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

September 30, ~~2018~~

2019

☐	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

☒

☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be ~~submitted~~su

bmitte

d 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

☒

☐

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~~	☐
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

☐

☒

Number of shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding as of ~~November 1, 2018~~

October

, 2019 was ~~38,651,360~~39,132,236 shares.

Table of Contents

MARCUS & MILLICHAP, ~~INC.~~

Inc.

TABLE OF CONTENTS


	~~Page~~
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		Page

Condensed Consolidated Balance Sheets at September 30, ~~2018~~2019 (Unaudited) and December 31, ~~2017~~2018		3

Condensed Consolidated Statements of Net and Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 ~~and 2017~~ (Unaudited)		4

Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 ~~and 2017~~ (Unaudited)		6 7

Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		27 25

Item 3. Quantitative and Qualitative Disclosures About Market Risk		40 38

Item 4. Controls and Procedures		41 38

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		42 39

Item 1A. Risk Factors		42 39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42 39
~~Item 3. Defaults upon Senior Securities~~		42
Item 3. Defaults Upon Senior Securities		39

Item 4. Mine Safety Disclosures		42 39

Item 5. Other Information		43 39
~~Item 6. Exhibits~~		43

~~SIGNATURES~~Item 6. Exhibits		40

SIGNATURES		41

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(~~dollar amounts~~ in thousands, except ~~per share amounts)~~

   September 30,
2018
(Unaudited) December 31,
2017
Assets

Current assets:

Cash and cash equivalents
   $ 181,020 $ 220,786
Commissions receivable
   5,548 9,586
Prepaid expenses
   6,516 9,661
Income tax receivable
   —   1,308
Marketable securities,available-for-sale
   120,701 73,560
Other assets, net
   7,572 5,529


Total current assets
   321,357 320,430
Prepaid rent
   14,517 15,392
Property and equipment, net
   18,169 17,153
Marketable securities,available-for-sale
   85,135 52,099
Assets held in rabbi trust
   9,115 8,787
Deferred tax assets, net
   23,635 22,640
Goodwill and other intangible assets, net
   5,639 —
Other assets
   32,568 23,163


Total assets
   $ 510,135 $ 459,664


Liabilities and stockholders’ equity

Current liabilities:

Accounts payable and other liabilities
   $ 8,780 $ 9,202
Notes payable to former stockholders
   1,087 1,035
Deferred compensation and commissions
   29,839 49,180
Income tax payable
   5,963 —
Accrued bonuses and other employee related expenses
   23,103 23,842


Total current liabilities
   68,772 83,259
Deferred compensation and commissions
   45,418 49,361
Notes payable to former stockholders
   6,564 7,651
Deferred rent and other liabilities
   6,690 4,505


Total liabilities
   127,444 144,776


Commitments and contingencies
   —   —
Stockholders’ equity:

Preferred stock, $0.0001 par value:

Authorized shares – 25,000,000; issued and outstanding shares – none at September 30, 2018 and December 31, 2017, respectively
   —   —
Common stock, $0.0001 par value:

Authorized shares – 150,000,000; issued and outstanding shares – 38,651,360 and 38,374,011 at September 30, 2018 and December 31, 2017, respectively
   4 4
Additionalpaid-in capital
   97,375 89,877
Stock notes receivable from employees
   (4 ) (4 )
Retained earnings
   285,116 224,071
Accumulated other comprehensive income
   200 940


Total stockholders’ equity
   382,691 314,888


Total liabilities and stockholders’ equity
   $ 510,135 $ 459,664

for shares and par value)

September 30,
2019
(Unaudited)

December 31,
2018

Assets

Current assets:

Cash and cash equivalents
$
226,081
$
214,683

Commissions receivable

6,316

4,948

Prepaid expenses

9,330

7,904

Income tax receivable

7,786

—

Marketable securities,
available-for-sale

124,475

137,436

Other assets, net

12,352

6,368

Total current assets

386,340

371,339

Prepaid rent

—

13,892

Property and equipment, net

21,609

19,550

Operating lease
right-of-use
assets, net

90,165

—

Marketable securities,
available-for-sale

70,785

83,209

Assets held in rabbi trust

9,102

8,268

Deferred tax assets, net

18,513

22,959

Goodwill and other intangible assets, net

14,647

15,385

Other assets

53,432

31,778

Total assets
$
664,593
$
566,380

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable and other liabilities
$
11,003
$
11,035

Notes payable to former stockholders

6,564

1,087

Deferred compensation and commissions

32,450

47,910

Income tax payable

—

4,486

Operating lease liabilities

17,500

—

Accrued bonuses and other employee related expenses

16,964

28,338

Total current liabilities

84,481

92,856

Deferred compensation and commissions

41,695

49,887

Notes payable to former stockholders

—

6,564

Operating lease liabilities

64,316

—

Deferred rent and other liabilities

2,001

7,499

Total liabilities

192,493

156,806

Commitments and contingencies

—

—

Stockholders’ equity:

Preferred stock, $0.0001 par value:

Authorized shares – 25,000,000; issued and outstanding shares – NaN at September 30, 2019 and December 31, 2018, respectively

—

—

Common stock, $
0.0001
par value:

Authorized shares – 150,000,000; issued and outstanding shares –
39,132,236
and
38,814,464
at September 30, 2019 and December 31, 2018, respectively

4

4

Additional
paid-in
capital

102,142

97,458

Stock notes receivable from employees

(4
)
(4
)
Retained earnings

367,550

311,341

Accumulated other comprehensive income

2,408

775

Total stockholders’ equity

472,100

409,574

Total liabilities and stockholders’ equity
$
664,593
$
566,380

See accompanying notes to condensed consolidated financial statements.

Table of Contents

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF NET AND COMPREHENSIVE INCOME

(~~dollar and share amounts~~ in thousands, except per share amounts)

(Unaudited)

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2018 2017 2018 2017
Revenues:

Real estate brokerage commissions
   $ 191,980 $ 169,357 $ 536,145 $ 472,069
Financing fees
   15,947 11,368 41,234 34,131
Other revenues
   2,663 2,616 7,154 10,724


Total revenues
   210,590 183,341 584,533 516,924


Operating expenses:

Cost of services
   132,896 114,803 354,414 314,827
Selling, general and administrative expense
   48,659 42,480 145,792 129,393
Depreciation and amortization expense
   1,651 1,375 4,529 3,975


Total operating expenses
   183,206 158,658 504,735 448,195


Operating income
   27,384 24,683 79,798 68,729
Other income (expense), net
   2,127 1,172 5,060 3,005
Interest expense
   (342 ) (370 ) (1,054 ) (1,126 )


Income before provision for income taxes
   29,169 25,485 83,804 70,608
Provision for income taxes
   8,315 10,010 22,772 27,564


Net income
   20,854 15,475 61,032 43,044
Other comprehensive (loss) income:

Unrealized (losses) gains on marketable securities, net of tax of $(38), $66, $(259) and $242 for the three months ended September 30, 2018 and 2017 and the nine months ended September 30, 2018 and 2017, respectively
   (115 ) 104 (771 ) 325
Foreign currency translation (loss) gain, net of tax of $0 for each of the three months ended September 30, 2018 and 2017 and each of the nine months ended September 30, 2018 and 2017
   (29 ) (40 ) 44 (65 )


Total other comprehensive (loss) income
   (144 ) 64 (727 ) 260


Comprehensive income
   $ 20,710 $ 15,539 $ 60,305 $ 43,304


Earnings per share:

Basic
   $ 0.53 $ 0.40 $ 1.56 $ 1.10
Diluted
   $ 0.53 $ 0.39 $ 1.55 $ 1.10
Weighted average common shares outstanding:

Basic
   39,191 39,033 39,147 38,995
Diluted
   39,484 39,204 39,359 39,136

Three Months Ended
September 30,

Nine Months Ended
September 30,

2019

2018

2019

2018

Revenues:

Real estate brokerage commissions
$

180,198
$

191,980
$

513,815
$

536,145

Financing fees

16,013

15,947

47,487

41,234

Other revenues

2,009

2,663

7,218

7,154

Total revenues

198,220

210,590

568,520

584,533

Operating expenses:

Cost of services

124,147

132,896

343,682

354,414

Selling, general and administrative expense

48,091

48,659

149,845

145,792

Depreciation and amortization expense

1,910

1,651

5,674

4,529

Total operating expenses

174,148

183,206

499,201

504,735

Operating income

24,072

27,384

69,319

79,798

Other income (expense), net

2,573

2,127

9,067

5,060

Interest expense

(329
)
(342
)
(1,018
)
(1,054
)

Income before provision for income taxes

26,316

29,169

77,368

83,804

Provision for income taxes

7,024

8,315

21,159

22,772

Net income

19,292

20,854

56,209

61,032

Other comprehensive income (loss):

Marketable securities,
available-for-sale:

Change in unrealized gains (losses)

160

(115
)
1,874

(779
)
Less: reclassification adjustment for net (gains) losses included in other income (expense), net

(23
)
—

(41
)
8

Net change, net of tax of $
46
, $(38), $617 and $(259) for the three and nine months
ended September 30, 2019 and 2018, respectively

137

(115
)
1,833

(771
)
Foreign currency translation gain (loss), net of tax of $0 for each of the three and nine
months ended September 30, 2019 and 2018

114

(29
)
(200
)
44

Total other comprehensive income (loss)

251

(144
)
1,633

(727
)

Comprehensive income
$
19,543
$
20,710
$
57,842
$
60,305

Earnings per share:

Basic
$
0.49
$
0.53
$
1.43
$
1.56

Diluted
$
0.49
$
0.53
$
1.42
$
1.55

Weighted average common shares outstanding:

Basic

39,441

39,191

39,383

39,147

Diluted

39,550

39,484

39,527

39,359

See accompanying notes to condensed consolidated financial statements.

Table of Contents

MARCUS & MILLICHAP, ~~INC.~~

Inc.

CONDENSED ~~CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY~~

Consolidated StatementS of Stockholders’ Equity

(~~dollar amounts~~ in ~~thousands)~~

thousands, except for shares)

(Unaudited)

   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, 2017
   —      $ —      38,374,011 $ 4    $ 89,877 $ (4 ) $ 224,071    $ 940 $ 314,888
Cumulative effect of a change in accounting principle
   —      —      —   —      —   —   13    (13 ) —










Balance at January 1, 2018, as adjusted
   —      —      38,374,011 4    89,877 (4 ) 224,084    927 314,888
Net and comprehensive income
   —      —      —   —      —   —   61,032    (727 ) 60,305
Stock-based award activity

Stock-based compensation
   —      —      —   —      8,919 —   —      —   8,919
Shares issued pursuant to employee stock purchase plan
   —      —      13,028 —      356 —   —      —   356
Issuance of common stock for vesting of restricted stock units
   —      —      305,975 —      —   —   —      —   —
Issuance of common stock for unvested restricted stock awards
   —      —      12,852 —      —   —   —      —   —
Shares withheld related to net share settlement of stock-based awards
   —      —      (54,506 ) —      (1,777 ) —   —      —   (1,777 )










Balance as of September 30, 2018
   —      $ —      38,651,360 $ 4    $ 97,375 $ (4 ) $ 285,116    $ 200 $ 382,691

Three Months Ended September 30, 2019

Additional
Paid-In

Stock Notes
Receivable
From

Retained

Accumulated
Other
Comprehensive

Preferred Stock

Common Stock

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income

Total

Balance at June 30, 2019

—

$
—

39,090,861

$
4

$
100,098

$
(4
)

$

348,258

$
2,157

$

450,513

Net and comprehensive income

—

—

—

—

—

—

19,292

251

19,543

Stock-based award activity

Stock-based compensation

—

—

—

—

2,114

—

—

—

2,114

Shares issued pursuant to employee stock purchase plan

—

—

—

—

—

—

—

—

—

Issuance of common stock
for vesting of restricted stock units

—

—

41,257

—

—

—

—

—

—

Issuance of common stock
for unvested restricted stock awards

—

—

2,264

—

—

—

—

—

—

Shares withheld related to
net share settlement of stock-based awards

—

—

(2,146
)

—

(70
)

—

—

—

(70
)

Balance as of September 30, 2019

—

$
—

39,132,236

$
4

$
102,142

$
(4
)

$
367,550

$
2,408

$
472,100

Three Months Ended September 30, 2018

Preferred Stock

Common Stock

Additional
Paid-In

Stock Notes
Receivable
From

Retain
ed

Accumulated
Other
Comprehensive

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income (Loss)

Total

Balance at June 30, 2018

—

$
—

38,621,712

$
4

$

94,291

$
(4
)

$

264,262

$
344

$

358,897

Net and comprehensive income

—

—

—

—

—

—

20,854

(144
)

20,710

Stock-based award activity

Stock-based compensation

—

—

—

—

3,147

—

—

—

3,147

Issuance of common stock
for vesting of restricted stock units

—

—

31,235

—

—

—

—

—

—

Shares withheld related to
net share settlement of stock-based awards

—

—

(1,587
)

—

(63
)

—

—

—

(63
)

Balance as of September 30, 2018

—

$
—

38,651,360

$
4

$
97,375

$
(4
)

$
285,116

$
200

$
382,691

See accompanying notes to condensed consolidated financial statements.

Table of Contents

MARCUS & MILLICHAP, ~~INC.~~

Inc.

CONDENSED ~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Consolidated StatementS of Stockholders’ Equity

(continued)

(~~dollar amounts~~ in ~~thousands)~~

thousands, except for shares)

(Unaudited)

   Nine Months Ended
September 30,
   2018 2017
Cash flows from operating activities

Net income
   $ 61,032 $ 43,044
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization expense
   4,529 3,975
Provision for bad debt expense
   52 33
Stock-based compensation
   8,919 6,173
Deferred taxes, net
   (735 ) 1,541
Net realized (gains) losses on marketable securities,available-for-sale
   (12 ) (2 )
Othernon-cash items
   (148 ) (46 )
Changes in operating assets and liabilities:

Commissions receivable
   4,183 594
Prepaid expenses
   3,145 2,266
Prepaid rent
   875 (1,831 )
Asset held in rabbi trust
   —   (700 )
Other assets
   (9,066 ) (12,780 )
Accounts payable and other liabilities
   (1,552 ) (1,359 )
Income tax receivable/payable
   7,271 2,477
Accrued bonuses and other employee related expenses
   (558 ) (1,763 )
Deferred compensation and commissions
   (23,739 ) (16,760 )
Deferred rent and other liabilities
   817 476


Net cash provided by operating activities
   55,013 25,338
Cash flows from investing activities

Acquisitions, net of cash received
   (6,990 ) —
Purchases of marketable securities,available-for-sale
   (168,672 ) (37,561 )
Proceeds from sales and maturities of marketable securities,available-for-sale
   88,027 14,950
Issuances of employee notes receivable
   (126 ) (432 )
Payments received on employee notes receivable
   12 9
Proceeds from sale of property and equipment
   —   10
Purchase of property and equipment
   (4,574 ) (4,987 )


Net cash used in investing activities
   (92,323 ) (28,011 )
Cash flows from financing activities

Taxes paid related to net share settlement of stock-based awards
   (1,777 ) (1,442 )
Proceeds from issuance of shares pursuant to employee stock purchase plan
   356 392
Principal payments on notes payable to former stockholders
   (1,035 ) (986 )


Net cash used in financing activities
   (2,456 ) (2,036 )


Net decrease in cash and cash equivalents
   (39,766 ) (4,709 )
Cash and cash equivalents at beginning of period
   220,786 187,371


Cash and cash equivalents at end of period
   $ 181,020 $ 182,662

~~MARCUS & MILLICHAP, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)~~

~~(dollar amounts in thousands)~~

~~(Unaudited)~~

   Nine Months Ended
September 30,
   2018    2017
Supplemental disclosures of cash flow information

Interest paid during the period
   $ 2,180    $ 1,896




Income taxes paid, net
   $ 16,237    $ 23,546




Supplemental disclosures of noncash investing and financing activities

Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable
   $ 192    $ 243




Change in property and equipment included in accounts payable and other liabilities
   $ 708    $ (203 )

Nine Months Ended September 30, 2019

Stock Notes

Accumulated

Preferred Stock

Common Stock

Additional
Paid-I
n

Receivable
From

Retained

Other
Comprehensive

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income

Total

Balance at December 31, 2018

—

$
—

38,814,464

$
4

$
97,458

$
(4
)

$

311,341

$
775

$

409,574

Net and comprehensive income

—

—

—

—

—

—

56,209

1,633

57,842

Stock-based award activity

Stock-based compensation

—

—

—

—

7,040

—

—

—

7,040

Shares issued pursuant to employee stock purchase plan

—

—

11,022

—

338

—

—

—

338

Issuance of common stock
for vesting of restricted stock units

—

—

366,476

—

—

—

—

—

—

Issuance of common stock
for unvested restricted stock awards

—

—

12,806

—

—

—

—

—

—

Shares withheld related to
net share settlement of stock-based awards

—

—

(72,532
)

—

(2,694
)

—

—

—

(2,694
)

Balance as of September 30, 2019

—

$
—

39,132,236

$
4

$
102,142

$
(4
)

$
367,550

$
2,408

$
472,100

Nine Months Ended September 30, 2018

Additional
Paid-In

Stock Notes
Receivable

Accumulated
Other

Preferred Stock

Common Stock

From

Retained

Comprehensive

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income (Loss)

Total

Balance at December 31, 2017

—

$
—

38,374,011

$
4

$
89,877

$
(4
)

$
224,071

$
940

$
314,888

Cumulative effect of a change in accounting principle

—

—

—

—

—

—

13

(13
)

—

Balance at January 1, 2018, as
adjusted

—

—

38,374,011

4

89,877

(4
)

224,084

927

314,888

Net and comprehensive income

—

—

—

—

—

—

61,032

(727
)

60,305

Stock-based award activity

Stock-based compensation

—

—

—

—

8,919

—

—

—

8,919

Shares issued pursuant to employee stock purchase plan

—

—

13,028

—

356

—

—

—

356

Issuance of common stock
for vesting of restricted stock units

—

—

305,975

—

—

—

—

—

—

Issuance of common stock
for unvested restricted stock awards

—

—

12,852

—

—

—

—

—

—

Shares withheld related to
net share settlement of stock-based awards

—

—

(54,506
)

—

(1,777
)

—

—

—

(1,777
)

Balance as of September 30, 2018

—

$
—

38,651,360

$
4

$
97,375

$
(4
)

$
285,116

$
200

$
382,691

See accompanying notes to condensed consolidated financial statements.

Table of Contents

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS

CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net income	$	56,209		$	61,032
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization expense		5,674			4,529
Amortization of right-of-use assets		15,433			—
Provision of bad debt expense		75			52
Stock-based compensation		7,040			8,919
Deferred taxes, net		3,829			(735	)
Net realized gains on marketable securities, available-for-sale		(70	)		(12	)
Other non-cash items		489			(148	)
Changes in operating assets and liabilities:
Commissions receivable		(1,368	)		4,183
Prepaid expenses		(1,426	)		3,145
Prepaid rent		—			875
Other assets, net		(31,302	)		(9,066	)
Accounts payable and other liabilities		103			(1,552	)
Income tax receivable/payable		(12,272	)		7,271
Accrued bonuses and other employee related expenses		(11,314	)		(558	)
Deferred compensation and commissions		(24,409	)		(23,739	)
Operating lease liabilities		(12,725	)		—
Deferred rent and other liabilities		(19	)		817

Net cash (used in) provided by operating activities		(6,053	)		55,013

Cash flows from investing activities
Acquisition, net of cash received		—			(6,990	)
Purchases of marketable securities, available-for-sale		(115,744	)		(168,672	)
Proceeds from sales and maturities of marketable securities, available-for-sale		143,638			88,027
Issuances of employee notes receivable		(200	)		(126	)
Payments received on employee notes receivable		28			12
Purchase of property and equipment		(6,643	)		(4,574	)

Net cash provided by (used in) investing activities		21,079			(92,323	)

Cash flows from financing activities
Taxes paid related to net share settlement of stock-based awards		(2,694	)		(1,777	)
Proceeds from issuance of shares pursuant to employee stock purchase plan		338			356
Principal payments on notes payable to former stockholders		(1,087	)		(1,035	)
Principal payments on stock appreciation rights liability		(185	)		—

Net cash used in financing activities		(3,628	)		(2,456	)

Net increase (decrease) in cash and cash equivalents		11,398			(39,766	)
Cash and cash equivalents at beginning of period		214,683			220,786

Cash and cash equivalents at end of period	$	226,081		$	181,020

Supplemental disclosures of cash flow information
Interest paid during the period	$	2,092		$	2,180

Income taxes paid, net	$	29,602		$	16,237

See accompanying notes to condensed consolidated financial statements.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Description of Business and Basis of Presentation

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 September 30, ~~2018,~~2019, MMI ~~operates 79~~operated 82 offices in the United States and Canada through its wholly-owned ~~subsidiary, Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”), which primarily includes~~subsidiaries, including the operations of Marcus & Millichap Capital Corporation ~~(“MMCC”)~~

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, ~~MMREIS~~Marcus & Millichap Real Estate Investment Services, Inc. (“~~Spin-Off”~~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 on

October 30, ~~2013.~~

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

andArticle

10-01

ofRegulation

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 for the year ended December 31, ~~2017~~2018 included in the Company’s Annual Report on Form

10-K

filed on March ~~16, 2018~~1, 2019 with the SEC. The results of the three and nine months ended September 30, ~~2018~~2019 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2018, or~~2019, for other interim periods or future years.

