Newmark Retains all Upside to Expected Nasdaq
Earn-out
Eliminates Downside Risk for Anticipated 2019 and 2020
Payments
Newmark to Receive Net Cash Proceeds of Approximately
$153 million
Strengthens both Companies' Credit Metrics
NEW YORK, June 20, 2018 /PRNewswire/ -- Newmark Group,
Inc. (NASDAQ: NMRK) ("Newmark" or "Newmark Group"), a leading
full-service commercial real estate services business, and its
parent company BGC Partners, Inc. (NASDAQ: BGCP) ("BGC Partners" or
"BGC"), a leading global brokerage company servicing the financial
and real estate markets, today announced that Newmark entered into
transactions related to the monetization of the shares of
Nasdaq1 it expects to receive in 2019 and 2020 ("the
monetization").
Details of the Transactions
On June 18, 2018, Newmark's principal operating
subsidiary issued approximately $175
million of exchangeable preferred limited partnership units
("EPUs") in a private transaction to The Royal Bank of Canada ("RBC"). Contemporaneously with the
issuance of these EPUs, a newly formed special purpose vehicle,
(the "SPV") entered into two variable postpaid forward transactions
(together, the "Forward") with RBC. The SPV is an indirect
subsidiary of Newmark whose sole asset is the Nasdaq share
earn-outs for 2019 and 2020. RBC has rights to receive up to
992,247 shares of Nasdaq common stock in each of the fourth
quarters of 2019 and 2020. The Forward is economically similar to
at-the-money put options struck at Nasdaq's June 18, 2018 closing price of $94.21, and provides Newmark with downside
protection on the shares while allowing Newmark to retain all
appreciation related to the 2019 and 2020 Nasdaq share
earn-outs.
Net of transaction costs, Newmark will receive approximately
$153 million of net proceeds and
non-dilutive equity on its balance sheet from the monetization in
the second quarter of 2018. Newmark intends to use the net proceeds
from the monetization to repay a portion of the $400 million Converted Term Loan2
maturing September 8, 2019. After
this repayment, approximately $247
million of the Converted Term Loan will remain outstanding.
Approximately $153 million will also
become available to be drawn upon under BGC's revolving credit
facility. The monetization had no impact on the $93.5 million Nasdaq payment expected to be
recognized in the third quarter of 2018. Newmark retains the
flexibility to monetize some or all of the anticipated more than
$650 million worth of remaining seven
Nasdaq payments from 2021 through 2027.
Management Commentary
"By monetizing these expected
Nasdaq payments, Newmark and BGC have strengthened their balance
sheets, improved their financial flexibility and improved their
credit metrics", said Howard W.
Lutnick, Chairman of the Board and Chief Executive Officer
of BGC and Chairman of Newmark. "Newmark also now expects to be in
an even stronger position with respect to obtaining an investment
grade rating, and repaying and/or refinancing Newmark's debt owed
to or guaranteed by BGC. We therefore believe that the monetization
moves us closer to completing the planned spin-off3 of
Newmark. Furthermore, over time, both BGC and Newmark expect their
stronger balance sheets to enhance their ability to invest and grow
their businesses."
Barry M. Gosin, Chief Executive
Officer of Newmark, added: "We think that this monetization has
created immediate value for Newmark's investors. While protecting
ourselves from any downward price movements related to the shares
included in the transactions, Newmark maintains all potential
upside from any appreciation in Nasdaq's stock price. We believe
that the monetization has enhanced Newmark's capital position and
will increase Newmark's financial flexibility following its full
separation from BGC."
