Market Overview

Marcus & Millichap, Inc. Reports Results for Second Quarter 2018

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Marcus & Millichap, Inc. (the "Company", "Marcus & Millichap", "MMI")
(NYSE:MMI), a leading national brokerage firm specializing in
commercial real estate investment sales, financing, research and
advisory services, today reported financial results for the second
quarter ended June 30, 2018.

Second Quarter 2018 Highlights Compared to Second Quarter 2017

  • Total revenues increased by 10.6% to $199.4 million compared to a 1.6%
    decline in the second quarter of 2017
  • Net income was $22.2 million compared to $15.6 million in the second
    quarter of 2017, while adjusted EBITDA grew 17.6% year over year
  • Financing fees increased by 22.5% driven by significant growth in
    refinancing transactions
  • Private Client Market segment brokerage transactions increased by 6.0%
    in contrast to estimates of essentially flat year over year sales in
    the market
  • Brokerage revenue in the Larger Transaction Market segment increased
    by 29.0% compared to a 15.7% decline in the second quarter of 2017

Six Months 2018 Highlights Compared to Six Months 2017

  • Total revenues increased by 12.1% to $373.9 million compared to a 4.0%
    decline in the first half of 2017
  • Net income was $40.2 million compared to $27.6 million in the first
    half of 2017; while adjusted EBITDA grew 19.7%
  • Financing revenue increased by 11.1%
  • Private Client Market segment brokerage transactions increased 5.2%
    and represented approximately 65.1% of the Company's brokerage revenue
  • Brokerage revenue in the Larger Transaction Market segment increased
    by 36.2% compared to a 27.7% decline in the first half of 2017
  • Total sales force expanded by 92 professionals, or 5.3% over the past
    12 months

Hessam Nadji, President and CEO stated, "Marcus & Millichap delivered a
strong second quarter with growth in each of the Company's market
segments. Our expanded client outreach campaigns over the past year
enabled us to help more investors execute transactions in a changing
market environment. We are also seeing contribution from our investments
in proprietary tools, enhancements to our financing platform and ongoing
hiring." Mr. Nadji added, "Real estate fundamentals remain healthy and
the benefits of last year's Tax reform are trickling through the economy
and the real estate market. At the same time, higher interest rates and
buyer/seller price expectation gaps are keeping trading activity
generally flat. The second half of this year will be a more challenging
comparable for us as we finished the back half of 2017 strongly. We are
strengthening our position to capture more share and create long-term
shareholder value. Our strong balance sheet remains a competitive
advantage with sufficient defensive capital and more importantly to
actively pursue strategic acquisitions."

Second Quarter 2018 Results Compared to Second Quarter 2017

Total revenues for the second quarter of 2018 were $199.4 million
compared to $180.4 million for the same period in the prior year,
increasing by $19.0 million, or 10.6%. The increase in total revenues
was primarily driven by the increase in real estate brokerage
commissions, which increased by 11.7% to $181.6 million. This increase
in brokerage commissions was primarily due to an increase in overall
sales volume generated by the increase in the number of investment sales
transactions and increase in average transaction size. Average
commission rates declined due to a higher proportion of transactions
from the Larger Transaction and Middle Market segments, which generate
lower commission rates.

Total operating expenses for the second quarter of 2018 increased by
9.7% to $170.5 million, compared to $155.4 million for the same period
in the prior year. The increase was primarily driven by an 8.6% increase
in cost of services and a 12.3% increase in selling, general and
administrative expense. Cost of services as a percent of total revenues
improved by 110 basis points to 60.1% compared to the same period in the
prior year.

Selling, general and administrative expenses for the second quarter of
2018 increased by 12.3% to $49.1 million, compared to the same period in
the prior year. The increase was primarily due to increased costs
associated with (i) sales and promotional marketing expenses; (ii)
compensation related costs, including salaries and related benefits;
(iii) expansion of existing offices; (iv) stock-based compensation
expense and (v) other expense categories primarily driven by an increase
in professional fees.

