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Expected IPOs for NGKF, Cushman Could Boost CRE Sector's Cachet on Wall Street

If IPOs Come to Fruition, Two Major CRE Brokerage Firms Could Go Public Within the Same Year For the First Time
February 16, 2017
Plans announced last week by BGC Partners Inc. (NASDAQ: BGCP) to spin off Newmark Grubb Knight Frank (NGKF) as a separate publicly traded company, along with market speculation that Cushman & Wakefield may also launch an initial public offering as early as the third quarter, would raise the value and visibility of commercial real estate companies on Wall Street, according to equity analysts who follow the CRE services sector.

As CoStar reported last week, BGC is planning to make NGKF the first major full-service CRE firm to go public since Toronto-based FirstService Corp. spun off Colliers International Group Inc., which began trading on the Nasdaq Stock Market in June 2015.

Meanwhile Cushman & Wakefield and its parent, private-equity giant TPG, have been meeting informally with investment bankers about a potential IPO filing in the third quarter of this year or in early 2018, according to reports.

The possibility of any IPO moving forward seemed a remote possibility through last fall as geopolitical uncertainty and the prospect of higher interest rates resulted in rollercoaster swings in the stock market. However, the Dow Jones Industrial Average has jumped roughly 15% since Nov. 4 during the so-called "Trump bump," finally reaching the historic 20,000 mark a few days after President Donald Trump's inauguration.

The rising tide has lifted all real-estate boats. Shares of the two largest publicly traded CRE companies, CBRE Group, Inc. (NYSE: CBG) and Jones Lang LaSalle (NYSE: JLL), have jumped even more sharply than the broader market at 29% and 34.6%, respectively.

"It feels like the window for an offering is a lot more open than it was six months ago," said Brandon Dobell, an analyst with William Blair & Associates who tracks major CRE firms. "CBRE and JLL stocks are up, and the market is hitting all-time highs. (Interest) rates have moved up since the election, but they really haven't had a major impact. I think there's capital out there that still needs to get put to work."

Dobell noted that three years ago, the total combined market capitalization for the handful of publicly traded CRE brokerage and services companies was less than $10 billion, too small to attract much attention from buy-side institutions and equity analysts.

"Having one or two more publicly traded CRE services firms such as Cushman and Newmark actually ends up making it better for the other players," Dobell said. "In the past, these stocks have always suffered from being just a couple of companies" rather than a sector.

With CBRE and JLL now exceeding $16 billion market cap, "you add in Colliers and maybe HFF and Walker & Dunlop, and Marcus & Millichap, Cushman and Newmark and all of a sudden you've got a group of eight to 10 companies at $20 billion to $25 billion," Dobell said.
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"That's easier for the buy side and the sell side to justify allocating time and intellectual capital to, and that's good for the whole group," Dobell added.

From 'Dramatic New Footprint' to Potential Spin Off

When BGC made the surprising announcement that it was acquiring the company then known as Newmark Knight Frank in April 2011, critics wrote off the move is a minor diversification play. However, Chairman and CEO Howard W. Lutnick stated that it was "the beginning of a dramatic new footprint in commercial real estate by BGC, and the definitive starting point of BGC's strategy to grow in this sector."

Lutnick, who also serves as chief executive of investment bank Cantor Fitzgerald & Co., BGC's majority shareholder, said the same strategies used to grow the financial services brokerage's margins by investing in brokers, growing revenues and investing in proprietary technology would be deployed to create synergy and "position Newmark for dramatic growth."

"By applying our world-class technology platform and management skills, we will provide superior support to Newmark's brokers, further building Newmark's business as we've done consistently with BGC," Lutnick said in the 2011 announcement. "Both BGC and Newmark count the world's leading banks and investment banks as clients, and we see exciting opportunities for cross-marketing given the outstanding suite of transactional and consultative services Newmark offers the corporate and institutional market."

