かぶたん ロゴ
英語
エドガーで原本を確認する
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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
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)
 
(Zip Code)
(818)
212-2250
(Registrant’s telephone number, including area code)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
 
MMI
 
New York Stock Exchange
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 checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter time period that the registrant was required to submit such files).    Yes  ☒    No  ☐
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 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
     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 Exchange Act).    Yes  ☐    No  ☒
Number of shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding as of May 
3
, 2022 was 38,889,501 shares.
 
 
 

Table of Contents
MARCUS & MILLICHAP, INC.
TABLE OF CONTENTS
 
    
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2

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARCUS & MILLICHAP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for shares and par value)

                 
     March 31, 2022
(Unaudited)
    December 31,
2021
 
Assets
                
Current assets:
                
Cash and cash equivalents
   $ 315,695     $ 382,140  
Commissions receivable, net
     13,854       17,230  
Prepaid expenses
     10,373       13,220  
Marketable debt securities,
available-for-sale
(includes amortized cost of $220,015 and $183,915 at March 31, 2022 and December 31, 2021, respectively, and $0 allowance for credit losses)
     218,988       183,868  
Advances and loans, net
     5,889       6,403  
Other assets
     6,027       5,270  
    
 
 
   
 
 
 
Total current assets
     570,826       608,131  
Property and equipment, net
     23,249       23,192  
Operating lease
right-of-use
assets, net
     77,928       81,528  
Marketable debt securities,
available-for-sale
(includes amortized cost of $54,519 and $111,858 at March 31, 2022 and December 31, 2021, respectively, and $0 allowance for credit losses)
     52,980       112,610  
Assets held in rabbi trust
     10,916       11,508  
Deferred tax assets, net
     33,470       33,736  
Goodwill and other intangible assets, net
     59,434       48,105  
Advances and loans, net
     139,087       113,242  
Other assets
     12,273       13,146  
    
 
 
   
 
 
 
Total assets
   $ 980,163     $ 1,045,198  
    
 
 
   
 
 
 
     
Liabilities and stockholders’ equity
                
Current liabilities:
                
Accounts payable and other liabilities
   $ 24,388     $ 24,271  
Deferred compensation and commissions
     54,994       114,685  
Dividends payable
     50,694       —    
Income tax payable
     28,042       17,853  
Operating lease liabilities
     18,276       18,973  
Accrued bonuses and other employee related expenses
     15,863       49,848  
    
 
 
   
 
 
 
Total current liabilities
     192,257       225,630  
Deferred compensation and commissions
     45,603       53,536  
Operating lease liabilities
     56,307       58,334  
Other liabilities
     10,607       11,394  
    
 
 
   
 
 
 
Total liabilities
     304,774       348,894  
    
 
 
   
 
 
 
     
Commitments and contingencies
     —         —    
     
Stockholders’ equity:
                
Preferred stock, $0.0001 par value:
                
Authorized shares – 25,000,000; issued and outstanding shares – none at March 31, 2022 and December 31, 2021, respectively
     —         —    
Common stock, $0.0001 par value:
                
Authorized shares – 150,000,000; issued and outstanding shares – 39,795,399 and 39,692,373 at March 31, 2022 and December 31, 2021, respectively
     4       4  
Additional
paid-in
capital
     122,782       121,844  
Retained earnings
     554,193       573,546  
Accumulated other comprehensive income (loss)
     (1,590     910  
    
 
 
   
 
 
 
Total stockholders’ equity
     675,389       696,304  
    
 
 
   
 
 
 
Total liabilities and stockholders’ equity
   $ 980,163     $ 1,045,198  
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
3

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MARCUS & MILLICHAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(Unaudited)
 
     Three Months Ended
March 31,
 
     2022     2021  
Revenues:
                
Real estate brokerage commissions
   $ 286,909     $ 162,796  
Financing fees
     26,453       17,843  
Other revenues
     6,102       3,338  
    
 
 
   
 
 
 
Total revenues
     319,464       183,977  
    
 
 
   
 
 
 
Operating expenses:
                
Cost of services
     196,768       109,103  
Selling, general and administrative
     74,535       51,677  
Depreciation and amortization
     3,911       2,997  
    
 
 
   
 
 
 
Total operating expenses
     275,214       163,777  
    
 
 
   
 
 
 
Operating income
     44,250       20,200  
Other income, net
     450       1,044  
Interest expense
     (160     (146
    
 
 
   
 
 
 
Income before provision for income taxes
     44,540       21,098  
Provision for income taxes
     11,757       6,086  
    
 
 
   
 
 
 
Net income
   $ 32,783     $ 15,012  
     
Other comprehensive (loss) income:
                
Marketable debt securities,
available-for-sale:
                
Change in net unrealized gains/losses
     (2,357     (621
Less: reclassification adjustment for net gains included in other income, net
     (84     —    
    
 
 
   
 
 
 
Net change, net of tax of $838 and $(215) for the three months ended March 31, 2022 and 2021, respectively
     (2,441     (621
Foreign currency translation gain (loss), net of tax of $0 for each of the three months ended March 31, 2022 and 2021, respectively
     (59     (113
    
 
 
   
 
 
 
Total other comprehensive (loss) income
     (2,500     (734
    
 
 
   
 
 
 
Comprehensive income
   $ 30,283     $ 14,278  
    
 
 
   
 
 
 
     
Earnings per share:
                
Basic
   $ 0.82     $ 0.38  
Diluted
   $ 0.81     $ 0.37  
Weighted average common shares outstanding:
                
Basic
     39,989       39,757  
Diluted
     40,474       40,124  
See accompanying notes to condensed consolidated financial statements.
 
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MARCUS & MILLICHAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except for shares)
(Unaudited)

                                                                         
    Three Months Ended March 31, 2022  
    Preferred Stock     Common Stock     Additional
Paid-In

Capital
    Stock Notes
Receivable
From
Employees
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  
    Shares     Amount     Shares     Amount  
Balance at December 31, 2021
    —       $ —         39,692,373     $ 4     $ 121,844     $ —       $ 573,546     $ 910     $ 696,304  
Net and comprehensive income (loss)
    —         —         —         —         —         —         32,783       (2,500     30,283  
Stock-based award activity
                                                                       
Stock-based compensation
    —         —         —         —         3,856       —         —         —         3,856  
Issuance of common stock for vesting of restricted stock units
    —         —         167,263       —         —         —         —         —         —    
Shares withheld related to net share settlement of stock-based awards
    —         —         (64,237     —         (2,918     —         —         —         (2,918
Dividends on common stock
    —         —         —         —         —         —         (52,136     —         (52,136
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance as of March 31, 2022
    —       $ —         39,795,399     $ 4     $ 122,782     $ —       $ 554,193     $ (1,590   $ 675,389  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
                                                                         
    Three Months Ended March 31, 2021  
    Preferred Stock     Common Stock     Additional
Paid-In

Capital
    Stock Notes
Receivable
From
Employees
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total  
    Shares     Amount     Shares     Amount  
Balance at December 31, 2020
    —       $ —         39,401,976     $ 4     $ 113,182     $ —       $ 431,076     $ 2,574     $ 546,836  
Net and comprehensive income
    —         —         —         —         —         —         15,012       (734     14,278  
Stock-based award activity
                                                                       
Stock-based compensation
    —         —         —         —         2,288       —         —         —         2,288  
Issuance of common stock for vesting of restricted stock units
    —         —         149,117       —         —         —         —         —         —    
Shares withheld related to net share settlement of stock-based awards
    —         —         (50,127     —         (1,733     —         —         —         (1,733
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Balance as of March 31, 2021
    —       $ —         39,500,966     $ 4     $ 113,737     $ —       $ 446,088      $  1,840      $ 561,669  
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
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MARCUS & MILLICHAP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
     Three Months Ended
March 31,
 
