Newmark Retains all Upside to Expected Nasdaq Earn-out
Eliminates Downside Risk for Anticipated 2019 and 2020 Payments
Newmark to Receive Net Cash Proceeds of Approximately $153 million
Strengthens both Companies' Credit Metrics
NEW YORK, June 20, 2018 /PRNewswire/ -- Newmark Group,
Inc. (NASDAQ: NMRK) ("Newmark" or "Newmark Group"), a leading full-service commercial real estate services business, and its
parent company BGC Partners, Inc. (NASDAQ: BGCP) ("BGC Partners" or "BGC"), a leading global brokerage company servicing the
financial and real estate markets, today announced that Newmark entered into transactions related to the monetization of the
shares of Nasdaq1 it expects to receive in 2019 and 2020 ("the monetization").
Details of the Transactions
On June 18, 2018, Newmark's principal operating subsidiary issued approximately
$175 million of exchangeable preferred limited partnership units ("EPUs") in a private transaction
to The Royal Bank of Canada ("RBC"). Contemporaneously with the issuance of these EPUs, a newly
formed special purpose vehicle, (the "SPV") entered into two variable postpaid forward transactions (together, the "Forward")
with RBC. The SPV is an indirect subsidiary of Newmark whose sole asset is the Nasdaq share earn-outs for 2019 and 2020. RBC has
rights to receive up to 992,247 shares of Nasdaq common stock in each of the fourth quarters of 2019 and 2020. The Forward is
economically similar to at-the-money put options struck at Nasdaq's June 18, 2018 closing price of
$94.21, and provides Newmark with downside protection on the shares while allowing Newmark to
retain all appreciation related to the 2019 and 2020 Nasdaq share earn-outs.
Net of transaction costs, Newmark will receive approximately $153 million of net proceeds and
non-dilutive equity on its balance sheet from the monetization in the second quarter of 2018. Newmark intends to use the net
proceeds from the monetization to repay a portion of the $400 million Converted Term
Loan2 maturing September 8, 2019. After this repayment, approximately $247 million of the Converted Term Loan will remain outstanding. Approximately $153
million will also become available to be drawn upon under BGC's revolving credit facility. The monetization had no impact
on the $93.5 million Nasdaq payment expected to be recognized in the third quarter of 2018. Newmark
retains the flexibility to monetize some or all of the anticipated more than $650 million worth of
remaining seven Nasdaq payments from 2021 through 2027.
Management Commentary
"By monetizing these expected Nasdaq payments, Newmark and BGC have strengthened their balance sheets, improved their
financial flexibility and improved their credit metrics", said Howard W. Lutnick, Chairman of the
Board and Chief Executive Officer of BGC and Chairman of Newmark. "Newmark also now expects to be in an even stronger position
with respect to obtaining an investment grade rating, and repaying and/or refinancing Newmark's debt owed to or guaranteed by
BGC. We therefore believe that the monetization moves us closer to completing the planned spin-off3 of Newmark.
Furthermore, over time, both BGC and Newmark expect their stronger balance sheets to enhance their ability to invest and grow
their businesses."
Barry M. Gosin, Chief Executive Officer of Newmark, added: "We think that this monetization has
created immediate value for Newmark's investors. While protecting ourselves from any downward price movements related to the
shares included in the transactions, Newmark maintains all potential upside from any appreciation in Nasdaq's stock price. We
believe that the monetization has enhanced Newmark's capital position and will increase Newmark's financial flexibility following
its full separation from BGC."
Improved Credit Metrics 4
As a result of the debt repayment, both BGC's consolidated and Newmark's stand-alone long-term debt will be reduced by
approximately $153 million. The current interest rate on the $400
million Converted Term Loan is 4.30725 percent. The leverage ratios for BGC on a consolidated basis and for Newmark
stand-alone will therefore improve.5
Impact on Financial Results
The issuance of the EPUs to RBC are not expected to have any impact on Newmark's fully diluted share
count.6 Newmark continues to expect to record income and any tax obligation related to the receipt of the Nasdaq
shares in the third quarter of each year for GAAP earnings, Adjusted Earnings, and Adjusted EBITDA. BGC's consolidated results
will include those of Newmark unless and until the proposed spin-off is completed. Both companies have amended their definitions
of Adjusted Earnings to exclude the impact of any unrealized non-cash mark-to-market gains or losses on "other income (loss)"
related to the Nasdaq Forward. The outlooks for both companies discussed below factor in these amendments.
Update to Outlooks
Newmark today reaffirmed the entirety of its outlook for the full year 2018 as contained in Newmark's financial
results press release issued on May 3, 2018. This press release can be found at http://ir.ngkf.com. Newmark's reiterated annual guidance includes the full impact
of the items discussed in this document.
BGC expects its results to be around the high end of its previously stated consolidated outlook for revenues and Adjusted
Earnings for the second quarter of 2018. This outlook was contained in BGC's financial results press release issued on
May 3, 2018, which can be found at http://ir.bgcpartners.com. BGC's updated quarterly guidance includes the full impact of the items discussed in
this document.
