NEWMARK GROUP, INC. 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 "Special Note Regarding Forward-Looking Information" relating to forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, (the "Exchange Act"), included in Newmark'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 endedJune 30, 2020 and 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 accompanying condensed consolidated financial statements and the notes thereto included elsewhere in this report.
Overview
Newmark is a full-service commercial real estate services business. We offer a
diverse array of integrated services and products designed to meet the full
needs of both real estate investors/owners and 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 advisory services and government sponsored enterprise ("GSE")
lending and loan 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.
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 inNorth America . As ofJune 30, 2020 , we have nearly 5,900 employees, including more than 1,800 revenue-generating producers in over 139 offices in more than 111 cities. In addition, Newmark has licensed its name to 11 commercial real estate providers that operate out of 17 offices in certain locations where Newmark does not have its own offices. The discussion of our financial results reflects only the 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 producers in key markets throughoutthe 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$65.2 billion as ofJune 30, 2020 (of which 3.7% relates to special servicing). This servicing portfolio provides a steady stream of income over the life of the serviced loans. Additionally, over time we expect to see continued growth from our valuation and advisory and property management businesses, particularly in conjunction with our increasingly robust capital markets platform.
We continued to invest in the business by adding high profile and talented
producers and other revenue-generating professionals through
Our pre-tax margins are impacted by the mix of revenues generated. For example,
servicing revenues tend to have higher pre-tax margins than Newmark as a whole
and margins from "Gains from mortgage 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
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leasing advisory transactions. Pre-tax earnings margins on our property and
facilities management, along with certain of our other Global Corporate Services
("GCS") products, are at the lower end of margins for our business as a whole.
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 contain 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 continue 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 canceled. 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 a summary of the impact of COVID-19 on our
various businesses:
•
during the quarter due to the impact of COVID-19, which caused widespread
disruptions in economic activity and elevated uncertainty for commercial
real estate valuations 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
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 wake
of the pandemic.
• Valuation and Advisory revenues declined during the quarter. However, we
are seeing signs of stronger 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 itsoffices 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
Newmark has encouraged the use of telemedicine during the pandemic;
• The Company has reminded employees about its
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
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• 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
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
owners and 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 thelargest 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 part
of cost savings initiatives;
• Non-compensation-related charges incurred as part of cost savingsinitiatives. 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 CECL
methodology; and
• Increased debt as a result of an 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 calculating 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 the 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 2020 related to support and operations functions. Separation and Distribution Separation and Distribution and Related Agreements OnDecember 13, 2017 , BGC,BGC Holdings, L.P. ("BGC Holdings "),BGC Partners, L.P. ("BGCU.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", includingCantor Fitzgerald & Co. ("CF&Co") andBGC Global Holdings, L.P. ("BGC Global OpCo") entered into a Separation and Distribution Agreement (as amended onNovember 8, 2018 and amended and restated onNovember 23, 2018 , the "Separation and Distribution Agreement"). See 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 endedDecember 31, 2019 , for additional information regarding the transactions related to the Separation, IPO 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. 57 --------------------------------------------------------------------------------BGC's Investment inNewmark Holdings OnMarch 7, 2018 ,BGC Partners and its operating subsidiaries purchased 16.6 million newly issued exchangeable limited partnership units (the "Newmark Units") ofNewmark Holdings for$242.0 million (the "Investment by BGC inNewmark 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 OnNovember 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 6.125% Senior Notes are general senior unsecured obligations of Newmark. The 6.125% Senior Notes, which were priced onNovember 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 received net proceeds of$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 eachMay 15 andNovember 15 , beginning onMay 15, 2019 and will mature onNovember 15, 2023 . Newmark used the net proceeds to repay the remaining balance of the Converted 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 ofJune 30, 2020 andDecember 31, 2019 , the carrying amount of the 6.125% Senior Notes was$541.6 million and$540.4 million , respectively.
On
OnFebruary 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 toFebruary 26, 2023 . The interest rate on the Credit Facility was reduced to LIBOR plus 1.75% per annum, subject to a pricing grid linked to Newmark's credit ratings fromStandard & Poor's and Fitch. OnMarch 16, 2020 , Newmark entered into a second amendment to the Credit Agreement (the "Second Amended Credit Agreement"), increasing the size of the Credit Facility to$465.0 million and extending the maturity date toFebruary 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 fromStandard & Poor's and Fitch. As ofJune 30, 2020 andDecember 31, 2019 , the carrying amount of the Credit Facility was$412.1 million and$48.9 million , respectively. OnJune 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 authorization, 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 throughCantor 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
OnJune 19, 2020 , Newmark established 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 dueJune 16, 2021 . The advance line will provide 100% of the principal and interest advance payment at a rate of 1-month LIBOR plus 2.00% and will be collateralized 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 ofMay 31, 2020 . OnNovember 30, 2018 , Newmark entered into an unsecured credit agreement (the "Cantor Credit Agreement") with Cantor. The Cantor Credit Agreement provides for each party to issue loans to the other party in the lender's discretion. Pursuant to the Cantor Credit Agreement, the parties and their respective subsidiaries (with respect to CFLP, other than BGC and its subsidiaries) may borrow up to an aggregate principal amount of$250.0 million from each other from time to time at an interest 58 --------------------------------------------------------------------------------
rate which is the higher of Cantor's or Newmark's short-term borrowing rate then
in effect, plus 1.0%. As of
Credit Rating Newmark has a stand-alone BBB+ stable credit rating from JCRA, BBB- stable credit ratings fromFitch Ratings, Inc. andKroll Bond Rating Agency and a BB+ stable rating fromStandard & Poor's . The Spin-Off OnNovember 30, 2018 , BGC completed the Spin-Off to its stockholders of all of the shares of the Newmark common stock owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of Newmark Class A common stock distributed to the holders of shares of BGC Class A common stock (including directors and executive officers ofBGC Partners ) of record as of the close of business onNovember 23, 2018 (the "Record Date"), and shares of Newmark Class B common stock distributed to the holders of shares of BGC's Class B common stock (consisting ofCantor and CF Group Management, Inc. ("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 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 94% of the total 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. OnNovember 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 ofNewmark Holdings held byBGC Holdings immediately prior to the effective time of theBGC Holdings distribution to its limited partners entitled to receive distributions on theirBGC Holdings units (including Cantor and executive officers of BGC)who were holders of record of such units as of the Record Date. TheNewmark Holdings units distributed toBGC Holdings partners in theBGC Holdings distribution are exchangeable for shares of Newmark Class A common stock, and in the case of the 449,917Newmark Holdings units received by Cantor also into shares of Newmark Class B common stock, at the applicable exchange ratio (subject to adjustment). As ofJune 30, 2020 , the exchange ratio was 0.9366 shares of Newmark common stock perNewmark Holdings unit. Following the Spin-Off and theBGC Holdings distribution,BGC Partners ceased to be our controlling stockholder, and BGC and its 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. Cantor continues to control Newmark and its subsidiaries following the Spin-Off and theBGC Holdings distribution. Nasdaq Monetization Transactions OnJune 28, 2013 , BGC sold certain assets of its on-the-run, electronic benchmarkU.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-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. Nasdaq generated gross revenues of approximately$4.3 billion in 2019. The remaining rights under the Nasdaq Earn-out were transferred to Newmark onSeptember 28, 2017 . 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 for additional information. Exchangeable Preferred Partnership Units and Forward Contracts OnJune 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. 59 --------------------------------------------------------------------------------
