Notes to the Consolidated Financial Statements
(1) Organization and Basis of Presentation
Newmark Group, Inc., formerly known as Newmark Knight Frank (together with its subsidiaries, “Newmark” or the “Company”), a Delaware corporation, was formed as NRE Delaware, Inc. on November 18, 2016. Newmark changed its name to Newmark Group, Inc. on October 18, 2017. Newmark Holdings, L.P. (“Newmark Holdings”) is a consolidated subsidiary of Newmark for which Newmark is the general partner. Newmark and Newmark Holdings jointly own Newmark Partners, L.P. (“Newmark OpCo”), the operating partnership. Newmark is a leading commercial real estate services firm. Newmark offers a diverse array of integrated services and products designed to meet the full needs of both real estate investors/owners and occupiers. Newmark’s 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 brokerage and equity-raising. Newmark’s 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. Newmark enhances these services and products through innovative real estate technology solutions and data analytics that enable clients to increase their efficiency and profits by optimizing their real estate portfolio. Newmark 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's Separation and Spin-Off From BGC Partners, Inc.
Newmark was formed initially through the purchase by BGC Partners, Inc. (“BGC Partners” or “BGC”) of Newmark & Company Real Estate, Inc. and certain of its affiliates in 2011. A majority of the voting power of BGC Partners is held by Cantor Fitzgerald, L.P. (“Cantor”).
On December 13, 2017, BGC, BGC Holdings L.P. (“BGC Holdings”), BGC Partners, L.P. (“BGC U.S. OpCo”), Newmark, Newmark Holdings, Newmark OpCo and, solely for the provisions listed therein, Cantor and BGC Global Holdings, L.P. entered into a Separation and Distribution Agreement (as amended on November 8, 2018 and amended and restated on November 23, 2018, the “Separation and Distribution Agreement”) governing the separation and pro-rata distribution.
On November 30, 2018 (the “Distribution Date”), BGC completed its previously announced Spin-Off to its stockholders of all of the shares of common stock of Newmark owned by BGC as of immediately prior to the effective time of the Spin-Off, with shares of Newmark Class A common stock distributed to the holders of shares of BGC 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 Newmark Class B common stock distributed to the holders of shares of BGC 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. The Spin-Off was effective as of 12:01 a.m., New York City time, on the Distribution Date.
In connection with the Separation and Distribution Agreement, BGC contributed its interests in Berkeley Point Financial LLC (“Berkeley Point”) and Cantor Commercial Real Estate Company, LP (“Real Estate, L.P”) to Newmark.
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 Holdings 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 Newmark Class A common stock and 21,285,537 shares of Newmark Class B common stock to BGC’s stockholders in the Spin-Off. These shares of Newmark common stock collectively represented approximately 94% of the total voting power of outstanding common stock and approximately 87% of the total economics of Newmark outstanding common stock, in each case as of the Distribution Date.
On March 7, 2018, BGC Partners and its operating subsidiaries had purchased 16.6 million newly issued exchangeable limited partnership units (the “Newmark Holdings Units”) of Newmark Holdings for approximately $242.0 million (the “Investment in Newmark Holdings”). 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 Newmark Holdings Units 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 December 31, 2020, the exchange ratio was 0.9379 shares of Newmark common stock per Newmark Holdings Unit.
Following the Spin-Off and the BGC Holdings Distribution, BGC Partners ceased to be Newmark’s controlling stockholder, and BGC and its subsidiaries no longer held any shares of Newmark common stock or other equity interests in it or its subsidiaries. Therefore, BGC no longer consolidates Newmark with its financial results subsequent to the Spin-Off. 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 had sold certain assets of its on-the-run, electronic benchmark U.S. Treasury platform (“eSpeed”) to Nasdaq, Inc. 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 shares 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 (the “Nasdaq Earn-out”). The remaining rights under the Nasdaq Earn-out were transferred to Newmark on September 28, 2017 as part of the transaction (see Note 7 — “Marketable Securities” for additional information).
Exchangeable Preferred Partnership Units and Nasdaq Forward Contracts
On June 18, 2018 and September 26, 2018, Newmark OpCo issued approximately 175.0 million and 150.0 million of exchangeable preferred partnership units (“EPUs”), respectively, in private transactions to the Royal Bank of Canada (“RBC”) (the “Newmark OpCo Preferred Investment”). Newmark received $266.1 million of cash in 2018 with respect to these transactions. The EPUs were issued in four tranches and are separately convertible by either RBC or Newmark into a fixed number of shares of Newmark Class A common stock, subject to a revenue hurdle in each of the fourth quarters of 2019 through 2022 for each of the respective four tranches. The ability to convert the EPUs into Newmark Class A common stock is subject to the special purpose vehicle's (the “SPVs”) option to settle the postpaid forward contracts as described below. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in “Noncontrolling interests” on the accompanying consolidated balance sheets and consolidated statements 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 through Retained earnings on the accompanying consolidated statements of changes in equity and are reductions to “Net income (loss) available to common stockholders” for the purpose of calculating earnings per share.
Contemporaneously with the issuance of the EPUs, an SPV that is a consolidated subsidiary of Newmark entered into variable postpaid forward contracts with RBC (together, the “Nasdaq Forwards”). The SPV is an indirect subsidiary of Newmark whose sole assets are the Nasdaq Earn-outs for 2019 through 2022. The Nasdaq Forwards provide the SPV the option to settle using up to 992,247 Nasdaq shares, to be received by the SPV pursuant to the Nasdaq Earn-out shares to be received (see Note 7 — “Marketable Securities”), or Newmark Class A common stock, in exchange for either cash or redemption of the EPUs, notice of which must be provided to RBC prior to November 1 of each year from 2019 through 2022.
In September 2020, the SPV notified RBC of its decision to settle the second Nasdaq Forward using the Nasdaq shares the SPV received in November 2020 in exchange for the second tranche of the EPUs, which resulted in a payable to RBC that was settled upon receipt of Nasdaq Earn-out shares. The fair value of the Nasdaq common shares that Newmark received was $121.9 million. On November 30, 2020, Newmark settled the second Nasdaq Forward 741,505 Nasdaq shares, with a fair value of $93.5 million and Newmark retained 250,742 Nasdaq shares.
In September 2019, the SPV notified RBC of its decision to settle the second Nasdaq Forward using the Nasdaq shares the SPV received in November 2019 in exchange for the first tranche of the EPUs, which resulted in a payable to RBC that was settled upon receipt of Nasdaq Earn-out shares. The fair value of the Nasdaq shares that Newmark received was $98.6 million. On December 2, 2019, Newmark settled the first Nasdaq forward contract with 898,685 Nasdaq shares, with a fair value of $93.5 million and Newmark retained 93,562 Nasdaq shares.
(a) Basis of Presentation
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission and in conformity with accounting principles generally accepted in the U.S. (“U.S. GAAP”). For the year ended December 31, 2019, Newmark changed the 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” on the consolidated statements of operations and statements of cash flow. The change resulted in the reclassification of amortization charges related to equity-based awards, such as REUs and Restricted Stock Units (“RSUs”), from “Compensation and employee benefits” to “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” reflect the following items related to cash and equity-based compensation:
•Charges with respect to the grant of shares of common stock or limited partnership units, such as HDUs, including in connection with the redemption of non-exchangeable limited partnership units, including PSUs;
•Charges with respect to grants of exchangeability, such as the right of holders of limited partnership units with no capital accounts, such as PSUs, to exchange the units into shares of common stock, or HDUs, as well as the cash paid in the settlement of the related exchangeable preferred units to pay withholding taxes owed by the unit holder upon such exchange;
•Preferred units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder, rather than issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes;
•Charges related to the amortization of RSUs and REUs; and
•Allocations of net income to limited partnership units and founding/working partner units (“FPUs”), including the Preferred Distribution (as hereinafter defined).
Intercompany balances and transactions within Newmark have been eliminated. Transactions between Cantor and Newmark pursuant to service agreements with Cantor (see Note 27 — “Related Party Transactions”), representing valid receivables and liabilities of Newmark which are periodically cash settled, have been included on the accompanying consolidated financial statements as either receivables from or payables to related parties.
Newmark receives administrative services to support its operations, and in return, Cantor allocates certain of its expenses to Newmark. Such expenses represent costs related, but not limited to, treasury, legal, accounting, information technology, payroll administration, human resources, incentive compensation plans and other services. These costs, together with an allocation of Cantor's overhead costs, are included as expenses on the accompanying consolidated statements of operations. Where it is possible to specifically attribute such expenses to activities of Newmark, these amounts have been expensed directly to Newmark. Allocation of all other such expenses is based on a services agreement between Cantor which reflects the utilization of service provided or benefits received by Newmark during the periods presented on a consistent basis, such as headcount, square footage, revenue, etc. Management believes the assumptions underlying the stand-alone financial statements, including the assumptions regarding allocated expenses, reasonably reflect the utilization of services provided to or the benefit received by Newmark during the periods presented. However, these shared expenses may not represent the amounts that would have been incurred had Newmark operated independently from Cantor. Actual costs that would have been incurred if Newmark had performed the services itself would depend on multiple factors, including organizational structure and strategic decisions in various areas, including information technology and infrastructure (see Note 27 — “Related Party Transactions” for an additional discussion of expense allocations).
Transfers of cash, both to and from Cantor, are included in “Receivables from related parties or Payables to related parties” on the consolidated balance sheets and as part of the change in payments to and borrowings from related parties in the financing section prior to the Spin-Off and in the operating section after the Spin-Off on the accompanying consolidated statements of cash flows.
The income tax provision on the accompanying consolidated statements of operations and consolidated statements of comprehensive income has been calculated as if Newmark had been operating on a stand-alone basis and filed separate tax returns in the jurisdictions in which it operates. Prior to the Spin-Off, Newmark’s operations had been included in the BGC U.S. federal and state tax returns or separate non-U.S. jurisdictions tax returns. As Newmark operations in many jurisdictions were unincorporated commercial units of BGC and its subsidiaries, stand-alone tax returns have not been filed for the operations in these jurisdictions.
The accompanying consolidated financial statements contain all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the accompanying consolidated balance sheets, consolidated statements of operations, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of changes in equity of Newmark for the periods presented.
(b) Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which relates to how an entity recognizes the revenue it expects to be entitled to for the transfer of promised goods and services to customers. The ASU replaced certain previously existing revenue recognition guidance. The FASB has subsequently issued several additional amendments to the standard, including ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the guidance on principal versus agent analysis based on the notion of control and affects recognition of revenue on a gross or net basis. Newmark adopted the standards as of their effective date of January 1, 2018 and recognized an increase in assets, liabilities, beginning retained earnings and noncontrolling interests of $64.4 million, $45.6 million, $16.5 million and $2.3 million, respectively, as the cumulative effect of adoption of this accounting change. The impact of adoption is primarily related to Newmark’s brokerage revenues from leasing commissions where revenue recognition was previously deferred when future contingencies exist under the previous revenue recognition guidance. The adoption of the new revenue recognition guidance accelerated these commission revenues that were based, in part, on future contingent events. For example, a portion of certain brokerage revenues from leasing commissions were deferred until a future contingency was resolved (e.g., tenant move-in or payment of first month’s rent). Under the new revenue recognition model, Newmark’s performance obligation will be typically satisfied at lease signing, and, therefore, the portion of the commission that is contingent on a future event will likely be recognized earlier, if it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.
Further, Newmark previously presented expenses incurred on behalf of customers for certain management services subject to reimbursement on a net basis within expenses. Under the new revenue recognition model, Newmark concluded that it controls the services provided by a third-party on behalf of customers and, therefore, acts as a principal under those contracts. As a result, for these service contracts Newmark will present expenses incurred on behalf of customers along with corresponding reimbursement revenue on a gross basis on the accompanying consolidated statements of operations, with no material impact on net income available to common stockholders.
Newmark elected to adopt the new guidance using a modified retrospective approach applied to contracts that were not completed as of January 1, 2018. Accordingly, the new revenue standard is applied prospectively in Newmark’s financial statements from January 1, 2018 onward.
The new revenue recognition guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP standards, and as a result did not have a material impact on the elements of the accompanying consolidated statements of operations most closely associated with financial instruments, including Gains from mortgage banking activities/origination, net, and Servicing fees. See Note 13 — “Revenues from Contracts with Customers” for additional information.
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). This standard requires lessees to recognize a Right-of-use (“ROU”) asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures. Accounting guidance for lessors is mostly unchanged. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, to clarify how to apply certain aspects of the new leases standard. The amendments address the rate implicit in the lease, impairment of the net investment in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase options, variable payments that depend on an index or rate and certain transition adjustments, among other issues. In addition, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842), Targeted Improvements, which provided an additional (and optional) transition method to adopt the new leases standard. Under the new transition method, a reporting entity would initially apply the new lease requirements at the effective date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption; continue to report comparative periods presented in the financial statements in the period of adoption in accordance with legacy U.S. GAAP (i.e., ASC 840, Leases); and provide the required disclosures under ASC 840 for all periods presented under legacy U.S. GAAP. Further, ASU No. 2018-11 contains a practical expedient that allows lessors to avoid separating lease and associated non-lease components within a contract if certain criteria are met. In December 2018, the FASB issued ASU No. 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors, to clarify guidance for lessors on sales taxes and other similar taxes collected from lessees, certain lessor costs and recognition of variable payments for contracts with lease and non-lease components. In March 2019, the FASB issued ASU No. 2019-01, Leases
(Topic 842), Codification Improvements, to clarify certain application and transitional disclosure aspects of the new leases standard. The amendments address determination of the fair value of the underlying asset by lessors that are not manufacturers or dealers and clarify interim period transition disclosure requirements, among other issues. The guidance in ASUs No. 2016-02, 2018-10, 2018-11 and 2018-20 was effective beginning January 1, 2019, with early adoption permitted; whereas the guidance in ASU No. 2019-01 is effective beginning January 1, 2020, with early adoption permitted. Newmark adopted the above mentioned standards on January 1, 2019 using the effective date as the date of initial application. Therefore, pursuant to this transition method, financial information was not updated, and the disclosures required under the new leases standards were not provided for dates and periods before January 1, 2019. The guidance provides a number of optional practical expedients to be utilized by lessees upon transition. Accordingly, Newmark elected the “package of practical expedients,” which permitted Newmark not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. Newmark did not elect the use-of-hindsight or the practical expedient pertaining to land easements, with the latter not being applicable to Newmark. The new standard also provides practical expedients for an entity’s ongoing accounting as a lessee. Newmark elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, Newmark will not recognize ROU assets and lease liabilities, and this includes not recognizing ROU assets and lease liabilities for existing short-term leases of those assets upon transition. Newmark also elected the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate. The primary non-lease component that is combined with a lease component represents operating expenses such as utilities, maintenance or management fees. As a result, upon adoption, acting primarily as a lessee, Newmark recognized a $178.8 million ROU asset, net of tenant improvements, and a $226.7 million lease liability on the accompanying consolidated balance sheets for its real estate operating leases. The adoption of the guidance did not have a material impact on the accompanying consolidated statements of operations, consolidated statements of changes in equity and consolidated statements of cash flows. See Note 18 — “Leases” for additional information on Newmark’s leasing arrangements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires entities to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new measurement alternative. The guidance also requires entities to record changes in instrument-specific credit risk for financial liabilities measured under the fair value option in other comprehensive income. In February 2018, the FASB issued ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, to clarify transition and subsequent accounting for equity investments without a readily determinable fair value, among other aspects of the guidance issued in ASU No. 2016-01. The amendments in ASU No. 2018-03 were effective for fiscal years beginning January 1, 2018 and interim periods beginning July 1, 2018. The amendments and technical corrections provided in ASU No. 2018-03 could be adopted concurrently with ASU No. 2016-01, which was effective for Newmark on January 1, 2018. Newmark adopted both ASUs on January 1, 2018 using the modified retrospective approach for equity securities with a readily determinable fair value and the prospective method for equity investments without a readily determinable fair value. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires financial assets that are measured at amortized cost to be presented, net of an allowance for credit losses, at the amount expected to be collected over their estimated life. Expected credit losses for newly recognized financial assets, as well as changes to credit losses during the period, are recognized in earnings. For certain purchased financial assets with deterioration in credit quality since origination (“PCD assets”), the initial allowance for expected credit losses will be recorded as an increase to the purchase price. Expected credit losses, including losses on off-balance-sheet exposures, such as lending commitments, will be measured based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, to clarify that operating lease receivables accounted for under ASC 842, Leases, are not in the scope of the new credit losses guidance, and, instead, impairment of receivables arising from operating leases should be accounted for in accordance with ASC 842, Leases. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The ASU makes changes to the guidance introduced or amended by ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments. See below for the description of the amendments stipulated in ASU No. 2019-04. In addition, in May 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief. The amendments in this ASU allow entities, upon adoption of ASU No. 2016-13, to irrevocably elect the fair value option for financial instruments that were previously carried at amortized cost and are eligible for the fair value option under ASC 825-10, Financial Instruments: Overall. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. The amendments in this ASU require entities to include certain expected recoveries of the amortized cost basis previously written off, or expected to be written off, in the allowance for credit losses for PCD
assets; provide transition relief related to troubled debt restructurings; allow entities to exclude accrued interest amounts from certain required disclosures; and clarify the requirements for applying the collateral maintenance practical expedient. The amendments in ASUs No. 2018-19, 2019-04, 2019-05 and 2019-11 are required to be adopted concurrently with the guidance in ASU No. 2016-13. Newmark adopted the standards on their required effective date beginning January 1, 2020. The primary effect of adoption, on a pre-tax basis, resulted in a decrease in assets of $8.0 million, an increase in liabilities of $17.9 million and a decrease in retained earnings of $25.9 million, respectively.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of Business, which clarifies the definition of a business with the objective of providing additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard became effective beginning January 1, 2018 on a prospective basis. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminates the requirement to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. Under the amendments in the new ASU, goodwill impairment testing will be performed by comparing the fair value of the reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Newmark adopted the standard on its required effective date beginning January 1, 2020, and the guidance was applied on a prospective basis starting with the goodwill impairment test during the year ended December 31, 2020. The adoption of the new guidance did not have a material impact on the accompanying consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of ASC 610-20, Other Income-Gains and Losses from Derecognition of Nonfinancial Assets, and defines in substance nonfinancial assets. The ASU also impacts the accounting for partial sales of nonfinancial assets (including in substance real estate). Under this guidance, when an entity transfers its controlling interest in a nonfinancial asset but retains a noncontrolling ownership interest, the entity is required to measure the retained interest at fair value, which results in a full gain or loss recognition upon the sale of a controlling interest in a nonfinancial asset. Newmark adopted the standard on its required effective date of January 1, 2018. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718)-Scope of Modification Accounting, which amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. Under this guidance, an entity would not apply modification accounting if the fair value, the vesting conditions, and the classification of the awards (as equity or liability) are the same immediately before and after the modification. The new standard became effective for Newmark beginning January 1, 2018 on a prospective basis for awards modified on or after the adoption date. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The guidance intends to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. To meet that objective, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. Based on concerns about the sustainability of LIBOR, in 2017, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York identified a broad Treasury repurchase agreement (repo) financing rate referred to as the SOFR as its preferred alternative reference rate. The guidance in ASU No. 2018-16 adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments in this ASU were required to be adopted concurrently with the guidance in ASU No. 2017-12. The guidance became effective beginning January 1, 2019 and was required to be applied on a prospective and modified retrospective basis. As Newmark currently does not designate any derivative contracts as hedges for accounting purposes, the adoption of this new guidance did not have a material impact on the accompanying consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance helps organizations address certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 by providing an option to reclassify these stranded tax effects to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The new standard became effective on January 1, 2019. The guidance was required to be applied to either in the period of adoption or retrospective to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. Newmark adopted the new standard on its required effective date and elected to reclassify the stranded income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. However, the adoption of the new guidance did not have a material effect on the accompanying consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation--Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance largely aligns the accounting for share-based payment awards issued to employees and nonemployees, whereby the existing employee guidance will apply to non-employee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance relate to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for non-employee awards. The new standard became effective beginning January 1, 2019. The ASU was required to be applied on a prospective basis to all new awards granted after the date of adoption. In addition, any liability-classified awards that were not been settled and equity-classified awards for which a measurement date had not been established by the adoption date were remeasured at fair value as of the adoption date with cumulative effect adjustment to opening retained earnings in the year of adoption. Newmark adopted this standard on its effective date. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The guidance is part of the FASB’s disclosure framework project, whose objective and primary focus are to improve the effectiveness of disclosures in the notes to financial statements. The ASU eliminates, amends and adds certain disclosure requirements for fair value measurements. The FASB concluded that these changes improve the overall usefulness of the footnote disclosures for financial statement users and reduce costs for preparers. Certain disclosures are required to be applied prospectively and other disclosures need to be adopted retrospectively in the period of adoption. As permitted by the transition guidance in the ASU, Newmark early adopted eliminated and modified disclosure requirements as of September 30, 2018. The early adoption of this standard did not have an impact on the accompanying consolidated financial statements. The additional disclosure requirements were adopted by Newmark beginning January 1, 2020, and the adoption of these fair value measurement disclosures did not have an impact on Newmark’s consolidated financial statements. See Note 26 — “Fair Value of Financial Assets and Liabilities” for additional information.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). The guidance on the accounting for implementation, setup, and other upfront costs (collectively referred to as implementation costs) applies to entities that are a customer in a hosting arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the guidance in this ASU. The new standard became effective beginning January 1, 2020. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance was issued in response to stakeholders’ observations that Topic 810, Consolidation, could be improved in the areas of applying the variable interest entity guidance to private companies under common control and in considering indirect interests held through related parties under common control for determining whether fees paid to decision makers and service providers are variable interests. The new standard became effective beginning January 1, 2020, with early adoption permitted, and must be applied retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented. Newmark adopted the standard on its effective date beginning January 1, 2020. The adoption of this guidance did not have a material impact on the accompanying consolidated financial statements.
