Good morning, and welcome to the Newmark Group Second Quarter 2020 financial results conference call [Operator instruction] Please note this event is being recorded. I would now like to turn the conference over to Mr. Jason Harbes, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. We issued our second quarter 2020 financial results press release and a presentation summarizing these results this morning. I stated the results provided on today's call compare only the second quarter of 2020 with the year-earlier period. Any figures with respect to cash flow from operations discussed on today's call refer to net cash provided by operating activities, excluding activity from loan originations and sales. We will be referring to our results on this call only on an adjusted earnings basis unless otherwise stated. We may also refer to adjusted EBITDA and cash flow from operations before lending activities. Please see today's press release for results under generally accepted accounting principles or GAAP. Please see the sections in the back of today's press release for the complete definitions of any such non-GAAP terms, reconciliations of these items to the corresponding GAAP results and how when and why management uses them. Additional information with respect to our GAAP and non-GAAP results mentioned on today's call is available on our website and in our investor presentation. Any outlook discussed on today's call assumes no material acquisitions, share repurchases, or meaningful changes in the company's stock price. Unless otherwise stated the estimated value of the NASDAQ earn-out is based on the closing price on August 5, 2020. I also remind you that information on this call regarding our business that are not historical facts are forward-looking statements 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. These include statements about the effects of the Covid 19 pandemic on the company's business results, financial position, liquidity and outlook, which may constitute forward-looking statements and are subject to the risks, but the actual impact may differ perhaps materially from what is currently expected. Except as required by law, Newmark undertakes no obligation to unspecified any forward-looking statements. For a 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 set forth in our most recent Form 10-K, Form 10-Q or Form 8-K filings. I'm now happy to turn the call over to our host, Barry Gosin. CEO of Newmark Group Inc.

Thank you, Jason. Good morning and thank you for joining us for Newmark's second quarter 2020 Conference Call Joining me virtually on the call today are Newmark's Chief Financial Officer, Mike Rispoli, our Chief Strategy Officer, Jeff Day, and our Chief Revenue Officer Lou Alvarado. The second quarter was challenging for the company and the industry. We moved rapidly to protect the health and well-being of our employees. While our offices slowly begin to reopen, we continue to support remote working. Our professionals remain focused on the needs of our clients, providing strategic advice consulting service, and market leading analytics to help them navigate the current environment. I'd like to take a moment to applaud our employees for their tireless work, dedication, and ingenuity. I would also like to thank our clients for the trust they've placed in Newmark as a strategic real estate advisor. Despite significantly lower industry transaction volumes, we generated $47 million of cash flow operations. We finished the quarter with over $300 million in cash and cash equivalents, nearly $450 million in mortgage servicing rights, and approximately $680 million of expected proceeds from NASDAQ that are not yet reflected on our balance sheet. These significant assets, taken together with numerous operating earnings potential, represent a very attractive investment. As we've referenced in our earnings release, we attribute our results to three competitive advantages: our strength in management services, our strong growth in GSE originations, and our outperformance in investment sales. We continue to improve our market share in US investment sales in the second quarter, according to RCA data, our industry ranking improved to number three in the first half of 2020, from number five in the first half of 2019. We believe that the low interest rate environment, the significant available investment capital for real…

Thank you, Barry, and good morning everybody. In the second quarter, our revenues were down 30.4% due to the impact of the pandemic. Leasing went down 44.8% and our overall capital markets business including originations was down 29.8%. Gains for mortgage banking activities increased by 53.2% due to a higher volume and a more balanced mix of GSE origination. Our multifamily mortgage originations were up 23% as compared to 14% for the industry. Management services, servicing fees and others declined by 11.6% due to lower non-fee past revenues and less interest income on escrow balances and yield maintenance fees in our servicing business. But were otherwise unaffected by the pandemic. We expect management services and servicing fee revenues to be more resilient during the downturn. Moving on to expenses. Total expenses increased by 25.4%, reflecting lower commission-based revenues and a $40.8 million reduction in support and operations cost. This is part of our effort to reduce approximately $100 million in support, and operations cost in 2020. As demonstrated in the earnings presentation, Newmark has a highly variable compensation structure. In the quarter, our commission-based revenues declined by 43% and our commission based compensation fell by 43%. The variable nature of our expenses, combined with the cost reductions, contributed to our profitability despite the challenging environment. Turning to our earnings. Adjusted earnings per share were $0.10 down 66.7%, adjusted EBITDA, $45.6 million was down 59%. We are not providing specific revenue or earnings guidance for 2020, due to the ongoing uncertainty related to COVID-19 and its impact on commercial real estate services. However, we expect U.S. industry volumes in the third quarter will be similar to the second quarter. Our support and operations cost will be approximately $40 million lower in the third quarter as compared to the year-ago period and…

Thank you. We will now begin the question and answer session [Operator Instructions]. Your first question comes from Alexander Goldfarb from Piper Sandler. Please go ahead.

