Good day, and welcome to the Newmark First Quarter 2023 Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Jason McGruder, Head of Investor Relations. Please go ahead, sir.

Thank you for your patience as we dealt with some technical difficulties on the vendor line. But also thank you operator and good morning. Newmark issued its first quarter 2023 financial results press release and a presentation summarizing these results this morning. Unless otherwise stated, the results provided on today's call compare only to the three months ending March 31, 2023 in the year-earlier period. Unless otherwise stated, we will be reporting our results only on a non-GAAP basis, and these terms include adjusted earnings and adjusted EBITDA. Please refer to the section in today's press release for complete and/or updated definitions of any non-GAAP terms, reconciliations of these terms to the corresponding GAAP results, and how, when and why management uses them. You can find more information with respect to our GAAP and non-GAAP results on today's website, in today's press release and supplemental Excel tables, and the quarterly results presentation. Unless otherwise stated, any figures discussed today with respect to cash flow from operations refer to net cash provided by operating activities, excluding loan origination and sale as well as the impact of the 2021 equity gain. Cash from the business is the same cash flow metric excluding loan originations. The outlook on today's call assumes no additional share repurchases, material acquisitions, or meaningful changes in the company's stock price. Our expectations are subject to change based on various economic, social, political, and other factors. While our long-term financial and operating targets assume no acquisitions, they are also subject to change for the same reasons. None of our long-term targets should be considered formal guidance. Lastly, we remind you that information on this call about our business that is not historical fact is a forward-looking statement within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve risks and uncertainties. Except as required by law, Newmark undertakes no obligation to update any forward-looking statements. For a complete discussion of additional risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see Newmark's Securities and Exchange Commission filings, including but not limited to the risk factors in our most recent Form 10-K, Form 10-Q, and Form 8-K filings which are incorporated by reference. I'm now happy to hand the call over to our host, Chief Executive Officer of Newmark, Barry Gosin.

Good morning and thank you for joining us. With me today are Newmark's Chief Financial Officer, Mike Rispoli; our Chief Strategy Officer, Jeff Day; and our Chief Revenue Officer, Lou Alvarado. Newmark's strategy is to assemble the industry's most talented professionals and arm them with superior data and analytics for our clients. Since the beginning of the year, we added industry-leading capital markets producers in New York, Dallas, Phoenix, and San Diego focused on industrial, multifamily, office, and life sciences. We continued our global expansion by acquiring UK-based full-service real estate advisory firm Gerald Eve, bringing to Newmark a top-three UK industrial capital markets platform. Now, we generate nearly $200 million in annual revenues in the UK, and plan to expand further across Europe. Our exclusive FDIC mandate to sell Signature Bank's $60 billion loan portfolio exemplifies our strength in managing large and complex transactions. This portfolio represents the largest real estate loan sale in US history and demonstrates the capacity and depth of Newmark. Loan advisory services are becoming increasingly significant for us. Trust almost $2.6 trillion in US commercial and multifamily loans mature over the next five years with 55% owned by banks. During the quarter, we acquired the remainder of Spring11, increasing the size of our overall servicing portfolio from $71 billion to $169 billion. Our loan portfolio solutions practice, which provides risk assessment and stress testing services for banks, is seeing a significant increase in activity. These businesses, together with Capital Markets and GSE/FHA origination, provide Newmark with tremendous insight into commercial and multifamily lending. This combination helps us to better advise our clients across property types and service lines. Newmark's long-term prospects remain strong because of the $400 billion of uninvested capital in closed-end funds, which will drive capital markets; the $2.6 trillion of commercial and multifamily mortgages maturing over the next five years, which will fuel our debt, loan servicing, loan sales, and loan advisory businesses; the continuing consolidation of our industry; and the ongoing trend of outsourcing of real estate services which will drive business towards full-service, well-capitalized companies like Newmark. Given our strong financial position and significant global growth prospects, we expect to remain the preferred destination for the industry's top professionals. With interest rates stabilizing, capital markets activity should increase in the fourth quarter and continue growing through 2024. As a result of our strong client relationships and deep pool of talent, we are uniquely positioned to benefit as industry volumes rebound, similar to our success in 2021. With that, I'm happy to turn the call over to Mike.