Additional Information on Monetization of Nasdaq Shares Expected to be Available
For more information on the monetization of the Nasdaq shares, please see Newmark's and BGC's Securities and Exchange
Commission filings on Form 8-K, which are expected to be filed shortly, as well as the section about the monetization of the
Nasdaq shares contained in BGC's 2018 Annual Meeting Investor presentation to be delivered and webcast on June 20, 2018, all of which are expected to be available at http://ir.bgcpartners.com and http://ir.ngkf.com.
BGC's Non-GAAP Definitions
Please see BGC's financial results press release issued on May 3, 2018, including the
sections titled "Adjusted Earnings Defined", "Differences between Consolidated Results for Adjusted Earnings and GAAP",
"Reconciliation of GAAP income (loss) to Adjusted Earnings", "Adjusted EBITDA Defined", "Adjusted EBITDA before allocations to
units", and "Reconciliation of GAAP Income (Loss) to Adjusted EBITDA" for more information on these non-GAAP terms and how, when
and why management uses them, as well as for the differences between results under GAAP and these non-GAAP items for the periods
discussed therein. This press release can be found at http://ir.bgcpartners.com. The Adjusted Earnings definition has been amended below with respect to the
Forward.
BGC's Adjusted Earnings Defined
BGC Partners uses non-GAAP financial measures including, but not limited to, "pre-tax Adjusted Earnings" and "post-tax
Adjusted Earnings," which are supplemental measures of operating results that are used by management to evaluate the financial
performance of the Company and its consolidated subsidiaries. BGC believes that Adjusted Earnings best reflect the operating
earnings generated by the Company on a consolidated basis and are the earnings which management considers when managing its
business.
As compared with "income (loss) from operations before income taxes", and "net income (loss) per fully diluted share", all
prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain non-cash items and other expenses that
generally do not involve the receipt or outlay of cash by the Company and/or which do not dilute existing stockholders, as
described below. In addition, Adjusted Earnings calculations exclude certain gains and charges that management believes do not
best reflect the ordinary results of BGC.
Adjustments Made to Calculate BGC's Pre-Tax Adjusted Earnings
BGC defines pre-tax Adjusted Earnings as GAAP income (loss) from operations before income taxes and noncontrolling
interest in subsidiaries, excluding items such as:
- The impact of any unrealized non-cash mark-to-market gains or losses on "other income (loss)" related to the variable share
forward agreement with respect to Newmark's expected receipt of the Nasdaq payments in 2019 and 2020 (the "Nasdaq
Forward");
- Non-cash asset impairment charges, if any;
- Allocations of net income to limited partnership units;
- Non-cash charges related to the amortization of intangibles with respect to acquisitions; and
- Non-cash charges relating to grants of exchangeability to limited partnership units that reflect the value of the shares of
common stock into which the unit is exchangeable when the unit holder is granted exchangeability not previously expensed in
accordance with GAAP.
Virtually all of BGC's key executives and producers have partnership or equity stakes in the Company and receive deferred
equity or limited partnership units as part of their compensation. A significant percentage of the Company's fully diluted shares
are owned by its executives, partners and employees. The Company issues limited partnership units and grant exchangeability to
unit holders to provide liquidity to its employees, to align the interests of its employees and management with those of common
stockholders, to help motivate and retain key employees, and to encourage a collaborative culture that drives cross-selling and
revenue growth.
When the Company issues limited partnership units, the shares of common stock into which the units can be ultimately exchanged
are included in BGC's fully diluted share count for Adjusted Earnings at the beginning of the subsequent quarter after the date
of grant. BGC includes such shares in the Company's fully diluted share count when the unit is granted because the unit holder is
expected to be paid a pro-rata distribution based on BGC's calculation of Adjusted Earnings per fully diluted share and because
the holder could be granted the ability to exchange their units into shares of common stock in the future. Non-cash charges with
respect to grants of exchangeability reflect the value of the shares of common stock into which the unit is exchangeable when the
unit holder is granted exchangeability not previously expensed in accordance with GAAP. The amount of non-cash charges relating
to grants of exchangeability the Company uses to calculate pre-tax Adjusted Earnings on a quarterly basis is based upon the
Company's estimate of expected grants of exchangeability to limited partnership units during the annual period, as described
further below under "Adjustments Made to Calculate Post-Tax Adjusted Earnings."
Adjusted Earnings also excludes non-cash GAAP gains attributable to originated mortgage servicing rights (which Newmark refer
to as "OMSRs") and non-cash GAAP amortization of mortgage servicing rights (which the Company refers to as "MSRs"). Under GAAP,
the Company recognizes OMSRs gains equal to the fair value of servicing rights retained on mortgage loans originated and sold.
Subsequent to the initial recognition at fair value, MSRs are carried at the lower of amortized cost or fair value and amortized
in proportion to the net servicing revenue expected to be earned. However, it is expected that any cash received with respect to
these servicing rights, net of associated expenses, will increase Adjusted Earnings (and Adjusted EBITDA) in future periods.
Additionally, Adjusted Earnings calculations exclude certain unusual, one-time, non-ordinary or non-recurring items, if any.
