Marcus & Millichap, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. The company is a commercial real estate brokerage and financing firm, operating 80 offices with 1,736 investment sales and financing professionals.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $153.2 million | $164.3 million | Down 6.7% |
| Operating income | $19.0 million | $24.9 million | Down 23.4% |
| Net income | $12.0 million | $14.8 million | Down 19.0% |
| Diluted EPS | $0.31 | $0.38 | Down $0.07 |
| Adjusted EBITDA | $22.4 million | $27.2 million | Down 17.5% |
| Operating margin | 12.4% | 15.1% | Down 2.7 percentage points |
| Net margin | 7.8% | 9.0% | Down 1.2 percentage points |
Real estate brokerage commissions fell 8.8% to $140.1 million, primarily as sales volume declined 13.8%. Financing fees grew 15.1% to $10.1 million; other revenue rose 61.1% to $3.0 million. Cost of services fell 6.8% to $89.6 million and remained 58.5% of revenue. SG&A increased 2.3% to $43.2 million, including higher facilities, stock compensation and support costs, partly offset by lower performance-related compensation. The effective tax rate was 38.5%, versus 40.0%.
Cash flow, balance sheet and liquidity
Operating cash flow was negative $37.1 million, compared with negative $19.0 million a year earlier. Management attributed first-quarter cash use in part to the seasonal payment of prior-year bonuses and deferred commissions; cash flow also reflected timing of payments and receipts and increased advances to professionals. Investing cash flow was negative $19.9 million, mainly due to net purchases of marketable securities. Financing cash flow was negative $1.4 million. Cash and cash equivalents declined $58.3 million during the quarter to $129.0 million.
At March 31, the company held $123.4 million in available-for-sale marketable securities, bringing cash plus securities to approximately $252.4 million. Current assets were $204.9 million and current liabilities $40.9 million. No amounts were drawn on the $60 million revolving credit facility; $0.533 million of its letter-of-credit sublimit was in use. Notes payable to former stockholders totaled $9.7 million and are due in installments, with final principal due in 2020. The filing reports no material change in contractual obligations other than approximately $10 million of additional operating lease obligations; aggregate remaining operating lease commitments were approximately $86.3 million. Management stated available liquidity should meet operating requirements for at least the next 12 months.
Business trends, outlook and risks
The company completed 2,067 investment sales, financing and other transactions with approximately $8.5 billion in volume, versus 2,038 transactions and $9.6 billion in Q1 2016. Brokerage transactions declined slightly, while average transaction size and brokerage sales volume fell. The private-client segment ($1–$10 million) generated 71% of brokerage commissions, up from 68% a year earlier. Financing activity improved, with 391 transactions versus 370.
Management described a maturing real estate cycle and said sales activity had continued to step down from 2015 peak levels. It cited rising interest rates, investor caution, longer transaction closing times, and uncertainty about tax, regulatory and other government policies as near-term headwinds. Management also pointed to balanced property fundamentals, lender liquidity and potential improvement in investor activity as policy clarity develops. The filing provides no quantified revenue or earnings guidance; management cautioned that first-quarter results are not necessarily indicative of full-year results.
Key risks include sensitivity to transaction volume and timing, economic and capital-market conditions, interest-rate changes, recruiting and retaining professionals, and legal claims arising in the ordinary course. The company said it did not expect pending litigation to have a material adverse effect, while noting that outcomes cannot be determined with certainty. It reported compliance with credit-facility covenants and effective disclosure controls. Adoption of the new lease standard is expected to materially increase balance-sheet assets and liabilities; the amount and income-statement and cash-flow effects were not yet determined. The company also adopted share-based payment accounting changes in 2017, with no material effect on financial position or results.
Important facts for investors to verify
- Whether the decline in brokerage volume and revenue continues, and whether financing growth can offset it.
- How first-quarter operating cash use reverses or persists in subsequent quarters, given seasonal commission and bonus payments.
- Liquidity and investment portfolio exposure: $123.4 million of marketable securities, with management reporting an average credit rating of AA.
- The effect of the approximately $86.3 million in operating lease commitments and eventual adoption of lease accounting requirements.
- Developments in real estate transaction markets, interest rates, policy uncertainty, and ordinary-course litigation, including claims concerning independent-contractor classification.