Marcus & Millichap, Inc. - Quarter Report: 2016 September (Form 10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36155

MARCUS & MILLICHAP, INC.

(Exact name of registrant as specified in its Charter)


Delaware		35-2478370
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

23975 Park Sorrento, Suite 400 Calabasas, California		91302
(Address of Principal Executive Offices)		(Zip Code)

(818) 212-2250

(Registrant’s telephone number, including area code)

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 x No ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter time period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Number of shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding as of November 2, 2016 was 37,616,243 shares.

MARCUS & MILLICHAP, INC.

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015		3
	Condensed Consolidated Statements of Net and Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015 (Unaudited)		4
	Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2016 (Unaudited)		5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)		6
	Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		36
Item 4.	Controls and Procedures		37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		38
Item 1A.	Risk Factors		38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		38
Item 3.	Defaults upon Senior Securities		38
Item 4.	Mine Safety Disclosures		38
Item 5.	Other Information		38
Item 6.	Exhibits		38

SIGNATURES

EXHIBIT INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except per share amounts)


	September 30, 2016 (Unaudited)			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	121,953		$	96,185
Commissions receivable		4,501			3,342
Prepaid expenses		6,987			7,542
Income tax receivable		—			4,049
Marketable securities, available-for-sale		48,377			79,860
Other assets, net		3,826			5,136

Total current assets		185,644			196,114
Prepaid rent		12,628			9,075
Property and equipment, net		15,585			11,579
Marketable securities, available-for-sale		94,279			54,395
Assets held in rabbi trust		7,309			5,661
Deferred tax assets, net		35,495			35,285
Other assets		9,056			9,116

Total assets	$	359,996		$	321,225


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses	$	9,865		$	9,135
Notes payable to former stockholders		986			939
Deferred compensation and commissions		29,644			34,091
Income tax payable		4,181			—
Accrued bonuses and other employee related expenses		20,152			30,846

Total current liabilities		64,828			75,011
Deferred compensation and commissions		40,278			43,678
Notes payable to former stockholders		8,686			9,671
Deferred rent and other liabilities		4,291			3,875

Total liabilities		118,083			132,235


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized shares – 25,000,000; issued and outstanding shares – none at September 30, 2016, and December 31, 2015, respectively		—			—
Common stock, $0.0001 par value:
Authorized shares – 150,000,000; issued and outstanding shares – 37,616,243 and 37,396,456 at September 30, 2016, and December 31, 2015, respectively		4			4
Additional paid-in capital		84,949			80,591
Stock notes receivable from employees		(4	)		(4	)
Retained earnings		155,425			107,942
Accumulated other comprehensive income		1,539			457

Total stockholders’ equity		241,913			188,990

Total liabilities and stockholders’ equity	$	359,996		$	321,225

See accompanying notes to condensed consolidated financial statements.

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF NET AND COMPREHENSIVE INCOME

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

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues:
Real estate brokerage commissions	$	165,695		$	151,942		$	489,477		$	446,356
Financing fees		11,320			10,865			30,779			30,046
Other revenues		3,619			3,069			8,037			9,497

Total revenues		180,634			165,876			528,293			485,899

Operating expenses:
Cost of services		113,852			102,010			323,131			293,725
Selling, general, and administrative expense		40,728			35,646			123,403			109,064
Depreciation and amortization expense		1,149			802			3,164			2,389

Total operating expenses		155,729			138,458			449,698			405,178

Operating income		24,905			27,418			78,595			80,721
Other income (expense), net		719			(464	)		1,567			23
Interest expense		(380	)		(380	)		(1,155	)		(1,349	)

Income before provision for income taxes		25,244			26,574			79,007			79,395
Provision for income taxes		10,100			11,398			31,524			32,994

Net income		15,144			15,176			47,483			46,401
Other comprehensive (loss) income:
Unrealized (loss) gain on marketable securities, net of tax of $(37), $47, $684 and $(159) for the three months ended September 30, 2016, and 2015 and the nine months ended September 30, 2016 and 2015, respectively		(56	)		56			1,050			(249	)
Foreign currency translation (loss) gain, net of tax of $0, $140, $0 and $226 for the three months ended September 30, 2016, and 2015 and the nine months ended September 30, 2016 and 2015, respectively		(3	)		234			32			361

Total other comprehensive (loss) income		(59	)		290			1,082			112

Comprehensive income	$	15,085		$	15,466		$	48,565		$	46,513

Earnings per share:
Basic	$	0.39		$	0.39		$	1.22		$	1.19
Diluted	$	0.39		$	0.39		$	1.22		$	1.19
Weighted average common shares outstanding:
Basic		38,939			38,890			38,916			38,868
Diluted		39,122			39,160			39,034			39,051

See accompanying notes to condensed consolidated financial statements.

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(dollar amounts in thousands)

(Unaudited)


	Preferred Stock				Common Stock					Additional Paid-In Capital			Stock Notes Receivable From Employees			Retained Earnings				Total
	Shares		Amount		Shares			Amount		Additional Paid-In Capital			Stock Notes Receivable From Employees			Retained Earnings		Accumulated Other Comprehensive Income		Total
Balance as of December 31, 2015		—	$	—		37,396,456		$	4	$	80,591		$	(4	)	$	107,942	$	457	$	188,990

Net and comprehensive income		—		—		—			—		—			—			47,483		1,082		48,565

Stock-based award activity
Stock-based compensation		—		—		—			—		4,933			—			—		—		4,933
Shares issued pursuant to employee stock purchase plan		—		—		17,940			—		402			—			—		—		402
Issuance of common stock for unvested restricted stock awards		—		—		14,742			—		—			—			—		—		—
Issuance of common stock for vesting of restricted stock units		—		—		228,398			—		—			—			—		—		—
Shares withheld related to net share settlement of stock-based awards		—		—		(41,293	)		—		(1,134	)		—			—		—		(1,134	)
Windfall tax benefit from stock-based award activity		—		—		—			—		157			—			—		—		157

Balance as of September 30, 2016		—	$	—		37,616,243		$	4	$	84,949		$	(4	)	$	155,425	$	1,539	$	241,913

See accompanying notes to condensed consolidated financial statements.