These items are excluded from Adjusted Earnings because the Company views excluding such items as a better reflection of the
ongoing operations of BGC. BGC's definition of Adjusted Earnings also excludes certain gains and charges with respect to
acquisitions, dispositions, or resolutions of litigation. Management believes that excluding such gains and charges also best
reflects the ongoing performance of BGC.
Adjustments Made to Calculate BGC's Post-Tax Adjusted Earnings
Because Adjusted Earnings are calculated on a pre-tax basis, BGC also intends to report post-tax Adjusted Earnings on
a consolidated basis. The Company defines post-tax Adjusted Earnings as pre-tax Adjusted Earnings reduced by the non-GAAP tax
provision described below and Adjusted Earnings attributable to noncontrolling interest in subsidiaries.
The Company calculates its tax provision for post-tax Adjusted Earnings using an annual estimate similar to how it accounts
for its income tax provision under GAAP. To calculate the quarterly tax provision under GAAP, BGC estimates its full fiscal year
GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries and the expected inclusions
and deductions for income tax purposes, including expected grants of exchangeability to limited partnership units during the
annual period. The resulting annualized tax rate is applied to BGC's quarterly GAAP income (loss) from operations before income
taxes and noncontrolling interests in subsidiaries. At the end of the annual period, the Company updates its estimate to reflect
the actual tax amounts owed for the period.
To determine the non-GAAP tax provision, BGC first adjusts pre-tax Adjusted Earnings by recognizing any, and only, amounts for
which a tax deduction applies under applicable law. The amounts include non-cash charges with respect to grants of
exchangeability; certain charges related to employee loan forgiveness; certain net operating loss carryforwards when taken for
statutory purposes; certain charges related to tax goodwill amortization; and deductions with respect to charitable
contributions. These adjustments may also reflect timing and measurement differences, including treatment of employee loans,
changes in the value of units between the dates of grants of exchangeability and the date of actual unit exchange, variations in
the value of certain deferred tax assets and liabilities and the different timing of permitted deductions for tax under GAAP and
statutory tax requirements.
After application of these previously described adjustments, the result is the Company's taxable income for its pre-tax
Adjusted Earnings, to which BGC then applies the statutory tax rates. This amount is the Company's non-GAAP tax provision. BGC
views the effective tax rate on pre-tax Adjusted Earnings as equal to the amount of its non-GAAP tax provision divided by the
amount of pre-tax Adjusted Earnings.
Generally, the most significant factor affecting this non-GAAP tax provision is the amount of non-cash charges relating to the
grants of exchangeability to limited partnership units. Because the non-cash charges relating to the grants of exchangeability
are deductible in accordance with applicable tax laws, increases in exchangeability have the effect of lowering the Company's
non-GAAP effective tax rate and thereby increasing its post-tax Adjusted Earnings.
Management uses post-tax Adjusted Earnings in part to help it evaluate, among other things, the overall performance of the
business, to make decisions with respect to the Company's operations, and to determine the amount of dividends payable to common
stockholders and distributions payable to holders of limited partnership units.
BGC incurs income tax expenses based on the location, legal structure and jurisdictional taxing authorities of each of its
subsidiaries. Certain of the Company's entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax
("UBT") in New York City. Any U.S. federal and state income tax liability or benefit related to
the partnership income or loss, with the exception of UBT, rests with the unit holders rather than with the partnership entity.
The Company's consolidated financial statements include U.S. federal, state and local income taxes on the Company's allocable
share of the U.S. results of operations. Outside of the U.S., BGC operates principally through subsidiary corporations subject to
local income taxes. For these reasons, taxes for Adjusted Earnings are expected to be presented to show the tax provision the
consolidated Company would expect to pay if 100 percent of earnings were taxed at global corporate rates.
Adjusted Earnings Attributable to BGC's Noncontrolling Interest in Subsidiaries
Adjusted Earnings attributable to noncontrolling interest in subsidiaries is calculated based on the relevant
noncontrolling interest existing on the balance sheet date. Until the proposed spin-off of Newmark occurs, noncontrolling
interest will reflect the allocation of income to Newmark's public shareholders and the pro-rata ownership of certain shares
and/or units of BGC and Newmark.
Calculations of BGC's Pre-Tax and Post-Tax Adjusted Earnings per Common Share
BGC's Adjusted Earnings per common share calculations assume either that:
- The fully diluted share count includes the shares related to any dilutive instruments, but excludes the associated expense,
net of tax, when the impact would be dilutive; or
- The fully diluted share count excludes the shares related to these instruments, but includes the associated expense, net of
tax.
The share count for Adjusted Earnings excludes certain shares expected to be issued in future periods but not yet eligible to
receive dividends and/or distributions. Each quarter, the dividend payable to BGC's common stockholders, if any, is expected to
be determined by the Company's Board of Directors with reference to a number of factors, including post-tax Adjusted Earnings per
common share. BGC may also pay a pro-rata distribution of net income to limited partnership units, as well as to Cantor for its
noncontrolling interest. The amount of this net income, and therefore of these payments per unit, would be determined using the
above definition of post-tax Adjusted Earnings per common share.