Improved Credit Metrics4
As a result of the debt repayment, both BGC's consolidated and
Newmark's stand-alone long-term debt will be reduced by
approximately $153 million. The
current interest rate on the $400
million Converted Term Loan is 4.30725 percent. The leverage
ratios for BGC on a consolidated basis and for Newmark stand-alone
will therefore improve.5
Impact on Financial Results
The issuance of the EPUs
to RBC are not expected to have any impact on Newmark's fully
diluted share count.6 Newmark continues to expect to
record income and any tax obligation related to the receipt of the
Nasdaq shares in the third quarter of each year for GAAP earnings,
Adjusted Earnings, and Adjusted EBITDA. BGC's consolidated results
will include those of Newmark unless and until the proposed
spin-off is completed. Both companies have amended their
definitions of Adjusted Earnings to exclude the impact of any
unrealized non-cash mark-to-market gains or losses on "other income
(loss)" related to the Nasdaq Forward. The outlooks for both
companies discussed below factor in these amendments.
Update to Outlooks
Newmark today reaffirmed the
entirety of its outlook for the full year 2018 as contained in
Newmark's financial results press release issued on May 3, 2018. This press release can be found at
http://ir.ngkf.com. Newmark's reiterated annual guidance includes
the full impact of the items discussed in this document.
BGC expects its results to be around the high end of its
previously stated consolidated outlook for revenues and Adjusted
Earnings for the second quarter of 2018. This outlook was contained
in BGC's financial results press release issued on May 3, 2018, which can be found at
http://ir.bgcpartners.com. BGC's updated quarterly guidance
includes the full impact of the items discussed in this
document.
Additional Information on Monetization of Nasdaq Shares
Expected to be Available
For more information on the
monetization of the Nasdaq shares, please see Newmark's and BGC's
Securities and Exchange Commission filings on Form 8-K, which are
expected to be filed shortly, as well as the section about the
monetization of the Nasdaq shares contained in BGC's 2018 Annual
Meeting Investor presentation to be delivered and webcast on
June 20, 2018, all of which are
expected to be available at http://ir.bgcpartners.com and
http://ir.ngkf.com.
BGC's Non-GAAP Definitions
Please see BGC's financial
results press release issued on May 3,
2018, including the sections titled "Adjusted Earnings
Defined", "Differences between Consolidated Results for Adjusted
Earnings and GAAP", "Reconciliation of GAAP income (loss) to
Adjusted Earnings", "Adjusted EBITDA Defined", "Adjusted EBITDA
before allocations to units", and "Reconciliation of GAAP Income
(Loss) to Adjusted EBITDA" for more information on these non-GAAP
terms and how, when and why management uses them, as well as for
the differences between results under GAAP and these non-GAAP items
for the periods discussed therein. This press release can be found
at http://ir.bgcpartners.com. The Adjusted Earnings definition has
been amended below with respect to the Forward.
BGC's Adjusted Earnings Defined
BGC Partners
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. BGC 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) 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 BGC.
Adjustments Made to Calculate BGC's Pre-Tax
Adjusted Earnings
BGC defines pre-tax Adjusted Earnings as
GAAP income (loss) from operations before income taxes and
noncontrolling interest in subsidiaries, excluding items such
as:
- The impact of any unrealized non-cash mark-to-market gains or
losses on "other income (loss)" related to the variable share
forward agreement with respect to Newmark's expected receipt of the
Nasdaq payments in 2019 and 2020 (the "Nasdaq Forward");
- Non-cash asset impairment charges, if any;
- Allocations of net income to limited partnership units;
- Non-cash charges related to the amortization of intangibles
with respect to acquisitions; and
- Non-cash charges relating to grants of exchangeability to
limited partnership units that reflect the value of the shares of
common stock into which the unit is exchangeable when the unit
holder is granted exchangeability not previously expensed in
accordance with GAAP.
Virtually all of BGC's key executives and producers have
partnership or equity stakes in the Company and receive deferred
equity or limited partnership units as part of their compensation.
A significant percentage of the Company's fully diluted shares are
owned by its executives, partners and employees. The Company issues
limited partnership units and grant exchangeability to unit holders
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.
When the Company issues limited partnership units, the shares of
common stock into which the units can be ultimately exchanged are
included in BGC's fully diluted share count for Adjusted Earnings
at the beginning of the subsequent quarter after the date of grant.
