Newmark Group Inc

NASDAQ:NMRK

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Shauntel [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Newmark’s Second Quarter 2018 Earnings Conference Call. [Operator Instructions]

Thank you. I'll now turn the call over to Jason McGruder, Head of Investor Relations. Sir, you may begin when ready.

[Jason McGruder, IR]

Thanks and [Indiscernible]. We issued our second quarter 2018 financial results press release and a presentation summarizing our results these results this morning. You can find these documents at ir.ngkf.com.

Unless otherwise stated, the results provided on today's call compare only the second quarter of 2018 with the year earlier period. We'll be referring to results on this call only on an adjusted earnings basis, unless otherwise stated. We may also refer to adjusted EBITDA. Please see today’s press release results on the generally accepted accounting principles or GAAP. Please note that for all periods in the third quarter of 2018 onward we will simplify a definition of adjusted EBITDA so that the term excludes GAAP charges with respect to allocations and net income to limited partnership units. Therefore the term adjusted EBITDA will be consistent with what we now refer to as adjusted EBITDA before allocation to units.

Please see the section in the back of today’s press release for the complete definition of any such non-GAAP terms; reconciliation of these items to the corresponding GAAP results and how, when and why management uses them.

I also remind you that the information on the today's call regarding our business that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of Securities Exchange Act of 1934 as amended. Such statements involve risks and uncertainties, except as required by law, Newmark undertakes no obligation to update any forward-looking statements.

With regard to references about the proposed spin-off of Newmark on today's call, it is important to note that we cannot provide any assurance regarding when, if or how and whether the spin-off will take place. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see Newmark’s Securities and Exchange Commission filings, including, but not limited to the risk factors set forth in the most recent prospective and any updates to such risk factors contained in subsequent Form 10-K, Form 10-Q or Form 8-K filings.

I'm happy to turn the call over to our host, Howard Lutnick, Chairman of Newmark Group.

[Howard Lutnick, Chairman]

Thank you, Jason. Good morning and thank you for joining us for Newmark's second quarter 2018 conference call. With me today are Newmark's CEO, Barry Gosin; our Chief Operating Officer, Jim Ficarro and our Chief Financial Officer, Mike Rispoli. Newmark had another excellent quarter, generating over 15% revenue growth. Adjusted EBITDA grew by 39% and post-tax adjusted earnings grew by 35%.

We continue to make progress towards our plan spin off which we intend to complete by the end of 2018. Due to our upcoming spin-off we believe that Newmark is trading in very attractive multiples versus its publicly traded full service peers, despite growing between two and three times faster.

For example at yesterday's close, Newmark traded at 9.2 times 2018 price to adjusted earnings versus 16 to 22 times for our full service peers and at 8 times 2018 enterprise value to adjusted EBITDA which compares to 10 to 12 times for our full service peers.

For the full year 2018, we expect our revenues to increase by 19% to 28% and adjusted earnings per share to grow by 22% to 39%. We expect our strong outperformance to continue into 2019.

Given our expected growth for the full year 2018, the company’s Board of Directors declared dividend for the second quarter of $0.09 per common share. We expect our dividend to remain consistent for each of the four fiscal quarters of 2018.

In addition to returning cash in the form of dividends, Newmark’s Board of Directors doubled our share repurchase authorization to $200 million. And with that I’m happy to turn the call over to Barry.

[Barry Gosin, CEO]

Thanks, Howard and Good morning everyone. We once again generated strong topline growth from leasing capital markets, valuation advisory and global corporate services. Over 80% of Newmark revenue growth for the quarter was organic.

In addition to making a number of high-profile hires, we also recently closed the acquisitions of Jackson Cooksey and multiple Integra Realty Resources offices. In June of this year, we agreed to acquire RKF and we anticipate this deal to close by the end of the third quarter.

We expect these acquisitions to be immediately accretive and to strengthen our platform. We also believe that we gained further market share in investment sales during the quarter, as our revenue growth outpaced comparable industry volume metrics. While capital markets generate the most headlines for the industry, I’d like to highlight that the 67% of our revenues, which are recurring were up 27%.