In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. The ASU amends guidance introduced or amended by ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326)-Measurement of Credit Losses on Financial Instruments, ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, and ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments to ASU No. 2016-13 clarify the scope of the credit losses standard and address guidance related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other issues. With respect to amendments to ASU No. 2017-12, the guidance addresses partial-term fair value hedges, fair value hedge basis adjustments, and certain transition requirements, along with other issues. The clarifying guidance pertaining to ASU No. 2016-01 requires an entity to remeasure an equity security without a readily determinable fair value accounted for under the measurement alternative at fair value in accordance with guidance in ASC 820, Fair Value Measurement; specifies that equity securities without a readily determinable fair value denominated in nonfunctional currency must be remeasured at historical exchange rates; and provides fair value measurement disclosure guidance. Newmark adopted this standard on the required effective date beginning January 1, 2020. The adoption of the hedge accounting and the recognition and measurement guidance amendments did not have a material impact on Newmark’s consolidated financial statements. See above for the impact of adoption of the amendments related to the credit losses standard.
In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections-Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates. The guidance clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with already effective SEC final rules, thereby eliminating redundancies and making the codification easier to apply. This ASU was effective upon issuance and did not have a material impact on Newmark's consolidated financial statements and related disclosures.
In November 2019, the FASB issued ASU No. 2019-08, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements-Share-Based Consideration Payable to a Customer. The ASU simplifies and increases comparability of accounting for nonemployee share-based payments, specifically those made to customers. Under the new guidance, such awards will be accounted for as a reduction of the transaction price in revenue, but should be measured and classified following the stock compensation guidance in ASC 718, Compensation-Stock Compensation. Newmark adopted standard on the required effective date beginning January 1, 2020. The adoption of this guidance did not have a material impact on Newmark’s consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-03, Codification Improvements to Financial Instruments. This ASU makes narrow-scope amendments related to various aspects pertaining to financial instruments and related disclosures by clarifying or improving the Codification. For the most part, the guidance was effective upon issuance, and the adoption of the standard did not have a material impact on Newmark’s consolidated financial statements.
(c) New Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU is part of the FASB’s simplification initiative, and it is expected to reduce costs and complexity related to accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740, Income Taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The new standard will become effective for Newmark beginning January 1, 2021 and, with certain exceptions, will be applied prospectively. Early adoption is permitted. Management is currently evaluating the impact of the new guidance on Newmark’s consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force). These amendments improve previous guidance by reducing diversity in practice and increasing comparability of the accounting for the interactions between these codification topics as they pertain to certain equity securities, investments under the equity method of accounting and forward contracts or purchased options to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option. The new standard became effective for Newmark beginning January 1, 2021 and will be applied prospectively. The adoption of this guidance is not expected to have a material impact on Newmark's consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The guidance is designed to provide relief from the accounting analysis and impacts that may otherwise be required for modifications to agreements (e.g., loans, debt securities, derivatives, and borrowings) necessitated by reference rate reform as entities transition away from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This ASU also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. Application of the guidance is optional and only available in certain situations. The ASU is effective upon issuance and generally can be applied through December 31, 2022. Management is evaluating and planning for adoption of the new guidance, including forming a cross-functional LIBOR transition team to determine Newmark’s transition plan and facilitate an orderly transition to alternative reference rates, and continuing its assessment on Newmark’s consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The standard is expected to reduce complexity and improve comparability of financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The ASU also enhances information transparency by making targeted improvements to the related disclosures guidance. Additionally, the amendments affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The new standard will become effective for Newmark beginning January 1, 2022 and can be applied using either a modified retrospective or a fully retrospective method of transition. Early adoption is permitted, but no earlier than beginning January 1, 2021. Management is currently evaluating the impact of the new guidance on Newmark’s consolidated financial statements.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvements. The standard amends the Codification by moving existing disclosure requirements to (or adding appropriate references in) the relevant disclosure sections. The ASU also clarifies various provisions of the Codification by amending and adding new headings, cross-referencing, and refining or correcting terminology. The new standard became effective for Newmark beginning January 1, 2021 and can be applied using either a modified retrospective or a fully retrospective method of transition. The adoption of this guidance is not expected to have a material impact on Newmark’s consolidated financial statements.
(2) Limited Partnership Interests in Newmark Holdings and BGC Holdings
Newmark is a holding company with no direct operations and conducts substantially all of its operations through its operating subsidiaries. Virtually all of Newmark’s consolidated net assets and net income are those of consolidated variable interest entities. Newmark Holdings is a consolidated subsidiary of Newmark for which Newmark is the general partner. Newmark and Newmark Holdings jointly own Newmark OpCo, the operating partnership. In connection with the Separation and BGC Holdings Distribution, holders of BGC Holdings partnership interests received partnership interests in Newmark Holdings, described below (see Note 27 — “Related Party Transactions”). These collectively represent all of the “limited partnership interests” in BGC Holdings and Newmark Holdings.
As a result of the Separation, the limited partnership interests in Newmark Holdings were distributed to the holders of limited partnership interests in BGC Holdings, whereby each holder of BGC Holdings limited partnership interests at that time received a corresponding Newmark Holdings limited partnership interest, determined by the contribution ratio (as hereafter defined), which was equal to a BGC Holdings limited partnership interest multiplied by one divided by 2.2 (the “contribution ratio”), divided by the exchange ratio (which is the ratio by which a Newmark Holdings limited partnership interest can be exchanged for a number of shares of Newmark Class A common stock (the “exchange ratio”)). Initially, the exchange ratio equaled one, so that each Newmark Holdings limited partnership interest was exchangeable for one share of Newmark Class A common stock; however, such exchange ratio is subject to adjustment. For reinvestment, acquisition or other purposes, Newmark may determine on a quarterly basis to distribute to its stockholders a smaller percentage of its income than Newmark Holdings distributes to its equity holders (excluding tax distributions from Newmark Holdings) of the cash that it received from Newmark OpCo. In such circumstances, the Separation and Distribution Agreement provides that the exchange ratio will be reduced to reflect the amount of additional cash retained by Newmark as a result of the distribution of such smaller percentage, after the payment of taxes. As of December 31, 2020, the exchange ratio equaled 0.9379.
Redeemable Partnership Interests
Founding/working partners have limited partnership interests (“FPUs”) in BGC Holdings and Newmark Holdings. Newmark accounts for FPUs outside of permanent capital as “Redeemable partnership interests,” on the accompanying consolidated balance sheets. This classification is applicable to FPUs because these units are redeemable upon termination of a partner, including a termination of employment, which can be at the option of the partner and not within the control of the issuer.
FPUs are held by limited partners who are primarily employees of BGC and generally receive quarterly allocations of net income. Upon termination of employment or otherwise ceasing to provide substantive services, the FPUs are generally redeemed, and the unit holders are no longer entitled to participate in the quarterly allocations of net income. These quarterly allocations of net income are contingent upon services being provided by the unit holder and are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations to the extent they relate to FPUs held by Newmark employees.
Limited Partnership Units
Certain employees of Newmark hold limited partnership interests in Newmark Holdings and BGC Holdings (e.g., REUs, RPUs, PSUs, PSIs, HDUs, and LPUs, collectively the “limited partnership units”).
Prior to the Separation, certain employees of both BGC and Newmark generally received limited partnership units in BGC Holdings. As a result of the Separation, these employees were distributed limited partnership units in Newmark Holdings equal to a BGC Holdings limited partnership unit multiplied by the contribution ratio. In addition, in the BGC Holdings Distribution, these employees also received additional limited partnership units in Newmark Holdings. Subsequent to the Separation, Newmark employees generally have been granted limited partnership units in Newmark Holdings.
Generally, such limited partnership units receive quarterly allocations of net income and generally are contingent upon services being provided by the unit holders. As prescribed in U.S. GAAP guidance, prior to the Spin-Off, the quarterly allocations of net income on such limited partnership units were reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the consolidated statements of operations. Following the Spin-Off, the quarterly allocations of net income on BGC Holdings and Newmark Holdings limited partnership units held by Newmark employees are reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations, and the quarterly allocations of net income on Newmark Holdings limited partnership units held by BGC employees are reflected as a component of “Net income (loss) attributable to noncontrolling interests” on the accompanying consolidated statements of operations. From time to time, Newmark issues limited partnership units as part of the consideration for acquisitions.
Certain of these limited partnership units held by Newmark and BGC employees entitle the holders to receive post-termination payments equal to the notional amount of the units in four equal yearly installments after the holder’s termination. These limited partnership units are accounted for as post-termination liability awards, and in accordance with U.S. GAAP guidance, Newmark records compensation expense for the awards based on the change in value at each reporting date on the accompanying consolidated statements of operations as part of “Equity-based compensation and allocations of net income to limited partnership units and FPUs.”
Certain Newmark employees hold preferred partnership units (“Preferred Units”). Each quarter, the net profits of 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 (the “Preferred Distribution”). These allocations are deducted before the calculation and distribution of the quarterly partnership distribution for the remaining partnership units and are generally contingent upon services being provided by the unit holder. 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 Newmark’s Class A common stock and are only entitled to the Preferred Distribution, and accordingly are not included in Newmark’s fully diluted share count. The quarterly allocations of net income on Preferred Units are reflected in compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” on the accompanying consolidated statements of operations. After deduction of the Preferred Distribution, the remaining partnership units generally receive quarterly allocation of net income based on their weighted-average pro rata share of economic ownership of the operating subsidiaries. In addition, Preferred Units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder, rather than issuing the gross amount of shares to employees, subject to cashless withholding of shares to pay applicable withholding taxes.
Certain Newmark employees hold non-distribution earning units (e.g. NPSUs and NREUs, collectively “N Units”) that do not participate in quarterly partnership distributions and are not allocated any items of profit or loss. N Units become distribution earning limited partnership units, ratably over a four-year vesting term, if certain revenue thresholds are met at the end of each vesting term.
Cantor Units
Cantor holds limited partnership interests in Newmark Holdings (“Cantor units”). Cantor units are reflected as a component of “Noncontrolling interests” on the accompanying consolidated balance sheets. Cantor receives quarterly allocations of net income (loss) and are reflected as a component of “Net income (loss) attributable to noncontrolling interests” on the accompanying consolidated statements of operations.
BGC Units
Prior to the Spin-Off, BGC and its operating subsidiaries held limited partnership interests in Newmark Holdings (“BGC Units”). Such BGC Units were reflected as a component of “Noncontrolling interests” on the accompanying consolidated balance sheets. BGC received quarterly allocations of net income (loss) on BGC Units, which were reflected as a component of “Net income (loss) attributable to noncontrolling interests” on the accompanying consolidated statements of operations. In conjunction with the Spin-Off, such units were either exchanged for shares of Newmark Class A and Class B shares that were distributed to BGC Stockholders in the Spin-Off, or distributed to the partners of BGC Holdings in the BGC Holdings Distribution (see Note 1 — “Organization and Basis of Presentation”).
Exchangeable Preferred Limited Partnership Units
The EPUs were issued in four tranches and are separately convertible by either RBC or Newmark into a fixed number of Newmark’s Class A common stock, subject to a revenue hurdle for Newmark in each of the fourth quarters of 2019 through 2022 for each of the four tranches, respectively. As the EPUs represent equity ownership of a consolidated subsidiary of Newmark, they have been included in “Noncontrolling interests” on the consolidated statements 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 through retained earnings on the consolidated statements of changes in equity and are reductions to “Net income available to common stockholders” for the purpose of calculating earnings per share. (See Note 1 — “Organization and Basis of Presentation” for additional information).
General
Certain of the limited partnership interests, described above, have been granted exchangeability into BGC and/or Newmark Class A common stock, and additional limited partnership interests may become exchangeable for BGC and/or Newmark Class A common stock. At the time exchangeability is granted, Newmark 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” on the accompanying consolidated statements of operations. In addition, certain limited partnership interests have been granted the right to exchange into a Newmark partnership unit with a capital account, such as HDUs. HDUs have a stated capital account which is initially based on the closing trading price of Newmark Class A common stock at the time the HDU is granted and are included in “Other long-term liabilities” on the accompanying consolidated balance sheets. HDUs participate in quarterly partnership distributions and are not exchangeable into shares of Class A common stock. Limited partnership interests held by Cantor in Newmark Holdings as of December 31, 2020 are exchangeable for 22.7 million shares of Newmark Class B common stock. Subsequent to the Spin-Off, limited partnership interests in BGC Holdings held by a partner or Cantor may become exchangeable for BGC Class A or Class B common stock on a one-for-one basis, and limited partnership interests in Newmark Holdings held by a partner or Cantor may become exchangeable for a number of shares of Newmark Class A or Class B common stock equal to the number of limited partnership interests multiplied by the exchange ratio at that time. As of December 31, 2020, the exchange ratio equaled 0.9379.
Each quarter, net income (loss) is allocated between the limited partnership interests and the common stockholders. In quarterly periods in which Newmark has a net loss, the loss is allocated to Cantor and reflected as a component of “Net income (loss) attributable to noncontrolling interests” on the accompanying consolidated statements of operations. In subsequent quarters in which Newmark has net income, the initial allocation of income to the limited partnership interests is allocated to Cantor, and reflected in, “Net income (loss) attributable to noncontrolling interests,” to recover any losses taken in earlier quarters, with the remaining income allocated to the limited partnership interests. This loss allocation process between limited partners and Cantor has no material impact on the net income (loss) allocated to common stockholders.
(3) Summary of Significant Accounting Policies
Use of Estimates:
The preparation of Newmark’s consolidated financial statements in conformity with U.S. GAAP 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 on the accompanying consolidated financial statements. Management believes that the estimates utilized in preparing these consolidated financial statements are reasonable. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from the estimates included on the accompanying consolidated financial statements.
Equity Investments and Marketable Securities:
In accordance with the guidance on recognition and measurement of equity investments, Newmark carries its marketable equity securities at fair value and recognizes any changes in fair value in consolidated net income (loss). Further, Newmark has elected to use a measurement alternative for its equity investments without a readily determinable fair value, pursuant to which these investments are initially recognized at cost and remeasured through earnings when there is an observable transaction involving the same or similar investment of the same issuer, or due to an impairment. Newmark’s investments, in which it has significant influence but not a controlling financial interest and of which it is not the primary beneficiary, are accounted for under the equity method. (See Note 8 — “Investments” for additional information).
Revenue Recognition:
The accounting policies described below were updated pursuant to the adoption of the U.S. GAAP standard on Revenue from Contracts with Customers and related amendments on January 1, 2018. These revenue recognition policy updates have been applied prospectively in the accompanying consolidated financial statements from January 1, 2018 onward.
Commissions:
Commissions from real estate lease brokerage transactions are typically recognized at a point in time on the date the lease is signed, if deemed not subject to significant reversal. The date the lease is signed represents the transfer of control and satisfaction of the performance obligation as the tenant has been secured. Commission payments may be due entirely upon lease execution or may be paid in installments upon the resolution of a future contingency (e.g. tenant move-in or payment of first month’s rent).
Commission revenues from real estate sales brokerage transactions are recognized at the time the service has been provided and the commission becomes legally due, except when future contingencies exist. In most cases, close of escrow or transfer of title is a future contingency, and revenue recognition is deferred until all contingencies are satisfied.
Gains from Mortgage Banking Activities/Originations, net:
Gains from mortgage banking activities/originations, net are recognized when a derivative asset or liability 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 third-party brokers.
Management Services, Servicing Fees and Other:
Management services revenues include property management, facilities management, project management and valuation and appraisal. Management fees are recognized at the time the related services have been performed, unless future contingencies exist. In addition, in regard to management and facility service contracts, the owner of the property will typically reimburse Newmark for certain expenses that are incurred on behalf of the owner, which comprise primarily on-site employee salaries and related benefit costs. The amounts which are to be reimbursed per the terms of the services contract are recognized as revenue in the same period as the related expenses are incurred. In certain instances, Newmark subcontracts property management services to independent property managers, in which case Newmark passes a portion of its property management fee on to the subcontractor, and Newmark retains the balance. Accordingly, Newmark records these fees gross of the amounts paid to subcontractors, and the amounts paid to subcontractors are recognized as expenses in the same period.
Newmark also uses third party service providers in the provision of its services to customers. In instances where a third-party service provider is used, Newmark performs an analysis to determine whether it is acting as a principal or an agent with respect to the services provided. To the extent that Newmark determines that it is acting as a principal, the revenue and the expenses incurred are recorded on a gross basis. In instances where Newmark 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, Newmark performs services for customers and incurs out-of-pocket expenses as part of delivering those services. Newmark’s customers agree to reimburse Newmark 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.
Servicing fees are earned for servicing mortgage loans and are recognized on an accrual basis over the lives of the related mortgage loans. Also included in servicing fees are the fees earned on prepayments, interest and placement fees on borrowers’ escrow accounts and other ancillary fees.
Other revenues include interest income on warehouse notes receivable.
Fees to Related Parties:
Newmark is allocated costs from Cantor for back-office services provided by Cantor and their affiliates, including occupancy of office space, utilization of fixed assets, accounting, operations, human resources and legal services and information technology. Fees are expensed as they are incurred.
Other Income, net:
Other income, net comprises of gains or losses recorded in connection with changes in fair value of contingent consideration (See Note 26 — “Fair Value of Financial Assets and Liabilities”) in connection with entities acquired, gains and losses associated with the Nasdaq monetization transactions and the movement of mark-to-market and/or hedge on marketable securities that are classified as trading securities (See Note 7 — “Marketable Securities”), Newmark’s pro rata share for equity method investments and unrealized gains or losses relating to investments carried under the measurement alternative (See Note 8 — “Investments” and Note 19 — “Other assets”) and movements related to the impact of any unrealized mark-to-market gains or losses related to the Nasdaq Forwards.
Restricted Cash:
Represents cash set aside for amounts pledged for the benefit of Fannie Mae in excess of the required cash to secure Newmark’s financial guarantee liability (See Note 12 — “Credit Enhancement Receivable, Contingent Liability and Credit Enhancement Deposit”).
Leases:
Newmark enters into leasing arrangements in the ordinary course of business, as a lessee and has leases primarily relating to office space.
The accounting policies described below were updated pursuant to the adoption of ASC 842, Leases and related amendments on January 1, 2019. These policy updates have been applied using the modified retrospective approach in the accompanying consolidated financial statements from January 1, 2019, onward. Financial information for the year ended December 31, 2018 was not revised and continues to be reported under the previous accounting guidance on leases in effect during that historical period.
Newmark determines whether an arrangement is a lease or includes a lease at the contract inception. ROU lease assets represent the Newmark’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Other than for leases with an initial term of twelve months or less, operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease payments may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. Lease expense pertaining to operating leases is recognized on a straight-line basis over the lease term (See Note 18 — “Leases” for additional information).
