# Newmark Group, Inc.: Form 10-Q for the period ended Mar 31, 2019 - Company: [Newmark Group, Inc.](/companies/nmrk.md) (CIK 1690680) - Form: 10-Q - Filed: 2019-05-10 - Accepted by EDGAR: May 9, 2019, 18:39 ET - Period: 2019-03-31 - Accession: 0001564590-19-018154 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1690680/000156459019018154/nmrk-10q_20190331.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1690680/000156459019018154/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2019-03-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2019-01-01 to 2019-03-31 | $373.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Operating income | 3 months, 2019-01-01 to 2019-03-31 | $37.8m | us-gaap:OperatingIncomeLoss | | Income tax | 3 months, 2019-01-01 to 2019-03-31 | $6.7m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2019-01-01 to 2019-03-31 | $16.9m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.08 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2019-01-01 to 2019-03-31 | $0.08 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 269,057,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | $39.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $5.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2019-03-31 | $72.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2019-03-31 | $1.55bn | us-gaap:AssetsCurrent | | Total assets | at 2019-03-31 | $3.45bn | us-gaap:Assets | | Current liabilities | at 2019-03-31 | $1.52bn | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2019-03-31 | $2.41bn | us-gaap:Liabilities | | Long-term debt | at 2019-03-31 | $538.6m | us-gaap:LongTermDebtNoncurrent | | Shareholders' equity | at 2019-03-31 | $564.1m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 154,049 characters. *The following discussion of Newmark’s financial condition and results of operations should be read together with Newmark’s unaudited condensed consolidated financial statements and related notes, as well as the “Special Note Regarding Forward-Looking Statements” relating to forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, (the “Exchange Act”), included in Newmark’s Annual Report on Form 10-K and in this report. When used herein, the terms “Newmark Knight Frank,” “Newmark,” the “Company,” “we,” “us,” and “our” refer to Newmark and its consolidated subsidiaries.* *This discussion summarizes the significant factors affecting our results of operations and financial condition during the three months ended March 31, 2019 and 2018. We operate in one reportable segment, real estate services. This discussion is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report.* ### Overview and Business Environment Newmark is a growing, full-service commercial real estate services business. We have been the fastest growing U.S. commercial real estate services firm (when compared with our full service publicly traded U.S. peers (based on fee revenues when disclosed, or on total revenues otherwise)), with a revenue compound annual growth rate of 20.8% from 2016 to March 31, 2019. We offer a diverse array of integrated services and products designed to meet the full needs of both real estate investors/owners and occupiers. Our investor/owner services and products include capital markets, which consists of investment sales, debt and structured finance and loan sales, agency leasing, property management, valuation and advisory, commercial real estate due diligence consulting and advisory services and government sponsored enterprise (“GSE”) lending and loan servicing, mortgage broking and equity-raising. Our occupier services and products include tenant representation, real estate management technology systems, workplace and occupancy strategy, global corporate consulting services, project management, lease administration and facilities management. We enhance these services and products through innovative real estate technology solutions and data analytics that enable our clients to increase their efficiency and profits by optimizing their real estate portfolio. We have relationships with many of the world’s largest commercial property owners, real estate developers and investors, as well as Fortune 500 and Forbes Global 2000 companies. We generate revenues from commissions on leasing and capital markets transactions, consulting and technology user fees, property and facility management fees, and mortgage origination and loan servicing fees. Our growth to date has been focused in North America. As of March 31, 2019, we have more than 5,300 employees, including more than 1,700 revenue-generating producers in approximately 135 offices in 97 cities. In addition, Newmark has licensed its name to 15 commercial real estate providers that operate out of 26 offices in certain locations where Newmark does not have its own offices. Our partner, Knight Frank, operates out of over 500 offices. The discussion of our financial results reflects only the business owned by us and does not include the results for Knight Frank or for the independently owned offices that use some variation of the Newmark name in their branding or marketing. Over the past several years, we expanded our capital markets capabilities through the strategic addition of many prolific, accomplished capital markets producers in key markets throughout the United States. We have access to many of the world’s largest owners of commercial real estate, and this will drive growth throughout the life cycle of each real estate asset by allowing us to provide best-in-class agency leasing and property management during the ownership period. We also provide investment sales and arrange debt and equity financing to assist owners in maximizing the return on investment in each of their real estate assets. Specifically, with respect to multifamily assets, we are a leading GSE lender by loan origination volume and servicer with a servicing portfolio of $60.0 billion as of March 31, 2019 (of which approximately 5% relates to special servicing). This servicing portfolio provides a steady stream of income over the life of the serviced loans. Additionally, we expect to see continued growth from our valuation and advisory business particularly in conjunction with our increasingly robust capital markets platform. We continue to invest in the business by adding high profile and talented producers and other revenue-generating professionals. Historically, newly hired commercial real estate producers tend to achieve dramatically higher productivity in their second and third years with our company, although we incur related expenses immediately. As our newly hired producers increase their production, we expect our commission revenue and earnings growth to accelerate, thus reflecting our operating leverage. Our pre-tax margins are impacted by the mix of revenues generated. For example, servicing revenues tend to have higher pre-tax margins than Newmark as a whole and margins from “Gains from mortgage banking activities/originations, net” tend to be lower as we retain rights to service loans over time. In addition, capital markets, which includes sales, commercial mortgage broking, and other real estate-related financial services, generally has larger transactions that occur with less frequency and visibility when compared with leasing advisory. Capital markets transactions tend to have higher pre-tax margins than leasing advisory transactions, while leasing advisory revenues are generally more predictable than revenues from capital markets. Property and facilities management, along with certain of our other Global Corporate Services (“GCS”) products, generally have the most predictable and steady revenues, although pre-tax earnings margins for property and facilities management are at the lower end of those for our business as a whole. When management services clients agree to give us exclusive rights to provide real estate services for their facilities or properties, it is for an extended period, which provides us with stable and foreseeable sources of revenues. Newmark’s revenues are balanced between businesses that are relatively less predictable and contractual sources that are very predictable. Approximately 69% of our revenues for the three months ended March 31, 2019 were generated by our most predictable and highly visible sources, including agency leasing, valuation, GCS, management services, loan servicing and tenant representation leasing business. The remaining 31% of revenues were generated by our more transactional investment sales, mortgage brokerage, and GSE lending platforms. Despite being more transactional, there are $2.0 trillion of mortgage maturities between 2019 and 2023 which should support strong levels of mortgage brokerage activities. Our mortgage brokerage volume has increased 47.2% year-on-year in the quarter. ### Berkeley Point Acquisition and Investment in Real Estate LP On September 8, 2017, BGC Partners, Inc. (“BGC” or “BGC Partners”) acquired, from Cantor Commercial Real Estate Company, LP (“CCRE”), 100% of the equity of Berkeley Point Financial LLC (“Berkeley Point” or “BPF”). Berkeley Point is a leading commercial real estate finance company focused on the origination and sale of multifamily and other commercial real estate loans through government-sponsored and government-funded loan programs, as well as the servicing of commercial real estate loans. On December 13, 2017, in connection with the separation from BGC, the assets and liabilities of Berkeley Point were transferred to Newmark. See Note 27 – “Related Party Transactions” to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. Concurrently with the Berkeley Point acquisition, on September 8, 2017 Newmark invested $100.0 million in a newly formed commercial real estate-related financial and investment business, CF Real Estate Finance Holdings, L.P. (“Real Estate LP”), which is controlled and managed by Cantor. Real Estate LP may conduct activities in any real estate related business or asset backed securities-related business or any extensions thereof and ancillary activities thereto. In addition, Real Estate LP may provide short-term loans to related parties from time to time when funds in excess of amounts needed for investment are available. Newmark’s investment in Real Estate LP is accounted for under the equity method. ### Separation, Initial Public Offering and Spin-Off ### Separation and Distribution and Related Agreements On December 13, 2017, prior to the closing of Newmark’s initial public offering (“IPO”), BGC, BGC Holdings, L.P (“BGC Holdings”) BGC Partners, L.P. (“BGC U.S. OpCo”), Newmark, Newmark Holdings, L.P (“Newmark Holdings”), Newmark Partners, L.P. (“Newmark OpCo”) and, solely for the provisions listed therein, Cantor Fitzgerald L.P. (“CFLP”, and together with affiliates, “Cantor”) and BGC Global Holdings, L.P. (“BGC Global OpCo”) entered into a Separation and Distribution Agreement (the “Original Separation and Distribution Agreement”). The Original Separation and Distribution Agreement set forth the agreements among BGC, Cantor, Newmark and their respective subsidiaries regarding, among other things: - the principal corporate transactions pursuant to which BGC, BGC Holdings and BGC U.S. OpCo and their respective subsidiaries (other than the Newmark Group (defined below), the “BGC Group”) transferred to Newmark, Newmark Holdings and Newmark OpCo and their respective subsidiaries (the “Newmark Group”) the assets and liabilities of the BGC Group relating to BGC’s Real Estate Services business, including BGC’s interests in both BPF and Real Estate LP (the “Separation”); - the proportional distribution of interests in Newmark Holdings to holders of interests in BGC Holdings; - the IPO; - the assumption and repayment of indebtedness by the BGC Group and the Newmark Group, as further described below; and - the pro rata distribution of the shares of Newmark Class A common stock and the shares of Newmark Class B common stock held by BGC, pursuant to which shares of Newmark Class A common stock held by BGC would be distributed to the holders of shares of BGC Class A common stock and shares of Newmark Class B common stock held by BGC would be distributed to the holders of shares of BGC Class B common stock, which distribution is intended to qualify as generally tax-free for U.S. federal income tax purposes. See Note 27 – “Related Party Transactions” and Note 22 – “Long-Term Debt” to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. ### Initial Public Offering On December 15, 2017, Newmark announced the pricing of the IPO of 20 million shares of Newmark’s Class A common stock at a price to the public of $14.00 per share, which was completed on December 19, 2017. Newmark Class A shares began trading on December 15, 2017 on the NASDAQ Global Select Market under the symbol “NMRK.” In addition, Newmark granted the underwriters a 30-day option to purchase up to an additional 3 million shares of Newmark Class A common stock at the IPO price, less underwriting discounts and commissions. On December 26, 2017, the underwriters of the IPO exercised in full their overallotment option to purchase an additional 3 million shares of Newmark Class A common stock from Newmark at the IPO price, less underwriting discounts and commission (the “option”). As a result, Newmark received aggregate net proceeds of approximately $295.4 million from the IPO, after deducting underwriting discounts and commissions and estimated offering expenses. See Note 27 – “Related Party Transactions ” to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. ### BGC’s Investment in Newmark Holdings On March 7, 2018, BGC Partners and its operating subsidiaries purchased 16.6 million newly issued exchangeable limited partnership units (the “Newmark Units”) of Newmark Holdings. for approximately $242.0 million (the “Investment in Newmark in Newmark Holdings”). See Note 27 – “Related Party Transactions” to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. ### Debt Repayment and Credit Agreements As of January 1, 2018 Newmark had an outstanding balance of $270.7 million under the Term Loan (“Term Loan”). Newmark used the proceeds of BGC’s 2018 Investment in Newmark plus cash on hand to repay in full the Term Loan. As of January 1, 2018, Newmark had an outstanding balance of $40.0 million under an unsecured senior credit agreement, which was amended and restated on March 19, 2018 (“Intercompany Credit Agreement”). Through the six months ended June 30, 2018, Newmark borrowed an additional $230.0 million and used these proceeds plus cash on hand to fund its restricted cash account pledged for the benefit of Fannie Mae. On September 4, 2018 Newmark borrowed $112.5 million in order to repay the 2042 Promissory Note (“2042 Promissory Note”). On October 4, 2018, Newmark withdrew $252.0 million of cash on hand that was in excess of the minimum balance required to be pledged for the benefit of Fannie Mae to repay $252.0 million towards the outstanding balance of the Intercompany Credit Agreement. The remaining balance of $130.5 million was repaid with the proceeds of the 6.125% Senior Notes (as defined below). As of January 1, 2018, Newmark had an outstanding balance of $400.0 million under the Converted Term Loan, (“Converted Term Loan”). On June 19, 2018 Newmark repaid $152.9 million, and on September 26, 2018 repaid $113.2 million of the Converted Term Loan, using the proceeds from the Newmark Opco Preferred Investments (as defined below). On November 6, 2018, Newmark repaid the remaining balance of $133.9 million with the proceeds of the 6.125% Senior Notes. As of January 1, 2018 Newmark, had an outstanding balance of $112.5 million under the 2042 Promissory Note payable to BGC. On September 4, 2018, Newmark borrowed $112.5 million under the Intercompany Credit Agreement and repaid this note in full. On November 6, 2018, Newmark closed its offering of $550.0 million aggregate principal amount of 6.125% Senior Notes due 2023 (“6.125% Senior Notes”). The 6.125% Senior Notes are general senior unsecured obligations of Newmark. The 6.125% Senior Notes, which were priced on November 1, 2018 at 98.937% to yield 6.375%, were offered and sold by Newmark in a private offering exempt from the registration requirements under the Securities Act. Newmark received net proceeds of approximately $537.6 million, net of debt issue costs and debt discount. The 6.125% Senior Notes bear an interest rate of 6.125% per annum, payable on each May 15 and November 15, beginning on May 15, 2019 and will mature on November 15, 2023. Newmark used the net proceeds to repay the remaining balance of the Converted Term Loan of $133.9 million, the balance of the Intercompany Credit Agreement of $130.5 million, and a portion of the 2019 Promissory Note (as defined below). The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act. On November 23, 2018, Newmark repaid the $300.0 million outstanding principal amount under the 2019 Promissory Note, (“2019 Promissory Note”), primarily using proceeds from the sale of its 6.125% Senior Notes. Upon repayment of the 2019 Promissory Note, Newmark had no further debt obligations owed to or guaranteed by BGC, which was one of the requirements for the Spin-Off to be tax-free. On November 28, 2018, Newmark entered into a credit agreement by and among Newmark, the several financial institutions from time to time party thereto, as Lenders, and Bank of America N.A., as administrative agent (the “Credit Agreement”). The Credit Agreement provides for a $250.0 million three-year unsecured senior revolving credit facility (the “Credit Facility”). On November 30, 2018 the Company entered into an unsecured credit agreement (the “Cantor Credit Agreement”) with Cantor. The Cantor Credit Agreement provides for each party to issue loans to the other party in the lender’s discretion. Pursuant to the Cantor Credit Agreement, the parties and their respective subsidiaries (with respect to CFLP, other than BGC and its subsidiaries) may borrow up to an aggregate principal amount of $250.0 million from each other from time to time at an interest rate which is higher to Cantor’s or the Company’s short-term borrowing rate then in effect, plus 1.0%. ### Credit Rating In 2018, we improved the credit profile of Newmark. The combination of our lower long-term debt and higher total equity improved our credit ratios with specific regard to debt to equity. Newmark received a stand-alone BBB- stable credit rating from Fitch and Kroll, as well as a BB+ stable rating from Standard & Poor’s during the fourth quarter of 2018. ### The Spin-Off On November 30, 2018, BGC completed the Spin-Off to its stockholders of all of the shares of our common stock owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of our Class A common stock distributed to the holders of shares of BGC’s Class A common stock (including directors and executive officers of BGC Partners) of record as of the close of business on November 23, 2018 (the “Record Date”), and shares of our Class B common stock distributed to the holders of shares of BGC’s Class B common stock (consisting of Cantor and CF Group Management, Inc. (“CFGM”) of record as of the close of business on the Record Date). Based on the number of shares of BGC common stock outstanding as of the close of business on the Record Date, BGC’s stockholders as of the Record Date received in the Spin-Off 0.463895 of a share of Newmark Class A common stock for each share of BGC Class A common stock held as of the Record Date, and 0.463895 of a share of Newmark Class B common stock for each share of BGC Class B common stock held as of the Record Date. BGC Partners stockholders received cash in lieu of any fraction of a share of Newmark common stock that they otherwise would have received in the Spin-Off. Prior to and in connection with the Spin-Off, 14.8 million Newmark Units held by BGC were exchanged into 9.4 million shares of Newmark Class A common stock and 5.4 million shares of Newmark Class B common stock, and 7.0 million Newmark OpCo Units held by BGC were exchanged into 6.9 million shares of Newmark Class A common stock. These Newmark Class A and