Thank you, Barry, and good morning. During the first quarter, Newmark made significant investments for future growth. Once our new producers ramp up, we expect these investments to add approximately $300 million of annualized revenues. For full year 2023, we anticipate generating $300 million to $350 million of cash from the business and using a portion to pay down our revolver, which we used to fund these first quarter investments. Our first quarter results were down compared to our record performance in the first quarter of 2022, but in line with our expectations. Total revenues were $520.8 million, down 23.2%, mainly due to lower industry-wide capital markets activity with US investment sales down 56% according to RCA and origination activity down by as much as 53% according to Newmark Research. Leasing revenues declined 2.8%, but grew 31.1% versus the first quarter of 2021, with retail and industrial revenues rising year-on-year to above pre-pandemic levels. We achieved these results despite US leasing volumes being down more than 10%. We produced double-digit percentage organic growth in fees from Global Corporate Services, as well as continued improvement in our high-margin servicing business. Total revenues for management services, servicing fees and other declined by 8.9% due to lower pass-through revenues and valuation fees. Total expenses were $461.9 million, or 13% lower, largely due to the variable nature of our cost structure. We remain ahead of schedule with respect to our $50 million annualized fixed cost savings target and expect to realize at least $35 million during 2023. Turning to earnings, adjusted EBITDA was $62.9 million versus $126.5 million. Our EPS was $0.15 compared with $0.36. These results reflect the impact of the dramatic rise in interest rates on a higher-margin capital markets platform. Our fully diluted weighted average share count declined by 5.1% to 239.9 million shares. Moving to the balance sheet, we ended the quarter with $210.7 million of cash and cash equivalents and $773.4 million of total corporate debt. Changes from year-end 2022 were primarily related to cash generated by the business, offset by normal first-quarter movements in working capital and $225 million of borrowings under our revolving credit facility, which were used to fund our first-quarter investments. We remain in a strong financial position with net leverage of 1.3 times. Moving to our outlook, we expect to be near the low end of our full year guidance range, which was first issued on February 16, 2023. Our full year outlook assumes that the decline in industry-wide transactions will begin to rebound in the fourth quarter. We expect our second quarter results to be up sequentially, but down year-on-year by similar percentages to the first quarter of 2023. For the balance of the year, we expect continued sequential improvement. And with that, I would like to open the call for questions. Operator?

Thank you. Our first question is going to come from Chandni Luthra from Goldman Sachs. Please go ahead.

Hi. Good morning. Thank you for taking my question. I'd like to start with the Signature Bank loan sale. Could you talk about the composition of the portfolio in terms of the asset class, what's the geography, what is the age? Are there any restrictions you have to keep in mind as you sell them? And then, Barry, give us a sense of the economics, perhaps talk about the commission rate. How do you think about the timing of this sale? When do you expect to complete the $60 billion loan sale and what's the impact in 2023?

I apologize, we can't comment on the loan portfolio. Whatever is public is on the FDIC website and we're not prepared to comment beyond that.

Okay. Noted.

However, you should note that we are doing other loan sales and we are seeing much more activity in that space in advisory and debt. So it serves us very well.

Got it. So let me pivot to a little bit more of a macro question then. How would you say the backdrop for capital markets has changed after the events in the banking industry almost two months ago? Are you seeing anything different in the market right now? Are there any green shoots in the business currently that you're seeing? Just give us a sense of the broader landscape, please. Thank you.

What has been signaled is an opportunity for more certainty in interest rates. The stabilization of interest rates and a pause by the Fed in raising interest rates is a good thing. It's very hard to trade properties when you can't underwrite what the interest rates will be. So we see that it has shortened the period of uncertainty and will lead to a faster rebound in terms of opportunities to finance. There are green shoots. The GSEs—Freddie and Fannie—are actually financing in some cases. Life insurers are, in some cases, under-allocated in the sweet spot of $50 million to $150 million. And there's new formation of CMBS debt that seems to be coming up. So we're seeing some things. Ultimately, what the banking crisis has done is I think it sped up the capitulation in terms of the delta between buyer and seller on valuation. So once that's established people start to trade.

Got it. And this one is going to be quick for Mike. In your outlook, as we think about adjusted EBITDA, is there any incremental M&A embedded based on the recent deals that you just announced? And is there any impact of the Signature Bank loan portfolio in there?

So the outlook for the year includes our pipeline—everything we know that's in the pipeline—and includes Gerald Eve for the remainder of the year. It does not include any incremental M&A beyond that. So as I said, the second quarter, while sequentially better than the first quarter, will be down in a similar percentage versus the first quarter of last year. But the results should get sequentially better as we go through the year.

Thank you so much.

And our next question will come from Jade Rahmani from Keefe, Bruyette & Woods. Please go ahead.

Thank you very much. Hopefully, you can hear this. I just wanted to ask—excuse me.

Hi, Jade. We can hear you.

