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MMI > SEC Filings for MMI > Form 10-Q on 22-Nov-2013All Recent SEC Filings

Show all filings for MARCUS & MILLICHAP, INC.

Form 10-Q for MARCUS & MILLICHAP, INC.


22-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2013, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form 10-Q and in conjunction with our Final Prospectus filed pursuant to Rule 424(b)(5) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission October 30, 2013, including the "Risk Factors" section and the consolidated financial statements and notes included therein.

Overview

We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions over the last 10 years, based on data from CoStar and Real Capital Analytics. We have more than 1,100 investment sales and financing professionals in 73 offices who provide investment brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. In 2012, we closed more than 6,100 sales and financing transactions with total volume of approximately $22.0 billion. For the three months ended September 30, 2013, we closed more than 1,600 sales, financing and other transactions with total volume of approximately $6.0 billion. For the nine months ended September 30, 2013, we closed more than 4,600 sales, financing and other transactions with total volume of approximately $16.0 billion.

We generate revenues by collecting real estate brokerage commissions upon the sale and fees upon the financing of commercial properties and, in addition, by providing consulting and advisory services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. In 2012, approximately 91% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 3% from other fees, including consulting and advisory services. For the three months ended September 30, 2013, approximately 91% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 3% from other fees, including consulting and advisory services. For the nine months ended September 30, 2013, approximately 90% of our revenues were generated from real estate brokerage commissions, 7% from financing fees and 3% from other fees, including consulting and advisory services.

The Spin-Off and Initial Public Offering

On November 5, 2013, MMI completed its initial public offering (the "IPO") of 6,900,000 shares of common stock at a price to the public of $12.00 per share. MMI sold 4,173,413 shares of common stock in the IPO, including 900,000 shares of common stock pursuant to the exercise of the underwriters' option to purchase additional shares. Selling stockholders sold an aggregate of 2,726,587 shares in the IPO at the same price to the public. MMI did not receive any proceeds from the sale of the shares by the selling stockholders.

The IPO generated net proceeds to MMI of approximately $42.7 million, including the underwriters' full exercise of their option to purchase additional shares and after deducting the underwriters' discount of $3.5 million and IPO related expenses estimated to be $3.9 million. Prior to the completion of the IPO, the shareholders of MMREIS contributed all of the outstanding shares of capital stock of MMREIS to the MMI in exchange for MMI common stock, pursuant to which MMREIS became MMI's wholly owned subsidiary, Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMC's shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness.

Factors Affecting Our Business

Our business and our operating results, financial condition and liquidity are significantly affected by the number and size of commercial real estate sales and financing transactions. The number and size of these transactions is affected by our ability to recruit and retain sales and financing professionals and by the general trends in the economy and real estate industry, particularly including:

Economic and commercial real estate market conditions. Our business is dependent on economic conditions and the demand for commercial real estate and related services in the markets in which we operate. Changes in the economy on a national, regional or local basis can have a positive or negative impact on our business. Fluctuations in acquisition and


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disposition activity, as well as general commercial real estate investment activity, can impact commissions for arranging such transactions, as well as impacting fees for arranging financing for acquirers and property owners that are seeking to recapitalize their existing properties. In each period discussed, the number of commercial real estate transactions for us has increased.

Credit and liquidity in the financial markets. Since real estate purchases are often financed with debt, credit and liquidity issues in the financial markets have a direct impact on flow of capital to the commercial real estate markets as well as transaction activity and prices. For the periods discussed, credit availability and liquidity were favorable after having been significantly limited in 2008 and 2009.

Demand for investment in commercial real estate. The willingness of private investors to invest in commercial real estate is affected by factors beyond our control, including the performance of real estate assets when compared with the performance of other investments.

Fluctuations in interest rates. Changes in interest rates as well as steady and protracted movements of interest rates in one direction (increases or decreases) could adversely or positively affect the operation and income of commercial real estate properties, as well as the demand from investors for commercial real estate investments. In particular, increased interest rates may cause prices to decrease due to the increased costs of obtaining financing and could lead to decreases in purchase and sale activities, thereby reducing the amounts of investment sales and loan originations. In contrast, decreased interest rates will generally decrease the costs of obtaining financing which could lead to increases in purchase and sales activities. For the periods discussed, interest rates generally remained low and have not fluctuated significantly.