We expect Newmark’s momentum to continue as we make accretive acquisitions, attract industry-leading talent to our platform, as well as win new business.

In terms of overall U.S. Commercial Realty markets, the fundamentals remain strong for office and industrial as employment growth continues and e-commerce expands. Retail continues to be challenging for some owners, but transaction activity for retail properties was strong in the quarter.

Multifamily rents and vacancy rates continue to show improvement, although industry wide U.S. investment sales volumes declined for this property type in the second quarter. While the industry was up 88% in the first half of the year, our multifamily sales volumes were up 12%.

Overall U.S. investment sales volumes were up by 2% year-on-year in the second quarter and 4% in the first half, while leasing activity remains strong in many markets throughout the country.

As we have previously said, year-over-year comparisons for Berkeley Point originations are not as meaningful this quarter due to a single $2.2 billion transaction in the second quarter of 2017. Excluding that one financing Berkeley Points originations increased by 7%. The timing of the loan origination often varies from period to period, which makes full comparisons more useful.

Given our strong pipeline of financings, we expect our origination volumes to increase by more than 75% in the second half of 2018 as compared to last year and for our full year origination volumes to grow including the $2.2 billion deal in 2007.

With that I am happy to turn the call over to Mike.

[Mike Rispoli, CFO]

Thank you, Barry and good morning everybody. Newmark generated overall revenues of $466.6 million, an increase of 15.2%. Our compensation expenses increased 12.8% to $269 million, while non-compensation expenses increased 4.7% to $114.

The majority of our compensation expenses are variable in nature and tied directly to revenue, while our non-compensation expenses are largely fixed. Because of the seasonality of commercial real estate revenues, first quarter generally has the lowest operating margin of the year. This seasonality is typically reversed in the second half of the year, making our third and fourth quarters our most profitable.

Non-compensation expenses for adjusted earnings include our non-cash OMSRs as well as the additional $24.5 million of pass-through expense related to ASC 606. Excluding these items, non-compensation expenses for adjusted earnings decreased by 2% in the second quarter of 2018.

In addition, we will record income from our NASDAQ shares in the third quarter of each year through 2027. Based on yesterday's closing stock price, we expect the income from the NASDAQ shares to generate approximately $91 million in the third quarter of 2018.

We recently announced transactions related to the monetization of the expected 2019 and 2020 NASDAQ payments. We received $152.9 million of cash from the transaction with no downside risk while maintaining all appreciation above $94.21 on those 1,984,000 NASDAQ shares.

In addition to these monetized NASDAQ shares, we expect to receive an additional 7,936,000 NASDAQ shares worth more than $725 million based on yesterday's closing price. We have clearly demonstrated the ability to modify the shares with no downside risk while maintaining all the upside.

Using similar mass, we can monetize NASDAQ to buyback a significant amount of shares post in, reduce our net debt to virtually zero, or accretively acquire companies without significant dilution.

Turning now to our earnings, our adjusted EBITDA before allocations to units improved by 39.5% to $99.2 million, for a margin of 21.3% which was up by approximately 370 basis points year-on year.

Our pre-tax adjusted earnings for the quarter were up by 27.9% to $75.5 million, while our pre-tax margin expanded by over 160 basis points to 16.2%.

Our GAAP fee tax income declined largely due to the $2.2 billion Berkeley Point financing in the year ago period, and higher grants of exchangeability with the material portion of those grants related to producers extending their contracts.

We expect our GAAP earnings to be significantly higher in the second half of the year, this is due in part to our strong pipeline of Berkeley Point financings. Our tax rate for adjusted earnings was 13.2% for the quarter, versus 18% a year earlier. Our tax rate declined due to the U.S. Tax Cut and Job’s Act.