Current Expected Credit Losses ("CECL"):
The accounting policy changes described below were updated pursuant to the adoption of ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments and related amendments on January 1, 2020. These policy updates have been applied using the modified retrospective approach in the accompanying consolidated financial statements from January 1, 2020 onward. Financial information for the historical comparable periods was not revised and continues to be reported under the accounting standards in effect during those historical periods. In accordance with the guidance in ASC Topic 326, Newmark presents its financial assets that are measured at amortized cost, net of an allowance for credit losses, which represents the amount expected to be collected over their estimated life. Expected credit losses for newly recognized financial assets carried at amortized cost and credit exposures on off-balance sheet financial guarantees, as well as changes to expected lifetime credit losses during the period, are recognized in earnings. The CECL methodology represents a significant change from prior U.S. GAAP and replaced the prior multiple impairment methods, which generally required that a loss be incurred before it was recognized. Within the life cycle of a loan or other financial asset in scope, the CECL methodology generally results in the earlier recognition of the provision for credit losses and the related allowance for credit losses than under prior U.S. GAAP. The CECL methodology’s impact on expected credit losses, among other things, reflects Newmark’s view of the current state of the economy, forecasted macroeconomic conditions and Newmark’s portfolios.
Financial guarantee liability:
Newmark's adoption of ASC 326 impacted the expected credit loss reserving methodology for the financial guarantee liability provided to Fannie Mae under the Delegated Underwriting and Servicing (“DUS”) Program and Freddie Mac’s Targeted Affordable Housing Program “TAH”). The expected credit loss is modeled based on Newmark's historical loss experience adjusted to reflect current economic conditions. A significant amount of judgment is required in the determination of the appropriate reasonable and supportable period, the methodology used to incorporate current and future macroeconomic conditions, determination of the probability of and exposure at default or non-payment, current delinquency status, loan size, terms, amortization types, and the forward-looking view of the primary risk drivers (debt-service coverage ratio and loan-to-value), all of which are ultimately used in measuring the quantitative components of the reserve. Beyond the reasonable and supportable period, Newmark estimates expected credit losses using its historical loss rates. In addition, Newmark reviews the reserves periodically and makes adjustments for certain external and internal qualitative factors, which may increase or decrease the reserves for credit losses. In order to estimate credit losses, assumptions about current and future economic conditions are incorporated into the model using multiple economic scenarios that are weighted to reflect the conditions at each measurement date. As a result of the adoption of ASC 326, Newmark recorded a pre-tax increase to the financial guarantee liability of $17.9 million through beginning stockholders' equity on January 1, 2020. During the year ended December 31, 2020, there was an increase to the loss sharing liability of $11.6 million. As of December 31, 2020 the balance of the financial guarantee liabilities is $29.6 million are included in “Other long-term liabilities” on the accompanying consolidated balance sheets.
Receivables, net:
Newmark has accrued commissions receivable from real estate brokerage transactions, management services and other receivables from contractual management assignments. Receivables are presented net of the CECL allowance as discussed above and are included in “Receivables, net” on the accompanying consolidated balance sheets. For its CECL reserve, Newmark segregated its receivables into certain pools based on similar risk characteristics and further defined a range of potential loss rates for each pool based on aging. Newmark designed its methodology to allow for a range of loss rates in each pool such that changes in forward-looking conditions can be incorporated into the estimate. Each pool is assigned a loss rate that incorporates management’s view of current conditions and forward-looking conditions that inform the level of expected credit losses in each pool. The credit loss estimate includes specifically identified amounts for which payment has become unlikely. As a result of the adoption of ASC 326, As of December 31, 2019 Newmark had a balance in the allowance for doubtful accounts of $11.8 million. As a result of the adoption of ASC 326, Newmark recorded a pre-tax increase to the reserves of $4.2 million through beginning stockholder's equity on January 1, 2020. As of December 31, 2020, the balance of the reserve was $13.4 million and is included in "Receivables, net' on the accompany consolidated balance sheets..
Loans, Forgivable Loans and Other Receivables from Employees and Partners, net:
Newmark has entered into various agreements with certain of its 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 some or all of their limited partnership units or may be forgiven over a period of time. The forgivable portion of these loans is not included in Newmark’s estimate of expected credit losses when employees meet the conditions for forgiveness through their continued employment over the specified time period and is recognized as compensation expense over the life of the loan. The amounts due from terminated employees that Newmark does not expect to collect are included in the allowance for credit losses. As a result of the adoption of ASC 326, Newmark recorded a pre-tax reserves of $3.7 million through beginning stockholders' equity on January 1, 2020. As of December 31, 2020, the balance of this reserve was $3.7 million and is included in “Loans, forgivable loans and other receivables from employees and partners, net” on the accompanying consolidated balance sheets.
From time to time, Newmark 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 time frame outlined in the underlying agreements. Newmark reviews loan balances each reporting period for collectability. If Newmark determines that the collectability of a portion of the loan balances is not expected, Newmark recognizes a reserve against the loan balances as compensation expense.
Segment:
Newmark has a single operating segment. Newmark is a real estate services firm offering services to commercial real estate tenants, investors, owners, occupiers, developers, leasing and corporate advisory, investment sales and real estate finance, consulting, origination and servicing of commercial mortgage loans, valuation, project and development management and property and facility management. The chief operating decision-maker regardless of geographic location evaluates the operating results of Newmark as total real estate services and allocates resources accordingly. Newmark recognized revenues as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Leasing and other commissions
|
|
|
|
|
$
|
513,842
|
|
|
$
|
854,780
|
|
|
$
|
817,435
|
|
Capital markets commissions
|
|
|
|
|
454,106
|
|
|
541,255
|
|
|
468,904
|
|
Gains from mortgage banking activities/origination, net
|
|
|
|
|
310,914
|
|
|
198,085
|
|
|
182,264
|
|
Management services, servicing fees and other
|
|
|
|
|
626,136
|
|
|
624,012
|
|
|
578,976
|
|
Revenues
|
|
|
|
|
$
|
1,904,998
|
|
|
$
|
2,218,132
|
|
|
$
|
2,047,579
|
|
Fair Value:
U.S. GAAP guidance defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and further expands disclosures about such fair value measurements.
The guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 measurements—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.
•Level 2 measurements—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
•Level 3 measurements—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
Cash and Cash Equivalents:
Newmark considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents are held with banks as deposits.
Principles of Consolidation:
Newmark’s consolidated financial statements include the accounts of Newmark and its wholly owned and majority owned subsidiaries. Newmark’s policy is to consolidate all entities of which it owns more than 50% unless it does not have control over the entity. In accordance with U.S. GAAP guidance, Consolidation of Variable Interest Entities, Newmark also consolidates any variable interest entities of which it is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
Loans Held for Sale, at Fair Value (“LHFS”):
Newmark maintains multifamily and commercial mortgage loans for the purpose of sale to GSEs. Prior to funding, Newmark enters into an agreement to sell the loans to third-party investors at a fixed price. During the period prior to sale, interest income is calculated and recognized in accordance with the terms of the individual loan. LHFS are carried at fair value, as Newmark has elected the fair value option. The primary reasons Newmark has elected to account for loans backed by commercial real estate under the fair value option are to better offset the change in fair value of the loan and the change in fair value of the derivative instruments used as economic hedges.
Derivative Financial Instruments:
Newmark has 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. Newmark is committed to extend credit to the counterparty as long as there is no violation of any condition established in the commitment contracts.
Newmark simultaneously enters into a commitment to deliver such mortgages to third-party investors at a fixed price (forward sale contracts).
Newmark entered into variable postpaid forward contracts as a result of the Nasdaq Forwards. These contracts qualify as derivative financial instruments.
The commitment to extend credit, the forward sale commitment and Nasdaq Forwards qualify as derivative financial instruments. Newmark recognizes all derivatives on the accompanying consolidated balance sheets as assets or liabilities measured at fair value. The change in the derivatives fair value is recognized in included in “Other income” on the accompanying consolidated statements of operations.
Mortgage Servicing Rights, Net (“MSRs”):
Newmark initially recognizes and measures the rights to service mortgage loans at fair value and subsequently measures them using the amortization method. Newmark recognizes rights to service mortgage loans as separate assets at the time the underlying originated mortgage loan is sold, and the value of those rights is included in the determination of the gains on loans held for sale.
Purchased MSRs, including MSRs purchased from Cantor Commercial Real Estate ("CCRE"), are initially recorded at fair value, and subsequently measured using the amortization method.
Newmark receives up to a 3-basis point servicing fee and/or up to a 1-basis point surveillance fee on certain Freddie Mac loans after the loan is securitized in a Freddie Mac pool (Freddie Mac Strip). The Freddie Mac Strip is also recognized at fair value and subsequently measured using the amortization method, but is recognized as a MSR at the securitization date.
MSRs are assessed for impairment, at least on an annual basis, based upon the fair value of those rights as compared to the amortized cost. Fair values are estimated using a valuation model that calculates the present value of the future net servicing cash flows. In using this valuation method, Newmark incorporates assumptions that management believes market participants would use in estimating future net servicing income. It is reasonably possible that such estimates may change. Newmark amortizes the mortgage servicing rights in proportion to, and over the period of, the projected net servicing income. For purposes of impairment evaluation and measurement, Newmark stratifies MSRs based on predominant risk characteristics of the underlying loans, primarily by investor type (Fannie Mae/Freddie Mac, FHA/GNMA, CMBS and other). To the extent that the carrying value exceeds the fair value of a specific MSR strata, a valuation allowance is established, which is adjusted in the future as the fair value of MSRs increases or decreases. Reversals of valuation allowances cannot exceed the previously recognized impairment up to the amortized cost.
Fixed Assets, net:
Fixed assets are carried at cost net of accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The costs of additions and improvements are capitalized, while maintenance and repairs are expensed as incurred. Fixed assets are depreciated over their estimated useful lives as follows:
|
|
|
|
|
|
|
|
|
Leasehold improvements and other fixed assets
|
|
shorter of the remaining term of lease or useful life
|
|
|
|
Software, including software development costs
|
|
3-5 years straight-line
|
|
|
|
Computer and communications equipment
|
|
3-5 years straight-line
|
Long-Lived Assets:
Newmark periodically evaluates potential impairment of long-lived assets and amortizable intangible assets, when a change in circumstances occurs, by applying the U.S. GAAP guidance, Accounting for the Impairment or Disposal of Long-Lived Assets, and assessing whether the unamortized carrying amount can be recovered over the remaining life through undiscounted future expected cash flows generated by the underlying assets. If the undiscounted future cash flows were less than the carrying value of the asset, an impairment charge would be recorded. The impairment charge would be measured as the excess of the carrying value of the asset over the present value of estimated expected future cash flows using a discount rate commensurate with the risks involved.
Goodwill and Other Intangible Assets, net:
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, goodwill and other indefinite-lived intangible assets are not amortized, but instead are periodically tested for impairment. Newmark reviews goodwill and other indefinite-lived intangible assets 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, Newmark first assesses 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. Newmark did not recognize any impairment for the years ended December 31, 2020, 2019 and 2018.
Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. Definite-lived intangible assets arising from business combinations include trademarks and trade names, contractual and non-contractual customers, non-compete agreements and brokerage backlog.
Transfer of Financial Assets:
Newmark originates its commercial mortgage loans primarily for the GSEs’ distribution channels, which generally involve (a) Freddie Mac purchasing Newmark’s loans for cash, (b) Fannie Mae securitizing Newmark’s loans into a mortgage-backed security (“MBS”) guaranteed by Fannie Mae, (c) FHA guaranteeing the credit risk of Newmark’s loans or (d) Ginnie Mae securitizing Newmark’s loans into an MBS. MBS are collateralized by the loan and Ginnie Mae selling the MBS for cash. As part of its origination activities, Newmark accounts for the transfer of financial assets in accordance with U.S. GAAP guidance on Transfers and Servicing. In accordance with this guidance, the transfer of financial assets between two entities must meet the following criteria for derecognition and sale accounting:
•The transfer must involve a financial asset, group of financial assets or a participating interest;
•The financial assets must be isolated from the transferor and its consolidated affiliates as well as its creditors;
•The transferee or beneficial interest holders must have the right to pledge or exchange the transferred financial assets; and;
•The transferor may not maintain effective control of the transferred assets.
Newmark determined that all loans sold during the periods presented met these specific conditions and accounted for all transfers of loans held for sale as completed sales.
Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises:
Warehouse facilities collateralized by U.S. Government Sponsored Enterprises are borrowings under warehouse line agreements. The carrying amounts approximate fair value due to the short-term maturity of these instruments. Outstanding borrowings against these lines are collateralized by an assignment of the underlying mortgages, reflected as loans held for sale, at fair value on Newmark’s consolidated balance sheets and third-party purchase commitments. The borrowing rates on the warehouse lines are based on short-term LIBOR plus applicable margins. Accordingly, the warehouse facilities collateralized by U.S. Government Sponsored Enterprises are typically classified within Level 2 of the fair value hierarchy. The facilities are generally repaid within a 45-day period when Freddie Mac buys the loans or upon settlement of the Fannie Mae or Ginnie Mae mortgage-backed securities, while Newmark retains servicing rights.
Income Taxes:
Newmark accounts for income taxes using the asset and liability method as prescribed in U.S. GAAP guidance on Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to basis differences between the 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 on the accompanying consolidated financial statements. The tax-related assets, liabilities, provisions or benefits included on the accompanying 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’s income taxes as presented are calculated on a separate return basis for the periods prior to the Spin-Off and have historically been included in BGC’s U.S. federal and state tax returns or separate non-U.S. jurisdictions tax returns. Subsequent to the Spin-Off, Newmark files its own stand-alone tax returns for its operations within these jurisdictions. The 2018 tax results reflect both the pre and post spin periods and, as such, Newmark’s tax results as presented are not necessarily reflective of the results that Newmark would have generated on a stand-alone basis.
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” on the accompanying 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.
Equity-Based and Other Compensation:
Equity-based compensation expense recognized during the period is based on the fair value of the portion of equity-based payment awards that is ultimately expected to vest. The grant-date fair value of equity-based awards is amortized to expense ratably over the awards’ vesting periods. As equity-based compensation expense recognized in the Newmark’s consolidated statements of operations is based on awards ultimately expected to vest, it has been reviewed for estimated forfeitures. Further, forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Restricted Stock Units:
RSUs are accounted for as equity awards and in accordance with U.S. GAAP, Newmark is required to record an expense for the portion of the RSUs that is ultimately expected to vest. The grant-date fair value of RSUs is amortized to expense ratably over the awards’ expected vesting periods. The amortization is reflected as a component of compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in the accompanying consolidated statements of operations.
Limited Partnership Units:
Limited partnership units in BGC Holdings and Newmark Holdings are held by Newmark employees and receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders. 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 the accompanying consolidated statements of operations.
Certain of these limited partnership units in Newmark Holdings and BGC Holdings, such as REUs, 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, which requires that Newmark record an expense for such awards based on the change in value at each reporting period and include the expense in the Newmark’s consolidated statements of operations as part of “Equity-based compensation and allocations of net income to limited partnership units and FPUs.” The liability for limited partnership units held by Newmark employees with a post-termination payout amount is included in “Other long-term liabilities” on the Newmark’s consolidated balance sheets.
Certain limited partnership units held by Newmark employees are granted exchangeability into Class A common stock or may be redeemed in connection with the grant of shares of Class A common stock. At the time exchangeability is granted, or the shares are issued, Newmark 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 the accompanying consolidated statements of operations.
In addition, Preferred Units are granted in connection with the grant of certain limited partnership units, such as PSUs, that may be granted exchangeability to cover the withholding taxes owed by the unit holder upon such exchange. 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 Preferred Distribution, which is deducted before the calculation and distribution of the quarterly partnership distribution for the remaining limited partnership interests. 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 BGC or Newmark Class A common stock and are only entitled to the Preferred Distribution, and accordingly they are not included in Newmark’s fully diluted share count. The quarterly allocations of net income on Preferred Units are reflected in compensation expense under “Equity-based compensation and allocations of net income to limited partnership units and FPUs” in the accompanying consolidated statements of operations.
Redeemable Partnership Interests:
Redeemable partnership interest represents limited partnership interests in Newmark Holdings held by founding/working partners. (See Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings” for additional information related to redeemable partnership interest).
Noncontrolling Interests:
Noncontrolling interests represent third-party, Cantor’s and BGC’s (prior to the Spin-Off) ownership interests on the accompanying consolidated subsidiaries and EPUs (See Note 1 — “Organization and Basis of Presentation”) and are included on Newmark’s consolidated balance sheets. Prior to the Spin-Off, Cantor and BGC units received allocations of net income (loss). Subsequent to the Spin-Off, Cantor units received allocations of net income (loss). Allocations of net income (loss) are reflected as a component of “Net income (loss) attributable to noncontrolling interests” in the accompanying consolidated statements of operations.
(4) Acquisitions
In January 2020, Newmark completed the acquisition of certain assets of Hopkins Appraisal Services, a national leader in the valuation of restaurants and retail petroleum facilities.
For the year ended December 31, 2020, the following table summarizes the components of the purchase consideration transferred, and the preliminary allocation of the assets acquired and liabilities assumed, for the acquisition. Newmark expects to finalize its analysis of the assets acquired and liabilities assumed within the first year of the acquisition, and therefore adjustments to assets and liabilities may occur (in thousands):
|
|
|
|
|
|
|
As of the
Acquisition
Date
|
Purchase Price
|
|
Cash and stock issued at closing
|
$
|
6,249
|
|
Contingent consideration
|
3,590
|
|
Total
|
$
|
9,839
|
|
|
|
Allocations
|
|
Goodwill
|
$
|
6,294
|
|
Other intangible assets, net
|
2,700
|
|
Receivables, net
|
796
|
|
Fixed Assets, net
|
134
|
|
Other assets
|
29
|
|
Accounts payable, accrued expenses and other liabilities
|
(114)
|
|
Total
|
$
|
9,839
|
|
The total consideration for the acquisition during the year ended December 31, 2020 was $9.8 million in total fair value, comprising cash of $5.9 million and $0.4 million of RSUs. The total consideration included contingent consideration of 104,653 RSUs (with an acquisition date fair value of $1.3 million), and $2.2 million in cash that may be issued contingent on certain targets being met through 2022. The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill of $6.3 million, of which $2.4 million is deductible by Newmark for tax purposes.
This acquisition was accounted for using the purchase method of accounting. The results of operations of the acquisition have been included on the accompanying consolidated financial statements subsequent to the date of acquisition, which in aggregate contributed $7.5 million to Newmark’s revenues for the year ended December 31, 2020.
In April 2019, Newmark completed the acquisition of MLG Commercial LLC, a Milwaukee-based commercial real estate company offering both brokerage and property management services in Wisconsin.
In June 2019, Newmark completed the acquisition of ACRES, a commercial brokerage and management firm headquartered in Utah. ACRES operates offices in Salt Lake City, Utah; Boise, Idaho; and Reno, Nevada.
In December 2019, Newmark completed the acquisition of Harper Dennis Hobbs Holdings Limited, a tenant-focused real estate advisory services firm, based in London.
For the year ended December 31, 2019, the following table summarizes the components of the purchase consideration transferred, and the preliminary allocation of the assets acquired and liabilities assumed in connection with the acquisitions in 2019 (in thousands):
|
|
|
|
|
|
|
As of the
Acquisition
Date
|
Purchase Price
|
|
Cash, stock and units issued at closing
|
$
|
38,826
|
|
Contingent consideration
|
18,067
|
|
Total
|
$
|
56,893
|
|
|
|
Allocations
|
|
Cash
|
$
|
1,391
|
|
Goodwill
|
43,804
|
|
Other intangible assets, net
|
9,641
|
|
Receivables, net
|
7,540
|
|
Other assets
|
614
|
|
Accounts payable, accrued expenses and other liabilities
|
(3,972)
|
|
Accrued compensation
|
(2,125)
|
|
Total
|
$
|
56,893
|
|
The total consideration for acquisitions during the year ended December 31, 2019 was $56.9 million in total fair value, comprising cash and Newmark Holdings partnership units. The total consideration included contingent consideration of 327,692 Newmark Holdings partnership units (with an acquisition date fair value of $2.7 million), and $15.3 million in cash that may be issued contingent on certain targets being met through 2021. The excess of the consideration over the fair value of the net assets acquired has been recorded as goodwill of $43.8 million, of which $29.7 million is deductible by Newmark for tax purposes.
The 2019 acquisitions were accounted for using the purchase method of accounting. The results of operations of these acquisitions have been included on the accompanying consolidated financial statements subsequent to their respective dates of acquisition, which in aggregate contributed $18.4 million to Newmark’s revenue for the year ended December 31, 2019.