BGC includes such shares in the Company's fully diluted share count
when the unit is granted because the unit holder is expected to be
paid a pro-rata distribution based on BGC's calculation of Adjusted
Earnings per fully diluted share and because the holder could be
granted the ability to exchange their units into shares of common
stock in the future. Non-cash charges with respect to grants of
exchangeability reflect the value of the shares of common stock
into which the unit is exchangeable when the unit holder is granted
exchangeability not previously expensed in accordance with GAAP.
The amount of non-cash charges relating to grants of
exchangeability the Company uses to calculate pre-tax Adjusted
Earnings on a quarterly basis is based upon the Company's estimate
of expected grants of exchangeability to limited partnership units
during the annual period, as described further below under
"Adjustments Made to Calculate Post-Tax Adjusted Earnings."
Adjusted Earnings also excludes 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
(and Adjusted EBITDA) in future periods.
Additionally, Adjusted Earnings calculations exclude certain
unusual, one-time, non-ordinary or non-recurring items, if any.
These items are excluded from Adjusted Earnings because the Company
views excluding such items as a better reflection of the ongoing
operations of BGC. BGC's definition of Adjusted Earnings also
excludes certain gains and charges with respect to acquisitions,
dispositions, or resolutions of litigation. Management believes
that excluding such gains and charges also best reflects the
ongoing performance of BGC.
Adjustments Made to Calculate BGC's Post-Tax
Adjusted Earnings
Because Adjusted Earnings are calculated
on a pre-tax basis, BGC also intends to report post-tax Adjusted
Earnings on a consolidated basis. The Company defines post-tax
Adjusted Earnings as pre-tax Adjusted Earnings reduced by the
non-GAAP tax provision described below and Adjusted Earnings
attributable to noncontrolling interest in subsidiaries.
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, BGC 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 grants of exchangeability to limited partnership units
during the annual period. The resulting annualized tax rate is
applied to BGC'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, BGC first adjusts
pre-tax Adjusted Earnings by recognizing any, and only, amounts for
which a tax deduction applies under applicable law. The amounts
include non-cash charges with respect to grants of exchangeability;
certain charges related to employee loan forgiveness; certain net
operating loss carryforwards when taken for statutory purposes;
certain charges related to tax goodwill amortization; and
deductions with respect to charitable contributions. 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 previously described adjustments, the
result is the Company's taxable income for its pre-tax Adjusted
Earnings, to which BGC then applies the statutory tax rates. This
amount is the Company's non-GAAP tax provision. BGC 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 non-cash charges relating to the
grants of exchangeability to limited partnership units. Because the
non-cash charges relating to the grants of exchangeability are
deductible in accordance with applicable tax laws, increases in
exchangeability have the effect of lowering the Company's non-GAAP
effective tax rate and thereby increasing its post-tax Adjusted
Earnings.
Management uses post-tax Adjusted Earnings in part to help it
evaluate, among other things, the overall performance of the
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.
BGC 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., BGC operates
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.
Adjusted Earnings Attributable to BGC's Noncontrolling
Interest in Subsidiaries
Adjusted Earnings attributable to
noncontrolling interest in subsidiaries is calculated based on the
relevant noncontrolling interest existing on the balance sheet
date. Until the proposed spin-off of Newmark occurs, noncontrolling
interest will reflect the allocation of income to Newmark's public
shareholders and the pro-rata ownership of certain shares and/or
units of BGC and Newmark.
Calculations of BGC's Pre-Tax and Post-Tax
Adjusted Earnings per Common Share
BGC's Adjusted Earnings
per common 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
expected to be issued in future periods but not yet eligible to
receive dividends and/or distributions. Each quarter, the dividend
payable to BGC's common 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 common
share. BGC 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 post-tax Adjusted Earnings per common
share.
The declaration, payment, timing and amount of any future
dividends payable by the Company will be at the discretion of its
board of directors.
Other Matters with Respect to BGC's 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 BGC'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 Adjusted Earnings measures and the GAAP
measures of financial performance should be considered
together.