Our post tax earnings increased 34.9% to $65.3 million. Our post tax earnings per share increased 19% to $0.25. Newmark’s fully diluted weighted average share count for the quarter was $258.7 million for adjusted earnings. The GAAP share account for the quarter was lower because GAAP excludes certain share equivalent in order to avoid dilution.

A year earlier weighted average share count for adjusted earnings was $228.4 million. Newmark had no statistics for GAAP earnings per share prior to the RPL [ph]

Newmark’s fully diluted share count increased mainly due to the first quarter 2018 sales BGC of approximately 16.6 million newly issued exchangeable limited partnership units of Newmark for $242 million at a price of $14.57 per share. Our fully diluted share count as of June 30, 2018 was 258.9 million shares.

Moving on to the balance sheet, as of quarter end, our cash and cash equivalents were $60.3 million, restricted cash was $315 million, long term debt was $659.7 million, and total equity was $778.3 million. The restricted cash is pledged for the benefit of Fannie Mae and includes an elective excess of approximately $260 million above the minimum required balance. We have chosen to maintain excess liquidity in the Fannie Mae restricted account as we believe this has a favorable impact on the company's credit profile.

We currently expect withdraw our elective excess capital within 12 months. The change in cash and cash equivalents since year end was due to the repayment of $423.5 million of long-term debt as well as our continued investment in the business.

Total equity increased largely due to the unit sale, NASDAQ monetization, GAAP net income and the previously reported impact of ASC 606. After the end of the quarter, BGC closed an offering of $450 million of 5.375% Senior Notes.

BGC intends to use some of the net proceeds of this offering to redeem the $112.5 million of 8.125% Senior Notes in 2042, which were assumed by Newmark in connection with the IPO.

These notes are callable at par. BGC expects to lend market funds to redeem the callable notes, which will reduce Newmark’s annualized interest expense by approximately $1.8 million. We believe that a combination of lower long-term debt increased total equity, and improving adjusted EBITDA has significantly strengthened Newmark’s balance sheet and further solidified our credit ratios.

For example, our long-term debt to adjusted EBTIDA at the mid-point of our 2018 EBITDA guidance range is 1.3 times. As Howard mentioned, we continue to make progress towards our planned spinoff, which we intend to complete by the end of 2008.

We are working with the rating agencies to obtain our own credit rating and believe that we have positioned the company to be the best in recovery. This will allow us to refinance our long-term debt at an attractive interest rate.

Separation for BGC is required in order for the spinoff to be tax free.

With that, I'm happy to turn the call back over to Barry.

[Barry Gosin, CEO]

Thank you, Mike. Our outlook is as follows. We expect to generate revenues of between $1.9 and $2.05 billion, or an increase of 19% to 28%, compared with approximately $1.6 billion last year.

We continue to anticipate our 2018 tax rate for adjusted earnings to be in the range of 12% to 14% versus 18% in 2017. We expect our 2018 earnings-per-share to be between a $1.40 and $1.60 as compared to $1.15 last year, or an increase of 22% to 39%.

We are raising our outlook for adjusted EBITDA before allocations to units to between $500 million and $550 million, and a increase of 34% to 47% compared with approximately $374 million in 2017.

We expect to update our annual guidance periodically over the course of the year. Our stock currently trades at a significant discount to our peers based on either price-to-earnings or enterprise value to adjusted EBITDA.

As we continue to grow at our industry leading pace, we expect our adjusted earnings, adjusted EBITDA, dividends and stock price will all go higher.

Operator, we'd like to open this call to questions.

[Operator]

[Operator Instructions] Your first question comes from Jade Rahmani with KBW. Your line is open.

[Jade Rahmani, KBW]

Thanks very much. I wanted to see if you could give any color on where you think you're gaining the Newmark brand is gaining the most traction, across your various business lines and geographies?

[Barry Gosin, CEO]

We’re gaining traction in pretty much every category. Capital, capital market has been the fastest trajectory over the last few years. So we continue to hire great talent. We continue to get and win more business that's doing really well. Our leasing and agency business is up significantly, so all of those businesses are moving pretty nicely.