The declaration, payment, timing and amount of any future dividends payable by the Company will be at the discretion of its
board of directors.
Other Matters with Respect to BGC's Adjusted Earnings
The term "Adjusted Earnings" should not be considered in isolation or as an alternative to GAAP net income (loss). The
Company views Adjusted Earnings as a metric that is not indicative of liquidity or the cash available to fund its operations, but
rather as a performance measure. Pre- and post-tax Adjusted Earnings, as well as related measures, are not intended to replace
the Company's presentation of its GAAP financial results. However, management believes that these measures help provide investors
with a clearer understanding of BGC's financial performance and offer useful information to both management and investors
regarding certain financial and business trends related to the Company's financial condition and results of operations.
Management believes that Adjusted Earnings measures and the GAAP measures of financial performance should be considered
together.
BGC anticipates providing forward-looking guidance for GAAP revenues and for certain Adjusted Earnings measures from time to
time. However, the Company does not anticipate providing an outlook for other GAAP results. This is because certain GAAP items,
which are excluded from Adjusted Earnings, are difficult to forecast with precision before the end of each period. The Company
therefore believes that it is not possible to forecast GAAP results or to quantitatively reconcile GAAP results to non-GAAP
results with sufficient precision unless BGC makes unreasonable efforts. The items that are difficult to predict on a quarterly
basis with precision and which can have a material impact on the Company's GAAP results include, but are not limited, to the
following:
- Allocations of net income and grants of exchangeability to limited partnership units, which are determined at the
discretion of management throughout and up to the period-end;
- The impact of certain marketable securities, as well as any gains or losses related to associated mark-to- market movements
and/or hedging, including with respect to the Nasdaq Forward. These items are calculated using period-end closing prices;
- Non-cash asset impairment charges, which are calculated and analyzed based on the period-end values of the underlying
assets. These amounts may not be known until after period-end; and
- Acquisitions, dispositions and/or resolutions of litigation, which are fluid and unpredictable in nature.
See the sections of this document titled "Reconciliation of GAAP income (loss) to Adjusted Earnings" and "Differences between
Consolidated Results for Adjusted Earnings and GAAP" for more information on BGC's non-GAAP results.
BGC's Adjusted EBITDA and Adjusted EBITDA Before Allocations to Units Defined
BGC also provides an additional non-GAAP financial performance measure, "Adjusted EBITDA", which it defines as GAAP
"Net income (loss) available to common stockholders", adjusted to add back the following items:
- Interest expense;
- Fixed asset depreciation and intangible asset amortization;
- Impairment charges;
- Employee loan amortization and reserves on employee loans;
- Provision (benefit) for income taxes;
- Net income (loss) attributable to noncontrolling interest in subsidiaries;
- Non-cash charges relating to grants of exchangeability to limited partnership interests;
- Non-cash charges related to issuance of restricted shares;
- Non-cash earnings or losses related to BGC's equity investments; and
- Net non-cash GAAP gains related to OMSR gains and MSR amortization.
The Company also discloses "Adjusted EBITDA before allocations to units", which is Adjusted EBITDA excluding GAAP charges with
respect to allocations of net income to limited partnership units. Such allocations represent the pro-rata portion of pre-tax
earnings available to such unit holders. These units are in the fully diluted share count, and are exchangeable on a one-to-one
basis into common stock. As these units are exchanged into common shares, unit holders become entitled to cash dividends rather
than cash distributions. The Company views such allocations as intellectually similar to dividends on common shares. Because
dividends paid to common shares are not an expense under GAAP, management believes similar allocations of income to unit holders
should also be excluded by investors when analyzing BGC's results on a fully diluted share basis with respect to Adjusted
EBITDA.
The Company's management believes that these Adjusted EBITDA measures are useful in evaluating BGC's operating performance,
because the calculation of this measure generally eliminates the effects of financing and income taxes and the accounting effects
of capital spending and acquisitions, which would include impairment charges of goodwill and intangibles created from
acquisitions. Such items may vary for different companies for reasons unrelated to overall operating performance. As a result,
the Company's management uses these measures to evaluate operating performance and for other discretionary purposes. BGC believes
that Adjusted EBITDA is useful to investors to assist them in getting a more complete picture of the Company's financial results
and operations.
Since these Adjusted EBITDA measures are not recognized measurements under GAAP, investors should use these measures in
addition to GAAP measures of net income when analyzing BGC's operating performance. Because not all companies use identical
EBITDA calculations, the Company's presentation of these Adjusted EBITDA measures are may not be comparable to similarly titled
measures of other companies. Furthermore, these Adjusted EBITDA measures are not intended to be a measure of free cash flow or
GAAP cash flow from operations, because these Adjusted EBITDA measures do not consider certain cash requirements, such as tax and
debt service payments.