     2022     2021  
Cash flows from operating activities
                
Net income
   $ 32,783     $ 15,012  
Adjustments to reconcile net income to net cash used in operating activities:
                
Depreciation and amortization
     3,911       2,997  
Noncash lease expense
     5,961       6,009  
Credit loss recovery
     (167     (146
Stock-based compensation
     3,856       2,288  
Deferred taxes, net
     1,104       909  
Unrealized foreign exchange (gains) losses
     (151     (157
Net realized gains on marketable debt securities,
available-for-sale
     (113     (1
Other
non-cash
items
     11       (49
Changes in operating assets and liabilities:
                
Commissions receivable
     3,430       1,776  
Prepaid expenses
     2,850       74  
Advances and loans
     (25,084     (4,440
Other assets
     (794     (1,187
Accounts payable and other liabilities
     1,308       2,071  
Income tax receivable/payable
     10,189       4,786  
Accrued bonuses and other employee related expenses
     (33,990     (9,362
Deferred compensation and commissions
     (65,384     (33,781
Operating lease liabilities
     (5,031     (5,275
Other liabilities
     (2,224     (1,626
    
 
 
   
 
 
 
Net cash flows used in operating activities
     (67,535     (20,102
    
 
 
   
 
 
 
Cash flows from investing activities
                
Acquisition of businesses, net of cash received
     (12,500     229  
Purchases of marketable debt securities,
available-for-sale
     (40,551     (81,264
Proceeds from sales and maturities of marketable debt securities,
available-for-sale
     61,970       85,065  
Issuances of employee notes receivable
     (71     (40
Payments received on employee notes receivable
     18       250  
Purchase of property and equipment
     (1,883     (1,099
    
 
 
   
 
 
 
Net cash flows provided by investing activities
     6,983       3,141  
    
 
 
   
 
 
 
Cash flows from financing activities
                
Taxes paid related to net share settlement of stock-based awards
     (2,918     (1,733
Principal payments on stock appreciation rights liability
     (1,761     (1,481
Principal payments on contingent and deferred consideration
     (1,264     (1,302
    
 
 
   
 
 
 
Net cash flows used in financing activities
     (5,943     (4,516
    
 
 
   
 
 
 
Effect of currency exchange rate changes on cash and cash equivalents
     50       33  
    
 
 
   
 
 
 
Net (decrease) in cash and cash equivalents
     (66,445     (21,444
Cash and cash equivalents at beginning of period
     382,140       243,152  
    
 
 
   
 
 
 
Cash and cash equivalents at end of period
   $ 315,695     $ 221,708  
    
 
 
   
 
 
 
     
Supplemental disclosures of cash flow information
                
Interest paid during the period
   $ 499     $ 697  
    
 
 
   
 
 
 
Income taxes paid, net
   $ 464     $ 339  
    
 
 
   
 
 
 
See accompanying notes to condensed consolidated financial statements.
 
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Table of Contents
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Description of Business, Basis of Presentation and Recent Accounting Pronouncements
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 March 31, 2022, MMI operates 81 offices in the United States and Canada through its wholly-owned subsidiaries, including the operations of Marcus & Millichap Capital Corporation.
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, Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”). 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 MMC’s shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness of MMC. MMI completed its IPO in November 2013.
Basis of Presentation
The financial information presented in the accompanying unaudited condensed consolidated financial statements, has been prepared in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form
10-Q
and
Article 10-01
of
Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial position, results of operations and cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto, including the Company’s accounting policies for the year ended December 31, 2021 included in the Company’s Annual Report on Form
10-K
filed on March 1, 2022 with the SEC. The results of the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022, for other interim periods or for future years.
Considerations Related to the
COVID-19
Pandemic
The Company may continue to experience operational and financial impacts due to the ongoing
COVID-19
pandemic and actual results may differ from the Company’s current estimates and historical trends because of that uncertainty. Notwithstanding the potential continuing impact of the
COVID-19
pandemic and changes in interest rates on the current macroeconomic environment, the Company believes it is well positioned to achieve long-term growth.
See Note 5 – “Acquisitions, Goodwill and Other Intangible Assets” and Note 8 – “Fair Value Measurements” for further discussions on the potential impacts of
COVID-19.
Consolidation
The accompanying condensed 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.
Use of Estimates
The preparation of condensed 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
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Table of Contents
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, investments in marketable debt securities,
available-for-sale,
security deposits (included under other assets,
non-current)
and commissions receivable, net. 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 and ratings of marketable debt 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 money market funds that represent amounts recorded as cash and cash equivalents. The Company historically has not experienced any significant losses related to cash and cash equivalents.
In September 2021, the Company entered into a Strategic Alliance (“Strategic Alliance”) with M&T Reality Capital Corporation (“MTRCC”) pursuant to which the Company has agreed to provide loan opportunities that may be funded through MTRCC’s Delegated Underwriting and Servicing Agreement (“DUS Agreement”) with the Federal National Mortgage Association (“Fannie Mae”) and which requires MTRCC to guarantee a portion of each loan funded. On a
loan-by-loan
basis, the Company, at its option, can indemnify a portion of MTRCC’s guarantee obligation of loan opportunities presented to and closed by MTRCC though the DUS Agreement. The Company manages and limits the concentration of risk related to the guarantees assumed by monitoring the underlying property type, geographic location, credit of the borrowers, underlying debt service coverage, and loan to value ratios.
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 maintains allowances, as needed, for estimated credit losses based on management’s assessment of the likelihood of collection. For the three months ended March 31, 2022 and 2021, 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 three months ended March 31, 2022, the Company’s Canadian operations represented 2.3% of total revenues. During the three months ended March 31, 2021, the Company’s Canadian operations represented less than 2% of total revenues.
During each of the three months ended March 31, 2022 and 2021, no office represented 10% or more of total revenues.
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 and generates financing fees from securing financing on purchase transactions, from refinancing its clients’ existing mortgage debt and other ancillary fees associated with financing activities, including, but not limited to, mortgage servicing, debt and equity advisory services, loan sales, due diligence services, guarantee fees, loan performance fees and other consulting. The Company’s contracts, except as noted below, do not contain multiple-element arrangements, variable consideration, financing components, significant noncash consideration, licenses, long-term contracts with customers or other items affecting the transaction price.
Real Estate Brokerage Commissions
Contracts for representing buyers and sellers of real estate are usually negotiated on a
transaction-by-transaction
basis. The consideration associated with the successful outcome remains constrained until the completion of a transaction which, in almost all cases, is at the close of escrow. At that time, the Company recognizes revenue related to the transaction. The Company’s fee agreements do not include terms or conditions that require the Company to perform any service or fulfill any obligation once the transaction closes.
Financing Fees
Contracts for representing potential borrowers are usually negotiated on a
transaction-by-transaction
basis. The consideration associated with the successful outcome remains constrained until the completion of a transaction which, in almost all cases, is at the time the loan closes. At that time, the Company recognizes revenue related to the transaction. The Company’s fee arrangements, with certain exceptions, do not include terms or conditions that require the Company to perform any service or fulfill any obligation once the loan closes.
Loan Performance Fees
- For loans originated through the Strategic Alliance with MTRCC, the Company receives variable consideration in the form of loan performance fees based on a portion of the servicing fees expected to be received under the servicing contract for servicing the loan. As the Company is not obligated to perform any servicing functions and has no further obligations related to the transaction giving rise to the loan performance fees, the estimated value of the loan performance fees to be received is recorded at the time the loan closes and are collected over the estimated term of the related loan. Any changes in the estimate of loan performance fees to be received are recorded in revenue in the period the estimate changes.
 
