Marcus & Millichap, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 1, 2019. This is an annual filing, not a standalone Q4 report. Dollar amounts are U.S. dollars.
Business context
The company provides commercial real estate investment sales brokerage, financing, research and advisory services, primarily in the U.S. and Canada. Brokerage commissions accounted for 91.7% of 2018 revenue, financing fees 7.1%, and other revenue 1.2%. At year-end it operated 80 offices and had 1,977 sales and financing professionals. It closed 9,472 total transactions with approximately $46.4 billion in volume.
Financial performance and liquidity
- Revenue: $814.8 million, up 13.2% from $719.7 million in 2017. Brokerage commissions rose 15.1% to $747.4 million; financing fees rose 16.4% to $57.8 million. Other revenue declined 53.3% to $9.6 million, largely because two large advisory fees recorded in 2017 did not recur.
- Profit and margins: Operating income was $112.3 million, up 16.8%, with operating margin of 13.8% versus 13.4%. Net income increased 69.4% to $87.3 million; diluted EPS was $2.22 versus $1.32. Net margin was 10.7% versus 7.2%. The comparison benefited from the lower 2018 tax rate; 2017 included an $11.6 million one-time deferred-tax remeasurement charge following U.S. tax reform.
- Expenses and non-GAAP measure: Operating expenses rose 12.7% to $702.5 million. Cost of services was 61.7% of revenue versus 62.0%. Adjusted EBITDA, a non-GAAP measure, was $129.5 million, up 15.9%; the company cautions it should not replace GAAP measures.
- Cash flow: Operating cash flow was $117.3 million, compared with $66.5 million in 2017. Investing activities used $118.0 million, including $94.5 million of net purchases of marketable securities and $14.9 million for acquisitions. Financing activities used $5.4 million. Cash and cash equivalents declined $6.1 million to $214.7 million.
- Liquidity, assets and obligations: Marketable securities totaled $220.6 million, bringing cash plus securities to approximately $435.3 million. Total assets were $566.4 million and stockholders’ equity $409.6 million. No credit-facility borrowings were outstanding; the company had a $60 million revolving facility, with $533,000 of letters of credit used. It reported $7.7 million of notes payable to former stockholders and $21.1 million of SARs liabilities. Total liabilities were $156.8 million.
Material changes and Q4 detail
- Brokerage sales volume increased 18.4% to $36.1 billion, and brokerage transactions rose to 7,079 from 6,562. The average commission rate edged down to 2.07% from 2.13%, reflecting a greater mix of middle- and larger-market transactions.
- Financing volume increased 10.7% to $6.2 billion, although financing transactions declined 1.7% to 1,678. Growth in financing fees reflected larger average transactions, hiring and acquisitions.
- The company completed four acquisitions in 2018, paying $14.9 million net of cash received at closing. Preliminary purchase accounting included $11.5 million of goodwill and $4.2 million of intangible assets.
- Q4 2018 revenue was $230.3 million versus $202.8 million in Q4 2017; operating income was $32.5 million versus $27.4 million; net income was $26.2 million versus $8.5 million. The year-over-year net income comparison was affected by the 2017 tax charge.
Outlook, risks and notable items
Management described its baseline outlook for 2019 as positive, citing economic momentum, generally sound property fundamentals and elevated liquidity. It also noted financial-market volatility, weakening international economies, trade tensions, cautious buyers, elevated seller price expectations and a widening buyer-seller expectation gap that can extend transaction timelines. No quantified 2019 revenue or earnings guidance is provided in the filing. Management’s strategy is to grow market share, recruit and develop professionals, expand specialty-property and larger-transaction coverage, grow financing, and pursue selective acquisitions.
- Results are transaction-dependent and cyclical; revenues, profits and cash flows are generally seasonally stronger in the second half, particularly Q4. Commission structures can also reduce margins in the second half.
- California generated approximately 34% of 2018 revenue, creating geographic concentration, including exposure to regional economic conditions, legislation and natural disasters.
- Key risks include attracting and retaining professionals and clients, competition, capital-market and interest-rate changes, transaction volumes and property values, regulation and tax changes, independent-contractor classification, litigation, conflicts of interest, and technology or cybersecurity disruption.
- The company reported ordinary-course litigation and contingencies; management did not believe currently known matters would materially adversely affect consolidated financial position, results or cash flows. The filing does not provide a single clear estimate of potential aggregate litigation exposure.
- Adoption of the new lease standard on January 1, 2019 was expected to add approximately $84.5 million of right-of-use assets and $76.7 million of lease liabilities, materially affecting the balance sheet but not materially affecting the income statement.
- Management and the auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether transaction activity, brokerage volume and financing growth continued after year-end, particularly given the buyer-seller pricing gap and market volatility.
- How 2018 acquisitions contribute to revenue and earnings, and whether contingent payments or integration costs change from estimates.
- Whether cash generation and the sizable securities portfolio remain adequate alongside lease obligations, deferred commissions and SARs payments.
- How much of the rise in net income and EPS reflects ongoing operating performance versus the lower tax burden after the 2017 tax-reform charge.
- Exposure to California and the ability to retain experienced sales professionals, whose relationships and production are important to the business.
- The impact of lease accounting adoption and any changes in investment-portfolio fair values or interest-rate sensitivity.