Greetings, and welcome to the Newmark Group Second Quarter 2022 Financial Results Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jason McGruder, Head of Investor Relations for Newmark Group. Please go ahead.

Thank you, operator, and good morning. Newmark issued its second quarter 2022 financial results press release and a presentation summarizing these results this morning. The results provided on today's call compare only the second quarter of 2022 with the year earlier period, unless otherwise stated. Any figures with respect to cash flow from operations discussed on today's call refer to net cash provided by operating activities, excluding loan origination and sales, as well as the impact of the 2021 Equity Event. We will be referring to our results on this call only on a non-GAAP basis, unless otherwise stated. These non-GAAP terms include adjusted earnings and adjusted EBITDA. Please see the section of today's press release for the complete and/or updated definitions of any non-GAAP terms, reconciliation 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 is available on our website in today's press release, the supplemental Excel tables and the quarterly results presentation. Any outlook discussed on today's call assumes no material acquisitions, share repurchases or meaningful changes in the company's stock price. These expectations are subject to change based on various macroeconomic, social, political and other factors, including the COVID-19 pandemic. While our 2025 financial and operational targets do assume acquisitions, they are also subject to change for these same reasons. None of our targets or goals through 2025 should be considered formal guidance. 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. 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 forward-looking statements, see Newmark's Securities and Exchange Commission filings, including, but not limited to, the risk factors set forth in the most recent 10-K, 10-Q or 8-K filings, which are incorporated by reference. I'm now happy to turn the call over to our host, Barry Gosin, Chief Executive Officer of Newmark Group, Inc.

Good morning, everyone, and thank you for joining us. With me today are Newmark's Chief Financial Officer, Mike Rispoli; our Chief Revenue Officer, Lou Alvarado; and our Chief Strategy Officer, Jeff Day. In the second quarter, we achieved record revenues, up 20%; record adjusted EBITDA, up 32%; and record earnings per share, up 48%. This is our fifth quarter in a row that we've achieved such quarterly records. Our average revenue per producer of $1.3 million and our average revenue per all employees of $538,000 have both increased by over 40% since 2019. That is the definition of organic growth and is the clearest indication of the quality of our business, caliber of our people and the strength of our platform. Our culture of collaboration and use of data and technology enhances our cross-selling of services, which in turn has led to superior client experience and increased productivity per employee. Since the onset of the global pandemic, Newmark has substantially increased its revenues and earnings while gaining market share. We believe that our clients appreciate the expertise of our professionals, especially in times of uncertainty, and we are well positioned for further market share gains. We are confident that we will reach our 2025 targets, which include generating $4.5 billion of total revenue and $900 million of adjusted EBITDA. We also are reiterating our 2022 outlook despite the near-term macroeconomic headwinds. Newmark has been the fastest-growing commercial real estate services company for the past decade, and we expect to continue to outperform the industry. I want to highlight some of the areas that are contributing to our growth. Year-to-date, we are the #2 U.S. investment sales company compared to a decade ago when we were #25. 10 years ago, we announced that we were going to focus and grow our…

Thank you, Barry, and good morning. Today, Newmark reported its best ever second quarter revenues and earnings. We increased our revenues by 19.9% to $755.4 million compared with $629.9 million. We grew adjusted EBITDA by 32.2% to $159.5 million versus $120.6 million. We improved EPS by 48.4% to $0.46 compared with $0.31. During the quarter, we repurchased 11.4 million shares at an average price of $12.75 per share. We expanded our adjusted EBITDA margin by 196 basis points to 21.1% versus 19.1%. Expenses increased by $84.3 million, of which $61 million was variable compensation, primarily related to growth in commission-based revenues and $17.9 million was related to acquisitions. We remain vigilant on expenses given the current macroeconomic conditions. Moving to the balance sheet. We ended the second quarter with $280.5 million of cash and cash equivalents. This reflected strong cash flow from operations, offset by $175.9 million for share repurchases, cash used for acquisitions of $64.2 million and normal first half uses of working capital. Our net leverage is 0.4x. Our cash on hand, undrawn credit facility and seasonally strong cash generation in the second half of the year will provide us with well over $1 billion of available capital. Before I turn to outlook, I want to highlight our long-term track record of growth. Since 2011, we've had an industry-leading 29% annual growth rate and more than doubled our revenues and our adjusted EBITDA since our year-end 2017 IPO. Now turning to guidance. We remain confident in our 2022 revenue and adjusted EBITDA outlook, which we initially published in February. We expect to grow total revenues between 3% and 7% compared with $2,906.4 million. We expect to grow adjusted EBITDA between 4% and 9% versus $597.5 million. We expect our adjusted earnings tax rate to be between 17% and 19% compared with 18.9%. And we expect weighted average share count to decline by 4% to 5% compared with 264 million. Now I'd like to open the call for questions. Operator?

[Operator Instructions]. Our first question comes from the line of Chandni Luthra with Goldman Sachs.

Congrats on a strong quarter. As we think about the second quarter and how strong investment sales were, could you perhaps throw some light on how much of that was any pull forward in activity or any residual from 1Q as investors perhaps braced for higher rates and maybe expedited anything? Just trying to understand how should we think about 3Q given you've kept guidance unchanged despite such a strong first half.

