 |
|
Gains from mortgage banking activities/origination, net | | | 38,914 | | | | 45,262 | | 69,071 |
| | 45,091 |
| | 119,494 |
| | 76,437 |
|
Management services, servicing fees and other | | | 130,811 | | | | 82,362 | | 141,609 |
| | 160,256 |
| | 306,754 |
| | 301,298 |
|
Revenues | | $ | 430,460 | | | $ | 332,582 | | $ | 383,718 |
| | $ | 551,478 |
| | $ | 867,647 |
| | $ | 999,134 |
|
There were no acquisitions during the three months ended March 31, 2018.
On September 8, 2017, Newmark acquired from CCRE 100% 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—Organization 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). (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
In 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 and specializes in commercial real estate due diligence.
In September 2017,2020, Newmark completed the acquisition of six former Integra Realty Resources offices (Washington DC, Baltimore, Willmington, DE, New York/New Jersey, Philadelphiacertain assets of Hopkins Appraisal Services, a national leader in the valuation of restaurants and Atlanta offices). These firms specialize in valuation services, and the acquisition provides Newmark with greater geographic coverage.
retail petroleum facilities.
For the
yearsix months ended
December 31, 2017,June 30, 2020, the following
tables summarizetable summarizes 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.acquisition. Newmark expects to finalize its analysis of the assets acquired and liabilities assumed within the first year of the acquisition, and therefore adjustments to assets and liabilities may occur.
occur (in thousands): | | As of the Acquisition Date | |
Assets | | | | |
Cash and cash equivalents | | $ | 3,903 | |
Goodwill | | | 64,291 | |
Intangibles assets, net | | | 3,188 | |
Other assets | | | 9,234 | |
Total Assets | | | 80,616 | |
Current liabilities | | | | |
Accounts payable, accrued expenses and other liabilities | | | 7,119 | |
Total Liabilities | | | 7,119 | |
Noncontrolling interest | | | 19,145 | |
Net assets acquired | | $ | 54,352 | |
|
| | | |
| | As of the
Acquisition
Date |
| Purchase Price | |
|
| Cash and stock issued at closing | $ | 6,249 |
|
| Contingent consideration | 3,590 |
|
| Total | $ | 9,839 |
|
| | |
| Allocations | |
| Goodwill | $ | 6,294 |
|
| Other intangible assets, net | 2,700 |
|
| Receivables, net | 796 |
|
| Fixed Assets, net | 134 |
|
| Other assets | 29 |
|
| Accounts payable, accrued expenses and other liabilities | (114 | ) |
| Total | $ | 9,839 |
|
The total consideration for
acquisitionsthe acquisition during the
yearsix months ended
December 31, 2017June 30, 2020 was
approximately $55.6$9.8 million in total fair value,
comprisedcomprising cash of
cash,$5.9 million and
BGC Holdings limited partnership units.$0.4 million of RSUs. The total consideration included contingent consideration of
approximately 477,169 BGC’s Holding partnership units104,653 RSUs (with an acquisition date fair value of
approximately $5.0$1.3 million)
, and
$1.3$2.2 million in cash that may be issued contingent on certain targets being met through
2020.2022. The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill of
approximately $64.3$6.3 million, of which
$45.4$2.4 million is deductible by Newmark for tax purposes.
These
This acquisition was accounted for using the purchase method of accounting. The results of operations of the acquisition have been included on the accompanying unaudited condensed consolidated financial statements subsequent to the date of acquisition, which in aggregate contributed $1.4 million and $3.3 million to Newmark’s revenues for the three and six months ended June 30, 2020.
In April 2019, Newmark completed the acquisition of MLG Commercial LLC, a Milwaukee-based commercial real estate company offering both brokerage and property management services in Wisconsin.
In June 2019, Newmark completed the acquisition of ACRES, a commercial brokerage and management firm headquartered in Utah. ACRES operates offices in Salt Lake City, Utah; Boise, Idaho; and Reno, Nevada.
In December 2019, Newmark completed the acquisition of Harper Dennis Hobbs Holdings Limited, a tenant-focused real estate advisory services firm, based in London.
For the year ended December 31, 2019, the following table summarizes the components of the purchase consideration transferred, and the preliminary allocation of the assets acquired and liabilities assumed in connection with the acquisitions arein 2019 (in thousands):
|
| | | |
| | As of the
Acquisition
Date |
| Purchase Price | |
|
| Cash, stock and units issued at closing | $ | 38,826 |
|
| Contingent consideration | 18,067 |
|
| Total | $ | 56,893 |
|
| |
|
|
| Allocations | |
| Cash | $ | 1,391 |
|
| Goodwill | 43,804 |
|
| Other intangible assets, net | 9,641 |
|
| Receivables, net | 7,540 |
|
| Other assets | 614 |
|
| Accounts payable, accrued expenses and other liabilities | (3,972 | ) |
| Accrued compensation | (2,125 | ) |
| Total | $ | 56,893 |
|
The total consideration for acquisitions during the year ended December 31, 2019 was $56.9 million in total fair value, comprising cash and Newmark Holdings partnership units. The total consideration included contingent consideration of 327,692 Newmark Holdings partnership units (with an acquisition date fair value of $2.7 million), and $15.3 million in cash that may be issued contingent on certain targets being met through 2021. The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill of $43.8 million, of which $29.7 million is deductible by Newmark for tax purposes.
The 2019 acquisitions were accounted for using the purchase method of accounting. The results of operations of these acquisitions have been included in Newmark’son the accompanying unaudited condensed consolidated financial statements subsequent to their respective dates of acquisition, which in aggregate contributed $13.1$1.7 million to Newmark’s revenue for the yearthree and six months ended December 31, 2017.June 30, 2019.
(5)
| Earnings Per Share and Weighted-Average Shares Outstanding
|
(5) Earnings (Loss) Per Share and Weighted-Average Shares Outstanding
U.S. GAAP guidance—guidance —Earnings (Loss) Per Share provides guidance on the computation and presentation of earnings (loss) per share (“EPS”). Basic EPS excludes dilution and is computed by dividing Net income (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 Cantor units and BGCCantor units (see Note 2—Limited2 — “Limited Partnership InterestInterests in Newmark Holdings)Holdings and BGC Holdings”). In addition, in relation to the Newmark OpCo Preferred Investment, the EPUs issued in June 2018 and September 2018 are entitled to a preferred payable-in-kind dividend which is recorded as accretion to the carrying amount of the EPUs and is a reduction to net income available to common stockholders for the calculation of Newmark’s basic earnings per share and fully diluted earnings per share.
The following is the calculation of Newmark’s basic EPS (in thousands, except per share data):
| | Three Months Ended March 31, | |
| | 2018 | | | 2017 | |
Basic earnings per share: | | | | | | | | |
Net income available to common stockholders | | $ | 19,997 | | | $ | 36,711 | |
Basic weighted-average shares of common stock outstanding | | | 155,694 | | | N/A | |
Basic earnings per share | | | 0.13 | | | N/A | |
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Basic earnings (loss) per share: | |
| | |
| | | | |
Net income (loss) available to common stockholders (1) | $ | (2,131 | ) | | $ | 19,444 |
| | $ | 3,604 |
| | $ | 33,124 |
|
| Basic weighted-average shares of common stock outstanding | 178,523 |
| | 178,754 |
| | 178,034 |
| | 178,683 |
|
| Basic earnings (loss) per share | $ | (0.01 | ) | | $ | 0.11 |
| | $ | 0.02 |
| | $ | 0.19 |
|
| |
(1) | Includes a reduction for dividends on preferred stock or exchangeable preferred partnership units in the amount of $2.4 million and $4.9 million for the three and six months ended June 30, 2020, respectively, and $3.2 million and $6.4 million for the three and six months ended June 30, 2019 (see Note 1 — “Organization and Basis of Presentation”). |
Fully diluted EPS is calculated utilizing net 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.
The following is the calculation of Newmark’s fully diluted EPS (in thousands, except per share data):
| | Three Months Ended March 31, | |
| | 2018 | | | 2017 | |
Fully diluted earnings per share | | | | | | | | |
Net income available to common stockholders | | $ | 19,997 | | | $ | 36,711 | |
Allocations of net income to limited partnership interests in BGC Holdings and Newmark Holdings, net of tax | | | 10,289 | | | N/A | |
Net income for fully diluted shares | | $ | 30,286 | | | N/A | |
Weighted-average shares: | | | | | | | | |
Common stock outstanding | | | 155,694 | | | N/A | |
Partnership units1 | | | 90,222 | | | N/A | |
Other | | | 918 | | | N/A | |
Fully diluted weighted-average shares of common stock outstanding | | | 246,834 | | | N/A | |
Fully diluted earnings per share | | | 0.12 | | | N/A | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Fully diluted earnings (loss) per share: | | | | | | | |
| Net income (loss) available to common stockholders | $ | (2,131 | ) | | $ | 19,444 |
| | $ | 3,604 |
| | $ | 33,124 |
|
Allocations of net income (loss) to limited partnership interests in Newmark
Holdings, net of tax | — |
| | 3,864 |
| | — |
| | — |
|
| Net income (loss) for fully diluted shares | $ | (2,131 | ) | | $ | 23,308 |
| | $ | 3,604 |
| | $ | 33,124 |
|
| Weighted-average shares: | | | | | | | |
| Common stock outstanding | 178,523 |
| | 178,754 |
| | 178,034 |
| | 178,683 |
|
Partnership units (1) | — |
| | 28,769 |
| | — |
| | — |
|
| RSUs (Treasury stock method) | — |
| | 228 |
| | 442 |
| | 324 |
|
| Newmark exchange shares | — |
| | 399 |
| | 234 |
| | 427 |
|
| Fully diluted weighted-average shares of common stock outstanding | 178,523 |
| | 208,150 |
| | 178,710 |
| | 179,434 |
|
| Fully diluted earnings (loss) per share | $ | (0.01 | ) | | $ | 0.11 |
| | $ | 0.02 |
| | $ | 0.18 |
|
| |
1(1)
| Partnership units collectively include founding/working partner units, limited partnership units, and Cantor and BGC units (see Note 2—Limited2 — “Limited Partnership InterestInterests in Newmark Holdings and BGC Holdings” for more information). |
For the quarterthree and six months ended March 31, 2018, there were noJune 30, 2020, 97.5 million and 90.7 million potentially dilutive securities thatwere excluded from the computation of fully diluted EPS because their effect would have had an anti-dilutive effect.been anti-dilutive. Anti-dilutive securities for the three and six months ended June 30, 2020 included 86.9 million limited partnership units and 10.6 million RSUs, respectively, and 85.7 million limited partnership units and 5.0 million RSUs, respectively. For the three and six months ended June 30, 2019, 62.9 million and 90.9 million potentially dilutive securities were excluded from the computation of fully diluted EPS because their effect would have been anti-dilutive. Anti-dilutive securities for the three and six months ended June 30, 2019 were substantially all limited partnership units.
(6) Stock Transactions and Unit Redemptions
As of June 30, 2020, Newmark has 2 classes of authorized common stock: Class A common stock and Class B common stock.
Class A Common Stock
Each share of Class A common stock is entitled to 1 vote. Newmark has 1.0 billion authorized shares of Class A common stock at $0.01 par value per share.
Changes in shares of Newmark’s Class A common stock outstanding were as follows:
|
| | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Shares outstanding at beginning of period | 156,701,746 |
| | 157,422,916 |
| | 156,265,461 |
| | 156,916,336 |
|
| Share issuances: | | | | | | | |
LPU redemption/exchange (1) | 827,847 |
| | 747,846 |
| | 1,009,719 |
| | 1,122,776 |
|
| Issuance of Class A common stock for Newmark RSUs | 281,843 |
| | 51,406 |
| | 536,256 |
| | 174,605 |
|
| Other | — |
| | 70,391 |
| | — |
| | 78,842 |
|
| Treasury stock repurchases | — |
| | (1,613,032 | ) | | — |
| | (1,613,032 | ) |
| Shares outstanding at end of period | 157,811,436 |
| | 156,679,527 |
| | 157,811,436 |
| | 156,679,527 |
|
(6)
| Marketable Securities
|
(1) | Because they were included in the Newmark’s fully diluted share count, if dilutive, any exchange of LPUs into Class A common stock would not impact the fully diluted number of shares and units outstanding. |
Class B Common Stock
Each share of Class B common stock is entitled to 10 votes and is convertible at any time into 1 share of Class A common stock.
As of June 30, 2020 and 2019, there were 21.3 million shares of Newmark 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 Class A common stock and purchases of limited partnership interests or other equity interests in Newmark's subsidiaries up to $200 million. This authorization includes repurchases of shares or purchase of units from executive officers, other employees and partners, including of BGC and Cantor, as well as other affiliated persons or entities. From time to time, Newmark may actively continue to repurchase shares and/or purchase units. As of June 30, 2020, Newmark had repurchased 4.6 million shares of Class A common stock at an average price of $9.32. As of June 30, 2020, Newmark had $157.4 million remaining from its share repurchase and unit purchase authorization.
The following table details Newmark's share repurchase activity during 2020, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of Newmark's publicly announced repurchase program and the approximate value that may yet be purchased under such program (in thousands except share and per share amounts):
|
| | | | | | | | | | | | | |
| Period | Total Number of Shares Repurchased/Purchased | | Average Price Paid per Unit or Share | | Total Number of Shares Repurchased as Part of Publicly Announced Program | | Approximate Dollar Value of Units and Shares That May Yet Be Repurchased/ Purchased Under the Program |
| Balance, January 1, 2020 | 4,568,002 |
| | $ | 9.32 |
| | 4,568,002 |
| | $ | 157,413 |
|
| January 1, 2020 - March 31, 2020 | — |
| | — |
| | — |
| | — |
|
| April 1, 2020 - June 30, 2020 | — |
| | — |
| | — |
| | — |
|
| Total | 4,568,002 |
| | $ | 9.32 |
| | 4,568,002 |
| | $ | 157,413 |
|
Redeemable Partnership Interests
The changes in the carrying amount of FPUs as of June 30, 2020 and December 31, 2019 were as follows (in thousands):
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Balance at beginning of period: | $ | 21,517 |
| | $ | 26,170 |
|
| Income allocation | 6 |
| | 5,288 |
|
| Distributions of income | — |
| | (5,355 | ) |
| Redemptions | (280 | ) | | (927 | ) |
| Issuance and other | — |
| | (3,659 | ) |
| Balance at end of period | $ | 21,243 |
| | $ | 21,517 |
|
(7) Marketable Securities
On June 28, 2013, BGC sold certain assets of
eSpeed, its on-the-run
electronic benchmark U.S. Treasury platform (“eSpeed”)business, to Nasdaq. The total consideration received
by BGC in the transaction included
an earn-outthe Nasdaq 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. 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”). Thecontingencies. BGC transferred the remaining rights under the Nasdaq
Earn-Out were transferredEarn-out to Newmark on September 28, 2017. Any Nasdaq shares that were received by BGC prior to September 28, 2017 were not transferred to Newmark.
In connection with the Nasdaq Earn-Out,Earn-out, Newmark received 992,247 shares during the year ended December 31, 2017.2019. Newmark will receive arecognize the remaining Earn-OutNasdaq Earn-out of up to 9,922,4707,937,976 shares of Nasdaq common stock ratably over approximately the next approximately 108 years, provided that Nasdaq, as a whole, produces at least $25.0 million in gross revenues each year. DuringFor further information, refer to the section titled “Exchangeable Preferred Partnership Units and Forward Contracts” 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 343,562 of the Nasdaq shares during the three months ended March 31, 2018,2020 and 250,000 and 150,000 for the three and six months ended June 30, 2019, respectively. Newmark sold 650,000 sharesreceived gross proceeds of $34.6 million during the three and six months ended June 30, 2020 and $13.1 million and $22.2 million during the three and six months ended June 30, 2019, respectively, on 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 $52.2 million. For the three months ended March 31, 2018,sold. Newmark recognized a gainloss on the sale of these securitiesshares of $2.4 million. For$2.2 million for the three and six months ended March 31, 2018, Newmark also recorded an unrealizedJune 30, 2020 and a gain of $0.8$1.9 million and $1.8 million for the three and six months ended June 30, 2019, respectively. Newmark did not record unrealized gains or losses on the mark to marketmark-to-market of these securities which isfor the three and six months ended June 30, 2020. Newmark recorded unrealized gains on the mark-to-market of these securities of $1.2 million and $5.1 million for the three and six months ended June 30, 2019, respectively. Realized and unrealized gains on the mark-to-market of these shares are included in “Other income, net” in Newmark’son the accompanying unaudited condensed consolidated statementstatements of operations. As of March 31, 2018 andJune 30 2020, Newmark held no Nasdaq shares. As of December 31, 2017,2019, Newmark had $8.6held $36.8 million and $57.6 million, respectivelyof Nasdaq shares, included in “Marketable securities” on itsthe accompanying unaudited condensed consolidated balance sheetsheets (see Note 18—Securities Loans)20 — “Securities Loaned”).
(7)
| Cost and Equity Method
|
| (8) | Investments |
Newmark has a 27% ownership in Real Estate LP, a joint venture with Cantor in which Newmark has the ability to exert significant influence over the operating and financial policies. Accordingly, Newmark accounts for this investment under the equity method of accounting.
ForNewmark recognized equity (loss) income of $(4.1) million and $4.8 million for the three
and six months ended
MarchJune 30, 2020 and 2019, respectively. Newmark did 0t receive any distributions for the three and six months ended June 30, 2020 and 2019, respectively. Newmark received distributions of $8.6 million for the year ended December 31,
2018, Newmark recognized $3.22019. The carrying value of these investments was $95.9 million
and $100.0 million as of
equity income included in “Other income, net” in its unaudited condensed consolidated statements of operations. As of March 31, 2018June 30, 2020 and December 31,
2017, Newmark had $104.7 million and $101.6 million,2019, respectively,
in an equity method investment, and is included in “Other assets”
in Newmark’son the accompanying unaudited condensed consolidated balance sheets.
Investments Carried Under
Measurements AlternativeMeasurement Alternatives
Newmark had previouslyhas acquired investments in entities for which it diddoes not have the ability to exert significant influence over operating and financial policiespolicies.
For the three and six months ended June 30, 2020, Newmark recorded an unrealized loss of
the investees. Prior$10.0 million and $26.8 million related to
January 1, 2018, these investments,
were accountedrespectively. Newmark recognized an unrealized gain of $3.9 million for
using the
cost methodthree and six months ended June 30, 2019 as a result of changes in
accordance with U.S. GAAP guidance, Investments—Other.the fair value of its instruments. Newmark did not record realized gains or losses for the three and six months ended June 30, 2020 and 2019, respectively. The unrealized loss is included as a part of “Other income (loss), net” on the accompanying unaudited condensed consolidated statements of operations. The carrying value of
the cost methodthese investments was
$6.0$67.3 million and
$94.1 million and is included in “Other assets” inon the Newmark’saccompanying unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2017. Newmark did not recognize any gain or loss relating to cost method investments for the three months ended March 31, 2017.
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 million and is included in “Other assets” in the Newmark’s unaudited condensed statements balance sheets as of March 31, 2018. Newmark did not recognize any gains, losses, or impairments relating to investments carried under the measurement alternative for the three months ended March 31, 2018.
2019, respectively.
(8)
| |
| (9) | Capital and Liquidity Requirements |
Newmark is subject to various capital requirements in connection with seller/servicer agreements that Newmark has entered into with the various GSEs. Failure to maintain minimum capital requirements could result in Newmark’s inability to originate and service loans for the respective GSEs and could have a direct material adverse effect on
Newmark’sthe accompanying unaudited condensed consolidated financial statements. Management believes that, as of
March 31, 2018June 30, 2020 and December 31,
2017,2019, Newmark
hashad met all capital requirements. As of
March 31, 2018,June 30, 2020, the most restrictive capital requirement was
Fannie Mae’sthe net worth
requirement.requirement of the Federal National Mortgage Association (“Fannie Mae”). Newmark exceeded the minimum requirement by
$426.0$343.1 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
the Federal Home Loan Mortgage Corporation (“Freddie
MacMac”) 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, 2018June 30, 2020 and December 31,
2017,2019, Newmark
hashad met all liquidity requirements.
In addition, as a servicer for Fannie Mae, GNMAthe Government National Mortgage Association (“Ginnie 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, 2018June 30, 2020 and December 31, 2017,2019, outstanding borrower advances were approximately $0.1$1.0 million and $0.3 million, respectively, and are included in “Other assets” in Newmark’son the accompanying unaudited condensed consolidated balance sheets.
(9)
| |
| (10) | Loans Held for Sale, at Fair Value |
Loans held for sale,
at fair value represent originated loans that are typically
financed by short-term warehouse facilities (see Note 21 — “Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises”) and sold within 45 days from the date
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
loanloans 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 |
| June 30, 2020 | $ | 1,064,271 |
| | $ | 1,089,429 |
|
| December 31, 2019 | 210,116 |
| | 215,290 |
|
As of
March 31, 2018June 30, 2020 and December 31,
2017,2019, 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 June 30, 2020 and December 31, 2019, there were
no0 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$6.3 million and $6.5 million for the three months ended
March 31, 2018June 30, 2020 and
2017,2019, respectively, and $12.1 million and $15.1 million for the six months ended June 30, 2020 and 2019, respectively. Interest income on loans held for sale
inis included in “Management services, servicing fees and other”
in Newmark’son the accompanying unaudited condensed consolidated statements of operations.
DuringGains for the fair value adjustments on loans held for sale were $10.9 million and $12.4 million for the three months ended
March 31, 2018June 30, 2020 and
2017, Newmark also recognized gains of $15.12019, respectively, and
$2.1$25.2 million
respectively,and $25.7 million for the
change in fair value on loans held for sale.six months ended June 30, 2020 and 2019, respectively. These gains were included in “Gains from mortgage banking
activity/activities/originations, net”
in Newmark’son the accompanying unaudited condensed consolidated statements of operations.
Newmark accounts for its derivatives at fair value and
recognizedrecognizes all derivatives as either assets or liabilities
in itson the accompanying 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 transactionsIn addition, Newmark has entered into the Nasdaq Forwards (see Note 1 — “Organization and Basis of Presentation”) that are accounted for as derivatives.
The fair value of derivative contracts, computed in accordance with
the Newmark’s netting policy, is set forth below (in thousands):
| | March 31, 2018 | | | December 31, 2017 | |
| | | | | | | | | | Notional | | | | | | | | | | | Notional | |
Derivative contract | | Assets | | | Liabilities | | | Amounts (1) | | | Assets | | | Liabilities | | | Amounts(1) | |
Forwards | | $ | 9,687 | | | $ | 2,421 | | | $ | 1,324,711 | | | $ | 3,753 | | | $ | 657 | | | $ | 541,359 | |
Rate lock commitments | | | 8,750 | | | | 8,980 | | | | 374,197 | | | | 2,923 | | | | 2,390 | | | | 180,918 | |
Total | | $ | 18,437 | | | $ | 11,401 | | | | | | | $ | 6,676 | | | $ | 3,047 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2020 | | As of December 31, 2019 |
| Derivative contract | Assets | | Liabilities | | Notional Amounts(1) | | Assets | | Liabilities | | Notional Amounts(1) |
| Rate lock commitments | $ | 50,170 |
| | $ | 1,114 |
| | $ | 390,213 |
| | $ | 32,035 |
| | $ | 12,124 |
| | $ | 1,396,827 |
|
| Nasdaq Forwards | 24,730 |
| | — |
| | 267,480 |
| | 26,502 |
| | — |
| | 267,480 |
|
| Forward sale contracts | 2,325 |
| | 50,617 |
| | 1,454,484 |
| | 14,389 |
| | 13,537 |
| | 1,606,943 |
|
| Total | $ | 77,225 |
| | $ | 51,731 |
| | $ | 2,112,177 |
| | $ | 72,926 |
| | $ | 25,661 |
| | $ | 3,271,250 |
|
(1)
| |
(1) | Notional amounts represent the sum of gross long and short derivative contracts, an indication of the volume of Newmark’s derivative activity, and doesdo not represent anticipated losses. |
The change in fair value of rate lock commitments and forward sale contracts related to mortgage loans are reported as part of
“Gain“Gains from mortgage banking activities/originations, net”
in Newmark’son the accompanying unaudited condensed consolidated statements of operations. The change in fair value of rate lock commitments are disclosed net of
expenses of $2.5$0.5 million and
$0.8$0.2 million
of income for the three months ended
March 31, 2018June 30, 2020 and
2017, which2019, respectively, and $0.9 million and $1.9 million of expenses for the six months ended June 30, 2020 and 2019, respectively. The changes in fair value of rate lock commitments are reported as part of “Compensation and employee benefits”
inon the
Newmark’saccompanying unaudited condensed consolidated statements of operations.
The fair value of Newmark’s derivatives for rate lock commitments
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” inon the unaudited condensed consolidated statements of
operations:operations were as follows (in thousands): | | | | Location of gain (loss) recognized | | Three Months Ended March 31, | | Location of gain (loss) recognized in income for derivatives | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | in income for derivatives | | 2018 | | | 2017 | | | 2020 | | 2019 | | 2020 | | 2019 |
Derivatives not designed as hedging instruments: | | | | | | | | | | | | | |
| | |
| | | | |
| Nasdaq Forwards | | Other income (loss), net | | $ | (22,945 | ) | | $ | (15,638 | ) | | $ | (1,772 | ) | | $ | (28,967 | ) |
Rate lock commitments | | Gains from mortgage banking activities/originations, net | | $ | 2,269 | | | $ | 132 | | Gains from mortgage banking activities/originations, net | | (10,208 | ) | | 14,292 |
| | 49,955 |
| | 21,379 |
|
Rate lock commitments | | Compensation and employee benefits | | | (2,500 | ) | | | (807 | ) | Compensation and employee benefits | | 512 |
| | 211 |
| | (899 | ) | | (1,856 | ) |
Forward sale contracts | | Gains from mortgage banking activities/originations, net | | | 7,266 | | | | 3,317 | | Gains (loss) from mortgage banking activities/originations, net | | 29,388 |
| | (20,784 | ) | | (48,292 | ) | | (24,416 | ) |
| | | | $ | 7,035 | | | $ | 2,642 | | |
| Total | | | | $ | (3,253 | ) | | $ | (21,919 | ) | | $ | (1,008 | ) | | $ | (33,860 | ) |
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.liabilities”, on the accompanying unaudited condensed consolidated balance sheets.
(11)
| |
| (12) | Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit and Contingent Liability |
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 Note
21—Financial23 — “Financial Guarantee
Liability)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
servingservicing agreements that occurred prior to March 9, 2012. For the three
and six months ended
March 31, 2018June 30, 2020 and
20172019, there were
no0 reimbursements under
this agreement.the CEA.
Credit enhancement receivable
At March 31, 2018, Newmark had $18.9 billion of credit risk loans in its
Newmark's servicing portfolio with a maximum pre-credit enhancement loss exposure of $5.4 billion. Newmark had a form of credit protection from DB Cayman on $0.4 billion of credit risk loans with a maximum loss exposure coverage of $0.1 billion. The amountconsisted of the maximum loss exposure without any formfollowing loss-sharing components (in thousands):
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Total credit risk loan portfolio | $ | 21,466,665 |
| | $ | 20,209,577 |
|
| Maximum DB Cayman credit protection | 28,994 |
| | 29,253 |
|
| | | | |
| Maximum pre-credit enhancement loss exposure | $ | 6,315,566 |
| | $ | 5,835,163 |
|
| Maximum DB Cayman credit protection | 9,665 |
| | 9,751 |
|
| Maximum loss exposure without any form of credit protection | $ | 6,305,901 |
| | $ | 5,825,412 |
|
As of
credit protection from DB Cayman was $5.3 billion.
AtJune 30, 2020 and December 31, 2017, Newmark had $18.8 billion of credit risk loans in its servicing portfolio with a maximum pre-credit enhancement loss exposure of $5.3 billion. Newmark had a form of credit protection from DB Cayman on $4.2 billion of credit risk loans with a maximum loss exposure coverage of $1.2 billion. The amount of the maximum loss exposure without any form of credit protection from DB Cayman was $4.1 billion.
As of March 31, 2018,2019, there was nowere 0 credit 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.
receivables.
Credit enhancement deposit
The CEA required the DB Entities to deposit
$25$25.0 million into Newmark’s Fannie Mae restricted liquidity account (see Note
8—Capital9 — “Capital and Liquidity
Requirements)Requirements”), which Newmark is required to return to DB Cayman, less any outstanding claims, on March 9, 2021. The
$25$25.0 million deposit is included in
“Restricted cash”“Accounts payable, accrued expenses and
other liabilities” on the
offsetting liability in “Other long-term liabilities” in Newmark’s unaudited
accompanying condensed consolidated balance sheets.
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$25.0 million, and (b) Newmark’s unreimbursed loss-sharing payments from March 9, 2012 through March 9, 2021 on Newmark’s servicing portfolio as of March 9, 2012.
Contingent liabilities as of March 31, 2018June 30, 2020 and December 31, 20172019 were $10.7$12.2 million and $10.7$11.8 million, respectively and are included in “Other long-term liabilities” in Newmark’son the accompanying unaudited condensed consolidated balance sheets.
(12)
| Revenues from Contracts with Customers
|
(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, | |
| | 2018 | |
Revenues from contracts with customers: | | | | |
Leasing and other commissions | | $ | 159,371 | |
Capital markets | | | 101,364 | |
Management services | | | 96,933 | |
Revenues | | | 357,668 | |
Other sources of revenue: | | | | |
Gains from mortgage banking activities/originations, net(1) | | | 38,914 | |
Servicing fees and other(1) | | | 33,878 | |
Revenues | | $ | 430,460 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Revenues from contracts with customers: | | | | | | | |
| Leasing and other commissions | $ | 120,079 |
| | $ | 217,381 |
| | $ | 260,517 |
| | $ | 389,852 |
|
| Capital markets commissions | 52,959 |
| | 128,750 |
| | 180,882 |
| | 231,547 |
|
| Management services | 105,097 |
| | 117,472 |
| | 230,667 |
| | 215,560 |
|
| Total | 278,135 |
| | 463,603 |
| | 672,066 |
| | 836,959 |
|
Other sources of revenue(1): | | | | | | | |
| Gains from mortgage banking activities/originations, net | 69,071 |
| | 45,091 |
| | 119,494 |
| | 76,437 |
|
| Servicing fees and other | 36,512 |
| | 42,784 |
| | 76,087 |
| | 85,738 |
|
| Total | $ | 383,718 |
| | $ | 551,478 |
| | $ | 867,647 |
| | $ | 999,134 |
|
(1)
| |
(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. 2014-09.2014-9. |
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 | |
(1)
| The amounts reflect each affected financial statement line item as they would have been reported under U.S. GAAP, prior to the adoption of the new revenue standard.
|
| | 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 | |
(1)
| The amounts reflect each affected financial statement line item as they would have been reported under U.S. GAAP, prior to the adoption of the new revenue standard
|
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
revenues
Newmark’s chief operating
decision makerdecision-maker, regardless of geographic location, evaluates the operating results,
including revenues, of Newmark as total real
estate. Seeestate (see Note 3
Summary— “Summary of Significant Accounting
PoliciesPolicies” for further
discussion.discussion).
Contract
Balancesbalances
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
MarchJune 30, 2020 and December 31,
2018 and January 1, 20182019 was
$3.9$2.3 million and
$4.6$4.2 million, respectively. During the
threesix months ended
March 31, 2018,June 30, 2020 and 2019, Newmark recognized revenue of
$1.8$1.9 million
and $1.2 million, respectively, 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.
(13)
| |
| (14) | 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, | |
| | 2018 | | | 2017 | |
Loan originations related fees and sales premiums, net | | $ | 17,817 | | | $ | 15,952 | |
Fair value of expected net future cash flows from servicing recognized at commitment, net | | | 21,097 | | | | 29,310 | |
Gains from mortgage banking activities/originations, net | | $ | 38,914 | | | $ | 45,262 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Fair value of expected net future cash flows from servicing recognized at commitment, net | $ | 42,128 |
| | $ | 24,856 |
| | $ | 71,475 |
| | $ | 41,234 |
|
| Loan originations related fees and sales premiums, net | 26,943 |
| | 20,235 |
| | 48,019 |
| | 35,203 |
|
| Total | $ | 69,071 |
| | $ | 45,091 |
| | $ | 119,494 |
| | $ | 76,437 |
|
(14)
| |
| (15) | Mortgage Servicing Rights,Net (MSR) |
A summary
The changes in the carrying amount of
the activity in mortgage servicing rights by class for the three months ended March 31, 2018 and 2017 isMSRs were as follows (in thousands):
| | | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
Mortgage Servicing Rights | | 2018 | | | 2017 | | | 2020 | | 2019 | | 2020 | | 2019 |
Beginning Balance | | $ | 399,349 | | | $ | 347,558 | | | $ | 449,391 |
| | $ | 413,004 |
| | $ | 432,666 |
| | $ | 416,131 |
|
Additions | | | 6,389 | | | | 28,806 | | | 34,598 |
| | 21,433 |
| | 73,565 |
| | 38,687 |
|
Purchases from an affiliate | | | 509 | | | | — | | | 108 |
| | 424 |
| | 200 |
| | 722 |
|
Amortization | | | (19,294 | ) | | | (17,175 | ) | | (23,624 | ) | | (21,436 | ) | | (45,958 | ) | | (42,115 | ) |
Ending Balance | | $ | 386,953 | | | $ | 359,189 | | | $ | 460,473 |
| | $ | 413,425 |
| | $ | 460,473 |
| | $ | 413,425 |
|
| | | | | | | | | | |
Valuation Allowance | | | | | | | | | | | | | | | | |
Beginning Balance | | $ | (6,723 | ) | | $ | (7,742 | ) | | $ | (36,578 | ) | | $ | (6,044 | ) | | $ | (19,022 | ) | | $ | (4,322 | ) |
Decrease | | | 1,296 | | | | 3,168 | | |
| Decrease (increase) | | | (663 | ) | | (6,598 | ) | | (18,219 | ) | | (8,320 | ) |
Ending Balance | | $ | (5,427 | ) | | $ | (4,574 | ) | | $ | (37,241 | ) | | $ | (12,642 | ) | | $ | (37,241 | ) | | $ | (12,642 | ) |
Net balance | | $ | 381,526 | | | $ | 354,615 | | |
| Net Balance | | | $ | 423,232 |
| | $ | 400,783 |
| | $ | 423,232 |
| | $ | 400,783 |
|
Servicing fees are included in “Management services, servicing fees and other”
in Newmark’son the accompanying unaudited condensed consolidated statements of operations and
arewere as follows (in thousands):
| | | | Three Months Ended March 31, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | | 2017 | | 2020 | | 2019 | | 2020 | | 2019 |
Servicing fees | | $ | 25,132 | | | $ | 22,050 | | $ | 28,250 |
| | $ | 25,977 |
| | $ | 54,915 |
| | $ | 51,608 |
|
Escrow interest and placement fees | | | 2,967 | | | | 1,459 | | 727 |
| | 5,624 |
| | 4,119 |
| | 10,987 |
|
Ancillary fees | | | 827 | | | | 1,323 | | 1,283 |
| | 4,131 |
| | 3,524 |
| | 7,315 |
|
Total servicing fees and escrow interest | | $ | 28,926 | | | $ | 24,832 | | |
| Total | | $ | 30,260 |
| | $ | 35,732 |
| | $ | 62,558 |
| | $ | 69,910 |
|
Newmark’s primary servicing portfolio at
March 31, 2018June 30, 2020 and December 31,
20172019 was
approximately $55.1$62.8 billion and
$54.2$59.9 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
was $2.4 billion at
March 31, 2018June 30, 2020 and December 31,
2017 was $3.6 billion and $3.8 billion,2019, respectively.
The estimated fair value of the MSRs at March 31, 2018June 30, 2020 and December 31, 20172019 was $ 422.2$448.4 million and $418.1$441.7 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 threesix months ended March 31, 2018June 30, 2020 and for the year ended December 31, 2017 was2019 were between 6.1% and 13.5%, and 3.0% and 13.5%, respectively, and varied based on investor type. An increase in discount rate of 100 bpsbasis points or 200 bpsbasis points would result in a decrease in fair value by $13.7$12.1 million and $25.0$23.7 million, respectively, at March 31, 2018. An increase in discount rate of 100 bps or 200 bps would result in a decrease in fair valueJune 30, 2020 and by $11.8$11.9 million and $23.0$23.3 million, respectively, at December 31, 2017.2019.
(15)
| Goodwill and Other Intangible Assets, Net of Accumulated Amortization
|
(16) Goodwill and Other Intangible Assets, Net
The changes in the carrying amount of goodwill
the three months ended March 31, 2018 and the year ended December 31, 2017 were as follows (in thousands):
Balance at December 31, 2016 | | $ | 412,846 | | |
| | | Balance, January 1, 2019 | | $ | 515,321 |
|
Acquisitions | | | 64,291 | | 43,804 |
|
Measurement period adjustments | | | 395 | | (1,211 | ) |
Balance at December 31, 2017 | | | 477,532 | | |
| Balance, December 31, 2019 | | 557,914 |
|
Acquisitions | | | — | | 6,294 |
|
Measurement period adjustments | | | (2,542 | ) | (4,305 | ) |
Balance at March 31, 2018 | | $ | 474,990 | | |
| Balance, June 30, 2020 | | $ | 559,903 |
|
During the three months ended March 31, 2018, Newmark recognized measurement period adjustments of approximately $(2.5) million. Newmark did not have any additions to goodwill as a result of acquisitions for the three months ended March 31, 2018. During the years ended December 31, 2017, Newmark recognized additional goodwill and measurement period adjustments of approximately $64.3 million and $0.4 million, respectively. See Note 4—Acquisitions for more 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.Assets. Newmark completed its annual goodwill impairment testing duringfor the fourth quarter of 2017,year ended December 31, 2019, which did not0t result in anya goodwill impairment.impairment (see Note 4 — “Acquisitions” for more information).
Other intangible assets consisted of the following
at March 31, 2018 and December 31, 2017 (in thousands, except
weighted averageweighted-average life):
| | | | March 31, 2018 | | June 30, 2020 |
| | 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 | | 10,913 |
| | (9,379 | ) | | 1,534 |
| | 0.3 |
Non-contractual customers | | | 10,447 | | | | (2,407 | ) | | | 8,040 | | | | 2.5 | | 30,131 |
| | (7,884 | ) | | 22,247 |
| | 7.2 |
License agreements | | | 4,981 | | | | (1,548 | ) | | | 3,433 | | | | 0.7 | | 4,981 |
| | (3,779 | ) | | 1,202 |
| | 0.1 |
Non-compete agreements | | | 3,608 | | | | (642 | ) | | | 2,966 | | | | 1.1 | | 7,067 |
| | (2,921 | ) | | 4,146 |
| | 0.8 |
Contractual customers | | | 1,452 | | | | (664 | ) | | | 788 | | | | 0.2 | | 3,052 |
| | (1,380 | ) | | 1,672 |
| | 0.4 |
Below market leases | | | 15 | | | | (14 | ) | | | 1 | | | | — | | 941 |
| | (180 | ) | | 761 |
| | 0.3 |
| | $ | 37,354 | | | $ | (11,458 | ) | | $ | 25,896 | | | | 4.6 | | |
| Total | | $ | 73,825 |
| | $ | (25,523 | ) | | $ | 48,302 |
| | 5.2 |
| | | | December 31, 2017 | | December 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 | | | | (6,030 | ) | | | 1,031 | | | | 0.2 | | 10,511 |
| | (9,070 | ) | | 1,441 |
| | 0.1 |
Non-contractual customers | | | 7,950 | | | | (1,495 | ) | | | 6,455 | | | | 2.5 | | 24,262 |
| | (6,109 | ) | | 18,153 |
| | 7.4 |
License agreements | | | 4,981 | | | | (1,298 | ) | | | 3,683 | | | | 0.9 | | 4,981 |
| | (3,288 | ) | | 1,693 |
| | 0.1 |
Non-compete agreements | | | 3,606 | | | | (496 | ) | | | 3,110 | | | | 1.2 | | 6,953 |
| | (2,434 | ) | | 4,519 |
| | 0.8 |
Contractual customers | | | 1,452 | | | | (602 | ) | | | 850 | | | | 0.2 | | 3,052 |
| | (1,177 | ) | | 1,875 |
| | 0.5 |
Below market leases | | | 15 | | | | (13 | ) | | | 2 | | | | — | | 941 |
| | (136 | ) | | 805 |
| | 0.3 |
| | $ | 34,855 | | | $ | (9,934 | ) | | $ | 24,921 | | | | 5.0 | | |
| Total | | $ | 67,440 |
| | $ | (22,214 | ) | | $ | 45,226 |
| | 4.9 |
Intangible amortization expense for the three months ended
March 31, 2018June 30, 2020 and
20172019 was
$1.5$1.7 million and $1.3 million,
respectively, and $3.4 million and $2.6 million for the six months ended June 30, 2020 and 2019, respectively. Intangible amortization is included as a part of “Depreciation and amortization”
in Newmark’son the accompanying unaudited condensed consolidated statements of operations.
Impairment charges are included in intangible amortization expense.
The estimated future amortization of definite life intangible assets as of March 31, 2018June 30, 2020 was as follows (in thousands):2018 | | $ | 3,047 | | |
2019 | | | 3,934 | | |
| | 2020 | | | 3,691 | | $ | 4,053 |
|
2021 | | | 2,709 | | 6,907 |
|
2022 and thereafter | | | 2,725 | | |
| 2022 | | 4,803 |
|
| 2023 | | 4,262 |
|
| 2024 | | 3,404 |
|
| Thereafter | | 8,133 |
|
Total | | $ | 16,106 | | $ | 31,562 |
|
(17) Fixed Assets, Net
Fixed assets, net consisted of the following (in thousands):
| | | | March 31, 2018 | | | December 31, 2017 | | June 30,
2020 | | December 31,
2019 |
Leasehold improvements and other fixed assets | | $ | 79,121 | | | $ | 77,313 | | $ | 127,102 |
| | $ | 119,682 |
|
Software, including software development costs | | | 17,827 | | | | 17,395 | | 29,082 |
| | 28,063 |
|
Computer and communications equipment | | | 16,450 | | | | 15,878 | | 25,071 |
| | 23,028 |
|
| | | 113,398 | | | | 110,586 | | |
| Total, cost | | 181,255 |
| | 170,773 |
|
Accumulated depreciation and amortization | | | (48,833 | ) | | | (45,764 | ) | (78,654 | ) | | (72,757 | ) |
| | $ | 64,565 | | | $ | 64,822 | | |
| Total, net | | $ | 102,601 |
| | $ | 98,016 |
|
Depreciation expense for the three months ended
June 30, 2020 and 2019 was $3.4 million and $4.4 million, respectively, and $8.3 million and $9.3 million for the six months ended June 30, 2020 and 2019, respectively. Newmark recorded an impairment charge of $1.3 million for the three months ended March 31,
2018 and 2017, was $3.2 million and $3.0 million, respectively. Depreciation expense2020 for internally developed software. Newmark did not record impairments for the three months ended June 30, 2020. The impairment charge is included as a part of “Depreciation and amortization”
in Newmark’son the accompanying unaudited condensed consolidated
statementstatements of operations.
For There were 0 impairment charges for the three and six months ended June 30, 2019.
Capitalized software development costs for the three months ended March 31, 2018June 30, 2020 and 2017, $0.52019 were $0.8 million and $0.1$1.6 million, of software development costs were capitalized,respectively, and $2.1 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively. Amortization of software development costs totaled $0.2 million and $0.1million$0.6 million for the three months ended March 31, 2018June 30, 2020 and 2017,2019, respectively, and $0.6 million and $1.1 million for the six months ended June 30, 2020 and 2019, respectively. Amortization of software development costs is included as part of “Operating, administrative“Depreciation and other” in Newmark’samortization” on the accompanying unaudited condensed consolidated statements of operations.
(18) Leases
Newmark has operating leases for real estate and equipment. These leases have remaining lease terms ranging from 1 to 12 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 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.
Operating lease costs were $12.5 million and $11.7 million for the three months ended June 30, 2020 and 2019, respectively, and $25.0 million and $22.6 million for the six months ended June 30, 2020 and 2019, respectively, and are included in “Operating, administrative and other” on the accompanying unaudited condensed consolidated statements of operations. Operating cash flows for the six months ended June 30, 2020 and 2019 included payments of $23.9 million and $21.8 million for operating lease liabilities, respectively. As of June 30, 2020 and December 31, 2019, Newmark did not have any leases that have not yet commenced but that create significant rights and obligations. For the three and six months ended June 30, 2020 and 2019, Newmark had short-term lease expense of $0.3 million and $0.5 million, respectively, and $0.7 million and $1.3 million respectively, and sublease income of $0.3 million and $0.4 million, respectively, and $0.2 million and $0.4 million, respectively.
