Business Overview
Newmark Group, Inc. (NASDAQ: NMRK) is a leading commercial real estate services firm that offers a diverse array of integrated services and products designed to meet the full needs of its clients. The company has a strong presence in the United States, the United Kingdom, and other international markets, providing a wide range of services including capital markets, landlord (or agency) leasing, valuation and advisory, property management, and flexible workspace solutions.
Newmark's business is divided into two main segments: investor/owner services and corporate or occupier services. The investor/owner services segment includes capital markets, landlord (or agency) leasing, valuation and advisory, property management, and flexible workspace solutions for owners. The corporate or occupier services segment includes tenant representation leasing, global corporate services, and flexible workspace solutions for occupiers.
The company has a long and storied history, having been founded in New York City in 1929. Newmark's acquisition by Cantor Fitzgerald's subsidiary BGC in 2011 and the subsequent investments in the business contributed to its strong growth. This growth continued following Newmark's initial public offering in 2017. Between 2011 and 2023, the company increased its total revenues by a CAGR of 22%, outpacing its publicly traded commercial real estate services peers.
Newmark has relationships with many of the world's largest commercial property owners, real estate developers and investors, as well as Fortune 500 and Forbes Global 2000 companies. For the full year 2023, the company generated revenues of approximately $2.45 billion, primarily 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.
Financials
In 2023, Newmark reported annual net income of $42.6 million and annual revenue of $2.45 billion. The company's annual operating cash flow was -$265.9 million, and its annual free cash flow was -$321.3 million.
For the first quarter of 2024, Newmark generated revenues of $546.5 million, up 4.9% year-over-year. This was driven by a 21.0% increase in management services, servicing fees and other revenue, which reached $256.9 million. Leasing and other commissions revenue decreased by 17.9% to $158.8 million, reflecting industry-wide declines of over 10% in the U.S. and more than 20% in the U.K. Investment sales revenue decreased by 1.6% to $70.8 million, compared to a 16% industry decline in the U.S. and 26% in Europe. Commercial mortgage origination, net increased by 38.7% to $59.9 million, outperforming the overall U.S. commercial and multifamily originations market, which grew by approximately 5%.
Expenses in the first quarter of 2024 were relatively flat, with compensation and employee benefits expenses remaining unchanged at $328.2 million. Non-compensation expenses, excluding pass-through items, increased by $10.6 million, primarily due to a $6 million increase in interest expense on the company's GSE warehouse lines, which was offset by interest income on the GSE loans held for sale. The company remains on track to complete its $75 million cost savings plan by the end of the second quarter of 2024.
Adjusted earnings per share for the first quarter of 2024 were $0.15, and adjusted EBITDA was $63.5 million. Newmark's fully diluted weighted average share count for the quarter was 255.4 million, compared to 249.8 million in the fourth quarter of 2023. The increase was primarily due to the accelerated recognition of RSUs under GAAP due to the 38.5% increase in the company's average share price quarter-over-quarter.
Geographic and Segment Performance
Geographically, Newmark's revenues are primarily generated in the United States, which accounted for 84.5% of total revenues in the first quarter of 2024. The United Kingdom contributed 9.2% of revenues, while other international markets, including Asia, Other Europe, and Other Americas, made up the remaining 6.3%.
By business segment, Newmark's management services, servicing fees and other revenue accounted for 47.0% of total revenues in the first quarter of 2024, up from 40.8% in the year-ago period. Leasing and other commissions revenue made up 29.1% of total revenues, down from 37.1% a year earlier. Investment sales revenue contributed 13.0% of total revenues, compared to 13.8% in the first quarter of 2023. Commercial mortgage origination, net revenue represented 11.0% of total revenues, up from 8.3% in the year-ago period.
Outlook
Newmark is well-positioned to capitalize on several key industry trends and growth opportunities. The company is targeting over $3 billion in revenue and more than $630 million of adjusted EBITDA by 2026, driven by substantial investments in talent and an improving macroeconomic environment.
The commercial real estate industry is facing a significant wave of debt maturities, with an estimated $929 billion of U.S. commercial and multifamily mortgage maturities due in 2024 and $2 trillion over the next three years. Newmark believes that approximately one-third of these maturing loans will result in a loan sale or property sale, one-third will need assistance with restructurings and/or recapitalizations, and one-third will likely require an adviser to help find new lenders. The company's substantial investments in data, analytics, and talent uniquely position it to capitalize on these macroeconomic trends and continue outperforming the industry.
Newmark is also making considerable gains toward its goal of becoming the #1 capital markets adviser in the U.S. while also expanding internationally across all service lines. The company's capital markets revenues increased by nearly 14% in the first quarter of 2024, outpacing the industry for the third consecutive quarter. This strong performance was led by a 51% improvement in debt origination fees, which was multiple times greater than the industry.
In addition to its capital markets success, Newmark is focused on increasing the percentage of its total revenues from recurring and/or contractual businesses, such as servicing, valuation and advisory, global corporate services, agency leasing, and property management. The company's recent acquisition of Gerald Eve, a U.K.-based real estate advisory firm, as well as the acquisition of the remaining stake in Spring11, an asset management and servicing business, are expected to contribute to this goal.
Risks and Challenges
While Newmark is well-positioned for growth, the company faces several risks and challenges, including:
1. Macroeconomic conditions: The company's performance is heavily influenced by broader economic trends, such as interest rate fluctuations, inflation, and the overall health of the commercial real estate market.
2. Competition: Newmark operates in a highly competitive industry, with several large, well-established players vying for market share.
3. Regulatory environment: The real estate services industry is subject to various regulations and compliance requirements, which could impact the company's operations and profitability.
4. Integration of acquisitions: Newmark's growth strategy includes strategic acquisitions, which carry integration risks and the potential for unexpected costs or challenges.
5. Talent retention and recruitment: The company's success is heavily dependent on its ability to attract, retain, and motivate top-performing brokers and other revenue-generating professionals.
Despite these risks, Newmark's diversified business model, strong market position, and strategic investments in talent and technology position the company well to navigate the current market environment and capitalize on emerging opportunities in the commercial real estate services industry.
Conclusion
Newmark Group, Inc. is a leading commercial real estate services firm with a strong track record of growth and a diversified business model. The company is well-positioned to capitalize on the significant wave of debt maturities and other industry trends, leveraging its substantial investments in data, analytics, and talent to drive continued outperformance. While the company faces some risks and challenges, Newmark's strategic focus, geographic reach, and diverse service offerings make it a compelling investment opportunity in the dynamic commercial real estate services sector.