BGC anticipates providing forward-looking guidance for GAAP
revenues and for certain Adjusted Earnings measures from time to
time. However, the Company does not anticipate providing an outlook
for other GAAP results. This is because certain GAAP items, which
are excluded from Adjusted Earnings, are difficult to forecast with
precision before the end of each period. The Company therefore
believes that it is not possible to forecast GAAP results or to
quantitatively reconcile GAAP results to non-GAAP results with
sufficient precision unless BGC makes unreasonable efforts. The
items that are difficult to predict on a quarterly basis with
precision and which can have a material impact on the Company's
GAAP results include, but are not limited, to the following:
- Allocations of net income and grants of exchangeability to
limited partnership units, which are determined at the discretion
of management throughout and up to the period-end;
- The impact of certain marketable securities, as well as any
gains or losses related to associated mark-to- market movements
and/or hedging, including with respect to the Nasdaq Forward. These
items are calculated using period-end closing prices;
- Non-cash asset impairment charges, which are calculated and
analyzed based on the period-end values of the underlying assets.
These amounts may not be known until after period-end; and
- Acquisitions, dispositions and/or resolutions of litigation,
which are fluid and unpredictable in nature.
See the sections of this document titled "Reconciliation of GAAP
income (loss) to Adjusted Earnings" and "Differences between
Consolidated Results for Adjusted Earnings and GAAP" for more
information on BGC's non-GAAP results.
BGC's Adjusted EBITDA and Adjusted EBITDA Before
Allocations to Units Defined
BGC also provides an
additional non-GAAP financial performance measure, "Adjusted
EBITDA", which it defines as GAAP "Net income (loss) available to
common stockholders", adjusted to add back the following items:
- Interest expense;
- Fixed asset depreciation and intangible asset
amortization;
- Impairment charges;
- Employee loan amortization and reserves on employee loans;
- Provision (benefit) for income taxes;
- Net income (loss) attributable to noncontrolling interest in
subsidiaries;
- Non-cash charges relating to grants of exchangeability to
limited partnership interests;
- Non-cash charges related to issuance of restricted shares;
- Non-cash earnings or losses related to BGC's equity
investments; and
- Net non-cash GAAP gains related to OMSR gains and MSR
amortization.
The Company also discloses "Adjusted EBITDA before allocations
to units", which is Adjusted EBITDA excluding GAAP charges with
respect to allocations of net income to limited partnership units.
Such allocations represent the pro-rata portion of pre-tax earnings
available to such unit holders. These units are in the fully
diluted share count, and are exchangeable on a one-to-one basis
into common stock. As these units are exchanged into common shares,
unit holders become entitled to cash dividends rather than cash
distributions. The Company views such allocations as intellectually
similar to dividends on common shares. Because dividends paid to
common shares are not an expense under GAAP, management believes
similar allocations of income to unit holders should also be
excluded by investors when analyzing BGC's results on a fully
diluted share basis with respect to Adjusted EBITDA.
The Company's management believes that these Adjusted EBITDA
measures are useful in evaluating BGC's operating performance,
because the calculation of this measure generally eliminates the
effects of financing and income taxes and the accounting effects of
capital spending and acquisitions, which would include impairment
charges of goodwill and intangibles created from acquisitions. Such
items may vary for different companies for reasons unrelated to
overall operating performance. As a result, the Company's
management uses these measures to evaluate operating performance
and for other discretionary purposes. BGC believes that Adjusted
EBITDA is useful to investors to assist them in getting a more
complete picture of the Company's financial results and
operations.
Since these Adjusted EBITDA measures are not recognized
measurements under GAAP, investors should use these measures in
addition to GAAP measures of net income when analyzing BGC's
operating performance. Because not all companies use identical
EBITDA calculations, the Company's presentation of these Adjusted
EBITDA measures are may not be comparable to similarly titled
measures of other companies. Furthermore, these Adjusted EBITDA
measures are not intended to be a measure of free cash flow or GAAP
cash flow from operations, because these Adjusted EBITDA measures
do not consider certain cash requirements, such as tax and debt
service payments.
