SECURITIES AND EXCHANGE COMMISSION
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
June 30, 2019 March 31, 2020
| 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
(Exact name of registrant as specified in its Charter)
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(State or Other Jurisdiction of Incorporation or Organization) | | |
Incorporation or Organization)
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23975 Park Sorrento, Suite 400 | | |
(Address of Principal Executive Offices) | | |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.0001 per share | | | | | | |
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
☒
No
☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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
☒
No
☐
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.
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Large accelerated filer | | | | | | | | | | |
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| | | | Smaller reporting company | | |
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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
☐
No
☒
Number of shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding as of August 1, 2019May 4, 2020 was 39,090,86139,273,941 shares.
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PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements |
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except for shares and par value)
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Cash and cash equivalents | | $ | | | | $ | | |
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Marketable securities, available-for-sale | | | | | | | | |
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Property and equipment, net | | | | | | | | |
Operating lease right-of-use assets, net | | | | | | | | |
Marketable securities, available-for-sale | | | | | | | | |
Assets held in rabbi trust | | | | | | | | |
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Goodwill and other intangible assets, net | | | | | | | | |
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| | $ | | | | $ | | |
Liabilities and stockholders’ equity | | | | | | | | |
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Accounts payable and other liabilities | | $ | | | | $ | | |
Notes payable to former stockholders | | | | | | | | |
Deferred compensation and commissions | | | | | | | | |
| | | | | | | | |
Operating lease liabilities | | | | | | | | |
Accrued bonuses and other employee related expenses | | | | | | | | |
| | | | | | | | |
Total current liabilities | | | | | | | | |
Deferred compensation and commissions | | | | | | | | |
Notes payable to former stockholders | | | | | | | | |
Operating lease liabilities | | | | | | | | |
Deferred rent and other liabilities | | | | | | | | |
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Commitments and contingencies | | | | | | | | |
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Preferred stock, $ 0.0001 par value: | | | | | | | | |
Authorized shares – 25,000,000 ; issued and outstanding shares – none at June 30, 2019 and December 31, 2018, respectively | | | | | | | | |
Common stock, $ 0.0001 par value: | | | | | | | | |
Authorized shares – 150,000,000 ; issued and outstanding shares – 39,090,861 and 38,814,464 at June 30, 2019 and December 31, 2018, respectively | | | | | | | | |
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Stock notes receivable from employees | | | | ) | | | | ) |
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Accumulated other comprehensive income | | | | | | | | |
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Total stockholders’ equity | | | | | | | | |
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Total liabilities and stockholders’ equity | | $ | | | | $ | | |
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Cash and cash equivalents | | $ | | | | $ | | |
Commissions receivable, net | | | | | | | | |
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Marketable debt securities, available-for-sale (includes amortized cost and an allowance for credit losses of $143,115 and $0, respectively, at March 31, 2020) | | | | | | | | |
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Property and equipment, net | | | | | | | | |
Operating lease right-of-use assets, net | | | | | | | | |
Marketable debt securities, available-for-sale (includes amortized cost and an allowance for credit losses of $44,954 and $0, respectively, at March 31, 2020) | | | | | | | | |
Assets held in rabbi trust | | | | | | | | |
| | | | | | | | |
Goodwill and other intangible assets, net | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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| | $ | | | | $ | | |
| | | | | | | | |
Liabilities and stockholders’ equity | | | | | | | | |
| | | | | | | | |
Accounts payable and other liabilities | | $ | | | | $ | | |
Notes payable to former stockholders | | | | | | | | |
Deferred compensation and commissions | | | | | | | | |
Operating lease liabilities | | | | | | | | |
Accrued bonuses and other employee related expenses | | | | | | | | |
| | | | | | | | |
Total current liabilities | | | | | | | | |
Deferred compensation and commissions | | | | | | | | |
Operating lease liabilities | | | | | | | | |
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Commitments and contingencies | | | | | | | | |
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Preferred stock, $0.0001 par value: | | | | | | | | |
Authorized shares – 25,000,000; issued and outstanding shares – NaN at March 31, 2020 and December 31, 2019, respectively | | | | | | | | |
Common stock, $0.0001 par value: | | | | | | | | |
Authorized shares – 150,000,000; issued and outstanding shares – 39,272,429 and 39,153,195 at March 31, 2020 and December 31, 2019, respectively | | | | | | | | |
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Stock notes receivable from employees | | | | ) | | | | ) |
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Accumulated other comprehensive income | | | | | | | | |
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Total stockholders’ equity | | | | | | | | |
| | | | | | | | |
Total liabilities and stockholders’ equity | | $ | | | | $ | | |
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See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF NET AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | |
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Real estate brokerage commissions | | $ | | | | $ | | | | $ | | | | $ | | |
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| | | | | | | | | | | | | | | | |
Selling, general and administrative expense | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
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Other income (expense), net | | | | | | | | | | | | | | | | |
| | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | |
Income before provision for income taxes | | | | | | | | | | | | | | | | |
Provision for income taxes | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | | | | | |
Marketable securities, available-for-sale: | | | | | | | | | | | | | | | | |
Change in unrealized gains (losses) | | | | | | | | ) | | | | | | | | ) |
Less: reclassification adjustment for net (gains) losses included in other income (expense), net | | | | ) | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
Net change, net of tax of $ 283 , $ (57) , $ 571 and $ (221) for the three and six months ended June 30, 2019 and 2018, respectively | | | | | | | | ) | | | | | | | | ) |
Foreign currency translation (loss) gain, net of tax of $ 0 for each of the three and six months ended June 30, 2019 and 2018 | | | | ) | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
Total other comprehensive income (loss) | | | | | | | | ) | | | | | | | | ) |
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| | $ | | | | $ | | | | $ | | | | $ | | |
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| | $ | | | | $ | | | | $ | | | | $ | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | |
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Real estate brokerage commissions | | $ | | | | $ | | |
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Selling, general and administrative expense | | | | | | | | |
Depreciation and amortization expense | | | | | | | | |
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Other (expense) income, net | | | | ) | | | | |
| | | | ) | | | | ) |
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Income before provision for income taxes | | | | | | | | |
Provision for income taxes | | | | | | | | |
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Other comprehensive (loss) income: | | | | | | | | |
Marketable debt securities, available-for-sale: | | | | | | | | |
Change in unrealized (losses) gains | | | | ) | | | | |
Less: reclassification adjustment for net losses (gains) included in other (expense) income, net | | | | | | | | ) |
| | | | | | | | |
Net change, net of tax of $(168) and $288 for the three months ended March 31, 2020 and 2019, respectively | | | | ) | | | | |
Foreign currency translation gain (loss), net of tax of $0 for each of the three months ended March 31, 2020 and 2019 | | | | | | | | ) |
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Total other comprehensive income | | | | | | | | |
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| | $ | | | | $ | | |
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| | $ | | | | $ | | |
| | $ | | | | $ | | |
Weighted average common shares outstanding: | | | | | | | | |
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See accompanying notes to condensed consolidated financial statements.
CONDENSED Consolidated StatementS of Stockholders’ Equity
(in thousands, except for shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 | |
| | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income | | | | |
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Balance at December 31, 2019 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
Cumulative effect of a change in accounting principle, net of tax | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2020, as adjusted | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | |
Net and comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based award activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for vesting of restricted stock units | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares withheld related to net share settlement of stock-based awards | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2020 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| | | | | | | | | | | | | | | | | | Accumulated Other Comprehensive | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2019 | | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
Net and comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based award activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued pursuant to employee stock purchase plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for vesting of restricted stock units | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for unvested restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares withheld related to net share settlement of stock-based awards | | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2019 | | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 20 19 | |
| | | | | | | | | | | | | | | | | Accumulated Other Comprehensive Income | | | | |
| | | | |
| | | | | | | | | | | | |
Balance at December 31, 2018 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
Net and comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based award activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for vesting of restricted stock units | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares withheld related to net share settlement of stock-based awards | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of March 31, 2019 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
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| | Three Months Ended June 30, 2018 | |
| | | | | | | | | | | | | | | | | Accumulated Other Comprehensive | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at March 31, 2018 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
Net and comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | |
Stock-based award activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued pursuant to employee stock purchase plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for vesting of restricted stock units | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for unvested restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares withheld related to net share settlement of stock-based awards | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2018 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS
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| | | |
| | | | | | |
Cash flows from operating activities | | | | | | | | |
| | $ | | | | $ | | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | |
Depreciation and amortization expense | | | | | | | | |
Amortization of right-of-use assets | | | | | | | | |
| | | | ) | | | | ) |
| | | | | | | | |
| | | | | | | | |
| | | 1,024 | | | | — | |
Net realized (gains) losses on marketable debt securities, available-for-sale | | | | ) | | | | |
| | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
| | | | | | | | ) |
| | | | | | | | ) |
| | | | ) | | | | ) |
| | | | ) | | | | ) |
Accounts payable and other liabilities | | | | ) | | | | |
Income tax receivable/payable | | | | | | | | |
Accrued bonuses and other employee related expenses | | | | ) | | | | ) |
Deferred compensation and commissions | | | | ) | | | | ) |
Operating lease liabilities | | | | ) | | | | ) |
| | | | ) | | | | |
| | | | | | | | |
Net cash used in operating activities | | | | ) | | | | ) |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Acquisition, net of cash received | | | | ) | | | | |
Purchases of marketable debt securities, available-for-sale | | | | ) | | | | ) |
Proceeds from sales and maturities of marketable debt securities, available-for-sale | | | | | | | | |
Issuances of employee notes receivable | | | | ) | | | | |
Payments received on employee notes receivable | | | | | | | | |
Purchase of property and equipment | | | | ) | | | | ) |
| | | | | | | | |
Net cash provided by investing activities | | | | | | | | |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Taxes paid related to net share settlement of stock-based awards | | | | ) | | | | ) |
Principal payments on stock appreciation rights liability | | | | ) | | | | |
| | | | | | | | |
Net cash used in financing activities | | | | ) | | | | ) |
| | | | | | | | |
Effect of currency exchange rate changes on cash and cash equivalents | | | | ) | | | | |
| | | | | | | | |
Net decrease in cash and cash equivalents | | | | ) | | | | ) |
Cash and cash equivalents at beginning of period | | | | | | | | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | | | | $ | | |
| | | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | | |
Interest paid during the period | | $ | | | | $ | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
CONDENSED Consolidated StatementS of Stockholders’ Equity
(continued)(in thousands, except for shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | |
| | | | | | | | | | | | | | | | | Accumulated Other Comprehensive | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
Net and comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock-based award activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued pursuant to employee stock purchase plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for vesting of restricted stock units | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for unvested restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares withheld related to net share settlement of stock-based awards | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2019 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 | |
| | | | | | | | | | | | | | | | | Accumulated Other Comprehensive | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2017 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
Cumulative effect of a change in accounting principle | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at January 1, 2018, as adjusted | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | |
Net and comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | |
Stock-based award activity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued pursuant to employee stock purchase plan | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for vesting of restricted stock units | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock for unvested restricted stock awards | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares withheld related to net share settlement of stock-based awards | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2018 | | | | | | $ | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to condensed consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTSof
CASH FLOWS | | | | | | | | |
| | | |
| | | | | | |
Cash flows from operating activities | | | | | | | | |
| | $ | | | | $ | | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | | | | |
Depreciation and amortization expense | | | | | | | | |
Amortization of right-of-use assets | | | | | | | | |
Recovery of bad debt expense | | | | ) | | | | ) |
| | | | | | | | |
| | | | | | | | |
Net realized gains on marketable securities, available-for-sale | | | | ) | | | | ) |
| | | | ) | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
| | | | ) | | | | |
| | | | ) | | | | |
| | | | | | | | |
| | | | ) | | | | ) |
Accounts payable and other liabilities | | | | | | | | ) |
Income tax receivable/payable | | | | ) | | | | |
Accrued bonuses and other employee related expenses | | | | ) | | | | ) |
Deferred compensation and commissions | | | | ) | | | | ) |
Operating lease liabilities | | | | ) | | | | |
Deferred rent and other liabilities | | | | ) | | | | |
| | | | | | | | |
Net cash (used in) provided by operating activities | | | | ) | | | | |
| | | | | | | | |
Cash flows from investing activities | | | | | | | | |
Acquisition, net of cash received | | | | | | | | ) |
Purchases of marketable securities, available-for-sale | | | | ) | | | | ) |
Proceeds from sales and maturities of marketable securities, available-for-sale | | | | | | | | |
Issuances of employee notes receivable | | | | | | | | ) |
Payments received on employee notes receivable | | | | | | | | |
Purchase of property and equipment | | | | ) | | | | ) |
| | | | | | | | |
Net cash provided by (used in) investing activities | | | | | | | | ) |
| | | | | | | | |
Cash flows from financing activities | | | | | | | | |
Taxes paid related to net share settlement of stock-based awards | | | | ) | | | | ) |
Proceeds from issuance of shares pursuant to employee stock purchase plan | | | | | | | | |
Principal payments on notes payable to former stockholders | | | | ) | | | | ) |
Principal payments on stock appreciation rights liability | | | | | | | | |
| | | | | | | | |
Net cash used in financing activities | | | | ) | | | | ) |
| | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | | ) | | | | |
Cash and cash equivalents at beginning of period | | | | | | | | |
| | | | | | | | |
Cash and cash equivalents at end of period | | $ | | | | $ | | |
Supplemental disclosures of cash flow information | | | | | | | | |
Interest paid during the period | | $ | | | | $ | | |
| | $ | | | | $ | | |
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Description of Business and Basis of Presentation |
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 June 30, 2019,March 31, 2020, MMI operated 80operates 82 offices in the United States and Canada through its wholly-owned subsidiaries, including the operations of Marcus & Millichap Capital Corporation.
