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Friday, Jul 19, 2024

Real Estate Brokerage Making Bid to Trade Up

Marcus & Millichap Inc., a real estate brokerage known for being the big fish in the relatively small pond of multifamily sales, is heading out to deeper waters. The Calabasas firm plans to raise $104 million in an IPO to trade on the New York Stock Exchange, according to a prospectus it filed late last month with the Securities and Exchange Commission. The firm is taking advantage of the recovering real estate market and one of the most successful years for companies going public in a decade. Marcus & Millichap reported its profits rose last year 105 percent to $27.9 million, while revenue was up 40 percent to $386 million. “They represent the smaller, higher-growth story and many investors are looking for that,” said Tim Keating, chief executive of Keating Capital Inc., a Greenwood Village, Colo. business development firm that focuses on pre-IPO financing. “If ever there was a strong window to go public, the time is now.” The “private client segment,” which comprises sales by private, non-institutional owners of less than $10 million, accounted for about 90 percent of the brokerage’s sales last year, according to its prospectus. The firm closed 6,149 sales and financings worth about $22 billion last year. Marcus & Millichap does not handle lease transactions, like many other real estate brokerages. The firm plans to use the proceeds from the offering for general purposes, which could include acquiring other real estate companies and expanding its market and services. It employs more than 1,000 brokers in 73 offices nationwide. Alex Cappello, chief executive of Cappello Capital Corp., a boutique Santa Monica investment bank, said the cash will allow the company to grow by acquisitions and attract talent. “It must be that they’re thinking about acquisitions, but maybe they just want to have a war chest,” he said. “With that capital they can offer stock options to attract talent too.” Strong financials The brokerage was founded in 1971 by George M. Marcus and William A. Millichap, two commercial brokers, in Palo Alto. The brokerage represented the private client segment, which the pair thought was severely underserved. The firm moved to Encino in the early 1990s and to Calabasas about 18 months ago. The pair currently serve as chairmen of the company and also of Essex Property Trust of Palo Alto, a real estate investment trust focused on the multifamily market on the West Coast. Chief Executive John Kerin joined the company as a sales agent at the Encino office in 1981. He rose through the ranks and was named to the top spot in 2010. Kerin declined comment on the pending IPO, stating that the company is in an SEC-mandated silent period. There are several businesses under the Marcus & Millichap umbrella, including multifamily investment unit Pacific Urban Residential, private equity investment group Sovereign Investment Co. and home builder SummerHill Homes, which focuses on the Bay Area and Southern California markets. Still, almost 91 percent of the company’s revenue comes from brokerage commissions, according to its prospectus. Lloyd Greif, chief executive at investment bank Greif & Co. in downtown Los Angeles, said the company is in a strong position to go public. “This company is screaming in terms of its financial performance. And people are listening,” he said. “I would expect, so long as they don’t overprice it, they should get a reasonably warm reception.” The firm intends to be listed on the New York Stock Exchange under the ticker “MMI.” The number of shares and their price, as well as the date of offering, has not yet been disclosed. For investors, the offering may be attractive for another reason – the company’s strong financial position. When CBRE Group Inc., the national real estate services firm based in Los Angeles, went public in 2004, the company raised about $135 million. The brokerage said it used the proceeds to pay down mainly higher rate interest debt. And when LaSalle Partners, now Jones Lang LaSalle Inc. in Chicago, went public in 1997, the roughly $72 million it raised wasn’t even enough to pay off all its debt. By contrast, Marcus & Millichap has no long-term debt, according to its prospectus. William R. Boyd Sr., senior managing director at the Glendale office of Charles Dunn Co., said the lack of debt gives the company more flexibility in how it uses the proceeds. One strategy may be to expand into more geographic markets, but he is not sure that the company will necessarily be successful at expanding its business focus. “They are very good at the multifamily business. That’s their forte,” said Boyd. “I don’t think they are necessarily invited to the same party when there’s a $300 million office building available.” Rising tides The firm is small in comparison to CBRE, which employs more than 35,000 people in about 300 offices worldwide, while JLL has more than 45,000 employees in about 200 offices worldwide. But the company clearly has its eyes set on closing larger sales. In 2011, Marcus & Millichap created Institutional Property Advisors, a multifamily brokerage division formed to work on deals for larger, institutional investors. Case in point, IPA closed two large deals in the L.A. area alone last month. The division brokered the sale of the Mercer at Warner Center, a 477-unit apartment building in Woodland Hills, for $88 million. That deal represented the largest multifamily sale in the San Fernando Valley this year. Also in September, the IPA unit brokered the sale of a large portfolio of apartments. The 669-unit Crenshaw Village in Baldwin Hills, a 652,750-square-foot portfolio of 65 buildings, was sold for $60 million. Boyd, who was with CBRE during its 2004 IPO, said going public won’t necessarily boost the typical deal size, and it has some downsides for individual brokers. “It doesn’t mean they’ve jumped up,” he said. “The broker that’s going from privately-held to public will be asked more about reporting and projections. And now the broker has two clients: The shareholder master and the client.” Still, Marcus & Millichap is picking a good time to go public. The commercial real estate market is in recovery mode, something reflected in the share prices at both CBRE and JLL. CBRE has had about a 16 percent bump in share price this year and JLL about 4 percent. What’s more, the IPO market has been strong this year, with more than 150 already filed. Keating, the investment banker, said IPOs are up more than 35 percent on the year and he thinks more are on the way. “The IPO market is white-hot right now,” he said. “I think we will have the most IPOs this year since 2007.” That was a year 160 IPOs were filed. Eclipsing that number would represent an increase of more than 25 percent over last year’s 128. Capello, the investment banker, said even though Marcus & Millichap may lack the heft of CBRE or JLL, that’s not necessarily paramount to investors. “Don’t confuse a great company with a great stock,” he said. “There are better margins at the small end of the market and these guys do great there. They make for a very interesting opportunity as an investment.”

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