[Jade Rahmani, KBW]

In terms of the recruiting environment, could you provide any color, perhaps on the value proposition that your offering various brokers and teams to join Newmark, and also if you've seen any trend in the market of various teams got choosing to go independent perhaps to build scale and then eventually consolidate back into one of the larger players?

[Barry Gosin, CEO]

Seeing very few people wanting to go get smaller. The world is consolidating clients one more from their providers, so that the consolidation is continuing, that which creates an opportunity for us. We are very attractive, because we do have opportunities where we can use certain people in certain markets that are not overcrowded, so we were very attractive. We’re very entrepreneurial in environment. Brokers like us. We enable and empower the brokers to do more with the stuff we have, and people more and more are very interested in Newmark as a brand to join.

[Jade Rahmani, KBW]

And in terms of the new hires, what's the typical lag period before there's a material impact on revenue production. Is it about six months? And so, could you quantify what percentage of your investment professionals are not yet had a normalized revenue basis ?

[Barry Gosin, CEO]

Depending on the product class investment sales might be a little longer than six months to ramp-up as they finish particular old firms or maybe somewhere between six and 12 months, leasing brokers on tenant rep side probably take a little longer, on the Landauer rep side probably little shorter timeline.

What you're seeing for us is continued investment through 2017 and through the first half of 2018 at a really rapid pace that we're continuing to invest in brokerage talent and valuation and advisory talent and you see we've grown that business. So all of our -- more than 8% of our growth this year has been organic and we expect to continue to see that kind of growth from the talent that we've hired over the six to 12 months, going forward as well as some of the acquisitions that we've announced and closed.

[Jade Rahmani, KBW]

In terms of the origination guidance of 75% growth year-on-year in the back half, is that particular to Berkeley Point? Or is that it also inclusive of investment sales and non-GSE mortgage banking?

[Barry Gosin, CEO]

That's particular Berkeley Point. I can say that Joe, we started off the quarter really well. We locked [ph] on about $1 billion -- on a billion dollar, approximate billion dollars worth of loans to Berkeley Point. We have visibility into a pretty good backend.

[Analyst]

Okay. And just lastly the guidance, I was wondering if you can give any color what drove the increase in adjusted EBITDA guidance, but fee revenue and adjusted EPS were unchanged?

[Mike Rispoli, CFO]

Yes. There's a little bit of mix difference in terms of the revenue for the year, so we have some higher [technical difficulty]

[Operator]

…line of Alexander Goldfarb with Sandler O’Neil. Your line is open.

[Alexander Goldfarb, Sandler O’Neil]

Hey. Good morning. Just a few questions here. First, can you just walk us through the intercompany loan that BGCP is going to be lending money to Newmark. What the rate is? And then also just if the whole idea of financial separation is truly financial separation to get tax-free spend, why won't Newmark pursue its own independent debt options, I mean you could get a private issuance, you could do other things that are under -- solely under Newmark rather than perpetuating the length between the two companies?

[Mike Rispoli, CFO]

Sure. So, there was an opportunity to get rid of some high yield there which is 8.125, BGC typically loans is their cost to capital, plus 1% Newmark, the Newmark will stay probably 160 basis points, close to 160 basis points and maybe for short period of time. I'm sorry, Alex.

[Alexander Goldfarb, Sandler O’Neil]

So what is the absolute rate that we should think about for that loan?

[Barry Gosin, CEO]

It will be around 6.5 versus the current 8.125, and you're right, Newmark is in the process of replacing, getting his own debt and its own credit rating, so it will be for short period of time, but we saw an opportunity to reduce our interest expense and we took that opportunity.

[Alexander Goldfarb, Sandler O’Neil]

Okay. And then, if we go and just look at your results this morning, I mean, on an operations basis, basically it seems like if it wasn't for the compensation and unit grant add-back you guys would have been well below the street. So, can you just walk us through sort of the P&L, what's going on? And then with all this hiring are you guys just doing a lot of big upfront contracts that are hitting and you're not getting the revenue? Or it just seems like comp expense is outpacing their revenue production? But if you could just walk through, because again looking at the P&L looks like if it weren't for the add-backs you guys would've missed?