Newmark's Non-GAAP Definitions
Please see Newmark's financial results press release issued on May 3, 2018, including
the sections titled "Adjusted Earnings Defined", "Differences between Consolidated Results for Adjusted Earnings and GAAP",
"Reconciliation of GAAP income (loss) to adjusted earnings", "Adjusted EBITDA and Adjusted EBITDA Before Allocations to Units
Defined", and "Reconciliation of GAAP Income (Loss) to Adjusted EBITDA" for more information these non-GAAP terms and how, when
and why management uses them, as well as for the differences between results under GAAP and these non-GAAP items for the periods
discussed therein. This press release can be found at http://ir.ngkf.com. The Adjusted Earnings definition has been amended below with respect to the Nasdaq
Forward.
Newmark's Adjusted Earnings Defined
Newmark uses non-GAAP financial measures including, but not limited to, "pre-tax Adjusted Earnings" and "post-tax
Adjusted Earnings," which are supplemental measures of operating results that are used by management to evaluate the financial
performance of the Company and its consolidated subsidiaries. Newmark believes that Adjusted Earnings best reflect the operating
earnings generated by the Company on a consolidated basis and are the earnings which management considers available for, among
other things, dividends and/or distributions to Newmark's common stockholders and holders of Newmark Holdings partnership units
during any period.
As compared with items such as "Income (loss) before income taxes and noncontrolling interests" and "Net income (loss) for
fully diluted shares" all prepared in accordance with GAAP, Adjusted Earnings calculations primarily exclude certain non-cash
compensation and other expenses that generally do not involve the receipt or outlay of cash by the Company and/or which do not
dilute existing stockholders, as described below. In addition, Adjusted Earnings calculations exclude certain gains and charges
that management believes do not best reflect the ordinary operating results of Newmark.
Adjustments Made to Calculate Newmark's Pre-Tax Adjusted Earnings
Newmark defines pre-tax Adjusted Earnings as GAAP income (loss) from operations before income taxes and noncontrolling
interest in subsidiaries, excluding certain items such as:
- The impact of any unrealized non-cash mark-to-market gains or losses on "other income (loss)" related to the variable share
forward agreement with respect to Newmark's expected receipt of the Nasdaq payments in 2019 and 2020;
- Non-cash asset impairment charges, if any;
- Allocations of net income to limited partnership units;
- Non-cash charges related to the amortization of intangibles with respect to acquisitions;
- Non-cash charges relating to grants of exchangeability to limited partnership units.
Virtually all of the Company's key executives and producers have partnership or equity stakes in the Company and receive
deferred equity or limited partnership units as part of their compensation. A significant percentage of Newmark's fully diluted
shares are owned by the Company's executives, partners and employees. The Company issues limited partnership units and grants
exchangeability to unit holders to provide liquidity to Newmark's employees, to align the interests of the Company's employees
and management with those of common stockholders, to help motivate and retain key employees, and to encourage a collaborative
culture that drives cross-selling and revenue growth.
When the Company issues limited partnership units, the shares of common stock into which the units can be ultimately exchanged
are included in Newmark's fully diluted share count for Adjusted Earnings at the beginning of the subsequent quarter after the
date of grant. Newmark includes such shares in the Company's fully diluted share count when the unit is granted because the unit
holder is expected to be paid a pro-rata distribution based on Newmark's calculation of Adjusted Earnings per fully diluted share
and because the holder could be granted the ability to exchange their units into shares of common stock in the future. Non-cash
charges with respect to grants of exchangeability reflect the value of the shares of common stock into which the unit is
exchangeable when the unit holder is granted exchangeability not previously expensed in accordance with GAAP. The amount of
non-cash charges relating to grants of exchangeability the Company uses to calculate pre-tax Adjusted Earnings on a quarterly
basis is based upon the Company's estimate of expected grants of exchangeability to limited partnership units during the annual
period, as described further below under "Adjustments Made to Calculate Post-Tax Adjusted Earnings."
Adjusted Earnings also excludes non-cash GAAP gains attributable to originated mortgage servicing rights (which Newmark refer
to as "OMSRs") and non-cash GAAP amortization of mortgage servicing rights (which the Company refers to as "MSRs"). Under GAAP,
the Company recognizes OMSRs gains equal to the fair value of servicing rights retained on mortgage loans originated and sold.
Subsequent to the initial recognition at fair value, MSRs are carried at the lower of amortized cost or fair value and amortized
in proportion to the net servicing revenue expected to be earned. However, it is expected that any cash received with respect to
these servicing rights, net of associated expenses, will increase Adjusted Earnings (and Adjusted EBITDA) in future periods.
Additionally, Adjusted Earnings calculations exclude certain unusual, one-time or non-recurring items, if any. These items are
excluded from Adjusted Earnings because the Company views excluding such items as a better reflection of the ongoing, ordinary
operations of Newmark. Newmark's definition of Adjusted Earnings also excludes certain gains and charges with respect to
acquisitions, dispositions, or resolutions of litigation. Management believes that excluding such gains and charges also best
reflects the ongoing operating performance of Newmark.
Adjustments Made to Calculate Newmark's Post-Tax Adjusted Earnings
Because Adjusted Earnings are calculated on a pre-tax basis, Newmark also intends to report post-tax Adjusted Earnings
to fully diluted stockholders. Newmark defines post-tax Adjusted Earnings to fully diluted stockholders as pre-tax Adjusted
Earnings reduced by the non-GAAP tax provision described below.