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, Marcus & Millichap Real Estate Investment Services, Inc. (“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
onOctober 30,i
n November 2013.
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
and Article
10-01
of Regulation
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,
20182019 included in the Company’s Annual Report on Form
10-K
filed on March
1, 20192, 2020 with the SEC. The results of the three
and six months ended
June 30, 2019March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31,
2019,2020, for other interim periods or future years.
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.
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.
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)servicing) 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.
Certain prior-period amounts in the condensed consolidated balance sheet and statement of cash flows, Note 137 – “Income Taxes”“Selected Balance Sheet Data” and Note 10 – “Fair Value Measurements” have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported condensed consolidated results of operations or any totals or subtotals therein.operations.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. | Accounting Policies and Recent Accounting Pronouncements |
The complete list of the Company’s accounting policies is included in the Company’s Annual
ReportReport on Form
10-K
filed on March
1, 20192, 2020 with the SEC. The following are updated, or new accounting
policies.policies related to the adoption of the credit losses standard.Leases
Cash and Cash EquivalentsThe Company
utilizes operating leasesconsiders cash equivalents to include short-term, highly liquid investments with maturities of three months or less when purchased. Portions of the balance of cash and cash equivalents were held in financial institutions, various money market funds with fixed and floating net asset values and short-term commercial paper. Money market funds have floating net asset values and may be subject to gating or liquidity fees. The Company assesses short-term commercial papers for
allimpairment in connection with investments in marketable debt securities,available-for-sale.
The likelihood of realizing material losses from cash and cash equivalents, including the excess of cash balances over federally insured limits, is remote.Commissions Receivable, Net
Commissions receivable, net consists of commissions earned on brokerage and financing transactions for which payment has not yet been received. The Company evaluates the need for an allowance for credit losses based on consideration of historical experience, current conditions and forecasts of future economic conditions. The majority of commissions receivable are settled within 10 days after the close of escrow. The allowance for credit losses for commissions receivable was 0t material as of March 31, 2020 and December 31, 2019.
Advances and loans, net includes amounts advanced and loans due from the Company’s investment sales and financing professionals.
In order to attract and retain highly skilled professionals, from time to time, the Company advances funds to its facilitiesinvestment sales and autos.financing professionals. The advances are typically in the form of forgivable loans that have terms that are generally between 5 and 10 years. The principal amount of a forgivable loan and accrued interest are forgiven over the term of the loan, so long as the investment sales and financing professionals continue to be a service provider with the Company, or upon achieving contractual performance criteria. Amounts forgiven are charged to selling, general and administrative expense at the time the amounts are forgiven. If the investment sales and financing professional’s relationship with the Company is terminated before the amount advanced is forgiven, the unforgiven amount becomes due and payable. The Company evaluates the need for an allowance for credit losses based on amounts advanced and expected forgiveness, in consideration of historical experience, current conditions and forecasts of future economic conditions. Estimated credit losses, net of any reversals, are charged to credit loss expense included in selling, general and administrative expense. Amounts are generally written off when amounts are determined to be no longer collectable. Accrued interest, when applicable, has historically been immaterial.
The Company, from time to time, enters into various agreements with certain of its investment sales and financing professionals whereby these individuals receive loans. The notes receivable along with stated interest, are typically collected from future commissions or repaid based on the terms stipulated in the respective agreements that are generally between 1 and 7 years . The Company evaluates the need for an allowance for credit losses for the loans based on historical experience, current conditions and reasonable and forecasts of future economic conditions. Estimated credit losses, net of any reversals, are charged to credit loss expense included in selling, general and administrative expense. Amounts are generally written off when amounts are determined to be no longer collectable.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Investments in Marketable Debt Securities,Available-for-Sale
The Company maintains a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities (“ABS”) and other. The Company considers its investments in marketable debt securities to beavailable-for-sale,
and accordingly are recorded at their fair values. The Company determines
if an arrangement is a leasethe appropriate classification of investments in marketable debt securities at
inception.Right-of-use
assets (“ROU assets”) represent the
Company’s right to use an underlying asset fortime of purchase. Interest along with accretion and amortization of purchase premiums and discounts from the
lease termpurchase date through the estimated maturity date, including consideration of variable maturities and
lease liabilities represent the Company’s contractual
obligation to make lease payments under the lease. Operating leasescall provisions, are included in
operating lease ROU assets,non-current,
and operating lease liabilities current andnon-current
captionsother (expense) income, net in the condensed consolidated
balance sheets.statements of net and comprehensive income. The Company typically invests in highly-rated debt securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires substantially all investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities. Operating lease ROUThe Company reviews quarterly its investment portfolio of all securities in an unrealized loss position to determine if an impairment charge or credit reserve is required. The Company excludes accrued interest from both the fair value and the amortized cost basis of marketable debt securities,available-for-sale,
for the purposes of identifying and measuring an impairment. An investment is impaired if the fair value is less than its amortized cost basis. Impairment relating to credit losses is recorded through a reduction in the amortized cost of the security or an allowance for credit losses and credit loss expense (included in selling, general and administrative expense), limited by the amount that the fair value is less than the amortized cost basis. Impairment that has not been recorded as a credit loss is recorded through other comprehensive income (loss), net of applicable taxes. The Company made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables. The Company evaluateswrite-off
of accrued interest receivable by the major security-type level at the time credit loss exists for the underlying security.Determining whether a credit loss exists requires a high degree of judgment and the Company considers both qualitative and quantitative factors in making its determination. The Company evaluates its intent to sell, or whether the Company will more likely than not be required to sell, the security before recovery of its amortized cost basis. For all securities in an unrealized loss position, the Company evaluates, among other items, the extent and length of time the fair market value of a security is less than its amortized cost, time to maturity, duration, seniority, the financial condition of the issuer including credit ratings, any changes thereto and relative default rates, leverage ratios, availability of liquidity to make principle and interest payments, performance indicators of the underlying assets,
analyst reports and
liabilities are recognized onrecommendations and changes in base and market interest rates. If qualitative and quantitative analysis is sufficient to conclude that an impairment related to credit losses does not exist, the
commencement date based onCompany typically does not perform further quantitative analysis to estimate the present value of
lease payments over the lease term. Lease agreements may contain periods of free rent or reduced rent, predetermined fixed increases in the minimum rent and renewal or termination options, all impacting the determination of the lease term and lease paymentscash flows expected to be
used in calculatingcollected from the
lease liability. Certain facility leases provide for rental escalations related to increases in the lessors’ direct operating expenses. The Company uses the implicit rate in the lease when determinable. As mostdebt security. Estimates of
expected future cash flows are the Company’s
leases do not have a determinable implicit rate, the Company uses a derived incremental borrowing ratebest estimate based on
borrowing options under its credit agreement. The Company applies a spread over treasury rates for the indicated term of the lease based on the information available on the commencement date of the lease. The Company typically leases general purposebuilt-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 assetpast events, current conditions and
considered in the determination of the lease cost. The Company has lease agreements with lease andnon-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, parkingreasonable and
other lease related costs, which are determined principally based on billings from landlords.supportable economic forecasts.ConcentrationConcentrations 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 assetsnon-current),
investments in marketable
debt securities,
available-for-sale,
security deposits (included under other assets,
non-current)
and commissions
receivable.receivable, net. 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
debt 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 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 maintains allowances, as needed, for estimated credit losses based on management’s assessment of the likelihood of collection. For the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, no0 transaction represented 10% or more of total revenues. Further, while one 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 six months ended June 30,March 31, 2020 and 2019, and 2018, the Company’s Canadian operations represented less thanapproximately 2% and 1% of total revenues.revenues, respectively.
During the three and six months ended June 30,March 31, 2020, 1 office represented 10% or more of total revenues. During the three months ended March 31, 2019, and 2018, no0 office represented 10% or more of total revenues.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In
FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.
2016-02,
, 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 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. At 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 sheet, but did not have a material impact on the Company’s condensed consolidated statements of net and comprehensive 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 andnon-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
(“ASU2017-08”).
The Company adopted the new standard effective January 1, 2019. ASU2017-08
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 ASU2017-08
did not have a material effect on the Company’s condensed consolidated financial statements.In June 2016, the FASB issued ASU No.2016-13,
Financial Instruments - Instruments—Credit Losses
(“ASU
2016-13”).
ASU2016-13
is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, theThe new standard
will be effective on January 1, 2020. Under ASU2016-13,
requires the
Company will be required to use
of an expected-loss model for
itsfinancial assets measured at amortized cost and marketable
debt securities,
available-for
sale, which requires that
identified 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.
CurrentPreviously, U.S. GAAP
prohibitsprohibited reflecting
any reversals of impairment
losses. At June 30, 2019, the Company had $199.2 million in marketable securities, available for sale which would be subject to this new standard. As of June 30, 2019, these marketable securities, available for sale have an average credit rating of AA+ and no impairment write-downs have been recorded.charges. The Company
is currently evaluatingadopted the
impact of this new standard on
its investment policyJanuary 1, 2020 using the modified-retrospective transition method for assets measured at amortized cost other than marketable debt securities,available-for-sale,
which was adopted using a prospective transition approach as required by the new standard. On the adoption date, the Company recorded a cumulative-effect adjustment related to an allowance for credit losses related to commissions receivable and
investmentsadvances and
doesloans, net of tax in the amount of $33,000 with the offset to retained earnings as of the beginning of the period presented after adoption. The adoption of ASU2016-13
did not
expect the standard to have a material impact on
its condensed consolidated financial statements at adoption or in subsequent periods. the Company’s investment policy and impairment model for marketable debt securities,available-for-sale.
The Company
does not planelected the practical expedient to
early adopt ASU2016-13.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
(“ASU2018-13”).
ASU2018-13
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. ASU2018-13
modifies prior disclosure requirements for fair value measurement. ASU2018-13
removes certain disclosure requirements related toexclude accrued interest from both the fair value
hierarchy, such as removingand the
requirement to discloseamortized cost basis of marketable debt securities,available-for-sale,
for the
amountpurposes of
identifying and
reasons for transfers between Level 1 and Level 2, 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 measurements. As of June 30, 2019, the Company had contingent consideration liability of $2.9 million measured as Level 3. The Company is currently evaluating the impact of this new standard and does not expect ASU2018-13
to have a material effect on its condensed consolidated financial statements.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
measuring an impairment.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”).
ASU2018-15
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
adopted the new standard effective January 1, 2020 using the prospective method. The adoption of ASU2018-15
did not have a material effect on the Company’s condensed consolidated financial statements.In December 2019, the FASB issued ASU No. 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes
(“ASU2019-12”).
ASU2019-12
is effective for reporting periods beginning after December 15, 2020 with early adoption permitted. For the Company, the new standard will be effective on January 1, 2021. ASU2019-12
simplifies the accounting for income taxes by eliminating certain exceptions including the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities related to outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes such asstep-up
in tax basis for goodwill and interim recognition of enactment of tax laws or rate changes. The Company is currently evaluating the impact of this new standard and does not expect ASU
2018-152019-12
to have a material effect on its condensed consolidated financial statements. In March 2020, the FASB issued ASU No. 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
(“ASU2020-04”).