Class B shares of common stock were included in the Spin-Off to BGC’s stockholders. In the aggregate, BGC distributed 131,886,409 shares of our Class A common stock and 21,285,537 shares of our Class B common stock to BGC’s stockholders in the Spin-Off. These shares of our common stock collectively represented approximately 94% of the total voting power of our outstanding common stock and approximately 87% of the total economics of our outstanding common stock in each case as of the Distribution Date. On November 30, 2018, BGC Partners also caused its subsidiary, BGC Holdings, to distribute pro rata (the “BGC Holdings distribution”) all of the 1,458,931 exchangeable limited partnership units of Newmark Holdings held by BGC Holdings immediately prior to the effective time of the BGC Holdings distribution to its limited partners entitled to receive distributions on their BGC Holdings units (including Cantor and executive officers of BGC) who were holders of record of such units as of the Record Date. The Newmark Holdings units distributed to BGC Holdings partners in the BGC Holdings distribution are exchangeable for shares of Newmark Class A common stock, and in the case of the 449,917 Newmark Holdings units received by Cantor also into shares of Newmark Class B common stock, at the applicable exchange ratio (subject to adjustment). As of March 31, 2019, the exchange ratio was 0.9558 shares of Newmark common stock per Newmark Holdings unit. Following the Spin-Off and the BGC Holdings distribution, BGC Partners ceased to be our controlling stockholder, and BGC and its subsidiaries no longer held any shares of our common stock or other equity interests in us or our subsidiaries. Cantor continues to control Newmark and its subsidiaries following the Spin-Off and the BGC Holdings distribution. ### Nasdaq Monetization Transactions On June 28, 2013, BGC sold certain assets of its on-the-run, electronic benchmark U.S. Treasury platform (“eSpeed”) to Nasdaq. The total consideration received in the transaction included $750.0 million in cash paid upon closing and an earn-out of up to 14,883,705 shares of Nasdaq common stock to be paid ratably over 15 years, provided that Nasdaq, as a whole, produces at least $25.0 million in consolidated gross revenues each year. Nasdaq generated gross revenues of approximately $4.3 billion in 2018. The remaining rights under the Nasdaq Earn-out were transferred to Newmark on September 28, 2017. See Note 7— “Marketable Securities” to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. ### Exchangeable Preferred Partnership Units and Forward Contract On June 18, 2018, Newmark's principal operating subsidiary, Newmark OpCo, issued approximately $175.0 million of exchangeable preferred partnership units (“EPUs”) in a private transaction to the Royal Bank of Canada (“RBC”). Newmark received $152.9 million of cash with respect to this transaction. On September 26, 2018 Newmark entered into a second agreement to issue approximately $150.0 million of additional EPUs to RBC, similar to the June 18, 2018 transaction (together the “Newmark OpCo Preferred Investment”). Newmark received $113.2 million of cash with respect to this transaction. The EPUs were issued in four tranches and are separately convertible by either RBC or Newmark, into a fixed number of shares of Newmark’s Class A common stock, subject to a revenue hurdle, in each of the fourth quarters of 2019 through 2022 for the first, second, third and fourth tranche, respectively. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark they have been included as “Noncontrolling interests” on the unaudited condensed consolidated statement of changes in equity. The EPUs are entitled to a preferred payable-in-kind dividend, which is recorded as accretion to the carrying amount of the EPUs as “Retained earnings” on the unaudited condensed consolidated statement of changes in equity and included in “Consolidated net income (loss) available to common stockholders” for purposes of calculating earnings per share. Contemporaneously with the issuance of the EPUs, the newly formed special purpose vehicles (“SPVs”) that are consolidated subsidiaries of Newmark, entered into four variable postpaid forward contracts with RBC (together, the "Nasdaq Forwards"). The SPVs are indirect subsidiaries of Newmark whose sole assets are the Nasdaq share Earn-outs for 2019 through 2022. The Nasdaq Forwards provide the option to both Newmark and RBC for RBC to receive up to 992,247 shares of Nasdaq common stock, received by Newmark pursuant to the Nasdaq Earn-out (See Note 7— “Marketable Securities” to our Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q), in each of the fourth quarters of 2019 through 2022 in exchange for either cash or redemption of the EPUs, solely at Newmark’s option. ### Transfer of Employees to Newmark and Other Related Party Transactions In connection with the expansion of our mortgage brokerage and lending activities, Newmark has entered into an agreement with Cantor pursuant to which five former employees of its affiliate, CCRE, have transferred to Newmark, effective as of May 1, 2018. In connection with this transfer of employees, Cantor paid $6.9 million to Newmark in October 2018 and Newmark Holdings issued $6.7 million of limited partnership units and $0.2 million of cash in the form of a cash distribution agreement to the employees. In addition, Newmark Holdings issued $2.2 million of Newmark Holdings partnership units with a capital account and $0.5 million of limited partnership units in exchange for the cash payment from Cantor to Newmark of $2.2 million. In consideration for the Cantor payment, Newmark has agreed to return up to a maximum of $3.3 million to Cantor based on the employees’ production during their first two years of employment with Newmark. Newmark has agreed to allow certain of these employees to continue to provide consulting services to Cantor in exchange for a forgivable loan which was directly paid by Cantor to these employees. In November 2018, the Audit Committee authorized Newmark to enter into an engagement agreement with Cantor Fitzgerald & Co. and its affiliates to act as financial advisor in connection with one or more third-party business combination transactions as requested by Newmark on behalf of its affiliates from time to time on specified terms, conditions and fees. In February 2019, the Audit Committee of the Company authorized Newmark and its subsidiaries to originate and service GSE loans to Cantor and its affiliates (other than BGC) and service loans originated by Cantor and its affiliates (other than BGC) on prices, rates and terms no less favorable to Newmark and its subsidiaries than those charged by third parties. The authorization is subject to certain terms and conditions, including but not limited to: (i) a maximum amount up to $100.0 million per loan, (ii) a $250.0 million limit on loans that have not yet been acquired or sold to a GSE at any given time, and (iii) a separate a $250.0 million limit on originated Fannie Mae loans outstanding to Cantor at any given time. ### Growth Drivers The key drivers of revenue growth for U.S. commercial real estate services companies include the overall health of the U.S. economy, the institutional ownership of commercial real estate as an investible asset class and the ability to attract and retain talent. In addition, in our capital markets business growth is driven by the availability of credit to purchasers of and investors in commercial real estate. In our multifamily business, delayed marriages, an aging population and immigration to the U.S. are increasing a pressing need for new apartments, with an estimated 4.6 million needed by 2030, according to a recent study commissioned by the National Multifamily Housing Council and the National Apartment Association. This should continue to drive investment sales, GSE multifamily lending and other mortgage brokerage and growth in our servicing portfolio for the foreseeable future. Our origination business is impacted by the lending caps imposed by the Federal Housing Finance Agency (“FHFA”). As of December 31, 2018, the industry-wide caps are set at $35.0 billion excluding loans exempt from the caps, such as loans in the affordable and underserved market segments, or that finance water and energy efficiency improvements. These excluded categories can make up a significant portion of the overall market. For example, in both 2017 and 2018, more than half of the loan production reported by the GSEs and Federal Housing Administration (“FHA”) was excluded from the FHFA lending caps. ### Economic Growth in the United States The U.S. economy expanded by 3.2% during the first quarter of 2019, according to a preliminary estimate from the U.S. Department of Commerce. This growth compares with an increase of 2.2% in the first quarter of 2018 and 2.9% for full year 2018. The consensus is for U.S. gross domestic product to expand by 2.4% in 2019 and 1.9% in 2020, according to a recent Bloomberg survey of economists. This moderate pace of growth should help keep interest rates and inflation low by historical standards. According to a preliminary report from the Bureau of Labor Statistics employers added a monthly average of approximately 180 thousand net new payroll jobs during the first quarter of 2019, which was below the prior year period’s 228 thousand and the average of 223 thousand per month in full year 2018. Despite the return to pre-recession unemployment rates (3.8% as of March 2019), the number of long-term unemployed and the labor force participation rate remains near a 30-year low. However, these latter two indicators are less important to commercial real estate than job creation. The 10-year Treasury yield was down approximately 33 basis points to 2.41% as of March 31, 2019 versus the year-earlier date. Ten year Treasury yields have remained well below their 50-year average of approximately 6.35%, in large part due to market expectations that the Federal Open Market Committee will only moderately raise the federal funds rate over the next few years, as well as due to muted long-term inflation expectations. Interest rates are also relatively low due to even lower or negative benchmark government interest rates in much of the rest of the developed world, which makes U.S. government bonds relatively more attractive. Steady economic growth and historically low interest rates have helped push vacancy rates down for the office, apartment, retail and industrial markets over the current economic expansion. Construction activity, while increasing, remains low compared with prior expansion cycles and low relative to demand and absorption, which means that property leasing markets continue to tighten. Overall, demand for commercial real estate remains strong. While the vast majority of new supply is going to the top 10-15 U.S. markets, there is healthy demand among investors for well-positioned suburban value add assets in secondary and tertiary markets, according to NKF Research. Asking rental rates posted moderate gains across all property types during 2018. The following key trends drove the commercial real estate market during 2018: - Sustained U.S. employment growth and rising home values have fueled the economy and generated demand for commercial real estate space across all major sectors; - Technology, professional and business services, coworking/flex and healthcare continued to power demand for office space; - E-commerce and supply-chain optimization has pushed industrial absorption to 36 consecutive quarters of positive net absorption, creating tenant and owner-user demand for warehouses and distribution centers; - Apartment rents benefited from sustained job growth, and underlying demographic trends towards apartment living among two key age groups: millennials and baby boomers; and - Continued corporate employment growth, combined with increased leisure travel, generated demand for hotel room-nights. The U.S. tax cuts could continue to lift growth, along with leasing activity. Rising inflation and interest rates, byproducts of faster economic growth, could deliver a mixed outcome: rising interest rates can put upward pressure on cap rates, but stronger rent growth and sustained investor demand could support higher property values and income growth. ### Market Statistics Although overall industry metrics are not necessarily correlated to our revenues, they do provide some indication of spread between local benchmark government bond yields and U.S. cap rates will drive future international investment. According to Real Capital Analytics (“RCA”), prices for commercial real estate were up by approximately 6.0% year-over-year for the quarter ended March 31, 2019. During the quarter, overall U.S. Commercial RCA real estate notional sales volumes declined by approximately 11.0% year-on-year in the U.S. According to a February, 2019 Mortgage Bankers Association (“MBA”) forecast, originations of commercial/multifamily loans of all types are projected to increase in terms of dollar volume for the year ended December 31, 2019. In comparison, our real estate capital markets business, which includes investment sales and commercial mortgage brokerage, increased its notional volumes by 21.8% year-over-year, during the quarter. Our loan origination volumes are driven more by the GSE multifamily financing volumes than the activity level of the overall commercial mortgage market. Overall industry GSE multifamily volumes increased by 25.0% while RCA multifamily investment sales volumes increased by 1.0% year-over-year in the quarter. Newmark’s multifamily investments sales volumes increased by 14.6% year-over-year in the quarter. The GSE multifamily agency volume statistics for the industry are based on when loans are sold and/or securitized, and typically lag those reported by Newmark and its competitors by 30 to 45 days. In comparison, Newmark’s combined notional volumes across GSE and FHA multifamily loan originations increased by 20.0% year-on-year in the quarter. As with other multifamily lenders, the Company’s mix of originations, and therefore revenues from “Gains from mortgage banking activities/origination, net”, can vary depending on the size of loans, as well by the categories of loans with respect to the FHA, Freddie Mac, and different Fannie Mae structures. According to NKF Research, the combined average vacancy rate for office, industrial, and retail properties ended the quarter at 7.6%, which represents an improvement of approximately 50 basis points on an unweighted basis compared with the year earlier period. NKF Research estimates that rents for all property types in the U.S. increased year-on-year across all 3 sectors, while overall U.S. leasing activity decreased. In comparison, revenues from our leasing commissions business increased by 8.2% year-on-year in the quarter. ### Regulatory Environment See “—Regulatory Requirements” herein for information related to our regulatory environment. ### Liquidity See “—Financial Position, Liquidity and Capital Resources” herein for information related to our liquidity and capital resources. ### Hiring and Acquisitions Key drivers of our revenue are producer headcount and average revenue per producer. We believe that our strong technology platform and unique partnership structure have enabled us to use both acquisitions and recruiting to profitably increase our front-office revenue per producer. We have invested significantly to capitalize on the current business environment through acquisitions, technology spending and the hiring of new producers, salespeople, managers and other front-office personnel. The business climate for these acquisitions has been competitive, and it is expected that these conditions will persist for the foreseeable future. We have been able to attract businesses and producers, salespeople, managers and other front-office personnel to our platform as we believe they recognize that we have the scale, technology, experience and expertise to succeed in the current business environment. See “Business—Our History” in Part I, Item 1 of our Annual Report on Form 10-K for a description of our acquisitions since 2017. As of March 31, 2019 our producer headcount was up 11% year-on-year to over 1,700 producers and salespeople as compared to the prior year. As of March 31, 2019, average revenue generated per producer increased by 6.6% to approximately $885 thousand on a trailing twelve-month basis. This increase can be attributed to the hiring of highly productive and talented producers to the platform. Since 2015, our acquisitions have included Berkeley Point, a controlling interest in a commercial real estate due diligence joint venture, several companies which were affiliated under the Apartment Realty Advisors brand, Computerized Facility Integration, LLC, Excess Space, RKF, Jackson & Cooksey, Inc., MiT National Land Services, LLC and several local and regional brokerage, property management, project management and commercial real estate valuation and advisory services companies, including our first international acquisition in Mexico City. We recently acquired MLG Commerical, a leading commercial real estate company offering both brokerage and property management services in Wisconsin. ### Financial Overview ### Revenues We derive revenues from the following general four sources: - *Leasing and Other Commissions*. We offer a diverse range of commercial real estate brokerage and advisory services, including tenant and agency representation, which includes comprehensive lease negotiations, strategic planning, site selection, lease auditing, and other financial and market analysis. - *Capital Markets*. Our real estate capital markets business specializes in the arrangement of acquisitions and dispositions of commercial properties, as well as providing other financial services, including the arrangement of debt and equity financing, and loan sale advisory. - *Gains from Mortgage Banking Activities/Originations, Net.