Ladies and gentlemen, good day, and welcome to the Newmark Group 3Q 2024 Financial Results Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jason McGruder, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good morning. Newmark issued its third quarter 2024 financial results press release this morning. Unless otherwise stated, the results provided on today's call compare only the three months ended September 30, 2024, with the year-earlier period. Except as otherwise stated, we will be referring to results only on a non-GAAP basis, including the terms adjusted earnings and adjusted EBITDA. Unless otherwise stated, any figures today with respect to cash flow from operations refer to net cash provided by operating activities, excluding GSE/FHA loan origination and sales. We may also use the term cash generated by the business, which is the same operating cash flow metric before the impact of cash used for employee loans. Please refer to today's press release, supplemental tables and the quarterly results presentation on our website for complete and updated definitions of any non-GAAP terms, reconciliations of these items to the corresponding GAAP results and how, when and why management use them. For additional information on our cash flow measures as well as relevant industry and economic statistics, the outlook discussed today assumes no material acquisitions or meaningful changes in our stock price. Our expectations are subject to change based on various macroeconomic, social, political and other factors. None of our targets or goals beyond 2024 should be considered formal guidance. I also remind you that information on this call contains forward-looking statements, including, without limitation, statements concerning our economic outlook and business. Such statements are subject to risks and uncertainties, which could cause actual results to differ from expectations. Except as required by law, we undertake no obligation to update any forward-looking statements. For a complete discussion of the risks and other factors that may impact these forward-looking statements, see our SEC filings, including, but not limited to, the risk factors and disclosures regarding forward-looking information in our most recent SEC filings, which are incorporated by reference. I'm now happy to turn the call over to our host, CEO, Barry Gosin.

Good morning, and thank you for joining us. Newmark's growth accelerated as every major business line improved during the quarter. We increased capital markets revenues by over 18%, the fourth consecutive quarter of double-digit improvement. This performance was fueled by a 77% increase in our mortgage brokerage volumes. With approximately $2 trillion of US commercial and multifamily mortgages maturing in the near-term, our professionals are incredibly active, finding new sources of debt and equity capital for our clients, including private credit, CMBS and insurance companies, while still matching borrowers with the GSEs and banks. Newmark's pipeline of capital markets transactions across debt, equity placements and investment sales is incredibly robust, and we expect this to continue through 2025. In addition, we increased our Fannie Mae origination volumes by 58% over the trailing 12 months compared with a year earlier, which will fuel the future growth of our high-margin primary servicing business. We generated an 11% revenue increase in management services and servicing. The broad-based organic growth marked the fifth consecutive quarter of strong improvement for these businesses. We expect continued growth of these service lines and target doubling them to over $2 billion within five years. We increased leasing fees by 6%, led by growth across retail and industrial, which are businesses we have strategically grown over the past several years. We remain bullish on the fundamentals of retail leasing, where availability in the US remains at historic lows and asking rents continue to climb. We also expect industrial leasing to continue benefiting from the tailwinds provided by growing demand for data centers as well as reshoring and nearshoring of North American manufacturing. Office leasing activity continues to increase as more companies commit to space and mandate returning to the workplace. We anticipate the recapitalization of properties at lower values to further drive leasing activity. Newmark continues to be the platform of choice for the industry's most talented professionals as we continue to attract industry leaders across service lines and geographies. Following our recent expansions in France and the UK, we are now building Newmark in Germany. With improved macroeconomic and monetary environment, sustained growth in demand for our services and our continued market share gains, we are more excited than ever about Newmark's future. With that, I'm happy to turn the call over to Mike Rispoli.

Thank you, Barry, and good morning. Newmark's third quarter results once again demonstrated our strong operating leverage. Our total revenues were $685.9 million, up 11.3%, which delivered adjusted EPS and EBITDA growth of 22.2% and 17%, respectively. Revenues for management services, servicing and other improved by 11.4%. We generated organic growth across all of our businesses, including strong improvement from GCS, servicing and property management as well as higher valuation and advisory fees. Leasing revenues increased by 5.6%, led by growth in retail and industrial. We improved capital markets revenues by 18.5%. Newmark's debt business once again gained considerable market share as we expanded fees from commercial mortgage origination by 45.2%. This outperformance was broad-based across property types, reflecting volume growth of 76.8% from mortgage brokerage compared with approximately 25% for the US market. We also grew volumes from our GSE/FHA origination platform by 27.5% compared with a 5% industry decline. Our investment sales fees rose by 4.8%, which included higher retail and office volumes. Turning to expenses, excluding pass-through items, total expenses were up 7%. Compensation expenses were up 6.3%, reflecting higher variable commissions. Non-compensation expenses were up 9.3% tied to higher management and servicing fees. Our tax rate for adjusted earnings was 13.4% compared with 15.7% last year. Moving to earnings, our adjusted EPS was $0.33, up 22.2%. Adjusted EBITDA was $112.6 million, up 17%. With respect to our share count, our fully diluted weighted average share count was 255 million, down slightly compared with the second quarter of 2024. Newmark's higher stock price accelerated the recognition of 3.7 million RSUs, which was not related to the issuance of new shares. Accordingly, our fully diluted weighted average share count was up 3.1%. Excluding this RSU impact, our share count was only up 1.7%. During the quarter, we repurchased 7.6 million shares and units for $100.8 million at an average price of $13.30, and year-to-date, $193.5 million at an average price of $11.69. Yesterday, our Board authorized increasing our share buyback program to $400 million. Turning to the balance sheet, we ended the quarter with $178.6 million of cash and cash equivalents and $770.4 million in corporate debt, resulting in 1.4 times net leverage, amongst the lowest in the industry. The change in cash from year-end reflects $266.2 million of cash generated from the business and $223.1 million of incremental corporate debt. This was offset by $209.8 million used primarily for investments in revenue-generating headcount, the return of $241.4 million of capital to shareholders and normal movements in working capital. Turning to guidance, our updated outlook for the full year 2024, compared with 2023, is as follows: we expect total revenues of between $2.620 billion and $2.680 billion, an increase of 6% to 9%. We anticipate adjusted EPS of between $1.11 and $1.17, up 6% to 11%. We expect our adjusted earnings tax rate to be between 13% and 15%, and we anticipate adjusted EBITDA in the range of $410 million to $430 million, an increase of 3% to 8%. We've included more detail on our guidance in today's press release and investor presentation. And with that, I would like to open the call for questions.