(5) Earnings Per Share and Weighted-Average Shares Outstanding
U.S. GAAP guidance — Earnings (Loss) Per Share provides guidance on the computation and presentation of earnings (loss) per share (“EPS”). Basic EPS excludes dilution and is computed by dividing Net income available to common stockholders by the weighted-average number of shares of common stock outstanding and contingent shares for which all necessary conditions have been satisfied except for the passage of time. Net income (loss) is allocated to Newmark’s outstanding common stock, FPUs, limited partnership units and Cantor units (see Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings”). In addition, in relation to the Newmark OpCo Preferred Investment, the EPUs issued in June 2018 and September 2018 are entitled to a preferred payable-in-kind dividend which is recorded as accretion to the carrying amount of the EPUs and is a reduction to net income available to common stockholders for the calculation of Newmark’s basic earnings per share and fully diluted earnings per share.
The following is the calculation of Newmark’s basic EPS (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders (1)
|
|
|
|
|
$
|
70,281
|
|
|
$
|
104,406
|
|
|
$
|
101.641
|
|
|
Basic weighted-average shares of common stock outstanding
|
|
|
|
|
179,106
|
|
|
177,774
|
|
|
157.256
|
|
|
Basic earnings per share
|
|
|
|
|
$
|
0.39
|
|
|
$
|
0.59
|
|
|
$
|
0.65
|
|
|
(1)Includes a reduction for dividends on preferred stock or exchangeable preferred partnership units in the amount of $9.8 million, $12.9 million and $5.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. (see Note 1 — “Organization and Basis of Presentation”).
Fully diluted EPS is calculated utilizing net income available to common stockholders plus net income allocations to the limited partnership interests in Newmark Holdings as the numerator. The denominator comprises Newmark’s weighted-average number of outstanding shares of Newmark common stock to the extent the related units are dilutive and, if dilutive, the weighted-average number of limited partnership interests and other contracts to issue shares of common stock, stock options and RSUs. The limited partnership interests generally are potentially exchangeable into shares of Newmark Class A common stock and are entitled to remaining earnings after the deduction for the Preferred Distribution; as a result, they are included in the fully diluted EPS computation to the extent that the effect would be dilutive.
The following is the calculation of Newmark’s fully diluted EPS (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Fully diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
|
|
|
$
|
70,281
|
|
|
$
|
104,406
|
|
|
$
|
101,641
|
|
Allocations of net income to limited partnership interests in Newmark Holdings, net of tax
|
|
|
|
|
—
|
|
|
3,754
|
|
|
3,930
|
|
Net income for fully diluted shares
|
|
|
|
|
$
|
70,281
|
|
|
$
|
108,160
|
|
|
$
|
105,571
|
|
Weighted-average shares:
|
|
|
|
|
|
|
|
|
|
Common stock outstanding
|
|
|
|
|
179,106
|
|
|
177,774
|
|
|
157,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Partnership units (1)
|
|
|
|
|
—
|
|
|
5,583
|
|
|
5,717
|
|
RSUs (Treasury stock method)
|
|
|
|
|
355
|
|
|
1,290
|
|
|
187
|
|
Newmark exchange shares
|
|
|
|
|
229
|
|
|
369
|
|
|
650
|
|
Fully diluted weighted-average shares of common stock outstanding
|
|
|
|
|
179,690
|
|
|
185,016
|
|
|
163,810
|
|
Fully diluted earnings per share
|
|
|
|
|
$
|
0.39
|
|
|
$
|
0.58
|
|
|
$
|
0.64
|
|
(1)Partnership units collectively include founding/working partner units, limited partnership units, and Cantor and BGC units (see Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings” for more information).
For the years ended December 31, 2020, 2019 and 2018, 85.2 million, 84.5 million and 95.2 million potentially dilutive securities, respectively, were excluded from the computation of fully diluted EPS because their effect would have been anti-dilutive. Anti-dilutive securities for the year ended December 31, 2018 included only limited partnership units.
(6) Stock Transactions and Unit Redemptions
As of December 31, 2020, Newmark has two classes of authorized common stock: Class A common stock and Class B common stock.
Class A Common Stock
Each share of Class A common stock is entitled to one vote. Newmark has 1.0 billion authorized shares of Class A common stock at $0.01 par value per share.
Changes in shares of Newmark’s Class A common stock outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Shares outstanding at beginning of period
|
|
|
|
|
156,265,461
|
|
|
156,916,336
|
|
|
138,593,787
|
|
Share issuances:
|
|
|
|
|
|
|
|
|
|
Issuance of Class A common stock in connection with The Spin-Off
|
|
|
|
|
—
|
|
|
—
|
|
|
16,292,623
|
|
LPU redemption/exchange (1)
|
|
|
|
|
4,868,169
|
|
|
2,052,416
|
|
|
1,709,048
|
|
Issuance of Class A common stock for Newmark RSUs
|
|
|
|
|
972,490
|
|
|
1,536,530
|
|
|
343,135
|
|
Other
|
|
|
|
|
—
|
|
|
278,181
|
|
|
27,743
|
|
Treasury stock repurchases
|
|
|
|
|
(930,226)
|
|
|
(4,518,002)
|
|
|
(50,000)
|
|
Shares outstanding at end of period
|
|
|
|
|
161,175,894
|
|
|
156,265,461
|
|
|
156,916,336
|
|
(1)Because they were included in the Newmark’s fully diluted share count, if dilutive, any exchange of LPUs into Class A common stock would not impact the fully diluted number of shares and units outstanding.
Class B Common Stock
Each share of Class B common stock is entitled to 10 votes and is convertible at any time into one share of Class A common stock.
As of December 31, 2020 and 2019, there were 21.3 million shares of Newmark Class B common stock outstanding.
Share Repurchases
On August 1, 2018, the Newmark Board of Directors and Audit Committee authorized repurchases of shares of Newmark Class A common stock and purchases of limited partnership interests or other equity interests in Newmark's subsidiaries up to $200 million. This authorization includes repurchases of shares or purchase of 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, Newmark may actively continue to repurchase shares and/or purchase units. During the year ended December 31, 2020, Newmark had repurchased 930,226 shares of Class A common stock at an average price of $7.33. As of December 31, 2020, Newmark had $150.6 million remaining from its share repurchase and unit purchase authorization (see Note 32 — “Subsequent Events”).
The following table details Newmark's share repurchase activity during 2020, including the total number of shares purchased, the average price paid per share, the number of shares repurchased as part of Newmark's publicly announced repurchase program and the approximate value that may yet be purchased under such program (in thousands except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Number of
Shares
Repurchased/Purchased
|
|
Average
Price Paid
per Unit
or Share
|
|
Total Number of Shares Repurchased as Part of Publicly Announced Program
|
|
Approximate
Dollar Value
of Units and
Shares That
May Yet Be
Repurchased/
Purchased
Under the
Program
|
Balance, January 1, 2020
|
4,568,002
|
|
|
$
|
9.32
|
|
|
4,568,002
|
|
|
$
|
157,413
|
|
January 1, 2020 - March 31, 2020
|
—
|
|
|
—
|
|
|
—
|
|
|
|
April 1, 2020 - June 30, 2020
|
—
|
|
|
—
|
|
|
—
|
|
|
|
July 1, 2020 - September 30, 2020
|
—
|
|
|
—
|
|
|
—
|
|
|
|
October 1, 2020 - December 31, 2020
|
930,226
|
|
|
7.33
|
|
|
930,226
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
5,498,228
|
|
|
$
|
8.99
|
|
|
5,498,228
|
|
|
$
|
150,596
|
|
Redeemable Partnership Interests
The changes in the carrying amount of FPUs as of December 31, 2020 and 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Balance at beginning of period:
|
$
|
21,517
|
|
|
$
|
26,170
|
|
Income allocation
|
1,740
|
|
|
5,288
|
|
Distributions of income
|
(1,740)
|
|
|
(5,355)
|
|
Redemptions
|
(1,472)
|
|
|
(927)
|
|
Issuance and other
|
—
|
|
|
(3,659)
|
|
Balance at end of period
|
$
|
20,045
|
|
|
$
|
21,517
|
|
(7) Marketable Securities
On June 28, 2013, BGC sold certain assets of eSpeed, its on-the-run business, to Nasdaq. The total consideration received by BGC in the transaction included the Nasdaq Earn-out of up to 14,883,705 shares of Nasdaq shares 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. The Nasdaq Earn-out was excluded from the initial gain on the divestiture and is recognized in income as it is realized and earned when these contingent events have occurred, consistent with the accounting guidance for gain contingencies. BGC transferred the remaining rights under the Nasdaq Earn-out to Newmark on September 28, 2017. Any Nasdaq shares that were received by BGC prior to September 28, 2017 were not transferred to Newmark.
In connection with the Nasdaq Earn-out, Newmark received 992,247 shares during each of the years ended December 31, 2020 and 2019, respectively. Newmark will recognize the remaining Nasdaq Earn-out of up to 6,945,729 shares of Nasdaq shares ratably over approximately the next 7 years, provided that Nasdaq, as a whole, produces at least $25.0 million in gross revenues each year. In connection with the Nasdaq Earn-out, Newmark recognized a gain of $121.9 million, $98.6 million and $85.1 million for the years ended December 31, 2020, 2019 and 2018, respectively, which is included in “Other income” on the accompanying consolidated statements of operations. For further information, refer to the section titled “Exchangeable Preferred Partnership Units and Forward Contracts” in Note 1 — “Organization and Basis of Presentation”, see Note 11 — “Derivatives”, see Note 26 — “Fair Value of Financial Assets and Liabilities”, and see Note 32 “Subsequent Events”.
Newmark sold 343,562, 350,000 and 1,142,247 of the Nasdaq shares for the years ended December 31, 2020, 2019 and 2018, respectively. As of the years ended December 31, 2020, 2019 and 2018 Newmark had 250,742, 343,562 and 600,000 shares remaining in connection with the Nasdaq Earn-out. The gross proceeds of the Nasdaq shares sold was $34.7 million, $32.6 million and $95.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Newmark recognized a (loss) gain on the sale of these securities of $(2.2) million, $4.1 million and $3.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Newmark recorded unrealized gains (loss) on the mark-to-market of these securities of $5.0 million, $11.3 million and $(1.2) million for the years ended December 31, 2020, 2019 and 2018, respectively. Realized and unrealized gains on the mark-to-market of these shares are included in “Other income, net” on the accompanying consolidated statements of operations. As of December 31, 2020 and 2019, Newmark had $33.3 million and $36.8 million, respectively, included in “Marketable securities” on the accompanying consolidated balance sheets (see Note 20 — “Securities Loaned”).
(8) Investments
Newmark has a 27% ownership in Real Estate LP, a joint venture with Cantor in which Newmark has the ability to exert significant influence over the operating and financial policies. Accordingly, Newmark accounts for this investment under the equity method of accounting. Newmark recognized equity (loss) income of $(11.6) million, $7.3 million and $2.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts were included in "Other income, net" on the consolidated statements of operations. Newmark received distributions of $0.1 million and $8.6 million for the years ended December 31, 2020 and 2019, respectively. The carrying value of these investments were $88.3 million and $100.0 million for the years ended December 31, 2020 and 2019, respectively, included in “Other assets” on the accompanying consolidated balance sheets.
Investments Carried Under Measurement Alternatives
Newmark has acquired investments in entities for which it does not have the ability to exert significant influence over operating and financial policies.
For the years ended December 31, 2020, 2019 and 2018, Newmark recorded realized (losses) gains related to these investments of $(84.2) million, $12.6 million and $17.9 million, respectively. The $84.2 million loss primarily relates to the write-off of Newmark's $50.0 million investment in Knotel Inc. (“Knotel”) during the fourth quarter of 2020 (see Note 32 — “Subsequent Events” for additional information). The changes in value are included as a part of “Other income (loss), net” on the accompanying consolidated statements of operations. The carrying value of these investments were $9.9 million and $94.1 million and are included in “Other assets” on the accompanying consolidated balance sheets as of December 31, 2020 and 2019, respectively.
(9) Capital and Liquidity Requirements
Newmark is 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 the accompanying consolidated financial statements. Management believes that, as of December 31, 2020 and 2019, Newmark had met all capital
requirements. As of December 31, 2020, the most restrictive capital requirement was the net worth requirement of the Federal National Mortgage Association (“Fannie Mae”). Newmark exceeded the minimum requirement by $357.8 million.
Certain of Newmark’s agreements with Fannie Mae allow Newmark to originate and service loans under Fannie Mae’s 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 the Federal Home Loan Mortgage Corporation (“Freddie Mac”) allow Newmark to service loans under TAH. 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. Management believes that, as of December 31, 2020 and 2019, Newmark had met all liquidity requirements.
In addition, as a servicer for Fannie Mae, the Government National Mortgage Association (“Ginnie Mae”) and Federal Housing Administration, Newmark is required to advance to investors any uncollected principal and interest due from borrowers. As of December 31, 2020 and 2019, outstanding borrower advances were $0.8 million and $0.3 million, respectively, and are included in “Other assets” on the accompanying consolidated balance sheets.
(10) Loans Held for Sale, at Fair Value
Loans held for sale, at fair value represent originated loans that are typically financed by short-term warehouse facilities (see Note 21 — “Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises”) and sold within 45 days from the date the mortgage loan is funded. Newmark initially and subsequently measures all loans held for sale at fair value on the accompanying consolidated balance sheets. The fair value measurement falls within the definition of a Level 2 measurement (significant other observable inputs) within the fair value hierarchy. Electing to use fair value allows a better offset of the change in the fair value of the loans and the change in fair value of the derivative instruments used as economic hedges. Loans held for sale had a cost basis and fair value as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Cost Basis
|
$
|
1,062,511
|
|
|
$
|
210,116
|
|
Fair Value
|
1,086,805
|
|
|
215,290
|
|
As of December 31, 2020 and 2019, 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. As of December 31, 2020 and 2019, there were no loans held for sale that were 90 days or more past due or in nonaccrual status.
Newmark records interest income on loans held for sale, in accordance with the terms of the individual loans, during the period prior to sale. Interest income on loans held for sale is included in “Management services, servicing fees and other” on the accompanying consolidated statements of operations. Gains (losses) for fair value adjustments on loans held for sale is included in “Gains from mortgage banking activities/originations, net” on the accompanying consolidated statements of operations. Interest income and gains (losses) for fair value adjustments on loans held for sale were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Interest income on loans held for sale
|
|
|
|
|
$
|
27,560
|
|
|
$
|
34,239
|
|
|
$
|
31,607
|
|
Gains (loss) recognized on change in fair value on loans held for sale
|
|
|
|
|
24,294
|
|
|
5,174
|
|
|
18,430
|
|
(11) Derivatives
Newmark accounts for its derivatives at fair value and recognizes all derivatives as either assets or liabilities on the accompanying consolidated balance sheets. In its normal course of business, Newmark enters into commitments to extend credit for mortgage loans at a specific rate (rate lock commitments) and commitments to deliver these loans to third-party investors at a fixed price (forward sale contracts). In addition, Newmark has entered into the Nasdaq Forwards (see Note 1 — “Organization and Basis of Presentation”) that are accounted for as derivatives.
The fair value of derivative contracts, computed in accordance with Newmark’s netting policy, is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
Derivative contract
|
|
Assets
|
|
Liabilities
|
|
Notional
Amounts(1)
|
|
Assets
|
|
Liabilities
|
|
Notional
Amounts(1)
|
Rate lock commitments
|
|
$
|
21,034
|
|
|
$
|
2,977
|
|
|
$
|
296,972
|
|
|
$
|
32,035
|
|
|
$
|
12,124
|
|
|
$
|
1,396,827
|
|
Nasdaq Forwards
|
|
12,822
|
|
|
—
|
|
|
174,000
|
|
|
26,502
|
|
|
—
|
|
|
267,480
|
|
Forward sale contracts
|
|
7,632
|
|
|
14,971
|
|
|
1,359,482
|
|
|
14,389
|
|
|
13,537
|
|
|
1,606,943
|
|
Total
|
|
$
|
41,488
|
|
|
$
|
17,948
|
|
|
$
|
1,830,454
|
|
|
$
|
72,926
|
|
|
$
|
25,661
|
|
|
$
|
3,271,250
|
|
(1)Notional amounts represent the sum of gross long and short derivative contracts, an indication of the volume of Newmark’s derivative activity, and do not represent anticipated losses.
The change in fair value of rate lock commitments and forward sale contracts related to mortgage loans are reported as part of “Gains from mortgage banking activities/originations, net” on the accompanying consolidated statements of operations. The change in fair value of rate lock commitments are disclosed net of $2.1 million, $2.0 million and $1.7 million of expenses for the years ended December 31, 2020, 2019 and 2018, respectively. The changes in fair value of rate lock commitments are reported as part of “Compensation and employee benefits” on the accompanying consolidated statements of operations.
Gains and losses on derivative contracts, which are included on the consolidated statements of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of gain (loss) recognized in income for derivatives
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Derivatives not designed as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nasdaq Forwards
|
|
Other income (loss), net
|
|
|
|
|
|
|
$
|
(13,680)
|
|
|
$
|
(51,117)
|
|
|
$
|
19,002
|
|
Rate lock commitments
|
|
Gains from mortgage banking
activities/originations, net
|
|
|
|
|
|
|
20,125
|
|
|
21,916
|
|
|
935
|
|
Rate lock commitments
|
|
Compensation and employee benefits
|
|
|
|
|
|
|
(2,068)
|
|
|
(2,004)
|
|
|
(1,673)
|
|
Forward sale contracts
|
|
Gains (loss) from mortgage banking
activities/originations, net
|
|
|
|
|
|
|
(7,339)
|
|
|
851
|
|
|
(1,031)
|
|
Total
|
|
|
|
|
|
|
|
|
$
|
(2,962)
|
|
|
$
|
(30,354)
|
|
|
$
|
17,233
|
|
Derivative assets and derivative liabilities are included in “Other current assets”, “Other assets” and the “Accounts payable, accrued expenses and other liabilities”, on the accompanying consolidated balance sheets.
(12) Credit Enhancement Receivable, Credit Enhancement Deposit and Contingent Liability
Newmark is a party to a Credit Enhancement Agreement (“CEA”), dated March 9, 2012, with German American Capital Corporation and Deutsche Bank Americas Holding Corporation (together, the “DB Entities”). On October 20, 2016, the DB Entities assigned the CEA to Deutsche Bank AG Cayman Island Branch, a Cayman Island Branch of Deutsche Bank AG (“DB Cayman”). Under the terms of these agreements, DB Cayman provides Newmark with varying levels of ongoing credit protection, subject to certain limits, for Fannie Mae and Freddie Mac loans subject to loss-sharing (see Note 23 — “Financial Guarantee Liability”) in Newmark’s servicing portfolio as of March 9, 2012. DB Cayman will also reimburse Newmark for any losses incurred due to violation of underwriting and servicing agreements that occurred prior to March 9, 2012. For the for the years ended December 31, 2020 and 2019, there were no reimbursements under the CEA.
Credit enhancement receivable
Newmark's servicing portfolio consisted of the following loss-sharing components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Total credit risk loan portfolio
|
$
|
24,048,754
|
|
|
$
|
20,209,577
|
|
Maximum DB Cayman credit protection
|
18,689
|
|
|
29,253
|
|
|
|
|
|
Maximum pre-credit enhancement loss exposure
|
$
|
7,172,509
|
|
|
$
|
5,835,163
|
|
Maximum DB Cayman credit protection
|
6,230
|
|
|
9,751
|
|
Maximum loss exposure without any form of credit protection
|
$
|
7,166,279
|
|
|
$
|
5,825,412
|
|
As of December 31, 2020 and 2019, there were no credit enhancement receivables.
Credit enhancement deposit
The CEA required the DB Entities to deposit $25.0 million into Newmark’s Fannie Mae restricted liquidity account (see Note 9 — “Capital and Liquidity Requirements”), which Newmark is required to return to DB Cayman, less any outstanding claims, on March 9, 2021. As of December 31, 2020 and 2019, the $25.0 million deposit is included in “Accounts payable, accrued expenses and other liabilities” and "Other long-term liabilities", respectively, on the accompanying consolidated balance sheets.
Contingent liability
Under the CEA, Newmark is required to pay DB Cayman, on March 9, 2021, an amount equal to 50% of the positive difference, if any, between (a) $25.0 million, and (b) Newmark’s unreimbursed loss-sharing payments from March 9, 2012 through March 9, 2021 on Newmark’s servicing portfolio as of March 9, 2012. Contingent liabilities as of December 31, 2020 and 2019 were $12.3 million and $11.8 million, respectively and are included in “Accounts payable, accrued expenses and other liabilities” on the accompanying consolidated balance sheets.
