Business context and reporting period
Marcus & Millichap, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2017. The commercial real estate brokerage provides investment sales, financing, research and advisory services through 79 U.S. and Canadian offices. Its 1,757 investment sales and financing professionals closed 2,278 transactions totaling approximately $10.1 billion in Q3 and 6,536 transactions totaling $29.9 billion in the first nine months of 2017. Results are transaction-driven and may vary with closing timing and market conditions.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $183.3 | $180.6 | $516.9 | $528.3 |
| Operating income | $24.7 | $24.9 | $68.7 | $78.6 |
| Operating margin | 13.5% | 13.8% | 13.3% | 14.9% |
| Net income | $15.5 | $15.1 | $43.0 | $47.5 |
| Net margin | 8.4% | 8.4% | 8.3% | 9.0% |
| Diluted EPS | $0.39 | $0.39 | $1.10 | $1.22 |
| Adjusted EBITDA | $28.5 | $28.1 | $79.6 | $87.0 |
Q3 brokerage commissions were $169.4 million, financing fees $11.4 million and other revenue $2.6 million. Nine-month amounts were $472.1 million, $34.1 million and $10.7 million, respectively. Adjusted EBITDA is a non-GAAP measure; the company cautions it should not replace GAAP results.
Cash and cash equivalents were $182.7 million at September 30, 2017, and available-for-sale marketable securities totaled $128.3 million. Current assets were $280.5 million and current liabilities $60.7 million. Total assets were $423.6 million; stockholders’ equity was $307.3 million. The company had no borrowings under its $60 million revolving credit facility; $0.5 million of its letter-of-credit sublimit was in use. Notes payable to former stockholders totaled $8.7 million. The company reported covenant compliance.
For the first nine months, operating cash flow was $25.3 million, down from $41.5 million. Investing activities used $28.0 million, including net purchases of marketable securities; financing activities used $2.0 million. Cash declined $4.7 million from year-end 2016. Management said available cash, operating cash generation, securities and the undrawn facility should meet requirements for at least 12 months.
Material changes versus prior comparable periods
- Q3 revenue rose 1.5%, but operating income fell 0.9%; net income increased 2.2%. Brokerage revenue rose 2.2%, supported by 5.2% higher sales volume, partly offset by lower average commission rates. SG&A increased 4.3%, driven by sales support, marketing, office expansion and stock compensation.
- Nine-month revenue fell 2.2%, operating income fell 12.6%, net income fell 9.3%, and adjusted EBITDA fell 8.5%. Brokerage commissions declined 3.6%, primarily as sales volume fell 8.1%; financing fees grew 10.9% and other revenue 33.4%.
- Nine-month transaction volume was $29.9 billion versus $31.4 billion. Brokerage sales volume declined to $21.8 billion from $23.7 billion, while financing volume increased to $3.9 billion from $3.7 billion. The private-client segment ($1 million–$10 million) generated about 68% of Q3 brokerage commissions.
- Operating cash flow was lower year over year, which management attributed largely to timing of receipts and payments, increased advances to professionals, reduced commission deferrals and a $1.4 million SAR-liability payment.
Outlook, management commentary and risks
The filing provides no numerical revenue or earnings guidance. Management described the U.S. economy as durable but characterized investor sentiment as cautiously optimistic. It believes the commercial real estate cycle is maturing and transactions have stepped down from 2015 peak levels. Interest-rate volatility, cautious underwriting, uncertainty around tax and regulatory policy, and investors delaying decisions were cited as near-term headwinds. Management noted that transactions have taken longer to close since late 2016, while expressing the view that generally sound property fundamentals and available market liquidity support longer-term demand.
Risks include dependence on transaction volume, property values and recruiting and retaining professionals; economic, interest-rate and capital-market changes; and delays or cancellations in closings. Management noted that hurricanes in Texas and Florida could affect local economies and transaction activity. Ordinary-course litigation includes brokerage, employment and other claims; the company does not expect the outcomes to materially affect its financial position or results, but ultimate liability cannot be determined. Commitments to advance funds to professionals totaled $1.1 million. No material risk-factor changes were reported.
Operating lease obligations were approximately $83.2 million at September 30, 2017. The company expects adoption of the lease accounting standard in 2019 to materially increase balance-sheet assets and liabilities; income-statement and cash-flow effects had not been determined. The company also reported $128.3 million of available-for-sale securities, rated AA on average, and estimated that a 1% interest-rate increase would reduce their fair value by approximately $1.9 million.
The 2017 adoption of share-based compensation guidance was not material to financial position or results, but changed the treatment of certain tax benefits. The nine-month effective tax rate was 39.0%, versus 39.9% in 2016. Management said revenue-recognition guidance expected to take effect in 2018 should not significantly affect the timing or manner of recognition.
Important facts for investors to verify
- Whether the decline in nine-month brokerage volume and margins persists, and how the larger-transaction mix affects commission rates.
- Whether Q3 revenue growth can be sustained as management describes a maturing, more cautious market and longer closing timelines.
- The drivers of weaker operating cash flow, including advances to professionals and timing of commission, bonus and other payments.
- Liquidity quality and availability: cash and securities, the undrawn credit facility, former-stockholder notes and the $83.2 million lease commitment.
- Potential effects of interest-rate movements, marketable-security valuation, tax-law changes and adoption of lease accounting.
- Exposure to litigation and independent-contractor classification claims; the filing does not quantify a clear aggregate loss estimate.