The Company calculates its tax provision for post-tax Adjusted Earnings using an annual estimate similar to how it accounts
for its income tax provision under GAAP. To calculate the quarterly tax provision under GAAP, Newmark estimates its full fiscal
year GAAP income (loss) from operations before income taxes and noncontrolling interests in subsidiaries and the expected
inclusions and deductions for income tax purposes, including expected grants of exchangeability to limited partnership units
during the annual period. The resulting annualized tax rate is applied to Newmark's quarterly GAAP income (loss) from operations
before income taxes and noncontrolling interests in subsidiaries. At the end of the annual period, the Company updates its
estimate to reflect the actual tax amounts owed for the period.
To determine the non-GAAP tax provision, Newmark first adjusts pre-tax Adjusted Earnings by recognizing any, and only, amounts
for which a tax deduction applies under applicable law. The amounts include non-cash charges with respect to grants of
exchangeability, certain charges related to employee loan forgiveness, certain net operating loss carryforwards when taken for
statutory purposes, and certain charges related to tax goodwill amortization. These adjustments may also reflect timing and
measurement differences, including treatment of employee loans, changes in the value of units between the dates of grants of
exchangeability and the date of actual unit exchange, variations in the value of certain deferred tax assets and liabilities and
the different timing of permitted deductions for tax under GAAP and statutory tax requirements.
After application of these previously described adjustments, the result is the Company's taxable income for Newmark's pre-tax
Adjusted Earnings, to which the Company then applies the statutory tax rates. This amount is the Company's non-GAAP tax
provision. Newmark views the effective tax rate on pre-tax Adjusted Earnings as equal to the amount of Newmark's non-GAAP tax
provision divided by the amount of pre-tax Adjusted Earnings.
Generally, the most significant factor affecting this non-GAAP tax provision is the amount of non-cash charges relating to the
grants of exchangeability to limited partnership units. Because the non-cash charges relating to the grants of exchangeability
are deductible in accordance with applicable tax laws, increases in exchangeability have the effect of lowering the Company's
non-GAAP effective tax rate and thereby increasing Newmark's post-tax Adjusted Earnings.
Management uses post-tax Adjusted Earnings in part to help it evaluate, among other things, the overall performance of the
business, to make decisions with respect to the Company's operations, and to determine the amount of dividends payable to common
stockholders and distributions payable to holders of limited partnership units.
Newmark incurs income tax expenses based on the location, legal structure and jurisdictional taxing authorities of each of its
subsidiaries. Certain of the Company's entities are taxed as U.S. partnerships and are subject to the Unincorporated Business Tax
("UBT") in New York City. Any U.S. federal and state income tax liability or benefit related to
the partnership income or loss, with the exception of UBT, rests with the unit holders rather than with the partnership entity.
The Company's consolidated financial statements include U.S. federal, state and local income taxes on the Company's allocable
share of the U.S. results of operations. Outside of the U.S., Newmark is expected to operate principally through subsidiary
corporations subject to local income taxes. For these reasons, taxes for Adjusted Earnings are expected to be presented to show
the tax provision the consolidated Company would expect to pay if 100 percent of earnings were taxed at global corporate
rates.
Calculations of Newmark's Pre-Tax and Post-Tax Adjusted Earnings per Share
Newmark's Adjusted Earnings per share calculations assume either that:
- The fully diluted share count includes the shares related to any dilutive instruments, but excludes the associated interest
expense, net of tax, when the impact would be dilutive; or
- The fully diluted share count excludes the shares related to these instruments, but includes the associated interest
expense, net of tax.
The share count for Adjusted Earnings excludes certain shares expected to be issued in future periods but not yet eligible to
receive dividends and/or distributions. Each quarter, the dividend payable to Newmark's common stockholders, if any, is expected
to be determined by the Company's Board of Directors with reference to a number of factors, including post-tax Adjusted Earnings
per fully diluted share. Newmark may also pay a pro-rata distribution of net income to limited partnership units, as well as to
Cantor for its noncontrolling interest. The amount of this net income, and therefore of these payments per unit, would be
determined using the above definition of pre-tax Adjusted Earnings using the fully diluted share count. The declaration,
payment, timing and amount of any future dividends payable by the Company will be at the discretion of its board of directors
using the fully diluted share count.
Other Matters with Respect to Newmark's Adjusted Earnings
The term "Adjusted Earnings" should not be considered in isolation or as an alternative to GAAP net income (loss). The
Company views Adjusted Earnings as a metric that is not indicative of liquidity or the cash available to fund its operations, but
rather as a performance measure. Pre- and post-tax Adjusted Earnings are not intended to replace the Company's presentation of
its GAAP financial results. However, management believes that these measures help provide investors with a clearer understanding
of Newmark's financial performance and offer useful information to both management and investors regarding certain financial and
business trends related to the Company's financial condition and results of operations. Management believes that Adjusted
Earnings measures and the GAAP measures of financial performance should be considered together.
