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Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2019

Fair Value of Financial Assets and Liabilities

(26)	Fair Value of Financial Assets and Liabilities

U.S. GAAP guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

•

Level 1 measurements—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2 measurements—Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly.

•

Level 3 measurements—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

As required by U.S. GAAP guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth, by level within the fair value hierarchy, financial assets and liabilities accounted for at fair value under U.S. GAAP guidance (in thousands):

	As of September 30, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities	$	123,417	$	—	$	—	$	123,417
Nasdaq Forwards		—		—		40,438		40,438
Loans held for sale, at fair value		—		704,357		—		704,357
Rate lock commitments		—		—		26,691		26,691
Forward sale contracts		—		—		1,567		1,567
Total	$	123,417	$	704,357	$	68,696	$	896,470
Liabilities:
Accounts payable, accrued expenses and other liabilities—contingent consideration	$	—	$	—	$	40,051	$	40,051
Rate lock commitments		—		—		1,198		1,198
Forward sale contracts		—		—		25,971		25,971
Total	$	—	$	—	$	67,220	$	67,220

	As of December 31, 2018
	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities	$	48,942	$	—	$	—	$	48,942
Nasdaq Forwards		—		—		77,619		77,619
Loans held for sale, at fair value		—		990,864		—		990,864
Rate lock commitments		—		—		6,732		6,732
Forward sale contracts		—		—		8,177		8,177
Total	$	48,942	$	990,864	$	92,528	$	1,132,334
Liabilities:
Accounts payable, accrued expenses and other liabilities—contingent consideration	$	—	$	—	$	32,552	$	32,552
Rate lock commitments		—		—		7,470		7,470
Forward sale contracts		—		—		9,208		9,208
Total	$	—	$	—	$	49,230	$	49,230

There were no transfers among Level 1, 2 and 3 for the nine months ended September 30, 2019 and the year ended December 31, 2018.

Level 3 Financial Assets and Liabilities: Changes in Level 3 Nasdaq Forwards, rate lock commitments, forwards and contingent consideration measured at fair value on recurring basis were as follows (in thousands):

	Opening Balance July 1, 2019		Total realized and unrealized gains (losses) included in Net income⁽¹⁾			Issuances		Settlements			Closing Balance as of September 30, 2019		Unrealized gains (losses) outstanding as of September 30, 2019
Assets:
Rate lock commitments	$	21,951	$	26,691		$	—	$	(21,951	)	$	26,691	$	26,691
Forward sale contracts		2,845		1,567			—		(2,845	)		1,567		1,567
Nasdaq Forwards		48,652		(8,214	)		—		—			40,438		(8,214	)
Total	$	73,448	$	20,044		$	—	$	(24,796	)	$	68,696	$	20,044
	Opening Balance July 1, 2019		Total realized and unrealized (gains) losses included in Net income⁽¹⁾			Issuances		Settlements			Closing Balance as of September 30, 2019		Unrealized (gains) losses outstanding as of September 30, 2019
Liabilities:
Accounts payable, accrued expenses and other liabilities – contingent consideration(1)	$	38,712	$	1,492		$	1,180	$	(1,333	)	$	40,051	$	1,492
Rate lock commitments		2,428		1,198			—		(2,428	)		1,198		1,198
Forward sale contracts		27,261		25,971			—		(27,261	)		25,971		25,971
Total	$	68,401	$	28,661		$	1,180	$	(31,022	)	$	67,220	$	28,661

(1)

Realized and unrealized losses are reported in “Other income, net” on the accompanying unaudited condensed consolidated statements of operations.

Changes in Level 3 Nasdaq Forwards, rate lock commitments, forwards and contingent consideration measured at fair value on recurring basis for the three months ended September 30, 2018 were as follows (in thousands):

	Opening Balance as of July 1, 2018		Total realized and unrealized gains (losses) included in Net income⁽¹⁾		Issuances		Settlements			Closing Balance as of September 30, 2018		Unrealized gains (losses) outstanding as of September 30, 2018
Assets:
Rate lock commitments	$	14,448	$	6,219	$	—	$	(14,448	)	$	6,219	$	6,219
Forward sale contracts		16,442		20,515		—		(16,442	)		20,515		20,515
Nasdaq Forwards		19,085		6,327		58,617		—			84,029		6,327
Total	$	49,975	$	33,061	$	58,617	$	(30,890	)	$	110,763	$	33,061
	Opening Balance as of July 1, 2018		Total realized and unrealized (gains) losses included in Net income⁽¹⁾		Issuances		Settlements			Closing Balance as of September 30, 2018		Unrealized (gains) losses outstanding as of September 30, 2018
Liabilities:
Accounts payable, accrued expenses and other liabilities – contingent consideration(1)	$	21,573	$	271	$	10,006	$	(245	)	$	31,605	$	271
Rate lock commitments		13,945		12,089		—		(13,945	)		12,089		12,089
Forward sale contracts		641		37		—		(641	)		37		37
Total	$	36,159	$	12,397	$	10,006	$	(14,831	)	$	43,731	$	12,397

