Marcus & Millichap, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparison is with Q1 2018. The company is a commercial real estate brokerage and financing firm, operating 80 offices in the U.S. and Canada with 1,919 investment sales and financing professionals at quarter-end. It reported one operating segment.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $160.7 million | $174.5 million | Down 7.9% |
| Operating income / margin | $18.3 million / 11.4% | $23.5 million / 13.4% | Income down 22.1% |
| Net income / net margin | $15.6 million / 9.7% | $18.0 million / 10.3% | Down 13.2% |
| Diluted EPS | $0.40 | $0.46 | Down $0.06 |
| Adjusted EBITDA | $23.2 million | $27.4 million | Down 15.6% |
| Operating cash flow | $(38.6) million | $(13.0) million | Greater cash use |
Revenue comprised $144.9 million in brokerage commissions (down 10.8%), $13.7 million in financing fees (up 41.2%) and $2.0 million in other revenue (down 11.1%). Total operating expenses fell 5.7% to $142.4 million; cost of services declined 9.8% to $91.7 million, while SG&A increased 1.8% to $48.9 million. The effective tax rate was 26.6%, versus 25.9%.
At March 31, cash and cash equivalents were $198.1 million and available-for-sale securities totaled $196.1 million, or $394.2 million combined. Current assets were $340.2 million against current liabilities of $73.4 million. The company had no borrowings under its $60 million revolving credit facility; $533,000 of its letter-of-credit sublimit was used. Notes payable to former stockholders totaled $7.7 million, with final principal due in Q2 2020. Operating lease liabilities were $75.9 million. Stockholders’ equity was $426.1 million.
Material changes and operating performance
- Brokerage commissions fell mainly because brokerage sales volume declined 10.3%; brokerage transactions decreased to 1,405 from 1,585, while average commission per transaction was broadly stable.
- Financing fees benefited from 388 transactions versus 324 and financing volume of $1.46 billion versus $1.01 billion. Management attributed part of the growth to acquisitions completed in 2018; average fee rate declined four basis points.
- Total reported transaction volume was approximately $9.8 billion in both periods, although the company closed more than 1,900 transactions in Q1 2019 versus nearly 2,100 in Q1 2018.
- Operating cash outflow increased primarily with timing of payments and receipts, higher advances to professionals, reduced bonus accruals and less deferral of discretionary commissions. Management noted that Q1 typically uses cash as prior-year bonuses and deferred commissions are paid.
Outlook, risks and notable items
- No numerical full-year guidance was provided. Management described its baseline outlook for commercial real estate investment as generally stable and remained optimistic that economic expansion would continue through 2019.
- Management cited first-quarter headwinds from interest-rate volatility, cautious buyer underwriting, elevated seller pricing expectations and longer marketing and closing timelines. Trade tensions, international economic uncertainty, market volatility and the maturing economic cycle could also affect activity. The company’s results are transaction-dependent and seasonal, typically stronger in the second half, especially Q4; Q1 results are not necessarily indicative of the full year.
- Adoption of the lease accounting standard on January 1, 2019 added lease right-of-use assets and liabilities to the balance sheet, materially affecting balance-sheet presentation but not materially affecting reported income. Future minimum lease payments were $83.2 million before $7.4 million of imputed interest.
- The investment portfolio had an average credit rating of AA+. Management estimated that a 1% interest-rate increase would reduce its fair value by approximately $2.5 million, while a 1% decrease would increase it by approximately $2.5 million. No investment impairment write-downs were recorded.
- The revolving facility matures June 1, 2020 and is secured by substantially all company assets. The company reported compliance with its covenants. Management believed available liquidity would meet operating requirements for the foreseeable future, while noting that additional financing may not be available on acceptable terms if needed.
- Ordinary-course legal claims include brokerage, commercial relationship and employment matters, including challenges to sales professionals’ independent-contractor classification. The company did not expect their outcome to materially adversely affect its financial position, results or cash flows. It reported no material change to previously disclosed risk factors.
- Disclosure controls were deemed effective, with no reported material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether brokerage transaction volume and commission revenue stabilize, and whether financing growth persists beyond acquisition contributions.
- Drivers of operating cash use, including timing of bonus and commission payments, professional advances and receivables.
- Liquidity and investment portfolio composition, interest-rate sensitivity, and the terms and covenant headroom of the credit facility.
- Lease obligations, the timing of former-stockholder note repayments, and possible liquidity effects of SARs or other commitments.
- How market conditions, transaction seasonality and buyer-seller pricing gaps affect full-year results; the filing provides no quantitative earnings or revenue guidance.