Newmark's Non-GAAP Definitions
Please see Newmark's
financial results press release issued on May 3, 2018, including the sections titled
"Adjusted Earnings Defined", "Differences between Consolidated
Results for Adjusted Earnings and GAAP", "Reconciliation of GAAP
income (loss) to adjusted earnings", "Adjusted EBITDA and Adjusted
EBITDA Before Allocations to Units Defined", and "Reconciliation of
GAAP Income (Loss) to Adjusted EBITDA" for more information these
non-GAAP terms and how, when and why management uses them, as well
as for the differences between results under GAAP and these
non-GAAP items for the periods discussed therein. This press
release can be found at http://ir.ngkf.com. The Adjusted Earnings
definition has been amended below with respect to the Nasdaq
Forward.
Newmark's 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 available for, among other things, dividends
and/or distributions to Newmark's common stockholders and holders
of Newmark Holdings partnership units during any period.
As compared with items such as "Income (loss) before income
taxes and noncontrolling interests" and "Net income (loss) for
fully diluted shares" all prepared in accordance with GAAP,
Adjusted Earnings calculations primarily exclude certain non-cash
compensation 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 operating
results of Newmark.
Adjustments Made to Calculate Newmark's Pre-Tax Adjusted
Earnings
Newmark defines pre-tax Adjusted Earnings as GAAP
income (loss) from operations before income taxes and
noncontrolling interest in subsidiaries, excluding certain items
such as:
- The impact of any unrealized non-cash mark-to-market gains or
losses on "other income (loss)" related to the variable share
forward agreement with respect to Newmark's expected receipt of the
Nasdaq payments in 2019 and 2020;
- Non-cash asset impairment charges, if any;
- Allocations of net income to limited partnership units;
- Non-cash charges related to the amortization of intangibles
with respect to acquisitions;
- Non-cash charges relating to grants of exchangeability to
limited partnership units.
Virtually all of the Company's key executives and producers have
partnership or equity stakes in the Company and receive deferred
equity or limited partnership units as part of their compensation.
A significant percentage of Newmark's fully diluted shares are
owned by the Company's executives, partners and employees. The
Company issues limited partnership units and grants exchangeability
to unit holders to provide liquidity to Newmark's employees, to
align the interests of the Company's 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.
When the Company issues limited partnership units, the shares of
common stock into which the units can be ultimately exchanged are
included in Newmark's fully diluted share count for Adjusted
Earnings at the beginning of the subsequent quarter after the date
of grant. Newmark includes such shares in the Company's fully
diluted share count when the unit is granted because the unit
holder is expected to be paid a pro-rata distribution based on
Newmark's calculation of Adjusted Earnings per fully diluted share
and because the holder could be granted the ability to exchange
their units into shares of common stock in the future. Non-cash
charges with respect to grants of exchangeability reflect the value
of the shares of common stock into which the unit is exchangeable
when the unit holder is granted exchangeability not previously
expensed in accordance with GAAP. The amount of non-cash charges
relating to grants of exchangeability the Company uses to calculate
pre-tax Adjusted Earnings on a quarterly basis is based upon the
Company's estimate of expected grants of exchangeability to limited
partnership units during the annual period, as described further
below under "Adjustments Made to Calculate Post-Tax Adjusted
Earnings."
Adjusted Earnings also excludes 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
(and Adjusted EBITDA) in future periods.
Additionally, Adjusted Earnings calculations exclude certain
unusual, one-time or non-recurring items, if any. These items are
excluded from Adjusted Earnings because the Company views excluding
such items as a better reflection of the ongoing, ordinary
operations of Newmark. Newmark's definition of Adjusted Earnings
also excludes certain gains and charges with respect to
acquisitions, dispositions, or resolutions of litigation.
Management believes that excluding such gains and charges also best
reflects the ongoing operating performance of Newmark.
