BGC Partners Agrees to Acquire 100 Percent of Berkeley Point Financial LLC

BGC Partners, Inc. (NASDAQ: BGCP) (“BGC Partners”, “BGC”, or the “Company”) has agreed to acquire Berkeley Point Financial LLC.1 Berkeley Point is a leading commercial real estate finance company focused on the origination and sale of multifamily and other commercial real estate loans through government-sponsored and government-funded loan programs, as well as the servicing of commercial real estate loans, including those it originates. Berkeley Point was acquired by an affiliate of Cantor Fitzgerald, L.P.2 on April 10, 2014.

The Board of Directors of BGC, upon the unanimous recommendation of a Special Committee consisting of all four independent directors (the “Special Committee”) assisted by independent advisors, has unanimously approved the acquisition of Berkeley Point and the related transactions. The total consideration payable by BGC for the acquisition of Berkeley Point is $875 million, subject to certain adjustments at closing. After the proposed acquisition is completed, Berkeley Point and the investment in the new real estate business described below will become part of Newmark Knight Frank (“Newmark” or “NKF”), BGC’s Real Estate Services segment. The acquisition of BPF is expected to be immediately accretive to BGC’s earnings per share upon closing.

Howard W. Lutnick, Chairman and Chief Executive Officer of BGC Partners, said: “We believe that the addition of Berkeley Point will significantly increase the scale and scope of Newmark, as well as substantially improve upon its already strong financial performance. BPF’s revenues increased by more than 55 percent year-over-year in the 12 months ended March 31, 2017. Over the same timeframe, Berkeley Point’s GAAP3 pre-tax income grew by approximately 169 percent, while its pre-tax income, excluding GAAP net non-cash MSR income,4 increased by over 52 percent. BPF is also expected to generate strong double-digit revenue and earnings growth for full years 2017 and 2018.

“Berkeley Point is a low-risk intermediary in commercial real estate finance for the multifamily market. It originates and services multifamily loans as part of programs run by U.S. government-sponsored enterprises such as Fannie Mae and Freddie Mac, as well as by the U.S. Department of Housing and Urban Development.5 This means that unlike traditional lenders, Berkeley Point originates loans that meet strict criteria set by the U.S. government. These loans are guaranteed by GSEs, and are pre-sold.6 Berkeley Point is entirely consistent with our low-risk business model.”

Barry M. Gosin, Chief Executive Officer of Newmark, added: “This transaction will combine BPF’s top five Fannie Mae and Freddie Mac multifamily origination business with ARA, Newmark’s top three multifamily investment sales business,7 along with our fast-growing commercial mortgage brokerage business. We believe that this combination will be a catalyst for dramatically higher revenue and earnings growth for Newmark.

“Berkeley Point will drive our margins higher, as it is more profitable than our publicly-traded commercial real estate services peers.8 In addition, Berkeley Point generated approximately 30 percent of its revenues from stable and recurring loan servicing fees, which come from mortgage servicing rights with an average duration of almost eight years.9 These servicing fees, alongside Newmark’s existing property management, facilities management, advisory, consulting, and agency leasing businesses, mean that a significant amount of our revenues and earnings will be recurring and predictable.”

Jeff Day, Chief Executive Officer of Berkeley Point, stated: “Being part of Newmark will give us the ability to offer our clients a broad array of financing options. The combined business will also provide tenant and agency leasing, property and facilities management, advisory and consulting, appraisal, project and development management, real estate technology solutions, and commercial loan servicing. This diverse suite of offerings covers the full spectrum of products applicable to tenants, landlords, and investors, which will be unmatched across the commercial real estate services industry”.

Highlights of Berkeley Point Financial Results

Berkeley Point’s net asset or book value was $509 million as of March 31, 2017.10 BPF generated revenues and pre-tax income under GAAP of $314 million and $143 million, respectively, for the trailing 12 months ended March 31, 2017. The latter two results represented year-on-year increases of 55 percent and 169 percent, respectively.

BPF’s GAAP pre-tax income includes non-cash GAAP gains attributable to originated MSRs and non-cash GAAP amortization of MSRs. Excluding the net impact of these non-cash items, Berkeley Point’s pre-tax earnings would have increased by 52 percent to $64 million11 for the same trailing 12 month period. Following the completion of the proposed transaction, BGC’s calculation of pre-tax distributable earnings and adjusted EBITDA12 will exclude the net impact of these same non-cash GAAP items. Investors should note that the cash received with respect to these MSRs, net of associated expenses, is expected to increase pre-tax distributable earnings and adjusted EBITDA recorded by the Real Estate Services segment in future periods.

Berkeley Point Outlook

  • For the year ended December 31, 2017, Berkeley Point’s revenues are expected to increase by at least 30 percent compared with $294 million in 2016. BPF’s revenues are expected to increase by at least an additional 20 percent year-over-year in 2018.
  • Berkeley Point’s 2017 GAAP pre-tax income is expected to increase by at least 35 percent compared with $126 million in 2016. BPF’s GAAP pre-tax income is expected to increase by at least 35 percent year-over-year again in 2018.
  • Berkeley Point’s 2017 pre-tax income excluding GAAP net non-cash MSR income is expected to increase by at least 35 percent compared with $60 million in 2016. This same metric is expected to increase by at least another 40 percent year-over-year in 2018.13

This growth is expected to be driven by synergies between Berkeley Point’s and NKF’s large national sales organizations.

