UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number 001-36155
MARCUS & MILLICHAP, INC.
(Exact name of registrant as specified in its charter)
Delaware | 35-2478370 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer
Identification No.) |
23975 Park Sorrento, Suite 400 Calabasas, California, 91302
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (818) 212-2250
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered |
|
Common Stock, par value $0.0001 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ | |||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrants voting stock held by non-affiliates at June 30, 2017 was approximately $458.8 million, based on the closing price per share of common stock on that date of $26.36 as reported on the New York Stock Exchange. Shares of common stock known by the registrant to be beneficially owned by directors and executive officers of the registrant and 10% stockholders are not included in the computation. The registrant, however, has made no determination that such persons are affiliates within the meaning of Rule 12b-2 under the Securities Exchange Act of 1934.
As of March 5, 2018, there were 38,578,808 shares of the registrants common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement to be delivered to stockholders in connection with the annual meeting of stockholders to be held on May 4, 2018 are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the United States Securities and Exchange Commission (the SEC) within 120 days of the registrants fiscal year ended December 31, 2017.
TABLE OF CONTENTS
Page | ||||||
PART I | ||||||
Item 1. |
Business | 4 | ||||
Item 1A. |
Risk Factors | 19 | ||||
Item 1B. |
Unresolved Staff Comments | 32 | ||||
Item 2. |
Properties | 32 | ||||
Item 3. |
Legal Proceedings | 32 | ||||
Item 4. |
Mine Safety Disclosures | 32 | ||||
PART II | ||||||
Item 5. |
33 | |||||
Item 6. |
35 | |||||
Item 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
37 | ||||
Item 7A. |
54 | |||||
Item 8. |
55 | |||||
Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
55 | ||||
Item 9A. |
55 | |||||
Item 9B. |
56 | |||||
PART III | ||||||
Item 10. |
Directors, Executive Officers and Corporate Governance | 57 | ||||
Item 11. |
Executive Compensation | 58 | ||||
Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
58 | ||||
Item 13. |
Certain Relationships and Related Transactions, and Director Independence | 59 | ||||
Item 14. |
Principal Accounting Fees and Services | 59 | ||||
PART IV | ||||||
Item 15. |
Exhibits, Financial Statement Schedules | 60 | ||||
Item 16. |
Form 10-K Summary | 62 | ||||
63 |
MARKET, INDUSTRY AND OTHER DATA
Unless otherwise indicated, information contained in this Annual Report on Form 10-K concerning the commercial real estate industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on (i) information gathered from various sources, (ii) certain assumptions that we have made, and (iii) on our knowledge of the commercial real estate market. While we believe our market position, market opportunity and market size information included in this Annual Report on Form 10-K are generally reliable, such information is inherently imprecise. Unless indicated otherwise, the industry data included herein is generally based on information available through the nine months ended September 30, 2017 since full year 2017 information may not yet have been published. We use market data from Costar Group, Inc. and Real Capital Analytics that consists of list side information of sales transactions, with a value of $1 million or more, of multifamily, retail, office and industrial buildings.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements, including the Companys business outlook for 2018 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 managements 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 recently enacted Tax Cuts and Jobs Act, employment laws or other government regulation affecting our business; and |
| other risk factors included under Risk Factors in this Annual Report on Form 10-K. |
In addition, in this Annual Report, 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K. 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.
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PART I
Unless the context requires otherwise, the words Marcus & Millichap, Marcus & Millichap Real Estate Investment Services, MMREIS, we, the Company, us and our refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other consolidated subsidiaries.
Overview
Marcus & Millichap, Inc. (MMI) is a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top broker in the United States based on the number of investment transactions for over 10 years. As of December 31, 2017, we had over 1,800 investment sales and financing professionals in 78 offices in the United States and Canada that provide investment brokerage and financing services to sellers and buyers of commercial real estate. In 2017, we closed 8,979 sales, financing and other transactions with total sales volume of approximately $42.2 billion.
We divide commercial real estate into four major market segments, characterized by price:
| Properties with prices less than $1 million; |
| Private client market: properties priced from $1 million up to $10 million; |
| Middle market: properties priced from $10 million up to $20 million; and |
| Larger transaction market: properties priced from $20 million and above. |
We service clients in all of these market segments by underwriting, marketing, selling and financing commercial real estate properties in a manner that maximizes value for sellers and provides buyers with the largest and most diverse inventory of commercial properties. Our business model is based on several key attributes:
| a 47-year history of providing investment brokerage and financing services through a proprietary marketing system, policies and culture of information sharing and in-depth investment brokerage training, all of which is executed under the supervision of a dedicated management team focused on client service and growing the firm; |
| market leading share and brand within the $1-$10 million private client market segment, which consistently represents more than 80% of total U.S. commercial property transactions greater than $1 million in the marketplace; |
| Over 1,800 investment sales and financing professionals providing consistent services and exclusive client representation across multiple property types; |
| a broad geographic platform consisting of 78 offices in the United States and Canada powered by information sharing and proprietary real estate marketing technologies; |
| an ability to scale with our private clients as they grow and connect private capital with larger assets through our Institutional Property Advisors (IPA) group; |
| a financing team integrated with our brokerage sales force providing independent mortgage brokerage services; |
| an experienced management team overseeing our offices, with an average of approximately 10 years of real estate investment brokerage experience with our Company; |
| our managers not competing with or participating in investment sales professionals commissions; because they are in a support and leadership role as company executives; and |
| industry-leading research and advisory services tailored to the needs of our clients and supporting our investment sales and financing professionals. |
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The investment brokerage and financing businesses serving private clients within the $1-$10 million private client market segment represent the largest part of our business, which differentiates us from our competitors. In 2017, approximately 68% of our brokerage commissions came from this market segment. Accordingly, our business model distinguishes us from our national competitors, who may focus primarily on the more volatile larger transaction market segment or on other business activities such as leasing or property management, and from our local and regional competitors, who lack a broad national platform.
Our business model and geographic footprint provide an unparalleled level of connectivity to the marketplace for our clients. Our investment sales and financing professionals are specialized by property type and by local market area, as we believe this focused expertise brings value to our clients. Our broad geographic coverage, encompassing 78 offices in the United States and Canada, combined with our local and national property expertise and significant relationships with both buyers and sellers, provides exposure and access to properties across the United States and Canada. This connectivity to a broad marketplace increases liquidity and opportunities for our clients as we maximize the value of their properties by accessing the largest pool of qualified buyers through our network of sales professionals and proprietary real estate inventory and marketing system. By closing more transactions annually than any other brokerage firm in the private client market segment, our investment sales professionals are able to provide clients with a broad and deep perspective in multiple property types in real estate markets locally, regionally and nationally.
Our experienced management team is responsible for developing and mentoring our investment sales and financing professionals creating a consistent culture of information sharing and environment of best practices to maximize value for our clients. Our managers are compensated as executives incentivized to grow their offices and do not participate in commissions generated by our investment sales and financing professionals. This structure eliminates any competition with our sales force and puts the emphasis on investment sales and financing professionals support and client service. In addition, we support our clients and investment sales and financing teams with market and property focused research, publications and custom analysis.
We generate revenues by collecting fees upon the sale and financing of commercial properties. These fees consist of commissions collected upon the sale of a property and fees collected from the placement of loans. The fees are principally based upon the sales price of the property or amount financed. In 2017, approximately 90% of our revenues were generated from real estate brokerage commissions, 7% from financing fees and 3% from other revenues, including consulting and advisory services.
Corporate Information
We were formed as a sole proprietorship in 1971, incorporated in California on August 26, 1976 as G. M. Marcus & Company, and we were renamed as Marcus & Millichap, Inc. in August 1978, Marcus & Millichap Real Estate Investment Brokerage Company in September 1985, and Marcus & Millichap Real Estate Investment Services, Inc. (MMREIS) in February 2007. Prior to the completion of our initial public offering (IPO), MMREIS was majority-owned by Marcus & Millichap Company (MMC) and all of MMREIS preferred and common stock outstanding was held by MMC and its affiliates or officers and employees of MMREIS. In June 2013, in preparation for the spin-off of its real estate investment services business (the Spin-Off), MMC formed a holding company called Marcus & Millichap, Inc. (MMI) in Delaware. Prior to the completion of our IPO, the shareholders of MMREIS contributed the shares of MMREIS to MMI in exchange for common stock of MMI, and MMREIS became a wholly owned subsidiary of MMI. On November 5, 2013, MMI completed its IPO.
Our principal executive offices are located at 23975 Park Sorrento, Suite 400 Calabasas, California 91302. Our telephone number at this location is (818) 212-2250. Our website address is www.MarcusMillichap.com. The information on our website is not part of, and is not incorporated into, this Annual Report on Form 10-K.
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Competitive Strengths
We believe the following strengths provide us with a competitive advantage and opportunities for success:
National Platform Built on Investment Brokerage and Financing Services
We have built a leading national platform serving our clients needs of investment brokerage and financing services. We continue to be focused on investment brokerage and financing services as opposed to other businesses such as leasing or property management. We equip our highly qualified investment sales and financing professionals in 78 offices across the United States and Canada with proprietary real estate marketing technologies and processes to market investment real estate for our clients. Our commitment to specialization is reflected in how we generally organize our investment sales and financing professionals by market area and property type, which enhances our investment sales and financing professionals skills, relationships and market knowledge required for achieving the best results for our clients. As a result of these founding principles, we offer an efficient system of matching every property with the largest pool of qualified buyers and maximize value in the process.
Market Leader in the Private Client Market Segment
Since our founding in 1971, we have focused on being the leading service provider to the $1-$10 million private client market segment. This segment is the largest by ownership and transaction count and, consistently accounts for over 80% of total U.S. commercial property transactions. It is comprised of high-net-worth individuals, partnerships and small private fund managers with both passive, long-term investments, as well as those with opportunistic, short-term investment horizons. Private clients are often motivated to buy, sell and/or refinance properties due to personal circumstances such as death, divorce, partnership breakups and estate planning in addition to macroeconomic and capital market trends and events. The vast size and personal transaction drivers of private clients make this market segment the most active in terms of sales velocity. Therefore, sales in the private client market segment over the long term tend to be less volatile than higher priced properties priced at $10 million and above. In addition, this market segment is highly fragmented with the top ten brokerage firms accounting for approximately 25% of transactions in 2017. Marcus & Millichap is the leading broker in the $1-$10 million private client market segment with an 8.8% market share by transaction count. With our established market leadership and brand name, Marcus & Millichap has significant room for market share expansion by further consolidating its leadership position in this market segment.
In addition, the private client market segment is characterized by high barriers to entry. These barriers include the need for a large specialized sales force prospecting private clients, difficulties in identifying, establishing and maintaining relationships with such investors, capabilities of exposing properties to a large pool of potential buyers and the challenge of serving their needs locally, regionally and nationally. We believe this private client market segment is the least covered market segment by other national firms and is significantly underserved by local and regional firms that lack a multi-market platform.
Platform Built for Maximizing Investor Value
We have built our business to maximize value for real estate investors through an integrated set of services geared toward our clients needs. We are committed to an investment brokerage specialization, provide one of the largest sales force in the industry, a culture and policy of information sharing on each property we represent and equip our investment sales professionals with proprietary real estate inventory and marketing technologies that enhance the marketability of the properties we represent. Our system generates real-time buyer-seller matching and maximizes value one property at a time. Our investment sales organization can therefore underwrite, position and market investment real estate to the largest pool of qualified buyers. We coordinate proactive marketing campaigns across investor relationships and resources of the entire firm, far beyond the capabilities of an individual listing agent. These efforts produce wide exposure to investors whom we identify as
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high-probability bidders for each property. To grow with our clients, we established the IPA group to serve the needs of our private client investors that are now seeking higher valued properties as well as larger institutional investors. Our ability to bridge private capital with larger, institutional assets creates value for private and larger transaction clients while strengthening the retention of our investment sales and financing professionals.
We have one of the largest teams of financing professionals in the investment brokerage industry through Marcus & Millichap Capital Corporation (MMCC). MMCC provides financing expertise and access to debt and capital sources by identifying and securing competitive loan pricing and terms for our clients across a broad range of potential lenders and financing alternatives. We are a leading mortgage broker in the industry based on the number of financing transactions closed in 2016. Finally, our dedicated market research teams analyze the latest local and national economic and real estate trends and produce proprietary analyses for our clients enabling them to make informed investment and financing decisions. Our research team produces more than 1,100 reports, publications, presentations and briefs addressing real estate investment trends. Integrating all these services into one national platform increases opportunities to maximize value for our clients across multiple property types, market segments and geographies.
Management with Significant Investment Brokerage Experience
Our management team members, as executives of the firm, are dedicated to recruiting, training, developing and supporting our investment sales and financing professionals. The majority of our management team are former senior investment sales professionals of our Company who now focus on management, do not compete with our sales force and have an average of approximately 10 years of real estate investment brokerage experience with our Company. Our training, development and mentoring programs rely greatly on the regional managers personal involvement. Their past experience as senior investment sales professionals plays a key role in developing new and experienced investment sales and financing professionals. They help our junior professionals establish technical and client service skills as well as setting up, developing and growing relationships with clients. We believe this management structure has helped differentiate the firm from our competitors and ultimately achieve better results for our clients.
Growth Strategy
We have a long track record of growing our business model driven by opening new offices, recruiting, training and developing new investment sales and financing professionals as well as deploying our client-focused business model to increase coverage of specialty property types and the middle and larger transaction market segments. Our long-term growth plan has focused on investing in our current business model through growing internally and by providing our unique business model to a wider client base. Since 2010, our revenue has increased threefold, and we have grown from slightly over 1,000 investment sales and financing professionals to over 1,800 investment sales and financing professionals in the United States and Canada. Our future growth will depend on continually expanding our national footprint and optimizing the size, product segmentation and specialization of our team of investment sales and financing professionals. The key strategies of our growth plan include:
Increase Market Share in the Private Client Market Segment
The $1-$10 million private client market segment is fragmented and underserved. The top 10 brokerage firms accounted for only approximately 25% of 2017 transactions in this market segment. Our industry leading market share in this segment increased to 8.8% in 2017 from approximately 7.5% in 2013. Our leading position in this market segment and inherent fragmentation continues to provide significant opportunity for us to expand and bring our client service offerings to a larger portion of this expansive market segment. We can continue to leverage our existing platform, relationships and brand recognition among private clients to grow through expanded marketing and coverage.
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Focused Office Expansion
Since we currently have offices in most major-market and mid-market metropolitan cities, our growth is expected to come from focused office expansion, targeted hiring and increased coverage of specialty property types. We have targeted markets based on population, employment, level of commercial real estate sales, inventory and competitive landscape. Our optimal office plans are used to capitalize on these factors by tailoring sales force size, coverage and composition by office and business activity to direct efforts to offices with the most opportunity where we believe we can leverage our national footprint and proprietary real estate marketing technologies. These initiatives do not require a significant increase in the number of offices or a significant increase in the size of our offices, which allows us to leverage our current office locations without significant incremental investment.
Expand and Develop Our Team of Investment Sales Professionals
A key to growing our business is hiring, training and developing investment sales professionals. We have increased our focus on hiring experienced investment sales professionals through our recruiting department, specialty directors and regional managers in support of our optimal office plans. Our new investment sales professionals are trained in all aspects of real estate fundamentals, client service and proprietary marketing technologies through formal training, apprenticeship programs and mentorship by our dedicated regional, district and division managers. As these investment sales professionals mature, we continue to provide them with identified best practices and training in specialty property types. We believe this model creates a high level of teamwork, as well as operational and client service consistency. During 2017, we reached an all-time high in the number of investment sales professionals, ending the year with over 1,800.
Grow in Specialty Property Types and Middle and Larger Transaction Market Segment Presence
Leveraging our current business model into specialty property types and to the middle and larger transaction market segments opens up significant opportunities for growth.
Specialty Property Types
We believe that specialty property types, including hospitality, self-storage, seniors housing, land and manufactured housing offer significant opportunities for our clients. By deploying our unique business model to increase coverage of these property types, we can create growth for us as well as enhance value for our clients through diversification. To create these opportunities, we are increasing our property type expertise by continuing to strategically add specialty directors who can bring added management capacity, business development and investment sales professional support. These executives will work with our sales management team to increase investment sales professional hiring, training, development and redeployment and to execute various branding and marketing campaigns to expand our presence in these targeted property types. The number and volume of transactions in the primary property types of multifamily, retail, office and industrial should continue to grow with upside opportunity, particularly in the office and industrial properties. At the same time, we intend to continue to grow our presence in specialty property types.
Middle and Larger Transaction Market Segments Presence
Our extensive relationships with private client investors who typically invest in the $1-$10 million private client market segment have enabled us to capture a greater portion of commercial real estate transactions in excess of $10 million and bridge the private client market investor to the middle market and larger transaction market segments in recent years. As property values increase and investors grow and expand, they require larger properties and we are organized to provide our unique brokerage and financing services to them in those market segments. Our ability to connect historically private client capital with middle and larger transaction market
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segment properties allows us to continue to serve our clients as they grow and plays a major role in differentiating our services. In 2011, we introduced a group dedicated to serving major investors branded as IPA, specifically to service larger multifamily investors. This strategy has met with great success and market acceptance and provides a vehicle for growth by delivering our unique service platform within the middle and larger transaction multifamily, retail and office property types. The growth of our investors and introduction of IPA has driven incremental growth for us.
Expand Marcus & Millichap Capital Corporation Financing Business
We are dedicated to growing our financing services through our MMCC platform. Our focus continues to be expanding financing services in markets currently served by our investment brokerage offices, increasing the capacity of financing professionals in offices we currently serve, integrating financing professionals in offices that do not have an MMCC presence and expanding our service platform by creating access to a broad array of capital resources. We have established alliances with national capital sources that provide highly competitive access to an assortment of financing products including products sponsored by Fannie Mae, Freddie Mac and HUD. These alliances serve to expand our partners distribution networks while affording our financing professionals and clients with more favorable pricing and service. Our internally developed training programs are directed to enhancing our branding, skill development, increasing our internal capture rate and cross-selling with a focus on the MMCC value proposition for our brokerage and non-brokerage clients. We will continue to seek out and hire experienced financing professionals and capital markets teams to grow our MMCC business to support the growth in our service platform and establish relationships with various capital sources. As of December 31, 2017, we have 40 offices with financing professionals embedded within our brokerage teams. We continue to capitalize on the synergies our financing professionals provide to our client focused service platform with approximately 14.3% growth in financing fees to $49.7 million in 2017 from $43.4 million in 2016.
Our Company
We provide investment brokerage and financing services to investors of all sizes and types of commercial real estate properties. We are the leading national investment brokerage company in the $1-$10 million private client market segment. This is the largest and most active market segment and comprised approximately 85% of total U.S. commercial property transactions in 2017. We have over 1,800 investment sales and financing professionals in 78 offices in the United States and Canada. We have 58 offices concentrated in 47 major markets consisting of metropolitan areas with a population of at least one million and 20 offices in 20 mid-market locations consisting of metropolitan areas with a population of less than one million. We leverage our relationships with investors and use proprietary marketing tools to match properties with qualified buyers. Our financing professionals obtain competitive debt financing for buyers of our properties and owners who need to refinance or restructure their positions.
We have a 47-year history in the real estate marketplace. The real estate market is cyclical, and our results are impacted by many macroeconomic and microeconomic factors as discussed in Item 1A Risk Factors and Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Our Business . We have demonstrated the ability, over the long-term, to manage through the cyclical market and continue to be a leader in the $1-10 million private client market segment. The most recent downturn began in 2007 when the global credit markets began to show signs of distress resulting in a shortage of liquidity in some financing markets, including real estate. Beginning in late 2008, the credit crisis and recession greatly affected the commercial real estate industry, resulting in a dramatic decline in sales volume and number of transactions. Despite the severity of the market downturn, we maintained all of our offices and services, enabling us to quickly take advantage of the market recovery and resume our growth. As the real estate and financing markets recovered after 2009, our sales volume has steadily grown and now exceeds pre-downturn levels both as a result of the market transaction growth and executing our growth initiatives, which expanded our market
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presence. The following graph shows the number of transactions and sales volume of investment sales, financing and other transactions from 2008 to 2017:
Geographic Locations
We have grown to have offices in 35 states across the United States and in three provinces in Canada, with over 1,800 investment sales and financing professionals in 58 offices in major metropolitan markets and 20 offices in mid-market locations. Below is a map reflecting the geographic location of our offices as of December 31, 2017.
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Geographic Concentrations
We were founded in 1971 in the western United States and we continue to increase our presence in states in the Mid-Atlantic, Northeast, Midwest, Mountain and the South regions through execution of our growth strategies by targeting markets based on population, employment, level of commercial real estate sales, inventory and competitive landscape opportunities where we believe the markets will benefit from our business model. The following charts set forth the percentage of transactions by region for our investment sales transactions in 2017 and 2016.
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(1) | Includes our Canadian operations, which represented less than 1% of our total revenues in each period presented. |
Commercial Real Estate Market Segments
We divide the commercial real estate market into four major market segments, characterized by investment size. Our strength is in serving private clients in the $1-$10 million private client market segment, which contributed approximately 68% of our brokerage commissions in 2017. In addition, we achieved growth by leveraging the strength of our relationships in the private client market segment to increase our share of the middle and larger transaction market segments. Commission percentages are generally lower in the middle and larger transaction market segments since commission rates earned on commercial properties are typically inversely correlated with sales price. Because of the expansion into the middle and larger transaction market segments, we have seen our average commission rates fluctuate from period-to-period as a result of changes in the relative mix of transactions closed in the middle and larger transaction market segments as compared to the private client market segment.
The following table sets forth the number of transactions, sales volume and revenue by commercial real estate market segment for real estate brokerage in 2017 compared to 2016:
2017 | 2016 | 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 |
1,062 | $ | 661 | $ | 27,952 | 1,070 | $ | 682 | $ | 29,217 | (8 | ) | $ | (21 | ) | $ | (1,265 | ) | ||||||||||||||||||
Private client market ($1-$10 million) |
4,891 | 15,029 | 444,081 | 4,779 | 15,274 | 447,366 | 112 | (245 | ) | (3,285 | ) | |||||||||||||||||||||||||
Middle market ( ³ $10-$20 million) |
361 | 4,906 | 91,035 | 374 | 5,099 | 88,568 | (13 | ) | (193 | ) | 2,467 | |||||||||||||||||||||||||
Larger transaction market ( ³ $20 million) |
248 | 9,879 | 86,325 | 253 | 10,907 | 97,069 | (5 | ) | (1,028 | ) | (10,744 | ) | ||||||||||||||||||||||||
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6,562 | $ | 30,475 | $ | 649,393 | 6,476 | $ | 31,962 | $ | 662,220 | 86 | $ | (1,487 | ) | $ | (12,827 | ) | ||||||||||||||||||||
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Property Type
We have a long history and significant expertise in our primary property types of multifamily, retail, office and industrial. We have expanded our expertise in the specialty property types by hiring and assigning specialty directors to coordinate our national presence in these property types and expand our market share.
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The following table sets forth the number and sales volume (dollars in billions) of investment sales, financing and other transactions in 2017 compared to 2016 by property type:
2017 | 2016 | Change | ||||||||||||||||||||||
Number | Volume | Number | Volume | Number | Volume | |||||||||||||||||||
Primary Property Types: |
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Multifamily |
3,322 | $ | 21.5 | 3,308 | $ | 20.2 | 14 | $ | 1.3 | |||||||||||||||
Retail |
3,553 | 11.5 | 3,671 | 12.0 | (118 | ) | (0.5 | ) | ||||||||||||||||
Office |
662 | 2.7 | 585 | 2.8 | 77 | (0.1 | ) | |||||||||||||||||
Industrial |
353 | 1.3 | 255 | 1.0 | 98 | 0.3 | ||||||||||||||||||
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Total Primary Property Types |
7,890 | $ | 37.0 | 7,819 | $ | 36.0 | 71 | $ | 1.0 | |||||||||||||||
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Specialty Property Types: |
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Hospitality |
237 | 1.3 | 242 | 1.3 | (5 | ) | | |||||||||||||||||
Self-Storage |
195 | 1.1 | 190 | 1.3 | 5 | (0.2 | ) | |||||||||||||||||
Land |
273 | 0.7 | 267 | 0.8 | 6 | (0.1 | ) | |||||||||||||||||
Manufactured Housing |
95 | 0.6 | 113 | 0.4 | (18 | ) | 0.2 | |||||||||||||||||
Seniors Housing |
53 | 0.5 | 85 | 1.5 | (32 | ) | (1.0 | ) | ||||||||||||||||
Mixed - Use / Other |
236 | 1.0 | 279 | 1.0 | (43 | ) | | |||||||||||||||||
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Total Specialty Property Types |
1,089 | $ | 5.2 | 1,176 | $ | 6.3 | (87 | ) | $ | (1.1 | ) | |||||||||||||
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8,979 | $ | 42.2 | 8,995 | $ | 42.3 | (16 | ) | $ | (0.1 | ) | ||||||||||||||
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Our Services
We serve clients with one property, multiple properties and large investment portfolios. The largest group of investors we serve typically transacts in the $1-$10 million private client market segment. Properties in this market segment are characterized by higher asset turnover rates due to the type of investor as compared to other market segments. Investors in the private client market segment typically transact due to personal circumstances and business reasons, such as death, divorce, changes in partnership structures and other personal or financial circumstances. Therefore, private client investors are influenced less by the macroeconomic trends than other large scale investors, making the private client market segment less volatile over the long-term than other market segments. We offer three primary services to our clients, commercial real estate investment brokerage and financing and ancillary services including other research, advisory and consulting services.
Commercial Real Estate Investment Brokerage
Our primary business and source of revenue is the representation of commercial property owners as their exclusive investment broker in the sale of their properties. Commissions from real estate investment brokerage sales accounted for approximately 90% of our revenues in 2017. Sales are generated by maintaining relationships with property owners, providing market information and trends to them during their investment or hold period and being selected as their representative when they decide to sell, buy additional property or exchange their property for another property. We collect commissions upon the sale of each property based on a percentage of sales price. These commission percentages are typically inversely correlated with sales price and thus are generally higher for smaller transactions. Our investment sales professionals also represent buyers in fulfilling their investment real estate acquisition needs; however, the vast majority of our investment sales business is generated from our exclusive representation of sellers.
We underwrite, value, position and market properties to reach the largest and most qualified pool of buyers. We offer our clients the industrys largest team of investment sales professionals, who operate with a culture and policy of information sharing powered by our proprietary system, MNet, which enables real-time buyer-seller matching. We use a proactive marketing campaign that leverages the investor relationships of our entire sales
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force, direct marketing and a suite of proprietary web-based tools that connects each asset with the right buyer pool. We strive to maximize value for the seller by generating high demand for each property. Our approach also provides a diverse, consistently underwritten inventory of investment real estate for buyers. When a client engages one of our investment sales professionals, they are engaging an entire system, structure and organization committed to maximizing value for them.
In 2017, we closed 6,562 real estate brokerage transactions in a broad range of commercial property types, with a total sales volume of approximately $30.5 billion. In the last 10 years, we have closed more transactions than any other firm. We have significantly diversified our business beyond our historical focus on multifamily properties.
The majority of our business activity is in the $1-$10 million private client market segment and is aligned with the largest real estate market segment. During 2017, we closed 4,891 real estate brokerage transactions in this market segment, which comprised approximately 89% of our total real estate brokerage transactions greater than $1 million and 71% of our brokerage commissions for transactions greater than $1 million. Of the commercial real estate industry as a whole, the $1-$10 million private client market segment represented over 80% of total U.S. commercial property transactions greater than $1 million in 2017.
We are building on our track record of growth in multifamily, retail, office and industrial properties by expanding our coverage of additional property types. These include hospitality, self-storage, seniors housing, land and manufactured housing properties, where we are already a leading broker but have significant room for additional growth due to market size, fragmentation and specific geographic market opportunities. We are also expanding our specialty group management and support infrastructure, specialized branding and business development customized for each property type and intensifying our recruiting efforts, for management and investment sales and financing professionals. These efforts should expand our presence and result in increased business in these property types.
Financing
MMCC is a broker of debt financing for commercial properties principally in the under $10 million market segments. We generate revenue in the form of financing fees collected from the placement of loans with banks, insurance companies, government agencies, commercial mortgage backed securities (CMBS), and conduits. In addition to placing financing for acquisitions, we also place loans for refinancing for individual assets and portfolios. MMCCs financing fees vary by loan amount and type. In 2017, MMCC completed more than 1,700 financing transactions with a sales volume of approximately $5.6 billion and accounted for approximately 7% of our revenues. MMCCs size, market reach and sales volume enable us to establish long-term relationships and special programs with various capital sources. This, in turn, improves MMCCs value proposition to borrowers seeking competitive financing rates and terms. MMCC is not limited to promoting in-house or exclusive capital sources and seeks the most competitive financing solution for each clients specific needs and circumstances. During 2017, approximately 48% of MMCCs revenues came from placing acquisition financing, 44% from refinancing activities and 8% from other financing activities.
MMCC is fully integrated with our investment sales force in our brokerage offices. MMCC financing professionals are supervised by our regional managers, who promote cross-selling, information sharing, business referrals and high quality client service within the offices. The MMCC national network of financing professionals is supported by a dedicated, nationally focused management team coordinating access to a broad range of national and regional capital sources including bank lenders, conduit lenders, CMBS lenders, structured debt facilitators (mezzanine and preferred equity), Freddie Mac and Fannie Mae programs, HUD and other GSE lending programs. With these resources coupled with the latest property and capital markets information, we are able to access and deliver the best loan structures, financing rates and terms to meet our clients financial objectives.
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Ancillary Services: Research, Advisory and Consulting
Our research, advisory and consulting services are designed to assist clients in forming their investment strategy and making transaction decisions. Our advisory and consulting services are coordinated with both our investment sales and financing professionals and are designed to provide market and property focused market research, publications and customized analysis that increase customer loyalty and long-term relationships.
We also provide a wide range of advisory and consulting services to developers, lenders, owners, real estate investment trusts, high net worth individuals, pension fund advisors and other institutions. Our advisory services include opinions of value, operating and financial performance benchmarking analysis, specific asset buy-sell strategies, market and submarket analysis and ranking, portfolio strategies by property type, market strategy, development and redevelopment feasibility studies and other services.
Seasonality
There is seasonality in our real estate brokerage commissions and financing fees, which has generally caused our revenues, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year, particularly in the fourth quarter. For a more detailed description of our seasonality, refer to Item 1A Risk Factors External Business Risks Seasonal fluctuations and other market data in the investment real estate industry could adversely affect our business and make comparisons of our quarterly results difficult and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Overview Seasonality of this Annual Report on Form 10-K.
Competition
We compete in real estate brokerage and financing within the commercial real estate industry on a national, regional and local basis. Competition is based on a number of critical factors, including the quality and expertise of our investment sales and financing professionals, our execution skills, sales support, brand recognition and our business reputation. We primarily compete with other brokerage and financing firms that seek investment brokerage and financing business from real estate owners and investors. To a lesser extent, we compete with in-house real estate departments, owners who may transact without using a brokerage firm, direct lenders, consulting firms and investment managers, some of which may have greater financial resources than we do. Our relative competitive position also varies across geographies, property types and services. In investment sales, our competitors on a national level include CBRE Group, Inc., Cushman & Wakefield, Colliers International, HFF, Inc. and Jones Lang LaSalle. Our major financing competitors include HFF, Inc., CBRE Group, Inc., Jones Lang LaSalle, Walker & Dunlop, Grandbridge Real Estate Capital and NorthMarq Capital, LLC. The investment sales firms mainly focus on larger sales and institutional investors and are not heavily concentrated in our largest market segment, which is the $1-$10 million private client market segment. However, there is crossover and competition between us and these firms. As a result of the fragmentation in the market, there are also numerous local and regional competitors in our markets, as well as competitors specializing in certain property types. Despite recent consolidation, the commercial real estate services industry remains highly fragmented and competitive.
Competition to attract and retain qualified professionals is also intense in each of our geographic regions and across all property types. We offer what we believe to be competitive compensation and support programs to our professionals. Our ability to continue to compete effectively will depend on retaining, motivating and appropriately compensating our professionals.
Technology
We have a long-standing tradition of technological orientation, innovation and advancement. Our efforts include the development of proprietary applications designed to make the process of matching buyer and sellers faster and more efficient as well as state-of-the-art communication technology, infrastructure, internet presence and electronic marketing.
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We have a proprietary internal marketing system, MNet, which allows our sales force to share listing information with investors across the country. MNet is an integrated tool that contains our entire national property inventory, which allows our sales force to search for properties based on investors acquisition criteria. This system is an essential part of connecting buyers and sellers through our national platform. Our policies require information sharing among our sales force, and the MNet system automates the process of matching each property we represent to the largest pool of qualified buyers tracked by our national sales force. A part of MNet, called Buyer Needs, enables our sales force to register the investment needs of various buyers, which are then matched to our available inventory on a real-time basis.
In 2016, we began the deployment of an improved proprietary system for automating the production of property marketing materials and launching marketing campaigns, which we call MNet-Offering, replacing our previous system called iMpact. MNet-Offering allows our investment sales professionals to create a listing proposal or marketing package, which automatically imports property information, data on comparable properties and other information, and then dynamically populates our e-marketing, print, and Internet media. This system allows our sales force to rapidly create professionally branded and designed materials for marketing properties on behalf of our clients in an efficient and timely manner. This new web-based application improves sales force efficiency by tightly integrating MNet data for transaction history, sales and rent comparables, and market insights that differentiate our sales force in the marketplace. The proposals and marketing packages produced by MNet-Offering also deliver updated content and expanded demographic and financial analysis to better market those properties for our clients. We completed the rollout of MNet-Offering for all property types in the first half of 2017 and have begun planning to sunset the legacy iMpact application.