Net income for the second quarter of 2018 was $22.2 million, or $0.57
per common share basic and $0.56 per common share diluted, compared to
net income of $15.6 million, or $0.40 per common share (basic and
diluted) for the same period in the prior year. Adjusted EBITDA for the
second quarter of 2018 increased by 17.6% to $33.7 million, compared to
adjusted EBITDA of $28.7 million for the same period in the prior year.

Six Months 2018 Results Compared to Six Months 2017

Total revenues for the six months ended June 30, 2018, were $373.9
million, compared to $333.6 million for the same period in the prior
year, an increase of $40.4 million, or 12.1%. Total operating expenses
for the six months ended June 30, 2018, increased by 11.1% to $321.5
million compared to $289.5 million for the same period in the prior
year. Cost of services as a percent of total revenues decreased to
59.2%, down 80 basis points compared to the first six months of 2017.
The Company reported net income for the six months ended June 30, 2018
of $40.2 million, or $1.03 per common share basic and $1.02 per common
share diluted, compared with net income of $27.6 million, or $0.71 per
common share basic and $0.70 per common share diluted, for the same
period in the prior year. Adjusted EBITDA for the six months ended June
30, 2018, increased by 19.7% to $61.2 million, from $51.1 million for
the same period in the prior year. As of June 30, 2018, the Company had
1,841 investment sales and financing professionals, a net gain of 92
over the prior year.

Business Outlook

We believe that the Company is positioned to continue to gain market
share by leveraging a number of factors, including our leading national
brand predominantly within our Private Client Market segment and
specialty groups, experienced management team, infrastructure
investments and proprietary technology. The size and fragmentation of
the Private Client Market segment, in particular, continues to offer
long-term growth opportunities with the top ten brokerage firms making
up only 25.2% market share. This market segment consistently accounts
for over 80% of commercial property sales transactions and over 60% of
the commission pool. The Company's growth plan also includes further
expansion into various specialty property types such as hospitality,
self-storage, seniors housing and the Larger Transaction Market segment,
as well as expansion of its financing division, Marcus & Millichap
Capital Corporation.

Key factors likely to influence the Company's business during the
balance of 2018 include:

  • Volatility in market sales and investor sentiment driven by:
    • Slowdown in market sales in the short- to mid-term in view of a
      maturing cycle, rising interest rates, bid-ask spread gap between
      buyers and sellers and economic trends
    • Possible boost to investor sentiment and sales activity based on
      the Tax Cuts and Jobs Act, regulatory easing and economic
      initiatives which are expected to increase real estate investor
      demand
    • Possible regional legislation that promote affordable housing may
      initially decrease real estate investor demand
  • Experienced agents' larger share of revenue production in a more
    challenging market environment, resulting in a higher average
    commission payout
  • Volatility in the Company's Middle and Larger Transaction Market
    segments
  • The potential for acquisition activity and subsequent integration

In addition, the reduction of MMI's effective corporate tax rate to the
25.5%-27.5% range from nearly 40% in prior years as a result of the
enactment of the Tax Cuts and Jobs Act may also affect the Company's
business in 2018. The factors above, in addition to the business's
typical transaction closing date variability, highlight the importance
of viewing the Company's business through a long-term, at least annual,
perspective.

Conference Call Details

Marcus & Millichap will host a conference call today to discuss the
results at 2:00 p.m. Pacific Time/5:00 p.m. Eastern Time. To participate
in the conference call, callers from the United States and Canada should
dial (877) 407-9208 ten minutes prior to the scheduled call time.
International callers should dial (201) 493-6784. For those unable to
participate during the live broadcast, a telephonic replay of the call
will also be available from 5:00 p.m. Pacific Time/8:00 p.m. Eastern
Time on Tuesday, August 7, 2018, through 8:59 p.m. Pacific Time/11:59
p.m. Eastern Time on Tuesday, August 21, 2018, by dialing (844) 512-2921
in the United States and Canada or (412) 317-6671 internationally and
entering passcode 13681319.