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.

Segment Reporting

The Company follows U.S. GAAP for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of the Company’s operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing (including mortgage servicing rights revenue) and consulting and advisory services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute the Company’s only operating segment for financial reporting purposes.

Reclassifications

Certain prior-period amounts in Note 13 – “Income Taxes” have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or any totals or subtotals therein.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2.	Accounting Policies and Recent Accounting Pronouncements

Accounting Policies

The complete list of the Company’s accounting policies is included in the Company’s Annual Report on Form
10-K
filed on March 1, 2019 with the SEC. The following are updated or new accounting policies.

Leases

The Company utilizes operating leases for all its facilities and autos. The Company determines if an arrangement is a lease at inception.
Right-of-use
assets (“ROU assets”) represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s contractual obligation to make lease payments under the lease. Operating leases are included in operating lease ROU assets,
non-current,
and operating lease liabilities current and
non-current
captions in the condensed consolidated balance sheets.

The Company has lease agreements with lease and
non-lease
components, which are accounted for as a single lease component. Lease cost is recognized on a straight-line basis over the lease term. Variable lease payments consist of common area costs, insurance, taxes, utilities, parking and other lease related costs, which are determined principally based on billings from landlords.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents due from independent contractors (included under other assets, net current and other assets

non-current),

investments in marketable securities,

available-for-sale,

security deposits (included under other assets,

non-current)

and commissions receivable. 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 of marketable 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 and money market funds that ~~hold the Company’s~~represent amounts recorded as cash and cash equivalents. The Company historically has not experienced any significant losses related to cash and cash equivalents.

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 ~~requires collateral on acase-by-case~~ ~~basis. The Company~~ maintains allowances, as needed, for estimated credit losses based on management’s assessment of the likelihood of collection. For the ~~three and~~ nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, no transaction represented 10% or more of total revenues. Further, while one ~~transaction~~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 and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company’s Canadian operations represented less than 1% of total revenues.

During the three and nine months ended September 30, 2019 and 2018, ~~and 2017, no~~0 office represented 10% or more of total revenues.

2.	~~Accounting Policies and Recent Accounting Pronouncements~~

~~Accounting Policies~~

~~The complete list~~

Table of ~~the Company’s accounting policies is included in the Company’s Annual Report on Form10-K~~ ~~filed on March 16, 2018 with the SEC. The following are updated or new accounting policies.~~

~~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. The Company generates financing fees from securing financing on purchase transactions as well as fees earned from refinancing its clients’ existing mortgage debt and other financing activities, including mortgage servicing. Other revenues include fees generated from consulting and advisory services, as well as referral fees from other real estate brokers. The Company’s contracts contain one performance obligation related to its real estate brokerage, financing and consulting and advisory services offered to buyers and sellers of commercial real estate and provide that it is operating as a principal in all its revenue generating activities. The Company does not have multiple-element arrangements, variable consideration, financing components, significant noncash consideration, licenses, long-term contracts with customers or other items affecting the transaction price. Accordingly, the Company determined that the transaction price is fixed and determinable and collectability is reasonably assured. The Company recognizes revenue in principally all cases at the close of escrow for real estate brokerage, close of loan for financing and when services are provided or upon closing of the transaction for other revenues.

~~Mortgage Servicing Rights and Fees~~

Mortgage servicing rights (“MSRs”) are recorded at fair value upon acquisition of a servicing contract. The estimated net cash flows on the contracts are discounted over the estimated life of the underlying loan. The life of the underlying loan is estimated giving consideration to the prepayment provisions in the loan. The Company’s model assumes full prepayment of the loan at or near the point where the prepayment provisions have expired. The MSRs have principally similar risk characteristics.

The assumptions used to estimate the fair value of MSRs are based on internal models and are periodically compared to assumptions used by other market participants. Due to the relatively few transactions in the MSR market, we have experienced little volatility in the assumptions we use during the periods presented. Additionally, we do not expect to see much volatility in the assumptions for the foreseeable future. Management actively monitors the assumptions used and makes adjustments to those assumptions when market conditions change or other factors indicate such adjustments are warranted. We carry MSRs at the lower of the amortized cost or fair value and evaluate the carrying value for impairment quarterly. We engage a third party to assist in determining the estimated fair value of our existing MSRs quarterly.

~~All MSRs are amortized using the interest method over the period that servicing income is expected to be received. MSRs are included in other assetsnon-current~~ in the accompanying condensed consolidated balance sheets. See Note 5 – “Selected Balance Sheet Data” for additional information. Amortization related to the MSRs is included in depreciation and amortization expense in the accompanying condensed consolidated statements of net and comprehensive income.

We recognize 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. MSRs and related servicing fees are recorded in financing fees in the accompanying condensed consolidated statements of net and comprehensive income.

~~Capitalization of Internal Labor~~

~~Certain costs related to the development or purchases ofinternal-use~~ software are capitalized. Internal computer software costs that are incurred in the preliminary project stage are expensed as incurred. Direct consulting costs and certain payroll and related costs that are incurred during the development stage of a project are capitalized and amortized using the straight-line method over a useful life of five years. Capitalized costs are recorded in property and equipment, net and depreciation is recorded in the depreciation and amortization in the condensed consolidated financial statements. Depreciation begins for software that has been placed into production and is ready for its intended use. Post-implementation costs such as training, maintenance and support are expensed as incurred. The Company evaluates the carrying value of capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

Contents

~~Business Combinations~~

The Company accounts for business combinations using the acquisition method of accounting, under which the consideration for the acquisition is allocated to the assets acquired and liabilities assumed. The Company recognizes identifiable assets acquired and liabilities assumed (both specific and contingent) at their acquisition date fair values as determined by management as of the acquisition date. Acquisition-related costs, such as due diligence, legal and accounting fees, are expensed as incurred and not considered in determining the fair value of the acquired assets. The excess of the consideration over the assets acquired net of liabilities assumed is recognized as goodwill.

~~Goodwill~~

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 currently has only one reporting unit; therefore, all goodwill is allocated to that one reporting unit.

~~Intangible Assets~~

~~The Company’s intangible assets primarily includenon-compete~~ agreements and customer relationships that resulted from its business combinations. These intangible assets are amortized on a straight-line basis using a useful life between one and six years.The Company evaluates its intangible assets for impairment at least annually, or as events or changes in circumstances indicate the carrying value may be impaired.

~~Stock-Based Compensation~~

The Company follows the accounting guidance for share-based payments which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, independent contractors and~~non-employee~~ ~~directors. Awards are issued under the Amended and Restated 2013 Omnibus Equity Incentive Plan and 2013 Employee Stock Purchase Plan (“ESPP Plan”).~~

~~After adoption of Accounting Standards Update (“ASU”)No. 2016-09,~~~~Improvements to Employee Share-Based Payment Accounting~~~~(“ASU 2016-09”)~~ ~~on January 1, 2017, the Company accounts for forfeitures as they occur.~~

For awards made to the Company’s employees and directors, the Company initially values restricted stock units and restricted stock awards based on the grant date closing price of the Company’s common stock. For awards with periodic vesting, the Company recognizes the related expense on a straight-line basis over the requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the portion of the grant date value of the award that has vested through that date.

~~The Company adopted ASUNo. 2018-7,~~~~Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting~~~~awards (“ASU2018-7”)~~ on July 1, 2018. As a result, awards made to independent contractors will be measured based on the grant date closing price of the Company’s common stock consistent with awards made to the Company’s employees and directors. Unvested awards issued to independent contractors as of the adoption date of July 1, 2018 were remeasured at the adoption date stock price. The Company will recognize the remaining unrecognized value of unvested awards over the remaining performance period based on the adoption date stock price, with no further remeasurement through the performance completion date. Prior to the adoption of ASU~~2018-7,~~ the Company determined that the fair value of the awards made to independent contractors shall be measured based on the fair value of the equity instrument as it is more reliably measurable than the fair value of the consideration received. The Company used the grant date as the performance commitment date, and the measurement date was the date the services were completed, which was the vesting date. As a result, the Company recorded stock-based compensation for these awards over the vesting period on a straight-line basis with periodic adjustments during the vesting period for changes in the fair value of the awards.

If there are any modifications or cancellations of the underlying unvested share-based awards, the Company may be required to accelerate, increase or cancel any remaining unrecognized or previously recorded stock-based compensation expense.

~~For awards issued under the ESPP Plan, the Company determined that the plan was a compensatory plan and is required to expense the fair value of the awards over eachsix-month~~ offering period. The Company estimates the fair value of these awards using the Black-Scholes option pricing model. The Company calculates the expected volatility based on the historical volatility of the Company’s common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant, both consistent with the term of the offering period. The Company incorporates no forfeiture rate and includes no expected dividend yield as the Company has not, and currently does not intend to pay a regular dividend.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

Adopted

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued ~~ASUNo. 2014-09,~~~~Revenue from Contracts with Customers~~~~(“ASU 2014-09”),~~ which supersedes virtually all of the existing revenue recognition guidance under U.S. GAAP, and requires entities to recognize revenue for the transfer to a customer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. Subsequent to the issuance of ASU~~2014-09,~~ ~~the FASB issued ASUNo. 2015-14,~~~~Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~~~, ASU2016-08,~~~~Revenue from Contacts with Customers: Principal Versus Agent Considerations~~~~, ASUNo. 2016-10,~~~~Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing~~~~, and ASUNo. 2016-12,~~~~Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients~~~~. The additional ASUs clarified certain provisions of ASU2014-09~~ ~~in response to recommendations from the Transition Resources Group established by the FASB and extended the required adoption of ASU2014-09~~ ~~which is now effective for reporting periods beginning after December 15, 2017. The Company adopted the new standard on January 1, 2018 using the modified retrospective method.~~

The Company assessed the impact of the standard and determined that its contracts contain one performance obligation related to its real estate brokerage, financing and consulting and advisory services offered to buyers and sellers of commercial real estate and provide that it is operating as a principal in all of its revenue generating activities. The Company does not have multiple-element arrangements, variable consideration, financing components, significant noncash consideration, licenses, long-term contracts with customers or other items affecting the transaction price. The Company determined the transaction price is generally fixed and determinable and collectability is reasonably assured. Revenue was and will continue to be recognized in principally all cases at the close of escrow for real estate brokerage, close of loan for financing and when services are provided upon closing of the transaction for other revenues. Accordingly, the adoption of ASU~~2014-09,~~ ~~as clarified, did not have an effect on the manner or timing of the recognition of the Company’s revenue.~~

~~In January 2017, the FASB issued ASUNo. 2017-01,~~~~Business Combinations: Clarifying the Definition of a Business~~~~(“ASU 2017-01”).~~ ~~ASU2017-01~~ ~~changed the definition of a business in an effort to assist entities with evaluating whether a set of transferred assets and activities is a business. ASU2017-01~~ ~~was effective for the Company on January 1, 2018.~~

~~In January 2017, the FASB issued ASUNo. 2017-04,~~~~Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment~~~~(“ASU 2017-04”).~~ ~~ASU2017-04~~ ~~simplifies the accounting for goodwill impairment by eliminating Step 2 from the goodwill impairment test. ASU2017-04~~ ~~is effective for the Company on January 1, 2020, with early adoption permitted. The qualitative assessment remains optional and is unchanged. The Company prospectively adopted ASU2017-04~~ ~~in the second quarter of 2018. There was no impact to the Company as the Company was not required to evaluate goodwill for impairment.~~

~~In February 2018, the FASB issued ASUNo. 2018-02,~~~~Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~Accounting Standards Update (“~~ASU2018-02”).~~ ~~ASU2018-02~~ ~~is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. ASU2018-02~~ permits companies that elect to make the reclassification adjustment the option to apply the guidance retrospectively or to record the reclassification as of the beginning of the period of adoption. The Company adopted the new standard on January 1, 2018 and elected to make the reclassification adjustment pertaining to the stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the “Act”ASU”) ~~from accumulated other comprehensive income to retained earnings as of the beginning of the period, which was in the amount of $13,000.~~

~~In June 2018, the FASB issued ASU~~No. ~~2018-7.~~ ~~ASU2018-7~~ is effective for reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted, including in interim periods, but no earlier than an entity’s adoption of ASC 606,~~Revenue from Contracts with Customers~~~~. For the Company, the new standard would have been effective during the first quarter of 2019 with early adoption permitted and will require equity-classified share-based payment awards issued tonon-employees~~ ~~to be measured based on the grant date price, instead of the previous requirement to remeasure the awards through the performance completion date. The Company early adopted ASU2018-7~~ ~~during the third quarter of 2018. As a result of the adoption, awards issued tonon-employees~~ prior to the adoption date of July 1, 2018 were remeasured at the adoption date stock price with no further remeasurement through the performance completion date. Awards issued to nonemployees subsequent to the adoption date are based on the grant date stock price. The Company will recognize the remaining unrecognized value of unvested~~non-employee~~ ~~awards over the remaining performance period based on the adoption date stock price with no further remeasurement through the performance completion date.~~

2016-02,

~~Pending Adoption~~

~~In February 2016, the FASB issued ASUNo. 2016-02,~~

Leases

, to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company ~~will be required to adopt~~adopted the new standard effective January 1, 2019, which resulted in the recognition of ROU assets and lease liabilities for operating leases. Upon adoption, the Company, in determining ROU assets, also considered currently recorded amounts related to differences in straight line lease expense and cash lease payments and prepaid rent. ROU assets and operating lease obligations in connection with adoption of the new lease standard were $76.7 million.

On the

adoption date, the Company reclassified deferred rent in the amount of $5.6 million (the noncurrent portion was included in defered rent and other liabilities, and the current portion was included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets) and prepaid rent in the amount of $13.4 million to ROU assets. The Company also reclassified prepaid rent in the amount of $462,000 to other assets, current.

The adoption of the new standard had a material impact on the Company’s condensed consolidated balance sheets will be impacted by the recording of a lease liability and right of use asset for virtually all of its current operating leases. As of September 30, 2018, the Company had remaining contractual obligations for operating leases (autos and office) that aggregate approximately $89.6 million. Accordingly, the Company anticipates that the adoption of the new standard willsheet, but did not have a material impact on the Company’s condensed consolidated ~~balance sheets. The amount of which and the potential impact on the condensed consolidated~~ statements of net and comprehensive ~~income~~income.

The Company elected available practical expedients permitted under the guidance, which among other items, allow the Company to (i) carry forward its historical lease classification, (ii) not reassess leases for the definition of “lease” under the new standard, (iii) utilize a discount rate as of the effective date and (iv) not record leases that expired or were terminated prior to the effective date.

The Company made an accounting policy election to account for lease and

non-lease

components as a single lease component.

The Company implemented internal controls and key system functionality to enable the preparation of the required financial information.

In March 2017, the FASB issued ASU No.

2017-08,

Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

(“ASU

2017-08”).

The Company adopted the new standard effective January 1, 2019. ASU

2017-08

shortens the amortization period of a callable security that was acquired at a premium to the earliest call date of that security instead of the contractual life of the security. The adoption of ASU

2017-08

did not have a material effect on the Company’s condensed consolidated ~~statements of cash flows has yet to be determined.~~

financial statements.

Pending Adoption

In June 2016, the FASB issued ASUNo.

2016-13,

Financial Instruments—Credit Losses

(“ASU

2016-13”).

ASU

2016-13

is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2020. Under ASU

2016-13,

the

Company will be required to use an expected-loss model for its marketable securities,

available-for

sale, which requires that credit losses be presented as an allowance rather than as an impairment write-down. Reversals of credit losses (in situations in which the estimate of credit losses declines) is permitted in the reporting period that the change occurs. Current U.S. GAAP prohibits reflecting reversals of credit losses in current period earnings. At September 30, 2018, the Company had $205.8 million in marketable securities, available for sale which would be subject to this new standard. As of September 30, 2018, these marketable securities, available for sale have an average credit rating of AA+ and no impairment ~~write-downs have been recorded.~~losses. The Company is currently evaluating the impact of this new standard on its investment policy and ~~investments.~~

impairment model for marketable securities,

available-for-sale

and other financial assets, and due to the average credit rating of its marketable securities, and nature and type of the

available-for-sale

and other financial assets it holds, the Company does not expect the standard to have a material impact on its condensed consolidated financial statements at adoption or in subsequent periods.

In August 2018, the FASB issued ASUNo.

2018-13,

Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“

(“ASU

2018-13”).

ASU

2018-13

is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2020. ASU

2018-13

modifies prior disclosure requirements for fair value measurement. ~~The modification~~ ASU

2018-13

removes certain disclosure requirements related to the fair value hierarchy, such as removing the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2, ~~modifying~~modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements for recurring and nonrecurring fair value measurements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value ~~measurement.~~measurements. As of September 30, ~~2018,~~2019, the Company had contingent consideration liability of ~~$1.8~~$2.9 million and mortgage servicing rights (“MSRs”) of $2.0 million measured as Level 3. The Company is currently evaluating the impact of this new standard and does not expect ASU

2018-13

to have a material effect on its condensed consolidated financial statements.

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In August 2018, the FASB issued ASU No.

2018-15,

Internal-Use Software (Subtopic 350-40)

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

(“ASU

2018-15”).

ASU

2018-15

is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2020. ASU

2018-15

aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain

internal-use

software (and hosting arrangements that include an internal use software license), by permitting a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an

internal-use

software project. The Company is currently evaluating the impact of this new standard and does not expect ASU

2018-15

to have a material effect on its condensed consolidated financial statements.

3.	~~Acquisitions, Goodwill~~Property and ~~Intangible Assets~~ Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	September 30, 2019			December 31, 2018
Computer software and hardware equipment	$	24,489		$	20,427
Furniture, fixtures, and equipment		23,410			24,227
Less: accumulated depreciation and amortization		(26,290	)		(25,104	)

	$	21,609		$	19,550

During the nine months ended September 30, 2019 and 2018, the Company ~~completed three acquisitions~~

wrote-off

approximately $3.3 million and $1.4 million, respectively, of fully depreciated computer software and hardware equipment and furniture, fixtures and equipment.

As of September 30, 2019 and 2018, property and equipment additions incurred but not yet paid included in accounts payable and other liabilities were $264,000 and $926,000, respectively.

4.	Operating Leases

The Company has operating leases for all of its facilities and autos. As of September 30, 2019, operating lease ROU assets were $105.6 million and the ~~results of each~~related accumulated amortization was $15.4 million.

The operating lease cost consisted of the ~~acquisitions have been~~following (in thousands):


	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
Operating lease cost:
Lease cost (1)	$	6,148		$	18,163
Variable lease cost (2)		1,423			3,913
Sublease income		(68	)		(199	)

	$	7,503		$	21,877

(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 fiscal year consisted of the following (in thousands):


	September 30, 2019
Remainder of 2019	$	5,187
2020		20,724
2021		18,233
2022		14,158
2023		10,959
Thereafter		21,345

Total future minimum lease payments		90,606
Less imputed interest		(8,790	)

Present value of operating lease liabilities	$	81,816

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Supplemental cash flow information and noncash activity related to the operating leases consisted of the following (in thousands):


	Nine Months Ended September 30, 2019
Operating cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities	$	15,064
Noncash activity:
ROU assets obtained in exchange for operating lease liabilities	$	17,806
Tenant improvements owned by lessor related to ROU assets (1)	$	3,642

(1)	Reclassification from other assets current.

Additional noncash activity in connection with the adoption of the new lease standard on January 1, 2019 included recording of $76.7 million of ROU assets and operating lease liabilities, and reclassifying $7.8 million in prepaid rent and deferred rent to ROU assets.

Other information related to the operating leases consisted of the following:


	September 30, 2019
Weighted average remaining operating lease term		5.18 years
Weighted average discount rate		3.9	%

Prior to the adoption of the new leases standard (as previously disclosed in the ~~condensed consolidated financial statements beginning~~Company’s Annual Report on ~~their respective acquisition date. The acquisitions expand~~Form

10-K

for the ~~Company’s network~~year ended December 31, 2018), future minimum lease payments under

non-cancelable

operating leases for office facilities and autos with terms in excess of ~~its real estate sales~~one year consisted of the following (in thousands):


	December 31, 2018
2019	$	19,649
2020		19,287
2021		16,833
2022		12,368
2023		8,805
Thereafter		10,452

	$	87,394

5.	Investments in Marketable Securities

Amortized cost and financing professionals and loan originators and provides further diversification to its loan origination platform and financing services. Aggregate terms of these acquisitions included: (i) cash paid at closing of approximately $7.0 million, net of cash received and (ii) the fair value of ~~contingent consideration which may be paid over~~marketable securities,

available-for-sale,

by type of security consisted of the ~~next five-year period after the related acquisition based on achievement~~following (in thousands):


	September 30, 2019									December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
U.S. treasuries	$	109,208	$	192	$	(1	)	$	109,399	$	121,252	$	7	$	(79	)	$	121,180
U.S. government sponsored entities		—		—		—			—		3,512		—		(7	)		3,505
Corporate debt securities		15,019		57		—			15,076		11,962		—		(11	)		11,951
Asset-backed securities and other		—		—		—			—		806		—		(6	)		800

	$	124,227	$	249	$	(1	)	$	124,475	$	137,532	$	7	$	(103	)	$	137,436

Long-term investments:
U.S. treasuries	$	30,146	$	325	$	(15	)	$	30,456	$	44,997	$	128	$	(115	)	$	45,010
U.S. government sponsored entities		1,415		2		(4	)		1,413		1,569		—		(62	)		1,507
Corporate debt securities		29,870		980		(8	)		30,842		32,467		3		(633	)		31,837
Asset-backed securities and other		7,965		113		(4	)		8,074		4,889		12		(46	)		4,855

	$	69,396	$	1,420	$	(31	)	$	70,785	$	83,922	$	143	$	(856	)	$	83,209

Table of ~~certain EBITDA targets or service requirements.~~ Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The ~~Company determined the~~amortized cost and fair value of the ~~contingent consideration was $1.7 million using~~Company’s investments in

available-for-sale

securities that have been in a ~~probability-weighted, discounted cash flow estimate based on achieving EBITDA targets. See Note 9 – “Fair Value Measurements” for additional information on contingent consideration.~~

The acquisitions were accounted for as business combinations. Based on preliminary purchase price allocations, $2.0 million, net, was allocated to mortgage servicing assets ($2.1 million) and liabilities ($0.1 million), $1.6 million was allocated to the fair values of intangible assets, $0.8 million to other assets noncurrent and $0.1 million to acquired working capital, with the remainder of $4.2 million allocated to goodwill.