Thank you. Our first question comes from Connor Mitchell with Piper Sandler.

Hey, good morning. Thanks for taking my question. You guys touched on it a little bit in your opening remarks. The leasing was up 5.6%, just lower growth than some of the other revenue line items, and the leasing was driven by retail and industrial. It just seems that recently we've seen some pretty healthy leasing numbers coming from some recent office reported earnings. So the first question I was just wondering is how should we think about Newmark's office leasing commissions contribution in the quarter? And then how should we think about the potential upside for leasing commission contribution for office along with, I guess, the strong performance of retail and industrial too?

Sure. Good morning, Connor. Our office leasing pipeline continues to be strong. We're winning a lot of big mandates. And I think year-over-year, we'll have good leasing performance. If you remember, last year, we outperformed the market in leasing and we're up more than the average market, particularly in the fourth quarter. But we see office mandates coming back. We see a strong leasing pipeline, and we think that's going to continue into 2025.

Okay. And then just a follow-up on that. For retail and industrial, it seems like it was a pretty good quarter for leasing in those property types. Do you also see some continued tailwinds for them as well? And maybe on the data center side, too?

Yeah. Hey, Connor, this is Luis Alvarado. Look, we're seeing, on the industrial and the retail, significant activity. Data center is definitely a big active sector of the market as well as cold storage. We expect that activity to continue. The demand for that doesn't seem to be slowing down at all. And I think that we've got some talented people working in those sectors, and I think we'll benefit from that business.

Okay. I appreciate the color there. And then maybe just switching gears. The updated guidance looks like a pretty healthy increase in revenue and adjusted EPS. I think, if you guys could just help me reconcile the change to adjusted EBITDA. It looks like the year-over-year change came down slightly versus the revenue and EPS was increased for the year-over-year change from prior outlook. Just if there's anything you guys could help me reconcile there? I know, there's the legal settlement that is treated differently between EPS and EBITDA. But is there something else that might be changing the outlook for one versus the other in divergence there?

Sure, Connor. I'll take that. You're correct. Our increased revenue and adjusted EPS guidance is a result of our strong performance year-to-date, and the growing pipeline of capital markets activity and leasing mandates. The adjusted EBITDA is really just a function of how we treat legal settlements and related costs for adjusted EPS versus how we treat it for adjusted EBITDA. And if you remember, in the fourth quarter last year, we had a very large favorable litigation settlement for about $12.8 million.

Okay. And then, if I could just squeeze one more in. You guys continue to grow overseas. I think the revenue was about less than 1% in 2017 versus now, it's 13%. Just curious what lessons have you guys learned so far about maybe continued growth? Are you kind of looking at deepening investments in the current countries and markets regions that you're currently operating in? Or is the focus a little bit more on continuing to expand to other regions and markets that Newmark hasn't really set up shop yet?

Well, we bought three companies in the UK. We now have a significant presence in the UK. We opened five months ago in France, and we have 45 people in our Paris office and growing. We launched Germany two or three weeks ago, and we seem to be an incredible—there is an enormous amount of interest of people wanting to join us. Our goal is to be throughout Europe, and we're doing it in an intentional, thoughtful, careful way. The same plan that we had in the United States: hire the best people in the verticals in every geography, and we're going to continue along that plan. It seems to be working. We've learned that lesson: you hire great people, and you will have great results.

Okay. Thanks everyone.

And our next question comes from Jade Rahmani with KBW.

Thank you very much. In the quarter, investment sales came in slightly below my estimate, while commercial mortgage came in above. And I think that reflects the dynamic in the marketplace around where we are in the cycle and investors more interested in debt or perhaps that piece of the market coming back first. Can you give any color on how you're viewing capital markets and what you anticipate going forward?

