Marcus & Millichap, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the same 2012 periods. The financial statements are for Marcus & Millichap Real Estate Investment Services, Inc. and subsidiaries, the operating business that became a subsidiary of Marcus & Millichap, Inc. following the November 5, 2013 IPO and spin-off.
Business context
The company provides commercial real estate investment sales brokerage, financing, research, and advisory services. Its transaction-based revenues depend on commercial property activity, financing availability, investor demand, interest rates, and recruiting and retaining sales professionals.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $112.0 million | $91.2 million | $286.8 million | $238.1 million |
| Operating income | $12.6 million | $11.3 million | $29.5 million | $26.0 million |
| Net income | $7.3 million | $6.4 million | $16.9 million | $14.9 million |
| Adjusted EBITDA (non-GAAP) | $15.7 million | $13.8 million | $36.8 million | $32.4 million |
| Operating margin | 11.3% | 12.4% | 10.3% | 10.9% |
| Net margin | 6.5% | 7.0% | 5.9% | 6.3% |
- Q3 revenue rose 22.7%; brokerage commissions increased 23.2% and financing fees increased 30.6%. For the first nine months, revenue increased 20.5%, with brokerage commissions up 19.8% and financing fees up 39.2%.
- Q3 operating expenses increased 24.3%, faster than revenue, and operating margin declined. Cost of services rose with commissions and transaction volume. SG&A increases included legal costs, staffing to support the sales force, and public-company preparation costs.
- For the nine months, brokerage transaction count increased 17.9%; financing transaction count increased 40.4%. The company reported $11.5 billion in sales volume and $1.9 billion in financing volume for the period.
- Adjusted EBITDA is a company-defined non-GAAP measure; it should not be treated as a substitute for GAAP earnings or assumed comparable with other companies’ measures.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $62.1 million versus $20.5 million in 2012; investing cash outflow was $2.9 million and financing cash outflow was $33.6 million. Cash increased by $25.6 million to $28.7 million at September 30.
- Operating cash flow was materially affected by affiliate-related working capital and the termination of the MMC cash-sweep arrangement. The filing attributes a significant working-capital change to amounts due from/to affiliates; the cash flow increase should not be read as solely recurring operating improvement.
- Current assets were $39.9 million and current liabilities $42.7 million; total assets were $60.8 million, total liabilities $57.1 million, and stockholders’ equity $3.7 million. The filing shows no material company debt balance, but the business had guaranteed MMC credit facilities with $56.9 million outstanding at September 30. That guarantee was released on November 5, 2013 in connection with the IPO and spin-off.
- Cash flow from investing included $3.7 million of property and equipment purchases. Financing cash outflow included $31.2 million of dividends paid to MMC and $2.6 million of IPO-cost payments.
Changes, outlook, and notable items
- On November 5, 2013, the IPO closed at $12 per share. The company sold 4,173,413 shares and received approximately $42.7 million in net proceeds; selling stockholders sold the remaining shares in the 6.9 million-share offering and the company received no proceeds from those sales.
- Before the IPO, the company distributed substantially all net income to MMC. It stated that it did not intend to pay a regular dividend after the IPO; future dividends are at the board’s discretion.
- Management said first-quarter 2013 transactions were affected by the fiscal-cliff-related acceleration of transactions into late 2012, and did not expect the same level of growth in Q4 2013. Brokerage and financing activity are seasonal, generally stronger in the second half, especially Q4; margins may be lower in the second half due to senior agents’ graduated commission schedules.
- Management anticipated a stand-alone effective tax rate of approximately 41%, compared with the 43.5% tax-sharing rate applied in the reported periods. The tax-sharing agreement with MMC ended effective October 31, 2013.
- IPO-related changes to restricted stock and stock appreciation rights, accelerated vesting, and replacement awards were expected to create $30–$35 million of non-cash stock-based compensation expense in Q4 2013.
- SG&A included higher legal settlement costs and lower insurance recoveries. The company reported ordinary-course legal claims, including brokerage, employment, and other disputes, but did not expect their outcome to materially adversely affect financial position, results, or cash flows. It maintained errors-and-omissions insurance for certain brokerage claims.
- The filing identifies real estate transaction activity, credit and liquidity conditions, interest-rate movements, and the ability to recruit and retain professionals as key business risks. Management reported effective disclosure controls as of September 30 and no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue and transaction growth continued after Q3, given the stated fiscal-cliff comparison effect and seasonality.
- How much reported operating cash flow reflected recurring cash generation versus affiliate balances and working-capital timing.
- The actual Q4 stock-based compensation charge and its effect on reported earnings and margins.
- Post-IPO liquidity, stand-alone tax expense, transition-services costs, and any future dividend policy.
- That the MMC credit guarantee was released as disclosed, and the terms and remaining exposure, if any, under post-spin-off arrangements.
- Developments in legal matters and the costs of operating as a newly public company.