* Gains from mortgage banking activities/originations are derived from the origination of loans with borrowers and the sale of those loans to investors. - *Management Services, Servicing Fees and Other*. We provide commercial services to tenants and landlords in several key U.S. markets. In this business, we provide property and facilities management services along with project management, appraisal services and other consulting services, as well as technology, to customers who may also utilize our commercial real estate brokerage services. Servicing fees are derived from the servicing of loans originated by us as well as loans originated by third parties. Fees are generally earned when a lease is signed. In many cases, landlords are responsible for paying the fees. In capital markets, fees are earned and recognized when the sale of a property closes, and title passes from seller to buyer for investment sales and when debt or equity is funded to a vehicle for debt and equity transactions. Gains from mortgage banking activities/originations, net are recognized when a derivative asset is recorded upon the commitment to originate a loan with a borrower and sell the loan to an investor. The derivative is recorded at fair value and includes loan origination fees, sales premiums and the estimated fair value of the expected net servicing cash flows. Gains from mortgage banking activities/originations, net are recognized net of related fees and commissions to affiliates or third-party brokers. For loans we produce, revenues are recognized when the loan is closed. Servicing fees are recognized on an accrual basis over the lives of the related mortgage loans. We typically receive monthly management fees based upon a percentage of monthly rental income generated from the property under management, or in some cases, the greater of such percentage or a minimum agreed upon fee. We are often reimbursed for our administrative and payroll costs, as well as certain out-of-pocket expenses, directly attributable to properties under management. We follow accounting principles generally accepted in the U.S., or “U.S. GAAP”, which provides guidance when accounting for reimbursements from clients and when accounting for certain contingent events for Leasing and Capital Markets transactions. See Note 3—"Summary of Significant Accounting Policies” to our Unaudited Condensed Consolidated Financial Statements included Part I, Item 1 of this Quarterly Report on Form 10-Q for a more detailed discussion. ### Expenses ### Compensation and Employee Benefits The majority of our operating costs consist of cash and non-cash compensation expenses, which include base salaries, producer commissions based on production, discretionary and other bonuses and all related employee benefits and taxes. Our employees consist of commissioned producers, executives and other administrative support. Our producers are compensated based on the revenue they generate for the firm, keeping these costs variable in nature. As part of our compensation plans, certain employees have been granted limited partnership units in BGC Holdings and Newmark Holdings, which generally receive quarterly allocations of net income, that are cash distributed on a quarterly basis and that are generally contingent upon services being provided by the unit holders. As prescribed in U.S. GAAP guidance, the quarterly allocations of net income on such limited partnership units are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our unaudited condensed consolidated statements of operations. Certain of these limited partnership units entitle the holders to receive post-termination payments. These limited partnership units are accounted for as post-termination liability awards under U.S. GAAP guidance, which requires that we record an expense for such awards based on the change in value at each reporting period and include the expense in our unaudited condensed consolidated statements of operations as part of “Compensation and employee benefits.” The liability for limited partnership units with a post-termination payout amount is included in “Accrued compensation” on our unaudited condensed consolidated balance sheets. Certain limited partnership units are granted exchangeability into Class A common stock. At the time exchangeability is granted, the Company recognizes an expense based on the fair value of the award on that date, which is included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our unaudited condensed consolidated statements of operations. Our employees have been awarded preferred partnership units in BGC Holdings and Newmark Holdings. Each quarter, the net profits of BGC Holdings and Newmark Holdings are allocated to such units at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation, which is deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership units in BGC Holdings and Newmark Holdings, respectively. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution. Preferred Units may not be made exchangeable into our Class A common stock and are only entitled to the Preferred Distribution, and accordingly they are not included in our fully diluted share count. The quarterly allocations of net income on these preferred partnership units are also reflected in compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our unaudited condensed consolidated statements of operations. We have entered into various agreements with certain of our employees and partners whereby these individuals receive loans, which may be either wholly or in part repaid from the distribution earnings that the individual receives on their limited partnership interests in BGC Holdings and Newmark Holdings. The forgivable portion of these loans is recognized as compensation expense over the life of the loan. From time to time, we may also enter into agreements with employees and partners to grant bonus and salary advances or other types of loans. These advances and loans are repayable in the timeframes outlined in the underlying agreements. In addition, we also enter into deferred compensation agreements with employees providing services to us. The costs associated with such plans are generally amortized over the period in which they vest. (See Note 30— “Compensation” and Note 31— “Commitment and Contingencies,” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q). ### Other Operating Expenses We have various other operating expenses. We incur leasing, equipment and maintenance expenses. We also incur selling and promotion expenses, which include entertainment, marketing and travel-related expenses. We incur communication expenses, professional and consulting fees for legal, audit and other special projects, and interest expense related to short-term operational funding needs, and notes payable and collateralized borrowings. We pay fees to BGC Partners and/or Cantor for performing certain administrative and other support, including charges for occupancy of office space, utilization of fixed assets and accounting, operations, human resources, legal services and technology infrastructure support. Management believes that these charges are a reasonable reflection of the utilization of services rendered. However, the expenses for these services are not necessarily indicative of the expenses that would have been incurred if we had not obtained these services from BGC Partners or Cantor. In addition, these charges may not reflect the costs of services we may receive from BGC Partners or Cantor in the future. ### Other Income, Net Other income, net is comprised of the gains associated with the earn-out shares related to the Nasdaq transaction and the movements related to the to the impact of any unrealized non-cash mark-to-market gains or losses related to the Nasdaq Forwards. Additionally, other income included gains (losses) on equity method investments which represent our pro-rata share of the net gains (losses) on investments over which we have significant influence but which we do not control, and the mark-to-market gains or losses on the cost method investments accounted for pursuant to the measurement alternative under Accounting Standards Update 2016-01, *Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.* ### Provision for Income Taxes We incur income tax expenses based on the location, legal structure, and jurisdictional taxing authorities of each of our subsidiaries. Certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (which we refer to as “UBT”) in New York City. U.S. federal and state income tax liability or benefit related to the partnership income or loss, with the exception of UBT, rests with the partners (See Note 2 – “Limited Partnership Interests” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q) rather than the partnership entity. The Company’s unaudited condensed consolidated financial statements include U.S. federal, state and local income taxes on the Company’s allocable share of the U.S. results of operations. Outside of the U.S., we operate principally through subsidiary corporations subject to local income taxes. ### Financial Highlights For the three months ended March 31, 2019, Newmark’s total revenues increased by 4.0% as compared to the three months ended March 31, 2018. This improvement was led by an 8.2% increase in leasing and other commissions, which was the result of acquisitions, 1.4% increase in revenues from capital markets brokerage, net and a 7.8% increase in management services, servicing fees, and other, partially offset by a 19.4% decrease in gains from mortgage banking activities. Newmark’s revenues from both tenant representation and agency businesses leasing improved in the first quarter of 2019. The Company’s capital markets volumes increased by 22% year-on-year, which significantly outpaced overall volumes in the U.S. Gains from mortgage banking activities/origination declined due to lower originated mortgage servicing rights (“OMSR”) fees and lower origination fees due to a change in the loan mix. Management services, servicing fees, and other revenues increased primarily due to higher servicing fees and higher interest income. The Company’s first quarter of 2019 revenues were consistent with normal quarterly seasonality for Newmark and its full service peers. Over the past three calendar years, Newmark generated an average 21 percent of its full year revenues in the first quarter. For the Company’s full service peers, the comparable simple average for full year revenues in the first quarter was 20 percent over the past two years. This is based on the reported results U.S. ticker symbols CBRE, JLL, CIGI, and CWK. 2016 revenues for the peers may not be applicable due to the impact of ASC 606 on certain of their results. Quarterly seasonality also generally impacts measures of GAAP earnings and cash flows from operations before lending activities reported by commercial real estate services companies. Newmark’s GAAP Income before income taxes and noncontrolling interests would have increased by approximately 10% year-over-year for the quarter but for the decrease in non-cash “Other income (loss)” related to unrealized mark-to-market movements with respect to the Nasdaq Forwards.We continue to hire high quality producers, strategically acquire local and regional firms and enhance our cross-selling capabilities across business lines as prior acquisitions and hires become more acclimated to the platform. ### Impact of Adopting Revenue Recognition Guidance On January 1, 2018, we adopted Accounting Standards Codification 606, *Revenue from Contracts with Customers (“*ASC 606”), which provides accounting guidance on the recognition of revenues from contracts with customers and impacts the presentation of certain revenues and expenses in our unaudited condensed consolidated statements of operations. Newmark elected to adopt ASC 606 using a modified retrospective approach with regard to contracts that were not completed as of December 31, 2017, and prospectively from January 1, 2018 onward. Due to the adoption of ASC 606, for all periods from the first quarter of 2018 onward, Newmark did not and will not record revenues or earnings related to “Leasing and other commissions” with respect to contingent revenue expected to be received in future periods as of December 31, 2017, in relation to contracts signed prior to January 1, 2018, for which services have already been completed. Instead, the Company recorded this contingent revenue and related commission payments on the balance sheet on January 1, 2018, with a corresponding pre-tax improvement of approximately $22.7 million and Newmark recognized an increase of $16.5 million and $2.3 million to beginning retained earnings and noncontrolling interests, respectively, as a cumulative effect of adoption of an accounting change. Over time, the Company expects to receive $23.0 million of cash related to these “Leasing and other commissions” receivables, primarily over the course of 2018 and 2019. This cash, however, will not be recorded as GAAP net income. See Note 13— “Revenues from Contracts with Customers” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further information. ### Impact of Adopting Lease Guidance On January 1, 2019 Newmark adopted ASC 842 *Leases (“*ASC 842”), which provides guidance on the accounting and disclosure for accounting for leases. Newmark has elected the optional transition method, and pursuant to this transition method, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods prior to January 1, 2019. Newmark has elected the package of ‘practical expedients,’ which permits Newmark not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Newmark has elected the short-term lease recognition exemption for all leases that qualify, and has elected the practical expedient to not separate lease and non-lease components for all leases other than real estate leases. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of Right of Use (“ROU”) assets of approximately $178.8 million and ROU liabilities of approximately $226.7 million, with no effect on beginning retained earnings. The adoption of the new guidance did not have a significant impact on Newmark’s unaudited condensed consolidated statements of operations, unaudited condensed consolidated statements of changes in equity and unaudited condensed consolidated statements of cash flows. See Note 3— “Summary of Significant Accounting Policies” and Note 18— “Leases” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for further information. ### Results of Operations The following table sets forth our unaudited condensed consolidated statements of operations data expressed as a percentage of total revenues for the periods indicated (in thousands): | Revenues: | Three Months Ended March 31, 2019 Actual Results | Percentage of Total Revenues | 2018 Actual Results | Percentage of Total Revenues | | --- | ---: | ---: | ---: | ---: | | Leasing and other commissions | $172,471 | 38.5% | $159,371 | 37.0% | | Capital markets | 102,797 | 23.0 | 101,364 | 23.6 | | Gains from mortgage banking activities/originations, net | 31,346 | 7.0 | 38,914 | 9.0 | | Management services, servicing fees and other | 141,042 | 31.5 | 130,811 | 30.4 | | **Total revenues** | 447,656 | 100.0 | 430,460 | 100.0 | | **Expenses:** | | | | | | Compensation and employee benefits | 263,353 | 58.8 | 261,088 | 60.7 | | Equity-based compensation and allocations of net income to limited partnership units and FPUs | 13,871 | 3.1 | 17,416 | 4.0 | | **Total compensation and employee benefits** | 277,224 | 61.9 | 278,504 | 64.7 | | Operating, administrative and other | 87,893 | 19.6 | 75,427 | 17.5 | | Fees to related parties | 6,725 | 1.5 | 6,894 | 1.6 | | Depreciation and amortization | 28,304 | 6.3 | 22,513 | 5.2 | | **Total operating expenses** | 400,146 | 89.3 | 383,338 | 89.0 | | **Other income (losses), net:** | | | | | | Other income (loss) | (9,718) | (2.2) | 5,707 | 1.3 | | **Total other income, net** | (9,718) | (2.2) | 5,707 | 1.3 | | **Income from operations** | 37,792 | 8.4 | 52,829 | 12.3 | | Interest expense, net | (7,699) | (1.7) | (13,409) | (3.1) | | **Income before income taxes and noncontrolling interests** | 30,093 | 6.7 | 39,420 | 9.2 | | Provision for income taxes | 6,687 | 1.5 | 6,933 | 1.6 | | **Consolidated net income** | 23,406 | 5.2 | 32,487 | 7.6 | | Less: Net income attributable to noncontrolling interests | 6,502 | 1.5 | 12,490 | 2.9 | | **Net income available to common stockholders** | $16,904 | 3.7% | $19,997 | 4.7% | ### Three months ended March 31, 2019 as compared to the three months ended March 31, 2018 ### Revenues #### Leasing and Other Commissions Leasing and other commission revenues increased by $13.1 million, or 8.2%, to $172.5 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The increase was due to the result of prior acquisitions. #### Capital Markets Capital markets revenue increased by $1.4 million, or 1.4%, to $102.8 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. Capital markets volumes increased by 22% year-on-year, which significantly outpaced overall volumes in the U.S. #### Gains from Mortgage Banking Activities/Originations, Net Gains from mortgage banking activities, net decreased by $7.6 million, or 19.4%, to $31.3 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease was primarily driven by lower OMSR revenue of $4.7 million, resulting from the change in the product mix. Newmark’s combined volumes from multifamily originations, investment sales, and non-originated mortgage brokerage increased by 20% year-on-year to approximately $7.0 billion in the first quarter of 2019. As with other multifamily agency lenders, the Company’s mix of originations, and therefore revenues, can vary depending on the size of loans, as well by the categories of loans with respect to the FHA, Freddie Mac, and different Fannie Mae structures. A portion of our gains from mortgage banking activities, net, relate to non-cash gains attributable to OMSRs. We recognize OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold. For the three months ended March 31, 2019 and 2018, we recognized $16.4 million and $21.1 million of non-cash gains, respectively, related to OMSRs. #### Management Services, Servicing Fees and Other Management services, servicing fees and other revenue increased $10.2 million, or 7.8%, to $141.1 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. $5.5 million of this increase was related to the valuation and advisory business and $5.3 million was related to servicing fee revenues. ### Expenses #### Compensation and Employee Benefits Compensation and employee benefits expense increased by $2.3 million, or 0.9%, to $263.4 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. Compensation and employee benefits were 58.8% of total revenue for the three months ended March 31, 2019 as compared to 60.7% for the three months ended March 31, 2018. #### Equity-based compensation and allocations of net income to limited partnership units and FPUs Equity-based compensation and allocations of net income to limited partnership units and FPUs decreased by $3.5 million, or 20.4%, to $13.9 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. This decrease was primarily driven by a decrease of $5.8 million in equity-based compensation, partially offset by allocations of net income of $2.3 million. #### Operating, Administrative and Other Operating, administrative and other expenses increased $12.5 million, or 16.5%, to $87.9 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. This increase was primarily driven by costs related to prior acquisitions and increased interest expense on the warehouse facilities collateralized by U.S. Government Sponsored Enterprises of $4.4 million, which is commensurate with the increase in interest income on Loans held for sale. #### Fees to Related Parties Fees to related parties decreased by $0.2 million, or 2.5%, to $6.7 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. Fees to related parties are allocations paid to BGC Partners and/or Cantor for administrative and support services. #### Depreciation and Amortization Depreciation and amortization for the three months ended March 31, 2019 increased by $5.8 million, or 25.7%, to $28.3 million as compared to the three months ended March 31, 2018. This increase is due to a $4.3 million increase in mortgage servicing rights amortization and $1.7 million increase in fixed asset depreciation. Because the Company recognizes OMSR gains equal to the fair value of servicing rights retained on mortgage loans originated and sold, it also amortizes mortgage servicing rights (“MSRs”) in proportion to the net servicing revenue expected to be earned. Subsequent to the initial recording, MSRs are amortized and carried at the lower of amortized cost or fair value. For the three months ended March 31, 2019 and 2018, our expenses included $22.1 million and $17.8 million of MSR amortization, respectively. #### Other Income (Losses), Net Other Income (Losses), Net of $(9.7) million in the three months ended March 31, 2019 is primarily related to the mark-to-market losses related to the Nasdaq Forwards of $13.3 million, which was partially offset by $3.9 million of mark-to-market income on the Nasdaq shares held at March 31, 2019. #### Interest (Expense) Income, Net Interest expense of $7.7 million incurred during the three months ended March 31, 2019 is primarily related to interest expense on the 6.125% Senior Notes. This is partially offset by interest income primarily related to employee loans. #### Provision (Benefit) for Income Taxes Provision for income taxes decreased by $0.2 million, or 3.5%, to $6.7 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. This decrease was primarily driven by the mix of allocable revenues among legal entities as a corporation. In general, our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings. #### Net income (loss) attributable to noncontrolling interests Net income attributable to noncontrolling interests decreased by $6.0 million, or 47.9%, to $6.5 million for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. This decrease was due to lower pre-tax income and the change in Newmark’s corporate structure as result of the Spin-Off. ### QUARTERLY