Our website is designed not only to bring in new clients for our investment sales and financing professionals, but also to make our inventory of properties available for maximum exposure for our sellers, and to provide buyers an opportunity to engage with our investment sales and financing professionals. We actively qualify leads generated from the contact forms, and pass those leads to our agents via our customer relationship management platform. Our websites average approximately 64,000 visitors per month and over 850,000 page views per month (all based on data from Google Analytics) and also serves as a portal for delivery of online marketing materials and for deal collaboration.
Marketing and Branding
Our 47 years of investment brokerage specialization and concentration in the $1-$10 million private client market segment have established our brand as the leading broker of investment real estate as well as a trusted source of financing solutions and market research. In recent years we have also garnered recognition among larger private investors and institutions due to our integrated platform and capability of linking private and institutional capital. We continue to strengthen and broaden the Companys name recognition and credibility by executing a variety of marketing and branding strategies. Locally, our offices and investment sales and financing professionals engage in numerous events, direct mail campaigns, investor symposiums and participate in real estate conferences and organizations for various market segments and property types. Our regional managers and investment sales and financing professionals develop long-term client relationships and promote the Companys brand through these activities.
Our research division produces more than 1,100 publications and client presentations per year and has become a leading source of information for the industry as well as the general business media. We provide research on 10 commercial property types covering: multifamily, retail, office, industrial, single-tenant net lease, seniors housing, self-storage, hospitality, medical office and manufactured housing, as well as capital markets/financing. This research includes analysis and forecasting of the economy, capital markets, real estate fundamentals, investment, pricing and yield trends, and is designed to assist investors in their strategy formation and decisions relating to specific assets and help our investment sales professionals develop and maintain relationships with clients.
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Our transactional and market research expertise result in significant print, radio, television and online media coverage including most major real estate publications such as Real Estate Forum, Multi-Housing News, Commercial Property Executive and National Real Estate Investor as well as local market and major national news outlets such as CNBC, Fox Business, The Wall Street Journal, Los Angeles Times, Chicago Tribune, Bloomberg Businessweek, Forbes and Investors Business Daily. Our CEO is frequently interviewed on national business channels, such as CNBC, Bloomberg and Fox Business, to address the commercial real estate market. We frequently have featured speaking roles in key regional and national industry events, and we are regularly quoted in regional and national publications and media, and deliver content directly to the real estate investment community through print, electronic publications and video. Nationally, our specialty groups and capital markets executives actively participate in various trade organizations, many of which focus on specific property types and provide an effective vehicle for client relationship development and branding.
We believe all these activities create significant exposure and name recognition for our firm, which fosters and builds strong, long-term client relationships.
Intellectual Property
We hold various trademarks and trade names, which include the Marcus & Millichap name. Although we believe our intellectual property plays a role in maintaining our competitive position in a number of the markets that we serve, we do not believe we would be materially, adversely affected by the expiration or termination of our trademarks or trade names or the loss of any of our other intellectual property rights other than the Marcus & Millichap name. With respect to the Marcus & Millichap name, we maintain trademark registrations for these service marks.
In addition to trade names, we have developed proprietary technologies for the provision of real estate investment services, such as MNet, MNet-Offering and iMpact. We also offer proprietary research to clients through our research division. While we seek to secure our rights under applicable intellectual property protection laws in these and any other proprietary assets that we use in our business, we do not believe any of these other items of intellectual property are material to our business in the aggregate.
Government Regulation
We are subject to various real estate regulations, as such we maintain real estate and other broker licenses in 45 states in the United States and three provinces in Canada. We are a licensed broker in each state in which we have an office, as well as those states where we frequently do business. We are also subject to numerous other federal, state and local laws and regulations that contain general standards for, and prohibitions on, the conduct of real estate brokers and sales associates, including agency duties, collection of commissions, telemarketing, advertising and consumer disclosures.
Employees and Investment Sales and Financing Professionals
As of December 31, 2017, we had 1,819 investment sales and financing professionals of which 1,733 are exclusive independent contractors and the remainder are our employees.
We had 774 employees as of December 31, 2017, consisting of 86 employees as financing professionals, 21 employees in communications and marketing, 18 employees in research and 649 employees in management, support and general and administrative functions. We believe our employee relations are good.
Most of the Companys investment sales professionals are classified as independent contractors under state and IRS guidelines. As such, the Company generally does not pay for the professionals expenses or benefits or withhold payroll taxes; rather they are paid from the commissions earned by the Company upon the closing of a transaction, and these individuals do not earn a salary from which taxes are withheld. Almost all of the
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investment sales professionals hold applicable real estate sales licenses and execute a Salespersons Agreement setting out the relationship between the professional and the Company. Each professional is obligated to provide brokerage services exclusively to the Company, and is provided access to the Companys information technology, research and other support and business forms. Each professional generally reports on their activities to either the local regional manager, or in some cases, to product specialty managers.
Our investment sales and financing professionals are located in offices throughout the United States and Canada, each led by a regional manager with previous investment brokerage experience and an active real estate or brokerage license. We have regional managers and investment sales managers, who are responsible for hiring, developing and deploying investment sales professionals, managing regional and mid-market offices and supervising MMCC originators and support staff in their area of responsibility. We also have six division managers who oversee multiple offices; division managers hire, develop, and support our office management and provide additional leadership and support for our local sales management team. Finally, our management structure includes national specialty directors who lead each property type. Our national specialty directors develop our national and local brand in each property type, develop major accounts and coordinate multi-market assignments on behalf of large clients.
Traditionally, our growth has been driven by recruiting, training and developing new investment sales and financing professionals. Our new investment sales and financing professionals are trained in our technical and client service standards through a comprehensive program starting with pre-training, formal training and apprenticeship programs. While continuing to improve the recruiting, training and developing of new investment sales and financing professionals remains a major priority, we have also expanded our strategy to include more experienced investment sales and financing professionals who fit our culture and values. Over the past several years, experienced investment sales and financing professionals, including some top performers previously with national competitors, have joined the firm and have become productive members of our team. As investment sales and financing professionals mature, we continue with specialized training and best practices sessions by tenure, which are conducted by senior management, regional managers, leading investment sales professionals and our national specialty directors. The goal of this rigorous approach to training is to continually improve our teams skill set and client services. Our sales force conducts business the same way across the country to deliver a high level of consistency, professionalism and reliability to our clients who often buy and sell investments in variety of property types and locations.
Our investment sales and financing professionals receive a percentage of the commission received by the Company. As investment sales and financing professionals become more senior, they receive a larger percentage of the commission based on tenure and production. Depending on the aggregate gross commissions, a portion of the investment sales and financing professionals commission may be deferred for three years.
Emerging Growth Company Status
We are currently an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act), and we will continue to be an emerging growth company until December 31, 2018. Currently, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
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Available Information
Our website address is www.MarcusMillichap.com . Information on our website does not constitute part of this report and inclusions of our internet address in this Annual Report on Form 10-K are inactive textual references only. We are required to file current, annual and quarterly reports, proxy statements and other information required by the Exchange Act, with the SEC. We make available free of charge through a link provided on our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large stockholders, and any amendments to those documents filed or furnished pursuant to the Exchange Act. Such reports are available as soon as reasonably practicable after they are filed with the SEC.
The public may read and copy any materials we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding the Company that we file electronically with the SEC at www.sec.gov .
We also make available on our website and will provide print copies to stockholders upon request, (i) our corporate governance guidelines, (ii) our code of ethics, and (iii) charters of the audit, compensation, corporate governance and nominating committees of our board of directors.
From time to time, we may announce key information in compliance with Regulation FD by disclosing that information on our website.
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Investing in our securities involves a high degree of risk. You should consider carefully the following risk factors and the other information in this Annual Report on Form 10-K, including our consolidated financial statements and related notes, before making any investment decisions regarding our securities. If any of the following risks actually occur, our business, financial condition and operating results could be adversely affected. As a result, the trading price of our securities could decline and you may lose part or all of your investment.
Overview
We are impacted by and manage many risk factors detailed below affecting our business including External Business Risks, Human Resource and Personnel Risks, Internal Business Risks, and Risks related to the Ownership of Our Common Stock. Many of these factors described below in External Business Risk, are outside of our control. In addition, we are a personnel and relationship intensive business rather than a capital intensive business. While all the risk factors discussed below have the potential to negatively impact our business, the most significant risks facing the Company are the general economic conditions and commercial real estate market conditions risk and our ability to attract and retain qualified and experienced managers and investment sales and financing professionals.
External Business Risks
General economic conditions and commercial real estate market conditions have had and may in the future have a negative impact on our business.
We may be negatively impacted by periods of economic downturns, recessions and disruptions in the capital markets; credit and liquidity issues in the capital markets, including international, national, regional and local markets; tax and regulatory changes and corresponding declines in the demand for commercial real estate investment and related services. Historically, commercial real estate markets and, in particular, the U.S. commercial real estate market, have tended to be cyclical and related to the flow of capital to the sector, the condition of the economy as a whole and to the perceptions and confidence of the market participants as to the relevant economic outlook. Cycles in the real estate markets may lead to similar cycles in our earnings and significant volatility in our stock price. Further real estate markets may lag behind the broader economy such that even when underlying economic fundamentals improve in a given market, additional time may be required for these improvements to translate into strength in the real estate markets. The lag may be exacerbated when banks delay their resolution of commercial real estate assets whose values are less than their associated loans.
Negative economic conditions, changes in interest rates, credit and the availability of capital, both debt and/or equity, disruptions in capital markets, uncertainty of the tax and regulatory environment and/or declines in the demand for commercial real estate investment and related services in international and domestic markets or in significant markets in which we do business, have had and could have in the future a material adverse effect on our business, results of operations and/or financial condition. In particular, the commercial real estate market is directly impacted by (i) the lack of debt and/or equity financing for commercial real estate transactions, (ii) increased interest rates and changes in monetary policies by the U.S Federal Reserve, (iii) changes in the perception that commercial real estate is an accepted asset class for portfolio diversification, (iv) changes in tax policy affecting the attractiveness of real estate as an investment choice, (v) changes in regulatory policy impacting real estate development opportunities and capital markets and (vi) slowdowns in economic activity that could cause residential and commercial tenant demand to decline, which would adversely affect the operation and income of commercial real estate properties. Severe restrictions in debt and/or equity liquidity as well as the lack of the availability of credit in the markets we serviced in 2010, 2009 and 2008 significantly reduced the volume and pace of commercial real estate transactions compared with past periods. These restrictions also had a general negative effect upon commercial real estate prices themselves.
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These and other types of events could lead to a decline in transaction activity as well as a decrease in property values which, in turn, would likely lead to a reduction in brokerage commissions and financing fees relating to such transactions. These effects would likely cause us to realize lower revenues from our transaction service fees, including investment sales commissions, which fees usually are tied to the transaction value and are payable upon the successful completion of a particular transaction. Such declines in transaction activity and value would likely also significantly reduce our financing activities and revenues. For example, the disruptions and dislocations in the global credit markets during 2008 and 2009 created significant restrictions in the availability of credit, especially on transitional assets and in the secondary and tertiary markets. In turn, the volume and pace of commercial real estate transactions were significantly reduced, as were property values, which generally peaked in 2007 and fell through 2010.
Fiscal uncertainty, significant changes and volatility in the financial markets and business environment and similar significant changes in the global, political, security and competitive landscape, make it increasingly difficult for us to predict our revenue and earnings into the future. As a result, any revenue or earnings guidance or outlook which we may give may be affected by such events or may otherwise turn out to be inaccurate.
We have numerous significant competitors and potential future competitors, some of which may have greater resources than we do, and we may not be able to continue to compete effectively.
We compete in investment sales and financing within the commercial real estate industry. Our investment sales focus is on the private client market segment, which is highly fragmented. The fragmentation of our market makes it challenging to effectively gain market share. While we have a competitive advantage over other national firms in the private client market segment, we also face competition from local and regional service providers who have existing relationships with potential clients. Furthermore, transactions in the private client market segment are smaller than many other commercial real estate transactions. Although the brokerage commissions in this segment are generally a higher percentage of the sales price, the smaller size of the transactions requires us to close many more transactions to sustain revenues. If the commission structure or the velocity of transactions were to change, we could be disproportionately affected by changes compared to other companies that focus on larger transactions, institutional clients and other segments of the commercial real estate market.
There is no assurance that we will be able to continue to compete effectively, maintain our current fee arrangements with our private clients, maintain current margin levels or counteract increased competition. The services we provide to our clients are highly competitive on a national, regional and local level. Depending on the geography, property type or service, we face competition from, including, but not limited to, commercial real estate service providers, in-house real estate departments, private owners and developers, commercial mortgage servicers, institutional lenders, research and consulting firms, and investment managers, some of whom are clients and many of whom may have greater financial resources than we do. In addition, future changes in laws and regulations could lead to the entry of other competitors. Many of our competitors are local, regional or national firms. Although most are substantially smaller than we are, some of these competitors are larger on a local, regional or national basis, and we believe more national firms are exploring entry into or expansion in the $1-$10 million private client market segment. We may face increased competition from even stronger competitors in the future due to a trend toward acquisitions and consolidation. We are also subject to competition from other large national and multi-national firms as well as regional and local firms that have similar service competencies to ours. Our existing and future competitors may choose to undercut our fees, increase the levels of compensation they are willing to pay to their employees and investment sales and financing professionals, and either recruit our employees and investment sales and financing professionals or cause us to increase our level of compensation necessary to retain employees or investment sales and financing professionals, or recruit new employees or investment sales and financing professionals. These occurrences could cause our revenue to decrease, and/or expenses to increase which could have an adverse effect on our business, financial condition and results of operations.
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Our brokerage operations are subject to geographic and commercial real estate market risks, which could adversely affect our revenues and profitability.
Our real estate brokerage offices are located in and around large metropolitan areas as well as mid-market regions throughout the United States and Canada. Local and regional economic conditions in these locations could differ materially from prevailing conditions in other parts of the country. We realize more of our revenues in California. In 2017, we earned approximately 33% in California. In particular, as a result of this concentration, we are subject to risks related to the California economy and real estate markets more than in other geographic markets. In addition to economic conditions, this geographic concentration means that California-specific legislation, taxes and regional disasters, such as earthquakes, could disproportionately affect us. A downturn in investment real estate demand or economic conditions in these regions could result in a further decline in our total gross commission income and profitability and have a material adverse effect on us.
Seasonal fluctuations and other market data in the investment real estate industry could adversely affect our business and make comparisons of our quarterly results difficult.
Our revenue and profits have historically tended to be significantly higher in the second half of each year than in the first half of the year. This is a result of a general focus in the real estate industry on completing or documenting transactions by calendar year end and because certain expenses are relatively constant throughout the year. This historical trend can be disrupted both positively and negatively by major economic, regulatory or political events impacting investor sentiment for a particular property type or location, current and future projections of interest rates and tax rates, attractiveness of other asset classes, market liquidity and the extent of limitations or availability of capital allocations for larger institutional buyers, to name a few. As a result, our historical pattern of seasonality may or may not continue to the same degree experienced in the prior years and may make it difficult to determine during the course of the year whether planned results will be achieved, and thus to adjust to changes in expectations.
A change in the tax laws relating to like-kind exchanges could adversely affect our business and the value of our stock.
Section 1031 of the Internal Revenue Code of 1986, as amended (the Code), provides for tax-free exchanges of real property for other real property. Legislation has been proposed on several occasions that would repeal or restrict the application of Section 1031. If tax-free exchanges under Section 1031 were to be limited or unavailable, our clients or prospective clients may decide not to purchase or sell property that they would have otherwise purchased or sold due to the tax consequences of the transaction, thus reducing the commissions we would have otherwise received. Any repeal or significant change in the tax rules pertaining to like-kind exchanges could have a substantial adverse impact on our business and the value of our stock.
A change in the tax laws could adversely affect our business and value of our stock.
The Code and state and local tax codes contain numerous provisions, regulations and interpretations. We operate in numerous states and cities in the United States and in Canada and are exposed to the risk of complying with those tax codes. Changes in tax laws in the various jurisdictions in which we operate may impact taxes we are required to pay and our ability to transact business in the jurisdictions. Further, such changes may make operating in these jurisdictions unprofitable and may unfavorably impact our results of operations and ability to execute our growth plans.
In addition, changes in tax laws can impact investors perceived value of real estate, timing of transactions and perception of real estate as favorable investment. As a result, such changes may increase or decrease investors desire to engage in real estate transactions, which could have an unfavorable impact on our financial condition and results of operations.
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The Internet could devalue our information services and lead to reduced client relationships, which could reduce the demand for our services.
The dynamic nature of the Internet, which has substantially increased the availability and transparency of information relating to commercial real estate listings and transactions, could change the way commercial real estate transactions are done. This has occurred to some extent in the residential real estate market as online brokerage and/or auction companies have eroded part of the market for traditional residential real estate brokerage firms. The proliferation of large amounts of data on the Internet could also devalue the information that we gather and disseminate as part of our business model and may harm certain aspects of our investment brokerage business in the event that principals of transactions prefer to transact directly with each other. The rapid dissemination and increasing transparency of information, particularly for public companies, increases the risks to our business that could result from negative media or announcements about ethics lapses, improper behavior or other operational problems, which could lead clients to terminate or reduce their relationships with us.
Our businesses, financial condition, results of operations and prospects could be adversely affected by new laws or regulations or by changes in existing laws or regulations or the application thereof. If we fail to comply with laws and regulations applicable to us, including in our role as a real estate broker or mortgage broker, we may incur significant financial penalties.
We are subject to numerous federal, state, local and foreign regulations specific to the services we perform in our business, as well as laws of broader applicability, such as securities, financial services and employment laws. In general, the brokerage of real estate transactions requires us to maintain applicable licenses where we perform these services. If we fail to maintain our licenses or conduct these activities without a license, or violate any of the regulations covering our licenses, we may be required to pay fines (including treble damages in certain states) or return commissions received or have our licenses suspended or revoked. We could also be subject to disciplinary or other actions in the future due to claimed noncompliance with these regulations, which could have a material adverse effect on our operations and profitability.
Our business is also governed by various laws and regulations, limiting the manner in which prospective clients may be contacted, including federal and state Do Not Call and Do Not Fax regulations. We may be subject to legal claims and governmental action if we are perceived to be acting in violation of these laws and regulations. We may also be subject to claims to the extent individual employees or investment sales and financing professionals breach or fail to adhere to company policies and practices designed to maintain compliance with these laws and regulations. The penalties for violating these laws and regulations, can be material, and could result in changes in which we are able to contact prospective clients.
As the size and scope of commercial real estate transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with numerous licensing regimes and the possible loss resulting from non-compliance have increased. New or revised legislation or regulations applicable to our business, both within and outside of the United States, as well as changes in administrations or enforcement priorities may have an adverse effect on our business. Such new or revised legislation or regulations applicable to our business may impact transaction volumes and values, increase the costs of compliance or prevent us from providing certain types of services in certain jurisdictions or in connection with certain transactions or clients. For example, legislation which limits or prohibits dual agency, which is under consideration in California, could have an adverse impact on our revenues. We are unable to predict how any of these new laws, rules, regulations and proposals will be implemented or in what form, or whether any additional or similar changes to laws or regulations, including the interpretation or implementation thereof, will occur in the future. Risks of legislative changes, including as a result of interpretive guidance or other directives from the current administration, and new laws, regulations and interpretations may also come into effect. The impact of any new or revised legislation or regulations under the current administration is unknown. Any such action could affect us in substantial and unpredictable ways and could have an adverse effect on our business, financial condition and results of operations.
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Human Resource and Personnel Risks
If we are unable to attract and retain qualified and experienced managers, investment sales and financing professionals, our growth may be limited and our business and operating results could suffer.
Our most important asset is people, and our continued success is highly dependent upon the efforts of our managers and investment sales and financing professionals. If these managers or investment sales and financing professionals depart, we will lose the substantial time and resources we have invested in training and developing those individuals and our business, financial condition and results of operations may suffer. Additionally, such departures may have a disproportionate adverse effect on our operations if our most experienced investment sales and financing professionals do not remain with us or if departures occur in geographic areas where substantial amounts of our real estate brokerage commissions and financing fee revenues are generated.
Our competitors may attempt to recruit our investment sales and financing professionals or change commission structures in the market place. For a variety of reasons, the exclusive independent contractor arrangements we have entered into or may enter into with investment sales professionals may not prevent these investment sales professionals from departing and competing against us due to our commission compensation being relatively less attractive to our investment sales and financing professionals. We currently do not have employment agreements with most key employees, and there is no assurance that we will be able to retain their services.
An increasing component of our growth has also occurred through the recruiting, training and retention of key experienced investment sales and financing professionals. Any future growth through attracting these types of professionals will be partially dependent upon the continued availability of qualified candidates fitting the culture of our firm at reasonable terms and conditions. However, individuals whom we would like to recruit or retain may not agree to terms and conditions acceptable to us. In addition, the recruiting of new personnel involves risks that the persons acquired will not perform in accordance with expectations and that business judgments concerning the value, strengths and weaknesses of persons recruited will prove incorrect.
If we lose the services of our executive officers or certain other members of our senior management team, we may not be able to execute our business strategy.
Our success depends in a large part upon the continued service of our senior management team, who are important to our vision, strategic direction and culture. Our current long-term business strategy was developed in large part by our senior-level officers and depends in part on their skills and knowledge to implement, and also includes a focus on new growth and investment initiatives that may require additional management expertise to successfully execute our strategy. We may not be able to offset the impact on our business of the loss of the services of our senior management or other key officers or employees or be able to recruit additional or replacement talent, which could negatively impact our business, financial condition and results of operations.
Our business could be hurt if we are unable to retain our business philosophy and culture of information-sharing and efforts to retain our philosophy and culture could adversely affect our ability to maintain and grow our business.
Our policy of information-sharing, matching properties with large pools of investors and the emphasis that we place on our clients, our people and our culture defines our business philosophy and differentiates our services. Various factors could adversely affect this culture. If we do not continue to develop and implement the right processes and tools to manage our changing enterprise and maintain this culture, our ability to compete successfully and achieve our business objectives could be impaired, which could negatively impact our business, financial condition and results of operations.
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The concentration of sales among our top investment sales and financing professionals could lead to losses if we are unable to retain them.
Our most successful investment sales and financing professionals are responsible for a significant percentage of our revenues. They also serve as mentors and role models, and provide invaluable training for younger professionals, which is an integral part of our culture. This concentration among our top investment sales and financing professionals of real estate brokerage commissions and financing fees revenues can lead to greater and more concentrated risk of loss if we are unable to retain them, and could have a material adverse impact on our business and financial condition. Furthermore, many of our investment sales and financing professionals work in teams. If a team leader or manager leaves our Company, his or her team members may leave with the team leader.
Most of our sales professionals are independent contractors, not employees, and if laws, regulations or rulings mandate that they be employees, our business would be adversely impacted.
Most of our investment sales professionals are retained as independent contractors, and we are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor classification. These regulations and guidelines are subject to judicial and agency interpretation, and it could be determined that the independent contractor classification is inapplicable to some or all of our investment sales professionals. Further, if legal standards for classification of these investment sales professionals as independent contractors change or appear to be changing, it may be necessary to modify our compensation structure for these investment sales professionals in some or all of our markets, including paying additional compensation or reimbursing expenses. If we are forced to classify these investment sales professionals as employees, we would also become subject to laws regarding employee classification and compensation, and to claims regarding overtime, minimum wage, and meal and rest periods. We could also incur substantial costs, penalties and damages due to future challenges by current or former investment sales professionals to our classification or compensation practices. Any of these outcomes could result in substantial costs to us, could significantly impair our financial condition and our ability to conduct our business as we choose, and could damage our reputation and impair our ability to attract clients and investment sales and financing professionals.
Fraud, or theft, which is difficult to detect and deter, could harm us by impairing our ability to attract and retain clients and subjecting us to significant legal liability and reputational harm.
If our employees or investment sales and financing professionals engage in misconduct, our business could be adversely affected. It is not always possible to deter misconduct, and the precautions we take to deter and prevent this activity may not be effective in all cases. If our employees or investment sales and financing professionals were to engage in unethical business practices, improperly use, disseminate, fail to disseminate or disclose information provided by our clients, we could be subject to regulatory sanctions, suffer serious harm to our reputation, financial position and current client relationships and significantly impair our ability to attract future clients. These events could adversely affect our business, financial condition and results of operation. To the extent any fraud or theft of funds or misconduct result in losses that exceeds our insurance coverage, our business could be materially adversely affected.
Internal Business Risks
We may fail to successfully differentiate our brand from those of our competitors, which could adversely affect our revenues.
The value of our brand and reputation is one of our most important assets. An inherent risk in maintaining our brand is we may fail to successfully differentiate the scope and quality of our service and product offerings from those of our competitors, or we may fail to sufficiently innovate or develop improved products or services that will be attractive to our clients. Additionally, given the rigors of the competitive marketplace in which we operate, there is the risk we may not be able to continue to find ways to operate more productively and more
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cost-effectively, including by achieving economies of scale, or we will be limited in our ability to further reduce the costs required to operate on a nationally coordinated platform.
Our attempts to expand our services and businesses may not be successful and we may expend significant resources without corresponding returns.
We intend to expand our specialty groups, particularly multi-tenant retail, office, industrial and hospitality, as well as various niche segments, including multifamily tax credit, affordable housing, student housing, manufactured housing, seniors housing and self-storage. We also plan to grow our financing services provided through our subsidiary, Marcus & Millichap Capital Corporation. We expect to incur expenses relating to recruitment, training, and expanding our markets and services. The planned expansion of services and platforms requires significant resources, and there can be no assurance we will compete effectively, attract or train a sufficient number of professionals to support the expansion, or operate these businesses profitably. We may incur significant expenses for these plans without corresponding returns, which would harm our business, financial condition and results of operations.
If we experience significant growth in the future, such growth may be difficult to sustain and may place significant demands on our administrative, operational and financial resources.
If we experience significant growth in the future, such growth could place additional demands on our resources and increase our expenses, as we will have to commit additional management, operational and financial resources to maintain appropriate operational and financial systems to adequately support expansion. There can be no assurance we will be able to manage our expanding operations effectively or we will be able to maintain or accelerate our growth, and any failure to do so could adversely affect our ability to generate revenue and control our expenses, which could adversely affect our business, financial condition and results of operations. Moreover, we may have to delay, alter or eliminate the implementation of certain aspects of our growth strategy due to events beyond our control, including, but not limited to, changes in general economic conditions and commercial real estate market conditions. Such delays or changes to our growth strategy may adversely affect our business.
A majority of our revenue is derived from transaction fees, which are not long-term contracted sources of revenue and are subject to external economic conditions, and declines in those engagements could have a material adverse effect on our financial condition and results of operations.
We historically have earned principally all of our revenue from real estate brokerage transactions and financing fees. We expect that we will continue to rely heavily on revenue from these sources for substantially all of our revenue for the foreseeable future. A decline in number of transactions completed or in the value of the commercial real estate we sell could significantly decrease our revenues which would adversely affect our business, financial condition and results of operations.
If we are unable to retain existing clients and develop new clients, our financial condition may be adversely affected.
We are substantially dependent on long-term client relationships and on revenue received for services provided for them. Our listing agreements generally expire within six months and depend on the cooperation of the client during the pendency of the agreement, as is typical in the industry. In this competitive market, if we are unable to maintain these relationships or are otherwise unable to retain existing clients and develop new clients, our business, results of operations and/or financial condition may be materially adversely affected. Historically, a global economic downturn and weaknesses in the markets in which our clients and potential clients compete have led to a lower volume of transactions and fewer real estate clients generally, which makes it more difficult to maintain existing and establish new client relationships. These effects could increase again in the wake of the continuing political and economic uncertainties in the United States and in other countries.
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If we do not respond to technological innovations or changes or upgrade our technology systems, our growth prospects and results of operations could be adversely affected.
To remain competitive, we must continue to enhance and improve the functionality, features and security of our technology infrastructure. Infrastructure upgrades may require significant capital investment outside of the normal course of business. In the future, we will likely need to improve and upgrade our technology, database systems and network infrastructure in order to allow our business to grow in both size and scope. Without such improvements, our operations might suffer from unanticipated system disruptions, slow performance or unreliable service levels, any of which could negatively affect our ability to provide rapid customer service. We may face significant delays in introducing new services, investment sales professional tools and enhancements. Moreover, if we do not keep pace with the rapid innovations and changes taking place in information technology in our industry, we could be at a competitive disadvantage. If competitors introduce new products and services using new technologies, our proprietary technology and systems may become less competitive, and our business may be harmed. In addition, the expansion and improvement of our systems and infrastructure may require us to commit substantial financial, operational and technical resources, with no assurance that our business will improve.
Interruption, unauthorized breaches, or failure of our information technology, communications systems or data services could hurt our ability to effectively provide our services, which could damage our reputation and harm our operating results.
Our business requires the continued operation of information technology and communication systems and network infrastructure. Our ability to conduct our national business may be adversely impacted by disruptions or breaches to these systems or infrastructure. Our information technology and communications systems are vulnerable to damage or disruption from fire, power loss, telecommunications failure, system malfunctions, computer viruses, third-party misconduct or penetration and criminal acts, natural disasters such as hurricanes, earthquakes and floods, acts of war or terrorism, or other events which are beyond our control. In addition, the operation and maintenance of these systems and networks is, in some cases, dependent on third-party technologies, systems and service providers for which there is no certainty of uninterrupted availability. Any of these events could cause system interruption, delays, and loss of critical data or intellectual property (such as our client lists and information, business methods and research) and may also disrupt our ability to provide services to or interact with our clients, and we may not be able to successfully implement contingency plans that depend on communication or travel. We have disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, but our disaster recovery planning may not be sufficient and cannot account for all eventualities. A catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected. Our business relies significantly on the use of commercial real estate data. We produce much of this data internally, but a significant portion is purchased from third-party providers for which there is no certainty of uninterrupted availability. A disruption of our ability to provide data to our professionals and/or clients could damage our reputation, and our operating results could be adversely affected.
Failure to maintain the security of our information and technology networks, including personally identifiable and client information could adversely affect us.
Security breaches and other disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer. In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and intellectual property and that of our clients and personally identifiable information of our employees and contractors, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to various cyber-attacks, such as hacking, spoofing and phishing attacks, or our systems may be breached due to employee error,
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malfeasance or other disruptions. A significant actual or potential theft, loss, fraudulent use or misuse of client, employee or other personally identifiable data, whether by third parties or as a result of employee malfeasance or otherwise, non-compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could result in significant costs, fines, litigation or regulatory actions against us. Such an event could additionally disrupt our operations and the services we provide to clients, damage our reputation, and cause a loss of confidence in our services, which could adversely affect our business, revenues and competitive position. Additionally, we increasingly rely on third-party data storage providers, including cloud storage solution providers, resulting in less direct control over our data. Such third parties may also be vulnerable to security breaches and compromised security systems, which could adversely affect our reputation.
In addition, we rely on the collection and use of personally identifiable information from clients to conduct our business. We disclose our information collection and dissemination practices in a published privacy statement on our websites, which we may modify from time to time. We may be subject to legal claims, government action, including under the Racketeer Influenced and Corrupt Organizations Act (RICO), and damage to our reputation if we act or are perceived to be acting inconsistently with the terms of our privacy statement, client expectations or the law. In the event we or the vendors with which we contract to provide services on behalf of our clients were to suffer a breach of personally identifiable information, our customers could terminate their business with us. Further, we may be subject to claims to the extent individual employees or investment sales and financing professionals breach or fail to adhere to company policies and practices and such actions jeopardize any personally identifiable information. In addition, concern among potential buyers or sellers about our privacy practices could keep them from using our services or require us to incur significant expense to alter our business practices or educate them about how we use personally identifiable information.
Failure to appropriately deal with actual or perceived conflicts of interest could adversely affect our businesses.
Outside of our employees and investment sales and financing professionals, our reputation is one of our most important assets. As we have expanded the scope of our services, we increasingly have to address potential, actual or perceived conflicts of interest relating to the services we provide to our existing and potential clients. For example, conflicts may arise between our position as an advisor to both the buyer and seller in commercial real estate sales transactions or in instances when a potential buyer requests that we represent them in securing the necessary capital to acquire an asset we are selling for another client or when a capital source takes an adverse action against an owner client that we are advising in another matter. From time to time, we also advise or represent entities and parties affiliated with us in commercial real estate transactions which also involve clients unaffiliated with us. In this context, we may be subject to complaints or claims of a conflict of interest. While we believe we have attempted to adopt various policies, controls and procedures to address or limit actual or perceived conflicts, these policies and procedures may not be adequate or carry attendant costs and may not be adhered to by our employees. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged and cause us to lose existing clients or fail to gain new clients if we fail, or appear to fail, to deal appropriately with conflicts of interest, which could have an adverse effect on our business, financial condition and results of operations.
If we acquire companies or recruit significant groups of personnel in the future, we may experience high transaction and integration costs, the integration process may be disruptive to our business and the acquired businesses and/or personnel may not perform as expected.
Our growth strategy may include the future acquisition of companies and/or recruitment of people and may involve significant transaction-related expenses. Transaction-related expenditures include severance costs, lease termination costs, transaction costs, deferred financing costs, possible regulatory costs and merger-related costs, among others. We may also experience difficulties in integrating operations and accounting systems acquired from other companies. These challenges include the diversion of managements attention from the regular
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operations of our business and the potential loss of our key clients, our key associates or those of the acquired operations, each of which could harm our financial condition and results of operation. We believe some acquisitions could initially have an adverse impact on revenues, expenses, operating income and net income. Acquisitions also frequently involve significant costs related to integrating people, information technology, accounting, reporting and management services and rationalizing personnel levels. If we are unable to fully integrate the accounting, reporting and other systems of the businesses we acquire, we may not be able to effectively manage them and our financial results may be materially affected. Moreover, the integration process itself may be disruptive to our business as it requires coordination of culture, people and geographically diverse organizations and implementation of new accounting and information technology systems.