Adjustments Made to Calculate Newmark's Post-Tax Adjusted
Earnings
Because Adjusted Earnings are calculated on a
pre-tax basis, Newmark also intends to report post-tax Adjusted
Earnings to fully diluted stockholders. Newmark defines post-tax
Adjusted Earnings to fully diluted stockholders as pre-tax Adjusted
Earnings reduced by the non-GAAP tax provision described below.
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 grants of exchangeability to limited partnership units
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 non-cash charges with respect to grants of exchangeability,
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 previously described adjustments, the
result is the Company's taxable income for Newmark's pre-tax
Adjusted Earnings, to which the Company then applies the statutory
tax rates. This amount is the Company's non-GAAP tax provision.
Newmark views the effective tax rate on pre-tax Adjusted Earnings
as equal to the amount of Newmark's 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 non-cash charges relating to the
grants of exchangeability to limited partnership units. Because the
non-cash charges relating to the grants of exchangeability are
deductible in accordance with applicable tax laws, increases in
exchangeability have the effect of lowering the Company's non-GAAP
effective tax rate and thereby increasing Newmark's post-tax
Adjusted Earnings.
Management uses post-tax Adjusted Earnings in part to help it
evaluate, among other things, the overall performance of the
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 Newmark's Pre-Tax and Post-Tax Adjusted
Earnings per Share
Newmark's 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 interest
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 interest expense,
net of tax.
The share count for Adjusted Earnings excludes certain shares
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 common 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 fully
diluted 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 pre-tax Adjusted Earnings using the fully
diluted share count. 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.
Other Matters with Respect to Newmark's 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 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
Adjusted Earnings measures and the GAAP measures of financial
performance should be considered together.
Newmark anticipates providing forward-looking guidance for GAAP
revenues and for certain Adjusted Earnings measures from time to
time. However, the Company does not anticipate providing an outlook
for GAAP results other than revenue. This is because certain GAAP
items, which are excluded from Adjusted Earnings, are difficult to
forecast with precision before the end of each period. The Company
therefore believes that it is not possible to forecast GAAP results
or to quantitatively reconcile GAAP results to non-GAAP results
with sufficient precision unless Newmark makes unreasonable
efforts. The items that are difficult to predict on a quarterly
basis with precision and which can have a material impact on the
Company's GAAP results include, but are not limited, to the
following:
- Allocations of net income and grants of exchangeability to
limited partnership units, which are determined at the discretion
of management throughout and up to the period-end;
- The impact of certain marketable securities, as well as any
gains or losses related to associated mark-to- market movements
and/or hedging including with respect to the Nasdaq Forward. These
items are calculated using period-end closing prices;
- Non-cash asset impairment charges, which are calculated and
analyzed based on the period-end values of the underlying assets.
These amounts may not be known until after period-end; and
- Acquisitions, dispositions and/or resolutions of litigation,
which are fluid and unpredictable in nature.
Newmark's Adjusted EBITDA and Adjusted EBITDA Before
Allocations to Units Defined
Newmark provides a non-GAAP
financial performance measure, "Adjusted EBITDA," which the Company
defines as "Net income (loss) for fully diluted shares" derived in
accordance with GAAP and adjusted for the addition of the following
items (the last two items of which are discussed further in section
of this documents called "Adjustments Made to Calculate Pre-Tax
Adjusted Earnings.")
- Provision (benefit) for income taxes;
- Net income (loss) attributable to noncontrolling interest;
- Employee loan amortization and reserves on employee loans;
- Interest expense;
- Fixed asset depreciation and intangible asset
amortization;
- Non-cash charges relating to grants of exchangeability to
limited partnership units;
- Other non-cash charges related to equity-based
compensation;
- Other non-cash income (loss); and
- Net non-cash GAAP gains related to OMSRs and MSRs
amortization.
The Company also discloses "Adjusted EBITDA before allocations
to units," which is Adjusted EBITDA excluding GAAP charges with
respect to allocations of net income to limited partnership units.