ASU2020-04
provides temporary optional exceptions to the guidance in U.S. GAAP on contract modifications to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. ASU2020-04
is effective for all entities upon issuance and may be applied prospectively to contract modifications through December 31, 2022. The guidance applies to the Company’s Credit Agreement (see Note 15 – “Commitments and Contingencies”), which references LIBOR, and will generally allow it to account for and present a modification as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. As of March 31, 2020, the Company has not drawn funds from the credit facility. The Company continues to evaluate the impact of this new standard and does not expect ASU2020-04
to have a material effect on its condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. | Property and Equipment, Net |
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | |
| | | | | | | | | | | | |
Computer software and hardware equipment | | $ | | | | $ | | | | $ | | | | $ | | |
Furniture, fixtures, and equipment | | | | | | | | | | | | | | | | |
Less: accumulated depreciation and amortization | | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | |
During the
sixthree months ended
June 30,March 31, 2020 and 2019,
and 2018, the Company
wrote-off
approximately
$3.1 million$191,000 and
$0.8 million,$233,000, respectively, of fully depreciated computer software and hardware equipment and furniture, fixtures and equipment.
As of June 30,March 31, 2020 and 2019, and 2018, property and equipment additions incurred but not yet paid included in accounts payable and other liabilities were $466,000$259,000 and $398,000,$473,000, respectively.
The Company evaluates its fixed assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of March 31, 2020, the Company considered the novel coronavirus(“COVID-19”)
pandemic as a triggering event and evaluated its fixed assets for impairment testing. The Company concluded that as of March 31, 2020, there was 0impairment of its property and equipment. The Company has operating leases for all of its facilities and autos. As of
June 30,March 31, 2020 and December 31, 2019, operating lease
ROUright-of-use
(“ROU”) assets were
$103.3$114.5 million
and $111.1 million, respectively, and the related accumulated amortization was
$10.2 million. $26.0 million and $20.6 million, respectively.The operating lease cost, included in selling, general and administrative expense in the condensed consolidated statement of net and comprehensive income, consisted of the following (in thousands):
| | | | | |
| | | | | | Three Months Ended March 31, | |
| | | | | | | | 2020 | | | 2019 | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | |
| | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | |
(1) | Includes short-term lease cost and ROU asset amortization. |
(2) | Primarily relates to common area maintenance, property taxes, insurance, utilitiesutilities and parking. |
Maturities of lease liabilities by fiscal year consisted of the following (in thousands):
| | | | |
| | | |
| | $ | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total future minimum lease payments | | | | |
| | | | ) |
| | | | |
Present value of operating lease liabilities | | $ | | |
| | | | |
| | | |
| | $ | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total future minimum lease payments | | | | |
| | | | ) |
| | | | |
Present value of operating lease liabilities | | $ | | |
| | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Supplemental cash flow information and noncash activity related to the operating leases consisted of the following (in thousands):
| | | | |
| | | |
Operating cash flow information: | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | | |
| | | | |
ROU assets obtained in exchange for operating lease liabilities | | $ | | |
Tenant improvements owned by lessor related to ROU assets (1) | | $ | | |
| | | | | | | | |
| | | |
| | | | | | |
Operating cash flow information: | | | | | | | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | | | | $ | | |
| | | | | | | | |
ROU assets obtained in exchange for operating lease liabilities | | $ | | | | $ | | |
Tenant improvements owned by lessor related to ROU assets (1) | | $ | | | | $ | | |
(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:
| | | | |
| | | |
Weighted average remaining operating lease term
| | | | |
Weighted average discount rate
| | | | % |
| | | | | | | | |
| | | | | | |
Weighted average remaining operating lease term | | | | | | | | |
Weighted average discount rate | | | | % | | | | % |
Prior to the adoption of the new leases standard (as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018), future minimum lease payments under non-cancelable operating leases for office facilities and autos with terms in excess of one year consisted of the following (in thousands):
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Investments in Marketable Debt Securities |
Amortized cost,
allowance for credit losses, gross unrealized gains/losses in accumulated other comprehensive income (loss) and fair value of marketable
debt securities,
available-for-sale,
by type of security consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for Credit Losses | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | ) | | | | | |
Asset-backed securities and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | |
| | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | ) | | | | | |
Asset-backed securities and other | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | ) | | | | | |
| | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | |
The
amortized cost and fair value of the Company’s investments in
available-for-sale
debt securities that have been in a continuous unrealized loss position,
for which an allowance for credit losses has not been recorded, by type of security consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | ) |
| | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | | | $ | | ) |
U.S. government sponsored entities | | | | | | | | | | | | | | | | ) | | | | | | | | ) |
| | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | ) | | | | | | | | | | | | | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | ) | | $ | | | | $ | | ) | | $ | | | | $ | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross realized gains and gross realized losses from the sales of the
Company���sCompany’savailable-for-sale
debt securities consisted of the following (in thousands):
(1) | Recorded in other (expense) 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. |
The Company invests its excess cash in a diversified portfolio of fixed and variable rate debt securities to meet current and future cash flow needs. All investments are made in accordance with the Company’s approved investment policy. As of March 31, 2020, the portfolio had an average credit rating of AA+ and weighted term to final maturity of 1.8 years, with 54 securities in the portfolio with an unrealized loss aggregating $1.0 million, or 0.6% of amortized cost, and an average credit rating of A.
As of June 30, 2019,March 31, 2020, the Company considers the declines in market value of its marketable securities, available-for-sale to be temporary in natureperformed an impairment analysis and does not consider any of its investments other-than-temporarily impaired.determined an allowance for credit losses was 0t required. The Company has no currentdetermined that it did not have an intent to sell and it iswas not more likely than not that the Company willwould be required to sell these investments before recovery of their amortized cost basis, which may be at maturity.any security based on its current liquidity position, or to maintain compliance with its investment policy, specifically as it relates to minimum credit ratings. The Company may sell certainevaluated the securities with an unrealized loss considering severity of its marketable securities, available-for-sale prior to their stated maturities for strategic reasons including, but not limited to, anticipatedloss, credit ratings, specific credit events during the period since acquisition, overall likelihood of default, market sector, potential impact from the current economic situation and a review of an issuer’s liquidity and capital requirements, anticipatedfinancial strength, as needed. The Company concluded that it would receive all scheduled interest and principle payments. The Company, therefore, determined qualitatively that the unrealized loss was related to changes in interest rates and other market factors and that no allowance for credit deterioration, duration management or when a security no longer meets the criteria of the Company’s investment policy.
13
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSlosses was required.
Amortized cost and fair value of marketable
debt securities,
available-for-sale,
by contractual maturity consisted of the following (in thousands, except weighted average data):
| | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Due after one year through five years | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Due after five years through ten years | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | |
Weighted average contractual maturity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Actual maturities may differ from contractual maturities because certain borrowersissuers have the right to prepay certain obligations with or without prepayment penalties.
| Acquisitions, Goodwill and Other Intangible Assets |
Through acquisitions, the Company expanded its network of its real estate sales professionals and provided further diversification to its real estate brokerage services.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Acquisitions are accounted for as a business combination, and the results are included in the condensed consolidated financial statements beginning on the acquisition date. The aggregate consideration generally includes: (i) cash paid at closing and (ii) the fair value of contingent and deferred consideration using a probability-weighted, discounted cash flow estimate on achieving certain financial metrics or service and time requirements. Contingent and deferred consideration are included in accounts payable and other liabilities and other liabilities captions in the condensed consolidated balance sheets.
The goodwill recorded as part of the acquisitions primarily arises from the acquired assembled workforce and commercial sales platform. The Company expects all of the goodwill to be tax deductible, with thetax-deductible
amount of goodwill related to the contingent and deferred consideration to be determined once the cash payments are made to settle any contingent and deferred consideration. The goodwill resulting from acquisitions is allocated to the Company’s 1 reporting unit. Goodwill and intangible assets, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
Goodwill and intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | ) | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | |
Goodwill and intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | ) | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | ) | | $ | | | | $ | | | | $ | | ) | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents additions from acquisitions. |
(2) | Total weighted average amortization period was 5.00 years and 4.37 years as of March 31, 2020 and December 31, 2019, respectively. |
The changes in the carrying amount of goodwill consisted of the following (in thousands):
| | | | | | | | |
| | | |
| | | | | | |
| | $ | | | | $ | | |
Additions from acquisitions | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
Estimated amortization expense for intangible assets by year for the next five years and thereafter consisted of the following (in thousands):
The Company evaluates goodwill and intangible assets 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. As of March 31, 2020, the Company considered theCOVID-19
pandemic as a triggering event and evaluated its goodwill and intangible 14assets for impairment testing. The Company considered the impact from the
COVID-19
induced economic slowdown and current projected recovery timeframes and their impact on goodwill and intangible assets. The Company concluded that as of March 31, 2020, there was no impairment of its goodwill and intangible assets.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Selected Balance Sheet Data |
Allowance for credit losses for advances and loans consisted of the following (in thousands):
Other assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage servicing rights (“MSRs”), net of amortization | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Due from independent contractors, net (1) (2) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Employee notes receivable (3) | | | | | | | | | | | | | | | | | |
Employee notes receivable (1) | | | | | | | | | | | | | | | | | |
Customer trust accounts and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | |
| 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. |
| Includes allowance for doubtful accounts related to current receivables of $398 and $514 as of June 30, 2019 and December 31, 2018, respectively. The Company recorded a provision for bad debt expense of $91 and $77 andwrote-off
$100 and $4 of these receivables for the three months ended June 30, 2019 and 2018, respectively. The Company recorded a recovery for bad debt expense of $(13) and $(29) andwrote-off
$103 and $55 of these receivables for the six months ended June 30, 2019 and 2018, respectively. Any cash receipts on notes are applied first to unpaid principal balance prior to any income being recognized. |
| Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable were $60$0 and $192$60 for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively. See Note 9 – “Related-Party Transactions” for additional information. |
The net change in the carrying value of MSRs consisted of the following (in thousands):
| | | | | | | | |
| | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
Additions from acquisition | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | |
The portfolio of loans serviced by the Company aggregated $1.5 billion and $1.6 billion asfor each of June 30, 2019the periods ended March 31, 2020 and December 31, 2018,2019, respectively. See Note 10 – “Fair Value Measurements” for additional information on MSRs.
In connection with MSRsMSR activities, the Company holds funds in escrow for the benefit of the lenders. These funds, which totaled $2.5$3.5 million and $2.1$2.6 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, 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. Revenue from the fees on such accounts is included in financing revenue in the condensed consolidated statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred Compensation and Commissions
Deferred compensation and commissions consisted of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Stock appreciation rights (“SARs”) liability (1) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Commissions payable to investment sales and financing professionals | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred compensation liability (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. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
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,
2020 and 2019
were 3.920% and
2018 were 4.684%
and 4.409%, respectively. MMI recorded interest expense related to this liability of
$226,000$178,000 and
$224,000$226,000 for the three months ended
June 30,March 31, 2020 and 2019,
and 2018, respectively, and $452,000 and $449,000 for the six months ended June 30, 2019 and 2018, respectively.
Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, the Company made total payments of $2.1 million and $1.7 million, (consistingconsisting of principal and accumulated interest) and $1.5 million, respectively (consisting of accumulated interest).interest, respectively.
