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Fair Value of Financial Assets and Liabilities

9 Months Ended

Sep. 30, 2020

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 and 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, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities	$	121,759	$	—	$	—	$	121,759
Nasdaq Forwards	—		$	—	$	18,959	$	18,959
Loans held for sale, at fair value	—		1,537,734		—		1,537,734
Rate lock commitments	—		—		45,561		45,561
Forward sale contracts	—		—		9,625		9,625
Total	$	121,759	$	1,537,734	$	74,145	$	1,733,638
Liabilities:
Contingent consideration	$	—	$	—	$	31,575	$	31,575
Rate lock commitments	—		—		1,133		1,133
Forward sale contracts	—		—		41,730		41,730
Total	$	—	$	—	$	74,438	$	74,438


	As of December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Marketable securities	$	36,795	$	—	$	—	$	36,795
Nasdaq Forwards	—		—		26,502		26,502
Loans held for sale, at fair value	—		215,290		—		215,290
Rate lock commitments	—		—		32,035		32,035
Forward sale contracts	—		—		14,389		14,389
Total	$	36,795	$	215,290	$	72,926	$	325,011
Liabilities:
Contingent consideration	$	—	$	—	$	45,172	$	45,172
Rate lock commitments	—		—		12,124		12,124
Forwards sale contracts	—		—		13,537		13,537
Total	$	—	$	—	$	70,833	$	70,833

There were no transfers among Level 1, Level 2 and Level 3 for the three and nine months ended September 30, 2020 and September 30, 2019.

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


	As of September 30, 2020
	Opening Balance		Total realized and unrealized gains (losses) included in Net income (loss)		Issuances		Settlements		Closing Balance		Unrealized gains (losses) outstanding as of September 30, 2020
Assets:
Rate lock commitments	$	32,035	$	45,561	$	—	$	(32,035)	$	45,561	$	45,561
Forward sale contracts	14,389		9,625		—		(14,389)		9,625		9,625
Nasdaq Forwards	26,502		(7,543)		—		—		18,959		18,959
Total	$	72,926	$	47,643	$	—	$	(46,424)	$	74,145	$	74,145
	Opening Balance		Total realized and unrealized (gains) losses included in Net income (loss)		Issuances		Settlements		Closing Balance		Unrealized (gains) losses outstanding as of September 30, 2020
Liabilities:
Contingent consideration	$	45,172	$	(12,034)	$	2,221	$	(3,784)	$	31,575	$	145
Rate lock commitments	12,124		1,133		—		(12,124)		1,133		1,133
Forward sale contracts	13,537		41,730		—		(13,537)		41,730		41,730
Total	$	70,833	$	30,829	$	2,221	$	(29,445)	$	74,438	$	43,008


	As of December 31, 2019
	Opening Balance		Total realized and unrealized gains (losses) included in Net income (loss)		Issuances		Settlements		Closing Balance		Unrealized gains (losses) outstanding as of December 31, 2019
Assets:
Rate lock commitments	$	6,732	$	32,035	$	—	$	(6,732)	$	32,035	$	32,035
Forward sale contracts	8,177		14,389		—		(8,177)		14,389		14,389
Nasdaq Forwards	77,619		(51,117)		—		—		26,502		26,502
Total	$	92,528	$	(4,693)	$	—	$	(14,909)	$	72,926	$	72,926
	Opening Balance		Total realized and unrealized (gains) losses included in Net income (loss)		Issuances		Settlements		Closing Balance		Unrealized (gains) losses outstanding as of December 31, 2019
Liabilities:
Contingent consideration	$	32,551	$	2,287	$	14,957	$	(4,623)	$	45,172	$	2,287
Rate lock commitments	7,470		12,124		—		(7,470)		12,124		12,124
Forward sale contracts	9,208		13,537		—		(9,208)		13,537		13,537
Total	$	49,229	$	27,948	$	14,957	$	(21,301)	$	70,833	$	27,948

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:


September 30, 2020
Level 3 assets and liabilities	Assets		Liabilities		Significant Unobservable Inputs	Range		Weighted Average
Accounts payable, accrued expenses and other liabilities:
Contingent consideration	$	—	$	31,575	Discount rate	0.3% - 10.4%	(1)	7.3%
					Probability of meeting earnout and contingencies	0% - 100%	(1)	98.5%
					Financial forecast information
Derivative assets and liabilities:
Nasdaq Forwards	$	18,959	$	—	Implied volatility	37.9% - 42.2%	(2)	41.9%
Forward sale contracts	$	9,625	$	41,730	Counterparty credit risk	N/A		N/A
Rate lock commitments	$	45,561	$	1,133	Counterparty credit risk	N/A		N/A


December 31, 2019
Level 3 assets and liabilities	Assets		Liabilities		Significant Unobservable Inputs	Range		Weighted Average
Accounts payable, accrued expenses and other liabilities:
Contingent consideration	$	—	$	45,172	Discount rate	0.3% - 10.4%		8.6%
					Probability of meeting earnout and contingencies	90% - 100%	(1)	98.1%
					Financial forecast information
Derivative assets and liabilities:
Nasdaq Forwards	$	26,502	$	—	Implied volatility	25.7% - 34.8%	(2)	32.2%
Forward sale contracts	$	14,389	$	13,537	Counterparty credit risk	N/A		N/A
Rate lock commitments	$	32,035	$	12,124	Counterparty credit risk	N/A		N/A

(1)Newmark’s estimate of contingent consideration as of September 30, 2020 and December 31, 2019 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:

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

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

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

•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 are determined utilizing the following inputs, as applicable:

•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, 2020 and December 31, 2019, the present value of expected payments related to Newmark’s contingent consideration was $31.6 million and $45.2 million, respectively (see Note 31 — “Commitments and Contingencies”). As of September 30, 2020 and December 31, 2019, the undiscounted value of the payments, assuming that all contingencies are met, would be $60.6 million and $66.4 million, respectively.

Fair Value Measurements on a Non-Recurring Basis

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 $67.3 million and $94.1 million, which were included in “Other assets” on the accompanying unaudited condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019, 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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