The weighted-average discount rate as of June 30, 2020 and December 31, 2019 was 7.24% and the remaining weighted-average lease term was 8.4 years and 8.8 years, respectively.
As of June 30, 2020 and December 31, 2019, Newmark had operating lease ROU assets of $191.2 million and $201.7 million, respectively, and operating lease ROU liabilities of $29.4 million and $27.2 million, respectively, recorded in “Accounts payable, and accrued expenses and other liabilities” and $215.5 million and $227.9 million, respectively, recorded in “Right-of-use liabilities”, on the accompanying unaudited condensed consolidated balance sheets.
Rent expense, including the operating lease costs above, for the three months ended June 30, 2020 and 2019 were $12.5 million and $12.0 million, respectively, and $25.0 million and $23.7 million for the six months ended June 30, 2020 and 2019, respectively. Rent expense is included in “Operating, administrative and other” on the accompanying 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 2032. Certain of these leases contain escalation clauses that require payment of additional rent to the extent of increases in certain operating or other costs.
Minimum lease payments under these arrangements were as follows (in thousands):
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| 2020 | $ | 23,341 |
| | $ | 44,709 |
|
| 2021 | 43,420 |
| | 42,612 |
|
| 2022 | 40,144 |
| | 39,812 |
|
| 2023 | 38,559 |
| | 38,210 |
|
| 2024 | 35,973 |
| | 35,602 |
|
| Thereafter | 146,778 |
| | 146,463 |
|
| Total lease payments | 328,215 |
| | 347,408 |
|
| Less: Interest | 83,310 |
| | 92,282 |
|
| Present value of lease liability | $ | 244,905 |
| | $ | 255,126 |
|
(19) Other Current Assets and Other Assets
Other current assets consisted of the following (in thousands):
| | March 31, | | | December 31, | | |
| | 2018 | | | 2017 | | | | | | | |
| | | June 30,
2020 | | December 31,
2019 |
| Derivative assets | | $ | 54,829 |
| | $ | 51,021 |
|
Prepaid expenses | | $ | 16,108 | | | $ | 12,708 | | 11,183 |
| | 15,251 |
|
Derivative assets | | | 18,437 | | | | 6,676 | | |
| Other taxes | | 10,140 |
| | 22,483 |
|
Rent and other deposits | | | 1,279 | | | | 1,479 | | 1,623 |
| | 1,703 |
|
Other | | | 675 | | | | 131 | | 1,235 |
| | 736 |
|
| | $ | 36,499 | | | $ | 20,994 | | |
| Total | | $ | 79,010 |
| | $ | 91,194 |
|
Non-current other
Other assets consisted of the following (in thousands):
| | March 31, | | | December 31, | |
| | 2018 | | | 2017 | |
Equity method investment | | $ | 104,718 | | | $ | 101,562 | |
Deferred tax assets(a) | | | 166,804 | | | | 168,594 | |
Cost method investments | | | 13,580 | | | | 6,005 | |
Other | | | 2,406 | | | | 2,299 | |
| | $ | 287,508 | | | $ | 278,460 | |
(a)
| 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 year ended December 31, 2017 for the basis difference between BPF’s net assets and its tax basis.
|
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Deferred tax assets | $ | 190,621 |
| | $ | 182,781 |
|
| Equity method investment | 95,850 |
| | 99,966 |
|
| Non-marketable investments | 67,275 |
| | 94,113 |
|
| Derivative assets | 22,397 |
| | 21,905 |
|
| Other | 7,193 |
| | 9,133 |
|
| Total | $ | 383,336 |
| | $ | 407,898 |
|
(20) Securities Loaned
As of
March 31, 2018 andJune 30, 2020, Newmark did 0t have Securities loaned with Cantor. As of December 31,
2017,2019, Newmark had
securitiesSecurities loaned
transactions with Cantor of
$8.6 million and $57.6 million, respectively.$36.7 million. The market value of the
securities lent was $8.6 million and $57.6 millionSecurities loaned as
of March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, the cash collateral received from Cantor bore an interest rate of 2.18%. As of December 31,
2017, the cash collateral received from Cantor bore interest rates ranging from 3.1% to 3.25%. Securities loaned transactions are included in “Securities loaned” in Newmark’s unaudited condensed consolidated balance sheets.
2019 was $36.8 million.
(19)
| Warehouse Notes Payable
|
(21) Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises
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. As of March 31, 2018, commitments and are recourse only to Berkeley Point Capital, LLC.
Newmark had the following lines available and borrowings outstanding (in thousands):
| | Committed Lines | | | Uncommitted Lines | | | Balance at 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
June 30, 2020 | | Balance at
December 31, 2019 | | Stated Spread to One-Month LIBOR | | Rate Type |
Warehouse facility due October 9, 2020(1) | $ | 1,000,000 |
| | $ | — |
| | $ | 850,685 |
| | $ | 34,125 |
| | 115 bps | | Variable |
Warehouse facility due June 16, 2021(2) | 450,000 |
| | — |
| | 94,249 |
| | 16,759 |
| | 115 bps - 150 bps | | Variable |
| Warehouse facility due September 25, 2020 | 200,000 |
| | — |
| | 48,587 |
| | 8,097 |
| | 115 bps | | Variable |
| Fannie Mae repurchase agreement, open maturity | — |
| | 400,000 |
| | 70,575 |
| | 150,667 |
| | 105 bps | | Variable |
| Total | $ | 1,650,000 |
| | $ | 400,000 |
| | $ | 1,064,096 |
| | $ | 209,648 |
| | | | |
(1)
| The
|
(1) | A warehouse line was temporarily increased by $300.0 million to $400.0$200 million for the period of MarchJune 1, 2020 to July 16, 2020. A warehouse line was temporarily increased by $400 million for the period June 29, 20182020 to May 12, 2018.August 29, 2020. |
| |
(2) | A warehouse line established a $125 million sublimit line of credit to fund potential principal and interest servicing advances on the Company's Fannie Mae portfolio during the forbearance period related to the CARES Act. Advances will have an interest rate of 1-month LIBOR plus 200 bps. There were 0 outstanding draws outstanding under this sublimit at June 30, 2020. |
As
Pursuant to the terms 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 | | | | | |
warehouse facilities, Newmark is required to meet a number ofseveral 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, 2018as of June 30, 2020 and December 31, 20172019 and for the three and six months ended March 31, 2018June 30, 2020 and the year ended December 31, 2017.
2019.
The borrowing rates on the warehouse linesfacilities are based on short term London Interbank Offered Rate (LIBOR)short-term LIBOR plus applicable margins. Due to the short termshort-term maturity of these instruments, the carrying amounts approximate fair value.
(20)
| Long-Term Debt and Long-Term Debt Payable to Related Parties
|
(22) 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 | |
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| 6.125% Senior Notes | $ | 541,565 |
| | $ | 540,377 |
|
| Credit Facility | 412,063 |
| | 48,917 |
|
| Total | $ | 953,628 |
| | $ | 589,294 |
|
Converted Term Loan
6.125% 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 on November 1, 2018 at 98.937% to yield 6.375%. The 6.125% Senior Notes were offered and sold by Newmark in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended (“Securities Act”). The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act. The 6.125% Senior Notes bear an interest rate of 6.125% per annum, payable on each May 15 and November 15, beginning on May 15, 2019, and will mature on November 15, 2023.
The carrying amount of the 6.125% Senior Notes was determined as follows (in thousands):
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Principal balance | $ | 550,000 |
| | $ | 550,000 |
|
| Less: debt issue cost | 4,330 |
| | 4,972 |
|
| Less: debt discount | 4,105 |
| | 4,651 |
|
| Total | $ | 541,565 |
| | $ | 540,377 |
|
Newmark uses the effective interest rate method to amortize debt discounts and uses the straight-line method to amortize debt issue costs over the life of the notes. Interest expense, amortization of debt issue costs and amortization of the debt discount of the 6.125% Senior Notes, included in “Interest (expense) income, net” on the accompanying unaudited condensed consolidated statements of operations, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Interest expense | 8,697 |
| | 8,680 |
| | 17,390 |
| | 17,357 |
|
| Debt issue cost amortization | 321 |
| | 321 |
| | 642 |
| | 640 |
|
| Debt discount amortization | 275 |
| | 258 |
| | 546 |
| | 513 |
|
| Total | $ | 9,293 |
| | $ | 9,259 |
| | $ | 18,578 |
| | $ | 18,510 |
|
Debt Repurchase Program
On June 16, 2020, the Newmark Board of Directors and its Audit Committee authorized a debt repurchase program for the repurchase by Newmark of up to $50.0 million of Newmark’s 6.125% Senior Notes and any future debt securities issued by the Company (collectively, “Company debt securities”).
As of June 30, 2020, Newmark had $50.0 million remaining under its debt repurchase authorization.
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(the “Credit Agreement”). The Credit Agreement provided for a
syndicate of lenders. The$250.0 million three-year unsecured senior revolving credit
agreement provides for revolving loans of up to $400.0 million. The maturity date of the facility
is September 8, 2019.(the “Credit Facility”). Borrowings under the
Converted Term Loan bearCredit Facility bore an annual interest
rate equal to, at
Newmark’s option, either
(a) LIBOR
for specified periods, or
a defined base rateupon the consent of all Lenders, such other period that is 12 months or less, plus an
additionalapplicable 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
(b) 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 returnequal to the levels previously described. 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 2.0% with respect to LIBOR borrowings and can range from 1.25% to 2.25% in (a) above and was 1.00% with respect to base rate borrowings and can range from 0.25% to 1.25% in (b) above, depending upon Newmark’s credit rating. The Credit Facility also provides for an unused facility fee.
On November 22, 2017, BGC andFebruary 26, 2020, Newmark entered into an amendment to the unsecured senior revolving credit agreement. Pursuant toCredit Agreement (the “Amended Credit Agreement”), increasing the amendment, the then-outstanding borrowingssize of the BGC under the revolving credit facility were converted into a term loan. There was no change inCredit Facility to $425.0 million (the “Amended Credit Facility”) and extending 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. As of March 31, 2018 and December 31, 2017, there were $400.0 million of borrowings outstanding under the Converted Term Loan. As of March 31, 2018, theFebruary 26, 2023. The annual interest rate on the Converted Term LoanAmended Credit Facility was 3.99%.reduced to LIBOR plus 1.75%, subject to a pricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch.
On March 16, 2020, Newmark
recorded interest expense related to the Converted Term Loan of $4.6 million for the three months ended March 31, 2018. There was no interest expense recorded for the three months ended March 31, 2017.Term Loan
On September 8, 2017, BGC entered into a committed unsecured senior term loan credit agreement with Banksecond amendment to the Credit Agreement (the “Second Amended Credit Agreement”), increasing the size of America, N.A., as administrative agent,the Amended Credit Facility to $465.0 million and a syndicate of lenders. The term loan credit agreement provides for loans of up to $575.0 million. Theextending the maturity date to February 26, 2023 (the "Second Amended Credit Facility"). The annual interest rate on the Second Amended Credit Facility is LIBOR plus 1.75%, subject to a pricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch.
Details of the agreement is September 8, 2019. Borrowings under the 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 ratingSecond Amended Credit Facility are 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 asfollows (in thousands):
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Principal balance | $ | 415,000 |
| | $ | 50,000 |
|
| Less: Debt issue cost | 2,937 |
| | 1,083 |
|
| Total | $ | 412,063 |
| | $ | 48,917 |
|
As of June 30,
2018,2020 and 2019, borrowings under the
pricing shall increase byCredit Facility carried an
additional 75 basis points (125 basis points ininterest rate of 1.94% and 4.41%, with a weighted-average interest rate of 2.83% and 4.41%, respectively. Newmark uses the
aggregate) untilstraight-line method to amortize debt issue costs over the
term loan facility is paid in full. From and after the repayment in fulllife of the
term loan facility, the pricing shall return to the levels previously described. On November 22, 2017, BGCnotes. Interest expense and
Newmark entered into an amendment to the unsecured senior term loan credit agreement. Pursuant to the term loan amendment and effective asamortization of
December 13, 2017, Newmark assumed the obligationsdebt issue costs of the
BGC as borrower under the senior term loan (the “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 been used to partially repay the Term Loan. The proceeds from the exercise by the underwriters of their option to purchase additional shares of Newmark Class A Common StockSecond Amended Credit Facility, included in
the IPO were also used to partially repay the Term Loan. During the three months ended March 31, 2018, Newmark repaid the outstanding balance of $270.7 million“Interest (expense) income, net” on the
Term Loan. Asaccompanying unaudited condensed consolidated statements of
March 31, 2018, there were no borrowings outstanding under the Term Loan. Newmark recorded interest expense related to the Term Loan of $2.6 million for three months ended March 31, 2018.As of March 31, 2018 the carrying value of Converted Term Loan approximated the fair value. As of December 31, 2017 the carrying value of the Converted Term Loan and Term Loan approximated the fair value.
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 and $112.5 million principal amount of its 2042 Promissory Note due June 26, 2042. Newmark’s Senior Notes are recorded at amortized cost. As of March 31, 2018 and December 31, 2017, the carrying amounts and estimated fair values of the Senior Notesoperations, 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 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Interest expense | $ | 2,339 |
| | $ | 603 |
| | $ | 3,969 |
| | $ | 715 |
|
| Debt issue cost amortization | 275 |
| | 141 |
| | 461 |
| | 283 |
|
| Unused facility fee | 32 |
| | 149 |
| | 141 |
| | 329 |
|
| Total | $ | 2,646 |
| | $ | 893 |
| | $ | 4,571 |
| | $ | 1,327 |
|
The fair value of the 2042 Promissory Notes was determined using observable market prices as these securities are traded and are considered Level 1 within the fair value hierarchy as they are deemed to be actively traded and the 2019 Promissory Notes are considered Level 2 within the fair value hierarchy.
For the three months ended March 31,
On November 30, 2018, Newmark
recorded interest expense on its 2019 Promissoryentered into an unsecured credit agreement (the “Cantor Credit Agreement”) with Cantor (see 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.
27 — “Related Party Transactions” for a more detailed discussion).
(21)
| Financial Guarantee Liability
|
(23) Financial Guarantee Liability
Newmark shares risk of loss for loans originated under the Fannie Mae DUS and Freddie TAH programs and could incur losses in the event of defaults under or foreclosure of these loans. Under the
loss-share guarantee, Newmark’s maximum
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 sharingRisk-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 sharingrisk-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 MarchJune 30, 2020, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of $21.5 billion with a maximum potential loss of $6.3 billion, of which $9.7 million is covered by the Credit Enhancement Agreement. At December 31, 2018,2019, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of approximately $18.9$20.2 billion with a maximum potential loss of approximately $5.4and $5.8 billion, of which $0.1 billion isand $9.8 million was covered by the Credit Enhancement Agreement (see Note 11—12 — “Credit Enhancement Receivable, Credit Enhancement Receivable,Deposit and Contingent LiabilityLiability”).
Newmark’s current estimate of expected credit losses considers various factors, including, without being limited to, historical default and
Credit Enhancement Deposit).At December 31, 2017,losses, current delinquency status, loan size, terms, amortization types, the forward-looking view of the primary risk drivers (debt-service coverage ratio and loan-to-value) based on forecasts of economic conditions and local market performance. During the three and six months ended June 30, 2020, there was an increase in the reserve by $0.2 million and $14.7 million, respectively. A loan is considered to be delinquent once it is 60 days past due. As of June 30, 2020, there were no delinquent loans in 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—Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit).
At March 31, 2018 and the year ended December 31, 2017, changes on the estimated liability under the guarantee liability were as follows:
portfolio. Financial guarantee liability (in thousands) | | | | |
Balance at December 31, 2016 | | $ | (413 | ) |
Reversal of provision | | | 359 | |
Balance at December 31, 2017 | | $ | (54 | ) |
Increase to provision | | | (7 | ) |
Balance at March 31, 2018 | | $ | (61 | ) |
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.
See Note 11—Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit for further explanation of credit protection provided by DB Cayman.
The provisions for
risk sharingrisk-sharing were
includeincluded in “Operating, administrative and other”
in Newmark’son the accompanying 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 | ) |
|
| | | |
| Balance, January 1, 2019 | $ | 15 |
|
| Impact of adopting ASC 326 | 17,935 |
|
| Provision for expected credit losses | 14,480 |
|
| Balance, March 31, 2020 | $ | 32,430 |
|
| Provision for expected credit losses | 222 |
|
| Balance, June 30, 2020 | $ | 32,652 |
|
(22)
| Concentrations of Credit Risk
|
(24) Concentrations of Credit Risk
The lending activities of Newmark create credit risk in the event that counterparties do not fulfill their contractual payment obligations. In particular, Newmark is exposed to credit risk related to the Fannie Mae DUS and Freddie Mac TAH loans (see Note 21—Financial23 — “Financial Guarantee Liability)Liability”). As of March 31, 2018, 26%June 30, 2020, 20% and 15% of $5.4$6.3 billion of the maximum loss (see Note 21—Financial Guarantee Liability) was for properties located in California.California and Texas, respectively. As of December 31, 2017, 26%2019, 21% and 16% of $5.3$5.8 billion of the maximum loss (see Note 21—Financial Guarantee Liability) was for properties located in California.California and Texas, respectively.
(23)
| Escrow and Custodial Funds
|
(25) Escrow and Custodial Funds
In conjunction with the servicing of multifamily and commercial loans, Newmark holds escrow and other custodial funds. Escrow funds are held at unaffiliated financial institutions generally in the form of cash and cash equivalents. These funds amounted
to approximately $0.8 billion$931.0 million and $0.8 billion,$925.0 million as of March 31, 2018June 30, 2020 and December 31, 2017,2019, 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.
(24)
| Fair Value of Financial Assets and Liabilities
|
(26) Fair Value of Financial Assets and Liabilities
U.S. GAAP guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 measurements—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 measurements—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
Level 3 measurements—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As required by U.S. GAAP guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth by level within the fair value hierarchy financial assets and liabilities accounted for at fair value under U.S. GAAP guidance
at March 31, 2018 and December 31, 2017 (in thousands):
| | As of March 31, 2018 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | | | Total | |
Assets: | | | | | | | | | | | | | | | | | | |
Marketable securities | | $ | 8,622 | | | $ | — | | | $ | — | | | | | $ | 8,622 | |
Loans held for sale | | | — | | | | 965,639 | | | | — | | | | | | 965,639 | |
Rate lock commitments | | | — | | | | — | | | | 8,750 | | | | | | 8,750 | |
Forwards | | | — | | | | — | | | | 9,687 | | | | | | 9,687 | |
Total assets | | $ | 8,622 | | | $ | 965,639 | | | $ | 18,437 | | | # | | $ | 992,698 | |
Liabilities: | | | | | | | | | | | | | | | | | | |
Accounts payable, accrued expenses and other liabilities—contingent consideration | | $ | — | | | $ | — | | | $ | 23,087 | | | | | $ | 23,087 | |
Rate lock commitments | | | — | | | | — | | | | 8,980 | | | | | | 8,980 | |
Forwards | | | — | | | | — | | | | 2,421 | | | | | | 2,421 | |
Total Liabilities | | $ | — | | | $ | — | | | $ | 34,488 | | | | | $ | 34,488 | |
|
| | | | | | | | | | | | | | | |
| | As of June 30, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | |
| | |
| | |
| | |
|
| Nasdaq Forwards | $ | — |
| | $ | — |
| | $ | 24,730 |
| | $ | 24,730 |
|
| Loans held for sale, at fair value | — |
| | 1,089,429 |
| | — |
| | 1,089,429 |
|
| Rate lock commitments | — |
| | — |
| | 50,170 |
| | 50,170 |
|
| Forward sale contracts | — |
| | — |
| | 2,325 |
| | 2,325 |
|
| Total | $ | — |
| | $ | 1,089,429 |
| | $ | 77,225 |
| | $ | 1,166,654 |
|
| Liabilities: | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 33,567 |
| | $ | 33,567 |
|
| Rate lock commitments | — |
| | — |
| | 1,114 |
| | 1,114 |
|
| Forward sale contracts | — |
| | — |
| | 50,617 |
| | 50,617 |
|
| Total | $ | — |
| | $ | — |
| | $ | 85,298 |
| | $ | 85,298 |
|
| | As of December 31, 2017 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets: | | | | | | | | | | | | | | | | |
Marketable securities | | $ | 57,623 | | | $ | — | | | $ | — | | | $ | 57,623 | |
Loans held for sale | | | — | | | | 362,635 | | | | — | | | | 362,635 | |
Rate lock commitments | | | — | | | | — | | | | 2,923 | | | | 2,923 | |
Forwards | | | — | | | | — | | | | 3,753 | | | | 3,753 | |
Total assets | | $ | 57,623 | | | $ | 362,635 | | | $ | 6,676 | | | $ | 426,934 | |
Liabilities: | | | | | | | | | | | | | | | | |
Accounts payable, accrued expenses and other liabilities—contingent consideration | | $ | — | | | $ | — | | | $ | 23,711 | | | $ | 23,711 | |
Rate lock commitments | | | — | | | | — | | | | 2,390 | | | | 2,390 | |
Forwards | | | — | | | | — | | | | 657 | | | | 657 | |
Total Liabilities | | $ | — | | | $ | — | | | $ | 26,758 | | | $ | 26,758 | |
|
| | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | |
| | |
| | |
| | |
|
| Marketable securities | $ | 36,795 |
| | $ | — |
| | $ | — |
| | $ | 36,795 |
|
| Nasdaq Forwards | — |
| | — |
| | 26,502 |
| | 26,502 |
|
| Loans held for sale, at fair value | — |
| | 215,290 |
| | — |
| | 215,290 |
|
| Rate lock commitments | — |
| | — |
| | 32,035 |
| | 32,035 |
|
| Forward sale contracts | — |
| | — |
| | 14,389 |
| | 14,389 |
|
| Total | $ | 36,795 |
| | $ | 215,290 |
| | $ | 72,926 |
| | $ | 325,011 |
|
| Liabilities: | | | | | | | |
| Contingent consideration | $ | — |
| | $ | — |
| | $ | 45,172 |
| | $ | 45,172 |
|
| Rate lock commitments | — |
| | — |
| | 12,124 |
| | 12,124 |
|
| Forwards sale contracts | — |
| | — |
| | 13,537 |
| | 13,537 |
|
| Total | $ | — |
| | $ | — |
| | $ | 70,833 |
| | $ | 70,833 |
|
There were no transfers among levelLevel 1, Level 2 and levelLevel 3 for the three and six months ended March 31, 2018June 30, 2020 and the year ended December 31, 2017.2019.
Derivative instruments are outstanding for short periods of time (generally less than 60 days). A roll
Level 3 Financial Assets and Liabilities: Changes in Level 3 Nasdaq Forwards, rate lock commitments, forward of derivative instrumentssale contracts and contingent consideration (level 3) that require valuation based upon significant unobservable inputs is presented belowmeasured at fair value on recurring basis 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 June 30, 2020 |
| | Opening Balance | | Total realized
and unrealized
gains (losses)
included in
Net income (loss) | | Issuances | | Settlements | | Closing Balance | | Unrealized gains (losses) outstanding as of June 30, 2020 |
| Assets: | |
| | |
| | |
| | |
| | |
| | |
|
| Rate lock commitments | $ | 32,035 |
| | $ | 50,170 |
| | $ | — |
| | $ | (32,035 | ) | | $ | 50,170 |
| | $ | 50,170 |
|
| Forward sale contracts | 14,389 |
| | 2,325 |
| | — |
| | (14,389 | ) | | 2,325 |
| | 2,325 |
|
| Nasdaq Forwards | 26,502 |
| | (1,772 | ) | | — |
| | — |
| | 24,730 |
| | 24,730 |
|
| Total | $ | 72,926 |
| | $ | 50,723 |
| | $ | — |
| | $ | (46,424 | ) | | $ | 77,225 |
| | $ | 77,225 |
|
| | Opening Balance | | Total realized and unrealized (gains) losses included in Net income (loss) | | Issuances | | Settlements | | Closing Balance | | Unrealized
(gains) losses
outstanding
as of
June 30,
2020 |
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
| Contingent consideration | $ | 45,172 |
| | $ | (12,263 | ) | | $ | 2,221 |
| | $ | (1,563 | ) | | $ | 33,567 |
| | $ | 84 |
|
| Rate lock commitments | 12,124 |
| | 1,114 |
| | — |
| | (12,124 | ) | | 1,114 |
| | 1,114 |
|
| Forward sale contracts | 13,537 |
| | 50,617 |
| | — |
| | (13,537 | ) | | 50,617 |
| | 50,617 |
|
| Total | $ | 70,833 |
| | $ | 39,468 |
| | $ | 2,221 |
| | $ | (27,224 | ) | | $ | 85,298 |
| | $ | 51,815 |
|
| | 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 | |
(1)
| Realized losses are reported in “Other income, net” in Newmark’s unaudited condensed consolidated statements of operations.
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2019 |
| | Opening Balance | | Total realized and unrealized gains (losses) included in Net income (loss) | | Issuances | | Settlements | | Closing Balance | | Unrealized gains (losses) outstanding as of December 31, 2019 |
| Assets: | |
| | |
| | |
| | |
| | |
| | |
|
| Rate lock commitments | $ | 6,732 |
| | $ | 32,035 |
| | $ | — |
| | $ | (6,732 | ) | | $ | 32,035 |
| | $ | 32,035 |
|
| Forward sale contracts | 8,177 |
| | 14,389 |
| | — |
| | (8,177 | ) | | 14,389 |
| | 14,389 |
|
| Nasdaq Forwards | 77,619 |
| | (51,117 | ) | | — |
| | — |
| | 26,502 |
| | 26,502 |
|
| Total | $ | 92,528 |
| | $ | (4,693 | ) | | $ | — |
| | $ | (14,909 | ) | | $ | 72,926 |
| | $ | 72,926 |
|
| | Opening Balance | | Total realized and unrealized (gains) losses included in Net income (loss) | | Issuances | | Settlements | | Closing Balance | | Unrealized (gains) losses outstanding as of December 31, 2019 |
| Liabilities: | |
| | |
| | |
| | |
| | |
| | |
|
| Contingent consideration | $ | 32,551 |
| | $ | 2,287 |
| | $ | 14,957 |
| | $ | (4,623 | ) | | $ | 45,172 |
| | $ | 2,287 |
|
| Rate lock commitments | 7,470 |
| | 12,124 |
| | — |
| | (7,470 | ) | | 12,124 |
| | 12,124 |
|
| Forward sale contracts | 9,208 |
| | 13,537 |
| | — |
| | (9,208 | ) | | 13,537 |
| | 13,537 |
|
| Total | $ | 49,229 |
| | $ | 27,948 |
| | $ | 14,957 |
| | $ | (21,301 | ) | | $ | 70,833 |
| | $ | 27,948 |
|
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 |
Level 3 assets and liabilities | | Assets | | | Liabilities | | | Significant Unobservable Inputs |
Accounts payable, accrued expenses and other liabilities: | | | | | | | | | | |
Contingent consideration | | $ | — | | | $ | 23,087 | | | Discount rate—6.6% weighted average rate(a) |
Derivative assets and liabilities: | | | | | | | | | | Financial forecast information |
Forward sale contracts | | $ | 9,687 | | | $ | 2,421 | | | Counterparty credit risk |
Rate lock commitments | | $ | 8,750 | | | $ | 8,980 | | | Counterparty credit risk |
|
| | | | | | | | | | | | | | |
| June 30, 2020 |
| Level 3 assets and liabilities | | Assets | | Liabilities | | Significant Unobservable Inputs | | Range | | Weighted Average |
| Accounts payable, accrued expenses and other liabilities: | | |
| | |
| | | | | | |
| Contingent consideration | | $ | — |
| | $ | 33,567 |
| | Discount rate | | 0.3%-10.4% | (1) | 7.7% |
| | | | | | | Probability of meeting earnout and contingencies | | 0%-100% | (1) | 98.5% |
| | | | | | | Financial forecast information | | | | |
| Derivative assets and liabilities: | | | | | | | | | | |
| Nasdaq Forwards | | $ | 24,730 |
| | $ | — |
| | Implied volatility | | 37.7% - 41.9% | (2) | 41.3% |
| Forward sale contracts | | $ | 2,325 |
| | $ | 50,617 |
| | Counterparty credit risk | | N/A | | N/A |
| Rate lock commitments | | $ | 50,170 |
| | $ | 1,114 |
| | Counterparty credit risk | | N/A | | N/A |
December 31, 2017 | |
| | | December 31, 2019 | | December 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 | | $ | — | | | $ | 23,711 | | | Discount rate—6.43% weighted average rate(a) | | $ | — |
| | $ | 45,172 |
| | Discount rate | | 0.3%-10.4% | | 8.6% |
| | | | | | | | Probability of meeting earnout and contingencies | | 90%-100% | (1) | 98.1% |
| | | | | | | | Financial forecast information | |
Derivative assets and liabilities: | | | | | | | | | | Financial forecast information | | | | | |
| Nasdaq Forwards | | | $ | 26,502 |
| | $ | — |
| | Implied volatility | | 25.7%-34.8% | (2) | 32.2% |
Forward sale contracts | | $ | 3,753 | | | $ | 657 | | | Counterparty credit risk | | $ | 14,389 |
| | $ | 13,537 |
| | Counterparty credit risk | | N/A | | N/A |
Rate lock commitments | | $ | 2,923 | | | $ | 2,390 | | | Counterparty credit risk | | $ | 32,035 |
| | $ | 12,124 |
| | Counterparty credit risk | | N/A | | N/A |
(a)
| |
(1) | Newmark’s estimate of contingent consideration as of March 31, 2018June 30, 2020 and December 31, 20172019 was based on the acquired business’ projected future financial performance, including revenues. |
| |
(2) | The volatility of Newmark’s Nasdaq Forwards is primarily based on the volatility of the underlying Nasdaq stock price. |
Valuation Processes - Level 3 Measurements
Both the rate lock commitments to borrowers and the forward sale contracts to investors are derivatives and, accordingly, are marked to fair value through Newmark’son the accompanying 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/gain loss of the expected loan sale to the investor, net of employee benefits;
•The expected net future cash flows associateassociated 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 Nasdaq Forwards are derivatives and, accordingly, are marked to fair value on the accompanying unaudited condensed consolidated statements of operations. The fair value of the Nasdaq Forwards are determined utilizing the following inputs, as applicable:
The underlying number of shares and the related strike price;
The maturity date; and
The implied volatility of Nasdaq’s stock price.
The fair value of Newmark’s Nasdaq Forwards considers the effects of Nasdaq’s stock price volatility between the balance sheet date and the maturity date. The fair value is determined by the use of a Black-Scholes put option valuation model.
Information About Uncertainty of Level 3
Fair Value Measurements
The significant unobservable inputs used in the fair value of Newmark’s contingent consideration are the discount rate and forecasted financial information. Significant increases (decreases) in the discount rate would have resulted in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a significantly higher (lower) fair value measurement. As of March 31, 2018June 30, 2020 and December 31, 2017,2019, the present value of expected payments related to Newmark’s contingent consideration was $26.7$33.6 million and $23.7$45.2 million, respectively (Note 28- Commitments(see Note 31 — “Commitments and Contingencies)Contingencies”). Valuations for contingent considerationAs of June 30, 2020 and December 31, 2019, the undiscounted value of the payments, assuming that all contingencies are conducted by Newmark. Each reporting period, Newmark updates unobservable inputs. Newmark hasmet, would be $63.9 million and $66.4 million, respectively.
Fair Value Measurements on a formal process to review changes inNon-Recurring Basis
Equity investments carried under the measurement alternative are remeasured at fair value for satisfactory explanation.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 $67.3 million and $94.1 million, which were included in “Other assets” on the accompanying unaudited condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively. These investments are classified within Level 2 in the fair value hierarchy, because their estimated fair value is based on valuation methods using the observable transaction price at the transaction date.
(27) Related Party Transactions
(25)
| Related Party Transactions
|
| (a) | Service Agreements |
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/or BGC. Allocated expenses were $5.2 million and
BGC. For$7.2 million for the three months ended
March 31, 2018June 30, 2020 and
2017, allocated expenses were $6.92019, respectively, and $11.0 million and
$4.7$13.9 million
for the six months ended June 30, 2020 and 2019, respectively. These expenses are included as part of “Fees to related parties”
in Newmark’son the accompanying 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, 2018June 30, 2020 and December 31,
2017,2019, the aggregate balance of employee loans was
$226.7$483.8 million and
$209.6$403.7 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners, net”
in Newmark’son the accompanying unaudited condensed consolidated balance sheets. Compensation expense for the
above mentionedabove-mentioned employee loans for the three months ended
March 31, 2018June 30, 2020 and
20172019 was
$6.0$17.5 million and
$2.0$11.1 million,
respectively, and $31.9 million and $18.5 million for the six months ended June 30, 2020 and 2019, respectively. The compensation expense related to these employee loans is included as part of “Compensation and employee benefits”
in Newmark’son the accompanying unaudited condensed consolidated statements of operations.
Transfer of Employees to Newmark and Other Related Party Transactions
In connection with
the expansion of the mortgage brokerage and lending activities, Newmark has entered into an agreement with Cantor pursuant to which 5 former employees of Cantor's affiliate, Cantor Commercial Real Estate
Company, L.P.("CCRE"), transferred to Newmark, alsoeffective as of May 1, 2018. In connection with this transfer of employees, Cantor paid $6.9 million to Newmark in October 2018, and Newmark Holdings issued $6.7 million of limited partnership units and $0.2 million of cash in the form of a
cash distribution agreement to the employees. In addition, Newmark Holdings issued $2.2 million of Newmark Holdings partnership units with a capital account and $0.5 million of limited partnership units in exchange for the cash payment from Cantor to Newmark of $2.2 million. Newmark recorded $6.9 million and $2.2 million as “Stockholders’ equity” and “Redeemable partnership interests”, respectively, on the unaudited condensed consolidated balance sheets.
In consideration for the Cantor payment, Newmark has 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. As of June 30, 2020 and December 31, 2019, Newmark had $3.3 million and $2.6 million, respectively, included in “Payables to related parties” on the accompanying unaudited condensed consolidated balance sheets, to be returned to Cantor related to this transaction. Newmark has agreed to allow certain of these employees to continue to provide consulting services to Cantor in exchange for a forgivable loan which was directly paid by Cantor to these employees. In July 2020, Newmark paid $3.3 million to Cantor based on the employees’ production.
In February 2019, Newmark's Audit Committee authorized Newmark and its subsidiaries to originate and service GSE loans for Cantor and its affiliates (other than BGC) and service loans originated by Cantor and its affiliates (other than BGC) on prices, rates and terms no less favorable to Newmark and its subsidiaries than those charged by third parties. The authorization is subject to certain terms and conditions, including but not limited to: (i) a maximum amount up to $100.0 million per loan, (ii) a $250.0 million limit on loans that have not yet been acquired or sold to a GSE at any given time, and (iii) a separate $250.0 million limit on originated Fannie Mae Loans outstanding to Cantor at any given time.
(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$0.1 million and $0.5 million of
$60.9 thousand millionrevenue for the three months ended
March 31, 2017. Newmark did not recognize any revenue related to this agreement duringJune 30, 2020 and 2019, respectively, and $0.3 million and $0.7 million for the
threesix months ended
March 31, 2018. This revenue was recorded as part of “Commissions”June 30, 2020 and 2019, respectively, in
Newmark’s unaudited condensed consolidated statements of operations.connection with this revenue-share agreement.
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
and six months ended
March 31, 2018June 30, 2020 and
2017,2019, respectively.
In addition, Newmark has a loan referral agreement in place with CCRE, in which either party can refer a loan to the other. RevenueFor the three and six months ended June 30, 2020, Newmark did not have any revenues from these referrals. For the three and six months ended June 30, 2019, revenues from these referrals were $3.7$0.2 million and $0.3$0.9 million, for the three months ended March 31, 2018 and 2017, respectively, and wasrespectively. Such revenues are recognized in “Gain“Gains from mortgage banking activities/originations, net” in Newmark’son the accompanying unaudited condensed consolidated statements of operations. These referralsreferral fees are net of the broker fees and commissions paid to CCRE of $0.7CCRE. Broker fees and commissions for the three and six months ended June 30, 2019 were $0.1 million and $0.2 million, forrespectively.
During the three months ended
March 31, 2018June 30, 2020 and
2017, 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 for the three months ended March 31, 2017.
For the three months ended March 31, 2018,2019, Newmark purchased the primary servicing rights for $0.3 billion$136.3 million and $329.1 million of loans originated by CCRE for $0.5 million. Newmark did not purchase any servicing rights from$0.1 million and $0.4 million, respectively, and $227.0 million and $447.0 million of loans originated by CCRE for $0.2 million and $0.7 million for the threesix months ended March 31, 2017.June 30, 2020 and 2019, respectively. 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 $0.9servicing revenues (excluding interest and placement fees) from servicing rights purchased from CCRE on a “fee for service” basis of $1.0 million and $1.0 million for the three months ended March 31, 2018June 30, 2020 and 2017,2019, respectively, of servicing revenues from (excludes interest and placement fees) loans purchased from CCRE on a “fee$1.9 million and $1.9 million for service” basis,the six months ended June 30, 2020 and 2019, respectively, which was included as part of “Management services, servicing fee and other” in Newmark’son the accompanying unaudited condensed consolidated statements of operations.
On July 22, 2019, Cantor Commercial Real Estate Lending, L.P. (“CCRE Lending”), a wholly owned subsidiary of Real Estate LP, made a $146.6 million commercial real estate loan (the “Loan”) to a single-purpose company (the “Borrower”) in which Barry Gosin, Newmark’s Chief Executive Officer, owns a 19% interest. The Loan is secured by the Borrower’s interest in property in Pennsylvania that is subject to a ground lease. While CCRE Lending initially provided the full loan amount, on August 16, 2019, a third-party bank purchased approximately 80% of the Loan value from CCRE Lending, with CCRE Lending retaining approximately 20%. The Loan matures on August 6, 2029, and is payable monthly at a fixed interest rate of 4.38% per annum. Newmark provided certain commercial loan brokerage services to the Borrower in the ordinary course of its business, and the Borrower paid Newmark a fee, as the broker of the Loan, of $0.7 million. The Newmark Audit Committee approved the commercial loan brokerage services and the related fee amount received.
Transactions with Executive Officers and Directors
In connection with Newmark’s 2019 executive compensation process, Newmark’s executive officers received certain monetization of prior awards as compensation at Newmark, as set forth below:
On December 19, 2019, the Newmark Compensation Committee approved the right to (i) exchange 552,483 non-exchangeable PSUs held by Mr. Lutnick into 552,483 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $7,017,000); and (ii) exchange for cash 602,463 non-exchangeable PPSUs held by Mr. Lutnick (which had an average determination price of $13.25 per unit) for a payment of $7,983,000 for taxes when the PSUs are exchanged.
On December 19, 2019, the Compensation Committee approved the right to (i) exchange 443,872 non-exchangeable PSUs held by Mr. Gosin into 443,872 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $5,637,548); and (ii) exchange for cash 539,080 non-exchangeable PPSUs held by Mr. Gosin (which had an average determination price of $9.95 per unit) for a payment of $5,362,452 for taxes when the PSUs are exchanged.
On December 19, 2019, the Compensation Committee approved the cancellation of 145,464 non-exchangeable PSUs held by Mr. Merkel, and the cancellation of 178,179 non-exchangeable PPSUs (which had an average determination price of $10.61 per unit). Additionally, on December 19, 2019, Mr. Merkel exchanged 4,222 already exchangeable PSUs held by him in exchange for Class A common stock. The above transaction resulted in income of $3,791,848 for Mr. Merkel, of which Newmark withheld $1,989,483 for taxes and issued the remaining $1,802,365 in the form of 132,429 net shares of Class A common stock valued at a price of $13.61 per share.
On December 19, 2019, the Compensation Committee approved the right to (i) exchange 5,846 non-exchangeable PSUs held by Mr. Rispoli into 5,846 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $74,250); and (ii) exchange for cash 4,917 Newmark Holdings non-exchangeable PPSUs held by Mr. Rispoli (which had an average determination price of $12.355 per unit) for a payment of $60,750 for taxes when the PSUs are exchanged.
On October 30, 2019, the Newmark Audit and Compensation Committees approved the repurchase from Mr. Merkel of 55,193 shares of Newmark Class A common stock at $10.69 per share, the closing price on October 30, 2019.
On December 19, 2019, the Newmark Audit and Compensation Committees approved the repurchase from Mr. Merkel of 132,429 shares of Newmark Class A common stock at $13.61 per share, the closing price on December 19, 2019.
CF Real Estate Finance Holdings, LP.
Contemporaneously with the
acquisition of 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
MarchJune 30, 2020 and December 31,
2018, $339.2 million had been loaned to related parties. As of March 31, 2018,2019, Newmark’s investment
iswas accounted for under the equity
method.IPO
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 Separation and Distribution Agreement. method (see Note 8 — “Investments”).
Spin-Off
The 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“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 AgreementPresentation” for additional information).
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.
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
and CFGM, whereby each holder of BGC Holdings limited partnership interests at that time now
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 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, seeSeparation and Distribution Agreement (see Note 2 —
Limited“Limited Partnership Interests in Newmark
Holdings.)In addition CF&Co, a wholly owned subsidiary ofHoldings and BGC Holdings” for additional information).
On November 30, 2018, BGC completed the Spin-Off. BGC Partners’ stockholders, including Cantor was an underwriterand CFGM, as of the IPO. Pursuant toRecord Date, received in the underwriting agreement,Spin-Off 0.463895 of a share of Newmark paid CF&Co 5.5%Class A or Class B common stock for each share of BGC Class A or Class B common stock held as of the gross proceeds fromRecord Date. In the sale ofaggregate, BGC distributed 131.9 million shares of Newmark Class A common stock sold by CF&Co.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.
Prior to and in connection with the
IPO.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, pursuant to the BGC Holdings Distribution, 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, CFGM and executive officers of BGC and Newmark). 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 June 30, 2020, the exchange ratio equaled 0.9366. (See Note 1 — “Organization and Basis of Presentation” for additional information).
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 and the BGC Holdings Distribution, there are remaining partners who hold limited partnership interests in Newmark Holdings who are BGC employees, and there are remaining partners who hold limited partnership interests in BGC Holdings who are Newmark employees. The Newmark limited partnership interests were distributed as part of the Separation and the BGC Holdings Distribution. Employees of Newmark and BGC are granted only limited partnership interests in Newmark Holdings and BGC Holdings, respectively. As a result of the Spin-Off and the BGC Holdings Distribution, 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 is 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 Unitsunits of Newmark Holdings for approximately $242.0 million. The price per Newmark
Holdings 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-issuednewly issued Newmark
Holdings Units
arewere exchangeable, at BGC’s discretion, into either shares of
Newmark Class A common stock or shares of
Newmark Class B common
stock of Newmark.stock. BGC made the Investment in Newmark
Holdings 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. BGC’s investmentOpCo. The Investment by BGC 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
by BGC in Newmark
Holdings 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. Payableslenders 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 Related Parties
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.
Other Transactions with CF&Co
On March 19,June 18, 2018 and September 26, 2018, Newmark entered into transactions related to the “Intercompanymonetization of the Nasdaq shares that Newmark expects to receive in 2019 through 2022 (see Note 1 — “Organization and Basis of Presentation”). Newmark paid $4.0 million in fees for services provided by CF&Co related to these monetization transactions. These fees were recorded as a deduction from the carrying amount of the EPUs.
On November 6, 2018, Newmark issued an aggregate of $550.0 million principal amount of 6.125% Senior Notes due 2023. In connection with this issuance of the 6.125% Senior Notes, Newmark paid $0.8 million in underwriting fees to CF&Co.