~~The goodwill recorded as part~~continuous unrealized loss position consisted of the ~~acquisitions primarily arose~~following (in thousands):


	September 30, 2019					December 31, 2018
	Unrealized Loss			Fair Value		Unrealized Loss			Fair Value
Less than 12 months	$	(28	)	$	11,931	$	(576	)	$	127,326

12 months or longer	$	(4	)	$	1,071	$	(383	)	$	30,609

Gross realized gains and gross realized losses from the ~~acquired assembled workforce~~sales of the Company’s

available-for-sale

securities consisted of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019			2018
Gross realized gains (1)	$	58	$	—	$	117		$	12

Gross realized losses (1)	$	—	$	—	$	(47	)	$	—

(1)	Recorded in other income (expense), 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.

As of September 30, 2019, the Company considers the declines in market value of its marketable securities,

available-for-sale

to be temporary in nature and ~~commercial sales, lending and servicing platforms.~~does not consider any of its investments other-than-te

porarily impaired. The Company ~~expects all~~has no current intent to sell, and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Company may sell certain of its marketable securities,

available-for-sale

prior to their stated maturities for strategic reasons including, but not limited to, anticipated liquidity and capital requirements, anticipated credit deterioration, duration management or when a security no longer meets the criteria of the ~~goodwill~~Company’s investment policy.

Amortized cost and fair value of marketable securities,

available-for-sale,

by contractual maturity consisted of the following (in thousands, except weighted average data):


	September 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	124,227	$	124,475	$	137,532	$	137,436
Due after one year through five years		49,754		50,435		61,875		61,846
Due after five years through ten years		14,923		15,601		17,310		16,747
Due after ten years		4,719		4,749		4,737		4,616

	$	193,623	$	195,260	$	221,454	$	220,645

Weighted average contractual maturity		1.9 years				1.8 years

Actual maturities may differ from contractual maturities because certain borrowers have the right to ~~be tax deductible,~~prepay certain obligations with ~~thetax-deductible~~ amount of goodwill related to the contingent consideration to be determined once the cash payments are made to settle the contingent consideration. The goodwill resulting from these acquisitions is allocated to the Company’s one reporting unit.

or without prepayment penalties.

6.	Goodwill and Other Intangible Assets

Goodwill and intangible assets, net consisted of the following (in thousands):

   September 30, 2018    December 31, 2017
   Gross
Carrying
Amount    Accumulated
Amortization Net Book
Value    Gross
Carrying
Amount    Accumulated
Amortization    Net Book
Value
Goodwill and intangible assets:

Goodwill⁽¹⁾
   $ 4,186    $ —   $ 4,186    $ —      $ —      $ —
Intangible assets⁽¹⁾
   1,571    (118 ) 1,453    —      —      —










   $ 5,757    $ (118 ) $ 5,639    $ —      $ —      $ —


	September 30, 2019							December 31, 2018
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Goodwill and intangible assets:
Goodwill (1)	$	11,459	$	—		$	11,459	$	11,459	$	—		$	11,459
Intangible assets (1)		4,240		(1,052	)		3,188		4,240		(314	)		3,926

	$	15,699	$	(1,052	)	$	14,647	$	15,699	$	(314	)	$	15,385

⁽¹⁾	Represents additions from ~~acquisition.~~ acquisitions.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The ~~net change~~changes in the carrying ~~value~~amount of ~~intangible assets~~goodwill consisted of the following (in thousands):

   September 30,
2018    December 31,
2017
Beginning balance
   $ —      $ —
Additions from acquisition
   1,571    —
Amortization
   (118 )    —




   $ 1,453    $ —


	Nine Months Ended September 30,
	2019		2018
Beginning balance	$	11,459	$	—
Additions from acquisitions		—		4,186
Impairment losses		—		—

Ending balance	$	11,459	$	4,186

Estimated amortization expense for intangible assets for the next five years and thereafter consisted of the following (in thousands):

   September 30,
2018
Remainder of 2018
   $ 88
2019
   340
2020
   327
2021
   245
2022
   184
Thereafter
   269


   $ 1,453


	September 30, 2019
Remainder of 2019	$	205
2020		817
2021		743
2022		621
2023		493
Thereafter		309

	$	3,188

4.7.	~~Property and Equipment~~

~~Property and equipment, net consisted of the following (in thousands):~~

   September 30,
2018    December 31,
2017
Computer software and hardware equipment
   $ 18,311    $ 16,247
Furniture, fixtures, and equipment
   23,527    21,695
Less: accumulated depreciation and amortization
   (23,669 )    (20,789 )




   $ 18,169    $ 17,153

During the nine months ended September 30, 2018 and 2017, the Company wrote off approximately $1.4 million and $2.9 million, respectively, of fully depreciated computer software and hardware equipment and furniture, fixtures and equipment.

5.	Selected Balance Sheet Data

Other Assets

Other assets consisted of the following (in thousands):

   Current    Non-Current
   September 30,
2018    December 31,
2017    September 30,
2018    December 31,
2017
MSRs, net of amortization
   $ —      $ —      $ 2,329    $ —
Due from independent contractors, net^{(1) (2)}
   3,236    3,672    28,032    21,726
Security deposits
   —      —      1,170    1,158
Employee notes receivable⁽³⁾
   184    366    139    255
Customer trust accounts and other
   4,152    1,491    898    24








   $ 7,572    $ 5,529    $ 32,568    $ 23,163


	Current				Non-Current
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
MSRs, net of amortization	$	—	$	—	$	2,039	$	2,209
Due from independent contractors, net (1) (2)		2,381		3,831		48,911		27,157
Security deposits		—		—		1,313		1,196
Employee notes receivable (3)		150		156		373		370
Customer trust accounts and other		9,821		2,381		796		846

	$	12,352	$	6,368	$	53,432	$	31,778

⁽¹⁾	Represents amounts advanced, notes receivable and other receivables due from the Company’s investment sales and financing professionals. The notes receivable along with interest are typically collected from future commissions and are generally due in one to five years.

⁽²⁾

Includes allowance for doubtful accounts related to current receivables of ~~$474~~$404 and ~~$494~~$514 as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The Company recorded a provision for bad debt expense of $88 and $81 and ~~$87~~

wrote-off

$82 and ~~wrote off~~ $17 ~~and $4~~ of these receivables for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The Company recorded a provision for bad debt expense of $75 and $52 and ~~$33~~

wrote-off

$185 and ~~wrote off~~ $72 ~~and $14~~ of these receivables for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Any cash receipts on notes are applied first to unpaid principal balance prior to any income being recognized.

⁽³⁾	Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable were $60 and $192 for the nine months ended September 30, 2019 and 2018, respectively. See Note 89 – “Related-Party Transactions” for additional information.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MSRs

The net change in the carrying value of MSRs consisted of the following (in thousands):

   September 30,
2018    December 31,
2017
Beginning balance
   $ —      $ —
Additions from acquisition
   2,121    —
Additions
   373    —
Amortization
   (165 )    —




   $ 2,329    $ —


	September 30, 2019			December 31, 2018
Beginning balance	$	2,209		$	—
Additions from acquisition		—			2,121
Additions		243			391
Amortization		(413	)		(303	)

Ending balance	$	2,039		$	2,209

The portfolio of loans serviced by the Company aggregated $1.6 billion as of September 30, 2019 and December 31, 2018. See Note 910 – “Fair Value Measurements” for additional information ~~about~~on MSRs.

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 $2.1 million as of September 30, 2019 and December 31, 2018, 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.

Deferred Compensation and Commissions

Deferred compensation and commissions consisted of the following (in thousands):

   Current    Non-Current
   September 30,
2018    December 31,
2017    September 30,
2018    December 31,
2017
Stock appreciation rights (“SARs”) liability⁽¹⁾
   $ 1,735    $ 1,662    $ 19,150    $ 20,217
Commissions payable to investment sales and financing professionals
   26,843    46,257    18,583    21,924
Deferred compensation liability⁽¹⁾
   1,261    1,261    7,685    7,220








   $ 29,839    $ 49,180    $ 45,418    $ 49,361


	Current				Non-Current
	September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Stock appreciation rights (“SARs”) liability (1)	$	1,895	$	1,810	$	18,082	$	19,299
Commissions payable to investment sales and financing professionals		29,118		44,812		16,858		23,983
Deferred compensation liability (1)		1,437		1,288		6,755		6,605

	$	32,450	$	47,910	$	41,695	$	49,887

⁽¹⁾

The SARs and deferred compensation liability become subject to payout as a result of a participant no longer being considered as 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~~10 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, 2019 and 2018 were 4.684% and ~~2017 were~~ 4.409% ~~and 4.446%~~, respectively. MMI recorded interest expense related to this liability of ~~$220,000~~$226,000 and ~~$233,000,~~$220,000 for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$669,000~~$678,000 and ~~$699,000~~$669,000 for the nine months ended September 30, 2019 and 2018, ~~and 2017,~~ respectively.

Estimated payouts within the next twelve months for participants that have separated from service have been classified as current.

During the nine months ended September 30, 2019 and 2018, the Company made total payments ~~(consisting~~of $1.8 million, consisting of principal ($

185,000

) and accumulated interest ($

1.6

million) and $1.7 million, consisting of accumulated ~~interest)~~interest, respectively.

Table of ~~$1.7 million classified as an operating cash flow in the deferred compensation and commissions caption in the accompanying condensed consolidated statements of cash flows.~~

Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Commissions Payable

Certain investment sales professionals have the ability to 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 has the ability to 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 ~~plan~~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 ~~as determined by~~set forth in the ~~plan.~~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 ~~MMI’s~~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 nine months ended September 30, 2019 and 2018, the Company made total payments to participants of ~~$946,000.~~

$1.3 million and $946,000, respectively.

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
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Increase in the carrying value of the assets held in the rabbi trust⁽¹⁾
   $ 266    $ 202    $ 456    $ 571








Increase in the net carrying value of the deferred compensation obligation⁽²⁾
   $ 267    $ 219    $ 455    $ 618


	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Increase in the carrying value of the assets held in the rabbi trust (1)	$	31	$	266	$	959	$	456

Increase in the net carrying value of the deferred compensation obligation (2)	$	31	$	267	$	943	$	455

⁽¹⁾	Recorded in other income (expense), 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.

6.	~~Investments in Marketable Securities~~

~~Amortized cost~~

Deferred Rent and ~~fair value of marketable securities,available-for-sale,~~ ~~by type of security~~Other Liabilities

Deferred rent and other liabilities consisted of the following (in thousands):

   September 30, 2018    December 31, 2017
   Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses Fair
Value    Amortized
Cost    Gross
Unrealized
Gains    Gross
Unrealized
Losses Fair
Value
Short-term investments:

U.S. treasuries
   $ 106,291    $ —      $ (150 ) $ 106,141    $ 57,712    $ —      $ (88 ) $ 57,624
U.S. government sponsored entities
   3,502    —      (17 ) 3,485    7,016    —      (8 ) 7,008
Corporate debt securities
   10,988    —      (13 ) 10,975    8,931    —      (3 ) 8,928
Asset-backed securities and other
   100    —      —   100    —      —      — —












   $ 120,881    $ —      $ (180 ) $ 120,701    $ 73,659    $ —      $ (99 ) $ 73,560












Long-term investments:

U.S. treasuries
   $ 52,865    $ —      $ (343 ) $ 52,522    $ 18,111    $ 7    $ (164 ) $ 17,954
U.S. government sponsored entities
   1,603    —      (83 ) 1,520    5,306    —      (62 ) 5,244
Corporate debt securities
   25,374    4    (471 ) 24,907    22,505    268    (54 ) 22,719
Asset-backed securities and other
   6,252    1    (67 ) 6,186    6,180    17    (15 ) 6,182












   $ 86,094    $ 5    $ (964 ) $ 85,135    $ 52,102    $ 292    $ (295 ) $ 52,099

~~The amortized cost and fair value of the Company’s investments inavailable-for-sale~~ ~~securities that have been in a continuous unrealized loss position consisted of the following (in thousands):~~

   September 30, 2018    December 31, 2017
   Unrealized
Loss    Fair Value    Unrealized
Loss    Fair Value
Less than 12 months
   $ (730 )    $ 187,177    $ (158 )    $ 63,229








12 months or longer
   $ (414 )    $ 17,099    $ (236 )    $ 44,961

~~Gross realized gains and gross realized losses from the sales of the Company’savailable-for-sale~~ ~~securities consisted of the following (in thousands):~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Gross realized gains⁽¹⁾
   $ —      $ 1    $ 12    $ 2








Gross realized losses⁽¹⁾
   $ —      $ —      $ —      $ —


	Non-Current
	September 30, 2019		December 31, 2018
Deferred rent (1)	$	—	$	5,445
Contingent consideration and other (2)		2,001		2,054

	$	2,001	$	7,499

⁽¹⁾	~~Recorded~~The Company does not have deferred rent in 2019 due to adoption of the new lease standard on January 1, 2019.

(2)

The current portions of contingent consideration in the amounts of $853 and $821 as of September 30, 2019 and December 31, 2018, respectively, are included in accounts payable and other ~~income (expense), net~~liabilities in the condensed consolidated ~~statements of net and comprehensive income. The cost basis of securities sold were determined based on the specific identification method.~~

balance sheets.

Table of ~~September 30, 2018, the Company considers the declines in market value of its marketable securities,available-for-sale~~ to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not that it will be required to sell the investment before recovery of the investment’s cost basis. The Company has no current intent to sell, and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Company may sell certain of its marketable securities,~~available-for-sale~~ prior to their stated maturities for strategic reasons including, but not limited to, anticipated liquidity and capital requirements, anticipated credit deterioration, duration management or when a security no longer meets the criteria of the Company’s investment policy.

Contents

~~Amortized cost and fair value of marketable securities,available-for-sale,~~ ~~by contractual maturity consisted of the following (in thousands):~~

   September 30, 2018    December 31, 2017
   Amortized
Cost    Fair Value    Amortized
Cost    Fair Value
Due in one year or less
   $ 120,881    $ 120,701    $ 73,659    $ 73,560
Due after one year through five years
   63,511    63,236    30,644    30,517
Due after five years through ten years
   16,451    15,955    15,090    15,200
Due after ten years
   6,132    5,944    6,368    6,382








   $ 206,975    $ 205,836    $ 125,761    $ 125,659








Weighted average contractual maturity
   2.0 years       2.6 years

~~Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay certain obligations with or without prepayment penalties.~~

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Notes Payable to Former Stockholders

In conjunction with the~~Spin-Off~~

spin-off

and IPO, notes payable to certain former stockholders of MMREIS were issued in settlement of restricted stock and SARs awards that were redeemed by MMREIS upon the termination of employment by the former stockholders ~~(“the Notes”~~(the “Notes”). Such Notes had been previously assumed by MMC, and were transferred to the Company. The Notes are unsecured and bear interest at 5% with annual principal and interest installments with a final principal payment due during the second quarter of ~~2020.~~2020. During each of the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company made total payments on the Notes of $1.5 million, including principal and interest.

~~Accrued interest included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets pertaining to the Notes consisted of the following (in thousands):~~

   September 30,
2018    December 31,
2017
Accrued interest
   $ 175    $ 305

~~Interest expense pertaining to the Notes consisted of the following (in thousands):~~

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Interest expense
   $ 96    $ 110    $ 307    $ 345

8.9.	Related-Party Transactions

Shared and Transition Services

Prior to October 2013, the Company operated under a shared services arrangement with MMC whereby the Company was charged for actual costs specifically incurred on behalf of the Company or allocated to the Company on a pro rata basis. Beginning in October 2013, certain

Certain services are provided to the Company under a Transition Services Agreement (“TSA”) between MMC and the ~~Company, which replaced thepre-IPO~~ ~~shared services arrangement.~~Company. The TSA is intended to provide certain services until the Company acquires the services separately. ~~During~~Under the TSA, the Company incurred net costs during the three months ended September 30, 2019 and 2018 of $21,000 and ~~2017, the Company incurred net costs of~~ $20,000, respectively, and ~~$43,000 under the TSA, respectively. During~~during the nine months ended September 30, 2019 and 2018 of $96,000 and ~~2017, the Company incurred net costs of~~ $147,000, ~~and $168,000 under the TSA,~~ 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 September 30, ~~2018~~2019 and ~~2017,~~2018, the Company earned real estate brokerage commissions and financing fees of ~~$1.8~~$1.2 million and ~~$309,000,~~$1.8 million, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $688,000 and $1.1 million, ~~and $181,000,~~ respectively, related to these revenues. For the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company earned real estate brokerage commissions and financing fees of $4.0 million and $4.9 million, ~~and $632,000,~~ respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of ~~$2.9~~$2.3 million and ~~$368,000,~~$2.9 million, 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. ~~Rent expense for this~~The related operating lease ~~aggregated $257,000 and $253,000~~cost for the three months ended September 30, 2019 and 2018 was $333,000 and ~~2017 respectively. Rent expense for this lease aggregated $765,000~~$257,000, respectively, and ~~759,000~~ for the nine months ended September 30, 2019 and 2018 was $999,000 and ~~2017~~$765,000, respectively. ~~Rent expense~~Operating lease cost is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.

See Note 4 – “Operating Leases” for additional information.

Accounts Payable and Other Liabilities with MMC

~~For each~~

As of ~~the periods ended~~ September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, accounts payable and other liabilities with MMC totaling ~~$91,000~~$93,000 and $101,000, 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 September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the aggregate principal amount for employee notes receivable was ~~$323,000~~$523,000 and ~~$621,000,~~$526,000, respectively, which is included in other assets (current and

non-current),

in the accompanying condensed consolidated balance sheets. See Note 57 – “Selected Balance Sheet Data” for additional information.

As of September 30, ~~2018,~~2019, George M. Marcus, the Company’s founder and

Co-Chairman,

beneficially owned approximately ~~42%~~40% of the Company’s issued and outstanding common stock, including shares owned by Phoenix Investments Holdings, LLC and the Marcus Family Foundation II.

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10.

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 the value of the ~~investment~~investments carried at fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to 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:

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.~~

model

Recurring Fair Value Measurements

The Company values its investments including ~~assets held in rabbi trust,~~ commercial paper and floating NAV money market funds recorded in cash and cash equivalents, investments in marketable securities,

available-for-sale,

assets held in the rabbi trust, acquired MSR contracts, deferred compensation liability and contingent consideration at fair value on a recurring basis. Fair values for ~~assets held~~investments included in ~~rabbi trust were determined based on the underlying investments in the trust. For~~cash and cash equivalents and marketable securities,

available-for-sale ~~fair values~~

were determined for each individual security in the investment portfolio and all these securities are ~~measured as Levels~~Level 1 or 2 measurements as appropriate.

Fair values for assets held in the rabbi trust and r

lated 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 ~~based~~and determined on a

contract-by-contract

basis, calculated using a probability weighted discounted cash flow model based on the probability of achieving EBITDA and other service requirements, and is ~~measured as~~a Level 3.

3 measurement.

The Company values MSRs at fair value upon acquisition of a servicing contract. MSRs do not trade in an active, open market with readily observable prices, and are a Level 3 measurement.