Newmark anticipates providing forward-looking guidance for GAAP revenues and for certain Adjusted Earnings measures from time
to time. However, the Company does not anticipate providing an outlook for GAAP results other than revenue. This is because
certain GAAP items, which are excluded from Adjusted Earnings, are difficult to forecast with precision before the end of each
period. The Company therefore believes that it is not possible to forecast GAAP results or to quantitatively reconcile GAAP
results to non-GAAP results with sufficient precision unless Newmark makes unreasonable efforts. The items that are difficult to
predict on a quarterly basis with precision and which can have a material impact on the Company's GAAP results include, but are
not limited, to the following:
- Allocations of net income and grants of exchangeability to limited partnership units, which are determined at the
discretion of management throughout and up to the period-end;
- The impact of certain marketable securities, as well as any gains or losses related to associated mark-to- market movements
and/or hedging including with respect to the Nasdaq Forward. These items are calculated using period-end closing prices;
- Non-cash asset impairment charges, which are calculated and analyzed based on the period-end values of the underlying
assets. These amounts may not be known until after period-end; and
- Acquisitions, dispositions and/or resolutions of litigation, which are fluid and unpredictable in nature.
Newmark's Adjusted EBITDA and Adjusted EBITDA Before Allocations to Units Defined
Newmark provides a non-GAAP financial performance measure, "Adjusted EBITDA," which the Company defines as "Net income
(loss) for fully diluted shares" derived in accordance with GAAP and adjusted for the addition of the following items (the last
two items of which are discussed further in section of this documents called "Adjustments Made to Calculate Pre-Tax Adjusted
Earnings.")
- Provision (benefit) for income taxes;
- Net income (loss) attributable to noncontrolling interest;
- Employee loan amortization and reserves on employee loans;
- Interest expense;
- Fixed asset depreciation and intangible asset amortization;
- Non-cash charges relating to grants of exchangeability to limited partnership units;
- Other non-cash charges related to equity-based compensation;
- Other non-cash income (loss); and
- Net non-cash GAAP gains related to OMSRs and MSRs amortization.
The Company also discloses "Adjusted EBITDA before allocations to units," which is Adjusted EBITDA excluding GAAP charges with
respect to allocations of net income to limited partnership units. Such allocations represent the pro-rata portion of pre-tax
earnings available to such unit holders. These units are included in the fully-diluted share count, and are exchangeable on a
one-to-one basis, subject to certain adjustments, into shares of Newmark's Class A common stock. As these units are
exchanged into shares of the Company's Class A common stock, unit holders will become entitled to cash dividends paid on the
shares of the Class A common stock rather than cash distributions in respect of the units. The Company views such
allocations as economically equivalent to dividends on common shares. Because dividends paid to common shares are not an expense
under GAAP, management believes similar allocations of income to unit holders should also be excluded by investors when analyzing
Newmark's results on a fully-diluted basis with respect to Adjusted EBITDA.
The Company's management believes that these Adjusted EBITDA measures are useful in evaluating Newmark's operating
performance, because the calculations of these measures generally eliminate the effects of financing and income taxes and the
accounting effects of capital spending and acquisitions, which would include impairment charges of goodwill and intangibles
created from acquisitions. Such items may vary for different companies for reasons unrelated to overall operating performance. As
a result, the Company's management uses these measures to evaluate operating performance and for other discretionary purposes.
Newmark believes that these Adjusted EBITDA measures are useful to investors to assist them in achieving a more complete picture
of the Company's financial condition and results of operations.
Because these Adjusted EBITDA measures are not recognized measurements under GAAP, investors should use these measures in
addition to "Net income (loss) for fully diluted shares" when analyzing Newmark's operating performance. Because not all
companies use identical Adjusted EBITDA calculations, the Company's presentation of these Adjusted EBITDA measures may not be
comparable to similarly-titled measures of other companies. Furthermore, these Adjusted EBITDA measures are not intended to be
measures of free cash flow or GAAP cash flow from operations, because these Adjusted EBITDA measures do not consider certain cash
requirements, such as tax and debt service payments.
About BGC Partners, Inc.
BGC Partners is a leading global brokerage company servicing the financial and real estate markets. BGC offers Real
Estate Services through its publicly traded subsidiary Newmark Group, Inc. BGC owns GFI Group Inc., a leading intermediary and
provider of trading technologies and support services to the global OTC and listed markets. BGC's Financial Services offerings
include fixed income securities, interest rate swaps, foreign exchange, equities, equity derivatives, credit derivatives,
commodities, futures, and structured products. BGC provides a wide range of services, including trade execution, broker-dealer
services, clearing, trade compression, post trade, information, and other services to a broad range of financial and
non-financial institutions. Through brands including Fenics, BGC Trader, Capitalab, Lucera, and Fenics Market Data, BGC offers
financial technology solutions, market data, and analytics related to numerous financial instruments and markets. BGC, BGC
Trader, GFI, Fenics, Fenics Market Data, Capitalab, and Lucera are trademarks/service marks and/or registered trademarks/service
marks of BGC Partners, Inc. and/or its affiliates.
