Marcus & Millichap, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company is a commercial real estate brokerage and financing firm, operating 82 U.S. and Canadian offices with 1,880 investment sales and financing professionals at quarter-end.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $323.8m | $332.4m | $1,039.3m | $801.3m |
| Operating income | $30.6m | $45.7m | $131.5m | $107.5m |
| Operating margin | 9.4% | 13.7% | 12.7% | 13.4% |
| Net income | $21.4m | $33.9m | $96.3m | $80.5m |
| Diluted EPS | $0.53 | $0.84 | $2.39 | $2.00 |
| Adjusted EBITDA (non-GAAP) | $36.6m | $51.0m | $151.4m | $124.8m |
Q3 revenue declined 2.6% year over year and net income fell 37.0%; nine-month revenue and net income rose 29.7% and 19.7%, respectively. Q3 net margin was 6.6% versus 10.2%; nine-month net margin was 9.3% versus 9.9%. Financing fees were $28.1m in Q3 and $91.4m year to date. Brokerage commissions were $292.9m and $934.5m, respectively.
Q3 brokerage sales volume increased 8.6% to $17.9bn, while transaction count fell 8.6% to 2,246; larger transactions increased as a share of revenue and reduced the average commission rate. For the nine months, brokerage volume rose 41.3% to $55.0bn. Q3 financing transactions decreased 13.7% to 518; nine-month financing volume increased 33.8% to $10.4bn.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $270.9m at September 30, down from $382.1m at year-end 2021. Available-for-sale marketable debt securities totaled $301.1m; combined with cash, these were $572.0m.
- Operating cash flow was a use of $11.8m for the nine months, versus $99.6m provided in 2021. Investing cash use was $31.3m; financing cash use was $67.8m, including $50.2m of dividends paid and $5.7m of repurchases.
- Total assets were $999.9m and stockholders’ equity was $724.0m. Total liabilities were $275.9m. The filing reports no borrowings outstanding under its $60m revolving credit facility; $59.5m of capacity was available after letters of credit. The facility matures June 1, 2025, and the company reported covenant compliance.
- The company said cash, expected operating cash flow, marketable securities and available revolver capacity should fund operating requirements for at least 12 months.
Material changes, outlook and risks
- Q3 selling, general and administrative expense rose 12.9% to $73.0m, attributed to compensation, retention and business-development spending, and the return of in-person events. Nine-month cost of services rose 32.2%, faster than revenue growth, partly because senior professionals reached additional commission thresholds earlier.
- Management described rising rates, elevated inflation, tighter lender underwriting, higher capital costs and a widening buyer-seller expectation gap as pressures on transaction activity. It noted cancellations and delays, and said these conditions could weigh on activity into Q4 2022 and 2023. No quantitative earnings or revenue guidance is provided.
- Investment securities had $6.7m of aggregate unrealized losses at quarter-end, which the company attributed to interest rates and market factors; it recorded no credit-loss allowance and said it did not expect to need to sell the securities. A 1% interest-rate increase was estimated to reduce their fair value by approximately $2.8m.
- The company agreed to a maximum aggregate guarantee obligation of $54.1m on MTRCC loans with $324.9m unpaid balance. The stated maximum is not an estimate of likely loss; liability would arise under severe default and collateral-loss conditions.
- The company discontinued mortgage servicing and completed the sale of its remaining servicing rights in Q3, following a loss recorded in Q2. It also completed a business acquisition for $12.5m in cash during the first nine months.
- A $70m share repurchase program was authorized in August. Through September 30, the company repurchased 226,795 shares for $7.6m, with $62.4m remaining. It repurchased a further 431,700 shares for $14.9m between quarter-end and October 31.
- Management said ordinary-course legal matters were not expected, based on information available, to materially affect financial position, results or cash flows. No material changes to the 2021 Form 10-K risk factors were reported.
Investor verification priorities
- Monitor transaction closings, cancellations and pricing as higher rates and tighter financing affect commercial property activity.
- Assess whether expense growth, commission mix and lower Q3 margins persist if transaction volumes weaken.
- Track operating cash conversion, advances and loans to professionals, and cash deployment through dividends and repurchases.
- Review marketable-security valuation exposure and the MTRCC guarantee portfolio as rates and credit conditions change.
- Confirm the impact of the servicing-rights exit, acquisition-related consideration and continued repurchases on future results and liquidity.