(d)Other Related Party Transactions
On November 30, 2018, Newmark entered into an unsecured credit agreement with Cantor (the “Cantor 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 IntercompanyCantor Credit Agreement provides for each party to issue revolving loans to the other party inat the lender’s discretion. The interest rate onPursuant to the IntercompanyCantor Credit Agreement, can bethe parties and their respective subsidiaries (with respect to Cantor, 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
BGC’sCantor’s or Newmark’s
short term borrowingsshort-term borrowing rate
then 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 rate1%. Receivables from related parties were $1.6 million as of
March 31, 2018 was 4.99%. As of March 31, 2018, the amount outstanding under the Intercompany Facility was $202.0 million and is included in “Current portion of payables toJune 30, 2020. There were 0 receivables from related
parties” on the unaudited condensed consolidated balance sheets 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.Asparties as of December 31, 2017, the related party receivables and current portion of payables2019. Payables to related parties were $0.0$3.9 million and $34.2$38.1 million as of June 30, 2020 and December 31, 2019, respectively.
(26)
For a detailed discussion about Newmark’s Payables to related parties, see Note 1 — “Organization and Basis of Presentation”, Note 2 — “Limited Partnership Interests in Newmark and BGC Holdings” and Note 22 — “Long-Term Debt” in Newmark’s consolidated financial statements, included in Part II, Item 8 of Newmark’s Annual Report on Form 10-K for the year ended December 31, 2019.
On May 15, 2020, the Newmark Audit Committee authorized RKF Retail Holdings LLC, a subsidiary of the Company, to enter into an arrangement to sublease excess space to BGC U.S. OpCo ("BGC"). The sublease commenced on May 15, 2020 and expires on May 31, 2021. Under the terms of the lease, BGC will pay Newmark a fixed rent amount of $1.1 million. In connection with this agreement, Newmark received $0.2 million from BGC for the three and six months ended June 30, 2020.
(28) Income Taxes
Newmark’s
The accompanying 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—“Limited2 — “Limited Partnership Interests in BGC Holdings and Newmark Holdings”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.Taxes.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the
accompanying unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax
bases.basis. 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.
Provisional amounts in effective rate
OnThe Tax Cut and Jobs Act (the “Tax Act”), enacted on December 22, 2017,
“H.R.1,” formerly known asincludes the
Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”global intangible low-taxed income (“GILTI”)
, was signed into law provision. This provision requires inclusion in
theNewmark's U.S.
The 2017 Tax Act is expected to have a favorable impact on Newmark’s effectiveincome tax
rate and net income as reported under generally accepted accounting principles both in the first quarter of 2018 and subsequent reporting periods to which the 2017 Tax Act is effective. Newmark is applying the guidance in SAB 118 when accounting for the enactment-date effectsreturn of the
2017 Tax Act. Asearnings of
March 31, 2018,certain foreign subsidiaries. Newmark has
not completed its accounting for all ofelected to treat taxes associated with the
tax effects of the 2017 Tax Act. Newmark will continue to make and refine its calculations as additional analysis is completed.The final impact of the 2017 Tax Act may differ from Newmark’s estimate for theGILT provision for income taxes, possibly materially, due to, among other factors, changes in interpretations, additional guidance that may be issued, unexpected negative changes in business and market conditions that could reduce certain tax benefits, and actions taken by Newmark as a result of the 2017 Tax Act.Because of the complexity of the new Global Intangible Low-Taxed Income (“GILTI”) tax rules, Newmark continues to evaluate this provision of the 2017 Tax Act. Under U.S. GAAP, Newmark can elect an accounting policy choice to either (a) treat future taxes related to GILTI as a current period expense when incurred (“period cost method”) or (b) factor amounts related to GILTI into Newmark’s measurement of its deferredand thus has not recorded taxes, (“deferred method”). Newmark’s accounting for the effects of the GILTI tax law provisions is incomplete at this time, and, therefore, Newmark is not yet able to reasonably estimate the effect of this provision of the 2017 Tax Act nor has an accounting policy decision been made with respect to GILTI. As of March 31, 2018, because Newmark is still evaluating the GILTI provisions as well as future taxable income that may be subject to GILTI, Newmark shall include GILTI related to current-year operations, if any, only in the Estimated Annualized Effective Tax Rate and have not provided additional GILTI on deferred items.
for basis differences under this regime.
Pursuant to U.S. GAAP guidance on 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, 2018,June 30, 2020, Newmark had $0.2 million of unrecognized tax benefits which, if recognized, would affect the effective tax rate. As of December 31, 2017, Newmark’s2019, 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 recognizesrecognized interest and penalties related to income tax matters in ”Provision“Provision for income taxes”, in Newmark’s on the accompanying unaudited condensed consolidated statements of operations. As of March 31, 2018,June 30, 2020, Newmark had approximately $45 thousand ofhas not accrued any tax-related interest and penalties related to uncertain tax positions. As of December 31, 2017, there were $45 thousand of accrued interestpenalties.
(29) Accounts Payable, Accrued Expenses and
penalties related to uncertain tax positions.Other Liabilities (27)
| Accounts Payable, Accrued Expenses and Other Liabilities
|
The
current portion of accounts payable, accrued expenses and other liabilities consisted of the
following:following (in thousands): | | | March 31, | | | December 31, | | | | | | | |
| | 2018 | | | 2017 | | June 30,
2020 | | December 31,
2019 |
Accounts payable and accrued expenses | | $ | 85,571 | | | $ | 79,376 | | $ | 124,905 |
| | $ | 189,172 |
|
Payroll taxes payable | | | 20,416 | | | | 12,673 | | 46,993 |
| | 45,612 |
|
| Derivative liability | | 51,731 |
| | 25,661 |
|
Outside broker payable | | | 41,242 | | | | 23,361 | | 56,463 |
| | 74,280 |
|
| Credit enhancement deposit | | 25,000 |
| | — |
|
| Corporate taxes payable | | 16,720 |
| | 69,237 |
|
Contingent consideration | | | 7,116 | | | | 6,504 | | 19,736 |
| | 13,107 |
|
Derivative liability | | | 11,401 | | | | 3,047 | | |
| | $ | 165,746 | | | $ | 124,961 | | |
| Total | | $ | 341,548 |
| | $ | 417,069 |
|
Other
long-term liabilities consisted of the
following:following (in thousands): | | March 31, | | | December 31, | | |
| | 2018 | | | 2017 | | | | | | | |
Deferred rent | | $ | 41,841 | | | $ | 41,875 | | |
| | | June 30,
2020 | | December 31,
2019 |
| Accrued compensation | | $ | 292,141 |
| | $ | 278,399 |
|
Payroll taxes payable | | | 47,777 | | | | 48,248 | | 62,650 |
| | 41,355 |
|
Accrued compensation | | | 32,540 | | | | 31,411 | | |
| Contingent consideration | | 13,831 |
| | 32,065 |
|
Credit enhancement deposit | | | 25,000 | | | | 25,000 | | — |
| | 25,000 |
|
Contingent consideration | | | 15,971 | | | | 17,207 | | |
Financial guarantee liability | | | 61 | | | | 54 | | 32,652 |
| | 15 |
|
| | $ | 163,190 | | | $ | 163,795 | | |
| Total | | $ | 401,274 |
| | $ | 376,834 |
|
Newmark’s Compensation Committee may grant various equity-based awards to employees of Newmark, including RSUs, restricted stock, units, limited partnership units and exchange rights for shares of Newmark’sNewmark Class A common stock upon exchange or redemption of
Newmark limited partnership units (see Note 2—Limited2 — “Limited Partnership InterestInterests in Newmark Holdings)Holdings and BGC Holdings”). 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 then sole stockholder, BGC, for Newmark to issue up to 400.0 million aggregate numbershares of shares ofNewmark Class A common stock, of Newmark, of which 50.065.0 million isare registered, that may be delivered or cash-settled pursuant to awards granted during the life of the Newmark Equity Plan.
As of
June 30, 2020, awards with respect to 27.5 million shares have been granted and 372.5 million shares are available for future awards. Upon vesting of RSUs, issuance of restricted stock and exchange or redemption of limited partnership units, Newmark generally issues new shares of its Class A common stock.
Prior to the Separation, BGC’s Compensation Committee granted various equity-based awards to employees of Newmark, including RSUs, restricted stock, units, limited partnership units and exchange rights for shares of BGC’sBGC Class A common stock upon exchange of BGC’sBGC Holdings limited partnership units (see Note 2—Limited2 — “Limited Partnership Interestsinterests in Newmark Holdings)Holdings and BGC Holdings”).
| (a)
| Limited Partnership Units
|
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 eachHoldings. Each holder of BGC Holdings limited partnership interests at that time held a BGC Holdings limited partnership interest and 0.4545 of a corresponding Newmark Holdings limited partnership interest, whichinterest.
The exchange ratio 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 common stock that a holder will receive upon exchange of one Newmark Holdings exchangeable unit (the exchange ratio was initially 1, but is subject to adjustment as set forth in the Separation and Distribution Agreement and was 0.9366 as of June 30, 2020).
Newmark incurred compensation expense related to Class A common stock,
(the “exchange ratio”).limited partnership units and RSUs held by Newmark employees as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Issuance of common stock and exchangeability expenses | $ | 306 |
| | $ | 21,511 |
| | $ | 8,425 |
| | $ | 22,172 |
|
Allocations of net income to limited partnership units and FPUs (1) | 1,104 |
| | 11,601 |
| | 1,653 |
| | 17,915 |
|
| Limited partnership units amortization | 6,011 |
| | 5,044 |
| | 7,906 |
| | 11,377 |
|
| RSU amortization | 3,560 |
| | 1,197 |
| | 5,911 |
| | 1,760 |
|
Equity-based compensation and allocations of net income to limited partnership units and FPUs (2) | $ | 10,981 |
| | $ | 39,353 |
| | $ | 23,895 |
| | $ | 53,224 |
|
| |
(1) | Certain limited partnership units receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders, including the Preferred Distribution. |
| |
(2) | Reclassifications have been made to previously reported amounts to conform to the new presentation (see Note 1 — “Organization and Basis of Presentation”). |
| |
| (a) | Limited Partnership Units |
A summary of the activity associated with limited partnership units held by Newmark employees in BGC Holdings is as follows: |
| | | | | |
| | Newmark Units | | BGC Units |
| Balance, January 1, 2019 | 44,733,487 |
| (1) | 61,870,969 |
|
| Issued | 13,813,204 |
| | 319,586 |
|
| Redeemed/exchanged units | (2,487,885 | ) | | (3,938,134 | ) |
| Forfeited units/other | 4,742,046 |
| | (2,198,720 | ) |
| Balance, December 31, 2019 | 60,800,852 |
| | 56,053,701 |
|
| Issued | 5,451,714 |
| | 1,064,781 |
|
| Redeemed/exchanged units | (1,314,615 | ) | | (1,269,498 | ) |
| Forfeited units/other | (5,067 | ) | | (1,671 | ) |
| Balance, June 30, 2020 | 64,932,884 |
| | 55,847,313 |
|
| | | | |
| Total exchangeable units outstanding: | | | |
| December 31, 2019 | 10,108,598 |
| | 24,692,695 |
|
| June 30, 2020 | 10,527,658 |
| | 26,071,003 |
|
| | Number of
Units
| |
Balance at December 31, 2017
(1) | | | 64,708,915
| |
Redeemed/exchangedIncludes the pre-IPO Newmark employees share-equivalent limited partnership units
| | | (353,054
| )
|
Forfeited units
| | | (18,233
| )
|
Balance at March 31, 2018
| | | 64,337,628
| in BGC Holdings. |
A summary of
The Limited Partnership Units table above includes both regular and Preferred Units. The Preferred Units are not entitled to participate in partnership distributions other than with respect to 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: | | Number of
Units
| |
Balance at December 31, 2017
| | | 29,413,143
| |
Granted
| | | 3,767,619
| |
Redeemed/exchanged units
| | | (160,479
| )
|
Forfeited units
| | | (8,288
| )
|
Balance at March 31, 2018
| | | 33,011,995
| |
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 andPreferred 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—Limited2 — “Limited Partnership Interests in BGC Holdings and Newmark HoldingsHoldings” for further detailsinformation on Preferred Units). The Limited Partnership table above also includes acquisition-related partnership units. As of
June 30, 2020, there were 5.3 million partnership units in Newmark Holdings outstanding, of which 2.2 million units were exchangeable, and 9.6 million partnership units in BGC Holdings outstanding, of which 5.0 million were exchangeable. As of December 31, 2019, there were 5.3 million partnership units in Newmark Holdings outstanding, of which 1.4 million units were exchangeable, and 9.5 million partnership units in BGC Holdings outstanding, of which 2.9 million were exchangeable. A summary of the SeparationBGC Holdings 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 forheld by Newmark Class A common stock.employees is as follows: |
| | | | | |
| | Newmark Units | | BGC Units |
| Regular units | 60,514,149 |
| | 54,233,769 |
|
| Preferred Units | 4,418,735 |
| | 1,613,544 |
|
| Balance, June 30, 2020 | 64,932,884 |
| | 55,847,313 |
|
During
A summary of units held by Newmark employees redeemed in connection with the
three months ended March 31, 2018, BGC granted exchangeability on 1.5 million and 0.7 million limited partnership units in BGC Holdings andissuance of 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 ofor 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(at the current exchange ratio) or granted exchangeability for 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 intoor BGC Class A common stock contingent uponis as follows:
|
| | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| BGC Units | 38,552 |
| | 232,625 |
| | 187,832 |
| | 291,625 |
|
| Newmark Units | 26,212 |
| | 24,466 |
| | 168,653 |
| | 54,466 |
|
| Total | 64,764 |
| | 257,091 |
| | 356,485 |
| | 346,091 |
|
Compensation expense related to the
issuance of Newmark
spinoff. The number of share-equivalent limited partnership units exchangeable into shares ofor BGC Class A common stock
asand grants of
December 31, 2017 represented 12.3 millionexchangeability on Newmark Holdings and
5.6 million ofBGC Holdings limited partnership units
in BGC Holdings andto 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 limitedemployees is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Issuance of common stock and exchangeability expenses | $ | 7 |
| | $ | 2,559 |
| | $ | 2,481 |
| | $ | 3,220 |
|
Limited partnership units with a post-termination
pay-out amountpayout held by
executives and non-executiveNewmark employees
awardedare as follows (dollars 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.
thousands):
|
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
Notional Value(1) | $ | 253,730 |
| | $ | 261,025 |
|
Estimated fair value of the post-termination payout(2) | $ | 58,568 |
| | $ | 51,378 |
|
| Outstanding limited partnership units in BGC Holdings | 5,397,109 |
| | 6,251,816 |
|
| Outstanding limited partnership units in BGC Holdings - unvested | 1,133,784 |
| | 1,508,510 |
|
| Outstanding limited partnership units in Newmark Holdings | 17,820,912 |
| | 17,097,639 |
|
| Outstanding limited partnership units in Newmark Holdings - unvested | 9,028,859 |
| | 9,357,822 |
|
| |
(1) | Beginning January 1, 2018, Newmark began granting stand-alone limited partnership units in Newmark Holdings to Newmark employees. |
| |
(2) | Included in “Other long-term liabilities” on the accompanying unaudited condensed consolidated balance sheets. Liability balance also includes $6.8 million of acquisition related post-termination units. |
Compensation expense related to limited partnership units held by Newmark employees with a post-termination pay-out amount is recognized over the stated service period. These units generally vest between three and fiveseven years from the date of grant. Newmark recognized compensation expense expense/(benefit), before associated income taxes, related to these limited partnership units that were not redeemed of $(8.7) million and $5.8 million threeas follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Limited partnership units amortization | $ | 6,011 |
| | $ | 5,044 |
| | $ | 7,906 |
| | $ | 11,377 |
|
During the six months ended March 31, 2018June 30, 2020 and 2017, respectively. These are included in “Compensation and employee benefits” in Newmark’s unaudited condensed consolidated statements of operations.Certain
2019, Newmark did not grant any conversion rights to Newmark employees on outstanding limited partnership units generallyin BGC Holdings or Newmark Holdings, giving the employee the option to convert the limited partnership units to HDUs with a capital balance within BGC Holdings or Newmark Holdings. Generally, HDUs are not considered share-equivalent limited partnership units and are not in the fully diluted share count. The grant of conversion rights to Newmark employees are as follows (in thousands): |
| | | | | | | |
| | June 30,
2020 | | December 31,
2019 |
| Notional Value | $ | 193,278 |
| | $ | 194,995 |
|
Estimated fair value of limited partnership units (1) | $ | 187,646 |
| | $ | 182,800 |
|
| |
(1) | Included in “Other long-term liabilities” on the accompanying unaudited condensed consolidated balance sheets. |
Compensation expense related to these limited partnership units held by Newmark employees was as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Issuance of common stock and exchangeability expenses | $ | 299 |
| | $ | 18,952 |
| | $ | 5,944 |
| | $ | 18,952 |
|
During the three and six months ended June 30, 2020, Newmark employees were granted 1.4 million and 6.3 million N Units, respectively, that are excluded from the table above, since these units are not considered share-equivalent limited partnership units and are not included in the fully diluted share count. The N Units do not receive quarterly allocations of net income and remain unvested. Upon vesting, which occurs if the certain thresholds are cash distributed on a quarterly basis and generally contingent upon services being provided bymet, the unit holders. The allocation of incomeN Units are converted to equivalent limited partnership units was $4.1that receive quarterly certain income distributions and can be granted exchange rights or redeemed at a later date, at which time these N Units would be reflected as a share-equivalent grant in the tables above. During the three and six months ended June 30, 2020, 0.9 million and $4.61.5 million for the three months ended March 31, 2018N Units respectively, vested and 2017, respectively. This expense is included within “Allocations of net income and grant of exchangeability toconverted into distribution earning limited partnership units”units and were therefore included in Newmark’s unaudited condensed consolidated statements of operations.
the fully diluted share count.
| |
| (b) | Restricted Stock Units |
A summary of the activity associated with
Newmark and BGC RSUs
in BGCheld by Newmark employees is as
follows:follows (fair value amount in thousands):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 | |
|
| | | | | | | | | | | | | | | | | | | |
| | Newmark RSUs(1) | | BGC RSUs(2) |
| | Restricted
Stock
Units | Weighted-
Average
Grant Date
Fair Value Per Share | Fair Value Amount | Weighted-
Average
Remaining
Contractual
Term (Years) | | Restricted
Stock
Units | Weighted-
Average
Grant Date
Fair Value Per Share | Fair Value Amount | Weighted-
Average
Remaining
Contractual
Term (Years) |
| Balance, January 1, 2019 | 219,887 |
| $ | 13.52 |
| $ | 2,973 |
| 2.28 | | 168,675 |
| $ | 9.77 |
| $ | 1,619 |
| 0.98 |
| Granted | 4,766,611 |
| 7.42 |
| 35,344 |
| | | — |
| — |
| — |
| |
| Settled units (delivered shares) | (109,007 | ) | 11.70 |
| (1,275 | ) | | | (107,820 | ) | 9.38 |
| (1,011 | ) | |
| Forfeited units | (193,920 | ) | 8.67 |
| (1,681 | ) | | | (14,048 | ) | 10.02 |
| (141 | ) | |
| Balance, December 31, 2019 | 4,683,571 |
| $ | 7.55 |
| $ | 35,361 |
| 5.69 | | 46,807 |
| $ | 9.97 |
| $ | 467 |
| 0.25 |
| Granted | 6,203,624 |
| $ | 8.63 |
| $ | 53,512 |
| | | 7,912 |
| $ | 3.69 |
| $ | 29 |
| |
| Settled units (delivered shares) | (626,788 | ) | $ | 8.00 |
| $ | (5,015 | ) | | | (40,642 | ) | $ | 10.35 |
| $ | (421 | ) | |
| Forfeited units | (48,645 | ) | $ | 8.65 |
| $ | (421 | ) | | | (1,063 | ) | $ | 10.52 |
| $ | (11 | ) | |
| Balance, June 30, 2020 | 10,211,762 |
| $ | 8.17 |
| $ | 83,437 |
| 6.14 | | 13,014 |
| $ | 4.94 |
| $ | 64 |
| 1.71 |
| |
(1) | Beginning January 1, 2018, Newmark began granting stand-alone Newmark RSUs to Newmark employees with the awards vesting ratably over the two- to eight-year vesting period into shares of Newmark Class A common stock. |
| |
(2) | RSUs granted to these individuals generally vest over a two to four year period. |
The fair value of
Newmark and BGC RSUs
awarded toheld by Newmark 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
infor one share of
BGC’sBGC or Newmark Class A common stock,
as applicable, 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 Newmark and BGC 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. are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| RSU amortization | $ | 3,560 |
| | $ | 1,197 |
| | $ | 5,911 |
| | $ | 1,760 |
|
As of March 31, 2018June 30, 2020, there was approximately $2.5$80.5 million total unrecognized compensation expense related to unvested Newmark RSUs and $0.1 million total unrecognized compensation expense related to unvested BGC 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 $1.1was $0.1 million and $0.2 million for the three and six months ended June 30, 2020, respectively, and $0.2 million and $0.4 million for the three and six months ended June 30, 2019, respectively. As of March 31, 2018June 30, 2020 and December 31, 2017,2019, the total liability for the deferred cash compensation awards was $0.6$1.1 million and $0.4$1.5 million, respectively, and is included in “Accounts payable and accrued expenses” in Newmark’s“Other long-term liabilities” on the unaudited condensed consolidated balance sheets.
See Note 27 — "Related Party Transactions" for compensation related matters for the transfer of CCRE employees to Newmark.
(31) Commitments and Contingencies
(29)
| Commitments
|
| (a) | Contractual Obligations and ContingenciesCommitments |
Contractual Obligations and Commitments
As of
March 31, 2018June 30, 2020 and December 31,
2017,2019, Newmark was committed to fund approximately
$437 million$0.5 billion and
$244 million,$1.5 billion, respectively, which is the total remaining draws on construction loans originated by Newmark under the HUD 221(d)4, 220 and 232 programs, rate locked loans that have not been funded, forward commitments, as well as the funding for Fannie Mae structured transactions. Newmark also has corresponding commitments to sell these loans to various investors as they are funded.
Lease Commitments
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 the leases contain escalation clauses that require payment of additional rent to the extent of increases in certain operating or other costs.
Rent expense for the three months ended March 31, 2018 and 2017 was $10.2 million and $9.8 million, respectively. Rent expense is reported in “Operating, administrative and other” in Newmark’s unaudited condensed consolidated statements of operations.
Contingent Payments Related to Acquisitions
| |
| (b) | Contingent Payments Related to Acquisitions |
Newmark completed acquisitions in 2014,from 2015 2016 and 2017through 2020 for which contingent cash consideration may be issued on certain targets being met through 2020 of $12.4$20.1 million. The contingent equity instruments are issued byincluded in “Accounts payable, accrued expenses and are recorded as a payable to related partyother liabilities” on Newmark’s unauditedcondensed consolidated balance sheet.sheets. The contingent cash liability is recorded at fair value as deferred consideration on Newmark’sthe accompanying unauditedcondensed consolidated balance sheet.sheets.
Contingencies
In the ordinary course of business, various legal actions are brought and are pending against Newmark and its subsidiaries in the U.S. and internationally. In some of these actions, substantial amounts are claimed. Newmark is also involved, from time to time, in reviews, examinations, investigations and proceedings by governmental and self-regulatory agencies (both formal and informal) regarding Newmark’s businesses, which may result in
regulatory, civil and criminal judgments, settlements, fines, penalties, injunctions or other relief. The following generally does not include matters that Newmark has pending against other parties which, if successful, would result in awards in favor of Newmark or its subsidiaries:
Employment, Competitor-Related and Other Litigation
From time to time, Newmark and its subsidiaries are involved in litigation, claims and arbitrations in the U.S. and internationally, relating to various employment matters, including with respect to termination of employment, hiring of employees currently or previously employed by competitors, terms and conditions of employment and other matters. In light of the competitive nature of the real estate services industry, litigation, claims and arbitration between competitors regarding employee hiring are not uncommon.
Legal reserves are established in accordance with U.S. GAAP guidance on Accounting for Contingencies, when a material legal liability is both probable and reasonably estimable. Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change. The outcome of such items cannot be determined with certainty. Newmark is unable to estimate a possible loss or range of loss in connection with specific matters beyond its current accrual and any other amounts disclosed. Management believes that, based on currently available information, the final outcome of these current pending matters will not have a material adverse effect on Newmark’s unauditedcondensed consolidated financial statements and disclosures taken as a whole.
Newmark generates revenues by providing financial intermediary and brokerage activities and commercial real estate services to institutional customers. Revenues for these services are transaction-based. As a result, revenues could vary based on the transaction volume of global financial and real estate markets. Additionally, financing is sensitive to interest rate fluctuations, which could have an impact on Newmark’s overall profitability.
(30)
(32) Subsequent Events
First
Second Quarter
20182020 Dividend
On May 2, 2018,August 5, 2020, Newmark’s Board of Directors declared a quarterly qualified cash dividend of $0.09$0.01 per share for the first quarter of 2018, payable on June 5, 2018September 14, 2020 to Newmark Class A and Class B common stockholders of record as of May 21, 2018.August 26, 2020. The ex-dividend date will be August 25, 2020.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Newmark’s financial condition and results of operations should be read together with Newmark’s
accompanying unaudited condensed consolidated financial statements and related notes, as well as the
risk factors and the cautionary statements“Special Note Regarding Forward-Looking Information” relating to forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), included in
Newmark’sNewmark's Annual Report on Form 10-K and in this report. When used herein, the terms “Newmark Knight Frank,” “Newmark,” the “Company,” “we,” “us,” and “our” refer to Newmark and its consolidated subsidiaries.
This discussion summarizes the significant factors affecting our results of operations and financial condition during the three months ended
March 31, 2018June 30, 2020 and
2017.2019. We operate in one reportable segment, real estate services. This discussion is provided to increase the understanding of, and should be read in conjunction with, our
unauditedaccompanying condensed consolidated financial statements and the notes thereto included elsewhere in this report.
Overview
and Business EnvironmentNewmark is a
rapidly growing, high-margin, full-service commercial real estate services business.
Since 2011, the year in which we were acquired by BGC Partners, Inc. (“BGC”), we have been the fastest growing U.S. commercial real estate services firm (when compared with our publicly traded U.S. peers), with a revenue compound annual growth rate of 37.7%. We offer a
full suitediverse array of
integrated services and products
fordesigned to meet the full needs of both
real estate investors/owners and
occupiers across the entire commercial real estate industry.occupiers. Our investor/owner services and products include capital markets, which consists of investment sales, debt and structured finance and loan sales, agency leasing, property management, valuation and advisory,
commercial real estate due diligence
consulting and
underwritingadvisory services and
government-sponsoredgovernment sponsored enterprise
(which we refer to as “GSE”(“GSE”) lending and loan
servicing.servicing, mortgage broking and equity-raising. Our occupier services and products include tenant representation, real estate management technology systems, workplace and occupancy strategy, global corporate consulting services, project management, lease administration and facilities management. We enhance 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. We have relationships with many of the world’s largest commercial property owners, real estate developers and investors, as well as Fortune 500 and Forbes Global 2000 companies.
For the three months ended March 31, 2018, we generated revenues of $430.5 million, representing growth of 29.4% versus the same period in the prior year.
We generate revenues from commissions on leasing and capital markets transactions, consulting and technology user fees, property and facility management fees, and mortgage origination and loan servicing fees.
Our growth to date has been focused in North America.
WeAs of June 30, 2020, we have
nearly 5,900 employees, including more than
4,900 employees, including over 1,5501,800 revenue-generating producers in over
120139 offices in
90more than 111 cities. In addition, Newmark has licensed its name to
2111 commercial real estate providers that operate out of
3717 offices in certain locations where Newmark does not have its own offices.
Our partner, Knight Frank, operates out of nearly 300 offices.
The discussion of our financial results reflects only
those businessesthe business owned by us and does not include the results for Knight Frank or for the independently owned offices that use some variation of the Newmark name in their branding or marketing.
Over the past several years, we expanded our capital markets capabilities through the strategic addition of many prolific, accomplished capital markets
brokersproducers in key markets throughout the United States. We have access to many of the world’s largest owners of commercial real estate, and this will drive growth throughout the life cycle of each real estate asset by allowing us to provide best-in-class agency leasing and property management during the ownership period. We also provide investment sales and arrange debt and equity financing to assist owners in maximizing the return on investment in each of their real estate assets. Specifically, with respect to multifamily assets, we are a leading GSE lender by loan origination volume and servicer with a servicing portfolio of
$58.8$65.2 billion as of
March 31, 2018June 30, 2020 (of which
approximately 6.2%3.7% relates to special servicing). This servicing portfolio provides a steady stream of income over the life of the serviced loans.
We have also begun a dramatic expansion of our valuation and appraisal business from whichAdditionally, over time we expect to see
significantcontinued growth
from our valuation and advisory and property management businesses, particularly in conjunction with our increasingly robust capital markets platform.
We continuecontinued to invest in the business by adding dozens of high profile and talented brokersproducers and other revenue-generating professionals.professionals through March 31, 2020. Historically, newly hired commercial real estate brokersproducers tend to achieve dramatically higher productivity in their second and third years with our company, although we incur related expenses immediately. As our newly hired brokersproducers increase their production, we expect our commission revenue and earnings growth to strongly accelerate, thus reflecting our operating leverage. We expect our overall profitability to increase as we increase the size and scale of our business.
Our pre-tax margins are impacted by the mix of revenues generated. For example,
Gains from mortgage banking activities/originations, net, which includesservicing revenues
related to commercial mortgage origination, tendstend to have higher pre-tax margins than Newmark as a
whole. In addition, capital markets, which
includes sales, commercialwhole and margins from “Gains from mortgage broking, and other real estate-related financial services, generally has larger transactions that occur with less frequency and more seasonality when compared with leasing advisory.banking activities/originations, net” tend to be lower as we retain rights to service loans over time. Capital markets transactions tend to have higher pre-tax margins than
leasing advisory transactions, while leasing advisory revenues are generally more predictable than revenues from capital markets. Propertytransactions. Pre-tax earnings margins on our property and facilities management, along with certain of our other Global Corporate Services (“GCS”) products, generally have the most predictable and steady revenues, although pre-tax earnings margins for property and facilities management are at the lower end of thosemargins for our business as a whole. When management services clients agree
Business Environment
In early March 2020, COVID-19 was characterized as a global pandemic by the World Health Organization. COVID-19 has spread rapidly across the world, which has resulted in governments and businesses around the world implementing numerous measures to give us exclusive rightscontain the virus, such as travel bans and restrictions, quarantines, "shelter-in-place" orders and business shutdowns. The pandemic and these containment measures have had, and are expected to provide real estate services for their facilitiescontinue to have, a substantial negative impact on businesses around the world and on national and global economies.
As the COVID-19 pandemic unfolded globally, we moved quickly to protect our employees and implemented a work from home policy, all nonessential business travel was banned and corporate events were deferred or properties, itcanceled. While COVID-19 was primarily limited to specific countries in Asia and Europe in the first two months of the year, the second half of March through June 30, 2020 saw a sharp contraction in the U.S. economy, which triggered a dramatic decline in our business volumes. There continues to be a significant amount of uncertainty around COVID-19 and the measures taken by the federal and state governments in response to this pandemic. Here is for an extended perioda summary of time, which provides us with stablethe impact of COVID-19 on our various businesses:
U.S. industry leasing and
foreseeable sources of revenues. Newmark’s revenues are balanced between businesses that are relatively less predictable and contractual sources that are very predictable. Approximately 42% of our revenues and other income forcapital markets volumes fell significantly during the
trailing twelve months ended March 31, 2018 were generated by our most predictable and recurring sources, including agency leasing, valuation, GCS, management services, income relatedquarter due to the
receiptimpact of
Nasdaq shares,COVID-19, which caused widespread disruptions in economic activity and
loan servicing. Another approximately 23% was generated by our moderately recurring tenant representation leasing business. The remaining 35% of revenues and other income was generated by our more transactional investment sales, mortgage broking, and GSE lending platforms.Berkeley Point Acquisition
On July 18, 2017, BGC announced that it agreed to acquire Berkeley Point Financial LLC and its subsidiary (together referred to as “Berkeley Point” or “BPF”) from an affiliate of Cantor Fitzgerald, L.P. (“Cantor”). This affiliate of Cantor had acquired Berkeley Point on April 10, 2014. Berkeley Point is a leadingelevated uncertainty for commercial real estate finance company focusedvaluations and the outlook for the global economy. We expect our leasing and capital markets volumes to remain muted at least through the end of the third quarter of 2020.
The GSEs financed approximately 70 percent of all multifamily originations in 2008 and 2009, according to the Urban Institute, largely because alternative sources of financing pulled back significantly. GSE mortgage originations were strong in the second quarter and we expect volumes to remain healthy through the remainder of the year.
Management and consulting businesses performed well during the quarter, as our clients turned to Newmark for advice on their real estate portfolios, including new environmental safety requirements, managing costs associated with implementing these new standards as well as assessing facility and employee readiness as companies plan their return to offices in the originationwake of the pandemic.
Valuation and saleAdvisory revenues declined during the quarter. However, we are seeing signs of multifamilystronger demand and pipelines are building into the third quarter of 2020.
Impact of COVID-19 on Employees
Newmark has taken steps that it believes will help its employees during this global pandemic. These policies and practices protect the health, safety and welfare of the Company’s workforce while enabling employees to maintain a high level of performance in compliance with applicable “shelter-in-place” orders. Certain of these items are summarized below.
The Company activated its Business Continuity Plan in the first quarter of 2020 and implemented a work from home policy. In all cases, the Company has mandated appropriate social distancing measures;
The Company has developed standardized procedures for reopening its offices safely in accordance with state and local regulatory requirements. While we began opening offices at reduced capacity to some employees in mid-July, a majority of our staff members continue to work from home, or other remote locations and disaster recovery venues.
The Company provides ongoing informational COVID-19 related messages and notices;
Where applicable, Newmark has applied and is continuing to apply more frequent and vigorous hygiene and sanitation measures and providing personal protective equipment;
Internal and external meetings are conducted virtually or via phone calls;
Nonessential business travel has been restricted while personal travel has been discouraged, particularly in areas most affected by the pandemic;
Newmark has deferred and is continuing to defer corporate events and participation in industry conferences;
If relevant, Newmark has deployed clinical staff internally to support its employees and required self-quarantine;
The Company’s medical plans have waived applicable member cost sharing for all diagnostic testing related to COVID-19;
Newmark continues to pay medical, dental, vision, and life insurance contributions for furloughed employees;
The Company also introduced zero co-pay telemedicine visits for general medicine for participants in the U.S. medical plans and their dependents. Newmark has encouraged the use of telemedicine during the pandemic;
The Company has reminded employees about its Employee Assistance Program and the ways it can assist them during this challenging time;
Newmark provides paid leave in accordance with its policies and applicable COVID-19-related laws and regulations; and
Newmark's executive officers volunteered to reduce their annual basis salaries by 50% for Messrs, Lutnick and Gosin and 15% by Messrs, Merkel and Rispoli and Newmark's independent directors volunteered to forego 15% of their annual cash retainer, effective from April 27, 2020 through December 31, 2020.
Impact of COVID-19 on Newmark's Clients
Newmark expects to help its clients manage their real estate portfolios during this pandemic in the following ways:
The Company has provided and is continuing to provide consulting and advisory services for tenants that need assistance with implementing policies with respect to social distancing, workplace strategy, and portfolio strategies;
Newmark has assisted and is continuing to assist clients in determining what their real estate needs will be in the short, medium, and long term and how they can devise and implement related strategies;
The Company has enabled and is continuing to enable commercial real estate loans through government-sponsoredowners and government-funded loan programs,investors with respect to appraisals and has helped and is continuing to help in select ways for them to preserve and create value. The Company has also helped and is continuing to help them navigate new requirements resulting from the pandemic, including with respect to cleaning, social distancing, and remote working; and
Newmark's professionals are in constant communication with many of the largest institutions in the world to discuss debt and asset strategies in this rapidly evolving environment.
Impact of COVID-19 on the Company's Results
Newmark's brokerage revenues declined in the second quarter of 2020, primarily due to lower industry-wide leasing and capital markets volumes. Management services, servicing fees, and other declined due to lower non-fee pass-through revenues and lower interest income on escrow balances, but were otherwise largely unaffected by the pandemic. The declines in brokerage and other revenues were partially offset by gains from mortgage banking activities, which increased due to higher volumes and a more balanced mix of GSE originations.
Certain GAAP expenses have been and may continue to be higher than they otherwise would have due to the pandemic. The impacted items have included and may continue to include:
Non-cash amortization of intangibles with respect to acquisitions;
Non-cash asset impairment charges with respect to goodwill or other intangible assets;
Non-cash mark-to-market adjustments for non-marketable investments;
Severance charges incurred in connection with headcount reductions as well uspart of cost savings initiatives;
Non-compensation-related charges incurred as part of cost savings initiatives. Such GAAP items may include charges for exiting leases and/or other long-term contracts as part of cost-saving initiatives;
Newmark’s provisions for non-cash credit reserves under the servicingCECL methodology; and
Increased debt as a result of commercial real estate loans, including those it originates. The acquisitionan additional drawdown on the Credit Facility.
In addition, certain other expenses may be greater than they might otherwise have been or negatively impact the Company’s margins due to the pandemic. These items are included for purposes of Berkeley Point was completedcalculating Newmark's GAAP results.
Some of the potentially elevated expenses may be partially offset by certain tax benefits. It is difficult to predict the amounts of any of these items or when they might be recorded because they may depend on September 8, 2017 (the “Berkeley Point Acquisition”). The total considerationthe duration, severity, and overall impact of the pandemic.
In response to the impact of the COVID-19 pandemic, we took actions to reduce at least $100 million in expenses for
the Berkeley Point Acquisition was $875 million, subject2020 related to
certain adjustments at closing.support and operations functions.
Separation and Distribution
Separation and Distribution and Related Agreements
On December 13, 2017,
in connection with the Separation (as defined below), the assets and liabilities of BPF were transferred to Newmark. This transaction has been determined to be a combination of entities under common control that resulted in a change in the reporting entity. Accordingly, our financial results have been recast to include the financial results of BPF in the current and prior periods as if BPF had always been consolidated. We believe that the addition of Berkeley Point will significantly increase the scale and scope of our business and generate substantial revenue synergies.Initial Public Offering
On December 13, 2017, prior to the closing of Newmark’s initial public offering (the “IPO”); BGC, BGC Holdings, L.P. (“BGC Holdings”), BGC Partners, L.P. (“BGC U.S. OpCo”), Newmark, Newmark Holdings, L.P. (“Newmark Holdings”), Newmark Partners, L.P. (“Newmark OpCo”), and, solely for the provisions listed therein, Cantor Fitzgerald L.P. (“CFLP” or “Cantor”, including Cantor Fitzgerald & Co. (“CF&Co”) and BGC Global Holdings, L.P. (“BGC Global OpCo”) entered into a Separation and Distribution Agreement (the(as amended on November 8, 2018 and amended and restated on November 23, 2018, the “Separation and Distribution Agreement”). The SeparationSee Note 1 — “Organization and Distribution Agreement sets forth the agreements among BGC, Cantor, Newmark and their respective subsidiaries regarding, among other things:
the principal corporate transactions pursuantBasis of Presentation” 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 liabilitiesfinancial statements in Part II, Item 8 of the BGC Group relating to BGC’s Real Estate Services business (the “Separation”);
Newmark Annual Report on Form 10-K for the proportional distribution of interests in Newmark Holdings to holders of interests in BGC Holdings;
year ended December 31, 2019, for additional information regarding the IPO;
the assumption and repayment of indebtedness by the BGC Group and the Newmark Group, as further described below;
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 (the “Distribution” or the “Spin-off’), pursuant to which shares of Newmark Class A common stock held by BGC would be distributed to the holders of shares of Class A common stock of BGC and shares of Newmark Class B Common Stock held by BGC would be distributed to the holders of shares of Class B common stock of BGC (which are currently Cantor and another entity controlled by Howard W. Lutnick), which distribution is intended to qualify as generally tax-free for U.S. federal income tax purposes; provided that the determination of whether, when and how to proceed with the Distribution shall be entirely within the discretion of BGC; and
other agreements governing the relationship between BGC, Newmark and Cantor.
In connection with the Separation and the IPO, on December 13, 2017, the applicable parties entered into the following additional agreements:
an Amended and Restated Agreement of Limited Partnership of Newmark Holdings, dated as of December 13, 2017;
an Amended and Restated Agreement of Limited Partnership of Newmark OpCo, dated as of December 13, 2017, as amended;
a Second Amended and Restated Agreement of Limited Partnership of BGC U.S. OpCo, dated as of December 13, 2017;
a Second Amended and Restated Agreement of Limited Partnership of BGC Global OpCo, dated as of December 13, 2017;
a Registration Rights Agreement, dated as of December 13, 2017, by and among Cantor, BGC and Newmark;
a Transition Services Agreement, dated as of December 13, 2017, by and between BGC and Newmark;
a Tax Matters Agreement, dated as of December 13,2017, by and among BGC, BGC Holdings, BGC U.S. OpCo, Newmark, Newmark Holdings and Newmark OpCo;
an Amended and Restated Tax Receivable Agreement, dated as of December 13, 2017, by and between Cantor and BGC;
an Exchange Agreement, dated as of December 13, 2017, by and among Cantor, BGC and Newmark;
an Administrative Services Agreement, dated as of December 13, 2017, by and between Cantor and Newmark; and
a Tax Receivable Agreement, dated as of December 13, 2017, by and between Cantor and Newmark.
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.
Immediately priortransactions related to the Separation, the limited partnership interestsIPO and Spin-Off.
See Note 22 — “Long-Term Debt” and Note 27 — “Related Party Transactions” to our accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.
BGC’s Investment in Newmark Holdings
were distributed to the holders of limited partnership interests in BGC Holdings, whereby each holder of BGC Holdings limited partnership interests at that time received a BGC Holdings limited partnership interest and a corresponding Newmark Holdings limited partnership interest, equal to a BGC Holdings limited partnership interest multiplied by one divided by 2.2 (the “contribution ratio”), divided by the ratio by which a Newmark Holdings limited partnership interest can be exchanged for a number of Newmark Class A common stock (the “exchange ratio.”) Initially, the exchange ratio equaled one, so that each Newmark Holdings limited partnership interest is exchangeable for one Newmark Class A common stock, however, the exchange ratio is subject to adjustment. For example, for reinvestment, acquisition or other purposes, Newmark has determined on a quarterly basis to distribute to its stockholders a smaller percentage 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 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.On December 19, 2017, Newmark closed its IPO of 20 million shares of Newmark’s Class A common stock at a price to the public of $14.00 per share. A registration statement relating to these securities was filed with, and declared effective by, the U.S. Securities and Exchange Commission. In addition, Newmark granted the underwriters a 30-day option to purchase up to an additional 3 million shares of Newmark’s Class A common stock at the IPO price, less underwriting discounts and commissions (the “overallotment option”). Subsequent to the IPO, the underwriters exercised the overallotment option in full. Upon the closing of the overallotment option, which occurred on December 26, 2017, Newmark’s public stockholders owned approximately 9.8% of Newmark’s 234.2 million fully diluted shares outstanding. Newmark received aggregate net proceeds of $295.4 million from the IPO, after deducting underwriting discounts and commissions and estimated offering expenses.
Accordingly, our financial results reflect the agreements discussed above related to the IPO. In addition, since the IPO, we have improved the credit profile of Newmark. The combination of our lower long-term debt and higher total equity have improved our credit ratios with specific regard to debt to equity. Newmark intends to continue to benefit from these strengths and pursue its own credit rating. We aim to obtain an investment grade rating to assist us in refinancing our $812.5 million of long-term debt owed to or guaranteed by BGC.
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 for approximately $242.0 million (“BGC’s Investment(the “Investment by BGC in Newmark”Newmark Holdings”). See Note 27 — “Related Party Transactions” to our accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.
Debt Credit Agreements
On November 6, 2018, Newmark closed its offering of $550.0 million aggregate principal amount of 6.125% Senior Notes due 2023 (“6.125% Senior Notes”). 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 Units6.125% Senior Notes are exchangeable, at BGC’s discretion, into either shares of Class A common stock or shares of Class B common stockgeneral senior unsecured obligations of Newmark. BGC’s InvestmentThe 6.125% Senior Notes, which were priced on November 1, 2018 at 98.937% to yield 6.375%, were offered and sold by Newmark in a private offering exempt from the registration requirements under the Securities Act. Newmark was made pursuant to an Investment Agreement, dated as of March 6, 2018, by and among BGC, BGC Holdings, BGC Partners, L.P., BGC Global Holdings, L.P., Newmark, Newmark Holdings and Newmark Partners, L.P. BGC’s Investment in Newmark and related transactions were approved by the Audit Committees and Boards of Directors of BGC and Newmark. BGC and its operating subsidiaries funded BGC’s Investment in Newmark using thereceived net proceeds of BGC’s CEO sales program.$537.6 million, net of debt issue costs and debt discount. 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. Newmark used the net proceeds to repay the remaining balance of the outstanding principalConverted Term Loan of $133.9 million, the balance of the Intercompany Credit Agreement of $130.5 million, and a portion of the 2019 Promissory Note (as defined below). The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act. As of June 30, 2020 and December 31, 2019, the carrying amount under its unsecured senior term loanof the 6.125% Senior Notes was $541.6 million and $540.4 million, respectively.