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Table of Contents
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Guarantee Obligations
- For certain loans originated through the Strategic Alliance with MTRCC, the Company may agree, at its option, to indemnify MTRCC for a portion of MTRCC’s obligations for loans sold to Fannie Mae. For these loans, the Company allocates a portion of the transaction price and records a loan guarantee obligation based on its fair value. Revenue for this stand ready obligation is recorded on a straight-line basis over the term of the estimated guarantee period and is recorded in financing fees in the condensed consolidated statements of net and comprehensive income. The guarantee obligation is capped at 16.7% of the unpaid principal balance in excess of the collateral securing such loan. For these loans, the Company also records an allowance for loss-sharing obligations based on the unpaid balance of the loan for its portion of the obligation guaranteed to MTRCC.
Mortgage Servicing
- The Company recognizes mortgage servicing revenues upon the acquisition of a servicing contract. The Company records servicing fees when earned provided the loans are current and the debt service payments are made by the borrowers.
Other Revenues
Other revenues include fees generated from consulting and advisory services, as well as referral fees from other real estate brokers, and are recognized when services are provided, or upon closing of the transaction.
Recent Accounting Pronouncements
Pending Adoption
In March 2020, the FASB issued Accounting Standards Update (“ASU”)
No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(“ASU
2020-04”).
ASU
2020-04
provides temporary optional exceptions to the guidance in U.S. GAAP on contract modifications to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). ASU
2020-04
is effective for all entities upon issuance and may be applied prospectively to contract modifications through December 31, 2022. The guidance applies to the Company’s Credit Agreement (see Note 13 – “Commitments and Contingencies”), which references LIBOR, and will generally allow it to account for and present a modification as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. As of March 31, 2022, the Company has not drawn funds from the credit facility. The Company continues to evaluate the impact of this new standard but does not expect ASU
2020-04
to have a material effect on its condensed consolidated financial statements.
 
2.
Property and Equipment, Net
Property and equipment, net consisted of the following (in thousands):
 
     March 31,
2022
     December 31,
2021
 
Computer software and hardware equipment
   $ 35,404      $ 33,819  
Furniture, fixtures and equipment
     24,817        24,511  
Less: accumulated depreciation and amortization
     (36,972      (35,138
    
 
 
    
 
 
 
     $ 23,249      $ 23,192  
    
 
 
    
 
 
 
During the three months ended March 31, 2022 and 2021, the Company
wrote-off
approximately $22,000 and $41,000, respectively, of fully depreciated computer software and hardware equipment and furniture, fixtures and equipment.
As of March 31, 2022 and 2021, property and equipment additions incurred but not yet paid included in accounts payable and other liabilities were $406,000 and $275,000, respectively.
 
3.
Operating Leases
The Company has operating leases for all of its facilities and autos. As of March 31, 2022 and December 31, 2021, operating lease
right-of-use
(“ROU”) assets, net were $77.9 million and $81.5 million, respectively.
 
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Table of Contents
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The operating lease cost, included in selling, general and administrative expense in the condensed consolidated statement
s
of net and comprehensive income, consisted of the following (in thousands):
 
     Three Months Ended
March 31,
 
     2022      2021  
Operating lease cost:
                 
Lease cost
(1)
   $ 6,544      $ 6,589  
Variable lease cost
(2)
     1,363        1,400  
Sublease income
     (234      (33
    
 
 
    
 
 
 
     $ 7,673      $ 7,956  
    
 
 
    
 
 
 
 
(1)
Includes short-term lease cost and ROU asset amortization.
(2)
Primarily relates to common area maintenance, property taxes, insurance, utilities and parking.
Maturities of lease liabilities by year consisted of the following (in thousands):
 
     March 31, 2022  
Remainder of 2022
   $ 15,484  
2023
     18,311  
2024
     15,829  
2025
     13,320  
2026
     9,716  
Thereafter
     7,027  
    
 
 
 
Total future minimum lease payments
     79,687  
Less imputed interest
     (5,104
    
 
 
 
Present value of operating lease liabilities
   $ 74,583  
    
 
 
 
Supplemental cash flow information and noncash activity related to the operating leases consisted of the following (in thousands):
 
     Three Months Ended
March 31,
 
     2022      2021  
Operating cash flow information:
                 
Cash paid for amounts included in the measurement of operating lease liabilities
   $ 5,589      $ 5,862  
Noncash activity:
                 
ROU assets obtained in exchange for operating lease liabilities
   $ 2,435      $ 3,004  
Tenant improvements owned by lessor related to ROU assets
(1)
   $ 66       $ 55   
 
(1)
Reclassification from other assets current.
Other information related to the operating leases consisted of the following:
 
     March 31, 2022     December 31, 2021  
Weighted average remaining operating lease term
     4.44 years       4.57 years  
Weighted average discount rate
     2.9     2.9
 
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Table of Contents
MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
4.
Investments in Marketable Debt Securities, Available for Sale
Amortized cost, allowance for credit losses, gross unrealized gains/losses in accumulated other comprehensive income (loss) and fair value of marketable debt securities,
available-for-sale,
by type of security consisted of the following (in thousands):
 
     March 31, 2022  
     Amortized
Cost
     Allowance
for Credit
Losses
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
Short-term investments:
                                           
U.S. treasuries
   $ 101,141      $ —        $ —        $ (849   $ 100,292  
Corporate debt
     118,271        —          7        (193     118,085  
Asset-backed securities (“ABS”) and other
     603        —          8        —         611  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
     $
 
 
220,015
 
 
   $ —        $ 15      $ (1,042   $ 218,988  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Long-term investments:
                                           
U.S. treasuries
   $ 12,420      $ —        $ 9      $ (311   $ 12,118  
U.S. government sponsored entities
     674        —          —          (18     656  
Corporate debt
     34,300        —          147        (1,141     33,306  
Asset-backed securities (“ABS”) and other
     7,125        —          5        (230     6,900  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
     $ 54,519      $ —        $ 161      $ (1,700   $ 52,980  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
     December 31, 2021  
     Amortized
Cost
     Allowance
for Credit
Losses
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 
Short-term investments:
                                           
U.S. treasuries
   $ 35,767      $ —        $ —        $ (34   $ 35,733  
Corporate debt
     148,148        —          22        (35     148,135  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
     $ 183,915      $ —        $ 22      $ (69   $ 183,868  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Long-term investments:
                                           
U.S. treasuries
   $ 70,902      $ —        $ 128      $ (263   $ 70,767  
U.S. government sponsored entities
     726        —          22        (3     745  
Corporate debt
     33,197        —          962        (146     34,013  
ABS and other
     7,033        —          82        (30     7,085  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
     $ 111,858      $ —        $ 1,194      $ (442   $ 112,610  
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
The Company’s investments in marketable debt securities,
available-for-sale,
that have been in a continuous unrealized loss position, for which an allowance for credit losses has not been recorded, by type of security consisted of the following (in thousands):
 
     March 31, 2022  
     Less than 12 months     12 months or greater     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
U.S. treasuries
   $ 111,232      $ (1,160     —          —       $ 111,232      $ (1,160
U.S. government sponsored entities
     549        (8     105        (10     654        (18
Corporate debt
     137,510        (1,277     618        (57     138,128        (1,334
ABS and other
     6,181        (230     —          —         6,181        (230
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
     $ 255,472      $ (2,675   $ 723      $ (67   $ 256,195      $ (2,742
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
     December 31, 2021  
     Less than 12 months     12 months or greater     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
U.S. treasuries
   $ 103,019      $ (297   $ —        $ —       $ 103,019      $ (297
U.S. government sponsored entities
     115        (3     —          —         115        (3
Corporate debt
     115,908        (173     146        (8     116,054        (181
ABS and other
     2,915        (30     —          —         2,915        (30
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
     $ 221,957      $ (503   $ 146      $ (8   $ 222,103      $ (511
    
