Marcus & Millichap, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. The company brokers commercial real estate investment sales and provides financing, research and advisory services. It operated 82 offices with 1,901 investment sales and financing professionals at quarter-end.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $396.0 million | $284.9 million | $715.4 million | $468.9 million |
| Operating income | $56.7 million | $41.6 million | $101.0 million | $61.8 million |
| Operating margin | 14.3% | 14.6% | 14.1% | 13.1% |
| Net income | $42.2 million | $31.5 million | $75.0 million | $46.5 million |
| Net margin | 10.6% | 11.1% | 10.5% | 9.9% |
| Diluted EPS | $1.04 | $0.78 | $1.85 | $1.16 |
| Adjusted EBITDA (non-GAAP) | $62.9 million | $48.1 million | $114.8 million | $73.8 million |
- Q2 revenue grew 39.0%; six-month revenue grew 52.6%. Brokerage commissions contributed $354.7 million in Q2 and $641.6 million year to date; financing fees were $36.8 million and $63.3 million, respectively.
- Six-month brokerage revenue growth reflected a 65.3% increase in sales volume, from more transactions and larger average transaction size. Larger and middle-market brokerage revenue grew faster than private-client revenue; the larger transaction mix contributed to lower average commission rates.
- Expenses rose with activity. Cost of services increased 43.4% in Q2 and 57.4% year to date, outpacing revenue growth; its share of revenue rose to 64.7% and 63.3%, respectively. Management cited senior professionals reaching annual commission thresholds earlier. SG&A also increased, including performance compensation, business development and in-person events.
- Six-month operating cash flow was negative $51.8 million, versus positive $33.5 million in 2021. The company attributed the decline mainly to increased advances to sales and financing professionals, deferred commissions and bonus payments, partly offset by higher business volume.
Financial position and liquidity
- At June 30, cash and cash equivalents were $211.7 million and available-for-sale marketable debt securities were $330.6 million, totaling $542.3 million. Cash declined $170.5 million from year-end 2021, including $50.1 million of dividends paid.
- Total assets were $966.8 million, total liabilities $249.6 million and stockholders’ equity $717.2 million. The balance sheet reports no outstanding borrowings. The $60 million secured revolving facility had $59.5 million of borrowing capacity after letters of credit.
- Investing cash outflow was $56.6 million, including $12.5 million for a business acquisition. Financing cash outflow was $61.9 million, primarily reflecting dividends and taxes on net share settlements.
- Marketable debt securities had a fair value of $330.6 million and an AA+ weighted-average credit rating. The portfolio carried $4.6 million of aggregate unrealized losses, attributed by the company to interest rates and market factors; no credit-loss allowance was recorded.
Changes, outlook and risks
- Transaction activity and sales volume rose sharply year over year, but management reported that rising interest rates, inflation, market volatility and recession concerns were beginning to moderate activity and widen buyer-seller pricing expectations. It noted mixed property-sector conditions, with industrial and apartments in demand and office and seniors housing comparatively softer.
- The filing does not provide a specific revenue, earnings or transaction forecast. Management said first-half results are not necessarily indicative of full-year results and expressed confidence that available liquidity and expected operating cash flows would cover requirements for at least 12 months.
- After quarter-end, the company extended its $60 million credit facility to June 1, 2025, on principally similar terms. It declared a $0.25-per-share regular dividend payable in October and authorized up to $70 million of share repurchases; the program had not commenced and does not require repurchases.
- The company decided to exit mortgage servicing and sell its remaining servicing rights. It recorded a $0.3 million loss in Q2; the sale closed July 21, 2022.
- Under its strategic alliance with M&T Realty Capital, the company had agreed to a maximum aggregate guarantee obligation of $25.4 million on loans with $152.6 million unpaid principal. The stated maximum would require all covered loans to default and all collateral to have no value.
- Management identified COVID-19 uncertainty, inflation, interest-rate changes and commercial real estate market conditions as risks. Ordinary-course litigation includes brokerage, employment and independent-contractor classification claims; management does not believe the proceedings will materially adversely affect the company. No material risk-factor changes from the 2021 Form 10-K were reported.
Important facts for investors to verify
- Whether higher interest rates and the moderating transaction market affect brokerage volume, financing activity and commission rates in subsequent periods.
- Whether operating cash flow improves as advances, deferred commissions, bonuses and other working-capital uses normalize.
- The effect of the larger-transaction mix and higher professional commission costs on margins.
- Performance and liquidity of the investment portfolio, including sensitivity to further rate changes and the unrealized losses.
- Actual use, if any, of the $70 million repurchase authorization, and the company’s capacity to sustain dividends alongside acquisitions and other cash needs.
- Potential losses, if any, under the M&T Realty Capital guarantee arrangements and the outcome of material litigation or claims.