RESULTS OF OPERATIONS The following table sets forth our unaudited quarterly results of operations for the indicated periods (in thousands). Results of any period are not necessarily indicative of results for a full year and may, in certain periods, be affected by seasonal fluctuations in our business. Certain reclassifications have been made to prior period amounts to conform to the current period’s presentation. | Revenues: | March 31, 2019 | December 31, 2018 | September 30, 20182 | June 30, 2018 | March 31, 2018 | December 31, 2017 | September 30, 20171,2 | June 30, 20171 | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Commissions | $275,268 | $426,431 | $319,340 | $279,833 | $260,735 | $312,992 | $256,918 | $239,848 | | Gains from mortgage banking activities/originations, net | 31,346 | 49,501 | 51,972 | 41,877 | 38,914 | 41,737 | 45,455 | 73,546 | | Management services, servicing fees and other | 141,042 | 155,759 | 147,497 | 144,909 | 130,811 | 105,847 | 95,848 | 91,677 | | Total revenues | 447,656 | 631,691 | 518,809 | 466,619 | 430,460 | 460,576 | 398,221 | 405,071 | | **Expenses:** | | | | | | | | | | Compensation and employee benefits | 263,353 | 342,876 | 291,382 | 266,639 | 261,088 | 281,439 | 264,294 | 232,862 | | Equity-based compensation and allocations of net income to limited partnership units and FPUs | 13,871 | 99,085 | 40,776 | 67,367 | 17,416 | 76,078 | 24,866 | 29,507 | | Total compensation and employee benefits | 277,224 | 441,961 | 332,158 | 334,006 | 278,504 | 357,517 | 289,160 | 262,369 | | Operating, administrative and other | 87,893 | 91,369 | 84,914 | 80,048 | 75,427 | 60,064 | 52,313 | 59,404 | | Fees to related parties | 6,725 | 6,323 | 6,644 | 6,301 | 6,894 | 6,531 | 5,355 | 4,167 | | Depreciation and amortization | 28,304 | 29,146 | 25,873 | 20,201 | 22,513 | 24,438 | 29,922 | 23,218 | | Total operating expenses | 400,146 | 568,799 | 449,589 | 440,556 | 383,338 | 448,550 | 376,750 | 349,158 | | **Other income (losses), net:** | | | | | | | | | | Other income (loss) | (9,718) | 28,234 | 93,717 | (365) | 5,707 | (2,029) | 77,264 | (715) | | Total other income (losses), net | (9,718) | 28,234 | 93,717 | (365) | 5,707 | (2,029) | 77,264 | (715) | | Income from operations | 37,792 | 91,126 | 162,937 | 25,698 | 52,829 | 9,997 | 98,735 | 55,198 | | Interest (Expense) Income, net | (7,699) | (14,705) | (11,509) | (10,582) | (13,409) | (1,453) | 1,724 | 1,381 | | Income before income taxes and noncontrolling interests | 30,093 | 76,421 | 151,428 | 15,116 | 39,420 | 8,544 | 100,459 | 56,579 | | Provision for income taxes | 6,687 | 36,862 | 35,870 | 10,822 | 6,933 | 54,082 | 1,989 | 1,422 | | Consolidated net income (loss) | 23,406 | 39,559 | 115,558 | 4,294 | 32,487 | (45,538) | 98,470 | 55,157 | | Less: Net income (loss) attributable to noncontrolling interests | 6,502 | 21,800 | 47,321 | 3,555 | 12,490 | 633 | (337) | 12 | | Net income (loss) available to common stockholders | $16,904 | $17,759 | $68,237 | $739 | $19,997 | $(46,171) | $98,807 | $55,145 | (1) Financial results have been retrospectively adjusted to include the financial results of Berkeley Point. See “Berkeley Point Acquisition and Investment in Real Estate LP”. (2) Amounts include the gains related to the Nasdaq Earn-out associated with the Nasdaq monetization transactions recorded in Other income, net. ### Financial Position, Liquidity and Capital Resources ### Overview The primary source of liquidity for our business is the cash flow provided by our operations. Our future capital requirements will depend on many factors, including our rate of sales growth, the expansion of our sales and marketing activities, our expansion into other markets and our results of operations. To the extent that existing cash, cash from operations and credit facilities (including the Cantor Credit Agreement), and Nasdaq shares are insufficient to fund our future activities, we may need to raise additional funds through public equity or debt financing. On October 25, 2018 Newmark received a stand-alone BBB- stable credit rating from Fitch Ratings Inc. and a BB+ stable rating from Standard & Poor’s and on October 29, 2018 Newmark received a stand-alone BBB- stable credit rating from Kroll Bond Rating Agency. As of March 31, 2019, our long-term debt consists of our 6.125% Senior Notes with a carrying amount of $538.6 million. ### Balance Sheet Total assets at March 31, 2019 were $3,453.2 million as compared to $3,454.2 million at December 31, 2018. The decrease of $1.0 million was driven by decreases of $117.8 million in loans held for sale, a decrease in cash of $50.0 million, a decrease in receivables from related parties of $20.5 million, a decrease in other current assets of $6.2 million, a decrease in receivables, net of $5.7 million and a decrease in marketable securities of $5.2 million. These decreases were partially offset by increases in other assets of $179.7 million primarily related to ROU assets and in loans from employees and partners of $27.5 million. Total liabilities at March 31, 2019 and December 31, 2018 were $2,405.8 million and $2,371.2 million, respectively. Total liabilities increased primarily due to an increase of $174.8 million of other long-term liabilities, resulting from the ROU liabilities, an increase in securities loaned of $43.7 million, and an increase in current portion of payables to related parties of $15.8 million. These increases were partially offset by decreases in borrowings from our warehouse facilities collateralized by U.S. Government Sponsored Enterprises of $112.6 million, $77.7 million of accrued compensation, and $10.0 million of current portion of accounts payable, accrued expenses and liabilities. ### Liquidity Fees to related parties that are charged by BGC Partners and/ or Cantor to Newmark are reflected as cash flows from operating activities in the unaudited condensed consolidated statement of cash flows for each period presented. All other amounts sent to or from BGC Partners and Cantor are reflected as cash flows from financing activities in the unaudited condensed consolidated statement of cash flows for each period presented. For the three months ended March 31, 2019, net cash provided by operating activities was $39.4 million, and net cash used in operating activities was $590.4 million for the three months ended March 31, 2018. Net cash used in operating activities excluding activity from loan originations and sales for the three months ended March 31, 2019 was $78.4 million, and net cash provided by operating activities excluding activity from loan originations and sales for the three months ended March 31, 2018 was $12.6 million. We expect to generate cash flows from operations to fund our business operations and growth strategy to meet our short-term liquidity requirements, which we define as the next 12 months. We also expect that cash flows from operations, cash on hand, our $250.0 million Credit Facility, and Nasdaq shares will be sufficient to fund our operations, growth strategy and dividends and distributions to meet our long-term liquidity requirements. As of March 31, 2019, our liquidity, which Newmark defines as cash and cash equivalents, and marketable securities, less securities loaned, was $72.5 million. This does not include the approximately $451.4 million in additional Nasdaq stock (stock value based on the May 8, 2019 closing price) that Newmark expects to receive between 2023 and 2027. Newmark expects to use its considerable financial resources to repay debt, profitably hire, make accretive acquisitions, pay dividends, and/or repurchase shares and units of Newmark, all while maintaining or improving its credit profile. ### Debt Debt outstanding as of March 31, 2019 and December 31, 2018 was as follows (in thousands): | | As of March 31, 2019 | As of December 31, 2018 | | --- | ---: | ---: | | Warehouse facilities | $859,746 | $972,387 | | **Short-term debt** | 859,746 | 972,387 | | 6.125% Senior Notes | 538,626 | 537,926 | | **Long-term debt** | 538,626 | 537,926 | | **Total debt** | $1,398,372 | $1,510,313 | In addition to the above, Newmark also has a $250.0 million three-year unsecured senior revolving credit facility and a $250.0 million unsecured credit agreement with Cantor. As of March 31, 2019, there were no borrowings under these facilities. #### Credit Facility On November 28, 2018, Newmark entered into a credit agreement by and among Newmark, the several financial institutions from time to time party thereto, as Lenders, and Bank of America N.A., as administrative agent. The Credit Agreement provides for a $250.0 million three-year unsecured senior revolving credit facility. As of December 31, 2018, there were no borrowings outstanding under the new credit agreement. Borrowings under the Credit Facility will bear an annual interest equal to, at Newmark’s option, either (a) LIBOR for specified periods, or upon the consent of all Lenders, such other period that is 12 months or less, plus an applicable margin, or (b) a base rate equal to the greatest of (i) the federal funds rate plus 0.5%, (ii) the prime rate as established by the administrative agent, and (iii) one-month LIBOR plus 1.0%. The applicable margin is 200 basis points with respect to LIBOR borrowings in (a) above and can range 0.25% to 1.25% higher, depending upon Newmark’s credit rating. The Credit Facility also provides for an unused facility fee. #### 6.125% Senior Notes On November 2, 2018, Newmark announced the pricing of an offering of $550.0 million aggregate principal amount of 6.125% Senior Notes due 2023, which closed on November 6, 2018. The 6.125% Senior Notes were offered and sold in a private offering exempt from the registration requirements under the Securities Act. The 6.125% Senior Notes are general senior unsecured obligations of the Company. These 6.125% Senior Notes were priced at 98.937% to yield 6.375%. The 6.125% Senior Notes bear an interest rate of 6.125% per annum, payable on each May 15 and November 15, beginning on May 15, 2019 and will mature on November 15, 2023. The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act. #### Cantor Credit Agreement On November 30, 2018 the Company entered into an unsecured credit agreement with Cantor. The Cantor Credit Agreement provides for each party to issue loans to the other party in the lender’s discretion. Pursuant to the Cantor Credit Agreement, the parties and their respective subsidiaries (with respect to CFLP, other than BGC and its subsidiaries) may borrow up to an aggregate principal amount of $250.0 million from each other from time to time at an interest rate which is higher to CFLP’s or the Company’s short-term borrowing rate then in effect, plus 1.0%. As of December 31, 2018, there were no borrowings outstanding under the new unsecured senior revolving credit agreement. ### Short-Term Borrowings #### Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises As of March 31, 2019, Newmark had $1,250.0 million of committed loan funding available through three commercial banks, an uncommitted warehouse line of $200.0 million, and an uncommitted $325.0 million Fannie Mae loan repurchase facility. Consistent with industry practice, these warehouse facilities are short-term, requiring annual renewal. These warehouse facilities are collateralized by an assignment of the underlying mortgage loans originated under its various lending programs and third-party purchase commitments and are recourse only to our wholly-owned subsidiary, Berkeley Point Capital, LLC. ### Cash flows from operations excluding activity from loan originations and sales, net were as follows (in thousands): | | For the three months ended March 31, 2019 | 2018 | | --- | ---: | ---: | | **Net cash provided by (used in) operating activities (1)** | $39,433 | $(590,394) | | **Add back :** | | | | Loan originations - loans held for sale | 1,554,443 | 1,410,690 | | Loan sales - loans held for sale | (1,685,561) | (822,811) | | Unrealized Gains on loans held for sale | 13,276 | 15,126 | | **Net cash provided by (used in) operations excluding activity from loan orignations and sales (1)** | $(78,409) | $12,611 | 77 (1) Included in working capital are payments for corporate taxes in the amount of $59.3 million for the three months ended March 31, 2019. ### Cash Flows for the three months ended March 31, 2019 For the three months ended March 31, 2019, we generated $39.4 million of cash from operations. However, excluding activity from loan originations and sales, net cash used by operating activities for the three months ended March 31, 2019 was $78.4 million. We had consolidated net income of $23.4 million, $44.1 million of positive adjustments to reconcile net income to net cash provided by operating activities (excluding activity from loan originations and sales) and $145.9 million of negative changes in operating assets and liabilities. The negative change in operating assets and liabilities included $62.1 million of decreases in accrued compensation, $30.0 million in decreases in accounts payable, accrued expenses and other liabilities, $40.0 million of increases in loans, forgivable loans and other receivables from employees and partners primarily related to continued hiring and expansion of our business, and $18.6 million in increases in other assets. Cash provided by investing activities was $2.9 million, primarily related to $9.1 million of proceeds from the sale of marketable securities, partially offset by $5.9 million of purchases of fixed assets. We used $91.9 million of cash from financing activities primarily due to net payments to warehouse facilities collateralized by U.S. Government Sponsored Enterprises of $112.6 million, distributions to limited partnership interests and noncontrolling interests of $34.0 million, and dividends of $16.0 million, which were partially offset from proceeds from securities loaned of $43.7 million and settlement of pre-Spin-Off related party receivables of $27.0 million. ### Cash Flows for the three months ended March 31, 2018 For the three months ended March 31, 2018, we used $590.4 million of cash in operations. We had consolidated net income of $32.5 million, $568.3 million of negative adjustments to reconcile net income to net cash provided by operating activities, and $54.6 million of negative changes in operating assets and liabilities. $603.0 million of adjustments to reconcile net income to net cash provided by operating activities was related to loans held for sale. The negative change in operating assets and liabilities included $24.6 million of increases in loans, forgivable loans and other receivables from employees and partners primarily related to continued hiring and expansion of our business. We generated $42.5 million of cash provided by investing activities primarily related to proceeds from the sale of marketable securities. We generated $666.6 million of cash from financing activities primarily due to net proceeds from warehouse notes payable of $590.0 million, $242.0 million of proceeds from BGC’s investment in Newmark LPU’s and $162.0 million of new borrowings from BGC under the credit facility, partially offset by $270.7 million repayment of long-term debt. ### CREDIT RATINGS Our public long-term credit ratings and associated outlooks are as follows: | | Rating | Outlook | | --- | --- | --- | | Fitch Ratings Inc. (1) | BBB- | Stable | | Standards & Poor's (2) | BB+ | Stable | | Kroll Bond Rating Agency (3) | BBB- | Stable | (1) On October 25, 2018, Fitch Ratings Inc. assigned Newmark’s first-time Issuer Default rating of BBB- and assigned a stable rating outlook. (2) On October 25, 2018, Standard & Poor’s assigned Newmark’s Issuer credit rating at BB+ and assigned a stable rating outlook. (3) On October 29, 2018, Kroll Bond Rating Agency assigned Newmark’s long-term Issuer credit rating at BBB- and assigned a stable rating outlook. Credit ratings and associated outlooks are influenced by a number of factors, including but not limited to: operating environment, earnings and profitability trends, the prudence of funding and liquidity management practices, balance sheet size/composition and resulting leverage, cash flow coverage of interest, composition and size of the capital base, available liquidity, outstanding borrowing levels and the firm’s competitive position in the industry. A credit rating and/or the associated outlook can be revised upward or downward at any time by a rating agency if such rating agency decides that circumstances warrant such a change. Any reduction in our credit ratings and/or the associated outlook could adversely affect the availability of debt financing on terms acceptable to us, as well as the cost and other terms upon which we are able to obtain any such financing. In addition, credit ratings and associated outlooks may be important to customers or counterparties when we compete in certain markets and when we seek to engage in certain transactions. In connection with certain agreements, interest rates on our notes may incur increases of up to 2% in the event of a credit ratings downgrade. ### REGULATORY REQUIREMENTS As a result of the Berkeley Point Acquisition, Newmark is now subject to various capital requirements in connection with seller/servicer agreements that Newmark has entered into with the various GSEs. Failure to maintain minimum capital requirements could result in Newmark’s inability to originate and service loans for the respective GSEs and could have a direct material adverse effect on Newmark’s unaudited condensed consolidated financial statements. As of March 31, 2019, Newmark has met all capital requirements. As of March 31, 2019, the most restrictive capital requirement was Fannie Mae’s net worth requirement. Newmark exceeded the minimum requirement by $326.8 million. Certain of Newmark’s agreements with Fannie Mae allow Newmark to originate and service loans under Fannie Mae’s Delegated Underwriting and Servicing (“DUS”) Program. These agreements require Newmark to maintain sufficient collateral to meet Fannie Mae’s restricted and operational liquidity requirements based on a pre-established formula. Certain of Newmark’s agreements with Freddie Mac allow Newmark to service loans under Freddie Mac’s Targeted Affordable Housing (“TAH”) Program. These agreements require Newmark to pledge sufficient collateral to meet Freddie Mac’s liquidity requirement of 8% of the outstanding principal of TAH loans serviced by Newmark. As of March 31, 2019 Newmark has met all liquidity requirements. In addition, as a servicer for Fannie Mae, GNMA and FHA, Newmark is required to advance to investors any uncollected principal and interest due from borrowers. As of March 31, 2019 outstanding borrower advances were approximately $0.1 million, and are included in “Other assets” in the accompanying unaudited condensed consolidated balance sheets. See “Regulation” in Part I, Item 1 of our Annual Report on Form 10-K for additional information related to our regulatory environment. ### EQUITY ### Share Exchange Agreement In relation to the IPO, on December 13, 2017, Newmark entered into an exchange agreement with Cantor, CFGM, BGC and other Cantor affiliates entitled to hold Class B common stock, providing the right to exchange from time to time shares of Class A common stock of Newmark now owned or hereafter acquired, as applicable, on a one-for-one basis for shares of Class B common stock, up to the number of shares of Newmark Class B common stock that are authorized but unissued under Newmark’s certificate of incorporation. The Newmark Audit Committee and Board of Directors have determined that the exchange agreement is in the best interests of Newmark and its stockholders because, among other things, it will help ensure that Cantor retains its exchangeable limited partnership units in Newmark Holdings, which is the same partnership in which Newmark’s partner employees participate, thus continuing to align the interests of Cantor with those of the partner employees. ### Repurchase Program On August 1, 2018, the Newmark Board of Directors and Audit Committee authorized repurchases of shares of Newmark’s Class A common