 
 
    
 
 
   
 
 
    
 
 
   
 
 
    
 
 
 
Gross realized gains and losses from the sales of the Company’s marketable debt securities,
available-for-sale,
consisted of the following (in thousands):
 
     Three Months Ended
March 31,
 
     2022      2021  
Gross realized gains
(1)
   $ 113      $ 1  
    
 
 
    
 
 
 
Gross realized losses
(1)
   $ —        $ —    
    
 
 
    
 
 
 
 
(1)
Recorded in other income, net in the condensed consolidated statements of net and comprehensive income. The cost basis of securities sold were determined based on the specific identification method.
The Company invests its excess cash in a diversified portfolio of fixed and variable rate debt securities to meet current and future cash flow needs. All investments are made in accordance with the Company’s approved investment policy. As of March 31, 2022, the portfolio had an average credit rating of AA and a weighted term to contractual maturity of 1.4 years, with 161 securities in the portfolio representing an unrealized aggregate loss
 of
$2.7 million or 1% of amortized cost, and a weighted average credit rating of AA+.
As of March 31, 2022, the Company performed an impairment analysis and determined an allowance for credit losses was not required. The Company determined that it did not have an intent to sell and it was not more likely than not that the Company would be required to sell any security based on its current liquidity position, or to maintain compliance with its investment policy, specifically as it relates to minimum credit ratings. The Company evaluated the securities with an unrealized loss considering severity of loss, credit ratings, specific credit events during the period since acquisition, overall likelihood of default, market sector, potential impact from the current economic environment, geopolitical unrest and a review of an issuer’s and securities’ liquidity and financial strength, as needed. The Company concluded that it would receive all scheduled interest and principal payments. The Company, therefore, determined qualitatively that the unrealized loss was related to changes in interest rates and other market factors and therefore no allowance for credit losses was required.
Amortized cost and fair value of marketable debt securities,
available-for-sale,
by contractual maturity consisted of the following (in thousands, except weighted average data):
 
     March 31, 2022      December 31, 2021  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  
Due in one year or less
   $ 220,015      $ 218,988      $ 183,915      $ 183,868  
Due after one year through five years
     36,442        35,478        96,035        96,257  
Due after five years through ten years
     12,978        12,582        11,129        11,601  
Due after ten years
     5,099        4,920        4,694        4,752  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 274,534      $ 271,968      $ 295,773      $ 296,478  
    
 
 
    
 
 
    
 
 
    
 
 
 
Weighted average contractual maturity
              1.4 years                 1.5 years  
Actual maturities may differ from contractual maturities because certain issuers have the right to prepay certain obligations with or without prepayment penalties.
 
5.
Acquisitions, Goodwill and Other Intangible Assets
During the three months ended March 31, 2022, the Company expanded its network of financing professionals and provided further diversification to its financing services.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The Company completed an acquisition of a business that was accounted for as a business combination and the results have been included in the condensed consolidated financial statements beginning on the acquisition date. Terms of the acquisition principally included cash paid at closing.
The goodwill recorded as part of the acquisition primarily arose from the acquired assembled workforce and brokerage and financing sales platforms. The Company expects all of the goodwill to be tax deductible, with the
tax-deductible
amount of goodwill related to the contingent and deferred consideration to be determined once the cash payments are made to settle any contingent and deferred consideration. The goodwill resulting from acquisitions is allocated to the Company’s one reporting unit.
Goodwill and intangible assets, net consisted of the following (in thousands):
                                                 
     March 31, 2022      December 31, 2021  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Book
Value
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net Book
Value
 
Goodwill and intangible assets:
                                                   
Goodwill
   $ 38,101      $ —       $ 38,101      $ 34,071      $ —       $ 34,071  
Intangible assets
(1)
     32,444        (11,111     21,333        23,974        (9,940     14,034  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 
     $ 70,545      $ (11,111   $ 59,434      $ 58,045      $ (9,940   $ 48,105  
    
 
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
 

(1)
Total weighted average amortization period was 5.2 years and 4.4 years as of March 31, 2022 and December 31, 2021, respectively.
Amortization expense for the intangible assets was $1.2 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively.
The changes in the carrying amount of goodwill consisted of the following (in thousands):
                 
     Three Months Ended
March 31,
 
     2022      2021  
Beginning balance
   $ 34,071      $ 33,375  
Additions from acquisitions
(1)
     4,030        671  
Impairment losses
     —          —    
    
 
 
    
 
 
 
Ending balance
   $ 38,101      $ 34,046  
    
 
 
    
 
 
 

(1)
The 2021 addition represents a measurement period adjustment for an acquisition made in 2020.
Estimated amortization expense for intangible assets by year for the next five years and thereafter consisted of the following (in thousands):
         
     March 31, 2022  
Remainder of 2022
   $ 3,512  
2023
     4,617  
2024
     4,101  
2025
     3,881  
2026
     2,156  
Thereafter
     3,066  
    
 
 
 
     $ 21,333  
    
 
 
 
The Company evaluates goodwill for impairment annually in the fourth quarter. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing, which indicate that it is more likely than not an impairment loss has occurred. The Company evaluates its intangible assets that have finite useful lives whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
As of March 31, 2022, the Company considered the impact of the continuing
COVID-19
pandemic and geopolitical unrest and evaluated its goodwill and intangible assets for impairment testing. The Company estimated the recoverability of the intangible assets by comparing the carrying amount of each asset to the future undiscounted cash flows that the Company expects the asset to generate. The sum of the undiscounted expected future cash flows was greater than the carrying amount of the intangible assets. The Company concluded that as of March 31, 2022, there was no impairment of its goodwill and intangible assets.
 
6.
Selected Balance Sheet Data
Allowances on Advances and Loans, and Commissions Receivable
Allowance for credit losses for advances and loans and commissions receivable as of March 31, 2022 and December 31, 2021 was $667,000 and $794,000, respectively.
Other Assets
Other assets consisted of the following (in thousands):
                                 
     Current     
Non-Current
 
     March 31,
2022
     December 31,
2021
     March 31,
2022
     December 31,
2021
 
Mortgage servicing rights (“MSRs”), net of amortization
   $ —        $ —        $ 951      $ 1,855  
Security deposits
     —          —          1,484        1,395  
Employee notes receivable
(1)
     67        40        —          —    
Securities,
held-to-maturity
(2)
     —          —          9,500        9,500  
Customer trust accounts and other
     5,960        5,230        338        396  
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 6,027      $ 5,270      $ 12,273      $ 13,146  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable were $0 and $10 for the three months ended March 31, 2022 and March 31, 2021, respectively. See Note 7 – “Related-Party Transactions” for additional information.
(2)
Securities,
held-to-maturity,
are expected to mature on September 1, 2024 and accrue interest based on the
1-year
treasury rate.
MSRs
The net change in the carrying value of MSRs consisted of the following (in thousands):
 
                 
     Three Months Ended
March 31,
 
     2022      2021  
Beginning balance
   $ 1,855      $ 1,897  
Additions
     —          303  
Amortization
     (904      (138
    
 
 
    
 
 
 
Ending balance
   $ 951      $ 2,062  
    
 
 
    
 
 
 
