Who’s winning and losing on Wall Street?

Newmark is still lagging, while Cushman, CBRE and JLL have all rebounded from late 2018’s stock market turmoil
By Kevin Sun | April 01, 2019 09:00AM

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Newmark Knight Frank saw its stock take another beating in February and March, while the rest of the “Big Four” commercial brokerages bounced back from late last year’s market-wide malaise.

Newmark, which made its Nasdaq debut in December 2017, was trading at about $8.30 a share on March 27 — down 41 percent from the already discounted $14 when the firm went public, and up less than 1 percent from the start of this year. Sources say Newmark’s deflated stock price since its IPO has stemmed from multiple factors unrelated to the firm’s core business, which has been in growth mode.

“Last year, the company had a big communication issue,” Sandler O’Neill & Partners analyst Alexander Goldfarb said about the firm’s timeline for its spinoff from Howard Lutnick’s BGC Partners. “They weren’t being forthright, or as forthright as they would have wanted.”

But with much of that in the rearview, Goldfarb added, Newmark’s valuation could soon pick up if market conditions allow.

After going through their own rough patches last year, the other three big firms, Cushman & Wakefield, CBRE and JLL, all showed strong rebounds at the start of 2019.

As the S&P 500 caught a windfall in the first quarter, Cushman’s stock price rose by 22 percent, to $18, CBRE’s by 22 percent, to $49, and JLL’s by 19 percent, to $152, as of March 27.

JLL’s stock took a slight hit in mid-March after the firm announced plans to acquire and merge with HFF — a $2 billion deal that will create the country’s largest debt brokerage platform. But firms that acquire competitors typically see the price of their shares fall in the short term, analysts say.

JLL and CBRE, which went public in 1997 and 2004, respectively, now command share prices eight and five times higher than where they started. Cushman’s stock, meanwhile, has held up the best among the four brokerages since its IPO last August.

“Cushman has outperformed other peer stocks somewhat in recent months, and part of that probably comes from the IPO discount,” said Anthony Paolone, a stock analyst at JPMorgan. He noted that share prices are often discounted upon issuance, which can make performance appear better in the short term.

Booming business

Following a strong year in commercial leasing and investment sales activity nationally, earnings season came with more good news for Cushman, CBRE and JLL.

On the day of JLL’s latest earnings call, on Feb. 12, the price of its shares rose by more than 10 percent on the heels of strong fourth-quarter results. The firm’s $4.9 billion in revenue marked a 13 percent year-over-year increase — including a 34 percent spike in leasing revenue in the Americas alone.

CBRE and Cushman saw less dramatic one-day jumps after their most recent earnings calls, though the two firms also reported strong quarterly revenue growth of 14 and 17 percent, year-over-year.

But the markets appeared unimpressed by Newmark’s 37 percent year-over-year revenue growth. The firm’s stock continued its downward slide after peaking at just under $11 earlier in February.

One factor that could be holding back commercial brokerage stock prices across the board is the amount of debt the firms have taken on. According to the four firms’ latest quarterly earnings, Cushman had the most long-term debt at the end of last year, at $2.64 billion, while CBRE had $1.77 billion, JLL had $672 million and Newmark had $538 million.

Cushman’s high leverage stems from its 2015 merger with the private equity giant TPG Capital. Cushman has begun paying down its debt with the $831 million in proceeds from its August IPO of 45 million shares at $17 apiece.

Newmark’s struggle

Given Newmark’s revenue growth and relatively low debt, its underwhelming stock price is all the more glaring.

The brokerage’s valuation troubles began even before its IPO, when a plan to sell 30 million shares at $19 to $22 was scaled back to 20 million shares at $14. Newmark’s stock then hit rock bottom last December, when it fell to a record low of $7.70.

Analysts attributed the firm’s poor start to several factors, including the pressure to go public by the end of the year (Newmark had committed to a 2017 IPO to qualify as an “emerging growth company”), rising interest rates and unconventional accounting practices.

Then, as Newmark passed the one-year mark as a publicly traded firm, it grappled with the delayed spinoff from BCG that led to prolonged uncertainty among investors.

Newmark’s share price may also have been crimped by the fact that nearly all of its senior managers and top brokers have equity or partnership stakes in the company, analysts say. This has led to uneven growth metrics that caught some investors off guard.

“Earnings growth is in the double digits, but earnings per share is only growing in the single digits,” said Goldfarb, who cited equity dilution from Newmark “hiring more broker teams and issuing more stock for those teams.”

In its February earnings report, the brokerage confirmed that it’s looking to dial that back by using a larger amount of cash for acquisitions, new hires and employee compensation going forward.

“They seem to realize that they need to fix it, so their overall business is solid,” Goldfarb noted. “But the ability to translate that really solid top-line growth into bottom-line growth is something they need to work on.”

Merger fever

From Newmark snapping up RKF late last year to JLL’s plan to acquire and merge with HFF — another publicly traded brokerage — there’s a lot to watch out for with company valuations going forward.

But the news of the JLL and HFF deal didn’t come as a big surprise to many industry observers. JLL’s senior management unveiled its “Thinking Beyond” strategy in late 2016 with an emphasis on growing the firm’s capital markets business.

“This was probably the cleanest way to do it … as long as you’re locking up HFF’s people and as long as it’s a fit with the culture,” said Josh Barber, a research analyst at the Ohio-based investment adviser Diamond Hill Capital Management, which owns more than 260,000 JLL shares worth nearly $40 million, as of March 27. He added that the merger is a safe bet for long-term investors.

The $2 billion deal comes at a time of heightened merger activity among real estate firms. At a TRD forum last May, Peter Riguardi, JLL’s tri-state region president, opined that the big commercial brokerages are in for another wave of consolidations.

“If you look at the demands and needs of clients on a global basis … I think it becomes harder and harder for small firms to compete,” he said.

JPMorgan’s Paolone shared a similar view.

“There are three major platforms in the commercial real estate services space, globally, and as they continue to build their moats, it’s going to be harder for others to compete at the same level,” he said.

As the country’s economic outlook dims, however, some say commercial firms could grow wary of pursuing big mergers.

“If the capital markets stay good through the end of 2020, I think this deal ends up looking fine,” Barber said of the JLL and HFF merger. “But you don’t want to see it get swamped by factors that are out of their control.”