(13) Revenues from Contracts with Customers
The following table presents Newmark’s total revenues separately for its revenues from contracts with customers and other sources of revenues (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Revenues from contracts with customers:
|
|
|
|
|
|
|
|
|
|
Leasing and other commissions
|
|
|
|
|
$
|
513,842
|
|
|
$
|
854,780
|
|
|
$
|
817,435
|
|
Capital markets commissions
|
|
|
|
|
454,106
|
|
|
541,255
|
|
|
468,904
|
|
Management services
|
|
|
|
|
467,453
|
|
|
446,367
|
|
|
414,447
|
|
Total
|
|
|
|
|
1,435,401
|
|
|
1,842,402
|
|
|
1,700,786
|
|
Other sources of revenue(1):
|
|
|
|
|
|
|
|
|
|
Gains from mortgage banking activities/originations, net
|
|
|
|
|
310,914
|
|
|
198,085
|
|
|
182,264
|
|
Servicing fees and other
|
|
|
|
|
158,683
|
|
|
177,645
|
|
|
164,529
|
|
Total
|
|
|
|
|
$
|
1,904,998
|
|
|
$
|
2,218,132
|
|
|
$
|
2,047,579
|
|
(1)Although these items have customers under contract, they were recorded as other sources of revenue as they were excluded from the scope of ASU No. 2014-9.
Disaggregation of revenues
Newmark’s chief operating decision-maker, regardless of geographic location, evaluates the operating results, including revenues, of Newmark as total real estate (see Note 3 — “Summary of Significant Accounting Policies” for further discussion).
Contract balances
The timing of Newmark’s revenue recognition may differ from the timing of payment by its customers. Newmark records a receivable when revenue is recognized prior to payment and Newmark has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, Newmark records deferred revenue until the performance obligations are satisfied.
Newmark’s deferred revenue primarily relates to customers paying in advance or billed in advance where the performance obligation has not yet been satisfied. Deferred revenue at December 31, 2020 and 2019 was $2.9 million and $4.2 million, respectively. During the years ended December 31, 2020 and 2019, Newmark recognized revenue of $2.8 million and $1.8 million, respectively, that was recorded as deferred revenue at the beginning of the period.
(14) Gains from Mortgage Banking Activities/Originations, Net
Gains from mortgage banking activities/originations, net consists of the following activity (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Fair value of expected net future cash flows from servicing recognized at commitment, net
|
|
|
|
|
$
|
194,814
|
|
$
|
109,249
|
|
$
|
103,202
|
Loan originations related fees and sales premiums, net
|
|
|
|
|
116,100
|
|
|
88,836
|
|
|
79,062
|
|
Total
|
|
|
|
|
$
|
310,914
|
|
|
$
|
198,085
|
|
|
$
|
182,264
|
|
(15) Mortgage Servicing Rights, Net
The changes in the carrying amount of MSRs were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Mortgage Servicing Rights
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Beginning Balance
|
|
|
|
|
|
|
$
|
432,666
|
|
|
$
|
416,131
|
|
|
$
|
399,349
|
|
Additions
|
|
|
|
|
|
|
193,913
|
|
|
103,160
|
|
|
95,284
|
|
Purchases from an affiliate
|
|
|
|
|
|
|
200
|
|
|
1,489
|
|
|
3,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
(97,796)
|
|
|
(88,114)
|
|
|
(81,609)
|
|
Ending Balance
|
|
|
|
|
|
|
$
|
528,983
|
|
|
$
|
432,666
|
|
|
$
|
416,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
|
|
|
|
|
$
|
(19,022)
|
|
|
$
|
(4,322)
|
|
|
$
|
(6,723)
|
|
Decrease (increase)
|
|
|
|
|
|
|
(15,232)
|
|
|
(14,700)
|
|
|
2,401
|
|
Ending Balance
|
|
|
|
|
|
|
$
|
(34,254)
|
|
|
$
|
(19,022)
|
|
|
$
|
(4,322)
|
|
Net Balance
|
|
|
|
|
|
|
$
|
494,729
|
|
|
$
|
413,644
|
|
|
$
|
411,809
|
|
Servicing fees are included in “Management services, servicing fees and other” on the accompanying consolidated statements of operations and were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Servicing fees
|
|
|
|
|
$
|
116,005
|
|
|
$
|
104,305
|
|
|
$
|
103,365
|
|
Escrow interest and placement fees
|
|
|
|
|
6,140
|
|
|
22,417
|
|
|
18,293
|
|
Ancillary fees
|
|
|
|
|
7,353
|
|
|
13,671
|
|
|
10,118
|
|
Total
|
|
|
|
|
$
|
129,498
|
|
|
$
|
140,393
|
|
|
$
|
131,776
|
|
Newmark’s primary servicing portfolio at December 31, 2020 and 2019 was $66.3 billion and $59.9 billion, respectively. Also, Newmark is the named special servicer for a number of commercial mortgage-backed securitizations. Upon certain specified events (such as, but not limited to, loan defaults and loans assumptions), the administration of the loan is transferred to Newmark. Newmark’s special servicing portfolio was $2.3 billion and $2.4 billion at December 31, 2020 and 2019, respectively.
The estimated fair value of the MSRs at December 31, 2020 and 2019 was $527.1 million and $441.7 million, respectively.
Fair values are estimated using a valuation model that calculates the present value of the future net servicing cash flows. The cash flows assumptions used are based on assumptions Newmark believes market participants would use to value the portfolio. Significant assumptions include estimates of the cost of servicing per loan, discount rate, earnings rate on escrow deposits and prepayment speeds. The discount rates used in measuring fair value for the years ended December 31, 2020 and 2019 were between 6.1% and 13.5% and varied based on investor type. An increase in discount rate of 100 basis points or 200 basis points would result in a decrease in fair value by $14.8 million and $28.9 million, respectively, at December 31, 2020 and by $11.9 million and $23.3 million, respectively, at 2019.
(16) Goodwill and Other Intangible Assets, Net
The changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
|
Balance, January 1, 2019
|
$
|
515,321
|
|
Acquisitions
|
43,804
|
|
Measurement period adjustments
|
(1,211)
|
|
Balance, December 31, 2019
|
557,914
|
|
Acquisitions
|
6,294
|
|
Measurement period adjustments
|
(3,876)
|
|
|
|
Balance, December 31, 2020
|
$
|
560,332
|
|
Goodwill is not amortized and is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with U.S. GAAP guidance on Goodwill and Other Intangible Assets. Newmark completed its annual goodwill impairment testing for the years ended December 31, 2020 and 2019, which did not result in a goodwill impairment (see Note 4 — “Acquisitions” for more information).
Other intangible assets consisted of the following (in thousands, except weighted-average life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted-
Average
Remaining
Life (Years)
|
Indefinite life:
|
|
|
|
|
|
|
|
Trademark and trade names
|
$
|
11,350
|
|
|
$
|
—
|
|
|
$
|
11,350
|
|
|
N/A
|
License agreements (GSE)
|
5,390
|
|
|
—
|
|
|
5,390
|
|
|
N/A
|
Definite life:
|
|
|
|
|
|
|
|
Trademark and trade names
|
5,704
|
|
|
(4,519)
|
|
|
1,185
|
|
|
0.1
|
Non-contractual customers
|
30,131
|
|
|
(9,729)
|
|
|
20,402
|
|
|
7.2
|
License agreements
|
4,981
|
|
|
(4,266)
|
|
|
715
|
|
|
0.0
|
Non-compete agreements
|
6,557
|
|
|
(2,920)
|
|
|
3,637
|
|
|
0.6
|
Contractual customers
|
3,052
|
|
|
(1,584)
|
|
|
1,468
|
|
|
0.4
|
Below market leases
|
350
|
|
|
(208)
|
|
|
142
|
|
|
0.0
|
Total
|
$
|
67,515
|
|
|
$
|
(23,226)
|
|
|
$
|
44,289
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Weighted-
Average
Remaining
Life (Years)
|
Indefinite life:
|
|
|
|
|
|
|
|
Trademark and trade names
|
$
|
11,350
|
|
|
$
|
—
|
|
|
$
|
11,350
|
|
|
N/A
|
License agreements (GSE)
|
5,390
|
|
|
—
|
|
|
5,390
|
|
|
N/A
|
Definite life:
|
|
|
|
|
|
|
|
Trademark and trade names
|
10,511
|
|
|
(9,070)
|
|
|
1,441
|
|
|
0.1
|
Non-contractual customers
|
24,262
|
|
|
(6,109)
|
|
|
18,153
|
|
|
7.4
|
License agreements
|
4,981
|
|
|
(3,288)
|
|
|
1,693
|
|
|
0.1
|
Non-compete agreements
|
6,953
|
|
|
(2,434)
|
|
|
4,519
|
|
|
0.8
|
Contractual customers
|
3,052
|
|
|
(1,177)
|
|
|
1,875
|
|
|
0.5
|
Below market leases
|
941
|
|
|
(136)
|
|
|
805
|
|
|
0.3
|
Total
|
$
|
67,440
|
|
|
$
|
(22,214)
|
|
|
$
|
45,226
|
|
|
4.9
|
Intangible amortization expense for the years ended December 31, 2020, 2019 and 2018 was $6.7 million, $6.9 million, and $5.6 million, respectively. Intangible amortization is included as a part of “Depreciation and amortization” on the accompanying consolidated statements of operations. Impairment charges are included in intangible amortization expense. During 2019, Newmark recorded an impairment charge of $1.6 million related to the RKF trademark and trade names.
The estimated future amortization of definite life intangible assets as of December 31, 2020 was as follows (in thousands):
|
|
|
|
|
|
2021
|
$
|
5,700
|
|
2022
|
3,660
|
|
2023
|
3,301
|
|
2024
|
2,747
|
|
2025
|
2,287
|
|
Thereafter
|
9,854
|
|
Total
|
$
|
27,549
|
|
(17) Fixed Assets, Net
Fixed assets, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
|
|
Leasehold improvements and other fixed assets
|
$
|
126,428
|
|
|
$
|
119,682
|
|
|
|
Software, including software development costs
|
30,928
|
|
|
21,538
|
|
|
|
Computer and communications equipment
|
26,168
|
|
|
23,028
|
|
|
|
Total, cost
|
183,524
|
|
|
164,248
|
|
|
|
Accumulated depreciation and amortization
|
(87,157)
|
|
|
(66,232)
|
|
|
|
Total, net
|
$
|
96,367
|
|
|
$
|
98,016
|
|
|
|
Depreciation expense for the years ended December 31, 2020, 2019 and 2018 was $22.9 million and $22.7 million and $13.7 million, respectively. For the years ended December 31, 2020 and 2019, Newmark recorded an impairment charge of $6.0 million and $5.0 million, respectively. There was no impairments recorded for the year ended December 21, 2018. The impairment charge is included as a part of “Depreciation and amortization” on the accompanying consolidated statements of operations.
Capitalized software development costs for the years ended December 31, 2020, 2019 and 2018 were $2.0 million and $5.9 million and $2.4 million, respectively. Amortization of software development costs totaled $1.3 million, $2.0 million and $0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization of software development costs is included as part of “Depreciation and amortization” on the accompanying consolidated statements of operations.
(18) Leases
Newmark has operating leases for real estate and equipment. These leases have remaining lease terms ranging from 1 to 12 years, some of which include options to extend the leases in 5 to 10 years increments for up to 10 years. Renewal periods are included in the lease term only when renewal is reasonably certain, which is a high threshold and requires management to apply the judgment to determine the appropriate lease term. Certain leases also include periods covered by an option to terminate the lease if Newmark is reasonably certain not to exercise the termination option. The Company measures its lease payments by including fixed rental payments and, where relevant, variable rental payments tied to an index, such as the Consumer Price Index. Payments for leases in place before the date of adoption of ASC 842, Leases were determined based on previous leases guidance. The Company recognizes lease expense for its operating leases on a straight-line basis over the lease term and variable lease expense not included in the lease payment measurement is recognized as incurred. All leases were classified as operating leases as of December 31, 2020.
Pursuant to the accounting policy election, leases with an initial term of twelve months or less are not recognized on the balance sheet. The short-term lease expense over the period reasonably reflects the Company’s short-term lease commitments.
ASC 842, Leases requires the Company to make certain assumptions and judgments in applying the guidance, including determining whether an arrangement includes a lease, determining the term of a lease when the contract has renewal or cancelation provisions, and determining the discount rate.
The Company determines whether an arrangement is a lease or includes a lease at the contract inception by evaluating whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. If the Company has the right to obtain substantially all of the economic benefits from, and can direct the use of, the identified asset for a period of time, the Company accounts for the identified asset as a lease. The Company has elected the practical expedient to not separate lease and non-lease components for all leases other than real estate leases. The primary non-lease component that is combined with a lease component represents operating expenses such as utilities, maintenance or management fees.
As the rate implicit in the lease is not usually available, the Company used an incremental borrowing rate based on the information available at the adoption date of the new Leases standard in determining the present value of lease payments for existing leases. The Company has elected to use a portfolio approach for the incremental borrowing rate, applying corporate bond rates to the leases. The Company calculated the appropriate rates with reference to the lease term and lease currency. The Company uses information available at the lease commencement date to determine the discount rate for any new leases.
Operating lease costs were $50.4 million and $47.1 million for the years ended December 31, 2020, and 2019, respectively, and are included in “Operating, administrative and other” on the accompanying consolidated statements of operations. Operating cash flows for the years ended December 31, 2020 and 2019 included payments of $49.0 million and $44.4 million for operating lease liabilities, respectively. As of December 31, 2020 and 2019, Newmark did not have any leases that have not yet commenced but that create significant rights and obligations. For the years ended December 31, 2020 and 2019 Newmark had short-term lease expense of $0.8 million and $2.3 million, respectively, and sublease income of $1.3 million and $0.7 million, respectively. During 2020 Newmark recorded a lease impairment charge of $5.1 million to “Operating, administrative and other” on the accompanying consolidated statements of operations.
The weighted-average discount rate as of December 31, 2020 and 2019 was 7.11% and 7.24% and the remaining weighted-average lease term was 8.2 years and 8.8 years, respectively.
As of December 31, 2020 and 2019, Newmark had operating lease ROU assets of $190.5 million and $201.7 million, respectively, and operating lease ROU liabilities of $29.5 million and $27.2 million, respectively, recorded in “Accounts payable, and accrued expenses and other liabilities” and $218.6 million and $227.9 million, respectively, recorded in “Right-of-use liabilities”, on the accompanying consolidated balance sheets.
Rent expense, including the operating lease costs above, for the years ended December 31, 2020, 2019 and 2018 were $49.9 million, $49.4 million and $42.6 million, respectively. Rent expense is included in “Operating, administrative and other” on the accompanying consolidated statements of operations.
Newmark is obligated for minimum rental payments under various non-cancelable operating leases, principally for office space, expiring at various dates through 2032. Certain of these leases contain escalation clauses that require payment of additional rent to the extent of increases in certain operating or other costs.
Minimum lease payments under these arrangements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
2021
|
$
|
45,701
|
|
|
$
|
44,709
|
|
2022
|
42,072
|
|
|
42,612
|
|
2023
|
40,507
|
|
|
39,812
|
|
2024
|
37,866
|
|
|
38,210
|
|
2025
|
36,520
|
|
|
35,602
|
|
Thereafter
|
126,668
|
|
|
146,463
|
|
Total lease payments
|
329,334
|
|
|
347,408
|
|
Less: Interest
|
81,237
|
|
|
92,282
|
|
Present value of lease liability
|
$
|
248,097
|
|
|
$
|
255,126
|
|
(19) Other Current Assets and Other Assets
Other current assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Derivative assets
|
$
|
32,259
|
|
|
$
|
51,021
|
|
Prepaid expenses
|
18,900
|
|
|
15,251
|
|
Other taxes
|
9,204
|
|
|
22,483
|
|
Rent and other deposits
|
1,539
|
|
|
1,703
|
|
Other
|
1,888
|
|
|
736
|
|
Total
|
$
|
63,790
|
|
|
$
|
91,194
|
|
Other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Deferred tax assets
|
$
|
187,526
|
|
|
$
|
182,781
|
|
Equity method investment
|
88,315
|
|
|
99,966
|
|
Debt securities
|
12,754
|
|
|
—
|
|
Non-marketable investments
|
9,927
|
|
|
94,113
|
|
Derivative assets
|
9,229
|
|
|
21,905
|
|
Other
|
15,171
|
|
|
9,133
|
|
Total
|
$
|
322,922
|
|
|
$
|
407,898
|
|
(20) Securities Loaned
As of December 31, 2020 and 2019, Newmark had Securities loaned with Cantor of $33.3 million and $36.7 million, respectively. The market value of the Securities loaned as of December 31, 2020 and 2019 were $32.6 million and $36.8 million, respectively. The cash collateral received from Cantor bore an interest rate of 0.85% and 2.45% as of December 31, 2020 and 2019, respectively.
(21) Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises
Newmark uses its warehouse facilities and repurchase agreements to fund mortgage loans originated under its various lending programs. Outstanding borrowings against these lines are collateralized by an assignment of the underlying mortgages and third-party purchase commitments and are recourse only to Berkeley Point Capital, LLC.
Newmark had the following lines available and borrowings outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Committed
Lines
|
|
Uncommitted
Lines
|
|
Balance at December 31, 2020
|
|
Balance at December 31, 2019
|
|
Stated Spread
to One-Month
LIBOR(3)
|
|
Rate Type
|
Warehouse facility due October 8, 2021(2)
|
$
|
900,000
|
|
|
$
|
—
|
|
|
$
|
358,247
|
|
|
$
|
34,125
|
|
|
115 bps - 140 bps
|
|
Variable
|
Warehouse facility due June 16, 2021(1)
|
450,000
|
|
|
—
|
|
|
292,040
|
|
|
16,759
|
|
|
115 bps - 140 bps
|
|
Variable
|
Warehouse facility due September 25, 2021
|
400,000
|
|
|
—
|
|
|
146,380
|
|
|
8,097
|
|
|
115 bps - 140 bps
|
|
Variable
|
Fannie Mae repurchase agreement, open maturity
|
—
|
|
|
400,000
|
|
|
264,535
|
|
|
150,667
|
|
|
105 bps - 115 bps
|
|
Variable
|
Total
|
$
|
1,750,000
|
|
|
$
|
400,000
|
|
|
$
|
1,061,202
|
|
|
$
|
209,648
|
|
|
|
|
|
(1)The warehouse line established a $125.0 million sublimit line of credit to find potential principal and interest servicing advances on the Company's Fannie Mae portfolio during the forbearance period related to the CARES Act. Advances will have an interest rate of 1-month LIBOR plus 200 bps. There were no outstanding draws outstanding under this sublimit at December 31, 2020.
(2)The warehouse line was temporarily increased by $300.0 million to $900.0 million for the period December 1, 2020 to February 1, 2021.
(3)The spread for the Fannie Mae repurchase line is to SOFR. The warehouse lines are to LIBOR.
Pursuant to the terms of the warehouse facilities, Newmark is required to meet several financial covenants. Newmark was in compliance with all covenants as of December 31, 2020 and 2019, respectively.
The borrowing rates on the warehouse facilities are based on short-term LIBOR plus applicable margins. Due to the short-term maturity of these instruments, the carrying amounts approximate fair value.
(22) Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
6.125% Senior Notes
|
$
|
542,772
|
|
|
$
|
540,377
|
|
Credit Facility
|
137,613
|
|
|
48,917
|
|
Total
|
$
|
680,385
|
|
|
$
|
589,294
|
|
6.125% Senior Notes
On November 6, 2018, Newmark closed its offering of $550.0 million aggregate principal amount of 6.125% Senior Notes due 2023 (the “6.125% Senior Notes”). The 6.125% Senior Notes were priced on November 1, 2018 at 98.94% to yield 6.375%. The 6.125% Senior Notes were offered and sold by Newmark in a private offering exempt from the registration requirements under the Securities Act of 1933, as amended (“Securities Act”). The 6.125% Senior Notes were subsequently exchanged for notes with substantially similar terms that were registered under the Securities Act. 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 carrying amount of the 6.125% Senior Notes was determined as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Principal balance
|
$
|
550,000
|
|
|
$
|
550,000
|
|
Less: debt issue cost
|
3,688
|
|
|
4,972
|
|
Less: debt discount
|
3,540
|
|
|
4,651
|
|
Total
|
$
|
542,772
|
|
|
$
|
540,377
|
|
Newmark uses the effective interest rate method to amortize debt discounts and uses the straight-line method to amortize debt issue costs over the life of the notes. Interest expense, amortization of debt issue costs and amortization of the debt discount of the 6.125% Senior Notes, included in “Interest (expense) income, net” on the accompanying consolidated statements of operations, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Interest expense
|
|
|
|
|
$
|
33,687
|
|
|
$
|
34,730
|
|
|
$
|
5,300
|
|
Debt issue cost amortization
|
|
|
|
|
1,284
|
|
|
1,282
|
|
|
198
|
|
Debt discount amortization
|
|
|
|
|
1,111
|
|
|
565
|
|
|
47
|
|
Total
|
|
|
|
|
$
|
36,082
|
|
|
$
|
36,577
|
|
|
$
|
5,545
|
|
Debt Repurchase Program
On June 16, 2020, the Newmark Board of Directors and its Audit Committee authorized a debt repurchase program for the repurchase by Newmark of up to $50.0 million of Newmark’s 6.125% Senior Notes and any future debt securities issued by the Company.