The portfolio of loans serviced by the Company aggregated $1.7 billion for each of the periods ended March 31, 2022 and December 31, 2021. See Note 8 – “Fair Value Measurements” for additional information on MSRs. In the three months ended March 31, 2022, the Company received cancellation notices on certain servicing contracts. Amortization of those contracts was adjusted to reflect the cancellations.
In connection with MSR activities, the Company holds funds in escrow for the benefit of the lenders. These funds, which totaled $2.6 million and $4.1 million as of March 31, 2022 and December 31, 2021, respectively, and the offsetting obligations are not presented in the Company’s condensed consolidated financial statements as they do not represent assets and liabilities of the Company.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Deferred Compensation and Commissions
Deferred compensation and commissions consisted of the following (in thousands):
 
     Current     
Non-Current
 
     March 31,
2022
     December 31,
2021
     March 31,
2022
     December 31,
2021
 
Stock appreciation rights (“SARs”) liability
(1)
   $ 2,323      $ 2,241      $ 12,731      $ 14,918  
Commissions payable to investment sales and financing professionals
     51,195        110,769        25,082        31,697  
Deferred compensation liability
(1)
     749        1,080        7,790        6,921  
Other
     727        595        —          —    
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 54,994      $ 114,685      $ 45,603      $ 53,536  
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
The SARs and deferred compensation liability become subject to payout as a result of a participant no longer being considered a service provider. As a result of the retirement of certain participants, estimated amounts to be paid to the participants within the next twelve months have 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 year upon retirement or termination from service, or in full upon consummation of a change in control of the Company.
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, 2022 and 2021 were 3.63% and 2.93%, respectively. MMI recorded interest expense related to this liability of $135,000 and $122,000 for the three months ended March 31, 2022 and 2021, respectively.
Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During each of the three months ended March 31, 2022 and 2021, the Company made total payments of $2.2 million, consisting of principal and accumulated interest.
Commissions Payable
Certain investment sales professionals can 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 may 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 the Marcus & Millichap Deferred Compensation Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is a
non-qualified
deferred compensation plan that is intended to comply with Section 409A of the Internal Revenue Code and permits participants to defer compensation up to the limits set forth in the Deferred Compensation 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 condensed consolidated balance sheets. The assets in the trust are restricted unless the Company becomes insolvent, in which case the trust assets are subject to the claims of the Company’s 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 or elected in service payout have been classified as current. During the three months ended March 31, 2022 and 2021, the Company made total payments to participants of $365,000 and $371,000, respectively.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
The assets held in the rabbi trust are carried at the cash surrender value of the variable life insurance policies, which represents its fair value. 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):
 
     Three Months Ended
March 31,
 
     2022      2021  
Increase (Decrease) in the carrying value of the assets held in the rabbi trust
(1)
   $ (525    $ 333  
    
 
 
    
 
 
 
Increase (Decrease) in the net carrying value of the deferred compensation obligation
(2)
   $ (532    $ 260  
    
 
 
    
 
 
 
 
(1)
Recorded in other income, net in the condensed consolidated statements of net and comprehensive income.
(2)
Recorded in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income.
Other Liabilities
Other liabilities consisted of the following (in thousands):
 
    
Non-Current
 
     March 31,
2022
     December 31,
2021
 
Deferred consideration
(1)
   $ 3,300      $ 4,689  
Contingent consideration
(1)
     5,782        6,631  
Dividends Payable
     1,443        —    
Other
     82        74  
    
 
 
    
 
 
 
     $ 10,607      $ 11,394  
    
 
 
    
 
 
 
 
(1)
Includes a measurement period adjustment in 2021 and a settlement of deferred consideration made during the three months ended March 31, 2022 and 2021, which represents a noncash investing activity. See Note 5 – “Acquisitions, Goodwill and Other Intangible Assets” for additional information.
 
7
.
Related-Party Transactions
Shared and Transition Services
Certain services are provided to the Company under a Transition Services Agreement (“TSA”) between MMC and the Company. The TSA is intended to provide certain services until the Company acquires these services separately. Under the TSA, the Company incurred net costs (charge-back) during the three months ended March 31, 2022 and 2021 of $12,000 and $19,000, respectively. These amounts are included in selling, general and administrative expense in the accompanying condensed 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 three months ended March 31, 2022 and 2021, the Company earned real estate brokerage commissions and financing fees of $1,598,000 and $457,000, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $954,000 and $274,000, 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. The related operating lease cost was $333,000 for each of the three months ended March 31, 2022 and 2021, respectively. Operating lease cost is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income. See Note 3 – “Operating Leases” for additional information.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Accounts Payable and Other Liabilities with MMC
As of March 31, 2022 and December 31, 2021, accounts payable and other liabilities with MMC totaling $101,000 and $93,000, respectively, remain unpaid and are included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.
Other
The Company makes advances to
non-executive
employees from
time-to-time.
At March 31, 2022 and December 31, 2021, the aggregate principal amount for employee notes receivable was $67,000 and $40,000, respectively, which is included in other assets (current and
non-current)
in the accompanying condensed consolidated balance sheets. See Note 6 – “Selected Balance Sheet Data” for additional information.
As of March 31, 2022, George M. Marcus, the Company’s founder and Chairman, beneficially owned approximately 38% of the Company’s issued and outstanding common stock, including shares owned by Phoenix Investments Holdings, LLC and the Marcus Family Foundation II.
 
8.
Fair Value Measurements
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 fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to provide and validate the values utilized.
The degree of judgment used in measuring the fair value of financial instruments is generally inversely correlated 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 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:
Unobservable inputs reflect management’s 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. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Recurring Fair Value Measurements
The Company values its investments including commercial paper and floating NAV money market funds recorded in cash and cash equivalents, investments in marketable debt securities,
available-for-sale,
assets held in the rabbi trust, deferred compensation liability and contingent and deferred consideration at fair value on a recurring basis.
Fair values for investments included in cash and cash equivalents and marketable debt securities,
available-for-sale
were determined for each individual security in the investment portfolio and all these securities are Level 1 or 2 measurements as appropriate.
Fair values for assets held in the rabbi trust and related deferred compensation liability were determined based on the cash surrender value of the company owned variable life insurance policies and underlying investments in the trust, and are Level 2 and Level 1 measurements, respectively.
Contingent consideration in connection with acquisitions, is carried at fair value and determined on a
contract-by-contract
basis, calculated using unobservable inputs based on a probability of achieving EBITDA and other performance requirements, and is a Level 3 measurement. Deferred consideration in connection with acquisitions is carried at fair value and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time, and is a Level 2 measurement.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):
                                                                 
     March 31, 2022      December 31, 2021  
     Fair Value      Level 1      Level 2      Level 3      Fair Value      Level 1      Level 2      Level 3  
Assets:
                                                                       
Assets held in rabbi trust
   $ 10,916      $ —        $ 10,916      $ —        $ 11,508      $ —        $ 11,508      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Cash equivalents
(1)
:
                                                                       
Commercial paper
   $ 32,223      $ —        $ 32,223      $ —        $ 8,948      $ —        $ 8,948      $ —    
Money market funds
     51,403        51,403        —          —          210,985        210,985        —          —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 83,626      $ 51,403      $ 32,223      $ —        $ 219,933      $ 210,985      $ 8,948      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
                 
Marketable debt securities,
available-for-sale:
                                                                       
Short-term investments:
                                                                       
U.S. treasuries
   $ 100,292      $ 100,292      $ —        $ —        $ 35,733      $ 35,733      $ —        $ —    
U.S. government sponsored entities
     —          —          —          —          —          —          —          —    
Corporate debt
     118,085        —          118,085        —          —          —          —          —    
ABS and other
     611        —          611        —          148,135        —          148,135        —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 218,988      $ 100,292      $ 118,696      $ —        $ 183,868      $ 35,733      $ 148,135      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
                 