On
The EPUs were issued in four tranches and are separately convertible by either RBC or Newmark into a fixed number of shares of Newmark Class A common stock, subject to a revenue hurdle in each of the fourth quarters of 2019 through 2022 for each of the respective four tranches. The ability to convert 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-outs for 2019 through 2022. The Nasdaq Forwards provide the SPV the option to settle using up to 992,247 shares of Nasdaq common stock, to be received by the SPV 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 toNovember 1 of each year from 2019 through 2022. InSeptember 2019 , the SPV notified RBC of its decision to settle the first variable postpaid forward contract using the Nasdaq common stock the SPV received inNovember 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. OnDecember 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 endedMarch 31, 2020 . Related Party Transactions Pre-IPO intercompany agreements InDecember 2017 , prior to our Separation and IPO, all intercompany arrangements and agreements that were previously approved by theAudit Committee of BGC Partners with respect toBGC 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 byBGC 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 endedDecember 31, 2019 filed onApril 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 ofMay 1, 2018 . In connection with this transfer of employees, Cantor paid$6.9 million to Newmark inOctober 2018 andNewmark 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 ofNewmark 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 ofJune 30, 2020 , Newmark has$3.3 million 60 -------------------------------------------------------------------------------- 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 inJuly 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 inDubai , inMay 2020 , theAudit Committee of the Company authorizedNewmark & Company Real Estate, Inc. ("Newmark & Co. "), a subsidiary of Newmark, to enter into an agreement withCantor Fitzgerald Europe (DIFC Branch) ("CFE Dubai") pursuant to which CFE Dubai will employ and support an individualwho is a resident ofDubai in order to enhance Newmark's capital markets platform, in exchange for a fee. CFE Dubai andNewmark & Co. negotiated a Services Agreement memorializing the arrangement between the parties (the "Services Agreement"). The Services Agreement provides thatNewmark & Co. will reimburse CFE Dubai for the individual's fully allocated costs, plus a mark-up of seven percent (7%). In addition, theAudit 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 the applicable agreements contain customary terms for arrangements of this type and that the mark-up charged by the party employing one or more individuals for the benefit of the other is between 3% and 7.5%, depending on the level of support required for the employed individual(s). Sublease to BGC InMay 2020 , theAudit Committee of the Company authorizedRKF Retail Holdings LLC , a subsidiary of the Company, to enter into an arrangement to sublease excess space to BGCU.S. OpCo. The deal is a one-year sublease of approximately 21,000 rentable square feet inNew York City . GSE loans and related party limits InFebruary 2019 , theAudit 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 OnJuly 22, 2019 ,Cantor Commercial Real Estate Lending, L.P. ("CCRE Lending"), a wholly-owned subsidiary ofReal Estate LP , made a$146.6 million commercial real estate loan (the "Loan") to a single-purpose company (the "Borrower") in whichBarry Gosin , Newmark's Chief Executive Officer, owns a 19% interest. The Loan is secured by the Borrower's interest in property inPennsylvania that is subject to a ground lease. While CCRE Lending initially provided the full loan amount, onAugust 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 onAugust 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. Key Business Drivers Key drivers forU.S. commercial real estate services companies include the overall health of theU.S. economy, institutional ownership of commercial real estate as an investible asset class, and the ability to attract and retain talent. In our capital markets business, the availability of credit and certainty of valuations to investors are key drivers. In our multifamily business, delayed marriages, an aging population and less home ownership are driving increased demand for new apartments, with an estimated 4.6 million needed by 2030, according to a 2017 study commissioned by theNational Multifamily Housing Council andNational Apartment Association . This should continue to drive investment sales, GSE multifamily lending and other mortgage brokerage and growth in our servicing portfolio over time. Our origination business is impacted by the lending caps imposed by theFederal Housing Finance Agency (the "FHFA"). OnSeptember 13, 2019 , the FHFA revised its industry-wide multifamily loan purchase caps to$200.0 billion combined for the five-quarter period from the fourth quarter of 2019 to the fourth quarter of 2020. These caps on 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, as well as loans that finance water and energy efficiency improvements. There is approximately$100.0 billion of lending capacity available under the FHFA caps in the second half of 2020. 61
-------------------------------------------------------------------------------- Economic Outlook inthe United States COVID-19 adversely affected the economic outlook in the first half of 2020 and the scope and duration of its impact on theU.S. and global economy is highly uncertain and cannot be predicted. TheU.S. economy contracted by 32.9% annualized during the second quarter of 2020, according to a preliminary estimate from theU.S. Department of Commerce . The consensus is forU.S. gross domestic product to contract by 5.6% and then grow by 4.7% in 2021 and 3.2% in 2022, according to a recentWall Street Journal survey of economists. This muted pace of growth expected during the next few years should help keep interest rates and inflation low by historical standards. According to a preliminary report from theBureau of Labor Statistics , employers reduced the monthly average of payroll jobs by approximately 4.4 million on a net basis during the second quarter of 2020. The unemployment rate increased to 11.1% inJune 2020 from 4.4% inMarch 2020 . The ten-yearTreasury yield declined by approximately 134 basis points to 0.66% as ofJune 30, 2020 versus the year-earlier date. Ten-yearTreasury yields have remained well below their 50-year average of approximately 6.26% due to market expectations that theFederal Open Market Committee ("FOMC") will maintain a near-zero federal funds rate over the next several years in addition to muted long-term inflation expectations. OnJune 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 the second quarter of 2020 and its impact onU.S. and international commercial real estate, GSE multifamily financing and the overall commercial mortgage market is highly uncertain and cannot be predicted. According toReal Capital Analytics ("RCA"), prices for commercial real estate were up by approximately 3.6% year-over-year for the quarter endedJune 30, 2020 . In the second quarter of 2020, overallU.S. commercial real estate notional sales volumes decreased by approximately 68%. In comparison, our investment sales volumes decreased 58% year-over-year in the second quarter of 2020. 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 second quarter of 2020 as compared with the second quarter of 2019. Newmark's loan origination volumes are driven more by the GSE multifamily financing volumes than the activity level of the overall commercial mortgage market. Overall industry GSE multifamily origination volumes increased by approximately 14% year-over-year in the second quarter of 2020. In comparison, Newmark's combined notional volumes across GSE and FHA multifamily loan originations increased by 23% year-over-year. According toNKF Research , the unweighted average vacancy rate across office, industrial and retail increased to 8.1% in the second quarter of 2020, up 40 basis points compared with the first quarter of 2020. However, we believe approximately$200.0 billion of industry dry powder and historically low interest rates will serve as a catalyst for capital markets activity once markets stabilize and price discovery begins. Regulatory Environment See "-Regulatory Requirements" herein for information related to our regulatory environment.
Liquidity
See "- Financial Position, Liquidity and Capital Resources" herein for information related to our liquidity and capital resources.
Financial Overview Revenues We derive revenues from the following general four sources: • Leasing and Other Commissions. We offer a diverse range of commercial real
estate brokerage and advisory services, including tenant and agency
representation, which includes comprehensive lease negotiations, strategic
planning, site selection, lease auditing, and other financial and market
analysis.
• Capital Markets. Our real estate capital markets business specializes in
the arrangement of acquisitions and dispositions of commercial properties,
as well as providing other financial services, including the arrangement
of debt and equity financing, and loan sale advisory.
• Gains from Mortgage Banking Activities/Originations, Net. Gains frommortgage banking activities/originations are derived from the origination
of loans with borrowers and the sale of those loans to investors.