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Assets and liabilities carried ~~at fair value are categorized into one of the three categories described above and consisted of the following (in thousands):~~

   September 30, 2018    December 31, 2017
   Fair Value    Level 1    Level 2    Level 3    Fair Value    Level 1    Level 2    Level 3
Assets:

Assets held in rabbi trust
   $ 9,115    $ —      $ 9,115    $ —      $ 8,787    $ —      $ 8,787    $ —
















Cash equivalents⁽¹⁾:

Commercial paper
   $ 8,496    $ —      $ 8,496    $ —      $ 11,441    $ —      $ 11,441    $ —
Money market funds
   110,231    110,231    —      —      157,788    157,788    —      —
















   $ 118,727    $ 110,231    $ 8,496    $ —      $ 169,229    $ 157,788    $ 11,441    $ —
















Marketable securities,available-for-sale:

Short-term investments:

U.S. treasuries
   $ 106,141    $ 106,141    $ —      $ —      $ 57,624    $ 57,624    $ —      $ —
U.S. government sponsored entities
   3,485    —      3,485    —      7,008    —      7,008    —
Corporate debt securities
   10,975    —      10,975    —      8,928    —      8,928    —
Asset-backed securities and other
   100    —      100    —      —      —      —      —
















   $ 120,701    $ 106,141    $ 14,560    $ —      $ 73,560    $ 57,624    $ 15,936    $ —
















Long-term investments:

U.S. treasuries
   $ 52,522    $ 52,522    $ —      $ —      $ 17,954    $ 17,954    $ —      $ —
U.S. government sponsored entities
   1,520    —      1,520    —      5,244    —      5,244    —
Corporate debt securities
   24,907    —      24,907    —      22,719    —      22,719    —
Asset-backed securities and other
   6,186    —      6,186    —      6,182    —      6,182    —
















   $ 85,135    $ 52,522    $ 32,613    $ —      $ 52,099    $ 17,954    $ 34,145    $ —
















Liabilities:

Contingent consideration
   $ 1,806    $ —      $ —      $ 1,806    $ —      $ —      $ —      $ —

⁽¹⁾	~~Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.~~

~~At September 30, 2018, the fair value of the contingent consideration was $1.8 million. Assuming the achievement of the applicable performance criteria, the Company anticipates theseearn-out~~ ~~payments will be made over the next five-year period. Adjustments toearn-out~~ liabilities in periods subsequent to the completion of acquisitions are reflected in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income.

~~A reconciliation of contingent consideration measured~~ at fair value on a recurring basis consisted of the following (in thousands):

   September 30,
2018    December 31,
2017
Beginning balance
   $ —      $ —
Contingent consideration in connection with acquisitions
   1,720    —
Change in fair value of contingent consideration
   86    —
Payments of contingent consideration
   —      —




   $ 1,806    $ —


	September 30, 2019								December 31, 2018
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
Assets held in rabbi trust	$	9,102	$	—	$	9,102	$	—	$	8,268	$	—	$	8,268	$	—

Cash equivalents (1) :
Commercial paper and other	$	12,480	$	—	$	12,480	$	—	$	1,599	$	1,599	$	—	$	—
Money market funds		167,321		167,321		—		—		163,126		163,126		—		—

	$	179,801	$	167,321	$	12,480	$	—	$	164,725	$	164,725	$	—	$	—

Marketable securities, available-for-sale:
Short-term investments:
U.S. treasuries	$	109,399	$	109,399	$	—	$	—	$	121,180	$	121,180	$	—	$	—
U.S. government sponsored entities		—		—		—		—		3,505		—		3,505		—
Corporate debt securities		15,076		—		15,076		—		11,951		—		11,951		—
Asset-backed securities and other		—		—		—		—		800		—		800		—

	$	124,475	$	109,399	$	15,076	$	—	$	137,436	$	121,180	$	16,256	$	—

Long-term investments:
U.S. treasuries	$	30,456	$	30,456	$	—	$	—	$	45,010	$	45,010	$	—	$	—
U.S. government sponsored entities		1,413		—		1,413		—		1,507		—		1,507		—
Corporate debt securities		30,842		—		30,842		—		31,837		—		31,837		—
Asset-backed securities and other		8,074		—		8,074		—		4,855		—		4,855		—

	$	70,785	$	30,456	$	40,329	$	—	$	83,209	$	45,010	$	38,199	$	—

Liabilities:
Contingent consideration (2)	$	2,864	$	—	$	—	$	2,864	$	2,875	$	—	$	—	$	2,875

Deferred compensation liability	$	8,192	$	8,192	$	—	$	—	$	7,893	$	7,893	$	—	$	—

(1)	Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

(2)

As of September 30, 2019, contingent consideration has a maximum undiscounted payment of $4.2 million.

Assuming the achievement of the applicable performance criteria, the Company anticipates these earn-out payments will be made over the next three to seven-year period. A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):


	September 30, 2019			December 31, 2018
Beginning balance	$	2,875		$	—
Contingent consideration in connection with acquisitions		—			2,674
Change in fair value of contingent consideration		(11	)		201
Payments of contingent consideration		—			—

Ending balance	$	2,864		$	2,875

There were no0 transfers in or out of Level 1, Level 2 and Level 3 during the nine months ended September 30, ~~2018.~~

2019.

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nonrecurring Fair Value Measurements

The Company reviews the carrying value of MSRs, intangibles, goodwill and other assets for indications of impairment quarterly. 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. In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. ~~These assets include MSRs.~~ MSRs are initially recorded at fair value based on internal models ~~using contractual information and assumptions of a market participant~~ and are ~~measured as~~a Level 3.3 measurement. The Company’s MSRs do not trade in an active, open market with readily observable prices. The Company has elected the amortization method for the subsequent measurement of MSRs. The estimated fair value of the Company’s MSRs were developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers ~~contractually~~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 in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or fair value. The fair value of the MSRs approximated the carrying value at September 30, 2019 and December 31, 2018.

See Note 7 – “Selected Balance Sheet Data – Other Assets – MSRs” for additional information.

~~10.~~11.

Stockholders’ Equity

Common Stock

As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, there were ~~38,651,360~~39,132,236 and ~~38,374,011~~38,814,464 shares of common stock, $0.0001 par value, issued and outstanding, which ~~includes~~include unvested restricted stock awards issued to

non-employee

directors, respectively. See Note 1314 – “Earnings per Share” for additional information.

Preferred Stock

The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, there were no0 preferred shares issued or outstanding.

Accumulated Other Comprehensive ~~(Loss) Income~~

~~The components of~~Income/Loss

Amounts reclassified from accumulated other comprehensive income/loss are included as a component of other income (expense), net 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 ~~of September 30, 2018, by component, net of income~~it is operating at a loss and has 0 earnings and profits to remit. As a result, deferred taxes ~~consisted of~~were not provided related to the ~~following (in thousands):~~

   Unrealized
gains and
(losses) of
available-for-
sale securities    Foreign
currency
translation ⁽³⁾    Total
Beginning balance, December 31, 2017
   $ (62 )    $ 1,002    $ 940
Cumulative effect of change in accounting principle⁽¹⁾
   (13 )    —      (13 )






Balance at January 1, 2018, as adjusted
   (75 )    1,002    927






Other comprehensive (loss) income before reclassifications
   (779 )    44    (735 )
Amounts reclassified from accumulated other comprehensive (loss) income⁽²⁾
   8    —      8






Net current-period other comprehensive (loss) income
   (771 )    44    (727 )






   $ (846 )    $ 1,046    $ 200

cumulative foreign currency translation adjustments.

⁽¹⁾12.

~~Relates to reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings as a result of adoption of ASU2018-02.~~ ~~See Note 2 – “Accounting Policies and Recent Accounting Pronouncements” for additional information.~~

⁽²⁾	Included as a component of other income (expense), net in the condensed consolidated statements of net and comprehensive income. The reclassifications were determined on a specific identification basis.

⁽³⁾	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.

~~11.~~

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. Upon adoption of the 2013 Plan, 5,500,000 shares of common stock were initially reserved for the issuance of awards. Pursuant to the automatic increases previously provided for in the 2013 Plan, the board of In addition,

non-employee

directors ~~approved share reserve increases aggregating 3,300,000. Pursuant to the amendment and restatement of the 2013 Plan referenced above, the automatic share increase provision was removed.~~receive annual grants under a director compensation policy. As of September 30, ~~2018,~~2019, there were ~~5,401,371~~5,272,786 shares available for future grants under the 2013 Plan.

Awards Granted and Settled

Under the 2013 Plan, the Company has issued restricted stock awards (“RSAs”) to

non-employee

directors and restricted stock units (“RSUs”) to employees and independent contractors. RSAs vest in equal annual installments over a

one-year

or three-year period from the date of grant. All RSUs vest in equal annual installments over a five-year period from the date of ~~grant.~~grant or earlier as approved by the compensation committee of the Company’s board of directors. Any unvested awards are canceled upon termination as a service provider. Awards accelerate upon death subject to approval by the compensation committee. As of September 30, ~~2018,~~2019, there were no0 issued or outstanding options, SARs, performance units or performance ~~shares~~share awards under the 2013 Plan.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the nine months ended September 30, ~~2018, 305,975~~2019, 366,476 shares of RSUs were vested and ~~were delivered and 54,506~~delivered. Additionally, 72,532 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.

Outstanding Awards

Activity under the 2013 Plan consisted of the following (dollars in thousands, except per share data):

   RSA Grants to
Non-employee
Directors RSU Grants to
Employees RSU Grants to
Independent
Contractors Total Weighted-
Average Grant
Date Fair Value
Per Share
Nonvested shares at December 31, 2017
   30,732 500,859 450,264 981,855 $ 23.90


Granted

February 2018
   —   106,419 20,293 126,712
March 2018
   —   15,000 —   15,000
May 2018
   12,852 4,854 14,280 31,986
August 2018
   —   10,407 63,651 74,058


Total Granted
   12,852 136,680 98,224 247,756 34.92
Vested
   (16,488 ) (142,433 ) (163,542 ) (322,463 ) 22.06
Transferred
   —   (7,356 ) 7,356 —   26.52
Forfeited/canceled
   —   (1,960 ) (5,744 ) (7,704 ) 28.76


Nonvested shares at September 30, 2018⁽¹⁾
   27,096 485,790 386,558 899,444 $ 27.56


Unrecognized stock-based compensation expense as of September 30, 2018⁽²⁾
   $ 526 $ 10,884 $ 10,621 $ 22,031


Weighted average remaining vesting period (years) as of September 30, 2018
   0.95 3.27 3.27 3.22


	RSA Grants to Non-employee Directors			RSU Grants to Employees			RSU Grants to Independent Contractors			Total			Weighted- Average Grant Date Fair Value Per Share
Nonvested shares at December 31, 2018		27,096			471,782			392,697			891,575		$	27.59
Granted		12,806			241,932			76,642			331,380			38.62
Vested		(22,422	)		(182,714	)		(183,762	)		(388,898	)		24.11
Transferred		—			(8,136	)		8,136			—			29.68
Forfeited/canceled		—			(8,119	)		(32,354	)		(40,473	)		30.99

Nonvested shares at September 30, 2019 (1)		17,480			514,745			261,359			793,584		$	33.73

Unrecognized stock-based compensation expense as of September 30, 2019 (2)	$	397		$	14,629		$	8,473		$	23,499

Weighted average remaining vesting period (years) as of September 30, 2019		0.63			3.70			3.45			3.56

⁽¹⁾	Nonvested RSUs will be settled through the issuance of new shares of common stock.

⁽²⁾	The total unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately ~~3.22~~3.56 years.

As of September 30, 2018, 578,618 fully vested deferred stock units (“DSUs”) remained outstanding. See “Amendments to Restricted Stock and SARs” section below and Note 13 – “Earnings per Share” for additional information. Future share settlements of DSUs by year consisted of the following:

   September 30,
2018
2018
   237,052
2019
   —
2020
   —
2021
   60,373
2022
   281,193


   578,618

Employee Stock Purchase Plan

In 2013, the Company adopted the ~~ESPP Plan.~~2013 Employee Stock Purchase Plan (“ESPP”). The ESPP ~~Plan qualifies~~

is intended to qualify

under Section 423 of the Internal Revenue Code and provides for consecutive,~~non-overlapping6-month~~

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 ~~Plan~~ was a compensatory plan and is required to expense the fair value of the awards over each

6-month

offering period.

The ESPP ~~Plan~~ initially had 366,667 shares of common stock reserved

and ~~233,867 and 246,895~~214,872 shares of common stock remain available for issuance ~~for each of the periods~~ at September 30, ~~2018 and December 31, 2017, respectively.~~2019. The ESPP ~~Plan~~ 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 Company’s board of directors. Pursuant to the provisions of the ESPP, ~~Plan,~~ the board of directors has determined to not provide for any annual increases to date. ~~As of~~At September 30, ~~2018,~~2019, total unrecognized compensation cost related to the ESPP ~~Plan~~ was ~~$18,000~~$20,000 and is expected to be recognized over a weighted average period of 0.12 years.

~~Amendments to Restricted Stock and SARs~~

~~Restricted Stock~~

In connection with the IPO, the Company entered into sales restriction agreements with certain of its executive officers. The sale restriction agreements provided for vesting acceleration as to all outstanding shares of restricted shares held by the executive officers and termination of certain existing~~Buy-Sell~~ Agreements entered into between the Company and such executive officers prior to the IPO in exchange for the executive officers’ agreement to limit their ability to sell, transfer, hypothecate, encumber, or in any way alienate any of their shares. Such sales restrictions lapse at a rate of 20% per year for five years if the participant remains employed by the Company. In the event of death or termination of employment after reaching the age of 67, 100% of the shares of stock will be released from the resale restriction. Further, 100% of the shares of stock will be released from the resale restriction upon the consummation of a change of control of the Company. Of the original 3,689,326 shares subject to resale restriction, 732,020 shares remained subject to sales restriction at September 30, 2018 and will be fully released during the fourth quarter of 2018.

SARs and ~~DSUs~~

Deferred Stock Units (“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 DSUs, which were fully vested upon receipt and ~~will be~~were settled in actual stock at a rate of 20% per year if the participant ~~remains~~remained 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.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Future share settlements of fully vested DSUs by year consisted of the following:


	September 30, 2019
2021		60,373
2022		281,193

		341,566

Summary of Stock-Based Compensation

~~The Company adopted ASU2018-7~~ on July 1, 2018. As a result of the adoption, awards issued to its independent contractors prior to the adoption date of July 1, 2018 were remeasured at the adoption date stock price. The Company will recognize the remaining unrecognized value of unvested awards over the remaining performance period with no further remeasurement through the performance completion date. For all new awards after the date of adoption, the Company will measure its awards made to independent contractors based on the grant date closing price of its common stock consistent with awards made to the Company’s employees and~~non-employee~~ ~~directors.~~

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 September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
ESPP	$	40	$	37	$	108	$	100
RSAs – non-employee directors		157		182		481		458
RSUs – employees (1)		1,230		1,112		4,197		3,161
RSUs – independent contractors (2)		687		1,816		2,254		5,200

	$	2,114	$	3,147	$	7,040	$	8,919

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Employee stock purchase plan
   $ 37    $ 31    $ 100    $ 106
RSAs –non-employee directors
   182    105    458    284
RSUs – employees
   1,112    975    3,161    2,841
RSUs – independent contractors⁽¹⁾
   1,816    1,081    5,200    2,942








   $ 3,147    $ 2,192    $ 8,919    $ 6,173

⁽¹⁾	2019 includes expense related to the acceleration of vesting of certain RSUs.

(2)

The Company grants RSUs to independent contractors (i.e. investment sales and financing professionals), who are considered~~non-employees.~~

non-employees.

Prior to the adoption of ASU~~2018-7,~~ No.

2018-07

on July 1, 2018, such awards were required to be measured at fair value at the end of each reporting period until settlement. Stock-based compensation expense was therefore impacted by the changes in the Company’s common stock price during each reporting period prior to the date of adoption. New awards after the date of adoption are measured based on the grant date closing price of ~~July 1, 2018.~~

the Company’s common stock consistent with awards made to the Company’s employees and

non-employee

directors.

~~12.~~13.

Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, ~~2018~~2019 was ~~28.5%~~26.7% and ~~27.2%~~27.3%, respectively, compared to ~~39.3%~~28.5% and ~~39.0%~~27.2% for the three and nine months ended September 30, ~~2017,~~2018, respectively. 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 the 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 ~~(in~~(dollars in thousands):

   Three Months Ended September 30,
   2018 2017
   Amount    Rate Amount    Rate
Income tax expense at the federal statutory rate
   $ 6,125    21.0 % $ 8,920    35.0 %
State income tax expense, net of federal benefit
   1,462    5.0 % 993    3.9 %
Effect of foreign operations
   (28 )    (0.1 )% 16    0.1 %
Windfall tax benefits, net related to stock-based compensation
   (17 )    (0.1 )% 32    0.1 %
Change in valuation allowance
   162    0.6 % 38    0.2 %
Permanent items and other⁽¹⁾
   611    2.1 % 11    —






   $ 8,315    28.5 % $ 10,010    39.3 %


	Three Months Ended September 30,												Nine Months Ended September 30,
	2019						2018						2019						2018
	Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate
Income tax expense at the federal statutory rate	$	5,526			21.0	%	$	6,125			21.0	%	$	16,247			21.0	%	$	17,599			21.0	%
State income tax expense, net of federal benefit		1,118			4.2	%		1,462			5.0	%		3,359			4.3	%		3,974			4.7	%
Windfall (shortfall) tax benefits, net related to stock-based compensation		53			0.2	%		(17	)		(0.1	)%		(201	)		(0.2	)%		(261	)		(0.3	)%
Change in valuation allowance		408			1.6	%		162			0.6	%		874			1.1	%		284			0.3	%
Permanent and other items (1)		(81	)		(0.3	)%		583			2.0	%		880			1.1	%		1,176			1.5	%

	$	7,024			26.7	%	$	8,315			28.5	%	$	21,159			27.3	%	$	22,772			27.2	%

⁽¹⁾

~~2018 includes the impact of the changes in tax laws under the Act, primarily relating~~Permanent items relate principally to ~~changes to Section 162(m) of the Internal Revenue Code and the tax rules regarding the deductibility of entertainment expenses and recording~~compensation charges, qualified transportation fringe benefits, reversal of uncertain tax ~~positions.~~

positions and meals and entertainment.

   Nine Months Ended September 30,
   2018 2017
   Amount    Rate Amount    Rate
Income tax expense at the federal statutory rate
   $ 17,599    21.0 % $ 24,713    35.0 %
State income tax expense, net of federal benefit
   3,974    4.7 % 2,734    3.9 %
Effect of foreign operations
   (48 )    —   63    0.1 %
Windfall tax benefits, net related to stock-based compensation
   (261 )    (0.3 )% (124 )    (0.2 )%
Change in valuation allowance
   284    0.3 % 154    0.2 %
Permanent items and other⁽¹⁾
   1,224    1.5 % 24    —






   $ 22,772    27.2 % $ 27,564    39.0 %

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

⁽¹⁾14.

2018 includes the impact of the changes in tax laws under the Act, primarily relating to changes to Section 162(m) of the Internal Revenue Code and the tax rules regarding the deductibility of entertainment expenses and recording of uncertain tax positions.

On December 22, 2017, the Act was enacted, which significantly changed the U.S. corporate income tax laws by, among other items, reducing the U.S. corporate income tax rate to 21% from 35% starting in 2018, eliminating certain exceptions to Section 162(m) of the Internal Revenue Code and expanding the employees, companies and types of compensation covered by Section 162(m), and creating a territorial tax system with a~~one-time~~ mandatory tax on previously deferred foreign earnings of U.S. subsidiaries. As a result of the Act, the Company revalued its deferred taxes, net due to the changes in the U.S. corporate statutory federal income tax rate and recorded a net charge of $11.6 million in the provision for income taxes during the fourth quarter of 2017. Although the Company’s accounting for certain income tax effects of the Act is incomplete, it was determined that the $11.6 million charge is a reasonable estimate of those effects. As of September 30, 2018, this amount continues to be our best estimate of the impact of the Act in accordance with our understanding of the Act and the related guidance available.When the IRS issues additional guidance and regulations enabling the Company to finalize certain tax positions, the Company will be able to conclude whether any further adjustments are required to be made to its deferred tax assets, net balance as of December 31, 2017. Any adjustments to this provisional amount will be reported no later than the fourth quarter of 2018, as a component of the provision for income taxes in the reporting period in which any such adjustments are determined.

~~13.~~

Earnings per Share

Basic and diluted earnings per share for the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively consisted of the following (in thousands, except per share data):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018 2017
Numerator (Basic and Diluted):

Net income
   $ 20,854    $ 15,475    $ 61,032 $ 43,044






Denominator:

Basic

Weighted average common shares issued and outstanding
   38,641    38,132    38,598 38,094
Deduct: Unvested RSAs⁽¹⁾
   (29 )    (29 )    (30 ) (29 )
Add: Fully vested DSUs⁽²⁾
   579    930    579 930






Weighted Average Common Shares Outstanding
   39,191    39,033    39,147 38,995






Basic earnings per common share
   $ 0.53    $ 0.40    $ 1.56 $ 1.10






Diluted

Weighted Average Common Shares Outstanding from above
   39,191    39,033    39,147 38,995
Add: Dilutive effect of RSUs, RSAs & ESPP
   293    171    212 141






Weighted Average Common Shares Outstanding
   39,484    39,204    39,359 39,136






Diluted earnings per common share
   $ 0.53    $ 0.39    $ 1.55 $ 1.10






Antidilutive shares excluded from diluted earnings per common share⁽³⁾
   76    205    250 381


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Numerator (Basic and Diluted):
Net income	$	19,292		$	20,854		$	56,209		$	61,032

Denominator:
Basic
Weighted average common shares issued and outstanding		39,116			38,641			39,062			38,598
Deduct: Unvested RSAs (1)		(17	)		(29	)		(21	)		(30	)
Add: Fully vested DSUs (2)		342			579			342			579

Weighted Average Common Shares Outstanding		39,441			39,191			39,383			39,147

Basic earnings per common share	$	0.49		$	0.53		$	1.43		$	1.56

Diluted
Weighted Average Common Shares Outstanding from above		39,441			39,191			39,383			39,147
Add: Dilutive effect of RSUs, RSAs & ESPP		109			293			144			212

Weighted Average Common Shares Outstanding		39,550			39,484			39,527			39,359

Diluted earnings per common share	$	0.49		$	0.53		$	1.42		$	1.55

Antidilutive shares excluded from diluted earnings per common share (3)		425			76			325			250

⁽¹⁾	RSAs were issued and outstanding to the non-employee directors and have a one-year or three-year vesting term subject to service requirements. See Note 1112 – “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 1112 – “Stock-Based Compensation Plans” for additional information.