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 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 set forth in the 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 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
sixthree months ended
June 30,March 31, 2020 and 2019,
and 2018, the Company made total payments to participants of
$786,000$358,000 and
$387,000,$315,000, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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):
| | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Increase in the carrying value of the assets held in the rabbi trust (1) | | $ | | | | $ | | | | $ | | | | $ | | |
Increase in the net carrying value of the deferred compensation obligation (2) | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | |
| | | |
| | | | | | |
(Decrease) increase in the carrying value of the assets held in the rabbi trust (1) | | $ | | ) | | $ | | |
| | | | | | | | |
(Decrease) increase in the net carrying value of the deferred compensation obligation (2) | | $ | | ) | | $ | | |
| | | | | | | | |
(1) | Recorded in other (expense) 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. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Deferred Rent and Other Liabilities
Deferred rent and otherOther liabilities consisted of the following (in thousands):
| | | | | | | | |
| | | |
| | | | | | |
| | $ | | | | $ | | |
Contingent consideration and other (2) | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
| | | |
| | | | | | |
Deferred consideration and other (1) (2) | | $ | | | | $ | | |
Contingent consideration (1) (2) | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
(1) | The Company does not havecurrent portions of deferred rentconsideration in the amounts of $1,783 and $560 as of March 31, 2020 and December 31, 2019, due to adoption ofrespectively, are included in accounts payable and other liabilities in the new lease standard on January 1, 2019. |
(2) | condensed consolidated balance sheets. The current portions of contingent consideration in the amounts of $853$664 and $821$678 as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, are included in accounts payable and other liabilities in the condensed consolidated balance sheets. |
(2) | Deferred consideration in the aggregate amount of $1,401 was reclassified from contingent consideration during the three months ended March 31, 2020 and of this amount, $560 and $841 pertained to the current and non-current portions, respectively. |
8. | Notes Payable to Former Stockholders |
In conjunction with the
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 duringin the
second quarteramount of
2020.$6.6 million paid in April 2020.9. | Related-Party Transactions |
Shared and Transition Services
Certain services are provided to the Company under a Transition Services Agreement (“TSA”) between MMC and the Company. The TSA is intended to provide certain services until the Company acquires the services separately. Under the TSA, the Company incurred net costs during the three months ended June 30,March 31, 2020 and 2019 of $26,000 and 2018 of $32,000 and $55,000, respectively, and during the six months ended June 30, 2019 and 2018 of $75,000 and $127,000,$43,000, 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 June 30,March 31, 2020 and 2019, and 2018, the Company earned real estate brokerage commissions and financing fees of $1.9 million$766,000 and $560,000,$882,000, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $1.1 million$453,000 and $321,000, respectively, related to these revenues. For the six months ended June 30, 2019 and 2018, the Company earned real estate brokerage commissions and financing fees of $2.8 million and $3.1 million, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $1.6 million and $1.8 million,$522,000, respectively, related to these revenues.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Operating Lease with MMCMMCC
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
.2022. The related operating lease cost
was $333,000 for the three months ended
June 30,March 31, 2020 and 2019,
and 2018 was $333,000 and $255,000, respectively, and for the six months ended June 30, 2019 and 2018 was $666,000 and $508,000, respectively. 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
As of June 30, 2019March 31, 2020, and December 31, 2018,2019, accounts payable and other liabilities with MMC totaling $92,000$86,000 and $101,000,$88,000, respectively, remain unpaid and are included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company makes advances to
non-executive
employees from
time-to-time.
At
June 30, 2019March 31, 2020, and December 31,
2018,2019, the aggregate principal amount for employee notes receivable was
$415,000$598,000 and
$526,000,$388,000, respectively, which is included in other assets (current and
non-current),
in the accompanying condensed consolidated balance sheets. See Note 7 – “Selected Balance Sheet Data” for additional information.
As of
June 30, 2019,March 31, 2020, George M. Marcus, the Company’s founder and
Co-Chairman,
beneficially owned approximately 40% of the Company’s issued and outstanding common stock, including shares owned by Phoenix Investments Holdings, LLC and the Marcus Family Foundation II.
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 investments carried at fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to provide and 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:
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
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
InputsUnobservable 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.
Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.Recurring Fair Value Measurements
The Company values its investments including commercial paper and floating
NAVnet asset value money market funds recorded in cash and cash equivalents, investments in marketable
debt securities,
available-for-sale,
assets held in the
Rabbi Trust, acquired MSR contractsrabbi trust, deferred compensation liability and contingent consideration at fair value on a recurring basis. Fair values for investments included in cash and cash equivalents and marketable
debt securities,
available-for-sale
were determined for each individual security in the investment portfolio and all these securities are
LevelsLevel 1 or 2 measurements as appropriate.
Fair values for assets held in the Rabbi Trustrabbi trust and related 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contingent consideration in connection with acquisitions, is carried at fair value and determined on a
contract-by-contract
basis, calculated using a probability weighted discounted cash
flowsflow model based on the probability of achieving EBITDA and other
performance and service requirements, and is a Level 3 measurement.
During the three months ended March 31, 2020, the Company considered the economic impact ofCOVID-19
and current and future interest rates in its determination of fair value for the contingent consideration. The Company values MSRs at fair value upon acquisitionis uncertain to the extent of a servicing contract. MSRs do not tradethe volatility in an active, open market with readily observable prices, and are a Level 3 measurement.the unobservable inputs in the foreseeable future.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets held in rabbi trust | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial paper and other | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Marketable securities, available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed securities and other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contingent consideration (2) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Deferred compensation liability | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets held in rabbi trust | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial paper and other | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Marketable debt securities, available-for-sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
U.S. government sponsored entities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | 3,387 | | | $ | | | | $ | | | | $ | 3,387 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred compensation liability | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets. |
There were 0 transfers in or out of Level 3 during the three months ended March 31, 2020 and 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2020 and December 31, 2019, contingent consideration has a maximum undiscounted payment of $7.0 million and $7.3 million, respectively. Assuming the achievement of the applicable performance criteria and/or service and time requirements, the Company anticipates theseearn-out
payments will be made over the next one to seven-year period. Changes in fair value are included 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): | | | | | | | | |
| | | |
| | | | | | |
| | $ | | | | $ | | |
Contingent consideration in connection with acquisitions (2) | | | | | | | | |
Change in fair value of contingent consideration | | | | ) | | | | |
Payments of contingent consideration | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
| Included in cash and cash equivalents onBeginning balance for 2020 reflects the accompanying condensed consolidated balance sheets. |
(2) | Assuming the achievementreclassification of the applicable performance criteria, the Company anticipates theseearn-out
payments will be made over the next three to seven-year period.A reconciliation of$1,401 from contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands): related to deferred consideration. See Note 7 – “Selected Balance Sheet Data – Other Liabilities” for additional information. |
| | | | | | | | |
| | | | | | |
| | $ | | | | $ | | |
Contingent consideration in connection with acquisitions | | | | | | | | |
Change in fair value of contingent consideration | | | | ) | | | | |
Payments of contingent consideration | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
(2) | Contingent consideration in connections with acquisitions represents a noncash investing activity. |
There were no transfersQuantitative information about the valuation technique and significant unobservable inputs used in or outthe valuation of Level 1, Level 2 andthe Company’s Level 3 duringfinancial liabilities measured at fair value on a recurring basis consisted of the six months ended June 30, 2019.following (dollars in thousands):
| | | | | | | | | | | | |
| | | | | | | | | Range (Weighted Average) (1) | |
| | $ | | | | | | Expected life of cash flows | | | 0.2-5.5 years (2.1 years) | |
| | | | | | | | | | | | |
| | | | | | | | Probability of achievement | | | | |
| | | | | | | | | | |
| | | | | | | | | Range (Weighted Average) (1) | |
| | $ | | | | | | Expected life of cash flows | | | 0.4-5.8 years (2.4 years) | |
| | | | | | | | | | | | |
| | | | | | | | Probability of achievement | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| Unobservable inputs were weighted by the relative fair value of the instruments. |
Nonrecurring Fair Value Measurements
In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of MSRs, intangibles, goodwill and other assets for indications of impairment quarterly.
at least annually
. 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 inunder 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.
MSRs are
initially recorded at fair value
based on internal models andupon acquisition of a servicing contract. The Company has elected the amortization method for the subsequent measurement of MSRs. MSRs are carried at the lower of amortized cost or fair value. MSRs are a Level 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
a discounted cash flow
modelsmodel that
calculatecalculates the present value of estimated future net servicing income. The model considers 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.
Management made revisions to the assumptions used in the determination of fair value for MSRs
are carried atconsidering the
lowereconomic impact of
amortized cost or fair value.theCOVID-19
pandemic on default rates related to the specific types and underlying collateral of the various serviced loans, interest rates, refinance rates and current government and private sector responses to the pandemic. The fair value of the MSRs approximated the carrying value at
June 30, 2019March 31, 2020 and December 31,
2018.2019 after consideration of the revisions to the various assumptions. See Note 7 – “Selected Balance Sheet Data – Other Assets –
MSR’s”MSRs” for additional information.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As market conditions change, the Company willre-evaluate
assumptions used in the determination of fair value for MSRs and is uncertain to the extent of the volatility in the unobservable inputs in the foreseeable future. Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial assets measured at fair value on a nonrecurring basis consisted of the following (dollars in thousands):
| | | | | | | | | | | | |
| | | | | | | | | | |
| | $ | | | | | | Constant prepayment rates | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | |
| | $ | | | | | | Constant prepayment rates | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) | Weighted average is based on the 10% constant prepayment rate scenario which the Company uses as the reported fair value. |
As of
June 30, 2019March 31, 2020 and December 31,
2018,2019, there were
39,090,86139,272,429 and
38,814,46439,153,195 shares of common stock, $0.0001 par value, issued and outstanding, which
includesinclude unvested restricted stock awards
issued to
non-employee
directors, respectively. See Note
14
– “Earnings per Share” for additional information.
The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At June 30, 2019March 31, 2020 and December 31, 2018,2019, there were no0 preferred shares issued or outstanding.
Accumulated Other Comprehensive Income/Loss
Amounts reclassified from accumulated other comprehensive income/loss are included as a component of other (expense) 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 it is operating at a loss and has no0 earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative foreign currency translation adjustments.
12. | 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
.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. In addition,
non-employee
directors receive annual grants under a director compensation policy. As of
June 30, 2019,March 31, 2020, there were
5,322,8135,065,218 shares available for future grants under the 2013
Plan.Plan.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Awards Granted and Settled
Under the 2013 Plan, the Company has issued
restricted stock awards (“RSAs”)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
generally vest in equal annual installments over a five-year period from the date of 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
June 30, 2019,March 31, 2020, there were
no
0 issued or outstanding options, SARs, performance units or performance
sharesshare awards under the 2013 Plan.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the sixthree months ended June 30, 2019, 325,219March 31, 2020, 170,106 shares of RSUs were vested and delivered. Additionally, 70,38650,872 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. During the three months ended March 31, 2020, there were 0 deferred stock units (“DSUs”) that settled.
Activity under the 2013 Plan consisted of the following (dollars in thousands, except weighted average per share data):
| | | | | | | | | | | | | | | | | | | | |
| | RSA Grants to Non-employee Directors | | | | | | RSU Grants to Independent Contractors | | | | | | Weighted- Average Grant Date Fair Value Per Share | |
Nonvested shares at December 31, 2018 | | | | | | | | | | | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | ) | | | | ) | | | | ) | | | | ) | | | | |
| | | | | | | | ) | | | | | | | | | | | | |
| | | | | | | | ) | | | | ) | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | |
Nonvested shares at June 30, 2019 (1) | | | | | | | | | | | | | | | | | | $ | | |
Unrecognized stock-based compensation expense as of June 30, 2019 (2) | | $ | | | | $ | | | | $ | | | | $ | | | | | | |
Weighted average remaining vesting period (years) as of June 30, 2019 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | RSA Grants to Non-employee Directors | | | | | | RSU Grants to Independent Contractors | | | | | | Average Grant Date Fair Value Per Share | |
Nonvested shares at December 31, 2019 | | | | | | | | | | | | | | | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | ) | | | | ) | | | | ) | | | | |
| | | | | | | | ) | | | | | | | | | | | | |
| | | | | | | | ) | | | | ) | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | |
Nonvested shares at March 31, 2020 (1) | | | | | | | | | | | | | | | | | | $ | | |
Unrecognized stock-based compensation expense as of March 31, 2020 (2) | | $ | | | | $ | | | | $ | | | | $ | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Weighted average remaining vesting period (years) as of March 31, 2020 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
(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 3.583.83 years. |
Employee Stock Purchase Plan
In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“ESPP”). The ESPP
qualifiesis intended to qualify under Section 423 of the Internal Revenue Code and provides for consecutive,
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 was a compensatory plan and is required to expense the fair value of the awards over each
offering period.