62--------------------------------------------------------------------------------
• 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
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 many cases, landlords are responsible for paying the fees. In capital markets, fees are earned and recognized when the sale of a property closes, and title passes from seller to buyer for investment sales and when debt or equity is funded to a vehicle for debt and equity transactions. Gains from mortgage banking activities/originations, net are recognized when a derivative asset is recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The derivative is recorded at fair value and includes loan origination fees, sales premiums and the estimated fair value of the expected net servicing cash flows. Gains from mortgage banking activities/originations, net are recognized net of related fees and commissions to affiliates or third-party brokers. For loans we broker, revenues are recognized when the loan is closed. Servicing fees are recognized on an accrual basis over the lives of the related mortgage loans. We typically receive monthly management fees based upon a percentage of monthly rental income generated from the property under management, or in some cases, the greater of such percentage or a minimum agreed upon fee. We are often reimbursed for our administrative and payroll costs, as well as certain out-of-pocket expenses, directly attributable to properties under management. We follow accounting principles generally accepted in theU.S. , or "U.S. GAAP", which provides guidance when accounting for reimbursements from clients and when accounting for certain contingent events for Leasing and Capital Markets transactions. See Note 3 - "Summary of Significant Accounting Policies" to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a more detailed discussion.
Expenses
Compensation and Employee Benefits The majority of our operating costs consist of cash and non-cash compensation expenses, which include base salaries, producer commissions based on production, forgivable loans for term contracts, discretionary and other bonuses and all related employee benefits and taxes. Our employees consist of commissioned producers, executives and other administrative support. Our producers are largely compensated based on the revenue they generate for the firm, keeping these costs variable in nature. As part of our compensation plans, certain employees have been granted limited partnership units inNewmark Holdings andBGC Holdings , which generally receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders. Certain Newmark employees also hold non-distribution earnings units (e.g. NPSUs and NREUs, collectively "N Units") that do not participate in quarterly partnership distributions and are not allocated any items of profit or loss. These N Units vest into distribution earnings units over a 4-year period. As prescribed inU.S. GAAP guidance, the quarterly allocations of net income on such limited partnership units are reflected as a component of compensation expense under "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our accompanying 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 inNewmark Holdings andBGC Holdings to Newmark employees to convert the limited partnership units to a capital balance withinNewmark Holdings orBGC 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 underU.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 "Equity-based compensation and allocations of net income to limited partnership units and FPUs". The liability for limited partnership units with a post-termination payout amount is included in "Other long-term liabilities" on our accompanying unaudited condensed consolidated balance sheets. Certain limited partnership units are granted exchangeability into Class A common stock or may be redeemed in connection with the grant of shares of Class A common stock. At the time exchangeability is granted, or the shares are issued, Newmark recognizes an expense based on the fair value of the award on that date, which is included in "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our accompanying unaudited condensed consolidated statements of operations. 63 -------------------------------------------------------------------------------- Our employees have been awarded preferred partnership units ("Preferred Units") inNewmark Holdings andBGC Holdings . Each quarter, the net profits ofNewmark Holdings andBGC 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 inNewmark Holdings andBGC Holdings , respectively. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into our Class A common stock and are only entitled to the Preferred Distribution, and accordingly they are not included in our fully diluted share count. The quarterly allocations of net income on Preferred Units are also reflected in compensation expense under "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our accompanying 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 inBGC Holdings andNewmark Holdings . The forgivable portion of these loans is recognized as compensation expense over the life of the loan. From time to time, we may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the timeframes outlined in the underlying agreements. In addition, we also enter into deferred compensation agreements with employees providing services to us. The costs associated with such plans are generally amortized over the period in which they vest. (See Note 30 - "Compensation" and Note 31 - "Commitment and Contingencies", to our accompanying Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q). Other Operating Expenses We have various other operating expenses. We incur leasing, equipment and maintenance expenses. We also incur selling and promotion expenses, which include entertainment, marketing and travel-related expenses. We incur communication expenses, professional and consulting fees for legal, audit and other special projects, and interest expense related to short-term operational funding needs, and notes payable and collateralized borrowings. We pay fees toBGC Partners and/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 fromBGC Partners or Cantor. In addition, these charges may not reflect the costs of services we may receive fromBGC Partners or Cantor in the future. Other Income, Net Other income, net is comprised of the gains associated with the Earn-out shares related to the Nasdaq transaction and the movements related to the impact of any unrealized non-cash mark-to-market gains or losses related to the Nasdaq Forwards. Additionally, other income includes 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, 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 asU.S. partnerships and are subject to the Unincorporated Business Tax (which we refer to as "UBT") inNew York City .U.S. federal and state income tax liability or benefit related to the partnership income or loss, with the exception of UBT, rests with the partners (see Note 2 - "Limited Partnership Interests inNewmark Holdings andBGC 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. Our accompanying unaudited condensed consolidated financial statements includeU.S. federal, state and local income taxes on Newmark's allocable share of theU.S. results of operations. Outside of theU.S. , we operate principally through subsidiary corporations subject to local income taxes. 64 -------------------------------------------------------------------------------- Impact of Adopting Revenue Recognition Guidance OnJanuary 1, 2018 , we adopted Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 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 accompanying unaudited condensed consolidated statements of operations. Newmark elected to adopt ASC 606 using a modified retrospective approach with regard to contracts that were not completed as ofDecember 31, 2017 , and prospectively fromJanuary 1, 2018 onward. 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 ofDecember 31, 2017 , in relation to contracts signed prior toJanuary 1, 2018 , for which services have already been completed. Instead, Newmark recorded this contingent revenue and related commission payments on the balance sheet onJanuary 1, 2018 , with a corresponding pre-tax improvement of$22.7 million and Newmark recognized an increase of$16.5 million and$2.3 million to beginning retained earnings and noncontrolling interests, respectively, as a cumulative effect of adoption of an accounting change.
See Note 13 - "Revenues from Contracts with Customers" to our accompanying Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further information.
Impact of Adopting Lease Guidance OnJanuary 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 toJanuary 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
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 OnJanuary 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 onJanuary 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.
65
--------------------------------------------------------------------------------Results of Operations
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 June 30, Six Months Ended June 30,
2020 2019 2020 2019
Percentage Percentage Percentage Percentage
of Total of Total of Total of Total
Actual Results Revenues Actual Results Revenues Actual Results Revenues Actual Results 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 63.4Operating,
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
Percentage of Actual Percentage of Percentage of Actual Percentage of
Actual Results Total Revenues Results Total Revenues Actual Results Total Revenues Results 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.
66
--------------------------------------------------------------------------------
Three months ended
Revenues Leasing and Other Commissions Leasing and other commission revenues decreased by$97.3 million , or 44.8%, to$120.1 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . The decrease was largely due to 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 Capital markets revenue decreased by$75.8 million , or 58.9%, to$53.0 million for the three months endedJune 30, 2020 as compared to the three months endedJune 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, net increased by$24.0 million , or 53.2%, to$69.1 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . The increase was primarily driven by an increase of GSE originations and 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 three months endedJune 30, 2020 and 2019, we recognized$42.1 million and$24.9 million of non-cash gains, respectively, related to OMSRs. Management Services, Servicing Fees and Other Management services, servicing fees and other revenue decreased$18.6 million , or 11.6%, to$141.6 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . The decrease was due to lower non-fee pass-through revenues of$9.0 million , lower interest income on escrow balances of$4.9 million and lower yield maintenance fees of$2.8 million , partially offset by an increase in servicing fees of$1.7 million .
