Newmark Group, Inc. Q2 FY2025 earnings call

• Acknowledged the tragic shooting in New York City. - Reported strong revenue and earnings growth: total revenues up 20%, adjusted EPS up 41%, adjusted EBITDA up 32.1% to $114 million. - Advised on large office and retail leases in NYC and SF Bay Area. - Expanded occupier solutions and leasing footprint globally in nearly 100 countries. - Gained market share in capital markets, with total debt volumes up 135%, and investment sales ranking #1 office broker in U.S. first half 2025 and #3 globally for sales brokers. - Launched Germany business a year ago with 70 signed brokers, expanding international platform. - Discussed diversified services in U.K., France, Asia. - Addressed data centers as a focus, with emphasis on equity/finance aspects and management services in data centers. - Noted pipeline strength with no significant slowdowns observed.

Total revenues increased by 20%. Management Services, Servicing and Other grew by 13.6%, with ~30% growth from Valuation and Advisory and improvement in servicing/asset management. Leasing revenues were up 13.8%, led by double-digit retail growth and improving office activity in key markets. Capital Markets revenues rose 37.9%, with total debt volumes up 135% vs. U.S. commercial/multifamily originations up 38%, and investment sales volumes up 26% vs. industry up ~11%. Investment sales saw market share gains led by data center growth, office, and multifamily activity.

• Raised full-year 2025 outlook: total revenues $3.05B-$3.25B (15% midpoint increase), adjusted EPS $1.47-$1.57 (20%-28% increase), adjusted EBITDA $523M-$573M (17%-29% increase). - Expectations for back half 2025: management/leasing to grow high-single to low-double digits, capital markets mid- to high-teens. - Target for management services business by 2029 is ~$2B. - 2026 targets: adjusted EBITDA $630M and adjusted EPS $1.75, considered achievable.

• Forward-looking statements subject to risks/uncertainties from macroeconomic, social, political factors. - Risks related to actual results differing from expectations as outlined in SEC filings.

Q: Congrats on the quarter. Barry, obviously, you referenced the global investment sales #3. And obviously, you're making investments outside the U.S. I'm curious how the opportunity in Germany has been transpiring to date?

A: Well, we launched about a year ago, actually, at just about the time of Expo Real in Munich. Since that time, we've signed 70 brokers, many of whom are on garden leave, generally how it's done in Europe. So our real launch of that business is actually this Expo Real, which is in October. So there seems to be a clamoring of people who want to come to Newmark. They like our model. They like the platform. They like what we've done in France and U.K. and other parts of Europe. So I think, I mean it all bodes well for us here and we're excited.

Q: Do you think the capital markets activity is sustainable? Or are you seeing maybe a little bit of a pull forward given some of the future uncertainty?

A: Yes. Let me just -- so you understand it, we've hired leasing people appraisal people, we're a fully integrated platform. So in all of our markets, we hire full boat of services for clients as we have in Germany. So it's a pretty diversified mix of people. That includes the U.K., includes France, includes what we're doing in Asia as well. We have, for the moment, a sided advantage, we have a lot of white space. We have an enormous runway. We -- a couple of years ago, we did virtually 0 business in Europe. It's now a 13% plus of our volume. We have -- we're building in Asia as well. And we think it's a great opportunity to build a completely diversified integrated platform. It will serve our corporate clients well to be in all of those markets, so we could be able to serve our corporate leasing clients on consulting and other aspects of our business, not only capital markets, but we think there's always going to be capital markets. We think the runway is pretty good in Europe and some people think that Europe is a better opportunity right now. But we're pretty bullish on our direction and where we go.

Q: Just some thoughts on capital allocation. Mike, you talked about some of the free cash flow growth. You bought back shares, but we've obviously seen a rallies 25% plus, since you did that. So where is investment dollars? Obviously, they're going to new broker acquisitions, but could we potentially see you guys consider some M&A here? Is buyback still on the table? Some thoughts around that, please?

A: Sure. I would say buybacks are certainly still on the table. As I said, we did a pretty significant buyback in the second quarter. So I would see us -- I would expect us to pivot to M&A in the back half of the year. We have a lot of interesting opportunities, particularly on the management services side that we're looking at, and we think are very -- we can add a lot to those companies, and they can add a lot to our platform. So I would say for the back half of the year, you'll see us pivot to growth capital versus buybacks. But longer term, we still think the stock is undervalued. If you look at our adjusted free cash flow, even relative to the current market cap, it's probably around 6% yield versus the S&P 500, which is 2.8%. Our peer group, which is around 4.2%. So we still think there's a lot of upside to our stock, and that's why we'll continue to look at buybacks as well.

