2019 Ends on Uptick for Marcus & Millichap

Marcus & Millichap Inc. closed 9,726 real estate transactions in 2019, worth about $50 billion, even though the overall market slowed, according to executives. The Calabasas real estate brokerage, which originally specialized in small apartment buildings, announced its full-year financial results on Feb. 20. Marcus & Millichap reported fourth-quarter net income of $20.7 million (52 cents a share), compared to $26.2 million (67 cents) for a year ago. Total revenue increased 3.3 percent to $238 million. “We finished 2019 on a positive note, achieving 3.3 percent revenue growth year over year on top of nearly 14 percent in the fourth quarter of 2018,” Chief Executive Hessam Nadji said in a conference call after results were disclosed. “Strength in our private client brokerage revenue and financing fees were key forces behind the strong finish.” Full-year 2019 highlights include total revenues of $806 million and net income of $76.9 million, or $1.95 a share. However, during the call Nadji cautioned that the real estate market was cooling. “The fourth quarter benefited from transactions that had been slow to consummate throughout much of the year, as well as our expanded client outreach, marketing campaigns and efforts to replenish inventory,” he said. “These initiatives were launched in the first quarter of 2019 as the market downshifted. Our brokerage sales volume increased nearly 11 percent in contrast to a market decline of 7 percent reported by third-party sources.” ‘Better than expected’ Analysts Stephen Sheldon and Joshua Lamers of Chicago-based William Blair & Co., wrote that the company had a “good finish to the year, and some momentum heading into 2020, but limited visibility.” The report singled out Marcus & Millichap’s “better-than-expected fourth-quarter results across most metrics,” noting that even though the company’s adjusted EBITDA – or earnings before interest, taxes, depreciation and amortization – declined 200 basis points in the quarter, “it held up better than we had expected (by 70 basis points).” The analysts were also impressed with the 2 percent year-over-year rise in real estate brokerage commissions in the quarter on top of prior-year growth of 19 percent, while financing fees grew more than 13 percent in the quarter. As for the market slowdown, Nadji pointed to interest rate fluctuations and non-apartment sales opportunities. “We saw strength in retail, hospitality, office and industrial, which currently represents a small base but a significant growth opportunity for us,” Nadji said in the conference call. “For the year, total revenue was just 1 percent below our 2018 record as we navigated through market aberration. As a reminder, the urgency to transact throughout 2018, offset by the Federal Reserve’s aggressive interest rate increases, was followed by a sharp course reversal in early 2019.” Nadji said that the Federal Reserve’s move “contributed to sales declines as many investors paused in anticipation of lower interest rates. … These dynamics resulted in essentially flat revenue in our private client business in 2019 but particularly impacted our transaction mix.” To compensate for slowing sales, Marcus & Millichap increased its refinancing transactions, with financing volume rising nearly 20 percent in 2019. In terms of employment, the company finished the year with a payroll of 2,021 for a net addition of 44 during 2019. The company increased its roster in sales by 59 professionals to 1,925. The financing operations shrank by 15 people to 96. Looking ahead, Sheldon and Lamers at William Blair & Co. cited acquisition opportunities and available resources and stated “we believe investors would welcome the company putting its cash balance to work toward accretive M&A.” Marcus & Millichap finished the year with about $399 million in cash, cash equivalents and core cash investments. Nadji ended the conference call with a silver-lining statement about how the current real estate market is now in an 11th year of expansion, and unlike other cycles, commercial real estate supply demand fundamentals remain in balance, amid a steady rent growth and a pullback in new construction. “The overall economy is healthy, and capital remains disciplined but plentiful,” Nadji said. The Blair analysts also sounded constructive about the company’s outlook for 2020. “In general, we believe that management sounded incrementally more positive about the outlook for 2020,” they wrote. “Positively, interest rate reductions have likely bottomed out, which provides more clarity on financing costs; sales volumes are expected to be fairly steady in 2020 and there remains a high level of broad-based investor demand for real estate assets.”