Expenses
Compensation and Employee Benefits Compensation and employee benefits expense decreased by$86.2 million , or 27.2%, to$230.5 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . The decrease in the second quarter of 2020 was directly related to lower commission based revenues and lower employee benefit charges as a result of the cost savings initiatives. 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$28.4 million , or 72.2%, to$10.9 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 as a result of lower exchange charges of$21.2 million and lower income allocations of$10.6 million due to less earning in the quarter. Operating, Administrative and Other Operating, administrative and other expenses decreased$40.7 million , or 40.0%, to$61.0 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 due to our cost saving initiatives. Fees to Related Parties Fees to related parties decreased by$2.0 million , or 27.9%, to$5.2 million for the three months endedJune 30, 2020 as compared to the three months endedJune 30, 2019 . Depreciation and Amortization Depreciation and amortization for the three months endedJune 30, 2020 decreased by$4.5 million , or 13.4%, to$28.9 million as compared to the three months endedJune 30, 2019 . This decrease was due to a$3.9 million decrease in mortgage servicing rights amortization. Because Newmark recognizes OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold, it also amortizes MSRs in proportion to the net servicing revenue expected to be earned. Subsequent to the initial recording, 67 --------------------------------------------------------------------------------
MSRs are amortized and carried at the lower of amortized cost or fair value. For
the three months ended
Other Income (loss), Net Other income (loss), net of$(36.4) million in the three months endedJune 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$4.0 million of equity losses fromReal Estate LP . Other income (loss), net of$(3.7) million in the three months endedJune 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 fromReal 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
Provision for Income Taxes Provision for income taxes decreased by$9.0 million , or 99.0%, to$0.1 million for the three months endedJune 30, 2020 as compared to the three months endedJune 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
Six months ended
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 endedJune 30, 2020 as compared to the six months endedJune 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 endedJune 30, 2020 as compared to the six months endedJune 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,
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 endedJune 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 endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . This increase was due to increases in valuation 68 -------------------------------------------------------------------------------- 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 endedJune 30, 2020 as compared to the six months endedJune 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 endedJune 30, 2020 as compared to the six months endedJune 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 endedJune 30, 2020 as compared to the six months endedJune 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 onJanuary 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 endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . Depreciation and Amortization Depreciation and amortization for the six months endedJune 30, 2020 increased by$13.3 million , or 21.5%, to$75.0 million as compared to the six months endedJune 30, 2019 . This increase was due to a$13.5 million increase in mortgage servicing rights amortization. Because Newmark recognizes OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold, it also amortizes MSRs in proportion to the net servicing revenue expected to be earned. Subsequent to the initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value. For the six months endedJune 30, 2020 and 2019, our expenses included$63.3 million and$49.9 million of MSR amortization, respectively. The MSR amortization increased primarily due to higher impairments as a result of the decline in short term interest rates caused by COVID-19. Other Income (loss), Net Other income (loss), net of$(35.0) million in the six months endedJune 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 fromReal 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 endedJune 30, 2019 is primarily related to the mark-to-market losses related to the Nasdaq Forwards of$29.0 million , which was partially offset by$6.9 million of income on the Nasdaq shares, equity income fromReal Estate LP of$4.8 million and unrealized gains of$3.9 million resulting from non-marketable investments carried under the measurement alternative. Interest (Expense) Income, Net Interest expense, net increased by$3.3 million , or 20.9%, to$19.1 million during the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 increased due to borrowings on the Credit Facility. Provision for Income Taxes Provision for income taxes decreased by$10.9 million , or 69.1%, to$4.9 million for the six months endedJune 30, 2020 as compared to the six months endedJune 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
69
--------------------------------------------------------------------------------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.
December 31, September 30, December 31, September 30,
June 30, 2020 March 31, 2020 2019 2019 (1) June 30, 2019 March 31, 2019 2018 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
(1) Amounts include the gains related to the Nasdaq Earn-out associated with
the Nasdaq monetization 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. InMarch 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 ofJune 30, 2020 , leaving us with$50.0 million of remaining availability. Subsequent toJune 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.
Overview
The primary source of liquidity for our business is the cash flow provided by our operations and our off-balance sheet Nasdaq asset.
As ofJune 30, 2020 , we have$306.4 million in cash and cash equivalents and approximately$787.0 million in additional Nasdaq stock (stock value based on theAugust 5, 2020 closing price) that Newmark expects to receive through 2027. 70 -------------------------------------------------------------------------------- Our future capital requirements will depend on many factors, including our growth, the expansion of our sales and marketing activities, our expansion into other markets and our results of operations. To the extent that existing cash, cash from operations and credit facilities, and Nasdaq shares are insufficient to fund our future activities, we may need to raise additional funds through public equity or debt financing. As ofJune 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 atJune 30, 2020 were$4,132.2 million as compared to$3,201.6 million atDecember 31, 2019 . The increase of$929.0 million 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 atJune 30, 2020 andDecember 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 under warehouse facilities collateralized byU.S. Government Sponsored Enterprises of$854.4 million and an increase in long-term debt of$364.3 million , partially offset by a decrease in accrued compensation of$97.6 million , a decrease of$36.7 million in securities loaned and a$109.8 million decrease in other payables.
Liquidity
We expect to generate cash flows from operations to fund our business and to meet our short-term liquidity requirements, which we define as the next twelve months. As ofJune 30, 2020 , our liquidity was$306.4 million . This does not include the approximately$787.0 million in additional Nasdaq stock (stock value based on theAugust 5, 2020 closing price) that Newmark expects to receive through 2027.
Managing our multifamily GSE mortgage business through the pandemic
We are a lender for Multifamily, Seniors, Healthcare, Student, and
by us prior to the 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
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 be conservative in terms of relevant
credit metrics such as debt service coverage, original loan-to-value and
market and borrower quality.
Following enactment of the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act") on
(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
servicing advances.
• Newmark has a
its
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
program.
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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 sold in a private
offering exempt from the registration requirements under the Securities Act. The
6.125% Senior Notes are general senior unsecured obligations of Newmark. These
6.125% Senior Notes were priced at 98.937% 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 Securities Act.
Credit Facility
On November 28, 2018 , Newmark entered into the Credit Agreement by and among
Newmark, the several financial institutions from time to time party thereto, as
Lenders, and Bank of America N.A ., as administrative agent. The Credit Agreement
was amended on February 26, 2020 to increase the size of the facility and extend
the maturity date to February 26, 2023 . The Amended Credit Agreement provides
for a $425.0 million three-year unsecured senior revolving credit facility. The
Credit Agreement was again amended on March 16, 2020 to increase the size of the
facility and extend the maturity date to February 26, 2023 . The Amended Credit
Agreement provides for a $465.0 million three-year unsecured senior revolving
credit facility. As of June 30, 2020 , the carrying value of borrowings
outstanding under the Amended Credit Agreement was $412.1 million . Borrowings
under the Amended Credit Facility will bear an annual interest equal to, at
Newmark's option, either (a) London Interbank Offered Rate ("LIBOR") for
specified periods, or upon the consent of all Lenders, such other period that is
12 months or less, plus an applicable margin, or (b) a base rate equal to the
greatest of (i) the federal funds rate plus 0.5%, (ii) the prime rate as
established by the administrative agent, and (iii) one-month LIBOR plus 1.0%.
The applicable margin is 175 basis points with respect to LIBOR borrowings and
(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 their respective subsidiaries (with respect to CFLP,
other than BGC and its subsidiaries) may borrow up to an aggregate principal
amount of $250.0 million from each other from time to time at an interest rate
which is the higher of CFLP's or Newmark's short-term borrowing rate then in
effect, plus 1.0%. As of June 30, 2020 , there were no borrowings outstanding
under the Cantor Credit Agreement.
Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises
As of June 30, 2020 , Newmark had $1.7 billion of committed loan funding
available through three commercial banks and an uncommitted $400.0 million
Fannie Mae loan repurchase facility. Consistent with industry practice, these
warehouse facilities are short-term, requiring annual renewal. These warehouse
facilities are collateralized by an assignment of the underlying mortgage loans
originated under its various lending programs and third-party purchase
commitments and are recourse only to our wholly-owned subsidiary, Berkeley Point
Capital, LLC . As of June 30, 2020 and December 31, 2019 , we had $1.1 billion and
$209.6 million outstanding under "Warehouse facilities collateralized by U.S.
Government Sponsored Enterprises " on our accompanying unaudited condensed
consolidated balance sheets.
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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
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 amount of $1.0 million
and $61.0 million for the three and six months ended June 30, 2020 ,
respectively, and $14.0 million and $54.0 million for the three and six months
ended June 30, 2019 , respectively.
Cash Flows for the Six Months Ended June 30, 2020
For the six months ended June 30, 2020 , we used $955.1 million of cash for
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 $14.9 million , $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 sales) and
$122.0 million of negative changes in operating assets and liabilities. The
negative change in operating assets and liabilities included $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,
$43.5 million in increases in other assets, $41.6 million of decreases 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 used $215.1 million of cash from financing activities
primarily due to net payments to warehouse facilities collateralized by U.S.
Government Sponsored Enterprises of $179.2 million , distributions to limited
partnership interests and noncontrolling interests of $93.9 million , dividends
of $34.0 million , and treasury stock repurchases of $13.9 million , which were
partially offset by net borrowings under the Credit Facility of $45.0 million ,
proceeds from securities loaned of $33.7 million and settlement of pre-Spin-Off
related party receivables of $33.9 million .
Credit Ratings
As ofJune 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 prudence of funding and liquidity management practices, balance sheet size/
73
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composition and resulting leverage, cash flow coverage of interest, composition
and size of the capital base, available liquidity, outstanding borrowing levels
and the firm's competitive position in the industry. A credit rating and/or the
associated outlook can be revised upward or downward at any time by a rating
agency if such rating agency decides that circumstances warrant such a change.
Any reduction in our credit ratings and/or the associated outlook could
adversely affect the availability of debt financing on terms acceptable to us,
as well as the cost and other terms upon which we are able to obtain any such
financing. In addition, credit ratings and associated outlooks may be important
to customers or counterparties when we compete in certain markets and when we
seek to engage in certain transactions. In connection with certain agreements,
interest rates on our notes may incur increases of up to 2% in the event of a
credit ratings downgrade.
Regulatory Requirements
Newmark is subject to various capital requirements in connection with
seller/servicer agreements that Newmark has entered into with the various GSEs.
Failure to maintain minimum capital requirements could result in Newmark's
inability to originate and service loans for the respective GSEs and could have
a direct material adverse effect on our accompanying unaudited condensed
consolidated financial statements. As of June 30, 2020 , Newmark has met all
capital requirements. As of June 30, 2020 , the most restrictive capital
requirement was Fannie Mae's net worth requirement. Newmark exceeded the minimum
requirement by $343.1 million .
Certain of Newmark's agreements with Fannie Mae allow Newmark to originate and
service loans under Fannie Mae's Delegated Underwriting and Servicing ("DUS")
Program. These agreements require Newmark to maintain sufficient collateral to
meet Fannie Mae's restricted and operational liquidity requirements based on a
pre-established formula. Certain of Newmark's agreements with Freddie Mac allow
Newmark to service loans under Freddie Mac's Targeted Affordable Housing ("TAH")
Program. These agreements require Newmark to pledge sufficient collateral to
meet Freddie Mac's liquidity requirement of 8% of the outstanding principal of
TAH loans serviced by Newmark. As of June 30, 2020 and December 31, 2019 ,
Newmark has met all liquidity requirements.
In addition, as a servicer for Fannie Mae, the Government National Mortgage
Association ("Ginnie Mae") and FHA, Newmark is required to advance to investors
any uncollected principal and interest due from borrowers. As of June 30, 2020
and December 31, 2019 , outstanding borrower advances were $1.0 million and $0.3
million , respectively, and are included in "Other assets" in our 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-Q for additional information related to our regulatory environment.
EQUITY
Repurchase Program OnAugust 1, 2018 , the Newmark Board of Directors and Audit Committee authorized repurchases of shares of Newmark's 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 stock or units from executive officers, other employees and partners, including of BGC and Cantor, as well as other affiliated persons or entities. During 2020, Newmark did not repurchase any shares of Class A common stock under this program. As ofJune 30, 2020 , Newmark has repurchased 4.6 million shares of Class A common stock at an average price of$9.32 . As ofJune 30, 2020 , Newmark had$157.4 million remaining from its share repurchase and unit purchase authorization. 74 -------------------------------------------------------------------------------- The following table details our share repurchase activity during 2020, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of our publicly announced repurchase program and the approximate value that may yet be purchased under such program (in thousands except share and per share amounts): Approximate Total Number Dollar Value of Shares of Units and Repurchased Shares That Total Average as Part of May Yet Be Number of Price Paid Publicly Repurchased/ Shares per Unit Announced Purchased Period Repurchased/Purchased or Share Program Under the Plan Balance, January 1, 2020 4,568,002$ 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
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. For the year
ended June 30, 2020 , the weighted-average number of Class A shares was
157.2 million shares and Class B shares was 21.3 million that were
included in our fully diluted EPS computation because the conditions for
issuance had been met by the end of the period.
(2) Partnership units collectively include founding/working partner units,
limited partnership units, and Cantor units, (see Note 2 - "Limited
Partnership Interests in
Consolidated Financial Statements in Part II, Item 8 of this Annual Report
on Form 10-Q for more information.) In general, these partnership units
are potentially exchangeable into shares of Newmark Class A common
stock. In addition, partnership units held by Cantor are generally
exchangeable into shares of Newmark Class A common stock and/or for upto 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) For the three months ended June 30, 2020 , the weighted-average share count
includes 97.5 million potentially anti-dilutive securities, which were
excluded in the computation of fully diluted earnings per share.