It was a combination of the market. The market is still good. Interest rates were still low. There was a certain amount of people that were looking to get in front of any potential interest change, but it was consistent and that was a good quarter.

Yes. And I would add to that. I mean, we're in an environment where the Fed just raised interest rates 75 basis points 2x in a row. And there's a period where there's going to be some price discovery between buyers and sellers. And I think that's reflected in our guidance for the back half of the year.

All right. Could you perhaps talk about how much have asset values changed since the beginning of this year? And how much more recalibration is needed for perhaps a little bit more optimism on the back half?

There still is the same amount of liquidity in the market worldwide. There's $400 billion of available capital and $250 billion in the United States, so there is certainly still a desire to acquire. There is an element -- there is a period in any change where there's an element of discovery that has to be determined between the buyer expectations and the seller expectations. And that's the period we'll be in for a couple of quarters. So some assets have repriced already. There's some repricing that has occurred already. So there are some aspects of the market in some markets where there's been a reset and things are trading. So I think it will -- unlike in some markets where it could last 3, 4 quarters, I think this could be actually quicker and reset quicker. And we're in a business of trading. And the people who invest are in the business of buying. And the people who invest in as funds do are in the business of selling their assets.

Our next question comes from the line of Alexander Goldfarb with Piper Sandler.

So just a few questions from me. The first is, Barry, on the office REIT calls over the past -- this earnings season, they've all talked about slowdown in leasing, whether it was actual slowdown that they recorded in the quarter or their conversations with their tenants are clearly indicating a slowdown. On the capital market side, whether it's office, retail -- not retail, well, retail is slow, apartments, like all the sectors, levered buyers have pulled back. So transaction volumes that they're seeing are way down and the mortgage market has really come to an almost standstill, if you will, save for a few deals. Your outlook and your comments are fairly upbeat. How do I reconcile what you guys are seeing versus the REIT commentaries both on the leasing side and the transaction/mortgage market side?

I mean, we reiterated our guidance for the year. We've obviously had 2 great quarters and our back end is reflected in some change in the market and a reflection of the change in interest rates and exit caps. So we're aware of that. The real question -- and what always happens in a cycle is just how long that period of buyer/seller examination takes. So there's already some capitulation in the market from sellers. We've seen that. And as soon as that occurs, there will also -- they'll just be back to business and things will start trading again. So -- yes...

Sorry, go.

Yes, I mean with respect to the leasing market, there has been some slowdown in the leasing market. Remember, occupancy is 45%, and we're up 15%. People who want to sublease space, people who want to renew their leases, I think some of what you've read in terms of the companies that have stopped their recent leases has been just the expansion, and that's a function of the market and where tech is right now. But if you look at the -- historically, at San Francisco and other markets, when the tech market goes down, they stop acquiring. There's lots of empty space, and it goes down quick and then it comes up just as quick. So this is just -- the only question that we all have to face is how long the period of reconciliation will be.

Okay. And then that brings up a good point. On your Knotel business, what is your -- maybe just an update on that what the occupancy is, how the trends have been as far as occupancy rates and growth of U.S. versus international. Just maybe some comments around that.

Alex, it's Mike. We're seeing incredibly strong demand in our flex office products. Our portfolio is nearly 90% occupied. Our biggest problem is getting enough product out into the market to meet the demand. We think this is a market that's going to grow mid- to high-teens for the next several years, and we think we're going to meaningfully outgrow it. We have a great business in Europe, and we have a growing business in the U.S., and we just think it's a growing category. And we're in a -- as you know, a very low price point, and we think it's going to be a great outcome for Newmark and for our shareholders.

And Mike, when you say the 90% occupied for Knotel, is that the same, whether it's Europe, international or U.S. or is there a bunch of new variations?

Yes, it's the same. Remember, we don't have a lot of product in North America today. We're building it out. And I think as we head into next year, towards the end of this year, beginning of next year, we'll have more product in the U.S. And then we'll be able to compare occupancy rates, I think, U.S. versus Europe and the rest of the world.

Okay. And then just a final comment. You guys mentioned getting into the portfolio advisory business, if I understood that correctly. So does that mean like you want to expand your like real estate banking? Like you're going to get involved in REIT M&A or some of these large portfolios that are trading? Or how -- just like -- I'm just trying to figure out how far like that comment goes versus traditional capital markets investment sales.

It's yes, yes and yes. Sure. We're one of the largest aggregators of property for investors across the country in many categories. We were the #2 investment sales company in the U.S. That's the hard work, building -- going through 5 years of trench warfare to create the geographic distribution and the capability and expertise in the market for single assets and some smaller portfolios. The amount of knowledge we have in those categories, you could boil the ocean. So this is a function of focus. And we've made -- the same way we made the determination to go into capital markets and you see the results is the same approach that we'll have with portfolios and banking. And yes, banking. There is a disconnect between NAV and market. We understand the inside-out of real estate. We're in a great position to advise REITs on what they should do with their portfolio and how to exit. We also have very good access to money around the globe. We have an incredible international team that raises money for real estate around the globe. So to access new sources of capital, more patient sources of capital, we've been -- we've demonstrated really good success over the last few years. So the answer to your question is yes, yes and yes.