Operating Segments

An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses whose separate financial information is available and is evaluated regularly by our chief operating decision maker, or CODM, to perform resource allocations and performance assessments. Our CODM is our Chief Executive Officer and Chief Financial Officer. Our CODM reviews financial information presented on an office-by-office basis for purposes of making operating decisions, assessing financial performance and allocating resources. Based on the evaluation of our financial information, our management believes that our offices represent individual operating segments with similar economic characteristics that meet the criteria for aggregation into a single reportable segment for financial statement purposes. Our financing operations also represent an individual operating segment, which does not meet the thresholds to be presented as a separate reportable segment.

Key Financial Measures and Indicators

Revenues

Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other revenues, which are primarily comprised of consulting and advisory fees.

Real estate brokerage commissions. We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenues from real estate brokerage commissions are recognized at the earlier of the close of escrow or the transfer of title between the seller and buyer.

Financing fees. We earn financing fees by securing financing on purchase transactions as well as by refinancing our clients' existing mortgage debt. We recognize financing fee revenues at the time the loan closes and we have no remaining significant obligations for performance in connection with the transaction.

Other revenues. Other revenues include fees generated from consulting and advisory services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed.

Substantially all of our transactions are success based, with a small percentage including retainer fees (such retainer fees are credited against a success-based fee upon the closing of a transaction) and/or breakage fees. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed. The amount and timing of all of the fees paid vary by the type of transaction and are generally negotiated on a transaction-by-transaction basis.

Operating Expenses

Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization expenses. The significant components of our expenses are further described below.

Cost of services. The majority of our cost of services expense is commission expense. Commission expenses are directly attributable to providing services to our clients for investment sales and mortgage brokerage services. Most of our


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transaction professionals are independent contractors and are paid commissions; however, there are some who are initially paid a salary and as such, these expenses also include employee-related compensation, employer taxes and benefits. In addition, some of our most senior investment sales professionals have the ability to earn additional commissions after meeting certain annual revenue thresholds. These additional commissions are recognized as cost of services in the period in which they are earned. Payment of a portion of these additional commissions are deferred for a period of three years and paid at the beginning of the fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers.

Selling, general & administrative expenses. The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and support staff. In addition, these costs include facilities costs (excluding depreciation and amortization), staff related expenses, sales, marketing, legal, telecommunication, network, data sources and other administrative expenses. Also included in selling, general and administrative are expenses related to stock-based compensation to key employees.

Prior to the IPO, we issued stock options and stock appreciation rights, or SARs, to key employees through a book value, stock-based compensation award program. The program gave certain employees the option to acquire unvested restricted stock and issued an equivalent number of unvested SARs, typically in exchange for a nonrecourse note receivable. Awards under the program typically vested over a three to five-year period, and could be redeemed or repurchased upon the occurrence of certain events, including termination of employment. Compensation expense was recognized over the vesting term based upon the formula settlement value of the awards. See Note 9 - Subsequent Events to the "Notes to the Condensed Consolidated Financial Statements" for additional information.

As a result of being a public company, our costs for such items as insurance, accounting and legal advice will increase relative to our historical costs for such services. We will also incur costs which we have not previously incurred for directors fees, increased directors and officers insurance, investor relations fees, expenses for compliance with the Sarbanes-Oxley Act and new rules implemented by the Securities and Exchange Commission and the New York Stock Exchange, and various other costs of a public company.

Depreciation and amortization expense. Depreciation and amortization expense consists of depreciation and amortization recorded on our leasehold improvements, furniture, fixture, and equipment assets. Depreciation is provided over estimated useful lives ranging from three to seven years for owned assets or over the lesser of the asset estimated useful lives or the related lease term for leased assets.

Other Income and Expenses, Net

Other income primarily consists of gains or losses, net on our deferred compensation plan assets, interest income and other non-operating gains or losses.

Provision for Income Taxes

For the three and nine months ended September 30, 2013 and 2012, our provision for income taxes was based on a tax-sharing agreement between us and MMC, which stipulated an effective tax rate annual rate of 43.5% and was utilized to compute the our income tax provision (benefit) and the resulting amount due
(from) to MMC, which were net of deferred tax assets and liabilities. The tax-sharing agreement with MMC was terminated effective October 31, 2013. We will file as a stand-alone tax entity for tax purposes in the future. When we file as a stand-alone tax entity our future taxable income will be subject to the applicable U.S. federal and state and local tax rates in the jurisdictions in which the taxable income is generated. The change to a stand-alone entity for tax purposes may result in material changes to our income tax provision in future years.