BGC's customers include many of the world's largest banks, broker-dealers, investment banks, trading firms, hedge funds,
governments, corporations, property owners, real estate developers, and investment firms. BGC's common stock trades on the NASDAQ
Global Select Market under the ticker symbol (NASDAQ: BGCP). BGC also has an outstanding bond issuance of Senior Notes due
June 15, 2042, which trade on the New York Stock Exchange under the symbol (NYSE: BGCA). BGC
Partners is led by Chairman and Chief Executive Officer Howard W. Lutnick . For more information, please visit http://www.bgcpartners.com. You can also follow BGC at https://twitter.com/bgcpartners, https://www.linkedin.com/company/bgc-partners and/or http://ir.bgcpartners.com/Investors/default.aspx.
About Newmark Group, Inc.
Newmark Group, Inc. ("Newmark Group") is a publicly traded company that, through subsidiaries, operates as a
full-service commercial real estate services business with a complete suite of services and products for both owners and
occupiers across the entire commercial real estate industry. The investor/owner services and products of Newmark Group's
subsidiaries include capital markets (including investment sales), agency leasing, property management, valuation and advisory,
diligence and underwriting. Under the Newmark Knight Frank and Berkeley Point Capital names, the company's subsidiaries
also offer government sponsored enterprise lending, loan servicing, debt and structured finance and loan sales. Newmark Group's
occupier services and products include tenant representation, global corporate services, real estate management technology
systems, workplace and occupancy strategy, consulting, project management, lease administration and facilities management.
Newmark Group enhances these services and products through innovative real estate technology solutions and data analytics
designed to enable its clients to increase their efficiency and profits by optimizing their real estate portfolio.
Newmark Group has relationships with many of the world's largest commercial property owners, real estate developers and
investors, as well as Fortune 500 and Forbes Global 2000 companies. Newmark Group, which is listed on the NASDAQ Global Select
Market under the symbol "NMRK", is a publicly traded subsidiary of BGC Partners, Inc. ("BGC"), a leading global brokerage company
servicing the financial and real estate markets. BGC's common stock trades on the NASDAQ Global Select Market under the ticker
symbol "BGCP". BGC also has an outstanding bond issuance of Senior Notes due June 15, 2042, which
trade on the New York Stock Exchange under the symbol "BGCA". Newmark and Berkeley Point are trademarks/service marks and/or
registered trademarks/service marks of Newmark Group, Inc. and/or its affiliates. Knight Frank is a service mark of Knight Frank
(Nominees) Limited. Find out more about Newmark at http://www.ngkf.com/, https://twitter.com/newmarkkf, https://www.linkedin.com/company/newmark-knight-frank/, and/or http://ir.ngkf.com/investors/investors-home/default.aspx.
Discussion of Forward-Looking Statements about Newmark and BGC
Statements in this document regarding Newmark and BGC that are not historical facts are "forward-looking statements"
that involve risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking
statements. Except as required by law, Newmark and BGC undertake no obligation to update any forward-looking statements. For a
discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the
forward-looking statements, see Newmark's and BGC's Securities and Exchange Commission filings, including, but not limited to,
the risk factors set forth in these filings and any updates to such risk factors contained in subsequent Forms 10-K, Forms 10-Q
or Forms 8-K.
1 On June 28, 2013, BGC sold its eSpeed business to Nasdaq, Inc. ("Nasdaq"). The
purchase consideration consisted of $750 million in cash paid upon closing, plus an expected
payment of up to 14.9 million shares of Nasdaq common stock to be paid ratably over 15 years beginning in 2013, assuming that
Nasdaq, as a whole, generates at least $25 million in gross revenues each of these years.
"Payments" may be used interchangeably with the Nasdaq share "earn-out". In connection with the separation of Newmark from BGC,
BGC transferred to Newmark the right to receive the remainder of the Nasdaq payments. The value of these Nasdaq shares discussed
in this document are based on the $94.21 closing price of Nasdaq's common stock as of June 18, 2018.
2 Subject to certain exceptions, Newmark is required to use any cash proceeds from capital raises above $25 million, net of fees and anticipated taxes, to repay any balance on the Converted Term Loan. See Newmark's and/or BGC's most recent SEC filing on Form 10-Q for more information on the Converted Term
Loan.
3 See the section of either BGC's or Newmark's first quarter financial results press release called "Proposed Spin-Off
of Newmark".
4 The debt and interest expense items referred to herein exclude operating interest on Warehouse notes payable. The
balance sheet figures and ratios do not include short-term borrowings and restricted cash.
5 The consolidated leverage ratio for BGC is defined as Notes payable and other borrowings over trailing twelve months
consolidated Adjusted EBITDA. Newmark's leverage ratio is defined as Long-term debt over trailing twelve months Adjusted EBITDA.
6 Should Newmark Group's consolidated revenues exceed $475 million in the third quarters
of 2019 or 2020, the EPUs may be exchanged at Newmark's election for Newmark Group common Class A shares, which would raise
additional equity capital for Newmark.
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