[Mike Rispoli, CFO]

Yes. Remember on the exchange charges there some benefits to that namely and it keeps effected tax rate down between 12% to 14%. These are shares are already in share count, so its already in fully diluted share count and we grant exchangeability to those are partnership units over time. We fully expected those grants be go up as our earnings go up, so that we can keep our tax rate low.

[Howard Lutnick, Chairman]

And just to clear. When we issued shares to our employees over the years when the stock was six at BGC, and seven and eight before the spent. Those shares when they exchange them at you know the BGC equivalent of 11 or the Newmark equivalents of 14 that is significant appreciation. We get a tax deduction, but it cost us no money. When we issued the shares the shares went in the share count. So this is not cost, that appreciation keeps our tax rate down, but it does not cost us more money. And that's the key. The cost of exchangeability, the cost of my employees selling their units in shares does not cost the company more money. That is the key. A regular company that issues ARSUs the appreciation employees get capital gain and the company gets no deduction. At our company the employees get ordinary income and the company gets a tax deduction. So that is what – that's structural change keeps our tax rate down, right, to makes them look like our GAAP earnings are lower than they actually are and that's why our EBITDA is so strong and continues to grow.

So as you get experience with the company you're going to see that the way you've described it was just – because its new and its lack of experience, what you're going to see is the appreciation of the stock do not cost the company money. If the stock double all the unitholders who added now they would reluctant to sell their shares, there would be a huge tax deduction, it would look like an huge exchange charge, but all that happen is if the stock went up, the company got a huge tax deduction, but it didn't cost the any more money, because these shares are already in the share count. They are already in the share count and as you get more comfortable with the company you'll understand that the way you said that we had some sort of miss because our stock appreciated over the last couple of years you realized we did not issue more shares, it was not additional comp charge, you will become comfortable with just not – just ignoring those exchange charges because those are primarily driven by stock appreciation.

[Alexander Goldfarb, Sandler O’Neil]

Right. Howard, I appreciate that, but I'm looking on the screen that stocks up 4.5%, so its not just me I mean, the market I think looked at the P&L this morning, I had a similar reaction. So I think, look, as their earnings grow and the topline grows that's a positive, but I think when you see that its add-backs that allowed for the company to meet earnings, that's a tougher situation to write-up, its much easier for analysts to write-up that hey, topline be -- their revenue exceeded our expectation, those are the type of headlines I think that you'd rather read and that would drive the stock.

But if I can just ask one final question in your comments in the press release this morning you said that you guys intent to have the spin done by the end of 2018 and appreciate the timing. And I'm curious the intent is not just sort of generic, sort of safe harbor intend, but the view is that you want to get – you'll have it done sooner or are there some issues with getting the investment grade rating that make you say, look we're hopeful to get it done by the end of 2018, but actually may slip.

[Mike Rispoli, CFO]

There are no issues that we know we are saying things take time and we expect or we intent to get it done by the end of the year, but we're working hard on and get it done sooner. Of course it would be done sooner. We don't know of anything that would lead us to think otherwise.

[Alexander Goldfarb, Sandler O’Neil]

Okay. I appreciate that. Thank you.

[Operator]

[Operator Instructions] Your next question comes from David Ridley-Lane with Bank of America/Merrill Lynch. Your line is open.

[David Ridley-Lane, Bank of America Merrill Lynch]

Good morning. Curious on the intra-quarter acquisitions that were announced, if you don't want to go, get sort of financial details on each one, I can understand that. But any help that you could give us in sort of quantifying and sizing maybe the aggregate impact of the announced acquisitions this quarter?

