Marcus & Millichap, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter results. The company is a commercial real estate brokerage and financing firm, operating 79 offices in the United States and Canada.
Business context and performance
Revenue is primarily transaction-based: brokerage commissions accounted for 91.8% of 2015 revenue, financing fees 6.2%, and other revenue 2.0%. The company closed 8,715 sales, financing and other transactions with approximately $37.8 billion of volume, compared with 7,667 transactions and $33.1 billion in 2014. Its largest business segment is private-client properties priced at $1–$10 million.
Key financial metrics
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Total revenue | $689.1 million | $572.2 million | +20.4% |
| Brokerage commissions | $632.6 million | $525.0 million | +20.5% |
| Financing fees | $42.6 million | $33.9 million | +25.6% |
| Operating income | $114.7 million | $84.6 million | +35.5% |
| Operating margin | 16.6% | 14.8% | +1.8 percentage points |
| Net income | $66.4 million | $49.5 million | +34.0% |
| Net margin | 9.6% | 8.7% | +0.9 percentage points |
| Diluted EPS | $1.69 | $1.27 | +33.1% |
| Adjusted EBITDA | $124.1 million | $92.8 million | +33.7% |
Adjusted EBITDA is a non-GAAP measure; the company cautions that it should not be viewed as a substitute for GAAP results.
Cash flow and liquidity: Operating cash flow was $72.1 million, versus $71.4 million in 2014. Investing activities used $126.9 million, primarily reflecting net purchases of marketable securities. Cash and cash equivalents declined to $96.2 million from $149.2 million; available-for-sale marketable securities totaled $134.3 million. Current assets were $196.1 million and current liabilities $75.0 million.
Debt and obligations: No amounts were drawn on the $60 million revolving credit facility at year-end; $533,000 of its $10 million letter-of-credit sublimit was in use. Notes payable to former stockholders totaled approximately $10.6 million in principal. The balance sheet also included a $21.4 million SARs liability. Contractual obligations included $79.8 million of operating leases. The company reported compliance with its credit facility covenants and stated that available liquidity should cover operating needs for at least 12 months.
Material changes and fourth-quarter results
- Full-year revenue growth reflected more brokerage transactions and higher average commission rates; brokerage transaction count rose 13.3%. The higher average rate was attributed to a greater share of private-client transactions, which generally earn higher commission rates.
- Financing activity expanded: financing transactions increased to 1,601 from 1,332, and loan volume rose to $4.9 billion from $3.8 billion.
- Operating expenses grew 17.8%, slower than revenue growth. Cost of services remained about 61% of revenue; SG&A declined to 21.4% of revenue from 23.5%.
- Fourth-quarter 2015 revenue was $203.2 million, operating income $33.9 million and net income $19.9 million. For Q4 2014, the corresponding figures were $172.4 million, $27.1 million and $16.4 million.
- Cash declined mainly because the company shifted funds into marketable securities: net purchases were $119.9 million for the year.
Outlook, commentary, and risks
The filing provides no quantified revenue or earnings guidance. Management described 2015 commercial real estate fundamentals as improving, with ample financing liquidity and generally stable long-term interest rates, but noted that transactions were taking longer to close late in the year. The company plans to grow through recruiting, office and market coverage, specialty property types, larger transactions, and expansion of its financing business.
- Results depend on commercial property transaction volume and values, financing availability, interest rates, economic conditions, and investor demand. Revenue is not primarily contracted, and transactions may be delayed or canceled.
- Revenue and cash flow are seasonal, generally strongest in the second half, particularly Q4. Commission schedules for senior professionals can also pressure margins in the second half.
- The business depends on recruiting and retaining managers and sales professionals. CEO John J. Kerin announced retirement effective March 31, 2016; Hessam Nadji was selected as successor.
- Other disclosed risks include competition, California and other regional concentration, independent-contractor classification, technology and cybersecurity incidents, litigation and conflicts of interest, and potential changes to like-kind exchange tax rules.
- The company reported ordinary-course legal matters and did not expect their resolution to materially affect its financial position or results; ultimate liability could not be determined. It paid no regular dividend and stated that it did not intend to begin one at that time.
Important facts for investors to verify
- Whether transaction activity, average commission rates, financing growth, and margins remain resilient as real estate and credit-market conditions change.
- The composition, maturity, credit quality, and interest-rate sensitivity of the $134.3 million marketable-securities portfolio; the filing estimates a $4.9 million fair-value decline under a 2% rate increase.
- The cash-flow effect and timing of the $79.8 million lease commitments, former-stockholder notes, SARs liability, and deferred commissions.
- Execution of the CEO transition and continued ability to attract and retain productive professionals.
- Developments in litigation, independent-contractor classification, tax positions, and the company’s related-party relationships.