The ESPP initially had 366,667 shares of common stock reserved, and 214,872204,473 shares of common stock remain available for issuance at June 30, 2019.for each of the periods ended as of March 31, 2020 and December 31, 2019, respectively. The ESPP 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, the board of directors has determined to not provide for any annual increases to date. At June 30, 2019,March 31, 2020, total unrecognized compensation cost related to the ESPP was $61,000$23,000 and is expected to be recognized over a weighted average period of 0.380.12 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SARs and Deferred Stock Units (“DSUs”)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 werewill be settled in actual stock at a rate of 20% per year if the participant remainedremains 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FutureMarch 31, 2020, the remaining future share settlements of fully vested DSUs by year consisted of the following:
Summary of Stock-Based Compensation
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):
| | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | |
Employee stock purchase plan | | $ | | | | $ | | | | $ | | | | $ | | |
RSAs – non-employee directors | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
RSUs – independent contractors ( 2 ) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | |
| | | |
| | | | | | |
| | $ | | | | $ | | |
RSAs – non-employee directors | | | | | | | | |
| | | | | | | | |
RSUs – independent contractors | | | | | | | | |
| | | | | | | | |
| | $ | | | | $ | | |
| | | | | | | | |
(1) | 2019 includesIncludes 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 considerednon-employees.
Prior to the adoption of ASU 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 the Company’s common stock consistent with awards made to the Company’s employees andnon-employee
directors. |
The Company’s effective tax rate for the three and six months ended June 30,March 31, 2020 and 2019 was 28.5%31.2% and 27.7%26.6%, respectively, compared to 26.9% and 26.4% for the three and six months ended June 30, 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 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income tax expense at the federal statutory rate | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % |
State income tax expense, net of federal benefit | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % |
Windfall tax benefits, net related to stock-based compensation | | | | | | | | | | | | ) | | | | )% | | | | ) | | | | )% | | | | ) | | | | )% | | | | ) | | | | )% | | | | ) | | | | )% |
Change in valuation allowance | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % |
Permanent and other items (1) | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % |
| | | | | | | | | | | | | |
(1) | Permanent items relate principally to compensation charges, qualified transportation fringe benefits, andreversal of uncertain tax positions, meals and entertainment.entertainment and ourtax-exempt deferred compensation plan assets. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings per share for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, respectively consisted of the following (in thousands, except per share data):
| | | | | | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Numerator (Basic and Diluted): | | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average common shares issued and outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) |
Add: Fully vested DSUs (2) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Basic earnings per common share | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding from above | | | | | | | | | | | | | | | | | | | | | | | | |
Add: Dilutive effect of RSUs, RSAs & ESPP | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Weighted Average Common Shares Outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Diluted earnings per common share | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | |
Antidilutive shares excluded from diluted earnings per common share (3) | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| RSAs were issued and outstanding to the non-employee directors and have a one-yearone-year or three-yearthree-year vesting term subject to service requirements. See Note 12 – “Stock-Based Compensation Plans” for additional information. |
| Shares are included in weighted average common shares outstanding as the shares are fully vested but have not yet been delivered. See Note 12 – “Stock-Based Compensation Plans” for additional information. |
| Primarily pertaining to RSU grants to the Company’s employees and independent contractors. |
15. | Commitments and Contingencies |
On
June 18, 2014,
, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (the “Bank”),
dated as
ofJune 1, 2014
, which was amended and restated on May 28, 2019,
(the which was amended on November 27, 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
restated, matures on
June 1, 2022
.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
June 30, 2019.March 31, 2020. 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 Base Rate (defined as the highest of (a) the Bank’s prime rate, (b)
one-month
LIBOR plus
1.50
% 1.50%, and (c) the federal funds rate plus
1.50
% 1.50%), or (ii) at a fixed rate per annum determined by Bank to be
% 0.875% above LIBOR. In connection with
executingthe amendment of the Credit Agreement,
as amended and restated, 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$22,000 and $26,000 during
both the three months ended
June 30,March 31, 2020 and 2019,
and 2018, and $52,000 during both the six months ended June 30, 2019 and 2018.respectively. As of
June 30, 2019 and DecemberMarch 31,
2018,2020, there were
no0 amounts outstanding under the Credit Agreement.
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, determined on a rolling four-quarter basis, and
(iii) limitsalso limit investments in foreign entities and
capscap 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
June 30, 2019,March 31, 2020, the Company was in compliance with all financial and
non-financial
covenants and has not experienced any limitation in its operations as a result of the covenants.
In connection with certain agreements with current and prospective investment sales and financing professionals, the Company hasmay agree to advance amounts to certain investment sales and financing professionals upon reaching certain performance goals. Such commitments as of June 30, 2019 and DecemberMarch 31, 2018, aggregating
$9.8
million
and $1.0 2020 aggregated $11.6 million.
million, respectively, including amounts committedCOVID-19
The Company could experience other potential impacts as a result ofCOVID-19.
Actual results may differ from the Company’s current estimates as the scope ofCOVID-19
evolves or if the duration of business disruptions is longer than initially anticipated. While this disruption is currently expected to
be temporary, there is considerable uncertainty around thescope and
duration. The extent of the impact ofCOVID-19
on our operational and financial performance will depend on the duration of business disruption, which is uncertain and cannot be predicted. In April 2020, the Company completed the acquisition of a commercial real estate finance intermediary specializing in arranging debt and equity for commercial real estate on behalf of developers, investors and owners in the United States.
In connection with agreements in principal with investment sales and financing professionals and business acquisitions, the Company entered into commitments through the date these condensed consolidated financial statements were issued. Theseissued, aggregating $17.9 million. Such commitments areto investment sales and financing professionals may be subject to various conditions and/or reachingconditions.
During the second quarter of performance goals.2020, the Company’s management approved, committed to and initiated a plan to reduce its controllable expenses, including layoffs, furloughs and a reduction of salaries of senior executives, management and key Company personnel. To date, the plan included a reduction of the Company’s employee workforce of approximately 20%. The Company does not expect to incur material one-time terminations benefits related to this plan.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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.factors, including but not limited to the impact of theCOVID-19
pandemic. The results of operations for the three
and six months ended
June 30, 2019March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31,
2019,2020, 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,
20182019 filed with the SEC on March
1, 2019,2, 2020, including the “Risk Factors” section and the consolidated financial statements and notes included therein.
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 June 30, 2019,March 31, 2020, we had 1,9651,993 investment sales and financing professionals that are primarily exclusive independent contractors operating in 8082 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 six months ended June 30, 2019,March 31, 2020, we closed 2,535 and 4,485 investment sales, financing and other transactions with total volume of approximately $13.0 billion and $22.8 billion, respectively. During the year ended December 31, 2018, we closed 9,4722,250 investment sales, financing and other transactions with total sales volume of approximately $46.4$11.8 billion. During the year ended December 31, 2019, we closed 9,726 investment sales, financing and other transactions with total sales volume of approximately $49.7 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, advisory and advisoryother real estate 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 bothDuring the three and six months ended June 30, 2019,March 31, 2020, approximately 90% of our revenues were generated from real estate brokerage commissions, 9%8% from financing fees and 1%2% from other revenues, including consulting and advisoryreal estate related services. During the year ended December 31, 2018,2019, approximately 92%91% of our revenues were generated from real estate brokerage commissions, 7%8% from financing fees and 1% from other revenues, including consulting and advisoryreal estate related services.
We divide commercial real estate into four major market segments, characterized by price:
Properties priced less than $1 million;
properties priced from $1 million up to $10 million;
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
68%67% and
65%66% of our real estate brokerage commissions during the three months ended
June 30,March 31, 2020 and 2019,
and 2018, respectively, and approximately 67% and 65% of our real estate brokerage commissions during the six months ended June 30, 2019 and 2018, respectively. The following
tables settable sets forth the number of transactions, and amount of sales volume and revenues by commercial real estate market segment for real estate brokerage:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended March 31, | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | |
Private client market ($1 - $10 million) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Middle market ( ≥ $10 - $20 million) | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) |
Larger transaction market ( ≥ $20 million) | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | ) | | $ | | ) | | $ | | ) |
Private client market ($1 - $10 million) | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | |
Middle market ( ≥ $10 - $20 million) | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) |
Larger transaction market ( ≥ $20 million) | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | $ | | | | $ | | | | | | | | $ | | | | $ | | | | | | ) | | $ | | ) | | $ | | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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. In 2018,2019 and 2020, we completed acquisitions that expanded our presence in the financing market in the Midwest and in the real estate brokerage market in Canada. Canada and United States.
In
2018,January 2020, the World Health Organization (“WHO”) declaredCOVID-19
a Public Health Emergency of International Concern. In February 2020, the WHO raised its assessment of theCOVID-19
threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and in March 2020, the WHO characterizedCOVID-19
as a pandemic. Many states and cities, including where we
also addedconduct our business activities, have reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and may limit the activity of our sales and financing professionals in engaging with our clients. We have implemented work from home protocols for all of our offices, and most of our employees and investment sales and financing professionals based in the United States and Canada are currently working remotely.We are closely monitoring the impact ofCOVID-19
pandemic on all aspects of our business and in the regions we operate. We did not incur significant disruptions through March 15, 2020, which marked the onset of wide-spread “shelter in place” mandates. Since then, we have seen increases in closing timelines, died transactions, cancelled contracts and miss-priced listings. Overall the economic shut-down and “shelter in place” mandates are slowing our real estate brokerage and financing transaction activity, and, in certain cases, restricting the ability of borrowers to access the capital markets and other sources of financing. Further, the effect of theCOVID-19
restrictions, including an extended period of remote work arrangements and the effects of preventative and precautionary health measures mandated to us by federal, state and local governments will likely affect our ability to identify and close commercial
mortgage servicingreal estate transactions. The long-term impact of the disruption in financial markets, consumer spending, unemployment as well as other unanticipated consequences remain unknown. Additionally, we are unable to
predict the impact that the COVID-19
pandemic will have on our
financial condition, results of operations and cash flows due to numerous uncertainties and the fluidity of this situation, but we anticipate that total revenues will be negatively impacted for the second and third quarter of 2020 until normal business conditions resume. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, the direct and indirect economic effects of the pandemic and containment measures and actions and the impact of these and other factors on our employees, independent contractors and clients and potential clients. We continue to monitor the expected trends and related demand for our services and will continue to adjust our operations accordingly. In response to this period of business disruption, we have assessed our cost structure and instituted various controllable expense reduction initiatives, including but not limited to, base salary reductions for senior executives, management and key personnel, furloughs and layoffs to preserve our balance sheet and financial position. We believe real estate sales and financing services.volumes will improve and eventually post solid growth as the market is able to assess the impact of the economic shut down on property occupancies, rent collections and values and when financing flows improve. Due to a high degree of uncertainty, the timing of this recovery in real estate transactions and therefore our revenues is difficult to forecast. Our priority is to support our team’s efforts to increase client contact, provide expanded content and advisory services to investors and clients and preserve our financial position through expense reductions. We believe our company will be well positioned to benefit from and lead in the real estate transaction recovery when it emerges.
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 investmentinvestor sentiment and investment activity.
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 affect investor sentiment and, ultimately, the demand for our services from investors in real estate.
The rapid spread ofCOVID-19
across the globe and into the U.S. has dramatically impacted the global, U.S. and key local economies in which we operate. The movement of 95 percent of the U.S. population to“sheltering-in-place”
and the associated shutdown of numerous businesses has taken a heavy toll on employment, consumption and many other segments of the economy. Action by both the Federal Reserve and Congress appear to have largely sustained financial market liquidity while delivering resources to support local governments, the healthcare sector, businesses of all sizes and the general public. However, with the magnitude and duration of the pandemic still in question, the severity and length of the economic impact remains unclear. The broad range of unknowns, including the impact of large-scale furloughs and layoffs as well as the significant short-term changes in public policy such as those forestalling evictions have increased investor uncertainty. We believe these and other conditions caused many investors to step to the sidelines until additional clarity emerges.
Commercial Real Estate Supply and Demand
Our business is dependent on the willingness of investors to invest in or sell commercial real estate, which is affected by many factors beyond our control. These factors include the supply of commercial real estate coupled with user demand for these properties and the performance of real estate assets when compared with other investment alternatives, such as stocks and bonds.
The COVID-19 pandemic quickly transformed the 2020 real estate market outlook from a promising start to one with significant uncertainty. Although occupancy levels have technically remained elevated for most property types, questions surrounding rent collections remains an issue for operators, potential buyers and financiers alike. Preliminary indicators point to differing results for different real estate asset classes. With the CARES stimulus package beginning to flow to the businesses and people that need it and with several states starting to take initial steps to cautiously reopen, pressures on the economy and commercial real estate may begin to ease in the future, which should increase both supply and demand. However, such easing will be dependent on the nature of, severity of and speed with which the federal, state and local governments mandate and eventually begin to lift the preventative and precautionary measures our business will be subject to as it begins to resume normal operations.
