MARCUS & MILLICHAP, INC. Unless the context requires otherwise, the words "Marcus & Millichap," "MMI," "we," the "Company," "us" and "our" refer toMarcus & 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, further interest rate changes and rising inflation. The results of operations for the six months endedJune 30, 2022 are not necessarily indicative of the results that may be expected for the full year endingDecember 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 endedDecember 31, 2021 filed with theSEC onMarch 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 inthe United States based on the number of investment transactions for more than 15 years. As ofJune 30, 2022 , we had 1,901 investment sales and financing professionals that are primarily exclusive independent contractors operating in 82 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate assets. During the three and six months endedJune 30, 2022 , we closed 3,636 and 6,540 investment sales, financing and other transactions with total sales volume of approximately$26.4 billion and$47.4 billion , respectively. During the year endedDecember 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, loan guarantees 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 endedJune 30, 2022 , and the year endedDecember 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
less than $10 million ;
• Middle market: properties priced from
$20 million ; and
• Larger transaction market: properties priced from
We are the industry leader in serving private clients in the$1-$10 million private client market segment, which contributed approximately 59% and 63% of our real estate brokerage commissions during the three months endedJune 30, 2022 and 2021, respectively, and approximately 58% and 63% of our real estate brokerage commissions during the six months endedJune 30, 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 June 30, 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 279 $ 168 $ 6,672 297 $ 200 $
7,618 (18 ) $ (32) $ (946)
Private Client Market (
2,021 7,348 209,868 1,767 5,675 158,136 254 1,673 51,732
Middle Market ($10 - <$20 million ) 209 2,819 56,456 156 2,134 41,745 53 685 14,711
Larger Transaction Market (?$20 million ) 176 9,533 81,689 110 5,551 45,404 66 3,982 36,285
2,685 $ 19,868 $ 354,685 2,330 $ 13,560 $ 252,903 355 $ 6,308 $ 101,782
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Six Months Ended June 30,
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 485 $ 296 $ 12,459 524 $ 349 $
13,756 (39 ) $ (53)
3,627 13,044 370,899 2,967 9,343 263,559 660 3,701 107,340
Middle Market ($10 - <$20 million ) 393 5,322 103,216 234 3,201 62,346 159 2,121 40,870
Larger Transaction Market (?$20 million ) 317 18,411 155,020 193 9,531 76,038 124 8,880 78,982
4,822 $ 37,073 $ 641,594 3,918 $ 22,424 $ 415,699 904 $ 14,649 $ 225,895 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. Following last year's 5.7% increase in GDP, theU.S. economy has displayed a variety of mixed signals in the first half of 2022. Underlying inflation drivers including supply chain disruptions, oil and gas price surges and rapidly shifting inventory levels have aligned with financial market turbulence and weakening consumer confidence to weigh on investor sentiment. At the same time, positive economic indicators including the addition of more than 2.7 million jobs in the first six months of the year, near-record-low unemployment and underemployment rates and a 5.5% gain in core retail sales through just the first half of the year all suggest the economy remains sound. These mixed messages will likely empower theFederal Reserve to continue the inflation-battling monetary policies they initiated in late 2021. TheFederal Reserve has signaled an acceleration of their quantitative tightening program is forthcoming as they double the pace of their balance sheet drawdown. They have also signaled steady increases of the Federal Funds rate through the remainder of 2022, which many believe will lift the overnight rate by a total of 300 to 400 basis points in 2022. TheFederal Reserve's actions are placing upward pressure on the cost of debt financing, adding to the complexity of investor underwriting and acquisition strategies. The unique blend of economic crosscurrents in 2022 has created additional choppiness in the commercial real estate market, causing each property type and geographic region to operate in a unique micro-climate significantly influenced by both national and local economic forces.
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.
The economic choppiness translated to mixed results for commercial real estate
space demand. Occupied multifamily housing units tapered, giving back some of
the first quarter gains that had driven the national vacancy rate to a record
low. Office space demand remained positive for a fifth consecutive quarter, but
absorption fell short of construction completions resulting in a modest vacancy
gain. Retail space demand sustained momentum, delivering a seventh consecutive
quarter of positive absorption and a quarterly vacancy rate decline. Industrial
vacancy rates also declined, pushing deeper into record territory with a 3.6%
vacancy rate. The hotel sector also achieved growth, with occupancy rates
surpassing 70% in June, nearly back to 2019 levels, supporting record-high
average daily rates. These performance metrics reiterate the highly localized,
property-specific trends in the commercial real estate sector that are
challenging real estate investors to closely assess each market and each asset.