On November 28, 2018, Newmark entered into a 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 (the “Credit Agreement”). The Credit Agreement provides for a $250.0 million three-year unsecured senior revolving credit facility (the “Credit Facility”).
On February 26, 2020, Newmark entered into an amendment to the Credit Agreement (the “Amended Credit Agreement”), increasing the size of the Credit Facility to $425.0 million (“the Credit Facility”) and extending the maturity date to February 26, 2023. The interest rate on the Credit Facility was reduced to LIBOR plus 1.75% per annum, subject to a syndicatepricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch.
On March 16, 2020, Newmark entered into a second amendment to the Credit Agreement (the “Second Amended Credit Agreement”), increasing the size of lenders. In addition,the Credit Facility to $465.0 million and extending the maturity date to February 26, 2023. The interest rate on the Amended Credit Facility is LIBOR plus 1.75% per annum, subject to a pricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch. As of June 30, 2020 and December 31, 2019, the carrying amount of the Credit Facility was $412.1 million and $48.9 million, respectively.
On June 16, 2020, the Company’s Board of Directors and its Audit Committee authorized a debt repurchase program for the repurchase by the Company in the amount of up to $50.0 million of the Company’s 6.125% Senior Notes and any future debt securities issued by the Company hereafter (collectively, “Company debt securities”). Repurchases of Company debt securities, if any, are expected to reduce future cash interest payments, as well as future amounts due at maturity or upon redemption.
Under the spin-off, theseauthorization, the Company may make repurchases of Company debt securities for cash from time to time in the open market or in privately negotiated transactions upon such terms and at such prices as management may determine. Additionally, the Company is authorized to make any such repurchases of Company debt securities through Cantor Fitzgerald & Co. (or its affiliates), in its capacity as agent or principal, or such other broker-dealers as management shall determine to utilize from time to time upon customary market terms or commissions.
As of June 30, 2020, the Company had $50.0 million remaining from its debt repurchase authorization.
On June 19, 2020, Newmark
Unitsestablished a $125.0 million sublimit line of credit to fund potential principal and interest servicing advances on its Fannie Mae portfolio during the forbearance period related to the CARES Act. The sublimit is now included within the Company’s existing $450 million warehouse facility due June 16, 2021. The advance line will
be exchanged into Newmark Class A or Class B common stock,provide 100% of the principal and interest advance payment at a rate of 1-month LIBOR plus 2.00% and will be
includedcollateralized by Fannie Mae's commitment to repay advances. Newmark currently has four Fannie Mae loans in forbearance, with $0.3 million of advances outstanding as
part of
the Newmark Distribution to holders of shares of BGC Class A or Class B common stock.May 31, 2020.
On March 19,November 30, 2018, Newmark and BGC Partners entered into an Amended and Restated Intercompanyunsecured credit agreement (the “Cantor Credit Agreement”) with Cantor. The Cantor Credit Agreement (the “Intercompanyprovides for each party to issue loans to the other party in the lender’s discretion. Pursuant to the Cantor Credit Agreement”)Agreement, the parties and on the same date Newmark borrowed $150.0their respective subsidiaries (with respect to CFLP, other than BGC and its subsidiaries) may borrow up to an aggregate principal amount of $250.0 million from BGC pursuanteach other from time to the facilities under the Intercompany Credit Agreement. Thetime at an interest
rate as of March 31, 2018 was LIBOR plus 3.25%, or 4.99%, which may be adjusted based onis the higher of BGC’sCantor’s or Newmark’s short-term borrowing rate then in effect, at such time plus 100 basis points, or such other interest rate as may be mutually agreed between BGC and Newmark.. 1.0%. As of June 30, 2020 the Company did not have an outstanding balance under this facility.
Credit Rating
Newmark has transferred these proceeds to its restricted cash account pledged fora stand-alone BBB+ stable credit rating from JCRA, BBB- stable credit ratings from Fitch Ratings, Inc. and Kroll Bond Rating Agency and a BB+ stable rating from Standard & Poor’s.
The Spin-Off
On November 30, 2018, BGC completed the
benefit of Fannie Mae. As of March 31, 2018, Newmark’s total net borrowings under the Intercompany Credit Agreement are $202.0 million.BGC expects to pursue a distributionSpin-Off to its stockholders of all of the Class A shares of the Newmark common and Class B commonstock owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of Newmark (collectively, the “Newmark common shares”) that BGC then owns in a manner that is intended to qualify as generally tax-free for U.S. federal income tax purposes (the “spin-off”). As currently contemplated, shares of Class A common stock of Newmark held by BGC would be 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 of Newmark held by BGC would be distributed to thatthe holders of shares of BGC’s Class B common stock (consisting of BGC. Key steps that Newmark plans to take towards the tax-free spin-off include: first, Newmark intends to attain its own credit rating;Cantor and second, Newmark expects to repay or refinance its $812.5 millionCF Group Management, Inc. (“CFGM”) of long-term debt owed to or guaranteed by BGC. This is necessary for the spin-off to be tax free. Newmark’s management is planning to begin the processrecord as of pursuing its own credit rating now that BGC’s credit watch has been resolved.
Had the spin-off occurred immediately following the close of business on the first quarterRecord Date).
Based on the number of 2018,shares of BGC common stock outstanding as of the ratioclose of business on the Record Date, BGC’s stockholders as of the Record Date received in the Spin-Off 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 shares to be distributed in respect of each BGC common sharestock that they otherwise would have beenreceived in the Spin-Off.
Prior to and in connection with the Spin-Off, 14.8 million Newmark 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.
In the aggregate, BGC distributed 131,886,409 shares of our Class A common stock and 21,285,537 shares of our Class B common stock to BGC’s stockholders in the Spin-Off. These shares of our common stock collectively represented approximately 0.4702. However,94% of the exacttotal voting power of our outstanding common stock and approximately 87% of the total economics of our outstanding common stock in each case as of the Distribution Date.
On November 30, 2018, BGC Partners also caused its subsidiary, 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 Record Date. 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 449,917 Newmark Holdings units received by Cantor also into shares of Newmark Class B common stock, at the applicable exchange ratio (subject to adjustment). As of June 30, 2020, the exchange ratio was 0.9366 shares of Newmark common sharesstock per Newmark Holdings unit.
Following the Spin-Off and the BGC Holdings distribution, BGC Partners ceased to be
distributed in respect of each BGC common share in the spin-off will depend on, among other things, the number of BGC common shares outstandingour controlling stockholder, and
the number of Newmark common shares (including Newmark common shares underlying units of Newmark OpCo) owned by BGC as of the record date of the spin-off. 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 spin-off is not in the best interest of BGC and its
stockholders. Accordingly,subsidiaries no longer held any shares of our common stock or other equity interests in us or our subsidiaries. Therefore, BGC no longer consolidates Newmark with its financial results subsequent to the
spin-off may not occur onSpin-Off. Cantor continues to control Newmark and its subsidiaries following the
expected timeframe, or at all.Spin-Off and the BGC Holdings distribution.
Nasdaq
TransactionMonetization Transactions
On June 28, 2013, BGC sold certain assets of its on-the-run, electronic benchmark U.S. Treasury platform (“eSpeed”) to Nasdaq. The total consideration received in the transaction included $750.0 million in cash paid upon closing and an earn-outEarn-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. The earn-out was excluded from the initial gain on the divestiture and is recognizedNasdaq generated gross revenues of approximately $4.3 billion 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”).2019. The remaining rights under the Nasdaq Earn-out were transferred to Newmark on September 28, 2017. Any NasdaqSee Note 7 — “Marketable Securities” to our accompanying unaudited condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for additional information.
Exchangeable Preferred Partnership Units and Forward Contracts
On June 18, 2018, Newmark’s principal operating subsidiary, Newmark OpCo, issued $175.0 million of exchangeable preferred partnership units (“EPUs”) in a private transaction to the Royal Bank of Canada (“RBC”). Newmark received $152.9 million of cash with respect to this transaction.
On September 26, 2018, Newmark entered into a second agreement to issue $150.0 million of additional EPUs to RBC, similar to the June 18, 2018 transaction (together the “Newmark OpCo Preferred Investment”). Newmark received $113.2 million of cash with respect to this transaction.
The EPUs were issued in four tranches and are separately convertible by either RBC or Newmark into a fixed number of shares
that were received by BGC priorof Newmark Class A common stock, subject to
September 28, 2017 were not transferreda revenue hurdle in each of the fourth quarters of 2019 through 2022 for each of the respective four tranches. The ability to
Newmark.In connectionconvert the EPUs into Newmark Class A common stock is subject to the SPV’s option to settle the postpaid forward contracts as described below. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in “Noncontrolling interests” on our accompanying unaudited condensed consolidated balance sheets and consolidated statements of changes in equity. The EPUs are entitled to a preferred payable-in-kind dividend, which is recorded as accretion to the carrying amount of the EPUs through “Retained earnings” on our accompanying 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 special purpose vehicle (the “SPV”) that is a consolidated subsidiary of Newmark entered into four variable postpaid forward contracts with RBC (together, the “Nasdaq Forwards”). The SPV is an indirect subsidiary of Newmark whose sole assets are the Nasdaq Earn-out, Newmark received 992,247 shares duringEarn-outs for 2019 through 2022. The Nasdaq Forwards provide the year ended December 31, 2017. Newmark will receive a remaining earn-out ofSPV the option to settle using up to 9,922,470992,247 shares of Nasdaq common stock, ratably overto be received by the next approximately 10SPV pursuant to the Nasdaq Earn-out (see Note 7 — “Marketable Securities” to our accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q), or Newmark Class A common stock, in exchange for either cash or redemption of the EPUs, notice of which must be provided to RBC prior to November 1 of each year from 2019 through 2022.
In September 2019, the SPV notified RBC of its decision to settle the first variable postpaid forward contract using the Nasdaq common stock the SPV received in November 2019 in exchange for the first tranche of the EPUs, which resulted in a payable to RBC that was settled upon receipt of Nasdaq earn-out shares. The fair value of the Nasdaq common stock that Newmark received was $98.6 million. As a result of Newmark's settlement election, Newmark reclassified $93.5 million of EPUs from “Noncontrolling interest” to “Accounts payable, accrued expenses and other liabilities” on the unaudited condensed consolidated balance sheets. On December 2, 2019, Newmark settled the first variable postpaid forward contract with 898,685 Nasdaq common stock shares, with a fair value of $93.5 million and Newmark retained 93,562 Nasdaq common stock shares. These remaining Nasdaq common stock shares were sold during the three months ended March 31, 2020.
Related Party Transactions
Pre-IPO intercompany agreements
In December 2017, prior to our Separation and IPO, all intercompany arrangements and agreements that were previously approved by the Audit Committee of BGC Partners with respect to BGC Partners and its subsidiaries and Cantor and its subsidiaries were also approved by our Board of Directors with respect to the relationships between us and our subsidiaries and Cantor and its subsidiaries following our IPO on the terms and conditions approved by the BGC Audit Committee during such time that our business was owned by BGC Partners. These arrangements include, but are not limited to, the following: (i) an authorization to provide Cantor real estate and related services, including real estate advice, brokerage, property or facilities management, valuation and advisory and other services; (ii) an authorization to enter into brokerage and similar agreements with respect to the provision of ordinary course brokerage services in circumstances in which such entities customarily provide brokerage services to third-party customers; (iii) an authorization to enter into agreements with Cantor and/or its affiliates, to provide services, including finding and reviewing suitable acquisition or partner candidates, structuring transactions and negotiating and due diligence services in connection with acquisitions and other business strategies in commercial real estate and other businesses from time to time; and (iv) an arrangement to jointly manage exposure to changes in foreign exchange rates. Please see the section entitled “Certain Relationships and Related Transactions, and Director Independence” in the Company's Amendment No.1 to the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2019 filed on April 28, 2020 for a description of these and other approved arrangements.
Transfer of Employees to Newmark
In connection with the expansion of our mortgage brokerage and lending activities, Newmark has entered into an agreement with Cantor 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. In consideration for the Cantor payment, Newmark has 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. As of June 30, 2020, Newmark has $3.3 million
included in “Payables to related parties” on the unaudited condensed consolidated balance sheets, to be returned to Cantor related to this transaction which was subsequently paid in July 2020. 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.
Services Agreement with CFE Dubai
As the Company does not yet have a presence in Dubai, in May 2020, the Audit Committee of the Company authorized Newmark & Company Real Estate, Inc. (“Newmark & Co.”), a subsidiary of Newmark, to enter into an agreement with Cantor Fitzgerald Europe (DIFC Branch) (“CFE Dubai”) pursuant to which CFE Dubai will employ and support an individual who is a resident of Dubai in order to enhance Newmark’s capital markets platform, in exchange for a fee. CFE Dubai and Newmark & Co. negotiated a Services Agreement memorializing the arrangement between the parties (the “Services Agreement”). The Services Agreement provides that Newmark & Co. will reimburse CFE Dubai for the individual’s fully allocated costs, plus a mark-up of seven percent (7%). In addition, the Audit Committee of the Company authorized the Company and its subsidiaries to enter into similar arrangements in respect of any jurisdiction, in the future, with Cantor and its subsidiaries, provided that Nasdaq, as a whole, produces at least $25.0 million in gross revenues each year. In Novemberthe applicable agreements contain customary terms for arrangements of 2017, Newmark sold 242,247 sharesthis type and that the mark-up charged by the party employing one or more individuals for the benefit of the 992,247 Nasdaq sharesother is between 3% and 7.5%, depending on the level of support required for the employed individual(s).
Sublease to BGC
In May 2020, the Audit Committee of the Company authorized RKF Retail Holdings LLC, a subsidiary of the Company, to enter into an arrangement to sublease excess space to BGC U.S. OpCo. The deal is a one-year sublease of approximately 21,000 rentable square feet in New York City.
GSE loans and related party limits
In February 2019, the Audit Committee of the Company authorized Newmark and its subsidiaries to originate and service GSE loans to Cantor and its affiliates (other than BGC) and service loans originated by Cantor and its affiliates (other than BGC) on prices, rates and terms no less favorable to Newmark and its subsidiaries than those charged by third parties. The authorization is subject to certain terms and conditions, including but not limited to: (i) a maximum amount up to $100.0 million per loan, (ii) a $250.0 million limit on loans that have not yet been acquired or sold to a GSE at any given time, and (iii) a separate $250.0 million limit on originated Fannie Mae loans outstanding to Cantor at any given time.
Transaction with CCRE Lending
On July 22, 2019, Cantor Commercial Real Estate Lending, L.P. (“CCRE Lending”), a wholly-owned subsidiary of Real Estate LP, made a $146.6 million commercial real estate loan (the “Loan”) to a single-purpose company (the “Borrower”) in which Barry Gosin, Newmark’s Chief Executive Officer, owns a 19% interest. The Loan is secured by the Borrower’s interest in property in Pennsylvania that is subject to a ground lease. While CCRE Lending initially provided the full loan amount, on August 16, 2019, a third-party bank purchased approximately 80% of the Loan value from CCRE Lending, with CCRE Lending retaining approximately 20%. The Loan matures on August 6, 2029, and is payable monthly at a fixed interest rate of 4.38% per annum. Newmark provided certain commercial loan brokerage services to the Borrower in the ordinary course of its business, and the Borrower paid Newmark a fee, as the broker of the Loan, of $0.7 million. The Newmark Audit Committee approved the commercial loan brokerage services and the related fee amount received. During the first quarter of 2018, Newmark sold an additional 650,000 Nasdaq shares.
Growth
Key Business Drivers
The key
Key drivers of revenue growth for U.S. commercial real estate services companies include the overall health of the U.S. economy, the institutional ownership of commercial real estate as an investible asset class, and the ability to attract and retain talent. In addition, in our capital markets business, growth is driven by the availability of credit and certainty of valuations to purchasers of and investors in commercial real estate.are key drivers. In our multifamily business, delayed marriages, an aging population and immigration to the U.S.less home ownership are increasing a pressing needdriving increased demand for new apartments, with an estimated 4.6 million needed by 2030, according to a recent2017 study commissioned by the National Multifamily Housing Council and the National Apartment Association. This should continue to drive investment sales, GSE multifamily lending and other mortgage brokerage and growth in our servicing portfolio for the foreseeable future. Berkeley Point’sover time.
Our origination business is impacted by the lending caps imposed by the Federal Housing Finance
Agency. As of March 31, 2018,Agency (the “FHFA”). On September 13, 2019, the
FHFA revised its industry-wide
multifamily loan purchase caps
are set at $70to $200.0 billion
excluding loans exemptcombined for the five-quarter period from the
fourth quarter of 2019 to the fourth quarter of 2020. These caps
such ason an annualized basis exceed total 2019 GSE volume of $148.5 billion and provide visibility through the end of 2020. Of the $200.0 billion, 37.5% must be loans in the affordable and underserved market segments,
oras well as loans that finance water and energy efficiency improvements.
These excluded categories can make up a significant portionThere is approximately $100.0 billion of
lending capacity available under the
overall market. For example,FHFA caps in
2017, more thanthe second half of
the loan production reported by Fannie Mae and Freddie Mac was excluded from the Federal Housing Finance Agency lending caps.2020.
Economic GrowthOutlook in the United States COVID-19 adversely affected the economic outlook in the first half of 2020 and the scope and duration of its impact on the U.S. and global economy is highly uncertain and cannot be predicted. The U.S. economy
expandedcontracted by
2.3%32.9% annualized during the
firstsecond quarter of
2018,2020, according to a preliminary estimate from the U.S. Department of Commerce.
This growth compares with an increase of 1.2% during the first quarter of 2017. The consensus is for U.S. gross domestic product to
expandcontract by
2.5%5.6% and
2.1%then grow by 4.7% in
20192021 and
2020, respectively,3.2% in 2022, according to a recent
BloombergWall Street Journal survey of economists. This
moderatemuted pace of growth
expected during the next few years should help keep interest rates and inflation low by historical standards.
The
According to a preliminary report from the Bureau of Labor Statistics, reported that employers added areduced the monthly average of 202,000 net new payroll jobs by approximately 4.4 million on a net basis during the firstsecond quarter of 2018, which was above the prior year period’s 177,000 and the seasonally adjusted average of 182,000 per month2020. The unemployment rate increased to 11.1% in 2017. Despite the returnJune 2020 from 4.4% in March 2020.
The ten-year Treasury yield declined by approximately 134 basis points to
pre-recession unemployment rates (4.1%0.66% as of
March 2018), the number of long-term unemployed and the labor force participation rate (the latter of which is near a 39-year low) remained disappointing for many economists, but these indicators are less important to commercial real estate than job creation.The 10-year Treasury yield ended the first quarter of 2018 at 2.74%, up 35 basis points fromJune 30, 2020 versus the year-earlier date. In addition, 10-yearTen-year Treasury yields have remained well below their 50-year average of approximately 6.32%, in large part6.26% due to market expectations that the Federal Open Market Committee (“FOMC”) will only moderately raise themaintain a near-zero federal funds rate over the next few years. Interest rates are also relatively low dueseveral years in addition to even lower or negative benchmark government interest ratesmuted long-term inflation expectations. On June 10, 2020, the FOMC Committee decided to maintain the target range for the federal funds rate at 0 to 0.25%. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.
Market Statistics
COVID-19 adversely affected the economic outlook in
muchthe second quarter of
the rest of the developed world, which makes2020 and its impact on U.S.
government bonds relatively more attractive.The combination of moderate economic growth and low interest rates that has been in place since the recession ended has been a powerful stimulus forinternational commercial real estate, delivering steady absorption of spaceGSE multifamily financing and strong investor demand for the yields available through both direct ownership of assetsoverall commercial mortgage market is highly uncertain and publicly traded funds. Steady economic growth and low interest rates have helped push vacancy rates down for the office, apartment, retail and industrial markets over the current economic expansion, now in its ninth year. Construction activity, though it is ramping up, remains low compared with prior expansion cycles and low relative to demand and absorption, which means that property leasing markets continue to tighten. Overall, demand for commercial real estate remains strong. While the vast majority of new supply is going to just the top 10-15 markets, there is healthy demand among investors for well positioned suburban value add assets in secondary and tertiary markets, according to NKF Research. Asking rental rates posted moderate gains across all property types during 2017.
The following key trends drove the commercial real estate market during the first three months of 2018:
Sustained U.S. employment growth and rising home values have fueled the economy and generated demand for commercial real estate space across all major sectors;
Technology, professional and business services and healthcare continued to power demand for office space, although technology occupiers have turned more cautious;
Oil prices rose sharply in the first quarter of 2018, but Houston and other energy-focused office markets continued to deal with excess vacancies and generous lease concessions;
E-commerce and supply-chain optimization pushed 2017 industrial absorption to 31 consecutive quarters of positive net absorption, creating tenant and owner-user demand for warehouses and distribution centers;
Apartment rents benefited from sustained job growth, and underlying demographic trends towards urban living among two key age groups: millennials and baby boomers; and
Continued corporate employment growth, combined with increased leisure travel, generated demand for hotel room-nights.
The recently enacted U.S. tax cuts could lift growth, along with leasing activity. Rising inflation and interest rates, a byproduct of faster growth, could deliver a mixed outcome: Rising interest rates could pressure cap rates, but stronger rent growth and sustained investor demand could support property values.
Market Statistics
Although overall industry metrics are not necessarily correlated to our, they do provide some indication of the general direction of the business. The U.S commercial property market continues to display strength as commercial property prices continue to rise, as per CoStar.cannot be predicted. According to RCA, U.S. commercial real estate sales volumes increased by 5.9% year-over-year, bolstered by strong performance in key primary markets. U.S. commercial real estate activity is growing again, after a decline in activity in the beginning of 2017 related to the election and general political uncertainty. Institutional-grade U.S. commercial real estate capitalization rates have not moved by more than 10 basis points, even in this period of interest rate uncertainty. On average, capitalization rates offered a 297 basis point premium over the 10-year Treasury yield in the first quarter, well above the pre-recession low of 165 basis points. If the U.S. economy expands at the moderate pace envisioned by many economists and the Federal Reserve, we would expect this to fuel the continued expansion of demand for commercial real estate. The spread between local 10-year benchmark government bonds and U.S. cap rates was even wider with respect to major countries including Japan, Canada, Germany, the U.K. and France during the quarter. This should continue to make U.S. commercial real estate a relatively attractive investment for non-U.S. investors.
According to RCA,Real Capital Analytics (“RCA”), prices for commercial real estate were downup by 6.3% quarter-over-quarterapproximately 3.6% year-over-year for the quarter ended March 31, 2018. DuringJune 30, 2020. In the second quarter of 2020, overall U.S. commercial real estate notional sales volumes decreased by approximately 68%. In comparison, our investment sales volumes decreased 58% year-over-year in the dollar volumesecond quarter of significant property sales totaled approximately $1092020. Our mortgage brokerage volumes were down 73% year-over-year in the second quarter of 2020 and our total debt volumes were down 53% to $4 billion in the U.S., representing onesecond quarter of 2020 as compared with the strongest starts in the past 10 years. According to a May 2018 MBA forecast, originationssecond quarter of commercial/multifamily loans of all types were estimated to be down 2% year-over-year in terms of dollar volume for the year ending December 31, 2018. In comparison, our real estate capital markets businesses, which includes investment sales and commercial mortgage brokerage, increased its revenues by 31% year-over-year, primarily due to organic growth. Our2019.
Newmark’s loan origination volumes are driven more by the GSE multifamily financing volumes than the activity level of the overall commercial mortgage market.
During the three months ended March 31, 2018,Overall industry GSE multifamily
origination volumes
decreased 19% year-over-year.increased by approximately 14% year-over-year in the second quarter of 2020. In comparison,
ourNewmark’s combined notional volumes across GSE and FHA multifamily loan
origination volume decreasedoriginations increased by
14% and our revenues from mortgage banking activities decreased by 14%.23% year-over-year.
According to NKF Research, the
combinedunweighted average vacancy rate
foracross office, industrial and retail
properties endedincreased to 8.1% in the second quarter of 2020, up 40 basis points compared with the first quarter
at 8.1%, down from 8.2%of 2020. However, we believe approximately $200.0 billion of industry dry powder and historically low interest rates will serve as a
year earlier, only a modest 10 basis point drop over the past 12 months. Rentscatalyst for
all property types in the U.S. continued to improve slightly across all three sectors. NKF Research estimates that overall U.S. leasingcapital markets activity
in quarter grew moderately from a year ago. In comparison, revenues from our leasingonce markets stabilize and
other commissions business increased by 24.9%.price discovery begins.
See
“Regulatory“—Regulatory Requirements” herein for information related to our regulatory environment.
See
“Financial“— Financial Position, Liquidity and Capital Resources” herein for information related to our liquidity and capital resources.
Hiring and Acquisitions
Key drivers of our revenue are producer headcount and average revenue per producer. We believe that our strong technology platform and unique partnership structure have enabled us to use both acquisitions and recruiting to profitably increase our front-office revenue per producer.
We have invested significantly to capitalize on the current business environment through acquisitions, technology spending and the hiring of new brokers, salespeople, managers and other front-office personnel. The business climate for these acquisitions has been competitive, and it is expected that these conditions will persist for the foreseeable future. We have been able to attract businesses and brokers, salespeople, managers and other front-office personnel to our platform as we believe they recognize that we have the scale, technology, experience and expertise to succeed in the current business environment. See “Business—Our History” in Part I, Item 1 of our Annual Report on Form 10-K for a description of our acquisitions since 2012.
As of March 31, 2018, our producer headcount was over 1,550 brokers and salespeople. For the three months ended March 31, 2018, average revenue generated per producer increased by 15% for the same period from a year ago to approximately $192,000. This growth can be attributed to increased sales and leasing activity and to the ramp up of brokers we hired over the past year.
On September 8, 2017, we completed our acquisition of Berkeley Point. Berkeley Point is principally engaged in the origination, funding, sale and servicing of multifamily and commercial mortgage loans.
We derive revenues from the following general four sources:
| |
| • | Leasing and Other Commissions. We offer a diverse range of commercial real estate brokerage and advisory services, including tenant and agency representation, which includes comprehensive lease negotiations, strategic planning, site selection, lease auditing, and other financial and market analysis. |
| |
| • | Capital Markets. Our real estate capital markets business specializes in the arrangement of acquisitions and dispositions of commercial properties, as well as providing other financial services, including the arrangement of debt and equity financing, and loan sale advisory. |
| |
| • | Gains from Mortgage Banking Activities/Originations, Net. Gains from mortgage banking activities/originations are derived from the origination of loans with borrowers and the sale of those loans to investors. |
Leasing and Other Commissions. We offer a diverse range of commercial real estate brokerage and advisory services, including tenant and agency representation, which includes comprehensive lease negotiations, strategic planning, site selection, lease auditing, appraisal services and other financial and market analysis.
| |
| • | Management Services, Servicing Fees and Other. We provide commercial services to tenants and landlords. In this business, we provide property and facilities management services along with project management, valuation and advisory services and other consulting services, as well as technology, to customers who may also utilize our commercial real estate brokerage services. Servicing fees are derived from the servicing of loans originated by us as well as loans originated by third parties. |
Capital Markets. Our real estate capital markets business specializes in the arrangement of acquisitions and dispositions of commercial properties, as well as providing other financial services, including the arrangement of debt and equity financing, and loan sale advisory.
Gains from Mortgage Banking Activities/Originations, Net. Gains from mortgage banking activities/origination are derived from the origination of loans with borrowers and the sale of those loans to investors.
Management Services, Servicing Fees and Other. We provide commercial services to tenants and landlords in several key U.S. markets. In this business, we provide property and facilities management services along with project management and other consulting services, as well as technology, to customers who may also utilize our commercial real estate brokerage services. Servicing fees are derived from the servicing of loans originated by us as well as loans originated by third parties.
Fees are generally earned when a lease is signed in leasing.signed. In many cases, landlords are responsible for paying the fees. In capital markets, fees are earned and recognized when the sale of a property closes, and title passes from seller to buyer for investment sales and when debt or equity is funded to a vehicle for debt and equity transactions. Gains from mortgage banking activities/origination,originations, net are recognized when a derivative asset is recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The derivative is recorded at fair value and includes loan origination fees, sales premiums and the estimated fair value of the expected net servicing cash flows. Gains from mortgage banking activities/origination,originations, net are recognized net of related fees and commissions to affiliates or third-party brokers. For loans we broker, revenues are recognized when the loan is closed. Servicing fees are recognized on an accrual basis over the lives of the related mortgage loans. We typically receive monthly management fees based upon a percentage of monthly rental income generated from the property under management, or in some cases, the greater of such percentage or a minimum agreed upon fee. We are often reimbursed for our administrative and payroll costs, as well as certain out-of-pocket expenses, directly attributable to properties under management. We follow accounting principles generally accepted in the U.S., or “U.S. GAAP”, which provides guidance when accounting for reimbursements from clients and when accounting for certain contingent events for Leasing and Capital Markets transactions. See Note 3—“Summary3 — “Summary of Significant Accounting Policies” to our unaudited condensed consolidated financial statementsUnaudited Condensed Consolidated Financial Statements included elsewhere in Part I, Item 1 of this Quarterly Report on Form 10-Q for a more detailed discussion.
Compensation and Employee Benefits
The majority of our operating costs consist of cash and non-cash compensation expenses, which include base salaries,
broker and producer commissions based on production,
forgivable loans for term contracts, discretionary and other bonuses and all related employee benefits and taxes. Our employees consist of
brokers and other commissioned producers, executives and other administrative support. Our
brokers and other producers are
largely compensated based on the revenue they generate for the firm, keeping these costs variable in nature.
As part of our compensation plans, certain employees have been granted limited partnership units in
BGCNewmark Holdings and
NewmarkBGC Holdings, which generally receive quarterly allocations of net income
that are cash distributed on a quarterly basis and
that are generally contingent upon services being provided by the unit holders.
Certain Newmark employees also hold non-distribution earnings units (e.g. NPSUs and NREUs, collectively “N Units”) that do not participate in quarterly partnership distributions and are not allocated any items of profit or loss. These N Units vest into distribution earnings units over a 4-year period. As prescribed in U.S. GAAP guidance, the quarterly allocations of net income on such limited partnership units are reflected as a component of compensation expense under
“Allocations“Equity-based compensation and allocations of net income
and grant of exchangeability to limited partnership
units”units and FPUs” in our
accompanying unaudited condensed consolidated statements of operations.
During 2019, Newmark simplified its compensation structure when hiring new personnel by issuing restricted stock units in lieu of limited partnership units. Newmark continues to monitor its compensation policy and make changes where necessary to attract industry leading producers to Newmark.
Newmark granted conversion rights on outstanding limited partnership units in Newmark Holdings and BGC Holdings to Newmark employees to convert the limited partnership units to a capital balance within Newmark Holdings or BGC Holdings. Generally, such units are not considered share-equivalent limited partnership units and are not in the fully diluted share count.
Certain of these limited partnership units entitle the holders to receive post-termination payments. These limited partnership units are accounted for as post-termination liability awards under U.S. GAAP guidance, which requires that we record an expense for such awards based on the change in value at each reporting period and include the expense in our
accompanying unaudited condensed consolidated
statements of operations as part of “Compensation“Equity-based compensation and employee benefits.”allocations of net income to limited partnership units and FPUs”. The liability for limited partnership units with a post-termination payout amount is included in “Accrued compensation”“Other long-term liabilities” on our accompanying unaudited condensed consolidated balance sheets.
Certain limited partnership units
in BGC Holdings and Newmark Holdings are granted exchangeability into
BGC Partners’ and Newmark Partners’ Class A common stock
on a one-for-one basis, respectively (subject to adjustments and other requirements as set forthor may be redeemed in
connection with the
BGC Holdings and Newmark Holdings respective limited partnership agreements).grant of shares of Class A common stock. At the time exchangeability is granted,
we recognizeor the shares are issued, Newmark recognizes an expense based on the fair value of the award on that date, which is included in
“Allocations“Equity-based compensation and allocations of net income
and grant of exchangeability to limited partnership
units”units and FPUs” in our
accompanying unaudited condensed consolidated statements of operations.
We
Our employees have
alsobeen awarded preferred partnership units
(“Preferred Units”) in
BGCNewmark Holdings and
NewmarkBGC Holdings. Each quarter, the net profits of
BGCNewmark Holdings and
NewmarkBGC Holdings are allocated to such units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation
(the “Preferred Distribution”), which is deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership units in
Newmark Holdings and BGC Holdings,
respectively. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into our Class A common stock and
Newmark Holdings, respectively.are only entitled to the Preferred Distribution, and accordingly they are not included in our fully diluted share count. The quarterly allocations of net income on
these preferred partnership unitsPreferred Units are also 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 our
accompanying 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 rata share of economic ownership of the operating subsidiaries. In addition, Preferred Units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder upon such exchange. This is an acceptable alternative to the common practice among public companies of issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes.
We have entered into various agreements with certain of our employees and partners whereby these individuals receive loans, which may be either wholly or in part repaid from the distribution earnings that the individual receives on their limited partnership interests in BGC Holdings and Newmark
Holdings or may be forgiven over a period of time. The repayment of these loans is derived from a cash flow source already accounted for through partnership distributions at BGC U.S. OpCo, BGC Global OpCo and Newmark OpCo.Holdings. The forgivable portion of these loans is recognized as compensation expense over the life of the
loan or the estimated life of the partner.loan.
From time to time, we may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the timeframes outlined in the underlying agreements. In addition, we also enter into deferred compensation agreements with employees providing services to us. The costs associated with such plans are generally amortized over the period in which they vest.
See(See Note
28—“Compensation,”,30 — “Compensation” and Note
29—“Commitment31 — “Commitment and
Contingencies,”Contingencies”, to our
unaudited condensed consolidated financial statementsaccompanying Unaudited Condensed Consolidated Financial Statements included
elsewhere in
Part I, Item 1 of this Quarterly Report on Form
10-Q.10-Q).
We have various other operating expenses. We incur leasing, equipment and maintenance expenses. We also incur selling and promotion expenses, which include entertainment, marketing and travel-related expenses. We incur communication expenses, professional and consulting fees for legal, audit and other special projects, and interest expense related to short-term operational funding needs, and notes payable and collateralized borrowings.
We pay fees to BGC Partners
andand/or Cantor for performing certain administrative and other support, including charges for occupancy of office space, utilization of fixed assets and accounting, operations, human resources, legal services and technology infrastructure support. Management believes that these charges are a reasonable reflection of the utilization of services rendered. However, the expenses for these services are not necessarily indicative of the expenses that would have been incurred if we had not obtained these services from BGC Partners or Cantor. In addition, these charges may not reflect the costs of services we may receive from BGC Partners or Cantor in the future.
Other Income,
(Losses), Net
Other Income (Losses)
Other income, net is comprised of the gains associated with the earn-outEarn-out shares related to the Nasdaq transaction and the movements related to the impact of any unrealized non-cash mark-to-market and/gains or hedges on marketable securities that are classified as trading securities.losses related to the Nasdaq Forwards. Additionally, other income includedincludes gains (losses) on equity method investments which represent our pro rata share of the net gains (losses) on investments over which we have significant influence but which we do not control.control, and the mark-to-market gains or losses on the non-marketable investments accounted for pursuant to the measurement alternative under Accounting Standards Update 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
Provision for Income Taxes
We incur income tax expenses based on the location, legal structure, and jurisdictional taxing authorities of each of our subsidiaries. Certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (which we refer to as “UBT”) in New York City. U.S. federal and state income tax liability or benefit related to the partnership income
or loss, with the exception of UBT, rests with the partners (see Note 2 –— “Limited Partnership InterestInterests in Newmark Holdings and BGC Holdings”), to our accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q) rather than the partnership entity.
Financial Highlights
For the three months ended March 31, 2018, Our accompanying unaudited condensed consolidated financial statements include U.S. federal, state and local income taxes on Newmark’s total revenues increased by 29.4% as compared to the three months ended March 31, 2017. This improvement was led by a 58.8% increase in management services, servicing fees and other, an almost entirely organic 24.9% increase in leasing and other commissions, and a 31.0% increase in revenues from capital markets brokerage, offset by a 14.0% decrease in Gains from mortgage banking activities/origination, net. $18.5 millionallocable share of the increase in management services, servicing fees and other relatedU.S. results of operations. Outside of the U.S., we operate principally through subsidiary corporations subject to additional pass-through revenues resulting from the adoption and implementation of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (as we refer to as “ASC 606” herein). We believe that we gained significant market share in capital markets as we outpaced relevant industry metrics. Our growth has outpaced the overall market as we continue to hire high quality brokers, strategically acquire local and regional firms and enhance our cross-selling capabilities across business lines as prior acquisitions and hires become more acclimated to the platform. Total expenses increased approximately $87.2 million to $383.3 million, due to a $15.2 million increase in allocations of net income and grant of exchangeability to limited partnership units, as well as a $37.6 million increase in compensation expenses. Operating, administrative and other expenses increased $28.0 million, of which $18.5 million is directly related to additional pass-through expenses resulting from the implementation of ASC 606. We expect our revenues and earnings to grow over time as we continue to invest in our business and to reap the benefits from our recent acquisitions and front-office hires. We believe that our stock price does not accurately reflect the more than $875 million of additional Nasdaq shares (based on the May 2, 2018 closing price) we anticipate receiving over time, which are not reflected on our balance sheet. We anticipate having substantial resources with which to pay dividends, repurchase shares and/or units, profitably hire, and make accretive acquisitions, all while maintaining or improving our core business.
taxes.
Impact of Adopting Revenue Recognition Guidance
On January 1, 2018, we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606,606”), which provides accounting guidance on the recognition of revenues from contracts with customers and impacts the presentation of certain revenues and expenses in our Condensed Consolidated Statementsaccompanying unaudited condensed consolidated statements of Operations.operations. Newmark elected to adopt ASC 606 using a modified retrospective approach with regard to contracts that were not completed as of December 31, 2017, and prospectively from January 1, 2018 onward. Accordingly, our financial information have not been revised for historical comparable periods and are presented under the accounting standards in effect during those periods. Due to the adoption of ASC 606, for all periods from the first quarter of 2018 onward, Newmark did not and will not record revenues or earnings related to “Leasing and other commissions” with respect to contingent revenue expected to be received in future periods as of December 31, 2017, in relation to contracts signed prior to January 1, 2018, for which services have already been completed. Instead, the CompanyNewmark recorded this contingent revenue and related commission payments on the balance sheet on January 1, 2018, with a corresponding pre-tax improvement of approximately $22.7 million and Newmark recognized an increase of $16.5$16.5 million and $2.3 million to beginning retained earnings and non-controlling interest,noncontrolling interests, respectively, as a cumulative effect of adoption of an accounting change. Over time, the Company expects to receive $23 million of cash related to these “Leasing and other commissions” receivables, primarily over the course of 2018 and 2019. This cash, however, will not be recorded as GAAP net income. Additionally, prior to the adoption of ASC 606, Newmark presented certain management services expenses incurred on behalf of customers, subject to reimbursement, on a net basis. Under ASC 606, 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 and will present the related expenses on a gross basis in our Condensed Consolidated Statements of Operations, with no impact on net income available to common stockholders.ASC 606 does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP guidance, and as a result, did not have an impact on the elements of our Condensed Consolidated Statements of Operations most closely associated with financial instruments, including Commissions, Gains from mortgage banking activities/originations, net and Servicing fees.
There was no significant impact as a result of applying ASC 606 to our results of operations for the three months ended March 31, 2018, except as it relates to the recognition and presentation of Management services, servicing fees and other revenues that contained future contingencies and certain Operating, Administrative and Other expenses subject to reimbursement.
Refer to
See Note 3-“Summary of Significant Accounting Policies” and Note 12-“Revenues13 — “Revenues from Contracts with Customers” to our accompanying Unaudited Condensed Consolidated Financial Statements in our condensed consolidated financial statements included inPart I, Item 1 of this Quarterly Report on Form 10-Q, for further information.
Impact of Adopting Lease Guidance
On January 1, 2019, Newmark adopted ASC 842 Leases (“ASC 842”), which provides guidance on the accounting and disclosure for accounting for leases. Newmark has elected the optional transition method, and pursuant to this transition method, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. Newmark has elected the package of “practical expedients,” which permits Newmark not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Newmark has elected the short-term lease recognition exemption for all leases that qualify, and has elected the practical expedient to not separate lease and non-lease components for all leases other than real estate leases.
The adoption of ASC 842 on January 1, 2019 resulted in the recognition of Right-of-use (“ROU”) assets of approximately $178.8 million and ROU liabilities of approximately $226.7 million, with no effect on beginning retained earnings.
The adoption of the new guidance did not have a significant impact on our accompanying unaudited condensed consolidated statements of operations, consolidated statements of changes in equity, and consolidated statements of cash flows.
See Note 3 — “Summary of Significant Accounting Policies” and Note 18 — “Leases” to our accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further information.
Impact of Adopting Credit Loss Guidance
On January 1, 2020, Newmark adopted Financial Instrument-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASC 326”), which provides guidance on the accounting and disclosure for accounting for expected credit losses on financial instruments.
The adoption of ASC 326 on January 1, 2020, on a pre-tax basis, resulted in a decrease in assets of $8.0 million, an increase in liabilities of $17.9 million and a decrease in beginning retained earnings of $25.9 million.
See Note 3 — “Summary of Significant Accounting Policies” and Note 23 — “Financial Guarantee Liability" to our accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further information.