[Mike Rispoli, CFO]

David, we haven't been disclosing the revenues from the acquisitions that aren't overall material. I think we have disclosed the number of brokers that are each of these companies, some with press releases, so we're adding 50 to 100 brokers in tenant rep and in Texas firm and another probably close to 100 brokers and retail across the country. But the bigger – I think the bigger story here is as we've done with our other acquisitions, we have the ability and a plan to really grow those businesses and we fully intent to do that.

[Barry Gosin, CEO]

We will take your question [Indiscernible] in there and we will study whether that's a good idea that each quarter when we come out maybe we can give scale and scope. So we'll take that as advice and take a look at that.

[David Ridley-Lane, Bank of America Merrill Lynch]

Sure. And then on the – you have gain some mortgage banking and your view on the back half, what is that kind of suggest your market-wide view if you will? What are you embedding in terms of the industry assumption there?

[Barry Gosin, CEO]

We see the pipeline. We see the applications. The amount of origination, the amount of sales, what's going back and forth and we feel good about what we have in the pipeline, so many of the things that we instituted with the purchase of Berkeley are starting to bear some fruit.

[Mike Rispoli, CFO]

And as you know, Fannie got off to a little bit of a slow start this year, it started to pick up the originations in the second quarter and they always want to hit their cap, both Fannie and Freddie want to hit their caps for the full year, so they're seeing a lot of that pivoting in the market.

[David Ridley-Lane, Bank of America Merrill Lynch]

All right. Thank you very much.

[Operator]

Your next question comes from the line of Henry Coffey with Wedbush. Your line is open.

[Henry Coffey, Wedbush]

To all the exciting questions, but very interesting quarter. So you made the comment and just correct me if I got this wrong, that 75% of your growth was organic. So should I focus just on the revenue number and say okay so revenue increase year-over-year 62 million, 75% of that is about 45 million or 46 million and the rest was acquired over the last 12 months. Is it that the appropriate way to think about it or should that be just measuring in a different way?

[Mike Rispoli, CFO]

Yes. I think that generally correct. We did say that over 80% of our growth in the quarter was organic.

[Henry Coffey, Wedbush]

It was 80%, I'm sorry, I did that wrong, okay. That's easy to fix.

[Mike Rispoli, CFO]

So -- but your math is correct, yes.

[Henry Coffey, Wedbush]

And then in terms of understanding the share count especially as the business grows and you recruit more people et cetera, et cetera, right now its 258.7 million and the end of period share count using the same math was about what that's a question?

[Mike Rispoli, CFO]

It was about the same. That was within a very small amount, 258.9.

[Henry Coffey, Wedbush]

Okay. And then and in terms of forward growth on that I know you've increase your buyback but at what point you're issuing equity, so you're not buying back stock. So what is the trigger for you actually to think about buying back stock? Or is that number, that 258 going to keep growing every quarter as you recruit employees and other factors that drive the number higher?

[Mike Rispoli, CFO]

Yes. As far as the buyback we will look at that how it spin in that regard, but I'd like to just address one point from the prior, just keep in mind that on our cap line as the stock appreciation we receive, the company receives a tax deduction for that value, the non-cash expense, but tax deductions benefit the entire group. Sorry, the buyback again you're going to consider that strongly post spin.

[Henry Coffey, Wedbush]

So on that issue that add-back, the expense add-back related to the – is it simple for me to look at it and say, well, its really just equivalent to where the lot of west coast companies do with stock compensation expense? Its has a different dynamic in different accounting, but the same basic issue that you're recognizing a stock grant and converting that, the only difference between stock compensation expense and this is that you've already done the capital at and so its really just recognizing a stock-based form of compensation, because there's no share issuance, there's no change in getting [ph] capital et cetera?

[Mike Rispoli, CFO]

Its even – I mean, that's okay, but its actually more positive should be than that which is we book in our adjusted earnings compensation according to GAAP without exception. So basically that means, if we gave and option, we would take to our adjusted earnings, when we get equity we amortize it according to GAAP without exception, right. What happens is because we issue the equity in the form that we did. When that stock appreciates, that appreciation creates -- so just the appreciation, now, so we gave someone 1 million with the stock and we sign the five-year contract, they'll amortize it over the five years, so 2000 years there's nothing and that's in our adjusted earnings, but if that appreciated, right.

