Marcus & Millichap, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Marcus & Millichap is a commercial real estate brokerage and financing firm operating 82 offices in the U.S. and Canada. It reported one operating segment. The quarter’s results largely preceded widespread shelter-in-place restrictions, which began affecting activity after March 15.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $190.7 million | $160.7 million | +18.7% |
| Operating income | $19.6 million | $18.3 million | +7.5% |
| Net income | $13.1 million | $15.6 million | -16.4% |
| Diluted EPS | $0.33 | $0.40 | Down $0.07 |
| Adjusted EBITDA | $22.4 million | $23.2 million | -3.4% |
| Net cash used in operating activities | $52.8 million | $38.6 million | Cash use increased $14.2 million |
- Brokerage commissions rose 18.6% to $171.8 million; financing fees increased 11.8% to $15.4 million; other revenue grew 73.6% to $3.5 million.
- Brokerage transaction count increased 14.9% and sales volume rose 18.9%. Financing volume increased 20.1%.
- Operating margin declined to 10.3% from 11.4%; net margin declined to 6.9% from 9.7%. Cost of services increased 24.1%, faster than revenue, and rose to 59.6% of revenue from 57.1%.
- SG&A increased 12.1% to $54.9 million, primarily reflecting sales support and marketing, legal and facilities costs. Other expense/income swung to a $0.4 million expense from $3.4 million of income, including lower deferred-compensation plan asset values and a foreign currency loss.
Balance sheet, liquidity and cash flow
- At March 31, cash and cash equivalents were $189.8 million; available-for-sale debt securities totaled $189.1 million. Total assets were $670.3 million and stockholders’ equity was $509.3 million.
- Current assets were $352.1 million and current liabilities $65.5 million. Management cited $336.9 million of cash on hand and core-cash investments and $60.0 million of borrowing capacity as available liquidity.
- No borrowings were outstanding under the $60 million revolving credit facility, which matures June 1, 2022. The company reported compliance with its covenants. Notes payable to former stockholders totaled $6.6 million at quarter-end and were paid in April 2020. Operating lease liabilities were $79.4 million.
- Operating cash use reflected seasonal payments of prior-period bonuses and deferred commissions, increased advances to professionals, and timing of receipts and payments. Investing activities provided $13.1 million, including securities sales and maturities, partially offset by a $6.0 million acquisition outflow. Cash declined $42.9 million during the quarter.
Changes, outlook and risks
- Revenue and transaction activity grew year over year, but expense growth, lower other income and a higher effective tax rate (31.2% versus 26.6%) reduced earnings. Q1 results are not necessarily indicative of full-year performance.
- Management expected revenue to be negatively affected in Q2 and Q3 2020, with recovery timing difficult to forecast. It provided no quantified full-year guidance.
- COVID-19 was associated with longer closing timelines, failed transactions, canceled contracts, mispriced listings and slower brokerage and financing activity. Management highlighted uncertainty around transaction demand, property occupancy and rent collection, capital availability, workforce disruption and the duration of restrictions.
- In Q2, management approved and began cost reductions, including layoffs, furloughs and senior personnel salary reductions; the filing said the workforce had been reduced by approximately 20% to date, with no material one-time termination benefits expected.
- An acquisition of a commercial real estate finance intermediary closed in April. Commitments associated with professional agreements and acquisitions totaled $17.9 million through the financial statement issuance date; separate commitments to professionals as of March 31 were $11.6 million.
- The company adopted the expected-credit-loss standard in January, recording a $33,000 after-tax cumulative adjustment to retained earnings. It reported no credit-loss allowance on its marketable debt securities at March 31, despite $1.0 million of unrealized losses, attributing them to market and interest-rate factors.
- Management assessed COVID-19 as an impairment trigger but reported no impairment of property and equipment, goodwill or intangible assets at March 31. Litigation arose in the ordinary course; management did not expect the known proceedings to have a material adverse effect.
Important facts for investors to verify
- Subsequent-quarter revenue, transaction closings and financing volumes against management’s expectation of weakness in Q2 and Q3.
- Cash generation and liquidity as operating cash use, professional advances, acquisition commitments and reduced transaction activity evolve.
- Whether cost reductions—including the approximately 20% workforce reduction—produce savings without impairing business capacity.
- Credit quality and fair value of the securities portfolio, and potential impairment of goodwill, intangibles and mortgage servicing rights under prolonged economic stress.
- Completion and financial contribution of the April acquisition, and the timing and conditions attached to outstanding commitments.