Financial market turbulence, economic crosscurrents and rising interest rates
have the potential to create additional hurdles for investors in the second half
of 2022.
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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 investor demand for commercial real estate investments. In their effort to battle inflation, theFederal Reserve has aggressively increased the overnight rate, placing upward pressure on the broader interest rate climate. However, it appears some of these efforts have been offset by financial market volatility as an increasing amount of capital has moved toward safer investments including long-term bonds. As a result, short-term interest rates have risen faster than long-term rates, keeping debt financing comparatively stable. Long-term rates may begin to rise in September when theFederal Reserve is scheduled to accelerate its quantitative tightening program. Both equity and debt capital remain very liquid, supporting an active commercial real estate transaction market. However, we believe that if interest rates increase significantly in a short period of time, they could restrain transaction activity as the higher cost of capital widens the expectation gap between buyers and sellers. Lenders have remained active in both the placement and pricing of capital, but caution has risen over the last quarter. Based onFederal Reserve Chairman Powell comments, many believe theFederal Reserve's overnight rate could be lifted by a total of 300 to 400 basis points in 2022. While many investors believe theFederal Reserve rate increases will translate to higher commercial real estate mortgage costs, other factors could come into play.Federal Reserve action and long-term interest rates tend to not have a one-to-one movement relationship and can even move contrary to each other on occasion. Should there be a significant financial market or geopolitical disruption, an investor flight to safety could act as a meaningful counterbalance to upward pressure from the benchmark rate.
Investor Sentiment and Investment Activity
We rely on investors to buy and sell properties in order to generate commissions. Investors' desires to engage in real estate transactions are dependent on many factors that are beyond our control. The economy, supply and demand for properly positioned properties, available credit and market events impact investor sentiment and, therefore, transaction velocity. In addition, our private clients, who make up the largest source of revenue, are often motivated to buy, sell and/or refinance properties due to personal circumstances, such as death, divorce, partnership breakups and estate planning. Commercial real estate sales dollar volume set a record high in 2021, and the momentum largely carried into the first half of 2022. However, rising interest rates have begun to modestly restrain transaction flow moving the market back toward traditional levels. Assets trading at historically high prices in the most sought-after markets have in many cases generated fewer bids than last year while properties offering higher yields in slower growth metros have largely sustained momentum thus far. The rising cost of debt capital, perceptions of rising recession risk and the tempering of occupancy gains and rent growth relative to 2021 have led investors to more carefully calibrate their underwriting assumptions. In some cases, this has widened the buyer/seller expectation gap, in turn moderating investment activity. Industrial and apartment properties have remained in high demand, with hotels, self-storage and necessity-based retail centers also attracting investor attention. Interest in office properties and seniors housing has remained softer by historical standards as investors continue to consider the impact of COVID-19 and work-from-home business models. Looking forward, elevated inflation and stock market volatility could bolster interest in commercial real estate investments as many believe the sector offers increased inflation resistance and stability. This may at least partially offset the headwind posed by rising interest rates.
Key Financial Measures and Indicators
Revenues
Our revenues are primarily generated from our real estate investment sales
business. In addition to real estate brokerage commissions, we generate revenues
from financing fees and from other revenues, which are primarily comprised of
consulting and advisory fees.
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Because our business is transaction oriented, we rely on investment sales and financing professionals to continually develop leads, identify properties to sell and finance, market those properties and close the sale timely to generate a consistent flow of revenue. While our sales volume is impacted by seasonality factors, the timing of closings is also dependent on many market and personal factors unique to a particular client or transaction, particularly clients transacting in the$1-$10 million private client market segment. These factors can cause transactions to be accelerated or delayed beyond our control. Further, commission rates earned are generally inversely related to the value of the property sold. As a result of our expansion into the middle and larger transaction market segments, we have seen our overall commission rates fluctuate from period-to-period as a result of changes in the relative mix of the number and volume of investment sales transactions closed in the middle and larger transaction market segments as compared to the$1-$10 million private client market segment. These factors may result in period-to-period variations in our revenues that differ from historical patterns. A small percentage of our transactions include retainer fees and/or breakage fees. Retainer fees are credited against a success-based fee paid upon the closing of a transaction or a breakage fee. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed.