In addition, acquisitions of businesses involve risks that the businesses acquired will not perform in accordance with expectations, that the expected synergies associated with acquisitions will not be achieved and that business judgments concerning the value, strengths and weaknesses of the people and the businesses acquired will prove incorrect, which could have an adverse effect on our business, financial condition and results of operations.
We may face significant liabilities and/or damage to our professional reputation as a result of litigation allegations and negative publicity.
As a licensed real estate broker, we and our licensed professionals and brokers are subject to regulatory due diligence, disclosure and standard-of-care obligations. The actual or perceived failure to fulfill these obligations could subject us or our professionals and brokers to litigation from parties who attempted to or in fact financed, purchased or sold properties that we or they brokered, managed or had some other involvement. We could become subject to claims by those who either wished to participate or did participate in real estate transactions alleging that we did not fulfill our regulatory, contractual or other legal obligations. We also face potential conflicts of interest claims when we represent both the buyer and the seller in a transaction.
We depend on our business relationships and our reputation for integrity and high-caliber professional services to attract and retain clients. As a result, allegations by private litigants or regulators, whether the ultimate outcome is favorable or unfavorable to us, as well as negative publicity and press speculation about us or our investment activities, whether or not valid, may harm our reputation and damage our business prospects. In addition, if any lawsuits were brought against us and resulted in a finding of substantial legal liability, it could materially, adversely affect our business, financial condition or results of operations or cause significant reputational harm to us, which could materially impact our business.
Some of these litigation risks may be mitigated by the commercial insurance we maintain in amounts we believe are appropriate. However, in the event of a substantial loss, our commercial insurance coverage and/or self-insurance reserve levels might not be sufficient to pay the full damages, or the scope of available coverage may not cover certain types of claims. Further, the value of otherwise valid claims we hold under insurance policies could become uncollectible in the event of the covering insurance companys insolvency, although we seek to limit this risk by placing our commercial insurance only with highly-rated companies. Any of these events could negatively impact our business, financial condition or results of operations.
We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, until December 31, 2018. As an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including, but not limited to; (i) not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act, which may increase the risk that
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weaknesses or deficiencies in the internal control over financial reporting go undetected; (ii) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, which may make it more difficult for investors and securities analysts to evaluate our company; and (iii) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act, and therefore, we are subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
We are obligated to develop and maintain proper and effective internal control over financial reporting. These internal controls may or may not be subject to auditor attestation, which may adversely affect investor confidence in our Company and, as a result, the value of our common stock.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
We are required to disclose changes made in our internal control and procedures on a quarterly basis. However, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an emerging growth company, as defined in the JOBS Act, which will likely be on December 31, 2018. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. Our remediation efforts may not enable us to avoid a material weakness in the future. In addition, to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff.
Our investments in marketable securities are subject to certain risks which could affect our overall financial condition, results of operations or cash flows.
We invest a portion of our available cash and cash equivalent balances in money market funds, some of which have floating net asset values or by purchasing marketable securities with maturities in excess of three months in a managed portfolio in a variety of fixed or variable rate debt securities, including U.S. government and federal agency securities and corporate debt securities. The primary objective of our investment activity is to maintain the safety of principal, provide for future liquidity requirements while maximizing yields without significantly increasing risk. Should any of our investments or marketable securities lose value or have their liquidity impaired, it could affect the Companys overall financial condition. Additionally, should we choose or are required to sell these securities in the future, our consolidated operating results or cash flows may be affected.
We may be deemed to be an investment company due to our investments in marketable securities, available-for-sale and, if such a determination were made, we would become subject to significant regulation that would adversely affect our business.
We may be deemed to be an investment company under the Investment Company Act of 1940 if, among other things, we own investment securities with a value exceeding 40% of the value of our total assets, unless
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we qualify under a particular exemption or safe harbor. We invest part of our available cash and cash equivalents in variety of short-term, investment grade securities, some of which may qualify as investment securities under the Investment Company Act. Investment companies are subject to registration under the Investment Company Act and compliance with a variety of restrictions and requirements. If we were to be deemed an investment company we would become subject to these restrictions and requirements, and the consequences of having been an investment company without registering under the Investment Company Act could have a material adverse effect on our business, financial condition and results of operations, as well as restrict our ability to sell and issue securities, borrow funds, engage in various transactions or other activities and make certain investment decisions. In addition, we may incur significant costs or limitation on business opportunities to avoid investment company status if an exemption from the Investment Company Act were to be considered unavailable to us at a time when the value of our investment securities exceeds 40% of the value of our total assets. We believe that we satisfy the conditions to be exempt from the Investment Company Act because, among other things, we are engaged directly and primarily in a business other than that of investing, reinvesting, owning, holding or trading in securities. However, absent an exemptive order from the SEC, our status of being exempt cannot be assured.
Risks related to the Ownership of Our Common Stock
Our Co-Chairman and founder controls a significant interest in our stock, and the concentrated ownership of our common stock may prevent other stockholders from influencing significant decisions.
George M. Marcus, our Co-Chairman and founder beneficially owns approximately 49% of our outstanding common stock as of December 31, 2017. Because Mr. Marcus controls the voting power of our outstanding common stock, he is able to determine the outcome of corporate actions requiring stockholder approval, including the election and removal of directors, so long as he controls a significant portion of our common stock.
The price of our common stock may fluctuate significantly and you could lose all or part of your investment.
Volatility in the market price of our common stock may prevent shareholders from being able to sell shares of our common stock at or above the price shareholders paid for them. The market price for our common stock could fluctuate significantly for various reasons, including quarterly and annual variations in our results and those of our competitors; changes to the competitive landscape; estimates and projections by the investment community; the arrival or departure of key personnel, especially the retirement or departure of key senior investment sales and financing professionals and management; the introduction of new services by us or our competitors; acquisitions, strategic alliances or joint ventures involving us or our competitors; and general global and domestic economic, credit and liquidity issues, market or political conditions. For example, in 2016 and 2017, the price of our shares has ranged from a high of $32.72 per share to a low of $18.77 per share.
As a result of these factors, investors in our common stock may not be able to resell their shares at or above the price paid to acquire the stock or may not be able to resell them at all. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
If our Co-Chairman sells a controlling interest in our Company to a third party in a private transaction, you may not realize any change-of-control premium on shares of our common stock and we may become subject to the control of a presently unknown third party.
Our Co-Chairman and controlling stockholder has the ability, should he choose to do so, to sell some or all of the shares of our common stock that he controls in a private transaction, which, if sufficient in size, could result in a change of control of our Company. The ability of our Co-Chairman and controlling stockholder to privately sell the shares of our common stock that he controls, with no requirement for a concurrent offer to be made to acquire all of our common stock that will be publicly traded hereafter, could prevent shareholders from realizing any change-of-control premium on shares of our common stock that may otherwise accrue to entities
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controlled by our Co-Chairman on a private sale of our common stock. If entities controlled by our Co-Chairman privately sell a significant equity interest in our Company, we may become subject to the control of a presently unknown third party. Such third party may have conflicts of interest with those of other stockholders. Furthermore, if our Co-Chairman sells a controlling interest in our Company to a third party, our commercial agreements and relationships could be impacted, all of which may adversely affect our ability to run our business as described herein and may have a material adverse effect on our operating results and financial condition.
Our Co-Chairman may have actual or potential conflicts of interest because of his position with MMC.
George M. Marcus serves as a Co-Chairman of our board of directors and is Chairman of the board of directors of MMC. In addition, Mr. Marcus beneficially owns most of the outstanding stock of MMC. His position at MMC and the ownership of any MMC equity or equity awards creates, or may create the appearance of conflicts of interest if and when he is faced with decisions that could have different implications for MMC and for us.
If securities analysts do not publish research or reports about our business or if they downgrade our Company or our sector, or we do not meet expectations of the analysts the price of our common stock could decline.
The trading market for our common stock depends in part on the research and reports that industry or financial analysts publish about us or our business. These research reports about our business may contain information about the Company, including but not limited to estimates of our future results of operations and stock price. We do not control these analysts, nor can we assure that any analysts will continue to follow us, issue research reports or publish information that accurately predicts our actual results or stock price. Furthermore, if we do not meet the expectations of industry or financial analysts or one or more of the analysts who do cover us downgrades our Company or our industry, or the stock of any of our competitors, the price of our common stock could decline. If one or more of these analysts ceases coverage of our Company, we could lose visibility in the market, which in turn could cause the price of our common stock to decline.
Significant fluctuations in our revenues and net income may make it difficult for us to achieve steady earnings growth on a quarterly or an annual basis, which may make the comparison between periods difficult and may cause the price of our common stock to decline.
We have experienced and may continue to experience fluctuations in revenues and net income as a result of many factors, including, but not limited to, economic conditions, capital market disruptions, the timing of transactions, revenue mix and the timing of additional selling, general and administrative expenses to support growth initiatives. We provide many of our services pursuant to contracts that typically expire within six months and that are dependent on the clients cooperation. Consequently, many of our clients can terminate or significantly reduce their relationships with us on very short notice for any reason.
We plan our capital and operating expenditures based on our expectations of future revenues and, if revenues are below expectations in any given quarter or year, we may be unable to adjust capital or operating expenditures in a timely manner to compensate for any unexpected revenue shortfall, which could have an immediate material adverse effect on our business, financial condition and results of operation.
Future sales or the perception of future sales of a substantial amount of our common stock may depress the price of shares of our common stock.
Future sales, the lifting of common stock resale restrictions that will expire in November of next year, issuances of shares under our 2013 Omnibus Equity Incentive Plan and 2013 Employee Stock Purchase Plan or the availability of a substantial amount of our common stock in the public market could adversely affect the prevailing market price of our common stock and could impair our ability to raise capital through the future sales of equity securities. As of December 31, 2017, there were approximately 19.6 million shares of our common stock outstanding, which could be registered and sold in a private or public sale. Substantially all of these shares are beneficially owned by entities controlled by George M. Marcus our Co-Chairman.
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We may issue shares of our common stock or other securities from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares of our common stock, or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be substantial. We may also grant registration rights covering those shares of our common stock or other securities in connection with any such acquisitions and investments.
We cannot predict the size of future issuances or sales of our common stock or the effect, if any, that future issuances and sales of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Our principal executive offices are located at 23975 Park Sorrento, Suite 400, Calabasas, California 91302 where our telephone number is (818) 212-2250. We lease approximately 24,028 (net of sublease) square feet, under a lease that expires in December 2021 for our executive offices in Calabasas, California. We also lease all of our 78 brokerage offices (typically less than 12,000 square feet) and other support facilities in United States and Canada aggregating approximately 591,000 square feet, primarily for our investment sales and financing professionals and support personnel. We believe that our current facilities are adequate to meet our needs through the end of 2018; however, as we continue to expand in various midmarket locations and grow our market share in existing metropolitan areas, we may need to lease additional space.
We are involved in claims and legal actions arising in the ordinary course of our business, some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by insurance which contain deductibles, exclusions, claim limits and aggregate policy limits. Such litigation and other proceedings may include, but are not limited to, actions relating to commercial relationships, standard brokerage disputes like the alleged failure to disclose physical or environmental defects or property expenses or contracts, the alleged inadequate disclosure of matters relating to the transaction like the relationships among the parties to the transaction, potential claims or losses pertaining to the asset, vicarious liability based upon conduct of individuals or entities outside of our control, general fraud claims, conflicts of interest claims, employment law claims, including claims challenging the classification of our sales professionals as independent contractors, claims alleging violations of state consumer fraud statutes and intellectual property. While the ultimate liability for these legal proceeding cannot be determined, we review the need for our accrual for loss contingencies quarterly and records an accrual for litigation related losses where the likelihood of loss is both probable and estimable. We do not believe, based on information currently available to us, that the final outcome of these proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
For information on our legal proceedings, see Note 14 Commitments and Contingencies of our accompanying Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Item 4. Mine Safety Disclosures
Not applicable.
32
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock has traded on the New York Stock Exchange (NYSE) under the symbol MMI since October 31, 2013. Prior to that time, there was no public market for our stock. The following table sets forth for the indicated period the high and low intra-day sales prices per share for our common stock on the NYSE.
High | Low | |||||||
2016: |
||||||||
First quarter |
$ | 28.34 | $ | 18.77 | ||||
Second quarter |
$ | 27.73 | $ | 23.60 | ||||
Third quarter |
$ | 28.99 | $ | 24.35 | ||||
Fourth quarter |
$ | 30.31 | $ | 22.93 | ||||
2017: |
||||||||
First quarter |
$ | 28.51 | $ | 23.22 | ||||
Second quarter |
$ | 26.94 | $ | 23.40 | ||||
Third quarter |
$ | 27.87 | $ | 24.34 | ||||
Fourth quarter |
$ | 32.72 | $ | 26.43 |
As of March 5, 2018, there were 23 stockholders of record, and the closing price of our common stock was $31.55 per share as reported on the NYSE.
Dividends
We do not pay a regular dividend. We may evaluate our dividend policy in the future. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of the board of directors and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant.
Stock Performance Graph
The performance graph shall not be deemed filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of Marcus & Millichap, Inc. under the Securities Act of 1933, as amended (the Securities Act), or the Exchange Act.
The following graph shows a comparison from October 31, 2013 through December 31, 2017 of the cumulative total return for our common stock, the Standard & Poors 500 Stock Index (S&P 500 Index) and an industry peer group for this period. The industry peer group is comprised of the following publicly-traded real estate services companies: CBRE Group, Inc., Jones Lang LaSalle Incorporated and HFF, Inc. (collectively Peer Group). These three companies represent our primary competitors that are publicly traded with certain business lines reasonably comparable to ours. The graph assumes that $100 was invested at the market close on October 31, 2013 in the common stock of Marcus & Millichap Inc., the S&P 500 Index and the Peer Group, and assumes reinvestments of dividends. The stock price performance of the following graph is not necessarily indicative of future stock price performance.
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Base Period
10/31/2013 |
March 31, | June 30, | September 30, | December 31, | ||||||||||||||||
2013: |
||||||||||||||||||||
Marcus & Millichap, Inc. |
100.00 | | | | 111.03 | |||||||||||||||
S&P 500 |
100.00 | | | | 105.66 | |||||||||||||||
Peer Group |
100.00 | | | | 111.20 | |||||||||||||||
2014: |
||||||||||||||||||||
Marcus & Millichap, Inc. |
| 132.94 | 190.09 | 225.48 | 247.76 | |||||||||||||||
S&P 500 |
| 107.57 | 113.20 | 114.47 | 120.12 | |||||||||||||||
Peer Group |
| 122.30 | 138.15 | 129.73 | 151.81 | |||||||||||||||
2015: |
||||||||||||||||||||
Marcus & Millichap, Inc. |
| 279.28 | 343.82 | 342.70 | 217.14 | |||||||||||||||
S&P 500 |
| 121.26 | 121.60 | 113.77 | 121.78 | |||||||||||||||
Peer Group |
| 171.58 | 168.67 | 143.74 | 155.41 | |||||||||||||||
2016: | ||||||||||||||||||||
Marcus & Millichap, Inc. |
| 189.20 | 189.34 | 194.86 | 199.11 | |||||||||||||||
S&P 500 |
| 123.42 | 126.45 | 131.32 | 136.35 | |||||||||||||||
Peer Group |
| 124.97 | 112.34 | 121.68 | 127.26 | |||||||||||||||
2017: | ||||||||||||||||||||
Marcus & Millichap, Inc. |
| 183.16 | 196.42 | 201.12 | 243.00 | |||||||||||||||
S&P 500 |
| 144.62 | 149.08 | 155.76 | 166.11 | |||||||||||||||
Peer Group |
| 139.29 | 150.57 | 155.38 | 181.54 |
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities
None.
34
Item 6. Selected Financial Data
The following selected consolidated financial and other data should be read in conjunction with Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, and our consolidated financial statements and the related notes included in Part II, Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
The following table presents the consolidated statement of income data for the years ended December 31, 2017, 2016 and 2015, and the consolidated balance sheet data at December 31, 2017 and 2016. Such financial data are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The table also presents the consolidated statement of income data for the years ended December 31, 2014 and 2013 and the consolidated balance sheet data at December 31, 2015, 2014 and 2013, which are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results in any future period.
Years Ended December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(in thousands except per share, investment sales and financing
professional and sales volume amounts) |
||||||||||||||||||||
Statement of Income Data: |
||||||||||||||||||||
Total revenues |
$ | 719,700 | $ | 717,450 | $ | 689,055 | $ | 572,188 | $ | 435,895 | ||||||||||
Cost of services |
446,557 | 444,768 | 423,389 | 350,102 | 264,637 | |||||||||||||||
Stock-based and other compensation in connection with IPO (1) |
| | | | 31,268 | |||||||||||||||
Operating income |
96,132 | 106,501 | 114,651 | 84,606 | 21,286 | |||||||||||||||
Provision for income taxes (2) |
47,702 | 42,445 | 47,018 | 33,452 | 13,735 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 51,524 | $ | 64,657 | $ | 66,350 | $ | 49,531 | $ | 8,206 | ||||||||||
Less: Net (loss) income 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 |
$ | 51,524 | $ | 64,657 | $ | 66,350 | $ | 49,531 | $ | 9,251 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings per share: |
||||||||||||||||||||
Basic |
$ | 1.32 | $ | 1.66 | $ | 1.71 | $ | 1.27 | $ | 0.24 | ||||||||||
Diluted |
$ | 1.32 | $ | 1.66 | $ | 1.69 | $ | 1.27 | $ | 0.24 | ||||||||||
Weighted average common shares outstanding: |
||||||||||||||||||||
Basic |
38,988 | 38,899 | 38,848 | 38,851 | 38,787 | |||||||||||||||
Diluted |
39,100 | 39,035 | 39,162 | 38,978 | 38,815 | |||||||||||||||
Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 220,786 | $ | 187,371 | $ | 96,185 | $ | 149,159 | $ | 100,952 | ||||||||||
Marketable securities, available-for-sale (3) |
$ | 125,659 | $ | 104,929 | $ | 134,255 | $ | 14,752 | $ | | ||||||||||
Total assets |
$ | 459,664 | $ | 394,016 | $ | 321,225 | $ | 233,604 | $ | 167,309 | ||||||||||
Long-term liabilities |
$ | 61,517 | $ | 56,986 | $ | 57,224 | $ | 49,591 | $ | 48,052 | ||||||||||
Total liabilities |
$ | 144,776 | $ | 135,162 | $ | 132,235 | $ | 116,795 | $ | 104,812 | ||||||||||
Total stockholders equity |
$ | 314,888 | $ | 258,854 | $ | 188,990 | $ | 116,809 | $ | 62,497 | ||||||||||
Other Data: |
||||||||||||||||||||
Adjusted EBITDA (4) |
$ | 111,716 | $ | 118,296 | $ | 124,140 | $ | 92,824 | $ | 61,286 | ||||||||||
Investment sales and financing professionals |
1,819 | 1,737 | 1,607 | 1,494 | 1,313 | |||||||||||||||
Sales volume (dollars in millions) |
$ | 42,191 | $ | 42,312 | $ | 37,847 | $ | 33,139 | $ | 23,975 |
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(1) | Consists of non-cash stock based compensation and other compensation charges incurred in connection with our IPO. |
(2) | Prior to the IPO in October 2013, we were subject to a tax-sharing agreement whereby we provided for income taxes using an effective tax rate of 43.5%. As part of the IPO, the tax-sharing agreement with MMC was terminated. Provision for income taxes for 2017, includes a one-time charge in the amount of $11.6 million in connection with the remeasurement of deferred tax assets, net due to enactment of the Tax Cuts and Jobs Act, which reduced the U.S. federal statutory corporate tax rate from 35% to 21%. In addition, we adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting in 2017 that required any windfall tax benefits, net of shortfalls to be recorded as a discrete item in our provision for income taxes. The Company recognized $2.9 million in windfall tax benefits, net during 2017 as a reduction in the Companys provision for income taxes. |
(3) | Includes both short-term and long-term marketable securities, available-for-sale. |
(4) | 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 Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations Non-GAAP Financial Measure. |
36
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Our Business of this Annual Report on Form 10-K.
Overview
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. As of December 31, 2017, we had over 1,800 investment sales and financing professionals operating in 78 offices who provide real estate 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, 2017, we closed 8,979 sales, financing and other transactions with total volume of approximately $42.2 billion, compared to 8,995 sales, financing and other transactions with total sales volume of approximately $42.3 billion in 2016.
We generate revenues by collecting real estate brokerage commissions upon the sale, and fees upon the financing of, commercial properties and 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, 2017, approximately 90% of our revenues were generated from real estate brokerage commissions, 7% from financing fees and 3% from other revenues, including consulting and advisory services.
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 investment sales and financing transactions we close in any period. The number and size of these transactions are affected by our ability to recruit and retain investment sales and financing professionals, identify and contract properties for sale and those that need financing and refinancing. We principally monitor the commercial real estate market through four factors, which generally drive our business. The factors are the economy, commercial real estate supply and demand, interest rates, availability of financing, capital markets conditions, investment sentiment and investment activity.
The Economy
Our business is dependent on economic conditions within the markets in which we operate. Changes in the economy on a global, national, regional or local basis can have a positive or a negative impact on our business. Economic indicators and projections related to job growth, unemployment, interest rates, retail spending and confidence trends can have a positive or a negative impact on our business. Overall market conditions can have an effect on investor sentiment and, ultimately, the demand for our services from investors in real estate. Significant disasters such as the hurricanes that struck Texas and Florida in 2017 can also affect local economies and investor behavior. The post-disaster assessment and recovery process can delay in-process transactions or change investor decisions to hold, buy or sell commercial real estate. Our national footprint allows us to support our clients in balancing the opportunities and risks of changing regional economic conditions. We believe the U.S. economy remains poised for growth this year, as the tax rate reductions under the new tax law act as a
37
stimulus for personal and corporate spending. Job creation last year was marginally slower than in 2016 and hiring should remain stable in 2018. Notably, despite the potential for accelerated economic growth and the elevated number of job openings, we believe the tight unemployment rate will restrain hiring. Further, we believe the demand for additional qualified personnel will continue to place upward pressure on wages, and increase risks of rising inflation. It is widely anticipated that the new leadership of the Federal Reserve will continue to cautiously exert upward pressure on interest rates to contain inflationary risk. We believe sentiment about economic expansion in 2018 remains conservatively optimistic, though some uncertainty surrounding fiscal policy, deregulation, inflation risk and other initiatives by the Trump administration could weigh on activity.
Commercial Real Estate Supply and Demand
Our business is dependent on the willingness of investors to invest in or sell commercial real estate, which is affected by factors beyond our control. These factors include the supply of commercial real estate coupled with user demand for these properties and the performance of real estate assets when compared with other investment alternatives, such as stocks and bonds. Despite the generally moderate pace of economic growth over the past eight years, we believe commercial real estate offers a compelling option for investors, as real estate fundamentals generally remain balanced. The slow-but-steady economic gains have generated demand while keeping construction levels limited for most property types on a national scale, although construction has begun to elevate for some property types in certain metropolitan areas. We believe the maturing cycle, combined with volatility in financial markets, inflation trends and rising interest rates have caused investors and lenders to assume more cautious underwriting assumptions resulting in a slowdown in sales. Furthermore, many investors are still delaying transactions as they await additional clarity on how the new tax law, regulatory easing and economic initiatives will affect investments. We believe a boost to investor sentiment will likely emerge as clarity on government policies and growth initiatives comes forth. Although the new tax law appears promising, many investors are still waiting for additional guidance from the IRS and the U.S. Treasury on how the new rules will be applied. We believe that these factors should continue to support long-term commercial real estate investor demand and, therefore, demand for our brokerage and financing services.
Capital Markets
Credit and liquidity issues in the financial markets have a direct impact on the flow of capital to the commercial real estate market. Real estate purchases are often financed with debt and, as a result, credit and liquidity impact transaction activity and prices. Changes in interest rates, as well as steady and protracted movements of interest rates in one direction, whether increase or decrease, could adversely or positively affect the operations and income potential of commercial real estate properties. These changes also influence the demand of investors for commercial real estate investments. We believe indications from the U.S. Federal Reserve of future interest rate increases, a reduction of the Federal Reserve balance sheet, uncertainty as to the impact of new fiscal policies, stock market volatility and rising longer term interest rates remain a short-term headwind for real estate transactions. In addition, a change of the Chairperson of the Federal Reserve could alter Federal Reserve policies and have a meaningful impact on interest rates and investor activity. We have continued to see disciplined underwriting from lenders as well as ample liquidity in the market.
Investor Sentiment and Investment Activity
We rely on investors to buy and sell properties in order to generate commissions. Investors desires to engage in real estate transactions are dependent on many factors that are beyond our control. The economy, supply and demand for properly positioned properties, available credit and market events impact investor sentiment and, therefore, transaction velocity. In addition, our private clients are often motivated to buy, sell and/or refinance properties due to personal circumstances such as death, divorce, partnership breakups and estate planning. We believe that we are in a maturing real estate cycle. During the last two years, the sales transaction market has continued to step-down from peak levels set in 2015. The combination of interest rate volatility
38
together with, regulatory easing and infrastructure initiatives have caused a portion of the active investors to assume a more wait-and-see attitude toward investment decisions. Although a new tax law is effective, considerable uncertainty surrounding the rules and implementation of the new tax laws remains. As the IRS and Treasury Department provide additional clarity, and investors digest the information and its application to their assets, we believe investors will begin to revive their activity levels. We believe that the healthy property fundamentals and lack of over-leveraging during the past several years support an active, but more tempered, market environment.
Seasonality
Our real estate brokerage commissions and financing fees have tended to be seasonal and, combined with other factors, can affect an investors ability to compare our financial condition and results of operations on a quarter-by-quarter basis. Historically, this seasonality has generally caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last six months of the year, particularly in the fourth quarter, is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. This historical trend can be disrupted both positively and negatively by major economic or political events impacting investor sentiment for a particular property type or location, volatility in financial markets, current and future projections of interest rates, attractiveness of other asset classes, market liquidity and the extent of limitations or availability of capital allocations for larger property buyers, among others. Private client investors may accelerate or delay transactions due to personal or business related reasons unrelated to economic events. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior investment sales and financing professionals. These senior investment sales and financing professionals are on a graduated commission schedule that resets annually in which higher commissions are paid for higher sales volumes. Our historical pattern of seasonality may or may not continue to the same degree experienced in prior years.
Operating Segments
We follow the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of our operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing and consulting and advisory services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute only one operating segment for financial reporting purposes.
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.
Our business is transaction oriented and, as such, we rely on investment sales and financing professionals to continually develop leads, identify properties to sell, market those properties and close sales timely to generate a consistent flow of revenue. While our sales volume is impacted by seasonality factors, the timing of closings is also dependent on many market and personal factors unique to a particular client or transaction, particularly clients transacting in the $1-$10 million private client market segment. These factors can cause transactions to be accelerated or delayed beyond our control. Further, commission rates earned are generally inversely related to the value of the property sold. As a result of our expansion into the middle and larger transaction market segments, we have seen our overall commission rates fluctuate from period-to-period as a result of changes in the relative
39
mix of the number and volume of transactions closed in the middle and larger transaction market segments as compared to the $1-$10 million private client market segment. These factors may result in period-to-period variations in our revenues that differ from historical patterns.
A small percentage of our transactions include retainer fees and/or breakage fees. Retainer fees are credited against a success-based fee upon the closing of a transaction or a breakage fee. 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.
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 typically recognized at the close of escrow.
Financing fees
We earn financing fees by securing financing on purchase transactions or by securing refinancing of 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 financing 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.
Operating Expenses
Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization. The significant components of our expenses are further described below.
Cost of services
The majority of our cost of services expense is predominately variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Commission expenses are directly attributable to providing services to our clients for investment sales and financing services. Most of our investment sales and financing professionals are independent contractors and are paid commissions; however, there are some who are initially paid a salary and certain of our financing professionals are employees and, as such, costs of services also include employee-related compensation, employer taxes and benefits for those employees. The commission rates we pay to our investment sales and financing professionals vary based on individual contracts negotiated and are generally higher for the more experienced professionals. Some of our most senior investment sales and financing professionals also 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 Companys election, and paid at the beginning of the fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers where the Company is the principal service provider. Cost of services, therefore, can vary based on the commission structure of the independent contractors that closed transactions in any particular period.
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Selling, general and administrative expenses
The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and sales 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 expenses is stock-based compensation to non-employee directors, employees and independent contractors (i.e. investment sales and financing professionals) under our 2013 Omnibus Equity Incentive Plan, as amended (2013 Plan) and the 2013 Employee Stock Purchase Plan (2013 ESPP Plan).
Depreciation and amortization expense
Depreciation and amortization expense consists of depreciation and amortization recorded on our computer software and hardware 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 leasehold improvements.
Other Income (Expense), Net
Other income (expense), net primarily consists of net gains or losses on our deferred compensation plan assets, interest income and realized gains and losses on our marketable securities, available-for-sale, foreign currency gains and losses and other non-operating gains and losses.
Interest Expense
Interest expense primarily consists of interest expense associated with the stock appreciation rights (SARs) liability, notes payable to former stockholders and our credit agreement.
Provision for Income Taxes
We are subject to U.S. and Canadian federal taxes and individual state and local taxes based on the income generated in the jurisdictions in which we operate. Our effective tax rate fluctuates as a result of the change in the mix of our activities in the jurisdictions we operate due to differing tax rates in those jurisdictions and other permanent items. Prior to December 31, 2016, windfall benefits, net from shares issued in connection with our 2013 Plan and 2013 ESPP Plan were recorded to additional paid in capital. Effective January 1, 2017, as a result of the adoption of ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09), any windfall tax benefits, net are recorded in our provision for income taxes.
We record deferred tax assets, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes. On December 22, 2017, the Tax Cuts and Jobs Act (the Act) legislation was enacted, which reduced the U.S. federal statutory tax rate from 35% to 21% beginning in 2018. As a result of the change in the future federal statutory tax rate, our recorded deferred tax assets, net were required to be revalued to reflect the new tax rate now expected to be in effect in 2018 and beyond. This one-time charge of $11.6 million was recorded as of the enactment date in our provision for income taxes in the fourth quarter of 2017.
Results of Operations
Following is a discussion of our results of operations for the years ended December 31, 2017, 2016 and 2015. 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 Operating 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. During the years ended December 31, 2017, 2016 and 2015, we closed more than 8,900, 8,900 and 8,700 sales, financing and other transactions with total volume of approximately $42.2 billion, $42.3 billion and $37.8 billion, respectively. Such key metrics for real estate brokerage and financing activities are as follows:
Years Ended
December 31, |
||||||||||||
Real Estate Brokerage: |
2017 | 2016 | 2015 | |||||||||
Average Number of Investment Sales Professionals |
1,649 | 1,527 | 1,428 | |||||||||
Average Number of Transactions per Investment Sales Professional |
3.98 | 4.24 | 4.43 | |||||||||
Average Commission per Transaction |
$ | 98,963 | $ | 102,258 | $ | 99,901 | ||||||
Average Commission Rate |
2.13 | % | 2.07 | % | 2.22 | % | ||||||
Average Transaction Size (in thousands) |
$ | 4,644 | $ | 4,935 | $ | 4,492 | ||||||
Total Number of Transactions |
6,562 | 6,476 | 6,332 | |||||||||
Total Sales Volume (in millions) |
$ | 30,475 | $ | 31,962 | $ | 28,444 | ||||||
Years Ended
December 31, |
||||||||||||
Financing (1) : |
2017 | 2016 | 2015 | |||||||||
Average Number of Financing Professionals |
95 | 98 | 85 | |||||||||
Average Number of Transactions per Financing Professional |
17.97 | 16.83 | 18.84 | |||||||||
Average Fee per Transaction |
$ | 28,960 | $ | 26,314 | $ | 26,582 | ||||||
Average Fee Rate |
0.88 | % | 0.85 | % | 0.87 | % | ||||||
Average Transaction Size (in thousands) |
$ | 3,299 | $ | 3,093 | $ | 3,053 | ||||||
Total Number of Transactions |
1,707 | 1,651 | 1,601 | |||||||||
Total Sales Volume (in millions) |
$ | 5,632 | $ | 5,107 | $ | 4,888 |
(1) | Operating metrics calculated excluding certain financing fees not directly associated to transactions. |
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Comparison of Years Ended December 31, 2017 and 2016
Below are key operating results for the year ended December 31, 2017 compared to the results for the year ended December 31, 2016 (dollars in thousands):
Year
Ended December 31, 2017 |
Percentage
of Revenue |
Year
Ended December 31, 2016 |
Percentage
of Revenue |
Change |
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Dollar | Percentage | |||||||||||||||||||||||
Revenues: |
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Real estate brokerage commissions |
$ | 649,393 | 90.2 | % | $ | 662,220 | 92.3 | % | $ | (12,827 | ) | (1.9 | )% | |||||||||||
Financing fees |
49,653 | 6.9 | 43,444 | 6.1 | 6,209 | 14.3 | ||||||||||||||||||
Other revenues |
20,654 | 2.9 | 11,786 | 1.6 | 8,868 | 75.2 | ||||||||||||||||||
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Total revenues |
719,700 | 100.0 | 717,450 | 100.0 | 2,250 | 0.3 | ||||||||||||||||||
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Operating expenses: |
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Cost of services |
446,557 | 62.0 | 444,768 | 62.0 | 1,789 | 0.4 | ||||||||||||||||||
Selling, general, and administrative expense |
171,648 | 23.8 | 161,794 | 22.6 | 9,854 | 6.1 | ||||||||||||||||||
Depreciation and amortization expense |
5,363 | 0.8 | 4,387 | 0.6 | 976 | 22.2 | ||||||||||||||||||
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Total operating expenses |
623,568 | 86.6 | 610,949 | 85.2 | 12,619 | 2.1 | ||||||||||||||||||
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Operating income |
96,132 | 13.4 | 106,501 | 14.8 | (10,369 | ) | (9.7 | ) | ||||||||||||||||
Other income (expense), net |
4,590 | 0.6 | 2,134 | 0.3 | 2,456 | nm | ||||||||||||||||||
Interest expense |
(1,496 | ) | (0.2 | ) | (1,533 | ) | (0.2 | ) | 37 | (2.4 | ) | |||||||||||||
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Income before provision for income taxes |
99,226 | 13.8 | 107,102 | 14.9 | (7,876 | ) | (7.4 | ) | ||||||||||||||||
Provision for income taxes |
47,702 | 6.6 | 42,445 | 5.9 | 5,257 | 12.4 | ||||||||||||||||||
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Net income |
$ | 51,524 | 7.2 | % | $ | 64,657 | 9.0 | % | $ | (13,133 | ) | (20.3 | )% | |||||||||||
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Adjusted EBITDA (1) |
$ | 111,716 | 15.5 | % | $ | 118,296 | 16.5 | % | $ | (6,580 | ) | (5.6 | )% | |||||||||||
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(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. |
Revenues
Our total revenues were $719.7 million in 2017 compared to $717.5 million in 2016, an increase of $2.3 million or 0.3%. Total revenues increased primarily as a result of increases in other revenues and financing fees, partially offset by a decrease in real estate brokerage commissions.