⁽³⁾	Primarily pertaining to RSU grants to the Company’s employees and independent ~~contractors.~~ contractors .

~~14.~~15.

Commitments and Contingencies

Credit Agreement

On June 18, 2014, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association ~~(“Bank”~~(the “Bank”), dated as of June 1, 2014, which was amended and restated on May 28, 2019 (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”)~~, which, as amended,~~ and matures on June 1, ~~2020.~~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.

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 September 30, ~~2018.~~2019. 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 ~~(i)~~ Base Rate (defined as the highest of (a) the Bank’s prime rate, (b) ~~the Federal Funds Rate plus 1.5% and(c)~~

one-month

LIBOR plus ~~1.5%~~1.50%, and (c) the federal funds rate plus 1.50%), or (ii) at a ~~variable~~fixed rate ~~between~~per annum determined by Bank to be 0.875% ~~and 1.125%~~ above ~~LIBOR, based upon the total funded debt to EBITDA ratio.~~LIBOR. In connection with ~~executing~~

the amendment of

the Credit Agreement, ~~as amended,~~ 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 ~~$26,000~~$20,000 and ~~$28,000~~$26,000 during the three months ended September 30, 2019 and 2018, respectively; and ~~2017, respectively,~~$72,000 and $78,000 ~~and $83,000~~ during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, there were no0 amounts outstanding under the Credit Agreement.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 2.0:1.0 as of each quarter end, ~~both~~determined on a rolling~~4-quarter~~ ~~basis.~~ four-quarter basis, and also limit investments in foreign entities and cap 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 September 30, ~~2018,~~2019, the Company was in compliance with all financial and

non-financial ~~covenants.~~

~~Litigation~~

~~The Company is subject to various legal proceedings~~

covenants and ~~claims that arise~~has not experienced any limitation in the ordinary course of business, some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by insurance, which contain deductibles, exclusions, claim limits and aggregate policy limits. While the ultimate liability for these legal proceeding cannot be determined, the Company reviews the need for its accrual for loss contingencies quarterly and records an accrual for litigation related losses where the likelihood of loss is both probable and estimable. The Company believes that the ultimate resolutionoperations as a result of the ~~legal proceedings will not have a material adverse effect on its financial condition or results of operations. The Company accrues legal fees for litigation as the legal services are provided.~~

covenants.

Other

In connection with certain agreements with current and prospective investment sales and financing professionals, the Company has ~~committed to advance amounts to these investment sales~~commitments as of September 30, 2019 and ~~financing professionals, subject to certain conditions and/or reaching performance goals. Such commitments aggregated $11.3~~December 31, 2018, aggregating $0.7 million and $1.0 million, respectively, including amounts committed to through the date ~~the~~these condensed consolidated financial statements were issued.

These commitments are subject to various conditions and/or reaching of performance goals.

16.	Subsequent Events

In October 2019, the Company completed the acquisition of a real estate brokerage firm in Canada
.

2
4

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, the words “Marcus & Millichap,” “we,” the “Company,” “us” and “our” refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other 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. The results of operations for the three and nine months ended September 30, ~~2018~~2019 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2018,~~2019, 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, ~~2017~~2018 filed with the SEC on March ~~16, 2018,~~1, 2019, 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 over the last 10 years.

As of September 30, ~~2018,~~2019, we had ~~1,870~~1,945 investment sales and financing professionals that are primarily exclusive independent contractors operating in 7982 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. During the three and nine months ended September 30, ~~2018,~~2019, we closed ~~2,427~~2,435 and ~~6,869~~6,920 investment sales, financing and other transactions with total volume of approximately ~~$12.0~~$12.1 billion and ~~$33.1~~$34.9 billion, respectively. During the year ended December 31, ~~2017,~~2018, we closed ~~8,979~~9,472 investment sales, financing and other transactions with total sales volume of approximately ~~$42.2~~$46.4 billion.

We generate revenues by collecting real estate brokerage commissions upon the sale, and fees upon the financing, of commercial properties and by providing 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. For the both the three and nine months ended September 30, ~~2018,~~2019, approximately 91% of our revenues were generated from real estate brokerage commissions, 8% from financing fees and 1% from other revenues, including consulting and advisory services. ~~For~~During the ~~nine months~~year ended ~~September 30,~~December 31, 2018, approximately 92% of our revenues were generated from real estate brokerage commissions, 7% from financing fees and 1% from other revenues, including consulting and advisory services. During the year ended December 31, 2017, approximately 90% of our revenues were generated from real estate brokerage commissions, 7% from financing fees and 3% from other revenues, including consulting and advisory 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 up to $10 million;~~

•

~~Middle market:~~ ~~properties priced from $10 million up to $20 million; and~~

•

~~Larger transaction market:~~ ~~properties priced from $20 million and above.~~

Private client market:

properties priced from $1 million up to $10 million;

Middle market:

properties priced from $10 million up to $20 million; and

Larger transaction market:

properties priced from $20 million and above.

Our strength is in serving private clients in the

$1-$10

million private client market segment, which contributed approximately ~~66%~~67% and ~~68%~~66% of our real estate brokerage commissions during the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and approximately ~~65%~~67% and ~~69%~~65% of our real estate brokerage commissions during the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The following tables set forth the number of investment sales transactions, and amount of sales volume and revenues by commercial real estate market segment for real estate brokerage:

   Three Months Ended September 30,
   2018    2017    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
   268    $ 166    $ 7,224    259    $ 166    $ 7,032    9    $ —      $ 192
Private client market ($1 - $10 million)
   1,352    4,382    125,898    1,282    3,906    115,959    70    476    9,939
Middle market (³$10 - $20 million)
   119    1,581    31,158    94    1,284    24,505    25    297    6,653
Larger transaction market (³$20 million)
   70    3,169    27,700    62    2,644    21,861    8    525    5,839


















   1,809    $ 9,298    $ 191,980    1,697    $ 8,000    $ 169,357    112    $ 1,298    $ 22,623

   Nine Months Ended September 30,
   2018    2017    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
   764    $ 489    $ 20,819    762    $ 472    $ 20,110    2    $ 17    $ 709
Private client market ($1 - $10 million)
   3,819    12,038    350,062    3,628    11,184    328,177    191    854    21,885
Middle market (³$10 - $20 million)
   350    4,789    85,984    258    3,501    64,047    92    1,288    21,937
Larger transaction market (³$20 million)
   213    8,846    79,280    162    6,607    59,735    51    2,239    19,545


















   5,146    $ 26,162    $ 536,145    4,810    $ 21,764    $ 472,069    336    $ 4,398    $ 64,076

















��


	Three Months Ended September 30,
	2019						2018							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		274	$	173	$	7,182		268	$	166	��	$	7,224		6		$	7		$	(42	)
Private client market ($1 - $10 million)		1,301		4,257		121,228		1,352		4,382			125,898		(51	)		(125	)		(4,670	)
Middle market ( ≥ $10 - $20 million)		109		1,466		25,997		119		1,581			31,158		(10	)		(115	)		(5,161	)
Larger transaction market ( ≥ $20 million)		69		3,675		25,791		70		3,169			27,700		(1	)		506			(1,909	)

		1,753	$	9,571	$	180,198		1,809	$	9,298		$	191,980		(56	)	$	273		$	(11,782	)

Table of Contents


	Nine Months Ended September 30,
	2019						2018						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		733	$	474	$	19,607		764	$	489	$	20,819		(31	)	$	(15	)	$	(1,212	)
Private client market ($1 - $10 million)		3,753		12,160		345,812		3,819		12,038		350,062		(66	)		122			(4,250	)
Middle market ( ≥ $10 - $20 million)		312		4,234		76,521		350		4,789		85,984		(38	)		(555	)		(9,463	)
Larger transaction market ( ≥ $20 million)		194		9,040		71,875		213		8,846		79,280		(19	)		194			(7,405	)

		4,992	$	25,908	$	513,815		5,146	$	26,162	$	536,145		(154	)	$	(254	)	$	(22,330	)

We continue to increase our presence in the United States and Canada through execution of our growth strategies by targeting markets based on population, employment, level of commercial real estate sales, inventory and competitive opportunities where we believe the markets will benefit from our business model. ~~For the nine months ended September 30,~~In 2018 and in October 2019, we completed acquisitions that expanded our presence in the financing market in the Midwest and in the real estate brokerage market in Canada. WeIn 2018, we also added commercial mortgage servicing to ~~the~~our financing services.

~~The following charts set forth the percentage of transactions by region for real estate brokerage.~~

Three Months Ended September 30,

Nine Months Ended September 30,
2018

2017

2018

2017

⁽¹⁾	~~Includes our Canadian operations, which represented less than 1% of our total revenues in each period presented.~~

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 ~~investment~~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 a 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 a negative impact on our business. Overall market conditions, including global trade, interest rate changes and job creation, can ~~have an effect on~~affect investor sentiment and, ultimately, the demand for our services from investors in real estate. ~~Economic momentum accelerated~~

The U.S. economy delivered moderate growth in the third quarter, ~~supported by~~but its overall momentum has fluctuated. The Federal Reserve cut interest rates two times in the ~~stimulus~~third quarter and committed to purchasing short-term Treasuries to boost market liquidity. This combination ultimately reversed the yield curve inversion, which could help allay fears of ~~tax reform and elevated confidence levels. Strong~~an impending recession. Steady job creation, exceptionally low unemployment and ~~accelerating wage growth reinforced consumption, lifting retail sales~~rising wages have all supported increased disposable income levels, personal savings rates and ~~contributing to broad-based economic growth. Considering~~ the strength of household balance sheets, resulting in strong consumption levels. This momentum has been partially offset by uncertainty surrounding the ~~employment market,~~trade war with China, which ~~attained anall-time~~ ~~record number of job openings~~has weighed on U.S. manufacturing, agriculture and the lowest unemployment rate in nearly 50 years, prospects for housing and commercial real estate space demand remain robust. However, the positive employment climate is converging with new tariffs and rising energy costs to spark inflationary pressure, inspiring the Federal Reserve to maintain a conservative stance and raise interest rates. Rising interest rates have the potential to impact commercial real estate transactions, particularly if long-term interest rates increase quickly. Despite these risks, we remain optimisticexports, restraining the economic ~~expansion will carry into 2019,~~growth outlook. Rising geopolitical tensions, both internationally and ~~this momentum will benefit the commercial real estate sector.~~

domestically, have also elevated investor caution, leading to a modest reduction in investor activity.

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 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 strong~~

Supported by the tight labor market and the accelerated pace of ~~economic growth this year has reinforced demand for all types of commercial real estate space, sustaining positive real estate fundamentals. We believe these trends should remainin-place~~ ~~into 2019 as elevated hiring, wage growth, consumption and~~ household formation, ~~all positively influence~~apartment housing demand remains strong, delivering the ~~sector. Although~~lowest third quarter U.S. vacancy rate in 19 years despite heightened construction ~~remains elevated for apartments,~~levels. Hotel and self-storage ~~facilities, hotels~~space demand has likewise outpaced historical averages. However, retail and industrial demand, which has been more sensitive to risks sparked by the trade war, has tapered in 2019. Increasingly cautious corporate expansion plans, together with tight vacancy levels in the most sought-after locations, have curtailed space absorption. Office properties, ~~demand has kept~~which remain favored by limited new supply additions, continued their

slow-but-steady

performance gains. Looking forward, tightened construction lending and rising development costs should temper the pace on a macro level. National apartment and industrial vacancy rates reached their tightest level in over 15 years while hotels have sustained record-high occupancy rates. There are, however, some pockets of oversupply risk in select major metropolitan areas. The strong performance trends and positive economic outlook continue to bolster seller’s valuation perceptions resulting in a widening expectation gap as prospective buyers closely monitor interest rates and the rising costnew supply additions.

Table of ~~capital.~~

Contents

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 increases or decreases, could adversely or positively affect the operations and income potential of commercial real estate ~~properties.~~properties, as well as lender and equity underwriting for real estate investments. These changes ~~also~~ influence the demand of investors for commercial real estate investments. ~~We believe that indications from the U.S.~~

The Federal Reserve of future interest rate increases and a reduction of the Federal Reserve balance sheet could place additional upward pressure on interest rates. This, together with uncertainty created by trade tensions, stock market volatility and questions regarding international monetary policy remain aReserve’s commitment to purchase short-term ~~headwind for real estate transactions. These risks could intensify if short-term~~Treasuries has fueled lower interest rates, ~~rise above long-term interest rates, creating an inverted yield curve, an event commonly perceived~~driving the

10-year

Treasury to ~~precede~~the 1.7% range. Though this has offered buyers increased positive leverage, it has not generated a ~~recession, as negative media coverage could potentially erode the current economic strength. However, lenders~~substantial boost to activity levels. Market liquidity remains elevated, with a range of capital sources offering favorable lending options, but buyer motivation has been moderate. Sellers continue to ~~make capital available for most areas~~price assets at a premium, keeping the

bid-ask

spread at a widened level and ~~property types. Lenders have tightened capital availability for new development and are less willing~~restraining activity. As a result, transaction flow remains dampened compared to ~~lend based on speculativevalue-add~~ ~~opportunities. These disciplined underwriting standards offer~~ the ~~investment market strong liquidity and balanced lending resources while curbing more speculative investment outlays and oversupply risk.~~

last few years.

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 are often motivated to buy, sell and/or refinance properties due to personal circumstances such as death, divorce, partnership breakups and estate planning. ~~Investor sentiment remains positive by historical standards, though it is still below~~

Lower interest rates and steady yields continue to attract investment to real estate through direct investment as well as a multitude of REITs, equity funds and syndication options. Despite the ~~peak set in 2016. The combination of economic strength~~compelling yield options and ~~generally positive~~strong fundamentals across most property types, ~~has raised seller expectations, causing them to price assets aggressively~~buyers remain cautious amid certain economic hints of an impending recession, and in many ~~cases. Buyers, however,~~cases, they are ~~using more cautious~~ underwriting to ~~value assets as the prospect of rising interest rates~~a more conservative outlook. Sellers, however, have been slow to reduce asking prices, and ~~the possibility of~~ a ~~softening late cycle outlook weigh on acquisition strategies.~~transactional hurdle has emerged. The ~~resulting~~ gap in pricing expectations ~~has moderated sales to~~remains a ~~degree,~~modest but steady headwind, extending ~~the~~asset marketing and closing ~~timelines, but overall velocity~~timelines.

Seasonality

Our real estate brokerage commissions and financing fees have tended to be seasonal and, combined with other factors, can affect an investor’s ability to compare our financial condition and results of operations on a

quarter-by-quarter

basis. Historically, this seasonality has ~~nudged~~generally caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher ~~from last-year’s levels. We believe that~~in the ~~maturing cycle, combined with~~second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last six months of the year, particularly in the fourth quarter, is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. This historical trend can be disrupted both positively and negatively by major economic or political events impacting investor sentiment for a particular property type or location, volatility in financial markets, ~~inflation trends~~current and ~~rising~~future projections of interest rates, ~~will balance with~~attractiveness of other asset classes, market liquidity and the ~~positive~~extent of limitations or availability of capital allocations for larger property buyers, among others. Private client investors may accelerate or delay transactions due to personal or business-related reasons unrelated to economic events. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior investment sales and ~~employment trends as well as~~financing professionals. These senior investment sales and financing professionals are on a graduated commission schedule that resets annually, pursuant to which higher commissions are paid for higher sales volumes. Our historical pattern of seasonality may or may not continue to the ~~strength of commercial real estate fundamentals to deliver generally stable sales activity.~~

same degree experienced in prior years.

Operating Segments

We follow the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of our operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing and consulting and advisory services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute only one operating segment for financial reporting purposes.

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.

~~Our~~

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Because our business is transaction oriented, ~~and, as such,~~ we rely on investment sales and financing professionals to continually develop leads, identify properties to sell, 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 that we would have received had the transaction closed.

Real ~~estate brokerage commissions~~

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 typically recognized at the close of escrow.

Financing ~~fees~~

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 for performance in connection with the transaction. To a lesser extent, we also earn mortgage servicing revenue, mortgage servicing fees and ancillary fees associated with financing activities. We recognize mortgage servicing revenues upon the acquisition of a servicing obligation. We generate mortgage servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related mortgage servicing functions, activities and services.

Other ~~revenues~~

Revenues

Other revenues include fees generated from consulting and advisory 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~~

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, ~~and, as such,~~ 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 also have the ability to earn additional commissions after meeting certain annual revenue 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 three years, at ~~the Company’s~~our election, and paid at the beginning of the fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers where ~~the Company is~~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 & administrative expenses~~

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 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 ~~as amended~~ (“2013 Plan”) and the 2013 Employee Stock Purchase Plan (“~~ESPP Plan”~~ESPP”).

Depreciation and ~~amortization expense~~

Amortization Expense

Depreciation expense consists of depreciation recorded on our computer software and hardware and furniture, fixture and equipment. Depreciation ~~are~~is provided over estimated useful lives ranging from three to seven years for owned ~~assets or over the lesser of the asset estimated useful lives or the related lease term for leasehold improvements.~~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 six years.

Other Income (Expense), Net

Other income (expense), net primarily consists of interest income, net gains or losses on our deferred compensation plan assets, realized gains and losses on our marketable securities,

available-for-sale,

foreign currency gains and losses and other

non-operating

gains and losses.

Interest Expense

Interest expense primarily consists of interest expense associated with the stock appreciation rights (“SARs”) liability, notes payable to former stockholders and our credit agreement.

Provision for Income Taxes

We are subject to U.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 we operate due to differing tax rates in those ~~jurisdictions.~~jurisdictions and other permanent items. Our provision for income taxes includes the windfall tax benefits, net, from shares issued in connection with our 2013 Plan and ~~ESPP Plan.~~

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. ~~On December 22, 2017,~~

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Results of Operations

Following is a discussion of our results of operations for the ~~Tax Cuts~~three and ~~Jobs Act (the “Act”) was enacted, which reduced~~nine months ended September 30, 2019 and 2018. The tables included in the ~~U.S. federal statutory tax rate from 35% to 21% beginning in 2018.~~

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. During both the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, we closed more than 2,400 ~~and 2,200~~ investment sales, financing and other transactions with total sales volume of approximately ~~$12.0~~$12.1 billion and ~~$10.1~~$12.0 billion, respectively. During the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, we closed more than ~~6,800~~6,900 and ~~6,500~~6,800 investment sales, financing and other transactions, respectively, with total sales volume of approximately ~~$33.1~~$34.9 billion and ~~$29.9~~$33.1 billion, respectively. Such key metrics for real estate brokerage and financing activities (excluding other transactions) are as follows:

   Three Months Ended
September 30, Nine Months Ended
September 30,
   2018 2017 2018 2017
Real Estate Brokerage

Average Number of Investment Sales Professionals
   1,738 1,658 1,701 1,638
Average Number of Transactions per Investment Sales Professional
   1.04 1.02 3.03 2.94
Average Commission per Transaction
   $ 106,125 $ 99,798 $ 104,187 $ 98,143
Average Commission Rate
   2.06 % 2.12 % 2.05 % 2.17 %
Average Transaction Size (in thousands)
   $ 5,140 $ 4,714 $ 5,084 $ 4,525
Total Number of Transactions
   1,809 1,697 5,146 4,810
Total Sales Volume (in millions)
   $ 9,298 $ 8,000 $ 26,162 $ 21,764
   Three Months Ended
September 30, Nine Months Ended
September 30,
   2018 2017 2018 2017
Financing⁽¹⁾

Average Number of Financing Professionals
   104 92 97 95
Average Number of Transactions per Financing Professional
   4.17 4.45 12.28 12.72
Average Fee per Transaction
   $ 34,733 $ 27,795 $ 33,326 $ 28,254
Average Fee Rate
   0.84 % 0.85 % 0.90 % 0.88 %
Average Transaction Size (in thousands)
   $ 4,112 $ 3,274 $ 3,717 $ 3,224
Total Number of Transactions
   434 409 1,191 1,208
Total Financing Volume (in millions)
   $ 1,785 $ 1,339 $ 4,427 $ 3,895


	Three Months Ended September 30,						Nine Months Ended September 30,
Real Estate Brokerage	2019			2018			2019			2018
Average Number of Investment Sales Professionals		1,837			1,738			1,829			1,701
Average Number of Transactions per Investment Sales Professional		0.95			1.04			2.73			3.03
Average Commission per Transaction	$	102,794		$	106,125		$	102,928		$	104,187
Average Commission Rate		1.88	%		2.06	%		1.98	%		2.05	%
Average Transaction Size (in thousands)	$	5,460		$	5,140		$	5,190		$	5,084
Total Number of Transactions		1,753			1,809			4,992			5,146
Total Sales Volume (in millions)	$	9,571		$	9,298		$	25,908		$	26,162

	Three Months Ended September 30,						Nine Months Ended September 30,
Financing (1)	2019			2018			2019			2018
Average Number of Financing Professionals		98			104			103			97
Average Number of Transactions per Financing Professional		5.01			4.17			13.23			12.28
Average Fee per Transaction	$	31,203		$	34,733		$	33,361		$	33,326
Average Fee Rate		0.90	%		0.84	%		0.91	%		0.90	%
Average Transaction Size (in thousands)	$	3,460		$	4,112		$	3,685		$	3,717
Total Number of Transactions		491			434			1,363			1,191
Total Financing Volume (in millions)	$	1,699		$	1,785		$	5,023		$	4,427

(1)

Operating metrics calculated excluding certain financing fees not directly associated towith transactions.