Real Estate Brokerage Commissions
We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenues from real estate brokerage commissions are recognized at the close of escrow. Financing Fees
We earn financing fees by securing financing on purchase transactions or by securing refinancing of our clients' existing mortgage debt. We recognize financing fee revenues at the time the loan closes, and we have no remaining significant obligations in connection with the transaction.
To a lesser extent, we also earn fees on loan performance, equity advisory services, loan sales, loan guarantees and ancillary services associated with financing activities. We recognize guarantee fees over the term of the guarantee and other fees when we have no further obligations, generally upon the closing of a transaction. We previously generated mortgage servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related mortgage servicing functions, activities and services. We recognized mortgage servicing revenues upon the acquisition of a servicing obligation.
Other Revenues
Other revenues include fees generated from consulting, advisory and other real estate services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed.
Operating Expenses
Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization. The significant components of our expenses are further described below.
Cost of Services
The majority of our cost of services expense is variable commissions paid to our
investment sales professionals and compensation-related costs related to our
financing activities. Commission expenses are directly attributable to providing
services to our clients for investment sales and financing services. Most of our
investment sales and financing professionals are independent contractors and are
paid commissions; however, because there are some who are initially paid a
salary and certain of our financing professionals are employees, costs of
services also include employee-related compensation, employer taxes and benefits
for those employees. The commission rates we pay to our investment sales and
financing professionals vary based on individual contracts negotiated and are
generally higher for the more experienced professionals. Some of our most senior
investment sales and financing professionals can also earn additional
commissions after meeting certain annual financial thresholds. These additional
commissions are recognized as cost of services in the period in which they are
earned. Payment of a portion of these additional commissions are generally
deferred for a period of one to three years, at our election, and paid at the
beginning of the second, third or fourth calendar year. Cost of services also
includes referral fees paid to other real estate brokers where we are the
principal service provider. Cost of services, therefore, can vary based on the
commission structure of the independent contractors that closed transactions in
any particular period.
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Selling, General and Administrative Expenses
The largest expense component within selling, general and administrative
expenses is personnel expenses for our management team and sales and support
staff. In addition, these costs include facilities costs (excluding depreciation
and amortization), staff related expenses, sales, marketing, legal,
telecommunication, network, data sources, transaction costs related to
acquisitions, changes in fair value for contingent and deferred consideration
and other administrative expenses. Also included in selling, general and
administrative are expenses for stock-based compensation to
non-employee
directors, employees and independent contractors (i.e. investment sales and
financing professionals) under the Amended and Restated 2013 Omnibus Equity
Incentive Plan ("2013 Plan") and the 2013 Employee Stock Purchase Plan ("ESPP").
Depreciation and Amortization Expense
Depreciation expense consists of depreciation recorded on our computer software
and hardware and furniture, fixture and equipment. Depreciation is provided over
estimated useful lives ranging from three to seven years for assets.
Amortization expense consists of (i) amortization recorded on our mortgage
servicing rights ("MSRs") using the interest method over the period that
servicing income is expected to be received and (ii) amortization recorded on
intangible assets amortized on a straight-line basis using a useful life between
one and seven years.
Other (Expense) Income, Net
Other income, net primarily consists of interest income, net gains or losses on
our deferred compensation plan assets, realized gains and losses on our
marketable debt securities,
available-for-sale,
foreign currency gains and losses and other
non-operating
income and expenses.
Interest Expense
Interest expense primarily consists of interest expense associated with the stock appreciation rights ("SARs") liability, and our Credit Agreement.
Provision for Income Taxes
We are subject toU.S. and Canadian federal taxes and individual state and local taxes based on the income generated in the jurisdictions in which we operate. Our effective tax rate fluctuates as a result of the change in the mix of our activities in the jurisdictions in which we operate due to differing tax rates in those jurisdictions and the impact of permanent items, including compensation charges, qualified transportation fringe benefits, uncertain tax positions, meals and entertainment and tax-exempt deferred compensation plan assets. Our provision for income taxes includes the windfall tax benefits and shortfall expenses, net, from shares issued in connection with our 2013 Plan and ESPP.
We record deferred taxes, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes.
