Description

Introduction
May I interest you in a a great business with a great (dare I say, Fort Knox) balance sheet and strong competitive position with a 36% stake owner-operator that is cheap due to cyclical concerns?

Marcus & Millichap (MMI) is a Calabases, CA-based commercial real estate brokerage firm with a national footprint. It has 80 offices and 1,900 investment professionals in the United States and focuses on transactions in the private client $1-10 million segment (58% revenue), also dealing in mid-market of $10-20 million (16% of sales) and large market of over $20 million (16% of sales). In 2022, the company closed 9k transactions with total volume of $68 billion for an average ticket of $7.5 million and revenue to MMI of $1.17 million, or 1.7% of transaction. Their bread and butter is brokering all kinds of commercial real estate transactions for rich people - apartments/industrial/self-storage/retail/etc.

The company investor presentation has a good overview of the business:
https://ir.marcusmillichap.com/company-information/presentations

The company has 39 million diluted shares, $27.72 stock price, $1,091 million market cap, $430 million net cash ($11/share net cash), $661 million EV. The EV is about as low as it has been since 2014, the lowest since IPO adjusting for size, as cash has been piling up over time.

History
MMI was founded in 1971 in Palo Alto, CA by George Marcus, who still owns 36% of the stock. Marcus was born in Greece in 1941 and immigrated to the U.S. at age 4. He founded both MMI and Essex Property Trust (ESS, 2.4% stake worth $38 million) in 1971. Hessam Nadji is the CEO and has been since 2016.

The company had its IPO in 2013 at $12/share. It was written up on VIC on 6/26/16 by aquicap at $24.99/share, and I encourage you to read that for background. This is a well-run company run by serious people.

Business Overview
This is a terrific business. It requires very little capital and churns out cash. It is basically a tax on small-to-mid market real estate transactions, and the business is like an investment bank that is run for shareholders instead of employees. Also, comparing it to residential real estate brokerage, commercial brokers have less power within the firm than their residential counterparts and I believe MMI has been and will be a better business over time. The industry is reasonably stable, with the key players being known quantities. In addition, the company has a pretty variable cost structure and should not lose too much money in a down cycle.

HFF was a good comp and was acquired by Jones Lang Lasalle (JLL) in early 2019. A similar multiple of revenue (applying 2.7x EV/revenue multiple to MMI revenues at the time) would get a MMI stock price north of $60/share. I do not expect MMI to be sold anytime soon, but I am highlighting the underlying value.

Marcus has built this business up slowly over many decades. He is not in a hurry and has been content to let the cash pile up. The company has made small tuck-in acquisitions of teams over time, $50 million total over the last 8 years. Management made only token repurchases prior to 2022, when they finally started to distribute the cash, with $1.75/share dividends in the last year+ and $42 million of repurchases in the last 2 quarters at $33/share. Note that because of the heavy cash balance the current EV is 24% lower than this repurchase price.

The $64k question on this business is where we are in the real estate cycle. Current trends for commercial real estate of all sizes are terrible. 2023 Q1 revenues were down 52%, and Adj EBITDA was negative. The bad news is that this will likely continue for awhile and there is no way of knowing when it will turn. The good news is that MMI will certainly make it through the other side. They have a tremendous balance sheet and a variable cost structure and will not burn that muich cash even in a terrible scenario.

Thesis
The way I look at it is that this is that 18x normalized earnings implies about $48 million EBIT at the current stock price. From 2016-2019, the company averaged $735 million revenue and $107 million EBIT. 18x PE on that plus cash gets you to $48/share. I note the company did $189 million EBIT on $1.3 billion revenue in 2021. Obviously, the next few quarters are going to be terrible, which is a big part of the reason the stock is way off and why a business of this quality is available for such a potentially cheap price. But if inflation and rates calm down and commercial real estate transactions bounce back, the stock will go up a lot. Even if that takes a few years, you are reasonably well-protected by the balance sheet ($11/share net cash) and the market position, and the controlling owner is intelligent, thinks long-term, has his name on the door, and is not going to do anything stupid.

Catalyst

Turn in cycle.