Marcus & Millichap, Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures are included below where relevant. The company is a commercial real estate brokerage and financing firm operating 82 offices in the U.S. and Canada. Brokerage commissions generated 92% of 2016 revenue.
Financial and operating results
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $717.5 million | $689.1 million | +4.1% |
| Operating income | $106.5 million | $114.7 million | -7.1% |
| Operating margin | 14.8% | 16.6% | -1.8 percentage points |
| Net income | $64.7 million | $66.4 million | -2.6% |
| Diluted EPS | $1.66 | $1.69 | -1.8% |
| Adjusted EBITDA | $118.3 million | $124.1 million | -4.7% |
| Cash from operating activities | $74.5 million | $72.1 million | +$2.4 million |
Revenue growth was driven mainly by brokerage commissions, up 4.7% to $662.2 million. Brokerage transactions rose 2.3% and average transaction size increased 9.9%, while the average commission rate fell 15 basis points to 2.07%, reflecting a greater mix of larger, lower-rate transactions. Financing fees rose 2.1% to $43.4 million; other revenue declined 15.3% to $11.8 million.
Operating expenses increased 6.4% to $610.9 million, faster than revenue. Cost of services rose to 62.0% of revenue from 61.4%; SG&A rose to 22.6% from 21.4%, including higher marketing, facilities, support staffing, technology and legal costs. The effective tax rate decreased to 39.6% from 41.5%.
Fourth quarter: Revenue was $189.2 million versus $203.2 million in Q4 2015; net income was $17.2 million versus $19.9 million. The filing notes that results are seasonal, typically stronger in the second half, especially Q4.
Liquidity, debt and capital resources
- Year-end cash and cash equivalents were $187.4 million, up from $96.2 million. Marketable securities totaled $104.9 million, for cash and securities of approximately $292.3 million.
- Current assets were $234.0 million and current liabilities $78.2 million. Operating cash flow was $74.5 million; investing activities provided $19.8 million, primarily reflecting net securities sales.
- No borrowings were outstanding on the $60 million secured revolving credit facility at year-end; $533,000 of its $10 million letter-of-credit sublimit was used. The facility matures June 1, 2019. The company reported compliance with its covenants.
- Notes payable to former stockholders totaled $9.7 million at year-end. The company also reported a stock appreciation rights liability and $76.3 million of operating lease commitments. Management stated existing liquidity and expected operating cash flows should cover requirements for at least 12 months.
- No regular dividend is paid. No off-balance-sheet arrangements were reported.
Changes, outlook and principal risks
Total sales, financing and other transactions increased to 8,995 from 8,715, and total transaction volume rose to $42.3 billion from $37.8 billion. Brokerage commissions in the $1–$10 million private-client segment grew modestly; commissions from the middle and larger transaction segments increased approximately 13.6% to $185.6 million. Staffing also expanded, with 1,737 investment sales and financing professionals at year-end versus 1,607.
Management described a maturing real estate cycle and said rising interest rates, uncertainty about policy and tax changes, and investor caution had slowed or delayed some transactions. It also cited balanced property fundamentals, disciplined lender underwriting and available market liquidity as supportive factors. The filing provides no quantified financial guidance. Management’s stated priorities include recruiting and developing professionals, expanding specialty-property coverage, growing larger-market and financing activity, and completing the rollout of its MNet-Offering marketing system in the first half of 2017.
- Results depend on transaction volume and property values, financing availability, interest rates, economic conditions and investor sentiment; revenue is primarily transaction-based and not long-term contracted.
- Competition for clients and experienced professionals, retention of top producers, and the independent-contractor classification of most sales professionals are material risks.
- Approximately 35% of 2016 revenue came from California, creating geographic concentration exposure. The business is seasonal and quarterly comparisons can be difficult.
- Other identified risks include technology interruption or cybersecurity incidents, regulation and tax-law changes (including like-kind exchange rules), litigation and reputational risk. The company reported ordinary-course legal claims and did not expect their resolution to materially harm results, based on information available.
- Founder and Co-Chairman George M. Marcus beneficially owned approximately 55% of shares, giving him control over stockholder votes. The company remains an emerging growth company and its auditor did not provide an opinion on internal control effectiveness; management assessed controls as effective.
Unusual or notable items: Lower 2016 earnings and adjusted EBITDA despite higher revenue reflected expense growth and lower commission rates. In January 2017, the company committed and advanced $5.0 million to investment sales and financing professionals under performance-related arrangements. Adoption of the new lease accounting standard is expected to materially increase balance-sheet assets and liabilities; the amount was not yet determined.
Investor verification priorities
- Check the full audited statements and notes for the composition, maturity and liquidity of the $104.9 million securities portfolio and cash equivalents.
- Assess whether transaction growth can offset lower commission rates and rising operating costs, and monitor margins and producer productivity.
- Review the $60 million revolver’s covenants and maturity, notes payable, SAR obligations, deferred commissions and lease commitments.
- Monitor real estate transaction activity, interest rates, financing availability, California exposure and the company’s progress in recruiting and retaining professionals.
- Examine the terms and collectability of advances to professionals, including the $5.0 million advanced in January 2017, and review legal contingencies and related-party transactions.