Marcus & Millichap, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
Marcus & Millichap is a commercial real estate brokerage and financing firm, operating 82 offices in the United States and Canada. Its revenue is primarily transaction-based brokerage commissions, with financing fees and other services contributing the remainder. COVID-19 restrictions and economic uncertainty sharply reduced transaction activity in Q2.
Key financial results
- Q2 revenue: $117.4 million, down 44.0% from $209.6 million. Brokerage commissions fell 45.2% to $103.4 million; financing fees fell 28.4% to $12.7 million.
- Q2 profitability: Operating loss was $2.6 million versus operating income of $27.0 million a year earlier. Net income was $0.1 million versus $21.3 million; diluted EPS rounded to $0.00 versus $0.54. Operating margin was -2.2%, versus 12.9%; net margin was 0.1%, versus 10.2%.
- Q2 activity: Real estate brokerage transactions declined to 1,075 from 1,834, and brokerage sales volume fell to $5.4 billion from $9.2 billion. Across investment sales, financing and other transactions, the company reported 1,587 transactions and $6.9 billion of volume, versus more than 2,500 and approximately $13.0 billion.
- Six-month results: Revenue was $308.1 million, down 16.8%; operating income was $17.0 million, down 62.4%; net income was $13.2 million, down 64.3%. Diluted EPS was $0.33 versus $0.93. Operating and net margins were 5.5% and 4.3%, respectively, versus 12.2% and 10.0%.
- Adjusted EBITDA: $4.2 million in Q2 versus $32.0 million; $26.5 million for the six months versus $55.2 million. This is a non-GAAP measure and should be considered alongside GAAP results.
- Cash flow and liquidity: Six-month operating cash flow was negative $51.8 million, compared with negative $24.4 million in 2019. Cash and cash equivalents were $154.9 million at June 30, down from $232.7 million at year-end 2019. Management reported $322.1 million of cash on hand and core-cash investments and said available liquidity was expected to meet operating needs for at least 12 months.
- Debt and obligations: No borrowings were outstanding on the $60 million revolving credit facility; $533,000 of its $10 million letter-of-credit sublimit was used. The facility matures June 1, 2022. Operating lease liabilities totaled $78.1 million. The company paid off former-stockholder notes in April 2020.
- Balance sheet: Total assets were $670.8 million, total liabilities $157.9 million and stockholders’ equity $512.9 million at June 30, 2020. Marketable debt securities totaled $212.5 million.
Changes, outlook and risks
- Q2’s sharp deterioration reflected the pandemic-related shutdown, lower transaction volumes, difficulty pricing assets and financing-market disruption. Management attributed the 45.2% decline in brokerage commissions mainly to lower sales volume and a lower average commission rate.
- Management expected COVID-19 to continue adversely affecting revenue at least through Q3 and Q4 2020, but said the duration and scale were uncertain and provided no numerical earnings or revenue guidance. It anticipated eventual improvement when market participants could better assess property performance and financing conditions.
- The company implemented cost reductions, including compensation reductions for senior leaders and key personnel, fewer events and travel, suspension of 401(k) matching contributions, and furloughs and layoffs. Cost of services rose to 62.8% of Q2 revenue from 61.0%; management expected the proportion to remain elevated near term.
- Two businesses were acquired during the first half for approximately $11.8 million net cash at closing, with additional contingent and deferred consideration. Preliminary purchase allocations included $9.2 million of goodwill. No goodwill or intangible-asset impairment was recorded at June 30.
- Contingent and deferred acquisition consideration had a maximum undiscounted payment of $17.3 million. The company also disclosed $15.6 million of commitments to advance funds to sales and financing professionals, and a commitment to invest up to $5.0 million in a limited liability company investing in highly rated asset-backed securities.
- The filing identifies uncertainty around the pandemic, economic conditions, real estate values and transaction activity as material risks. Ordinary-course litigation was disclosed; management did not believe its outcome would materially affect the company’s financial position, results or cash flows.
Most important facts to verify
- Whether transaction volume and brokerage activity recovered after Q2, particularly in the private-client market and the retail and hospitality property segments.
- Whether cash generation improved, given negative first-half operating cash flow and the $77.8 million decline in cash and cash equivalents.
- Whether the stated $322.1 million of cash and core-cash investments, plus the undrawn revolver, remained available on the terms management expected.
- How acquisition earn-outs, professional-advance commitments, lease obligations and cost reductions affected subsequent cash flows and margins.
- Whether future results or impairment assessments changed as pandemic conditions and market assumptions evolved; the filing states the extent of those impacts was uncertain.