Real estate brokerage commissions. Revenues from real estate brokerage commissions decreased to $649.4 million in 2017 from $662.2 million in 2016, a decrease of $12.8 million or 1.9%. The decrease was driven by the decrease in sales volume (4.7%). This decrease was partially offset by an increase in average commission rates (6 basis points) primarily due to improved rates in the middle market transaction segment.
Financing fees. Revenues from financing fees increased to $49.7 million in 2017 from $43.4 million in 2016, an increase of $6.2 million or 14.3%. The increase was driven by growth in sales volume (10.3%) primarily due to an increase in financing purchase transactions and an increase in average fee rates (3 basis points).
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Other revenues. Other revenues increased to $20.7 million in 2017 from $11.8 million in 2016, an increase of $8.9 million or 75.2%. The increase was primarily driven by two large consulting and advisory services fees earned during 2017 with no such comparable fees during 2016.
Total operating expenses
Our total operating expenses were $623.6 million in 2017 compared to $610.9 million in 2016, an increase of $12.6 million, or 2.1%. The increase was primarily due to increases in selling, general and administrative costs, cost of services, which is predominantly variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities and, to a lesser extent, depreciation and amortization expense, as described below.
Cost of services. Cost of services in 2017 increased $1.8 million, or 0.4%, to $446.6 million from $444.8 million in 2016. The increase was primarily due to increased commission expenses driven by increased revenues noted above. Cost of services as a percent of total revenues remained consistent at 62.0% in 2017 and 2016.
Selling, general and administrative expense. Selling, general and administrative expense in 2017 increased $9.9 million, or 6.1%, to $171.6 million from $161.8 million in 2016. Increases in our selling, general and administrative expense have been driven by our growth plans and investments in technology, sales and marketing tools and marketing and expansion of our services supporting our investment sales and financing professionals. These initiatives have primarily driven (i) a $6.5 million increase in sales operations support and promotional marketing expenses to support sales activity and (ii) a $2.2 million increase in facilities expenses due to expansion of existing offices. In addition, selling, general and administrative expense increased due to (i) a $2.1 million increase in stock-based compensation due to fluctuations in our stock price and incremental stock-based awards since the fourth quarter of 2016 and (ii) a $0.2 million increase in legal costs and accruals. These increases were partially offset by (i) a $0.5 million decrease in compensation related costs, including salaries and related benefits and management performance compensation primarily due to management and compensation realignments and (ii) a $0.6 million decrease in other expense categories, net.
Depreciation and amortization expense. Depreciation and amortization expense increased to $5.4 million in 2017 from $4.4 million in 2016, an increase of $1.0 million, or 22.2%. The increase is primarily driven by our expansion and growth and investment in technology to redesign sales and marketing tools.
Other income (expense), net
Other income (expense), net increased to $4.6 million in 2017 from $2.1 million in 2016, an increase of $2.5 million, or 115.1%. The increase was primarily driven by increases in interest income on our investments in marketable securities, available-for-sale and the value of our deferred compensation plan assets held in the rabbi trust. These increases were enhanced by realized losses on our investments in marketable securities, available-for-sale, primarily due to a security sold during the first quarter of 2016, which no longer met our investment policy criteria with no such comparable realized losses during 2017.
Interest expense
There were no significant changes in interest expenses in 2017 as compared to 2016.
Provision for income taxes
The provision for income taxes was $47.7 million for 2017 compared to $42.4 million in 2016, an increase of $5.3 million, or 12.4%. The effective tax rate for 2017 was 48.1%, compared with 39.6% in 2016. The
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increase in the effective tax rate was primarily due to a $11.6 million one-time charge related to the revaluation of the our deferred taxes, net in 2017 from changes in the U.S. federal statutory tax rate as result of the enactment of the Act. The provision was partially reduced by $2.9 million of windfall tax benefits, net in connection with our 2013 Plan recorded in our provision for income taxes as a result of the adoption of ASU 2016-09 in January 2017. ASU 2016-09 requires the difference in book and tax deductions associated with the settlement of shares under our 2013 Plan and certain disqualifying dispositions of shares issued under our 2013 ESPP Plan to be recorded in the provision for income taxes. Prior to 2016, any windfall tax benefits were recorded directly to additional paid-in capital.
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Comparison of Years Ended December 31, 2016 and 2015
Below are key operating results for the year ended December 31, 2016 compared to the results for the year ended December 31, 2015 (dollars in thousands):
Year
Ended December 31, 2016 |
Percentage
of Revenue |
Year
Ended December 31, 2015 |
Percentage
of Revenue |
Change | ||||||||||||||||||||
Dollar | Percentage | |||||||||||||||||||||||
Revenues: |
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Real estate brokerage commissions |
$ | 662,220 | 92.3 | % | $ | 632,574 | 91.8 | % | $ | 29,646 | 4.7 | % | ||||||||||||
Financing fees |
43,444 | 6.1 | 42,558 | 6.2 | 886 | 2.1 | ||||||||||||||||||
Other revenues |
11,786 | 1.6 | 13,923 | 2.0 | (2,137 | ) | (15.3 | ) | ||||||||||||||||
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Total revenues |
717,450 | 100.0 | 689,055 | 100.0 | 28,395 | 4.1 | ||||||||||||||||||
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Operating expenses: |
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Cost of services |
444,768 | 62.0 | 423,389 | 61.4 | 21,379 | 5.0 | ||||||||||||||||||
Selling, general, and administrative expense |
161,794 | 22.6 | 147,710 | 21.4 | 14,084 | 9.5 | ||||||||||||||||||
Depreciation and amortization expense |
4,387 | 0.6 | 3,305 | 0.6 | 1,082 | 32.7 | ||||||||||||||||||
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Total operating expenses |
610,949 | 85.2 | 574,404 | 83.4 | 36,545 | 6.4 | ||||||||||||||||||
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Operating income |
106,501 | 14.8 | 114,651 | 16.6 | (8,150 | ) | (7.1 | ) | ||||||||||||||||
Other income (expense), net |
2,134 | 0.3 | 443 | | 1,691 | nm | ||||||||||||||||||
Interest expense |
(1,533 | ) | (0.2 | ) | (1,726 | ) | (0.2 | ) | 193 | (11.2 | ) | |||||||||||||
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Income before provision for income taxes |
107,102 | 14.9 | 113,368 | 16.4 | (6,266 | ) | (5.5 | ) | ||||||||||||||||
Provision for income taxes |
42,445 | 5.9 | 47,018 | 6.8 | (4,573 | ) | (9.7 | ) | ||||||||||||||||
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Net income |
$ | 64,657 | 9.0 | % | $ | 66,350 | 9.6 | % | $ | (1,693 | ) | (2.6 | )% | |||||||||||
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Adjusted EBITDA (1) |
$ | 118,296 | 16.5 | % | $ | 124,140 | 18.0 | % | $ | (5,844 | ) | (4.7 | )% | |||||||||||
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(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. |
Revenues
Our total revenues were $717.5 million in 2016 compared to $689.1 million in 2015, an increase of $28.4 million or 4.1%. Total revenues increased primarily as a result of increases in real estate brokerage commissions, which contributed to substantially all of the total increase. A slight increase in financing fees, partially offset by a decrease in other revenues contributed the remaining change in total revenues.
Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $662.2 million in 2016 from $632.6 million in 2015, an increase of $29.6 million or 4.7%. The increase was driven by a combination of the growth in the number of investment sales transactions (2.3%) and average transaction size (9.9%), partially offset by a decrease in average commission rates (15 basis points) due to a larger proportion of our transactions that closed in the > $20 million larger transaction market segment, which generate lower commission rates.
Financing fees. Revenues from financing fees increased to $43.4 million in 2016 from $42.6 million in 2015, an increase of $0.9 million or 2.1%. The increase was driven by an increase in the number of loan
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transactions (3.1%) due to an increase in the average number of financing professionals (15.3%), partially offset by a decrease in average fee rates (2 basis points) due in part to fees from certain larger loan transactions during 2016 as compared to 2015. Larger loan transactions generally earn a lower fee percentage.
Other revenues. Other revenues decreased to $11.8 million in 2016 from $13.9 million in 2015, a decrease of $2.1 million or 15.3%. The decrease was primarily driven by a decrease in consulting and advisory services during 2016 as compared to 2015.
Operating expenses
Our total operating expenses were $610.9 million in 2016 compared to $574.4 million in 2015, an increase of $36.5 million, or 6.4%. Expenses increased primarily due to an increase in cost of services, which is predominantly variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Selling, general and administrative costs and to a lesser extent depreciation and amortization increased as well, as described below.
Cost of services. Cost of services in 2016 increased $21.4 million, or 5.0%, to $444.8 million from $423.4 million in 2015. The increase was primarily due to increased commission expenses driven by increased revenues. Cost of services as a percent of total revenues increased to 62.0% for 2016 compared to 61.4% in 2015 primarily due to an increase in proportion of transactions closed by our more senior investment sales professionals who are compensated generally at higher commission rates, partially offset by a reduction in referral fees.
Selling, general and administrative expense. Selling, general and administrative expense in 2016 increased $14.1 million, or 9.5%, to $161.8 million from $147.7 million in 2015. Increases in our selling, general and administrative expense have been driven by our growth and investments in technology, sales and marketing tools and marketing and expansion of our services supporting our investment sales and financing professionals. These initiatives have primarily driven (i) a $6.7 million increase in sales and promotional marketing expenses to support increased sales activity and our annual sales recognition event; (ii) a $6.1 million increase in facilities expenses due to expansion of existing offices; (iii) a $5.7 million increase in salaries and related benefits as a result of increases in headcount in corporate and sales office support in connection with our growth and expansion of services supporting our investment sales and financing professionals; (iv) a $2.7 million increase in other expense categories, net, primarily driven by our expansion and growth. In addition, selling, general and administrative expense increased $2.5 million due to legal costs and accruals, partly driven by settlement of outstanding litigation and recoveries from a settlement with an insurance carrier during the twelve months ended December 31, 2015, which reduced legal costs in that period. These increases were offset by a $9.6 million decrease in management performance-related compensation driven by reduced bonus accruals due to management exceeding performance criteria during 2015.
Depreciation and amortization expense. Depreciation and amortization expense increased to $4.4 million in 2016 from $3.3 million in 2015, an increase of $1.1 million, or 32.7%. The increase is primarily driven by our expansion and growth and investment in technology to redesign sales and marketing tools.
Other income (expense), net
Other income (expense), net increased to $2.1 million in 2016 from $0.4 million in 2015. The increase was primarily driven by an increase in the value of our foreign currency gains related to our Canadian operations, interest income on our investments in marketable securities, available-for-sale and deferred compensation plan assets held in the rabbi trust. The increase was partially offset by realized losses on our investments in marketable securities, available-for-sale, due to a security sold during 2016, which no longer met our investment policy criteria with no such similar realized losses in 2015.
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Interest expense
There were no significant changes in interest expenses in 2016 as compared to 2015.
Provision for income taxes
The provision for income taxes was $42.4 million for 2016 as compared to $47.0 million in 2015, a decrease of $4.6 million or 9.7%. The effective tax rate for 2016 was 39.6%, compared with 41.5% in 2015. The decrease in the effective tax rate was primarily due to the change in the Companys effective state tax rate on deferred taxes in 2015, which was minimal in 2016, lower net operating losses for our Canadian operations in 2016, which are subject to a full valuation allowance and other permanent items, primarily gains on company owned variable life insurance policies.
The provisions for income taxes excludes the difference in book and tax deductions associated with the settlement of shares under the Companys 2013 Plan and disqualifying dispositions of shares issued from our 2013 ESPP Plan. Such tax benefits, which aggregated $2.7 million in 2016 and $6.2 million in 2015, respectively, were recorded directly to additional paid-in capital.
Non-GAAP Financial Measure
In this Annual Report on Form 10-K, we include a non-GAAP financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization and stock-based compensation, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income and other, including net realized gains (losses) on marketable securities, available-for-sale and cash and cash equivalents, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization and (v) stock-based compensation expense. We use Adjusted EBITDA in our business operations to evaluate the performance of our business, develop budgets and measure our performance against those budgets, among other things. We also believe that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate our 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 our results as reported under U.S. generally accepted accounting principles (U.S. GAAP). We find Adjusted EBITDA as a useful tool to assist in evaluating performance because Adjusted EBITDA eliminates items related to capital structure, taxes and non-cash stock-based compensation charges. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. 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 calculated 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):
Years Ended December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
Net income |
$ | 51,524 | $ | 64,657 | $ | 66,350 | $ | 49,531 | $ | 8,206 | ||||||||||
Adjustments: |
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Interest income and other (1) |
(3,514 | ) | (1,761 | ) | (1,373 | ) | (50 | ) | 356 | |||||||||||
Interest expense |
1,496 | 1,533 | 1,726 | 1,651 | 105 | |||||||||||||||
Provision for income taxes (2) |
47,702 | 42,445 | 47,018 | 33,452 | 13,735 | |||||||||||||||
Depreciation and amortization |
5,363 | 4,387 | 3,305 | 3,206 | 3,043 | |||||||||||||||
Stock-based compensation (3) |
9,145 | 7,035 | 7,114 | 5,034 | 35,841 | |||||||||||||||
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Adjusted EBITDA (4) |
$ | 111,716 | $ | 118,296 | $ | 124,140 | $ | 92,824 | $ | 61,286 | ||||||||||
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(1) Other for the years ended December 31, 2017, 2016 and 2015 includes net realized gains (losses) on marketable securities available-for-sale. The year ended December 31, 2013 includes employer taxes related to deferred stock units (DSUs) and restricted stock in connection with the IPO. (2) The year ended December 31, 2017, includes a one-time charge in the amount of $11.6 million in connection with the remeasurement of deferred tax assets, net due to enactment of the Act, which reduced the U.S. federal statutory corporate tax rate from 35% to 21%. In addition, we adopted a new accounting pronouncement in 2017 that required any windfall tax benefits, net of shortfalls to be recorded as a discrete item in our provision for income taxes. These windfalls/shortfalls arise from the difference in the grant date price and the vesting date price of employee and non-employee directors vesting of equity awards granted under the Companys 2013 Plan. The Company recognized $2.9 million in windfall tax benefits, net during the year ended December 31, 2017 as a reduction in the Companys provision for income taxes. (3) The year ended December 31, 2013 includes non-cash stock-based compensation charges of $30.9 million in connection with the IPO. (4) The decrease in Adjusted EBITDA in 2017 compared to 2016 is primarily due to a higher proportion of operating expenses compared to revenues, partially offset by higher total revenues. |
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, marketable securities, available-for-sale and, if necessary, borrowings under our credit agreement. In order to enhance yield to us, we have invested a portion of our cash in money market funds and in fixed and variable income debt securities, in accordance with our investment policy approved by the board of directors. Certain of our investments in money market funds may not maintain a stable net asset value and may impose fees on redemptions and/or gate fees. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations, cash and cash equivalents, proceeds from the sale of marketable securities, available-for-sale or availability under our credit agreement.
Cash held in our Canadian operations aggregated $421,000 and $404,000 at December 31, 2017 and 2016, respectively.
Cash Flows
Our total cash and cash equivalents balance increased by $33.4 million to $220.8 million at December 31, 2017, compared to $187.4 million at December 31, 2016. The following table sets forth our summary cash flows for the years ended December 31, 2017, 2016 and 2015 (in thousands):
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Net cash provided by operating activities |
$ | 66,537 | $ | 74,486 | $ | 72,120 | ||||||
Net cash (used in) provided by investing activities |
(27,338 | ) | 19,819 | (126,929 | ) | |||||||
Net cash (used in) provided by financing activities |
(5,784 | ) | (3,119 | ) | 1,835 | |||||||
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Net increase (decrease) in cash and cash equivalents |
33,415 | 91,186 | (52,974 | ) | ||||||||
Cash and cash equivalents at beginning of period |
187,371 | 96,185 | 149,159 | |||||||||
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Cash and cash equivalents at end of period |
$ | 220,786 | $ | 187,371 | $ | 96,185 | ||||||
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Operating Activities
2017 Compared to 2016 . Cash flows provided by operating activities were $66.5 million in 2017 compared to $74.5 million in 2016. Net cash provided by operating activities is driven by our net income adjusted for
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non-cash items and changes in operating assets and liabilities. The $7.9 million decrease in cash flows provided by operating activities in 2017 compared to the same period in 2016 was primarily due to differences in timing of payments and receipts, an increase in advances to our investment sales and financing professionals, a reduction in the deferral of certain discretionary and other commissions and a higher proportion of operating expenses compared to revenues. Additionally, we made distributions of $1.4 million of the SARs liability during 2017 with no such comparable payments during the same period in 2016. These decreases were offset by a change in bonus accruals.
2016 Compared to 2015 . Cash flows provided by operating activities were $74.5 million in 2016 compared to $72.1 million in 2015. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in operating assets and liabilities. The $2.4 million increase in cash flows provided by operating activities in 2016 compared to the same period in 2015 was primarily due to the net effect of the growth of our business, differences in timing of payments and receipts, a reduction in the deferral of certain discretionary commissions, lower bonuses and a reduction of advances to our investment sales and financing professionals.
Investing Activities
2017 Compared to 2016 . Cash flows used in investing activities were $27.3 million in 2017 compared to cash flows provided by investing activities of $19.8 million in 2016. The change in cash flows used in investing activities in 2017 compared to the same period in 2016 was primarily due to $20.3 million in net purchases of marketable securities, available-for-sale for the year ended December 31, 2017 compared to $29.7 million in net proceeds from the sale of marketable securities, available-for-sale for the same period in 2016.
2016 Compared to 2015 . Cash flows provided by investing activities were $19.8 million in 2016 compared to cash flows used in investing activities of $126.9 million in 2015. The change in cash flows provided by investing activities in 2016 compared to the same period in 2015 was primarily due to $29.7 million in net proceeds from the sale of marketable securities, available-for-sale for the year ended December 31, 2016 compared to $119.9 million in net purchases for the same period in 2015.
Financing Activities
2017 Compared to 2016 . Cash flows used in financing activities were $5.8 million in 2017 compared to $3.1 million in 2016. The change in cash flows used in financing activities in 2017 compared to the same period in 2016 was primarily impacted by net changes in stock-based award activity and taxes paid related to net share settlement of stock-based awards. The net change in stock-based award activity in 2016 included excess tax benefits from stock-based award activity with no such comparable amounts in 2017 due to the adoption of new accounting rules. See Note 10 Stock-Based Compensation Plans our Notes to Consolidated Financial Statements for additional information.
2016 Compared to 2015 . Cash flows used in financing activities were $3.1 million in 2016 compared to cash flows provided by financing activities of $1.8 million in 2015. The change in cash flows used in financing activities in 2016 compared to the same period in 2015 was primarily impacted by net changes in stock-based award activity, including excess tax benefit from stock-based award activity and taxes paid related to net share settlement of stock-based awards. See Note 10 Stock-Based Compensation Plans our Notes to Consolidated Financial Statements for additional information.
Liquidity
We believe that our existing balances of cash and cash equivalents, cash flows expected to be generated from our operations, proceeds from the sale of marketable securities, available-for-sale and borrowings available under the Credit Agreement (defined below) will be sufficient to satisfy our operating requirements for at least
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the next twelve months. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms or at all. Our failure to raise sufficient capital, when needed, could prevent us from funding acquisitions or otherwise financing our growth or operations. In addition, our notes payable to former stockholders and SARs liability have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our liquidity.
Credit Agreement
On June 18, 2014, we entered into a Credit Agreement with Wells Fargo Bank, National Association (Bank), dated as of June 1, 2014 (the Credit Agreement). The Credit Agreement is intended to provide for future liquidity needs, if needed. The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of the Companys domestic subsidiaries (the Credit Facility), which, as amended, matures on June 1, 2020. We may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. We must pay a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility.
The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit, of which $533,000 was utilized at December 31, 2017. As of December 31, 2017, there were no amounts outstanding under the Credit Agreement.
Borrowings under the Credit Facility bear interest, at our option, at either the (i) Base Rate (defined as the highest of (a) the Banks prime rate, (b) the Federal Funds Rate plus 1.5% and (c) one-month LIBOR plus 1.5%), or (ii) at a variable rate between 0.875% and 1.125% above LIBOR, based upon the total funded debt to EBITDA ratio.
The Credit Facility contains customary covenants, including financial covenants (which require us, on a combined basis with our guarantors, to maintain (i) an EBITDAR Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25:1.0 as of each quarter end on a rolling 4-quarter basis and (ii) total funded debt to EBITDA not greater than 2.0:1.0), reporting requirements and events of default. The Credit Facility is secured by substantially all of our assets, including pledges of 100% of the stock or other equity interest of each subsidiary except to the extent such property constitutes the capital stock of a controlled foreign corporation (as defined in the Internal Revenue Code), in which case no such pledge is required.
See Note 14 Commitments and Contingencies of our Notes to Consolidated Financial Statements for additional information on the Credit Agreement.
Contractual Obligations and Commitments
The contractual obligations and other commitments consisted of the following at December 31, 2017 (in thousands):
Total |
Less than
1 Year |
1-3 Years | 3-5 Years |
More Than
5 Years |
Other (7) | |||||||||||||||||||
Operating lease obligations (1) |
$ | 86,897 | $ | 18,650 | $ | 31,891 | $ | 22,361 | $ | 13,995 | $ | | ||||||||||||
SARs liability (principal and interest) (2) |
30,413 | 1,662 | 3,625 | 4,235 | 20,891 | | ||||||||||||||||||
Notes payable (principal and interest) (3) |
9,843 | 1,472 | 8,371 | | | | ||||||||||||||||||
Deferred commissions payable (4) |
36,404 | 14,480 | 21,924 | | | | ||||||||||||||||||
Deferred compensation liability (5) |
8,481 | 1,261 | 2,522 | 1,664 | | 3,034 | ||||||||||||||||||
Other (6) |
2,860 | 1,855 | 1,005 | | | | ||||||||||||||||||
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$ | 174,898 | $ | 39,380 | $ | 69,338 | $ | 28,260 | $ | 34,886 | $ | 3,034 | |||||||||||||
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51
(1) | See Note 14 Commitments and Contingencies of our Notes to the Consolidated Financial Statements. |
(2) | Forecasted principal payments are based on each participants estimated retirement age and contractual interest rate of 4.409% on January 1, 2018 and reflect required payments that resulted from the retirement of certain executives. See Note 4 Selected Balance Sheet Data of our Notes to the Consolidated Financial Statements. |
(3) | See Note 6 Notes Payable to Former Stockholders of our Notes to the Consolidated Financial Statements. |
(4) | Includes short-term and long-term deferred commissions payable. See Note 4 Selected Balance Sheet Data of our Notes to the Consolidated Financial Statements. |
(5) | Represents current estimated payouts for participants currently receiving payments based on their elections at the time of deferral. The Company holds assets held in Rabbi Trust of $8.8 million to settle outstanding amounts when they become due. Amounts assume no increase in asset or liability due to future returns. See Note 4 Selected Balance Sheet Data of our Notes to the Consolidated Financial Statements. |
(6) | See Note 14 Commitments and Contingencies of our Notes to the Consolidated Financial Statements. |
(7) | Amounts in Other represent amounts where payments are dependent on future events, which may occur at any time from less than 1 year to more than 5 years, based on the participants elections at the time of deferral. |
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
Inflation
Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by general economic conditions including inflation. However, to date, we do not believe that general inflation has had a material impact upon our operations.
Critical Accounting Policies and Estimates
We prepare our financial statements in accordance with U.S. generally accepted accounting principles. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change negatively or positively based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known.
We believe that the critical accounting policies discussed below involve a greater degree of judgment or complexity than our other accounting policies. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. See the notes to our consolidated financial statements for a summary of our significant accounting policies.
Revenue Recognition
We generate real estate brokerage commissions by acting as a broker for real estate owners or investors seeking to buy or sell commercial properties. Revenues from real estate brokerage commissions and financing fees from securing financing on purchase transactions as well as fees earned from refinancing our clients existing mortgage debt and other financing activities are recognized, in principally all cases, on the close of escrow or when the loan closes.
52
Stock-Based Compensation
We initially value restricted stock units and restricted stock awards based on the grant date closing price of our common stock and recognize 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. Awards made to our independent contractors, who are primarily our investment sales professionals, are accounted for as liability awards and require remeasurement to fair value at the end of each reporting period. We may be required to use judgment in determining the service period for awards granted based on contract terms. After adoption of ASU 2016-09 on January 1, 2017, we account for forfeitures as they occur.
We estimate the grant-date fair value for issuances under the 2013 ESPP Plan using the Black-Scholes option-pricing model. We determined that the plan was a compensatory plan and the Company is required to expense the fair value of the awards over each six-month offering period. We use judgments and assumptions in determining the value of the awards. We calculate the expected volatility based on the historical volatility of our common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant, both consistent with the term of the offering period. We incorporate no forfeiture rate and include no expected dividend yield as the Company has not paid, and currently does not intend to pay, a regular dividend.
Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to (1) differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and (2) operating losses and tax credit carryforwards. We measure existing deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to have temporary differences realized or settled. We recognize in the provision for income taxes the effect on deferred tax assets and liabilities of a change in tax rates in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized.
Because of the nature of our business, which includes activity in the U.S. and Canada, incorporating numerous states and provinces as well as local jurisdictions, our tax position can be complex. As such, we use estimates to determine state tax apportionment, foreign and local taxes, recognized and unrecognized tax positions, tax related interest and penalties, valuation allowances and other permanent items, all which impact our effective tax rate. Changes in these estimates are as a result of changes in the mix of our activity in the various jurisdictions in which we operate and changes in the nature and extent of other estimates.
We evaluate the tax positions taken quarterly. The threshold for recognizing the benefits of tax return positions in the financial statements is more likely than not to be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not criterion, based on the largest benefit that is more than 50% likely to be realized.
We recognize interest and penalties incurred as income tax expense.
Investments in Marketable Securities, Available-for-sale
We maintain a portfolio of cash equivalents and investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt securities, asset-backed securities and other. We consider our investment in marketable securities to be available-for-sale. Accordingly, these investments are recorded at their fair values, with unrealized gains or losses recorded in other comprehensive income (loss), net of tax. We determine the appropriate classification of investments in
53
marketable securities at the time of purchase. Interest, along with accretion and amortization of purchase premiums and discounts, which are recorded over the remaining weighted average life of the security, are included in other income (expense), net in the consolidated statements of net and comprehensive income.
We regularly review our investment portfolio to determine if any security is other-than-temporarily impaired, which would require us to record an impairment charge in the period any such determination is made. In making this judgment, we evaluate, among other items, the time frame and extent to which the fair market value of a security is less than its amortized cost and our intent and ability to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. The assumptions and judgments may change based on changes in our operations or future plans.
The Company may sell certain of its marketable securities, available-for-sale prior to their stated maturities for strategic reasons including, but not limited to, anticipated liquidity and capital requirements, anticipated credit deterioration, duration management or when a security no longer meets the criteria of the Companys investment policy.
Litigation
We are subject to various legal proceeding and claims that arise in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by insurance which contain deductibles, exclusions, claim limits and aggregate policy limits. While the ultimate liability for these legal proceeding cannot be determined, we use judgment in the evaluation claims and the need for accrual for loss contingencies quarterly. We record an accrual for litigation related losses where we determine the likelihood of loss is both probable and estimable. We accrue legal fees for litigation as the legal services are provided.
Leases
We lease all of our facilities under operating lease agreements. Lease agreements may contain periods of free rent or reduced rent or contain predetermined fixed increases in the minimum rent. We recognize the minimum lease payments as rent expense on a straight-line basis over the noncancellable term of the lease. We record the difference between the amount charged to rent expense and the rent paid as a deferred rent obligation. We typically lease general purpose built-out office space, which reverts to the lessor upon termination of the lease. Any payments for improvements, net of incentives received, are recorded as prepaid rent. Prepaid rent is amortized using the straight-line method over the expected lease term as a charge to rent expense.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, see Note 2 Accounting Policies of our Notes to the Consolidated Financial Statements set forth in Item 8 of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We maintain a portfolio of investments in a variety of fixed and variable debt rate securities, including U.S. government and federal agency securities, corporate debt securities, asset backed securities and other. As of December 31, 2017, the fair value of investments in marketable securities, available-for-sale was $125.7 million. The primary objective of our investment activity is to maintain the safety of principal, provide for future liquidity requirements while maximizing yields without significantly increasing risk. While some investments may be securities of companies in foreign countries, all investments are denominated and payable in U.S. Dollars. We do not enter into investments for trading or speculative purposes. While our intent is not to sell these investment securities prior to their stated maturities, we may choose to sell any of the securities for strategic reasons including, but not limited to, anticipated capital requirements, anticipation of credit deterioration, duration
54
management and when a security no longer meets the criteria of the Companys investment policy. We do not use derivatives or similar instruments to manage our interest rate risk. We seek to invest in high quality investments. The weighted average rating (exclusive of cash and cash equivalents) was AA as of December 31, 2017. Maturities are maintained consistent with our short-, medium- and long-term liquidity objectives.
Currently, our portfolio of investments predominantly consists of fixed interest rate debt securities; however, a portion of our investment portfolio may consist of variable interest rate debt securities. Our investments in fixed interest rate debt securities are subject to market risk. Changes in prevailing interest rates may adversely impact their fair market value should interest rates generally rise or fall. Accordingly, we also may have interest rate risk with the variable rate debt securities as the income produced may decrease if interest rates fall. The following table sets forth the impact on the fair value of our investments from changes in interest rates based on the duration of the securities (dollars in thousands):
Change in Interest Rates |
Approximate Change in
Fair Value of Investments Increase (Decrease) |
|||
2% Decrease | $ | 3,788 | ||
1% Decrease | $ | 1,967 | ||
1% Increase | $ | (1,967 | ) | |
2% Increase | $ | (3,933 | ) |
Due to the nature of our business and the manner in which we conduct our operations, we believe we do not face any material interest rate risk with respect to other assets and liabilities, equity price risk or other market risks. The functional currency of our Canadian operations is the Canadian dollar. We are exposed to foreign currency exchange rate risk for the settlement of transactions of the Canadian operations as well as unrealized translation adjustments. To date, realized foreign currency exchange rate gains and losses have not been material.
Item 8. Financial Statements and Supplementary Data
See pages beginning at F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), including maintenance of (i) records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, and (ii) policies and procedures that provide reasonable assurance that (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (b) our receipts and expenditures are being made only in accordance with authorizations of management and our board of directors and (c) we will prevent or timely detect unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Our management, with the supervision and participation of our chief executive officer (CEO) and chief financial officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). Based on
55
such evaluation, our management has concluded that as of December 31, 2017, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Managements Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
Our system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external reporting purposes in accordance with United States generally accepted accounting principles. Our management, including our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In conducting its assessment, management used the criteria issued by the COSO. Based on this assessment, management concluded that, as of December 31, 2017, our internal control over financial reporting was effective based on those criteria.
Management, including our CEO and CFO, does not expect that our disclosure controls and procedures, or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of the inherent limitations of any system of internal control. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses of judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper overriding of controls. As a result of such limitations, there is risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
None.
56
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Executive Officers
The names and ages of our executive officers and directors as of March 1, 2018 are as follows:
Name |
Age |
Position(s) |
||
Hessam Nadji |
52 | President, Chief Executive Officer and Director | ||
Mitchell R. LaBar |
58 | Chief Operating Officer and Executive Vice President | ||
Martin E. Louie |
56 | Chief Financial Officer | ||
William E. Hughes, Jr. |
68 | Senior Vice President, Marcus and Millichap Capital Corporation |
Hessam Nadji
Mr. Nadji has served as President and Chief Executive Officer and as a director of the Company since March 31, 2016. Prior to his appointment as President and Chief Executive Officer of the Company, Mr. Nadji served as senior executive vice president from May 2015. Mr. Nadji joined the Company as vice president of research in 1996, became senior vice president in 1997, was appointed managing director in 2000, and became chief strategy officer and senior vice president responsible for the Companys specialty brokerage divisions as well as research, advisory services and marketing in 2013. Mr. Nadji has extensive knowledge of the Company and over 30 years of experience working in the real estate industry. Mr. Nadji received a B.S. in information management and computer science from City University in Seattle.
Mitchell R. LaBar
Mr. LaBar has served as Executive Vice President and Chief Operating Officer since March 2016. Before assuming this position, Mr. LaBar was employed with the Company from 1984 to 2008. He joined the Company in 1984 as an investment sales professional, was promoted to regional manager, then division manager and, then, served as a managing director in the Company until 2008. Mr. LaBar was instrumental in helping grow certain of the Companys markets, including offices in Southern California and subsequently Manhattan and other offices in the Northeast. In 2008, Mr. LaBar left the Company to pursue private real estate investing for his family trust. From March 2015 to March 2016, Mr. LaBar served as a consultant to the Company. He received a B.S. in Economics from Brigham Young University.