In the same announcement, Newmark executives said the "synergy in the structure of our brokerage businesses," along with improving CRE fundamentals and deal velocity, as factors supporting Newmark's growth prospects as part of BGC. At the same time, "BGC's deep and long-standing relationships with the world's leading financial institutions can only enhance Newmark's reach in the marketplace," Newmark CEO Barry Gosin said in 2011.

"Our business will capitalize on BGC’s cutting-edge platform and continuing investment in technology," added Newmark President James Kuhn.

The planned spinoff comes as little surprise to analysts who track BGC, Dobell said. The company has stated in presentations and filing since late 2015 that "although no decisions have been made, we are considering a number of options designed to unlock substantial shareholder value." Such moves could potentially include selling or spinning off Newmark and other individual divisions.

In an October 2015 earnings conference call, Lutnick first stated that NGKF and other BGC assets "are independently worth significantly more than what is reflected in our current stock price," and that the market is undervaluing Newmark and other assets based on recent equity market and M&A multiples. A spin off would also streamline and simplify the investment case for BGC's core business of electronic trading.

"Everyone kind of saw it coming; the question was when," Dobell said. "Does BGC sell or split off the entire thing or just a chunk and maintain ownership? My guess is the latter."

In the third-quarter 2015 earnings call with analysts, Lutnick first stated that BGC's assets, including NGKF, "are independently worth significantly more than what is reflected in our current stock price" and based on recent equity market and M&A multiples, the market is undervaluing Newmark.

"Although no decisions have been made, we are considering a number of options designed to unlock substantial shareholder value," Lutnick said. The company has consistently reiterated the theme in presentations and filings without specifically mentioning a potential IPO.

Paying for All Those Top Producers

From the start, Gosin, Kuhn and other leadership at NGKF, which had 425 real estate brokers in the US at the time of the acquisition, has tapped into BGC's financial resources to engineer the hiring of well-known producers and acquisition of firms in capital markets and other vital property market segments.

In April 2012, BGC Partners acquired and integrated the bankrupt Grubb & Ellis to form Newmark Grubb Knight Frank, and acquired several other regional firms, including Santa Clara, CA-based affiliate Cornish & Carey Commercial and Apartment Realty Advisors (ARA). In 2015, BGC acquired real estate consulting firm Computerized Facility Integration LLC (CFI), a technology platform managing projects among more than 3 billion square feet of corporate properties and facilities across the globe, a move expected to complement NGKF.

But that was just the beginning of Newmark's hiring spree, which ramped up after Cushman's acquisition by TPG helped fuel a national game of musical chairs in the US CRE industry. In late 2015, Newmark recruited Robert Griffin, Jr. and his top investment sales team in New England from Cushman & Wakefield. In another recruiting win, the New York-based real estate division of BGC Partners then landed top-producing Los Angeles office investment sales broker Kevin Shannon and his team from CBRE Group.

In early 2016, Newmark hired eight star brokers from Cushman's Southern California retail brokerage team, and recruited a pair of elite Chicago tenant rep brokers in Bob Chodos and Steve Levitas, both from Colliers International.

Cushman has been talking with investment banks and asset managers, streamlining its operations and improving its balance sheet in preparation for an IPO for at least 18 months since being acquired by TPG in September 2015, Dobell noted.

The company has hardly been standing pat in the search for high-price talent. Cushman last year hired longtime Eastdil Secured investment sales brokers Douglas Harmon and Adam Spies in a move that sent shock waves through the New York City brokerage community. Harmon and Spies brought colleagues Adam Doneger, Kevin Donner and Joshua King aboard as senior managing directors in a rebuilding of Cushman's capital markets team following the September 2015 departure of Griffin, Jr.

Last November, Cushman announced the hiring of CBRE Vice President Marcella Fasulo as a senior managing director with the Harmon/Spies capital markets team, which also includes Kevin Donner, Adam Doneger and Joshua King.

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