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MMI > SEC Filings for MMI > Form 10-K on 21-Mar-2014All Recent SEC Filings

Show all filings for MARCUS & MILLICHAP, INC.



Annual Report


Forward-Looking Statements

This Annual Report on Form 10-K and the documents incorporated herein by reference contain certain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto included elsewhere herein. The following discussion contains, in addition to historical information, forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those factors set forth under Item 1A - "Risk Factors" of this Annual Report on Form 10-K.


Our Business

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. As of December 31, 2013, we had more than 1,300 investment sales and financing professionals in 76 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. During the year ended December 31, 2013, we closed more than 6,600 sales, financing and other transactions with total volume of approximately $24.0 billion, an increase from more than 6,100 sales and financing transactions with total volume of approximately $22.0 billion in 2012.

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. During the year ended December 31, 2013, approximately 90% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 4% from other fees, including consulting and advisory services. 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.

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 the Company of $42.3 million, including the underwriters' full exercise of their option to purchase additional shares and after deducting total expenses of $7.8 million, consisting of $3.5 million of underwriters' discounts and commissions and IPO related expenses of $4.3 million. Prior to the completion of the IPO, the shareholders of MMREIS contributed all of the outstanding shares of capital stock of MMREIS to MMI in exchange for MMI common stock, pursuant to which MMREIS

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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 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.

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.

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.

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Key Financial Measures and Indicators


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. To a lesser extent, we also earn ancillary fees associated with financings activities.

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, depreciation and amortization expenses and stock-based and other compensation in connection with our IPO. 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 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 generally deferred for a period of three years, at the Company's election 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 for non-IPO related stock-based compensation to employees and independent contractors (i.e. agents).

Prior to our 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,

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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. Subsequent to the IPO, we issue share-based awards to employees, non-employees and directors under the 2013 Plan. The Company values its restricted stock units and restricted stock awards based on the grant date closing price of the Company's common stock when the award is based on shares or based on the grant date cash value when award is based on a predetermined dollar value. The awards typically vest over a three to five-year period. The Company recognizes the related expense on a straight-line basis over the requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the portion of the grant date value of the award that has vested through that date.

As a result of being a public company, our costs for such items as insurance, accounting and legal advice increased relative to our historical costs for such services. We also incurred 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 computer software and hardware equipment and furniture, fixture, and equipment. Depreciation and amortization are 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.

Stock-based and other compensation in connection with IPO. Stock-based and other compensation in connection with IPO consists of non-cash stock based compensation and other compensation charges incurred in conjunction with our IPO related to the acceleration of vesting of restricted stock and SARs, modifications to remove the formula settlement value of the restricted stock and SARs awards, grants of replacement awards in the form of DSUs to MMREIS's managing directors, a DSU grant to Mr. Millichap and grant of other stock-based compensation awards pursuant to the 2013 Plan and other compensation charges incurred in conjunction with IPO.

Other Income, Net

Other income, net primarily consists of gains or losses, net on our deferred compensation plan assets, interest income, interest expense pertaining to notes payable for former stockholders and other non-operating gains or losses.

Provision for Income Taxes

From inception through the date of the IPO, 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 included 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 beginning for the period ending December 31, 2013. As a stand-alone tax entity, our taxable income is 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.

Results of Operations

Following is a discussion of our results of operations for the years ended December 31, 2013, 2012 and 2011. 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.

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Key Metrics

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

                                                                        Year Ended
                                                                       December 31,
Real Estate Brokerage Commissions                          2013            2012            2011
Average Number of Sales Professionals                         1,125             982             968
Average Number of Transactions per Sales Professional           4.1             4.3             3.3
Average Commission per Transaction                      $    84,852     $    83,075     $    77,686
Average Transaction Size                                $ 3,736,044     $ 3,760,741     $ 3,551,433
Total Number of Transactions                                  4,634           4,230           3,158
Total Sales Volume (in millions)                        $    17,313     $    15,908     $    11,215

                                                                    Year Ended
                                                                   December 31,
Financing Fees                                         2013            2012            2011
Average Number of Financing Professionals                    69              58              48
Average Number of Transactions per
Financing Professional                                     16.9            15.7            15.5
Average Fee per Transaction                         $    22,250     $    23,170     $    22,267
Average Transaction Size                            $ 2,297,117     $ 2,417,763     $ 2,349,282
Total Number of Transactions                              1,165             912             742
Total Dollar Volume (in millions)                   $     2,676     $     2,205     $     1,777

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Comparison of Year Ended December 31, 2013 and 2012

                                           Year                                    Year
                                          Ended             Percentage            Ended            Percentage          Total            Total
                                       December 31,             of             December 31,            of             Dollar          Percentage
                                           2013              Revenue               2012             Revenue           Change            Change
(in thousands, except per share
Real estate brokerage commissions     $      393,203               90.3 %     $      351,407              91.1 %     $  41,796               11.9 %
Financing fees                                25,921                5.9               21,132               5.5           4,789               22.7
Other revenues                                16,771                3.8               13,177               3.4           3,594               27.3