Martin E. Louie
Mr. Louie has served as Chief Financial Officer since 2010. Prior to becoming Chief Financial Officer, Mr. Louie was First Vice President of Finance beginning in 2009, and Vice President of Finance from 2006 to 2009. Mr. Louie has served as a senior financial executive with worldwide responsibilities for various companies, including Sony Pictures Entertainment, The Walt Disney Co., Infineon Technologies and West Marine. In those roles, he was responsible for accounting, strategic planning, financial planning and analysis, treasury and investor relations. Prior to that, Mr. Louie, who is a CPA, was with KPMG. Mr. Louie received a B.A. in Economics from the University of California, Los Angeles and an MBA in Finance from the University of Southern California.
William E. Hughes, Jr.
Mr. Hughes has served as Senior Vice President of our subsidiary MMCC since 2000. He became a Managing Director of Marcus & Millichap in 2008. Mr. Hughes is responsible for managing MMCCs operations on a national basis. He joined Marcus & Millichap in 1996 and has a diversified background in real estate finance, financial consulting and modeling, project feasibility, leasing, construction management and real estate
57
development. Prior to joining the Company, Mr. Hughes held various senior executive roles with several financial and real estate investment firms. He received a B.S. in Business Administration from the University of Southern California. In January 2018, we announced that Mr. Hughes is transitioning into retirement.
Other Proxy Information
Certain information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held on May 4, 2018 (Proxy Statement), which information will appear under the captions entitled Proposal 1: Election of Directors and Other Matters in the Proxy Statement.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our executive officers and directors. The Code of Ethics is posted on our website. The Internet address for our website is http://www.marcusmillichap.com, and the Code of Ethics may be found as follows:
| From our main web page, click on Investor Relations at the bottom of the main web page. |
| Next click on Corporate Governance in the left hand navigation bar. |
| The click on Governance Documents. |
| Finally, click on Code of Ethics. |
We intend to satisfy the disclosure requirements under Item 5.05(c) of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions by posting such information on our website, at the address and location specified above.
Item 11. Executive Compensation
The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held on May 4, 2018, which information will appear under the caption entitled Compensation of the Named Executive Officers and Directors in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held on May 4, 2018, which information will appear under the captions entitled Principal Stockholders in the Proxy statement.
Equity Compensation Plan Information
The following table summarizes information about our equity compensation plans as of December 31, 2017. All outstanding awards relate to our common stock.
58
Plan Category |
Number of Securities to
be Issued Upon Exercise of Outstanding Options, Warrants and Rights (1) |
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights (2) |
Number of Securities
Remaining for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a) (c) (3) (4) (5) |
|||||||||
(a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders |
1,529,741 | $ | | 5,833,812 | ||||||||
Equity compensation plans not approved by security holders |
| | | |||||||||
|
|
|
|
|
|
|||||||
1,529,741 | $ | | 5,833,812 | |||||||||
|
|
|
|
|
|
(1) | Consist of deferred stock units (DSUs) and restricted stock units (RSUs) granted under the 2013 Omnibus Equity Incentive Plan (the 2013 Plan). Excludes RSAs granted under the 2013 Plan, purchase rights granted under the Companys 2013 Employee Stock Purchase Plan (the 2013 ESPP Plan) and cash settled SARs. |
(2) | Outstanding DSUs and RSUs have no exercise price. |
(3) | Includes 5,586,917 shares available for future issuance under the 2013 Plan. Includes 246,895 shares available for future issuance under the 2013 ESPP Plan, including shares subject to purchase during the current offering period, which commenced on November 15, 2017. Subject to the number of shares remaining in the share reserve, the maximum number of shares purchasable by any participant on any one purchase date for any purchase period, including the current purchase period may not exceed 1,250 shares. |
(4) | In February 2017, the board of directors approved an amendment to the 2013 Plan, which was approved by the shareholders in May 2017. Pursuant to the amendment to the 2013 Plan, the automatic share increase provision was removed. See Note 10 Stock-Based Compensation Plans of our Notes to the Consolidated Financial Statements. |
(5) | Pursuant to the terms of the 2013 ESPP Plan, on the first day of each fiscal year, beginning with the 2015 fiscal year, the number of shares authorized for issuance under the 2013 ESPP Plan is automatically increased by the lesser of: (i) 366,667 shares of our common stock; (ii) 1% of the outstanding shares of our common stock as of the last day of the immediately preceding fiscal year; or (iii) such other amount as the Board may determine. |
Item 13. Certain Relationships and Related Transactions, and Director Independence
Any information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held on May 4, 2018, which information will appear under the captions entitled Proposal 1: Election of Directors and Certain Relationships and Related Party Transactions in the Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated herein by reference to information appearing in our definitive Proxy Statement for our Annual Meeting of Stockholders to be held on May 4, 2018, which information will appear under the caption entitled Proposal 2: Ratification of Appointment of Independent Registered Public Accounting Firm for 2018 in the Proxy Statement.
59
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) | The following documents are filed as part of this Report: |
(1) | Consolidated Financial Statements |
The consolidated financial statements listed in the accompanying Index to Consolidated Financial Statements are attached to this Form 10-K beginning on page F-1.
(2) | Financial Statement Schedules |
The financial statement schedules have been omitted because they are not applicable or the information required to be set forth therein is included in the consolidated financial statements or notes thereto.
(b) | Exhibits |
The following exhibits are included herein or incorporated herein by reference:
60
61
| Indicates management contract or compensatory plan. |
* | Filed herewith. |
** | Furnished, not filed. |
(c) | Financial Statement Schedules |
Not applicable.
None.
62
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 16, 2018 |
Marcus & Millichap, Inc. |
|||||
/s/ Hessam Nadji |
||||||
Hessam Nadji |
||||||
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Hessam Nadji
|
Director, President and Chief Executive Officer | March 16, 2018 | ||
Hessam Nadji | (Principal Executive Officer) | |||
/s/ Martin E. Louie |
Chief Financial Officer | March 16, 2018 | ||
Martin E. Louie | (Principal Financial Officer) | |||
/s/ Kurt H. Schwarz Kurt H. Schwarz |
Vice President of Finance and Chief Accounting Officer (Principal Accounting Officer) | March 16, 2018 | ||
/s/ George M. Marcus |
Director | March 16, 2018 | ||
George M. Marcus | ||||
/s/ William A. Millichap |
Director | March 16, 2018 | ||
William A. Millichap | ||||
/s/ Norma J. Lawrence |
Director | March 16, 2018 | ||
Norma J. Lawrence | ||||
/ s/ Nicholas F. McClanahan |
Director | March 16, 2018 | ||
Nicholas F. McClanahan | ||||
/s/ George T. Shaheen |
Director | March 16, 2018 | ||
George T. Shaheen | ||||
/s/ Don C. Watters |
Director | March 16, 2018 | ||
Don C. Watters |
63
MARCUS & MILLICHAP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of
Marcus & Millichap, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Marcus & Millichap, Inc. (the Company) as of December 31, 2017 and 2016, the related consolidated statements of net and comprehensive income, stockholders equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2017 and 2016, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on the Companys financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to fraud or error. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Companys auditor since 2013.
Los Angeles, California
March 16, 2018
F-2
CONSOLIDATED BALANCE SHEETS
(dollar amounts in thousands, except per share amounts)
December 31, | ||||||||
2017 | 2016 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 220,786 | $ | 187,371 | ||||
Commissions receivable |
9,586 | 4,809 | ||||||
Prepaid expenses |
9,661 | 8,094 | ||||||
Income tax receivable |
1,308 | 1,182 | ||||||
Marketable securities, available-for-sale |
73,560 | 27,454 | ||||||
Other assets, net |
5,529 | 5,102 | ||||||
|
|
|
|
|||||
Total current assets |
320,430 | 234,012 | ||||||
Prepaid rent |
15,392 | 13,285 | ||||||
Property and equipment, net |
17,153 | 16,355 | ||||||
Marketable securities, availablefor-sale |
52,099 | 77,475 | ||||||
Assets held in rabbi trust |
8,787 | 7,337 | ||||||
Deferred tax assets, net |
22,640 | 35,571 | ||||||
Other assets |
23,163 | 9,981 | ||||||
|
|
|
|
|||||
Total assets |
$ | 459,664 | $ | 394,016 | ||||
|
|
|
|
|||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued expenses |
$ | 9,202 | $ | 10,133 | ||||
Notes payable to former stockholders |
1,035 | 986 | ||||||
Deferred compensation and commissions |
49,180 | 44,754 | ||||||
Accrued bonuses and other employee related expenses |
23,842 | 22,303 | ||||||
|
|
|
|
|||||
Total current liabilities |
83,259 | 78,176 | ||||||
Deferred compensation and commissions |
49,361 | 44,455 | ||||||
Notes payable to former stockholders |
7,651 | 8,686 | ||||||
Deferred rent and other liabilities |
4,505 | 3,845 | ||||||
|
|
|
|
|||||
Total liabilities |
144,776 | 135,162 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
| | ||||||
Stockholders equity: |
||||||||
Preferred stock, $0.0001 par value: |
||||||||
Authorized shares 25,000,000; issued and outstanding shares none at December 31, 2017 and 2016, respectively |
| | ||||||
Common stock, $0.0001 par value: |
||||||||
Authorized shares 150,000,000; issued and outstanding shares 38,374,011 and 37,882,266 at December 31, 2017 and 2016, respectively |
4 | 4 | ||||||
Additional paid-in capital |
89,877 | 85,445 | ||||||
Stock notes receivable from employees |
(4 | ) | (4 | ) | ||||
Retained earnings |
224,071 | 172,599 | ||||||
Accumulated other comprehensive income |
940 | 810 | ||||||
|
|
|
|
|||||
Total stockholders equity |
314,888 | 258,854 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 459,664 | $ | 394,016 | ||||
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF NET AND COMPREHENSIVE INCOME
(dollar and share amounts in thousands, except per share amounts)
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Revenues: |
||||||||||||
Real estate brokerage commissions |
$ | 649,393 | $ | 662,220 | $ | 632,574 | ||||||
Financing fees |
49,653 | 43,444 | 42,558 | |||||||||
Other revenues |
20,654 | 11,786 | 13,923 | |||||||||
|
|
|
|
|
|
|||||||
Total revenues |
719,700 | 717,450 | 689,055 | |||||||||
|
|
|
|
|
|
|||||||
Operating expenses: |
||||||||||||
Cost of services |
446,557 | 444,768 | 423,389 | |||||||||
Selling, general, and administrative expense |
171,648 | 161,794 | 147,710 | |||||||||
Depreciation and amortization expense |
5,363 | 4,387 | 3,305 | |||||||||
|
|
|
|
|
|
|||||||
Total operating expenses |
623,568 | 610,949 | 574,404 | |||||||||
|
|
|
|
|
|
|||||||
Operating income |
96,132 | 106,501 | 114,651 | |||||||||
Other income (expense), net |
4,590 | 2,134 | 443 | |||||||||
Interest expense |
(1,496 | ) | (1,533 | ) | (1,726 | ) | ||||||
|
|
|
|
|
|
|||||||
Income before provision for income taxes |
99,226 | 107,102 | 113,368 | |||||||||
Provision for income taxes |
47,702 | 42,445 | 47,018 | |||||||||
|
|
|
|
|
|
|||||||
Net income |
51,524 | 64,657 | 66,350 | |||||||||
Other comprehensive income: |
||||||||||||
Unrealized gains (losses) on marketable securities, net of tax of $139, $197 and $(394) for the years ended December 31, 2017, 2016 and 2015, respectively |
193 | 313 | (592 | ) | ||||||||
Foreign currency translation gain (loss), net of tax of $0, $0 and $(90) for the years ended December 31, 2017, 2016 and 2015, respectively |
(63 | ) | 40 | 890 | ||||||||
|
|
|
|
|
|
|||||||
Total other comprehensive income |
130 | 353 | 298 | |||||||||
|
|
|
|
|
|
|||||||
Comprehensive income |
$ | 51,654 | $ | 65,010 | $ | 66,648 | ||||||
|
|
|
|
|
|
|||||||
Earnings per share: |
||||||||||||
Basic |
$ | 1.32 | $ | 1.66 | $ | 1.71 | ||||||
Diluted |
$ | 1.32 | $ | 1.66 | $ | 1.69 | ||||||
Weighted average common shares outstanding: |
||||||||||||
Basic |
38,988 | 38,899 | 38,848 | |||||||||
Diluted |
39,100 | 39,035 | 39,162 |
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(dollar amounts in thousands)
Series A
Redeemable Preferred Stock |
Common Stock |
Additional
Paid-In Capital |
Stock Notes
Receivable From Employees |
Retained
Earnings (Accumulated Deficit) |
Accumulated
Other Comprehensive Income |
Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance as of December 31, 2014 |
| $ | | 36,918,442 | $ | 4 | $ | 75,058 | $ | (4 | ) | $ | 41,592 | $ | 159 | $ | 116,809 | |||||||||||||||||||
Net and comprehensive income |
| | | | | | 66,350 | 298 | 66,648 | |||||||||||||||||||||||||||
Stock-based award activity |
||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | 7,114 | | | | 7,114 | |||||||||||||||||||||||||||
Issuance of common stock pursuant to employee stock purchase plan |
| | 34,152 | | 976 | | | | 976 | |||||||||||||||||||||||||||
Issuance of common stock for settlement of deferred stock units |
| | 455,151 | | | | | | | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units |
| | 195,830 | | | | | | | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards |
| | 10,110 | | | | | | | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards |
| | (217,229 | ) | | (8,730 | ) | | | | (8,730 | ) | ||||||||||||||||||||||||
Windfall tax benefit from stock-based award activity |
| | | | 6,173 | | | | 6,173 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance as of December 31, 2015 |
| | 37,396,456 | 4 | 80,591 | (4 | ) | 107,942 | 457 | 188,990 | ||||||||||||||||||||||||||
Net and comprehensive income |
| | | | | | 64,657 | 353 | 65,010 | |||||||||||||||||||||||||||
Stock-based award activity |
||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | 7,035 | | | | 7,035 | |||||||||||||||||||||||||||
Issuance of common stock pursuant to employee stock purchase plan |
| | 30,080 | | 673 | | | | 673 | |||||||||||||||||||||||||||
Issuance of common stock for settlement of deferred stock units |
| | 435,026 | | | | | | | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units |
| | 231,971 | | | | | | | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards |
| | 14,742 | | | | | | | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards |
| | (226,009 | ) | | (5,565 | ) | | | | (5,565 | ) | ||||||||||||||||||||||||
Windfall tax benefit from stock-based award activity |
| | | | 2,711 | | | | 2,711 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance as of December 31, 2016 |
| | 37,882,266 | 4 | 85,445 | (4 | ) | 172,599 | 810 | 258,854 | ||||||||||||||||||||||||||
Cumulative effect of a change in accounting principle, net of tax |
| | | | 85 | | (52 | ) | | 33 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance at January 1, 2017, as adjusted |
| | 37,882,266 | 4 | 85,530 | (4 | ) | 172,547 | 810 | 258,887 | ||||||||||||||||||||||||||
Net and comprehensive income |
| | | | | | 51,524 | 130 | 51,654 | |||||||||||||||||||||||||||
Stock-based award activity |
||||||||||||||||||||||||||||||||||||
Stock-based compensation |
| | | | 9,145 | | | | 9,145 | |||||||||||||||||||||||||||
Issuance of common stock pursuant to employee stock purchase plan |
| | 30,209 | | 653 | | | | 653 | |||||||||||||||||||||||||||
Issuance of common stock for settlement of deferred stock units |
| | 351,801 | | | | | | | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units |
| | 284,837 | | | | | | | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards |
| | 17,538 | | | | | | | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards |
| | (192,640 | ) | | (5,451 | ) | | | | (5,451 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Balance as of December 31, 2017 |
| $ | | 38,374,011 | $ | 4 | $ | 89,877 | $ | (4 | ) | $ | 224,071 | $ | 940 | $ | 314,888 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar amounts in thousands)
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 51,524 | $ | 64,657 | $ | 66,350 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization expense |
5,363 | 4,387 | 3,305 | |||||||||
Provision for bad debt expense |
219 | 47 | 281 | |||||||||
Stock-based compensation |
9,145 | 7,035 | 7,114 | |||||||||
Deferred taxes, net |
12,825 | (483 | ) | 65 | ||||||||
Net realized losses (gains) on marketable securities, available-for-sale |
(2 | ) | 123 | (132 | ) | |||||||
Tax benefit from stock-based award activity |
| 2,711 | 10,483 | |||||||||
Excess tax benefit from stock-based award activity |
| (2,711 | ) | (10,483 | ) | |||||||
Other non-cash items |
108 | 444 | 509 | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Commissions receivable |
(4,777 | ) | (1,467 | ) | 70 | |||||||
Prepaid expenses |
(1,567 | ) | (552 | ) | (6 | ) | ||||||
Prepaid rent |
(2,107 | ) | (4,210 | ) | (5,430 | ) | ||||||
Assets held in rabbi trust |
(700 | ) | (1,263 | ) | (1,514 | ) | ||||||
Other assets, net |
(13,665 | ) | (803 | ) | (8,027 | ) | ||||||
Accounts payable and accrued expenses |
(572 | ) | 964 | (912 | ) | |||||||
Income tax receivable (payable) |
(126 | ) | 2,867 | (6,649 | ) | |||||||
Accrued bonuses and other employee related expenses |
1,782 | (8,218 | ) | 3,261 | ||||||||
Deferred compensation and commissions |
8,427 | 10,988 | 12,360 | |||||||||
Deferred rent obligation and other liabilities |
660 | (30 | ) | 1,475 | ||||||||
|
|
|
|
|
|
|||||||
Net cash provided by operating activities |
66,537 | 74,486 | 72,120 | |||||||||
Cash flows from investing activities |
||||||||||||
Purchases of marketable securities, available-for-sale |
(65,093 | ) | (107,898 | ) | (146,050 | ) | ||||||
Proceeds from sales and maturities of marketable securities, available-for-sale |
44,753 | 137,593 | 26,142 | |||||||||
Payments received on employee notes receivable |
27 | 12 | 22 | |||||||||
Issuances of employee notes receivable |
(481 | ) | (455 | ) | (247 | ) | ||||||
Purchase of property and equipment |
(6,554 | ) | (9,473 | ) | (6,796 | ) | ||||||
Proceeds from sale of property and equipment |
10 | 40 | | |||||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by investing activities |
(27,338 | ) | 19,819 | (126,929 | ) | |||||||
Cash flows from financing activities |
||||||||||||
Proceeds from issuance of shares pursuant to employee stock purchase plan |
653 | 673 | 976 | |||||||||
Taxes paid related to net share settlement of stock-based awards |
(5,451 | ) | (5,565 | ) | (8,730 | ) | ||||||
Excess tax benefit from stock-based award activity |
| 2,711 | 10,483 | |||||||||
Principal payments on notes payable to former stockholders |
(986 | ) | (938 | ) | (894 | ) | ||||||
|
|
|
|
|
|
|||||||
Net cash (used in) provided by financing activities |
(5,784 | ) | (3,119 | ) | 1,835 | |||||||
Net increase (decrease) in cash and cash equivalents |
33,415 | 91,186 | (52,974 | ) | ||||||||
Cash and cash equivalents at beginning of year |
187,371 | 96,185 | 149,159 | |||||||||
|
|
|
|
|
|
|||||||
Cash and cash equivalents at end of year |
$ | 220,786 | $ | 187,371 | $ | 96,185 | ||||||
|
|
|
|
|
|
F-6
MARCUS & MILLICHAP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(dollar amounts in thousands)
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Supplemental disclosures of cash flow information |
||||||||||||
Interest paid during the period |
$ | 1,912 | $ | 628 | $ | 868 | ||||||
|
|
|
|
|
|
|||||||
Income taxes paid, net |
$ | 35,002 | $ | 37,350 | $ | 43,120 | ||||||
|
|
|
|
|
|
|||||||
Supplemental disclosures of noncash investing and financing activities |
||||||||||||
Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable |
$ | 243 | $ | 325 | $ | 208 | ||||||
|
|
|
|
|
|
|||||||
Property and equipment additions incurred but not yet paid included in accounts payable and accrued expenses |
$ | (359 | ) | $ | 34 | $ | 462 | |||||
|
|
|
|
|
|
|||||||
Settlements of deferred compensation obligation with trust assets |
$ | | $ | | $ | 37 | ||||||
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
1. | Description of Business and Basis of Presentation |
Description of Business
Marcus & Millichap, Inc., (the Company, Marcus & Millichap, or MMI), a Delaware corporation, is a brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. As of December 31, 2017, MMI operates 78 offices in the United States and Canada through its wholly-owned subsidiary, Marcus & Millichap Real Estate Investment Services, Inc. (MMREIS), which includes the operations of Marcus & Millichap Capital Corporation (MMCC).
Reorganization and Initial Public Offering
MMI was formed in June 2013 in preparation for Marcus & Millichap Company (MMC) to spin-off its majority owned subsidiary, MMREIS (Spin-Off). Prior to the initial public offering (IPO) of MMI, all of the preferred and common stockholders of MMREIS (including MMC and employees of MMREIS) contributed all of their outstanding shares to MMI, in exchange for new MMI common stock. As a result, MMREIS became a wholly-owned subsidiary of MMI. Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMCs shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness of MMC. MMI completed its IPO on October 30, 2013.
Basis of Presentation
The Companys consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
2. | Accounting Policies |
Cash and Cash Equivalents
The Company considers cash and cash equivalents to include short-term, highly liquid investments with maturities of three months or less when purchased. At December 31, 2017 and 2016, portions of the balance of cash and cash equivalents were held in four financial institutions, various money market funds with fixed and floating net asset values and short-term commercial paper. Money market funds that have floating net asset values and may be subject to gating or liquidity fees. Management believes the likelihood of realizing material losses from the excess of cash balances over federally insured limits is remote.
Revenue Recognition
The Company generates real estate brokerage commissions by acting as a broker for real estate owners or investors seeking to buy or sell commercial properties. Revenues from real estate brokerage commissions are recognized when there is persuasive evidence of an arrangement, all services have been provided, the price is fixed and determinable and collectability is reasonably assured. These criteria are typically met at the close of escrow. The Company generates financing fees from securing financing on purchase transactions as well as fees earned from refinancing its clients existing mortgage debt and other financing activities. Revenues from financing fees are recognized at the time the loan closes and there are no remaining significant obligations for performance in connection with the transaction. Other revenues generally include fees generated from consulting and advisory services, as well as referral fees from other real estate brokers. Revenues from these services are recognized when the services are provided or upon closing of the transaction.
F-8
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
Commissions Receivable
Commissions receivable consists of commissions earned on brokerage transactions for which payment has not yet been received. The Company evaluates the need for an allowance for doubtful accounts based on the specific-identification of potentially uncollectible accounts. The majority of commissions receivable are settled within 10 days after the close of escrow. As a result, the Company did not require an allowance for commissions receivable at December 31, 2017 and 2016.
Cost of Services
Cost of services principally consists of variable commissions, compensation-related costs related to the Companys financing activities and other costs for the Companys investment sales and financing professionals related to transactions closed in the period. Investment sales and financing professionals commissions are generally accrued based on revenue from transactions generated by the Companys investment sales and financing professionals. Investment sales and financing professionals are compensated at commission rates based on individual agreements and a portion of the commissions due upon the closing of a transaction may be deferred in accordance with their contracts.
Investments in Marketable Securities, Available-for-Sale
The Company maintains a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt securities, asset-backed securities and other. The Company considers its investment in marketable securities to be available-for-sale. Accordingly, these investments are recorded at their fair values, with unrealized gains or losses recorded in other comprehensive income (loss), net of tax. The Company determines the appropriate classification of investments in marketable securities at the time of purchase. Interest along with accretion and amortization of purchase premiums and discounts, which are recorded over the remaining weighted average life of the security, are included in other income (expense), net in the consolidated statements of net and comprehensive income. See Note 5 Investments in Marketable Securities for additional information.
The Company regularly reviews its investment portfolio to determine if any security is other-than-temporarily impaired, which would require the Company to record an impairment charge in the period any such determination is made. In making this judgment, the Company evaluates, among other items, the time frame and extent to which the fair market value of a security is less than its amortized cost, the Companys intent and ability to sell, or whether the Company will more likely than not be required to sell, the security before recovery of its amortized cost basis.
Assets Held in Rabbi Trust
The Company provides a non-qualified deferred compensation program to certain employees. Deferred amounts are invested in variable whole life insurance policies owned by the Company for the participants benefit and held in a Rabbi Trust. Participants elect to invest in various equity and debt securities offered within the plan on a notional basis. The net change in the carrying value of the underlying assets held in the Rabbi Trust is recorded in other income (expense), net. The change in the deferred compensation liability as a result the change in the notional value of the participants accounts is recorded as a component of selling general and administrative expenses in the consolidated statements of net and comprehensive income.
Recurring Fair Value Measurements
The Company carries its investments including commercial paper and floating NAV money market funds recorded in cash and cash equivalents, investments in marketable securities, available-for-sale and assets held in
F-9
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
the Rabbi Trust at fair value. U.S. GAAP defines the fair value of a financial instrument as the amount that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of the value of the investment carried and fair value and the supporting methodologies and assumptions. The Company uses various pricing sources to validate the values utilized.
The degree of judgment used in measuring the fair value of financial instruments generally inversely correlates with the level of observable valuation inputs. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment.
Assets recorded at fair value in the consolidated balance sheets are measured and classified in accordance with a fair value hierarchy consisting of the three levels based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:
| Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability, or |
| Level 3: Inputs reflect managements best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. |
Investment in marketable securities, available-for-sale and assets held in the Rabbi Trust are carried at fair value based on observable inputs available. All these securities are measured as Levels 1 or 2 as appropriate. The Company has no investments measured as Level 3.
Assets and Liabilities not Measured at Fair Value
The Companys commissions receivable, amounts due from employees and investment sales and financing professionals (included in other assets, net current and other assets non-current captions), accounts payable and accrued expenses and commissions payable (included in deferred compensation and commissions current and deferred compensation and commissions non-current captions) are carried at cost, which approximates fair value based on their immediate or short-term maturities and terms which approximate current market rates.
The Companys obligations under notes payable to former stockholders bear fixed interest rates. The Company has determined that the carrying value on these instruments approximates fair value. As the Companys obligations under stock appreciation rights (SARs) liability (included in deferred compensation and commissions current and deferred compensation and commissions non-current captions) bear interest at a variable rate based on U.S. Treasuries, the Company has determined that the carrying value approximates their fair value.
Property and Equipment, Net
Property and equipment are stated at cost less accumulated depreciation and amortization. The Company uses the straight-line method for depreciation and amortization. Depreciation and amortization are generally provided over estimated useful lives ranging from three to seven years.
F-10
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
The Company evaluates its fixed assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Other Assets
Other assets consist primarily of amounts due from the Companys investment sales and financing professionals, security deposits made in connection with operating leases, customer trust accounts, employee notes receivable and other receivables.
The Company, from time to time, advances funds to its investment sales and financing professionals. Certain amounts may bear a nominal interest rate, with any cash receipts on notes applied first to any unpaid principal balance prior to any income being recognized. The Company generally has the ability to collect a portion of these amounts from future commissions due to the investment sales and financing professional. The Company may forgive a portion of the amount over time depending on the nature of the advance generally ratably over a contracted service period. Amounts forgiven are charged to selling, general and administrative expense at the time the amounts are forgiven. The Company evaluates the need for an allowance for these amounts based on the specific identification of potentially uncollectible amounts and provides an allowance based on consideration of historical experience. Amounts are generally written off upon separation from the Company of the investment sales and financing professional as a service provider or when amounts are determined to be no longer collectable.
In connection with a brokerage transaction, the Company may need to, or be required to, hold cash in escrow for a transaction participant. These amounts are deposited into separate customer trust accounts controlled by the Company. The amounts are included in current other assets, net with a corresponding liability included in accounts payable and accrued expenses, both in the consolidated balance sheets.
Leases
The Company leases all of its facilities under operating lease agreements. Lease agreements may contain periods of free rent or reduced rent or contain predetermined fixed increases in the minimum rent. The Company recognizes the minimum lease payments as rent expense on a straight-line basis over the noncancellable term of the lease, which considers renewals and early termination clauses. The Company records the difference between the amount charged to rent expense and the rent paid as a deferred rent obligation (included in accounts payable and accrued expenses and deferred rent and other liabilities captions). The Company typically leases general purpose built-out office space, which reverts to the lessor upon termination of the lease. Any payments for improvements, net of incentives received, are recorded as prepaid rent. Prepaid rent is amortized using the straight-line method over the expected lease term as a charge to rent expense.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are included in selling, general, and administrative expense in the accompanying consolidated statements of net and comprehensive income.
Advertising costs for the years ended December 31, 2017, 2016 and 2015 was $824,000, $1.2 million and $1.1 million, respectively.
Income Taxes
The Company accounts for income taxes under the asset and liability method. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to (1) differences between the
F-11
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
financial statement carrying amounts of existing assets and liabilities and their respective tax basis, and (2) operating losses and tax credit carryforwards. The Company measures existing deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which the Company expects to have temporary differences to be realized or settled. The Company recognizes in the provision for income taxes the effect on deferred tax assets and liabilities of a change in tax rates in the period that includes the enactment date. The Company periodically evaluates the deferred tax assets to assess whether it is likely that the deferred tax assets will be realized. In determining whether a valuation allowance is required, the Company considers the timing of deferred tax reversals, current year taxable income and historical performance. Valuation allowances are provided against deferred tax assets when it is more-likely-than-not that some portion or all of the deferred tax asset will not be realized.
Because of the nature of the Companys business, which includes activity in the U.S. and Canada, incorporating numerous states and provinces as well as local jurisdictions, the Companys tax position can be complex. As such, the Companys effective tax rate is subject to changes as a result of fluctuations in the mix of its activity in the various jurisdictions in which the Company operates including changes in tax rates, state apportionment, tax related interest and penalties, valuation allowances and other permanent items.
The threshold for recognizing the benefits of tax return positions in the financial statements is more likely than not to be sustained by the taxing authority and requires measurement of a tax position meeting the more-likely-than-not criterion, based on the largest benefit that is more than 50% likely to be realized. The Companys inventory of tax positions has been assessed with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction), and the Company has concluded that no uncertain tax positions are required to be recognized in the Companys consolidated financial statements.
The Company recognizes interest and penalties incurred as income tax expense.
Stock-Based Compensation
The Company follows the accounting guidance for share based payments which requires the measurement and recognition of compensation expense for all stock based awards made to employees, independent contractors and non-employee directors. Awards are issued under the Amended and Restated 2013 Omnibus Equity Incentive Plan (the 2013 Plan) and 2013 Employee Stock Purchase Plan (2013 ESPP Plan).
For awards made to the Companys employees and directors, the Company initially values restricted stock units and restricted stock awards based on the grant date closing price of the Companys common stock. For awards with periodic vesting, 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.
For awards made to independent contractors, which are the Companys investment sales and financing professionals, the Company determined that the fair value of the award shall be measured based on the fair value of the equity instrument as it is more reliably measureable than the fair value of the consideration received. The Company uses the grant date as the performance commitment date, and the measurement date for these awards is the date the services are completed, which is the vesting date. As a result, the Company records stock-based compensation for these awards over the vesting period on a straight-line basis with periodic adjustments during the vesting period for changes in the fair value of the awards.
After adoption of Accounting Standards Update (ASU) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) on January 1, 2017, the Company accounts for forfeitures as they occur.
F-12
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
If there are any modifications or cancellations of the underlying unvested share-based awards, the Company may be required to accelerate, increase or cancel any remaining unrecognized or previously recorded stock-based compensation expense.
For awards issued under the 2013 ESPP Plan, the Company determined that the plan was a compensatory plan and is required to expense the fair value of the awards over each six-month offering period. The Company estimates the fair value of these awards using the Black-Scholes option pricing model. The Company calculates the expected volatility based on the historical volatility of the Companys common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant, both consistent with the term of the offering period. The Company incorporates no forfeiture rate and includes no expected dividend yield as the Company has not, and currently does not intend to pay a regular dividend.
Earnings per Share
Basic weighted average shares outstanding includes vested, but un-issued, Deferred Stock Units (DSUs). The difference between basic and diluted weighted average shares outstanding represents the dilutive impact of common stock equivalents consisting of shares to be issued under the 2013 Plan and 2013 ESPP Plan.
Foreign Currency Translation
The Company prepares the financial statements of its Canadian subsidiary using the local currency as the functional currency. The assets and liabilities of the Companys Canadian subsidiary are translated in to U.S. dollars at the rates of exchange at the balance sheet date with the resulting translation adjustments included as a separate component of stockholders equity through other comprehensive income (loss) in the consolidated statements of net and comprehensive income.
Income and expenses are translated at the average monthly rates of exchange. The Company includes gains and losses from foreign currency transactions in other income (expense), net in the consolidated statements of net and comprehensive income.
The effect of foreign currency translation on cash and cash equivalents is reflected in cash flows from operating activities on the consolidated statements of cash flows, and is not material for any period presented.
Taxes Collected From Clients and Remitted to Governmental Authorities
The Company accounts for tax assessed by any governmental authority that is based on revenue or transaction value (i.e. sales, use and value added taxes) on a net basis, and, accordingly, such amounts are not included in revenue. Collected amounts are recorded as a current liability until paid.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, due from independent contractors (included under other assets, net current
F-13
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
and other assets non-current captions), investments in marketable securities, available-for-sale, security deposits (included under other assets, non-current caption) and commissions receivables. Cash and cash equivalents are placed with high-credit quality financial institutions and invested in high-credit quality money market funds and commercial paper. Concentrations of marketable securities, available-for-sale are limited by the approved investment policy.