Q: And Barry, thanks for the opening comments. Just obviously tragic. Mike, I appreciate the free cash flow emphasis in the slide, I think it's very helpful to help understand the economics of the business, which this quarter just really impressive. Along those lines, data centers have been huge in the news. Clearly, Barry, you've spoken before that it's been a focus of the company. But I think in prior comments, you talked about keeping it restrained like using the example, I think, it was you or 1 of your colleagues use the example of like Life Science, which boomed and then cooled off dramatically. So as you look at data centers today, is the view still that it's akin to Life Science in the sense that right now, that area is booming, but you want to keep your personnel appropriately staffed versus it's more enduring in which case there's room to expand and invest further in your data center offering?

A: Well, we believe we're appropriately staffed. It's a center of excellence. There's a lot of reach with a small amount of people, if you are the best at it and we think we are the best at it. We also -- there are 2 aspects of the business. There's a powered land play, which is, at some point, there will be less of the power land play, but our big -- our big emphasis has been on equity and finance and those are the areas which were the strongest. We think there's an enormous runway. There's a big runway in Europe. There's a big runway in Asia. AI is so relatively new. It's only really 2 years old. And a lot of people want to get into the game and the question for everyone is really what -- what do you think about AI and the future of AI. And if you believe in the future of AI, then you have to believe there is a long runway. Life Science has been as a more mature business that was just faced overbuilding oversupply. It's kind of like multifamily is a business that has enormous demand in the country and we'll continue. We are underserved for housing, but there are markets, where you just have too much supply. Life science is just a moment in time, where there's just too much supply to be absorbed. A lot of these transactions haven't come online, it's all coming online. So it will be 3, 4 years before we could see whether there is an oversupply, and it is pretty early.

Q: In your leasing stats, San Francisco led more so than New York. And just want to get some more perspective on that. Is that our sense of market visits is that, AI is a small part, but growing, but the larger tech companies still have too much space. So curious what's driving your business? Is it that you're advising tech in resizing their business? Or is AI just booming a lot more than we anticipated. Just wanted to understand better the drivers of the dramatic boom in your San Francisco leasing growth?

A: I mean we're told that San Francisco and the Bay. The entire Bay Area that has opened up that there is activity coming from every direction. Now that's -- that's based on what our brokers tell us and what we have in the pipeline. It's coming from all different places. A lot of that -- some of that's AI, but there's other tech -- tech companies as well that are growing. There's always 1 thing about the ecosystem in the Bay Area, there is a company born every 5 minutes in the Bay Area, it's part of the ecosystem.

Q: This is actually Jason Sabshon on for Jade. First, I just want to say congrats on the strong quarter. In your presentation, you provided a revenue target for management services for 2029. We applaud the long-term view and are there any other 2029 targets that you're thinking about in terms of total revenue, capital markets leasing or adjusted free cash flow?

A: Yes. The target on the management business is about $2 billion. We put out, I think, a few quarters ago and we continue to believe in the strong opportunity across all of our management and servicing businesses. We don't have similar targets out there for capital markets or leasing, but we do have targets out there for 2026 in terms of the adjusted EBITDA of $630 million and adjusted EPS of $1.75, and we feel that those are very achievable.

Q: And to touch on data centers. First, could you provide more color on what your deal flow looks like? And as well as fee ranges on those deals. Specifically, if you broker a new development capitalization, what are fees earned and are those negotiated in dollars or as a commission rate?

A: The fees are no different than the average fees that you see across the rest of our business. So typically, on average, it's based on deal size, but our average sales has been around 70 basis points, and our average debt fee has been in the 40 to 50 basis point range. As deals get larger, those basis points go down, as deals get smaller, they go up -- but on average, that's where you've seen our fees and data centers really are no different.

Q: What growth rates do you expect are reasonable to see in the second half?

A: So if you look at the midpoint of our guidance, let's just start there, we would expect the management and the leasing businesses to grow, say, high-single-digits to low-double-digits in the back half of the year in the capital markets business, probably mid- to high- teens. And which would suggest maybe there's a slowdown from the first half. But I think really, we put the range out there because there could be some macro events that affect the market and affect the activity. But if we have a really good pipeline into the third quarter, very strong. And if things continue along the path they're going now, I would certainly expect us to perform above the midpoint of the range towards the higher end.

