Marcus & Millichap, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Dollar amounts below are in millions unless stated otherwise. The company is a commercial real estate brokerage and financing firm operating 81 offices in the U.S. and Canada, with 1,671 investment sales and financing professionals at quarter-end.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $180.6 | $165.9 | $528.3 | $485.9 |
| Operating income | $24.9 | $27.4 | $78.6 | $80.7 |
| Net income | $15.1 | $15.2 | $47.5 | $46.4 |
| Diluted EPS | $0.39 | $0.39 | $1.22 | $1.19 |
| Adjusted EBITDA (non-GAAP) | $28.1 | $29.6 | $87.0 | $88.9 |
- Q3 revenue increased 8.9%; brokerage commissions rose 9.1% to $165.7 million, financing fees rose 4.2% to $11.3 million, and other revenue rose 17.9% to $3.6 million.
- Nine-month revenue increased 8.7%. Brokerage commissions rose 9.7% to $489.5 million and financing fees rose 2.4% to $30.8 million; other revenue declined 15.4% to $8.0 million, primarily due to lower consulting and advisory services.
- Operating margin declined to 13.8% from 16.5% in Q3 and to 14.9% from 16.6% for the nine-month period. Net margin was 8.4% versus 9.1% in Q3 and 9.0% versus 9.5% year to date. Operating expenses grew faster than revenue, including higher commission costs, support payroll, facilities, and marketing.
- Cash from operations was $41.5 million for the nine months, versus $38.6 million a year earlier. Capital spending was $7.0 million. Cash increased $25.8 million to $122.0 million; investing cash use was $14.2 million, compared with $123.8 million in 2015, largely reflecting lower net purchases of securities.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $122.0 million and available-for-sale marketable securities totaled $142.7 million. Current assets were $185.6 million against current liabilities of $64.8 million.
- Total liabilities were $118.1 million and stockholders’ equity was $241.9 million. No amounts were drawn under the $60 million revolving credit facility; $533,000 of its letter-of-credit sublimit was in use. The company reported compliance with facility covenants.
- Notes payable to former stockholders totaled approximately $9.7 million and mature in 2020. The company also reported deferred compensation and commissions liabilities, including a $22.1 million SARs liability. It stated that available liquidity should meet operating needs for at least 12 months.
- Operating lease commitments aggregated approximately $77.1 million. Adoption of the new lease accounting standard is expected to materially increase reported balance-sheet assets and liabilities; the amount was not yet determined.
Changes, outlook, and risks
- Transaction activity strengthened: Q3 closed transactions were 2,391 versus 2,212, with volume of $11.1 billion versus $9.4 billion. Nine-month transactions were 6,686 versus 6,255, with volume of $31.4 billion versus $26.9 billion.
- Management attributed brokerage growth to higher transaction counts and average transaction size. A shift toward larger transactions reduced average commission rates. Cost of services rose to 63.0% of revenue in Q3 from 61.5%, partly because more transactions were closed by higher-commission senior professionals.
- Management described U.S. economic growth and commercial real estate fundamentals as generally supportive, with ample financing liquidity and disciplined underwriting. It also cited market uncertainty, a maturing real estate cycle, more cautious buyers and lenders, and longer closing times as factors restraining transaction velocity. No specific full-year financial guidance was provided; interim results may not indicate full-year performance.
- Revenue, earnings, and cash flow are transaction-dependent and seasonal, historically tending to be higher in the second half, particularly Q4. Market conditions, interest rates, capital availability, recruiting and retaining professionals, and transaction timing may materially affect results.
- Ordinary-course legal claims include brokerage, employment, and other disputes; most are insured subject to policy limits and deductibles. The company said it did not expect their resolution to materially adversely affect its financial position, results, or cash flows. No material risk-factor changes were reported.
- The company does not currently intend to pay a regular dividend. Founder and Co-Chairman George M. Marcus beneficially owned 55.2% of shares. Related-party dealings included brokerage and financing services for MMC subsidiaries and an office lease from MMC.
Important facts for investors to verify
- Whether revenue growth can continue if transaction velocity slows, and how the larger-transaction mix affects commission rates and margins.
- Whether expense growth—especially commissions, staffing, facilities, and marketing—moderates relative to revenue.
- The composition and liquidity of the $142.7 million securities portfolio, and its sensitivity to interest-rate changes; the filing estimates a $5.5 million fair-value decline with a 2% rate increase.
- The timing and amount of payouts for SARs and deferred compensation, including the effect of participant retirements on contractual payment schedules.
- The eventual balance-sheet impact of lease accounting and the status of legal matters, related-party arrangements, and independent-contractor classification risks.