(1)

Realized and unrealized losses are reported in “Other income, net” on the accompanying unaudited condensed consolidated statements of operations.

Changes in Level 3 Nasdaq Forwards, rate lock commitments, forwards and contingent consideration measured at fair value on recurring basis for the nine months ended September 30, 2019 were as follows (in thousands):

	Opening Balance as of January 1, 2019		Total realized and unrealized gains (losses) included in Net income⁽¹⁾			Issuances		Settlements			Closing Balance as of September 30, 2019		Unrealized gains (losses) outstanding as of September 30, 2019
Assets:
Rate lock commitments	$	6,732	$	26,691		$	—	$	(6,732	)	$	26,691	$	26,691
Forward sale contracts		8,177		1,567			—		(8,177	)		1,567		1,567
Nasdaq Forwards		77,619		(37,181	)		—		—			40,438		40,438
Total	$	92,528	$	(8,923	)	$	—	$	(14,909	)	$	68,696	$	68,696
	Opening Balance as of January 1, 2019		Total realized and unrealized (gains) losses included in Net income⁽¹⁾			Issuances		Settlements			Closing Balance as of September 30, 2019		Unrealized (gains) losses outstanding as of September 30, 2019
Liabilities:
Accounts payable, accrued expenses and other liabilities – contingent consideration(1)	$	32,552	$	1,957		$	8,937	$	(3,395	)	$	40,051	$	1,957
Rate lock commitments		7,470		1,198			—		(7,470	)		1,198		1,198
Forward sale contracts		9,208		25,971			—		(9,208	)		25,971		25,971
Total	$	49,230	$	29,126		$	8,937	$	(20,073	)	$	67,220	$	29,126

(1)

Realized and unrealized losses are reported in “Other income, net” on the accompanying unaudited condensed consolidated statements of operations.

	Opening Balance as of January 1, 2018		Total realized and unrealized gains (losses) included in Net income⁽¹⁾		Issuances		Settlements			Closing Balance as of September 30, 2018		Unrealized gains (losses) outstanding as of September 30, 2018
Assets:
Rate lock commitments	$	2,923	$	6,219	$	—	$	(2,923	)	$	6,219	$	6,219
Forward sale contracts		3,753		20,515		—		(3,753	)		20,515		20,515
Nasdaq Forwards		—		6,327		58,617		—			84,029		6,327
Total	$	6,676	$	33,061	$	58,617	$	(6,676	)	$	110,763	$	33,061
	Opening Balance as of January 1, 2018		Total realized and unrealized (gains) losses included in Net income⁽¹⁾		Issuances		Settlements			Closing Balance as of September 30, 2018		Unrealized (gains) losses outstanding as of September 30, 2018
Liabilities:
Accounts payable, accrued expenses and other liabilities – contingent consideration(1)	$	23,711	$	700	$	10,695	$	(3,501	)	$	31,605	$	700
Rate lock commitments		2,390		12,089		—		(2,390	)		12,089		12,089
Forward sale contracts		657		37		—		(657	)		37		37
Total	$	26,758	$	12,826	$	10,695	$	(6,548	)	$	43,731	$	12,826

(1)

Realized and unrealized losses are reported in “Other income, net” on the accompanying unaudited condensed consolidated statements of operations.