Our fully diluted period-end (spot) share count for the three months ended
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
Newmark completed acquisitions for which contingent cash consideration of$20.3 million . The contingent cash liability is recorded at fair value as deferred consideration on our accompanying unaudited condensed consolidated balance sheets. 75
-------------------------------------------------------------------------------- Equity Method Investments Newmark has an investment inReal 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 ofJune 30, 2020 , Newmark had$95.9 million in this equity method investment, which represents a 27% ownership inReal Estate LP . Registration Statements OnMarch 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 ofJune 30, 2020 , we have issued 0.6 million shares of our Class A common stock under this registration statement. Contractual Obligations and Commitments As ofJune 30, 2020 , Newmark was committed to fund approximately$0.5 billion , which is the total remaining draws on construction loans originated by Newmark under theHousing 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. Critical Accounting Policies and Estimates The preparation of our accompanying unaudited condensed consolidated financial statements in conformity withU.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, consolidated statements of operations and consolidated statements of cash flows could be materially affected. We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and complexity. Revenue Recognition We derive our revenues primarily through commissions from brokerage services, gains from mortgage banking activities/originations, net, revenues from real estate management services, servicing fees and other revenues. Revenue from contracts with customers is recognized when, or as, we satisfy our performance obligations by transferring the promised goods or services to the customers as determined by when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring our progress in satisfying the performance obligation as evidenced by the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time when the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the "transaction price"). In determining the transaction price, we consider consideration promised in a contract that includes a variable amount, referred to as variable consideration, and estimate the amount of consideration due to us. Additionally, variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. In determining when to include variable consideration in the transaction price, we consider all information (historical, current and forecast) that is available, including the range of possible outcomes, the predictive value of past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of our influence. We also use third-party service providers in the provision of its services to customers. In instances where a third-party service provider is used, we perform an analysis to determine whether we are acting as a principal or an agent with respect to the services provided. To the extent that we are acting as a principal, the revenue and the expenses incurred are recorded on a gross basis. In instances where we are acting as an agent, the revenue and expenses are presented on a net basis within the revenue line item. In some instances, we perform services for customers and incur out-of-pocket expenses as part of delivering those services. Our customers agree to reimburse us for those expenses, and those reimbursements are part of the contract's transaction price. 76 -------------------------------------------------------------------------------- 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 ofU.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 withU.S. GAAP guidance, we are required to record an expense for the portion of the RSUs that is ultimately expected to vest. Further,U.S. GAAP guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because significant assumptions are used in estimating employee turnover and associated forfeiture rates, actual results may differ from our estimates under different assumptions or conditions. The fair value of RSU awards to employees is determined on the date of grant, based on the fair value of our Class A common stock. Generally, RSUs granted by us as employee compensation do not receive dividend equivalents; as such, we adjust the fair value of the RSUs for the present value of expected forgone dividends, which requires us to include an estimate of expected dividends as a valuation input. This grant-date fair value is amortized to expense ratably over the awards' vesting periods. For RSUs with graded vesting features, we have made an accounting policy election to recognize compensation cost on a straight-line basis. The amortization is reflected as non-cash equity-based compensation expense in our accompanying unaudited condensed consolidated statements of operations. Restricted Stock: Restricted stock provided to certain employees is accounted for as an equity award, and as perU.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. 77 -------------------------------------------------------------------------------- Limited Partnership Units: Limited partnership units inNewmark Holdings andBGC Holdings are held by Newmark employees and receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders. As discussed above, preferred units inNewmark Holdings andBGC Holdings are not entitled to participate in partnership distributions other than with respect to a distribution at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. The quarterly allocations of net income to such limited partnership units are reflected as a component of compensation expense under "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our accompanying 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 underU.S. GAAP guidance, which requires that Newmark record an expense for such awards based on the change in value at each reporting period and include the expense in our accompanying unaudited condensed consolidated statements of operations as part of "Equity-based compensation and allocations of net income to limited partnership units and FPUs." The liability for limited partnership units with a post-termination payout is included in "Other long-term liabilities" on our accompanying unaudited condensed consolidated balance sheets. Certain limited partnership units held by Newmark employees are granted exchangeability into Class A common stock or may be redeemed in connection with the grant of shares of Class A common stock. At the time exchangeability is granted, or the shares are issued, Newmark recognizes an expense based on the fair value of the award on that date, which is included in "Equity-based compensation and allocations of net income to limited partnership units and FPUs" in our accompanying 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 allocations of net income to the awards are treated as compensation expense and the proceeds from distributions are used to repay the loan. The forgivable portion of any loans is recognized as compensation expense in our accompanying 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 ofJune 30, 2020 andDecember 31, 2019 , the aggregate balance of employee loans, net of reserve, was$483.8 million and$403.7 million , respectively, and is included as "Loans, forgivable loans and other receivables from employees and partners, net" in our accompanying unaudited condensed consolidated balance sheets. Compensation expense for the above-mentioned employee loans for the three and six months endedJune 30, 2020 was$17.5 million and$31.9 million , respectively, and$11.1 million and$18.5 million , respectively, for the three and six months endedJune 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 inU.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 ofJune 30, 2020 andDecember 31, 2019 of$559.9 million and$557.9 million , respectively. The first step of the process involves comparing each reporting unit's estimated fair value with 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 78 --------------------------------------------------------------------------------
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 onJanuary 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 endedJune 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, theU.S. unemployment rate andU.S. GDP growth rate could significantly affect our estimated expected credit losses. These macroeconomic forecasts, under different conditions or using different assumptions or estimates, could result in significantly different changes in reserves for credit losses. It is difficult to estimate how potential changes in specific factors might affect the overall reserves for credit losses and current results may not reflect the potential future impact of macroeconomic forecast changes. Income Taxes Newmark accounts for income taxes using the asset and liability method as prescribed inU.S. GAAP guidance, Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between our 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 asU.S. partnerships and are subject to UBT inNew York City . Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners, rather than the partnership entity. As such, the partners' tax liability or benefit is not reflected in our accompanying unaudited condensed consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included in our accompanying unaudited condensed consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in theU.S. or in foreign jurisdictions. Newmark provides for uncertain tax positions based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from Newmark's estimates under different assumptions or conditions. Newmark recognizes interest and penalties related to uncertain tax positions in "Provision for income taxes" in our accompanying 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. 79 -------------------------------------------------------------------------------- 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 theU.S. and other tax jurisdictions. Because Newmark's interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law. Derivative Financial Instruments We have loan commitments to extend credit to third parties. The commitments to extend credit are for mortgage loans at a specific rate (rate lock commitments). These commitments generally have fixed expiration dates or other termination clauses and may require a fee. We are committed to extend credit to the counterparty as long as there is no violation of any condition established in the commitment contracts.
We simultaneously enter into an agreement to deliver such mortgages to third-party investors at a fixed price (forward sale contracts).
Both the commitment to extend credit and the forward sale commitment qualify as derivative financial instruments. We recognize all derivatives on our accompanying 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 - "Organization and Basis of Presentation", to our accompanying Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for information regarding recent accounting pronouncements. Dividend Policy 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. 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 the dividend. No assurance can be made, however, that a dividend will be paid each quarter. The declaration, payment, timing and amount of any future dividends payable by us will be at the sole discretion of our Board of 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 theNewmark Holdings exchangeable limited partnership 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, underDelaware law our dividends may be payable only out of surplus, which is our net assets minus our capital (as defined underDelaware 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, 80 --------------------------------------------------------------------------------
there can be no assurance that our Board of Directors 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 inthe 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 "Adjusted Earnings before noncontrolling interests and taxes" and "Post-tax Adjusted Earnings to fully diluted shareholders", which are supplemental measures of operating results 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 when managing its business. As compared with "Income (loss) before income taxes and noncontrolling interests" and "Net income (loss) for fully diluted shares", both prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain non-cash items 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. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary results of Newmark. Adjusted Earnings 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 Consolidated 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 are entitled only to a
fixed distribution. Preferred units are granted in connection with the
grant of certain limited partnership units that may be granted
exchangeability or redeemed in connection with the grant of shares ofcommon 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.
• GAAP equity-based compensation charges with respect to the grant of an
offsetting amount of common stock or partnership units with capital
accounts in connection with the redemption of non-exchangeable units,
including PSUs and LPUs.
• Charges related to amortization of RSUs and limited partnership units.
• Charges related to grants of equity awards, including common stock or
partnership units with capital accounts
• Allocations of net income to limited partnership units and FPUs. Such
allocations represent the pro-rata portion of post-tax GAAP earnings
available to such unit holders.
The amount of certain quarterly equity-based compensation charges is based upon
the Company's estimate of such expected charges during the annual period, as
described further below under "Methodology for Calculating Adjusted Earnings
Taxes".
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Virtually all of Newmark's key executives and producers have equity or
partnership 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's fully diluted shares are owned by its
executives, partners and employees. The Company issues limited partnership units
as well as other forms of equity-based compensation, including grants of
exchangeability into shares of common stock, to provide liquidity to its
employees, to align the interests of its 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 growth.