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Results of Operations

Following is a discussion of our results of operations for the three and nine months ended September 30, 2013 and 2012. The tables included in the period comparisons below provide summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results.

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. Such key metrics include the following:

                                                 Three Months Ended                Nine Months Ended
                                                   September 30,                     September 30,
Real Estate Brokerage Commissions              2013             2012             2013             2012
Average Number of Sales Professionals             1,139              985            1,101              977
Average Number of Transactions per
Sales Professional                                  1.0              1.0              2.9              2.8
Average Commission per Transaction          $    86,749      $    82,046      $    80,573      $    79,335
Average Transaction Size                    $ 3,790,048      $ 3,559,733      $ 3,568,151      $ 3,449,256
Total Number of Transactions                      1,173            1,007            3,211            2,723
Total Sales Volume (in millions)            $     4,446      $     3,585      $    11,457      $     9,392




                                                    Three Months Ended                Nine Months Ended
                                                      September 30,                     September 30,
Financing Fees                                    2013             2012             2013             2012
Average Number of Financing Professionals               72               58               69               57
Average Number of Transactions per
Financing Professional                                 4.2              3.7             12.3             10.6
Average Fee per Transaction                    $    22,609      $    24,276      $    22,017      $    22,207
Average Transaction Size                       $ 2,381,822      $ 2,435,981      $ 2,224,446      $ 2,294,702
Total Number of Transactions                           300              214              848              604
Total Dollar Volume (in millions)              $       715      $       521      $     1,886      $     1,386


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Comparison of Three Months Ended September 30, 2013 and 2012



                                          Three                                 Three
                                         Months                                Months
                                          Ended           Percentage            Ended           Percentage        Total          Total
                                      September 30,           of            September 30,           of            Dollar       Percentage
                                          2013             Revenue              2012             Revenue          Change         Change
(Dollars in thousands)
Revenues:
Real estate brokerage commissions    $       101,757             90.9 %    $        82,620             90.6 %    $ 19,137             23.2 %
Financing fees                                 6,783              6.1                5,195              5.7         1,588             30.6
Other revenues                                 3,413              3.0                3,413              3.7             0              0.0

Total revenues                               111,953            100.0               91,228            100.0        20,725             22.7
Operating expenses:
Cost of services                              67,718             60.5               54,194             59.4        13,524             25.0
Selling, general, and
administrative expense                        30,863             27.6               25,007             27.4         5,856             23.4
Depreciation and amortization
expense                                          747              0.7                  732              0.8            15              2.0

Total operating expenses                      99,328             88.8               79,933             87.6        19,395             24.3

Operating income                              12,625             11.2               11,295             12.4         1,330             11.8
Other income (expense), net                      247              0.2                   41              0.0           206            502.4

Income before provision for income
taxes                                         12,872             11.4               11,336             12.4         1,536             13.5
Provision for income taxes                     5,597              5.0                4,931              5.4           666             13.5

Net income                           $         7,275              6.4 %    $         6,405              7.0 %    $    870             13.6 %


Adjusted EBITDA (1)                  $        15,668             14.0 %    $        13,791             15.1 %    $  1,877             13.6 %

(1) Adjusted EBITDA is not a measurement of our 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. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see "-Non-GAAP Financial Measure."


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Revenues.

Our total revenues were $112.0 million for the three months ended September 30, 2013 compared to $91.2 million for the same period in 2012, an increase of $20.7 million, or 22.7%. Total revenues increased primarily as a result of increases in real estate brokerage commissions, which contributed 92.3% of the total increase, as well as increases in financing fees.

Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $101.8 million for the three months ended September 30, 2013 from $82.6 million for the three months ended September 30, 2012, an increase of $19.1 million or 23.2%. The increase was driven by a combination of a 16.5% increase in the number of investment sales transactions and a 5.7% increase in the average commission size during the three months ended September 30, 2013 as compared to the same period in 2012. The increase in average commission size was primarily due to an increase in the average transaction size.