Long-term investments:
                                                                       
U.S. treasuries
   $ 12,118      $ 12,118      $ —        $ —        $ 70,767      $ 70,767      $ —        $ —    
U.S. government sponsored entities
     656        —          656        —          745        —          745        —    
Corporate debt
     33,306        —          33,306        —          34,013        —          34,013        —    
ABS and other
     6,900        —          6,900        —          7,085        —          7,085        —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
     $ 52,980        12,118      $ 40,862      $ —        $ 112,610      $ 70,767      $ 41,843      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
                 
Liabilities:
                                                                       
                 
Contingent consideration
(2)
   $ 9,363      $ —        $ —        $ 9,363      $ 9,312      $ —        $ —        $ 9,312  
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
                 
Deferred consideration
(2)
   $ 8,371      $ —        $ 8,371      $ —        $ 9,801      $ —        $ 9,801      $ —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
                 
Deferred compensation liability
   $ 8,539      $ 8,539      $ —        $ —        $ 8,001      $ 8,001      $ —        $ —    
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.
(2)
$3,581 and $2,681 of Contingent consideration and $5,071 and $5,112 of Deferred consideration are included in Accounts payable and other liabilities as of March 31, 2022 and December 31, 2021, respectively.
There were no transfers in or out of Level 3 during the three months ended March 31, 2022 and 2021.
During the three months ended March 31, 2022, the Company considered current and future interest rates on the probability of achieving EBITDA and other performance targets in its determination of fair value for the contingent consideration. The Company is uncertain as to the extent of the volatility in the unobservable inputs in the foreseeable future. Deferred consideration in connection with acquisitions is carried at fair value and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time.
As of March 31, 2022 and December 31, 2021, contingent and deferred consideration had a maximum undiscounted payment to be settled in cash or stock of $27.2 million and $28.6 million, respectively. Assuming the achievement of the applicable performance criteria and/or service and time requirements, the Company anticipates these payments will be made over the next one to five-year period. Changes in fair value are included in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):
 
     Three Months Ended
March 31,
 
     2022      2021  
Beginning balance
   $ 9,312      $ 5,572  
Contingent consideration in connection with acquisitions
(1)
     —          (100
Change in fair value of contingent consideration
     51        (171
Payments of contingent consideration
     —          —    
    
 
 
    
 
 
 
Ending balance
   $ 9,363      $ 5,301  
    
 
 
    
 
 
 
 
(1)
Contingent consideration in connection with acquisitions represents a noncash investing activity. Three months ended March 31, 2021 relates to a measurement period adjustment. See Note 5 – “Acquisitions, Goodwill and Other Intangible Assets” for additional information.
Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial liabilities measured at fair value on a recurring basis consisted of the following (dollars in thousands):
 
     Fair Value at
March 31, 2022
    
Valuation Technique
  
Unobservable inputs
   Range
(Weighted Average) 
(1)
 
Contingent consideration
   $ 9,363      Discounted cash flow    Expected life of cash flows     
1.2-5.6 years (3.1
 y
ears)
 
                   Discount rate     
4.0%-4.6%       (4.3%)
 
                   Probability of achievement     
22.2%-100.0%     (96.6%)
 
         
     Fair Value at
December 31, 2021
    
Valuation Technique
  
Unobservable inputs
   Range
(Weighted Average)
(1)
 
Contingent consideration
   $ 9,312      Discounted cash flow    Expected life of cash flows     
1.4-5.8
years (3.4 years)
 
                   Discount rate     
2.2%-3.5%       (2.9%)
 
                   Probability of achievement     
29.0%-100.0%     (95.2%)
 
 
(1)
Unobservable inputs were weighted by the relative fair value of the instruments.
Nonrecurring Fair Value Measurements
In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of MSRs, intangibles, goodwill and other assets for indications of impairment at least annually. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on valuation approaches, which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required.
MSRs are recorded at fair value upon acquisition of a servicing contract. The Company has elected the amortization method for the subsequent measurement of MSRs. MSRs are carried at the lower of amortized cost or fair value. MSRs are a Level 3 measurement. The Company’s MSRs do not trade in an active, open market with readily observable prices. The estimated fair value of the Company’s MSRs were developed using a discounted cash flow model that calculates the present value of estimated future net servicing income. The model considers contractual provisions and assumptions of market participants including specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. Management uses assumptions in the determination of fair value for MSRs after considering default, severity, prepayment and discount rates related to the specific types and underlying collateral of the various serviced loans, interest rates, refinance rates, and current government and private sector responses on the economic impact of the
COVID-19
pandemic. In the three months ended March 31, 2022, the Company received cancellation notices on certain servicing contracts. Amortization of those contracts was adjusted to reflect the cancellations. The fair value of the MSRs exceeded the carrying value at March 31, 2022 and December 31, 2021 after consideration of the revisions to the various assumptions. See Note 6 – “Selected Balance Sheet Data” for additional information.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial assets measured at fair value on a nonrecurring basis consisted of the following (dollars in thousands):
 
     Fair Value at
March 31, 2022
    
Valuation Technique
  
Unobservable inputs
   Range
(Weighted Average) 
(1)
 
MSRs
   $ 1,967      Discounted cash flow    Constant prepayment rates     
0.0%-20.0% (10.0%)
 
                   Constant default rate     
0.28%-5.08%   (1.28%)
 
                   Loss severity     
26.2%-31.4% (27.95%)
 
                   Discount rate     
10.0%-10.0%
(10.0%)
 
         
     Fair Value at
December 31, 2021
    
Valuation Technique
  
Unobservable inputs
   Range
(Weighted Average)
(1)
 
MSRs
   $ 2,332      Discounted cash flow    Constant prepayment rates     
0.0%-20.0%
(10.0%)
 
                   Constant default rate     
0.3%-4.9%   (1.2%)
 
                   Loss severity     
26.2%-31.4%
(28.0%)
 
                   Discount rate     
10.0%-10.0%
(10.0%)
 
 
(1)
Weighted average is based on the 10% constant prepayment rate scenario which the Company uses as the reported fair value.
 
