2023-09-25 15:04:31 ET
Summary
- Newmark Group has executed on a number of significant hires in recent months.
- NMRK has made the right moves to grow the company's recurring revenue streams.
- Newmark Group continues to warrant a Buy rating in view of recent positive developments.
Elevator Pitch
I continue to assign a Buy investment rating to Newmark Group ( NMRK ) stock. I previously highlighted a number of re-rating catalysts for NMRK in my earlier article published on July 17, 2023.
With the current article, I turn my attention to the positive corporate developments for Newmark Group. A review of recent news flow and management commentary indicates that NMRK has found success in winning the war for talent and growing recurring revenue streams. This supports my Buy rating for Newmark Group.
Winning The War For Talent
Talent is key for a property services company such as Newmark Group, and there are signs suggesting that NMRK has done an excellent job in attracting talented people to join the company.
Last week, Newmark Group revealed in its September 19 press release that the company has recruited "five retail real estate experts in Boston" who come with a combined 70 years of brokerage experience." It is worthy of note that they were previously working at CBRE Group, Inc. ( CBRE ), the biggest real estate services firm in the world, before being hired by NMRK.
Another significant hire that NMRK had made recently was the appointment of Bill Fishel as "Executive Vice Chairman" at its "Debt, Equity and Structured Finance group" as disclosed in its July 10, 2023, media release . Bill Fishel was leading Jones Lang LaSalle's ( JLL ) Los Angeles office prior to joining Newmark Group. In the same month, Newmark Group also added Pat Devine to its ranks in Phoenix, who has past working experience at CBRE, Cushman & Wakefield plc ( CWK ), and Artis REIT ( ARESF ).
CBRE, JLL, and CWK are widely referred to as the "Big Three" players in the worldwide commercial property services markets. As such, it is no mean feat that Newmark Group has managed to attract top talent from its larger rivals. This isn't something that has gone unnoticed.
At NMRK's Q2 2023 earnings call , Jason Sabshon, a sell-side analyst from KBW , noted that "there seems to be a steady stream of producers that are leaving their current firms to join Newmark." In the middle of last year, NMRK was named by LinkedIn as the most ideal place for employees to "grow a career in the (real estate) industry."
Newmark Group emphasized at the company's most recent quarterly results briefing that "we continue to get momentum hiring the best and the brightest" and stressed that it is "a good place for high-earning brokers to work." While it is natural for investors to focus more on tangible assets and short-term financial performance, it is usually the intangible elements such as good talent recruitment are positively correlated with long-term success for corporates.
Growing Recurring Revenue Streams
Taking into consideration uncertainty associated with the global economy, it is critical for companies to increase their proportion of the top line derived from recurring sources which are unaffected by short term economic challenges. Newmark Group has done pretty well in this respect.
In the early part of this month, Newmark Group issued a news release highlighting that "its Global Corporate Services ((GCS)) division has been awarded a long-term renewal with Hancock Whitney Bank." Hancock Whitney Bank has already been engaging the services of NMRK's GCS business in the past nine years prior to the recent renewal. Separately, NMRK indicated at the company's Q2 2023 earnings briefing that its GCS unit achieved a reasonably decent organic revenue growth rate of +9.7% for the most recent quarter.
The company mentioned in its FY 2022 10-K filing that its GCS business offers "project management, lease administration and facilities management" services which tend to be governed by "multi-year contracts." Therefore, it is encouraging to know that Newmark Group's GCS business is growing steadily, and this translates into a higher proportion of recurring revenues for the company as a whole.
Also, Newmark Group has managed to expand its recurring revenue streams via inorganic means.
In March this year, NMRK bought Gerald Eve, which the company referred to as "a market-leading advisor in the UK." At the company's second quarter results call, Newmark Group disclosed that Gerald Eve adds incremental yearly sales of $110-$120 million (equivalent to about 4% of NMRK's FY 2022 top line), and stressed that "a large majority of their business is recurring."
Peer Valuations
Newmark Group is now valued by the market at a significant discount to the company's larger peers in the commercial real estate services industry.
NMRK currently trades at a consensus forward next twelve months' normalized P/E multiple of 5.9 times as per valuation data sourced from S&P Capital IQ . As a basis for comparison, Jones Lang LaSalle and CBRE Group are now trading at much higher consensus forward normalized P/E ratios of 10.7 times and 16.5 times, respectively.
Taking into account the recent positive corporate developments as highlighted earlier in this article, NMRK's valuation discount with its peers might possibly narrow going forward.
Closing Thoughts
My opinion of Newmark Group's recent developments relating to talent recruitment and revenue mix optimization is favorable. As such, I maintain my Buy rating for NMRK.
For further details see:
Newmark Group: Spotlight On Positive Developments