Transaction Details

The total consideration payable by BGC to Cantor for the acquisition of Berkeley Point is $875 million, expected to be in cash,14 subject to upward or downward adjustment to the extent that the net assets of Berkeley Point as of the closing are greater than or less than approximately $509 million. The proposed transaction does not include a transfer of the economics of BPF’s special asset servicing business,15 which was not profitable.

BGC expects to fund the acquisition through a combination of a bond issuance, term loan, or other debt financing arrangements, as well as from existing financing sources and cash on hand. BGC intends to remain investment-grade following the close of the transaction. The acquisition of Berkeley Point is expected to close during 2017, subject to receipt of certain regulatory approvals, including from Fannie Mae, Freddie Mac and HUD, and other customary closing conditions.

Minority Investment in a New Real Estate Finance and Investment Business with Cantor

Contemporaneously with the proposed acquisition of Berkeley Point, BGC will invest $100 million in cash for approximately 27 percent of the capital in a commercial real estate-related finance and investment business, along with Cantor (the “Investment”). Cantor will control the Investment and will contribute approximately $267 million of cash and non-cash assets for approximately 73 percent of the Investment’s capital. The Investment will be structured as a limited partnership, is expected to collaborate with Cantor’s significant existing commercial real estate finance business, and may conduct activities in any real estate-related business.

Under the terms of the Investment, Cantor has agreed to bear initial net losses of the partnership, if any, up to an aggregate amount of approximately $37 million per year. BGC will be entitled to a cumulative annual preferred return of five percent of its capital account balance and a profit participation thereafter.

Special Committee Unanimous Approval

The Board of Directors of BGC has unanimously approved the BPF acquisition and the Investment, upon the recommendation of the Special Committee, which was assisted by independent advisors. Sandler O’Neill & Partners, L.P. served as financial advisor to the Special Committee, and Debevoise & Plimpton LLP served as legal advisor to the Special Committee.

Cantor Fitzgerald & Co. served as Cantor’s financial advisor, and Wachtell, Lipton, Rosen & Katz served as Cantor’s legal advisor.

Recast Financial Results

After the proposed transaction is completed, the Company’s Real Estate Services segment will report one new revenue line item reflecting BPF’s “gains from mortgage banking activities, net” and record Berkeley Point’s “servicing fees” as part of what will be called “management services and servicing fees”. The proposed transaction involves a reorganization of entities under common control. Therefore, after the closing of the acquisition, BGC’s financial statements are expected to be retrospectively recast to include the results of BPF from April 10, 2014, onward. These adjustments will impact a number of line items on the financial statements for the Real Estate Services segment, Corporate Items, and the consolidated Company.

 

1 The proposed acquisition of Berkeley Point Financial LLC includes its wholly owned subsidiary Berkeley Point Capital LLC, which together are referred to as “Berkeley Point” or “BPF”.
2 Cantor Fitzgerald, L.P. and/or certain of its affiliates or subsidiaries are collectively referred to as “Cantor”.
3 “GAAP” is an abbreviation for Generally Accepted Accounting Principles.
4 “MSRs” is an abbreviation for “Mortgage Servicing Rights.”  “Net non-cash MSR income” consists of GAAP non-cash originated MSR gains, net of GAAP non-cash MSR amortization. See the sections of this document titled “Highlights of Berkeley Point Financial Results”, “Pre-Tax Distributable Earnings Following the Closing of the Proposed BPF Transaction”, and “Adjusted EBITDA Following the Closing of the Proposed BPF Transaction” for more information on how MSRs affect BPF’s financial results.
5 Abbreviated as “GSEs” and “HUD”.
6 These loans are held on BPF’s balance sheet for generally only 30 to 45 days.
7 Based on Real Estate Alert’s 2016 U.S. investment sales broker rankings and Fannie Mae and Freddie Mac 2016 multifamily lender rankings.
8 NKF’s peers trade under U.S. ticker symbols CBG, JLL, and CIGI, and U.K. ticker symbol SVS. The margins for these peers are based on Bloomberg data for the trailing 12 months ended March 31, 2017. BPF’s margin is based on the unaudited trailing 12 months ended March 31, 2017.
9 Revenues are for the trailing 12 months ended March 31, 2017.  Duration is based on the weighted average remaining term as of the same date.
10 As of March 31, 2017, BPF’s balance sheet included $355 million of mortgage servicing rights.
11 The net impact of non-cash GAAP gains attributable to originated MSRs and non-cash GAAP amortization of MSRs was $79 million for the trailing 12 months ended March 31, 2017.
12 See the portions of this document titled “Pre-tax Distributable Earnings Following the Closing of the Proposed BPF Transaction” and “Adjusted EBITDA Following the Closing of the Proposed BPF Transaction” for the expected revisions to these non-GAAP terms.
13 Approximately 50% of GAAP net income in both 2017 and 2018 is expected to consist of non-cash GAAP gains related to originated MSRs, net of non-cash MSR amortization expense.
14 Up to $3.5 million of the purchase price may be paid in units of BGC Holdings, L.P.
15 As of March 31, 2017, BPF’s special asset servicing business represented less than 10 percent of the notional value of Berkeley Point’s overall $56 billion servicing portfolio and an immaterial amount of BPF’s servicing fees.