stock and redemptions or repurchases of limited partnership interests or other equity interests in Newmark’s subsidiaries up to $200.0 million, increased from the $100.0 million that had been authorized on March 12, 2018. This authorization includes repurchases of stock or units from executive officers, other employees and partners, including of BGC and Cantor, as well as other affiliated persons or entities. From time to time, we may actively continue to repurchase shares and/or redeem units. In December 2018, we repurchased 50,000 shares of Newmark’s Class A common stock for $0.5 million. As of March 31, 2019, Newmark had approximately $199.5 million remaining from its share repurchase and unit redemption authorization. ### Fully Diluted Share Count Our fully diluted weighted-average share count for the three months ended March 31, 2019 was as follows (in thousands): | | Three Months Ended March 31, 2019 | | --- | ---: | | Common stock outstanding(1) | 178,611 | | Partnership units(2) | 89,991 | | Other | 455 | | Total(3) | 269,057 | (1) Common stock consisted of Class A shares, Class B shares and contingent shares for which all necessary conditions have been satisfied except for the passage of time. For the three months ended March 31, 2019, the weighted-average number of Class A shares was 157.2 million shares, Class B shares was 21.3 million shares and approximately 0.1 million shares of contingent Class A common stock and limited partnership units were included in our fully diluted EPS computation because the conditions for issuance had been met by the end of the period. (2) Partnership units collectively include founding/working partner units, limited partnership units, and Cantor units, (See Note 2— “Limited Partnership Interests”, to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of our Quarterly Report on Form 10-Q for more information.) In general, these partnership units are potentially exchangeable into shares of Newmark Class A common stock. In addition, partnership units held by Cantor are generally exchangeable into shares of Newmark Class A common stock and/or for up to 23.6 million shares of Newmark Class B common stock. These partnership units also generally receive quarterly allocations of net income, after the deduction of the Preferred Distribution, based on their weighted-average pro-rata share of economic ownership of the operating subsidiaries. As a result, these partnership units are included in the fully diluted share count calculation shown above. (3) For the three months ended March 31, 2019, there were no potentially anti-dilutive securities that were included in the computation of fully diluted earnings per share. ### CONTINGENT PAYMENTS RELATED TO ACQUISITIONS Newmark completed acquisitions from 2014 through 2018 for which contingent cash consideration of $16.8 million and limited partnership units of 1.4 million may be issued on certain targets being met through 2021. The contingent equity instruments are issued by and are included in the current portion of “Accounts payable, accrued expenses and other liabilities” on Newmark’s unaudited condensed consolidated balance sheets. The contingent cash liability is recorded at fair value as deferred consideration on Newmark’s unaudited condensed consolidated balance sheets. ### EQUITY METHOD INVESTMENTS Newmark has an investment in Real Estate LP, a joint venture with Cantor in which Newmark has a less than majority ownership and has the ability to exert significant influence over the operating and financial policies. As of March 31, 2019, Newmark had $101.3 million in this equity method investment, which represents a 27% ownership in Real Estate LP. ### Registration Statements In January 2019, we filed a registration statement on Form S-4 pursuant to which the holders of our 6.125% Senior Notes due 2023 which were issued in a private placement were offered an opportunity to exchange such notes for new registered notes with substantially identical terms. The registration statement was declared effective by the SEC and on February 5, 2019, we announced an offer to exchange up to all $550.0 million aggregate principal amount of our outstanding 6.125% Senior Notes due 2023 for an equivalent amount of 6.125% Senior Notes due 2023 registered under the Securities Act. The exchange offer closed on March 14, 2019, and the 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act. We have an effective registration statement on Form S-8 with respect to the issuance of up to 50.0 million shares of our Class A common stock (the “S-8 Registration Statement”) from time to time pursuant to our Long Term Incentive Plan (the “Equity Plan”). The Equity Plan authorizes the issuance of up to 400.0 million shares of our Class A common stock (subject to adjustment) pursuant to the exercise or settlement of awards granted under the Equity Plan. There are 400.0 million shares reserved for issuance under the Equity Plan and as of March 31, 2019, we have issued 13.3 million shares of Class A Common stock under the Equity Plan and the S-8 Registration Statement. As of March 31, 2019, there were 386.7 million shares remaining for issuance under the S-8 Registration Statement. ### Contractual Obligations and Commitments The following table summarizes certain of our contractual obligations at March 31, 2019 (in thousands): | | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | | --- | ---: | ---: | ---: | ---: | ---: | | Operating leases(1) | $322,679 | $29,522 | $76,899 | $66,489 | $149,769 | | Warehouse facility collateralized by U.S. Government Sponsored Enterprises (2) | 859,746 | 859,746 | — | — | — | | Long-term debt(3) | 550,000 | — | — | 550,000 | — | | Interest on long-term debt(4) | 168,437 | 33,687 | 67,375 | 67,375 | — | | Interest on Warehouse facilities collateralized by U.S. Government Sponsored Enterprises (5) | 18,822 | 18,822 | — | — | — | | Total contractual obligations | $1,919,684 | $941,777 | $144,274 | $683,864 | $149,769 | (1) Operating leases are related to rental payments under various non-cancelable leases principally for office space. (2) Warehouse Facilities are collateralized by $873.0 million of loans held for sale, at fair value (See Note 21 – “Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 in this Quarterly Report on Form 10-Q) which loans were either under commitment to be purchased by Freddie Mac or had confirmed forward trade commitments for the issuance of and purchase of Fannie Mae or Ginnie Mae mortgage-backed securities. (3) Long-term debt reflects long-term borrowings of $550.0 million, 6.125% Senior Notes due 2023. The carrying amount of these notes was approximately $538.6 million. (See Note 22 –“ Long-Term Debt” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.) (4) Reflects interest on the $550.0 million 6.125% Senior Notes until their maturity date of November 15, 2023. (5) Interest on the warehouse facilities collateralized by U.S. Government Sponsored Enterprises was projected by using the 1-month LIBOR rate plus their respective additional basis points, primarily 120 basis points above LIBOR, applied to their respective outstanding balances as of March 31, 2019, through their respective maturity dates. Their respective maturity dates range from June to October 2019, while one line has an open maturity date. The notional amount of these committed and uncommitted warehouse facilities was $1,775.0 million at March 31, 2019. One of these lines had been increased temporarily by $300.0 million to $600.0 million for the period of January 29, 2019 to April 1, 2019. As of March 31, 2019, Newmark was committed to fund approximately $657.0 million, which is the total remaining draws on construction loans originated by Newmark under the Housing and Urban Development (“HUD”) 221(d)4, 220 and 232 programs, rate locked loans that have not been funded, forward commitments as well as the funding for Fannie Mae structured transactions. Newmark also has corresponding commitments to sell these loans to various investors as they are funded. ### Critical Accounting Policies and Estimates The preparation of our unaudited condensed consolidated financial statements in conformity with U.S. GAAP guidance requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities in our unaudited condensed consolidated financial statements. These accounting estimates require the use of assumptions about matters, some which are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our unaudited condensed consolidated balance sheets, unaudited condensed consolidated statements of operations and unaudited condensed consolidated statements of cash flows could be materially affected. We believe that of our significant accounting policies, the following policies involve a higher degree of judgment and complexity. ### Revenue Recognition We derive our revenues primarily through commissions from brokerage services, gains from mortgage banking activities/originations, net, revenues from real estate management services, servicing fees and other revenues. Revenue from contracts with customers is recognized when, or as, the Company satisfies its performance obligations by transferring the promised goods or services to the customers as determined by when, or as, the customer obtains control of that good or service. A performance obligation may be satisfied over time or at a point in time. Revenue from a performance obligation satisfied over time is recognized by measuring the Company’s progress in satisfying the performance obligation as evidenced by the transfer of the goods or services to the customer. Revenue from a performance obligation satisfied at a point in time is recognized at the point in time when the customer obtains control over the promised good or service. The amount of revenue recognized reflects the consideration we expect to be entitled to in exchange for those promised goods or services (i.e., the “transaction price”). In determining the transaction price, we consider consideration promised in a contract that includes a variable amount, referred to as variable consideration, and estimate the amount of consideration due the Company. Additionally, variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. In determining when to include variable consideration in the transaction price, the Company considers all information (historical, current and forecast) that is available, including the range of possible outcomes, the predictive value of past experiences, the time period of when uncertainties expect to be resolved and the amount of consideration that is susceptible to factors outside of the Company’s influence. We also use third-party service providers in the provision of its services to customers. In instances where a third-party service provider is used, the Company performs an analysis to determine whether the Company is acting as a principal or an agent with respect to the services provided. To the extent that the Company determines that it is acting as a principal, the revenue and the expenses incurred are recorded on a gross basis. In instances where the Company has determined that it is acting as an agent, the revenue and expenses are presented on a net basis within the revenue line item. In some instances, the Company performs services for customers and incurs out-of-pocket expenses as part of delivering those services. The Company’s customers agree to reimburse the Company for those expenses, and those reimbursements are part of the contract’s transaction price. Consequently, these expenses and the reimbursements of such expenses from the customer are presented on a gross basis because the services giving rise to the out-of-pocket expenses do not transfer a good or service. The reimbursements are included in the transaction price when the costs are incurred, and the reimbursements are due from the customer. ### Equity-Based and Other Compensation Discretionary Bonus: A portion of our compensation and employee benefits expense comprises discretionary bonuses, which may be paid in cash, equity, partnership awards or a combination thereof. We accrue expense in a period based on revenues in that period and on the expected combination of cash, equity and partnership units. Given the assumptions used in estimating discretionary bonuses, actual results may differ. Restricted Stock Units: We account for equity-based compensation under the fair value recognition provisions of U.S. GAAP guidance. Restricted stock units (which we refer to as “RSUs”) provided to certain employees are accounted for as equity awards, and in accordance with U.S. GAAP guidance, we are required to record an expense for the portion of the RSUs that is ultimately expected to vest. Further, U.S. GAAP guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Because significant assumptions are used in estimating employee turnover and associated forfeiture rates, actual results may differ from our estimates under different assumptions or conditions. The fair value of RSU awards to employees is determined on the date of grant, based on the fair value of BGC Partners’ Class A common stock. Generally, RSUs granted by us as employee compensation do not receive dividend equivalents; as such, we adjust the fair value of the RSUs for the present value of expected forgone dividends, which requires us to include an estimate of expected dividends as a valuation input. This grant-date fair value is amortized to expense ratably over the awards’ vesting periods. For RSUs with graded vesting features, we have made an accounting policy election to recognize compensation cost on a straight-line basis. The amortization is reflected as non-cash equity-based compensation expense in our unaudited condensed consolidated statements of operations. Restricted Stock: Restricted stock provided to certain employees is accounted for as an equity award, and as per U.S. GAAP guidance, we are required to record an expense for the portion of the restricted stock that is ultimately expected to vest. We have granted restricted stock that is not subject to continued employment or service; however, transferability is subject to compliance with our and our affiliates’ customary non-compete obligations. Such shares of restricted stock are generally saleable by partners in 5 to 10 years. Because the restricted stock is not subject to continued employment or service, the grant-date fair value of the restricted stock is expensed on the date of grant. The expense is reflected as non-cash equity-based compensation expense in our unaudited condensed consolidated statements of operations. Limited Partnership Units: Limited partnership units in BGC Holdings and Newmark Holdings are generally held by employees. Generally, such units receive quarterly allocations of net income, which are cash distributed on a quarterly basis and generally contingent upon services being provided by the unit holders. As discussed above, preferred units in BGC Holdings and Newmark Holdings are not entitled to participate in partnership distributions other than with respect to a distribution at a rate of either 0.6875% (which is 2.75% per calendar year) or such other amount as set forth in the award documentation. The quarterly allocations of net income to such limited partnership units are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our unaudited condensed consolidated statements of operations. Certain of these limited partnership units entitle the holders to receive post-termination payments equal to the notional amount in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards under U.S. GAAP guidance. Accordingly, we recognize a liability for these units on our unaudited condensed consolidated balance sheets as part of “Accrued compensation” for the amortized portion of the post-termination payment amount, based on the current fair value of the expected future cash payout. We amortize the post-termination payment amount, less an expected forfeiture rate, over the vesting period, and record an expense for such awards based on the change in value at each reporting period in our unaudited condensed consolidated statements of operations as part of “Compensation and employee benefits.” Certain limited partnership units in BGC Holdings and Newmark Holdings are granted exchangeability into BGC Partners Class A common stock (subject to adjustments and other requirements as set forth in the BGC Holdings and Newmark Holdings limited partnership agreement). At the time exchangeability is granted, we recognize an expense based on the fair value of the award on that date, which is included in “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in our unaudited condensed consolidated statements of operations. Employee Loans: We have entered into various agreements with certain of our employees and partners whereby these individuals receive loans that may be either wholly or in part repaid from distributions that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. Cash advance distribution loans are documented in formal agreements and are repayable in timeframes outlined in the underlying agreements. We intend for these advances to be repaid in full from the future distributions on existing and future awards granted. The distributions are treated as compensation expense when made and the proceeds are used to repay the loan. The forgivable portion of any loans is recognized as compensation expense in our unaudited condensed consolidated statements of operations over the life of the loan. We review the loan balances each reporting period for collectability. If we determine that the collectability of a portion of the loan balances is not expected, we recognize a reserve against the loan balances. Actual collectability of loan balances may differ from our estimates. As of March 31, 2019, and December 31, 2018, the aggregate balance of employee loans, net of reserve, was $313.0 million and $285.5 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners, net” in our unaudited condensed consolidated balance sheets. Compensation expense for the above-mentioned employee loans for the three months ended March 31, 2019 was $7.4 million and $6.0 million for the three months ended March 31, 2018. The compensation expense related to these loans was included as part of “Compensation and employee benefits” in our unaudited condensed consolidated statements of operations. ### Goodwill Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. As prescribed in U.S. GAAP guidance, *Intangibles – Goodwill and Other Intangible Assets*, goodwill is not amortized, but instead is periodically tested for impairment. We review goodwill for impairment on an annual basis during the fourth quarter of each fiscal year or whenever an event occurs, or circumstances change that could reduce the fair value of a reporting unit below its carrying amount. When reviewing goodwill for impairment, we first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If the results of the qualitative assessment are not conclusive, or if we choose to bypass the qualitative assessment, we perform a goodwill impairment analysis using a two-step process. Newmark had goodwill balances as of March 31, 2019 and of December 31, 2018 of $515.3 million. The first step of the process involves comparing each reporting unit’s estimated fair value with its carrying value, including goodwill. To estimate the fair value of the reporting units, we use a discounted cash flow model and data regarding market comparables. The valuation process requires significant judgment and involves the use of significant estimates and assumptions. These assumptions include cash flow projections, estimated cost of capital and the selection of peer companies and relevant multiples. Because significant assumptions and estimates are used in projecting future cash flows, choosing peer companies and selecting relevant multiples, actual results may differ from our estimates under different assumptions or conditions. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is deemed not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of potential impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated a potential impairment may exist. The implied fair value of goodwill is determined by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identified intangibles. Events such as economic weakness, significant declines in operating results of reporting units, or significant changes to critical inputs of the goodwill impairment test (e.g., estimates of cash flows or cost of capital) could cause the estimated fair value of our reporting units to decline, which could result in an impairment of goodwill in the future. ### Income Taxes Newmark accounts for income taxes using the asset and liability method as prescribed in U.S. GAAP guidance, *Income Taxes*. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between the unaudited condensed consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Certain of Newmark’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (“UBT”) in New York City. Therefore, the tax liability or benefit related to the partnership income or loss except for UBT rests with the partners, rather than the partnership entity. As such, the partners’ tax liability or benefit is not reflected in Newmark’s unaudited condensed consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included in Newmark’s unaudited condensed consolidated financial statements also reflect the results of the entities that are taxed as corporations, either in the U.S. or in foreign jurisdictions. Newmark provides for uncertain tax positions based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. Management is required to determine whether a tax position is more likely than not to be sustained upon examination by tax authorities, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Because significant assumptions are used in determining whether a tax benefit is more likely than not to be sustained upon examination by tax authorities, actual results may differ from Newmark’s estimates under different assumptions or conditions. Newmark recognizes interest and penalties related to uncertain tax positions in “Provision for income taxes” in Newmark’s unaudited condensed consolidated statements of operations. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized. In assessing the need for a valuation allowance, Newmark considers all available evidence, including past operating results, the existence of cumulative losses in the most recent fiscal years, estimates of future taxable income and the feasibility of tax planning strategies. The measurement of current and deferred income tax assets and liabilities is based on provisions of enacted tax laws and involves uncertainties in the application of tax regulations in the U.S. and other tax jurisdictions. Because Newmark’s interpretation of complex tax law may impact the measurement of current and deferred income taxes, actual results may differ from these estimates under different assumptions regarding the application of tax law. ### Derivative Financial Instruments We have loan commitments to extend credit to third parties. The commitments to extend credit are for mortgage loans at a specific rate (rate lock commitments). These commitments generally have fixed expiration dates or other termination clauses and may require a fee. We are committed to extend credit to the counterparty as long as there is no violation of any condition established in the commitment contracts. We simultaneously enter into an agreement to deliver such mortgages to third-party investors at a fixed price (forward sale contracts). Both the commitment to extend credit and the forward sale commitment qualify as derivative financial instruments. We recognize all derivatives on the unaudited condensed consolidated balance sheets as assets or liabilities measured at fair value. The change in the derivatives fair value is recognized in current period earnings. Newmark entered into four variable postpaid forward contracts as a result of the Nasdaq Forwards. These contracts qualify as derivative financial instruments. The Nasdaq Forwards provide Newmark with the ability to redeem the EPUs for Nasdaq stock, and as these instruments are not legally detachable, they represent single financial instruments. The financial instruments’ EPU redemption feature for Nasdaq common stock is not clearly and closely related to the economic characteristics and risks of Newmark’s EPU equity host instruments, and, therefore, it represents an embedded derivative that is required to be bifurcated and recorded at fair value on Newmark’s balance sheet, with all changes in fair value recorded as a component of “Other income, net” on Newmark’s unaudited condensed consolidated statements of operations. See Note 11 — “Derivatives”, to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information. ### Recent Accounting Pronouncements See Note 1— “Organization and Basis of Presentation,” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, for information regarding recent accounting pronouncements. ### Dividend Policy Our Board of Directors has authorized a dividend policy that reflects our intention to pay a quarterly dividend. Our dividends to our common stockholders will be determined by our Board of Directors based on our expected post-tax Adjusted Earnings per fully diluted share, as a measure of net income for the year. See below for a definition of “post-tax Adjusted Earnings” per fully diluted share. For the first quarter of 2019, our Board of Directors declared a dividend of 10 cents per share based on management’s current expectation of our post-tax Adjusted Earning per fully diluted share for the year, and has indicated that it expects such dividend to remain consistent for the full year. To the extent that 25% of our post-tax Adjusted Earnings per fully diluted share for the year exceeds this dividend on an annualized basis (i.e. an expected aggregate of $0.40 for four quarters), we do not expect that our Board of Directors will increase the amount of the quarterly dividend payment during the year, or make downward adjustment in the event of a shortfall, although no assurance can be given that adjustments will not be made during the year. We have indicated that we expect to announce the annual expected dividend rate in the first quarter of each year. The declaration, payment, timing and amount of any future dividends payable by us will be at the sole discretion of our Board of Directors, provided that any dividend to our common stockholders that would result in the dividends for a year exceeding 25% of our post-tax Adjusted Earnings per fully diluted share for such year shall require the consent of the holder of a majority of the Newmark Holdings exchangeable limited partnership interests. We are a holding company, with no direct operations, and therefore we are able to pay dividends only from our available cash on hand and funds received from distributions from Newmark OpCo. Our ability to pay dividends may also be limited by regulatory or other considerations as well as by covenants contained in financing or other agreements. In addition, under Delaware law our dividends may be payable only out of surplus, which is our net assets minus our capital (as defined under Delaware law), or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Accordingly, any unanticipated accounting, tax, regulatory or other charges may adversely affect our ability to declare and pay dividends. While we intend to declare and pay dividends quarterly, there can be no assurance that our Board of Directors will declare dividends at all or on a regular basis or that the amount of our dividends will not change. ### Non-GAAP Financial Measures Newmark uses non-GAAP financial measures that differ from the most directly comparable measures calculated and presented in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”). Non-GAAP financial measures used by the Company include, but are not limited to “Adjusted Earnings before noncontrolling interests and taxes”, which is used interchangeably with “pre-tax Adjusted Earnings”; and “Post-tax Adjusted Earnings to fully diluted shareholders”, which is used interchangeably with “post-tax Adjusted Earnings.” ### Equity-based Compensation and Allocations of Net Income to Limited Partnership Units and FPUs Newmark has changed the GAAP line item formerly known as “Allocations of net income and grant of exchangeability to limited partnership units and FPUs and issuance of common stock” to “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in the Company’s unaudited condensed consolidated statements of operations. The change resulted in the reclassification of amortization charges related to equity-based awards such as REUs and RSUs from GAAP “Compensation and employee benefits” to “Equity-based compensation and allocations of net income to limited partnership units and FPUs”. This change in presentation had no impact on the Company’s GAAP “Total compensation and employee benefits” nor GAAP “Total expenses”. Certain reclassifications have been made to previously reported amounts to conform to the current presentation. These GAAP equity-based compensation charges reflect the following items: \* Charges with respect to grants of exchangeability, which reflect the right of holders of limited partnership units with no capital accounts, such as LPUs and PSUs, to exchange these units into shares of common stock, or into partnership units with capital accounts, such as HDUs, as well as cash paid with respect to taxes withheld or expected to be owed by the unit holder upon such exchange. The withholding taxes related to the exchange of certain non-exchangeable units without a capital account into either common shares or units with a capital account may be funded by the redemption of preferred units such as PPSUs. \* Charges with respect to preferred units. Any preferred units would not be included in the Company’s fully diluted share count because they cannot be made exchangeable into shares of common stock and are entitled only to a fixed distribution. Preferred units are granted in connection with the grant of certain limited partnership units that may be granted exchangeability at ratios designed to cover any withholding taxes expected to be paid by the unit holder upon exchange. This is an alternative to the common practice among public companies of issuing the gross amount of shares to employees, subject to cashless withholding of shares, to pay applicable withholding taxes. \* GAAP equity-based compensation charges with respect to the grant of an offsetting amount of common stock or partnership units with capital accounts in connection with the redemption of non-exchangeable units, including PSUs and LPUs. \* Charges related to amortization of RSUs and limited partnership units. \* Charges related to grants of equity awards, including common stock or partnership units with capital accounts. \* Allocations of net income to limited partnership units and FPUs. Such allocations represent the pro-rata portion of post-tax GAAP earnings available to such unit holders. The Company’s Adjusted Earnings measure excludes all GAAP charges included in the line item “Equity-based compensation and allocations of net income to limited partnership units and FPUs” (or “equity-based compensation” for purposes of defining the Company’s non-GAAP results) as recorded on the Company’s GAAP unaudited condensed consolidated statements of operations and GAAP unaudited condensed consolidated statements of cash flows. Newmark had formerly excluded all charges related to the previous line item “Allocations of net income and grant of exchangeability to limited partnership units and FPUs and issuance of common stock. Virtually all of Newmark’s key executives and producers have equity or partnership stakes in the Company and its subsidiaries and generally receive deferred equity or limited partnership units as part of their compensation. A significant percentage of Newmark’s fully diluted shares are owned by its executives, partners and employees. The Company issues limited partnership units as well as other forms of equity-based compensation, including grants of exchangeability into shares of common stock, to provide liquidity to its employees, to align the interests of its employees and management with those of common stockholders, to help motivate and retain key employees, and to encourage a collaborative culture that drives cross-selling and revenue growth. All share equivalents that are part of the Company’s equity-based compensation program, including REUs, PSUs, LPUs, HDUs, and other units that may be made exchangeable into common stock, as well as RSUs (which are recorded using the treasury stock method), are included in the fully diluted share count when issued or at the beginning of the subsequent quarter after the date of grant. Generally, limited partnership units other than preferred units are expected to be paid a pro-rata distribution based on Newmark’s calculation of Adjusted Earnings per fully diluted share. ### Other Items with Respect to Non-GAAP Results Adjusted Earnings calculations also exclude non-cash GAAP gains attributable to originated mortgage servicing rights (which Newmark refer to as “OMSRs”) and non-cash GAAP amortization of mortgage servicing rights (which the Company refers to as “MSRs”). Under GAAP, the Company recognizes OMSRs gains equal to the fair value of servicing rights retained on mortgage loans originated and sold. Subsequent to the initial recognition at fair value, MSRs are carried at the lower of amortized cost or fair value and amortized in proportion to the net servicing revenue expected to be earned. However, it is expected that any cash received with respect to these servicing rights, net of associated expenses, will increase Adjusted Earnings in future periods. In addition, Adjusted Earnings calculations exclude certain unusual, one-time, non-ordinary or non-recurring items, if any, as well as certain gains and charges with respect to acquisitions, dispositions, or resolutions of litigation. The Company views excluding such items as a better reflection of the ongoing operations of the Company. ### Adjusted Earnings Defined Newmark uses non-GAAP financial measures including, but not limited to, “pre-tax Adjusted Earnings” and “post-tax Adjusted Earnings”, which are supplemental measures of operating results that are used by management to evaluate the financial performance of the Company and its consolidated subsidiaries. Newmark believes that Adjusted Earnings best reflect the operating earnings generated by the Company on a consolidated basis and are the earnings which management considers when managing its business. As compared with “Income (loss) from operations before income taxes” and “Net income (loss) from operations per fully diluted share”, all prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain non-cash items and other expenses that generally do not involve the receipt or outlay of cash by the Company and/or which do not dilute existing stockholders, as described below. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not best reflect the ordinary results of Newmark. ### Adjustments Made to Calculate Pre-Tax Adjusted Earnings Newmark defines pre-tax Adjusted Earnings as GAAP income (loss) from operations, excluding items such as: - Net non-cash GAAP gains or losses related to OMSRs and MSRs - The impact of any unrealized non-cash mark-to-market gains or losses on “Other income (loss)” related to the variable share forward agreements with respect to Newmark’s expected receipt of the Nasdaq payments in 2019, 2020, 2021, and 2022 (the “Nasdaq Forwards”); - Mark-to-market adjustments for cost basis investments under ASU 2016-01; - Non-cash GAAP asset impairment charges, if any; - Non-cash GAAP charges related to the amortization of intangibles with respect to acquisitions; - Unusual, one-time, non-ordinary, or non-recurring items; and - Equity-based compensation. The amount of charges relating to equity-based compensation the Company uses to calculate pre-tax Adjusted Earnings on a quarterly basis is based upon the Company’s estimate of such expected charges during the annual period, as described further below under “Adjustments Made to Calculate Post-Tax Adjusted Earnings”. ### Adjustments Made to Calculate Post-Tax Adjusted Earnings Although Adjusted Earnings are calculated on a pre-tax basis, Newmark also reports post-tax Adjusted Earnings to fully diluted shareholders. The Company defines post-tax Adjusted Earnings to fully diluted shareholders as pre-tax Adjusted Earnings reduced by the non-GAAP tax provision described below and net income (loss) attributable to noncontrolling interest for Adjusted Earnings. The Company calculates its tax provision for post-tax Adjusted Earnings using an annual estimate similar to how it accounts for its income tax provision under GAAP. To calculate the quarterly tax provision under GAAP, Newmark estimates its full fiscal year GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries and the expected inclusions and deductions for income tax purposes, including expected equity-based compensation during the annual period. The resulting annualized tax rate is applied to Newmark’s quarterly GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries. At the end of the annual period, the Company updates its estimate to reflect the actual tax amounts owed for the period. To determine the non-GAAP tax provision, Newmark first adjusts pre-tax Adjusted Earnings by recognizing any, and only, amounts for which a tax deduction applies under applicable law. The amounts include charges with respect to equity-based compensation; certain charges related to employee loan forgiveness; certain net operating loss carryforwards when taken for statutory purposes; and certain charges related to tax goodwill amortization. These adjustments may also reflect timing and measurement differences, including treatment of employee loans; changes in the value of units between the dates of grants of exchangeability and the date of actual unit exchange; variations in the value of certain deferred tax assets; and liabilities and the different timing of permitted deductions for tax under GAAP and statutory tax requirements. After application of these adjustments, the result is the Company’s taxable income for its pre-tax Adjusted Earnings, to which Newmark then applies the statutory tax rates to determine its non-GAAP tax provision. Newmark views the effective tax rate on pre-tax Adjusted Earnings as equal to the amount of its non-GAAP tax provision divided by the amount of pre-tax Adjusted Earnings. Generally, the most significant factor affecting this non-GAAP tax provision is the amount of charges relating to equity-based compensation. Because the charges relating to equity-based compensation are deductible in accordance with applicable tax laws, increases in such charges have the effect of lowering the Company’s non-GAAP effective tax rate and thereby increasing its post-tax Adjusted Earnings. Management uses Adjusted Earnings in part to help it evaluate, among other things, the overall performance of the Company’s business, to make decisions with respect to the Company’s operations, and to determine the amount of dividends payable to common stockholders and distributions payable to holders of limited partnership units. Newmark incurs income tax expenses based on the location, legal structure and jurisdictional taxing authorities of each of its subsidiaries. Certain of the Company’s entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax (“UBT”) in New York City. Any U.S. federal and state income tax liability or benefit related to the partnership income or loss, with the exception of UBT, rests with the unit holders rather than with the partnership entity. The Company’s consolidated financial statements include U.S. federal, state and local income taxes on the Company’s allocable share of the U.S. results of operations. Outside of the U.S., Newmark is expected to operate principally through subsidiary corporations subject to local income taxes. For these reasons, taxes for Adjusted Earnings are expected to be