So just a few quick questions. First, Mike, just so we're on the same page, you said third quarter is expected to be similar to second quarter on the transaction side, expense side, and obviously that's excluding the NASDAQ. So should we think about the adjusted earnings being similar to the second quarter, is that a fair assumption?

Yes, I think that's generally fair, Alex. Plus the NASDAQ income that we discussed, I would mention that while the savings year-over-year are similar. The expenses in Q3 of 2019 were up, maybe, despite the $7 million sequentially from Q2 of 2019. But otherwise, I think you have it pretty fair.

But just on a linked quarter basis, third quarter 2020, the second quarter 2020, apart from NASDAQ should be pretty similar?

I think that's fair.

The second question, you mentioned that comp was down 43%. Obviously, I think everyone on the call could you feel for those people. But let me ask your question. One of the issues that you guys have had is the dilution from increased share count, so if second quarter was down 40%, third quarter sounds like it's going to be similar, does that mean that we should be modeling and thinking about fewer shares if this year interconnect, is that a fair assumption or how does this impact the share issuance and the diluted share count?

Sure, I think the way to think about it is yes, it will be less shares being issued related to comp. As you see in our supplemental tables in the earnings presentation, our comp rate is about 50% of our commission above revenue, that is the cash component and typically we pay 60% on an overall basis. So you can think about compensation in equity is about 10%, commissionable revenue. That's what it's been historically, and so if that revenue is down the issuance of shares will be down. We continue to believe that a 2% long-term growth rate in our share count is what we're expecting to manage to, and if you look at where we are this year were actually down a little bit year-over-year in our share count because of some of the actions we took last year.

But Mike, I guess, it sounds like this year and that should be below the 2% if you're issuing less share this year?

I think that's fair.

And then the final question is, heading toward year-end, the tax free spin, and so you guys will be from a corporate perspective free to do a lot more. So can you just talk to us what you guys are thinking as far as future stock buybacks maybe on the P&L side, maybe because the accounting is always a source of questions, maybe simplifying, maybe just going to Strait. EPS are things that can simplify that, given that you'll be out of the tax-free period. You'll have a lot more flexibility in your corporate activities. So maybe you could just talk to that?

Maybe I'll start with the share buyback question. As you know, because we're still in the tax-free spinoff period, we can't have any sort of plan to buy back shares in a material way. But however that said, the stock, we think is very attractively value as an attachment right now more than very attractively. We have a lot of balance sheet capital. We have a lot of cash on the balance sheet as well as future value in NASDAQ shares. I think we've proven in the past, we can monetize that value and if we think there's an opportunity to do that, we certainly will. So we're always going to look at the best use of our capital for the return more shareholders. I think that's as part of our DNA. In terms of simplifying, we continue to try and make our financial statements clear. I think you see we've put out the supplemental table in Excel that are on our website, which breakdown our financials in a lot of excruciating detail. We also have put out the the table, that's in the earnings presentation and was in the Covid supplement for the first quarter, where we show you our commissionable revenues, our pass-through revenues, how our expenses flow, and how you can model the business very simply for us going forward. So we will continue to take steps to make things simpler and easier and of course we value your input as we go through that process.

Your next question comes from Jade Rahmani from KBW. Please go ahead.

This is Ryan on for Jade. Barry, as we look into the second half of the year, what are the key factors in your mind that will drive a pickup in transaction pipelines, and any color you can provide on how pipelines are performed through the second quarter and into July, and if you're seeing any noticable differences among markets, particularly those that have seen a pickup in COVID cases more recently.

People buy on to an in anticipation of the future. Capital is generally long term. So, there is over $200 billion in dry powder in the U.S. I think that's luck, that's actually light, there's more and more behind that. And certainly as we see or have a better view of the recovery in terms of the Covid, people will buy on anticipation of a vaccine, anticipation of therapy, in anticipation of just getting on with life. The pipeline is the pipeline. It's the same pipeline that we had pre-Covid. It's all those pent up activities are still there. We're seeing some markets start to clear up independent of Covid. In some places in the multi space there already what we're BOB's broker opinion Value are now becoming full-fledged memorandums as the debt market clears. In terms of the Freddie Fannie has been very, very active, obviously, that business is up. As the CMBS market is starting to clear up a little bit and soon as many of the the LifeCos figure out exactly what the risk is, they'll be more prolific about lending. They're all in giving our money business. So I think the combinations will be clearer and activity will pick up as people either except this, there is a vaccine or there is a recovery, but activity, we are feeling that activity is starting to move toward increasing.

