Marcus & Millichap Keeps Up Acquisition Talks

Since starting its acquisition initiative in mid-2018, Marcus & Millichap Inc. has completed seven deals with particular emphasis on growing its lending business.In the past year, the Calabasas commercial real estate brokerage has acquired three companies that deal with financing of properties across a broad spectrum of real estate categories.The most recent deal was in late December, with the acquisition of LMI Capital, a Houston firm that provides debt and equity capital for real estate transactions in multifamily, office and retail.In October, it was Mission Capital, a New York real estate firm that provides financing for real estate deals, among other services.

In a conference call to discuss third quarter earnings, Chief Executive Hessam Nadji said that Mission Capital’s expertise and client base were complementary to the company’s commercial real estate financing subsidiary, Marcus & Millichap Capital Corp.“Their ability to help expand our business with lenders, while generating distressed property sales leads, will add value to our clients and our current sales and finance team,” Nadji said during the call.

For the third quarter ending Sept. 30, Marcus & Millichap reported net income of $6 million (15 cents a share), compared with net income of $19.3 million (49 cents) in the same period a year earlier. Revenue dropped by 20 percent to $159 million.

Marcus will release fourth quarter earnings later this month.

In the last 52 weeks through Jan. 27, the company’s shares have gained a meager 3 percent, according to BNY Mellon. On Jan. 27, the stock closed at $37.05.

Still, analysts who follow the company were pleased with the quarterly results.

Analyst optimismStephen Sheldon, who reports on Marcus for William Blair & Co. in Chicago, said in a research note that the third quarter results were better than expected, while Blaine Heck, with Wells Fargo Securities LLC, called it a strong quarter despite meaningful impacts from the pandemic.

During the conference call, Marcus executives indicated that shelter-in-place orders, travel restrictions and financial market disruptions had reduced transaction activity, Heck wrote in a research note.

“Until normal business activity resumes and (Marcus) can replenish its deal pipeline, the company’s transaction volume, revenue and earnings will be hindered,” Heck said in the note.

During the conference call, in which Heck was the only analyst to participate, he asked specifically about acquisitions and if the company could comment on whether it was actively pursuing other deals and how big they could potentially be.

Nadji responded that the company was actively in discussions with a number of firms and was targeting those that met the criteria of service needs, market coverage needs and compatibility of culture.

“So, we have dialogue going on with some larger firms and some smaller boutique firms, both at the same time and we are actively pursuing those discussions,” Nadji said.

In a research note released after the Mission deal was announced, Sheldon wrote that Marcus has focused on expanding its financing capabilities over the last few years and the acquisition of Mission represented more progress on that front.

“The Mission acquisition adds capital sources, experienced producers and more cross-selling opportunities with the brokerage business,” Sheldon wrote.

Sheldon estimated that the Mission deal could bring in an additional $15 million to $20 million in revenue on a normalized basis, assuming that producers at Mission are 15 percent to 50 percent more productive than legacy producers at Marcus & Millichap Capital Corp., or MMCC.“If owned in 2019, Mission would have boosted Marcus & Millichap’s revenue by about 2 percent to 2.5 percent,” Sheldon said in the note.

Nadji reported during the conference call that financing revenue declined 2.5 percent from the same period in 2019, with refinancing continuing to be a meaningful contributor while there was an improvement in purchase finance volume.“The strength of MMCC last quarter points to the successful integration of our acquisitions and the increasing productivity of our financing team. MMCC remains a key component of our growth plan,” Nadji said.

Steven DeGennaro, the new chief finance officer who was participating in his first quarterly conference call for the company, said Marcus was focused on headcount and productivity in its investment sales and financing professionals.Year-over-year for the third quarter, the company grew the combined team by 3 percent, with 1,920 in the sales team and 79 financing professionals, DeGennaro said.

“We are encouraged by recent progress in attracting experienced professionals, which remains a key strategy,” he added.