Marcus & Millichap, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The company is a commercial real estate brokerage and financing firm operating 82 offices in the U.S. and Canada, with 1,945 investment sales and financing professionals at quarter-end. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $198.2 | $210.6 | $568.5 | $584.5 |
| Operating income | $24.1 | $27.4 | $69.3 | $79.8 |
| Operating margin | 12.1% | 13.0% | 12.2% | 13.7% |
| Net income | $19.3 | $20.9 | $56.2 | $61.0 |
| Diluted EPS | $0.49 | $0.53 | $1.42 | $1.55 |
| Adjusted EBITDA (non-GAAP) | $27.9 | $32.2 | $83.0 | $93.3 |
- Revenue mix: Real estate brokerage commissions were $180.2 million in Q3, down 6.1%; financing fees were $16.0 million, broadly unchanged; other revenue was $2.0 million, down 24.6%. For nine months, brokerage commissions declined 4.2% to $513.8 million, while financing fees rose 15.2% to $47.5 million.
- Margins and earnings: Q3 net income declined 7.5%; nine-month net income declined 7.9%. Adjusted EBITDA fell 13.3% in Q3 and 11.0% for nine months. Management attributed the EBITDA decline to lower revenue and operating expenses representing a higher proportion of revenue. Adjusted EBITDA is a non-GAAP measure.
- Cash flow: Nine-month operating cash flow was negative $6.1 million, versus positive $55.0 million a year earlier. Investing activities provided $21.1 million, compared with $92.3 million used in the prior period, chiefly reflecting net sales and maturities of marketable securities. Financing activities used $3.6 million.
- Liquidity and debt: Cash and cash equivalents were $226.1 million at September 30, and marketable securities totaled $195.3 million. The company had no borrowings under its $60 million revolving credit facility, which matures June 1, 2022; $533,000 of its $10 million letter-of-credit sublimit was utilized. The company reported compliance with its credit covenants.
- Lease obligations: Operating lease liabilities totaled $81.8 million, including $17.5 million current. The company adopted the new lease accounting standard in January 2019, recognizing right-of-use assets and lease liabilities; adoption materially affected the balance sheet but not materially the income statement.
Changes and operating trends
- Q3 brokerage sales volume increased 2.9% to $9.6 billion, but brokerage revenue fell as transaction count declined 3.1% and average commission rates decreased, particularly in middle and larger transactions. Nine-month brokerage volume declined 1.0% to $25.9 billion.
- Financing activity strengthened: nine-month financing volume increased 13.5%, with transaction count up 14.4%; management cited refinancing activity and contributions from 2018 acquisitions. In Q3, more financing transactions and higher fee rates were offset by smaller average transaction size.
- Nine-month SG&A increased 2.8% to $149.8 million, reflecting investment in sales support, marketing, technology and office expansion, partly offset by lower legal, stock-based compensation and management compensation costs.
- Total transactions were approximately 2,435 in Q3 and 6,920 in the first nine months, with respective aggregate volume of about $12.1 billion and $34.9 billion. The $1–$10 million private-client segment generated about 67% of brokerage commissions in both periods.
Outlook, commentary and risks
- The filing provides no quantitative earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results and described the business as seasonal, historically stronger in the second half, especially Q4.
- Management characterized the U.S. economy as moderately growing, with low unemployment and wage growth supporting demand, but cited trade uncertainty and geopolitical tensions as weighing on confidence. Lower interest rates and ample lending capital had not substantially increased activity; cautious buyers and sellers’ high price expectations widened the bid-ask gap and prolonged marketing and closing timelines.
- Property trends were mixed: apartment demand remained strong, while retail and industrial demand had softened; office performance was described as steady. Tightened construction lending and higher development costs were expected to moderate new supply.
- Principal business sensitivities include transaction volume and size, professional recruitment and retention, capital availability and interest rates, investor sentiment, and timing of client transactions. Brokerage commissions are transaction-dependent and may fluctuate with property mix and commission rates.
- Ordinary-course legal claims include brokerage, employment and independent-contractor classification matters. The company said it did not believe currently known proceedings would materially adversely affect its financial position, results or cash flows. No material risk-factor changes from the 2018 Form 10-K were reported.
- In October 2019, the company completed an acquisition of a Canadian real estate brokerage firm. Contingent consideration was $2.9 million at quarter-end, with a maximum undiscounted payment of $4.2 million subject to performance conditions.
Most important facts to verify
- Whether the negative nine-month operating cash flow reflects timing and working-capital movements that reverse, or a sustained deterioration in cash generation.
- Whether brokerage transaction activity and commission rates recover, particularly in the private-client and larger-transaction segments, and whether the buyer-seller pricing gap narrows.
- Whether financing-fee growth persists after acquisition contributions and increased refinancing activity.
- The impact of lease commitments, the Canadian acquisition and contingent consideration on future costs, liquidity and earnings.
- The company’s use and reconciliation of Adjusted EBITDA alongside GAAP operating income, net income and cash flow.