Marcus & Millichap, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Dollar amounts below are in millions unless stated otherwise.
Business context
Marcus & Millichap provides commercial real estate investment sales brokerage, financing, research, and advisory services. At quarter-end it operated 79 offices and had 1,870 investment sales and financing professionals. It closed 2,427 transactions totaling approximately $12.0 billion in Q3 and 6,869 transactions totaling approximately $33.1 billion year to date. Brokerage commissions remain the principal revenue source; the $1–$10 million private-client segment generated about 66% of Q3 brokerage commissions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $210.6 | $183.3 | $584.5 | $516.9 |
| Operating income | $27.4 | $24.7 | $79.8 | $68.7 |
| Net income | $20.9 | $15.5 | $61.0 | $43.0 |
| Diluted EPS | $0.53 | $0.39 | $1.55 | $1.10 |
| Adjusted EBITDA | $32.2 | $28.5 | $93.3 | $79.6 |
| Operating margin | 13.0% | 13.5% | 13.7% | 13.3% |
| Net margin | 9.9% | 8.4% | 10.4% | 8.3% |
Q3 revenue increased 14.9% year over year, led by brokerage commissions (+13.4%) and financing fees (+40.3%). Brokerage growth reflected more transactions and larger average transaction size, partly offset by lower average commission rates as larger transactions represented a greater mix. Financing-fee growth reflected higher transaction size, hiring, and acquisitions. For the first nine months, revenue rose 13.1%; other revenue fell 33.3%, largely because a sizable 2017 consulting fee had no comparable 2018 item.
Q3 operating expenses increased 15.5%, slightly faster than revenue; cost of services rose 15.8% and SG&A rose 14.5%. Q3 operating margin declined from 13.5% to 13.0%, while nine-month operating margin improved from 13.3% to 13.7%. The effective tax rate fell to 28.5% in Q3 and 27.2% year to date, from 39.3% and 39.0%, respectively, primarily reflecting the federal rate reduction to 21% under the Tax Cuts and Jobs Act. The company recorded an approximately $1.0 million provision related to uncertain tax positions in both the three- and nine-month discussions.
Cash flow, liquidity, and debt
- For the nine months, operating cash flow was $55.0 million, versus $25.3 million in 2017. Investing cash outflow was $92.3 million, mainly reflecting net purchases of marketable securities and $7.0 million of acquisition spending; financing cash outflow was $2.5 million.
- Cash and cash equivalents were $181.0 million at September 30, down from $220.8 million at year-end 2017. Available-for-sale marketable securities totaled $205.8 million, bringing cash plus securities to approximately $386.9 million. Securities were rated AA+ on average; the company reported no impairment write-downs.
- Total assets were $510.1 million, total liabilities $127.4 million, and stockholders’ equity $382.7 million. The $60 million revolving facility had no borrowings outstanding; $0.533 million was used for letters of credit. The company reported covenant compliance. Notes payable to former stockholders totaled $7.7 million; stock appreciation-rights liabilities totaled $20.9 million.
- Management said available cash, operating cash flow, marketable securities, and the credit facility should cover operating requirements for at least 12 months. This is management’s assessment, not a guarantee.
Outlook, risks, and notable items
- No specific financial forecast or earnings guidance is provided. Management was optimistic that economic expansion and commercial real estate fundamentals would support activity into 2019, while noting higher interest rates, trade tensions, market volatility, and a possible yield-curve inversion as risks.
- Management described positive demand and generally stable transaction activity, but noted that seller price expectations and cautious buyer underwriting were widening the negotiation gap and extending marketing and closing timelines. Oversupply risks exist in some metropolitan areas.
- The company completed three acquisitions in the first nine months, paying about $7.0 million net of cash received and recording $4.2 million of goodwill, $1.5 million of net intangible assets, and $1.8 million of contingent consideration. The filing identifies integration, performance, and potential impairment risks.
- Adoption of the new lease standard on January 1, 2019 is expected to materially increase balance-sheet assets and liabilities. Remaining operating-lease commitments were approximately $89.6 million; the income-statement and cash-flow effects were still being evaluated.
- The company had $11.3 million of conditional commitments to advance funds to current and prospective professionals. Ordinary-course litigation is ongoing; management did not expect its ultimate resolution to materially affect financial condition or results.
- Interest-rate sensitivity analysis estimated that a 1% increase in rates would reduce the fair value of investments by about $3.0 million, and a 2% increase by about $6.0 million. The filing reports effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether transaction growth and financing-fee momentum continue, and whether the larger-deal mix keeps pressuring brokerage commission rates.
- How operating expenses, especially commissions, stock-based compensation, and growth-related SG&A, track revenue in subsequent periods.
- The effect of interest rates and market conditions on transaction volume, investment portfolio values, and the buyer–seller pricing gap.
- Acquisition integration and performance, contingent consideration, and any goodwill or intangible-asset impairment indicators.
- The eventual balance-sheet impact of lease accounting and the status of the company’s $11.3 million advance commitments and tax positions.
- Related-party transactions: the company reported $1.8 million of Q3 brokerage commissions and financing fees from MMC subsidiaries, compared with $0.3 million in Q3 2017; its founder and co-chairman beneficially owned about 42% of shares.