Then on the multifamily side, thanks for the the stats on forbearance there. Curious how you're thinking about the risk to that outlook based on potential for a reduction in government stimulus and then also your general outlook for volumes in -- that’s been your GSE business in the second half of the year?

Ryan, this is Jeff. The production rates that we've seen in our portfolio has been very steady. The occupancy to stay there and the anecdotal evidence that we're getting from our clients is that because you have many units that have two income earners in that model because of roommates or couples. We're still bullish on the portfolio. We think the performance is going to continue. We do believe that there is going to be some form of stimulus going forward. It's just not prepared exactly what that looks like, but our opinion is that the business remains robust and we should expect to see a similar pipeline in the second half that we saw in the first half.

Then as you look across the broader business, Barry, do you think that those areas of the platform that have a greater potential for reacceleration near term and potential growth opportunities from this environment. For example, one that comes to mind would be your loan sales business, how of pipeline and shift up there and is that an area you see potential growth in from just the volume of distress?

Well, we have been very active in the note sales. Many of them have been selling on par, the people who need liquidity have been selling the good stuff. As and if the stress continues for an extended period of time depending on where, where the demand side of the business, office rents, and coming back to office shows. You will begin to see things that are sold below par and more note sales. We are in a good position, we have a note sales group and we're talking to people all the time and we have billions of dollars of note sales out in the market as we speak. That's certainly one I think the one interesting thing of this period, the opportunity for all of the many people that we recruited over the last few years, in the last three, four years who have come into the company out of the gate very busy in a robust market, this few months has given everybody an opportunity to get to know each other and what everybody does, and our clients to get to know how extensive our capital markets business and our other tech our tech leasing business and other aspects of our business, and they're getting to know us and they're getting to know each other. We think we come out of this as a much better company, really prime to take advantage of the acceleration of the market going forward.

I also want to add, if you look at following on our business plans, the opportunity for our corporate service and property management has been significant, as people come out of this, and everybody is looking to reduce costs and is looking for expertise, that has been an area of growth for us, and will continue to be an area of growth for us. And it is an area that -- frankly in the past we had been smaller than our competitors, but we believe we'll be right there with them as this pandemic grows and as we come out of this into the -- solving problems for our clients.

Thank you. The next question comes from Henry Coffey from Wedbush. Please go ahead.

So, let me sound stupid in front of a large audience. To be exact I know it's this call the exact date on when you're past the two year anniversary of the distribution is.

This is Mike. It's the end of November of this year.

And so, we'll call it, December 1. When I look at your balance sheet, the principal use of any assets or investments or capital, and tell me if I'm thinking about this the wrong way. It's really either mortgage servicing rights, which go up a little bit, but then there is an offsetting gain there and that could be financed in one fashion or another and then forgivable loans which is essentially a recruiting tool and so everything else seems to have it's kind of, and again, correct me if I'm wrong, everything else seems to have it's offsetting liability, loans held to sale, well that's easily funded. Is that the right way to be thinking about your capacity, your needs for capital versus your ability to buy back stock?

Yes, I think that the fair characterization of the balance sheet, Henry. But remember, we have now at today's or yesterday's value about $775 million of potential cash flow we could tap into related to our NASDAQ shares.

So it's $300 million in cash plus $700 million in NASDAQ stock?

I think that's fair.

Yes, it's a big number, it's what we're all getting to.

We're very comfortable with where we're at on the balance sheet right now and our capital capacity and we'll certainly be thinking a lot about allocation to capital as the business starts to come back and activity resumes and as we passed the two year period, it will be something we'll focus a lot on.

How much cash. Right. So, I was going to say how much cash do you actually think you need to retain on the balance sheet to comfortably operate the business. You went from $163 million to $306 million during what is obviously a very difficult period and that's a lot of excess cash. How much of that cash do you need?

Certainly $300 million is a lot, and that's one of the reasons we pay down part of the revolver at the end of the quarter or after the end of the quarter. So I think if you look at the cash we have left, we'll continue to look for ways to pay down the revolver, as we generate cash flow through the back half of the year. Historically, Q3 and particularly Q4 has been our biggest cash flow generation quarters. We still have $125 million of capacity on a revolver even after the pay down and the off-balance sheet assets that we've discussed. So we feel pretty good about the financial position on the balance sheet of the company.

Thank you. Your next question comes from Michael Funk from Bank of the America Merrill Lynch. Please go ahead.

So just a quick for us. if I could. One of your competitors said earlier that we didn't expect to see property sales recover until there is a recovery and leasing occupancy and visibility into rents, so that for sequencing of revenue recovery curious if you agree with that.