The following table sets forth our unaudited condensed consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated (in thousands):
| | Three Months Ended March 31, | |
| | 2018 | | | 2017 | |
| | Actual Results | | | Percentage of Total Revenues | | | Actual Results | | | Percentage of Total Revenues | |
Revenues: | | | | | | | | | | | | | | | | |
Leasing and other commissions | | $ | 159,371 | | | | 37.0 | | | $ | 127,568 | | | | 38.4 | |
Capital markets | | | 101,364 | | | | 23.6 | | | | 77,390 | | | | 23.4 | |
Gains from mortgage banking activities/origination, net | | | 38,914 | | | | 9.0 | | | | 45,262 | | | | 13.6 | |
Management services, servicing fees and other | | | 130,811 | | | | 30.4 | | | | 82,362 | | | | 24.8 | |
Total revenues | | | 430,460 | | | | 100.0 | | | | 332,582 | | | | 100.2 | |
Expenses: | | | | | | | | | | | | | | | | |
Compensation and employee benefits | | | 252,695 | | | | 58.7 | | | | 215,145 | | | | 64.7 | |
Allocations of net income and grant of exchangeability to limited partnership units | | | 25,809 | | | | 6.0 | | | | 10,649 | | | | 3.2 | |
Total compensation and employee benefits | | | 278,504 | | | | 64.7 | | | | 225,794 | | | | 67.9 | |
Operating, administrative and other | | | 75,427 | | | | 17.5 | | | | 47,382 | | | | 14.2 | |
Fees to related parties | | | 6,894 | | | | 1.6 | | | | 4,718 | | | | 1.4 | |
Depreciation and amortization | | | 22,513 | | | | 5.2 | | | | 18,237 | | | | 5.5 | |
Total operating expenses | | | 383,338 | | | | 89.0 | | | | 296,131 | | | | 89.0 | |
Other income (losses), net: | | | | | | | - | | | | | | | 0 | |
Other income (loss) | | | 5,707 | | | | 1.3 | | | | (593 | ) | | | (0.2 | ) |
Total other income (losses), net | | | 5,707 | | | | 1.3 | | | | (593 | ) | | | (0.2 | ) |
Income (loss) from operations | | | 52,829 | | | | 12.3 | | | | 35,858 | | | | 10.8 | |
Interest (expense) income, net | | | (13,409 | ) | | | (3.1 | ) | | | 1,134 | | | | 0.3 | |
Income (loss) before income taxes and noncontrolling interests | | | 39,420 | | | | 9.2 | | | | 36,992 | | | | 11.1 | |
Provision (benefit) for income taxes | | | 6,933 | | | | 1.6 | | | | (15 | ) | | | 0.0 | |
Consolidated net income (loss) | | | 32,487 | | | | 7.6 | | | | 37,007 | | | | 11.1 | |
Less: Net income (loss) attributable to noncontrolling interests | | | 12,490 | | | | 2.9 | | | | 296 | | | | 0.1 | |
Net income (loss) available to common stockholders | | $ | 19,997 | | | | 4.7 | | | $ | 36,711 | | | | 11.0 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues |
| Revenues: |
|
| |
|
| |
|
| |
| | | | | | | | |
| Leasing and other commissions | $ | 120,079 |
| | 31.3 | % | | $ | 217,381 |
| | 39.4 | % | | $ | 260,517 |
| | 30.0 | % | | $ | 389,852 |
| | 39.0 | % |
| Capital markets | 52,959 |
| | 13.8 |
| | 128,750 |
| | 23.3 |
| | 180,882 |
| | 20.8 |
| | 231,547 |
| | 23.1 |
|
| Gains from mortgage banking activities/originations, net | 69,071 |
| | 18.0 |
| | 45,091 |
| | 8.2 |
| | 119,494 |
| | 13.8 |
| | 76,437 |
| | 7.7 |
|
| Management services, servicing fees and other | 141,609 |
| | 36.9 |
| | 160,256 |
| | 29.1 |
| | 306,754 |
| | 35.4 |
| | 301,298 |
| | 30.2 |
|
| Total revenues | 383,718 |
| | 100.0 |
| | 551,478 |
| | 100.0 |
| | 867,647 |
| | 100.0 |
| | 999,134 |
| | 100.0 |
|
| Expenses: |
|
| |
| |
|
| |
| | | | | | | | |
| Compensation and employee benefits | 230,518 |
| | 60.1 |
| | 316,737 |
| | 57.4 |
| | 530,775 |
| | 61.2 |
| | 580,090 |
| | 58.1 |
|
Equity-based compensation and allocations of net income to limited partnership units and FPUs (1) | 10,860 |
| | 2.8 |
| | 39,353 |
| | 7.1 |
| | 23,774 |
| | 2.7 |
| | 53,224 |
| | 5.3 |
|
| Total compensation and employee benefits | 241,378 |
| | 62.9 |
| | 356,090 |
| | 64.5 |
| | 554,549 |
| | 63.9 |
| | 633,314 |
| | 63.4 |
|
| Operating, administrative and other | 61,012 |
| | 15.9 |
| | 101,749 |
| | 18.5 |
| | 153,293 |
| | 17.7 |
| | 189,642 |
| | 19.0 |
|
| Fees to related parties | 5,205 |
| | 1.4 |
| | 7,222 |
| | 1.3 |
| | 11,017 |
| | 1.3 |
| | 13,947 |
| | 1.4 |
|
| Depreciation and amortization | 28,946 |
| | 7.5 |
| | 33,425 |
| | 6.1 |
| | 74,986 |
| | 8.6 |
| | 61,729 |
| | 6.2 |
|
| Total operating expenses | 336,541 |
| | 87.7 |
| | 498,486 |
| | 90.4 |
| | 793,845 |
| | 91.5 |
| | 898,632 |
| | 90.0 |
|
| Other income/(loss), net | (36,389 | ) | | (9.5 | ) | | (3,726 | ) | | (0.7 | ) | | (34,951 | ) | | (4.0 | ) | | (13,444 | ) | | (1.3 | ) |
| Income from operations | 10,788 |
| | 2.8 |
| | 49,266 |
| | 8.9 |
| | 38,851 |
| | 4.5 |
| | 87,058 |
| | 8.7 |
|
| Interest (expense) income, net | (10,056 | ) | | (2.6 | ) | | (8,081 | ) | | (1.5 | ) | | (19,085 | ) | | (2.2 | ) | | (15,780 | ) | | (1.6 | ) |
| Income before income taxes and noncontrolling interests | 732 |
| | 0.2 |
| | 41,185 |
| | 7.4 |
| | 19,766 |
| | 2.3 |
| | 71,278 |
| | 7.1 |
|
| Provision for income taxes | 88 |
| | — |
| | 9,121 |
| | 1.6 |
| | 4,886 |
| | 0.6 |
| | 15,808 |
| | 1.6 |
|
| Consolidated net income | 644 |
| | 0.2 |
| | 32,064 |
| | 5.8 |
| | 14,880 |
| | 1.7 |
| | 55,470 |
| | 5.5 |
|
| Less: Net income attributable to noncontrolling interests | 330 |
| | 0.1 |
| | 9,396 |
| | 1.7 |
| | 6,387 |
| | 0.7 |
| | 15,898 |
| | 1.6 |
|
| Net income available to common stockholders | $ | 314 |
| | 0.1 | % | | $ | 22,668 |
| | 4.1 | % | | $ | 8,493 |
| | 1.0 | % | | $ | 39,572 |
| | 3.9 | % |
(1)The components of Equity-based compensation and allocations of net income to limited partnership units and FPUs are as follows (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues | | Actual Results | | Percentage of Total Revenues |
| Issuance of common stock and exchangeability expenses | $ | 306 |
| | 0.1 | % | | $ | 21,511 |
| | 3.9 | % | | $ | 8,425 |
| | $ | — |
| | $ | 22,172 |
| | 2.2 | % |
Allocations of net income to limited partnership units and FPUs
| 1,104 |
| | 0.3 |
| | 11,601 |
| | 2.1 |
| | 1,653 |
| | — |
| | 17,915 |
| | 1.8 |
|
| Limited partnership units amortization | 6,011 |
| | 1.6 |
| | 5,044 |
| | 0.9 |
| | 7,906 |
| | — |
| | 11,377 |
| | 1.1 |
|
| RSU amortization | 3,560 |
| | 0.9 |
| | 1,197 |
| | 0.2 |
| | 5,911 |
| | — |
| | 1,760 |
| | 0.2 |
|
Equity-based compensation and allocations of net income to limited partnership units and FPUs (2) | $ | 10,981 |
| | 2.9 | % | | $ | 39,353 |
| | 7.1 | % | | $ | 23,895 |
| | $ | — |
| | $ | 53,224 |
| | 5.3 | % |
(2)Reclassifications have been made to previously reported amounts to conform to the new presentation.
Three months ended March 31, 2018June 30, 2020 compared to the three months ended March 31, 2017June 30, 2019
Leasing and Other Commissions
Leasing and other commission revenues
increaseddecreased by
$31.8$97.3 million, or
24.9%44.8%, to
$159.4$120.1 million for the three months ended
March 31, 2018June 30, 2020 as compared to the three months ended
March 31, 2017.June 30, 2019. The
increasedecrease was
largely due to
organic growth.a sharp decline in volumes as a result of the COVID-19 pandemic. We expect leasing volumes to remain muted at least through the end of the third quarter 2020.
Capital markets revenue
increaseddecreased by
$24.0$75.8 million, or
31.0%58.9%, to
$101.4$53.0 million for the three months ended
March 31, 2018June 30, 2020 as compared to the three months ended
March 31, 2017. The increase was driven by a 22.8% increase in investment sales volume and an 61.7% increase in mortgage brokerage volume.June 30, 2019. Capital market volumes fell significantly during the quarter due to the impact of the COVID- 19 Pandemic. We expect capital markets volumes to remain muted at least through the end of the third quarter.
Gains from Mortgage Banking Activities/Originations, Net
Gains from mortgage banking activities/origination,activities, net decreasedincreased by $6.3$24.0 million, or 14.0%53.2%, to $38.9$69.1 million for the three months ended March 31, 2018June 30, 2020 as compared to the three months ended March 31, 2017.June 30, 2019. The decreaseincrease was primarily driven by a 13.6% decrease inan increase of GSE lending to $1.6 billion as compared to $1.9 billion in the prior annual period.originations and product mix.
A portion of our gains from mortgage banking
activities/originations,activities, net, relate to non-cash gains attributable to
originated mortgage servicing rights (which we refer to as “OMSRs”).OMSRs. We recognize OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold. For the three months ended
March 31, 2018June 30, 2020 and
2017,2019, we recognized
$21.1$42.1 million and
$29.3$24.9 million of non-cash gains, respectively, related to OMSRs.
Management Services, Servicing Fees and Other
Management services, servicing fees and other revenue
increased $48.5decreased $18.6 million, or
58.8%11.6%, to
$130.8$141.6 million for the three months ended
March 31, 2018June 30, 2020 as compared to the three months ended
March 31, 2017. $18.5 million of the increaseJune 30, 2019. The decrease was
relateddue to
additionallower non-fee pass-through revenues
resulting from the implementation of
ASC 606, while $10.9$9.0 million,
was related to the valuationlower interest income on escrow balances of $4.9 million and
appraisal business. Additionally $4.1lower yield maintenance fees of $2.8 million,
was related topartially offset by an increase in servicing
fee revenues. The remainderfees of
the increase is due to management services of which acquisitions contributed to approximately one-third of the growth.$1.7 million.
Compensation and Employee Benefits
Compensation and employee benefits expense increaseddecreased by $37.6$86.2 million, or 17.5%27.2%, to $252.7$230.5 million for the three months ended March 31, 2018,June 30, 2020 as compared to the three months ended March 31, 2017.June 30, 2019. The main driversdecrease in the second quarter of this increase were $22.4 million of additional payments2020 was directly related to the increase inlower commission based revenues and lower employee benefit charges as a result of the remainder related to acquisitionscost savings initiatives.
Equity-based compensation and
new hires.Allocations of Net Income and Grant of Exchangeability to Limited Partnership Units
The Allocationsallocations of net income and grant of exchangeability to limited partnership units increasedand FPUs
Equity-based compensation and allocations of net income to limited partnership units and FPUs decreased by
$15.2$28.4 million, or
142.4%72.2%, to
$25.8$10.9 million for the three months ended
March 31, 2018June 30, 2020 as compared to the three months ended
March 31, 2017. This increase was primarily driven by an increaseJune 30, 2019 as a result of
$15.7lower exchange charges of $21.2 million
and lower income allocations of $10.6 million due to less earning in
exchangeability charges.the quarter.
Operating, Administrative and Other
Operating, administrative and other expenses
increased $28.0decreased $40.7 million, or
59.2%40.0%, to
$75.4$61.0 million for the three months ended
March 31, 2018June 30, 2020 as compared to the three months ended
March 31, 2017. This increase was primarily driven by $18.5 million directly related to additional pass-through expenses resulting from the implementation of ASC 606. The remainder isJune 30, 2019 due to
increases in selling and promotional and other expenses associated with acquisitions and new hires.our cost saving initiatives.
Fees to related parties
increaseddecreased by
$2.2$2.0 million, or
46.1%27.9%, to
$6.9$5.2 million for the three months ended
March 31, 2018June 30, 2020 as compared to the three months ended
March 31, 2017. Fees to related parties are allocations paid to BGC Partners and Cantor for administrative and support services.June 30, 2019.
Depreciation and Amortization
Depreciation and amortization for the three months ended
March 31, 2018 increasedJune 30, 2020 decreased by
$4.3$4.5 million, or
23.4%13.4%, to
$22.5$28.9 million as compared to the three months ended
March 31, 2017.June 30, 2019. This
increase isdecrease was due to a $3.9 million
increasedecrease in mortgage servicing rights
amortization and the remainder is primarily due to leasehold improvements placed in service due to the continued expansion of our business.amortization.
Because the CompanyNewmark recognizes OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold, it also amortizes MSRs in proportion to the net servicing revenue expected to be earned. Subsequent to the initial recording,
MSRs are amortized and carried at the lower of amortized cost or fair value. For the three months ended June 30, 2020 and 2019, our expenses included $23.9 million and $27.7 million of MSR amortization, respectively. The MSR amortization decreased due to an impairment in the prior year quarter.
Other Income (loss), Net
Other income (loss), net of $(36.4) million in the three months ended June 30, 2020 resulted from a mark-to-market loss related to the Nasdaq Forwards of $22.5 million, which Nasdaq Forwards is a hedge against potential downside risk from a decline in the share price of Nasdaq's common stock, while allowing the Company to retain all the potential upside from any related share price appreciation related to the annual Nasdaq Earn-out. The value of the Nasdaq Forwards moves inversely with the price of Nasdaq common stock. Additionally, other income, net was negatively impacted by an unrealized loss of $10.0 million relating to non-marketable investments carried under the measurement alternative and $4.0 million of equity losses from Real Estate LP.
Other income (loss), net of $(3.7) million in the three months ended June 30, 2019 is primarily related to mark-to-market losses related to the Nasdaq Forwards of $15.6 million, which was partially offset by equity income from Real Estate LP of $4.8 million, unrealized gains of $3.9 million resulting from non-marketable investments carried under the measurement alternatives and $3.1 million of income on Nasdaq shares.
Interest (Expense) Income, Net
Interest expense, net increased by $2.0 million, or 24.4%, to $10.1 million during the three months ended June 30, 2020 as compared to the three months ended June 30, 2019 due to borrowings on our Credit Facility.
Provision for Income Taxes
Provision for income taxes decreased by $9.0 million, or 99.0%, to $0.1 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. This decrease was primarily driven by lower pretax earnings. In general, our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests decreased by $9.1 million, or 96.5%, to $0.3 million for the three months ended June 30, 2020.
Six months ended June 30, 2020 compared to the six months ended June 30, 2019
Revenues
Leasing and Other Commissions
Leasing and other commission revenues decreased by $129.3 million, or 33.2%, to $260.5 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. Leasing and other commissions volumes fell significantly beginning in March of 2020 due to the impact of the COVID- 19 pandemic. We expect volumes to remain muted at least through the end of the third quarter.
Capital Markets
Capital markets revenue decreased by $50.7 million, or 21.9%, to $180.9 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. Capital market volumes fell significantly beginning in March of 2020 due to the impact of the COVID-19 pandemic. We expect volumes to remain muted at least through the end of the third quarter.
Gains from Mortgage Banking Activities/Originations, Net
Gains from mortgage banking activities, net increased by $43.1 million, or 56.3%, to $119.5 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The increase was primarily driven by an increase of GSE originations and a more favorable product mix.
A portion of our gains from mortgage banking activities, net, relate to non-cash gains attributable to OMSRs. We recognize OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold. For the six months ended June 30, 2020 and 2019, we recognized $71.5 million and $41.2 million of non-cash gains, respectively, related to OMSRs. As with originations, OMSR gains are also impacted by the product mix and weighted average servicing fees.
Management Services, Servicing Fees and Other
Management services, servicing fees and other revenue increased $5.5 million, or 1.8%, to $306.8 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. This increase was due to increases in valuation
and advisory of $10.0 million, non-fee pass-through revenues of $5.6 million and servicing fees of $4.2 million, partially offset by lower escrow earnings of $6.7 million and $3.8 million in lower yield maintenance fees.
Expenses
Compensation and Employee Benefits
Compensation and employee benefits expense decreased by $49.3 million, or 8.5%, to $530.8 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The decrease was primarily due to lower commission based revenues, partially offset by higher compensation related to our management service business earlier in the year.
Equity-based compensation and allocations of net income to limited partnership units and FPUs
Equity-based compensation and allocations of net income to limited partnership units and FPUs decreased by $29.5 million to $23.8 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 as a result of lower exchange charges of $13.7 million and lower income allocations of $16.4 million due to lower earnings in the quarter.
Operating, Administrative and Other
Operating, administrative and other expenses decreased $36.3 million, or 19.2%, to $153.3 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. This decrease was primarily due to the cost savings initiatives, $12.8 million of acquisition related earnout reversals partially offset by a $17.4 million provision related to CECL which was implemented on January 1, 2020.
Fees to Related Parties
Fees to related parties decreased by $2.9 million, or 21.0%, to $11.0 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019.
Depreciation and Amortization
Depreciation and amortization for the six months ended June 30, 2020 increased by $13.3 million, or 21.5%, to $75.0 million as compared to the six months ended June 30, 2019. This increase was due to a $13.5 million increase in mortgage servicing rights (which we referamortization.
Because Newmark recognizes OMSR gains equal to
as “MSRs”)the fair value of servicing rights retained on mortgage loans originated and sold, it also amortizes MSRs in proportion to the net servicing revenue expected to be earned. Subsequent to the initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value. For the
threesix months ended
March 31, 2018June 30, 2020 and
2017,2019, our expenses included
$17.8$63.3 million and
$13.9$49.9 million of MSR amortization, respectively.
The MSR amortization increased primarily due to higher impairments as a result of the decline in short term interest rates caused by COVID-19.
Other Income
(Losses)(loss), Net
Other income (loss), net of $5.7$(35.0) million in the threesix months ended March 31, 2018June 30, 2020 resulted from an unrealized loss of $26.8 million relating to non-marketable investments carried under the measurement alternative, $4.0 million of equity losses from Real Estate LP and $2.2 million of realized losses from the sale of Nasdaq shares.
Other income (loss), net of $(13.4) million in the six months ended June 30, 2019 is primarily related to the recognitionmark-to-market losses related to the Nasdaq Forwards of $29.0 million, which was partially offset by $6.9 million of income fromon the change in value of Nasdaq shares, of $2.4 million, plus earningsequity income from the Real Estate LP of $3.2 million. Other losses in$4.8 million and unrealized gains of $3.9 million resulting from non-marketable investments carried under the three months ended March 31, 2017 primarily relates to an accretion of the fair value of future earn-out payments.measurement alternative.
Interest (Expense) Income, Net
Interest expense,
net increased by $3.3 million, or 20.9%, to $19.1 million during the
threesix months ended
March 31, 2018 is primarily relatedJune 30, 2020 as compared to
interest expensethe six months ended June 30, 2019 increased due to borrowings on the
Company’s debt. Interest income during the three months ended March 31, 2018 is primarily related to income on employee loans.Credit Facility.
Provision
(Benefit) for Income Taxes
Provision for income taxes increaseddecreased by $6.9$10.9 million, or 69.1%, to $4.9 million for the threesix months ended March 31, 2018June 30, 2020 as compared to the threesix months ended March 31, 2017.June 30, 2019. This increasedecrease was primarily driven by an increase in the mix of allocable revenue among legal entities as a corporation versus flow through resulting from our Separation.lower pretax earnings. In general, our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. The Tax Act is expected
Net income attributable to
have a favorable impact on Newmark’s effective tax rate and net income as reported under generally accepted accounting principles in subsequent reporting periods to which the Tax Act is effective.Net Income (Loss) Attributable to Noncontrolling Interests
noncontrolling interests
Net income attributable to noncontrolling interests was $12.5decreased by $9.5 million, or 59.8%, to $6.4 million for the threesix months ended March 31, 2018. The increase was attributable to the change in Newmark’s corporate structure related to the Separation and IPO.June 30, 2020.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of operations for the indicated periods (in thousands). Results of any period are not necessarily indicative of results for a full year and may, in certain periods, be affected by seasonal fluctuations in our business. Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation.
| | March 31, 20182 | | | December 31, 20172 | | | September 30, 20171,2 | | | June 30, 20171 | | | March 31, 20171 | | | December 31, 20161 | | | September 30, 20161 | | | June 30, 20161 | |
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commissions | | $ | 260,735 | | | $ | 312,992 | | | $ | 256,918 | | | $ | 239,848 | | | $ | 204,958 | | | $ | 245,348 | | | $ | 230,204 | | | $ | 206,361 | |
Gains from mortgage banking activities/origination, net | | | 38,914 | | | | 41,737 | | | | 45,455 | | | | 73,546 | | | | 45,262 | | | | 54,378 | | | | 65,378 | | | | 43,597 | |
Management services, servicing fees and other | | | 130,811 | | | | 105,847 | | | | 95,848 | | | | 91,677 | | | | 82,362 | | | | 87,860 | | | | 77,046 | | | | 70,178 | |
Total revenues | | | 430,460 | | | | 460,576 | | | | 398,221 | | | | 405,071 | | | | 332,582 | | | | 387,586 | | | | 372,628 | | | | 320,136 | |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Compensation and employee benefits | | | 252,695 | | | | 295,577 | | | | 270,943 | | | | 238,518 | | | | 215,145 | | | | 231,910 | | | | 239,690 | | | | 203,432 | |
Allocations of net income and grant of exchangeability to limited partnership units | | | 25,809 | | | | 61,940 | | | | 18,217 | | | | 23,851 | | | | 10,649 | | | | 32,315 | | | | 16,568 | | | | 10,484 | |
Total compensation and employee benefits | | | 278,504 | | | | 357,517 | | | | 289,160 | | | | 262,369 | | | | 225,794 | | | | 264,225 | | | | 256,258 | | | | 213,916 | |
Operating, administrative and other | | | 75,427 | | | | 60,064 | | | | 52,313 | | | | 59,404 | | | | 47,382 | | | | 53,115 | | | | 44,546 | | | | 44,092 | |
Fees to related parties | | | 6,894 | | | | 6,531 | | | | 5,355 | | | | 4,167 | | | | 4,718 | | | | 2,348 | | | | 5,821 | | | | 4,770 | |
Depreciation and amortization | | | 22,513 | | | | 24,438 | | | | 29,922 | | | | 23,218 | | | | 18,237 | | | | 13,841 | | | | 20,918 | | | | 17,090 | |
Total operating expenses | | | 383,338 | | | | 448,550 | | | | 376,750 | | | | 349,158 | | | | 296,131 | | | | 333,529 | | | | 327,543 | | | | 279,868 | |
Other income (losses), net: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (loss) | | | 5,707 | | | | (2,029 | ) | | | 77,264 | | | | (715 | ) | | | (593 | ) | | | (684 | ) | | | 17,849 | | | | (813 | ) |
Total other income (losses), net | | | 5,707 | | | | (2,029 | ) | | | 77,264 | | | | (715 | ) | | | (593 | ) | | | (684 | ) | | | 17,849 | | | | (813 | ) |
Income (loss) from operations | | | 52,829 | | | | 9,997 | | | | 98,735 | | | | 55,198 | | | | 35,858 | | | | 53,373 | | | | 62,934 | | | | 39,455 | |
Interest (Expense) Income, net | | | (13,409 | ) | | | (1,453 | ) | | | 1,724 | | | | 1,381 | | | | 1,134 | | | | 1,021 | | | | 1,009 | | | | 1,010 | |
Income before income taxes and noncontrolling interests | | | 39,420 | | | | 8,544 | | | | 100,459 | | | | 56,579 | | | | 36,992 | | | | 54,394 | | | | 63,943 | | | | 40,465 | |
Provision (benefit) for income taxes | | | 6,933 | | | | 54,082 | | | | 1,989 | | | | 1,422 | | | | (15 | ) | | | 2,010 | | | | 1,125 | | | | 324 | |
Consolidated net income (loss) | | | 32,487 | | | | (45,538 | ) | | | 98,470 | | | | 55,157 | | | | 37,007 | | | | 52,384 | | | | 62,818 | | | | 40,141 | |
Less: Net income (loss) attributable to noncontrolling interest | | | 12,490 | | | | 633 | | | | (337 | ) | | | 12 | | | | 296 | | | | (69 | ) | | | (556 | ) | | | (190 | ) |
Net income (loss) available to common stockholders | | $ | 19,997 | | | $ | (46,171 | ) | | $ | 98,807 | | | $ | 55,145 | | | $ | 36,711 | | | $ | 52,453 | | | $ | 63,374 | | | $ | 40,331 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2020 | | March 31, 2020 | | December 31, 2019 | | September 30, 2019 (1) | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 (1) |
| Revenues: | | | | | |
| |
| |
| |
| |
| |
|
| Commissions | | $ | 173,038 |
| | $ | 268,362 |
| | $ | 416,728 |
| | $ | 357,908 |
| | $ | 346,131 |
| | $ | 275,268 |
| | $ | 426,431 |
| | $ | 319,340 |
|
Gains from mortgage banking activities/originations, net | | 69,071 |
| | 50,422 |
| | 49,316 |
| | 72,332 |
| | 45,091 |
| | 31,346 |
| | 49,501 |
| | 51,972 |
|
Management services, servicing fees and other | | 141,609 |
| | 165,146 |
| | 166,320 |
| | 156,394 |
| | 160,256 |
| | 141,042 |
| | 155,759 |
| | 147,497 |
|
| Total revenues | | 383,718 |
| | 483,930 |
| | 632,364 |
| | 586,634 |
| | 551,478 |
| | 447,656 |
| | 631,691 |
| | 518,809 |
|
| Expenses: | | | | | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Compensation and employee benefits | | 230,518 |
| | 300,257 |
| | 354,862 |
| | 341,036 |
| | 316,737 |
| | 263,353 |
| | 342,876 |
| | 291,382 |
|
Equity-based compensation and allocations of net income to limited partnership units and FPUs | | 10,860 |
| | 12,914 |
| | 148,965 |
| | 56,647 |
| | 39,353 |
| | 13,871 |
| | 99,085 |
| | 40,776 |
|
Total compensation and employee benefits | | 241,378 |
| | 313,171 |
| | 503,827 |
| | 397,683 |
| | 356,090 |
| | 277,224 |
| | 441,961 |
| | 332,158 |
|
Operating, administrative and other | | 61,012 |
| | 92,281 |
| | 85,918 |
| | 86,297 |
| | 101,749 |
| | 87,893 |
| | 91,369 |
| | 84,914 |
|
| Fees to related parties | | 5,205 |
| | 5,812 |
| | 3,990 |
| | 7,088 |
| | 7,222 |
| | 6,725 |
| | 6,323 |
| | 6,644 |
|
| Depreciation and amortization | | 28,946 |
| | 46,039 |
| | 32,634 |
| | 36,781 |
| | 33,425 |
| | 28,304 |
| | 29,146 |
| | 25,873 |
|
| Total operating expenses | | 336,541 |
| | 457,303 |
| | 626,369 |
| | 527,849 |
| | 498,486 |
| | 400,146 |
| | 568,799 |
| | 449,589 |
|
| Other income (loss), net | | (36,389 | ) | | 1,438 |
| | (14,313 | ) | | 108,711 |
| | (3,726 | ) | | (9,718 | ) | | 28,234 |
| | 93,717 |
|
| Income (loss) from operations | | 10,788 |
| | 28,065 |
| | (8,318 | ) | | 167,496 |
| | 49,266 |
| | 37,792 |
| | 91,126 |
| | 162,937 |
|
| Interest expense, net | | (10,056 | ) | | (9,030 | ) | | (8,141 | ) | | (8,167 | ) | | (8,081 | ) | | (7,699 | ) | | (14,705 | ) | | (11,509 | ) |
Income (loss) before income taxes and
noncontrolling interests | | 732 |
| | 19,035 |
| | (16,459 | ) | | 159,329 |
| | 41,185 |
| | 30,093 |
| | 76,421 |
| | 151,428 |
|
| Provision (benefit) for income taxes | | 88 |
| | 4,797 |
| | (132 | ) | | 36,760 |
| | 9,121 |
| | 6,687 |
| | 36,862 |
| | 35,870 |
|
| Consolidated net income (loss) | | 644 |
| | 14,238 |
| | (16,327 | ) | | 122,569 |
| | 32,064 |
| | 23,406 |
| | 39,559 |
| | 115,558 |
|
Less: Net income (loss) attributable to
noncontrolling interests | | 330 |
| | 6,056 |
| | (5,362 | ) | | 33,871 |
| | 9,396 |
| | 6,502 |
| | 21,800 |
| | 47,321 |
|
Net income (loss) available to
common stockholders | | $ | 314 |
| | $8,182 | | $(10,965) | | $88,698 | | $22,668 | | $16,904 | | $17,759 | | $68,237 |
1
| Financial results have been retrospectively adjusted to include the financial results of Berkeley Point. See “Berkeley Point Acquisition and Related Transactions” herein for a summary of the impact on Newmark’s Quarterly and Annual Results of Operations.
|
2
(1) | Amounts include the gains related to the Nasdaq Earn-out associated with the Nasdaq transactionmonetization transactions recorded in Other income (loss). , net. |
Financial Position, Liquidity and Capital Resources
Actions taken in response to COVID-19
In the first quarter of 2020, we took various measures to strengthen our balance sheet and maintain liquidity to withstand the potential impact of the COVID-19 pandemic. In March 2020, we drew down an incremental $180.0 million under the $465.0 million Credit Facility to enhance financial flexibility. We have $415.0 million outstanding under this Credit Facility as of June 30, 2020, leaving us with $50.0 million of remaining availability. Subsequent to June 30, 2020, we paid down $75.0 million on the Credit Facility. We have no debt maturities until 2023. Additionally, dividends to common stockholders have been reduced to $0.01 as approved by our Board of Directors for the second quarter of 2020 and distributions to partners have been reduced comparably. During the first and second quarter of 2020, we did not repurchase any common shares and do not expect to repurchase any shares in the foreseeable future. In addition, we took actions to reduce at least $100 million in expenses for 2020 related to support and operations functions. Collectively, these actions reinforce our ability to maintain financial flexibility during the COVID-19 pandemic and emerge from the crises with market share gains.
The primary source of liquidity for our business is the cash flow provided by our operations. Prior to the Separationoperations and IPO, our cash was transferred to BGC Partners to support its overall cash management strategy. Transfersoff-balance sheet Nasdaq asset.
As of
cash to and from BGC Partners’ cash management systemJune 30, 2020, we have
been reflected in related party receivables and payables in the historical unaudited condensed consolidated balance sheets and in payments to and borrowings from related parties in the financing section of the unaudited condensed consolidated statements of cash flows. Cash and equity issued for acquisitions have been reflected in BGC Partners’ net investment in the historical unaudited condensed consolidated balance sheets and statement of changes in invested equity.Following the completion of the Separation and IPO, we maintain separate cash management and financing functions for operations. Additionally, our capital structure, long-term commitments and sources of liquidity will change significantly from our historical capital structure, long-term commitments and sources of liquidity.
In connection with the Separation, we assumed from BGC Partners the Term Loan and the Converted Term Loan. Newmark OpCo also assumed from BGC U.S. OpCo the BGC Notes. We contributed all of the net proceeds of the IPO to Newmark OpCo in exchange for a number of units representing Newmark OpCo limited partnership interests equal to the number of shares issued by us in the IPO. Newmark OpCo used all of such net proceeds to partially repay intercompany indebtedness owed by Newmark OpCo to us in respect of the Term Loan (which intercompany indebtedness was originally issued by BGC U.S. OpCo and will be assumed by Newmark OpCo in connection with the separation). On March 7, 2018, BGC, including through its subsidiary invested $242.0$306.4 million in Newmark limited partnership interests. Newmark has used the proceeds from this transaction plus all of the repayment from Newmark OpCo,cash and cash on hand to repayequivalents and approximately $787.0 million in full the $270.7 million remaining balance of the Term Loan. Following the IPO, in the event that any member of Newmark receives net proceeds from the incurrence of indebtedness for borrowed money or an equity issuance (in each case subject to certain exceptions), Newmark OpCo will be obligated to use such net proceeds to repay the remaining intercompany indebtedness owed by Newmark OpCo to us in respect of the Converted Term Loan (which in turn we will use to repay the Converted Term Loan). Following the repayment of the remaining amount outstandingadditional Nasdaq stock (stock value based on the Converted Term Loan, in the eventAugust 5, 2020 closing price) that any member of the Newmark Group receives net proceeds from the incurrence of indebtedness for borrowed money (subjectexpects to certain exceptions), Newmark OpCo will be obligated to use such net proceeds to repay the BGC Notes. In addition, we will be obligated to repay any remaining amounts under the BGC Notes prior to the distribution. We intend to replace the financing provided by the Converted Term Loan and BGC Notes that remain outstanding with new senior term loans (which may be secured or unsecured), new senior unsecured notes, other long- or short-term financing or a combination thereof.
receive through 2027.
Our future capital requirements will depend on many factors, including our
rate of sales growth, the expansion of our sales and marketing activities, our expansion into other markets and our results of operations. To the extent that existing cash, cash from operations and credit facilities,
(including the Intercompany Credit Agreement with BGC)and Nasdaq shares are insufficient to fund our future activities, we may need to raise additional funds through public equity or debt financing.
Balance Sheet
As of June 30, 2020, our long-term debt consists of our 6.125% Senior Notes with a carrying amount of $541.6 million and $412.1 million outstanding under the Credit Facility.
Financial Position
Total assets at March 31, 2018June 30, 2020 were $3,057.1$4,132.2 million as compared to $2,273.0$3,201.6 million at December 31, 2017. Total liabilities at March 31, 2018 and December 31, 2017 were $2,503.52019. The increase of $929.0 million and $2,029.6 million, respectively. $603.0 million of the increase in total assets, and $590.0 million of the increase in total liabilities can be attributed to an increase in loans held for sale, at fair value of $874.1 million, an increase in cash and cash equivalents of $142.8 million, an increase in loans, forgivable loans and other receivables from employees and partners of $80.1 million, primarily related to our hiring of industry leading professionals, partially offset by a decrease in receivables, net of $105.7 million, a decrease in marketable securities of $36.8 million, and a decrease in other assets of $24.6 million.
Total liabilities at June 30, 2020 and December 31, 2019 were $3,226.2 million and $2,239.5 million, respectively. The increase of $985.2 million can be attributed to an increase in outstanding borrowings
from ourunder warehouse
facilities. Additionally, the Company’sfacilities collateralized by U.S. Government Sponsored Enterprises of $854.4 million and an increase in long-term debt
was reducedof $364.3 million, partially offset by
$270.7a decrease in accrued compensation of $97.6 million,
its current portiona decrease of
payables to related parties increased by $163.0$36.7 million
in securities loaned and
its restricted cash increased by $191.6 million. Liquidity
Prior to December 13, 2017, the date of the Separation, BGC Partners funded our growth through contributing acquired companies and related party payables. The related party payables are net of related party receivables which were generated from our earnings as BGC Partners sweeps our excess cash to manage treasury centrally. Additionally, prior to its acquisition by BGC, Berkeley Point and its parent company, Cantor Commercial Real Estate Company, L.P. (which we refer to as “CCRE”), loaned money to each other. In connection with the Separation and IPO, Newmark settled its intercompany payable to BGC. Subsequent to the IPO, Newmark’s total net borrowings under the credit facility between BGC and Newmark were $202.0a $109.8 million as of March 31, 2018, which are reflected as current portion of payables to related parties on the March 31, 2018 balance sheet. The total net payable to related parties at March 31, 2018 was $197.2 million as compared to a net payable at December 31, 2017 of $34.2 million. Loans held for sale were financed from the warehouse notes payable, net at March 31, 2018. Fees to related parties that are charged by BGC Partners and Cantor to Newmark are reflected as cash flows from operating activitiesdecrease in the unaudited condensed consolidated Statement of Cash Flows for each period presented. For the three months ended March 31, 2018, these fees and charges totaled $6.9 million. Additionally, prior to the Berkeley Point Acquisition, Berkeley Point loaned excess cash to CCRE to fund CCRE’s lending business. These amounts are presented as investing activities on the Statement of Cash Flows for all periods presented. All other amounts sent to or from BGC Partners are reflected as cash flows from financing activities in the unaudited condensed consolidated Statement of Cash Flows for each period presented.
For the three months ended March 31, 2018, net cash used in operating activities was $590.4 million and for the three months ended March 31, 2017, net cash provided by operating activities was $296.4 million. Cash flows from operating activities included $6.0 million of cash paid to BGC Partners, related to grant of exchangeability to limited partnership units for the three months ended March 31, 2017. As of the Separation and IPO, these charges became non-cash in nature to the extent they relate to limited partnership units in Newmark, and therefore are excluded from cash outflows from operating activities. payables.
Liquidity
We expect to generate cash flows from operations to fund our business
operations and
growth strategy to meet our short-term liquidity requirements, which we define as the next
12twelve months.
We also expect that proceeds from new debt financing combined with cash flows from operations will be sufficient to fund our operations, growth strategy and dividends and distributions to meet our long-term liquidity requirements.
Prior to the Separation, we received the rights to 10,914,717 million Nasdaq shares,As of which 992,247 million were received in 2017 and the remaining 9,922,470 million Nasdaq shares will be received ratably over approximately the next 10 years, provided that Nasdaq, as a whole, produces at least $25.0 million in gross revenues each year. The Nasdaq shares not yet received were valued at approximately $855.5 million based on the closing share price of Nasdaq on March 29, 2018 (the last day of trading for the first quarter of 2018). The value of the Nasdaq payment yet to be received is not reflected inJune 30, 2020, our liquidity position or on our balance sheet. The receipt of the Nasdaq payment will be reflected in our earnings and is expected to result in increases in our liquidity. We currently expect to receive more than $875.0 million in additional Nasdaq stock over time (stock value based on May 2, 2018 closing price) as a result of the Nasdaq Earn-out, which is not reflected in our balance sheet.
On September 8, 2017, BGC completed the Berkeley Point Acquisition. Berkeley Point 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, including those it originates. BGC acquired all of the outstanding membership interests of Berkeley Point Financial LLC for an acquisition price of $875 million, with $3.2 million of the acquisition price paid with 247,099 partnership units in BGC Holdings pursuant to a Transaction Agreement, dated as of July 17, 2017, with Cantor and certain Cantor’s affiliates, including CCRE and Cantor Commercial Real Estate Sponsor, L.P., the general partner of CCRE. In accordance with this Transaction Agreement, Berkeley Point made a distribution of $89.1 million to CCRE related to the Berkeley Point Acquisition, for the amount that Berkeley Point’s net assets, inclusive of certain fair value adjustments, exceeded $508.6 million. Contemporaneously with the Berkeley Point Acquisition, on September 8, 2017, the Company invested $100 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. The Company’s investment is accounted for under the equity method. In connection with these aforementioned transactions, BGC entered into a $400 million two-year unsecured senior revolving credit facility and a $575 million unsecured senior term loan maturing on the second anniversary of the Berkeley Point Acquisition closing date.
On October 23, 2017, we filed a registration statement on Form S-1 with the SEC relating to the IPO of our Class A common stock. On December 19, 2017 BGC Partners, Inc. and Newmark Group, Inc. announced the closing of the offering of 20 million shares of Newmark’s Class “A” common stock to the public at a price of $14.00 per share less underwriting discounts and commissions. On December 26, 2017, BGC and Newmark announced that the underwriters of Newmark’s IPO exercised in full their overallotment option to purchase an additional 3 million shares of Newmark’s Class A common stock at the initial public offering price of $14.00 per share less underwriting discounts and commissions. As a result, Newmark received aggregate net proceeds of $295.4 million from the IPO after deducting underwriting discounts and commissions and estimated offering expenses. The proceeds of the IPO were used to repay the Term Loan. Following some period after the IPO; BGC may, subject to market and other conditions, distribute the shares that BGC holds of Newmark Group, Inc. pro rata to BGC’s stockholders in a manner intended to qualify as tax-free for U.S. federal income tax purposes.
As of March 31, 2018, our liquidity, which we define as cash and cash equivalents, and marketable securities, less securities loaned, was approximately $48.1$306.4 million. This does not include the approximately (i) $190.0 million of excess funds maintained in our restricted liquidity account pledged for the benefit of Fannie Mae and (ii) more than $875.0$787.0 million in additional Nasdaq stock (stock value based on the May 2, 2018August 5, 2020 closing price) that we expectNewmark expects to receive over time. through 2027.
Managing our multifamily GSE mortgage business through the pandemic
We expectare a lender for Multifamily, Seniors, Healthcare, Student, and Manufactured Housing Community (MHC) assets through Fannie Mae, Freddie Mac, and FHA.
These loans are guaranteed by the respective capital source and pre-sold by us prior to usethe commitment of any corporate funds. We take no interest rate risk on the origination and sale of these loans.
The pre-sold loans are funded at a 100% advance rate via bank warehouse facilities and are generally held for a period of 30-45 days prior to the consummation of a sale at an annualized carry rate of approximately 50 basis points. As of June 30, 2020, we had $1.7 billion of warehouse loan funding available through multiple banking partners.
We also service loans for Fannie Mae, Freddie Mac, FHA, and various life insurance companies, banks, CMBS and other lenders.
We share credit losses on a pari passu basis with Fannie Mae (weighted average loss sharing is approximately 29%) on our considerable financial resources$21.5 billion portfolio. In the event of an actual credit loss, all losses are allocated between the two parties based on the contractual loss sharing arrangement. Although we share credit losses on our Fannie Mae DUS portfolio, we view our originated servicing portfolio to repaybe conservative in terms of relevant credit metrics such as debt profitably hire, make accretive acquisitions, pay dividends, and/or repurchase sharesservice coverage, original loan-to-value and unitsmarket and borrower quality.
Following enactment of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") on March 27, 2020, Fannie Mae, Freddie Mac and Ginnie Mae announced forbearance of loan payment programs. Newmark only has advancing obligations under Fannie Mae and Ginnie Mae. Effective July 1, 2020, Fannie announced an update to their forbearance of loan payment program:
Forbearance may be granted for an additional three months of loan payments (for a total of six months). To be eligible, borrower must be in compliance with existing forbearance and demonstrate a hardship directly related to COVID-19.
While the forbearance rate remains difficult to predict, we would be required to advance up to $4.4 million for each 1% increase in the forbearance rate based on the CARES Act forbearance period.
As of June 30, 2020, Newmark had five loans totaling $78.1 million in outstanding principal balance where we have $0.5 million in outstanding servicing advances.
Newmark has a $125.0 million line of credit with Bank of America within its $450 million warehouse facility to fund principal and interest servicing advances during the forbearance period related to the CARES Act.
We have a contractual right to be reimbursed in full by Fannie Mae and Ginnie Mae for all
while maintaining or improving our investment grade rating.Term Loanservicer advances made during the COVID-19 forbearance program.
Long-term debt
Long-term debt consisted of the following (in thousands):
|
| | | | | | | |
| | As of June 30, 2020 | | As of December 31, 2019 |
| 6.125% Senior Notes | $ | 541,565 |
| | $ | 540,377 |
|
| Credit Facility | 412,063 |
| | 48,917 |
|
| Total | $ | 953,628 |
| | $ | 589,294 |
|
6.125% Senior Notes
On November 2, 2018, Newmark announced the pricing of an offering of $550.0 million aggregate principal amount of 6.125% Senior Notes due 2023, which closed on November 6, 2018. The 6.125% Senior Notes were offered and
Converted Term LoanIn connectionsold in a private offering exempt from the registration requirements under the Securities Act. The 6.125% Senior Notes are general senior unsecured obligations of Newmark. These 6.125% Senior Notes were priced at 98.937% to yield 6.375%. The 6.125% Senior Notes bear an interest rate of 6.125% per annum, payable on each May 15 and November 15, beginning on May 15, 2019 and will mature on November 15, 2023. The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Berkeley Point Acquisition and BGC Partners’ investment in Real Estate LP, on September 8, 2017, BGC PartnersSecurities Act.
Credit Facility
On November 28, 2018, Newmark entered into
an unsecured senior term loan credit agreement (which we referthe Credit Agreement by and among Newmark, the several financial institutions from time to
time party thereto, as
the “Term Loan Credit Agreement”) withLenders, and Bank of America N.A., as administrative
agent (which we referagent. The Credit Agreement was amended on February 26, 2020 to
asincrease the
“Administrative Agent”),size of the facility and
a syndicate of lenders.extend the maturity date to February 26, 2023. The
Term LoanAmended Credit Agreement provides for a
term loan of up to $575.0$425.0 million
(which we refer to as the “Term Loan”). During the year ended December 31, 2017, in connection with the Term Loan, BGC Partners lent the proceeds of the Term Loan to BGC U.S. OpCo, and BGC U.S. OpCo issued a promissory note with an aggregate principal amount of $575.0 million to BGC Partners (which we refer to as the “Intercompany Term Loan Note”). Pursuant to the terms of the Intercompany Term Loan Note, all of the rights and obligations of BGC Partners under the Intercompany Term Loan Note are the same as the rights and obligations of the lenders with respect to payment under the Term Loan, and all of the rights and obligations of BGC U.S. OpCo under the Intercompany Term Loan Note are the same as the rights and obligations of BGC Partners with respect to payment under the Term Loan. On November 22, 2017, we entered into an amendment to the Term Loan Credit Agreement (which we refer to as the “Term Loan Amendment”), pursuant to which, in connection with the Separation and prior to the closing of the IPO, we assumed the obligations of BGC Partners under the Term Loan. In connection with our assumption of BGC Partners’ rights and obligations under the Term Loan, BGC Partners
assigned to us, and we assumed, all of BGC Partners’ rights and obligations under the Intercompany Term Loan Note and, pursuant to the separation, Newmark OpCo assumed all of BGC U.S. OpCo’s rights and obligations under the Intercompany Term Loan Note. During the three months ended March 31, 2018 the Term Loan Credit Agreement was repaid in full.