Our next question comes from the line of Jade Rahmani with KBW.

Do you have a range of capital markets expectations you're thinking about in the back half of the year? Just looking at your guidance and also recognizing the challenging comps, you notice something like down in the mid-teens on a percentage basis year-on-year makes sense? Or is there something else that you are thinking? And then on the leasing side, you mentioned some large leasing transactions potentially in 2022 still as well as next year. Just wondering if there's any expectations you could maybe provide some color on in the back half. I'm assuming you are expecting positive year-on-year growth in leasing in the back half.

So Jade, I think you rightly point out that the second half of last year is a typical comp. The business -- our business was up 45% if you compare it to 2019, back half of last year to back half of 2019. Certainly, it's our view that the capital markets transaction activity will be down more than, say, leasing. We also have some great businesses, recurring businesses that will continue to grow. Our servicing book continues to grow. We'll benefit from a rise in interest rates on the escrow interest on our portfolio. And I think you see, overall, the business is up 26% revenue in the first half and up 3% to 7% for the full year, but that's our thinking as we reaffirm the guidance. And we'll just have to wait and see what happens. We think we're being pretty prudent by keeping the guidance where it is.

In terms of the market share gains that Newmark has been able to achieve, particularly in capital markets, I'm on a couple of the e-mail lists, and I see it every week, every day also. It's clearly evident. What do you think has been the main driver of that?

Talent. I mean, we have great people. We have the best people. We have the deepest bench. We have great and improving coverage. We still have white space and opportunities, yet we're not crowded. So we've got -- we are a perfect formula for really talented people to come join us to be part of the best, most creative, innovative capital markets business and the fastest growing globally.

In terms of the M&A outlook and also your comments regarding international, do you think that at this point of size, large-scale M&A makes sense? Truthfully speaking or candidly speaking, the track record in the sector has been underwhelming. There's a lot of just value destruction that takes place, there's a lot of friction. And I know that Newmark's had a very strong track record gaining market share through bolt-on M&A and through recruitment rather than large-scale M&A. Do you think that there is a strong rationale for large-scale M&A in this space?

You mean mergers for real estate firms? Is that what you're talking about?

Yes, mergers of equals kinds of transactions.

No, I don't. I think the enormity of friction and the conflicts and the coverage and the crowded nature makes it very difficult for large companies to merge. There has to be a perfect synergy and fit. And there's a point of no return or indifference makes it really, really hard to do. We're -- so there's lots of ways to do it. And we have been doing both -- lots of bolt-ons, acquiring teams, talent, and we think that's an incredibly efficient way to do it. It's much harder to do. It takes a lot more work to do that, but we see that as the pathway for us.

[Operator Instructions]. Our next question comes from the line of Patrick O'Shaughnessy with Raymond James.

Can you talk about the state of deal financing in the investment sales space? It sounds like the CMBS market is really, really tough right now. Banks are maybe pulling back in the end a little bit. What are you guys seeing out there?

Well, what we've guided -- this is Jeff, Patrick. The CMBS space is actually showing some signs of life, and we're seeing a little bit of recovery there. Last year was a year where we saw a lot of relatively high leverage floating rate financing on acquisitions, much of which was executed through CLOs. That business, as interest rates started rising and we had more volatility in the capital markets, started to fall off earlier this year and still really hasn't recovered. But there's actually a very good supply of capital, debt capital coming from life companies, banks, still from some debt funds. Certainly, Fannie and Freddie have been very active. And so there isn't the financing liquidity that you might infer from some of the headlines.

Got it. That's helpful. And then what are you seeing out there in terms of property values right now across property types? Obviously, multifamily industrial have been going up a lot. Are there any signs that, that is cooling? And then on the office side, are there any signs that the high vacancy rates are starting to drive office values lower?

Well, there's still an enormous demand for multifamily in the U.S. for a host of reasons. And the reasons haven't changed. Offices has been stressed because, in part, because of the conversation and the confusion about what occupancy is going to look like, what hybrid is going to look like. But the reality is that CEOs are committed to office and companies have to be in the office at some point, and there's less hoteling than you might think. And so it's just a matter -- but there has been some reset in pricing, and it depends on the product. There is a flight to quality. Quality property is still maintaining and retaining the rents that they get. And we're in the trading business, so we -- companies need advice. We're actually doing some very large transactions for clients in co-working or flex work who are taking 5-year leases in flexible work environments. So there's always the need for space, and we're still committed to the office market. But there has been adjustment in certain end markets. Although if you look at Florida, there hasn't been much of an adjustment. It really depends on the market.

Got it. And lastly for me, what is embedded within your full year share count outlook in terms of share repurchases in the back half of the year?

Sure. I think our guidance at the moment assumes only share repurchases we did through the second quarter. The price remains very attractive for repurchases that share count could get better than what we had put out today.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Gosin for any final comments.

I'd like to thank everybody for joining us today, and I look forward to the next quarter. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.