About Marcus & Millichap, Inc. Marcus & Millichap, Inc. is a leading
national brokerage firm specializing in commercial real estate
investment sales, financing, research and advisory services. As of June
30, 2018, the Company had over 1,800 investment sales and financial
professionals in 78 offices who provide investment brokerage and
financing services to sellers and buyers of commercial real estate. The
Company also offers market research, consulting and advisory services to
our clients. Marcus & Millichap closed 4,442 transactions for the six
months ended June 30, 2018, with a sales volume of approximately $21.1
billion. For additional information, please visit www.MarcusMillichap.com.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This release includes forward-looking statements, including the
Company's business outlook for 2018 and beyond and expectations for
market share growth. We have based these forward-looking statements
largely on our current expectations and projections about future events
and financial trends affecting the financial condition of our business.
Forward-looking statements should not be read as a guarantee of future
performance or results and will not necessarily be accurate indications
of the times at, or by, which such performance or results will be
achieved. Forward-looking statements are based on information available
at the time those statements are made and/or management's good faith
belief as of that time with respect to future events and are subject to
risks and uncertainties that could cause actual performance or results
to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such
differences include, but are not limited to:

  • market trends in the commercial real estate market or the general
    economy;
  • our ability to attract and retain qualified managers and investment
    sales and financing professionals;
  • the effects of increased competition on our business;
  • our ability to successfully enter new markets or increase our market
    share;
  • our ability to successfully expand our services and businesses and to
    manage any such expansions;
  • our ability to retain existing clients and develop new clients;
  • our ability to keep pace with changes in technology;
  • any business interruption or technology failure and any related impact
    on our reputation;
  • changes in interest rates, tax laws, including the Tax Cuts and Jobs
    Act, employment laws or other government regulation affecting our
    business; and
  • other risk factors included under "Risk Factors" in our most recent
    Annual Report on Form 10-K.

In addition, in this release, the words "believe," "may," "will,"
"estimate," "continue," "anticipate," "intend," "expect," "predict,"
"potential," "should" and similar expressions, as they relate to our
company, our business and our management, are intended to identify
forward-looking statements. In light of these risks and uncertainties,
the forward-looking events and circumstances discussed in this release
may not occur and actual results could differ materially from those
anticipated or implied in the forward-looking statements.

Forward-looking statements speak only as of the date of this release.
You should not put undue reliance on any forward-looking statements. We
assume no obligation to update forward-looking statements to reflect
actual results, changes in assumptions or changes in other factors
affecting forward-looking information, except to the extent required by
applicable laws. If we update one or more forward-looking statements, no
inference should be drawn that we will make additional updates with
respect to those or other forward-looking statements.

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF NET

AND COMPREHENSIVE INCOME

(dollar and share amounts in thousands, except per share
amounts)

(Unaudited)

   
Three Months

Ended June 30,

Six Months

Ended June 30,

2018   2017   2018   2017
Revenues:
Real estate brokerage commissions $ 181,640 $ 162,575 $ 344,165 $ 302,712
Financing fees 15,563 12,709 25,287 22,763
Other revenues   2,199     5,087       4,491     8,108  
Total revenues   199,402     180,371       373,943     333,583  
Operating expenses:
Cost of services 119,869 110,377 221,518 200,024
Selling, general and administrative expense 49,080 43,693 97,133 86,913
Depreciation and amortization expense   1,503     1,303       2,878     2,600  
Total operating expenses   170,452     155,373       321,529     289,537  
Operating income 28,950 24,998 52,414 44,046
Other income (expense), net 1,724 997 2,933 1,833
Interest expense   (352 )   (374 )     (712 )   (756 )
Income before provision for income taxes 30,322 25,621 54,635 45,123
Provision for income taxes   8,155     10,052       14,457     17,554  
Net income 22,167 15,569 40,178 27,569
Other comprehensive (loss) income:

Unrealized (losses) gains on marketable securities, net of tax of
$(57),
$111, $(221) and $176 for the three months ended June
30, 2018 and
2017 and the six months ended June 30, 2018 and
2017, respectively.