Also in connection with the Berkeley Point Acquisition and BGC Partners’ investment in Real Estate LP, on September 8, 2017, BGC Partners entered into anthree-year unsecured senior revolving credit agreement (which we referfacility. The Credit Agreement was again amended on March 16, 2020 to asincrease the “Revolving Credit Agreement”) withsize of the Administrative Agentfacility and a syndicate of lenders.extend the maturity date to February 26, 2023. The RevolvingAmended Credit Agreement provides for a $465.0 million three-year unsecured senior revolving loans of up to $400.0 million (which we refer to as the “Revolving Credit Facility”).credit facility. As of March 31, 2018, there were $400.0 millionJune 30, 2020, the carrying value of borrowings outstanding under the RevolvingAmended Credit Facility. As of December 31, 2017, the pricingAgreement was increased by 50 basis points until the Term Loan Facility is paid in full, and if there are any amounts outstanding$412.1 million. Borrowings 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. In connection with the $400.0 million borrowings, the proceeds of which BGC Partners lent to BGC U.S. OpCo, BGC U.S. OpCo issued a promissory note with an aggregate principal amount of $400.0 million to BGC Partners (which we refer to as the “Intercompany Revolver Note”). Pursuant to the terms of the Intercompany Revolver Note, all of the rights and obligations of BGC Partners under the Intercompany Revolver Note are the same as the rights and obligations of the lenders with respect to payment under the RevolvingAmended Credit Facility and all of the rights and obligations of BGC U.S. OpCo under the Intercompany Revolver Note are the same as the rights and obligations of BGC Partners with respect to payment under the Revolving Credit Facility. On November 22, 2017, we entered into an amendment to the Revolving Credit Agreement (which we refer to as the “Revolver Amendment”), pursuant to which the then outstanding borrowings of BGC Partners under the Revolving Credit Facility were converted into a term loan (which we refer to as the “Converted Term Loan”) and thereafter, in connection with the Separation and prior to the closing of the IPO, we assumed the obligations of BGC Partners as borrower under the Converted Term Loan. BGC Partners remained the borrower under the Revolving Credit Facility for any future draws and, as long as there is any principal amount outstanding under the Converted Term Loan, we guaranteed the obligations of BGC Partners under the Revolving Credit Facility. In connection with our assumption of the Converted Term Loan, BGC Partners assigned to us, and we assumed, all of BGC Partners’ rights and obligations under the Intercompany Revolver Note and, pursuant to the Separation, Newmark OpCo assumed all of BGC U.S. OpCo’s rights and obligations under the Intercompany Revolver Note.
Under the Revolving Credit Agreement, as amended, BGC Partners guaranteed our repayment obligations under the Converted Term Loan. As long as the Converted Term Loan remains unpaid in any portion, we will guarantee any draws by BGC Partners under the Revolving Credit Facility. Once the Converted Term Loan has been paid in full, we will no longer have obligations as a borrower or as a guarantor under the Revolving Credit Agreement. Upon repayment, no portion of the Term Loan or the Converted Term Loan may be reborrowed by us.
Pursuant to the Separation and Distribution Agreement, (a) Newmark Group, Inc. will indemnify, defend and hold harmless the members of the BGC Partners group and each of their respective directors, officers, general partners, managers and employees from and against any and all losses of such persons to the extent relating to, arising out of or resulting from payments made to satisfy any guarantee by a member of the BGC Partners group to a third person in respect of the Term Loan Credit Agreement or the Converted Term Loan and (b) BGC Partners will indemnify, defend and hold harmless the members of the Newmark group and each of their respective directors, officers, general partners, managers and employees from and against any and all losses of such persons to the extent relating to, arising out of or resulting from payments made to satisfy any guarantee by a member of the Newmark group to a third person in respect of borrowings under the Revolving Credit Agreement other than the Converted Term Loans. In addition, (a) Newmark OpCo will indemnify, defend and hold harmless the Cantor group, the BGC Partners group and the Newmark group (other than Newmark OpCo and its subsidiaries) and each of their respective directors, officers, general partners, managers and employees, from and against all liabilities to the extent relating to, arising out of or resulting from any guarantee for the benefit of any member of the Newmark group by any member of the BGC Partners group that survives following the Separation and (b) BGC U.S. OpCo and BGC Global OpCo will indemnify, defend and hold harmless the Cantor group, the Newmark group and the BGC Partners Group (other than BGC U.S. OpCo , BGC Global OpCo and their respective subsidiaries) and each of their respective directors, officers, general partners, managers and employees from and against all liabilities to the extent relating to, arising out of or resulting from any guarantee for the benefit of any member of the BGC Partners group by any member of the Newmark group that survives following the Separation, including, in each case, any guarantee under the Term Loan Credit Agreement or the Revolving Credit Agreement.
The Converted Term Loan will mature on September 8, 2019. The outstanding amounts under the Converted Term Loan will bear an annual interest at a per annum rate equal to, at ourNewmark’s option, either (a) LIBORLondon Interbank Offered Rate (“LIBOR”) for interestspecified periods, of one, two, three or six months, as selected by us, or upon the consent of all applicable lenders,Lenders, such other period that is 12 months or less, (in each case, subject to availability), as selected by us, 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,administrative agent, and (iii) one-month LIBOR plus 1.0%, in each case plus an applicable margin.. The applicable margin will initially be 2.25%is 175 basis points with respect to LIBOR borrowings inand (a) above can be 0.50% higher depending upon Newmark’s credit rating. The Amended Credit Facility also provides for an unused facility fee.
Cantor Credit Agreement
On November 30, 2018 Newmark entered into an unsecured credit agreement with Cantor. The Cantor Credit Agreement provides for each party to issue loans to the other party in the lender’s discretion. Pursuant to the Cantor Credit Agreement, the parties and
1.25% withtheir respective subsidiaries (with respect to
base
CFLP, other than BGC and its subsidiaries) may borrow up to an aggregate principal amount of $250.0 million from each other from time to time at an interest rate borrowingswhich is the higher of CFLP’s or Newmark’s short-term borrowing rate then in (b) above. The applicable margin with respect to LIBOReffect, plus 1.0%. As of June 30, 2020, there were no borrowings in (a) above will range from 1.5% to 3.25% depending upon BGC Partners’ credit rating, and with respect to base rate borrowings in (b) above will range from 0.5% to 2.25% depending upon BGC Partners’ credit rating. In addition, (x) if there are any amounts outstanding under the Term Loan as of December 31, 2017, the pricing shall increaseCantor Credit Agreement.
Warehouse Facilities Collateralized by 0.50% until the Term Loan is paid in full, and (y) if there are any amounts outstanding under the Term Loan asU.S. Government Sponsored Enterprises
As of June 30,
2018, the pricing shall increase by an additional 0.75% (and 1.25% in the aggregate) until the Term Loan is paid in full. Since the repayment in full of the Term Loan, the pricing for the Converted Term Loan has returned to the levels described above, as applicable. On March 31, 2018, the interest rate on the Term Loan and the Converted Term Loan was one-month LIBOR plus 2.25%, which was approximately 3.99% per annum.The Revolving Credit Agreement also contain certain other customary affirmative and negative covenants and events of default that apply to us.
Pursuant to the Term Loan Credit Agreement the Converted Term Loan Credit Agreement and the Separation and Distribution Agreement, both the Term Loan and the Converted Term Loan were subject to a mandatory prepayment requirement by an amount equal to 100% of net cash proceeds of our IPO and all other material debt and equity issuances (and certain asset sales), in each case subject to customary exceptions. We contributed all of the net proceeds of the IPO to2020, Newmark OpCo in exchange for a number of units representing Newmark OpCo limited partnership interests equal to the number of shares issued by us in the IPO. Newmark OpCo used all of such net proceeds, plus proceeds from BGC’s investment on March 7, 2018, of $242.0 million in Newmark limited partnership interests and cash on hand to repay in full the Term Loan (which intercompany indebtedness was originally issued by BGC U.S. OpCo and was assumed by Newmark OpCo in connection with the Separation).
The Term Loan Credit Agreement and the Converted Term Loan Credit Agreement and the Separation and Distribution Agreement also require us to apply net cash proceeds of material debt issuances after repayment in full of the Term Loan and Converted Term Loan (and subject to certain exceptions) to repay the BGC Notes.
Berkeley Point Warehouse Facilities
As of March 31, 2018, Berkeley Point had $950 million$1.7 billion of committed loan funding available through three commercial banks and an uncommitted $325$400.0 million Fannie Mae loan repurchase facility. Consistent with industry practice, Berkeley Point’s existingthese warehouse facilities are short-term, requiring annual renewal. If anyThese warehouse facilities are collateralized by an assignment of the committedunderlying mortgage loans originated under its various lending programs and third-party purchase commitments and are recourse only to our wholly-owned subsidiary, Berkeley Point Capital, LLC. As of June 30, 2020 and December 31, 2019, we had $1.1 billion and $209.6 million outstanding under “Warehouse facilities are terminated or are not renewed orcollateralized by U.S. Government Sponsored Enterprises” on our accompanying unaudited condensed consolidated balance sheets.
Cash Flows
Cash flows from operations excluding activity from loan originations and sales, net were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| Net cash provided by (used in) operating activities | $ | (302,694 | ) | | $ | 179,177 |
| | $ | (955,095 | ) | | $ | 218,610 |
|
| Add back: | | | | | | �� |
|
| Loan originations - loans held for sale | 2,513,573 |
| | 1,944,040 |
| | 5,059,288 |
| | 3,498,483 |
|
| Loan sales - loans held for sale | (2,152,623 | ) | | (2,010,574 | ) | | (4,210,307 | ) | | (3,696,135 | ) |
| Unrealized gains on loans held for sale | (10,903 | ) | | 12,422 |
| | 25,158 |
| | 25,698 |
|
Net cash provided by operating activities excluding activity from loan originations and sales (1) | $ | 47,353 |
| | $ | 125,065 |
| | $ | (80,956 | ) | | $ | 46,656 |
|
(1) Includes payments for new hires and producers in the uncommitted facility is not honored, we would be required to obtain replacement financing.2042 Promissory Note
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,$1.0 million 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$61.0 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.
2019 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.
Intercompany Credit Agreement
In connection with the Separation on December 13, 2017, BGC entered into an unsecured senior credit agreement with Newmark (the “Original Credit Agreement”), which was amended and restated, as Intercompany Credit Agreement, on March 19, 2018. The Intercompany Credit Agreement provides for each party to issue revolving loans to the other party in the lender’s discretion.
The Intercompany Credit Agreement eliminates certain provisions from the Original Credit Agreement but the facility maturity date and the interest rate applicable to loans outstanding under the Intercompany Credit Facility remain the same.
On March 19, 2018, Newmark borrowed $150.0 million from BGC pursuant to the facilities under the Intercompany Credit Agreement. The interest rate as of March 31, 2018 was 4.99%, which may be adjusted based on the higher of BGC’s or Newmark’s short-term borrowing rate then in effect at such time plus 100 basis points, or such other interest rate as may be mutually agreed between BGC and Newmark.. Newmark has transferred these proceeds to its restricted cash account pledged for the benefit of Fannie Mae. As of March 31, 2018, Newmark’s total net borrowings underthree and six months ended June 30, 2020, respectively, and $14.0 million and $54.0 million for the Intercompany Credit Agreement are $202.0 million.
three and six months ended June 30, 2019, respectively.
Cash Flows for the threeSix Months Ended June 30, 2020
For the six months ended
March 31, 2018For the three months ended March 31, 2018,June 30, 2020, we used $590.4$955.1 million of cash infor operations. However, excluding activity from loan originations and sales, net cash used by operating activities for the six months ended June 30, 2020 was $81.0 million. We had consolidated net income of $32.5$14.9 million, $559.9$100.6 million of positive adjustments to reconcile net income to net cash used by operating activities (excluding activity from loan originations and sales) and $196.4 million of negative changes in operating assets and liabilities. The negative change in operating assets and liabilities included $115.8 million of increases in loans, forgivable loans and other receivables from employees and partners primarily related to hiring, $73.4 million of increases in other payables, and decreases in accrued compensation of $99.8 million, offset by a $98.1 million increase in receivables, net. Cash provided by investing activities was $16.6 million, primarily related to $34.6 million of proceeds from the sale of marketable securities, partially offset by $12.0 million in purchases of fixed assets and $5.9 million of payments for acquisitions, net of cash acquired. We had $1.1 billion of cash provided by financing activities primarily due to net borrowings on the warehouse facilities collateralized by U.S. Government Sponsored Enterprises of $5.1 billion and borrowing of $365.0 million under the Credit Facility, partially offset by $4.2 billion in principal payments on warehouse facilities, repayments of $36.7 million of securities loaned, distributions to limited partnership interests and other noncontrolling interests of $74.7 million and dividends to stockholders of $19.6 million.
Cash Flows for the Six Months Ended June 30, 2019
For the six months ended June 30, 2019, we generated $218.6 million of cash from operations. Excluding activity from loan originations and sales, net cash provided by operating activities for the six months ended June 30, 2019 was $46.7 million. We had consolidated net income of $55.5 million, $113.2 million of positive adjustments to reconcile net income to net cash provided by operating activities
(excluding activity from loan originations and
$63.0sales) and $122.0 million of negative changes in operating assets and liabilities.
$603.0 million of adjustments to reconcile net income to net cash provided by operating activities was related to loans held for sale. The negative change in operating assets and liabilities included
$24.6$53.8 million of increases in loans, forgivable loans and other receivables from employees and partners primarily related to continued hiring and expansion of our
business. We generated $42.5business, $43.5 million in increases in other assets, $41.6 million of
cash provided bydecreases in accrued compensation, $14.9 million increases in receivables, net and a $31.8 million increase in accounts payable, accrued expenses and other liabilities. Cash used in investing activities
was $25.6 million, primarily related to
$20.1 million of purchases of non-marketable investments, $16.2 million of payments for acquisitions, net of cash acquired, and $10.7 million of purchases of fixed assets, partially offset by $22.2 million of proceeds from the sale of marketable securities. We
generated $666.6used $215.1 million of cash from financing activities primarily due to net
proceeds frompayments to warehouse
notes payablefacilities collateralized by U.S. Government Sponsored Enterprises of
$590.0$179.2 million,
$242.0distributions to limited partnership interests and noncontrolling interests of $93.9 million,
dividends of
proceeds from BGC’s investment in Newmark LPU’s$34.0 million, and
$162.0treasury stock repurchases of $13.9 million,
of new borrowings from BGC under the credit facility,which were partially offset by
$270.7net borrowings under the Credit Facility of $45.0 million,
repaymentproceeds from securities loaned of
long term debt.Cash Flows for$33.7 million and settlement of pre-Spin-Off related party receivables of $33.9 million.
Credit Ratings
As of June 30, 2020, our public long-term credit ratings and associated outlooks are as follows:
|
| | | | |
| | Rating | | Outlook |
| Fitch Ratings Inc. | | BBB- | | Stable |
| JCRA | | BBB+ | | Stable |
| Standard & Poor's | | BB+ | | Stable |
| Kroll Bond Rating Agency | | BBB- | | Stable |
Credit ratings and associated outlooks are influenced by several factors, including but not limited to: operating environment, earnings and profitability trends, the
three months ended March 31, 2017For the three months ended March 31, 2017, we generated $296.4 millionprudence of funding and liquidity management practices, balance sheet size/
composition and resulting leverage, cash
from operations. We had net incomeflow coverage of
$37.0 million, $286.6 million of positive adjustments to reconcile net income to net cash provided by operating activities,interest, composition and
$27.2 million of negative changes in operating assets and liabilities. $295.2 millionsize of the
positive adjustments to reconcile net income to net cash provided by operating activities was related to loans held for sale. The negative changecapital base, available liquidity, outstanding borrowing levels and the firm’s competitive position in
operating assets and liabilities was driventhe industry. A credit rating and/or the associated outlook can be revised upward or downward at any time by a
$33.6 million decreaserating agency if such rating agency decides that circumstances warrant such a change. Any reduction in our
accrued compensation. We used $4.0 millioncredit ratings and/or the associated outlook could adversely affect the availability of
cash for investing activities primarily relateddebt financing on terms acceptable to
fixed asset purchases,us, as well as the cost and
used $272.0 millionother terms upon which we are able to obtain any such financing. In addition, credit ratings and associated outlooks may be important to customers or counterparties when we compete in
financing activities primarily duecertain markets and when we seek to
net paymentsengage in certain transactions. In connection with certain agreements, interest rates on our notes may incur increases of up to
related parties2% in the event of
$223.8.REGULATORY REQUIREMENTS
As a result of the Berkeley Point Acquisition, credit ratings downgrade.
Regulatory Requirements
Newmark is
now 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’sour accompanying unaudited condensed consolidated financial statements. As of
March 31, 2018,June 30, 2020, Newmark has met all capital requirements. As of
March 31, 2018,June 30, 2020, the most restrictive capital requirement was Fannie Mae’s net worth requirement. Newmark exceeded the minimum requirement by
$426.3$343.1 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. As of
MarchJune 30, 2020 and December 31,
20182019, Newmark has met all liquidity requirements.
In addition, as a servicer for Fannie Mae,
GNMAthe Government National Mortgage Association (“Ginnie Mae”) and FHA, Newmark is required to advance to investors any uncollected principal and interest due from borrowers. As of
March 31, 2018June 30, 2020 and December 31,
20172019, outstanding borrower advances were
approximately $63 thousand$1.0 million and
$120 thousand,$0.3 million, respectively, and are included in “Other assets” in
theour accompanying unaudited condensed consolidated balance sheets.
On September 9, 2019, the U.S. Department of the Treasury issued a Housing Reform Plan (the “Plan”) in response to a March 27, 2019 Presidential Memorandum soliciting reforms in the housing financing system designed to minimize taxpayer exposure to future bailouts. The primary recommendations of the Plan are: (i) that existing government support for the secondary markets should be explicitly defined, tailored and paid for; (ii) that the GSEs’ conservatorship should come to an end; (iii) the implementation of reforms necessary to ensure that the GSEs, and any successors, are appropriately capitalized to withstand a severe economic downturn and that shareholders and unsecured creditors, rather than U.S. taxpayers, bear the losses; (iv) that the GSEs should continue to support affordable housing at a reasonable economic return that may be less than the return earned on other activities; (v) that the FHFA and the U.S. Department of Housing and Urban Development should clearly define the appropriate roles and overlap between the GSEs and the Federal Housing Administration so as to avoid duplication and (vi) that measures should be implemented to “level the playing field” between the GSEs and private sector competitors. Additionally, in September 2019, FHFA announced a cap of $200 billion as the maximum volume for combined Fannie Mae and Freddie Mac multifamily volume through the end of 2020, of which 37.5% must meet certain affordability requirements. The foregoing proposals may have the effect of impacting the volume of business that we may do with Fannie Mae and Freddie Mac. Additionally, the potential increase in our proportion of affordable business and the potential implementation of a fee to be charged in connection with the government’s offer of a guarantee may alter the economics of the business and, accordingly, may impact our financial results.
See “Regulation” in Part I, Item 1 of our Annual Report on Form
10-K10-Q for additional information related to our regulatory environment.
EQUITY
Share Exchange
In relation to
Repurchase Program
On August 1, 2018, the
IPO, on December 13, 2017, Newmark
entered into an exchange agreement with Cantor, CFGM, BGC and other Cantor affiliates entitled to hold Class B common stock, providing the right to exchange from time to time shares of Class A
common stock of Newmark now owned or hereafter acquired, as applicable, on a one-for-one basis for shares of Class B common stock, up to the number of shares of Newmark Class B common stock that are authorized but unissued under Newmark’s certificate of incorporation. The Newmark Audit Committee and Board of Directors have determined that the exchange agreement is in the best interests of Newmark and its stockholders because, among other things, it will help ensure that Cantor retains its exchangeable limited partnership units in Newmark Holdings, which is the same partnership in which Newmark’s partner employees participate, thus continuing to align the interests of Cantor with those of the partner employees.
Repurchase Program
On March 12, 2018, our board of directors and audit committeeAudit Committee authorized repurchases of shares of ourNewmark's Class A common stock and redemptions or repurchasespurchases of limited partnership interests or other equity interests in ourNewmark's subsidiaries up to $100$200 million. 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, weDuring 2020, Newmark did not repurchase any shares of Class A common stock under this program. As of June 30, 2020, Newmark has repurchased 4.6 million shares of Class A common stock at an average price of $9.32. As of June 30, 2020, Newmark had $157.4 million remaining from its share repurchase and unit purchase authorization.
The following table details our share repurchase activity during 2020, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of our publicly announced repurchase program and the approximate value that may
repurchase shares or redeem or repurchase units. To date, noyet be purchased under such shares or units have been repurchased or redeemed.program (in thousands except share and per share amounts):
|
| | | | | | | | | | | | | |
| Period | Total
Number of
Shares
Repurchased/Purchased | | Average
Price Paid
per Unit
or Share | | Total Number of Shares Repurchased as Part of Publicly Announced Program | | Approximate
Dollar Value
of Units and
Shares That
May Yet Be
Repurchased/
Purchased
Under the Plan |
| Balance, January 1, 2020 | 4,568,002 |
| | $ | 9.32 |
| | 4,568,002 |
| | $ | 157,413 |
|
| January 1, 2020 - March 31, 2020 | — |
| | — |
| | — |
| | — |
|
| April 1, 2020 - June 30, 2020 | — |
| | — |
| | — |
| | — |
|
| Total | 4,568,002 |
| | $ | 9.32 |
| | 4,568,002 |
| | $ | 157,413 |
|
Fully Diluted Share Count
Our fully diluted weighted-average share count for the three months ended
March 31, 2018June 30, 2020 was as follows (in thousands)
: | | Three Months Ended March 31, 2018 | |
Common stock outstanding(1) | | | 155,694 | |
Partnership units(2) | | | 90,222 | |
RSUs (Treasury stock method) | | | 275 | |
Other | | | 643 | |
Total(3) | | $ | 246,834 | |
1
|
| | |
| Three Months Ended June 30, 2020 |
Common stock outstanding(1) | 178,523 |
|
Partnership units(2) | 86,867 |
|
| RSUs (Treasury stock method) | 22 |
|
| Newmark exchange shares | 228 |
|
Total(3) | 265,640 |
|
| |
(1) | Common stock consisted of Class A shares and Class B shares and contingent shares for which all necessary conditions have been satisfied except for the passage of time.shares. For the quarteryear ended March 31, 2018,June 30, 2020, the weighted-average number of Class A shares was 138.7157.2 million shares and Class B shares was 15.821.3 million shares and approximately 1.6 million shares of contingent Class A common stock and limited partnership unitsthat were included in our fully diluted EPS computation because the conditions for issuance had been met by the end of the period. |
2
| |
(2) | Partnership units collectively include founding/working partner units, limited partnership units, and Cantor units, (see(see Note 2—2 —“Limited Partnership Interests in Newmark Holdings” and BGC Holdings”, to our unaudited condensed consolidated financial statementsConsolidatedFinancialStatements in Part I,II, Item 18 of this QuarterlyAnnual Report on Form 10-Q for more information).information.)In general, these partnership units are potentially exchangeable into shares of Newmark Class A common stock. In addition, partnership units held by Cantor are generally exchangeable into shares of Newmark Class A common stock and/or for up to 22.7 million shares of Newmark Class B common stock. These partnership units also generally receive quarterly allocations of net income, after the deduction of the Preferred Distribution, based on their weighted-average pro rata share of economic ownership of the operating subsidiaries. As a result, these partnership units are included in the fully diluted share count calculation shown above. |
3
| |
(3) | For the quarterthree months ended March 31, 2018, allJune 30, 2020, the weighted-average share count includes 97.5 million potentially dilutiveanti-dilutive securities, which were includedexcluded in the computation of fully diluted earnings per share. |
Our fully diluted period-end (spot) share count for the three months ended June 30, 2020 was as follows (in thousands):
|
| | |
| Three Months Ended June 30, 2020 |
| Common stock outstanding | 179,043 |
|
| Partnership units | 85,450 |
|
| Newmark RSUs | 54 |
|
| Newmark exchange shares | 225 |
|
| Other | 378 |
|
| Total | 265,150 |
|
CONTINGENT PAYMENTS RELATED TO ACQUISITIONS
Contingent Payments Related to Acquisitions
Newmark completed acquisitions
in 2014, 2015, 2016 and 2017 for which contingent cash consideration
may be issued on certain targets being met through 2020 of
$12.4$20.3 million.
The contingent equity instruments are issued by and are recorded as a payable to related party on the unaudited condensed consolidated balance sheet. The contingent cash liability is recorded at fair value as deferred consideration on
theour accompanying unaudited condensed consolidated balance
sheet.EQUITY METHOD INVESTMENTS
sheets.
Equity Method Investments
Newmark has an investment in Real Estate LP, a joint venture with Cantor in which Newmark has a less than majority ownership and has the ability to exert significant influence over the operating and financial policies. As of March 31, 2018,June 30, 2020, Newmark had $104.7$95.9 million in anthis equity method investment, which represents a 27% ownership in Real Estate LP.
Registration Statements
On March 28, 2019, we filed a registration statement on Form S-3 pursuant to which CF&Co may make offers and sales of our 6.125% Senior Notes in connection with ongoing market-making transactions which may occur from time to time. Such market-making transactions in these securities may occur in the open market or may be privately negotiated at prevailing market prices at a time of resale or at related or negotiated prices. Neither CF&Co, nor any of our affiliates, has any obligation to make a market in our securities, and CF&Co or any such other affiliate may discontinue market-making activities at any time without notice. Newmark does not receive any proceeds from market-making activities in these securities by CF&Co (or any of its affiliates).
We have an effective registration statement on Form S-4, with respect to the offer and sale of up to 20.0 million shares of our Class A common stock from time to time in connection with business combination transactions, including acquisitions of other businesses, assets, properties or securities. As of June 30, 2020, we have issued 0.6 million shares of our Class A common stock under this registration statement.
Contractual Obligations and Commitments
The following table summarizes certain
As of
our contractual obligations at December 31, 2017 (in thousands): | | Total | | | Less than 1 Year | | | 1-3 Years | | | 3-5 Years | | | More than 5 Years | |
Operating leases(1) | | $ | 328,697 | | | $ | 36,624 | | | $ | 69,410 | | | $ | 61,940 | | | $ | 160,723 | |
Warehouse facility | | | 360,440 | | | | 360,440 | | | | — | | | | — | | | | — | |
Long-term debt(2) | | | 812,500 | | | | — | | | | 700,000 | | | | — | | | | 112,500 | |
Intercompany Credit Agreement | | | 202,000 | | | | 202,000 | | | | — | | | | — | | | | — | |
Total contractual obligations | | $ | 1,703,637 | | | $ | 599,064 | | | $ | 769,410 | | | $ | 61,940 | | | $ | 273,223 | |
(1)
| Operating leases are related to rental payments under various non-cancelable leases principally for office space, net of sublease payments to be received. The total amount of sublease payments to be received is approximately $2.9 over the life of the agreement.
|
June 30, 2020, Newmark was committed to fund approximately $0.5 billion, which is the total remaining draws on construction loans originated by Newmark under the Housing and Urban Development (“HUD”) 221(d)4, 220 and 232 programs, rate locked loans that have not been funded, and forward commitments, as well as the funding for Fannie Mae structured transactions. Newmark also has corresponding commitments to sell these loans to various purchasers as they are funded.(2)
| Long-term debt reflects long-term borrowings of $400.0 million under Newmark’s Term Loan: the issuance of $112.5 million of the 2042 Promissory Notes due June 26, 2042, and $300.0 million of the 2019 Promissory Notes due December 9, 2019. See Note 20–“Long-Term Debt” for more information regarding these obligations.
|
Critical Accounting Policies and Estimates
The preparation of our
accompanying unaudited condensed consolidated financial statements in conformity with U.S. GAAP guidance requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our
accompanying unaudited condensed consolidated financial statements. These accounting estimates require the use of assumptions about matters, some which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our
accompanying unaudited condensed consolidated balance sheets,
condensed consolidated statements of operations and
condensed consolidated statements of cash flows could be materially affected. We believe that
of our significant accounting policies, the following policies involve a higher degree of judgment and complexity.
We derive our revenues primarily through commissions from brokerage services, gains from mortgage banking activities/originations, net, revenues from real estate management services, servicing fees and other revenues. Revenue from contracts with customers is recognized when, or as,
the Company satisfies itswe satisfy our performance obligations by transferring the promised goods or services to the customers as determined by when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring
the Company’sour progress in satisfying the performance obligation as evidenced by the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time when the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we consider consideration promised in a contract that includes a variable amount, referred to as variable consideration, and estimate the amount of consideration due
the Company.to us. Additionally, variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. In determining when to include variable consideration in the transaction price,
the Company considerswe consider all information (historical, current and forecast) that is available, including the range of possible outcomes, the predictive value of past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of
the Company’sour influence.
We also use third-party service providers in the provision of its services to customers. In instances where a third-party service provider is used,
the Company performswe perform an analysis to determine whether
the Company iswe are acting as a principal or an agent with respect to the services provided. To the extent that
the Company determines that it iswe are acting as a principal, the revenue and the expenses incurred are recorded on a gross basis. In instances where
the Company has determined that it iswe are acting as an agent, the revenue and expenses are presented on a net basis within the revenue line item.
In some instances, the Company performswe perform services for customers and incursincur out-of-pocket expenses as part of delivering those services. The Company’sOur customers agree to reimburse the Companyus for those expenses, and those reimbursements are part of the contract’s transaction price.
Consequently, these expenses and the reimbursements of such expenses from the customer are presented on a gross basis because the services giving rise to the out-of-pocket expenses do not transfer a good or service. The reimbursements are included in the transaction price when the costs are incurred, and the reimbursements are due from the customer.
MSRs, Net
We initially recognize and measure the rights to service mortgage loans at fair value and subsequently measure them using the amortization method. We recognize rights to service mortgage loans as separate assets at the time the underlying originated mortgage loan is sold, and the value of those rights is included in the determination of the gains on loans held for sale. Purchased MSRs, including MSRs purchased from CCRE, are initially recorded at fair value, and subsequently measured using the amortization method.
We receive up to a 3-basis point servicing fee and/or up to a 1-basis point surveillance fee on certain Freddie Mac loans after the loan is securitized in a Freddie Mac pool (“Freddie Mac Strip”). The Freddie Mac Strip is also recognized at fair value and subsequently measured using the amortization method, but is recognized as a MSR at the securitization date.
MSRs are assessed for impairment, at least on an annual basis, based upon the fair value of those rights as compared to the amortized cost. Fair values are estimated using a valuation model that calculates the present value of the future net servicing cash flows. In using this valuation method, we incorporate assumptions that management believes market participants would use in estimating future net servicing income. The fair value estimates are sensitive to significant assumptions used in the valuation model such as prepayment rates, cost of servicing, escrow earnings rates, discount rates and servicing multiples, which are affected by expectations about future market or economic conditions derived, in part, from historical data. It is reasonably possible that such estimates may change. We amortize the MSRs in proportion to, and over the period of, the projected net servicing income. For purposes of impairment evaluation and measurement, we stratify MSRs based on predominant risk characteristics of the underlying loans, primarily by investor type (Fannie Mae/Freddie Mac, FHA/GNMA, CMBS and other). To the extent that the carrying value exceeds the fair value of a specific MSR strata, a valuation allowance is established, which is adjusted in the future as the fair value of MSRs increases or decreases. Reversals of valuation allowances cannot exceed the previously recognized impairment up to the amortized cost.
Equity-Based and Other Compensation
Discretionary Bonus: A portion of our compensation and employee benefits expense comprises discretionary bonuses, which may be paid in cash, equity, partnership awards or a combination thereof. We accrue expense in a period based on revenues in that period and on the expected combination of cash, equity and partnership units. Given the assumptions used in estimating discretionary bonuses, actual results may differ.
Restricted Stock Units: We account for equity-based compensation under the fair value recognition provisions of U.S. GAAP guidance. Restricted stock units (which we refer to as “RSUs”) provided to certain employees are accounted for as equity awards, and in accordance with U.S. GAAP guidance, we are required to record an expense for the portion of the RSUs that is ultimately expected to vest. Further, U.S. GAAP guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because significant assumptions are used in estimating employee turnover and associated forfeiture rates, actual results may differ from our estimates under different assumptions or conditions.
The fair value of RSU awards to employees is determined on the date of grant, based on the fair value of
BGC Partners’our Class A common stock. Generally, RSUs granted by us as employee compensation do not receive dividend equivalents; as such, we adjust the fair value of the RSUs for the present value of expected forgone dividends, which requires us to include an estimate of expected dividends as a valuation input. This grant-date fair value is amortized to expense ratably over the awards’ vesting periods. For RSUs with graded vesting features, we have made an accounting policy election to recognize compensation cost on a
straight linestraight-line basis. The amortization is reflected as non-cash equity-based compensation expense in our
accompanying unaudited condensed consolidated statements of operations.
Restricted Stock: Restricted stock provided to certain employees is accounted for as an equity award, and as per U.S. GAAP guidance, we are required to record an expense for the portion of the restricted stock that is ultimately expected to vest. We have granted restricted stock that is not subject to continued employment or service; however, transferability is subject to compliance with our and our affiliates’ customary non-compete obligations. Such shares of restricted stock are generally saleable by partners in 5 to 10 years. Because the restricted stock is not subject to continued employment or service, the grant-date fair value of the restricted stock is expensed on the date of grant. The expense is reflected as non-cash equity-based compensation expense in our
accompanying unaudited condensed consolidated statements of operations.
Limited Partnership Units: Limited partnership units in
Newmark Holdings and BGC Holdings
and Newmark Holdings are
generally held by
employees. Generally such unitsNewmark employees and receive quarterly allocations of net income
whichand are
cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. As discussed above, preferred units in
BGCNewmark Holdings and
NewmarkBGC Holdings are not entitled to participate in partnership distributions other than with respect to a distribution at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. The quarterly allocations of net income to such limited partnership units are reflected as a component of compensation expense under
“Allocations“Equity-based compensation and allocations of net income
and grants of exchangeability to limited partnership
units”units and FPUs” in our
accompanying unaudited condensed consolidated statements of operations.
Certain of these limited partnership units entitle the holders to receive post-termination payments equal to the notional amount in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards under U.S. GAAP
guidance. Accordingly, we recognize a liability for these units on our unaudited condensed consolidated statements of financial condition as part of “Accrued compensation” for the amortized portion of the post-termination payment amount, based on the current fair value of the expected future cash payout. We amortize the post-termination payment amount, less an expected forfeiture rate, over the vesting period, andguidance, which requires that Newmark record an expense for such awards based on the change in value at each reporting period
and include the expense in our
accompanying unaudited condensed consolidated statements of operations as part of
“Compensation“Equity-based compensation and
employee benefits.allocations of net income to limited partnership units and FPUs.”
The liability for limited partnership units with a post-termination payout is included in “Other long-term liabilities” on our accompanying unaudited condensed consolidated balance sheets.
Certain limited partnership units
in BGC Holdings andheld by Newmark
Holdingsemployees are granted exchangeability into
BGC Partners Class A common stock
on a one-for-one basis (subject to adjustments and other requirements as set forthor may be redeemed in
connection with the
BGC Holdings and Newmark Holdings limited partnership agreement).grant of shares of Class A common stock. At the time exchangeability is granted,
we recognizeor the shares are issued, Newmark recognizes an expense based on the fair value of the award on that date, which is included in
“Allocations“Equity-based compensation and allocations of net income
and grants of exchangeability to limited partnership
units”units and FPUs” in our
accompanying unaudited condensed consolidated statements of operations.
Employee Loans: We have entered into various agreements with certain
of our employees and partners whereby these individuals receive loans that may be either wholly or in part repaid from distributions that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. Cash advance distribution loans are documented in formal agreements and are repayable in timeframes outlined in the underlying agreements. We intend for these advances to be repaid in full from the future distributions on existing and future awards granted. The
distributionsallocations of net income to the awards are treated as compensation expense
when made and the proceeds
from distributions are used to repay the loan. The forgivable portion of any loans is recognized as compensation expense in our
accompanying unaudited
condensed consolidated statements of operations over the life of the loan. We review the loan balances each reporting period for collectability. If we determine that the collectability of a portion of the loan balances is not expected, we recognize a reserve against the loan balances. Actual collectability of loan balances may differ from our estimates. As of March 31, 2018June 30, 2020 and December 31, 2017,2019, the aggregate balance of employee loans, net of reserve, was $226.7$483.8 million and $209.6$403.7 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners”partners, net” in our accompanying unaudited condensed consolidated balance sheets. Compensation expense for the above-mentioned employee loans for the three and six months ended March 31, 2018 and 2017June 30, 2020 was $6.0$17.5 million and $2.0$31.9 million, respectively.respectively, and $11.1 million and $18.5 million, respectively, for the three and six months ended June 30, 2019. The compensation expense related to these loans was included as part of “Compensation and employee benefits” in our accompanying unaudited condensed consolidated statements of operations.
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. As prescribed in U.S. GAAP guidance, Intangibles
-– Goodwill and Other Intangible Assets, goodwill is not amortized, but instead is periodically tested for impairment. We review goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or whenever an event occurs, or circumstances change that could reduce the fair value of a reporting unit below its carrying amount.
When reviewing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If the results of the qualitative assessment are not conclusive, or if we choose to bypass the qualitative assessment, we perform a goodwill impairment analysis using a two-step process. Newmark had goodwill balances as of
March 31, 2018June 30, 2020 and December 31,
20172019 of
$475.0$559.9 million and
$477.0$557.9 million, respectively.
The first step of the process involves comparing each reporting unit’s estimated fair value towith its carrying value, including goodwill. To estimate the fair value of the reporting units, we use a discounted cash flow model and data regarding market comparables. The valuation process requires significant judgment and involves the use of significant estimates and assumptions. These assumptions include cash flow projections, estimated cost of capital and the selection of peer companies and relevant multiples. Because significant assumptions and estimates are used in projecting future cash flows, choosing peer companies and selecting relevant multiples, actual results may differ from our estimates under different assumptions or conditions. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired. If the carrying value exceeds
estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of potential impairment.
The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated a potential impairment may exist. The implied fair value of goodwill is determined by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identified intangibles. Events such as economic weakness, significant declines in operating results of reporting units, or significant changes to critical inputs of the goodwill impairment test (e.g., estimates of cash flows or cost of capital) could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future.
Credit Losses
The CECL methodology, which became effective on January 1, 2020, requires us to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period beyond the balance sheet date. The adoption of CECL resulted in the recognition of reserves relating to our loss sharing guarantee provided to Fannie Mae under the DUS Program which was previously accounted for under the incurred loss model, which generally required that a loss be incurred before it was recognized. Additional reserves were recognized for our receivables from customers including certain employee receivables carried at amortized cost.
The expected credit loss is modeled based on our historical loss experience adjusted to reflect current conditions. A significant amount of judgment is required in the determination of the appropriate reasonable and supportable period, the methodology used to incorporate current and future macroeconomic conditions, determination of the probability of and exposure at default, all of which are ultimately used in measuring the quantitative components of our reserves. Beyond the reasonable and supportable period, we estimate expected credit losses using our historical loss rates. We also consider whether to adjust the quantitative reserves for certain external and internal qualitative factors, which consequentially may increase or decrease the reserves for credit losses and receivables. In order to estimate credit losses, assumptions about current and future economic conditions are incorporated into the model using multiple economic scenarios that are weighted to reflect the conditions at each measurement date.
During the six months ended June 30, 2020, there was a significant increase in our reserves due to adverse changes in the macroeconomic forecast caused by COVID-19. Macroeconomic forecasts are critical inputs into our model and material movements in variables such as, the U.S. unemployment rate and U.S. GDP growth rate could significantly affect our estimated expected credit losses. These macroeconomic forecasts, under different conditions or using different assumptions or estimates, could result in significantly different changes in reserves for credit losses. It is difficult to estimate how potential changes in specific factors might affect the overall reserves for credit losses and current results may not reflect the potential future impact of macroeconomic forecast changes.
Newmark accounts for income taxes using the asset and liability method as prescribed in U.S. GAAP guidance,
Income Taxes.Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between
theour accompanying unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Certain of Newmark’s entities are taxed as U.S. partnerships and are subject to
the Unincorporated Business Tax (“UBT”)UBT in New York City. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners, rather than the partnership entity. As such, the partners’ tax liability or benefit is not reflected in
Newmark’sour accompanying unaudited condensed consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included in
Newmark’sour accompanying unaudited condensed consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in the U.S. or in foreign jurisdictions.
Newmark’s income taxes as presented are calculated on a separate return basis, although Newmark’s operations have historically been included in BGC’s U.S. federal and state tax returns or separate non-U.S. jurisdictions tax returns. As Newmark operations in many jurisdictions are unincorporated commercial units of BGC and its subsidiaries, stand-alone tax returns have not been filed for the operations in these jurisdictions. Accordingly, Newmark’s tax results as presented are not necessarily reflective of the results that Newmark would have generated on a stand-alone basis.
Newmark provides for uncertain tax positions based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely
than not to be sustained upon examination by tax authorities, actual results may differ from Newmark’s estimates under different assumptions or conditions. Newmark recognizes interest and penalties related to uncertain tax positions in “Provision for income taxes” in Newmark’sour accompanying unaudited condensed consolidated statements of operations.
A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. In assessing the need for a valuation allowance, Newmark considers all available evidence, including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies.
The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws and involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. Because Newmark’s interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the 2017 Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the 2017 Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act. While Newmark is able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the 2017 Tax Act may differ from these estimates, due to, among other things, changes in interpretations, additional guidance that may be issued, unexpected negative changes in business and market conditions that could reduce certain tax benefits, and actions taken by Newmark as a result of the 2017 Tax Act.
Derivative Financial Instruments
We have loan commitments to extend credit to third parties. The commitments to extend credit are for mortgage loans at a specific rate (rate lock commitments). These commitments generally have fixed expiration dates or other termination clauses and may require a fee. We are committed to extend credit to the counterparty as long as there is no violation of any condition established in the commitment contracts.
We simultaneously enter into an agreement to deliver such mortgages to third-party investors at a fixed price (forward sale contracts).
Both the commitment to extend credit and the forward sale commitment qualify as derivative financial instruments. We recognize all derivatives on
theour accompanying unaudited condensed consolidated balance sheets as assets or liabilities measured at fair value. The change in the derivatives fair value is recognized in current period earnings.
Newmark entered into four variable postpaid forward contracts as a result of the Nasdaq Forwards. These contracts qualify as derivative financial instruments. The Nasdaq Forwards provide Newmark with the ability to redeem the EPUs for Nasdaq stock, and as these instruments are not legally detachable, they represent single financial instruments. The financial instruments’ EPU redemption feature for Nasdaq common stock is not clearly and closely related to the economic characteristics and risks of Newmark’s EPU equity host instruments, and, therefore, it represents an embedded derivative that is required to be bifurcated and recorded at fair value on our accompanying unaudited condensed consolidated balance sheets, with all changes in fair value recorded as a component of “Other income (loss), net” on our accompanying unaudited condensed consolidated statements of operations. See Note 11 — “Derivatives”, to our accompanying Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
Recent Accounting Pronouncements
See Note
1—“Organization1 — “Organization and Basis of
Presentation,”Presentation”, to our
unaudited condensed consolidated financial statementsaccompanying Unaudited Condensed Consolidated Financial Statements in Part
1,I, Item 1 of this Quarterly Report on Form 10-Q, for information regarding recent accounting pronouncements.
Our
board of directorsBoard has authorized a dividend policy
which provides that
reflects our intentionwe expect to pay a quarterly
cash dividend
starting with the first quarter of 2018. Any dividends to our common stockholders
will be calculated based on
our expected post-tax Adjusted Earnings per fully diluted share, as a measure of net income for the year. See below for a definition of “post-tax Adjusted Earnings” per fully diluted share.We currently expect that, in any year, our aggregate quarterly dividends will be equal to or less than our estimate at the end of the first quarter of such year of 25% of our post-tax Adjusted Earnings per fully diluted share. Our Board declared a dividend of $0.01 per share for the second quarter of 2020. In the first quarter of 2020, the Board took the step of reducing the quarterly dividend out of an abundance of caution in order to strengthen our balance sheet as the real estate markets face difficult and unprecedented macroeconomic conditions. Additionally, Newmark Holdings has reduced its distributions to or on behalf of its partners. The distributions to or on behalf of partners will at least cover their related tax payments. Whether any given post-tax amount is equivalent to the amount received by a stockholder also on an after-tax basis depends upon stockholders’ and partners’ domiciles and tax status. Newmark believes that these steps will allow the Company to prioritize its financial strength. The Company expects to regularly review its capital return policy.