~~Results~~

Table of ~~Operations~~

Following is a discussion of our results of operations for the three months ended September 30, 2018 and 2017. 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.~~

Contents

Comparison of Three Months Ended September 30, ~~2018~~2019 and ~~2017~~

2018

Below are key operating results for the three months ended September 30, ~~2018~~2019 compared to the three months ended September 30, ~~2017~~2018 (dollar and share amounts in thousands, except per share amounts):

   Three Months
Ended
September 30,
2018 Percentage
of
Revenue Three Months
Ended
September 30,
2017 Percentage
of
Revenue Change

Dollar Percentage
Revenues:

Real estate brokerage commissions
   $ 191,980 91.2 % $ 169,357 92.4 % $ 22,623 13.4 %
Financing fees
   15,947 7.6 11,368 6.2 4,579 40.3
Other revenues
   2,663 1.2 2,616 1.4 47 1.8


Total revenues
   210,590 100.0 183,341 100.0 27,249 14.9


Operating expenses:

Cost of services
   132,896 63.1 114,803 62.6 18,093 15.8
Selling, general, and administrative expense
   48,659 23.1 42,480 23.2 6,179 14.5
Depreciation and amortization expense
   1,651 0.8 1,375 0.7 276 20.1


Total operating expenses
   183,206 87.0 158,658 86.5 24,548 15.5


Operating income
   27,384 13.0 24,683 13.5 2,701 10.9
Other income (expense), net
   2,127 1.0 1,172 0.6 955 81.5
Interest expense
   (342 ) (0.2 ) (370 ) (0.2 ) 28 (7.6 )


Income before provision for income taxes
   29,169 13.8 25,485 13.9 3,684 14.5
Provision for income taxes
   8,315 3.9 10,010 5.5 (1,695 ) (16.9 )


Net income
   $ 20,854 9.9 % $ 15,475 8.4 % $ 5,379 34.8 %


Adjusted EBITDA⁽¹⁾
   $ 32,155 15.3 % $ 28,499 15.5 % $ 3,656 12.8 %


Earnings per share:

Basic
   $ 0.53 $ 0.40
Diluted
   $ 0.53 $ 0.39
Weighted average common shares outstanding:

Basic
   39,191 39,033
Diluted
   39,484 39,204


	Three Months Ended September 30, 2019			Percentage of Revenue			Three Months Ended September 30, 2018			Percentage of Revenue			Change
	Three Months Ended September 30, 2019			Percentage of Revenue			Three Months Ended September 30, 2018			Percentage of Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	180,198			90.9	%	$	191,980			91.2	%	$	(11,782	)		(6.1	)%
Financing fees		16,013			8.1			15,947			7.6			66			0.4	%
Other revenues		2,009			1.0			2,663			1.2			(654	)		(24.6	)%

Total revenues		198,220			100.0			210,590			100.0			(12,370	)		(5.9	)%

Operating expenses:
Cost of services		124,147			62.6			132,896			63.1			(8,749	)		(6.6	)%
Selling, general and administrative expense		48,091			24.3			48,659			23.1			(568	)		(1.2	)%
Depreciation and amortization expense		1,910			1.0			1,651			0.8			259			15.7	%

Total operating expenses		174,148			87.9			183,206			87.0			(9,058	)		(4.9	)%

Operating income		24,072			12.1			27,384			13.0			(3,312	)		(12.1	)%
Other income (expense), net		2,573			1.4			2,127			1.0			446			21.0	%
Interest expense		(329	)		(0.2	)		(342	)		(0.2	)		13			(3.8	)%

Income before provision for income taxes		26,316			13.3			29,169			13.8			(2,853	)		(9.8	)%
Provision for income taxes		7,024			3.6			8,315			3.9			(1,291	)		(15.5	)%

Net income	$	19,292			9.7	%	$	20,854			9.9	%	$	(1,562	)		(7.5	)%

Adjusted EBITDA (1)	$	27,865			14.1	%	$	32,155			15.3	%	$	(4,290	)		(13.3	)%

Earnings per share:
Basic	$	0.49					$	0.53
Diluted	$	0.49					$	0.53
Weighted average common shares outstanding:
Basic		39,441						39,191
Diluted		39,550						39,484

⁽¹⁾

Adjusted EBITDA is not a measurement of our financial performance under U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see

“Non-GAAP

Financial Measure.”

Revenues

Our total revenues were $198.2 million for the three months ended September 30, 2019 compared to $210.6 million for the same period in 2018, a decrease of $12.4 million, or 5.9%. Total revenues decreased as a result of decreases in real estate brokerage commissions and other revenues, partially offset by an increase in financing fees, as described below.

Real estate brokerage commissions.

Revenues from real estate brokerage commissions decreased to $180.2 million for the three months ended September 30, 2019 from $192.0 million for the same period in 2018, a decrease of $11.8 million, or 6.1%. The decrease was primarily due to decreases in the number of investment sales transactions (3.1%) and average commission rates (18 basis points), primarily due to decreases in average commission rates in the middle market and larger transaction market segments. These decreases were partially offset by an increase in sales volume (2.9%) driven by the larger transaction market segment, relative to a 6% decline in sales volume in the broader market as reported by Real Capital Analytics.

Financing fees.

Revenues from financing fees were $16.0 million for the three months ended September 30, 2019, which was comparable to $15.9 million for the same period in 2018. There were increases in the number of financing transactions (13.1%), in part due to an increase in refinancing activity, and in average fee rates (6 basis points). The effect of these increases were partially offset by a decrease in the average transaction size (15.9%). The increase in number of financing transactions and the decrease in average transaction size resulted in a decrease in financing volume (4.8%).

Table of Contents

Other revenues.

Other revenues decreased to $2.0 million for the three months ended September 30, 2019 from $2.7 million for the same period in 2018, a decrease of $0.7 million, or 24.6%. The decrease was primarily driven by decreases in consulting and advisory services during the three months ended September 30, 2019 compared to the same period in 2018.

Total Operating Expenses

Our total operating expenses were $174.1 million for the three months ended September 30, 2019 compared to $183.2 million for the same period in 2018, a decrease of $9.1 million, or 4.9%. The decrease was primarily due to a decrease in cost of services, which are variable commissions paid to our investment sales professionals and compensation related costs in connection with our financing activities, and a decrease in selling, general and administrative costs, partially offset by an increase in depreciation and amortization expense, as described below.

Cost of services.

Cost of services decreased to $124.1 million for the three months ended September 30, 2019 from $132.9 million for the same period in 2018, a decrease of $8.7 million, or 6.6%. The decrease was primarily due to decreased commission expenses driven by the related decreased revenues noted above. Cost of services as a percent of total revenues decreased to 62.6% compared to 63.1% for the same period in 2018 primarily due to transaction size, mix and brokerage compensation.

Selling, general and administrative expense.

Selling, general and administrative expense decreased to $48.1 million for the three months ended September 30, 2019 from $48.7 million for the same period in 2018, a decrease of $0.6 million, or 1.2%. The decrease was primarily due to (i) a $2.8 million decrease in compensation related costs, including salaries and related benefits and management performance compensation, primarily driven by the reduction in management performance compensation; (ii) a $1.0 million decrease in stock-based compensation; and (iii) a $0.5 million decrease in legal costs. These decreases were partially offset by increases driven by our growth plans and investments in technology, sales and marketing tools and marketing and expansion of our services supporting our investment sales and financing professionals, which include (i) a $1.8 million increase in sales operation support and promotional marketing expenses; (ii) a $1.2 million increase in facilities expenses due to expansion of existing offices; and (iii) a $0.7 million increase in net other expense categories, primarily driven by an increase in certain licensing fees.

Depreciation and amortization expense.

Depreciation and amortization expense increased to $1.9 million for the three months ended September 30, 2019 from $1.7 million for the same period in 2018, an increase of $0.3 million, or 15.7%. The increase was primarily driven by capital expenditures due to our expansion and the amortization of intangible assets.

Other Income (Expense), Net

Other income (expense), net increased to $2.6 million for the three months ended September 30, 2019 from $2.1 million for the same period in 2018. The increase was primarily driven by increases in interest income on our investments in marketable securities,

available-for-sale,

partially offset by decreases in the value of our deferred compensation plan assets and foreign currency gains (losses).

Interest Expense

There were no significant changes in interest expense for the three months ended September 30, 2019 compared to the same period in 2018.

Provision for Income Taxes

The provision for income taxes was $7.0 million for the three months ended September 30, 2019 compared to $8.3 million in the same period in 2018, a decrease of $1.3 million, or 15.5%. The effective income tax rate for the three months ended September 30, 2019 was 26.7% compared to 28.5% for the same period in 2018. The effective income tax rate decreased primarily due to a partial reversal of a reserve of uncertain tax positions, a decrease in the blended state tax rate and an increase in state tax exempt interest. These decreases were partially offset by an increase in the valuation allowance with respect to our Canadian operations.

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Comparison of Nine Months Ended September 30, 2019 and 2018

Below are key operating results for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 (dollar and share amounts in thousands, except per share amounts):


	Nine Months Ended September 30, 2019			Percentage of Revenue			Nine Months Ended September 30, 2018			Percentage of Revenue			Change
	Nine Months Ended September 30, 2019			Percentage of Revenue			Nine Months Ended September 30, 2018			Percentage of Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	513,815			90.4	%	$	536,145			91.7	%	$	(22,330	)		(4.2	)%
Financing fees		47,487			8.4			41,234			7.1			6,253			15.2	%
Other revenues		7,218			1.2			7,154			1.2			64			0.9	%

Total revenues		568,520			100.0			584,533			100.0			(16,013	)		(2.7	)%

Operating expenses:
Cost of services		343,682			60.5			354,414			60.6			(10,732	)		(3.0	)%
Selling, general, and administrative expense		149,845			26.3			145,792			24.9			4,053			2.8	%
Depreciation and amortization expense		5,674			1.0			4,529			0.8			1,145			25.3	%

Total operating expenses		499,201			87.8			504,735			86.3			(5,534	)		(1.1	)%

Operating income		69,319			12.2			79,798			13.7			(10,479	)		(13.1	)%
Other income (expense), net		9,067			1.6			5,060			0.8			4,007			79.2	%
Interest expense		(1,018	)		(0.2	)		(1,054	)		(0.2	)		36			(3.4	)%

Income before provision for income taxes		77,368			13.6			83,804			14.3			(6,436	)		(7.7	)%
Provision for income taxes		21,159			3.7			22,772			3.9			(1,613	)		(7.1	)%

Net income		56,209			9.9	%	$	61,032			10.4	%	$	(4,823	)		(7.9	)%

Adjusted EBITDA (1)	$	83,040			14.6	%	$	93,309			16.0	%	$	(10,269	)		(11.0	)%

Earnings per share:
Basic	$	1.43					$	1.56
Diluted	$	1.42					$	1.55
Weighted average common shares outstanding:
Basic		39,383						39,147
Diluted		39,527						39,359

(1)

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 derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see

“Non-GAAP

Financial Measure.”

Revenues

Our total revenues were ~~$210.6~~$568.5 million for the ~~three~~nine months ended September 30, ~~2018~~2019 compared to ~~$183.3~~$584.5 million for the same period in ~~2017, an increase~~2018, a decrease of ~~$27.2~~$16.0 million, or ~~14.9%~~2.7%. Total revenues ~~increased primarily~~decreased as a result of ~~increases in~~decreased real estate brokerage commissions, ~~and~~partially offset by an increase in financing ~~fees.~~

fees, as described below.

Real estate brokerage commissions.

Revenues from real estate brokerage commissions ~~increased~~decreased to ~~$192.0~~$513.8 million for the ~~three~~nine months ended September 30, ~~2018~~2019 from ~~$169.4~~$536.1 million for the same period in ~~2017, an increase~~2018, a decrease of ~~$22.6~~$22.3 million, or ~~13.4%~~4.2%. The ~~increase~~decrease was primarily driven by ~~the increase~~decreases in the number of investment sales transactions ~~(6.6%~~(3.0%) relative to a 5% investment sales transaction decline in the broader market as reported by Real Capital Analytics and ~~an increase in~~ average commission per transaction ~~size (9.0%~~(1.2%). These factors combined generated ~~the increase~~decreases in sales volume ~~of 16.2%. These increases were partially offset by a decrease in~~(1.0%) and average commission rates (6(7 basis points) due to ~~a larger proportion of our transactions that closed~~lower average commission rates in the ~~Middle~~private client market and ~~Larger~~larger transaction market ~~segments, which generate lower commission rates.~~

segments. This decrease was partially offset by an increase in the average transaction size (2.1%).

Financing fees.

Revenues from financing fees increased to ~~$15.9~~$47.5 million for the ~~three~~nine months ended September 30, ~~2018~~2019 from ~~$11.4~~$41.2 million for the same period in ~~2017,~~2018, an increase of ~~$4.6~~$6.3 million, or ~~40.3%,~~15.2% in part spurred by ~~recent hiring and~~ growth from acquisitions during 2018. The increase was primarily driven by an increase in financing volume (13.5%), in part due to an increase in refinancing activity, as the average fee rate was comparable. Financing volume was impacted by an increase in the number of financing transactions ~~(6.1%~~(14.4%) and ~~increase~~a decrease in average transaction size ~~(25.6%~~(0.9%). ~~These factors combined generated the increase in sales volume of 33.3%. This increase was partially offset by a 1 basis point decrease in average commission rate.~~

Other revenues.

Other revenues ~~increased to $2.7~~were $7.2 million for both the ~~three~~nine months ended September 30, ~~2018 from $2.6~~2019 and 2018.

Table of Contents

Total operating expenses

Our total operating expenses were $499.2 million for the nine months ended September 30, 2019 compared to $504.7 million for the same period in ~~2017, an increase~~2018, a decrease of ~~$0.1~~$5.5 million, or ~~1.8%.~~

~~Total operating expenses~~

~~Our total operating expenses were $183.2 million for the three months ended September 30, 2018 compared to $158.7 million for the same period in 2017, an increase of $24.5 million, or 15.5%~~1.1%. The ~~increase~~decrease was primarily due to ~~increases~~a decrease in ~~cost~~costs of services, which are variable commissions paid to our investment sales professionals and compensation related costs in connection with our financing activities, partially offset by increases in selling, general and administrative costs and ~~to a lesser extent~~ depreciation and amortization expense, as described below.

Cost of services.

Cost of services ~~increased~~decreased to ~~$132.9~~$343.7 million for the ~~three~~nine months ended September 30, ~~2018~~2019 from ~~$114.8~~$354.4 million for the same period in ~~2017, an increase~~2018, a decrease of ~~$18.1~~$10.7 million, or ~~15.8%~~3.0%. The ~~increase~~decrease was primarily due to ~~increased~~decreased commission expenses driven by the related ~~increased~~decreased revenues noted above. Cost of services as a percent of total revenues ~~increased~~slightly decreased to ~~63.1%~~60.5% for the nine months ended September 30, 2019 compared to ~~62.6%~~60.6% for the same period in ~~2017~~2018 primarily due to ~~an increase in the proportion of transactions closed by our more senior investment sales professionals who are compensated generally at higher commission rates.~~

transaction size, mix and brokerage compensation.

Selling, general and administrative expense.

Selling, general and administrative expense increased to ~~$48.7~~$149.8 million for the ~~three~~nine months ended September 30, ~~2018~~2019 from ~~$42.5~~$145.8 million for the same period in ~~2017,~~2018, an increase of ~~$6.2~~$4.1 million, or ~~14.5%~~2.8%. Increases in our selling, general and administrative expense have been driven by our growth plans and investments in technology, sales and marketing tools and marketing and expansion of our services supporting our investment sales and financing professionals. These initiatives have primarily driven (i) a ~~$2.7~~$4.8 million increase in sales operations support and promotional marketing expenses; (ii) a $2.6 million increase in net other expense categories, primarily driven by an increase in certain licensing fees; and (iii) a $2.4 million increase in facilities expenses due to expansion of existing offices. These increases were partially offset by (i) a $2.0 million decrease in legal costs; (ii) a $1.9 million decrease in stock-based compensation; and (iii) a $1.8 million decrease in compensation related costs, including salaries and related benefits and management performance ~~compensation; (ii) a $0.9 million increase in sales operations support and promotional marketing expenses to support sales activity; (iii) a $0.8 million increase in other expense categories, net,~~compensation, primarily driven by ~~an increase~~the reduction in professional fees and (iv) a $0.5 million increase in facilities expenses due to expansion of existing offices. In addition, selling, general and administrative expense increased due to (i) a $1.0 million increase in stock-based compensation driven by fluctuations in our stock price and incremental stock-based awards since the third quarter of 2017 and (ii) a $0.3 million increase in legal costs and accruals.

management performance compensation.

Depreciation and amortization expense.

Depreciation and amortization expense increased to ~~$1.7~~$5.7 million for the ~~three~~nine months ended September 30, ~~2018~~2019 from ~~$1.4~~$4.5 million for the same period in ~~2017,~~2018, an increase of ~~$0.3~~$1.1 million, or ~~20.1%~~25.3%. The increase was primarily driven by capital expenditures due to our expansion and ~~growth.~~

growth and the amortization of intangible assets and MSRs.

Other income (expense), net

Other income (expense), net increased to ~~$2.1~~$9.1 million for the ~~three~~nine months ended September 30, ~~2018~~2019 from ~~$1.2~~$5.1 million for the same period in ~~2017.~~2018. The increase was primarily driven by ~~an increase~~increases in interest income on our investments in marketable securities,~~available-for-sale.~~

~~Interest expense~~

~~There were no significant changes in interest expense for the three months ended September 30, 2018 compared to the same period in 2017.~~

~~Provision for income taxes~~

The provision for income taxes was $8.3 million for the three months ended September 30, 2018 compared to $10.0 million in the same period in 2017, a decrease of $1.7 million, or 16.9%. The effective income tax rate for the three months ended September 30, 2018 was 28.5% compared to 39.3% for the same period in 2017. The decrease in the effective tax rate was primarily due to the decrease in the federal statutory rate from 35% to 21%, partially offset by an increase in permanent items and other. Permanent items and other increased in 2018 compared to the same period in 2017 due to changes in tax laws under the Act, primarily relating to changes to Section 162(m) of the Internal Revenue Code and the tax rules regarding the deductibility of entertainment expenses. As a result of our periodic review of uncertain tax positions, we recorded a provision of approximately $1.0 million in the three months ended September 30, 2018.

available-for-sale,

We calculate our provision for income taxes using an annual effective tax rate based on projected taxable income for the year adjusted for the effects of permanent and discrete items. Deferred taxes are adjusted for significant changes in temporary items in the period in which they occur. The future effective tax rate may vary from this estimated annual effective rate due to several factors, including but not limited to, the level of state and foreign jurisdiction activity, future changes in tax laws, the amount of future book versus income tax items that are permanent in nature and changes, if any, in a valuation allowance related to deferred tax assets.

The provisions for income taxes includes the difference in book and tax deductions associated with the settlement of shares under the Company’s 2013 Plan and certain disqualifying dispositions of shares issued under our ESPP Plan.

~~Comparison of Nine Months Ended September 30, 2018 and 2017~~

~~Below are key operating results for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 (dollar and share amounts in thousands, except per share amounts):~~

   Nine Months
Ended
September 30,
2018 Percentage
of
Revenue Nine Months
Ended
September 30,
2017 Percentage
of
Revenue Change

Dollar Percentage
Revenues:

Real estate brokerage commissions
   $ 536,145 91.7 % $ 472,069 91.3 % $ 64,076 13.6 %
Financing fees
   41,234 7.1 34,131 6.6 7,103 20.8
Other revenues
   7,154 1.2 10,724 2.1 (3,570 ) (33.3 )


Total revenues
   584,533 100.0 516,924 100.0 67,609 13.1


Operating expenses:

Cost of services
   354,414 60.6 314,827 60.9 39,587 12.6
Selling, general, and administrative expense
   145,792 24.9 129,393 25.0 16,399 12.7
Depreciation and amortization expense
   4,529 0.8 3,975 0.8 554 13.9


Total operating expenses
   504,735 86.3 448,195 86.7 56,540 12.6


Operating income
   79,798 13.7 68,729 13.3 11,069 16.1
Other income (expense), net
   5,060 0.8 3,005 0.6 2,055 68.4
Interest expense
   (1,054 ) (0.2 ) (1,126 ) (0.2 ) 72 (6.4 )


Income before provision for income taxes
   83,804 14.3 70,608 13.7 13,196 18.7
Provision for income taxes
   22,772 3.9 27,564 5.4 (4,792 ) (17.4 )


Net income
   61,032 10.4 % $ 43,044 8.3 % $ 17,988 41.8 %


Adjusted EBITDA⁽¹⁾
   $ 93,309 16.0 % $ 79,589 15.4 % $ 13,720 17.2 %


Earnings per share:

Basic
   $ 1.56 $ 1.10
Diluted
   $ 1.55 $ 1.10
Weighted average common shares outstanding:

Basic
   39,147 38,995
Diluted
   39,359 39,136

⁽¹⁾

~~Revenues~~

Our total revenues were $584.5 million for the nine months ended September 30, 2018 compared to $516.9 million for the same period in 2017, an increase of $67.6 million, or 13.1%. Total revenues increased primarily as a result of increases in real estate brokerage commissions and financing fees, partially offset by a decrease in other revenues.