Quantitative Information About Level 3 Fair Value Measurements

The following tables present quantitative information about the significant unobservable inputs utilized by Newmark in the fair value measurement of Level 3 assets and liabilities measured at fair value on a recurring basis (in thousands):

September 30, 2019
Level 3 assets and liabilities	Assets		Liabilities		Significant Unobservable Inputs	Range	Weighted- Average
Accounts payable, accrued expenses and other liabilities:
Contingent consideration	$	—	$	40,051	Discount rate	0.3%-10.4%	8.0%
					Probability of meeting earnout and contingencies	99%-100%	99.5%
					Financial forecast information
Derivative assets and liabilities:
Nasdaq Forwards	$	40,438	$	—	Volatility	28.04%-35.62%	32.9%
Forward sale contracts	$	1,567	$	25,971	Counterparty credit risk	N/A	N/A
Rate lock commitments	$	26,691	$	1,198	Counterparty credit risk	N/A	N/A

December 31, 2018
Level 3 assets and liabilities	Assets		Liabilities		Significant Unobservable Inputs	Range	Weighted- Average
Accounts payable, accrued expenses and other liabilities:
Contingent consideration	$	—	$	32,552	Discount rate	0.3%-10.4%	8.0%
					Probability of meeting earnout and contingencies	99%-100%⁽¹⁾	99.6%
					Financial forecast information
Derivative assets and liabilities:
Nasdaq Forwards	$	77,619	$	—	Volatility	23.7%-34.8%⁽²⁾	30.2%
Forward sale contracts	$	8,177	$	9,208	Counterparty credit risk	N/A	N/A
Rate lock commitments	$	6,732	$	7,470	Counterparty credit risk	N/A	N/A

(1)

Newmark’s estimate of contingent consideration as of September 30, 2019 and December 31, 2018 was based on the acquired business’ projected future financial performance, including revenues.

(2)

The volatility of Newmark’s Nasdaq Forwards is primarily based on the volatility of the underlying Nasdaq stock price.

Valuation Processes - Level 3 Measurements

Both the rate lock commitments to borrowers and the forward sale contracts to investors are derivatives and, accordingly, are marked to fair value on the accompanying unaudited condensed consolidated statements of operations. The fair value of Newmark’s rate lock commitments to borrowers and loans held for sale and the related input levels includes, as applicable:

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The assumed gain/loss of the expected loan sale to the investor, net of employee benefits;

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The expected net future cash flows associated with servicing the loan;

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The effects of interest rate movements between the date of the rate lock and the balance sheet date; and

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The nonperformance risk of both the counterparty and Newmark.

The fair value of Newmark’s forward sales contracts to investors considers effects of interest rate movements between the trade date and the balance sheet date. The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

The fair value of Newmark’s rate lock commitments and forward sale contracts is adjusted to reflect the risk that the agreement will not be fulfilled. Newmark’s exposure to nonperformance in rate lock and forward sale contracts is represented by the contractual amount of those instruments. Given the credit quality of Newmark’s counterparties, the short duration of rate lock commitments and forward sales contracts, and Newmark’s historical experience with the agreements, management does not believe the risk of nonperformance by Newmark’s counterparties to be significant.

The Nasdaq Forwards are derivatives and, accordingly, are marked to fair value on the accompanying unaudited condensed consolidated statements of operations. The fair value of the Nasdaq Forwards is determined utilizing the following inputs, as applicable:

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The underlying number of shares and the related strike price;

•

The maturity date; and

•

The implied volatility of Nasdaq’s stock price.

The fair value of Newmark’s Nasdaq Forwards considers the effects of Nasdaq’s stock price volatility between the balance sheet date and the maturity date. The fair value is determined by the use of a Black-Scholes put option valuation model.

Information About Uncertainty of Level 3 Fair Value Measurements

The significant unobservable inputs used in the fair value of Newmark’s contingent consideration are the discount rate and forecasted financial information. Significant increases (decreases) in the discount rate would have resulted in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the forecasted financial information would have resulted in a significantly higher (lower) fair value measurement. As of September 30, 2019 and December 31, 2018, the present value of expected payments related to Newmark’s contingent consideration was $40.1 million and $32.6 million, respectively (See Note 31 — “Commitments and Contingencies”). The undiscounted value of the payments, assuming that all contingencies are met, would be $45.0 million and $39.6 million, respectively.

Fair Value Measurements on a Non-Recurring Basis

Pursuant to the new recognition and measurement guidance for equity investments, effective January 1, 2018, equity investments carried under the measurement alternative are remeasured at fair value on a non-recurring basis to reflect observable transactions which occurred during the period. Newmark applied the measurement alternative to equity securities with the fair value of $102.4 million and $53.5 million, which were included in “Other assets” on the accompanying unaudited condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively. These investments are classified within Level 2 in the fair value hierarchy, because their estimated fair value is based on valuation methods using the observable transaction price at the transaction date.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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