Total revenues                               435,895              100.0              385,716             100.0          50,179               13.0
Operating expenses:
Cost of services                             264,637               60.7              230,248              59.7          34,389               14.9
Selling, general, and
administrative expense                       115,661               26.5              103,479              26.8          12,182               11.8
Depreciation and amortization
expense                                        3,043                0.7                2,981               0.8              62                2.1
Stock-based and other compensation
in connection with IPO                        31,268                7.2                   -                 -           31,268                 -

Total operating expenses                     414,609               95.1              336,708              87.3          77,901               23.1

Operating income                              21,286                4.9               49,008              12.7         (27,722 )            (56.6 )
Other income, net                                655                0.2                  433               0.1             222               51.3

Income before provision for income
taxes                                         21,941                5.1               49,441              12.8         (27,500 )            (55.6 )
Provision for income taxes                    13,735                3.2               21,507               5.6          (7,772 )            (36.1 )

Net income                            $        8,206                1.9 %     $       27,934               7.2 %     $ (19,728 )            (70.6 )%

Less: Net loss attributable to
Marcus & Millichap Real Estate
Investment Services, Inc. prior to
initial public offering on
October 31, 2013                      $       (1,045 )

Net income attributable to
Marcus & Millichap, Inc.
subsequent to initial public
offering                              $        9,251

Earnings per share (1):
Basic                                 $         0.24
Diluted                               $         0.24
Weighted average common shares
outstanding (1):
Basic                                         38,787
Diluted                                       38,815
Adjusted EBITDA (2)                   $       61,286               14.1 %     $       59,708              15.5 %     $   1,578                2.6 %

(1) Earnings per share information has not been presented for periods prior to the IPO on October 31, 2013. See Note 2 -"Accounting Policies" and Note 11 - "Earnings Per Share" of our Notes to Consolidated Financial Statements for additional information on earnings per share.

(2) 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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Our total revenues were $435.9 million in 2013 compared to $385.7 million in 2012, an increase of $50.2 million, or 13.0%. Total revenues increased primarily as a result of increases in real estate brokerage commissions of $41.8 million, which contributed 83.3% of the total increase, as well as an increase in financing fees of $4.8 million, and an increase in other revenues of $3.6 million.

Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $393.2 million in 2013 from $351.4 million in 2012, an increase of $41.8 million or 11.9%. The increase was driven by a 9.6% increase in the number of investment sales transactions as well as a 2.1% increase in the average commission size during 2013 as compared to 2012. The increase in average commission per transaction was primarily due to an increase in average commission fee percentage.

Financing fees. Revenues from financing fees increased to $25.9 million in 2013 from $21.1 million in 2012, an increase of $4.8 million or 22.7%. The increase was primarily driven by a 27.7% increase in the number of loan transactions primarily due to an increase in the number of financing professionals combined with an increase in their productivity levels, partially offset by a 4.0% decrease in average loan fees due in part to an increase in the proportion of fees from smaller loan transactions during 2013 as compared to 2012.

Other revenues. Other revenues increased to $16.8 million in 2013 from $13.2 million in 2012, an increase of $3.6 million or 27.3%. The increase was primarily driven by an increase in fees generated from advisory services during 2013 as compared to 2012.

Total operating expenses.

Our total operating expenses were $414.6 million in 2013 compared to $336.7 million in 2012, an increase of $77.9 million, or 23.1%. Operating expenses increased due to $34.4 million increase in cost of services, $31.3 million of non-cash stock-based and other compensation charges in connection with the IPO during the fourth quarter of 2013 and $12.2 million increase in selling, general and administrative costs.

Cost of services. Cost of services, which are primarily commissions paid to our investment sales professionals and compensation-related costs in connection with our financing activities in 2013 increased approximately $34.4 million, or 14.9% to $264.6 million from $230.2 million in 2012. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above and to a lesser extent, an increase in referral fees paid to other real estate brokers and an increase in the proportion of transactions closed by our senior sales agents who are paid higher commission rates.

Selling, general and administrative expense. Selling, general and administrative expense in 2013 increased $12.2 million, or 11.8%, to $115.7 million from $103.5 million in 2012. The increase was primarily due to (i) a $6.7 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 to directly support our more senior agents, recruiters to assist in the recruitment of experienced agents and corporate personnel in connection with being a public company, (ii) a $4.4 million increase in legal expenses, driven by higher legal settlement costs combined with lower insurance recoveries during 2013 as compared 2012, (iii) a $1.7 million increase in sales promotional expenses, driven by an increase in our annual sales recognition event and increased marketing expenses to support increased sales (The annual sales recognition event is typically held in the first quarter of the year and the majority of the expenses are incurred and recognized during that period.), and (iv) a $1.4 million increase in professional fees primarily driven by an increase in accounting and third party consulting service fees in preparation of and operating as a public company. These increases were partially offset by a $2.5 million decrease in stock-based compensation expense. Stock-based compensation expense included in selling, general and

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administrative expense decreased primarily due to the Company's book value restricted stock and SARs plans being terminated and replaced with immediately vested stock compensation granted in conjunction with the IPO. See Note 8 - "Stock-Based Compensation Plans" of our Notes to Consolidated Financial Statements for additional information on stock-based compensation. Stock-based compensation expense in connection with the IPO is presented separately and is further described below.

Depreciation and amortization expense. There were no significant changes . . .

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