As of December 31, 2020, Newmark had $50.0 million remaining under its debt repurchase authorization (see Note 32 — “Subsequent Events” for additional information).
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”). The Credit Agreement provided for a $250.0 million three-year unsecured senior revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility bore an annual interest rate 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%, plus an applicable margin. The applicable margin is 2.0% with respect to LIBOR borrowings and can range from 1.25% to 2.25% in (a) above and was 1.00% with respect to base rate borrowings and can range from 0.25% to 1.25% in (b) above, depending upon Newmark’s credit rating. The Credit Facility also provides for an unused facility fee.
On February 26, 2020, Newmark entered into an amendment to the Credit Agreement, increasing the size of the Credit Facility to $425.0 million (the “Amended Credit Facility”) and extending the maturity date to February 26, 2023. The annual interest rate on the Amended Credit Facility was reduced to LIBOR plus 1.75%, subject to a pricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch.
On March 16, 2020, Newmark entered into a second amendment to the Credit Agreement, increasing the size of the Amended Credit Facility to $465.0 million (the "Second Amended Credit Facility"). The annual interest rate on the Second Amended Credit Facility is LIBOR plus 1.75%, subject to a pricing grid linked to Newmark’s credit ratings from Standard & Poor’s and Fitch.
During the year ended December 31, 2020, Newmark drew $365.0 million on the Credit Facility and paid down $275.0 million.
Details of the Credit Facility are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Principal balance
|
$
|
140,000
|
|
|
$
|
50,000
|
|
Less: Debt issue cost
|
2,387
|
|
|
1,083
|
|
Total
|
$
|
137,613
|
|
|
$
|
48,917
|
|
As of December 31, 2020 and 2019, borrowings under the Credit Facility carried an interest rate of 1.90% and 3.76%, with a weighted-average interest rate of 2.37% and 3.76%, respectively. Newmark uses the straight-line method to amortize debt issue costs over the life of the notes. Interest expense and amortization of debt issue costs of the Credit Facility, included in “Interest (expense) income, net” on the accompanying consolidated statements of operations, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Interest expense
|
|
|
|
|
$
|
6,618
|
|
|
$
|
1,865
|
|
|
$
|
—
|
|
Debt issue cost amortization
|
|
|
|
|
1,012
|
|
|
565
|
|
|
47
|
|
Unused facility fee
|
|
|
|
|
354
|
|
|
627
|
|
|
71
|
|
Total
|
|
|
|
|
$
|
7,984
|
|
|
$
|
3,057
|
|
|
$
|
118
|
|
On November 30, 2018, Newmark entered into an unsecured credit agreement (the “Cantor Credit Agreement”) with Cantor (see Note 27 — “Related Party Transactions” for a more detailed discussion).
(23) Financial Guarantee Liability
Newmark shares risk of loss for loans originated under the Fannie Mae DUS and Freddie TAH programs and could incur losses in the event of defaults under or foreclosure of these loans. Under the loss-share guarantee, Newmark’s maximum liability to the extent of actual losses incurred is approximately 33% of the outstanding principal balance on Fannie Mae DUS or Freddie TAH loans. Risk-sharing percentages are established on a loan-by-loan basis when originated, with most loans at 33% and “modified” loans at lower percentages. Under certain circumstances, risk-sharing percentages can be revised subsequent to origination or Newmark could be required to repurchase the loan. In the event of a loss resulting from a catastrophic event that is not required to be covered by borrowers’ insurance policies, Newmark can recover the loss under its mortgage impairment insurance policy. Any potential recovery is subject to the policy’s deductibles and limits.
At December 31, 2020, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of $24.0 billion with a maximum potential loss of $7.2 billion, of which $6.2 million is covered by the Credit Enhancement Agreement. At December 31, 2019, the credit risk loans being serviced by Newmark on behalf of Fannie Mae and Freddie Mac had outstanding principal balances of approximately $20.2 billion with a maximum potential loss of approximately $5.8 billion, of which $9.8 million was covered by the Credit Enhancement Agreement (see Note 12 — “Credit Enhancement Receivable, Credit Enhancement Deposit and Contingent Liability”).
Newmark’s current estimate of expected credit losses considers various factors, including, without being limited to, historical default and losses, current delinquency status, loan size, terms, amortization types, the forward-looking view of the primary risk drivers (debt-service coverage ratio and loan-to-value) based on forecasts of economic conditions and local market performance. During the year ended December 31, 2020 there was an increase in the reserve by $11.6 million. A loan is considered to be delinquent once it is 60 days past due. As of December 31, 2020, there were four loans in the credit risk
portfolio with outstanding principal balances of $53.5 million, with a maximum loss exposure of $17.8 million, that were delinquent. If all four delinquent loans resulted in a loss event, proceeds from the liquidation of assets are estimated to approximate $39.0 million based on current estimates of fair value. Newmark’s share of the loss would approximate $5.3 million.
The provisions for risk-sharing were included in “Operating, administrative and other” on the accompanying consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
Balance, January 1, 2019
|
$
|
32
|
|
Reversal of provision
|
(17)
|
|
Balance, December 31, 2019
|
15
|
|
Impact of adopting ASC 326
|
17,935
|
|
Provision for expected credit losses
|
11,631
|
|
Balance, December 31, 2020
|
$
|
29,581
|
|
(24) Concentrations of Credit Risk
The lending activities of Newmark create credit risk in the event that counterparties do not fulfill their contractual payment obligations. In particular, Newmark is exposed to credit risk related to the Fannie Mae DUS and Freddie Mac TAH loans (see Note 23 — “Financial Guarantee Liability”). As of December 31, 2020, 21% and 14% of $7.2 billion of the maximum loss was for properties located in California and Texas, respectively. As of December 31, 2019, 21% and 16% of $5.8 billion of the maximum loss was for properties located in California and Texas, respectively.
(25) Escrow and Custodial Funds
In conjunction with the servicing of multifamily and commercial loans, Newmark holds escrow and other custodial funds. Escrow funds are held at unaffiliated financial institutions generally in the form of cash and cash equivalents. These funds amounted to $1.3 billion and $925.0 million, as of December 31, 2020 and 2019, respectively. These funds are held for the benefit of Newmark’s borrowers and are segregated in custodial bank accounts. These amounts are excluded from the assets and liabilities of Newmark.
(26) Fair Value of Financial Assets and Liabilities
U.S. GAAP guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
•Level 1 measurements—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
•Level 2 measurements—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.
•Level 3 measurements—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
As required by U.S. GAAP guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth by level within the fair value hierarchy financial assets and liabilities accounted for at fair value under U.S. GAAP guidance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Marketable securities
|
$
|
33,283
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
33,283
|
|
Loans held for sale, at fair value
|
—
|
|
|
1,086,805
|
|
|
—
|
|
|
1,086,805
|
|
Debt securities
|
—
|
|
|
12,754
|
|
|
—
|
|
|
12,754
|
|
Rate lock commitments
|
—
|
|
|
—
|
|
|
21,034
|
|
|
21,034
|
|
Nasdaq Forwards
|
—
|
|
|
—
|
|
|
12,822
|
|
|
12,822
|
|
Forward sale contracts
|
—
|
|
|
—
|
|
|
7,632
|
|
|
7,632
|
|
Total
|
$
|
33,283
|
|
|
$
|
1,099,559
|
|
|
$
|
41,488
|
|
|
$
|
1,174,330
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,481
|
|
|
$
|
31,481
|
|
Rate lock commitments
|
—
|
|
|
—
|
|
|
2,977
|
|
|
2,977
|
|
Forward sale contracts
|
—
|
|
|
—
|
|
|
14,971
|
|
|
14,971
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
49,429
|
|
|
$
|
49,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Marketable securities
|
$
|
36,795
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
36,795
|
|
Loans held for sale, at fair value
|
—
|
|
|
215,290
|
|
|
—
|
|
|
215,290
|
|
Rate lock commitments
|
—
|
|
|
—
|
|
|
32,035
|
|
|
32,035
|
|
Nasdaq Forwards
|
—
|
|
|
—
|
|
|
26,502
|
|
|
26,502
|
|
Forward sale contracts
|
—
|
|
|
—
|
|
|
14,389
|
|
|
14,389
|
|
Total
|
$
|
36,795
|
|
|
$
|
215,290
|
|
|
$
|
72,926
|
|
|
$
|
325,011
|
|
Liabilities:
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45,172
|
|
|
$
|
45,172
|
|
Rate lock commitments
|
—
|
|
|
—
|
|
|
12,124
|
|
|
12,124
|
|
Forwards sale contracts
|
—
|
|
|
—
|
|
|
13,537
|
|
|
13,537
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
70,833
|
|
|
$
|
70,833
|
|
There were no transfers among Level 1, Level 2 and Level 3 for the years ended December 31, 2020 and 2019, respectively.
Level 3 Financial Assets and Liabilities: Changes in Level 3 Nasdaq Forwards, rate lock commitments, forward sale contracts and contingent consideration measured at fair value on recurring basis were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
Opening
Balance
|
|
Total realized
and unrealized
gains (losses)
included in
Net income
|
|
Issuances
|
|
Settlements
|
|
Closing
Balance
|
|
Unrealized
gains (losses)
outstanding
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments
|
$
|
32,035
|
|
|
$
|
21,034
|
|
|
$
|
—
|
|
|
$
|
(32,035)
|
|
|
$
|
21,034
|
|
|
$
|
21,034
|
|
Forward sale contracts
|
14,389
|
|
|
7,632
|
|
|
—
|
|
|
(14,389)
|
|
|
7,632
|
|
|
7,632
|
|
Nasdaq Forwards
|
26,502
|
|
|
(13,680)
|
|
|
—
|
|
|
—
|
|
|
12,822
|
|
|
12,822
|
|
Total
|
$
|
72,926
|
|
|
$
|
14,986
|
|
|
$
|
—
|
|
|
$
|
(46,424)
|
|
|
$
|
41,488
|
|
|
$
|
41,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening
Balance
|
|
Total realized
and unrealized
gains (losses)
included in
Net income
|
|
Issuances
|
|
Settlements
|
|
Closing
Balance
|
|
Unrealized
gains (losses)
outstanding
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
45,172
|
|
|
$
|
(11,063)
|
|
|
$
|
2,221
|
|
|
$
|
(4,849)
|
|
|
$
|
31,481
|
|
|
$
|
(408)
|
|
Rate lock commitments
|
12,124
|
|
|
2,977
|
|
|
|
|
(12,124)
|
|
|
2,977
|
|
|
2,977
|
|
Forward sale contracts
|
13,537
|
|
|
14,971
|
|
|
|
|
(13,537)
|
|
|
14,971
|
|
|
14,971
|
|
Total
|
$
|
70,833
|
|
|
$
|
6,885
|
|
|
$
|
2,221
|
|
|
$
|
(30,510)
|
|
|
$
|
49,429
|
|
|
$
|
17,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Opening
Balance
|
|
Total realized
and unrealized
gains (losses)
included in
Net income
|
|
Issuances
|
|
Settlements
|
|
Closing
Balance
|
|
Unrealized
gains (losses)
outstanding
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Rate lock commitments
|
$
|
6,732
|
|
|
$
|
32,035
|
|
|
$
|
—
|
|
|
$
|
(6,732)
|
|
|
$
|
32,035
|
|
|
$
|
32,035
|
|
Forward sale contracts
|
8,177
|
|
|
14,389
|
|
|
—
|
|
|
(8,177)
|
|
|
14,389
|
|
|
14,389
|
|
Nasdaq Forwards
|
77,619
|
|
|
(51,117)
|
|
|
—
|
|
|
—
|
|
|
26,502
|
|
|
26,502
|
|
Total
|
$
|
92,528
|
|
|
$
|
(4,693)
|
|
|
$
|
—
|
|
|
$
|
(14,909)
|
|
|
$
|
72,926
|
|
|
$
|
72,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening
Balance
|
|
Total realized
and unrealized
gains (losses)
included in
Net income
|
|
Issuances
|
|
Settlements
|
|
Closing
Balance
|
|
Unrealized
gains (losses)
outstanding
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
32,551
|
|
|
$
|
2,287
|
|
|
$
|
14,957
|
|
|
$
|
(4,623)
|
|
|
$
|
45,172
|
|
|
$
|
2,287
|
|
Rate lock commitments
|
7,470
|
|
|
12,124
|
|
|
—
|
|
|
(7,470)
|
|
|
12,124
|
|
|
12,124
|
|
Forward sale contracts
|
9,208
|
|
|
13,537
|
|
|
—
|
|
|
(9,208)
|
|
|
13,537
|
|
|
13,537
|
|
Total
|
$
|
49,229
|
|
|
$
|
27,948
|
|
|
$
|
14,957
|
|
|
$
|
(21,301)
|
|
|
$
|
70,833
|
|
|
$
|
27,948
|
|
Quantitative Information About Level 3 Fair Value Measurements
The following tables present quantitative information about the significant unobservable inputs utilized by Newmark in the fair value measurement of Level 3 assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
Level 3 assets and liabilities
|
|
Assets
|
|
Liabilities
|
|
Significant Unobservable
Inputs
|
|
Range
|
|
Weighted
Average
|
Accounts payable, accrued expenses and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
31,481
|
|
|
Discount rate
|
|
0.3% - 10.4%
|
(1)
|
7.1%
|
|
|
|
|
|
|
Probability of meeting earnout and contingencies
|
|
0%- 100%
|
(1)
|
93.9%
|
|
|
|
|
|
|
Financial forecast information
|
|
|
|
|
Derivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Nasdaq Forwards
|
|
$
|
12,822
|
|
|
$
|
—
|
|
|
Implied volatility
|
|
42.4% - 42.6%
|
(2)
|
42.5%
|
Forward sale contracts
|
|
$
|
7,632
|
|
|
$
|
14,971
|
|
|
Counterparty credit risk
|
|
N/A
|
|
N/A
|
Rate lock commitments
|
|
$
|
21,034
|
|
|
$
|
2,977
|
|
|
Counterparty credit risk
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Level 3 assets and liabilities
|
|
Assets
|
|
Liabilities
|
|
Significant Unobservable
Inputs
|
|
Range
|
|
Weighted
Average
|
Accounts payable, accrued expenses and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
—
|
|
|
$
|
45,172
|
|
|
Discount rate
|
|
0.3% - 10.4%
|
|
8.6%
|
|
|
|
|
|
|
Probability of meeting earnout and contingencies
|
|
90% - 100%
|
(1)
|
98.1%
|
|
|
|
|
|
|
Financial forecast information
|
|
|
|
|
Derivative assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Nasdaq Forwards
|
|
$
|
26,502
|
|
|
$
|
—
|
|
|
Implied volatility
|
|
25.7% - 34.8%
|
(2)
|
32.2%
|
Forward sale contracts
|
|
$
|
14,389
|
|
|
$
|
13,537
|
|
|
Counterparty credit risk
|
|
N/A
|
|
N/A
|
Rate lock commitments
|
|
$
|
32,035
|
|
|
$
|
12,124
|
|
|
Counterparty credit risk
|
|
N/A
|
|
N/A
|
(1)Newmark’s estimate of contingent consideration as of December 31, 2020 and 2019 was based on the acquired business’ projected future financial performance, including revenues.
(2)The volatility of Newmark’s Nasdaq Forwards is primarily based on the volatility of the underlying Nasdaq stock price.
Valuation Processes - Level 3 Measurements
Both the rate lock commitments to borrowers and the forward sale contracts to investors are derivatives and, accordingly, are marked to fair value on the accompanying consolidated statements of operations. The fair value of Newmark’s rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:
•The assumed gain loss of the expected loan sale to the investor, net of employee benefits;
•The expected net future cash flows associated with servicing the loan;
•The effects of interest rate movements between the date of the rate lock and the balance sheet date; and
•The nonperformance risk of both the counterparty and Newmark.
The fair value of Newmark’s forward sales contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date. The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
The fair value of Newmark’s rate lock commitments and forward sale contracts is adjusted to reflect the risk that the agreement will not be fulfilled. Newmark’s exposure to nonperformance in rate lock and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of Newmark’s counterparties, the short duration of rate lock commitments and forward sales contracts, and Newmark’s historical experience with the agreements, management does not believe the risk of nonperformance by Newmark’s counterparties to be significant.
The Nasdaq Forwards are derivatives and, accordingly, are marked to fair value on the accompanying consolidated statements of operations. The fair value of the Nasdaq Forwards are determined utilizing the following inputs, as applicable:
•The underlying number of shares and the related strike price;
•The maturity date; and
•The implied volatility of Nasdaq’s stock price.
The fair value of Newmark’s Nasdaq Forwards considers the effects of Nasdaq’s stock price volatility between the balance sheet date and the maturity date. The fair value is determined by the use of a Black-Scholes put option valuation model.
Information About Uncertainty of Level 3 Fair Value Measurements
The significant unobservable inputs used in the fair value of Newmark’s contingent consideration are the discount rate and forecasted financial information. Significant increases (decreases) in the discount rate would have resulted in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a significantly higher (lower) fair value measurement. As of December 31, 2020 and 2019, the present value of expected payments related to Newmark’s contingent consideration was $31.5 million and $45.2 million, respectively (see Note 31 — “Commitments and Contingencies”). As of December 31, 2020 and 2019, the undiscounted value of the payments, assuming that all contingencies are met, would be $51.3 million and $66.4 million, respectively.
Fair Value Measurements on a Non-Recurring Basis
Equity investments carried under the measurement alternative are remeasured at fair value on a non-recurring basis to reflect observable transactions which occurred during the period. Newmark applied the measurement alternative to equity securities with the fair value of $9.9 million and $94.1 million, which were included in “Other assets” on the accompanying consolidated balance sheets as of December 31, 2020 and 2019, respectively. These investments are classified within Level 2 in the fair value hierarchy, because their estimated fair value is based on valuation methods using the observable transaction price at the transaction date.
(27) Related Party Transactions
(a)Service Agreements
Newmark receives administrative services, including but not limited to, treasury, legal, accounting, information technology, payroll administration, human resources, incentive compensation plans and other support, provided by Cantor. Allocated expenses were $22.6 million, $25.0 million and $26.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. These expenses are included as part of “Fees to related parties” on the accompanying consolidated statements of operations.
(b)Loans, Forgivable Loans and Other Receivables from Employees and Partners
Newmark has entered into various agreements with certain employees and partners whereby these individuals receive loans which may be either wholly or in part repaid from the distribution of earnings that the individuals receive on some or all of their limited partnership interests or may be forgiven over a period of time. The forgivable portion of these loans is recognized as compensation expense over the life of the loans. From time to time, Newmark 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.
As of December 31, 2020 and 2019, the aggregate balance of employee loans was $454.3 million and $403.7 million, respectively, and is included as “Loans, forgivable loans and other receivables from employees and partners, net” on the accompanying consolidated balance sheets. Compensation expense for the above-mentioned employee loans for the years ended December 31, 2020, 2019 and 2018 was $73.6 million, $39.0 million and $27.7 million, respectively. The compensation expense related to these employee loans is included as part of “Compensation and employee benefits” on the accompanying consolidated statements of operations.
Transfer of Employees to Newmark and Other Related Party Transactions
In connection with the expansion of the mortgage brokerage and lending activities, Newmark has entered into an agreement with Cantor pursuant to which five former employees of Cantor's affiliate, Cantor Commercial Real Estate ("CCRE"), 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. Newmark recorded $6.9 million and $2.2 million as “Stockholders’ equity” and “Redeemable partnership interests”, respectively, on the consolidated balance sheets.