Q: And congrats on another strong quarter. I guess digging into a little bit more into those comments around the pipeline, I guess, as we look into July, does it feel like there was sort of a re-acceleration in activity relative to what seemed to be a slower May and June for the industry?

A: It's interesting. Our pipelines have been pretty strong throughout the year. We didn't see any significant slowdowns as we move through the year. If anything, our pipelines continue to grow and get stronger. We certainly don't have full visibility into the fourth quarter at this point. It's still a little bit early, but everything at the moment looks pretty good.

Q: That's helpful. And it sounds like there wasn't any change to sort of how you're thinking about the 2026 targets. I guess do you -- is it just that you feel even more confident that they're sort of what you've put out there of $1.75 and $630 million of adjusted EBITDA are achievable? Or was there any temptation to maybe increase those targets?

A: Probably a little early to increase the targets. I think we put those targets out more than a year ago, and we felt pretty confident about the targets, when we put them out based on the people we hired and the businesses that we're building and I would say, we certainly feel more confident today as we get closer and closer to those targets. If you just take the midpoint of our guidance for the rest of this year or for 2025 full year, it suggests probably high single-digit revenue growth and mid-teens earnings growth, which seems very achievable for 2026 at this point.

Q: Just in New York City, I'm wondering if you're sort of expecting or seeing any impacts from the mayoral race there when you talk to your teams or your clients, are you seeing any signs of caution from buyers in Manhattan. It looked like New York City property sales volumes were maybe a little subdued in June. Wondering if there's anything to read into there?

A: It's too early to tell. Mamdani hasn't been elected yet. There's a lot of noise. Unfortunately, I think we have a firewall in our Governor, if people are concerned. The Mayor has a limited amount of power to do stuff. We still have the City Council. The City Council is pretty -- has moved more moderate over the last couple of years, very few democratic socialists. And so it's not -- so New York is incredibly resilient. I don't believe it will have an impact for certain people, it may annoy them. But it's -- New York is New York. The pool of talent in New York is unparalleled. The level of excitement in New York City being here is unparalleled. So I'm not -- I'm pretty sanguine about it.

Q: So with the new disclosure, your adjusted free cash flow, do you -- what are your expectations in terms of adjusted free cash flow in 2025 and I guess, bigger picture or longer term, to kind of have a framework in terms of like targeted conversion ratio, what that free cash flow should look like as compared to your adjusted net income?

A: Sure. Thanks for the question, Patrick. So on a trailing 12-month basis compared to our post-tax adjusted earnings, it's about 65% conversion. Remember, in that metric or taken out of the cash flow from operations, is all the money we invest in brokers for growth. So that on a trailing 12-month basis was about $184 million, so it's hard to put a target precisely on what the conversion ratio will be because you have to know how much we're going to be investing into the business and how much of that investment will go towards talent versus go towards companies. And as you know, if you just buy a company, it goes through cash outflow from investing versus hiring a broker, which comes out of operations. But certainly, 65% to 85% depending on how much we invest in the business at any given time.

Q: Speaking of hiring talent with industry brokerage revenues generally trending better. Is it getting any harder to poach top talent away from competitors?

A: Well, it's never easy. But no, I think that we seem to be -- we seem to have struck a cord in the industry in terms of what the industry needs in respect of talent. And I think we fit the bill for many people that are high production, high revenue professionals, so that we don't think that's going away. It's -- it doesn't -- it's always been hard in some respects, but we don't see it changing.

Q: And lastly for me, you spoke about the likelihood of doing some M&A in the back half of the year. Can you remind us both strategically and financially, what your criteria is for M&A?

A: So generally, we've done mostly bolt-ons, tuck-ins. We think that strategy works really well for us. Less friction, less disturbance, less disruption. You never know what you get when something is too big, the amount of change people leaving, et cetera? And it's more targeted towards the talent and the needs and how we fit and curate the entire platform together as a puzzle. So that seems to be going well. That's generally how we've done it. We think we'll do some more of that going forward because there are certain areas that we want to focus on and that we are looking at companies. We've been -- we've been focusing on our superpower, which is hiring great talent, and we also have turned our attention to management services and things that will provide more recurring revenue that don't consistently conflict with the brand, things that work very well and are synergistic with both our capital markets and our leasing business.