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Results of Operations
Following is a discussion of our results of operations for the three and six months endedJune 30, 2022 and 2021. The tables included in the period comparisons below provide summaries of our results of operations. The period-to-period comparisons of financial results are not necessarily indicative of future results.
Key Operating Metrics
We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. We also believe these metrics are relevant to investors' and others' assessment of our financial condition and results of operations. During the three months endedJune 30, 2022 and 2021, we closed more than 3,600 and 3,200 investment sales, financing and other transactions, respectively, with total sales volume of approximately$26.4 billion and$17.4 billion , respectively. During the six months endedJune 30, 2022 and 2021, we closed more than 6,500 and 5,600 investment sales, financing and other transactions, respectively, with total sales volume of approximately$47.4 billion and$29.4 billion , respectively. Such key metrics for real estate brokerage and financing activities (excluding other transactions) are as follows: Three Months Ended Six Months Ended June 30, June 30, Real Estate Brokerage 2022 2021 2022 2021 Average Number of Investment Sales Professionals 1,822 1,934 1,839 1,946 Average Number of Transactions per Investment Sales Professional 1.47 1.20 2.62 2.01
1.79 % 1.87 % 1.73 % 1.85 %
Average Transaction Size (in thousands) $ 7,399 $ 5,820 $ 7,688 $ 5,723
Total Number of Transactions 2,685 2,330 4,822 3,918
Total Sales Volume (in millions) $ 19,868 $ 13,560 $ 37,073 $ 22,424
Three Months Ended Six Months Ended
June 30, June 30,
Financing
(1) 2022 2021 2022 2021
Average Number of Financing
Professionals 87 85 86 86
Average Number of Transactions per
Financing Professional 8.01 8.05 14.15 13.70
Average Fee per Transaction $ 44,985 $ 34,783 $ 44,198 $ 32,972
Average Fee Rate 0.70 % 0.82 % 0.75 % 0.86 %
Average Transaction Size (in thousands) $ 6,453 $ 4,228 $ 5,882 $ 3,824
Total Number of Transactions 697 684 1,217 1,178
Total Financing Volume (in millions)
(1) Operating metrics exclude certain financing fees not directly associated to
transactions.
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Comparison of Three Months Ended
Below are key operating results for the three months ended
Three Months Percentage Three Months Percentage Change
Ended of Ended of
June 30, 2022 Revenue 89.6 %$ 252,903 88.8 %$ 101,782 40.2 % Financing fees 36,811 9.3 28,214 9.9 8,597 30.5 % Other revenues 4,461 1.1 3,829 1.3 632 16.5 % Total revenues 395,957 100.0 284,946 100.0 111,011 39.0 % Operating expenses: Cost of services 256,042 64.7 178,585 62.7 77,457 43.4 % Selling, general and administrative 79,841 20.2 61,797 21.7 18,044 29.2 % Depreciation and amortization 3,332 0.8 2,959 1.0 373 12.6 % Total operating expenses 339,215 85.7 243,341 85.4 95,874 39.4 % Operating income 56,742 14.3 41,605 14.6 15,137 36.4 % Other (expense) income, net (461 ) (0.1 ) 1,370 0.5 (1,831 ) (133.6 )% Interest expense (158 ) 0.0 (146 ) 0.0 (12 ) 8.2 % Income before provision for income taxes 56,123 14.2 42,829 15.1 13,294 31.0 % Provision for income taxes 13,955 3.5 11,297 4.0 2,658 23.5 % Net income$ 42,168 10.6 %$ 31,532 11.1 %$ 10,636 33.7 % Adjusted EBITDA (1)$ 62,909 15.9 %$ 48,110 16.9 %$ 14,799 30.8 %
(1) Adjusted EBITDA is not a measurement of our financial performance under
generally accepted accounting principles ("
considered as an alternative to net income, operating income or any other
measures derived in accordance with
EBITDA and a reconciliation of Adjusted EBITDA to net income, see
"Non-GAAP
Financial Measure."
Revenues
Our total revenues were $396.0 million for the three months ended June 30, 2022
compared to $284.9 million for the same period in 2021, an increase of
$111.0 million , or 39%. Total revenues increased as a result of increases in
real estate brokerage commissions, financing fees and other revenues, as
described below.
Real estate brokerage commissions.