We expect to pay such dividends, if and when declared by our Board, on a quarterly basis. The dividend to our common stockholders is expected to be calculated based on post-tax Adjusted Earnings allocated to us and generated over the fiscal quarter ending prior to the record date for such year. the dividend. No assurance can be made, however, that a dividend will be paid each quarter.
The declaration, payment, timing and amount of any future dividends payable by us will be at the
sole discretion of our
boardBoard of
directors;Directors, provided that any dividend to our common stockholders that would result in the dividends for a year exceeding 25% of our post-tax Adjusted Earnings per fully diluted share for such year shall require the consent of the holder of a majority of the Newmark Holdings exchangeable limited partnership
interests, which is currently Cantor.
For the first quarter of 2018, our board of directors declared a dividend of 9 cents per share based on management’s current expectation of our post-tax Adjusted Earning per fully diluted share for the year, and has indicated that it expects such dividend to remain consistent for the full year. To the extent that 25% of our post-tax Adjusted Earnings per fully diluted share for the year exceeds this dividend on an annualized basis (i.e. an expected aggregate of $0.36 for four quarters), we do not expect that our board of directors will increase the amount of the quarterly dividend payment during the year, or make downward adjustments in the event of a shortfall, although no assurance can be given that adjustments will not be made during the year. We have indicated that we expect to announce the annual expected dividend rate in the first quarter of each year.
The declaration, payment, timing and amount of any future dividends payable by us will be at the sole discretion of our board of directors.interests. We are a holding company, with no direct operations, and therefore we are able to pay dividends only from our available cash on hand and funds received from distributions from Newmark OpCo. Our ability to pay dividends may also be limited by regulatory or other considerations as well as by covenants contained in financing or other agreements. In addition, under Delaware law our dividends may be payable only out of surplus, which is our net assets minus our capital (as defined under Delaware law), or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Accordingly, any unanticipated accounting, tax, regulatory or other charges may adversely affect our ability to declare and pay dividends. While we intend to declare and pay dividends quarterly,
there can be no assurance that our
boardBoard of
directorsDirectors will declare dividends at all or on a regular basis or that the amount of our dividends will not change.
Non-GAAP Financial Measures
Newmark uses non-GAAP financial measures that differ from the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”). Non-GAAP financial measures used by the Company include “Adjusted Earnings before noncontrolling interests and taxes”, which is used interchangeably with “pre-tax Adjusted Earnings”; “Post-tax Adjusted Earnings to fully diluted shareholders”, which is used interchangeably with “post-tax Adjusted Earnings”; “Adjusted EBITDA”; and “Liquidity”. The definitions of these terms are below.
Adjusted Earnings Defined
Newmark uses non-GAAP financial measures, including
but not limited“Adjusted Earnings before noncontrolling interests and taxes” and “Post-tax Adjusted Earnings to
“pre-tax Adjusted Earnings” and “post-tax Adjusted Earnings,”fully diluted shareholders”, which are supplemental measures of operating results
that are used by management to evaluate the financial performance of the Company and its consolidated subsidiaries. Newmark believes that Adjusted Earnings best reflect the operating earnings generated by the Company on a consolidated basis and are the earnings which management considers
available for, among other things, dividends and/or distributions to Newmark’s common stockholders and holders of Newmark Holdings partnership units during any period.when managing its business.
As compared with
items such as “Income (loss) before income taxes and noncontrolling interests” and “Net income (loss) for fully diluted shares”
all, both prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain non-cash
compensationitems and other expenses that generally do not involve the receipt or outlay of cash by the Company and/or which do not dilute existing
stockholders, as described below.stockholders. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary
operating results of
NewmarkAdjustments Made to Calculate Pre-TaxNewmark. Adjusted Earnings
Newmark defines pre-tax is calculated by taking the most comparable GAAP measures and making adjustments for certain items with respect to compensation expenses, non-compensation expenses, and other income, as discussed below.
Calculations of Compensation Adjustments for Adjusted Earnings and Adjusted EBITDA
Treatment of Equity-Based Compensation under Adjusted Earnings and Adjusted EBITDA
The Company's Adjusted Earnings and Adjusted EBITDA measures exclude all GAAP charges included in the line item "Equity-based compensation and allocations of net income to limited partnership units and FPUs" (or "equity-based compensation" for purposes of defining the Company's non-GAAP results) as recorded on the Company's GAAP income (loss) from operations before incomeConsolidated Statements of Operations and GAAP Consolidated Statements of Cash Flows. These GAAP equity-based compensation charges reflect the following items:
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.
Charges with respect to preferred units. Any preferred units would not be included in the Company's fully diluted share count because they cannot be made exchangeable into shares of common stock and noncontrolling interestare entitled only to a fixed distribution. Preferred units are granted in subsidiaries, excludingconnection with the grant of certain items such as:limited partnership units that may be granted exchangeability or redeemed in connection with the grant of shares of common stock at ratios designed to cover any withholding taxes expected to be paid. This is an acceptable alternative to the common practice among public companies of issuing the gross amount of shares to employees, subject to cashless withholding of shares, to pay applicable withholding taxes.
Non-cash asset impairmentGAAP equity-based compensation charges if any;
Charges related to amortization of RSUs and limited partnership units.
Charges related to grants of equity awards, including common stock or partnership units with capital accounts
Allocations of net income to limited partnership units;
units and FPUs. Such allocations represent the pro-rata portion of post-tax GAAP earnings available to such unit holders. Non-cashThe amount of certain quarterly equity-based compensation charges related tois based upon the amortizationCompany's estimate of intangibles with respect to acquisitions;
Non-cash charges relating to grants of exchangeability to limited partnership units.
Virtually all of
the Company’sNewmark's key executives and producers have
partnershipequity or
equitypartnership stakes in the Company and
its subsidiaries and generally receive deferred equity or limited partnership units as part of their compensation. A significant percentage of
Newmark’sNewmark's fully diluted shares are owned by
the Company’sits executives, partners and employees. The Company issues limited partnership units
andas well as other forms of equity-based compensation, including grants
of exchangeability
to unit holdersinto shares of common stock, to provide liquidity to
Newmark’sits employees, to align the interests of
the Company’sits employees and management with those of common stockholders, to help motivate and retain key employees, and to encourage a collaborative culture that drives cross-selling and
revenue growth.
When
All share equivalents that are part of the Company issues limited partnershipCompany's equity-based compensation program, including REUs, PSUs, LPUs, certain HDUs, and other units the shares ofthat may be made exchangeable into common stock, into whichas well as RSUs (which are recorded using the units can be ultimately exchangedtreasury stock method), are included in Newmark’sthe fully diluted share count for Adjusted Earningswhen issued or at the beginning of the subsequent quarter after the date of grant. Newmark includes such shares in the Company’s fully diluted share count when the unit is granted because the unit holder isGenerally, limited partnership units other than preferred units are expected to be paid a pro-rata distribution based on Newmark’sNewmark's calculation of Adjusted Earnings per fully diluted shareshare.
Certain Other Compensation-Related Items under Adjusted Earnings and becauseAdjusted EBITDA
Newmark also excludes various other GAAP items that management views as not reflective of the holder could be grantedCompany's underlying performance for the ability to exchange their units into sharesgiven period from its calculation of common stock in the future. Non-cash chargesAdjusted Earnings and Adjusted EBITDA. These may include compensation-related items with respect to grantscost-saving initiatives, such as severance charges incurred in connection with headcount reductions as part of exchangeability reflect the valuebroad restructuring and/or cost savings plans.
Calculation of the sharesNon-Compensation Adjustments for Adjusted Earnings and Adjusted EBITDA
Newmark's calculation of
common stock into which the unit is exchangeable when the unit holder is granted exchangeability not previously expensed in accordance with GAAP. The amount of non-cash charges relating to
grants of exchangeability the Company uses to calculate pre-tax Adjusted Earnings on a quarterly basis is based upon the Company’s estimate of expected grants of exchangeability to limited partnership units during the annual period, as described further below under “Adjustments Made to Calculate Post-Tax Adjusted Earnings.”
Adjusted Earnings also excludes non-cash GAAP gainscharges related to the following:
Amortization of intangibles with respect to acquisitions. • Gains attributable to originated mortgage servicing rights (which Newmark referrefers to as “OMSRs”"OMSRs") and non-cash GAAP amortization.
Amortization of mortgage servicing rights (which
the CompanyNewmark refers to as
“MSRs”"MSRs"). Under GAAP, the Company recognizes OMSRs gains equal to the fair value of servicing rights retained on mortgage loans originated and sold. Subsequent to the initial recognition at fair value, MSRs are carried at the lower of amortized cost or fair value and amortized in proportion to the net servicing revenue expected to be earned. However, it is expected that any cash received with respect to these servicing rights, net of associated expenses, will increase Adjusted Earnings
(andand Adjusted
EBITDA)EBITDA in future periods.
Additionally,
Various other GAAP items that management views as not reflective of the Company's underlying performance for the given period, including non-compensation-related charges incurred as part of broad restructuring and/or cost savings plans. Such GAAP items may include charges for exiting leases and/or other long-term contracts as part of cost-saving initiatives, as well as non-cash impairment charges related to assets, goodwill and/or intangibles created from acquisitions.
Calculation of Other (income) losses for Adjusted Earnings
Adjusted Earnings calculations also exclude certain unusual,other non-cash, non-dilutive, and/or non-economic items, which may, in some periods, include:
Unusual, one-time, non-ordinary or non-recurring items, if any. These items are excluded from Adjusted Earnings becausegains or losses;
Non-cash GAAP asset impairment charges;
The impact of any unrealized non-cash mark-to-market gains or losses on "Other income (loss)" related to the Company views excluding such items as a better reflection of the ongoing, ordinary operations of Newmark. Newmark’s definition of Adjusted Earnings also excludes certain gains and chargesvariable share forward agreements with respect to acquisitions, dispositions, Newmark's expected receipt of the Nasdaq payments in 2020, 2021, and 2022 and the previously settled 2019 Nasdaq payment (the "Nasdaq Forwards"); and/or
Mark-to-market adjustments for non-marketable investments;
Certain other non-cash, non-dilutive, and/or
resolutions of litigation. Management believes that excluding such gains and charges also best reflects the ongoing operating performance of Newmark.Adjustments Made to Calculate Post-Taxnon-economic items.
Methodology for Calculating Adjusted Earnings
Because Taxes
Although Adjusted Earnings are calculated on a pre-tax basis, Newmark also
intends to reportreports post-tax Adjusted Earnings to fully diluted
stockholders. Newmarkshareholders. The Company defines post-tax Adjusted Earnings to fully diluted
stockholdersshareholders as pre-tax Adjusted Earnings reduced by the non-GAAP tax provision described
below.below and net income (loss) attributable to noncontrolling interest for Adjusted Earnings.
The Company calculates its tax provision for post-tax Adjusted Earnings using an annual estimate similar to how it accounts for its income tax provision under GAAP. To calculate the quarterly tax provision under GAAP, Newmark estimates its full fiscal year GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiariesand taxes and the expected inclusions and deductions for income tax purposes, including expected grants of exchangeability to limited partnership unitsequity-based compensation during the annual period. The resulting annualized tax rate
is applied to
Newmark’sNewmark's quarterly GAAP income (loss)
from operations before income taxes and noncontrolling
interests in subsidiaries.interests. At the end of the annual period, the Company updates its estimate to reflect the actual tax amounts owed for the period.
To determine the non-GAAP tax provision, Newmark first adjusts pre-tax Adjusted Earnings by recognizing any, and only, amounts for which a tax deduction applies under applicable law. The amounts include
non-cash charges with respect to
grants of exchangeability,equity-based compensation; certain charges related to employee loan
forgiveness,forgiveness; certain net operating loss carryforwards when taken for statutory
purposes,purposes; and certain charges related to tax goodwill amortization. These adjustments may also reflect timing and measurement differences, including treatment of employee
loans,loans; changes in the value of units between the dates of grants of exchangeability and the date of actual unit
exchange,exchange; variations in the value of certain deferred tax
assetsassets; and liabilities and the different timing of permitted deductions for tax under GAAP and statutory tax requirements.
After application of these
previously described adjustments, the result is the
Company’sCompany's taxable income for
Newmark’sits pre-tax Adjusted Earnings, to which
the CompanyNewmark then applies the statutory tax
rates. This amount is the Company’srates to determine its non-GAAP tax provision. Newmark views the effective tax rate on pre-tax Adjusted Earnings as equal to the amount of
Newmark’sits non-GAAP tax provision divided by the amount of pre-tax Adjusted Earnings.
Generally, the most significant factor affecting this non-GAAP tax provision is the amount of non-cash charges relating to the grants of exchangeability to limited partnership units.equity-based compensation. Because the non-cash charges relating to the grants of exchangeabilityequity-based compensation are deductible in accordance with applicable tax laws, increases in exchangeabilitysuch charges have the effect of lowering the Company’sCompany's non-GAAP effective tax rate and thereby increasing Newmark’sits post-tax Adjusted Earnings.
Management uses post-tax Adjusted Earnings in part to help it evaluate, among other things, the overall performance of the business, to make decisions with respect to the Company’s operations, and to determine the amount of dividends payable to common stockholders and distributions payable to holders of limited partnership units.
Newmark incurs income tax expenses based on the location, legal structure and jurisdictional taxing authorities of each of its subsidiaries. Certain of the
Company’sCompany's entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax
(“UBT”("UBT") in New York City. Any U.S. federal and state income tax liability or benefit related to the partnership income or loss, with the exception of UBT, rests with the unit holders rather than with the partnership entity. The
Company’sCompany's consolidated financial statements include U.S. federal, state and local income taxes on the
Company’sCompany's allocable share of the U.S. results of operations. Outside of the U.S., Newmark is expected to operate principally through subsidiary corporations subject to local income taxes. For
these reasons, taxes for Adjusted Earnings are expected to be presented to show the tax provision the consolidated Company would expect to pay if 100 percent100% of earnings were taxed at global corporate rates.
Calculations of
Pre-TaxPre- and Post-Tax Adjusted Earnings per Share
Newmark’s
Newmark's pre- and post-tax Adjusted Earnings per share calculations assume either that:
The fully diluted share count includes the shares related to any dilutive instruments, but excludes the associated interest expense, net of tax, when the impact would be dilutive; or
The fully diluted share count excludes the shares related to these instruments, but includes the associated interest expense, net of tax.
The share count for Adjusted Earnings excludes certain shares and share equivalents expected to be issued in future periods but not yet eligible to receive dividends and/or distributions. Each quarter, the dividend payable to Newmark’s commonNewmark's stockholders, if any, is expected to be determined by the Company’s boardCompany's Board of directorsDirectors with reference to a number of factors, including post-tax Adjusted Earnings per fully diluted share. Newmark may also pay a pro ratapro-rata distribution of net income to limited partnership units, as well as to Cantor for its noncontrolling interest. The amount of this net income, and therefore of these payments per unit, would be determined using the above definition of pre-tax Adjusted Earnings using the fully dilutedper share count. on a pre-tax basis.
The declaration, payment, timing and amount of any future dividends payable by the Company will be at the discretion of its
boardBoard of
directorsDirectors using the fully diluted share count.
In addition, the non-cash preferred dividends are excluded from Adjusted Earnings per share as Newmark expects to redeem the related exchangeable preferred limited partnership units ("EPUs") with Nasdaq shares. For more information on any share count adjustments, see the table in this document and/or the Company’s most recent financial results release titled "Fully Diluted Weighted-Average Share Count for GAAP and Adjusted Earnings".
Management Rationale for Using Adjusted Earnings
Newmark's calculation of Adjusted Earnings excludes the items discussed above because they are either non-cash in nature, because the anticipated benefits from the expenditures are not expected to be fully realized until future periods, or because the Company views results excluding these items as a better reflection of the underlying performance of Newmark's ongoing operations. Management uses Adjusted Earnings in part to help it evaluate, among other things, the overall performance of the Company's business, to make decisions with respect to the Company's operations, and to determine the amount of dividends payable to common stockholders and distributions payable to holders of limited partnership units. Dividends payable to common stockholders and distributions payable to holders of limited partnership units are included within "Distributions to stockholders"
and "Earnings distributions to limited partnership interests and noncontrolling interests," respectively, in our unaudited, condensed, consolidated statements of cash flows.
The term "Adjusted Earnings" should not be considered in isolation or as an alternative to GAAP net income (loss). The Company views Adjusted Earnings as a metric that is not indicative of liquidity, or the cash available to fund its operations, but rather as a performance measure. Pre- and post-tax Adjusted Earnings, as well as related measures, are not intended to replace the Company's presentation of its GAAP financial results. However, management believes that these measures help provide investors with a clearer understanding of Newmark's financial performance and offer useful information to both management and investors regarding certain financial and business trends related to the Company's financial condition and results of operations. Management believes that the GAAP and Adjusted Earnings measures of financial performance should be considered together.
For more information regarding Adjusted Earnings, see the sections of this document and/or the Company's most recent financial results press release titled "Reconciliation of GAAP Income to Adjusted Earnings and GAAP Fully Diluted EPS to Post-tax Adjusted EPS", including the related footnotes, for details about how Newmark's non-GAAP results are reconciled to those under GAAP.
Adjusted EBITDA Defined
Newmark also provides an additional non-GAAP financial performance measure, "Adjusted EBITDA", which it defines as GAAP "Net income (loss) available to common stockholders", adjusted to add back the following items:
Net income (loss) attributable to noncontrolling interest;
Provision (benefit) for income taxes;
OMSR revenue;
MSR amortization;
Other depreciation and amortization;
Equity-based compensation and allocations of net income to limited partnership units and FPUs;
Various other GAAP items that management views as not reflective of the Company’s underlying performance for the given period, including non-compensation-related charges incurred as part of broad restructuring and/or cost savings plans. Such GAAP items may include charges for exiting leases and/or other long-term contracts as part of cost-saving initiatives, as well as non-cash impairment charges related to assets, goodwill and/or intangibles created from acquisitions.
Other non-cash, non-dilutive, and/or non-economic items, which may, in certain periods, include the impact of any unrealized non-cash mark-to-market gains or losses on "other income (loss)" related to the variable share forward agreements with respect to Newmark's expected receipt of the Nasdaq payments in 2020, 2021, and 2022 and the recently settled 2019 Nasdaq payment (the "Nasdaq Forwards"), as well as mark-to-market adjustments for non-marketable investments; and
Interest expense.
Newmark’s calculation of Adjusted EBITDA excludes certain items discussed above because they are either non-cash in nature, because the anticipated benefits from the expenditures are not expected to be fully realized until future periods, or because the Company views excluding these items as a better reflection of the underlying performance Newmark’s ongoing operations. The Company's management believes that its Adjusted EBITDA measure is useful in evaluating Newmark's operating performance, because the calculation of this measure generally eliminates the effects of financing and income taxes and the accounting effects of capital spending and acquisitions, which would include impairment charges of goodwill and intangibles created from acquisitions. Such items may vary for different companies for reasons unrelated to overall operating performance. As a result, the Company's management uses this measure to evaluate operating performance and for other discretionary purposes. Newmark believes that Adjusted EBITDA is useful to investors to assist them in getting a more complete picture of the Company's financial results and operations.
Since Newmark's Adjusted EBITDA is not a recognized measurement under GAAP, investors should use this measure in addition to GAAP measures of net income when analyzing Newmark's operating performance. Because not all companies use identical EBITDA calculations, the Company's presentation of Adjusted EBITDA may not be comparable to similarly titled measures of other companies. Furthermore, Adjusted EBITDA is not intended to be a measure of free cash flow or GAAP cash flow from operations because the Company's Adjusted EBITDA does not consider certain cash requirements, such as tax and debt service payments.
For more information regarding Adjusted EBITDA, see the section of this document and/or the Company's most recent financial results press release titled "Reconciliation of GAAP Income to Adjusted EBITDA", including the related footnotes, for details about how Newmark's non-GAAP results are reconciled to those under GAAP EPS.
Liquidity Defined
Newmark may also use a non-GAAP measure called "liquidity". The Company considers liquidity to be comprised of the sum of cash and cash equivalents, marketable securities, and reverse repurchase agreements (if any), less securities lent out in securities loaned transactions and repurchase agreements. The Company considers liquidity to be an important metric for determining the amount of cash that is available or that could be readily available to the Company on short notice.
For more information regarding liquidity, see the section of this document and/or the Company's most recent financial results press release titled "Liquidity Analysis", including any related footnotes, for details about how Newmark's non-GAAP results are reconciled to those under GAAP.
On December 19, 2019, the Compensation Committee approved the right to (i) convert 552,483 non-exchangeable Newmark Holdings PSUs held by Mr. Lutnick into 552,483 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $7,017,000); and (ii) exchange for cash 602,463 Newmark Holdings non-exchangeable PPSUs held by Mr. Lutnick (which had an average determination price of $13.25 per unit)for a payment of $7,983,000 for taxes when (i) is exchanged.On December 19, 2019, the Compensation Committee approved the right to (i) convert 443,872 non-exchangeable Newmark Holdings PSUs held by Mr. Gosin into 443,872 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $5,637,548); and (ii) exchange for cash 539,080 Newmark Holdings non-exchangeable PPSUs held by Mr. Gosin (which had an average determination price of $9.95 per unit) for a payment of $5,362,452 for taxes when (i) is exchanged. On December 19, 2019, the Compensation Committee approved the cancellation of 145,464 non-exchangeable Newmark Holdings PSUs held by Mr. Merkel, and the cancellation of 178,179 non-exchangeable PPSUs (which had an average determination price of $10.61 per unit). Additionally, on December 19, 2019, Mr. Merkel exchanged 4,222 already exchangeable Newmark Holdings PSUs held by him in exchange for Class A common stock. The above transaction resulted in income of $3,791,848 for Mr. Merkel, of which the Company withheld $1,989,483 for taxes and issued the remaining $1,802,365 in the form of 132,429 net shares of Class A common stock at a price of $13.61 per share. On December 19, 2019, the Compensation Committee approved the right to (i) convert 5,846 non-exchangeable Newmark Holdings PSUs held by Mr. Rispoli into 5,846 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $74,250); and (ii) exchange for cash 4,917 Newmark Holdings non-exchangeable PPSUs held by Mr. Rispoli (which had an average determination price of $12.355 per unit) for a payment of $60,750 for taxes when (i) is exchanged.
OUR ORGANIZATIONAL STRUCTURE
We are Newmark Group, Inc., a Delaware corporation. We were formed as NRE Delaware, Inc. on November 18, 2016 and changed our name to Newmark Group, Inc. on October 18, 2017. We were formed for the purpose of becoming a public company conducting the operations of BGC Partners’ Real Estate Services segment, including Newmark and Berkeley Point.
Through the following series of transactions prior to and following the completion of the Separation and our IPO, we became a separate publicly traded company. A majority of our issued and outstanding shares of common stock are held by BGC Partners. If BGC Partners completes the spin-off, a majority of our issued and outstanding shares of common stock will be held by the stockholders of BGC Partners as of the date of the spin-off.
Prior to the completion of our IPO, the separation and contribution pursuant to which members of the BGC Group transferred to us substantially all of the assets and liabilities of the BGC Partners’ Real Estate Services segment, including Newmark, Berkeley Point and the right to receive the remainder of the Nasdaq payment (the “Contribution”), various types of interests of Newmark Holdings were issued to holders of interests of BGC Holdings in proportion to such interests of BGC Holdings held by such holders immediately prior thereto.
Concurrently with the Separation and Contribution, we entered into the transactions described under “Assumption and Repayment of Indebtedness” below.
In March 2018, BGC Partners made an additional investment in us as described under “BGC Partners March 2018 Investment” below.
BGC Partners may distribute the shares of our common stock held thereby to its stockholders as described under “The Distribution” below.
The types of interests in Newmark, Newmark Holdings and Newmark OpCo outstanding following the completion of the these transactions are described under “Current Structure of Newmark” below.
The Separation and Contribution
Prior to the completion of the IPO, pursuant to the Separation and Distribution Agreement, members of the BGC Group transferred to us substantially all of the assets and liabilities of the BGC group relating to BGC Partners’ Real Estate Services segment, including Newmark, Berkeley Point and the right to receive the remainder of the Nasdaq Earn-out. For a description of the Nasdaq Earn-out, see “Nasdaq Transaction.” Prior to the separation, the BGC Group held all of the historical assets and liabilities related to our business.
In
connection with the Separation, Newmark Holdings limited partnership interests, Newmark Holdings founding partner interests, Newmark Holdings working partner interests and Newmark Holdings limited partnership units were distributed to holders of
BGC Holdings limited partnership interests, BGC Holdings founding partner interests, BGC Holdings working partner interests and BGC Holdings limited partnership units, respectively, in proportion to such interests of BGC Holdings held by such holders immediately prior to the Separation.
We also entered into a tax matters agreement with BGC Partners that governs the parties’ respective rights, responsibilities and obligations after the Separation with respect to taxes, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, tax elections, assistance and cooperation in respect of tax matters, procedures and restrictions relating to the Distribution,Spin-Off, if any, and certain other tax matters. We also entered into an administrative services agreement with Cantor, which governs the provision by Cantor of various administrative services to us, and our provision of various administrative services to Cantor, at a cost equal to (1) the direct cost that the providing party incurs in performing those services, including third-party charges incurred in providing services, plus (2) a reasonable allocation of other costs determined in a consistent and fair manner so as to cover the providing party’s appropriate costs or in such other manner as the parties agree. We also entered into a transition services agreement with BGC Partners, which governs the provision by BGC Partners of various administrative services to us, and our provision of various administrative services to BGC Partners, on a transitional basis (with a term of up to two years following the Distribution)Spin-Off) and at a cost equal to (1) the direct cost that the providing party incurs in performing those services,
including third-party charges incurred in providing services, plus (2) a reasonable allocation of other costs determined in a consistent and fair manner so as to cover the providing party’s appropriate costs or in such other manner as the parties agree.
Assumption and Repayment of Indebtedness
In connection with the Separation and prior to the closing of our IPO, we assumed from BGC Partners the Term Loan and the Converted Term Loan. Newmark OpCo also assumed from BGC U.S. OpCo the BGC Notes. We contributed all of the net proceeds of our IPO to Newmark OpCo in exchange for a number of units representing Newmark OpCo limited partnership interests equal to the number of shares issued by us in the IPO. Newmark OpCo used all of such net proceeds to partially repay intercompany indebtedness owed by Newmark OpCo to us in respect of the Term Loan (which intercompany indebtedness was originally issued by BGC U.S. OpCo and was assumed by Newmark OpCo in connection with the separation). We used all of such repayment from Newmark OpCo to partially repay the Term Loan. The Term Loan had a maturity date of September 8, 2019, and was repaid in full on March 9, 2018. Pursuant to the Term Loan, in the event that any member of the Newmark Group received net proceeds from the incurrence of indebtedness for borrowed money or an equity issuance (in each case subject to certain exceptions), Newmark OpCo was obligated to use such net proceeds to repay the remaining intercompany indebtedness owed by Newmark OpCo to us in respect of the Term Loan (which in turn we were obligated to the remaining amount outstanding on the Term Loan), and thereafter, to repay the remaining intercompany indebtedness owed by Newmark OpCo to us in respect of the Converted Term Loan (which in turn we will use to repay the remaining amount outstanding on the Converted Term Loan). Following the repayment of the Term Loan and the Converted Term Loan, in the event that any member of the Newmark Group receives net proceeds from the incurrence of indebtedness for borrowed money (subject to certain exceptions), Newmark OpCo will be obligated to use such net proceeds to repay the BGC Notes. In addition, we will be obligated to repay any remaining amounts under the BGC Notes prior to the Distribution.
On March 19, 2018, Newmark and BGC Partners entered into an Amended and Restated Intercompany Credit Agreement and on the same date Newmark borrowed $150.0 million from BGC pursuant to the facilities under the Intercompany Credit Agreement. The interest rate as of March 31, 2018 was LIBOR plus 3.25%, or 4.99%, which may be adjusted based on the higher of BGC’s or Newmark’s short-term borrowing rate then in effect at such time plus 100 basis points, or such other interest rate as may be mutually agreed between BGC and Newmark.. Newmark has transferred these proceeds to its restricted cash account pledged for the benefit of Fannie Mae. As of March 31, 2018, Newmark’s total net borrowings under the Intercompany Credit Agreement are $202.0 million.
BGC Partners March 2018 Investment
On March 7, 2018, BGC Partners and its operating subsidiaries purchased 16,606,726 newly issued exchangeable limited partnership units of Newmark Holdings for an aggregate investment of approximately $242.0 million. The price per unit was based on the $14.57 closing price of
ourNewmark Class A common stock on March 6, 2018 as reported on the NASDAQ Global Select Market. These units
arewere exchangeable, at BGC Partners’ discretion, into either shares of
ourNewmark Class
A common stock or
ourNewmark Class B common stock, par value $0.01 per share. Following such issuance, BGC Partners owned 83.4% of
ourthe 138.6 million shares of
Newmark Class A common issued and outstanding
on March 7, 2018 and 100% of
ourthe 15.8 million issued and outstanding shares of
Class B common stock. Including the newly issued exchangeable limited partnership units of Newmark
Holdings, BGC Group owned 59.2% of the 253.0 million fully diluted shares of Newmark outstanding on March 7, 2018. The balance of our fully diluted share count was owned by the public, Cantor, partners of Newmark Holdings, and employees. Because Newmark limited partnership units are not entitled to a vote until they are exchanged for Newmark common stock, BGC Group’s voting power with respect to Newmark did not change as a result of the March 2018 investment. If the BGC Group were to exchange such units into shares of our Class B common stock,
the BGC Group would have 95.0% of our total voting powerin each case as of March
31, 2018 (92.6% if the BGC Group were to exchange such units into shares of our Class A common stock).
Immediately after giving effect to the March 7, 2018 investment, the BGC Group owned an aggregate 19.2%2018.
Separation and Distribution Agreement
For a description of the economic interestSeparation and Distribution Agreement, see “Item 7-Management’s Discussion and Analysis of Financial Condition and Results of Operations-Separation, Initial Public Offering, and Spin-Off-Separation and Distribution and Related Agreements” in Newmark Holdings and an aggregate 59.8% indirect economic interest in Newmark OpCo. Immediately after giving effect to the March 7,10-K.
The Spin-Off
On November 30, 2018,
investment, Cantor owns 24.8% ofBGC completed the
economic interest in Newmark Holdings and a 9.5% indirect economic interest in Newmark OpCo, and the other limited partners of Newmark Holdings (including Newmark employees) owned 56.0% of the economics of Newmark Holdings and an aggregate 21.4% indirect economic interest in Newmark OpCo.The Distribution (Spin-off)
BGC Partners has advised us that it currently expects to pursue a Distribution, or spin-off,Spin-Off to its stockholders of all of the shares of ourNewmark common stock that it then owns in a manner that is intendedowned by BGC as of immediately prior to qualify as generally tax-free for U.S. federal income tax purposes. As currently contemplated,the effective time of the Spin-Off, with shares of ourNewmark Class A common stock held by BGC Partners would be 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 the Record Date, and shares of Newmark Class B common stock distributed to the holders of shares of BGC 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 Spin-Off 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 Spin-Off.
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.
In the aggregate, BGC distributed 131,886,409 shares of Newmark Class A common stock and 21,285,537 shares of Newmark Class B common stock to BGC’s stockholders in the Spin-Off. These shares of Newmark common stock collectively represented approximately 94% of the total voting power and approximately 87% of the total economics of Newmark outstanding common stock, in each case as of the Distribution Date.
On November 30, 2018, BGC 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 Record Date. 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 449,917 Newmark Holdings units received by Cantor, also into shares of Newmark Class B common stock, at the applicable exchange ratio (subject to adjustment).
Following the Spin-Off and the 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 it or its subsidiaries. Cantor continues to control Newmark and its subsidiaries following the Spin-Off and the BGC Holdings distribution.
Prior to the Spin-Off, 100% of the outstanding shares of our Class B common stock were held by BGC Partners would be distributed toBGC. Because 100% of the holdersoutstanding shares of shares ofBGC Class B common stock were held by Cantor and CFGM as of the Record Date, 100% of the outstanding shares of our Class B common stock were distributed to Cantor and CFGM in the Spin-Off. As of the Distribution Date, shares of our Class B common stock represented 57.8% of the total voting power of the outstanding Newmark common stock and 12.1% of the total economics of the outstanding Newmark common stock. Cantor is controlled by CFGM, its managing
general partner, and, ultimately, by Howard W. Lutnick, who serves as Chairman of Newmark. Mr. Lutnick is also the Chairman of the Board of Directors and Chief Executive Officer of BGC Partners
(which are currentlyand Cantor and
anotherthe Chairman and Chief Executive Officer of CFGM, as well as the trustee of an entity
controlled by Mr. Lutnick). The determinationthat is the sole shareholder of
whether, whenCFGM. Stephen M. Merkel, our Executive Vice President and
how to proceed with any such spin-off is entirely within the discretionChief Legal Officer, serves as Executive Vice President General Counsel and Assistant Secretary of BGC
Partners.Partners, and is employed as Executive Managing Director, General Counsel and Secretary of Cantor.
Current Organizational Structure
As of June 30, 2020, there were 162,379,438 shares of Newmark
As of March 31, 2018, there were 138,921,532 shares of Class A common stock issued and157,811,436 outstanding. Cantor and outstanding. BGC PartnersCFGM held 115,593,786no shares of our Class A common stock representing approximately 83.2% of our outstandingNewmark Class A common stock. Each share of Newmark Class A common stock is generally entitled to one vote on matters submitted to a vote of our stockholders. In addition, asAs of March 31, 2018, BGC PartnersJune 30, 2020, Cantor and CFGM held 15,840,04921,285,533 shares of ourNewmark Class B common stock representing all of the outstanding shares of ourNewmark Class B common stock. Together, theThe shares of Class A common stock andNewmark Class B common stock held by BGC PartnersCantor and CFGM as of March 31, 2018,June 30, 2020, represented approximately 92.2%57.4% of our total voting power. Each share of Newmark Class B common stock is generally entitled to the same rights as a share of Newmark Class A common stock, except that, on matters submitted to a vote of our stockholders, each share of Newmark Class B common stock is entitled to 10 votes. The Newmark Class B common stock generally votes together with the Newmark Class A common stock on all matters submitted to a vote of our stockholders. We expect to retain our dual class structure, and there are no circumstances under which the holders of Newmark Class B common stock would be required to convert their shares of Newmark Class B common stock into shares of Newmark Class A common stock. Our amended and restated certificate of incorporation referred to herein as our certificate of incorporation does not provide for automatic conversion of shares of Newmark Class B common stock into shares of Newmark Class A common stock upon the occurrence of any event.
We hold the Newmark Holdings general partnership interest and the Newmark Holdings special voting limited partnership interest, which entitle us to remove and appoint the general partner of Newmark Holdings and serve as the general partner of Newmark Holdings, which entitles us to control Newmark Holdings. Newmark Holdings, in turn, holds the Newmark OpCo general partnership interest and the Newmark OpCo special voting limited partnership interest, which entitle Newmark Holdings to remove and appoint the general partner of Newmark OpCo, and serve as the general partner of Newmark OpCo, which entitles Newmark Holdings (and thereby us) to control Newmark OpCo. In addition, as of
March 31, 2018,June 30, 2020, we
indirectly, through wholly owned subsidiaries,directly held Newmark OpCo limited partnership interests consisting of approximately
154,761,58188,085,042 units representing approximately
61.3%32.9% of the outstanding Newmark OpCo limited partnership
interests.interests (not including EPUs). We are a holding company that
will holdholds these interests,
serveserves as the general partner of Newmark Holdings and, through Newmark Holdings,
actacts as the general partner of Newmark OpCo. As a result of our ownership of the general partnership interest in Newmark Holdings and Newmark Holdings’ general partnership interest in Newmark OpCo, we
will consolidate Newmark OpCo’s results for financial reporting purposes.
Cantor,
BGC Partners (including through its operating subsidiaries), founding partners, working partners and limited partnership unit holders directly hold Newmark Holdings limited partnership interests. Newmark Holdings, in turn, holds Newmark OpCo limited partnership interests and, as a result, Cantor,
BGC Partners (including through its operating subsidiaries), founding partners, working partners and limited partnership unit holders indirectly have interests in Newmark OpCo limited partnership interests.
As a result In addition, The Royal Bank of the DistributionCanada holds $325 million of limited partnership interests ofEPUs issued by Newmark Holdings to partners of BGC Holdingson June 18, 2018 and September 26, 2018 in connection with the separation, each holder of BGC Holdings limited partnership interests held a BGC Holdings limited partnership interest and a corresponding 0.454545 of a Newmark Holdings limited partnership interest for each BGC Holdings limited partnership interest held thereby immediately prior to the Separation. The BGC Holdings limited partnership interests and Newmark Holdings limited partnership interests are each entitled to receive cash distributions from BGC Holdings and Newmark Holdings, respectively, in accordance with the terms of such partnership’s respective limited partnership agreement.
private transactions.
The Newmark Holdings limited partnership interests held by Cantor and
BGC Partners (including through its operating subsidiaries)CFGM are designated as Newmark Holdings exchangeable limited partnership interests. The Newmark Holdings limited partnership interests held by the founding partners are designated as Newmark Holdings founding partner interests. The Newmark
Holdings limited partnership interests held by the working partners are designated as Newmark Holdings working partner interests. The Newmark Holdings limited partnership interests held by the limited partnership unit holders are designated as limited partnership units.
Each unit of Newmark Holdings limited partnership interests held by Cantor and
BGC Partners (including through its operating subsidiaries)CFGM is generally exchangeable with us for a number of shares of Class B common stock (or, at Cantor’s option or if there are no additional authorized but unissued shares of Class B common stock, a number of shares of Class A common stock) equal to the exchange
ratio (which is currently one, but is subject to adjustment as set forth in the Separation and Distribution Agreement). Prior to the spin-off, however, such exchanges are subject to the limitation as described in our 2017 Annual Report on Form 10-K (the “10-K”) under “Item 13—Certain Relationships and Related-Party Transactions—Amended and Restated Newmark Holdings Limited Partnership Agreement—Exchanges.”ratio.
As of March 31, 2018, 5,732,543June 30, 2020, 5,125,142 founding/working partner interests were outstanding. These founding/working partnerpartners were issued in the Separation to holders of BGC Holdings founding/working partner interests, who received such founding/working partner interests in connection with BGC Partners’ acquisition of the BGC Partners business from Cantor in 2008. The Newmark Holdings limited partnership interests held by founding/working partners are not exchangeable with us unless (1) Cantor acquires such interests from Newmark Holdings upon termination or bankruptcy of the founding/working partners or redemption of their units by Newmark Holdings (which it has the right to do under certain circumstances), in which case such interests will be exchangeable with us for ourshares of Newmark Class A common stock or Newmark Class B common stock as described above, or (2) Cantor determines that such interests can be exchanged by such founding/working partners with us for ourNewmark Class A common stock, with each Newmark Holdings unit exchangeable for a number of shares of ourNewmark Class A common stock equal to the exchange ratio (which is currentlywas initially one, but is subject to adjustment as set forth in the Separation and Distribution Agreement),
on terms and conditions to be determined by Cantor (which exchange of certain interests Cantor expects to permit from time to time). Cantor has provided that certain founding/working partner interests are exchangeable with us for Class A common stock, with each Newmark Holdings unit exchangeable for a number of shares of
ourNewmark Class A common stock equal to the exchange ratio (which
is currentlywas initially one, but is subject to adjustment as set forth in the Separation and Distribution Agreement), in accordance with the terms of the Newmark Holdings limited partnership agreement. Once a Newmark Holdings founding/working partner interest becomes exchangeable, such founding/working partner interest is automatically exchanged upon a termination or bankruptcy
(x) with
BGC Partnersus for
Newmark Class A common
stock of BGC Partners (after also providing the requisite portion of BGC Holdings founding/working partner interests) if the termination or bankruptcy occurs prior to the Distribution and (y) in all other cases, with us for our Class A common stock.
Further, we provide exchangeability for partnership units under other circumstances in connection with (1) our partnership redemption, compensation and restructuring programs, (2) other incentive compensation arrangements and (3) business combination transactions.
As of
March 31, 2018, 73,863,094June 30, 2020, 63,833,777 limited partnership units were outstanding (including founding/working partner interests and
Cantor interests)working partner interests, and units held by Cantor). Limited partnership units will be only exchangeable with us in accordance with the terms and conditions of the grant of such units, which terms and conditions are determined in our sole discretion, as the Newmark Holdings general partner, with the consent of the Newmark Holdings exchangeable limited partnership interest majority in interest, in accordance with the terms of the Newmark Holdings limited partnership agreement.
Notwithstanding the foregoing, prior to the Distribution, without the prior consent of BGC Partners, no Newmark Holdings limited partnership interests shall be exchangeable into shares of our Class A common stock or Class B common stock. Prior to the Distribution, unless otherwise agreed by BGC Partners, in order for a partner to exchange an exchangeable limited partnership interest in BGC Holdings or Newmark Holdings into a share of BGC common stock, such partner must exchange both one BGC Holdings exchange right unit and a certain number of Newmark Holdings exchangeable units as set forth in the BGC Holdings limited partnership agreement, in order to receive one share of BGC Partners common stock. Prior to the Distribution, to the extent that BGC Partners receives any Newmark OpCo units as a result of any exchange of Newmark Holdings exchangeable units as described in the immediately preceding sentence or as a result of any contribution by BGC Partners to Newmark OpCo or purchase by BGC Partners of Newmark OpCo units (see “Item 13—Certain Relationships and Related-Party Transactions—Reinvestments in Newmark OpCo by BGC Partners” in our Annual Report on Form 10-K/A (“10-K/A”), then, in each case, prior to the Distribution BGC Partners will contribute such Newmark OpCo units to Newmark in exchange for a number of shares of Newmark common stock equal to the number of such Newmark OpCo units multiplied by the then current exchange ratio (with the class of shares of our common stock corresponding to the class of shares of common stock that BGC Partners issued upon such exchange).
The current exchange ratio between Newmark Holdings limited partnership interests and our common stock iswas initially one. However, this exchange ratio will be adjusted in accordance with the terms of the Separation and Distribution Agreement if our dividend policy and the distribution policy of Newmark Holdings are different. See “Item 5—Market forAs of June 30, 2020, the Registrant’s Common Equity, Related Stockholder Matters and Purchased of Equity Securities—Dividend Policy” and “Item 13—Certain Relationship and Related-Party Transactions-Adjustments to Exchange Ratio” in our 10-K/A.exchange ratio was 0.9366.
With each exchange, our direct and indirect
(and, prior to the Distribution and as described above, BGC Partners’ indirect) interest in Newmark OpCo will proportionately increase because, immediately following an exchange, Newmark Holdings will redeem the Newmark Holdings unit so acquired for the Newmark OpCo limited partnership interest underlying such Newmark Holdings unit.
The profit and loss of Newmark OpCo and Newmark Holdings, as the case may be, are allocated based on the total number of Newmark OpCo units
(not including EPUs) and Newmark Holdings units, as the case may be, outstanding.
The following diagram illustrates ourthe ownership structure of Newmark as of March 31, 2018.June 30, 2020. The diagram does not reflect the various subsidiaries of Newmark, Newmark Holdings, Newmark OpCo, BGC Partners, BGC U.S. OpCo, BGC Global OpCo or Cantor (including certain operating subsidiaries that are organized as corporations whose equity is either wholly-owned by Newmark or whose equity is majority-owned by Newmark with the remainder owned by Newmark OpCo) or the results of any exchange of Newmark Holdings exchangeable limited partnership interests or, to the extent applicable, Newmark Holdings founding partner interests, Newmark Holdings working partner interests or Newmark Holdings limited partnership units. In addition, the diagram does not reflect the Newmark OpCo exchangeable preferred limited partnership units, or EPUs, since they are not allocated any gains or losses of Newmark OpCo for tax purposes and are not entitled to regular distributions from Newmark OpCo.
OUR OWNERSHIP
STRUCTURE
OF NEWMARK AS OF JUNE 30, 2020
Shares of
ourNewmark Class B common stock are convertible into shares of
ourNewmark Class A common stock at any time in the discretion of the holder on a one-for-one basis. Accordingly, if
BGC PartnersCantor and CFGM converted all of
its common stock held in ourtheir shares of Newmark Class B common stock into
ourshares of Newmark Class A common stock,
BGC PartnersCantor and CFGM would hold
approximately 84.9%88.1% of the voting power
in Newmark and the
public stockholders
of Newmark other than Cantor and CFGM would hold
approximately 15.1%11.9% of the voting power
in Newmark (and the indirect economic interests in Newmark OpCo would remain unchanged).