Such allocations represent the pro-rata portion of pre-tax earnings
available to such unit holders. These units are included in the
fully-diluted share count, and are exchangeable on a one-to-one
basis, subject to certain adjustments, into shares of Newmark's
Class A common stock. As these units are exchanged into shares
of the Company's Class A common stock, unit holders will
become entitled to cash dividends paid on the shares of the
Class A common stock rather than cash distributions in respect
of the units. The Company views such allocations as economically
equivalent to dividends on common shares. Because dividends paid to
common shares are not an expense under GAAP, management believes
similar allocations of income to unit holders should also be
excluded by investors when analyzing Newmark's results on a
fully-diluted basis with respect to Adjusted EBITDA.
The Company's management believes that these Adjusted EBITDA
measures are useful in evaluating Newmark's operating performance,
because the calculations of these measures generally eliminate the
effects of financing and income taxes and the accounting effects of
capital spending and acquisitions, which would include impairment
charges of goodwill and intangibles created from acquisitions. Such
items may vary for different companies for reasons unrelated to
overall operating performance. As a result, the Company's
management uses these measures to evaluate operating performance
and for other discretionary purposes. Newmark believes that these
Adjusted EBITDA measures are useful to investors to assist them in
achieving a more complete picture of the Company's financial
condition and results of operations.
Because these Adjusted EBITDA measures are not recognized
measurements under GAAP, investors should use these measures in
addition to "Net income (loss) for fully diluted shares" when
analyzing Newmark's operating performance. Because not all
companies use identical Adjusted EBITDA calculations, the Company's
presentation of these Adjusted EBITDA measures may not be
comparable to similarly-titled measures of other companies.
Furthermore, these Adjusted EBITDA measures are not intended to be
measures of free cash flow or GAAP cash flow from operations,
because these Adjusted EBITDA measures do not consider certain cash
requirements, such as tax and debt service payments.
About BGC Partners, Inc.
BGC Partners is a leading
global brokerage company servicing the financial and real estate
markets. BGC offers Real Estate Services through its publicly
traded subsidiary Newmark Group, Inc. BGC owns GFI Group Inc., a
leading intermediary and provider of trading technologies and
support services to the global OTC and listed markets. BGC's
Financial Services offerings include fixed income securities,
interest rate swaps, foreign exchange, equities, equity
derivatives, credit derivatives, commodities, futures, and
structured products. BGC provides a wide range of services,
including trade execution, broker-dealer services, clearing, trade
compression, post trade, information, and other services to a broad
range of financial and non-financial institutions. Through brands
including Fenics, BGC Trader, Capitalab, Lucera, and Fenics Market
Data, BGC offers financial technology solutions, market data, and
analytics related to numerous financial instruments and markets.
BGC, BGC Trader, GFI, Fenics, Fenics Market Data, Capitalab, and
Lucera are trademarks/service marks and/or registered
trademarks/service marks of BGC Partners, Inc. and/or its
affiliates.
BGC's customers include many of the world's largest banks,
broker-dealers, investment banks, trading firms, hedge funds,
governments, corporations, property owners, real estate developers,
and investment firms. BGC's common stock trades on the NASDAQ
Global Select Market under the ticker symbol (NASDAQ: BGCP). BGC
also has an outstanding bond issuance of Senior Notes due
June 15, 2042, which trade on the New
York Stock Exchange under the symbol (NYSE: BGCA). BGC Partners is
led by Chairman and Chief Executive Officer Howard W. Lutnick. For more information, please
visit http://www.bgcpartners.com. You can also follow BGC at
https://twitter.com/bgcpartners,
https://www.linkedin.com/company/bgc-partners and/or
http://ir.bgcpartners.com/Investors/default.aspx.
About Newmark Group, Inc.
Newmark Group, Inc.