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, as well as lender and equity underwriting for real estate investments. These changes influence the demand of investors for commercial real estate investments.
Financial markets faced significant pressure from the economic and financial shockwave spawned by the pandemic, but we believe that action by the Federal Reserve largely sustained current market liquidity. The Fed’s commitment to quantitative easing, including the purchase of commercial mortgage backed securities (“CMBS”), as well as its main street lending programs and wide range of debt facilities have been instrumental in ensuring that lending is available across the business and investment spectrum. Despite these measures, access to acquisition capital has tightened, with active lenders increasing their spreads over the exceptionally low10-year
Treasury rate. CMBS lenders have largely been absent from the market since the onset of the pandemic, and major national banks have set elevated rates that in many cases have not been competitive. Fannie Mae and Freddie Mac have increased their reserve requirements, slowing the lending flow for apartment investments. Local community banks and credit unions have been the most active capital source in recent weeks, but their flow of capital was temporarily impeded by the flood of applications for CARES Act created Paycheck Protection Program lending. Although lending processes have been slowed by the pandemic, we believe that sufficient capital flow has been available to meet market needs in most cases. 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.
Questions about all facets of the real estate sector outlook as well as logistics hurdles impacting appraisals, site visits and the closing process have adversely impacted transaction activity. Many institutional investors moved to the sidelines in March, while many private investors remained active in their local markets. Investors in a 1031 tax deferred exchange sustained much of the activity as the market slowed, but the IRS extension of 1031 exchange timelines until July 15 may reduce some of the time pressure and urgency for investors. We understand that a wide range of well-funded investors are awaiting opportunistic acquisitions. Despite the significant toll the pandemic has had on the U.S. economy, strong underwriting practices and sturdy investor balance sheets have helped mitigate the pressure felt by property owners. In addition, many impacted investors, including many hotel owners, have been able to achieve various levels of lender forbearance to bridge the impact of the imposed economic downturn. In our view, many lenders, property owners and tenants understand their need to jointly address the economic consequences of the pandemic and are in the process of developing collaborative strategies to navigate the path ahead.
Investors have been reinvigorated by the interest rate decline as the widening spread between asset yields and debt financing costs has granted increased underwriting latitude. However, the combination of economic momentum and strong fundamentals across most property types has raised seller expectations, causing them to price assets aggressively in many cases. Buyers, however, continue to demonstrate increased caution as they consider the maturing growth cycle and the prospects of a recession occurring during their hold period. The resulting gap in expectations remains a modest but steady headwind, extending asset marketing and closing timelines. We believe that sustained economic and fundamentals performance momentum is balancing with caution surrounding financial market volatility, international trade relations and the maturing cycle to offer a generally stable investment climate.
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 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 in the 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
botheither positively
andor negatively by major economic or political events,
such as theCOVID-19
pandemic, impacting investor sentiment for a particular property type or location, volatility in financial markets, current and future projections of interest rates, attractiveness of other asset classes, market liquidity and the extent of limitations or availability of capital allocations for larger property buyers, among others. Private client investors may
also accelerate or delay transactions due to personal or business-related reasons unrelated to economic
or political 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 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
orbe significantly disrupted by theCOVID-19
pandemic due to uncertainties around all aspects of the economy and may not continue to the same degree experienced in prior years.
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, consulting, advisory and consulting and advisoryother real estate related 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
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 real estate related revenues, which are primarily comprised of consulting and advisory fees.
Because our business is transaction oriented, 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
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.
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 include fees generated from consulting, advisory and advisoryother real estate services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed.
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.
The majority of our cost of services expense is variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Commission expenses are directly attributable to providing services to our clients for investment sales and financing services. Most of our investment sales and financing professionals are independent contractors and are paid commissions; however, because there are some who are initially paid a salary and certain of our financing professionals are employees, costs of services also include employee-related compensation, employer taxes and benefits for those employees. The commission rates we pay to our investment sales and financing professionals vary based on individual contracts negotiated and are generally higher for the more experienced professionals. Some of our most senior investment sales and financing professionals 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 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 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.
Selling, General and Administrative Expenses
The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and sales and support staff. In addition, these costs include facilities costs (excluding depreciation and amortization), staff related expenses, sales, marketing, legal, telecommunication, network, data sources, transaction costs related to acquisitions, changes in fair value for contingent consideration and other administrative expenses. Also included in selling, general and administrative are expenses for stock-based compensation to
non-employee
directors, employees and independent contractors (i.e. investment sales and financing professionals) under the Amended and Restated 2013 Omnibus Equity Incentive Plan (“2013 Plan”) and the 2013 Employee Stock Purchase Plan (“ESPP”).
Depreciation and Amortization Expense
Depreciation expense consists of depreciation recorded on our computer software and hardware and furniture, fixture and equipment. Depreciation is provided over estimated useful lives ranging from three to seven years for owned 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 (Expense) Income, (Expense), Net
Other
(expense) 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
debt securities,
available-for-sale,
foreign currency gains and losses and other
non-operating
gains and losses.
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 and
otherthe impact of permanent
items.items, including principally compensation charges, qualified transportation fringe benefits, reversal of uncertain tax positions, meals and entertainment andtax-exempt
deferred compensation plan assets. Our provision for income taxes includes the windfall tax benefits, net, from shares issued in connection with our 2013 Plan and ESPP.
We record deferred taxes, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes.
Following is a discussion of our results of operations for the three
and six months ended
June 30, 2019March 31, 2020 and
2018.2019. 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.
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 the three months ended June 30,March 31, 2020 and 2019, and 2018, we closed more than 2,5002,200 and 2,3001,900 investment sales, financing and other transactions, respectively, with total sales volume of approximately $13.0$11.8 billion and $11.4 billion, respectively. During the six months ended June 30, 2019 and 2018, we closed more than 4,400 investment sales, financing and other transactions in each period, with total sales volume of approximately $22.8 billion and $21.1$9.8 billion, respectively. Such key metrics for real estate brokerage and financing activities (excluding other transactions) are as follows:
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Average Number of Investment Sales Professionals | | | | | | | | | | | | | | | | | | | | | | | | |
Average Number of Transactions per Investment Sales Professional | | | | | | | | | | | | | | | | | | | | | | | | |
Average Commission per Transaction | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | % | | | | % | | | | % | | | | % | | | | % | | | | % |
Average Transaction Size (in thousands) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Total Number of Transactions | | | | | | | | | | | | | | | | | | | | | | | | |
Total Sales Volume (in millions) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
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Average Number of Financing Professionals | | | | | | | | | | | | | | | | | | | | | | | | |
Average Number of Transactions per Financing Professional | | | | | | | | | | | | | | | | | | | | | | | | |
Average Fee per Transaction | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | % | | | | % | | | | % | | | | % | | | | % | | | | % |
Average Transaction Size (in thousands) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
Total Number of Transactions | | | | | | | | | | | | | | | | | | | | | | | | |
Total Financing Volume (in millions) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
(1) | Operating metrics calculated excluding certain financing fees not directly associated towith transactions. |
Comparison of Three Months Ended June 30,March 31, 2020 and 2019 and 2018
Below are key operating results for the three months ended June 30, 2019March 31, 2020 compared to the three months ended June 30, 2018 (dollar and share amountsMarch 31, 2019 (dollars in thousands, except per share amounts)thousands):
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| | | | | | | | | | | | | | | | | Three Months Ended March 31, 2020 | | | | | | Three Months Ended March 31, 2019 | | | | | | | |
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Real estate brokerage commissions | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | | | | % |
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| | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | % |
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| | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | % |
Selling, general and administrative expense | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | % |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | % |
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| | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | % |
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| | | | | | | | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | % |
Other income (expense), net | | | | | | | | | | | | | | | | | | | | | | | | % | |
Other (expense) income, net | | | | | ) | | | | ) | | | | | | | | | | | | ) | | | | )% |
| | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | )% | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | )% |
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Income before provision for income taxes | | | | | | | | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | ) | | | | )% |
Provision for income taxes | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | % |
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| | $ | | | | | | % | | $ | | | | | | % | | $ | | ) | | | | )% | | $ | | | | | | % | | $ | | | | | | % | | $ | | ) | | | | )% |
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| | $ | | | | | | % | | $ | | | | | | % | | $ | | ) | | | | )% | | $ | | | | | | % | | $ | | | | | | % | | $ | | ) | | | | )% |
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| | $ | | | | | | | | $ | | | | | | | | | | | | | | | |
| | $ | | | | | | | | $ | | | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | |
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(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.” |
Our total revenues were $209.6$190.7 million for the three months ended June 30, 2019March 31, 2020 compared to $199.4$160.7 million for the same period in 2018,2019, an increase of $10.2$30.0 million, or 5.1%18.7%. Total revenues increased as a result of increases in real estate brokerage commissions, financing fees and other revenues, as described below.
Real estate brokerage commissions.
Revenues from real estate brokerage commissions increased to
$188.7$171.8 million for the three months ended
June 30, 2019March 31, 2020 from
$181.6$144.9 million for the same period in
2018,2019, an increase of
$7.0$26.9 million, or
3.9%18.6%. The increase was primarily driven by
the increaseincreases in the number of
brokerageinvestment sales transactions
(4.7%(14.9%) and average
commission rates (1 basis point), partially offset by a decrease in average transaction size
(1.4%(3.4%).
These increases generated an 18.9% increase in the amount of sales volume. The average commission rate remained comparable.Revenues from financing fees increased to
$17.7$15.4 million for the three months ended
June 30, 2019March 31, 2020 from
$15.6$13.7 million for the same period in
2018,2019, an increase of
$2.2$1.6 million, or
14.0%, in part spurred by growth from acquisitions during 2018.11.8%. The increase was primarily driven by
a 20.1% increase in financing volume, partially offset by a 5 basis point reduction in average fee rates. Financing volume was primarily impacted by the
23.2% increase in the number of financing transactions,
(11.8%) and an increase in average transaction size (2.1%). These factors combined generated the increase in financing volume of 14.1%. This increase was partially offset by a decrease in
the average
fee rates (1 basis point)transaction size of 2.5%.
Other revenues increased to
$3.2$3.5 million for the three months ended
June 30, 2019March 31, 2020 from
$2.2$2.0 million for the same period in
2018,2019, an increase of
$1.0$1.5 million, or
44.2%73.6%. The increase was primarily driven by increases in consulting and advisory services during the three months ended
June 30, 2019March 31, 2020 compared to the same period in
2018.2019.Our total operating expenses were $182.6$171.1 million for the three months ended June 30, 2019March 31, 2020 compared to $170.5$142.4 million for the same period in 2018,2019, an increase of $12.2$28.6 million, or 7.1%20.1%. The increase was primarily due to increasesan increase 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 increases in selling, general and administrative costs and to a lesser extent depreciation and amortization, as described below.
Cost of services increased to
$127.8$113.8 million for the three months ended
June 30, 2019March 31, 2020 from
$119.9$91.7 million for the same period in
2018,2019, an increase of
$8.0$22.1 million, or
6.7%24.1%. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above. Cost of services as a percent of total revenues increased to
61.0%59.6% compared to
60.1%57.1% for the same period in
20182019 primarily due to
transaction size, mixa higher proportion of transactions closed by our more senior investment sales and
brokerage compensation.financing professionals. Traditionally, cost of services as a percent of total revenues is lower during the three-month periods ended March 31 as certain investment professionals may earn a higher commission rate later in the year after meeting annual revenue thresholds. However, due to the uncertainty surroundingCOVID-19,
we expect cost of services as a percent of total revenues to remain elevated in the coming quarters as we expect the majority of the deals closed to be weighted towards senior investment sales and financing professionals.Selling, general and administrative expense.