(164 ) 174 (656 ) 221

Foreign currency translation gain (loss), net of tax of $0 for
each of the
three months ended June 30, 2018 and 2017 and
each of the six months
ended June 30, 2018 and 2017

  34     (23 )     73     (25 )
Total other comprehensive (loss) income   (130 )   151       (583 )   196  
Comprehensive income $ 22,037   $ 15,720     $ 39,595   $ 27,765  
Earnings per share:
Basic $ 0.57 $ 0.40 $ 1.03 $ 0.71
Diluted $ 0.56 $ 0.40 $ 1.02 $ 0.70
Weighted average common shares outstanding:
Basic 39,154 39,002 39,124 38,976
Diluted 39,385 39,132 39,298 39,118

MARCUS & MILLICHAP, INC.
KEY OPERATING METRICS SUMMARY
(Unaudited)

Total sales volume was $11.4 billion for the three months ended June 30,
2018, encompassing 2,357 transactions consisting of $8.9 billion for
real estate brokerage (1,752 transactions), $1.6 billion for financing
(433 transactions) and $0.9 billion in other transactions, including
consulting and advisory services (172 transactions). Total sales volume
was $21.1 billion for the six months ended June 30, 2018, encompassing
4,442 transactions consisting of $16.9 billion for real estate brokerage
(3,337 transactions), $2.6 billion for financing (757 transactions) and
$1.6 billion in other transactions, including consulting and advisory
services (348 transactions). As of June 30, 2018, the Company had 1,739
investment sales professionals and 102 financing professionals. Key
metrics for real estate brokerage and financing are as follows:

  Three Months Ended

June 30,

    Six Months Ended

June 30,

Real Estate Brokerage 2018   2017 2018   2017
Average Number of Investment Sales Professionals 1,694 1,627 1,682 1,628
Average Number of Transactions per Investment Sales Professional 1.03 1.00 1.98 1.91
Average Commission per Transaction $ 103,676 $ 100,108 $ 103,136 $ 97,241
Average Commission Rate 2.03 % 2.24 % 2.04 % 2.20 %
Average Transaction Size (in thousands) $ 5,107 $ 4,479 $ 5,054 $ 4,421
Total Number of Transactions 1,752 1,624 3,337 3,113
Total Sales Volume (in millions) $ 8,948 $ 7,274 $ 16,864 $ 13,764
 
Three Months Ended

June 30,

Six Months Ended

June 30,

Financing (1) 2018 2017 2018 2017
Average Number of Financing Professionals 96 94 94 97
Average Number of Transactions per Financing Professional 4.51 4.34 8.05 8.24
Average Fee per Transaction $ 35,125 $ 31,150 $ 32,519 $ 28,489
Average Fee Rate 0.93 % 0.92 % 0.93 % 0.89 %
Average Transaction Size (in thousands) $ 3,774 $ 3,400 $ 3,490 $ 3,199
Total Number of Transactions 433 408 757 799
Total Sales Volume (in millions) $ 1,634 $ 1,387 $ 2,642 $ 2,556
(1)   Operating metrics calculated excluding certain financing fees not
directly associated to transactions.

The following table sets forth the number of transactions, sales volume
and revenues by commercial real estate market segment for real estate
brokerage:

  Three Months Ended June 30,  
2018   2017 Change
Real Estate Brokerage Number   Volume   Revenues Number   Volume   Revenues Number   Volume   Revenues
(in millions) (in thousands) (in millions) (in thousands) (in millions) (in thousands)
<$1 million 251 $ 161 $ 6,727 261 $ 164 $ 7,084 (10 ) $ (3 ) $ (357 )
Private Client Market ($1 - $10 million) 1,299 4,096 118,152 1,225 3,880 112,468 74 216 5,684
Middle Market (≥$10 - $20 million) 118 1,602 27,555 76 1,015 20,388 42 587 7,167
Larger Transaction Market (≥$20 million) 84   3,089   29,206 62   2,215   22,635 22     874     6,571  
1,752 $ 8,948 $ 181,640 1,624 $ 7,274 $ 162,575 128   $ 1,674   $ 19,065  
 
