Newmark is a
The primary driver of today's action is Newmark's low 23% leverage based on net debt to enterprise value1 , which would represent only 9% if net debt and enterprise value were reduced by the KBRA-estimated
Key Credit Considerations
The rating affirmation reflects the following key credit considerations:
(+) Credit Positives
The KBRA ratings reflect favorably on Newmark's scalable platform across diverse business segments; the relative post-pandemic resilience of its revenues from management services and servicing fees that during 2Q-3Q'20 declined by a relatively moderate 9% versus prior year levels; a largely variable expense structure (Newmark-reported 75% of 2019 expenses), as reflected in the 22% reduction in combined 2Q-3Q'20 operating expenses relative to a 28% decline in GAAP revenues; a post-pandemic commitment to maintaining liquidity as reflected in a 90% reduction in dividend payout and curtailment of share repurchases; $225MM of availability (following a
(-) Credit Negatives The primary credit risk for Newmark is concurrent downturns in commercial property transaction volume, leasing activity, and property values-as has materialized during the pandemic which has disproportionately impacted commercial real estate relative to other sectors, in particular hotel and retail properties to which Newmark has minimal exposure, and office properties that represent 14% of the company's transaction volumes and a majority of its leasing commissions. While values in most property sectors have proven resilient during the current recession, Newmark reported a 50% decline in 2Q'-3Q'20 capital markets revenues (investment sales and mortgage brokerage), which comprised 21% of year-to-date and 24% of 2019 revenues. Newmark reported a 45% decline in 2Q'-3Q'20 leasing and other commissions, which comprised 29% of year-to-date and 39% of 2019 revenues. While Newmark's post-pandemic decline in capital market fees is moderately more favorable than peers and trends in US transaction volumes reported by research firm RCA, the year-over-year decline in leasing commissions, while in line with the overall market, has been greater for Newmark than its peers. In contrast with capital market fees that increased 57% from 2Q to 3Q'20, Newmark reported a moderate sequential decline in leasing commissions, which KBRA attributes to office properties' proportionately greater contribution to leasing commissions than 1 Enterprise value based on Newmark's
2 KBRA-estimated
3 KBRA adjusted EBITDA excludes add-back of certain share-based compensation and includes
PRESS RELEASE
investment sale volumes. As commercial property transaction volumes recover from the pandemic, KBRA anticipates that Newmark's growth in capital markets volume will likely outperform peers owing to apartments' well above average 46% share of
Credit strengths are tempered by Newmark's lower 21.3% company reported TTM EBITDA margin, which is down from 25.5% in 2019. Newmark's Class A/B common share structure, whereby
owns 17% of Newmark equity but controls 57% of voting rights, is also considered a potential deterrent to institutional equity investment and a credit negative.
Potential credit risk associated with Newmark's commitment to share losses on loans sold to
Rating Sensitivities
Upgrade or Positive Outlook
Sustained EBITDA growth; net debt to KBRA-adjusted EBITDA maintained in the low 1.0x range; increased diversification of revenue across business segments; proportionately higher fees from more recessionresilient service- related business units; surrender of super-voting rights associated with Class-B shares; and/or continued appreciation in the value of non-monetized Nasdaq share awards.
Downgrade or Negative Outlook Net debt to KBRA-adjusted TTM EBITDA above 2.0x; continuation of year-over-year transaction-based revenue declines experienced during 2Q'-3Q'20; continued deterioration in operating margins; indications that commercial real estate transaction and leasing volumes will not recover from 2Q'3Q'20 trough levels as currently anticipated by KBRA; expectation that losses associated with GSE risk-sharing will exceed current reserve levels; a shift away from equity-based compensation; and/or monetization of future Nasdaq share awards and distribution of proceeds to equity investors.
ESG Considerations KBRA's ratings process incorporates all meaningful credit factors, including those that relate to Environmental, Social, and Governance (ESG) factors. ESG factors were not a driver of the subject Rating actions.
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Analytical Contacts
+1 (646) 731-2413
mberry@kbra.com
+1 (646) 731-1230
rbozzelli@kbra.com
PRESS RELEASE
+1 (646) 731-2355
ethompson@kbra.com
Business Development Contact:
+1 (646) 731-3372
nkumar@kbra.com
Disclosures
A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the
Information on the meaning of each rating category can be located here.
Further disclosures relating to this rating action are available in the
About KBRA
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