Selling, general and administrative expense
increased to $52.8 million for the three months ended
June 30, 2019March 31, 2020 increased $5.9 million, or 12.1%, to $54.9 million from
$49.1$48.9 million for the same period in
2018, an increase of $3.8 million, or 7.7%. The increases2019. Increases in our selling, general and administrative expense
hashave been driven by our growth plans and
spending’sinvestments 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
$1.8 million increase in compensation related costs, including salaries and related benefits; (ii) a $1.7$4.0 million increase in sales operations support and promotional marketing
expenses to support sales activity;expenses; (ii) a $1.2 million increase in legal costs; (iii) a
$0.8$0.9 million increase in facilities expenses due to expansion of existing offices; (iv) a $0.6 million increase in net other expense categories, primarily driven by
thean increase in certain licensing
fees; and
(iv)professional fees, partially offset by decreases in the change in value for deferred and contingent consideration; and (v) a
$0.7$0.3 million increase in
facilities expenses due to expansion of existing offices.stock-based compensation expense. These increases were partially offset by
(i) a
$0.6$1.1 million decrease in
legalcompensation related costs,
primarily driven by decreases in deferred compensation obligation and
(ii) a $0.6 million decreasemanagement performance compensation, which were partially offset by increases in
stock-based compensation.salaries and related benefits.Depreciation and amortization expense.
Depreciation and amortization expense increased to
$1.9$2.5 million for the three months ended
June 30, 2019March 31, 2020 from
$1.5$1.8 million for the same period in
2018,2019, an increase of
$0.4$0.6 million, or
28.5%34.5%. The increase was primarily driven by
capital expenditures due to our expansion and growth and the
increase in amortization of intangible
assets and MSRs.assets.Other (Expense) Income, (Expense), Net
Other
(expense) income,
(expense), net
increaseddecreased to
$3.1$(0.4) million for the three months ended
June 30, 2019March 31, 2020 from
$1.7$3.4 million for the same period in
2018.2019. The
increasedecrease was primarily driven by
increases(i) a $2.1 million unfavorable change in the value of our deferred compensation plan assets that are held in a rabbi trust; (ii) a $1.1 million foreign currency loss related to our Canadian operations; and (iii) a $0.6 million reduction in interest income on our investments in marketable
debt securities,
available-for-saleavailable-for-sale.
and foreign currency gains.There were no significant changes in interest expense for the three months ended June 30, 2019March 31, 2020 compared to the same period in 2018.2019.
Provision for Income Taxes
The provision for income taxes was
$8.5$5.9 million for the three months ended
June 30, 2019March 31, 2020 compared to
$8.2$5.7 million in the same period in
2018,2019, an increase of $0.3 million, or
4.0%4.6%. The effective income tax rate for the three months ended
June 30, 2019March 31, 2020 was
28.5%31.2% compared to
26.9%26.6% for the same period in
2018.2019. The effective income tax rate increased primarily due to
an increase in permanent items, the effect of permanent items
fromdriven by the decrease in value of our deferred compensation plan assets, a
decreasedpre-tax
incomeshift in the blended state tax rate to higher taxing jurisdictions and
an increasea recording of a valuation allowance with respect to
ourthe deferred tax assets of the Company’s Canadian operations.
Comparison of Six Months Ended June 30, 2019 and 2018
Below are key operating results for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 (dollar and share amounts in thousands, except per share amounts):
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Real estate brokerage commissions | | $ | | | | | | % | | $ | | | | | | % | | $ | | ) | | | | )% |
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| | | | | | | | | | | | | | | | | | | | ) | | | | )% |
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| | | | | | | | | | | | | | | | | | | | ) | | | | )% |
Selling, general, and administrative expense | | | | | | | | | | | | | | | | | | | | | | | | % |
Depreciation and amortization expense | | | | | | | | | | | | | | | | | | | | | | | | % |
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| | | | | | | | | | | | | | | | | | | | ) | | | | )% |
Other income (expense), net | | | | | | | | | | | | | | | | | | | | | | | | % |
| | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | )% |
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Income before provision for income taxes | | | | | | | | | | | | | | | | | | | | ) | | | | )% |
Provision for income taxes | | | | | | | | | | | | | | | | | | | | ) | | | | )% |
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| | | | | | | | % | | $ | | | | | | % | | $ | | ) | | | | )% |
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| | $ | | | | | | % | | $ | | | | | | % | | $ | | ) | | | | )% |
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| | $ | | | | | | | | $ | | | | | | | | | | | | | | |
| | $ | | | | | | | | $ | | | | | | | | | | | | | | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
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(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.” |
Our total revenues were $370.3 million for the six months ended June 30, 2019 compared to $373.9 million for the same period in 2018, a decrease of $3.6 million, or 1.0%. Total revenues decreased as a result of decreased real estate brokerage commissions, partially offset by increases in financing fees and other revenues, as described below.
Real estate brokerage commissions.
Revenues from real estate brokerage commissions decreased to $333.6 million for the six months ended June 30, 2019 from $344.2 million for the same period in 2018, a decrease of $10.5 million, or 3.1%. The decrease was primarily driven by the decrease in the number of investment sales transactions (2.9%) and a decrease in average transaction size (0.2%). These factors combined generated a decrease in sales volume of 3.1%.Revenues from financing fees increased to $31.5 million for the six months ended June 30, 2019 from $25.3 million for the same period in 2018, an increase of $6.2 million, or 24.5% in part spurred by growth from acquisitions during 2018. The increase was primarily driven by the increase in the number of financing transactions (15.2%) and an increase in average transaction size (9.2%). These factors combined generated the increase in financing volume of 25.8%. This increase was partially offset by a decrease in average fee rates (2 basis points).Other revenues increased to $5.2 million for the six months ended June 30, 2019 from $4.5 million for the same period in 2018, an increase of $0.7 million, or 16.0%. The increase was primarily driven by increases in consulting and advisory services during the six months June 30, 2019 compared to the same period in 2018.Our total operating expenses were $325.1 million for the six months ended June 30, 2019 compared to $321.5 million for the same period in 2018, an increase of $3.5 million, or 1.1%. The increase was primarily due to an increase in selling, general and administrative costs and to a lesser extent depreciation and amortization, partially offset by 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, as described below.
Cost of services decreased to $219.5 million for the six months ended June 30, 2019 from $221.5 million for the same period in 2018, a decrease of $2.0 million, or 0.9%. 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 slightly increased to 59.3% for the six months ended June 30, 2019 compared to 59.2% for the same period in 2018.Selling, general and administrative expense.
Selling, general and administrative expense increased to $101.8 million for the six months ended June 30, 2019 from $97.1 million for the same period in 2018, an increase of $4.6 million, or 4.8%. Increases in our selling, general and administrative expense have been driven by our growth plans and spending’s 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 $3.0 million increase in sales and promotional marketing expenses to support increased sales activity; (ii) a $1.7 million increase in net other expense categories, primarily driven by the increase in certain licensing fees; (iii) a $1.2 million increase in facilities expenses due to expansion of existing offices; and (iv) a $1.0 million increase in salaries and related benefits, partially offset by decreases in management performance compensation. These increases were partially offset by (i) a $1.5 million decrease in legal costs and (ii) a $0.8 million decrease in stock-based compensation.Depreciation and amortization expense.
Depreciation and amortization expense increased to $3.8 million for the six months ended June 30, 2019 from $2.9 million for the same period in 2018, an increase of $0.9 million, or 30.8%. The increase was primarily driven by capital expenditures due to our expansion and growth and the amortization of intangible assets and MSRs.Other income (expense), net
Other income (expense), net increased to $6.5 million for the six months ended June 30, 2019 from $2.9 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,
the value of our deferred compensation plan assets held in the Rabbi Trust and foreign currency gains.There were no significant changes in interest expense for the six months ended June 30, 2019 compared to the same period in 2018.
Provision for income taxes
The provision for income taxes was $14.1 million for the six months ended June 30, 2019 compared to $14.5 million in the same period in 2018, a decrease of $0.3 million, or 2.2%. The effective income tax rate for the six months ended June 30, 2019 was 27.7% compared to 26.4% for the same period in 2018. The effective income tax rate increased primarily due to an increase in permanent items, the effect of permanent items from a decreasedpre-tax
income and an increase of a valuation allowance with respect to our Canadian operations.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
and othernon-cash
items, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income and other, including net realized gains (losses) on marketable
debt securities,
available-for-sale
and cash and cash equivalents, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation,
expense and (vi)
non-cash
MSRsMSR 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. 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
items. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures calculated in accordance with U.S. GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.
A reconciliation of the most directly comparable U.S. GAAP financial measure, net income, to Adjusted EBITDA is as follows (in thousands):
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| | Three Months Ended June 30, | | | | | | |
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| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
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Interest income and other (1) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) | | | | ) |
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Provision for income taxes | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Non-cash MSRs activity (2) | | | | ) | | | | ) | | | | ) | | | | ) | |
| | | | | | | | | ) |
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| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
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(1) | Other for the three and six months ended June 30, 2019 and 2018 includes net realized gains (losses) on marketable debt securitiesavailable-for-sale. |
(2) | Non-cash MSRsMSR activity relates toincludes the assumption of servicing obligations. |
(3) | The decrease in Adjusted EBITDA for the three months ended June 30, 2019March 31, 2020 compared to the same period in 20182019 is primarily due to higher proportion of operating expenses compared to revenues. The decrease in Adjusted EBITDA for the six months ended June 30, 2019 compared to the same period in 2018 is primarily due to lower total revenues and a higher proportion of operating expenses compared to total revenues. |
Liquidity and Capital Resources
Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, marketable
debt securities,
available-for-sale
and, if necessary, borrowings under our credit agreement. In order to enhance yield to us, we have invested a portion of our cash in money market funds and 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
gategating fees.
To date, the Company has not experienced any restrictions or gating fees on its ability to redeem funds from money market funds. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations, cash and cash equivalents, proceeds from the sale of marketable
debt securities,
available-for-sale
or availability under our credit agreement.
Our total cash and cash equivalents balance decreased by $7.9$42.9 million to $206.8$189.8 million at June 30, 2019March 31, 2020, compared to $214.7$232.7 million at December 31, 2018.2019. The following table sets forth our summary cash flows for the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 (in thousands):
| | | | | | | | |
| | | | | | |
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Net cash (used in) provided by operating activities | | $ | | ) | | $ | | | |
Net cash provided by (used in) investing activities | | | | | | | | ) | |
Net cash used in operating activities | | | $ | | ) | | $ | | ) |
Net cash provided by investing activities | | | | | | | | | |
Net cash used in financing activities | | | | ) | | | | ) | | | | ) | | | | ) |
| | | | | | | | | | | | | | |
Net (decrease) increase in cash and cash equivalents | | | | ) | | | | | |
Effect of currency exchange rate changes on cash and cash equivalents | | | | | ) | | | | |
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Net decrease in cash and cash equivalents | | | | | ) | | | | ) |
Cash and cash equivalents at beginning of period | | | | | | | | | | | | | | | | |
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Cash and cash equivalents at end of period | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | |
Cash flows used in operating activities were
$24.4$52.8 million for the
sixthree months ended
June 30, 2019March 31, 2020 compared to
cash flows provided by operating activities of $23.0$38.6 million for the same period in
2018.2019. Net cash
(used in) provided byused in operating activities is driven by our net income adjusted for
non-cash
items and changes in operating assets and liabilities. The
$47.4$14.2 million increased usage in operating cash flows for the
sixthree months ended
June 30, 2019March 31, 2020 compared to the same period in
20182019 was primarily due to
a decrease in our real estate brokerage revenue and a higher proportion of operating expenses compared to total revenues, differences in timing of certain payments and receipts
and an increase in advances to our investment sales and financing professionals,
which was partially offset by a reduction in bonus accruals and a reduction in the deferral of certain discretionary commissions.
We traditionally experience net cash used in operating activities during the three-month periods ended March 31, since bonuses and certain deferred commissions related to the prior year(s) are typically paid during the first quarter of the new year.Cash flows provided by investing activities were
$19.6$13.1 million for the
sixthree months ended
June 30, 2019March 31, 2020 compared to
cash flows used in investing activities of $1.4$24.1 million for the same period in
2018.2019. The
$21.0$11.0 million
decreased usagedecrease in
investing cash flows
provided by investing activities for the
sixthree months ended
June 30, 2019March 31, 2020 compared to the same period in
20182019 was primarily due to a
$23.8$4.0 million
reduction in net proceeds from sales and maturities of marketable
debt securities,
available-for-sale
for the six months ended June 30, 2019 compared to a $7.6 million in net proceeds of marketable securities,available-for-sale
for the same period in 2018 and a
$6.2net $6.0 million
of outflow for acquisitions
net of cash received during the
sixthree months ended
June 30, 2018March 31, 2020 with no such comparable outflow for the same period in 2019.