~~Real estate brokerage commissions.~~ Revenues from real estate brokerage commissions increased to $536.1 million for the nine months ended September 30, 2018 from $472.1 million for the same period in 2017, an increase of $64.1 million, or 13.6%. The increase was primarily driven by the increase in the number of investment sales transactions (7.0%) and an increase in average transaction size (12.4%). These factors combined generated the increase in sales volume of 20.2%. This increase was partially offset by a decrease in average commission rates (12 basis points) due to a larger proportion of our transactions that closed in the Middle and Larger transaction market segments, which generate lower commission rates.

~~Financing fees.~~ Revenues from financing fees increased to $41.2 million for the nine months ended September 30, 2018 from $34.1 million for the same period in 2017, an increase of $7.1 million, or 20.8%, in part spurred by recent hiring and growth from acquisitions during 2018. The increase was primarily driven by growth in sales volume (13.7%), which was generated by an increase in average transaction size (15.3%), partially offset by a decrease in the number of financing transactions (1.4%).

~~Other revenues.~~ Other revenues decreased to $7.2 million for the nine months ended September 30, 2018 from $10.7 million for the same period in 2017, a decrease of $3.6 million, or 33.3%. The decrease was primarily driven by a large consulting and advisory fee earned in 2017 with no comparable fee in 2018.

~~Total operating expenses~~

Our total operating expenses were $504.7 million for the nine months ended September 30, 2018 compared to $448.2 million for the same period in 2017, an increase of $56.5 million, or 12.6%. The increase was primarily 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 to a lesser extent depreciation and amortization, as described below.

~~Cost of services.~~Cost of services for the nine months ended September 30, 2018 increased approximately $39.6 million, or 12.6% to $354.4 million from $314.8 million for the same period in 2017. 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 decreased to 60.6% for the nine months ended September 30, 2018 compared to 60.9% for the same period in 2017 primarily due to a decrease in referral fees, partially offset by an increase in the ~~proportion of transactions closed by our more senior investment sales professionals who are compensated generally at higher commission rates.~~

~~Selling, general and administrative expense.~~ Selling, general and administrative expense for the nine months ended September 30, 2018 increased $16.4 million, or 12.7%, to $145.8 million from $129.4 million for the same period in 2017. Increases in our selling, general and administrative expense have been driven by our growth plans and investments in technology, sales and marketing tools and marketing and expansionvalue of our ~~services supporting our investment sales~~deferred compensation plan assets and financing professionals. These initiatives have primarily driven (i) a $5.2 million increase in compensation related costs, including salaries and related benefits and management performance compensation; (ii) a $4.5 million increase in sales and promotional marketing expenses to support increased sales activity; (iii) a $2.2 million increase in other expense categories, net, primarily driven by our expansion and growth and (iv) a $1.7 million increase in facilities expenses due to expansion of existing offices. In addition, selling, general and administrative expense increased due to (i) a $2.7 million increase in stock-based compensation expense due to fluctuations in our stock price and incremental stock-based awards since third quarter of 2017 and (ii) a $0.1 million increase in legal costs and accruals.

~~Depreciation and amortization expense.~~~~Depreciation and amortization expense increased to $4.5 million for the nine months ended September 30, 2018 from $4.0 million for the same period in 2017, an increase of $0.6 million, or 13.9%~~foreign currency gains (losses). ~~The increase is primarily driven by our expansion and growth.~~

~~Other income (expense), net~~

Other income (expense), net increased to $5.1 million for the nine months ended September 30, 2018 from $3.0 million for the same period in 2017. The increase was primarily driven by an increase in interest income on our investments in marketable securities,~~available-for-sale.~~

Interest expense

There were no significant changes in interest expense for the nine months ended September 30, ~~2018~~2019 compared to the same period in ~~2017.~~

2018.

Provision for income taxes

The provision for income taxes was ~~$22.8~~$21.2 million for the nine months ended September 30, ~~2018~~2019 compared to ~~$27.6~~$22.8 million in the same period in ~~2017,~~2018, a decrease of ~~$4.8~~$1.6 million, or ~~17.4%~~7.1%. The effective income tax rate for the nine months ended September 30, ~~2018~~2019 was ~~27.2%~~27.3% compared to ~~39.0%~~27.2% for the same period in ~~2017.~~2018. The effective income tax rate increased slightly primarily due to an increase in the valuation allowance with respect to our Canadian operations, partially offset by a decrease in the ~~effective~~blended state tax rate was primarily due to the decrease in the federal statutory rate from 35% to 21%, partially offset by an increase in permanent items and other. Permanent items and other increased in 2018 compared to the same period prior in 2017 due to changes in tax laws under the Act, primarily relating to changes to Section 162(m)rate.

Table of the Internal Revenue Code and the tax rules regarding the deductibility of entertainment expenses. As a result of our periodic review of uncertain tax positions, we recorded a provision of approximately $1.0 million in the nine months ended September 30, 2018.

Contents

The provisions for income taxes includes the difference in book and tax deductions associated with the settlement of shares under our 2013 Plan and certain disqualifying dispositions of shares issued under our ESPP Plan.

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 and stock-based compensation, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income and other, including net realized gains (losses) on marketable 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 expense and(vi)

non-cash

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 an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. ~~generally accepted accounting principles (“U.S. GAAP”).~~GAAP. We find Adjusted EBITDA asto be a useful tool to assist in evaluating performance because Adjusted EBITDA eliminates items related to capital structure, taxes and

non-cash ~~stock-based compensation charges.~~

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):

   Three Months Ended
September 30,    Nine Months Ended
September 30,
   2018    2017    2018    2017
Net income
   $ 20,854    $ 15,475    $ 61,032    $ 43,044
Adjustments:

Interest income and other⁽¹⁾
   (1,824 )    (923 )    (4,626 )    (2,293 )
Interest expense
   342    370    1,054    1,126
Provision for income taxes⁽²⁾
   8,315    10,010    22,772    27,564
Depreciation and amortization
   1,651    1,375    4,529    3,975
Stock-based compensation
   3,147    2,192    8,919    6,173
Non-cash mortgage servicing rights activity⁽³⁾
   (330 )    —      (371 )    —








Adjusted EBITDA
   $ 32,155    $ 28,499    $ 93,309    $ 79,589


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income	$	19,292		$	20,854		$	56,209		$	61,032
Adjustments:
Interest income and other (1)		(2,725	)		(1,824	)		(7,828	)		(4,626	)
Interest expense		329			342			1,018			1,054
Provision for income taxes		7,024			8,315			21,159			22,772
Depreciation and amortization		1,910			1,651			5,674			4,529
Stock-based compensation		2,114			3,147			7,040			8,919
Non-cash MSR activity (2)		(79	)		(330	)		(232	)		(371	)

Adjusted EBITDA (3)	$	27,865		$	32,155		$	83,040		$	93,309

⁽¹⁾	Other for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 includes net realized gains (losses) on marketable securities, available-for-sale.

⁽²⁾	~~Provision for income taxes~~ Non-cash MSR activity relates to the assumption of servicing obligations.

(3)

The decrease in Adjusted EBITDA for the three and nine months ended September 30, 2019 compared to the same periods in 2018 ~~was calculated using a 21% U.S. federal corporate tax rate~~is primarily due to ~~the enactment~~lower total revenues and a higher proportion of ~~the Act, which reduced the U.S. federal corporate tax rate from 35%~~operating expenses compared to ~~21%.~~

total revenues.

⁽³⁾	~~Non-cash~~ ~~mortgage servicing rights activity includes the assumption of servicing obligations following the completion of our business acquisition in 2018.~~

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, marketable 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 in 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 gate fees. 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 securities,

available-for-sale

or availability under our credit agreement.

~~Cash held in our Canadian operations aggregated $333,000 and $421,000 at September 30, 2018 and December 31, 2017, respectively.~~

Table of Contents

Cash Flows

Our total cash and cash equivalents balance ~~decreased~~increased by ~~$39.8~~$11.4 million to ~~$181.0~~$226.1 million at September 30, ~~2018~~2019 compared to ~~$220.8~~$214.7 million at December 31, ~~2017.~~2018. The following table sets forth our summary cash flows for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 (in thousands):

   Nine Months Ended
September 30,
   2018    2017
Net cash provided by operating activities
   $ 55,013    $ 25,338
Net cash used in investing activities
   (92,323 )    (28,011 )
Net cash used in financing activities
   (2,456 )    (2,036 )




Net decrease in cash and cash equivalents
   (39,766 )    (4,709 )




Cash and cash equivalents at beginning of period
   $ 220,786    $ 187,371




Cash and cash equivalents at end of period
   $ 181,020    $ 182,662

Nine Months Ended
September 30,

2019

2018

Net cash (used in) provided by operating activities
$
(6,053)
$
55,013

Net cash provided by (used in) investing activities

21,079

(92,323
)
Net cash used in financing activities

(3,628
)
(2,456
)

Net increase (decrease) in cash and cash equivalents

11,398

(39,766
)
Cash and cash equivalents at beginning of period

214,683

220,786

Cash and cash equivalents at end of period
$
226,081
$
181,020

Operating Activities

Cash flows ~~provided~~used in operating activities were ~~$55.0~~$6.1 million for the nine months ended September 30, ~~2018~~2019 compared to ~~$25.3~~cash flows provided by operating activities of $55.0 million for the same period in ~~2017.~~2018. Net cash (used in) provided by operating activities is driven by our net income adjusted for

non-cash

items and changes in operating assets and liabilities. The ~~$29.7~~$61.1 million ~~improvement~~increased usage in operating cash flows for the nine months ended September 30, ~~2018~~2019 compared to the same period in ~~2017~~2018 was primarily due to ~~increases~~a decrease in our ~~sales volume of~~ real estate brokerage revenue and ~~financing activities, the reduction in our effective income tax rate,~~a higher proportion of operating expenses compared to total revenues, differences in timing of certain payments and receipts, ~~a decrease~~an increase in advances to our investment sales and financing professionals, an increase in bonus payments in 2019 related to the 2018 bonuses and a ~~change~~reduction in ~~bonus accruals. These improvements in operating cash flows were partially offset by a decrease in~~ the discretionary deferral of certain ~~discretionary and other~~ commissions.

Investing Activities

Cash flows ~~used in~~provided by investing activities were ~~$92.3~~$21.1 million for the nine months ended September 30, ~~2018~~2019 compared to ~~$28.0~~cash flows used in investing activities of $92.3 million for the same period in ~~2017.~~2018. The ~~change~~$113.4 million decreased usage in investing cash flows for the nine months ended September 30, ~~2018~~2019 compared to the same period in ~~2017~~2018 was primarily due to a $27.9 million in net proceeds from sales and maturities of marketable securities,

available-for-sale

for the nine months ended September 30, 2019 compared to a $80.6 million in net purchases of marketable securities,

available-for-sale

for the same period in 2018 and a net $7.0 million of outflow for acquisitions during the nine months ended September 30, 2018 ~~compared to $22.6 million~~with no comparable outflow for the same period in 2017. The nine months ended September 30, 2018 included a $7.0 million use of cash for business acquisitions in 2018 with no comparable costs for the same period in 2017. See Note 3 – “Acquisitions, Goodwill and Intangible Assets” of our Notes to Condensed Consolidated Financial Statements for additional information.

2019.

Financing Activities

Cash flows used in financing activities were ~~$2.5~~$3.6 million for the nine months ended September 30, ~~2018~~2019 compared to ~~$2.0~~$2.5 million for the same period in ~~2017.~~2018. The change in cash flows used in financing activities for the nine months ended September 30, ~~2018~~2019 compared to the same period in ~~2017~~2018 was primarily impacted by taxes paid related to net share settlement of stock-based awards. See Note 1112 – “Stock-Based Compensation Plans” of our Notes to Condensed Consolidated Financial Statements for additional information.

Liquidity

We believe that our existing balances of cash and cash equivalents, cash flows expected to be generated from our operations, proceeds from the sale of marketable securities,

available-for-sale

and borrowings available under the ~~credit agreement~~Credit Agreement (defined below) will be sufficient to satisfy our operating requirements for ~~at least~~ the ~~next twelve months.~~foreseeable future. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could prevent us from, among other factors, to fund acquisitions or to otherwise finance our growth or operations. In addition, our notes payable to former stockholders and SARs ~~liability~~agreements have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our liquidity.

Credit Agreement

We have a Credit Agreement with Wells Fargo Bank, National Association for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries and matures on June 1, 2022 (the “Credit Agreement”). See Note 15 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements for additional information on the Credit Agreement.

Table of Contents

Contractual Obligations and Commitments

There have been no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form

10-K

for the year ended December 31, ~~2017~~2018 through the date the condensed consolidated financial statements were issued other than ~~commitments~~an increase of operating lease obligations of $5.1 million due to ~~advance $11.3 million to current and prospective investment sales and financing professionals, subject to certain conditions and/~~new or ~~reaching performance goals.~~

extended leases.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Inflation

Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by general economic conditions including inflation. However, to date, we do not believe that general inflation has had a material impact upon our operations.

Critical Accounting Policies; Use of Estimates

We prepare our financial statements in accordance with U.S. GAAP. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. There were no material changes in our critical accounting policies, as disclosed in in our Annual Report on Form

10-K

for the year ended December 31, ~~2017~~2018 except for the following:

~~Revenue Recognition~~

Leases

We ~~generate real estate brokerage commissions by acting as~~utilize operating leases for all our facilities and autos. We determine if an arrangement is a ~~broker~~lease at inception.

Right-of-use

assets (“ROU assets”) represent our right to use an underlying asset for ~~real estate owners~~the lease term and lease liabilities represent our contractual obligation to make lease payments under the lease. Operating leases are included in the operating lease ROU assets,

non-current,

and operating lease liabilities, current and

non-current,

captions in the condensed consolidated balance sheets.

Operating lease ROU assets and liabilities are recognized on the commencement date based on the present value of lease payments over the lease term. Lease agreements may contain periods of free rent or ~~investors seeking~~reduced rent, predetermined fixed increases in the minimum rent and renewal or termination options, all of which impact the determination of the lease term and lease payments to buy or sell commercial properties. We generate financing fees from securing financing on purchase transactions as well as fees earned from refinancing our clients’ existing mortgage debt and other financing activities. Other revenues include fees generated from consulting and advisory services, as well as referral fees from other real estate brokers. Our contracts contain one performance obligationbe used in calculating the lease liability. Certain facility leases provide for rental escalations related to increases in the lessors’ direct operating expenses. We use the implicit rate in the lease when determinable. As most of our real estate brokerage, financing and consulting and advisory services offered to buyers and sellers of commercial real estate and provide that we are operating as a principal in all its revenue generating activities. Weleases do not have ~~multiple-element arrangements, variable consideration, financing components, significant noncash consideration, licenses, long-term contracts with customers or other items affecting~~a determinable implicit rate, we use a derived incremental borrowing rate based on borrowing options under our credit agreement. We apply a spread over treasury rates for the transaction price. Accordingly, we determined that the transaction price is fixed and determinable and collectability is reasonably assured. We recognize revenue in principally all cases at the close of escrow for real estate brokerage, close of loan for financing and when services are provided upon closingindicated term of the ~~transaction for other revenues.~~

~~Stock-Based Compensation~~

We follow the accounting guidance for share-based payments which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, independent contractors and~~non-employee~~ ~~directors. Awards are issued under the Amended and Restated 2013 Omnibus Equity Incentive Plan (the “2013 Plan”) and 2013 Employee Stock Purchase Plan (“ESPP Plan”).~~

~~After adoption of Accounting Standards Update (“ASU”)No. 2016-09,~~~~Improvements to Employee Share-Based Payment Accounting~~ ~~(“ASU2016-09”)~~ ~~on January 1, 2017, we account for forfeitures as they occur.~~

~~For awards made to our employees and directors, we initially value restricted stock units and restricted stock awards~~lease based on the ~~grant~~information available on the commencement date ~~closing price~~ of ~~our common stock. For awards~~the lease. We typically lease general purpose

built-out

office space, which reverts to the lessor upon termination of the lease. Any payments for completed improvements, determined to be owed by the lessor, net of incentives received, are recorded as an increase to the ROU asset and considered in the determination of the lease cost.

We have lease agreements with ~~periodic vesting, we recognize the related expense~~lease and

non-lease

components, which are accounted for as a single lease component. Lease cost is recognized on a straight-line basis over the ~~requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount~~lease term. Variable lease payments consist of ~~expense recognized through the end of any reporting period is at least equal to the portion of the grant date value of the award that has vested through that date.~~

~~We adopted ASUNo. 2018-7,~~~~Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting~~~~awards (“ASU2018-7”)~~ ~~on July 1, 2018. As a result, awards made to independent contractors, will be measured~~common area costs, insurance, taxes and other lease related costs, which are determined principally based on the grant date closing price of our common stock consistent with awards made to our employees and directors. Unvested awards issued to independent contractors as of the adoption date of July 1, 2018 were remeasured at the adoption date stock price. We will recognize the remaining unrecognized value of unvested awards over the remaining performance period with no further remeasurement through the performance completion date. Prior to the adoption of ASU~~2018-7,~~ we determined that the fair value of the award made to independent contractors shall be measured based on the fair value of the equity instrument as it is more reliably measurable than the fair value of the consideration received. We used the grant date as the performance commitment date, and the measurement date was the date the services were completed, which was the vesting date. As a result, we recorded stock-based compensation for these awards over the vesting period on a straight-line basis with periodic adjustments during the vesting period for changes in the fair value of the awards.

billings from landlords.

If there are any modifications or cancellations of the underlying unvested share-based awards, we may be required to accelerate, increase or cancel any remaining unrecognized or previously recorded stock-based compensation expense.

~~For awards issued under the ESPP Plan, we determined that the plan was a compensatory plan and are required to expense the fair value of the awards over eachsix-month~~ offering period. We estimate the fair value of these awards using the Black-Scholes option pricing model. We calculate the expected volatility based on the historical volatility of our common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant, both consistent with the term of the offering period. We incorporate no forfeiture rate and include no expected dividend yield as we have not, and currently do not intend to pay a regular dividend.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 – “Accounting Policies and Recent Accounting Pronouncements” of our Notes to Condensed Consolidated Financial Statements.

The accounting pronouncement related to leases had a material impact on our condensed consolidated balance sheets but did not have a material impact on our condensed consolidated statements of net and comprehensive income. Although we do not believe any of the other accounting pronouncements listed in that note will have a significant impact on our business, we are still in the process of determining the impact of the new pronouncements may have on our condensed consolidated financial statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We maintain a portfolio of investments in a variety of fixed and variable debt rate securities, including U.S. government and federal agency securities, corporate debt securities, asset backed securities and other. As of September 30, ~~2018,~~2019, the fair value of investments in marketable securities,

available-for-sale

was ~~$205.8~~$195.3 million. The primary objective of our investment activity is to maintain the safety of principal, and to provide for future liquidity requirements while maximizing yields without significantly increasing risk. While some investments may be securities of companies in foreign countries, all investments are denominated and payable in U.S. Dollars. We do not enter into investments for trading or speculative purposes. While our intent is not to sell these investment securities prior to their stated maturities, we may choose to sell any of the securities for strategic reasons including, but not limited to, anticipated capital requirements, anticipation of credit deterioration, duration management and ~~when~~because a security no longer meets the criteria of ~~the Company’s~~our investment policy. We do not use derivatives or similar instruments to manage our interest rate risk. We seek to invest in high quality investments. The weighted average rating (exclusive of cash and cash equivalents) was AA+ as of September 30, ~~2018.~~2019. Maturities are maintained consistent with our short-, medium- and long-term liquidity objectives.