presented to show the tax provision the consolidated Company would expect to pay if 100 percent of earnings were taxed at global corporate rates. ### Calculations of Post-Tax Adjusted Earnings per Share Newmark’s Post-tax Adjusted Earnings per share calculations assume either that: - The fully diluted share count includes the shares related to any dilutive instruments, but excludes the associated expense, net of tax, when the impact would be dilutive; or - The fully diluted share count excludes the shares related to these instruments, but includes the associated expense, net of tax. The share count for Adjusted Earnings excludes certain shares and share equivalents expected to be issued in future periods but not yet eligible to receive dividends and/or distributions. Each quarter, the dividend payable to Newmark’s stockholders, if any, is expected to be determined by the Company’s Board of Directors with reference to a number of factors, including post-tax Adjusted Earnings per share. Newmark may also pay a pro-rata distribution of net income to limited partnership units, as well as to Cantor for its noncontrolling interest. The amount of this net income, and therefore of these payments per unit, would be determined using the above definition of Adjusted Earnings per share on a pre-tax basis. The declaration, payment, timing and amount of any future dividends payable by the Company will be at the discretion of its Board of Directors using the fully diluted share count. In addition, the non-cash preferred dividends are excluded from Adjusted Earnings per share as Newmark expects to redeem the related EPUs with Nasdaq shares. ### Other Matters with Respect to Adjusted Earnings The term “Adjusted Earnings” should not be considered in isolation or as an alternative to GAAP net income (loss). The Company views Adjusted Earnings as a metric that is not indicative of liquidity, or the cash available to fund its operations, but rather as a performance measure. Pre- and post-tax Adjusted Earnings, as well as related measures, are not intended to replace the Company’s presentation of its GAAP financial results. However, management believes that these measures help provide investors with a clearer understanding of Newmark’s financial performance and offer useful information to both management and investors regarding certain financial and business trends related to the Company’s financial condition and results of operations. Management believes that the GAAP and Adjusted Earnings measures of financial performance should be considered together. For more information regarding Adjusted Earnings, see the Company’s most recent financial results press release in which Newmark’s non-GAAP results are reconciled to those under GAAP. ### Unit Redemptions and Exchanges – Executive Officers In connection with the Company’s 2018 executive compensation process, the Company’s executive officers received certain monetization of prior awards as compensation at Newmark, as set forth below. On December 31, 2018, the Compensation Committee approved the monetization of 898,080 BGC Holdings, PPSUs held by Mr. Lutnick (which had an average determination price of $7.65 per unit), and 592,721 Newmark Holdings PPSUs (which had an average determination price of $13.715 per unit), which transactions had an aggregate value of $15,000,000. On February 6, 2019, the Compensation Committee approved a modification which consisted of the following: (i) the right to exchange 1,131,774 non-exchangeable BGC Holdings PSUs held by Mr. Lutnick into 1,131,774 non-exchangeable partnership units with a capital account (HDUs) (which, based on the closing price of the BGC Class A common stock of $6.20 per share on such date, had a value of $7,017,000); and (ii) the right to exchange for cash 1,018,390 BGC Holdings non-exchangeable PPSUs held by Mr. Lutnick, (which had an average determination price of $7.8388 per unit), for a payment of $7,983,000 for taxes when (i) is exchanged. On December 31, 2018, the Compensation Committee approved the monetization of 1,909,188 BGC Holdings PSUs held by Mr. Gosin and 264,985 BGC Holdings PPSUs (which had an average determination price of $4.2625 per unit), which transactions had an aggregate value of $11,000,000. On February 6, 2019, the Compensation Committee approved a modification which consisted of the following: (i) the right to exchange 1,592,016 non-exchangeable HDUs (which, based on the closing price of the BGC Class A common stock of $6.20 per share on such date, had a value of $9,870,501); and (ii) the right to exchange for cash 264,985 BGC Holdings non-exchangeable PPSUs held by Mr. Gosin, (which had an average determination price of $4.2625 per unit), for a payment of $1,129,499 for taxes when (i) is exchanged. On February 22, 2019, the Compensation Committee initially approved for Mr. Gosin grants in Newmark Holdings NPSUs and NPPSUs. On April 25, 2019, the Compensation Committee modified Mr. Gosin’s awards by cancelling the grant of the previously mentioned Newmark Holdings NPSUs and NPPSUs and by granting non-exchangeable Newmark Holdings PSUs and PPSUs. The Committee approved this modification in order to reflect an annual compensation structure rather than a long-term NPSU/NPPSU structure. On December 31, 2018, the Compensation Committee approved the cancellation of 13,552 non-exchangeable PSUs in BGC Holdings held by Mr. Rispoli and the cancelation of 11,089 BGC Holdings PPSUs (which had an average determination price of $5.814 per unit). In connection with the transaction, BGC issued $134,535 in shares of Class A common stock, less applicable taxes and withholdings, resulting in 13,552 net shares of BGC Class A common stock at a price of $5.17 per share and the payment of $64,471 for taxes. On February 22, 2019, the Compensation Committee removed the sale restrictions on 4,229 shares of BGC Class A common stock and 1,961 shares of Newmark Class A common stock held by Mr. Rispoli. ### OUR ORGANIZATIONAL STRUCTURE ### Our Restructuring We are Newmark Group, Inc., a Delaware corporation. We were formed as NRE Delaware, Inc. on November 18, 2016 and changed our name to Newmark Group, Inc. on October 18, 2017. We were formed for the purpose of becoming a public company conducting the operations of BGC Partners’ Real Estate Services segment, including Newmark and Berkeley Point. In December 2017, Newmark completed its initial public offering (the “IPO”) of 23 million shares of its Class A common stock at an initial public offering price of $14.00 per share. Prior to the IPO, Newmark was a wholly owned subsidiary of BGC Partners. Initially, a majority of our issued and outstanding shares of common stock were held by BGC Partners. Through the following series of transactions prior to and following the completion of the Separation and our IPO, we became a separate publicly traded company. Prior to the completion of our IPO, the separation and contribution pursuant to which members of the BGC Group transferred to us substantially all of the assets and liabilities of the BGC Partners’ Real Estate Services segment, including Newmark, Berkeley Point and the right to receive the remainder of the Nasdaq payment, (the “Contribution”), various types of interests of Newmark Holdings were issued to holders of interests of BGC Holdings in proportion to such interests of BGC Holdings held by such holders immediately prior thereto. - Concurrently with the Separation and Contribution, we entered into the transactions described under “Item 7— Management’s Discussion and Analysis of Financial Condition and Results of Operations—Separation, Initial Public Offering, and Spin-Off” in our Annual Report on Form 10-K (the “10-K”). - In March 2018, BGC Partners made an additional investment in us as described under “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations— Separation, Initial Public Offering, and Spin-Off—BGC Partners March 2018 Investment by BGC” in the 10-K. - The types of interests in Newmark, Newmark Holdings and Newmark OpCo outstanding following the completion of these transactions are described under “— Newmark Organizational Structure Following the Spin-Off below.” ### The Separation and Contribution Prior to the completion of the IPO, pursuant to the Original Separation and Distribution Agreement, (“as defined below”), members of the BGC Group transferred to us substantially all of the assets and liabilities of the BGC group relating to BGC Partners’ Real Estate Services segment, including Newmark, Berkeley Point and the right to receive the remainder of the Nasdaq Earn-out. For a description of the Nasdaq Earn-out, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Nasdaq Monetization Transactions” in the 10-K. Prior to the Separation, the BGC Group held all of the historical assets and liabilities related to our business. In connection with the Separation, Newmark Holdings limited partnership interests, Newmark Holdings founding partner interests, Newmark Holdings working partner interests and Newmark Holdings limited partnership units were distributed to holders of BGC Holdings limited partnership interests, BGC Holdings founding partner interests, BGC Holdings working partner interests and BGC Holdings limited partnership units, respectively, in proportion to such interests of BGC Holdings held by such holders immediately prior to the Separation. We also entered into a tax matters agreement with BGC Partners that governs the parties’ respective rights, responsibilities and obligations after the Separation with respect to taxes, tax attributes, the preparation and filing of tax returns, the control of audits and other tax proceedings, tax elections, assistance and cooperation in respect of tax matters, procedures and restrictions relating to the Spin-Off, if any, and certain other tax matters. We also entered into an administrative services agreement with Cantor, which governs the provision by Cantor of various administrative services to us, and our provision of various administrative services to Cantor, at a cost equal to (1) the direct cost that the providing party incurs in performing those services, including third-party charges incurred in providing services, plus (2) a reasonable allocation of other costs determined in a consistent and fair manner so as to cover the providing party’s appropriate costs or in such other manner as the parties agree. We also entered into a transition services agreement with BGC Partners, which governs the provision by BGC Partners of various administrative services to us, and our provision of various administrative services to BGC Partners, on a transitional basis (with a term of up to two years following the Spin-Off) and at a cost equal to (1) the direct cost that the providing party incurs in performing those services, including third-party charges incurred in providing services, plus (2) a reasonable allocation of other costs determined in a consistent and fair manner so as to cover the providing party’s appropriate costs or in such other manner as the parties agree. ### Assumption and Repayment of Indebtedness For a description of Newmark’s assumption and repayment of certain indebtedness prior to the Spin-Off, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Separation, Initial Public Offering, and Spin-Off—Debt Repayments and Credit Agreements” in the 10-K. ### BGC Partners March 2018 Investment On March 7, 2018, BGC Partners and its operating subsidiaries purchased 16,606,726 newly issued exchangeable limited partnership units of Newmark Holdings for an aggregate investment of approximately $242.0 million. The price per unit was based on the $14.57 closing price of our Class A common stock on March 6, 2018 as reported on the NASDAQ Global Select Market. These units are exchangeable, at BGC Partners’ discretion, into either shares of our Class A common stock or our Class B common stock, par value $0.01 per share. Following such issuance, BGC Partners owned 83.4% of our 138.6 million shares of Class A common issued and outstanding on March 7, 2018 and 100% of our 15.8 million issued and outstanding shares of Class B common stock. ### Amended and Restated Separation and Distribution Agreement For a description of the Amended and Restated Separation and Distribution Agreement, see “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Separation, Initial Public Offering, and Spin-Off—Amended and Restated Separation and Distribution Agreement” in the 10-K. ### The Spin-Off On November 30, 2018 , BGC completed the Spin-Off to its stockholders of all of the shares of our common stock owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of our Class A common stock distributed to the holders of shares of BGC’s Class A common stock (including directors and executive officers of BGC Partners) of record as of the close of business on November 23, 2018 (the “Record Date”), and shares of our Class B common stock distributed to the holders of shares of BGC’s Class B common stock (consisting of Cantor and CFGM) of record as of the close of business on the Record Date. Based on the number of shares of BGC common stock outstanding as of the close of business on the Record Date, BGC’s stockholders as of the Record Date received in the Spin-Off 0.463895 of a share of Newmark Class A common stock for each share of BGC Class A common stock held as of the Record Date, and 0.463895 of a share of Newmark Class B common stock for each share of BGC Class B common stock held as of the Record Date. BGC Partners stockholders received cash in lieu of any fraction of a share of Newmark common stock that they otherwise would have received in the Spin-Off. Prior to and in connection with the Spin-Off, 14.8 million Newmark Units held by BGC were exchanged into 9.4 million shares of Newmark Class A common stock and 5.4 million shares of Newmark Class B common stock, and 7.0 million Newmark OpCo Units held by BGC were exchanged into 6.9 million shares of Newmark Class A common stock. These Newmark Class A and Class B shares of common stock were included in the Spin-Off to BGC’s stockholders. In the aggregate, BGC distributed 131,886,409 shares of our Class A common stock and 21,285,537 shares of our Class B common stock to BGC’s stockholders in the Spin-Off. These shares of our common stock collectively represented approximately 94% of the total voting power of our outstanding common stock and approximately 87% of the total economics of our outstanding common stock in each case as of the Distribution Date. On November 30, 2018, BGC Partners also caused its subsidiary, BGC Holdings, to distribute pro-rata (the “BGC Holdings distribution”) all of the 1,458,931 exchangeable limited partnership units of Newmark Holdings, held by BGC Holdings immediately prior to the effective time of the BGC Holdings distribution to its limited partners entitled to receive distributions on their BGC Holdings units (including Cantor and executive officers of BGC) who were holders of record of such units as of the Record Date. The Newmark Holdings units distributed to BGC Holdings partners in the BGC Holdings distribution are exchangeable for shares of Newmark Class A common stock, and in the case of the 449,917 Newmark Holdings units received by Cantor also into shares of Newmark Class B common stock, at the applicable exchange ratio (subject to adjustment). As of March 31, 2019, the exchange ratio was 0.9558 shares of Newmark common stock per Newmark Holdings unit. Following the Spin-Off and the BGC Holdings distribution, BGC Partners ceased to be our controlling stockholder, and BGC and its subsidiaries no longer held any shares of our common stock or other equity interests in us or our subsidiaries. Cantor continues to control Newmark and its subsidiaries following the Spin-Off and the BGC Holdings distribution. Prior to the Spin-Off, 100% of the outstanding shares of our Class B common stock were held by BGC. Because 100% of the outstanding shares of BGC Class B common stock were held by Cantor and CFGM as of the Record Date, 100% of the outstanding shares of our Class B common stock were distributed to Cantor and CFGM in the Spin-Off. As of the Distribution Date, shares of our Class B common stock represented 57.8% of the total voting power of the outstanding Newmark common stock and 12.1% of the total economics of the outstanding Newmark common stock. Cantor is controlled by CFGM, its managing general partner, and, ultimately, by Howard W. Lutnick, who serves as Chairman of Newmark. Mr. Lutnick is also the Chairman of the Board of Directors and Chief Executive Officer of BGC Partners and Cantor and the Chairman and Chief Executive Officer of CFGM, as well as the trustee of an entity that is the sole shareholder of CFGM. Stephen M. Merkel, our Executive Vice President and Chief Legal Officer serves as Executive Vice President General Counsel and Assistant Secretary of BGC Partners, and is employed as Executive Managing Director, General Counsel and Secretary of Cantor. ### Newmark Organizational Structure Following the Spin-Off As of March 31, 2019, there were 157,422,916 shares of our Class A common stock issued and outstanding. Cantor and CFGM held no shares of our Class A common stock. Each share of Class A common stock is generally entitled to one vote on matters submitted to a vote of our stockholders. As of March 31, 2019, Cantor and CFGM held 21,285,533 shares of our Class B common stock representing all of the outstanding shares of our Class B common stock. The shares of Class B common stock held by Cantor and CFGM as of March 31, 2019, represented approximately 57.5% of our total voting power. Each share of Class B common stock is generally entitled to the same rights as a share of Class A common stock, except that, on matters submitted to a vote of our stockholders, each share of Class B common stock is entitled to 10 votes. The Class B common stock generally votes together with the Class A common stock on all matters submitted to a vote of our stockholders. We expect to retain our dual class structure, and there are no circumstances under which the holders of Class B common stock would be required to convert their shares of Class B common stock into shares of Class A common stock. Our amended and restated certificate of incorporation referred to herein as our certificate of incorporation does not provide for automatic conversion of shares of Class B common stock into shares of Class A common stock upon the occurrence of any event. We hold the Newmark Holdings general partnership interest and the Newmark Holdings special voting limited partnership interest, which entitle us to remove and appoint the general partner of Newmark Holdings and serve as the general partner of Newmark Holdings, which entitles us to control Newmark Holdings. Newmark Holdings, in turn, holds the Newmark OpCo general partnership interest and the Newmark OpCo special voting limited partnership interest, which entitle Newmark Holdings to remove and appoint the general partner of Newmark OpCo, and serve as the general partner of Newmark OpCo, which entitles Newmark Holdings (and thereby us) to control Newmark OpCo. In addition, as of March 31, 2019, we directly held Newmark OpCo limited partnership interests consisting of approximately 89,130,079 units representing approximately 33.2% of the outstanding Newmark OpCo limited partnership interests (not including EPUs). We are a holding company that holds these interests, serves as the general partner of Newmark Holdings and, through Newmark Holdings, acts as the general partner of Newmark OpCo. As a result of our ownership of the general partnership interest in Newmark Holdings and Newmark Holdings’ general partnership interest in Newmark OpCo, we will consolidate Newmark OpCo’s results for financial reporting purposes. Cantor, founding partners, working partners and limited partnership unit holders directly hold Newmark Holdings limited partnership interests. Newmark Holdings, in turn, holds Newmark OpCo limited partnership interests and, as a result, Cantor, founding partners, working partners and limited partnership unit holders indirectly