9.
Stockholders’ Equity
Common Stock
As of March 31, 2022 and December 31, 2021, there were 39,795,399 and 39,692,373 shares of common stock, $0.0001 par value, issued and outstanding, which include unvested restricted stock awards (“RSAs”) issued to
non-employee
directors, respectively. See Note 12 – “Earnings per Share” for additional information.
On February 16, 2022, The Board of Directors declared a semi-annual regular dividend of $0.25 per share and a special dividend of $1.00 per share, payable on April 4, 2022, to stockholders of record at the close of business on March 8, 2022. The Company accrued a dividend payable of $52.1 million, including dividend equivalents aggregating $2.5 million to be paid upon vesting for on unvested restricted stock and deferred stock units granted under the 2013 Omnibus Equity Incentive Plan. The accrual of the dividend was a
non-cash
activity.
Accrued and unpaid dividends as of March 31, 2022 aggregated $52.1 million, and are recorded in dividends payable ($50.7 million) and other liabilities ($1.4 million) in the condensed consolidated balance sheets.
Preferred Stock
The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At March 31, 2022 and December 31, 2021, there were no preferred shares issued or outstanding.
Accumulated Other Comprehensive Income (Loss)
Amounts reclassified from accumulated other comprehensive income (loss) include marketable debt securities, available for sale are included as a component of other income, net or selling, general and administrative expense, as applicable, in the condensed consolidated statements of net and comprehensive income. The reclassifications were determined on a specific identification basis.
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.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
10.
Stock-Based Compensation Plans
2013 Omnibus Equity Incentive Plan
The Company’s board of directors adopted the 2013 Omnibus Equity Incentive Plan (the “2013 Plan”), which became effective upon the Company’s IPO. In February 2017, the board of directors amended and restated the 2013 Plan, which was approved by the Company’s stockholders in May 2017. Grants are made from time to time by the compensation committee of the Company’s 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. In addition,
non-employee
directors receive annual grants under a director compensation policy. The compensation committee of the Company’s board of directors has the option to grant dividend equivalents to unvested grants. Any dividend equivalents granted to unvested awards are paid to the participant at the time the related grants vest. As of March 31, 2022, there were 3,963,923 shares available for future grants under the 2013 Plan.
On February 16, 2022, the Board of Directors declared a semi-annual regular dividend of $0.25 per share and a special dividend of $1.00 per share payable on April 4, 2022, to stockholders of record at the close of business on March 8, 2022. The Compensation Committee granted dividend equivalents to all unvested grants as of the record date. As of March 31, 2022, $2.5 million was accrued for dividend equivalents on unvested grants outstanding as of the record date.
Awards Granted and Settled
Under the 2013 Plan, the Company has issued RSAs to
non-employee
directors and restricted stock units (“RSUs”) to employees and independent contractors. RSAs vest over a
one-year
period from the date of grant, subject to service requirements. RSUs generally vest in equal annual installments over a five-year period from the date of grant or earlier as approved by the compensation committee of the Company’s board of directors. Dividend equivalents granted for unvested stock awards are paid at the time the stock awards vest. Any unvested awards and dividend equivalents are canceled upon termination as a service provider. As of March 31, 2022, there were no issued or outstanding options, SARs, performance units or performance share awards under the 2013 Plan.
During the three months ended March 31, 2022, 176,227 shares of RSUs vested and 68,445 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. Unvested RSUs will be settled through the issuance of new shares of common stock.
Outstanding Awards
Activity under the 2013 Plan consisted of the following (dollars in thousands, except weighted average per share data):
                 
     Shares      Weighted-
Average Grant
Date Fair Value
Per Share
 
Nonvested shares at December 31, 2021
(1)
     980,936      $ 36.58  
Granted
     780,997      $ 47.29  
Vested
(2)
     (176,227    $ 36.84  
Forfeited/canceled
     (7,166    $ 36.38  
    
 
 
          
Nonvested shares at March 31, 2022
(1)
     1,578,540      $ 41.85  
    
 
 
          
Unrecognized stock-based compensation expense as of March 31, 2022
   $ 61,517           
    
 
 
          
Unrecognized compensation expense is expected to be recognized over a weighted-average period (years) of approximately
     4.22           
    
 
 
          
Weighted average remaining vesting period (years) as of March 31, 2022
     4.22           
    
 
 
          
 
(1)
Nonvested RSUs will be settled through the issuance of new shares of common stock.
(2)
Includes vested shares delivered subsequent to March 31, 2022.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Employee Stock Purchase Plan
In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“ESPP”). The ESPP is intended to qualify under Section 423 of the Internal Revenue 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 ESPP was a compensatory plan and is required to expense the fair value of the awards over each
6-month
offering period.
The ESPP initially had 366,667 shares of common stock reserved, and 156,725 shares of common stock remain available for issuance as of March 31, 2022. The ESPP 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 compensation committee of the board of directors. Pursuant to the provisions of the ESPP, the board of directors has determined to not provide for any annual increases to date. At March 31, 2022, total unrecognized compensation cost related to the ESPP was $27,000 and is expected to be recognized over a weighted average period of 0.12 years.
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 departure 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 deferred stock units (“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 employed by 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. As of March 31, 2022, 281,193 shares of fully vested DSUs remained to be settled in 2022.
Summary of Stock-Based Compensation
Components of stock-based compensation are included in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income and consisted of the following (in thousands):
                 
     Three Months Ended
March 31,
 
     2022      2021  
ESPP
   $ 56      $ 50  
RSUs and RSAs
     3,800        2,238  
    
 
 
    
 
 
 
     $ 3,856      $ 2,288  
    
 
 
    
 
 
 
 
11.
Income Taxes
The Company’s effective tax rate for the three months ended March 31, 2022 was 26.4%, compared to 28.8% for the three months ended March 31, 2021. The Company provides for the effects of income taxes in interim financial statements based on the Company’s estimate of its annual effective tax rate for the full year, which is based on forecasted income by jurisdiction where the Company operates, adjusted for any tax effects of items that relate discretely to the period, if any.
The provision for income taxes differs from the amount computed by applying the U.S. federal statutory rate to income before provision for income taxes and consisted of the following (dollars in thousands):
                                 
     Three Months Ended March 31,  
     2022     2021  
     Amount      Rate     Amount      Rate  
Income tax expense at the federal statutory rate
   $ 9,353        21.0   $ 4,431        21.0
State income tax expense, net of federal benefit
     2,033        4.6     1,048        5.0
(Windfall) shortfall tax benefits, net related to stock-based compensation
     (306      (0.7 )%      (27      (0.1 )% 
Change in valuation allowance
     (104      (0.2 )%      180        0.9
Permanent and other items
(1)
     781        1.7     454        2.0
    
 
 
    
 
 
   
 
 
    
 
 
 
     $ 11,757        26.4   $ 6,086        28.8
    
 
 
    
 
 
   
 
 
    
 
 
 
 
(1)
Permanent items relate principally to compensation charges, qualified transportation fringe benefits and meals and entertainment.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
12.
Earnings per Share
Basic and diluted earnings per share for the three months ended March 31, 2022 and 2021, respectively consisted of the following (in thousands, except per share data):
                 
     Three Months Ended
March 31,
 
     2022      2021  
Numerator (Basic and Diluted):
                 
Net income
   $ 32,783      $ 15,012  
Change in value for stock settled consideration
     (63      12  
    
 
 
    
 
 
 
Adjusted net income
   $ 32,720      $ 15,024  
    
 
 
    
 
 
 
     
Denominator:
                 
Basic
                 
Weighted average common shares issued and outstanding
     39,721        39,432  
Deduct: Unvested RSAs
(1)
     (13      (17
Add: Fully vested DSUs
(2)
     281        342  
    
 
 
    
 
 
 
Weighted average common shares outstanding
     39,989        39,757  
    
 
 
    
 
 
 
     
Basic earnings per common share
   $ 0.82      $ 0.38  
    
 
 
    
 
 
 
     
Diluted
                 
Weighted average common shares outstanding from above
     39,989        39,757  
Add: Dilutive effect of RSUs, RSAs & ESPP
     396        208  
Add: Contingently issuable shares
(3)
     89        159  
    
 
 
    
 
 
 
Weighted average common shares outstanding
     40,474        40,124  
    
 
 
    
 
 
 
Diluted earnings per common share
   $ 0.81      $ 0.37  
    
 
 
    
 
 
 
     
Antidilutive shares excluded from diluted earnings per common share
(4)
     778        230  
    
 
 
    
 
 
 
 
(1)
RSAs were issued and outstanding to the
non-employee
directors and have a
one-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 10 – “Stock-Based Compensation Plans” for additional information.
(3)
Relates to contingently issuable stock settled consideration.
(4)
Primarily pertaining to RSU grants to the Company’s employees and independent contractors.
 
13.
Commitments and Contingencies
Credit Agreement
On June 18, 2014, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (the “Bank”), as amended and restated on May 28, 2019, and further, amended on November 27, 2019 and on February 9, 2021 (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 Company’s domestic subsidiaries (the “Credit Facility”) and matures on June 1, 2022. 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. Upon the expiration of the use of the LIBOR as a benchmark, the benchmark will be replaced with the SOFR plus a spread adjustment.
 