Currently, our portfolio of investments predominantly consists of fixed interest rate debt securities; however, a portion of our investment portfolio may consist of variable interest rate debt securities. Our investments in fixed interest rate debt securities are subject to market risk. Changes in prevailing interest rates may adversely or positively impact their fair market value should interest rates generally rise or fall. Accordingly, we also may have interest rate risk with ~~the~~ variable interest rate debt securities as the income produced may decrease if interest rates fall. The following table sets forth the impact on the fair value of our investments as of September 30, ~~2018~~2019 from changes in interest rates based on the weighted average duration of the securities in our portfolio ~~(dollars in~~(in thousands):

Change in Interest Rates
   Approximate Change in
Fair Value of Investments
Increase (Decrease)
2% Decrease
   $ 5,983
1% Decrease
   $ 2,991
1% Increase
   $ (2,990 )
2% Increase
   $ (5,980 )


Change in Interest Rates	Approximate Change in Fair Value of Investments Increase (Decrease)
2% Decrease	$	4,587
1% Decrease	$	2,404
1% Increase	$	(2,404)
2% Increase	$	(4,807)

Due to the nature of our business and the manner in which we conduct our operations, we believe we do not face any material interest rate risk with respect to other assets and liabilities, equity price risk or other market risks. The functional currency of our Canadian operations is the Canadian dollar. We are exposed to foreign currency exchange rate risk for the settlement of transactions of the Canadian operations as well as unrealized translation adjustments. To date, realized foreign currency exchange rate gains and losses have not been material.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, ~~2018,~~2019, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures defined in Rules

13a-15(e)

and

15d-15(e)

under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, ~~2018,~~2019, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, ~~2018~~2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in claims and legal actions arising in the ordinary course of our business, some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by our insurance policies, which contain deductibles, exclusions, claim limits and aggregate policy limits. Such litigation and other proceedings may include, but are not limited to, actions relating to commercial relationships, standard brokerage disputes like the alleged failure to disclose physical or environmental defects or property expenses or contracts, the alleged inadequate disclosure of matters relating to the transaction like the relationships among the parties to the transaction, potential claims or losses pertaining to the asset, vicarious liability based upon conduct of individuals or entities outside of our control, general fraud claims, conflicts of interest claims, employment law claims, including claims challenging the classification of our sales professionals as independent contractors, claims alleging violations of state consumer fraud statutes and intellectual property. While the ultimate liability for these legal ~~proceeding~~proceedings cannot be determined, we review the need for our accrual for loss contingencies quarterly and record an accrual for litigation related losses where the likelihood of loss is both probable and estimable. We do not believe, based on information currently available to us, that the final outcome of these proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

~~For information on our legal proceedings, see Note 14 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements.~~

Item 1A. Risk Factors

There have been no material changes from the risk factors described in our Annual Report on Form

10-K

for the year ended December 31, ~~2017 other than the new risk factors below. During the nine months ended September 30, 2018, we made certain acquisitions that resulted in the recording of goodwill and intangible assets.~~

If we acquire businesses in the future, we may experience high transaction and integration costs, the integration process may be disruptive to our business and the acquired businesses may not perform as we expect.

From time to time, we pursue strategic acquisitions to add and enhance our real estate brokerage and financing service offerings. The companies we acquire have generally been regional or specialty firms that expand our network of investing and financing professionals and/or provide further diversification to our brokerage and financing services. Our acquisition structures may include deferred and/or contingent consideration payments in future periods that are subject to the passage of time or achievement of certain performance metrics and other conditions. Contingent consideration is included in accounts payable and other liabilities and deferred rent and other liabilities in the accompanying condensed consolidated balance sheet. Acquisitions also frequently involve significant costs related to integrating culture, information technology, accounting, reporting and management services and rationalizing personnel levels. If we are unable to fully integrate the culture, accounting, reporting and other systems of the businesses we acquire, we may not be able to effectively manage them, and our financial results may be materially affected.

In addition, the acquisitions of businesses involve risks that the businesses acquired will not perform in accordance with expectations, that the expected synergies associated with acquisitions will not be achieved and that business judgments concerning the value, strengths and weaknesses of the businesses acquired will prove incorrect, which could have an adverse effect on our business, financial condition and results of operations.

~~Our existing goodwill and other intangible assets could become impaired, which may require us to takenon-cash~~ ~~charges.~~

Under current accounting guidelines, we evaluate our goodwill and other intangible assets for potential impairment annually or more frequently if circumstances indicate impairment may have occurred. We perform the required annual goodwill impairment evaluation in the fourth quarter of each year. Any impairment of goodwill or other intangible assets would result in a~~non-cash~~ ~~charge against earnings, and such charge could materially adversely affect our reported results of operations and the market price of our common stock in future periods.~~

2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults ~~upon~~Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits


~~Exhibit No.~~		~~Description~~

31.1*
Exhibit No.				Description

	31.1*			Certification of Chief Executive Officer pursuant to Rule13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002.

31.2*
	31.2*			Certification of Chief Financial Officer pursuant to Rule13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of ~~2002~~2002.

32.1**
	32.1**			Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002~~2002.

101.INS*		~~XBRL Instance Document~~

101.SCH*		~~XBRL Taxonomy Extension Schema Document~~

101.CAL* 101		~~XBRL Taxonomy Calculation Linkbase Document~~	The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Net and Comprehensive Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

101.DEF*		~~XBRL Taxonomy Extension Definition Document~~

101.LAB*		~~XBRL Taxonomy Label Linkbase Document~~

101.PRE* 104			Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Presentation Linkbase Document~~and contained in Exhibit 101)

*	Filed herewith.

**	Furnished, not filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		~~Marcus~~ ~~& Millichap, Inc~~.

~~Date: November 9, 2018~~		~~By:~~	~~/s/ Hessam Nadji~~
			~~Hessam Nadji~~ ~~President and Chief Executive Officer~~ ~~(Principal Executive Officer)~~ Marcus & Millichap, Inc .

~~Date: November 9, 2018~~		~~By:~~	~~/s/ Martin E. Louie~~
Date:	November 8, 2019	By:	/s/ Hessam Nadji
			Hessam Nadji President and Chief Executive Officer (Principal Executive Officer)

Date:	November 8, 2019	By:	/s/ Martin E. Louie
			Martin E. Louie Chief Financial Officer (Principal Financial Officer)


	September 30, 2018 (Unaudited)			December 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	181,020		$	220,786
Commissions receivable		5,548			9,586
Prepaid expenses		6,516			9,661
Income tax receivable		—			1,308
Marketable securities,available-for-sale		120,701			73,560
Other assets, net		7,572			5,529

Total current assets		321,357			320,430
Prepaid rent		14,517			15,392
Property and equipment, net		18,169			17,153
Marketable securities,available-for-sale		85,135			52,099
Assets held in rabbi trust		9,115			8,787
Deferred tax assets, net		23,635			22,640
Goodwill and other intangible assets, net		5,639			—
Other assets		32,568			23,163

Total assets	$	510,135		$	459,664

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other liabilities	$	8,780		$	9,202
Notes payable to former stockholders		1,087			1,035
Deferred compensation and commissions		29,839			49,180
Income tax payable		5,963			—
Accrued bonuses and other employee related expenses		23,103			23,842

Total current liabilities		68,772			83,259
Deferred compensation and commissions		45,418			49,361
Notes payable to former stockholders		6,564			7,651
Deferred rent and other liabilities		6,690			4,505

Total liabilities		127,444			144,776

Commitments and contingencies		—			—

Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized shares – 25,000,000; issued and outstanding shares – none at September 30, 2018 and December 31, 2017, respectively		—			—
Common stock, $0.0001 par value:
Authorized shares – 150,000,000; issued and outstanding shares – 38,651,360 and 38,374,011 at September 30, 2018 and December 31, 2017, respectively		4			4
Additionalpaid-in capital		97,375			89,877
Stock notes receivable from employees		(4	)		(4	)
Retained earnings		285,116			224,071
Accumulated other comprehensive income		200			940

Total stockholders’ equity		382,691			314,888

Total liabilities and stockholders’ equity	$	510,135		$	459,664


	September 30, 2019 (Unaudited)			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	226,081		$	214,683
Commissions receivable		6,316			4,948
Prepaid expenses		9,330			7,904
Income tax receivable		7,786			—
Marketable securities, available-for-sale		124,475			137,436
Other assets, net		12,352			6,368

Total current assets		386,340			371,339
Prepaid rent		—			13,892
Property and equipment, net		21,609			19,550
Operating lease right-of-use assets, net		90,165			—
Marketable securities, available-for-sale		70,785			83,209
Assets held in rabbi trust		9,102			8,268
Deferred tax assets, net		18,513			22,959
Goodwill and other intangible assets, net		14,647			15,385
Other assets		53,432			31,778

Total assets	$	664,593		$	566,380

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other liabilities	$	11,003		$	11,035
Notes payable to former stockholders		6,564			1,087
Deferred compensation and commissions		32,450			47,910
Income tax payable		—			4,486
Operating lease liabilities		17,500			—
Accrued bonuses and other employee related expenses		16,964			28,338

Total current liabilities		84,481			92,856
Deferred compensation and commissions		41,695			49,887
Notes payable to former stockholders		—			6,564
Operating lease liabilities		64,316			—
Deferred rent and other liabilities		2,001			7,499

Total liabilities		192,493			156,806

Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized shares – 25,000,000; issued and outstanding shares – NaN at September 30, 2019 and December 31, 2018, respectively		—			—
Common stock, $ 0.0001 par value:
Authorized shares – 150,000,000; issued and outstanding shares – 39,132,236 and 38,814,464 at September 30, 2019 and December 31, 2018, respectively		4			4
Additional paid-in capital		102,142			97,458
Stock notes receivable from employees		(4	)		(4	)
Retained earnings		367,550			311,341
Accumulated other comprehensive income		2,408			775

Total stockholders’ equity		472,100			409,574

Total liabilities and stockholders’ equity	$	664,593		$	566,380


	Three Months Ended September 30, 2019
										Additional Paid-In			Stock Notes Receivable From			Retained		Accumulated Other Comprehensive
	Preferred Stock				Common Stock					Additional Paid-In			Stock Notes Receivable From			Retained		Accumulated Other Comprehensive
	Shares		Amount		Shares			Amount		Capital			Employees			Earnings		Income		Total
Balance at June 30, 2019		—	$	—		39,090,861		$	4	$	100,098		$	(4	)	$	348,258	$	2,157	$	450,513
Net and comprehensive income		—		—		—			—		—			—			19,292		251		19,543
Stock-based award activity
Stock-based compensation		—		—		—			—		2,114			—			—		—		2,114
Shares issued pursuant to employee stock purchase plan		—		—		—			—		—			—			—		—		—
Issuance of common stock for vesting of restricted stock units		—		—		41,257			—		—			—			—		—		—
Issuance of common stock for unvested restricted stock awards		—		—		2,264			—		—			—			—		—		—
Shares withheld related to net share settlement of stock-based awards		—		—		(2,146	)		—		(70	)		—			—		—		(70	)

Balance as of September 30, 2019		—	$	—		39,132,236		$	4	$	102,142		$	(4	)	$	367,550	$	2,408	$	472,100


	Three Months Ended September 30, 2018
	Preferred Stock				Common Stock					Additional Paid-In			Stock Notes Receivable From			Retain ed		Accumulated Other Comprehensive
	Shares		Amount		Shares			Amount		Capital			Employees			Earnings		Income (Loss)			Total
Balance at June 30, 2018		—	$	—		38,621,712		$	4	$	94,291		$	(4	)	$	264,262	$	344		$	358,897
Net and comprehensive income		—		—		—			—		—			—			20,854		(144	)		20,710
Stock-based award activity
Stock-based compensation		—		—		—			—		3,147			—			—		—			3,147
Issuance of common stock for vesting of restricted stock units		—		—		31,235			—		—			—			—		—			—
Shares withheld related to net share settlement of stock-based awards		—		—		(1,587	)		—		(63	)		—			—		—			(63	)

Balance as of September 30, 2018		—	$	—		38,651,360		$	4	$	97,375		$	(4	)	$	285,116	$	200		$	382,691


	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities
Net income	$	61,032		$	43,044
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		4,529			3,975
Provision for bad debt expense		52			33
Stock-based compensation		8,919			6,173
Deferred taxes, net		(735	)		1,541
Net realized (gains) losses on marketable securities,available-for-sale		(12	)		(2	)
Othernon-cash items		(148	)		(46	)
Changes in operating assets and liabilities:
Commissions receivable		4,183			594
Prepaid expenses		3,145			2,266
Prepaid rent		875			(1,831	)
Asset held in rabbi trust		—			(700	)
Other assets		(9,066	)		(12,780	)
Accounts payable and other liabilities		(1,552	)		(1,359	)
Income tax receivable/payable		7,271			2,477
Accrued bonuses and other employee related expenses		(558	)		(1,763	)
Deferred compensation and commissions		(23,739	)		(16,760	)
Deferred rent and other liabilities		817			476

Net cash provided by operating activities		55,013			25,338
Cash flows from investing activities
Acquisitions, net of cash received		(6,990	)		—
Purchases of marketable securities,available-for-sale		(168,672	)		(37,561	)
Proceeds from sales and maturities of marketable securities,available-for-sale		88,027			14,950
Issuances of employee notes receivable		(126	)		(432	)
Payments received on employee notes receivable		12			9
Proceeds from sale of property and equipment		—			10
Purchase of property and equipment		(4,574	)		(4,987	)

Net cash used in investing activities		(92,323	)		(28,011	)
Cash flows from financing activities
Taxes paid related to net share settlement of stock-based awards		(1,777	)		(1,442	)
Proceeds from issuance of shares pursuant to employee stock purchase plan		356			392
Principal payments on notes payable to former stockholders		(1,035	)		(986	)

Net cash used in financing activities		(2,456	)		(2,036	)

Net decrease in cash and cash equivalents		(39,766	)		(4,709	)
Cash and cash equivalents at beginning of period		220,786			187,371

Cash and cash equivalents at end of period	$	181,020		$	182,662


	Nine Months Ended September 30, 2019
													Stock Notes					Accumulated
	Preferred Stock				Common Stock					Additional Paid-I n			Receivable From			Retained		Other Comprehensive
	Shares		Amount		Shares			Amount		Capital			Employees			Earnings		Income			Total
Balance at December 31, 2018		—	$	—		38,814,464		$	4	$	97,458		$	(4	)	$	311,341	$	775		$	409,574
Net and comprehensive income		—		—		—			—		—			—			56,209		1,633			57,842
Stock-based award activity
Stock-based compensation		—		—		—			—		7,040			—			—		—			7,040
Shares issued pursuant to employee stock purchase plan		—		—		11,022			—		338			—			—		—			338
Issuance of common stock for vesting of restricted stock units		—		—		366,476			—		—			—			—		—			—
Issuance of common stock for unvested restricted stock awards		—		—		12,806			—		—			—			—		—			—
Shares withheld related to net share settlement of stock-based awards		—		—		(72,532	)		—		(2,694	)		—			—		—			(2,694	)

Balance as of September 30, 2019		—	$	—		39,132,236		$	4	$	102,142		$	(4	)	$	367,550	$	2,408		$	472,100


	Nine Months Ended September 30, 2018
										Additional Paid-In			Stock Notes Receivable					Accumulated Other
	Preferred Stock				Common Stock					Additional Paid-In			From			Retained		Comprehensive
	Shares		Amount		Shares			Amount		Capital			Employees			Earnings		Income (Loss)			Total
Balance at December 31, 2017		—	$	—		38,374,011		$	4	$	89,877		$	(4	)	$	224,071	$	940		$	314,888
Cumulative effect of a change in accounting principle		—		—		—			—		—			—			13		(13	)		—

Balance at January 1, 2018, as adjusted		—		—		38,374,011			4		89,877			(4	)		224,084		927			314,888
Net and comprehensive income		—		—		—			—		—			—			61,032		(727	)		60,305
Stock-based award activity
Stock-based compensation		—		—		—			—		8,919			—			—		—			8,919
Shares issued pursuant to employee stock purchase plan		—		—		13,028			—		356			—			—		—			356
Issuance of common stock for vesting of restricted stock units		—		—		305,975			—		—			—			—		—			—
Issuance of common stock for unvested restricted stock awards		—		—		12,852			—		—			—			—		—			—
Shares withheld related to net share settlement of stock-based awards		—		—		(54,506	)		—		(1,777	)		—			—		—			(1,777	)

Balance as of September 30, 2018		—	$	—		38,651,360		$	4	$	97,375		$	(4	)	$	285,116	$	200		$	382,691


	September 30, 2018							December 31, 2017
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization		Net Book Value
Goodwill and intangible assets:
Goodwill⁽¹⁾	$	4,186	$	—		$	4,186	$	—	$	—	$	—
Intangible assets⁽¹⁾		1,571		(118	)		1,453		—		—		—

	$	5,757	$	(118	)	$	5,639	$	—	$	—	$	—


	September 30, 2018			December 31, 2017
Beginning balance	$	—		$	—
Additions from acquisition		1,571			—
Amortization		(118	)		—

	$	1,453		$	—


	September 30, 2018
Remainder of 2018	$	88
2019		340
2020		327
2021		245
2022		184
Thereafter		269

	$	1,453


	Unrealized gains and (losses) of available-for- sale securities			Foreign currency translation ⁽³⁾		Total
Beginning balance, December 31, 2017	$	(62	)	$	1,002	$	940
Cumulative effect of change in accounting principle⁽¹⁾		(13	)		—		(13	)

Balance at January 1, 2018, as adjusted		(75	)		1,002		927

Other comprehensive (loss) income before reclassifications		(779	)		44		(735	)
Amounts reclassified from accumulated other comprehensive (loss) income⁽²⁾		8			—		8

Net current-period other comprehensive (loss) income		(771	)		44		(727	)

	$	(846	)	$	1,046	$	200


	RSA Grants to Non-employee Directors			RSU Grants to Employees			RSU Grants to Independent Contractors			Total			Weighted- Average Grant Date Fair Value Per Share
Nonvested shares at December 31, 2017		30,732			500,859			450,264			981,855		$	23.90

Granted
February 2018		—			106,419			20,293			126,712
March 2018		—			15,000			—			15,000
May 2018		12,852			4,854			14,280			31,986
August 2018		—			10,407			63,651			74,058

Total Granted		12,852			136,680			98,224			247,756			34.92
Vested		(16,488	)		(142,433	)		(163,542	)		(322,463	)		22.06
Transferred		—			(7,356	)		7,356			—			26.52
Forfeited/canceled		—			(1,960	)		(5,744	)		(7,704	)		28.76

Nonvested shares at September 30, 2018⁽¹⁾		27,096			485,790			386,558			899,444		$	27.56

Unrecognized stock-based compensation expense as of September 30, 2018⁽²⁾	$	526		$	10,884		$	10,621		$	22,031

Weighted average remaining vesting period (years) as of September 30, 2018		0.95			3.27			3.27			3.22


	September 30, 2018
2018		237,052
2019		—
2020		—
2021		60,373
2022		281,193

		578,618


	Three Months Ended September 30, 2018			Percentage of Revenue			Three Months Ended September 30, 2017			Percentage of Revenue			Change
													Change
													Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	191,980			91.2	%	$	169,357			92.4	%	$	22,623			13.4	%
Financing fees		15,947			7.6			11,368			6.2			4,579			40.3
Other revenues		2,663			1.2			2,616			1.4			47			1.8

Total revenues		210,590			100.0			183,341			100.0			27,249			14.9

Operating expenses:
Cost of services		132,896			63.1			114,803			62.6			18,093			15.8
Selling, general, and administrative expense		48,659			23.1			42,480			23.2			6,179			14.5
Depreciation and amortization expense		1,651			0.8			1,375			0.7			276			20.1

Total operating expenses		183,206			87.0			158,658			86.5			24,548			15.5

Operating income		27,384			13.0			24,683			13.5			2,701			10.9
Other income (expense), net		2,127			1.0			1,172			0.6			955			81.5
Interest expense		(342	)		(0.2	)		(370	)		(0.2	)		28			(7.6	)

Income before provision for income taxes		29,169			13.8			25,485			13.9			3,684			14.5
Provision for income taxes		8,315			3.9			10,010			5.5			(1,695	)		(16.9	)

Net income	$	20,854			9.9	%	$	15,475			8.4	%	$	5,379			34.8	%

Adjusted EBITDA⁽¹⁾	$	32,155			15.3	%	$	28,499			15.5	%	$	3,656			12.8	%

Earnings per share:
Basic	$	0.53					$	0.40
Diluted	$	0.53					$	0.39
Weighted average common shares outstanding:
Basic		39,191						39,033
Diluted		39,484						39,204


	Nine Months Ended September 30, 2018			Percentage of Revenue			Nine Months Ended September 30, 2017			Percentage of Revenue			Change
													Change
													Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	536,145			91.7	%	$	472,069			91.3	%	$	64,076			13.6	%
Financing fees		41,234			7.1			34,131			6.6			7,103			20.8
Other revenues		7,154			1.2			10,724			2.1			(3,570	)		(33.3	)

Total revenues		584,533			100.0			516,924			100.0			67,609			13.1

Operating expenses:
Cost of services		354,414			60.6			314,827			60.9			39,587			12.6
Selling, general, and administrative expense		145,792			24.9			129,393			25.0			16,399			12.7
Depreciation and amortization expense		4,529			0.8			3,975			0.8			554			13.9

Total operating expenses		504,735			86.3			448,195			86.7			56,540			12.6

Operating income		79,798			13.7			68,729			13.3			11,069			16.1
Other income (expense), net		5,060			0.8			3,005			0.6			2,055			68.4
Interest expense		(1,054	)		(0.2	)		(1,126	)		(0.2	)		72			(6.4	)

Income before provision for income taxes		83,804			14.3			70,608			13.7			13,196			18.7
Provision for income taxes		22,772			3.9			27,564			5.4			(4,792	)		(17.4	)

Net income		61,032			10.4	%	$	43,044			8.3	%	$	17,988			41.8	%

Adjusted EBITDA⁽¹⁾	$	93,309			16.0	%	$	79,589			15.4	%	$	13,720			17.2	%

Earnings per share:
Basic	$	1.56					$	1.10
Diluted	$	1.55					$	1.10
Weighted average common shares outstanding:
Basic		39,147						38,995
Diluted		39,359						39,136