The diagram above does not show certain operating subsidiaries that are organized as corporations whose equity are either wholly owned by us or whose equity are majority-owned by us with the remainder owned by Newmark OpCo.
Structure In addition, if Cantor and CFGM continued to hold shares of Newmark Following the Distribution (Spin-off)
BGC Partners has advised us that it currently expects to pursue a Distribution, or spin-off, to its stockholders ofClass B common stock and if Cantor exchanged all of the exchangeable limited partnership units held by Cantor for shares of ourNewmark Class B common stock, that it then ownsCantor and CFGM would hold 74.3% of the voting power in a manner that is intended to qualify as generally tax-free for U.S. federal income tax purposes. As currently contemplated, sharesNewmark, and the stockholders of ourNewmark other than Cantor and CFGM would hold 25.7% of the voting power in Newmark.
The diagram reflects Newmark Class A common stock
heldand Newmark Holdings partnership unit activity from January 1, 2020 through June 30, 2020 as follows: (a) an aggregate of 4,806,743 limited partnership units granted by
BGC Partners would be distributed to the holdersNewmark Holdings; (b) no shares of
Newmark Class A common stock repurchased by us; (c) no shares of Newmark Class A common stock forfeited; (d) 536,256 shares of Newmark Class A common stock issued for vested restricted stock units; (e) 209,110 shares of Class A common stock
issued by us under our acquisition shelf Registration Statement on Form S-4 (Registration No. 333-231616), but not the 19,426,478 of
BGC Partnerssuch shares remaining available for issuance by us under such Registration Statement; (h) 826,502 terminated limited partnership units; and
shares of our Class B common stock held by BGC Partners would be distributed to the holders of shares of Class B common stock of BGC Partners (which are currently Cantor and another entity controlled by Mr. Lutnick). The determination of whether, when and how to proceed with any such spin-off is entirely within the discretion of BGC Partners.To account for potential changes in the number of shares of Class A common stock and Class B common stock of BGC Partners and Newmark between the IPO and the spin-off, and to ensure that the spin-off (if it occurs) is pro rata to the stockholders of BGC Partners, immediately prior to the spin-off, BGC Partners will convert any shares of Class B common stock of Newmark beneficially owned by BGC Partners into shares of Class A common stock of Newmark, or exchange any shares of Class A common stock of Newmark beneficially owned by BGC Partners for shares of Class B common stock of Newmark, so that the ratio of shares of Class B common stock of Newmark held by BGC Partners to the shares of Class A common stock of Newmark held by BGC Partners, in each case as of immediately prior to the spin-off, equals the ratio of shares of outstanding Class B common stock of BGC Partners to the shares of outstanding Class A common stock of BGC Partners, in each case as of the record date of the spin-off.
(i) no purchased limited partnership units.
ITEM 3.
QUALITATIVEQUANTITATIVE AND
QUANTITATIVEQUALITATIVE DISCLOSURES ABOUT MARKET RISKInterest Rate
Our multifamily origination business, under the Fannie Mae DUS program, originates and services multifamily loans for Fannie Mae without having to obtain Fannie Mae’s prior approval for certain loans, as long as the loans meet the underwriting guidelines set forth by Fannie Mae. In connection withreturn for the Separation, we assumed from BGC Partners the Term Loandelegated authority to make loans and the Converted Term Loan. Newmark OpCo also assumed from BGC U.S. OpCocommitment to purchase loans by Fannie Mae, we must maintain minimum collateral and generally are required to share risk of loss on loans sold through Fannie Mae. With respect to most loans, we are generally required to absorb approximately one-third of any losses on the BGC Notes. We contributed allunpaid principal balance of a loan at the time of loss settlement. Some of the net proceedsloans that we originate under the Fannie Mae DUS program are subject to reduced levels or no risk-sharing. However, we generally receive higher servicing fees with respect to such loans. Although our Berkeley Point business’s average annual losses from such risk-sharing programs have been a minimal percentage of the IPO to Newmark OpCo in exchange for a number of units representing Newmark OpCo limited partnership interests equal to the number of shares issued by us in the IPO. Newmark OpCo used all of such net proceeds to partially repay intercompany indebtedness owed by Newmark OpCo to us in respect of the Term Loan (which intercompany indebtedness was originally issued by BGC U.S. OpCo and has been assumed by Newmark OpCo in connection with the separation). In addition, on March 7, 2018, BGC, including through its subsidiary invested $242.0 million in Newmark limited partnership interests. Newmark has used the proceeds from this transaction plus all of the repayment from Newmark OpCo, and cash on hand to repay in full the Term Loan during the three months ended March 31, 2018. Following the IPO, in the event that any member of the Newmark Group receives net proceeds from the incurrence of indebtedness for borrowed money or an equity issuance (in each case subject to certain exceptions), Newmark OpCo will be obligated to use such net proceeds to repay the remaining intercompany indebtedness owed by Newmark OpCo to us to repay the remaining intercompany indebtedness owed by Newmark OpCo to us in respect of the Converted Term Loan (which in turn we will use to repay the remaining amount outstanding on the Converted Term Loan). Following the repayment of the Term Loan and the Converted Term Loan, in the event that any member of the Newmark Group receives net proceeds from the incurrence of indebtedness for borrowed money (subject to certain exceptions), Newmark OpCo will be obligated to use such net proceeds to repay the BGC Notes. In addition, we will be obligated to repay any remaining amounts under the BGC Notes prior to the distribution. We intend to replace the financing provided by the BGC Notes that remain outstanding with new senior term loans (which may be secured or unsecured), new senior unsecured notes, other long- or short-term financing or a combination thereof in an aggregate principal amount of approximately $412.5 million. Whilesuch loans, if loan defaults increase, actual risk-sharing obligation payments under the termsFannie Mae DUS program could increase, and such defaults could have a material adverse effect on our business, financial condition, results of these borrowings, includingoperations and prospects. In addition, a material failure to pay its share of losses under the Fannie Mae DUS program could result in the revocation of Berkeley Point’s license from Fannie Mae and the exercise of various remedies available to Fannie Mae under the Fannie Mae DUS program.
Interest Rate Risk
Newmark had $541.6 million of fixed rate 6.125% Senior Notes outstanding as of June 30, 2020. These debt obligations are not currently subject to fluctuations in interest rates,
have not yet been determined, our interest income expensealthough in the event of refinancing or issuance of new debt, such debt could be
exposedsubject to changes in interest rates.
In that event, we may enter intoNewmark had $1.1 billion outstanding under its Credit Facility as of June 30, 2020. The interest rate
swap agreements to attempt to hedgeon the
variability of future interest payments due to changes in interest rates.Credit Facility is based upon LIBOR.
Berkeley Point is an intermediary that originates loans which are generally pre-sold prior to loan closing. Therefore, for loans held for sale to the GSEs and HUD, we are not currently exposed to unhedged interest rate risk. Prior to closing on loans with borrowers, we enter into agreements to sell the loans to investors, and originated loans are typically sold within 45 days of funding. The coupon rate for each loan is set concurrently with the establishment of the interest rate with the investor.
Some of our assets and liabilities are subject to changes in interest rates. Earnings from escrows are generally based on LIBOR. 30-day LIBOR as of
March 31, 2018June 30, 2020 and
December 31, 20172019 was
18816 basis points and
157239 basis points, respectively. A
100 basis100-basis point increase in
the 30-day LIBOR would increase our annual earnings by
approximately $7.9$9.3 million based on our escrow balance as of
March 31, 2018June 30, 2020 compared to
$8.1$10.2 million based on our escrow balance as of
December 31, 2017.June 30, 2019. A decrease in 30-day LIBOR to zero would decrease our annual earnings by
approximately $7.9$1.5 million based on the escrow
balancebalances as of
March 31, 2018 compared to $8.1June 30, 2020 and a 100-basis point decrease in 30-day LIBOR would decrease our annual earnings by $10.2 million based on our escrow
balancebalances as of
December 31, 2017.June 30, 2019.
We use warehouse facilities
borrowings from related parties, and a repurchase agreement to fund loans we originate under our various lending programs. The borrowing costs of our warehouse facilities and the repurchase agreement is based on LIBOR. A 100-basis point increase in 30-day LIBOR would decrease our annual
net interest incomeearnings by
approximately $9.5$10.6 million based on our outstanding balances as of
March 31, 2018June 30, 2020 compared to
$6.7$7.9 million based on our outstanding balances as of
March 31, 2017.June 30, 2019. A
100-basis point decrease in 30-day LIBOR
to zero would increase our annual earnings by approximately
$9.5$1.7 million based on our outstanding warehouse balance as of
March 31, 2018 compared to $6.6 million as of March 31, 2017.The borrowing cost of the Converted Term Loan is based on LIBOR. A 100-basisJune 30, 2020 and a 100 basis point increasedecrease in the 30-day LIBOR would increase our interest expense by $4.0earnings $7.9 million on our outstanding balances as of MarchJune 30, 2019.
Market Risk
We also have investments in marketable equity securities, which are publicly-traded, and which had a fair value of $0 and $36.8 million as of June 30, 2020 and December 31, 2018. A 100-basis point decrease2019, respectively. These include shares of common stock of Nasdaq, the rights to which initially resulted from BGC Partners sale of its electronic benchmark Treasury platform to Nasdaq. The right to receive the remainder of the Nasdaq payment was transferred from BGC Partners to us beginning in the 30-day LIBOR would decreasethird quarter of 2017. We have recorded gains related to the Nasdaq payments and related appreciation in shares held by Newmark of $0.0 million and $3.0 million for the three months ended June 30, 2020 and 2019, respectively, and expect our annual interest expense by $4.0future results to include the additional approximately 7.9 million basedNasdaq shares to be received over time. In 2018, we entered into monetization transactions with respect to the Nasdaq shares for the shares to be received in each of 2019, 2020, 2021 and 2022. On December 2, 2019 the SPV delivered 898,685 Nasdaq Shares to RBC in exchange for $93.5 million Newmark OpCo EPUs pursuant to the first forward agreement.
For the three months ended June 30, 2020 and 2019, we recorded losses of $22.9 million and $15.6 million for the mark-to-market adjustment related to the Nasdaq Forwards. For the six months ended June 30, 2020 and 2019, we recorded losses of $1.3 million and $29.0 million for the mark-to-market adjustment related to the Nasdaq Forwards.
Investments in marketable securities carry a degree of risk, as there can be no assurance that the marketable securities will not lose value and, in general, securities markets can be volatile and unpredictable. As a result of these different market risks, our holdings of marketable securities could be materially and adversely affected. We may seek to minimize the effect of price changes on
a portion of our
outstanding balance asinvestments in marketable securities through the use of
March 31, 2018.derivative contracts. However, there can be no assurance that our hedging activities will be adequate to protect us against price risks associated with our investments in marketable securities. See Note 7 — “Marketable Securities” and Note 11 — “Derivatives” to our accompanying Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding these investments and related hedging activities.
The borrowing costNasdaq Forwards are derivatives and, accordingly, are marked to fair value through our accompanying unaudited condensed consolidated statements of operations. The fair value of the Intercompany Credit AgreementNasdaq Forwards is based on LIBOR. A 100-basis point increase indetermined utilizing the 30-day LIBOR would increase our interest expense by $2.1 million on our outstanding balancesfollowing inputs, as applicable:
The underlying number of March 31, 2018. A 100-basis point decrease inshares and the 30-day LIBOR would decrease our annual interest expense by $2.1 million based on our outstandingrelated strike price;
The maturity date; and
The implied volatility of Nasdaq’s stock price.
The fair value of Newmark’s Nasdaq Forwards considers the effects of Nasdaq’s stock price volatility between the balance
assheet date and the maturity date. The fair value is determined through the use of
March 31, 2018.a Black-Scholes put option valuation model.
|
| | | | | | | | | | | | | | | | | | | | |
| Input | | Three Months Ended June 30, 2020 | | Three Months Ended March 31, 2020 | | Three Months Ended December 31, 2019 | | Three Months Ended September 30, 2019 | | Three Months Ended June 30, 2019 |
| Number of shares per tranche | | 992,247 |
| | 992,247 |
| | 992,247 |
| | 992,247 |
| | 992,247 |
|
| Strike price | | $87.68 to $94.21 |
| | $87.68 to $94.21 |
| | $87.68 to $94.21 |
| | $87.68 to $94.21 |
| | $87.68 to $94.21 |
|
| Maturity date | | November 30, 2020 - November 30, 2022 | | November 30, 2020 - November 30, 2022 | | November 30, 2020 - November 30, 2022 | | November 29, 2019 - November 30, 2022 | | November 29, 2019 - November 30, 2022 |
| Implied volatility - weighted-average | | 41.4 | % | | 39.8 | % | | 32.2 | % | | 32.9 | % | | 32.2 | % |
| Period end stock price | | $119.47 | | $94.95 | | $107.1 | | $99.35 | | $96.17 |
| Dividend yield - weighted-average | | 1.64 | % | | 1.98 | % | | 1.76 | % | | 1.89 | % | | 1.95 | % |
| Interest rate - weighted-average | | 0.24 | % | | 0.52 | % | | 1.70 | % | | 1.62 | % | | 1.82 | % |
| Unrealized gains/(losses) due to the changes in fair value of the Nasdaq Forwards | | $ | (22,945 | ) | | $ | 21,173 |
| | $ | (13,935 | ) | | $ | (8,214 | ) | | $ | (15,638 | ) |
We are exposed to risks associated with changes in foreign exchange rates. Changes in foreign exchange rates create volatility in the U.S. Dollar equivalent of our revenues and expenses. While our international results of operations, as measured in U.S. Dollars, are subject to foreign exchange fluctuations, we do not consider the related risk to be material to our results of operations. While our exposure to foreign exchange risk is not currently material to us, we expect to grow our international revenues in the future, and any future potential exposure to foreign exchange fluctuations may present a material risk to our business.
Our processes address disaster recovery concerns. We operate most of our technology from dual-primary data centers at our two different London locations. Either site alone is capable of running all of our essential systems. In addition, we maintain technology operations from data centers in New Jersey and Connecticut. Replicated instances of this technology are maintained in our London data centers. All data centers are built and equipped to best-practice standards of physical security with appropriate environmental monitoring and safeguards. Failover for the majority of our systems is automated.
ITEM 4. CONTROLS AND PROCEDURES | |
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Newmark
Group, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by Newmark
Group, Inc. is recorded, processed, accumulated, summarized and communicated to its management, including its Chairman and its Chief Financial Officer, to allow timely decisions regarding required disclosures, and reported within the time periods specified in the SEC’s rules and forms. The Chairman and the Chief Financial Officer have performed an evaluation of the effectiveness of the design and operation of Newmark Group, Inc.
’s disclosure controls and procedures as of
March 31, 2018.June 30, 2020. Based on that evaluation, the Chairman and the Chief Financial Officer concluded that
Newmark’sNewmark Group, Inc’s disclosure controls and procedures were effective as of
March 31, 2018.June 30, 2020.
Changes in Internal Control over Financial Reporting
During the
three months ending March 31, 2018,quarter ended June 30, 2020, there were no changes in our internal control over financial reporting that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
See Note
29—“Commitments, Contingencies31 — “Commitments and
Guarantees”Contingencies” to
the Company’s unaudited condensed consolidated financial statementsour accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q
for a description of our legal proceedings which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Investors
In addition to the information set forth in this report, including under the section titled “Special Note Regarding Forward-Looking Statements,” you should carefully consider the information set forth in Item 1A “Risk Factors” in Newmark’s Annual Report on Form 10-K for the year ended December 31, 2019 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 for a detailed discussion of known material factors which could materially and adversely affect our financial condition, liquidity, results of operations, cash flows or prospects. In addition, investors should consider the following additional
or updated risk factors:
We
The COVID-19 pandemic has severely disrupted the global conduct of business, and has disrupted, and may
not be ablecontinue to
protectdisrupt, our
intellectual property rights or may be prevented from using intellectual property used in our business.Our success is dependent, in part, upon our intellectual property. We rely primarily on trade secret, contract, patent, copyright and trademark law in the United States and other jurisdictions as well as confidentiality procedures and contractual provisions to establish and protect our intellectual property rights to proprietary technologies, products, services or methods,operations and our brand.
Unauthorized use of our intellectual property could make it more expensiveclients' operations, which has had, and may continue to do business and harm our operating results. We cannot ensure that our intellectual property rights are sufficient to protect our competitive advantages or that any particular patent, copyright or trademark is valid and enforceable, and all patents ultimately expire. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws in the United States, or at all. Any significant impairment of our intellectual property rights could harmhave, a materially adverse effect on our business, or our abilityfinancial condition, results of operations and prospects. The extent to compete.
Protecting our intellectual property rights is costlywhich the pandemic and time consuming. Although we havemeasures taken stepsin response thereto could continue to protect ourselves, there can be no assurance that we will be aware of all patents, copyrights or trademarks that may pose a risk of infringement by our products and services. Generally, it is not economically practicable to determine in advance whether our products or services may infringe the present or future rights of others.
Accordingly, we may face claims of infringement or other violations of intellectual property rights that could interfere with our ability to use intellectual property or technology that is material to our business. The number of such third-party claims may grow. Our technologies may not be able to withstand such third-party claims or rights against their use.
We may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the rights of others or defend against claims of infringement or invalidity. For example, we recently responded to a claim by Newmark Realty Capital, Inc. (which we refer to as “Realty Capital”) against us alleging, among other things, trademark infringement under Section 32 of the Lanham Act. In connection with our answer, we filed counterclaims alleging that Realty Capital has infringed our trademarks and seeking an order cancelling Realty Capital’s registered trademarks. We also separately initiated an action before the U.S. Patent and Trademark Office seeking invalidation of Realty Capital’s registration of a design mark that includes the stand-alone name “Newmark.” On November 16, 2017, a federal court in the Northern District of California issued an order denying Realty Capital’s motion to enjoin us from using the name “Newmark” generally as a trademark, which supported Newmark’s rights and longstanding goodwill in relation to the use of the “Newmark” name. The same order temporarily enjoined Newmark from using the name “Newmark” for “mortgage banking, mortgage brokerage, loan servicing, investment brokerage, and investment consulting services in the field of commercial real estate.” This order is in effect until a decision at trial, which is currently scheduled for January 2019. We have moved the court for an order reconsidering the injunction and lifting it in its entirety, and may eventually file an appeal if necessary. In response to our request that the court stay the injunction pending reconsideration, the court ruled in our favor and has suspended the injunction as to the categories of “investment consulting” and “investment brokerage.” In advance of the motion for reconsideration hearing, Realty Capital filed a motion for a new injunction prohibiting the use of “Newmark” for “any commercial real estate services” and demanding relief more expansive than the request the Court previously denied on November 16, 2017. On March 30, 2018, the court granted the reconsideration motion in part and denied it in part, reversing that part of the injunction that prohibited the us from using the “Newmark Knight Frank” name. We have initiated an appeal of the remaining portion of the injunction. On April 17, 2018, the court denied Realty Capital’s motion to modify the injunction in its entirety. No assurance can be given as to whether these cases will ultimately be determined in our favor or that our ability to use the “Newmark” name will be impacted by the proceedings. Any such claims or litigation, whether successful or unsuccessful, could result in substantial costs, the diversion of resources and the attention of management, any of which could materially negatively affect our business. Responding to these claims could also require us to enter into royalty or licensing agreements with the third parties claiming infringement, stop selling or redesign affected products or services or pay damages on our own behalf or to satisfy indemnification commitments with our clients. Such royalty or licensing agreements, if available, may not be available on terms acceptable to us, and may negativelyadversely affect our business, financial condition, results of operations or prospects. Despite these potential risks, even if weand prospects will depend on future developments and conditions, which are permanently
enjoined from usinghighly uncertain and cannot be predicted, including the “Newmark” namescope and duration of the pandemic, the actions taken by governmental authorities in response thereto, and the sectors described inresulting impact on the preliminary injunction order or in connection with commercial real estate services generally,industry.
The ongoing COVID-19 global and national health emergency has been severe and has caused significant disruptions in the United States and global economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The global spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, significant reduction in business activity and commercial transactions, labor shortages, supply chain interruptions, and overall economic and financial market instability. As of July 31, 2020, the U.S. had the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported numerous cases of infected individuals. Several countries and states, including New York, where we are headquartered, have declared states of emergency. Similar impacts have been experienced in every jurisdiction in which we do not believebusiness.
The economic and financial disruptions from the COVID-19 pandemic, as well as measures taken by various governmental authorities in response to the outbreak, have led us to implement operational changes as we executed our business continuity plan. We continue to take significant steps to protect our employees, and the employees of our clients and vendors.
While we began opening our offices at reduced capacity in mid-July, a majority of our staff members continue to work from home, or other remote locations and disaster recovery venues, and we continue to restrict business travel and discourage personal travel by our personnel, particularly to areas most affected by the pandemic. Although we have taken significant precautions to protect employees who work in our offices and others, no assurance can be given that the measures that we have taken will be sufficient.
Although our information technology systems have been able to support remote working of our employees to date, we cannot assure you that they will continue to be able to support the volume of business conducted remotely by our employees in the future, or to address increased demands and volumes as our workforce shifts to additional locations and venues. We are also dependent on third-party vendors for the performance of certain critical information technology processes, and many such an order would significantlyvendors are continuing to operate under business continuity plans. In addition, many of our vendors’ and clients’ workforces continue to work from home or other remote locations, and their normal operations have been disrupted due to the pandemic. Working remotely may also place additional stress on the telecommunications infrastructure in the areas where our employees and the employees of our clients and vendors live and work. Disruptions in the availability of internet and telephone service may adversely affect the ability of employees and the employees of our vendors and clients to perform their operations remotely in a timely manner. An extended period of remote working by our employees could also increase our cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the pandemic. Even as phased re-openings continue for some workers and in some locations, changes in state and local work orders or in our policies or those of our clients and vendors, including in response to further spreading of the virus through a resurgence or “second wave,” may impact work arrangements of our employees, clients and vendors for the foreseeable future.
In addition, certain aspects of our management services business require our personnel to perform their job responsibilities onsite at the locations we manage. Although such property management services have currently been exempted from most COVID-19 pandemic governmental restrictions on commercial activity as essential services, we cannot assure you that they will continue to be permitted to operate without further restrictions. The presence of our personnel onsite may also increase the risk of their exposure to the virus, which could adversely affect their health and well-being, leading to their unavailability to perform their job responsibilities and requiring us to incur additional expenses to reposition other employees to provide coverage of such functions.
If significant portions of our clients’ or our third-party vendors' workforces, including key personnel, are unable to work effectively because of illness, government actions, or other restrictions in connection with the COVID-19 pandemic, this may impair our ability to operate our business. For example, inability to tour and inspect buildings has impacted leasing, valuations, capital markets and debt financing. This is impacting industry-wide volumes and may continue despite use of technology for virtual tours and other innovations.
While we implemented our business continuity plans at the end of the first quarter of 2020 and continue to revise the plan to implement changes in state and local responses, development of protocols and other factors to protect the health of our employees, such plans cannot anticipate all scenarios. Remote working has negatively impacted productivity over the second quarter, and we may experience a continued loss of productivity or other adverse impacts on our business over time.
The extent to which the COVID-19 pandemic, or the emergence of another pandemic, and measures taken in response thereto, could materially adversely affect the conduct of our business will depend upon future developments and conditions, which remain highly uncertain. Although many state and local governments have begun to lift “shelter-in-place” and other orders for certain businesses, a resurgence of the pandemic in areas that previously had relatively low infection rates has led to a re-imposition of such orders. In addition, the lifting of restrictions may lead to a resurgence of the pandemic that may impact our business in additional ways as we adapt to a workforce working in our offices, remote locations and from home. Any increase in the duration and impact of the pandemic, as well as measures taken in response thereto, could materially adversely affect our business, financial condition, results of operations and prospects.
The COVID-19 pandemic and governmental responses thereto have also materially adversely affected, and may in the future continue to materially adversely affect, the U.S. and global economy, the commercial real estate services industry, and the financial markets, which has materially adversely affected, and may in the future continue to materially adversely affect, our business, financial condition, results of operations and prospects.
The COVID-19 pandemic and governmental responses thereto have also materially adversely affected, and may in the future continue to materially adversely affect, the U.S. and global economy, the commercial real estate services industry, and the financial markets, which has materially adversely affected, and may in the future continue to materially adversely affect, our business, financial condition, results of operations and prospects. Unemployment rates in the United States have increased dramatically to levels not experienced since the Great Depression. The U.S. has initially reported a 32.9% decline in GDP for the second quarter of 2020, and most economists expect a further decline for the third quarter of 2020.
The U.S. equity capital markets (as measured by the S&P 500) suffered a more than 30% decline in the first few weeks of the COVID-19 pandemic after many jurisdictions implemented “shelter-in-place” and other restrictions. While the S&P 500 recovered by 20% over the course of the second quarter of 2020, there can be no assurance that the broader equity markets will not suffer declines in future periods should the pandemic further harm the U.S. or global economy. Oil prices and interest rates remain at record low levels, primarily as a result of the decline in economic activity. All of these unprecedented developments in the U.S. and global economy have materially adversely affected the commercial real estate services industry and led to substantial uncertainty about future economic conditions and developments, which could further adversely impact the commercial real estate services industry. Some of these conditions and developments may accelerate pre-existing long-term social and economic trends, or encourage new trends, that could materially impact the commercial real estate services industry, the nature of its services, and its profitability.
The COVID-19 pandemic and the various governmental responses thereto have materially adversely affected the commercial real estate services industry. The imposition of these restrictions has led to a dramatic reduction in demand for office, retail and other commercial space. While many restrictions began to be lifted in some jurisdictions during the second quarter, the easing of restrictions has subsequently been halted or reversed in various jurisdictions, as the U.S. has begun to experience the resurgence of infections in some locations.
As many businesses have been required to operate remotely, their current need for office space has been significantly impacted. Even when various jurisdictions have begun to permit phased re-openings of office space, in most cases those measures
have been subject to limits on occupancy, social distancing requirements, temperature checks and testing requirements, and enhanced cleaning and other protocols. In addition, some employers and employees are reluctant to return to their offices given the disruptions and costs of re-opening, and other factors such as concerns about public transportation, the availability of related retail and commercial services, the lack of childcare, and the possibility of employees becoming infected. In addition restaurants, bars, shops, entertainment venues and other commercial businesses have been prohibited from keeping their doors open to customers and required to limit services to takeout, delivery, and e-commerce. Such prohibitions have severely limited demand for commercial space in recent periods.
Although a majority of jurisdictions have initiated a phased re-opening of businesses in certain sectors, and we expect that social distancing and other requirements may require such businesses to use more space in the near term to perform existing functions, public health concerns about large gatherings and use of public spaces and facilities, including buses, subways, and trains, and the impact of working remotely and on-line purchasing may lead to a further reduction in office, retail and other space requirements in the long term, resulting in reduced construction and higher vacancy rates, as well as bankruptcies and insolvencies of our clients and counterparties, higher foreclosure rates, and declines in real estate values and transaction volumes, resulting in lower demand for commercial real estate services, reduced commissions, fees, and other compensation, and increased costs to generate those revenues, including CECL, impairment, and restructuring charges. Although, remote working may be largely offset by a larger footprint per employee, we cannot assure you when or if there will be a resumption of prior levels of demand for commercial real estate services.
Thus, the COVID-19 pandemic may serve to accelerate certain pre-existing social and economic trends that could affect the commercial real estate service industry, including remote working, reductions in business travel, conferences, and conventions, increased on-line shopping, and greater use of electronic communications, entertainment, and social media. In addition, as the pandemic persists, it may increasingly impact other areas, including mass transit, schools and universities, leisure travel, and college and professional sports. Newer trends favoring preferences for part-time work, freelance work, less dense living environments, reduced commuting time, and greater leisure time also may be expected to grow. These trends also may negatively impact demand for centralized office space and related retail and other commercial business space.
To date, reductions in demand for commercial real estate have resulted in fewer acquisitions of commercial properties and reduced levels of new lease activity and long-term renewals, each of which has resulted in reduced commission revenue for our commercial real estate capital markets and leasing brokerage services. Declines in the value of such sale or leasing transactions also results in smaller commissions on a transaction-by-transaction basis. Reduced availability of debt financing has led to reduction in capital market activity and valuation and advisory services. Non-payment of rent by commercial tenants, whether as a result of increased unemployment or federal and state government mandates providing rent relief and restrictions on evictions, continues to reduce the cash flow of commercial real estate owners and borrowers, which could result in higher rates of non-payment of our receivables. Accordingly, the reduction in demand for commercial real estate space has had a materially adverse effect, and may continue in the future to have a material adverse effect, on our business, financial condition, results of operations and prospects.
In addition, a certain portion of our receivables are due upon future events such as tenant occupancy, lease commencement and obtaining government approvals. Delays in occupying newly leased premises due to concerns over social distancing, the need to reconfigure office layouts to conform to local regulatory requirements, construction related delays caused by restricted access to office buildings and premises due to the COVID-19 pandemic, and delays in obtaining approvals from state and local governments due to the pandemic could adversely affect our ability to collect such receivables which could negatively impact our cash flows from operations.
Additionally, general economic conditions may lead to higher rates of default and forbearance on commercial loans. The increase in defaults and forbearance may lead to reduced demand for new loan origination and servicing, adversely affecting the future revenues of our loan origination and servicing business. We may also be required to advance payments owed by borrowers under Fannie Mae and FHA/HUD loans whose loans are permitted under government regulations to enter into forbearance. On May 1, 2020, Fannie Mae stated that only a small number of multifamily properties had thus far opted into a forbearance agreement, although the agency’s allowance estimate reflects a multifamily forbearance rate of 20%. As of June 30, 2020, based on unpaid principal balance, 1.2% of Fannie Mae’s multifamily guaranty book of business was in forbearance, the vast majority of which were related to COVID-19. In comparison, less than 0.3% of our Fannie Mae multifamily portfolio was delinquent as of the same date. While we expect cumulative forbearance advances to be at or below Fannie Mae's expected 20%, as servicer of these loans we would be required to advance up to $4.4 million based on each 1% forbearance rate over a six-month period. Any forbearance-related servicing advances are guaranteed by the GSEs, and, as such, we are able to finance such advances at 100%. While we established a $125 million line of credit in June 2020 under our warehouse facility to fund potential default and forbearance advances, there can be no assurance that such line of credit will be enough to cover all potential forbearance-related servicing advances.
Moreover, we may incur losses on our Fannie Mae risk portfolio if the COVID-19 pandemic persists. We share losses pari passu on 29% of the $20.8 billion Fannie Mae servicing portfolio as of June 30, 2020. We adopted the CECL accounting standard on January 1, 2020. Under this methodology, we are required to estimate lifetime expected credit losses, which is a significant change from the incurred loss model that we previously used. Our adoption of CECL resulted in an initial non-cash pre-tax reserve of $25.9 million, which was recorded as a reduction to shareholder’s equity as of the beginning of 2020 but had no impact on our earnings or cash position in the first quarter of 2020. This reserve was primarily driven by our Fannie Mae multifamily mortgage servicing portfolio. During the quarter ended March 31, 2020, we incurred a non-cash charge of $17.2 million due to adverse changes in the macroeconomic forecast caused by COVID-19. As of June 30, 2020, we had $43.3 million in CECL reserves. If the pandemic persists, we may have to increase CECL reserves further or may incur actual cash losses, which could have a material negative impact on financial results and cash flows. While historical losses have been relatively modest even through the Great Recession, there can be no assurance that will be the case during this pandemic or its aftermath and the new CECL methodology requires us to take the changing future macroeconomic environment into account in determining our reserve.
Our businesses have also been adversely affected by the economic impact of the COVID-19 pandemic apart from the governmental responses thereto. Changing market conditions and future prospects for the commercial real estate industry have also caused us to begin to re-position aspects of our business to adapt to and better address the needs of our clients in the future.
Changes in the mix of demand for certain types of commercial space, business locations and property types as a result of the pandemic and its resulting market impact may negatively impact our results, on the whole or with respect to certain businesses, profitability or ability of our business to respond quickly.
A decline in general economic conditions and commercial real estate services industry may also lead to reduced cash flows from operations, constraints on our capital and liquidity, a higher cost of capital, and possible changes or downgrades to our credit ratings. Although the federal government has taken many actions to provide liquidity to businesses and the financial markets, including loan programs for businesses in certain sectors or meeting certain criteria, these programs have experienced greater demand than funds available and have had strict eligibility requirements. We have recently drawn substantial amounts under our Credit Facility, resulting in $50.0 million remaining available thereunder as of June 30, 2020. While, subsequent to quarter end, we repaid $75.0 million on our Credit Facility, we may need to raise additional debt and equity capital in the future.
The full extent to which the COVID-19 pandemic or the emergence of another pandemic, and measures taken in response thereto, could continue to negatively affect the U.S. and global economy and, in turn, materially adversely affect our business, financial condition, results of operations and prospects will depend on future conditions and developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, actions taken by governmental authorities to contain the pandemic, as well as the financial and economic impact of the pandemic, the effects on us, our clients, our vendors, our employees, and the employees of our clients and vendors, and the overall impact on the U.S. and global economy, the commercial real estate services industry, the financial markets, and society.
The impact of the COVID-19 pandemic on the commercial real-estate services industry and our businesses in
particular depends in part on the immediate and long-term responses of national, state, and local governments and businesses, the nature of restrictions imposed by governmental and business entities, and the success of such restrictions in combating the pandemic, including the degree of individual compliance with restrictions and the reactions of workers, consumers, and other persons who may have continuing concerns for themselves, their families, and others. It also depends on the degree of governmental relief, subsidy, stimulus, and other payments and spending; governmental and other moratoriums and abatements on rental and mortgage payments, evictions, and foreclosures; the outcome of litigation over the interpretation of force majeure, impracticality, and other provisions in sales, rental, and other commercial agreements; the number of actual and expected business bankruptcies, insolvencies, and restructurings, including decreased credit ratings and increased going concern limitations; changes in the tax law affecting individuals, corporations, real estate investors, and others; and changes in social and racial attitudes, including the nature and degree of any urban unrest. None of these factors, or their impact, can be predicted with any certainty at this time.
Reductions in our quarterly cash dividend and corresponding reductions in distributions by Newmark Holdings to its partners may reduce the value of our common stock and the attractiveness of our equity-based compensation and limit the ability of our partners to repay employee loans.
Our Board has authorized a dividend policy which provides that we expect to pay a quarterly cash dividend to our common stockholders based on our post-tax Adjusted Earnings per fully diluted share. On August 5, 2020, our Board declared a quarterly qualified cash dividend of $0.01 per share to Class A and Class B common stockholders of record as of August 26, 2020. Our Board took the step in the first quarter of 2020 of reducing the quarterly dividend from the previous $0.10 per share in order to
strengthen our balance sheet as the real estate markets face difficult and unprecedented macroeconomic conditions due to the COVID-19 pandemic. We cannot predict the duration of the current economic slowdown and its impact on our future quarterly dividend payments. Investors seeking a high short-term dividend yield may find our Class A common stock less attractive than securities of issuers continuing to pay larger dividends.
Additionally, beginning with the first quarter of 2020 and for the foreseeable future, Newmark Holdings has reduced its distributions to or on behalf of its partners. The distributions to or on behalf of partners will at least cover their related tax payments. Whether any given post-tax amount is equivalent to the amount received by a stockholder also on an after-tax depends upon stockholders’ and partners’ domiciles and tax status. Current or potential partners may find our equity-based compensation structure less attractive as a result. Moreover, we have entered into various agreements with certain partners, whereby these partners receive loans that may be either wholly or in part repaid from distributions that the partners receive on some or all of their limited partner units or may be forgiven over a period of time. The reduction in Newmark Holdings distributions may adversely affect the ability of such partners to repay such loans. The inability of partners to repay the loans may require us to forgive a greater portion of such loans, increasing our compensation expense.
We believe that these actions reinforce the Company’s ability to maintain financial flexibility during the pandemic and emerge from the crisis with market share gains, but we cannot assure you that such steps will prevent a decline in our financial condition. We expect to regularly review our capital return policy. There can be no assurance that future dividends will be paid or that dividend or distribution amounts will return to levels consistent with past practice.
We have debt, which could adversely affect our ability to raise additional capital to fund our operations and activities, limit our ability to react to changes in the economy or the commercial real estate services industry, expose us to interest rate risk, impact our ability to obtain
a favorable credit
ratingratings and prevent us from meeting or refinancing our obligations under our
indebtedness.Asindebtedness, which, depending on the impact of March 31, 2018, we hadthe COVID-19 pandemic, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our indebtedness, which at June 30, 2020 was approximately $1,014.5$953.6 million, in aggregate principal amount of indebtedness outstanding. The amount of debt we incur may have important, adverse consequences to us and our investors, including that:including:
it may limit our ability to borrow money, dispose of assets or sell equity to fund our working capital, capital expenditures, dividend payments, debt service, strategic initiatives or other obligations or purposes;
it may limit our flexibility in planning for, or reacting to, changes in the economy, the markets, regulatory requirements, our operations or business;
our business;
wefinancial leverage may be more highly leveragedhigher than some of our competitors, which may place us at a competitive disadvantage;
it may impact the time frame for the completion of the Distribution;
it may make us more vulnerable to downturns in the economy or our business;
it may require a substantial portion of our cash flow from operations to make interest payments;
it may make it more difficult for us to satisfy other obligations;
it may increase the risk of a future credit ratings downgrade of usour credit ratings or otherwise impact our ability to obtain favorableor maintain investment grade credit ratings, which could increase the interest rates under certain of our debt agreements, increase future debt costs and limit the future availability of debt financing;
we may not be able to borrow additional funds or refinance existing debt as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase common stock; and
there would be a material adverse effect on our businesses,business, financial condition, results of operations and prospects if we were unable to service our indebtedness or obtain additional financing or refinance our existing debt on terms acceptable to us.
In December 2017, following
Our indebtedness excludes the
announcementwarehouse facilities collateralized by GSEs because these lines are used to fund short term loans held for sale that are generally sold within 45 days from the date the loan is funded. All of the
Berkeley Point Acquisition and our IPO, the credit rating outlooks of BGCloans held for sale were
amended to “negative watch,” which is subject to the successful completion of various capital raising and other activities to strengthen its balance sheet. We are also planning to begin the process of pursuing our own credit rating, which is likelyeither under commitment to be
impactedpurchased by
BGC’s rating. Although BGC has taken steps in recent months to strengthen its balance sheetFreddie Mac or had confirmed forward trade commitments for the issuance and
improve its credit ratios, no assurance canpurchase of Fannie Mae or Ginnie Mae mortgage-backed securities that will be
given that we will obtain a credit rating in a timely fashion or thatsecured by the
credit rating we do ultimately receive will enable us to borrow on favorable terms. Such credit ratings may further impact the timing of our proposed tax-free spin-off, which is contingent upon us repaying or refinancing our $812.5 million of long-term debt owed to or guaranteed by BGC in order to be tax-free. On May 8, 2018, Fitch ratings affirmed Cantor’s and BGC’s Long-term Issuer Default Ratings (“IDRs”) at ‘BBB-‘ and Short-term IDRs at ‘F3’. Fitch has also removed the ratings from Rating Watch Negative and assigned Stable Rating Outlooks to both Cantor and BGC. Additionally, on May 14, 2018, Standard and Poor’s (“S&P”) also affirmed Cantor’s and BGC’s issuer credit and senior unsecured debt ratings at ‘BBB-‘ and removed the ratings from CreditWatch with negative implications, assigning stable rating outlooks.underlying loans.
To the extent that we incur additional indebtedness or seek to refinance our existing debt, or the COVID-19 pandemic continues to negatively affect the local, national and global economies, the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to service our outstanding debt or to repay the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt.
We may be adversely affected by changes in LIBOR reporting practices, the method in which LIBOR is determined, the possible transition away from LIBOR and the possible use of alternative reference rates.
LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the U.K. or elsewhere.
The possible withdrawal and replacement of LIBOR with alternative benchmarks introduces a number of risks for us, our clients and the commercial real estate industry more widely. These risks include legal implementation risks, as extensive changes to documentation for new and existing clients, including lenders and real estate investors/owners, may be required. There are also financial risks arising from any changes in the valuation of financial instruments, which may impact our valuation and advisory business, our real estate capital markets services business, and our lending and loan servicing business. There are also operational risks due to the potential requirement to adapt information technology systems and operational processes to address the withdrawal and replacement of LIBOR. In addition, the withdrawal or replacement of LIBOR may temporarily reduce or delay transaction volume and could lead to various complexities and uncertainties related to our industry.
Additionally, Fannie Mae and Freddie Mac have announced that they will stop purchasing adjustable-rate mortgages ("ARMs") based on LIBOR by the end of 2020 and plan to begin accepting ARMs based on the Secured Overnight Financing Rate ("SOFR") in late 2020. Fannie Mae’s and Freddie Mac’s switch to SOFR may result in a disruption of business flow for our real estate capital markets business due to changes in loan pricing as a result of spread differential between LIBOR and SOFR and hedging issues, both from a differential in cost and uncertainty with timing for the transition to the new index. Additionally, our real estate capital markets business might face operational risks associated with documentation for existing loans that may not adequately address the LIBOR transition and implementing SOFR into our systems and processes properly to ensure interest is accurately calculated.
While it is not currently possible to determine precisely whether, or to what extent, the possible withdrawal and replacement of LIBOR would affect us, the implementation of alternative benchmark rates to LIBOR could have a material adverse effect on our business, financial condition, results of operations and prospects.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The information required by this Item is set forth in Note
28-“Compensation”6 — “Stock Transactions and Unit Redemptions” and Note 30 — “Compensation” to
theour accompanying unaudited condensed consolidated financial statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q and in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2 of Part I) and is incorporated by reference herein.
| |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIESNone.
ITEM 4. MINE SAFETY DISCLOSURES
None.
Not Applicable.
None.
ITEM 5. OTHER INFORMATIONNone.
ITEM 6.EXHIBITS
| |
| ITEM 6. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The Exhibit Index set forth below is incorporated by reference in response to this Item 6.
EXHIBIT INDEX
Exhibit
Number
| | Exhibit Title
|
| | |
10.26
Exhibit Number | | Investment Agreement, dated as of March 6, 2018, by and among BGC Partners, Inc., BGC Holdings, L.P., BGC Partners, L.P., BGC Global Holdings, L.P., Newmark Group, Inc., Newmark Holdings, L.P., and Newmark Partners, L.P. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 7, 2018)
Title |
| | |
10.27
| | Amendment No. 1 to Amended and Restated Agreement of Limited Partnership of Newmark Partners, L.P., dated as of March 14, 2018 (incorporated by reference to Exhibit 10.27 to the Registrant’s Current Report on Form 10-K filed with the SEC on March 20, 2018)*
|
| 31.1 | | |
10.28
| | |
| | |
31.1
| | Certification by the Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | |
31.2 | | |
| | |
32.1 | | |
| | |
101 | | The following materials from Newmark Group, Inc.’s QuarterlyAnnual Report on Form 10-Q for the period ended March 31, 2018June 30, 2020 are formatted in inline eXtensible Business Reporting Language (XBRL)(iXBRL): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Income, (Loss), (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, (v) the Unaudited Condensed Consolidated Statements of Changes in Equity, and(v) the Consolidated Statements of Cash Flows (vi) Notes to the Unaudited Condensed Consolidated Financial Statements, and (vii) Schedule I, Parent Company Only Financial Statements. The XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the iXBRL document. |
| 104 | | The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report on Form 10-Q for the
three monthsquarter ended
March 31, 2018June 30, 2020 to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 15th day of May, 2018.authorized. |
| |
Newmark Group, Inc. |
| |
By:
| /s/ Howard W. Lutnick |
Name: | Howard W. Lutnick |
Title: | Chairman |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Quarterly Report on Form 10-Q has been signed below by the following persons on behalf of the registrant, Newmark Group, Inc., in the capacities and on the date indicated.
Signature
| | Capacity in Which Signed
| | Date
|
| | | | |
/s/ Howard W. Lutnick
Howard W. Lutnick
| | Chairman (Principal Executive Officer)
| | May 15, 2018
|
| | | | |
/s/ Michael J. Rispoli |
| Name: | Michael J. Rispoli |
| Title: | | Chief Financial Officer (Principal Financial and Accounting Officer) | | May 15, 2018
|
82
Date: August 7, 2020