Marcus & Millichap, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company is a commercial real estate brokerage and financing firm, operating 84 offices in the U.S. and Canada with 2,038 investment sales and financing professionals at quarter-end. All dollar amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $184.0 million | $190.7 million | Down 3.5% |
| Operating income | $20.2 million | $19.6 million | Up 2.9% |
| Net income | $15.0 million | $13.1 million | Up 14.9% |
| Diluted EPS | $0.37 | $0.33 | Up $0.04 |
| Adjusted EBITDA | $25.7 million | $22.4 million | Up 14.8% |
| Net cash used in operating activities | $20.1 million | $52.8 million | Use improved by $32.7 million |
Operating margin increased to 11.0% from 10.3%; net margin rose to 8.2% from 6.9%. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
- Revenue mix: Brokerage commissions were $162.8 million, down 5.3%; financing fees were $17.8 million, up 16.2%; other revenue was $3.3 million, down 5.6%.
- Brokerage activity: 1,588 transactions and $8.9 billion sales volume, versus 1,615 transactions and $8.4 billion a year earlier. Average commission rate declined to 1.84% from 2.04%; average transaction size rose to $5.58 million from $5.23 million.
- Financing activity: 494 transactions and $1.6 billion financing volume, versus 478 transactions and $1.8 billion. Financing revenue growth reflected acquisitions and ancillary fees.
- Expenses: Operating expenses fell 4.3% to $163.8 million. Cost of services declined 4.1% and SG&A declined 5.8%; depreciation and amortization rose 21.6% to $3.0 million, mainly due to acquisitions and expansion.
Liquidity, cash flow and obligations
- Cash and cash equivalents were $221.7 million at March 31, down from $243.2 million at year-end. Marketable debt securities totaled $201.4 million; cash plus securities was $423.1 million.
- Operating cash outflow was $20.1 million. Investing activities provided $3.1 million and financing activities used $4.5 million, resulting in a $21.4 million net decline in cash.
- The company reported no borrowings on its $60 million revolving credit facility, with $59.5 million of borrowing capacity available. A $533,000 letter of credit was outstanding. The facility matures June 1, 2022; the company reported covenant compliance.
- No funded debt was outstanding, but the balance sheet included $76.3 million of operating lease liabilities. Other obligations include deferred compensation and commissions, stock appreciation rights, and acquisition-related deferred and contingent consideration.
- Management said existing liquidity and expected operating cash flows should meet requirements for at least the next 12 months. This is management’s assessment, not a guarantee.
Changes, outlook and risks
- Revenue declined despite higher total transaction sales volume, as brokerage commission revenue fell amid a lower average commission rate and slightly fewer brokerage transactions. Larger transactions supported average transaction size and volume.
- Net income increased as lower operating expenses and improved other income more than offset lower revenue. Other income included favorable changes in deferred compensation plan assets and a Canadian-dollar foreign exchange gain; lower investment interest income partly offset these gains.
- Management expected COVID-19 impacts to continue at least through the first half of 2021 and did not provide numerical full-year guidance. It cited uncertainty around pandemic duration and variants, recovery pace, buyer-seller pricing expectations, hiring and ramp-up of professionals, and commercial property conditions.
- Management described stronger momentum from the 2020 downturn, with more favorable activity in multifamily, industrial, self-storage and net-leased retail; hospitality, senior housing, office and some retail remained uncertain. Potential tax changes, interest rates, capital availability and investor sentiment may affect transaction activity.
- The business is seasonal: historically, revenue and operating cash flow tend to be lower in the first half and higher in the second half, particularly Q4. Q1 cash outflow also reflected typical bonus and deferred commission payments.
- COVID-related impairment reviews found no impairment of property and equipment, goodwill or intangible assets at quarter-end. The investment portfolio had a weighted-average AA credit rating and no allowance for credit losses was recorded.
- The company disclosed ordinary-course legal claims, including brokerage, employment and independent-contractor classification matters; it did not believe their outcomes would materially affect its financial position or results. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether subsequent-quarter brokerage commission rates, transaction volume and revenue recover, particularly as pandemic-related market uncertainty eases.
- Whether financing fee growth from acquisitions and ancillary services continues and contributes profitably.
- How operating cash flow trends after seasonal bonus and deferred commission payments, and whether liquidity remains sufficient under weaker market conditions.
- Exposure to lease, deferred compensation, SAR and acquisition consideration obligations, alongside the unused revolving facility and its 2022 maturity.
- How changes in interest rates, tax policy, commercial property fundamentals and COVID-19 conditions affect investment activity and asset valuations.
- Potential dilution from equity awards and stock-settled acquisition consideration; common shares outstanding were 39.5 million at March 31, 2021.