In consideration for the Cantor payment, Newmark 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. In July 2020, Newmark paid $3.3 million to Cantor based on the employees’ production, satisfying this liability. As of December 31, 2019, Newmark had $2.6 million, included in “Payables to related parties” on the accompanying consolidated balance sheets, to be returned to
Cantor related to this transaction. 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 February 2019, Newmark's Audit Committee authorized Newmark and its subsidiaries to originate and service GSE loans for 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 $250.0 million limit on originated Fannie Mae Loans outstanding to Cantor at any given time.
On November 30, 2020, we entered into an arrangement to assist View, Inc. (“View”) in the sale of its products and services to real estate clients in exchange for commissions. View, Inc. is a Silicon Valley-based producer of high-efficiency dynamic glass that controls light, heat, and glare, providing unobstructed views and privacy using a low voltage control system. In connection with the arrangement, View also agreed to engage us as its exclusive provider of real estate services for a period of at least five years. While View is not under common control with us, it was, at the time that the agreement was executed, the target of a merger with CF Finance Acquisition Corp. II, a special purpose acquisition company sponsored by Cantor.
(c)Transactions with CCRE
Newmark has a referral agreement in place with CCRE, in which Newmark’s brokers are incentivized to refer business to CCRE through a revenue-share agreement. Newmark recognized $0.6 million and $0.8 million for the years ended December 31, 2020 and 2019, respectively, in connection with this revenue-share agreement.
Newmark also has a revenue-share agreement with CCRE, in which Newmark pays CCRE for referrals for leasing or other services. Newmark did not make any payments under this agreement to CCRE for the years ended December 31, 2020, 2019 and 2018, respectively.
In addition, Newmark has a loan referral agreement in place with CCRE, in which either party can refer a loan to the other. Newmark did not have any revenues from these referrals for the year ended December 31, 2020. Revenues from these referrals were $2.6 million and $2.2 million for the years December 31, 2019 and 2018, respectively. Such revenues are recognized in “Gains from mortgage banking activities/originations, net” on the accompanying consolidated statements of operations. These referral fees are net of the broker fees and commissions paid to CCRE. Broker fees and commissions for the years ended December 31, 2019 and 2018, were $1.4 million and $0.8 million, respectively.
For the years ended December 31, 2020 and 2019, Newmark purchased the primary servicing rights for $227.0 million and $1.2 billion of loans originated by CCRE for $0.2 million and $1.5 million, respectively. Newmark also services loans for CCRE on a “fee for service” basis, generally prior to a loan’s sale or securitization, and for which no MSR is recognized. Newmark recognized servicing revenues (excluding interest and placement fees) from servicing rights purchased from CCRE on a “fee for service” basis of $3.8 million for the years ended December 31, 2020, 2019 and 2018, respectively, which was included as part of “Management services, servicing fee and other” on the accompanying consolidated statements of operations.
On July 22, 2019, Cantor Commercial Real Estate Lending, L.P. (“CCRE Lending”), a wholly owned subsidiary of Real Estate LP, made a $146.6 million commercial real estate loan (the “Loan”) to a single-purpose company (the “Borrower”) in which Barry Gosin, Newmark’s Chief Executive Officer, owns a 19% interest. The Loan is secured by the Borrower’s interest in property in Pennsylvania that is subject to a ground lease. While CCRE Lending initially provided the full loan amount, on August 16, 2019, a third-party bank purchased approximately 80% of the Loan value from CCRE Lending, with CCRE Lending retaining approximately 20%. The Loan matures on August 6, 2029, and is payable monthly at a fixed interest rate of 4.38% per annum. Newmark provided certain commercial loan brokerage services to the Borrower in the ordinary course of its business, and the Borrower paid Newmark a fee, as the broker of the Loan, of $0.7 million. The Newmark Audit Committee approved the commercial loan brokerage services and the related fee amount received.
Transactions with Executive Officers and Directors
In connection with Newmark’s 2019 executive compensation process, Newmark’s executive officers received certain monetization of prior awards as compensation at Newmark, as set forth below:
On December 19, 2019, the Newmark Compensation Committee approved the right to (i) exchange 552,483 non-exchangeable PSUs held by Mr. Lutnick into 552,483 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $7,017,000); and (ii) exchange for cash 602,463 non-exchangeable PPSUs held by Mr. Lutnick (which had an average determination price of $13.25 per unit) for a payment of $7,983,000 for taxes when the PSUs are exchanged.
On December 19, 2019, the Compensation Committee approved the right to (i) exchange 443,872 non-exchangeable PSUs held by Mr. Gosin into 443,872 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $5,637,548); and (ii) exchange for cash 539,080 non-exchangeable PPSUs held by Mr. Gosin (which had an average determination price of $9.95 per unit) for a payment of $5,362,452 for taxes when the PSUs are exchanged.
On December 19, 2019, the Compensation Committee approved the cancellation of 145,464 non-exchangeable PSUs held by Mr. Merkel, and the cancellation of 178,179 non-exchangeable PPSUs (which had an average determination price of $10.61 per unit). Additionally, on December 19, 2019, Mr. Merkel exchanged 4,222 already exchangeable PSUs held by him in exchange for Class A common stock. The above transaction resulted in income of $3,791,848 for Mr. Merkel, of which Newmark withheld $1,989,483 for taxes and issued the remaining $1,802,365 in the form of 132,429 net shares of Class A common stock valued at a price of $13.61 per share.
On December 19, 2019, the Compensation Committee approved the right to (i) exchange 5,846 non-exchangeable PSUs held by Mr. Rispoli into 5,846 HDUs (which, based on the closing price of the Class A common stock of $13.61 per share on such date, had a value of $74,250); and (ii) exchange for cash 4,917 Newmark Holdings non-exchangeable PPSUs held by Mr. Rispoli (which had an average determination price of $12.355 per unit) for a payment of $60,750 for taxes when the PSUs are exchanged.
On October 30, 2019, the Newmark Audit and Compensation Committees approved the repurchase from Mr. Merkel of 55,193 shares of Newmark Class A common stock at $10.69 per share, the closing price on October 30, 2019.
On December 19, 2019, the Newmark Audit and Compensation Committees approved the repurchase from Mr. Merkel of 132,429 shares of Newmark Class A common stock at $13.61 per share, the closing price on December 19, 2019.
On November 4, 2020, the Audit Committee of the Board of Directors authorized entities in which executive officers have a non-controlling interest to engage Newmark to provide ordinary course real estate services to them as long as Newmark’s fees are consistent with the fees that Newmark ordinarily charges for these services.
CF Real Estate Finance Holdings, LP.
Contemporaneously with the acquisition of Berkeley Point, on September 8, 2017, Newmark invested $100.0 million in a newly formed commercial real estate-related financial and investment business, 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. As of December 31, 2020 and 2019, Newmark’s investment was accounted for under the equity method (see Note 8 — “Investments”).
Spin-Off
The Separation and Distribution Agreement sets forth the agreements among BGC, Cantor, Newmark and their respective subsidiaries with respect to the Separation and related matters (see Note 1 — “Organization and Basis of Presentation” for additional information).
As a result of the Separation, the limited partnership interests in Newmark Holdings were distributed to the holders of limited partnership interests in BGC Holdings, including Cantor and CFGM, whereby each holder of BGC Holdings limited partnership interests at that time now held a BGC Holdings limited partnership interest and a corresponding Newmark Holdings limited partnership interest, which was equal to a BGC Holdings limited partnership interest multiplied by the contribution ratio, divided by the current exchange ratio. The exchange ratio is subject to adjustment, in accordance with the terms of the Separation and Distribution Agreement (see Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings” for additional information).
On November 30, 2018, BGC completed the Spin-Off. BGC Partners’ stockholders, including Cantor and CFGM, as of the Record Date, received in the Spin-Off 0.463895 of a share of Newmark Class A or Class B common stock for each share of BGC Class A or Class B common stock held as of the Record Date. In the aggregate, BGC distributed 131.9 million shares of Newmark Class A common stock and 21.3 million shares of Newmark Class B common stock to BGC’s stockholders in the Spin-Off. As Cantor and CFGM held 100% of the shares of BGC Class B common stock as of the Record Date, Cantor and CFGM were distributed 100% of the shares of Newmark Class B common stock in the Spin-Off.
Prior to and in connection with the Spin-Off, 14.8 million Newmark Holdings 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. On November
30, 2018, pursuant to the BGC Holdings Distribution, BGC Holdings distributed pro rata all of the 1.5 million exchangeable limited partnership units of Newmark Holdings held by BGC Holdings immediately prior to the effective time of the Spin-Off to its limited partners entitled to receive distributions on their BGC Holdings units who were holders of record of such units as of November 23, 2018 (including Cantor, CFGM and executive officers of BGC and Newmark). 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 0.4 million Newmark Holdings Units received by Cantor also into shares of Newmark Class B common stock, at the exchange ratio of 0.9793 shares of Newmark common stock per Newmark Holdings Unit (subject to adjustment). As of December 31, 2020, the exchange ratio equaled 0.9379. (See Note 1 — “Organization and Basis of Presentation” for additional information).
Following the Spin-Off and the BGC Holdings Distribution, BGC Partners ceased to be a controlling stockholder of Newmark, and BGC and its subsidiaries no longer held any shares of Newmark common stock or equity interests in Newmark or its subsidiaries. Cantor continues to control Newmark and its subsidiaries following the Spin-Off and the BGC Holdings Distribution (see Note 1 — “Organization and Basis of Presentation” for additional information).
Subsequent to the Spin-Off and the BGC Holdings Distribution, there are remaining partners who hold limited partnership interests in Newmark Holdings who are BGC employees, and there are remaining partners who hold limited partnership interests in BGC Holdings who are Newmark employees. The Newmark limited partnership interests were distributed as part of the Separation and the BGC Holdings Distribution. Employees of Newmark and BGC are granted only limited partnership interests in Newmark Holdings and BGC Holdings, respectively. As a result of the Spin-Off and the BGC Holdings Distribution, as the existing limited partnership interests in Newmark Holdings held by BGC employees and the existing limited partnership interests in BGC Holdings held by Newmark employees are exchanged/redeemed, the related capital is contributed to and from Cantor, respectively.
BGC’s 2018 Investment in Newmark Holdings
On March 7, 2018, BGC Partners and its operating subsidiaries purchased 16.6 million units of Newmark Holdings for approximately $242.0 million. The price per Newmark Holdings Unit was based on the $14.57 closing price of Newmark’s Class A common stock on March 6, 2018, as reported on the NASDAQ Global Select Market. These newly issued Newmark Holdings Units were exchangeable, at BGC’s discretion, into either shares of Newmark Class A common stock or shares of Newmark Class B common stock. BGC made the Investment in Newmark Holdings pursuant to an Investment Agreement, dated as of March 6, 2018, by and among BGC, BGC Holdings, BGC U.S. OpCo, BGC Global OpCo, Newmark, Newmark Holdings and Newmark OpCo. The Investment by BGC in Newmark Holdings and related transactions were approved by the Audit Committees and Boards of Directors of BGC and Newmark. BGC and its subsidiaries funded the Investment by BGC in Newmark Holdings using the proceeds of its CEO sales program. Newmark used the proceeds to repay the balance of the outstanding principal amount under its unsecured senior term loan credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders that was guaranteed by BGC. In addition, in accordance with the Separation and Distribution Agreement, BGC owned 7.0 million limited partnership interests in the Newmark OpCo (“Newmark OpCo Units”) immediately prior to the Spin-Off, as a result of other issuances of BGC Class A common stock primarily related to the redemption of limited partnership units in BGC Holdings and Newmark Holdings.
Transactions with CF&Co
On June 18, 2018 and September 26, 2018, Newmark entered into transactions related to the monetization of the Nasdaq shares that Newmark expects to receive in 2019 through 2022 (see Note 1 — “Organization and Basis of Presentation”). Newmark paid $4.0 million in fees for services provided by CF&Co related to these monetization transactions. These fees were recorded as a deduction from the carrying amount of the EPUs.
On November 6, 2018, Newmark issued an aggregate of $550.0 million principal amount of 6.125% Senior Notes due 2023. In connection with this issuance of the 6.125% Senior Notes, Newmark paid $0.8 million in underwriting fees to CF&Co.
(d)Other Related Party Transactions
On November 30, 2018, Newmark entered into an unsecured credit agreement with Cantor (the “Cantor Credit Agreement”). The Cantor Credit Agreement provides for each party to issue loans to the other party at the lender’s discretion. Pursuant to the Cantor Credit Agreement, the parties and their respective subsidiaries (with respect to Cantor, other than BGC and its subsidiaries) may borrow up to an aggregate principal amount of $250 million from each other from time to time at an interest rate which is the higher of Cantor’s or Newmark’s short-term borrowing rate then in effect, plus 1%.
There were no receivables from related parties for the years ended December 31, 2020 and 2019, respectively. Payables to related parties were $4.4 million and $38.1 million as of December 31, 2020 and 2019, respectively.
For a detailed discussion about Newmark’s Payables to related parties, see Note 1 — “Organization and Basis of Presentation”, Note 2 — “Limited Partnership Interests in Newmark and BGC Holdings” and Note 22 — “Long-Term Debt”.
On May 15, 2020, the Newmark Audit Committee authorized RKF Retail Holdings LLC, a subsidiary of the Company, entered into a one-year sublease to BGC U.S. OpCo ("BGC") of approximately 21,000 rentable square feet of excess space. The sublease commenced on May 15, 2020 and expires on May 31, 2021. Under the terms of the lease, BGC will pay Newmark a fixed rent amount of $1.1 million in addition to all operating and tax expenses attributable to the lease. In connection with this agreement, Newmark received $0.8 million from BGC for the year ended December 31, 2020.
(28) Income Taxes
The accompanying consolidated financial statements include U.S. federal, state and local income taxes on Newmark’s allocable share of its U.S. results of operations, as well as taxes payable to jurisdictions outside the U.S. In addition, 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 (See Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings”, for discussion of partnership interests) rather than the partnership entity. Income taxes are accounted for using the asset and liability method, as prescribed in U.S. GAAP guidance for Income Taxes. The provision for income taxes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
24,880
|
|
|
$
|
63,359
|
|
|
$
|
49,985
|
|
U.S. state and local
|
6,038
|
|
|
15,130
|
|
|
19,290
|
|
Foreign
|
2,811
|
|
|
464
|
|
|
1,239
|
|
UBT
|
2,845
|
|
|
1,335
|
|
|
3,586
|
|
Total
|
36,574
|
|
|
80,288
|
|
|
74,100
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
3,249
|
|
|
(25,103)
|
|
|
(9,972)
|
|
U.S. state and local
|
(1,912)
|
|
|
(4,025)
|
|
|
24,092
|
|
Foreign
|
(120)
|
|
|
(15)
|
|
|
—
|
|
UBT
|
(798)
|
|
|
1,291
|
|
|
2,267
|
|
Total
|
419
|
|
|
(27,852)
|
|
|
16,387
|
|
Provision for income taxes
|
$
|
36,993
|
|
|
$
|
52,436
|
|
|
$
|
90,487
|
|
Newmark had pre-tax income of $146.3 million, $214.1 million and $282.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. Newmark had pre-tax loss from foreign operations of $4.5 million, $6.4 million and $3.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Differences between Newmark’s actual income tax expense and the amount calculated utilizing the U.S. federal statutory rates were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Tax expense at federal statutory rate
|
$
|
30,717
|
|
|
$
|
44,971
|
|
|
$
|
59,297
|
|
Non-controlling interest
|
(10,378)
|
|
|
(15,097)
|
|
|
(26,257)
|
|
Incremental impact of foreign taxes compared to the federal rate
|
212
|
|
|
(145)
|
|
|
44
|
|
Other permanent differences
|
5,272
|
|
|
9,915
|
|
|
9,948
|
|
U.S. state and local taxes, net of U.S. federal benefit
|
5,984
|
|
|
12,271
|
|
|
13,353
|
|
New York City UBT
|
2,046
|
|
|
2,627
|
|
|
3,119
|
|
Amortization of intangibles
|
—
|
|
|
—
|
|
|
—
|
|
Revaluation of deferred taxes related to tax reform
|
—
|
|
|
—
|
|
|
—
|
|
Other rate change
|
(4,747)
|
|
|
2,457
|
|
|
23,001
|
|
Section 453A interest
|
1,419
|
|
|
1,640
|
|
|
2,003
|
|
Valuation allowance
|
2,137
|
|
|
2,902
|
|
|
1,281
|
|
Prior year true ups
|
4,628
|
|
|
(7,981)
|
|
|
2,341
|
|
Other
|
(297)
|
|
|
(1,124)
|
|
|
2,357
|
|
Provision for income tax
|
$
|
36,993
|
|
|
$
|
52,436
|
|
|
$
|
90,487
|
|
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded against deferred tax assets if it is deemed more likely than not that those assets will not be realized.
Significant components of Newmark's deferred tax asset and liability consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Deferred tax asset
|
|
|
|
Basis difference of investments
|
$
|
65,954
|
|
|
$
|
54,445
|
|
Deferred compensation
|
167,251
|
|
|
153,978
|
|
Other deferred and accrued expenses
|
4,584
|
|
|
7,655
|
|
Net Operating loss and credit carry-forwards
|
2,447
|
|
|
4,216
|
|
Total deferred tax asset
|
240,236
|
|
|
220,294
|
|
Valuation Allowance
|
(2,035)
|
|
|
(3,973)
|
|
Deferred tax asset, net of allowance
|
238,201
|
|
|
216,321
|
|
Deferred tax liability
|
|
|
|
Depreciation and amortization
|
50,675
|
|
|
30,156
|
|
Other
|
—
|
|
|
3,384
|
|
Deferred tax liability(1)
|
50,675
|
|
|
33,540
|
|
Net deferred tax asset
|
$
|
187,526
|
|
|
$
|
182,781
|
|
(1)Before netting within tax jurisdictions.
Newmark has net operating losses in non-U.S. jurisdictions of an approximate tax effected value of $2.2 million, which has an indefinite life. Management assesses the available positive and negative evidence to determine whether existing deferred tax assets will be realized. Accordingly, a valuation allowance of $2.0 million has been recorded against the deferred tax asset primarily related to certain net operating losses in non-U.S. jurisdictions as it is more likely than not to not be realized. Newmark’s deferred tax asset and liability are included on the accompanying consolidated balance sheets as components of “Other assets” and “Other liabilities”, respectively.
The Global Intangible Low-Taxed Income (“GILTI”) provision on its foreign subsidiaries did not have a material impact on Newmark’s tax expense for the year ended December 31, 2020.
Pursuant to U.S. GAAP guidance on Accounting for Uncertainty in Income Taxes, 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.
A reconciliation of the beginning to the ending amounts of gross unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 is as follows (in thousands):
|
|
|
|
|
|
Balance, January 1, 2018
|
$
|
208
|
|
Increases for prior year tax positions
|
—
|
|
Decreases for prior year tax positions
|
—
|
|
Increases for current year tax positions
|
—
|
|
Decreases related to settlements with taxing authorities
|
—
|
|
Decreases related to a lapse of applicable statute of limitations
|
—
|
|
Balance, December 31, 2019
|
208
|
|
Increases for prior year tax positions
|
—
|
|
Decreases for prior year tax positions
|
—
|
|
Increases for current year tax positions
|
—
|
|
Decreases related to settlements with taxing authorities
|
—
|
|
Decreases related to a lapse of applicable statute of limitations
|
—
|
|
Balance, December 31, 2020
|
$
|
208
|
|
As of December 31, 2020, Newmark’s unrecognized tax benefits, excluding related interest and penalties, were $0.2 million, which, if recognized, would affect the effective tax rate. Newmark is currently open to examination by United States Federal, state and local and non-U.S. tax authorities as part of the BGC consolidated group for tax years beginning 2008, 2009 and 2015, respectively. Newmark does not believe that the amounts of unrecognized tax benefits will materially change over the next 12 months. Generally, Newmark is not subject to examination by taxing authorities prior to 2017.
Newmark recognizes interest and penalties related to uncertain tax positions in “Provision for income taxes” on the accompanying consolidated statements of operations. As of December 31, 2020, Newmark has not accrued any tax-related interest and penalties.