Revenues from real estate brokerage commissions increased to $354.7 million for
the three months ended June 30, 2022 from $252.9 million for the same period in
2021, an increase of $101.8 million , or 40.2%. The increase was primarily driven
by a 46.5% increase in overall sales volume generated by a 15.2% increase in the
number of investment sales transactions and a 27.1% increase in average
transaction size. The revenue from the combined Middle Market and Larger
Transaction Market increased 58.5% in the second quarter of 2022 as compared to
the same period last year and represented 38.9% of the brokerage revenue in the
second quarter of 2022 versus 34.5% of the brokerage revenue in the second
quarter of 2021. The average commission rates in the second quarter of 2022
decreased by 8 basis points compared to the same period last year primarily as a
result of the increase in average transaction size as larger transactions
typically earn lower commission rates.
Financing fees
. Revenues from financing fees increased to $36.8 million for the three months
ended June 30, 2022 from $28.2 million for the same period in 2021, an increase
of $8.6 million , or 30.5%, resulting primarily from the 52.6% increase in
average transaction size as the number of financing transactions remained
relatively flat. The average fee rate declined by 12 basis points due to the
larger size of financing transactions as larger transactions typically earn
lower commission rates.
Other revenues
. Other revenues increased to $4.5 million for the three months ended June 30,
2022 from $3.8 million for the same period in 2021, an increase of $0.6 million ,
or 16.5%. The increase was primarily driven by increases in consulting and
advisory services during the three months ended June 30, 2022 , compared to the
same period in 2021.
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Total Operating Expenses
Our total operating expenses were$339.2 million for the three months endedJune 30, 2022 compared to$243.3 million for the same period in 2021, an increase of$95.9 million , or 39.4%. The increase was due to increases in cost of services, which are variable commissions paid to our investment sales professionals and compensation-related costs in connection with our financing activities, selling, general and administrative costs and depreciation and amortization expense, as described below. Cost of services. Cost of services increased to$256.0 million for the three months endedJune 30, 2022 from$178.6 million for the same period in 2021, an increase of$77.5 million , or 43.4%. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above. Cost of services as a percent of total revenues increased to 64.7% compared to 62.7% for the same period in 2021 primarily due to our senior investment sales and financing professionals who earn additional commissions after meeting certain annual financial thresholds, reaching their thresholds earlier due to the increase in sales volume. Selling, general, and administrative expense. Selling, general and administrative expense for the second quarter of 2022 increased to$79.8 million , from$61.8 million compared to the same period in the prior year, an increase of$18.0 million or 29.2%. The change was primarily due to increases in (i) compensation related costs, primarily driven by increases in management performance compensation due to significant year-over-year growth in operating results; (ii) business development, marketing and other support related to the long-term retention of our sales and financing professionals; and (iii) return to in-person agent and client business events, conferences, and meetings. Depreciation and amortization expense. Depreciation and amortization expense increased to$3.3 million for the three months endedJune 30, 2022 , from$3.0 million for the same period in 2021, an increase of$0.4 million , or 12.6%, principally related to additional amortization of intangible assets related to recent acquisitions and additional amortization of mortgage servicing rights due to the cancellation notices received on certain servicing contracts.
Other (Expense) Income, Net
Other (expense) income, net decreased to a net expense of$0.5 million for the three months endedJune 30, 2022 from income of$1.4 million for the same period in 2021. The decrease was primarily driven by an unfavorable change in the value of our deferred compensation plan assets that are held in a rabbi trust and due to the$0.3 million loss on sale of the remaining mortgage servicing rights.
