Business context and reporting period
Marcus & Millichap, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company is a commercial real estate brokerage and financing firm focused mainly on private-client investment sales, supplemented by financing, research and advisory services. At year-end it had 76 offices and more than 1,300 sales and financing professionals. It completed 6,608 transactions totaling approximately $24.0 billion in 2013.
The company completed its IPO in November 2013 at $12 per share. It received approximately $42.3 million in net proceeds; selling stockholders received proceeds from their shares, not the company. Results for 2013 include periods before and after the IPO and are not fully comparable to the prior year’s public-company results.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $435.9 million | $385.7 million | +13.0% |
| Operating income | $21.3 million | $49.0 million | -56.6% |
| Operating margin | 4.9% | 12.7% | -7.8 percentage points |
| Net income | $8.2 million | $27.9 million | -70.6% |
| Adjusted EBITDA | $61.3 million | $59.7 million | +2.6% |
| Cash from operating activities | $96.9 million | $35.4 million | +$61.6 million |
| Cash and cash equivalents at year-end | $101.0 million | $3.1 million | +$97.8 million |
Real estate brokerage commissions were $393.2 million, up 11.9%; financing fees were $25.9 million, up 22.7%; and other revenue was $16.8 million, up 27.3%. Sales transaction count increased 9.6%, while average commission per transaction rose 2.1%. Financing transactions increased 27.7%, partly offset by lower average fees.
Cost of services was $264.6 million, or 60.7% of revenue, compared with 59.7% in 2012. SG&A was $115.7 million, or 26.5% of revenue. The filing reports no regular dividend policy and no off-balance-sheet arrangements.
At December 31, 2013, total assets were $167.3 million, liabilities $104.8 million and stockholders’ equity $62.5 million. Cash was the principal liquidity resource. The company reported $12.4 million of notes payable to former stockholders and a $20.0 million stock appreciation rights (SARs) liability. Contractual obligations totaled $76.1 million, including $40.8 million of operating leases. Management said cash, expected operating cash flow and IPO proceeds should cover operating needs for at least 12 months.
Material changes versus the prior comparable period
- Revenue grew 13.0%, but GAAP operating income and net income fell sharply as expenses increased 23.1%.
- 2013 included $31.3 million of IPO-related stock-based and other compensation expense, including $30.9 million of non-cash stock compensation. Excluding this unusual charge, Adjusted EBITDA increased modestly; it is a non-GAAP measure and is not a substitute for GAAP results.
- The effective tax rate rose to 62.6% from 43.5%, reflecting the transition to stand-alone taxpayer status after the IPO and unfavorable permanent tax differences on some IPO-related compensation. Management estimated an approximately 40% effective tax rate for 2014.
- Operating cash flow increased substantially, but included a major favorable working-capital movement associated with ending the cash-sweep arrangement with former parent Marcus & Millichap Company (MMC) and settling affiliate balances. It should not be assumed to represent a recurring run rate.
- Cash increased following the IPO and the end of the prior cash-sweep arrangement. MMC’s guarantee of the company under MMC’s credit agreement was released in November 2013.
- Fourth-quarter 2013 revenue was $149.1 million versus $147.6 million in fourth-quarter 2012. Fourth-quarter 2013 included the IPO-related charges and recorded an $8.2 million operating loss and $8.7 million net loss, compared with operating income of $23.0 million and net income of $13.0 million in fourth-quarter 2012.
Outlook, management commentary and risks
Management’s growth priorities include expanding market share and office coverage, recruiting and developing sales professionals, growing financing services and specialty property groups, and increasing participation in larger transactions. The filing provides no revenue or earnings guidance. Management noted that real estate brokerage is seasonal, with activity and cash flows typically stronger in the second half, especially the fourth quarter.
- Results depend on commercial real estate transaction volumes, property values, credit availability, interest rates and broader economic conditions; downturns can reduce both commissions and financing fees.
- Recruiting and retaining productive agents and managers is critical. Most sales professionals are independent contractors, and changes to their classification could increase costs and liabilities.
- Public-company separation creates execution and cost risks, including replacing services previously supplied by MMC. Transition-service arrangements and tax-related restrictions may affect flexibility and expenses.
- Founder and Co-Chairman George Marcus held approximately 71% of outstanding common stock, according to the risk-factor discussion, giving him substantial voting control. The filing also describes potential conflicts involving directors with MMC ties.
- Other disclosed risks include geographic concentration (California generated about 30% of 2013 revenue), competition, seasonality, technology and data-security disruptions, legal and regulatory exposure, and restrictions on certain transactions to preserve the tax treatment of the spin-off.
- The company reported routine litigation and stated it did not expect pending matters to have a material adverse effect. It said disclosure controls were effective at year-end, but, as a newly public emerging growth company, did not include management’s internal-control effectiveness assessment or auditor attestation in this report.
Most important facts for investors to verify
- How much of the 2013 operating-income decline is attributable to the nonrecurring IPO-related compensation charge, and how margins perform after that charge.
- Whether the $96.9 million of operating cash flow is sustainable after separating the affiliate settlement and other working-capital effects.
- Revenue and transaction trends by quarter, given seasonality, and whether the 2013 growth in transaction volume and financing fees continues.
- The cash, payment timing and potential acceleration terms for the $12.4 million former-stockholder notes and $20.0 million SARs liability, as well as lease commitments.
- Actual stand-alone tax rates and the realization of deferred tax assets and tax-loss carryforwards.
- Costs and operating effects of completing the separation from MMC, including transition-service replacement and related-party arrangements.
- Voting control, equity-award dilution and any changes in ownership or spin-off-related transaction restrictions.