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MARCUS & MILLICHAP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
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 March 31, 2022. Borrowings under the Credit Facility will bear interest, at the Company’s option, at either (i) a fluctuating rate per annum 2.00% below the Base Rate (defined as the highest of (a) the Bank’s prime rate,
(b) one-month
LIBOR plus 1.50%, and (c) the federal funds rate plus 1.50%), or (ii) at a fixed rate per annum determined by Bank to be between 0.875% to 1.125% above LIBOR. In connection with the amendments of the Credit Agreement, 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 and commitment fee is included in interest expense in the accompanying condensed consolidated statements of net and comprehensive income and was $25,000 and $24,000 for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, 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, determined on a rolling four-quarter basis, and (ii) total funded debt to EBITDA not greater than 1.5:1.0 as of each quarter end, determined on a rolling four-quarter basis, and also limits investments in foreign entities and certain other loans. 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), in which case no such pledge is required. As of March 31, 2022, the Company was in compliance with all financial and
non-financial
covenants and has not experienced any limitation in its operations as a result of the covenants.
Strategic Alliance
The Company, in connection with the Strategic Alliance with MTRCC, has agreed to provide loan opportunities that may be funded through MTRCC’s agreement with Fannie Mae and which requires MTRCC to guarantee a portion of each funded loan. On
a loan-by-loan basis,
the Company, at its option, can indemnify a portion of MTRCC’s guarantee obligation of loan opportunities presented to and closed by MTRCC. As of March 31, 2022, the Company has agreed to a maximum aggregate guarantee obligation of $4.0 million relating to loans with an unpaid balance of $24.0 million. The maximum guarantee obligation is not representative of the actual loss the Company would incur. The Company would be liable for this amount only if all of the loans for which it is providing a guarantee to MTRCC were to default and all of the collateral underlying these loans was determined to be without value at the time of settlement.
Other
In connection with certain agreements with investment sales and financing professionals, the Company may agree to advance amounts to such professionals upon reaching certain time and performance goals. Such commitments as of March 31, 2022 aggregated to $25.0 million.
 
14.
Subsequent Events
Subsequent to March 31, 2022, the Company paid $50.0 million in accrued dividends including $0.4 million in dividend equivalents for shares that vested under the 2013 Plan subsequent to the record date of March 8, 2022.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless the context requires otherwise, the words “Marcus & Millichap,” “MMI,” “we,” the “Company,” “us” and “our” refer to Marcus & Millichap, Inc., and its consolidated subsidiaries.
Forward-Looking Statements
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to any continuing impact of the
COVID-19
pandemic and anticipated interest rate changes. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2022, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form
10-Q
and in conjunction with our Annual Report on Form
10-K
for the year ended December 31, 2021 filed with the SEC on March 1, 2022, including the “Risk Factors” section and the consolidated financial statements and notes included therein.
Overview
We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions for more than 15 years. As of March 31, 2022, we had 1,931 investment sales and financing professionals that are primarily exclusive independent contractors operating in 81 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate assets. During the three months ended March 31, 2022, we closed 2,904 investment sales, financing and other transactions with total sales volume of approximately $21.0 billion. During the year ended December 31, 2021, we closed 13,255 investment sales, financing and other transactions with total sales volume of approximately $84.4 billion.
We generate revenues by collecting real estate brokerage commissions upon the sale, and fees upon the financing, of commercial properties, and by providing equity advisory services, loan sales and 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 three months ended March 31, 2022, approximately 90% of our revenues were generated from real estate brokerage commissions, 8% from financing fees and 2% from other real estate related services. During the year ended December 31, 2021, approximately 90% of our revenues were generated from real estate brokerage commissions, 9% from financing fees and 1% from other real estate related services.
We divide commercial real estate into four major market segments, characterized by price:
 
   
Properties priced less than $1 million;
 
   
Private client market:
properties priced from $1 million to up to but less than $10 million;
 
   
Middle market:
properties priced from $10 million to up to but less than $20 million; and
 
   
Larger transaction market:
properties priced from $20 million and above.
We are the industry leader in serving private clients in the
$1-$10 million
private client market segment, which contributed approximately 56% and 65% of our real estate brokerage commissions during the three months ended March 31, 2022 and 2021, respectively. The following table sets forth the number of transactions, sales volume and revenues by commercial real estate market segment for real estate brokerage:
 
     Three Months Ended March 31,         
     2022      2021      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
     206      $ 128      $ 5,787        227      $ 149      $ 6,138        (21   $ (21   $ (351
Private Client Market ($1 - <$10 million)
     1,606        5,696        161,031        1,200        3,668        105,423        406       2,028       55,608  
Middle Market ($10 - <$20 million)
     184        2,503        46,760        78        1,067        20,601        106       1,436       26,159  
Larger Transaction Market (≥$20 million)
     141        8,878        73,331        83        3,980        30,634        58       4,898       42,697  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
     2,137      $ 17,205      $ 286,909        1,588      $ 8,864      $ 162,796        549     $ 8,341     $ 124,113  
  
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
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Table of Contents
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 that 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 identify 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, capital markets, and investor 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 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 negative impact on our business. Overall market conditions, including global trade, interest rate changes, inflation, and job creation, can affect investor sentiment and, ultimately, the demand for our services from investors in real estate.
Last year’s economic bounce supported 5.7% GDP growth and the recovery of more than 6.7 million jobs, but in conjunction with other forces, the rapid gains pushed inflation to 8.5% year-over-year through March 2022 — the highest level in 40 years. Supply chain disruptions, surging housing costs, significant wage pressure and a variety of other factors were exacerbated by the energy cost surge sparked by the war in Ukraine. The conflict will remain a significant variable going forward, generating both energy and food inflation, as well as increased uncertainty. The Federal Reserve had already begun to address inflation in late 2021 by phasing out quantitative easing, then they followed that with interest rate increases beginning in March 2022. In total, the Federal Reserve is expected to raise their overnight rate by 175 to 250 basis points in 2022, pushing up the cost of debt for investors. Economic momentum remained strong in the first quarter with job additions totaling 1.7 million, unemployment declining to 3.6% and core retail sales continuing to rise to a record $468 billion in the month of March. In addition, reductions of
COVID-19
safety protocols have begun to take hold in even the most cautious states, supporting consumption gains as people return to restaurants, shopping and entertainment venues. This should bode well for all types of commercial real estate as reduced
COVID-19
restrictions facilitate at least a partial return to the office and increased hotel demand from business travelers and rising consumption.
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 many 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.
Space demand for virtually every commercial property type gained momentum over the last year through the first quarter 2022. Industrial and multifamily space absorption reached record levels, retail has now sustained positive momentum for six quarters and office properties have sustained positive demand for four consecutive quarters. Limited-service hotel demand has nearly fully recovered to
pre-pandemic
levels, and the end of
COVID-19
restrictions bodes well for the return of business travel, supporting the full-service hotel segment. This positive demand momentum, in conjunction with curtailed real estate development due to shortages of construction labor and building materials, has contributed to falling vacancy rates for most property types. Suburban areas nationwide and Sun Belt markets in general have outperformed over the last year, but the reduction of
COVID-19
restrictions could boost commercial real estate space demand in urban areas and in metros that had more restrictive
COVID-19
policies. Positive absorption, vacancy rate and rent growth metrics have helped support aggressive investor underwriting, and we believe the supply and demand outlook, barring a significant geopolitical, financial market or economic setback, remains positive.
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 increasing or decreasing, could adversely or positively affect the operations and income potential of commercial real estate properties, as well as lender and equity underwriting for real estate investments. These changes generally influence the demand of investors for commercial real estate investments.
 
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