 
Six Months Ended June 30,
2018 2017 Change
Real Estate Brokerage Number Volume Revenues Number Volume Revenues Number Volume Revenues
(in millions) (in thousands) (in millions) (in thousands) (in millions) (in thousands)
<$1 million 496 $ 323 $ 13,595 503 $ 306 $ 13,078 (7 ) $ 17 $ 517
Private Client Market ($1 - $10 million) 2,467 7,656 224,164 2,346 7,278 212,218 121 378 11,946
Middle Market (≥$10 - $20 million) 231 3,208 54,826 164 2,217 39,542 67 991 15,284
Larger Transaction Market (≥$20 million) 143   5,677   51,580 100   3,963   37,874 43     1,714     13,706  
3,337 $ 16,864 $ 344,165 3,113 $ 13,764 $ 302,712 224   $ 3,100   $ 41,453  

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except per share amounts)

   
June 30,

2018

(Unaudited)

December 31, 2017
Assets
Current assets:
Cash and cash equivalents $ 240,019 $ 220,786
Commissions receivable 6,870 9,586
Prepaid expenses 7,654 9,661
Income tax receivable 1,308
Marketable securities, available-for-sale 85,486 73,560
Other assets, net   4,918     5,529  
Total current assets 344,947 320,430
Prepaid rent 14,910 15,392
Property and equipment, net 17,159 17,153
Marketable securities, available-for-sale 31,917 52,099
Assets held in rabbi trust 8,890 8,787
Deferred tax assets, net 21,371 22,640
Goodwill and other intangible assets 5,727
Other assets   29,250     23,163  
Total assets $ 474,171   $ 459,664  
 
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and other liabilities $ 8,279 $ 9,202
Notes payable to former stockholders 1,087 1,035
Deferred compensation and commissions 34,107 49,180
Income tax payable 217
Accrued bonuses and other employee related expenses   16,910     23,842  
Total current liabilities 60,600 83,259
Deferred compensation and commissions 41,557 49,361
Notes payable to former stockholders 6,564 7,651
Deferred rent and other liabilities   6,553     4,505  
Total liabilities   115,274     144,776  
 
Commitments and contingencies

 

Stockholders' equity:
Preferred stock, $0.0001 par value:

Authorized shares – 25,000,000; issued and outstanding shares –
none at June 30, 2018 and
December 31, 2017, respectively

Common stock, $0.0001 par value:

Authorized shares – 150,000,000; issued and outstanding shares –
38,621,712 and 38,374,011
at June 30, 2018 and December 31,
2017, respectively

4 4
Additional paid-in capital 94,291 89,877
Stock notes receivable from employees (4 ) (4 )
Retained earnings 264,262 224,071
Accumulated other comprehensive income   344     940  
Total stockholders' equity   358,897     314,888  
Total liabilities and stockholders' equity $ 474,171   $ 459,664  

MARCUS & MILLICHAP, INC.
OTHER INFORMATION
(Unaudited)

Adjusted EBITDA Reconciliation

Adjusted EBITDA, which the Company defines as net income before (i)
interest income and other, including net realized (losses) gains on
marketable securities, available-for-sale and cash and cash equivalents,
(ii) interest expense, (iii) provision for income taxes, (iv)
depreciation and amortization, (v) stock-based compensation and (vi)
other non-cash MSR activity. The Company uses Adjusted EBITDA in its
business operations to evaluate the performance of its business, develop
budgets and measure its performance against those budgets, among other
things. The Company also believes that analysts and investors use
Adjusted EBITDA as a supplemental measure to evaluate its overall
operating performance. However, Adjusted EBITDA has material limitations
as an analytical tool and should not be considered in isolation or as a
substitute for analysis of the Company's results as reported under U.S.
generally accepted accounting principles ("U.S. GAAP"). The Company
finds Adjusted EBITDA as a useful tool to assist in evaluating
performance because Adjusted EBITDA eliminates items related to capital
structure and taxes and non-cash items. In light of the foregoing
limitations, the Company does not rely solely on Adjusted EBITDA as a
performance measure and also considers its U.S. GAAP results. Adjusted
EBITDA is not a measurement of the Company's financial performance under
U.S. GAAP and should not be considered as an alternative to net income,
operating income or any other measures derived in accordance with U.S.
GAAP. Because Adjusted EBITDA is not calculated in the same manner by
all companies, it may not be comparable to other similarly titled
measures used by other companies.