Well, it depends how far the recovery could go. I mean, in Boston, we're selling properties, people investors with $200 billion in cash to invest are thinking long term, they're not thinking they're not thinking tomorrow. They're thinking once there is a level of price discovery whether depending on what the what the particular Food Group is. They'll determine and to make that value for themselves. Yes, there has to be some visibility into what the rents will be a lot of markets. There have been some resetting of rents and those markets have reset the rent where they know this is the market and this is demand. Those markets will accelerate their back to normal, much faster than other markets. But we're already seeing that. We there are there are people now touring properties. The whole concept of remote working there was a grand pronouncement by many CEOs about not coming back to work. I'm getting more and more calls from CEOs who realize that they're living off of those. The CEO of Microsoft called Social Capital or I would say the reservoir of goodwill, is it doesn't work. Productivity is down. People can't be trained. They need to be mentored. Recruiting people, don't want to be recruited to a virtual company, they need to come to a place to work. And I think more and more the realization that companies are going to have to come back to the office and the acceptance of that as the realization of productivity decline. There'll be more visibility into that back, buildings will be sold.

If I'll break or not, I would generally agree with that. I could ask one more, just hypothetically assume that cap rates and office do check back up. So you have lower like-for-like sales prices. How should I think about that as a potential headwind to recovery in that revenue stream for you.

It's something I failed to mention is a multi-industrial. I mean people need a place at work. I mean we are live and we think that that's going to bounce back relatively quickly and industrial hasn't missed a beat. I mean there our industrial workers, brokers are doing very active and they're doing business now and those markets there are certain markets, they can take longer to come back. The cap rates in the multi space, if you buy a property today, you can borrow long-term at 2.5%. So if you have a five cap and buy with 2.5% money, I think that's a pretty good investment considering $12 trillion with negative yields around the globe. It still offers a great opportunity to invest long term in a country that is still growing. And if you look, there is a Times article about the 1918 pandemic. If you remember we had a war, we then had a pandemic. And then, we have the roaring 20s. So from 1920 to 29, we had nine years of boom after way more people died as a proportion of the population in 1918. And we have just come off a war where think of the devastation for Europeans et cetera, but we came back. The one thing that all these crisis is and disruptions and downturns have in common that they end.

And did you have a comment on just the mechanics of lower relevant or relative sales prices and the impact on revenue?

With interest rates as low as they are, there is some. We're seeing cases where the prices are actually going up in certain categories.

Thank you [Operator Instructions]. Your next question comes from Patrick O'Shaughnessy from Raymond James. Please go ahead.

How patient can that dry powder that's waiting on the sidelines be. Could it be years before those proceeds are put to work or are there generally constraints on how long that capital remains committed before being invested?

Lot of these investments have some time-frame upon which they have to be returned to the investor. It depends on where, whether it's pension funds or private equity funds or sovereign wealth. Sovereign wealth obviously is long term, but it's the job of the people that work there to put out money and even with some segment of the investment community, the question is whether they devote the amount of human resources to the funds that have already been put out. They come to a realization on price discovery, they sell those portfolios and then focus on buying for the new opportunities that they're going to get it in the market that they can see going forward. So, the one fund ends and a new fund starts. So, there is a regeneration of that activity which will see as people have either visibility into where the cure is, visibility into where the economy goes or acceptance of this is the new normal, and we're going to go on with life.

Curious about the current environment in terms of attracting talent. Is now the time to try to pick up market share by taking off some count for may be smaller brokers that are in a bad way right now?

I mean this is a good time to it's always a good time to recruit talent. We are talent base business as we discussed by getting the best people, you should have the best company and that's our fundamental DNA. It doesn't have to be small companies, it's all companies, I mean we are the platform of choice for high revenue generators, they want to be at the company. And it's for us, it's really the aspect of being a good custodian of our cash and capital and doing it the right way considering where the world is and but we are encouraged by what we see.

And then I think also on a strategic dimension,you guys have spoke in the past about global expansion plans. Will those generally be on hold in this environment or do you think about maybe getting more aggressive in progressing with international expansion due to maybe market disruptions and more attractive potential purchase prices?

We're always looking at opportunities. There is a great opportunity for us in Europe, Middle East and Asia. We are conscious of that, we talk about it quite often. We're interested in it. It's a great opportunity. We also have great opportunities in the Americas to grow our platform and to fill in the wide space and build on what we've created. So, it is an opportunity for us.

And then last one from me. What's the near-term outlook for valuation, appraisal and advisory type of revenue streams?

In our VNA business, we've actually seen a very steady role of revenue. The mix has shifted a little bit to its existing portfolio valuations and larger institutional assignments. But we haven't seen a drop off relative to last year.

Thank you. That does conclude our question and answer session, I would like to hand back for any closing remarks.

So I'd like to thank you all for joining us and we look forward to speaking to you again next quarter. And we hope that everyone here on this call remains safe and healthy. Thanks.

Thank you. This does concludes our conference for today. Thank you for participating. You many now disconnect.