Great. I wanted to ask on the loan portfolio health side if you could talk to the magnitude of deal flow that you're seeing and maybe general comments around economics. I know that one of your prior competitors broke out the commission rates on that business and I believe they're quite attractive—higher than on the investment sales side and debt placement side. But clearly sporadic and I'm sure very large portfolios there would be caps in place on what the commission would look like and probably some kind of incentive for execution. But what's the volume you're seeing and the economic impact?

We generally don't comment on the specifics or guidance and we have confidentiality agreements on the things that we do. These are sensitive topics. So we are not going to comment on that. I apologize.

That's actually a good answer. I really appreciate that. You mentioned the banking crisis speeding up capitulation on pricing. Historically, the banks have cleaned up an outsized share in commercial real estate. When you look at the ratios prior to the GFC, it's clear that the CMBS market has declined dramatically post the regulations that Dodd-Frank put in place on risk retention, as well as curtailment of liquidity, and the banks, as well as the debt funds, comprise the difference in terms of market share gain. When you look at the banks today, they probably will shrink their share in commercial real estate. So how do you think this unfolds? Could it potentially extend the magnitude and length of the downdraft in transaction volumes, or are you seeing any green shoots that would lead you to believe in the fourth quarter there would be a pickup?

Jade, this is Lou. We're definitely seeing more activity. With time, I think most of our clients have been really trying to find out where pricing will shake out—where things will settle. I think now that we've gotten some guidance from the Fed on rates, and I think as we get stability, we definitely believe we're going to see that activity as we get down in the year. It's very similar to what you saw in 2021, where once we got over the initial impact of the pandemic, activity picked up. I think you're going to see a very similar response as we get later into the year.

Thank you. And included in the slide—sorry.

The GSEs will, in the back-end of this year, accelerate and capture some of it up closer to the caps; we think we'll see more activity. They will be a lender of choice. As I said, life insurers are in some respects under-allocated in the sweet spot of $50 million to $150 million out there. We're starting to see some SBA loans and CMBS loans where there's some activity and discussions. You'll see it come from the private markets, and then ultimately the banks will step back in.

Thank you.

Yes, Jade. I think what you've seen—and what we've spoken about—is a continuing flight to quality and a flight to Class A product. We happen to represent a fair amount of Class A product across the markets. We also have some pretty sizable tenant deals where people made commitments to return and did move forward with plans to return to the office. Over time we still believe that there's going to be an increase in people returning to the office. It may not be five days a week; it could be three days a week, but whether it's three days or five days you still need the space. The space will be different, but that's what we're seeing. We were fortunate that we were in the right sectors—industrial was up, retail was up—so we weren't just whole-office; the office sector did very well as well because of the product mix that we have.

Thanks very much.

And now is Alexander Goldfarb from Piper Sandler. Please go ahead.

Hey. Good morning. I appreciate all your efforts with this morning's technical difficulties. Barry, if we look at the loans that are coming due—when we went back to the GFC, we all remember the monster peak-of-credit CMBS that everyone was worried about. That stuff basically worked its way out. There was blend-and-extend. Apart from certain condo markets, there wasn't really any distress that was sold into the market. So looking at the current wave, it doesn't seem so much a credit issue—it's one is rightsizing of loans and two is no one wants an office loan. My question is, do you really see that the $1.4 trillion this year and next (part of the $2.7 trillion you talked about) is really going to be actionable stuff, or in your view, might a lot of this be blend-and-extend and be resolved between the servicers and borrowers?

Blend-and-extend is actionable—where the maturities drive opportunity, whether it's recaps, raising equity, looking for new partners, or refinancing. Those have to be dealt with. We're involved in every piece of it in every way. That's going to provide and drive opportunities for us on the advisory side, on the equity raise side, on the loan replacement side—those all.

But if it's blend-and-extend, that doesn't seem to generate the same amount of fees as if it goes through an auction and a restructuring and sale to new owners. That would be much more lucrative fee-wise versus the lenders and borrowers just getting together and re-cutting the deal. Wouldn't blended extend be a smaller fee stream than an auction and wholesale restructuring and sale to new owners?

This is going to be all of the above. If there's a blend-and-extend, it's often short-term and may lead to a recap and likely a sale. There's a lot of activity that comes along with loan sales, resales, recaps and resets. In a market of disruption there are opportunities that rise up that we don't anticipate and that's happening. It is a big market. There are term dates on maturities and there is still an enormous amount of capital sitting on the sidelines—$400 billion of closed-end funds available. There's lots of dry powder around the world. We're seeing foreign investors becoming more interested in investing in the United States for a host of different reasons. They'll see an opportunity and they're jumping in. We've done some recent equity raises from first-time foreign investors in projects where the domestic buyers were out of the market. We have found equity in other parts of the world that was not available even 12 months ago.