We see a very active pipeline of sales. Our debt market, we've just been fortunate enough to hire a significant amount of really great people. We are winning market share in more complex larger transactions. So we have a significant piece of the market in that area, and that is serving us really well. On the sales side, you've had four years of headwinds. Once the pricing and discovery of pricing and the appropriate amount of capitulation on values occur, there will be a lot of trades, and we're seeing that now. We think that started over a couple of months ago, but the move in short-term interest rates always puts a little bit of a damper on activity. So it's hard to predict exactly when, but we see a lot of activity.

Thanks. Two follow-ups. Firstly, when might you expect growth in investment sales or new acquisitions to eclipse growth in the commercial mortgage business, or maybe you don't. And then secondly, aside from cold storage and data centers, are you seeing an increase in demand for traditional asset classes, multifamily and even office?

We're seeing activity in every category. Multifamily: there is going to be a shortage of multifamily housing; it depends on the specific market and that category is interest rate driven. Industrial continues to benefit from near-shoring; data centers continue to be strong; retail has activity as well. The only complicated segment has been office, which certainly on the A-quality, top-of-the-line properties are doing fine. Vacancy rate is almost at equilibrium in most of the gateway cities, and a bunch of these cities are starting to do conversions. In New York alone, we have probably 19 million square feet in the queue of office buildings that are being converted to residential, so that will remove inventory and bring us closer to the right kind of vacancy rate, and nothing is going to be put on the market for the next three to four years. I think the same thing is happening all over the country. So we're seeing every one of the categories start to create interest. People are investing in the United States. There is still a lot of liquidity and a lot of demand to acquire.

Within the commercial mortgage debt business on the multifamily side, you had really strong growth with the GSE, Fannie Mae and Freddie Mac. Are you seeing them pick up their volumes and get more active? Or were there any specific transactions, particular to Newmark that drove the growth?

We continue to have a fairly robust multifamily investment sales business. We continue to hire people and we will continue over the next year. We've won more market share. We capture a lot of the sales that we do for debt. Our capture rate has increased, so we're a beneficiary of that kind of business.

And Jade, I would add, we're seeing a big pickup in demand for the GSE business across the whole market as well as at Newmark. I think the biggest challenge is going to be how much can get closed this year and how much is going to get pushed out to next year.

Okay. But you all recognize revenue at rate lock rather than close. So that potentially could be a positive fourth quarter driver?

Yes, it could be. But again, getting the rate lock, there's just huge demand in the market, and how much can Fannie and Freddie push through the pipeline before year-end remains to be seen.

Okay. Well, certainly, it does sound like that business has picked up. So, thanks very much.

Thank you.

And our next question comes from Patrick O'Shaughnessy with Raymond James.

Hey, good morning. I want to follow-up on the question with your updated adjusted EBITDA guidance. So, I get the peculiarities of the year-over-year math with the settlement in the year-ago period. But on an absolute dollar basis, your adjusted EBITDA guidance fell, I think, $4 million to $8 million versus your prior guidance. It was $410 to $434, now it's $410 to $430. And so that implies that your margins are going to be around 15% to 16% versus the prior of 16.4%. So, what are you seeing in terms of this incremental revenue leading to a lower margin profile?

Sure. The first thing I'll point out is the 16%-plus last year included the $12.8 million favorable legal settlement. If you take that out, you're probably in the 15.5% range, maybe a little higher. So year-over-year, we would expect margins to improve. And then this year, year-to-date, and you could see it in the GAAP to non-GAAP reconciliations for adjusted EPS, there were favorable legal settlements last year for a few million dollars and unfavorable for a few million dollars this year, nothing too material, but just moving the guidance on adjusted EBITDA for the full year.

Okay. Thank you. And then I guess, maybe bigger picture, we're looking ahead to the fourth quarter and next year. How are you thinking about incremental margins for the business?

A lot relies on capital markets. We have the athletes on the field in all the geographies and all the verticals. As we said in the past, for every dollar that we add incrementally under the same footprint, it's $0.40 to $0.45 to the bottom line. So we expect $0.40 to $0.45 to flow to the bottom line. We expect that to happen when the market opens up. We've also stated that these are going to be sequentially improving over the next couple of years until the moment in time when the market stabilizes and normalizes and we're back to an ecosystem of selling and buying property in a generally robust market, which we think is happening between 2025 and 2026. That's why we gave you the guidance for 2026, because we think it's going to come back and we think it's going to improve our margin and get us back to an earnings position where we had projected.

Great. Thanks, Barry. And then last one for me. How do you characterize debt financing availability right now? And has there been a shift in sources of lending?

There's a whole new category of lender: the debt funds are taking some of the activity from the banks, who are concerned about the size of their CRE books. The debt funds are proliferating, and many private equity firms are building captive insurance companies, which gives them the opportunity to have long-term capital to invest in real estate. So that's replacing some of the older debt players. We're seeing a lot of liquidity in the market. The CMBS market is out there, and fortunately for us, it came back about a year ago. We're not having a problem finding money in those markets for good quality real estate.

Great. Thank you.

And ladies and gentlemen, it appears there are no further questions at this time. I'd like to turn the conference back over for any additional or closing remarks.

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