Marcus & Millichap, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed March 9, 2015. This is an annual report, not a standalone fourth-quarter filing. The company is a commercial real estate investment-sales and financing brokerage operating 78 offices in the U.S. and Canada, with nearly 1,500 sales and financing professionals. Most revenue comes from brokerage commissions.
Financial and operating performance
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Revenue | $572.2 million | $435.9 million | +31.3% |
| Operating income | $84.6 million | $21.3 million | +297.5% |
| Operating margin | 14.8% | 4.9% | +9.9 percentage points |
| Net income | $49.5 million | $8.2 million | +503.6% |
| Net margin | 8.7% | 1.9% | +6.8 percentage points |
| Adjusted EBITDA | $92.8 million | $61.3 million | +51.5% |
| Operating cash flow | $71.4 million | $96.9 million | Down $25.5 million |
- Brokerage commissions were $525.0 million, up 33.5%; financing fees were $33.9 million, up 30.7%; other revenue was $13.4 million, down 20.4%. Revenue mix was approximately 91.7% brokerage, 6.0% financing and 2.3% other.
- Completed 7,667 sales, financing and other transactions, with $33.1 billion in volume, versus 6,608 transactions and $24.0 billion in 2013. Investment sales volume reached $25.4 billion, up $8.1 billion; financing volume was $3.8 billion, up from $2.7 billion.
- Cost of services rose 32.3% to $350.1 million, chiefly reflecting higher commissions as transaction revenue grew and a greater share of transactions handled by senior professionals. SG&A increased 16.1% to $134.3 million.
- FY 2013 included $31.3 million of IPO-related stock-based and other compensation expense; there was no comparable charge in 2014. This materially affects year-over-year operating income and earnings comparisons. Adjusted EBITDA is a non-GAAP measure.
- Fourth-quarter 2014 revenue was $172.4 million and net income was $16.4 million; diluted EPS was $0.42. Fourth-quarter 2013 revenue was $149.1 million and reported net loss was $8.7 million, including the $31.3 million IPO-related charge.
Financial position, liquidity and obligations
- At December 31, 2014, cash and cash equivalents were $149.2 million, up from $101.0 million. Marketable securities were $14.8 million; total assets were $233.6 million and total liabilities were $116.8 million.
- Cash from operations was $71.4 million; investing activities used $17.2 million, including $14.7 million of marketable-security purchases; financing activities used $6.0 million. Operating cash flow was lower than 2013, in part because 2013 included cash returned following termination of the MMC cash-sweep arrangement.
- The company had a $60 million secured revolving credit facility maturing June 1, 2017; no borrowings or standby letters of credit were outstanding at year-end. It reported compliance with facility covenants.
- Other notable obligations included $11.5 million of notes payable to former stockholders and a $20.5 million SAR liability. Contractual obligations totaled $115.7 million, including $45.9 million of operating leases. Management said existing liquidity and expected operating cash flows were sufficient for at least the next 12 months.
- The company does not pay a regular dividend and said it did not currently intend to do so.
Changes, outlook and risks
- Growth was driven primarily by more investment-sale transactions (+20.6%) and higher average commission per transaction (+10.7%). Larger transactions contributed to lower average commission rates, as their rates are generally lower.
- Financing growth reflected more loan transactions and higher average fees; the company also expanded professional headcount. Other revenue declined, principally due to lower referral and consulting/advisory fees.
- Management’s strategy is to expand market share, offices, specialist property groups and sales-force capacity; grow financing services and cross-selling; and pursue larger hybrid and institutional transactions. The filing gives no quantified revenue or earnings guidance.
- Results are seasonal: revenue, earnings and operating cash flow historically tend to be lower in the first half and higher in the second half, particularly in Q4. Senior professionals’ graduated commission schedules can also reduce gross margins in the second half.
- Key risks include cyclical commercial-property activity and capital-market liquidity; interest-rate changes; intense competition; dependence on recruiting and retaining producers and managers; revenue concentration in California and other regions; independent-contractor classification; technology, data-security and business-interruption risks; and legal, regulatory and conflicts-of-interest exposure. A change to like-kind exchange tax rules could also reduce transaction activity.
- Founder and co-chairman George Marcus beneficially owned approximately 65% of fully diluted shares at year-end, according to the notes. A February 2015 registration statement covered 4.6 million shares controlled by him for potential future sale. These matters may affect voting control and share supply.
- The company reported effective disclosure controls and internal control over financial reporting as of year-end, based on management’s assessment. As an emerging growth company, it was not required to obtain auditor attestation of internal controls.
- Ordinary-course litigation includes brokerage, employment and other claims. Management did not believe the ultimate outcomes would materially adversely affect financial position or results; most matters are insured subject to policy limits and exclusions.
Important facts for investors to verify
- Whether transaction volume and average commission growth can persist, especially if commercial real estate activity, credit availability or interest rates change.
- The extent to which reported earnings growth reflects operating improvement versus the absence of the 2013 IPO-related charge and changes in tax treatment.
- Cash-flow conversion, seasonal working-capital needs, and the timing and terms of the SAR liability and former-stockholder notes.
- Potential dilution and market overhang from equity awards and possible sales by the controlling shareholder.
- Progress in recruiting and retaining professionals, expanding financing and specialty services, and replacing services previously provided by MMC.