[Henry Coffey, Wedbush]

If that unit appreciates in value you get a charge and you also get a tax deduction?

[Mike Rispoli, CFO]

Exactly, right. It will makes it look like we were in the last one, when we of course have not gives us the past reductions, we pay less taxes which is the benefit to us, but so that the idea, growth on five-year example just some more hypothetical, but the ideas is we take our compensation according to GAAP without exception and its not and we're not leading out our compensation from adjusted earnings, that would not be true. But the company had dramatic growth and dramatic appreciation where our employee partners and when they sell some shares we get the huge tax reduction and we said it that way, so we get the tax deduction, but it also looks like a GAAP, because it is compensation, it’s a GAAP charge, so that's why we say our exchangeability charges are non-cash, non-dilutive, non-economic.

[Henry Coffey, Wedbush]

I get it. I get the concept, but just want to make sure -- and that's going to be always a volatile item depending on where the shares are and what employees are doing etc cetera and then the add-back will be – it looks like the add-backs about 93% of the actual charge. That's what it's always going to be?

[Mike Rispoli, CFO]

Yes. You got the point, it will be volatile and you understand.

[Henry Coffey, Wedbush]

Okay. Thank you.

[Operator]

Your next question comes from the line of Jade Rahmani with KBW. Your line is open.

[Jade Rahmani, KBW]

I appreciate the disclosure that you gave about operating cash flow excluding the GSE businesses, because I know the timing of deliveries of those loans can be volatile? Just wanted to make sure were there any seasonal working capital adjustments that would have caused cash flow to be upsize, because it was pretty close to adjusted earnings which is a positive validation of the way you define earnings?

[Mike Rispoli, CFO]

Yes. I think that's exactly right. If you remember in the first quarter there were some working capital uses, in the second quarter it's basically our adjusted earnings less what we've invested or reinvested back into the business to continue to grow. So I think you're exactly right.

[Jade Rahmani, KBW]

Okay. And then just turning to the M&A pipeline, wanted to ask if you can make any comments about what you're seeing in terms of deal flow if they're still an attractive pipeline of deals that you're looking at?

[Mike Rispoli, CFO]

Well, the pipeline is robust. If you remember we talked about appraisal and valuation, we hired one person about two years ago, maybe year and a half ago. We now have 400 people in our appraisal business. The way we've done everything is by hiring the right leader who is a Pied Piper. We then are able to expand that platform geographically by other disciplines on appraisal we do. We have hotel. We have healthcare. And they're all part of this assemblage of monumental appraisal business.

Now the acquisition of RKF comes with leadership with the same conceptual framework and the Pied Piper effect, so we will not only be accretive thus instantaneously, but it'll be more creative thus because what we've done is connected with the acquisition, a number one retail broker in New York we've -- how we hired the number one person who is attracted to other smaller platforms around the country.

So there we now have another lane to travel in and pretty much everything we've done including the hiring of Boston team Rob Griffin and then Shannon team on the West Coast and then the team in Northern California and we're working our way around the country food group by food group, discipline by discipline, person by person, this is heavy lifting, and I would say the combination of acquisition of companies. The acquisition of talent, the expansion of types of businesses are the opportunities that hit us is, is accelerating.

[Jade Rahmani, KBW]

Okay, thanks very much. And just lastly, if the stock hypothetically were to stay in the current range, what would the tax rate be in 2019?

[Mike Rispoli, CFO]

We obviously haven’t given guidance beyond 2018. But our expectation is that we will capturing about the same range.

[Jade Rahmani, KBW]

Thanks very much.

[Operator]

[Operator Instructions] There are no further questions at this time.

[Howard Lutnick, Chairman]

I’d like to thank everybody for joining us. I look forward to speaking again.

[Operator]

This concludes today’s conference call. You may now disconnect