("Newmark Group") is a publicly traded company that, through
subsidiaries, operates as a full-service commercial real estate
services business with a complete suite of services and products
for both owners and occupiers across the entire commercial real
estate industry. The investor/owner services and products of
Newmark Group's subsidiaries include capital markets (including
investment sales), agency leasing, property management, valuation
and advisory, diligence and underwriting. Under the Newmark
Knight Frank and Berkeley Point Capital names, the company's
subsidiaries also offer government sponsored enterprise lending,
loan servicing, debt and structured finance and loan sales. Newmark
Group's occupier services and products include tenant
representation, global corporate services, real estate management
technology systems, workplace and occupancy strategy, consulting,
project management, lease administration and facilities management.
Newmark Group enhances these services and products through
innovative real estate technology solutions and data analytics
designed to enable its clients to increase their efficiency and
profits by optimizing their real estate portfolio.
Newmark Group has 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. Newmark
Group, which is listed on the NASDAQ Global Select Market under the
symbol "NMRK", is a publicly traded subsidiary of BGC Partners,
Inc. ("BGC"), a leading global brokerage company servicing the
financial and real estate markets. BGC's common stock trades on the
NASDAQ Global Select Market under the ticker symbol "BGCP". BGC
also has an outstanding bond issuance of Senior Notes due
June 15, 2042, which trade on the New
York Stock Exchange under the symbol "BGCA". Newmark and Berkeley
Point are trademarks/service marks and/or registered
trademarks/service marks of Newmark Group, Inc. and/or its
affiliates. Knight Frank is a service mark of Knight Frank
(Nominees) Limited. Find out more about Newmark at
http://www.ngkf.com/, https://twitter.com/newmarkkf,
https://www.linkedin.com/company/newmark-knight-frank/, and/or
http://ir.ngkf.com/investors/investors-home/default.aspx.
Discussion of Forward-Looking Statements about Newmark and
BGC
Statements in this document regarding Newmark and BGC
that are not historical facts are "forward-looking statements" that
involve risks and uncertainties, which could cause actual results
to differ from those contained in the forward-looking statements.
Except as required by law, Newmark and BGC undertake no obligation
to update any forward-looking statements. For a discussion of
additional risks and uncertainties, which could cause actual
results to differ from those contained in the forward-looking
statements, see Newmark's and BGC's Securities and Exchange
Commission filings, including, but not limited to, the risk factors
set forth in these filings and any updates to such risk factors
contained in subsequent Forms 10-K, Forms 10-Q or Forms 8-K.
1 On June 28, 2013, BGC
sold its eSpeed business to Nasdaq, Inc. ("Nasdaq"). The purchase
consideration consisted of $750
million in cash paid upon closing, plus an expected payment
of up to 14.9 million shares of Nasdaq common stock to be paid
ratably over 15 years beginning in 2013, assuming that Nasdaq, as a
whole, generates at least $25 million
in gross revenues each of these years. "Payments" may be used
interchangeably with the Nasdaq share "earn-out". In connection
with the separation of Newmark from BGC, BGC transferred to Newmark
the right to receive the remainder of the Nasdaq payments. The
value of these Nasdaq shares discussed in this document are based
on the $94.21 closing price of
Nasdaq's common stock as of June 18,
2018.
2 Subject to certain exceptions, Newmark is required to
use any cash proceeds from capital raises above $25 million, net of fees and anticipated taxes,
to repay any balance on the Converted Term Loan. See Newmark's and/or BGC's most recent SEC
filing on Form 10-Q for more information on the Converted Term
Loan.
3 See the section of either BGC's or Newmark's first
quarter financial results press release called "Proposed Spin-Off
of Newmark".
4 The debt and interest expense items referred to herein
exclude operating interest on Warehouse notes payable. The balance
sheet figures and ratios do not include short-term borrowings and
restricted cash.
5 The consolidated leverage ratio for BGC is defined as
Notes payable and other borrowings over trailing twelve months
consolidated Adjusted EBITDA. Newmark's leverage ratio is defined
as Long-term debt over trailing twelve months Adjusted EBITDA.
6 Should Newmark Group's consolidated revenues exceed
$475 million in the third quarters of
2019 or 2020, the EPUs may be exchanged at Newmark's election for
Newmark Group common Class A shares, which would raise additional
equity capital for Newmark.
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