To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Companys cash and cash equivalents. The Company historically has not experienced any significant losses related to cash and cash equivalents.
The Company derives its revenues from a broad range of real estate investors, owners, and users in the United States and Canada, none of which individually represents a significant concentration of credit risk. The Company requires collateral on a case-by-case basis. The Company maintains allowances, as needed, for estimated credit losses based on managements assessment of the likelihood of collection. For the twelve months ended December 31, 2017, 2016 and 2015, no transaction represented 10% or more of total revenues. Further, while one or more transactions may represent 10% or more of commissions receivable at any reporting date, amounts due are typically collected within 10 days of settlement and, therefore, do not expose the Company to significant credit risk.
During the twelve months ended December 31, 2017, 2016 and 2015, the Companys Canadian operations represented less than 1% of total revenues.
During the twelve months ended December 31, 2017, 2016 and 2015 no office represented 10% or more of total revenues.
Segment Reporting
The Company follows the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of the Companys operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing and consulting and advisory services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute the Companys only operating segment for financial reporting purposes.
Recent Accounting Pronouncements
Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09. ASU 2016-09 changes the accounting for share-based payment awards issued to employees. The Company adopted this new standard effective on January 1, 2017. The Company adopted the provisions of ASU 2016-09 on a prospective basis except for the change in the accounting for forfeitures, where the Company adopted the provision on a modified retrospective basis with a cumulative-effect adjustment as of January 1, 2017.
As a result of the adoption, in periods subsequent to December 31, 2016, windfall tax benefits, net are recorded as a discrete item in the Companys provision for income taxes. The Company recognized $2.9 million in windfall tax benefits, net during the year ended December 31, 2017 as a reduction in the provision for income taxes in the consolidated statements of net and comprehensive income. See Note 11 Income Taxes for additional information. Prior to the adoption, any windfall tax benefits, net were recorded in additional paid in
F-14
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
capital. Additionally, in periods subsequent to December 31, 2016, excess tax benefits for share-based payments are included in cash flows from operating activities rather than cash flows from financing activities, prior periods have not been adjusted. Further, the Company changed its accounting for forfeitures from estimating awards that are not expected to vest to recording forfeitures when they actually occur. The cumulative effect adjustment as of January 1, 2017 related to forfeitures was a charge to retained earnings of approximately $52,000 (net of tax) and is expected to have a minor impact on the timing of stock based compensation subsequent to January 1, 2017. See Note 10 Stock-Based Compensation Plans for additional information.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance clarifies that modification accounting will be applied if the value, vesting conditions or classification of the award changes. The Company adopted ASU 2017-09 during the year ended December 31, 2017. The adoption did not have any impact on the Companys consolidated financial position or results of operations.
Pending Adoption
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes virtually all of the current revenue recognition guidance under U.S. GAAP, and requires entities to recognize revenue for transfer to customer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date , ASU No. 2016-08, Revenue from Contacts with Customers: Principal Versus Agent Considerations , ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing , and ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients . The additional ASUs clarified certain provisions of ASU 2014-09 in response to recommendations from the Transition Resources Group established by the FASB and extended the required adoption of ASU 2014-09 which is now effective for reporting periods beginning after December 15, 2017 and early adoption is permitted as of the original effective date.
The Company assessed the impacts of the standard and determined that its contracts contain one performance obligation related to its real estate brokerage, financing and consulting and advisory services offered to buyers and sellers of commercial real estate and that it is operating as a principal in all of its revenue generating activities. The Company does not have multiple-element arrangements, variable consideration, financing components, significant noncash consideration, licenses, long-term contracts with customers or other items affecting the transaction price. The Company determined the transaction price is fixed and determinable and collectability is reasonably assured. Revenue should be recognized in principally all cases at the close of escrow for real estate brokerage, close of loan for financing and when services are provided upon closing of the transaction for other revenues. Accordingly, the adoption of ASU 2014-09, as clarified, will not have an effect on the manner or timing of the recognition of the Companys revenue.
ASU 2014-09 permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company will adopt the new standard on January 1, 2018 using the prospective application method.
In February 2016, the FASB issued ASU No. 2016-02, Leases , to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing
F-15
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
arrangements. The Company is still evaluating the impact of the new standard and has begun evaluating the population of all leases and related systems and internal control considerations. The Company will be required to adopt the new standard in 2019, and the Companys consolidated balance sheets will be impacted by the recording of a lease liability and right of use asset for virtually all of its current operating leases. As of December 31, 2017, the Company has remaining contractual obligations for operating leases (autos and office), which aggregate approximately $86.9 million. Accordingly, the Company anticipates that the adoption of the new standard will have a material impact on the Companys consolidated balance sheet. The amount of which and the potential impact on the consolidated statements of net and comprehensive income and consolidated statements of cash flows has yet to be determined.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments Credit Losses (ASU 2016-13). ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective January 1, 2020. Under ASU 2016-13, the Company will be required to use an expected-loss model for its marketable securities, available-for sale, which requires that credit losses be presented as an allowance rather than as an impairment write-down. Reversals of credit losses (in situations in which the estimate of credit losses declines) is permitted in the reporting period the change occurs. Current U.S. GAAP prohibits reflecting reversals of credit losses in current period earnings. At December 31, 2017, the Company had $125.7 million in marketable securities, available for sale which would be subject to this new standard. As of December 31, 2017, these marketable securities, available for sale have an average credit rating of AA and no impairment write-downs have been recorded. The Company is currently evaluating the impact of this new standard on its investment policy and investments.
3. | Property and Equipment, Net |
Property and equipment, net consisted of the following (in thousands):
December 31, | ||||||||
2017 | 2016 | |||||||
Computer software and hardware equipment |
$ | 16,247 | $ | 14,583 | ||||
Furniture, fixtures, and equipment |
21,695 | 20,066 | ||||||
Less: accumulated depreciation and amortization |
(20,789 | ) | (18,294 | ) | ||||
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|
|
|
|||||
$ | 17,153 | $ | 16,355 | |||||
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|
|
|
During the years ended December 31, 2017 and 2016, the Company wrote-off approximately $2.9 million and $2.8 million, respectively, of fully depreciated computer software and hardware and furniture, fixtures, and equipment.
F-16
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
4. | Selected Balance Sheet Data |
Other Assets
Other assets consisted of the following (in thousands):
Current
December 31, |
Non-Current
December 31, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Due from independent contractors, net (1) (2) |
$ | 3,672 | $ | 2,231 | $ | 21,726 | $ | 8,702 | ||||||||
Security deposits |
| | 1,158 | 1,059 | ||||||||||||
Employee notes receivable (3) |
366 | 314 | 255 | 132 | ||||||||||||
Customer trust accounts and other |
1,491 | 2,557 | 24 | 88 | ||||||||||||
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|
|
|||||||||
$ | 5,529 | $ | 5,102 | $ | 23,163 | $ | 9,981 | |||||||||
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|
|
(1) | Represents amounts advanced, notes receivable and other receivables due from the Companys investment sales and financing professionals. The notes receivable along with interest, are typically collected from future commissions and are generally due in one to five years. As of December 31, 2017 and 2016, the weighted average interest rate for notes receivable due from the Companys investment sales and financing professionals was approximately 3.5% and 3.3%, respectively. Any cash receipts on notes are applied first to unpaid principal balance prior to any income being recognized. |
(2) | Includes allowance for doubtful accounts related to current receivables of $494 and $313 as of December 31, 2017 and 2016, respectively. The Company recorded a provision for bad debt expense of $219, $47 and $281 and wrote off $38, $93 and $115 of these receivables for the years ended December 31, 2017, 2016 and 2015, respectively. |
(3) | See Note 7 Related-Party Transactions for additional information. |
Deferred Compensation and Commissions
Deferred compensation and commissions consisted of the following (in thousands):
Current
December 31, |
Non-Current
December 31, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
SARs liability (1) |
$ | 1,662 | $ | 1,366 | $ | 20,217 | $ | 20,949 | ||||||||
Commissions payable to investment sales and financing professionals |
46,257 | 42,781 | 21,924 | 17,101 | ||||||||||||
Deferred compensation liability (1) |
1,261 | 607 | 7,220 | 6,405 | ||||||||||||
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|||||||||
$ | 49,180 | $ | 44,754 | $ | 49,361 | $ | 44,455 | |||||||||
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|
(1) | The SARs and deferred compensation liability become subject to payout as a result of a participant no longer being considered as an employee or service provider. As a result of the retirement of certain participants, estimated amounts to be paid to the participants within the next twelve months has been classified as current. |
SARs Liability
Prior to the IPO, certain employees of the Company were granted SARs under a stock-based compensation program assumed by MMC. In connection with the IPO, the SARs agreements were revised, the MMC liability of $20.0 million for the SARs was frozen as of March 31, 2013, and was transferred to MMI through a capital distribution. The SARs liability will be settled with each participant in ten annual installments in January of each
F-17
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
year upon retirement or termination from service. Under the revised agreements, MMI is required to accrue interest on the outstanding balance beginning on January 1, 2014 at a rate based on the 10-year treasury note plus 2%. The rate resets annually. The rates at January 1, 2017, 2016 and 2015 were 4.446%, 4.273% and 4.173%, respectively. MMI recorded interest expense related to this liability of $931,000, $914,000 and $857,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During the twelve months ended December 31, 2017, the Company made total payments (consisting of accumulated interest) of $1.4 million classified as an operating cash flow in the deferred compensation and commissions caption in the accompanying consolidated statements of cash flows.
Commissions Payable
Certain investment sales professionals have the ability to earn additional commissions after meeting certain annual revenue thresholds. These commissions are recognized as cost of services in the period in which they are earned as they relate to specific transactions closed. The Company has the ability to defer payment of certain commissions, at its election, for up to three years. Commissions payable that are not expected to be paid within twelve months are classified as long-term.
Deferred Compensation Liability
A select group of management is eligible to participate in a Deferred Compensation Plan. The plan is a 409A plan and permits the participant to defer compensation up to limits as determined by the plan. Amounts are paid out generally when the participant is no longer a service provider; however, an in-service payout election is available to participants. Participants may elect to receive payouts as a lump sum or quarterly over a two to fifteen-year period. The Company elected to fund the Deferred Compensation Plan through company owned variable life insurance policies. The Deferred Compensation Plan is managed by a third-party institutional fund manager, and the deferred compensation and investment earnings are held as a Company asset in a rabbi trust, which is recorded in assets held in rabbi trust in the accompanying consolidated balance sheets. The assets in the trust are restricted unless the Company becomes insolvent, as defined in the Deferred Compensation Plan, in which case the trust assets are subject to the claims of MMIs creditors. The Company may also, in its sole and absolute discretion, elect to withdraw at any time a portion of the trust assets by an amount by which the fair market value of the trust assets exceeds 110% of the aggregate deferred compensation liability represented by the participants accounts. Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During the year ended December 31, 2017, the Company made total payments to participants of $607,000.
The net change in the carrying value of the assets held in the rabbi trust and the net change in the carrying value of the deferred compensation liability, each exclusive of additional contributions, distributions and trust expenses consisted of the following (in thousands):
December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Increase (decrease) in the carrying value of the assets held in the rabbi trust (1) |
$ | 849 | $ | 470 | $ | (57 | ) | |||||
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Increase (decrease) in the carrying value of the deferred compensation obligation (2) |
$ | 904 | $ | 452 | $ | (67 | ) | |||||
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(1) | Recorded in other income (expense), net in the consolidated statements of net and comprehensive income. |
(2) | Recorded in selling, general and administrative expense in the consolidated statements of net and comprehensive income. |
F-18
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
5. | Investments in Marketable Securities |
Amortized cost and fair value of marketable securities, available-for-sale, by type of security consisted of the following (in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
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Short-term investments: |
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U.S. treasuries |
$ | 57,712 | $ | | $ | (88 | ) | $ | 57,624 | $ | 24,987 | $ | | $ | (30 | ) | $ | 24,957 | ||||||||||||||
U.S. government sponsored entities |
7,016 | | (8 | ) | 7,008 | 2,497 | | | 2,497 | |||||||||||||||||||||||
Corporate debt securities |
8,931 | | (3 | ) | 8,928 | | | | | |||||||||||||||||||||||
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|
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$ | 73,659 | $ | | $ | (99 | ) | $ | 73,560 | $ | 27,484 | $ | | $ | (30 | ) | $ | 27,454 | |||||||||||||||
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Long-term investments: |
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U.S. treasuries |
$ | 18,111 | $ | 7 | $ | (164 | ) | $ | 17,954 | $ | 40,865 | $ | | $ | (229 | ) | $ | 40,636 | ||||||||||||||
U.S. government sponsored entities |
5,306 | | (62 | ) | 5,244 | 12,618 | | (58 | ) | 12,560 | ||||||||||||||||||||||
Corporate debt securities |
22,505 | 268 | (54 | ) | 22,719 | 17,841 | 74 | (165 | ) | 17,750 | ||||||||||||||||||||||
Asset-backed securities and other |
6,180 | 17 | (15 | ) | 6,182 | 6,557 | 18 | (46 | ) | 6,529 | ||||||||||||||||||||||
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$ | 52,102 | $ | 292 | $ | (295 | ) | $ | 52,099 | $ | 77,881 | $ | 92 | $ | (498 | ) | $ | 77,475 | |||||||||||||||
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The amortized cost and fair value of the Companys investments in available-for-sale securities that have been in a continuous unrealized loss position consisted of the following (in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||
Unrealized
Loss |
Fair
Value |
Unrealized
Loss |
Fair
Value |
|||||||||||||
Less than 12 months |
$ | (158 | ) | $ | 63,229 | $ | (491 | ) | $ | 86,105 | ||||||
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12 months or longer |
$ | (236 | ) | $ | 44,961 | $ | (37 | ) | $ | 721 | ||||||
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Gross realized gains and gross realized losses from the sales of the Companys available-for-sale securities consisted of the following (in thousands):
December 31, | ||||||||
2017 | 2016 | |||||||
Gross realized gains (1) |
$ | 2 | $ | 43 | ||||
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|||||
Gross realized losses (1) |
$ | | $ | (166 | ) | |||
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(1) | Recorded in other income (expense), net in the consolidated statements of net and comprehensive income. The cost basis of securities sold were determined on the specific identification method. |
F-19
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
The Company may sell certain of its marketable securities, available-for-sale prior to their stated maturities for strategic reasons including, but not limited to, anticipated liquidity and capital requirements, anticipated credit deterioration, duration management or when a security no longer meets the criteria of the Companys investment policy. During 2016, the Company sold one security, which no longer met the requirements of its investment policy for a loss of $152,000.
As of December 31, 2017, the Company considers the declines in market value of its marketable securities, available-for-sale to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Companys intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investments cost basis. The Company has no current intent to sell and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Company may sell certain of its marketable securities, available-for-sale prior to their stated maturities for strategic reasons including, but not limited to, anticipated liquidity and capital requirements, anticipated credit deterioration, duration management or when a security no longer meets the criteria of the Companys investment policy.
Amortized cost and fair value of marketable securities, available-for-sale, by contractual maturity consisted of the following (in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||||||
Due in one year or less |
$ | 73,659 | $ | 73,560 | $ | 27,484 | $ | 27,454 | ||||||||
Due after one year through five years |
30,644 | 30,517 | 57,309 | 57,144 | ||||||||||||
Due after five years through ten years |
15,090 | 15,200 | 14,992 | 14,841 | ||||||||||||
Due after ten years |
6,368 | 6,382 | 5,580 | 5,490 | ||||||||||||
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$ | 125,761 | $ | 125,659 | $ | 105,365 | $ | 104,929 | |||||||||
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Weighted average maturity |
2.6 years | 3.5 years |
Actual maturities may differ from contractual maturities because certain borrowers are required to make principal payments or have the right to prepay certain obligations with or without prepayment penalties.
6. | Notes Payable to Former Stockholders |
In conjunction with the Spin-Off and IPO, notes payable to certain former stockholders of MMREIS were issued in settlement of restricted stock and SARs awards that were redeemed by MMREIS upon the termination of employment by these former stockholders (the Notes). The Notes had been previously assumed by MMC, and were transferred to the Company. The Notes are unsecured and bear interest at 5% with annual principal and interest installments and a final principal payment due during the second quarter of 2020. During each of the years ended December 31, 2017 and 2016, the Company made total payments on the Notes, including interest, of $1.5 million.
F-20
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
Accrued interest included in accounts payable and accrued expenses in the accompanying consolidated balance sheets pertaining to the Notes consisted of the following (in thousands):
December 31, | ||||||||
2017 | 2016 | |||||||
Accrued interest |
$ | 305 | $ | 337 | ||||
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|
|
Interest expense pertaining to the Notes consisted of the following (in thousands):
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Interest expense |
$ | 454 | $ | 502 | $ | 548 | ||||||
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Future minimum principal payments on the Notes consisted of the following (in thousands):
December 31, 2017 | ||||
2018 |
$ | 1,035 | ||
2019 |
1,087 | |||
2020 |
6,564 | |||
2021 |
| |||
2022 |
| |||
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$ | 8,686 | |||
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|
7. | Related-Party Transactions |
Shared and Transition Services
Prior to October 2013, the Company operated under a shared services arrangement with MMC whereby the Company was charged for actual costs specifically incurred on behalf of the Company or allocated to the Company on a pro rata basis. Beginning in October 2013, certain services are provided to the Company under a Transition Services Agreement (TSA) between MMC and the Company, which replaced the pre-IPO shared services arrangement. The TSA is intended to provide certain services until the Company acquires the services separately. During the years ended December 31, 2017, 2016 and 2015, the Company incurred net costs of $210,000, $227,000 and $257,000 under the TSA, respectively. These amounts are included in selling, general and administrative expense in the accompanying consolidated statements of net and comprehensive income.
Brokerage and Financing Services with the Subsidiaries of MMC
MMC has wholly or majority owned subsidiaries that buy and sell commercial real estate properties. The Company performs certain brokerage and financing services related to transactions of the subsidiaries of MMC. For the years ended December 31, 2017, 2016 and 2015, the Company generated real estate brokerage commissions and financing fees of $2.1 million, $5.1 million and $2.7 million, respectively, from subsidiaries of MMC related to these services. The Company incurred cost of services of $1.2 million, $3.0 million and $1.6 million, respectively, related to these revenues.
Operating Lease with MMC
The Company has an operating lease with MMC for a single story office building located in Palo Alto, California, which expires on May 31, 2022. Rent expense for this lease aggregated $1.0 million, $1.0 million and
F-21
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
$693,500 for the years ended December 31, 2017, 2016 and 2015, respectively. Rent expense is included in selling, general and administrative expense in the accompanying consolidated statements of net and comprehensive income.
Accounts Payable and Accrued Expenses with MMC
As of December 31, 2017 and 2016, accounts payable and accrued expenses with MMC totaling $91,000 and $303,000, respectively, remain unpaid and are included in accounts payable and accrued expenses in the accompanying consolidated balance sheets.
Other
The Company makes advances to non-executive employees from time-to-time. At December 31, 2017 and 2016, the aggregate principal amount for employee notes receivable was $621,000 and $446,000, respectively, which is included in other assets, net current and other assets non-current captions in the accompanying consolidated balance sheets. See Note 4 Selected Balance Sheet Data for additional information.
As of December 31, 2017, George M. Marcus, the Companys founder and Co-Chairman, beneficially owned approximately 49% of the Companys issued and outstanding common stock, including shares owned by Phoenix Investments Holdings, LLC and the Marcus Family Foundation II.
8. | Fair Value Measurements |
Recurring Fair Value Measurements
The Company values its investments including assets held in rabbi trust, commercial paper, money market funds and investments in marketable securities, available-for-sale at fair value on a recurring basis. Fair values were determined for each individual security in the investment portfolio.
F-22
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
Assets carried at fair value are categorized into one of the three categories described in Note 2 Accounting Policies and consisted of the following (in thousands):
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
Assets held in rabbi trust |
$ | 8,787 | $ | | $ | 8,787 | $ | | $ | 7,337 | $ | | $ | 7,337 | $ | | ||||||||||||||||
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Cash and cash equivalents (1) : |
||||||||||||||||||||||||||||||||
Commercial Paper |
$ | 11,441 | $ | | $ | 11,441 | $ | | $ | 9,987 | $ | | $ | 9,987 | $ | | ||||||||||||||||
Money market funds |
157,788 | 157,788 | | | 142,503 | 142,503 | | | ||||||||||||||||||||||||
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$ | 169,229 | $ | 157,788 | $ | 11,441 | $ | | $ | 152,490 | $ | 142,503 | $ | 9,987 | $ | | |||||||||||||||||
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Marketable securities, available-for-sale: |
||||||||||||||||||||||||||||||||
Short-term investments: |
||||||||||||||||||||||||||||||||
U.S. Treasuries |
$ | 57,624 | $ | 57,624 | $ | | $ | | $ | 24,957 | $ | 24,957 | $ | | $ | | ||||||||||||||||
U.S. Government Sponsored Entities |
7,008 | | 7,008 | | 2,497 | | 2,497 | | ||||||||||||||||||||||||
Corporate debt securities |
8,928 | | 8,928 | | | | | | ||||||||||||||||||||||||
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$ | 73,560 | $ | 57,624 | $ | 15,936 | $ | | $ | 27,454 | $ | 24,957 | $ | 2,497 | $ | | |||||||||||||||||
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Long-term investments: |
||||||||||||||||||||||||||||||||
U.S. Treasuries |
$ | 17,954 | $ | 17,954 | $ | | $ | | $ | 40,636 | $ | 40,636 | $ | | $ | | ||||||||||||||||
U.S. Government Sponsored Entities |
5,244 | | 5,244 | | 12,560 | | 12,560 | | ||||||||||||||||||||||||
Corporate debt securities |
22,719 | | 22,719 | | 17,750 | | 17,750 | | ||||||||||||||||||||||||
Asset-backed securities and other |
6,182 | | 6,182 | | 6,529 | | 6,529 | | ||||||||||||||||||||||||
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$ | 52,099 | $ | 17,954 | $ | 34,145 | $ | | $ | 77,475 | $ | 40,636 | $ | 36,839 | $ | | |||||||||||||||||
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(1) | Included in cash and cash equivalents. |
See Note 2 Accounting Policies for information on fair value of the Companys other financial instruments.
There were no transfers in or out of Level 1 and Level 2 during the year ended December 31, 2017.
9. | Stockholders Equity |
Common Stock
As of December 31, 2017 and 2016, there were 38,374,011 and 37,882,266 shares of common stock, $0.0001 par value, issued and outstanding, respectively. Such amounts include unvested restricted stock awards issued to non-employee directors. See Note 13 Earnings Per Share for additional information.
F-23
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
Preferred Stock
The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At December 31, 2017 and 2016, there were no preferred shares issued or outstanding.
Accumulated Other Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income as of December 31, 2017, by component, net of income taxes consisted of the following (in thousands):
Unrealized
gains and (losses) of available- for-sale securities |
Foreign
currency translation (2) |
Total | ||||||||||
Beginning balance, December 31, 2016 |
$ | (255 | ) | $ | 1,065 | $ | 810 | |||||
Other comprehensive income (loss) before reclassifications |
193 | (63 | ) | 130 | ||||||||
Amounts reclassified from accumulated other comprehensive (loss) income (1) |
| | | |||||||||
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|||||||
Net current-period other comprehensive income (loss) |
193 | (63 | ) | 130 | ||||||||
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|||||||
Ending balance, December 31, 2017 |
$ | (62 | ) | $ | 1,002 | $ | 940 | |||||
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|
(1) | Included as a component of other income (expense), net in the consolidated statements of net and comprehensive income. Reclassifications are determined on a specific identification basis. |
(2) | The Company has not provided for U.S. taxes on unremitted earnings of its foreign subsidiary as it is operating at a loss and has no earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative foreign currency translation adjustments. See Note 11 Income Taxes for additional information. |
10. | Stock-Based Compensation Plans |
2013 Omnibus Equity Incentive Plan
The board of directors adopted the 2013 Omnibus Equity Incentive Plan (2013 Plan), which became effective upon the Companys IPO. In February 2017, the board of directors approved an amendment to the 2013 Plan, which was approved by the shareholders in May 2017. Grants are made from time to time by the Companys board of directors at its discretion subject to certain restrictions as to the number and value of shares that may be granted to any individual. Upon adoption of the 2013 Plan, 5,500,000 shares of common stock were initially reserved for the issuance of awards. Pursuant to the automatic increases previously provided for in the 2013 Plan, the board of directors approved share reserve increases aggregating 3,300,000. Pursuant to the amendment to the 2013 Plan referenced above, the automatic share increase provision was removed. At December 31, 2017, there were 5,586,917 shares available for future grants under the Plan.
Awards Granted and Settled
Under the 2013 Plan, the Company has issued restricted stock awards (RSAs) to non-employee directors and restricted stock units (RSUs) to employees and independent contractors. Substantially all RSAs vest in equal annual installments over a three-year period from the date of grant. All RSUs vest in equal annual installments over a five-year period from the date of grant. Any unvested awards are canceled upon termination
F-24
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
of service. Awards accelerate upon death subject to approval by the compensation committee. As of December 31, 2017, there were no issued or outstanding options, SARs, performance units or performance shares awards.
During the year ended December 31, 2017, 279,679 shares of RSUs vested and 284,837 shares of common stock were delivered, including 5,158 shares that vested in 2016 and 55,289 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date. During the year ended December 31, 2017, 351,801 fully vested DSUs settled and 137,351 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date. The shares withheld for taxes were returned to the share reserve and are available for future issuance in accordance with provisions of the 2013 Plan.
During the year ended December 31, 2017, the Company recorded windfall tax benefits, net of $2.9 million as a discrete item in the Companys provision for income taxes when awards were settled as a result of the adoption of ASU 2016-09 during 2017. Prior to January 1, 2017, windfall tax benefits, net were recorded as a component of additional paid-in capital. During the year ended December 31, 2016, the Company recorded windfall tax benefits, net of $2.7 million as a component of additional paid-in capital. See Note 11 Income Taxes for additional information.
Outstanding Awards
Activity under the 2013 Plan consisted of the following (dollars in thousands, except per share data):
RSA Grants to Non-
Employee Directors |
RSU Grants to
Employees |
RSU Grants to
Independent Contractors |
Total |
Weighted-
Average Grant Date Fair Value Per Share |
||||||||||||||||
Nonvested shares at December 31, 2015 (1) |
35,364 | 468,969 | 521,780 | 1,026,113 | $ | 21.17 | ||||||||||||||
Granted |
14,742 | 239,012 | 81,880 | 335,634 | 23.76 | |||||||||||||||
Vested |
(20,994 | ) | (104,820 | ) | (132,309 | ) | (258,123 | ) | 19.88 | |||||||||||
Transferred |
| 2,062 | (2,062 | ) | | 14.54 | ||||||||||||||
Forfeited/canceled |
| (38,743 | ) | (14,451 | ) | (53,194 | ) | 20.07 | ||||||||||||
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Nonvested shares at December 31, 2016 (1) |
29,112 | 566,480 | 454,838 | 1,050,430 | $ | 22.38 | ||||||||||||||
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Granted |
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February 2017 |
| 139,013 | 7,272 | 146,285 | ||||||||||||||||
May 2017 |
13,986 | 8,156 | 11,652 | 33,794 | ||||||||||||||||
August 2017 |
3,552 | 7,889 | 51,308 | 62,749 | ||||||||||||||||
November 2017 |
| 9,528 | 12,194 | 21,722 | ||||||||||||||||
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Total Granted |
17,538 | 164,586 | 82,426 | 264,550 | 26.86 | |||||||||||||||
Vested |
(15,918 | ) | (140,480 | ) | (139,199 | ) | (295,597 | ) | 21.21 | |||||||||||
Transferred |
| (58,503 | ) | 58,503 | | 25.70 | ||||||||||||||
Forfeited/canceled |
| (31,224 | ) | (6,304 | ) | (37,528 | ) | 23.30 | ||||||||||||
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Nonvested shares at December 31, 2017 (1) |
30,732 | 500,859 | 450,264 | 981,855 | $ | 23.90 | ||||||||||||||
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Unrecognized stock-based compensation expense as of December 31, 2017 (2) |
$ | 534 | $ | 9,753 | $ | 10,030 | $ | 20,317 | ||||||||||||
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Weighted average remaining vesting period (years) as of December 31, 2017 |
1.71 | 3.13 | 2.65 | 2.86 | ||||||||||||||||
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(1) | Nonvested RSUs will be settled through the issuance of new shares of common stock. |
(2) | The total unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 2.86 years. |
F-25
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
For the years ended December 31, 2017, 2016 and 2015, the aggregate fair value of vested RSUs and RSAs were $7.8 million, $7.0 million and $7.5 million, respectively.
As of December 31, 2017 and 2016, remaining outstanding fully vested DSUs were 578,618 and 930,419, respectively. For the years ended December 31, 2017, 2016 and 2015, the fair value of fully vested DSUs was $10.2 million, $10.4 million and $18.6 million, respectively. See Amendments to Restricted Stock and SARs section below and Note 13 Earnings Per Share for additional information. Future share settlements of DSUs by year consisted of the following:
December 31, 2017 | ||||
2018 | 237,052 | |||
2021 |
60,373 | |||
2022 |
281,193 | |||
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578,618 | ||||
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Employee Stock Purchase Plan
In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (2013 ESPP Plan). The 2013 ESPP Plan qualifies under Section 423 of the IRS Code and provides for consecutive, non-overlapping 6-month offering periods. The offering periods generally start on the first trading day on or after May 15 and November 15 of each year. Qualifying employees may purchase shares of the Company stock at a 10% discount based on the lower of the market price at the beginning or end of the offering period, subject to IRS limitations. The Company determined that the 2013 ESPP Plan was a compensatory plan and is required to expense the fair value of the awards over each 6-month offering period.
The 2013 ESPP Plan initially had 366,667 shares of common stock reserved and 246,895 and 277,104 shares of common stock remain available for issuance at December 31, 2017 and 2016, respectively. The 2013 ESPP Plan provides for annual increases in the number of shares available for issuance under the ESPP, equal to the least of (i) 366,667 shares, (ii) 1% of the outstanding shares on such date, or (iii) an amount determined by the board. Pursuant to the provisions of the 2013 ESPP Plan, the board of directors determined share reserve increases have not been required. At December 31, 2017, total unrecognized compensation cost related to the 2013 ESPP Plan was $58,000 and is expected to be recognized over a weighted average period of 0.37 years.
Amendments to Restricted Stock and SARs
Restricted Stock
In connection with the IPO, the formula settlement value of all outstanding shares of stock held by the plan participants was removed, and all such shares of stock are subject to sales restrictions that lapse at a rate of 20% per year for five years if the participant remains employed by the Company. In the event of death or termination of employment after reaching the age of 67, 100% of the shares of stock will be released from the resale restriction. Further, 100% of the shares of stock will be released from the resale restriction upon the consummation of a change of control of the Company. Of the original 3,689,326 shares subject to resale restriction, 732,020 shares remain subject to sales restriction for the year ended December 31, 2017.
F-26
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
SARs and DSUs
Prior to the IPO, certain employees were granted SARs. As of March 31, 2013, the outstanding SARs were frozen at the liability amount, and will be paid out to each participant in installments upon retirement or termination as employee or service provider under the terms of the revised SARs agreements. To replace beneficial ownership in the SARs, the difference between the book value liability and the fair value of the awards was granted to plan participants in the form of DSUs, which were fully vested upon receipt and will be settled in actual stock at a rate of 20% per year if the participant remains a service provider to the Company during that period (otherwise all unsettled shares of stock upon termination from service will be settled five years from the termination date, unless otherwise agreed to by the Company). In the event of death or termination of service after reaching the age of 67, 100% of the DSUs will be settled.
Summary of Stock-Based Compensation
The Company adopted ASU 2016-09 on January 1, 2017 and changed its accounting for forfeitures on a prospective basis from estimating awards that are not expected to vest to recording forfeitures when they actually occur. As a result of the change in the accounting for forfeitures, the Company recorded a cumulative effect adjustment to retained earnings of approximately $52,000 (net of tax) as of January 1, 2017. Components of stock-based compensation are included in selling, general and administrative expense in the consolidated statements of net and comprehensive income consisted of the following (in thousands, except common stock price):
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Employee stock purchase plan |
$ | 128 | $ | 169 | $ | 285 | ||||||
RSAs non-employee directors |
397 | 422 | 319 | |||||||||
RSUs employees |
3,750 | 3,130 | 2,351 | |||||||||
RSUs independent contractors (1) |
4,870 | 3,314 | 4,159 | |||||||||
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$ | 9,145 | $ | 7,035 | $ | 7,114 | |||||||
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Common stock price at beginning of period |
$ | 26.72 | $ | 29.14 | $ | 33.25 | ||||||
Common stock price at end of period |
$ | 32.61 | $ | 26.72 | $ | 29.14 | ||||||
Increase (decrease) in stock price |
$ | 5.89 | $ | (2.42 | ) | $ | (4.11 | ) |
(1) | The Company grants RSUs to independent contractors (i.e. investment sales and financing professionals), who are considered non-employees under the accounting standards. Accordingly, such awards are required to be measured at fair value at the end of each reporting period until settlement. Stock-based compensation expense is therefore impacted by the changes in the Companys common stock price during each reporting period. |
F-27
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
11. | Income Taxes |
The provision (benefit) for income taxes consisted of the following (in thousands):
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Income (loss) before provision for income taxes: |
||||||||||||
United States |
$ | 100,031 | $ | 108,797 | $ | 116,448 | ||||||
Foreign |
(805 | ) | (1,695 | ) | (3,080 | ) | ||||||
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$ | 99,226 | $ | 107,102 | $ | 113,368 | |||||||
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The provision (benefit) for income taxes consisted of the following: |
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Federal: |
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Current |
$ | 28,993 | $ | 36,228 | $ | 39,895 | ||||||
Deferred |
13,249 | (337 | ) | (1,853 | ) | |||||||
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$ | 42,242 | $ | 35,891 | $ | 38,042 | |||||||
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State: |
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Current |
$ | 5,883 | $ | 6,700 | $ | 7,058 | ||||||
Deferred |
(423 | ) | (146 | ) | 1,918 | |||||||
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$ | 5,460 | $ | 6,554 | $ | 8,976 | |||||||
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$ | 47,702 | $ | 42,445 | $ | 47,018 | |||||||
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On December 22, 2017, the Tax Cuts and Job Act (the Act) legislation was enacted, which significantly changed the U.S. corporate income tax laws by, among other items, reducing the U.S. corporate income tax rate to 21% from 35% starting in 2018, further limiting 162(m) deductions and creating a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a result of the Act, the Company revalued its deferred taxes, net due to the changes in the U.S. corporate statutory federal income tax rate and recorded a net charge of $11.6 million in the provision for income taxes during the fourth quarter of 2017. Although the Companys accounting for certain income tax effects of the Act is incomplete, it was determined that the $11.6 million charge is a reasonable estimate of those effects. When the IRS issues additional guidance and regulations enabling the Company to finalize certain tax positions, the Company will be able to conclude whether any further adjustments are required to be made to its deferred tax asset, net balance as of December 31, 2017. Any adjustments to this provisional amount will be reported no later than the fourth quarter of 2018, as a component of the provision for income taxes in the reporting period in which any such adjustments are determined.