All share equivalents that are part of the Company's equity-based compensation
program, including REUs, PSUs, LPUs, certain HDUs, and other units that may be
made exchangeable into common stock, as well as RSUs (which are recorded using
the treasury stock method), are included in the fully diluted share count when
issued or at the beginning of the subsequent quarter after the date of grant.
Generally, limited partnership units other than preferred units are expected to
be paid a pro-rata distribution based on Newmark's calculation of Adjusted
Earnings per fully diluted share.
Certain Other Compensation-Related Items under Adjusted Earnings and Adjusted
EBITDA
Newmark also excludes various other GAAP items that management views as not
reflective of the Company's underlying performance for the given period from its
calculation of Adjusted Earnings and Adjusted EBITDA. These may include
compensation-related items with respect to cost-saving initiatives, such as
severance charges incurred in connection with headcount reductions as part of
broad restructuring and/or cost savings plans.
Calculation of Non-Compensation Adjustments for Adjusted Earnings and Adjusted
EBITDA
Newmark's calculation of pre-tax Adjusted Earnings excludes non-cash GAAP
charges related to the following:
• Amortization of intangibles with respect to acquisitions. • Gains
attributable to originated mortgage servicing rights (which Newmark refers
to as "OMSRs").
• Amortization of mortgage servicing rights (which Newmark refers to as
"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 and Adjusted EBITDA
in future periods.
• 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 other non-cash, non-dilutive, and/or non-economic items, which may, in some periods, include: • Unusual, one-time, non-ordinary or non-recurring gains 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 variable share forward agreements
with respect to 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 non-economic items.
Methodology for Calculating Adjusted Earnings Taxes
Although Adjusted Earnings are calculated on a pre-tax basis, Newmark also
reports post-tax Adjusted Earnings to fully diluted shareholders. The Company
defines post-tax Adjusted Earnings to fully diluted shareholders as pre-tax
Adjusted Earnings reduced by the non-GAAP tax provision described 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) before noncontrolling interests and taxes
and the expected inclusions and deductions for income tax purposes, including
expected equity-based compensation during the annual period. The resulting
annualized tax rate
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is applied to Newmark's quarterly GAAP income (loss) before income taxes and
noncontrolling 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 charges with respect to equity-based
compensation; certain charges related to employee loan forgiveness; certain net
operating loss carryforwards when taken for statutory purposes; and certain
charges related to tax goodwill amortization. These adjustments may also reflect
timing and measurement differences, including treatment of employee loans;
changes in the value of units between the dates of grants of exchangeability and
the date of actual unit exchange; variations in the value of certain deferred
tax assets; and liabilities and the different timing of permitted deductions for
tax under GAAP and statutory tax requirements.
After application of these adjustments, the result is the Company's taxable
income for its pre-tax Adjusted Earnings, to which Newmark then applies the
statutory tax rates to determine its non-GAAP tax provision. Newmark views the
effective tax rate on pre-tax Adjusted Earnings as equal to the amount of its
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 charges relating to equity-based compensation. Because the charges
relating to equity-based compensation are deductible in accordance with
applicable tax laws, increases in such charges have the effect of lowering the
Company's non-GAAP effective tax rate and thereby increasing its post-tax
Adjusted Earnings.
Newmark incurs income tax expenses based on the location, legal structure and
jurisdictional taxing authorities of each of its subsidiaries. Certain of the
Company's entities are taxed as U.S. partnerships and are subject to the
Unincorporated Business Tax ("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's consolidated financial statements include U.S.
federal, state and local income taxes on the Company'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% of
earnings were taxed at global corporate rates.
Calculations of Pre- and Post-Tax Adjusted Earnings per Share 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 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 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 stockholders, if any, is expected to be determined by the Company's
Board of Directors with reference to a number of factors, including post-tax
Adjusted Earnings per share. Newmark may also pay a pro-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 Adjusted Earnings per
share 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 Board of Directors 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"
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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 expectedreceipt 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.
84
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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.
OnDecember 19, 2019 , the Compensation Committee approved the right to (i) convert 552,483 non-exchangeable Newmark Holdings PSUs held byMr. 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 602,463Newmark Holdings non-exchangeable PPSUs held byMr. 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.OnDecember 19, 2019 , the Compensation Committee approved the right to (i) convert 443,872 non-exchangeable Newmark Holdings PSUs held byMr. 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 539,080Newmark Holdings non-exchangeable PPSUs held byMr. 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. OnDecember 19, 2019 , the Compensation Committee approved the cancellation of 145,464 non-exchangeable Newmark Holdings PSUs held byMr. Merkel , and the cancellation of 178,179 non-exchangeable PPSUs (which had an average determination price of$10.61 per unit). Additionally, onDecember 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 forMr. 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. OnDecember 19, 2019 , the Compensation Committee approved the right to (i) convert 5,846 non-exchangeable Newmark Holdings PSUs held byMr. 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 4,917Newmark Holdings non-exchangeable PPSUs held byMr. 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
Our Restructuring We areNewmark Group, Inc. , aDelaware corporation. We were formed asNRE Delaware, Inc. onNovember 18, 2016 and changed our name toNewmark Group, Inc. onOctober 18, 2017 . We were formed for the purpose of becoming a public company conducting the operations ofBGC Partners' Real Estate Services segment, including Newmark and Berkeley Point. The Separation and Contribution In the Separation,Newmark Holdings limited partnership interests,Newmark Holdings founding partner interests,Newmark Holdings working partner interests andNewmark Holdings limited partnership units were distributed to holders ofBGC Holdings limited partnership interests,BGC Holdings founding partner interests,BGC Holdings working partner interests andBGC Holdings limited partnership units, respectively, in proportion to such interests ofBGC Holdings held by such holders immediately prior to the Separation. We also entered into a tax matters agreement withBGC 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 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 withBGC Partners , which governs the provision byBGC Partners of various administrative services to us, and our provision of various administrative services toBGC Partners , on a transitional basis (with a term of up to two years following the Spin-Off) and at a cost equal to (1) the direct cost that the providing party incurs in performing those services, 85 -------------------------------------------------------------------------------- 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.BGC Partners March 2018 Investment OnMarch 7, 2018 ,BGC Partners and its operating subsidiaries purchased 16,606,726 newly issued exchangeable limited partnership units ofNewmark Holdings for an aggregate investment of approximately$242.0 million . The price per unit was based on the$14.57 closing price of Newmark Class A common stock onMarch 6, 2018 as reported on the NASDAQ Global Select Market. These units were exchangeable, atBGC Partners' discretion, into either shares of Newmark Class A common stock or Newmark Class B common stock, par value$0.01 per share. Following such issuance,BGC Partners owned 83.4% of the 138.6 million shares of Newmark Class A common issued and outstanding and 100% of the 15.8 million issued and outstanding shares of Newmark Class B common stock, in each case as ofMarch 7, 2018 . Separation and Distribution Agreement For a description of the Separation 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 the 10-K. The Spin-Off OnNovember 30, 2018 , BGC completed the Spin-Off to its stockholders of all of the shares of Newmark common stock owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of Newmark Class A common stock distributed to the holders of shares of BGC Class A common stock (including directors and executive officers ofBGC 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 millionNewmark 