Interest Expense
Interest expense was comparable for the three months ended
Provision for Income Taxes
The provision for income taxes was$14.0 million for the three months endedJune 30, 2022 , compared to$11.3 million for the same period in 2021, an increase of$2.7 million . The effective income tax rate for the three months endedJune 30, 2022 , was 24.9% compared to 26.4% for the same period in 2021. The effective income tax rate decreased primarily due to an increase in windfall tax benefits, net related to the settlement of stock-based awards, partially offset by an increase in permanent items that are not tax deductible. 32
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Comparison of Six Months Ended
Below are key operating results for the six months ended
Six Months Percentage Six Months Percentage Change
Ended of Ended of
June 30, 2022 Revenue 89.7 %$ 415,699 88.7 %$ 225,895 54.3 % Financing fees 63,264 8.8 46,057 9.8 17,207 37.4 % Other revenues 10,563 1.5 7,167 1.5 3,396 47.4 % Total revenues 715,421 100.0 468,923 100.0 246,498 52.6 % Operating expenses: Cost of services 452,810 63.3 287,688 61.4 165,122 57.4 % Selling, general and administrative 154,376 21.6 113,474 24.2 40,902 36.0 % Depreciation and amortization 7,243 1.0 5,956 1.3 1,287 21.6 % Total operating expenses 614,429 85.9 407,118 86.9 207,311 50.9 % Operating income 100,992 14.1 61,805 13.1 39,187 63.4 % Other (expense) income, net (11 ) 0.0 2,414 0.5 (2,425 ) (100.5 )% Interest expense (318 ) 0.0 (292 ) 0.0 (26 ) 8.9 % Income before provision for income taxes 100,663 14.1 63,927 13.6 36,736 57.5 % Provision for income taxes 25,712 3.6 17,383 3.7 8,329 47.9 % Net income$ 74,951 10.5 %$ 46,544 9.9 %$ 28,407 61.0 % Adjusted EBITDA$ 114,761 16.0 %$ 73,805 15.7 %$ 40,956 55.5 % Revenues Our total revenues were$715.4 million for the six months endedJune 30, 2022 compared to$468.9 million for the same period in 2021, an increase of$246.5 million , or 52.6%. Total revenues increased as a result of increases in real estate brokerage commissions, financing fees and other revenues, as described below. Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to$641.6 million for the six months endedJune 30, 2022 from$415.7 million for the same period in 2021, an increase of$225.9 million , or 54.3%. The increase was primarily driven by a 65.3% increase in overall sales volume generated by a 23.1% increase in the number of investment sales transactions and a 34.3% increase in average transaction size. The revenue from the combined Middle Market and Larger Transaction Market increased 86.6% for the six months endedJune 30, 2022 as compared to the same period last year and represented 40.2% of the brokerage revenue for the six months endedJune 30, 2022 , versus 33.3% of the brokerage revenue for the six months endedJune 30, 2021 . The average commission rates in the six months endedJune 30, 2022 decreased by 12 basis points compared to the same period last year, primarily as a result of the increase in average transaction size as larger transactions typically earn lower commission rates. Financing fees . Revenues from financing fees increased to$63.3 million for the six months endedJune 30, 2022 from$46.1 million for the same period in 2021, an increase of$17.2 million , or 37.4%, resulting primarily from the 53.8% increase in average transaction size, and to a lesser extent, a 3.3% increase in the number of financing transactions. The average fee rate declined by 11 basis points as larger transactions typically earn lower commission rates. Other revenues . Other revenues increased to$10.6 million for the six months endedJune 30, 2022 from$7.2 million for the same period in 2021, an increase of$3.4 million , or 47.4%. The increase was primarily driven by increases in consulting and advisory services during the six months endedJune 30, 2022 , compared to the same period in 2021. Total Operating Expenses Our total operating expenses were$614.4 million for the six months endedJune 30, 2022 compared to$407.1 million for the same period in 2021, an increase of$207.3 million , or 50.9%. The increase was due to increases in cost of services, which are variable commissions paid to our investment sales professionals and compensation-related costs in connection with our financing activities, selling, general and administrative costs and depreciation and amortization expense, as described below. 33
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Cost of services. Cost of services increased to$452.8 million for the six months endedJune 30, 2022 from$287.7 million for the same period in 2021, an increase of$165.1 million , or 57.4%. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above. Cost of services as a percent of total revenues increased to 63.3% compared to 61.4% for the same period in 2021 primarily due to our senior investment sales and financing professionals who earn additional commissions after meeting certain annual financial thresholds, reaching their thresholds earlier due to the increase in sales volume. Selling, general, and administrative expense. Selling, general and administrative expense for six months endedJune 30, 2022 increased to$154.4 million from$113.5 million compared to the same period in 2021, an increase of$40.9 million , or 36.0%. The change was primarily due to increases in (i) compensation related costs, primarily driven by increases in management performance compensation due to significant year-over-year growth in operating results; (ii) business development, marketing and other support related to the long-term retention of our sales and financing professionals; and (iii) return to in-person agent and client business events, conferences, and meetings. Depreciation and amortization expense. Depreciation and amortization expense increased to$7.2 million for the six months endedJune 30, 2022 from$6.0 million for the same period in 2021, an increase of$1.3 million , or 21.6%, principally related to additional amortization of intangible assets related to recent acquisitions and additional amortization of mortgage servicing rights due to the cancellation notices received on certain servicing contracts.