F-28
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
Significant components of the Companys deferred tax assets, net consisted of the following (in thousands):
December 31, | ||||||||
2017 | 2016 | |||||||
Deferred Tax Assets: |
||||||||
Accrued expenses and bonuses |
$ | 1,307 | $ | 1,455 | ||||
Bad debt and other reserves |
1,416 | 2,191 | ||||||
Deferred compensation |
12,693 | 19,511 | ||||||
Stock-based compensation |
9,144 | 14,978 | ||||||
Deferred rent |
1,283 | 1,731 | ||||||
Net operating and capital loss carryforwards |
1,809 | 1,637 | ||||||
Other comprehensive income |
6 | 173 | ||||||
State taxes |
622 | 497 | ||||||
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Deferred tax assets before valuation allowance |
28,280 | 42,173 | ||||||
Valuation allowance |
(1,893 | ) | (1,723 | ) | ||||
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Deferred Tax Assets |
$ | 26,387 | $ | 40,450 | ||||
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Deferred Tax Liabilities: |
||||||||
Fixed assets |
$ | (2,861 | ) | $ | (3,850 | ) | ||
Prepaid expenses |
(886 | ) | (1,029 | ) | ||||
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Deferred Tax Liabilities |
(3,747 | ) | (4,879 | ) | ||||
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Deferred Tax Assets, Net |
$ | 22,640 | $ | 35,571 | ||||
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As of December 31, 2017, and 2016, the Company had state and Canadian net operating and capital losses (NOLs) of approximately $7.8 million and $6.4 million, respectively, which will begin to expire in 2019. Certain limitations may be placed on NOLs as a result of changes in control as defined in Section 382 of the Internal Revenue Code. In the event a change in control occurs, it will have the effect of limiting the annual usage of the carryforwards in future years. Additional changes in control in future periods could result in further limitations of the Companys ability to offset taxable income. In addition, the utilization of these NOLs may be subject to certain limitations under state and foreign laws.
A valuation allowance is required when it is more-likely-than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax asset is dependent upon taxable income in prior carryback years, estimates of future taxable income, tax planning strategies and reversals of existing taxable temporary differences. Management determined that as of December 31, 2017 and 2016, $1.9 million and $1.7 million, respectively, of the deferred tax assets related to state and Canadian losses do not satisfy the recognition criteria and therefore have recorded a valuation allowance for this amount. The valuation allowance for deferred tax assets was increased by $170,000, $412,000 and $583,000 during 2017, 2016 and 2015, respectively. The increases are primarily related to the Companys Canadian operations.
F-29
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
The provision for income taxes differs from the amount computed by applying the statutory federal corporate income tax rate of 35% to income before provision for income taxes and consisted of the following (in thousands):
Years Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||
Income tax expense at the federal statutory rate of 35% |
$ | 34,729 | 35.0 | % | $ | 37,485 | 35.0 | % | $ | 39,679 | 35.0 | % | ||||||||||||
State income tax expense, net of federal benefit |
3,577 | 3.6 | % | 4,346 | 4.1 | % | 4,569 | 4.0 | % | |||||||||||||||
Effect of state rate change on deferred taxes |
(30 | ) | | (79 | ) | (0.1 | )% | 1,273 | 1.1 | % | ||||||||||||||
Windfall tax benefits, net of shortfalls related to stock-based compensation |
(2,568 | ) | (2.6 | )% | | | | | ||||||||||||||||
Permanent differences related to compensation charges, net of federal benefit |
30 | | 39 | | 81 | 0.1 | % | |||||||||||||||||
Change in valuation allowance |
170 | 0.2 | % | 412 | 0.4 | % | 583 | 0.5 | % | |||||||||||||||
Effect of rate and other changes on federal deferred taxes, net due to enactment of Tax Cuts and Jobs Act |
11,644 | 11.7 | % | | | | | |||||||||||||||||
Other |
150 | 0.2 | % | 242 | 0.2 | % | 833 | 0.8 | % | |||||||||||||||
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$ | 47,702 | 48.1 | % | $ | 42,445 | 39.6 | % | $ | 47,018 | 41.5 | % | |||||||||||||
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During the year ended December 31, 2016, the Company recorded $2.7 million as a credit to additional paid-in capital in the accompanying consolidated balance sheets, in connection with windfall tax benefits, net associated with the settlement of DSUs/RSUs/RSAs. Effective January 1, 2017, as a result of the adoption of ASU 2016-09, any windfall tax benefits, net are recorded in the Companys provision for income taxes in the consolidated statements of net and comprehensive income.
As of December 31, 2017 and 2016, the Company has no liabilities for unrecognized tax benefits or any related interest or penalties.
The Company is subject to tax in various jurisdictions and, as a matter or ordinary course, the Company is subject to income tax examinations by the federal, state and foreign taxing authorities for the tax years 2013 to 2017. The Company is not currently under income tax examination by any taxing authorities.
The Company has not provided for U.S. taxes on unremitted earnings of its foreign subsidiary as it is operating at a loss and has no earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative translation adjustments.
12. | Retirement Plans |
Effective January 2014, the Company has its own defined contribution plan (the Contribution Plan) under Section 401(k) of the Internal Revenue Code for all eligible employees who have completed one month of service. The Contribution Plan is subject to the provisions of the Employee Retirement Income Security Act of
F-30
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
1974, as amended. Participants may contribute up to 100% of their annual eligible compensation, subject to IRS limitation and ERISA. The Company makes matching contributions of 50% on the first 8% of employee contributions per pay period up to a maximum of the employees compensation, up to a maximum of $4,000 per eligible employee per year. Company matching contributions aggregated $733,000, $628,000 and $570,000 for the years ended December 31, 2017, 2016 and 2015, respectively, which is included in selling, general and administrative expense in the consolidated statements of net and comprehensive income.
13. | Earnings per Share |
Basic and diluted earnings per share for the years ended December 31, 2017, 2016 and 2015 consisted of the following (in thousands, except per share data):
Years Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Numerator (Basic and Diluted): |
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Net income |
$ | 51,524 | $ | 64,657 | $ | 66,350 | ||||||
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Denominator: |
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Basic |
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Weighted Average Common Shares Issued and Outstanding |
38,142 | 37,637 | 37,141 | |||||||||
Deduct: Unvested RSAs (1) |
(29 | ) | (36 | ) | (43 | ) | ||||||
Add: Fully vested DSUs (2) |
875 | 1,298 | 1,750 | |||||||||
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Weighted Average Common Shares Outstanding |
38,988 | 38,899 | 38,848 | |||||||||
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Basic earnings per common share |
$ | 1.32 | $ | 1.66 | $ | 1.71 | ||||||
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Diluted |
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Weighted Average Common Shares Outstanding from above |
38,988 | 38,899 | 38,848 | |||||||||
Add: Dilutive effect of RSUs, RSAs & ESPP |
112 | 136 | 314 | |||||||||
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Weighted Average Common Shares Outstanding |
39,100 | 39,035 | 39,162 | |||||||||
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Diluted earnings per common share |
$ | 1.32 | $ | 1.66 | $ | 1.69 | ||||||
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Antidilutive shares excluded from diluted earnings per common share (3) |
512 | 516 | 79 | |||||||||
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(1) | RSAs were issued and outstanding to the non-employee directors and generally have a three-year vesting term subject to service requirements. See Note 10 Stock-Based Compensation Plans for additional information. |
(2) | Shares are included in weighted average common shares outstanding as the shares are fully vested but have not yet been delivered. See Note 9 Stockholders Equity for additional information. |
(3) | Primarily pertaining to RSU grants to the Companys employees and independent contractors. |
F-31
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
14. | Commitments and Contingencies |
Operating Leases
Future minimum lease payments under non-cancelable operating leases for office facilities and automobiles with terms in excess of one year consisted of the following (in thousands):
December 31, 2017 | ||||
2018 |
$ | 18,650 | ||
2019 |
16,468 | |||
2020 |
15,423 | |||
2021 |
12,997 | |||
2022 |
9,364 | |||
Thereafter |
13,995 | |||
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$ | 86,897 | |||
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Deferred rent totaled $4.8 million and $4.3 million as of December 31, 2017 and 2016, respectively. The noncurrent portion is included in defered rent and other liabilities and the current portion is included in accounts payable and accrued expenses in the accompanying consolidated balance sheets. Rental expense was $25.6 million, $23.4 million and $17.8 million for the years ended December 31, 2017, 2016 and 2015, respectively and is included in selling, general, and administrative expense in the accompanying consolidated statements of net and comprehensive income.
Certain facility leases provide for rental escalations related to increases in the lessors direct operating expenses.
The Company subleases certain office space to subtenants. The rental income received from these subleases is included as a reduction of rental expense and was not material for the years ended December 31, 2017, 2016 and 2015, respectively.
Credit Agreement
On June 18, 2014, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (Bank), dated as of June 1, 2014 (the Credit Agreement). The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of the Companys domestic subsidiaries (the Credit Facility), which, as amended, matures on June 1, 2020. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full.
Borrowings under the Credit Agreement are available for general corporate purposes and working capital. The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit of which $533,000 was utilized at December 31, 2017. Borrowings under the Credit Facility will bear interest, at the Companys option, at either the (i) Base Rate (defined as the highest of (a) the Banks prime rate, (b) the Federal Funds Rate plus 1.5% and (c) one-month LIBOR plus 1.5%), or (ii) at a variable rate between 0.875% and 1.125% above LIBOR, based upon the total funded debt to EBITDA ratio. In connection with executing the Credit Agreement, as amended, the Company paid bank fees and other expenses, which are being amortized over the remaining term of the Credit Agreement. The Company pays a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility. The amortization
F-32
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
and commitment fee is included in interest expense in the accompanying consolidated statements of net and comprehensive income and was $110,000, $116,000 and $130,000 during the years ended December 31, 2017, 2016 and 2015, respectively. As of December 31, 2017, there were no amounts outstanding under the Credit Agreement.
The Credit Facility contains customary covenants, including financial and other covenant reporting requirements and events of default. Financial covenants require the Company, on a combined basis with its guarantors, to maintain (i) an EBITDAR Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25:1.0 as of each quarter end and (ii) total funded debt to EBITDA not greater than 2.0:1.0 as of each quarter end both on a rolling 4-quarter basis. The Credit Facility is secured by substantially all assets of the Company, including pledges of 100% of the stock or other equity interest of each subsidiary except for the capital stock of a controlled foreign corporation (as defined in the Internal Revenue Code). As of December 31, 2017, the Company was in compliance with all financial and non-financial covenants.
Litigation
The Company is subject to various legal proceedings and claims that arise in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by insurance, which contain deductibles, exclusions, claim limits and aggregate policy limits. While the ultimate liability for these legal proceeding cannot be determined, the Company reviews the need for its accrual for loss contingencies quarterly and records an accrual for litigation related losses where the likelihood of loss is both probable and estimable. The Company believes that the ultimate resolution of the legal proceedings will not have a material adverse effect on its financial condition or results of operations. The Company accrues legal fees for litigation as the legal services are provided.
Other
In connection with certain agreements with investment sales and financing professionals, the Company may agree to advance amounts to its investment sales and financing professionals upon reaching certain performance goals. Such commitments as of December 31, 2017 aggregated $2.9 million.
15. | Selected Quarterly Financial Data (Unaudited) |
The Companys real estate brokerage commissions and financing fees are seasonal, which can affect an investors ability to compare the Companys financial condition and results of operation on a quarter-by-quarter basis. Historically, this seasonality has caused the Companys revenue, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year, particularly in the fourth quarter. These concentrations are due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. In addition, the Companys gross margins are typically lower during the second half of each year due to its commission structure for some of its senior investment sales and financing professionals. These senior investment sales and financing professionals are on a graduated commission schedule whose commission rates generally increase as they meet certain production thresholds.
F-33
Marcus & Millichap, Inc.
Notes to Consolidated Financial Statements
Three Months Ended | ||||||||||||||||||||||||||||||||
Dec. 31
2017 |
Sep. 30
2017 |
Jun. 30
2017 |
Mar. 31
2017 |
Dec. 31
2016 |
Sep. 30
2016 |
Jun. 30
2016 |
Mar. 31
2016 |
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(in thousands, except per share data) | ||||||||||||||||||||||||||||||||
Consolidated Financial Statement Data: |
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Total revenues |
$ | 202,776 | $ | 183,341 | $ | 180,371 | $ | 153,212 | $ | 189,157 | $ | 180,634 | $ | 183,387 | $ | 164,272 | ||||||||||||||||
Cost of services |
131,730 | 114,803 | 110,377 | 89,647 | 121,637 | 113,852 | 113,126 | 96,153 | ||||||||||||||||||||||||
Operating income |
27,403 | 24,683 | 24,998 | 19,048 | 27,906 | 24,905 | 28,832 | 24,858 | ||||||||||||||||||||||||
Net income |
8,480 | 15,475 | 15,569 | 12,000 | 17,174 | 15,144 | 17,524 | 14,815 | ||||||||||||||||||||||||
Earnings per share: |
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Basic |
$ | 0.22 | $ | 0.40 | $ | 0.40 | $ | 0.31 | $ | 0.44 | $ | 0.39 | $ | 0.45 | $ | 0.38 | ||||||||||||||||
Diluted |
$ | 0.22 | $ | 0.39 | $ | 0.40 | $ | 0.31 | $ | 0.44 | $ | 0.39 | $ | 0.45 | $ | 0.38 |
F-34
Exhibit 10.6
MARCUS AND MILLICHAP, INC.
AMENDED AND RESTATED 2013 OMNIBUS EQUITY INCENTIVE PLAN
(Approved by the Compensation Committee effective February 16, 2017)
(Recommended by the Board of Directors for stockholder approval effective February 16, 2017)
(Approved by the Companys stockholders effective May 4, 2017)
1. Purposes of the Plan . The purposes of this Plan are (a) to attract and retain the best available personnel to ensure the Companys success and accomplish the Companys goals; (b) to incentivize Employees, Directors and Independent Contractors with long-term equity-based compensation to align their interests with the Companys stockholders; and (c) to promote the success of the Companys business.
The Plan permits the grant of Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Restricted Stock Units, Stock Appreciation Rights, Performance Units and Performance Shares.
2. Definitions . As used herein, the following definitions will apply:
(a) Administrator means the Board or any of its Committees as will be administering the Plan, in accordance with Section 4 of the Plan.
(b) Applicable Laws means the requirements relating to the administration of equity-based awards under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Awards are, or will be, granted under the Plan.
(c) Award means, individually or collectively, a grant under the Plan of Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares.
(d) Award Agreement means the written or electronic agreement setting forth the terms and provisions applicable to each Award granted under the Plan. The Award Agreement is subject to the terms and conditions of the Plan.
(e) Board means the Board of Directors of the Company.
(f) Change in Control except as may otherwise be provided in a Stock Option Agreement, Restricted Stock Agreement or other applicable agreement, means the occurrence of any of the following:
(i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if the Companys shareholders immediately prior to such merger, consolidation or reorganization cease to directly or indirectly own immediately after such merger, consolidation or reorganization at least a majority of the combined voting power of the continuing or surviving entitys securities outstanding immediately after such merger, consolidation or other reorganization;
(ii) The consummation of the sale, transfer or other disposition of all or substantially all of the Companys assets (other than (x) to a corporation or other entity of which at least a majority of its combined voting power is owned directly or indirectly by the Company, (y) to a corporation or other entity owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the common stock of the Company or (z) to a continuing or surviving entity described in Section 2(f)(i) in connection with a merger, consolidation or corporate reorganization which does not result in a Change in Control under Section 2(f)(i));
(iii) A change in the effective control of the Company which occurs on the date that a majority of members of the Board is replaced during any twelve (12) month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election. For purposes of this clause, if any Person (as defined below in Section 2(f)(iv)) is considered to be in effective control of the Company, the acquisition of additional control of the Company by the same Person will not be considered a Change in Control;
(iv) The consummation of any transaction as a result of which any Person becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing at least fifty percent (50%) of the total voting power represented by the Companys then outstanding voting securities. For purposes of this Paragraph (iv), the term person shall have the same meaning as when used in sections 13(d) and 14(d) of the Exchange Act but shall exclude:
(1) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or an affiliate of the Company;
(2) a corporation or other entity owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of the common stock of the Company;
(3) the Company; and
(4) a corporation or other entity of which at least a majority of its combined voting power is owned directly or indirectly by the Company; or
(v) A complete winding up, liquidation or dissolution of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Companys incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Companys securities immediately before such transactions.
- 2 -
(g) Code means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.
(h) Committee means a committee of Directors or of other individuals satisfying Applicable Laws appointed by the Board in accordance with Section 4 hereof
(i) Common Stock means the common stock of the Company.
(j) Company means Marcus and Millichap, Inc., a Delaware corporation, or any successor thereto.
(k) Director means a member of the Board.
(l) Disability means total and permanent disability as defined in Section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the Administrator in its discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Administrator from time to time.
(m) Employee means any person, including Officers and Directors, employed by the Company or any Parent or Subsidiary of the Company. Neither service as a Director nor payment of a directors fee by the Company will be sufficient to constitute employment by the Company.
(n) Exchange Act means the Securities Exchange Act of 1934, as amended.
(o) Exchange Program means a program established by the Committee under which outstanding Awards are amended to provide for a lower Exercise Price or surrendered or cancelled in exchange for (i) Awards with a lower exercise price, (ii) a different type of Award or awards under a different equity incentive plan, (iii) cash, or (iv) a combination of (i), (ii) and/or (iii). Notwithstanding the preceding, the term Exchange Program does not include any (i) action described in Section 13 or any action taken in connection with a change in control transaction nor (ii) transfer or other disposition permitted under Section 12. For the purpose of clarity, each of the actions described in the prior sentence, none of which constitute an Exchange Program, may be undertaken (or authorized) by the Committee in its sole discretion without approval by the Companys shareholders.
(p) Fair Market Value means, as of any date, the value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the New York Stock Exchange, the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market of The Nasdaq Stock Market, its Fair Market Value will be the closing sales price for such stock (or the
- 3 -
closing bid, if no sales were reported) as quoted on such exchange or system on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share will be the mean between the high bid and low asked prices for the Common Stock on the day of determination, as reported in The Wall Street Journal or such other source as the Administrator deems reliable;
(iii) For purposes of any Awards granted on the Registration Date, the Fair Market Value will be the initial price to the public as set forth in the final prospectus included within the registration statement in Form S-1 filed with the Securities and Exchange Commission for the initial public offering of the Companys Common Stock; or
(iv) In the absence of an established market for the Common Stock, the Fair Market Value will be determined in good faith by the Administrator.
(q) Fiscal Year means the fiscal year of the Company.
(r) Incentive Stock Option means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(s) Independent Contractor means any person, including an advisor, consultant or agent engaged by the Company or a Parent or Subsidiary to render services to such entity.
(t) Inside Director means a Director who is an Employee.
(u) Nonstatutory Stock Option means an Option that by its terms does not qualify or is not intended to qualify as an Incentive Stock Option.
(v) Officer means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.
(w) Option means a stock option granted pursuant to the Plan.
(x) Outside Director means a Director who is not an Employee.
(y) Parent means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date.
- 4 -
(z) Participant means the holder of an outstanding Award.
(aa) Performance Goal means a performance goal established by the Committee pursuant to Section 10(c) of the Plan.
(bb) Performance Share means an Award denominated in Shares which may be earned in whole or in part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine pursuant to Section 10.
(cc) Performance Unit means an Award which may be earned in whole or in part upon attainment of Performance Goals or other vesting criteria as the Administrator may determine and which may be settled for cash, Shares or other securities or a combination of the foregoing pursuant to Section 10.
(dd) Period of Restriction means the period during which the transfer of Shares of Restricted Stock are subject to restrictions and therefore, the Shares are subject to a substantial risk of forfeiture. Such restrictions may be based on the passage of time, the achievement of target levels of performance, or the occurrence of other events as determined by the Administrator.
(ee) Plan means this Amended and Restated 2013 Omnibus Equity Incentive Plan.
(ff) Registration Date means the effective date of the first registration statement that is filed by the Company and declared effective pursuant to Section 12(g) of the Exchange Act, with respect to any class of the Companys securities.
(gg) Restricted Stock means Shares issued pursuant to a Restricted Stock award under Section 7 of the Plan.
(hh) Restricted Stock Unit means a bookkeeping entry representing an amount equal to the Fair Market Value of one Share, granted pursuant to Section 8. Each Restricted Stock Unit represents an unfunded and unsecured obligation of the Company.
(ii) Rule 16b-3 means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan.
(jj) Section 16(b) means Section 16(b) of the Exchange Act.
(kk) Service Provider means an Employee, Director or Independent Contractor.
(ll) Share means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan.
- 5 -
(mm) Stock Appreciation Right means an Award, granted alone or in connection with an Option, that pursuant to Section 9 is designated as a Stock Appreciation Right.
(nn) Subsidiary means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date.
3. Stock Subject to the Plan .
(a) Stock Subject to the Plan . Subject to the provisions of Section 13 of the Plan, the maximum aggregate number of Shares that may be issued under the Plan is 8,800,000, which represents the initial reserve of Shares of 5,500,000 Shares, which was subsequently increased by 3,300,000 Shares pursuant to the automatic share increase provision included in the Plan prior to the effective date of the amendment and restatement of the Plan. The Shares may be authorized, but unissued, or reacquired Common Stock. Notwithstanding the foregoing and, subject to adjustment as provided in Section 13, the maximum number of Shares that may be issued upon the exercise of Incentive Stock Options will equal the aggregate Share number stated in this Section 3(a), plus, to the extent allowable under Section 422 of the Code and the Treasury Regulations promulgated thereunder, any Shares that become available for issuance under the Plan pursuant to Sections 3(b) and 3(c).
(b) Lapsed Awards . To the extent an Award expires, is surrendered pursuant to an Exchange Program or becomes unexercisable without having been exercised or, with respect to Restricted Stock, Restricted Stock Units, Performance Units or Performance Shares, is forfeited to or repurchased by the Company due to failure to vest, the unpurchased Shares (or for Awards other than Options or Stock Appreciation Rights the forfeited or repurchased Shares), which were subject thereto will become available for future grant or sale under the Plan (unless the Plan has terminated). Notwithstanding the foregoing (and except with respect to Shares of Restricted Stock that are forfeited rather than vesting), Shares that have actually been issued under the Plan under any Award will not be returned to the Plan and will not become available for future distribution under the Plan; provided, however, that if Shares issued pursuant to Awards of Restricted Stock, Restricted Stock Units, Performance Shares or Performance Units are repurchased by the Company or are forfeited to the Company, such Shares will become available for future grant under the Plan. Shares used to pay the exercise price of an Award or to satisfy the tax withholding obligations related to an Award will become available for future grant or sale under the Plan. To the extent an Award under the Plan is paid out in cash rather than Shares, such cash payment will not result in reducing the number of Shares available for issuance under the Plan.
- 6 -
4. Administration of the Plan .
(a) Procedure .
(i) Multiple Administrative Bodies . Different Committees with respect to different groups of Service Providers may administer the Plan.
(ii) Section 162(m) . To the extent that the Administrator determines it to be desirable to qualify Awards granted hereunder as performance-based compensation within the meaning of Section 162(m) of the Code, the Plan will be administered by a Committee of two (2) or more outside directors within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3 . To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder will be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration . Other than as provided above, the Plan will be administered by (A) the Board or (B) a Committee, which committee will be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator . Subject to the provisions of the Plan, the Administrator will have the authority, in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Awards may be granted hereunder;
(iii) to determine the number of Shares to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the Plan;
(v) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder. Such terms and conditions include, but are not limited to, the exercise price, the time or times when Awards may be exercised (which may be based on performance criteria), any vesting acceleration or waiver of forfeiture restrictions, and any restriction or limitation regarding any Award or the Shares relating thereto, based in each case on such factors as the Administrator will determine;
(vi) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan;
(vii) to prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations established for the purpose of satisfying applicable foreign laws, for qualifying for favorable tax treatment under applicable foreign laws or facilitating compliance with foreign laws; sub-plans may be created for any of these purposes;
(viii) to modify or amend each Award (subject to Section 18 of the Plan), including but not limited to the discretionary authority to extend the post-termination exercisability period of Awards and to extend the maximum term of an Option (subject to Section 6(b) of the Plan regarding Incentive Stock Options);
- 7 -
(ix) to allow Participants to satisfy withholding tax obligations in such manner as prescribed in Section 14 of the Plan;
(x) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Award previously granted by the Administrator;
(xi) to allow a Participant to defer the receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant under an Award; and
(xii) to make all other determinations deemed necessary or advisable for administering the Plan.
(c) Effect of Administrators Decision . The Administrators decisions, determinations and interpretations will be final and binding on all Participants and any other holders of Awards.
(d) Exchange Program . Notwithstanding anything in this Section 4, the Committee shall not implement an Exchange Program without the approval of the holders of a majority of the Shares that are present in person or by proxy and entitled to vote at any annual or special meeting of Companys shareholders.
(e) Delegation by the Committee . The Committee, in its sole discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority and powers under the Plan to one or more Directors or officers of the Company; provided, however, that the Committee may not delegate its authority and powers (a) with respect to an Officer or (b) in any way which would jeopardize the Plans qualification under Code Section 162(m) or Rule 16b-3.
5. Award Eligibility and Limitations .
(a) Award Eligibility . Nonstatutory Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares and Performance Units may be granted to Service Providers. Incentive Stock Options may be granted only to Employees.
(b) Award Limitations . The following limits shall apply to the grant of any Award if, at the time of grant, the Company is a publicly held corporation within the meaning of Section 162(m) of the Code:
(i) Options and Stock Appreciation Rights . Subject to adjustment as provided in Section 13, no Employee shall be granted within any fiscal year of the Company one or more Options or Stock Appreciation Rights, which in the aggregate cover more than 500,000 Shares reserved for issuance under the Plan; provided, however, that in connection with an Employees initial service as an Employee, an Employee may be granted Options or Stock Appreciation Rights, which in the aggregate cover up to an additional 1,000,000 Shares reserved for issuance under the Plan.
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(ii) Restricted Stock and Restricted Stock Units . Subject to adjustment as provided in Section 13, no Employee shall be granted within any fiscal year of the Company one or more awards of Restricted Stock or Restricted Stock Units, which in the aggregate cover more than 500,000 Shares reserved for issuance under the Plan; provided, however, that in connection with an Employees initial service as an Employee, an Employee may be granted Restricted Stock or Restricted Stock Units, which in the aggregate cover up to an additional 1,000,000 Shares reserved for issuance under the Plan.
(iii) Performance Units and Performance Shares . Subject to adjustment as provided in Section 13, no Employee shall receive Performance Units or Performance Shares having a grant date value (assuming maximum payout) greater than two million dollars ($2 million) or covering more than 500,000 Shares, whichever is greater; provided, however, that in connection with an Employees initial service as an Employee, an Employee may receive Performance Units or Performance Shares having a grant date value (assuming maximum payout) of up to an additional amount equal five million dollars ($5 million) or covering up to 1,000,000 Shares, whichever is greater. No Participant may be granted more than one award of Performance Units or Performance Shares for the same Performance Period.
(c) Limitation on Grants to Non-Employee Directors . The maximum number of shares of Common Stock subject to Awards granted under the Plan during any one fiscal year to any Outside Director, taken together with any cash fees paid by the Company to such Outside Director during such fiscal year for service as an Outside Director, will not exceed $500,000 in total value (calculating the value of any such Awards based on the grant date fair value of such Awards for financial reporting purposes), including for this purpose, the value of any Awards that are received in lieu of all or a portion of any annual committee cash retainers or other similar cash based payments.
6. Stock Options .
(a) Limitations . Each Option will be designated in the Award Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and any Parent or Subsidiary) exceeds one hundred thousand dollars ($100,000), such Options will be treated as Nonstatutory Stock Options. For purposes of this Section 6(a), Incentive Stock Options will be taken into account in the order in which they were granted. The Fair Market Value of the Shares will be determined as of the time the Option with respect to such Shares is granted. With respect to the Committees authority in Section 4(b)(viii), if, at the time of any such extension, the exercise price per Share of the Option is less than the Fair Market Value of a Share, the extension shall, unless otherwise determined by the Committee, be limited to the earlier of (1) the maximum term of the Option as set by its original terms, or (2) ten (10) years from the grant date. Unless otherwise determined by the Committee, any extension of the term of an Option pursuant to this Section 4(b) (viii) shall comply with Code Section 409A to the extent necessary to avoid taxation thereunder.
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(b) Term of Option . The term of each Option will be stated in the Award Agreement. In the case of an Incentive Stock Option, the term will be ten (10) years from the date of grant or such shorter term as may be provided in the Award Agreement. Moreover, in the case of an Incentive Stock Option granted to a Participant who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option will be five (5) years from the date of grant or such shorter term as may be provided in the Award Agreement.
(c) Option Exercise Price and Consideration .
(i) Exercise Price . The per share exercise price for the Shares to be issued pursuant to exercise of an Option will be determined by the Administrator, subject to the following:
(1) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive Stock Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price will be no less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee described in paragraph (A) immediately above, the per Share exercise price will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.
(2) In the case of a Nonstatutory Stock Option, the per Share exercise price will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.
(3) Notwithstanding the foregoing, Options may be granted with a per Share exercise price of less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant pursuant to a transaction described in, and in a manner consistent with, Section 424(a) of the Code.
(ii) Waiting Period and Exercise Dates . At the time an Option is granted, the Administrator will fix the period within which the Option may be exercised and will determine any conditions that must be satisfied before the Option may be exercised.
(iii) Form of Consideration . The Administrator will determine the acceptable form of consideration for exercising an Option, including the method of payment. In the case of an Incentive Stock Option, the Administrator will determine the acceptable form of consideration at the time of grant. Such consideration for both types of Options may consist
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entirely of: (1) cash; (2) check; (3) promissory note, to the extent permitted by Applicable Laws, (4) other Shares, provided that such Shares have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which such Option will be exercised and provided that accepting such Shares will not result in any adverse accounting consequences to the Company, as the Administrator determines in its sole discretion; (5) consideration received by the Company under a broker-assisted (or other) cashless exercise program (whether through a broker or otherwise) implemented by the Company in connection with the Plan; (6) by net exercise; (7) such other consideration and method of payment for the issuance of Shares to the extent permitted by Applicable Laws; or (8) any combination of the foregoing methods of payment.
(d) Exercise of Option .
(i) Procedure for Exercise: Rights as a Stockholder . Any Option granted hereunder will be exercisable according to the terms of the Plan and at such times and under such conditions as determined by the Administrator and set forth in the Award Agreement. An Option may not be exercised for a fraction of a Share.
An Option will be deemed exercised when the Company receives: (i) a notice of exercise (in such form as the Administrator may specify from time to time) from the person entitled to exercise the Option, and (ii) full payment for the Shares with respect to which the Option is exercised (together with applicable withholding taxes). Full payment may consist of any consideration and method of payment authorized by the Administrator and permitted by the Award Agreement and the Plan. Shares issued upon exercise of an Option will be issued in the name of the Participant or, if requested by the Participant, in the name of the Participant and his or her spouse. Until the Shares are issued (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), no right to vote or receive dividends or any other rights as a stockholder will exist with respect to the Shares subject to an Option, notwithstanding the exercise of the Option. The Company will issue (or cause to be issued) such Shares promptly after the Option is exercised. No adjustment will be made for a dividend or other right for which the record date is prior to the date the Shares are issued, except as provided in Section 13 of the Plan.
(ii) Termination of Relationship as a Service Provider . If a Participant ceases to be a Service Provider, other than upon the Participants termination as the result of the Participants death or Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for three (3) months following the Participants termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified by the Administrator, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
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(iii) Disability of Participant . If a Participant ceases to be a Service Provider as a result of the Participants Disability, the Participant may exercise his or her Option within such period of time as is specified in the Award Agreement to the extent the Option is vested on the date of termination (but in no event later than the expiration of the term of such Option as set forth in the Award Agreement). In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following the Participants termination. Unless otherwise provided by the Administrator, if on the date of termination the Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will revert to the Plan. If after termination the Participant does not exercise his or her Option within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
(iv) Death of Participant . If a Participant dies while a Service Provider, the Option may be exercised following the Participants death within such period of time as is specified in the Award Agreement to the extent that the Option is vested on the date of death (but in no event may the Option be exercised later than the expiration of the term of such Option as set forth in the Award Agreement), by the Participants designated beneficiary, provided such beneficiary has been designated prior to Participants death in a form acceptable to the Administrator. If no such beneficiary has been designated by the Participant, then such Option may be exercised by the personal representative of the Participants estate or by the person(s) to whom the Option is transferred pursuant to the Participants will or in accordance with the laws of descent and distribution. In the absence of a specified time in the Award Agreement, the Option will remain exercisable for twelve (12) months following Participants death. Unless otherwise provided by the Administrator, if at the time of death Participant is not vested as to his or her entire Option, the Shares covered by the unvested portion of the Option will immediately revert to the Plan. If the Option is not so exercised within the time specified herein, the Option will terminate, and the Shares covered by such Option will revert to the Plan.