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. OnNovember 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 ofNewmark Holdings held byBGC Holdings immediately prior to the effective time of theBGC Holdings Distribution to its limited partners entitled to receive distributions on theirBGC Holdings units (including Cantor and executive officers of BGC)who were holders of record of such units as of the Record Date. TheNewmark Holdings units distributed toBGC Holdings partners in the BGC Holdings Distribution are exchangeable for shares of Newmark Class A common stock, and in the case of the 449,917Newmark 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 theBGC 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 theBGC Holdings distribution. Prior to the Spin-Off, 100% of the outstanding shares of our Class B common stock were held by BGC. Because 100% of the outstanding shares of BGC 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 86 -------------------------------------------------------------------------------- general partner, and, ultimately, byHoward W. Lutnick ,who serves as Chairman of Newmark.Mr. Lutnick is also the Chairman of the Board of Directors and Chief Executive Officer ofBGC Partners and Cantor and the Chairman and Chief Executive Officer of CFGM, as well as the trustee of an entity that is the sole shareholder of CFGM.Stephen M. Merkel , our Executive Vice President and Chief Legal Officer, serves as Executive Vice President General Counsel and Assistant Secretary ofBGC Partners , and is employed as Executive Managing Director, General Counsel and Secretary of Cantor. Current Organizational Structure As ofJune 30, 2020 , there were 162,379,438 shares of Newmark Class A common stock issued and157,811,436 outstanding. Cantor and CFGM held no shares of Newmark 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. As ofJune 30, 2020 , Cantor and CFGM held 21,285,533 shares of Newmark Class B common stock representing all of the outstanding shares of Newmark Class B common stock. The shares of Newmark Class B common stock held by Cantor and CFGM as ofJune 30, 2020 , represented approximately 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 theNewmark Holdings general partnership interest and theNewmark Holdings special voting limited partnership interest, which entitle us to remove and appoint the general partner ofNewmark Holdings and serve as the general partner ofNewmark Holdings , which entitles us to controlNewmark Holdings .Newmark Holdings , in turn, holds the Newmark OpCo general partnership interest and the Newmark OpCo special voting limited partnership interest, which entitleNewmark Holdings to remove and appoint the general partner of Newmark OpCo, and serve as the general partner of Newmark OpCo, which entitlesNewmark Holdings (and thereby us) to control Newmark OpCo. In addition, as ofJune 30, 2020 , we directly held Newmark OpCo limited partnership interests consisting of approximately 88,085,042 units representing approximately 32.9% of the outstanding Newmark OpCo limited partnership interests (not including EPUs). We are a holding company that holds these interests, serves as the general partner ofNewmark Holdings and, throughNewmark Holdings , acts as the general partner of Newmark OpCo. As a result of our ownership of the general partnership interest inNewmark Holdings andNewmark Holdings' general partnership interest in Newmark OpCo, we consolidate Newmark OpCo's results for financial reporting purposes. Cantor, founding partners, working partners and limited partnership unit holders directly holdNewmark Holdings limited partnership interests.Newmark Holdings , in turn, holds Newmark OpCo limited partnership interests and, as a result, Cantor, founding partners, working partners and limited partnership unit holders indirectly have interests in Newmark OpCo limited partnership interests. In addition, The Royal Bank of Canada holds$325 million of EPUs issued by Newmark onJune 18, 2018 andSeptember 26, 2018 in private transactions. TheNewmark Holdings limited partnership interests held by Cantor and CFGM are designated asNewmark Holdings exchangeable limited partnership interests. TheNewmark Holdings limited partnership interests held by the founding partners are designated asNewmark Holdings founding partner interests. TheNewmark Holdings limited partnership interests held by the working partners are designated asNewmark Holdings working partner interests. TheNewmark Holdings limited partnership interests held by the limited partnership unit holders are designated as limited partnership units. Each unit ofNewmark Holdings limited partnership interests held by Cantor and 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. As ofJune 30, 2020 , 5,125,142 founding/working partner interests were outstanding. These founding/working partners were issued in the Separation to holders ofBGC Holdings founding/working partner interests,who received such founding/working partner interests in connection withBGC Partners' acquisition of theBGC Partners business from Cantor in 2008. TheNewmark Holdings limited partnership interests held by founding/working partners are not exchangeable with us unless (1) Cantor acquires such interests fromNewmark Holdings upon termination or bankruptcy of the founding/working partners or redemption of their units byNewmark Holdings (which it has the right to do under certain circumstances), in which case such interests will be exchangeable with us for shares 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 Newmark Class A common stock, with eachNewmark Holdings unit exchangeable for a number of shares of Newmark Class A common stock equal to the exchange ratio (which was initially one, but is subject to adjustment as set forth in the Separation and Distribution Agreement), 87 -------------------------------------------------------------------------------- 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 eachNewmark Holdings unit exchangeable for a number of shares of Newmark Class A common stock equal to the exchange ratio (which was initially one, but is subject to adjustment as set forth in the Separation and Distribution Agreement), in accordance with the terms of theNewmark Holdings limited partnership agreement. Once aNewmark Holdings founding/working partner interest becomes exchangeable, such founding/working partner interest is automatically exchanged upon a termination or bankruptcy with us for Newmark 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 ofJune 30, 2020 , 63,833,777 limited partnership units were outstanding (including founding/working partner interests and 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 theNewmark Holdings general partner, with the consent of theNewmark Holdings exchangeable limited partnership interest majority in interest, in accordance with the terms of theNewmark Holdings limited partnership agreement. The exchange ratio betweenNewmark Holdings limited partnership interests and our common stock was 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 ofNewmark Holdings are different. As ofJune 30, 2020 , the exchange ratio was 0.9366. With each exchange, our direct and indirect interest in Newmark OpCo will proportionately increase because, immediately following an exchange,Newmark Holdings will redeem theNewmark Holdings unit so acquired for the Newmark OpCo limited partnership interest underlying suchNewmark Holdings unit. The profit and loss ofNewmark OpCo andNewmark Holdings , as the case may be, are allocated based on the total number of Newmark OpCo units (not including EPUs) andNewmark Holdings units, as the case may be, outstanding. The following diagram illustrates the ownership structure of Newmark as ofJune 30, 2020 . The diagram does not reflect the various subsidiaries of Newmark, Newmark 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 ofNewmark Holdings exchangeable limited partnership interests or, to the extent applicable,Newmark Holdings founding partner interests,Newmark Holdings working partner interests orNewmark 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. 88 --------------------------------------------------------------------------------
STRUCTURE OF NEWMARK AS OF JUNE 30, 2020
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Shares of Newmark Class B common stock are convertible into shares of Newmark Class A common stock at any time in the discretion of the holder on a one-for-one basis. Accordingly, if Cantor and CFGM converted all of their shares of Newmark Class B common stock into shares of Newmark Class A common stock, Cantor and CFGM would hold 88.1% of the voting power in Newmark and the stockholders of Newmark other than Cantor and CFGM would hold 11.9% of the voting power in Newmark (and the indirect economic interests in Newmark OpCo would remain unchanged). In addition, if Cantor and CFGM continued to hold shares of Newmark Class B common stock and if Cantor exchanged all of the exchangeable limited partnership units held by Cantor for shares of Newmark Class B common stock, Cantor and CFGM would hold 74.3% of the voting power in Newmark, and the stockholders of Newmark other than Cantor and CFGM would hold 25.7% of the voting power in Newmark. The diagram reflects Newmark Class A common stock andNewmark Holdings partnership unit activity fromJanuary 1, 2020 throughJune 30, 2020 as follows: (a) an aggregate of 4,806,743 limited partnership units granted byNewmark 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 such shares remaining available for issuance by us under such Registration Statement; (h) 826,502 terminated limited partnership units; and (i) no purchased limited partnership units.
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