A reconciliation of the most directly comparable U.S. GAAP financial
measure, net income, to Adjusted EBITDA is as follows (in thousands):

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

2018   2017 2018   2017
Net income $ 22,167 $ 15,569 $ 40,178 $ 27,569
Adjustments:
Interest income and other (1) (1,574 ) (745 ) (2,802 ) (1,370 )
Interest expense 352 374 712 756
Provision for income taxes (2) 8,155 10,052 14,457 17,554
Depreciation and amortization 1,503 1,303 2,878 2,600
Stock-based compensation 3,159 2,115 5,772 3,981
Other non-cash MSR activity (3)   (41 )       (41 )    
Adjusted EBITDA(4) $ 33,721   $ 28,668   $ 61,154   $ 51,090  
(1)   Other for the three and six months ended June 30, 2018 and 2017
includes net realized gains (losses) on marketable securities,
available-for-sale.
(2) Provision for income taxes for the three and six months ended June
30, 2018 was calculated using a 21% U.S. federal corporate tax rate
due to the enactment of the Tax Cuts and Jobs Act, which reduced the
U.S. federal corporate tax rate from 35% to 21%.
(3) Other non-cash mortgage servicing rights activity includes the
assumption of servicing obligations following the completion of our
business acquisitions in 2018.
(4) The increase in Adjusted EBITDA for the three and six months ended
June 30, 2018, compared to the same period in the prior year is
primarily due to higher total revenues and a lower proportion of
operating expenses compared to revenues.

Tax Adjusted Net Income Reconciliation

Due to the enactment of the Tax Cuts and Jobs Act, the U.S. federal
statutory corporate tax rate was reduced from 35% to 21% starting in
2018. For the three and six months ended June 30, 2017, the Company
calculated tax adjusted net income using the effective income tax rate
for the three and six months ended June 30, 2018 of 26.89% and 26.46%,
respectively. The adjustment was made to illustrate what the growth rate
would have been had the effective income tax rate been the same in both
periods. A reconciliation of the most directly comparable U.S. GAAP
financial measure, net income, to tax adjusted net income for the three
and six months ended June 30, 2018 is as follows (in thousands):

 

Three Months Ended June 30,

 

Change

 

Six Months Ended June 30,

 

Change

2018   2017 % 2018   2017 %
Income before provision for income taxes $ 30,322 $ 25,621 18.3 % $ 54,635 $ 45,123 21.1 %
Provision for income taxes   (8,155 )   (10,052 ) 18.9     (14,457 )   (17,554 ) 17.6  
Net income $ 22,167   $ 15,569   42.4 % $ 40,178   $ 27,569   45.7 %
Income before provision for income taxes $ 30,322 $ 25,621 18.3 % $ 54,635 $ 45,123 21.1 %
Provision for income taxes (1)   (8,155 )   (6,889 ) (18.4 )   (14,457 )   (11,940 ) (21.1 )
Tax adjusted net income (1) $ 22,167   $ 18,732   18.3 % $ 40,178   $ 33,183   21.1 %
(1)   Provision for income taxes for the three and six months ended June
30, 2017 was calculated using the effective income tax rate of
26.89% and 26.46%, respectively consistent with the three and six
months ended June 30, 2018.

Glossary of Terms

  • Private Client Market segment: transactions with values from $1
    million to up to but less than $10 million
  • Middle Market segment: transactions with values from $10 million to up
    to but less than $20 million
  • Larger Transaction Market segment (previously Institutional Market
    segment): transactions with values of $20 million and above

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