Cash flows used in financing activities were $3.2$2.9 million for the sixthree months ended June 30, 2019March 31, 2020 compared to $2.4$2.0 million for the same period in 2018.2019. The change in cash flows used in financing activities for the sixthree months ended June 30, 2019March 31, 2020 compared to the same period in 20182019 was primarily impacted by taxes paid related to net share settlement of stock-based awards.awards and principal payments on stock appreciation rights liability. See Note 12 – “Stock-Based Compensation Plans” of our Notes to Condensed Consolidated Financial Statements for additional information.
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
debt securities,
available-for-sale
and borrowings available under the Credit Agreement (defined below) will be sufficient to satisfy our operating requirements for the foreseeable future.
As of March 31, 2020, cash on hand and core-cash investments aggregated $336.9 million, and we had $60.0 million of borrowing capacity under our credit agreement.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.all due to various risks and uncertainties, including, but not limited to, the economic effects of theCOVID-19
pandemic. 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 agreements have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our liquidity.
On June 18, 2014, we entered intoWe have a Credit Agreement with Wells Fargo Bank, National Association (the “Bank”), dated as of June 1, 2014, which was amended and restated on May 28, 2019 (the “Credit Agreement”). The Credit Agreement is intended to provide for future liquidity needs, if needed. The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries (the “Credit Facility”), which, as amended and restated, matures on June 1, 2022. We 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. We must pay a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility.
The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit, of which $533,000 was utilized as of June 30, 2019. As of June 30, 2019, there were no amounts outstanding under the Credit Agreement.
Borrowings under the Credit Facility bear interest, at our option, at either (i) a fluctuating rate per annum 2.00% below the Base Rate (defined as the highest of (a) the Bank’s prime rate, (b) one-month
LIBOR plus 1.50%, and (c) the federal funds rate plus 1.50%2022 (the “Credit Agreement”)
, or (ii) at a fixed rate per annum determined by Bank to be 0.875% above LIBOR.The Credit Facility contains customary covenants, including financial and other covenant reporting requirements and events of default. Financial covenants require us, on a combined basis with our 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, (ii) total funded debt to EBITDA not greater than 2.0:1.0 as of each quarter end, determined on a rolling four-quarter basis and (iii) limits investments in foreign entities and caps certain other loans. The Credit Facility is secured by substantially all of our assets, 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.
. See Note 15 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements for additional information on the Credit Agreement.
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,
20182019 through the date the condensed consolidated financial statements were
issued other than an increase of operating lease obligations of $8.1 million due to new or extended leases and commitments of $9.8 million to current and prospective investment sales and financing professionals, subject to certain conditions and/or reaching performance goals.issued.Off Balance Sheet Arrangements
We do not have any
off balance off-balance
sheet arrangements.
Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by
generaluncertain or changing economic
and market conditions, including
inflation. However,inflation/deflation arising in connection with and in response to
date, we do not believe that general inflation has had a material impact upontheCOVID-19
pandemic. The economic impacts from inflation/deflation to our
operations.business remain unknown at this time.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
materialsignificant changes in our critical accounting policies, as disclosed
in in our Annual Report on Form
10-K
for the year ended December 31,
20182019 except for the following:
Investments in Marketable Debt Securities, We
utilize operating leases for allmaintain a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities and other. We consider our
facilities investments in marketable debt securities to beavailable-for-sale,
and
autos.accordingly are recorded at their fair values. We determine
if an arrangement is a leasethe appropriate classification of investments in marketable debt securities at
inception.Right-of-use
assets (“ROU assets”) represent our right to use an underlying asset for the
lease termtime of purchase. Interest along with accretion and
lease liabilities represent ouramortization of purchase premiums and discounts from the purchase date through the estimated maturity date, including consideration of variable maturities and contractual
obligation to make lease payments under the lease. Operating leasescall provisions, are included in
the operating lease ROU assets,non-current,
and operating lease liabilities, current andnon-current,
captionsother (expense) income, net in the condensed consolidated
balance sheets.statements of net and comprehensive income. We typically invest in highly-rated debt securities, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires substantially all investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities.We review quarterly our investment portfolio of all securities in an unrealized loss position to determine if an impairment charge or credit reserve is required. We exclude accrued interest from both the fair value and the amortized cost basis of marketable debt securities,available-for-sale,
for the purposes of identifying and measuring an impairment. An investment is impaired if the fair value is less than its amortized cost basis. Impairment relating to credit losses is recorded through a reduction in the amortized cost of the security or an allowance for credit losses and credit loss expense (included in selling, general and administrative expense), limited by the amount that the fair value is less than the amortized cost basis. Impairment that has not been recorded as a credit loss is recorded through other comprehensive income (loss), net of applicable taxes. We made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables. We evaluatewrite-off
of accrued interest receivable by the major security-type level at the time credit loss exists for the underlying security.
Operating lease ROUDetermining whether a credit loss exists requires a high degree of judgment and we consider both qualitative and quantitative factors in making our determination. We evaluate our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. For all securities in an unrealized loss position, we evaluate, among other items, the extent and length of time the fair market value of a security is less than its amortized cost, time to maturity, duration, seniority, the financial condition of the issuer including credit ratings, any changes thereto and relative default rates, leverage ratios, availability of liquidity to make principle and interest payments, performance indicators of the underlying assets,
analyst reports and
liabilities are recognized on the commencement date based onrecommendations and changes in base and market interest rates. If qualitative and quantitative analysis is sufficient to conclude that an impairment related to credit losses does not exist, we typically do not perform further quantitative analysis to estimate the present value of
lease payments over the lease term. Lease agreements may contain periods of free rent or reduced rent, predetermined fixed increases in the minimum rent and renewal or termination options, all impacting the determination of the lease term and lease paymentscash flows expected to be
used in calculatingcollected from 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 mostdebt security. Estimates of
expected future cash flows are our
leases do not have a determinable implicit rate, we use a derived incremental borrowing ratebest estimate based on
borrowing options under our credit agreement. We apply a spread over treasury rates for the indicated term of the lease based on the information available on the commencement date of the lease. We typically lease general purposebuilt-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 assetpast events, current conditions and
considered in the determination of the lease cost.We have lease agreements with lease andnon-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, taxesreasonable and
other lease related costs, which are determined principally based on billings from landlords.supportable economic forecasts.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.
TheOther than changing certain accounting processes and disclosures, the accounting pronouncement related to
leases had a material impact on our condensed consolidated balance sheets but Accounting Standards Update No. 2016-13,
Financial Instruments—Credit Losses
did not have a material impact on our condensed consolidated
statements of net and comprehensive income.financial statements. 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
some of the new pronouncements may have on our condensed consolidated financial statements.
Item 3. | 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 backedasset-backed securities and other. As of
June 30, 2019,March 31, 2020, the fair value of investments in marketable
debt securities,
available-for-sale
was
$199.2$189.1 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 because a security no longer meets the criteria of 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
June 30, 2019.March 31, 2020. 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 various market risk.risks. 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 variable interest rate debt securities as the income produced may decrease if interest rates fall. Contraction in market liquidity may adversely affect the value of portions of our portfolio and affect our ability to sell securities in the time frames required and at acceptable prices. Uncertainty in future market conditions may raise market participant’s expectations of returns, thus impacting the value of securities in our portfolio as well. During the three months ended March 31, 2020, increased demand for treasury securities caused a significant decrease in the yields on treasury securities and unbalanced demand and supply factors created significant liquidity shortfalls until the Federal Reserve initiated market intervention programs to stabilize the market. The following table sets forth the impact on the fair value of our investments as of June 30, 2019March 31, 2020 from changes in interest rates based on the weighted average duration of the debt securities in our portfolio (in thousands):
| | | | |
| | Approximate Change in Fair Value of Investments Increase (Decrease)
| |
| | $ | | |
| | $ | | |
| | $ | | ) |
| | $ | | ) |
| | | | |
| | Approximate Change in Fair Value of Investments Increase (Decrease) | |
| | $ | | |
| | $ | | |
| | $ | | ) |
| | $ | | ) |
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. | Item 4. Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules13a-15(f),
including maintenance of (i) records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, and (ii) policies and procedures that provide reasonable assurance that (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (b) our receipts and expenditures are being made only in accordance with authorizations of management and our board of directors and (c) we will prevent or timely detect unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. As of June 30, 2019, ourOur management, with the
supervision and participation of our
Chief Executive Officerchief executive officer (“CEO”) and
Chief Financial Officer,chief financial officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules
13a-15(e)13a-
15(e) and
15d-15(e)15d-
15(e) under the Exchange
Act.Act, as of the end of the period covered by this Form10-Q,
based on the criteria established under the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 framework). Based
upon thaton such evaluation, our
Chief Executive Officer and Chief Financial Officermanagement has concluded that as of
June 30, 2019,March 31, 2020, our disclosure controls and procedures
wereare designed at a reasonable assurance level and are effective
in ensuringto provide reasonable assurance that
material information
we are required to
be disclosed by usdisclose 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 ensuringof the SEC, and that such
material information is accumulated
by and communicated to our management, including our
Chief Executive OfficerCEO and
Chief Financial Officer,CFO, 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 nohave not been any changes in our internal control over financial reporting
(as such term is defined in Rules13a-15(f)
and15d-15(f)
under the Exchange Act) during the quarter ended
June 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. | 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 proceedings cannot be determined, we review the need for ouran 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.
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,
2018.2019, other than the new risk factor below relating to theCOVID-19
pandemic.The COVID-19 pandemichas adversely affected and could continue to adversely affect
how we operate our business, and the duration and extent to which it will impact our future results of operations and overall financial performance is unknown. TheCOVID-19
pandemic is a prolonged widespread global health crisis that has adversely affected and could continue to adversely affect the broader economies, capital markets and overall demand for our services. Government imposed restrictions, including the current state and local levelshelter-in-place
orders, that are implemented as a result of a pandemic can affect our clients or potential clients’ ability or willingness to purchase properties with limited or no ability to view properties; delay the closing of real estate sales and financing transactions; increase the borrowing cost and reduce the availability of debt financing; impact our ability to provide or deliver services to our clients or potential clients; and/or temporarily delay our expansion efforts. The currentCOVID-19
pandemic, the reoccurrence of theCOVID-19
pandemic or a future pandemic, could materially affect our future sales, operating results and overall financial performance due to, among other factors: Item 2. | Any impairment in value of our investments in marketable debt securities,available-for-sale, tangible or intangible assets, which could be recorded as a result of weaker economic conditions. A potential negative impact on the health of our employees and investment sales and financing professionals, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption. If significant portions of our workforce are unable to work effectively, including because of quarantines, facility closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. The long-term potential economic impact of a pandemic may be difficult to assess or predict. A pandemic, such as the currentCOVID-19 pandemic, can result in significant long-term disruption of global financial markets, and a recession or long-term market correction could have a material direct impact on the flow of capital to the commercial real estate market and/or the willingness of investors to invest in or sell commercial real estate. This may adversely impact the demand for our services as well as the value of our common stock and our access to capital. We did not incur significant disruptions during the three months ended March 31, 2020 from the COVID-19 pandemic. To date, we have seen an increase in closing timelines, slowing of our real estate brokerage and financing transaction activity, and, in certain cases, restricted ability of borrowers to access the capital markets and other sources of financing. Further, the effect of theCOVID-19 restrictions on our operations, including an extended period of remote work arrangements and preventative and precautionary health measures mandated to us by federal, state and local governments will likely affect our ability to identify and close commercial real estate transactions. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed. Please see “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussions of the potential impact of the COVID-19 pandemic and associated economic disruptions. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
Item 3. | Defaults Upon Senior Securities
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Item 3. Defaults Upon Senior Securities
Item 6. | None.Item 4. Mine Safety Disclosures Item 5. Other Information |
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| | | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
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| | | | The following financial statements from the Company’s Quarterly Report on FormXBRL Taxonomy Extension Schema Document10-Q for the quarter ended March 31, 2020, 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. |
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| | | | Cover Page Interactive Data File (formatted as Inline XBRL Taxonomy Calculation Linkbase Document |
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| | | | XBRL Taxonomy Extension Definition Document
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| | | | XBRL Taxonomy Label Linkbase Document
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| | | | XBRL Taxonomy Presentation Linkbase Documentand contained in Exhibit 101)
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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.
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| | | | | | President and Chief Executive Officer (Principal Executive Officer) |
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| | | | | | (Principal Financial Officer) |