Financing fees. Revenues from financing fees increased to $6.8 million for the three months ended September 30, 2013 from $5.2 million for the three months ended September 30, 2012, an increase of $1.6 million or 30.6%. The increase was driven by a 40.2% increase in the number of loan transactions due to an increase in the number of financing professionals combined with an increase in their productivity levels, partially offset by a 6.9% decrease in average loan commissions due in part to an increase in the proportion of fees from smaller loan transactions during the three months ended September 30, 2013 as compared to the same period in 2012.

Other revenues. Other revenues were $3.4 million for the three months ended September 30, 2013 and 2012.

Total operating expenses.

Our total operating expenses were $99.3 million for the three months ended September 30, 2013 compared to $79.9 million for the same period in 2012, an increase of $19.4 million, or 24.3%. Expenses increased primarily due to an increase in cost of services, which is primarily commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Selling, general and administrative costs increased as well, as described below.

Cost of services. Cost of services for the three months ended September 30, 2013 increased approximately $13.5 million, or 25.0% to $67.7 million from $54.2 million for the same period in 2012. The increase was primarily due to increased commission expenses driven by the increased revenues noted above, and to a lesser extent, an increase in referral fees paid to other real estate brokers.

Selling, general and administrative expense. Selling, general and administrative expense for the three months ended September 30, 2013 increased $5.9 million, or 23.4%, to $30.9 million from $25.0 million for the same period in 2012. The increase was primarily due to (i) a $2.5 million increase in legal expenses, driven by higher legal settlement costs combined with lower insurance recoveries in the current quarter as compared to the comparable prior year quarter, (ii) a $2.1 million increase in staff salaries, wages and related benefits expenses driven by an increase in our average headcount to build and support our sales force, including hiring of national and regional specialty directors and sales recruiters and (iii) a $0.7 million increase in other administrative costs primarily due to an increase in professional fees driven by third party consulting service fees in preparation of being a public company.

Depreciation and amortization expense. There were no significant changes in depreciation and amortization expenses for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012.

Other income/expense, net. Other income/expense, net was not significant for the three months ended September 30, 2013 or the three months ended September 30, 2012.

Provision for income taxes. Income tax expense totaled $5.6 million for the three months ended September 30, 2013 as compared to $4.9 million in same period in 2012, an increase of $0.7 million or 13.5%. The increase was attributable to the higher pre-tax income during the three months ended September 30, 2013 as compared to 2012.

During the three months ended September 30, 2013 and 2012, our income tax expense was based on a tax-sharing agreement between us and MMC. As specified by the agreement, our effective tax rate was 43.5% for the three months ended September 30, 2013 and 2012. Subsequent to the completion of the IPO, we anticipate our effective tax rate as a stand-alone tax entity to be approximately 41.0%.


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Comparison of Nine Months Ended September 30, 2013 and 2012



                                          Nine                                  Nine
                                         Months                                Months
                                          Ended           Percentage            Ended           Percentage        Total          Total
                                      September 30,           of            September 30,           of            Dollar      Percentage
                                          2013             Revenue              2012             Revenue          Change        Change
(Dollars in thousands)
Revenues:
Real estate brokerage commissions    $       258,720             90.2 %    $       216,029             90.8 %    $ 42,691            19.8 %
Financing fees                                18,671              6.5               13,413              5.6         5,258            39.2
Other revenues                                 9,403              3.3                8,636              3.6           767             8.9

Total revenues                               286,794            100.0              238,078            100.0        48,716            20.5
Operating expenses:
Cost of services                             170,395             59.4              138,903             58.3        31,492            22.7
Selling, general, and
administrative expense                        84,687             29.5               70,907             29.8        13,780            19.4
Depreciation and amortization
expense                                        2,261              0.8                2,227              0.9            34             1.5

Total operating expenses                     257,343             89.7              212,037             89.0        45,306            21.4

Operating income                              29,451             10.3               26,041             11.0         3,410            13.1
Other income (expense), net                      496              0.2                  324              0.1           172            53.1

Income before provision for income
taxes                                         29,947             10.5               26,365             11.1         3,582            13.6
Provision for income taxes                    13,025              4.5               11,469              4.8         1,556            13.6

Net income                           $        16,922              6.0 %    $        14,896              6.3 %    $  2,026            13.6 %

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