So then that leads to my second question. We all talk about negative leverage in certain sectors. In industrial it's easy to pencil because growth is there; office I imagine is much tougher. In order for the transaction market to reopen—let's talk about office—do we need to see positive leverage return, or can the office transaction market recover if it still has negative leverage on trades?

I think you have to see some positive leverage return in order to really move the market. It will also depend on the quality of the asset. The Class A, core product, well-amenitized assets will obviously trade at a much smaller discount. But the Class B and C is where we're going to struggle. Those are the areas where I think demand will be created by the fact that some of the market will shrink as obsolete products are no longer viewed as competitive. That's where I think you'll see the shift.

And we have Patrick O'Shaughnessy from Raymond James. Please go ahead.

Hi, good morning. Can you speak to the expected revenue contribution this year from Gerald Eve? And absent the acquisition, would you have had to lower your full year revenue outlook?

Good morning. When we announced the acquisition we said Gerald Eve did about £92 million of revenue in the prior fiscal year. So we'll get nine months of that. A lot of their revenue is recurring management services-type business—more than a majority of it. So we think it's pretty steady revenue and we'll see that on a pro-rata basis in our results this year. As we said, we think the market continues to improve. Our results will sequentially get better as we move through the year, and we currently feel comfortable around the low end of our guidance range.

Okay. I appreciate that. And then, Mike, I think for you: You guys have your senior notes coming due this November. How are you thinking about refinancing that? Do you have any preliminary expectations on what the refinancing rate might look like?

It will be higher than what we currently pay—I'm pretty sure about that. But look, we have a great clean balance sheet, low leverage and strong ratings, so we think we'll be able to execute on the refinance. We'll certainly go to market well in advance of the maturity, which is in November, and we don't really see much issue other than that we'll pay a bit more.

Okay. And then maybe one last one for me. Can you speak to your aspirations with the Spring11 business? Why was now the right time to buy the remainder of it?

The Spring11 business crosses a broad spectrum of support services for our clients, particularly servicing, asset management, and special servicing businesses. We felt demand in those areas was going to increase. We saw an entry point that was important for us, and actually the velocity has pleasantly surprised us to date. We're expecting, because of some of these bank failures, the large portfolio sales, and some of the resets in the marketplace, to grow this business rapidly.

Great. Thank you.

And our next question will come from Jade Rahmani from Keefe Bruyette & Woods. Please go ahead.

Thank you very much. I wanted to ask maybe for Jeff Day: multifamily credit—what are your expectations there? Do you think there will be a decent amount of loans going into performance issues given floating rate loans as well as interest rate caps expiring this year?

So let's level set where we are today versus some of our previous downturns. I've had the privilege to build our credit book for the last 23 years along with my team. We went through 9/11 and the GFC. Where we are today in multifamily is nothing compared to those prior periods in terms of distress. Top-line revenues are still growing, although a little bit slower. Expenses are increasing a little more rapidly, particularly insurance. But overall, we see very little distress. We, as Barry said, expect the GSEs to, if not approach, certainly hit the cap this year. Our book is pre-screened. Our performance has always been significantly better than the marketplace and significantly better than our competitors. So I don't expect that to be an issue.

And in the office sector, it seems the only lender right now is the current lender. That opens the door clearly for modifications and extensions as the most likely route to cushion the downturn. They'll have to be preferred equity brought in and probably loans being carved into A notes and B notes. What do you expect the office cycle to look like in terms of how the debt and capitalization plays out? What's your team seeing in terms of the office transactions they're involved with? Clearly they've been active.

By hiring the best talent in every market and category—from multifamily to office to industrial—we're the go-to firm for complex, complicated recaps, which includes talking to the lenders, talking to the owners, raising equity, restructuring notes, and recapitalizing. We're seeing an enormous amount of activity with owners who may have a solid book but stress in other parts of their businesses selling assets. They may have good assets that are salable with a good weighted-average lease term, and they're raising capital on those assets to support other assets that need it. We're seeing activity come from many different places and in many different ways, which works well for what we've built.

Thank you.

And I have no further questions in the queue. I will turn the call back over to Barry Gosin for the closing remarks.

Thank you for joining us today. I’m still extremely excited about the company's future and look forward to updating you on our next quarterly call. Thank you.

And this concludes today's call. Thank you for your participation. You may now disconnect.