7. Restricted Stock .
(a) Grant of Restricted Stock . Subject to the terms and provisions of the Plan, the Administrator, at any time and from time to time, may grant Shares of Restricted Stock to Service Providers in such amounts as the Administrator, in its sole discretion, will determine.
(b) Restricted Stock Agreement . Each Award of Restricted Stock will be evidenced by an Award Agreement that will specify the Period of Restriction, the number of Shares granted, and such other terms and conditions as the Administrator, in its sole discretion, will determine. Unless the Administrator determines otherwise, the Company as escrow agent will hold Shares of Restricted Stock until the restrictions on such Shares have lapsed.
(c) Transferability . Except as provided in this Section 7 or the Award Agreement, Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.
(d) Other Restrictions . The Administrator, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate.
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(e) Removal of Restrictions . Except as otherwise provided in this Section 7, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan will be released from escrow as soon as practicable after the last day of the Period of Restriction or at such other time as the Administrator may determine. The Administrator, in its discretion, may accelerate the time at which any restrictions will lapse or be removed.
(f) Voting Rights . During the Period of Restriction, Service Providers holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless the Administrator determines otherwise.
(g) Dividends and Other Distributions . During the Period of Restriction, Service Providers holding Shares of Restricted Stock will be credited with all dividends and other distributions that are paid by the Company on an equivalent number of Shares that are not subject to such restrictions. Any such dividends and other distributions shall be distributed to a Service Provider (with or without interest or other earnings, as provided at the discretion of the Administrator) only if, when and to the extent the related Shares of Restricted Stock vest. Dividends and other distributions credited with respect to any Shares of Restricted Stock that do not vest shall be forfeited.
(h) Return of Restricted Stock to Company . On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed will revert to the Company and again will become available for grant under the Plan.
8. Restricted Stock Units .
(a) Grant . Restricted Stock Units may be granted at any time and from time to time as determined by the Administrator. After the Administrator determines that it will grant Restricted Stock Units under the Plan, it will advise the Participant in an Award Agreement of the terms, conditions, and restrictions (if any) related to the grant, including the number of Restricted Stock Units.
(b) Vesting Criteria and Other Terms . The Administrator will set vesting criteria in its discretion, which, depending on the extent to which the criteria are met, will determine the number of Restricted Stock Units that will be paid out to the Participant. The Administrator may set vesting criteria based upon the achievement of Company-wide, business unit, or individual goals (including, but not limited to, continued employment), or any other basis (including the passage of time) determined by the Administrator in its discretion.
(c) Earning Restricted Stock Units . Upon meeting the applicable vesting criteria, the Participant will be entitled to receive a payout as determined by the Administrator. Notwithstanding the foregoing, at any time after the grant of Restricted Stock Units, the Administrator, in its sole discretion, may reduce or waive any vesting criteria that must be met to receive a payout.
(d) Dividend Equivalents . The Administrator may, in its sole discretion, provide that dividend equivalents will be credited in connection with the grant of Restricted
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Stock Units that may be settled in cash, in Shares of equivalent value, or in some combination thereof. Any dividend equivalents credited with respect to Restricted Stock Units shall be equal in value to the dividends and other distributions that are paid by the Company on an equivalent number of Shares and shall be settled in cash or Shares to the Participant (with or without interest or other earnings, as provided at the discretion of the Administrator) only if, when and to the extent the related Restricted Stock Units vest. Dividend equivalents credited with respect to any Restricted Stock Unit that does not vest shall be forfeited.
(e) Form and Timing of Payment . Payment of earned Restricted Stock Units will be made upon the date(s) determined by the Administrator and set forth in the Award Agreement. The Administrator, in its sole discretion, may only settle earned Restricted Stock Units in cash, Shares, or a combination of both.
(f) Cancellation . On the date set forth in the Award Agreement, all unearned Restricted Stock Units will be forfeited to the Company.
9. Stock Appreciation Rights .
(a) Grant of Stock Appreciation Rights . Subject to the terms and conditions of the Plan, a Stock Appreciation Right may be granted to Service Providers at any time and from time to time as will be determined by the Administrator, in its sole discretion.
(b) Number of Shares . The Administrator will have complete discretion to determine the number of Stock Appreciation Rights granted to any Service Provider.
(c) Exercise Price and Other Terms . The per share exercise price for the Shares to be issued pursuant to exercise of a Stock Appreciation Right will be determined by the Administrator and will be no less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. Otherwise, the Administrator, subject to the provisions of the Plan, will have complete discretion to determine the terms and conditions of Stock Appreciation Rights granted under the Plan.
(d) Stock Appreciation Right Agreement . Each Stock Appreciation Right grant will be evidenced by an Award Agreement that will specify the exercise price, the term of the Stock Appreciation Right, the conditions of exercise, and such other terms and conditions as the Administrator, in its sole discretion, will determine.
(e) Expiration of Stock Appreciation Rights . A Stock Appreciation Right granted under the Plan will expire upon the date determined by the Administrator, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 6(b) relating to the maximum term and Section 6(d) relating to exercise also will apply to Stock Appreciation Rights.
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(f) Payment of Stock Appreciation Right Amount . Upon exercise of a Stock Appreciation Right, a Participant will be entitled to receive payment from the Company in an amount determined by multiplying:
(i) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times
(ii) The number of Shares with respect to which the Stock Appreciation Right is exercised.
At the discretion of the Administrator, the payment upon Stock Appreciation Right exercise may be in cash, in Shares of equivalent value, or in some combination thereof.
10. Performance Units and Performance Shares .
(a) Grant of Performance Units/Shares . Performance Units and Performance Shares may be granted to Service Providers at any time and from time to time, as will be determined by the Administrator, in its sole discretion. The Administrator will have complete discretion in determining the number of Performance Units and Performance Shares granted to each Participant.
(b) Value of Performance Units/Shares . Each Performance Unit will have an initial value that is established by the Administrator on or before the date of grant. Each Performance Share will have an initial value equal to the Fair Market Value of a Share on the date of grant.
(c) Performance Objectives and Other Terms . The Administrator will set Performance Goals or other vesting provisions (including, without limitation, continued status as a Service Provider) in its discretion which, depending on the extent to which they are met, will determine the number or value of Performance Units/Shares that will be paid out to the Service Providers. The time period during which the performance objectives or other vesting provisions must be met will be called the Performance Period. Each Award of Performance Units/Shares will be evidenced by an Award Agreement that will specify the Performance Period, and such other terms and conditions as the Administrator, in its sole discretion, will determine. The Administrator may set performance objectives based upon the achievement of Company-wide, divisional, or individual goals, applicable federal or state securities laws, or any other basis determined by the Administrator in its discretion.
(d) Measurement of Performance Goals . Performance Goals shall be established by the Committee on the basis of targets to be attained ( Performance Targets ) with respect to one or more measures of business or financial performance (each, a Performance Measure ), subject to the following:
(i) Performance Measures . For each Performance Period, the Committee shall establish and set forth in writing the Performance Measures, if any, and any particulars, components and adjustments relating thereto, applicable to each Participant. The Performance Measures, if any, will be objectively measurable and will be based upon the achievement of a specified percentage or level in one or more objectively defined and non-discretionary factors pre-established by the Committee. Performance Measures may be one or more of the following, as determined by the Committee: (i) pre-tax income or after-tax income;
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(ii) income or earnings including operating income, earnings before or after taxes, interest, stock-based compensation expense, depreciation and/or amortization; (iii) net income excluding amortization of intangible assets, depreciation and impairment of goodwill and intangible assets and/or excluding charges attributable to the adoption of new accounting pronouncements; (iv) earnings or book value per share (basic or diluted); (v) return on assets (gross or net), return on investment, return on capital, or return on equity; (vi) return on revenues; (vii) cash flow, free cash flow, cash flow return on investment (discounted or otherwise), net cash provided by operations, or cash flow in excess of cost of capital; (viii) economic value created; (ix) operating margin or profit margin; (x) stock price or total stockholder return; (xi) income or earnings from continuing operations; (xii) capital expenditures, cost targets, reductions and savings and expense management; and (xiii) strategic business criteria, consisting of one or more objectives based on meeting specified market penetration or market share, geographic or product specialty expansion, recruitment and retention goals, or objective customer or agent satisfaction , and objective goals relating to divestitures, joint ventures, mergers, acquisitions and similar transactions, each with respect to the Company and/or one or more of its affiliates or operating units.
(ii) Committee Discretion on Performance Measures . As determined in the discretion of the Committee, the Performance Measures for any Performance Period may (a) differ from Participant to Participant, Performance Period to Performance Period and from Award to Award, (b) be based on the performance of the Company as a whole, the performance of a specific Participant or against any affiliate(s), a particular segment(s), a business unit(s) or a product(s) of the Company or individual project company, (c) be measured on a per share, share per capita basis, and/or other objective basis, (d) be measured on a pre-tax or after-tax basis, and (e) be measured on an absolute basis or in relative terms (including, but not limited to, any increase (or decrease) over the passage of time and/or any measurement against other companies or financial or business or stock index metrics particular to the Company), (f) be measured using an actual foreign exchange rate or on a foreign exchange neutral basis. Without limiting the foregoing, the Committee shall adjust any performance criteria, Performance Measures or other feature of an Award that relates to or is wholly or partially based on the number of, or the value of, any stock of the Company, to reflect any stock dividend or split, repurchase, recapitalization, combination, or exchange of shares or other similar changes in such stock. Awards issued to Participants who are not subject to the limitations of Code Section 162(m) or Awards to Participants that are not intended to comply with the requirements of Code Section 162(m) may, in either case, take into account other factors (including subjective factors).
(e) Earning of Performance Units/Shares . After the applicable Performance Period has ended, the holder of Performance Units/Shares will be entitled to receive a payout of the number of Performance Units/Shares earned by the Participant over the Performance Period, to be determined as a function of the extent to which the corresponding Performance Goals or other vesting provisions have been achieved. After the grant of a Performance Unit/Share, the Administrator, in its sole discretion, may reduce or waive any Performance Goals or other vesting provisions for such Performance Unit/Share.
(f) Form and Timing of Payment of Performance Units/Shares . Payment of earned Performance Units/Shares will be made upon the time set forth in the applicable Award
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Agreement. The Administrator, in its sole discretion, may pay earned Performance Units/Shares in the form of cash, in Shares (which have an aggregate Fair Market Value equal to the value of the earned Performance Units/Shares at the close of the applicable Performance Period) or in a combination thereof.
(g) Cancellation of Performance Units/Shares . On the date set forth in the Award Agreement, all unearned or unvested Performance Units/Shares will be forfeited to the Company, and again will be available for grant under the Plan.
11. Leaves of Absence/Transfer Between Locations . Unless the Administrator provides otherwise, vesting of Awards granted hereunder will be suspended during any unpaid leave of absence unless contrary to Applicable Law. A Participant will not cease to be an Employee in the case of (i) any leave of absence approved by the Participants employer or (ii) transfers between locations of the Company or between the Company, its Parent, or any Subsidiary. For purposes of Incentive Stock Options, no such leave may exceed three (3) months, unless reemployment upon expiration of such leave is guaranteed by statute or contract. If reemployment upon expiration of a leave of absence approved by the Participants employer is not so guaranteed, then six (6) months following the first (1st) day of such leave any Incentive Stock Option held by the Participant will cease to be treated as an Incentive Stock Option and will be treated for tax purposes as a Nonstatutory Stock Option.
12. Transferability of Awards . Unless determined otherwise by the Administrator, an Award may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Participant, only by the Participant. If the Administrator makes an Award transferable, such Award will contain such additional terms and conditions as the Administrator deems appropriate.
13. Adjustments; Dissolution or Liquidation; Merger or Change in Control .
(a) Adjustments . In the event of a stock split, reverse stock split, stock dividend, combination, consolidation, recapitalization (including a recapitalization through a large nonrecurring cash dividend) or reclassification of the Shares, subdivision of the Shares, a rights offering, a reorganization, merger, spin-off, split-up, repurchase, or exchange of Common Stock or other securities of the Company or other significant corporate transaction, or other change affecting the Common Stock occurs, the Administrator, in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, will, in such manner as it may deem equitable, adjust the number, kind and class of securities that may be delivered under the Plan and/or the number, class, kind and price of securities covered by each outstanding Award, the numerical Share limits in Section 3 of the Plan. Notwithstanding the forgoing, all adjustments under this Section 13 shall be made in a manner that does not result in taxation under Code Section 409A.
(b) Dissolution or Liquidation . In the event of the proposed winding up, dissolution or liquidation of the Company, the Administrator will notify each Participant as soon as practicable prior to the effective date of such proposed transaction. To the extent it has not been previously exercised, an Award will terminate immediately prior to the consummation of such proposed action.
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(c) Change in Control . In the event of a merger or Change in Control, each outstanding Award will be treated as the Administrator determines, including, without limitation, that each Award be assumed, cancelled or an equivalent option or right substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. The Administrator will not be required to treat all Awards similarly in the transaction.
Except as set forth in an Award Agreement, in the event that the successor corporation does not assume or substitute for the Award, the Participant will fully vest in and have the right to exercise all of his or her outstanding Options and Stock Appreciation Rights, including Shares as to which such Awards would not otherwise be vested or exercisable, all restrictions on Restricted Stock and Restricted Stock Units will lapse, and, with respect to Awards with performance-based vesting, all Performance Goals or other vesting criteria will be deemed achieved at one hundred percent (100%) of target levels and all other terms and conditions met. In addition, if an Option or Stock Appreciation Right is not assumed or substituted in the event of a Change in Control, the Administrator will notify the Participant in writing or electronically that the Option or Stock Appreciation Right will be exercisable for a period of time determined by the Administrator in its sole discretion, and the Option or Stock Appreciation Right will terminate upon the expiration of such period.
For the purposes of this subsection (c), an Award will be considered assumed if, following the Change in Control, the Award confers the right to purchase or receive, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, or other securities or property) received in the Change in Control by holders of Common Stock for each Share held on the effective date of the transaction (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding Shares); provided, however, that if such consideration received in the Change in Control is not solely common stock of the successor corporation or its Parent, the Administrator may, with the consent of the successor corporation, provide for the consideration to be received upon the exercise of an Option or Stock Appreciation Right or upon the payout of a Restricted Stock Unit, Performance Unit or Performance Share, for each Share subject to such Award, to be solely common stock of the successor corporation or its Parent equal in fair market value to the per share consideration received by holders of Common Stock in the Change in Control.
Notwithstanding anything in this Section 13(c) to the contrary, an Award that vests, is earned or paid-out upon the satisfaction of one or more Performance Goals will not be considered assumed if the Company or its successor modifies any of such Performance Goals without the Participants consent; provided, however, a modification to such Performance Goals only to reflect the successor corporations post-Change in Control corporate structure will not be deemed to invalidate an otherwise valid Award assumption.
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14. Tax .
(a) Withholding Requirements . Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof) or prior to any time the Award or Shares are subject to taxation, the Company and/or the Participants employer will have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local, foreign or other taxes (including the Participants FICA obligation or social insurance contributions) required to be withheld with respect to such Award (or exercise thereof).
(b) Withholding Arrangements . The Administrator, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit a Participant to satisfy such tax withholding obligation, in whole or in part by (without limitation) (a) paying cash, (b) electing to have the Company withhold otherwise deliverable cash or Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld, or (c) delivering to the Company already-owned Shares having a Fair Market Value equal to the minimum statutory amount required to be withheld or Shares having a Fair Market Value in excess of such amount that have been held for such period. Except as otherwise determined by the Administrator, the Fair Market Value of the Shares to be withheld or delivered will be determined as of the date that the taxes are required to be withheld.
(c) Compliance With Code Section 409A . Awards will be designed and operated in such a manner that they are either exempt from the application of, or comply with, the requirements of Code Section 409A such that the grant, payment, settlement or deferral will not be subject to the additional tax or interest applicable under Code Section 409A. The Plan and each Award Agreement under the Plan is intended to meet the requirements of Code Section 409A (or an exemption therefrom) and will be construed and interpreted in accordance with such intent, except as otherwise determined in the sole discretion of the Administrator. To the extent that an Award or payment, or the settlement or deferral thereof, is subject to Code Section 409A the Award will be granted, paid, settled or deferred in a manner that will meet the requirements of Code Section 409A (or an exemption therefrom), such that the grant, payment, settlement or deferral will not be subject to the additional tax or interest applicable under Code Section 409A. In no event will the Company be responsible for or reimburse a Participant for any taxes or other penalties incurred as a result of applicable of Code Section 409A.
15. Clawback . In the event of a restatement of incorrect financial results, the Administrator shall review all Awards held by Officers that (i) were earned based on performance or vested during the course of the financial period subject to such restatement or (ii) were granted during or within one year following such financial period. If any Award would have been lower or would not have been earned, vested or granted based on such restated financial results, the Administrator shall, if it determines appropriate in its sole discretion and to the extent permitted by Applicable Law, (a) cancel such Award, in whole or in part, whether or not earned, vested or payable or (b) require the Participant to repay to the Company an amount equal to all or any portion of the value of any gains from the grant, vesting or payment of the Award that would not have been realized had the restatement not occurred. Notwithstanding the foregoing, to the extent required to comply with Applicable Law, the Company may unilaterally amend this Section 15.
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16. No Effect on Employment or Service . Neither the Plan nor any Award will confer upon a Participant any right with respect to continuing the Participants relationship as a Service Provider with the Company, or (if different) the Participants employer, nor will they interfere in any way with the Participants right or the Participants employers right to terminate such relationship at any time, with or without cause, to the extent permitted by Applicable Laws.
17. Date of Grant . The date of grant of an Award will be, for all purposes, the date on which the Administrator makes the determination granting such Award, or such other later date as is determined by the Administrator. Notice of the determination will be provided to each Participant within a reasonable time after the date of such grant.
18. Term of Plan . The Plan initially became effective October 7, 2013 (the Initial Effective Date ). The Plan will continue in effect for a term of ten (10) years from the Initial Effective Date, unless terminated earlier under Section 18 of the Plan. The provisions of the Plan, as amended and restated herein, shall be effective as of the date approved by the Committee, subject to Section 22 below.
19. Amendment and Termination of the Plan .
(a) Amendment and Termination . The Committee may at any time amend, alter, suspend or terminate the Plan.
(b) Stockholder Approval . The Company will obtain stockholder approval of any Plan amendment to the extent necessary and desirable to comply with Applicable Laws.
(c) Effect of Amendment or Termination . No amendment, alteration, suspension or termination of the Plan will impair the rights of any Participant, unless mutually agreed otherwise between the Participant and the Administrator, which agreement must be in writing and signed by the Participant and the Company. Termination of the Plan will not affect the Administrators ability to exercise the powers granted to it hereunder with respect to Awards granted under the Plan prior to the date of such termination.
20. Conditions Upon Issuance of Shares .
(a) Legal Compliance . Shares will not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares will comply with Applicable Laws and will be further subject to the approval of counsel for the Company with respect to such compliance.
(b) Investment Representations . As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required.
21. Inability to Obtain Authority . The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Companys
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counsel to be necessary to the lawful issuance and sale of any Shares hereunder, will relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority will not have been obtained.
22. Stockholder Approval . The amendment and restatement of the Plan will be subject to approval by the stockholders of the Company at the annual meeting of stockholders that will be held in 2017. Such stockholder approval will be obtained in the manner and to the degree required under Applicable Laws.
23. Governing Law . The Plan and all Awards hereunder shall be construed in accordance with and governed by the laws of the State of California, but without regard to its conflict of law provisions.
o O o
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Exhibit 10.18
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS AMENDMENT TO CREDIT AGREEMENT (this Amendment) is entered into as of October 16, 2017, by and between MARCUS & MILLICHAP, INC., a Delaware corporation (Borrower), and WELLS FARGO BANK, NATIONAL ASSOCIATION (Bank).
RECITALS
WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of June 1, 2014, as amended from time to time (Credit Agreement).
WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows:
1. Section 1.1 (a) is hereby amended by deleting June 1, 2019 as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date June 1, 2020, with such change to be effective upon the execution and delivery to Bank of a promissory note dated as of October 16, 2017 (which promissory note shall replace and be deemed the Line of Credit Note defined in and made pursuant to the Credit Agreement) and all other contracts, instruments and documents required by Bank to evidence such change.
2. In consideration of the changes set forth herein and as a condition to the effectiveness hereof, immediately upon signing this Amendment Borrower shall pay to Bank a non-refundable fee of $35,000.00.
3. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document.
4. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.
MARCUS & MILLICHAP, INC. | WELLS FARGO BANK, NATIONAL ASSOCIATION | |||||||
By: |
|
By: |
|
|||||
MARTIN E. LOUIE, | JAMIE CHEN, | |||||||
SENIOR VICE PRESIDENT and | SENIOR VICE PRESIDENT | |||||||
CHIEF FINANCIAL OFFICER | ||||||||
|
||||||||
Kurt Schwarz | ||||||||
Chief Accounting Officer |
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REVOLVING LINE OF CREDIT NOTE
$60,000,000.00 |
Woodland Hills, California October 16, 2017 |
FOR VALUE RECEIVED, the undersigned MARCUS & MILLICHAP, INC. (Borrower) promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (Bank) at its office at MAC E2155-011, 21255 Burbank Blvd., Suite 110, Woodland Hills, California 91367, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Sixty Million Dollars ($60,000,000.00), or so much thereof as may be advanced and be outstanding pursuant to the terms of the Credit Agreement, as defined herein, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:
(a) Base Rate means, for any day, a fluctuating rate equal to the highest of: (i) the Prime Rate in effect on such day, (ii) a rate determined by Bank to be one and one-half percent (1.50%) above Daily One Month LIBOR in effect on such day, and (iii) the Federal Funds Rate plus one and one-half percent (1.50%).
(b) Daily One Month LIBOR means, for any day, the rate of interest equal to LIBOR then in effect for delivery for a one (1) month period .
(c) Federal Funds Rate means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers for the immediately preceding day, as published by the Federal Reserve Bank of New York; provided that if no such rate is so published on any day, then the Federal Funds Rate for such day shall be the rate most recently published, and further provided that if the Fed Funds Rate determined as provided above would be less than zero percent (0.0%), then the Fed Funds Rate shall be deemed to be zero percent (0.0%).
(d) LIBOR means (i) for the purpose of calculating effective rates of interest for loans making reference to LIBOR Periods, the rate of interest per annum determined by Bank based on the rate for United States dollar deposits for delivery on the first day of each LIBOR Period for a period approximately equal to such LIBOR Period as published by the ICE Benchmark Administration Limited, a United Kingdom company, at approximately 11:00 a.m., London time, two London Business Days prior to the first day of such LIBOR Period (or if not so published, then as determined by Bank from another recognized source or interbank quotation), or (ii) for the purpose of calculating effective rates of interest for loans making reference to Daily One Month LIBOR, the rate of interest per annum determined by Bank based on the rate for United States dollar deposits for delivery of funds for one (1) month as published by the ICE Benchmark Administration Limited, a United Kingdom company, at approximately 11 :00 a.m., London time, or, for any day not a London Business Day, the immediately preceding London Business Day (or if not so published, then as determined by Bank from another recognized source or interbank quotation); provided, however, that if LIBOR determined as provided above would be less than zero percent (0.0%), then LIBOR shall be deemed to be zero percent (0.0%).
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(e) LIBOR Period means a period commencing on a New York Business Day and continuing for one (1 ), two (2), three (3), six (6) or twelve (12) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that (i) no LIBOR Period may be selected for a principal amount less than One Million Dollars ($1 ,000,000.00), (ii) if the day after the end of any LIBOR Period is not a New York Business Day (so that a new LIBOR Period could not be selected by Borrower to start on such day), then such LIBOR Period shall continue up to, but shall not include, the next New York Business Day after the end of such LIBOR Period, unless the result of such extension would be to cause any immediately following LIBOR Period to begin in the next calendar month in which event the LIBOR Period shall continue up to, but shall not include, the New York Business Day immediately preceding the last day of such LIBOR Period, and (iii) no LIBOR Period shall extend beyond the scheduled maturity date hereof.
(f) London Business Day means any day that is a day for trading by and between banks in dollar deposits in the London interbank market.
(g) New York Business Day means any day except a Saturday, Sunday or any other day on which commercial banks in New York are authorized or required by law to close.
(h) Prime Rate means at any time the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Banks base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. If the rate of interest announced by Bank as its Prime Rate at any time is less than zero percent (0.0%), then for purposes of this Note the Prime Rate shall be deemed to be zero percent (0.0%).
(i) State Business Day means any day except a Saturday, Sunday or any other day on which commercial banks in the jurisdiction described in Governing Law herein are authorized or required by law to close.
INTEREST:
(a) Interest . The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum equal to the Base Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be eight hundred seventy five one thousandths of one percent (0.875%) above LIBOR in effect on the first day of the applicable LIBOR Period. When interest is determined in relation to the Base Rate, each change in the rate of interest hereunder shall become effective on the date each Base Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and LIBOR Period applicable thereto and any payments made thereon on Banks books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.
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(b) Selection of Interest Rate Options . Subject to the provisions herein regarding LIBOR Periods and the prior notice required for the selection of a LIBOR interest rate, (i) at any time any portion of this Note bears interest determined in relation to LIBOR for a LIBOR Period, it may be continued by Borrower at the end the LIBOR Period applicable thereto so that all or a portion thereof bears interest determined in relation to the Base Rate or to LIBOR for a new LIBOR Period designated by Borrower, (ii) at any time any portion of this Note bears interest determined in relation to the Base Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a LIBOR Period designated by Borrower, and (iii) at the time this Note is disbursed, Borrower may choose to have all or a portion thereof bear interest determined in relation to the Base Rate or to LIBOR for a LIBOR Period designated by Borrower.
To select an interest rate option hereunder determined in relation to LIBOR for a LIBOR Period, Borrower shall give Bank notice thereof that is received by Bank prior to 11:00 a.m. in the jurisdiction described in Governing Law herein on a State Business Day at least two State Business Days prior to the first day of the LIBOR Period, or at a later time during such State Business Day if Bank, at its sole discretion, accepts Borrowers notice and quotes a fixed rate to Borrower. Such notice shall specify: (A) the interest rate option selected by Borrower, (B) the principal amount subject thereto, and (C) for each LIBOR selection, the length of the applicable LIBOR Period. If Bank has not received such notice in accordance with the foregoing before principal is disbursed hereunder or before the end of any LIBOR Period, Borrower shall be deemed to have made a Base Rate interest selection for such disbursement or the principal amount to which such LIBOR Period applied. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as it is given in accordance with the foregoing and, with respect to each LIBOR selection, if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three State Business Days after such notice is given. Borrower shall reimburse Bank immediately upon demand for any loss or expense (including any loss or expense incurred by reason of the liquidation or redeployment of funds obtained to fund or maintain a LIBOR borrowing) incurred by Bank as a result of the failure of Borrower to accept or complete a LIBOR borrowing hereunder after making a request therefor. Any reasonable determination of such amounts by Bank shall be conclusive and binding upon Borrower. Should more than one person or entity sign this Note as a Borrower, any notice required above may be given by any one Borrower acting alone, which notice shall be binding on all other Borrowers.
(c) Taxes and Regulatory Costs . Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) costs, expenses and liabilities arising from or in connection with reserve percentages prescribed by the Board of Governors of the Federal Reserve System (or any successor) for Eurocurrency Liabilities (as defined in Regulation D of the Federal Reserve Board, as amended), assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.
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(d) Default Interest . From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, or upon the occurrence and during the continuance of an Event of Default, then at the option of Bank, in its sole and absolute discretion, the outstanding principal balance of this Note shall bear interest at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note.
INTEREST RATE ADJUSTMENTS:
(a) Initial LIBOR Margin . The initial LIBOR margin applicable to this Note shall be as set forth in the Interest paragraph herein.
(b) LIBOR Rate Adjustments . Bank shall adjust the LIBOR margin used to determine the rate of interest applicable to LIBOR options selected by Borrower under this Note on a quarterly basis, commencing with Borrowers fiscal quarter ending December 31, 2017, if required to reflect a change in Borrowers ratio of Total Funded Debt to EBITDA (as defined in the Credit Agreement referenced herein), in accordance with the following grid:
Total Funded Debt to EBITDA |
Applicable
LIBOR Margin |
|||
0.0:1.0 to 1.0:1.0 |
0.875 | % | ||
1.01:1.0 to 1.50:1.0 |
1.000 | % | ||
1.51:1.0 to 2.0:1.0 |
1.125 | % |
Each such adjustment shall be effective on the first business day of Borrowers fiscal quarter following the quarter during which Bank receives and reviews Borrowers most current fiscal quarter-end financial statements in accordance with any requirements established by Bank for the preparation and delivery thereof.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment of Principal . Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on June 1, 2020.
(b) Payment of Interest . Interest accrued on this Note shall be payable on the first day of each month, commencing November 1, 2017, and on the maturity date set forth above.
(c) Advances . Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Borrowers Chief
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Executive Officer, Chief Financial Officer or Chief Accounting Officer, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower.
(d) Application of Payments . Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Base Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest LIBOR Period first.
PREPAYMENT:
(a) Base Rate . Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Base Rate at any time, in any amount and without penalty.
(b) LIBOR . Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Million Dollars ($1,000,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the LIBOR Period applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such LIBOR Period matures, calculated as follows for each such month:
(i) | Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the LIBOR Period applicable thereto. |
(ii) | Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such LIBOR Period at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. |
(iii) | If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. |
Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the
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amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum zero percent (0.00%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).
(c) Application of Prepayments . If principal under this Note is payable in more than one installment, then any prepayments of principal shall be applied to the most remote principal installment or installments then unpaid.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of June 1, 2014, as amended from time to time (the Credit Agreement). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an Event of Default under this Note.
MISCELLANEOUS:
(a) Remedies . Upon the sale, transfer, hypothecation, assignment or other encumbrance, whether voluntary, involuntary or by operation of law, of all or any interest in any real property securing this Note, if any, or upon the occurrence of any Event of Default, the holder of this Note, at the holders option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys fees (to include outside counsel fees and all allocated costs of the holders in-house counsel) , expended or incurred by the holder in connection with the enforcement of the holders rights and/or the collection of any amounts which become due to the holder under this Note whether or not suit is brought, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.
(b) Obligations Joint and Several . Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.
(c) Governing Law . This Note shall be governed by and construed in accordance with the laws of California, but giving effect to federal laws applicable to national banks, without reference to the conflicts of law or choice of law principles thereof.
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IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.
MARCUS & MILLICHAP, INC. | ||
By: |
|
|
MARTIN E. LOUIE, | ||
SENIOR VICE PRESIDENT and | ||
CHIEF FINANCIAL OFFICER | ||
|
||
Kurt Schwarz Chief Accounting Officer |
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Exhibit 21.1
Subsidiaries of the Registrant
Name of Subsidiary |
State or Other Jurisdiction of
Incorporation or Organization |
|
Marcus & Millichap Real Estate Investment Services, Inc. |
California | |
Marcus & Millichap REIS of Atlanta, Inc. |
Georgia | |
Marcus & Millichap REIS of Chicago, Inc. |
California | |
Marcus & Millichap REIS of Florida, Inc. |
California | |
Marcus & Millichap REIS of Nevada, Inc. |
California | |
Marcus & Millichap REIS of North Carolina, Inc. |
California | |
Marcus & Millichap REIS of Seattle, Inc. |
California | |
Marcus & Millichap REIS Canada, Inc. |
Canada | |
Marcus & Millichap Capital Corporation |
California | |
Mark One Capital, Inc. |
Delaware |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 333-192506 and 333-216738) pertaining to the 2013 Omnibus Equity Incentive Plan and the 2013 Employee Stock Purchase Plan of Marcus & Millichap, Inc. of our report dated March 16, 2018 with respect to the consolidated financial statements of Marcus & Millichap, Inc. included in this Annual Report (Form 10-K) for the year ended December 31, 2017.
/s/ Ernst & Young LLP
Los Angeles, California
March 16, 2018
Exhibit 31.1
Certification of Chief Executive Officer of Marcus & Millichap, Inc. pursuant to
Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Hessam Nadji, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Marcus & Millichap, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 16, 2018 |
/s/ Hessam Nadji |
|
Hessam Nadji President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer of Marcus & Millichap, Inc. pursuant to
Rule 13a-14(a) under the Exchange Act,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Martin E. Louie, certify that:
1. | I have reviewed this Annual Report on Form 10-K of Marcus & Millichap, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 16, 2018 |
/s/ Martin E. Louie |
|
Martin E. Louie Chief Financial Officer |
Exhibit 32.1
Certifications of Chief Executive Officer and Chief Financial Officer of Marcus & Millichap, Inc. Pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Marcus & Millichap, Inc. on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, Hessam Nadji, President and Chief Executive Officer of Marcus & Millichap, Inc. and Martin E. Louie, Chief Financial Officer of Marcus & Millichap, Inc., certify, to the best of our knowledge, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Marcus & Millichap, Inc. |
Date: |
March 16, 2018 |
/s/ Hessam Nadji |
||||
Hessam Nadji President and Chief Executive Officer (Principal Executive Officer) |
||||||
Date: |
March 16, 2018 |
/s/ Martin E. Louie |
||||
Martin E. Louie Chief Financial Officer (Principal Financial Officer) |