KBRA affirms its BBB– issuer rating for Newmark Group, Inc. KBRA also affirms its BBB- issue rating for Newmark’s outstanding $600 million senior unsecured notes due 2029. The Outlook is Stable.
Newmark is a $5.2 billion (enterprise value) commercial real estate (CRE) services company that provides a wide range of services to real estate owners and tenants. Newmark generated $2.6 billion in revenues over the trailing 12-month (TTM) period ending September 30, 2024, and has over 7,800 employees in more than 170 offices. Key business segments include management services (41% of TTM revenues), leasing (31%), and capital markets (28%). Newmark ranks among the top three U.S. CRE brokers in year-to-date (YTD) transaction volume and among the top five originators and servicers of loans sold to Fannie Mae and Freddie Mac.
The rating action balances Newmark’s strong competitive position in the CRE services segment, earnings diversification across business lines and regions, moderate overall leverage levels, and improved financial flexibility following the June 2024 refinancing/issuance of a $600 million unsecured note that matures in June 2029, which together with the September 30, 2024 $175 million balance on its $600 million revolving credit facility (expiring April 2027) represents the company’s only debt obligations.
The rating also acknowledges the inherent cyclicality of the investment sales and mortgage origination segments, which after reaching record volumes in 2021 have been negatively impacted by higher interest rates that also contributed to declining values across nearly all CRE property types. Newmark’s capital markets segments have generated a 16% increase in YTD revenues year-over-year, driven by increases in both market share and CRE transaction volumes. KBRA maintains a favorable near- to intermediate-term outlook for CRE transaction and financing activities, supported by record levels of scheduled mortgage maturities.
Newmark debt leverage remains within KBRA expectations. Net debt/TTM EBITDA as reported by Newmark was 1.4x as of Q3 2024, and 1.6x as adjusted by KBRA to exclude add-back of certain compensation-related expenses. Net total debt leverage recognizing the $628 million capitalized value of lease obligations—including lease commitments relating to Newmark’s Knotel and Deskeo flexible office businesses—was 2.4x based on September 30, 2024, TTM EBITDAR.
Key Credit Considerations
The rating affirmation reflects the following key credit considerations:
(+) Credit Positives
Newmark’s expansion strategy that is self-funded and focused on moderate-sized acquisition targets; growth in market share across business lines; diversification into new markets including the UK, France, and Germany; the consistent growth of its management services and loan servicing segments that continue to reduce dependence on investment sales and mortgage origination transaction revenues; the company’s primarily variable expense structure and continued commitment to reducing operating expenses and increased process efficiencies; and high level of internally-generated cash flow estimated by KBRA at TTM $227 million after capital expenditures and dividends. Credit positives also include Newmark’s commitment to maintain company-reported net debt to EBITDA below a targeted 1.5x maximum—a level consistently achieved by Newmark including during both 2020 and 2023; a moderate 24% ratio of net debt and lease obligations to enterprise value (low 12% excluding lease obligations); satisfactory liquidity sources, which included $178 million of cash and $425 million revolver capacity as of September 30, 2024; and a modest 11% dividend payout ratio based on 2024 earnings guidance.
(-) Credit Negatives
Rating constraints include the high variability of investment sales and mortgage origination transaction volumes for Newmark and its peers—with record volumes in 2021 followed by declines in 2022 and 2023 to below pre-COVID volumes; meaningful but declining exposure to lease obligations for the flexible office space operators Knotel and Deskeo; and the potential that share buybacks could exceed internally-generated cash flow and result in incremental debt leverage.
Rating Sensitivities
Upgrade or Positive Outlook Growth in company-reported adjusted EBITDA to a level approaching the Newmark-targeted $630 million in 2026; maintenance of net debt to Newmark-reported adjusted EBITDA in the low 1x range, and net total debt (including net present value (NPV) of lease obligations) to EBITDAR below 2.0x; share buyback levels that remain below internally-generated cash flow after capital expenditures; and limited growth in capital expenditures and lease obligations as well as consistent unit-level profitability for Newmark’s flexible office segment.
Downgrade or Negative Outlook
EBITDA decline and increase in net debt to Newmark-reported TTM adjusted EBITDA above the 1.5x upper end of Newmark’s targeted range; net total debt (including the NPV of future lease obligations) to EBITDAR approaching 3.0x; and increased capital expenditures and lease obligations related to the flexible office lease segment.
ESG Considerations
KBRA ratings incorporate all meaningful credit factors including those that relate to ESG factors. While ESG factors may influence ratings, KBRA analysis captures the impact of ESG factors in the same manner as all other credit-relevant factors. The KBRA rating and Outlook reflect favorably on the high 30% share of Newmark equity owned by employees. KBRA considers Newmark’s dual-class share and voting structure to be a credit negative.
