Marcus & Millichap, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; compared with the corresponding 2018 periods. The filing was signed August 9, 2019. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
Marcus & Millichap is a commercial real estate brokerage and financing firm, also providing research, consulting and advisory services. At quarter-end, it operated 80 offices in the U.S. and Canada and had 1,965 investment sales and financing professionals, primarily independent contractors. It reported one operating segment. The private-client market ($1 million to $10 million properties) generated 68% of Q2 brokerage commissions, versus 65% a year earlier.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $209.6 | $199.4 | $370.3 | $373.9 |
| Operating income | $27.0 | $29.0 | $45.2 | $52.4 |
| Operating margin | 12.9% | 14.5% | 12.2% | 14.0% |
| Net income | $21.3 | $22.2 | $36.9 | $40.2 |
| Diluted EPS | $0.54 | $0.56 | $0.93 | $1.02 |
| Adjusted EBITDA | $32.0 | $33.7 | $55.2 | $61.2 |
- Q2 revenue: Up 5.1% year over year. Brokerage commissions rose 3.9% to $188.7 million, financing fees rose 14.0% to $17.7 million, and other revenue rose 44.2% to $3.2 million.
- First-half revenue: Down 1.0%. Brokerage commissions fell 3.1% to $333.6 million, partly offset by financing fees up 24.5% to $31.5 million and other revenue up 16.0% to $5.2 million.
- Profitability: Q2 net income declined 4.0% and first-half net income declined 8.1%. Operating expenses grew 7.1% in Q2 and 1.1% for the first half. SG&A rose 7.7% in Q2 and 4.8% in the first half; management cited spending on technology, marketing, sales support and office expansion.
- Cash flow: First-half operating cash flow was negative $24.4 million, versus positive $23.0 million in 2018. Management attributed the deterioration to lower brokerage revenue, expense mix, timing of payments and receipts, increased advances to professionals, lower bonus accruals and reduced deferral of certain commissions. Investing activities provided $19.6 million, principally reflecting net proceeds from marketable securities; financing activities used $3.2 million. Cash declined $7.9 million to $206.8 million.
- Liquidity and debt: At June 30, cash and cash equivalents were $206.8 million and available-for-sale marketable securities were $199.2 million, totaling approximately $406.0 million. The company had no borrowings under its $60 million revolving facility; $0.533 million of its $10 million letter-of-credit sublimit was used. It reported compliance with all covenants. It also had $6.6 million of current notes payable to former stockholders, with a final principal payment due in Q2 2020.
- Leases: Adoption of the new lease standard added operating-lease right-of-use assets and liabilities to the balance sheet. At June 30, operating-lease liabilities totaled $84.8 million; this is a lease obligation, not revolving-credit borrowing.
Material changes and management commentary
- Q2 transaction activity improved: the company closed 2,535 investment sales, financing and other transactions with approximately $13.0 billion in volume, compared with more than 2,300 transactions and $11.4 billion a year earlier. First-half total volume was approximately $22.8 billion, versus $21.1 billion.
- For first-half brokerage, transaction count fell 2.9% and sales volume fell 3.1%. Financing volume increased 25.8% for the first half, with growth partly attributed to 2018 acquisitions.
- Management described interest-rate declines as supporting investor interest and underwriting flexibility, while seller price expectations and cautious buyers created a gap that extended marketing and closing timelines. It characterized the investment climate as generally stable, with caution around financial-market volatility, trade relations and the maturing economic cycle.
- The company noted historical seasonality: revenue, operating income, net income and operating cash flow have generally been lower in the first half and higher in the second half, especially Q4. It cautioned that past seasonality may not continue and that second-half margins are typically affected by graduated commission schedules.
Outlook, risks and unusual items
- The filing provides no quantified revenue, earnings or transaction guidance. Management said existing cash, operating cash flows, marketable securities and revolver availability should meet operating requirements for the foreseeable future, while noting that additional capital may not be available on acceptable terms if needed.
- Key business sensitivities include transaction volume and timing, recruiting and retention of professionals, commercial-property supply and demand, financing availability, interest rates, investor sentiment and broader economic conditions. Management said the marketing-to-closing timeline remained a headwind.
- First-half operating cash use, lower brokerage revenue, and the increase in commitments to current and prospective professionals merit attention. Those conditional commitments were $9.8 million at June 30, compared with $1.0 million at December 31, 2018.
- Ordinary-course legal claims include brokerage disputes, employment matters and claims concerning independent-contractor classification. The company said it did not expect the proceedings, based on information then available, to materially adversely affect its financial position, results or cash flows; no clear aggregate exposure value is provided in the filing text.
- The $199.2 million marketable-securities portfolio had an average credit rating of AA+. Management considered unrealized declines temporary and reported no other-than-temporary impairments. A sensitivity analysis estimated fair-value changes of approximately +$5.0 million for a 2% rate decrease and −$5.1 million for a 2% increase.
- Lease accounting materially increased reported balance-sheet assets and liabilities but, according to the company, did not materially affect the income statement. The company also reported that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether first-half operating cash outflow reflects timing and working-capital movements or a more persistent weakening in cash conversion.
- Whether brokerage transaction counts and commissions recover, and whether financing growth continues as acquisition contributions compare against prior periods.
- Whether expense growth, commission mix and seasonal patterns continue to pressure operating margins and Adjusted EBITDA; Adjusted EBITDA is a non-GAAP measure.
- Liquidity after considering marketable-security values and maturities, lease payments, former-stockholder notes, and the $9.8 million of conditional professional commitments.
- Developments in commercial real estate transaction timelines, interest rates, buyer-seller pricing expectations, and the risks identified in the company’s annual filing.