Marcus & Millichap, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unless noted otherwise, amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Business context and reporting period
Marcus & Millichap is a commercial real estate brokerage and financing firm operating 84 offices in the U.S. and Canada, with 2,022 investment sales and financing professionals at quarter-end. Its revenues are primarily transaction-based brokerage commissions and financing fees. The company attributed the sharp year-over-year improvement to recovery from pandemic-related weakness in 2020.
- Q2 closed 3,285 investment sales, financing and other transactions, with approximately $17.4 billion in total sales volume; H1 totals were 5,617 transactions and approximately $29.4 billion.
- Real estate brokerage generated approximately 89% of Q2 and H1 revenue; financing fees contributed about 10%.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Revenue | $284.9m | $117.4m | $468.9m | $308.1m |
| Operating income (loss) | $41.6m | ($2.6m) | $61.8m | $17.0m |
| Net income | $31.5m | $0.1m | $46.5m | $13.2m |
| Diluted EPS | $0.78 | — | $1.16 | $0.33 |
| Adjusted EBITDA (non-GAAP) | $48.1m | $4.2m | $73.8m | $26.5m |
- Q2 revenue increased 142.7% year over year; brokerage commissions rose 144.7% and financing fees rose 122.1%. H1 revenue increased 52.2%, with brokerage commissions up 51.1% and financing fees up 64.2%.
- Operating margin was 14.6% in Q2 2021 versus a 2.2% operating loss margin in Q2 2020; H1 operating margin was 13.1% versus 5.5%. Net margin was 11.1% in Q2 and 9.9% for H1 2021.
- Cost of services was 62.7% of Q2 revenue and 61.4% of H1 revenue. H1 cost-of-services ratio increased from 60.9% in 2020, which management attributed partly to senior professionals reaching commission thresholds earlier than expected.
- H1 operating cash flow was positive $33.5m, versus negative $51.8m in 2020. Investing cash flow was negative $41.9m, primarily reflecting net purchases of marketable securities; financing cash flow was negative $4.5m. Cash declined $12.7m to $230.4m.
- At June 30, cash and marketable debt securities totaled $475.1m. Marketable securities had a reported fair value of $244.7m. The company had no credit-facility borrowings and reported $59.5m of borrowing capacity; the $60m revolving facility matures June 1, 2022. It was in covenant compliance.
- Total assets were $817.8m and total liabilities were $220.9m. Operating lease liabilities totaled $81.5m. The filing reports no outstanding preferred shares.
Material changes versus the prior comparable period
- Results rebounded substantially from Q2 2020, when pandemic disruption left the company near break-even. Q2 brokerage transaction count increased 116.7%, sales volume increased 150.0%, and average transaction size increased 15.4%; a larger mix of larger transactions reduced the average commission rate by 4 basis points.
- For H1, brokerage sales volume rose 61.7% and transaction count rose 45.7%; average transaction size increased 11.0%, partly offset by a 13-basis-point decline in average commission rates.
- SG&A increased 42.0% in Q2 and 15.3% in H1, including higher management performance compensation, facilities, retention and business-development costs, and acquisition-related contingent-consideration expense. H1 SG&A also benefited from lower event, legal and stock-compensation costs.
- Cash and cash equivalents were lower than December 31, 2020 ($230.4m versus $243.2m), while total marketable securities increased in fair value to $244.7m from $206.0m.
Outlook, risks, contingencies and unusual items
- No formal numerical revenue or earnings guidance is provided. Management said it was uncertain whether the unusually strong first-half growth could be sustained in the second half of 2021, while expressing confidence that liquidity positioned the company to benefit from an economic recovery and pursue accretive, synergistic acquisitions.
- Management cited COVID-19 resurgence and variants, vaccination rates, uneven property-sector recovery, buyer-seller pricing gaps, inflation and possible interest-rate increases, and potential tax-policy changes as risks to transaction activity. Office demand remained comparatively weak; some retail, hotel and seniors-housing segments were still recovering.
- Management noted transaction timing and seasonality: historically, revenue and cash flow are often higher in the second half, especially Q4, while operating margins may be lower later in the year due to commission schedules. These historical patterns may not recur.
- Acquisition-related contingent and deferred consideration had a maximum undiscounted payment of $31.0m, expected over one to seven years subject to applicable conditions. The company also disclosed $23.0m of potential advances to sales and financing professionals under time- and performance-based arrangements.
- The company reported ordinary-course legal claims, including brokerage, employment and independent-contractor classification matters; it did not believe their outcomes would materially adversely affect its financial position, results or cash flows. It reported no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
- After quarter-end, on August 3, 2021, the company adopted change-in-control and death-and-disability policies for specified executives and directors, including severance and/or equity acceleration benefits under stated conditions.
Most important facts for investors to verify
- Whether transaction volumes and commission revenue remain strong after the unusually weak 2020 comparison, and whether management’s second-half sustainability caution proves warranted.
- How transaction mix, average commission rates and senior-professional commission thresholds affect margins as revenue changes.
- Whether COVID-19 developments, interest rates, inflation, tax-policy changes, and sector-specific property recovery alter client activity or transaction timing.
- Liquidity composition and availability: cash, marketable securities, the undrawn revolving facility, and the timing of lease, acquisition-consideration and other commitments.
- The filing’s non-GAAP Adjusted EBITDA definition and reconciliation when comparing performance with other companies.