Marcus & Millichap, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2020. Marcus & Millichap is a commercial real estate brokerage and financing firm; it reported one operating segment and operated 83 offices in the U.S. and Canada. COVID-19 disrupted property transactions and financing, with management reporting some recovery in activity during Q3 from Q2 levels.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $158.6m | $198.2m | $466.7m | $568.5m |
| Operating income / margin | $6.5m / 4.1% | $24.1m / 12.1% | $23.6m / 5.0% | $69.3m / 12.2% |
| Net income / margin | $6.0m / 3.8% | $19.3m / 9.7% | $19.2m / 4.1% | $56.2m / 9.9% |
| Diluted EPS | $0.15 | $0.49 | $0.48 | $1.42 |
| Adjusted EBITDA | $12.2m | $27.9m | $38.8m | $83.0m |
- Q3 brokerage commissions fell 21.8% to $140.8m; financing fees were $15.6m, down 2.5%. Nine-month brokerage commissions declined 19.0% to $416.0m and financing fees declined 8.0% to $43.7m.
- Q3 brokerage sales volume was $7.0bn, down 26.9%; transaction count fell 12.9% and average transaction size fell 16.1%. Financing volume was $1.7bn, approximately flat year over year. Total Q3 transactions across investment sales, financing and other services rose 34.8% sequentially from Q2, while total revenue rose 35.1% sequentially.
- Q3 cost of services declined 19.7%, less than the revenue decline; it increased to 62.9% of revenue from 62.6%. SG&A rose 3.4% to $49.7m. For nine months, SG&A declined 1.2%, but rose to 31.7% of revenue from 26.3%.
- Cash and cash equivalents were $173.1m at September 30, down from $232.7m at year-end 2019. Marketable debt securities totaled $216.0m. Current assets were $373.3m and current liabilities $76.0m.
- Nine-month operating cash flow was negative $28.3m, versus negative $6.1m a year earlier; investing cash flow was negative $21.4m and financing cash flow negative $9.8m. The cash decrease was $59.6m. Advances and loans were a significant operating cash use.
- No borrowings were outstanding under the $60m revolving credit facility; $533,000 of its letter-of-credit sublimit was in use. The company reported compliance with covenants. Total liabilities were $175.1m, including $75.0m of operating lease liabilities; the filing does not report funded debt outstanding.
Changes, outlook, risks and unusual items
- Year-over-year revenue and earnings contracted substantially, primarily because of lower brokerage transaction volume and sales volume amid pandemic-related uncertainty and transaction delays. Q3 revenue remained 20.0% below prior year despite the sequential improvement from Q2.
- Management expected revenue to remain negatively affected at least through Q4 2020 and until more stable business conditions resume in 2021. It said the timing and pace of recovery were difficult to forecast; no quantified revenue or earnings guidance was provided.
- Management cited expense reductions, including compensation and headcount measures, reduced travel and events, and suspension of 401(k) matching contributions; some furloughs and compensation levels had been reinstated, while senior executive pay reductions remained in effect. It expected cost of services as a percentage of revenue to remain elevated in coming quarters.
- Key uncertainties include pandemic duration and restrictions, buyer-seller pricing gaps, property operating performance and rent collections, financing availability, delayed transaction closings, economic recovery, election and tax-policy uncertainty, and the potential for a renewed downturn. Hotel and parts of retail faced particular pressure; apartments and single-tenant properties were relatively more resilient.
- The company completed two acquisitions during the first nine months, with approximately $11.8m cash paid at closing, $1.8m contingent consideration and $3.9m deferred consideration. It acquired a capital-markets advisory firm in October 2020. Goodwill and intangible assets had no impairment recorded at September 30.
- Management said available liquidity was sufficient for at least 12 months, citing $342.8m in cash on hand and “core-cash investments” plus the undrawn credit facility. Separately, cash and marketable debt securities on the balance sheet totaled approximately $389.1m.
- The company disclosed ordinary-course legal claims, but said their outcomes were not expected to materially adversely affect its financial position, results or cash flows. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q4 and 2021 transaction activity and revenue recover as management anticipated, and whether the Q3 sequential rebound persists.
- How transaction volume, property pricing, financing access and sector-specific distress affect brokerage commissions, margins and cash generation.
- Whether operating cash use and advances to professionals continue; reconcile liquidity descriptions with cash, investments, commitments and the credit facility.
- Acquisition performance, contingent and deferred payments, and the October acquisition’s contribution and integration costs.
- Potential effects of pandemic conditions, rent collections, economic policy and capital-market changes on goodwill, intangible assets, servicing rights and investment securities.