have interests in Newmark OpCo limited partnership interests. In addition, The Royal Bank of Canada holds approximately $325 million of EPUs issued by Newmark on June 18, 2018 and September 26, 2018 in private transactions. The Newmark Holdings limited partnership interests held by Cantor and CFGM are designated as Newmark Holdings exchangeable limited partnership interests. The Newmark Holdings limited partnership interests held by the founding partners are designated as Newmark Holdings founding partner interests. The Newmark Holdings limited partnership interests held by the working partners are designated as Newmark Holdings working partner interests. The Newmark Holdings limited partnership interests held by the limited partnership unit holders are designated as limited partnership units. Each unit of Newmark Holdings limited partnership interests held by Cantor and CFGM is generally exchangeable with us for a number of shares of Class B common stock (or, at Cantor’s option or if there are no additional authorized but unissued shares of Class B common stock, a number of shares of Class A common stock) equal to the exchange ratio (which was initially one, but is subject to adjustment as set forth in the Amended and Restated Separation and Distribution Agreement) and was 0.9558 as of March 31, 2019. As of March 31, 2019, 5,402,901 founding/working partner interests were outstanding. These founding/working partner were issued in the Separation to holders of BGC Holdings founding/working partner interests, who received such founding/working partner interests in connection with BGC Partners’ acquisition of the BGC Partners business from Cantor in 2008. The Newmark Holdings limited partnership interests held by founding/working partners are not exchangeable with us unless (1) Cantor acquires such interests from Newmark Holdings upon termination or bankruptcy of the founding/working partners or redemption of their units by Newmark Holdings (which it has the right to do under certain circumstances), in which case such interests will be exchangeable with us for our Class A common stock or Class B common stock as described above, or (2) Cantor determines that such interests can be exchanged by such founding/working partners with us for our Class A common stock, with each Newmark Holdings unit exchangeable for a number of shares of our Class A common stock equal to the exchange ratio (which was initially one, but is subject to adjustment as set forth in the Amended and Restated Separation and Distribution Agreement), on terms and conditions to be determined by Cantor (which exchange of certain interests Cantor expects to permit from time to time). Cantor has provided that certain founding/working partner interests are exchangeable with us for Class A common stock, with each Newmark Holdings unit exchangeable for a number of shares of our Class A common stock equal to the exchange ratio (which was initially one, but is subject to adjustment as set forth in the Amended and Restated Separation and Distribution Agreement), in accordance with the terms of the Newmark Holdings limited partnership agreement. Once a Newmark Holdings founding/working partner interest becomes exchangeable, such founding/working partner interest is automatically exchanged upon a termination or bankruptcy with us for our Class A common stock. Further, we provide exchangeability for partnership units under other circumstances in connection with (1) our partnership redemption, compensation and restructuring programs, (2) other incentive compensation arrangements and (3) business combination transactions. As of March 31, 2019, 64,878,815 limited partnership units were outstanding (including founding/working partner interests and working partner interests, and units held by Cantor). Limited partnership units will be only exchangeable with us in accordance with the terms and conditions of the grant of such units, which terms and conditions are determined in our sole discretion, as the Newmark Holdings general partner, with the consent of the Newmark Holdings exchangeable limited partnership interest majority in interest, in accordance with the terms of the Newmark Holdings limited partnership agreement. The exchange ratio between Newmark Holdings limited partnership interests and our common stock was initially one. However, this exchange ratio will be adjusted in accordance with the terms of the Amended and Restated Separation and Distribution Agreement if our dividend policy and the distribution policy of Newmark Holdings are different. As of March 31, 2019, the exchange ratio was 0.9558. See “Item 5—Market for the Registrant’s Common Equity, Related Stockholder Matters and Purchased of Equity Securities—Dividend Policy” in the 10-K. With each exchange, our direct and indirect interest in Newmark OpCo will proportionately increase because, immediately following an exchange, Newmark Holdings will redeem the Newmark Holdings unit so acquired for the Newmark OpCo limited partnership interest underlying such Newmark Holdings unit. The profit and loss of Newmark OpCo and Newmark Holdings, as the case may be, are allocated based on the total number of Newmark OpCo units (not including EPUs) and Newmark Holdings units, as the case may be, outstanding. The following diagram illustrates the ownership structure of Newmark as of March 31, 2019. The diagram does not reflect the various subsidiaries of Newmark, Newmark OpCo or Cantor (including certain operating subsidiaries that are organized as corporations whose equity is either wholly owned by Newmark or whose equity is majority-owned by Newmark with the remainder owned by Newmark OpCo) or the results of any exchange of Newmark Holdings exchangeable limited partnership interests or, to the extent applicable, Newmark Holdings founding partner interests, Newmark Holdings working partner interests or Newmark Holdings limited partnership units. In addition, the diagram does not reflect the Newmark OpCo exchangeable preferred limited partnership units, or EPUs, since they are not allocated any gains or losses of Newmark OpCo for tax purposes and are not entitled to regular distributions from Newmark OpCo. STRUCTURE OF NEWMARK AS OF MARCH 31, 2019 Limited Partners / Employees Newmark OpCo • General Partner Interests (controlling interest) • Special Voting Limited Partnership Interest • Limited Partnership Interest ( 33.2 % of economics of Newmark OpCo) Newmark Group, Inc. Newmark Holdings • Limited Partnership Interests ( 7 2.8 % of economics of Newmark Holdings) • 24.2 % indirect economic interest in Newmark OpCo • Limited Partnership Interests ( 27 . 2 % of economics of Newmark Holdings) • 9.0 % indirect economic interest in Newmark OpCo • 100 % Class A common stock ( 88.1 % of economics and 42.5 % of voting power) • 58.8 % indirect economic interest in Newmark OpCo • General Partner Interests (controlling interest) • Special Voting Limited Partnership Interest Limited Partnership Interest ( 6 6.8 % of economics of Newmark OpCo) • Class A common stock (0.0% of economics and 0.0% of voting power of Newmark Group, Inc.) • % Class 100 B common stock (11.9 % of economics and 57.5 % of voting power) • 8. 0 % indirect economic interest in Newmark OpCo Cantor Fitzgerald, L.P. Public Stockholders of Newmark Group, Inc. Operating S ubs idi ar i es • Majority of all outstanding voting interests in each Newmark OpCo Operating Subsidiary Other Entities • Minority Equity Interests Shares of our Class B common stock are convertible into shares of our Class A common stock at any time in the discretion of the holder on a one-for-one basis. Accordingly, if Cantor and CFGM converted all of their shares of our Class B common stock into shares of our Class A common stock, Cantor and CFGM would hold 11.9% of the voting power in Newmark and the stockholders of Newmark other than Cantor and CFGM would hold 88.1% of the voting power in Newmark (and the indirect economic interests in Newmark OpCo would remain unchanged). In addition, if Cantor and CFGM continued to hold our Class B common stock and if Cantor exchanged all of the exchangeable limited partnership units held by Cantor for our Class B common stock, Cantor and CFGM would hold 74.3% of the voting power in Newmark, and the stockholders of Newmark other than Cantor and CFGM would hold 25.7% of the voting power in Newmark. ## Market risk As filed, 7,184 characters. ### Credit Risk Berkeley Point, under the Fannie Mae DUS program, originates and services multifamily loans for Fannie Mae without having to obtain Fannie Mae’s prior approval for certain loans, as long as the loans meet the underwriting guidelines set forth by Fannie Mae. In return for the delegated authority to make loans and the commitment to purchase loans by Fannie Mae, we must maintain minimum collateral and generally are required to share risk of loss on loans sold through Fannie Mae. With respect to most loans, we are generally required to absorb approximately one-third of any losses on the unpaid principal balance of a loan at the time of loss settlement. Some of the loans that we originate under the Fannie Mae DUS program are subject to reduced levels or no risk-sharing. However, we generally receive lower servicing fees with respect to such loans. Although our Berkeley Point business’s average annual losses from such risk-sharing programs have been a minimal percentage of the aggregate principal amount of such loans, if loan defaults increase, actual risk-sharing obligation payments under the Fannie Mae DUS program could increase, and such defaults could have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, a material failure to pay its share of losses under the Fannie Mae DUS program could result in the revocation of Berkeley Point’s license from Fannie Mae and the exercise of various remedies available to Fannie Mae under the Fannie Mae DUS program. ### Interest Rate Risk Newmark had $550.0 million of fixed rate 6.125% Senior Notes outstanding as of March 31, 2019 and December 31, 2018. These debt obligations are not currently subject to fluctuations in interest rates, although in the event of refinancing or issuance of new debt, such debt could be subject to changes in interest rates. Berkeley Point is an intermediary that originates loans which are generally pre-sold prior to loan closing. Therefore, for loans held for sale to the GSEs and HUD, we are not currently exposed to unhedged interest rate risk. Prior to closing on loans with borrowers, we enter into agreements to sell the loans to investors, and originated loans are typically sold within 45 days of funding. The coupon rate for each loan is set concurrently with the establishment of the interest rate with the investor. Some of our assets and liabilities are subject to changes in interest rates. Earnings from escrows are generally based on LIBOR. 30-day LIBOR as of March 31, 2019 and 2018 was 249 basis points and 188 basis points, respectively. A 100-basis point increase in the 30-day LIBOR would increase our annual earnings by approximately $10.0 million based on our escrow balance as of March 31, 2019 compared to $7.9 million based on our escrow balance as of March 31, 2018. A 100-basis point decrease in 30-day LIBOR would decrease our annual earnings by approximately $10.0 million based on the escrow balance as of March 31, 2019 compared to $7.9 million based on our escrow balance as of March 31, 2018. We use warehouse facilities and a repurchase agreement to fund loans we originate under our various lending programs. The borrowing costs of our warehouse facilities and the repurchase agreement is based on LIBOR. A 100-basis point increase in 30-day LIBOR would decrease our annual earnings by approximately $8.6 million based on our outstanding balances as of March 31, 2019 compared to $9.5 million based on our outstanding balances as of March 31, 2018. A 100-basis point decrease in 30-day LIBOR would increase our annual earnings by approximately $8.6 million based on our outstanding warehouse balance as of March 31, 2019 compared to $9.5 million as of March 31, 2018. ### Market Risk We also have investments in marketable equity securities, which are publicly-traded, and which had a fair value of $43.7 million and $48.9 million as of March 31, 2019 and December 31, 2018, respectively. These include shares of common stock of Nasdaq, the rights to which initially resulted from BGC Partners sale of its electronic benchmark Treasury platform to Nasdaq. The right to receive the remainder of the Nasdaq payment was transferred from BGC Partners to us beginning in the third quarter of 2017. We have recorded gains related to the Nasdaq payments of $87 million in 2018 and expect our future results to include the additional approximately 8.9 million Nasdaq shares to be received over time. In 2018, we entered into monetization transactions with respect to the Nasdaq shares for the shares to be received in each of 2019, 2020, 2021 and 2022. For the three months ended March 31, 2019 and 2018, respectively, we recorded unrealized gains on the mark-to-market of these securities of $3.9 million and $0.8 million, respectively. For the three months ended, we recorded a loss of $13.3 million for the mark-to-market adjustment related to the Nasdaq Forwards. Investments in marketable securities carry a degree of risk, as there can be no assurance that the marketable securities will not lose value and, in general, securities markets can be volatile and unpredictable. As a result of these different market risks, our holdings of marketable securities could be materially and adversely affected. We may seek to minimize the effect of price changes on a portion of our investments in marketable securities through the use of derivative contracts. However, there can be no assurance that our hedging activities will be adequate to protect us against price risks associated with our investments in marketable securities. See Note 7—“Marketable Securities” and Note 11—“Derivatives” to our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information regarding these investments and related hedging activities. ### Foreign Currency Risk We are exposed to risks associated with changes in foreign exchange rates. Changes in foreign exchange rates create volatility in the U.S. Dollar equivalent of our revenues and expenses. While our international results of operations, as measured in U.S. Dollars, are subject to foreign exchange fluctuations, we do not consider the related risk to be material to our results of operations. While our exposure to foreign exchange risk is not currently material to us, we expect to grow our international revenues in the future, and any future potential exposure to foreign exchange fluctuations may present a material risk to our business. ### Disaster Recovery Our processes address disaster recovery concerns. We operate most of our technology from dual-primary data centers at our two different London locations. Either site alone is capable of running all of our essential systems. In addition, we maintain technology operations from data centers in New Jersey and Connecticut. Replicated instances of this technology are maintained in our London data centers. All data centers are built and equipped to best-practice standards of physical security with appropriate environmental monitoring and safeguards. Failover for the majority of our systems is automated. ## Controls and procedures As filed, 1,155 characters. ### Evaluation of Disclosure Controls and Procedures Newmark Group, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed by Newmark Group, Inc. is recorded, processed, accumulated, summarized and communicated to its management, including its Chairman and its Chief Financial Officer, to allow timely decisions regarding required disclosures, and reported within the time periods specified in the SEC’s rules and forms. The Chairman and the Chief Financial Officer have performed an evaluation of the effectiveness of the design and operation of Newmark Group, Inc.’s disclosure controls and procedures as of March 31, 2019. Based on that evaluation, the Chairman and the Chief Financial Officer concluded that Newmark Group, Inc’s disclosure controls and procedures were effective as of March 31, 2019. ### Changes in Internal Control over Financial Reporting During the quarter ended March 31, 2019, there were no changes in our internal control over financial reporting that materially affect, or are reasonably likely to materially affect, our internal control over financial reporting. ## Risk factors As filed, 3,589 characters. In addition to the information set forth in this report, including under the section titled “Special Note Regarding Forward-Looking Statements,” you should carefully consider the information set forth in Item 1A “Risk Factors” in Newmark’s Annual Report on Form 10-K for a detailed discussion of known material factors which could materially and adversely affect our financial condition, liquidity, results of operations, cash flows or prospects. In addition, investors should consider the following additional risk factor: ***We have debt, which could adversely affect our ability to raise additional capital to fund our operations and activities, limit our ability to react to changes in the economy or the commercial real estate services industry, expose us to interest rate risk, impact our ability to obtain favorable credit ratings and prevent us from meeting or refinancing our obligations under our indebtedness.*** Our indebtedness, which at March 31, 2019 was approximately $538.6 million, may have important, adverse consequences to us and our investors, including: - it may limit our ability to borrow money, dispose of assets or sell equity to fund our working capital, capital expenditures, dividend payments, debt service, strategic initiatives or other obligations or purposes; - it may limit our flexibility in planning for, or reacting to, changes in the economy, the markets, regulatory requirements, our operations or business; - it may impact our ability to obtain favorable credit ratings; - our financial leverage may be higher than some of our competitors, which may place us at a competitive disadvantage; - it may make us more vulnerable to downturns in the economy or our business; - it may require a substantial portion of our cash flow from operations to make interest payments; - it may make it more difficult for us to satisfy other obligations; - it may increase the risk of a future downgrade of our credit ratings or otherwise impact our ability to obtain or maintain investment grade credit ratings, which could increase future debt costs and limit the future availability of debt financing; - we may not be able to borrow additional funds or refinance existing debt as needed or take advantage of business opportunities as they arise, pay cash dividends or repurchase common stock; and - there would be a material adverse effect on our business, financial condition, results of operations and prospects if we were unable to service our indebtedness or obtain additional financing or refinance our existing debt on terms acceptable to us. Our indebtedness excludes the warehouse facilities collateralized by U.S. Government Sponsored Enterprises because these lines are used to fund short term loans held for sale that are generally sold within 45 days from the date the loan is funded. All of the loans held for sale were either under commitment to be purchased by Freddie Mac or had confirmed forward trade commitments for the issuance and purchase of Fannie Mae or Ginnie Mae mortgage-backed securities that will be secured by the underlying loans. To the extent that we incur additional indebtedness or seek to refinance our existing debt the risks described above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to service our outstanding debt or to repay the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to service or refinance our debt. Filed May 10, 2019. Source: SEC EDGAR, the filing index for accession 0001564590-19-018154. Last ingested by Listed: Nov 6, 2026, 17:18 ET. No prices; not investment advice.