Other (Expense) Income, Net
Other (expense) income, net decreased to a net expense of$11,000 for the six months endedJune 30, 2022 from$2.4 million of income for the same period in 2021. The decrease was primarily driven by an unfavorable change in the value of our deferred compensation plan assets that are held in a rabbi trust and due to the$0.3 million loss on sale of the remaining mortgage servicing rights.
Interest Expense
Interest expense was comparable for the six months endedJune 30, 2022 and 2021, and primarily relates to interest expense on the Company's stock appreciation rights liability. Provision for Income Taxes The provision for income taxes was$25.7 million for the six months endedJune 30, 2022 , compared to$17.4 million for the same period in 2021, an increase of$8.3 million . The effective income tax rate for the six months endedJune 30, 2022 , was 25.5% compared to 27.2% for the same period in 2021. The effective income tax rate decreased primarily due to an increase in windfall tax benefits, net related to the settlement of stock-based awards, partially offset by an increase in permanent items that are not tax deductible.
Non-GAAP
Financial Measure
In this quarterly report on Form
10-Q,
we include a
non-GAAP
financial measure, adjusted earnings before interest income/expense, taxes,
depreciation and amortization, stock-based compensation and other
non-cash
items, or Adjusted EBITDA. We define Adjusted EBITDA as net income before
(i) interest income and other, including net realized gains (losses) on
marketable debt securities,
available-for-sale
and cash and cash equivalents, (ii) interest expense, (iii) provision for income
taxes, (iv) depreciation and amortization, (v) stock-based compensation, and
(vi) non-cash
Mortgage Servicing Rights ("MSR") activity. We use Adjusted EBITDA in our
business operations to evaluate the performance of our business, develop budgets
and measure our performance against those budgets, among other things. We also
believe that analysts and investors use Adjusted EBITDA as a supplemental
measure to evaluate our overall operating performance. However, Adjusted EBITDA
has material limitations as a supplemental metric and should not be considered
in isolation, or as a substitute for analysis of our results as reported under
U.S. GAAP. We find Adjusted EBITDA to be a useful management metric to assist in
evaluating performance, because Adjusted EBITDA eliminates items related to
capital structure, taxes and
non-cash
items. In light of the foregoing limitations, we do not rely solely on Adjusted
EBITDA as a performance measure and also consider our U.S. GAAP results.
Adjusted EBITDA is not a measurement of our financial performance under U.S.
GAAP and should not be considered as an alternative to net income, operating
income or any other measures calculated in accordance with U.S. GAAP. Because
Adjusted EBITDA is not calculated in the same manner by all companies, it may
not be comparable to other similarly titled measures used by other companies. A
reconciliation of the most directly comparable U.S. GAAP financial measure, net
income, to Adjusted EBITDA is as follows (in thousands):
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Three Months Ended Six Months Ended
June 30, June 30,
2022 2021 2022 2021
Net income $ 42,168 $ 31,532 $ 74,951 $ 46,544
Adjustments:
Interest income and other
(1) (979 ) (436 ) (1,594 ) (967 )
Interest expense 158 146 318 292
Provision for income taxes 13,955 11,297 25,712 17,383
Depreciation and amortization 3,332 2,959 7,243 5,956
Stock-based compensation 4,275 2,662 8,131 4,950
Non-cash
MSR activity
(2) - (50 ) - (353 )
Adjusted EBITDA $ 62,909 $ 48,110 $ 114,761 $ 73,805 (1) Other includes net realized gains (losses) on marketable debt securities
available-for-sale.
(2) Non-cash
MSR activity includes the assumption of servicing obligations.
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, marketable debt securities, available-for-sale and, if necessary, borrowings under our Credit Agreement. In order to enhance yield to us, we have invested a portion of our cash in money market funds and fixed and variable income debt securities, in accordance with our investment policy approved by the board of directors. Certain of our investments in money market funds may not maintain a stable net asset value and may impose fees on redemptions and/or gating fees. To date, the Company has not experienced any restrictions or gating fees on its ability to redeem funds from money market funds. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations, cash and cash equivalents, proceeds from the sale of marketable debt securities, available-for-sale or availability under our Credit Agreement.
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