(29) Accounts Payable, Accrued Expenses and Other Liabilities
The accounts payable, accrued expenses and other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Accounts payable and accrued expenses
|
$
|
97,304
|
|
|
$
|
161,988
|
|
|
|
|
|
Outside broker payable
|
53,504
|
|
|
74,280
|
|
Payroll taxes payable
|
60,696
|
|
|
45,612
|
|
Corporate taxes payable
|
25,666
|
|
|
69,237
|
|
Derivative liability
|
17,948
|
|
|
25,661
|
|
Right-of-use liabilities
|
29,468
|
|
|
27,184
|
|
Credit enhancement deposit
|
25,000
|
|
|
—
|
|
Contingent consideration
|
16,962
|
|
|
13,107
|
|
Total
|
$
|
326,548
|
|
|
$
|
417,069
|
|
Other long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Accrued compensation
|
$
|
331,288
|
|
|
$
|
278,399
|
|
Payroll taxes payable
|
61,564
|
|
|
41,355
|
|
Contingent consideration
|
14,519
|
|
|
32,065
|
|
Credit enhancement deposit
|
—
|
|
|
25,000
|
|
Financial guarantee liability
|
29,581
|
|
|
15
|
|
Total
|
$
|
436,952
|
|
|
$
|
376,834
|
|
(30) Compensation
Newmark’s Compensation Committee may grant various equity-based awards to employees of Newmark, including RSUs, restricted stock, limited partnership units and shares of Newmark Class A common stock upon exchange or redemption of Newmark limited partnership units (see Note 2 — “Limited Partnership Interests in Newmark Holdings and BGC Holdings”). On December 13, 2017, as part of the Separation, the Newmark Group, Inc. Long Term Incentive Plan (the “Newmark Equity Plan”) was approved by Newmark’s then sole stockholder, BGC, for Newmark to issue up to 400.0 million shares of Newmark Class A common stock, of which 65.0 million are registered, that may be delivered or cash-settled pursuant to awards granted during the life of the Newmark Equity Plan. As of December 31, 2020, awards with respect to 34.0 million shares have been granted and 366.0 million shares are available for future awards. Upon vesting of RSUs, issuance of restricted stock and exchange or redemption of limited partnership units, Newmark generally issues new shares of its Class A common stock.
Prior to the Separation, BGC’s Compensation Committee granted various equity-based awards to employees of Newmark, including RSUs, restricted stock, limited partnership units and exchange rights for shares of BGC Class A common stock upon exchange of BGC Holdings limited partnership units (see Note 2 — “Limited Partnership interests in Newmark Holdings and BGC Holdings”).
As a result of the Separation, limited partnership interests in Newmark Holdings were distributed to the holders of limited partnership interests in BGC Holdings. Each holder of BGC Holdings limited partnership interests at that time held a BGC Holdings limited partnership interest and 0.4545 of a corresponding Newmark Holdings limited partnership interest.
The exchange ratio is the number of shares of Newmark common stock that a holder will receive upon exchange of one Newmark Holdings exchangeable unit (the exchange ratio was initially one, but is subject to adjustment as set forth in the Separation and Distribution Agreement and was 0.9379 as of December 31, 2020).
Newmark incurred compensation expense related to Class A common stock, limited partnership units and RSUs held by Newmark employees as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Issuance of common stock and exchangeability expenses
|
|
|
|
|
$
|
69,041
|
|
|
$
|
181,714
|
|
|
$
|
179,333
|
|
Allocations of net income to limited partnership units and FPUs (1)
|
|
|
|
|
30,461
|
|
|
50,410
|
|
|
51,462
|
|
Limited partnership units amortization
|
|
|
|
|
18,692
|
|
|
21,508
|
|
|
(7,938)
|
|
RSU amortization
|
|
|
|
|
12,565
|
|
|
5,204
|
|
|
1,787
|
|
Equity-based compensation and allocations of net income to limited partnership units and FPUs
|
|
|
|
|
$
|
130,759
|
|
|
$
|
258,836
|
|
|
$
|
224,644
|
|
(1)Certain limited partnership units receive quarterly allocations of net income and are generally contingent upon services being provided by the unit holders, including the Preferred Distribution.
(a) Limited Partnership Units
A summary of the activity associated with limited partnership units held by Newmark employees is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Newmark Units
|
|
BGC Units
|
Balance, January 1, 2019
|
44,733,487
|
|
(1)
|
61,870,969
|
|
Issued
|
13,813,204
|
|
|
319,586
|
|
Redeemed/exchanged units
|
(2,487,885)
|
|
|
(3,938,134)
|
|
Forfeited units/other
|
4,742,046
|
|
|
(2,198,720)
|
|
Balance, December 31, 2019
|
60,800,852
|
|
|
56,053,701
|
|
Issued
|
12,569,298
|
|
|
1,071,612
|
|
Redeemed/exchanged units
|
(6,660,984)
|
|
|
(2,657,901)
|
|
Forfeited units/other
|
(82,981)
|
|
|
(45,410)
|
|
December 31, 2020
|
66,626,185
|
|
|
54,422,002
|
|
|
|
|
|
Total exchangeable units outstanding(2):
|
|
|
|
December 31, 2019
|
10,108,598
|
|
|
24,692,695
|
|
December 31, 2020
|
9,906,763
|
|
|
24,863,107
|
|
(1)Includes the pre-IPO Newmark employees share-equivalent limited partnership units in BGC Holdings.
(2)The Limited Partnership table above also includes partnership units issued for consideration for acquisitions. As of December 31, 2020, there were 5.3 million partnership units in Newmark Holdings outstanding, of which 2.0 million units were exchangeable, and 9.1 million partnership units in BGC Holdings outstanding, of which 4.5 million were exchangeable. As of December 31, 2019, there were 5.3 million partnership units in Newmark Holdings outstanding, of which 1.4 million units were exchangeable, and 9.5 million partnership units in BGC Holdings outstanding, of which 2.9 million were exchangeable.
The Limited Partnership Units table above includes both regular and Preferred Units. The Preferred Units are not entitled to participate in partnership distributions other than with respect to the Preferred Distribution (see Note 2 — “Limited Partnership Interests in BGC Holdings and Newmark Holdings” for further information on Preferred Units). Subsequent to the Spin-Off, there are remaining partners who hold limited partnership interests in Newmark Holdings who are BGC employees, and there are remaining partners who hold limited partnership interests in BGC Holdings who are Newmark employees. These limited partnership interests represent interests that were held prior to the Newmark IPO or were distributed in connection with the Separation. Following the Newmark IPO, employees of Newmark and BGC received limited partnership interests in Newmark Holdings and BGC Holdings, respectively. As a result of the Spin-Off, as the existing limited partnership interests in Newmark Holdings held by BGC employees and the existing limited partnership interests in BGC Holdings held by Newmark employees are exchanged/redeemed, the related capital can be contributed to and from Cantor, respectively. The compensation expenses under GAAP related to the limited partnership interests are based on the company where the partner is employed. Therefore, compensation expenses related to the limited partnership interests of both Newmark and BGC but held by a Newmark employee are recognized by Newmark. However, the Newmark Holdings limited partnership interests held by BGC employees are included in the Newmark share count and the BGC Holdings limited partnership interests held by Newmark employees are included in the BGC share count.
A summary of the BGC Holdings and Newmark Holdings limited partnership units held by Newmark employees is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Newmark
Units
|
|
BGC
Units
|
Regular units
|
62,157,822
|
|
|
52,833,075
|
|
Preferred Units
|
4,468,363
|
|
|
1,588,927
|
|
Balance, December 31, 2020
|
66,626,185
|
|
|
54,422,002
|
|
A summary of units held by Newmark employees redeemed in connection with the issuance of Newmark or BGC Class A common stock (at the current exchange ratio) or granted exchangeability for Newmark or BGC Class A common stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
BGC Units
|
|
|
|
|
315,685
|
|
|
620,903
|
|
|
18,325,470
|
|
Newmark Units
|
|
|
|
|
4,661,669
|
|
|
2,310,384
|
|
|
6,927,961
|
|
Total
|
|
|
|
|
4,977,354
|
|
|
2,931,287
|
|
|
25,253,431
|
|
Compensation expense related to the issuance of Newmark or BGC Class A common stock and grants of exchangeability on Newmark Holdings and BGC Holdings limited partnership units to Newmark employees is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Issuance of common stock and exchangeability expenses
|
|
|
|
|
$
|
36,458
|
|
|
$
|
35,499
|
|
|
$
|
142,333
|
|
Limited partnership units with a post-termination payout held by Newmark employees are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
Notional Value(1)
|
$
|
257,771
|
|
|
$
|
261,025
|
|
|
|
Estimated fair value of the post-termination payout(2)
|
$
|
68,682
|
|
|
$
|
58,149
|
|
|
|
Outstanding limited partnership units in BGC Holdings
|
4,873,040
|
|
|
6,251,816
|
|
|
|
Outstanding limited partnership units in BGC Holdings - unvested
|
837,822
|
|
|
1,508,510
|
|
|
|
Outstanding limited partnership units in Newmark Holdings
|
20,184,716
|
|
|
17,097,639
|
|
|
|
Outstanding limited partnership units in Newmark Holdings - unvested
|
9,778,078
|
|
|
9,357,822
|
|
|
|
(1)Beginning January 1, 2018, Newmark began granting stand-alone limited partnership units in Newmark Holdings to Newmark employees.
(2)Included in “Other long-term liabilities” on the accompanying consolidated balance sheets. Liability balance also includes $6.8 million of post-termination units issued as consideration for acquisition.
Compensation expense related to limited partnership units held by Newmark employees with a post-termination pay-out amount is recognized over the stated service period. These units generally vest between three and seven years from the date of grant. Newmark recognized compensation expense related to these limited partnership units that were not redeemed as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Limited partnership units amortization
|
|
|
|
|
$
|
18,692
|
|
|
$
|
21,508
|
|
|
$
|
(7,938)
|
|
During the year ended December 31, 2020, Newmark granted conversion rights to Newmark employees on 0.5 million outstanding limited partnership units in BGC Holdings and 5.3 million outstanding limited partnership units in Newmark Holdings. During the year ended December 31, 2019, Newmark granted conversion rights to Newmark employees on 4.9 million outstanding limited partnership units in BGC Holdings and 12.0 million outstanding limited partnership units in Newmark Holdings. Granting conversion rights gives the employee the option to convert the limited partnership units to HDUs with a capital balance within BGC Holdings or Newmark Holdings. Generally, HDUs are not considered share-equivalent limited partnership units and are not in the fully diluted share count. The grant of conversion rights to Newmark employees are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Notional Value
|
$
|
218,520
|
|
|
$
|
194,995
|
|
Estimated fair value of limited partnership units (1)
|
$
|
208,029
|
|
|
$
|
182,800
|
|
(1)Included in “Other long-term liabilities” on the accompanying consolidated balance sheets.
Compensation expense related to these limited partnership units held by Newmark employees was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Issuance of common stock and exchangeability expenses
|
|
|
|
|
$
|
32,583
|
|
|
$
|
146,215
|
|
|
$
|
37,000
|
|
During the year ended December 31, 2020 and December 31, 2019, Newmark employees were granted 5.0 million and 7.6 million N Units, respectively, that are excluded from the table above, since these units are not considered share-equivalent limited partnership units and are not included in the fully diluted share count. The N Units do not receive quarterly allocations of net income and remain unvested. Upon vesting, which occurs if the certain thresholds are met, the N Units are converted to
equivalent limited partnership units that receive quarterly certain income distributions and can be granted exchange rights or redeemed at a later date, at which time these N Units would be reflected as a share-equivalent grant in the tables above. During the year ended December 31, 2020, 3.3 million N Units vested and were converted into distribution earning limited partnership units and were therefore included in the fully diluted share count.
(b) Restricted Stock Units
A summary of the activity associated with Newmark and BGC RSUs held by Newmark employees is as follows (fair value amount in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Newmark RSUs(1)
|
|
BGC RSUs(2)
|
|
Restricted
Stock
Units
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
Fair
Value
Amount
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Restricted
Stock
Units
|
Weighted-
Average
Grant Date
Fair Value
Per Share
|
Fair
Value
Amount
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
Balance, January 1, 2019
|
219,887
|
|
$
|
13.52
|
|
$
|
2,973
|
|
2.28
|
|
168,675
|
|
$
|
9.77
|
|
$
|
1,619
|
|
0.98
|
Granted
|
4,766,611
|
|
7.42
|
|
35,344
|
|
|
|
—
|
|
—
|
|
—
|
|
|
Settled units (delivered shares)
|
(109,007)
|
|
11.70
|
|
(1,275)
|
|
|
|
(107,820)
|
|
9.38
|
|
(1,011)
|
|
|
Forfeited units
|
(193,920)
|
|
8.67
|
|
(1,681)
|
|
|
|
(14,048)
|
|
10.02
|
|
(141)
|
|
|
Balance, December 31, 2019
|
4,683,571
|
|
$
|
7.55
|
|
$
|
35,361
|
|
5.69
|
|
46,807
|
|
$
|
9.97
|
|
$
|
467
|
|
0.25
|
Granted
|
7,337,460
|
|
7.96
|
|
58,415
|
|
|
|
7,912
|
|
3.69
|
|
29
|
|
|
Settled units (delivered shares)
|
(1,151,507)
|
|
8.29
|
|
(9,549)
|
|
|
|
(45,544)
|
|
9.95
|
|
(453)
|
|
|
Forfeited units
|
(222,727)
|
|
7.78
|
|
(1,733)
|
|
|
|
(1,162)
|
|
10.64
|
|
(12)
|
|
|
Balance, December 31, 2020
|
10,646,797
|
|
$
|
7.75
|
|
$
|
82,494
|
|
5.69
|
|
8,013
|
|
$
|
3.80
|
|
$
|
31
|
|
2.17
|
(1)Beginning January 1, 2018, Newmark began granting stand-alone Newmark RSUs to Newmark employees with the awards vesting ratably over the two- to eight-year vesting period into shares of Newmark Class A common stock.
(2) RSUs granted to these individuals generally vest over a two to four year period.
The fair value of Newmark and BGC RSUs held by Newmark employees is determined on the date of grant based on the market value (adjusted if appropriate based upon the award’s eligibility to receive dividends), and is recognized, net of the effect of estimated forfeitures, ratably over the vesting period. Newmark uses historical data, including historical forfeitures and turnover rates, to estimate expected forfeiture rates for RSUs. Each RSU is settled for one share of BGC or Newmark Class A common stock, as applicable, upon completion of the vesting period.
Compensation expense related to Newmark and BGC RSUs are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
RSU amortization
|
|
|
|
|
$
|
12,565
|
|
|
$
|
5,204
|
|
|
$
|
1,787
|
|
As of December 31, 2020, there was $78.1 million total unrecognized compensation expense related to unvested Newmark RSUs.
(c) Deferred Compensation
The Company may pay certain bonuses in the form of deferred cash compensation awards, which generally vest over a future service period. The Company recognized compensation expense of $0.4 million, $0.8 million and $2.1 million, for the years ended December 31, 2020, 2019 and 2018, respectively for these deferred cash compensation awards. These expenses are recognized in "Personnel expenses" within the accompanying consolidated statements of operations. As of December 31, 2020, and 2019, the total liability for the deferred cash compensation awards was $1.3 million and $1.5 million, and is included in “Accounts payable and accrued expenses” in the accompanying consolidated balance sheets.
See Note 27 — "Related Party Transactions" for compensation related matters for the transfer of CCRE employees to Newmark.
(31) Commitments and Contingencies
(a)Contractual Obligations and Commitments
The following table summarizes certain of Newmark's contractual obligations at December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More than 5 Years
|
Operating leases (1)
|
|
|
|
|
$
|
329,334
|
|
|
$
|
45,701
|
|
|
$
|
82,579
|
|
|
$
|
74,386
|
|
|
$
|
126,668
|
|
Warehouse facilities(2)
|
|
|
|
|
1,061,202
|
|
|
1,061,202
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Long-term debt(3)
|
|
|
|
|
690,000
|
|
|
—
|
|
|
690,000
|
|
|
—
|
|
|
—
|
|
Interest in long-term debt(4)
|
|
|
|
|
102,503
|
|
|
36,339
|
|
|
66,164
|
|
|
—
|
|
|
—
|
|
Interest on warehouse facilities(5)
|
|
|
|
|
1,062
|
|
|
1,062
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
|
$
|
2,184,101
|
|
|
$
|
1,144,304
|
|
|
$
|
838,743
|
|
|
$
|
74,386
|
|
|
$
|
126,668
|
|
(1)Operating lease are related to rental payments under various non-cancelable leases principally for office space.
(2)Warehouse facilities are collateralized by $1,086.8 million of loans held for sale, at fair value (See Note 21 - “Warehouse Facilities Collateralized by U.S. Government Sponsored Enterprises” to our accompanying Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K) 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. The carrying amount of these notes was approximately $542.8 million. Long-term debt also includes the borrowings under the Credit Facility, which is assumed to be outstanding until the maturity date of the Credit Facility. The carrying amount of the borrowing under the Credit Facility is $137.6 million. (See Note 22 - “Long-Term Debt” to our accompanying Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.)
(4)Reflects interest on the $550.0 million 6.125% Senior Notes until their maturity date of November 15, 2023, in addition to the borrowings of $140.0 million assumed to be outstanding until the maturity date of the Credit Facility. Interest on the borrowings under the Credit Facility was projected using the 1-month LIBOR rate plus 175 basis points.
(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 140 basis points above LIBOR, applied to their respective outstanding balances as of December 31, 2020, through their respective maturity dates. Their respective maturity dates range from June 2021 to October 2021, while one line has an open maturity date. The notional amount of these committed and uncommitted warehouse facilities was $2.2 billion at December 31, 2020. One of the warehouse lines established a $125.0 million sublimit line of credit to fund potential principal and interest servicing advances on the Company's Fannie Mae portfolio during the forbearance period related to the CARES Act. Advances will have an interest rate of 1-month LIBOR plus 200 bps. There were no outstanding draws on this sublimit at December 31,2020. Another warehouse line was temporarily increased by $300.0 million to $900.0 million for the period December 1, 2020 to February 1 2021.
As of December 31, 2020 and 2019, Newmark was committed to fund approximately $0.4 billion and $1.5 billion, respectively, which is the total remaining draws on construction loans originated by Newmark under the 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.
(b) Contingent Payments Related to Acquisitions
Newmark completed acquisitions from 2015 through 2020 with contingent cash consideration of $18.8 million. The contingent equity instruments and cash liability is recorded at fair value in “Accounts payable, accrued expenses and other liabilities” on Newmark’s consolidated balance sheets.
(c) Contingencies
In the ordinary course of business, various legal actions are brought and are pending against Newmark and its subsidiaries in the U.S. and internationally. In some of these actions, substantial amounts are claimed. Newmark is also involved, from time to time, in reviews, examinations, investigations and proceedings by governmental and self-regulatory agencies (both formal and informal) regarding Newmark’s businesses, which may result in regulatory, civil and criminal judgments, settlements, fines, penalties, injunctions or other relief. The following generally does not include matters that Newmark has pending against other parties which, if successful, would result in awards in favor of Newmark or its subsidiaries:
Employment, Competitor-Related and Other Litigation
From time to time, Newmark and its subsidiaries are involved in litigation, claims and arbitration in the U.S. and internationally, relating to various employment matters, including with respect to termination of employment, hiring of employees currently or previously employed by competitors, terms and conditions of employment and other matters. In light of the competitive nature of the real estate services industry, litigation, claims and arbitration between competitors regarding employee hiring are not uncommon.
Legal reserves are established in accordance with U.S. GAAP guidance on Accounting for Contingencies, when a material legal liability is both probable and reasonably estimable. Once established, reserves are adjusted when there is more information available or when an event occurs requiring a change. The outcome of such items cannot be determined with certainty. Newmark is unable to estimate a possible loss or range of loss in connection with specific matters beyond its current accrual and any other amounts disclosed. Management believes that, based on currently available information, the final outcome of these current pending matters will not have a material adverse effect on Newmark’s consolidated financial statements and disclosures taken as a whole.
Risks and Uncertainties
Newmark generates revenues by providing financial intermediary and brokerage activities and commercial real estate services to institutional customers. Revenues for these services are transaction-based. As a result, revenues could vary based on the transaction volume of global financial and real estate markets. Additionally, financing is sensitive to interest rate fluctuations, which could have an impact on Newmark’s overall profitability.
(32) Subsequent Events
Newmark acquired Knotel's first lien debt in December of 2020. Newmark subsequently acquired Knotel's second lien debt in January of 2021. On January 31, 2021, Newmark agreed to provide approximately $20.0 million of debtor-in-possession financing to Knotel and to acquire the business as part of Knotel's Chapter 11 sales process, subject to approval of the U.S. Bankruptcy Court.
On February 17, 2021, Newmark's Board increased our share repurchase authorization to $400 million.
On February 17, 2021, Newmark declared a qualified quarterly dividend of $0.01 per share payable on March 26, 2021 to Class A and Class B common stockholders of record as of March 10, 2021. The ex-dividend date will be March 9, 2021.