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities
Net income	$	47,483		$	46,401
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		3,164			2,389
Provision for bad debt expense		15			127
Stock-based compensation		4,933			6,750
Deferred taxes, net		(894	)		(3,160	)
Net realized losses (gains) on marketable securities, available-for-sale		119			(130	)
Tax benefit from stock-based award activity		157			4,844
Excess tax benefit from stock-based award activity		(157	)		(4,844	)
Other non-cash items		359			295
Changes in operating assets and liabilities:
Commissions receivable		(1,159	)		(470	)
Prepaid expenses		555			1,144
Prepaid rent		(3,553	)		(4,538	)
Contributions to rabbi trust		(1,263	)		(1,448	)
Other assets		1,544			(3,993	)
Accounts payable and accrued expenses		309			(2,650	)
Income tax receivable/payable		8,230			4,939
Accrued bonuses and other employee related expenses		(10,495	)		(4,885	)
Deferred compensation and commissions		(8,245	)		(3,191	)
Deferred rent obligation and other liabilities		416			1,002

Net cash provided by operating activities		41,518			38,582
Cash flows from investing activities
Purchases of marketable securities, available-for-sale		(97,311	)		(130,500	)
Proceeds from sales and maturities of marketable securities, available-for-sale		90,476			10,608
Payments received on employee notes receivable		3			15
Issuances of employee notes receivable		(381	)		(175	)
Purchase of property and equipment		(7,049	)		(3,753	)
Proceeds from sale of property and equipment		25			—

Net cash used in investing activities		(14,237	)		(123,805	)
Cash flows from financing activities
Proceeds from issuance of shares pursuant to employee stock purchase plan		402			502
Taxes paid related to net share settlement of stock-based awards		(1,134	)		(756	)
Excess tax benefit from stock-based award activity		157			4,844
Principal payments on notes payable to former stockholders		(938	)		(894	)

Net cash (used in) provided by financing activities		(1,513	)		3,696

Net increase (decrease) in cash and cash equivalents		25,768			(81,527	)
Cash and cash equivalents at beginning of period		96,185			149,159

Cash and cash equivalents at end of period	$	121,953		$	67,632

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(dollar amounts in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2016		2015
Supplemental disclosures of cash flow information
Interest paid during the period	$	613	$	853

Income taxes paid, net	$	24,032	$	26,370

Supplemental disclosures of noncash investing and financing activities
Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable	$	199	$	208

Change in property and equipment included in accounts payable and accrued expenses	$	421	$	729

Settlements of deferred compensation obligation with trust assets	$	—	$	28

See accompanying notes to condensed consolidated financial statements.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Description of business, basis of presentation and recent accounting pronouncements

Description of Business

Marcus & Millichap, Inc., (the “Company”, “Marcus & Millichap”, or “MMI”), a Delaware corporation, is a brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. As of September 30, 2016, MMI operates 81 offices in the United States and Canada through its wholly-owned subsidiary, Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”), which includes the operations of Marcus & Millichap Capital Corporation (“MMCC”).

Reorganization and Initial Public Offering

MMI was formed in June 2013 in preparation for Marcus & Millichap Company (“MMC”) to spin-off its majority owned subsidiary, MMREIS (“Spin-Off”). Prior to the initial public offering (“IPO”) of MMI, all of the preferred and common stockholders of MMREIS (including MMC and employees of MMREIS) contributed all of their outstanding shares to MMI, in exchange for new MMI common stock. As a result, MMREIS became a wholly-owned subsidiary of MMI. Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMC’s shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness of MMC. MMI completed its IPO on October 30, 2013.

Basis of Presentation

The financial information presented in the accompanying unaudited condensed consolidated financial statements, has been prepared in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q 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 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, 2015 included in the Company’s Annual Report on Form 10-K filed on March 15, 2016 with the SEC. The results of the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2016, or for other interim periods or future years.

Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior-period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported condensed consolidated results of operations, financial condition, stockholders’ equity or on cash flows subtotals.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, due from independent contractors (included under other assets, net current and other assets non-current captions), investments in marketable securities, available-for-sale, security deposits (included under other assets, non-current caption) and commissions receivables. Cash is placed with high-credit quality financial institutions and invested high-credit quality money market funds.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

To reduce its credit risk, the Company monitors the credit standing of the financial institutions that hold the Company’s cash and cash equivalents. The Company historically has not experienced any 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 performs credit evaluations of its customers and debtors and requires collateral on a case-by-case basis. The Company maintains allowances, as needed, for estimated credit losses based on management’s assessment of the likelihood of collection. For the three and nine months ended September 30, 2016 and 2015, no 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.

The Company’s Canadian operations represented less than 1.0% of total revenues in each period presented.

For the three and nine months ended September 30, 2016, one office represented approximately 10.9% and 10.1% of real estate brokerage commissions revenue, respectively. No office represented 10% or more of real estate brokerage commissions revenue during the three and nine months ended September 30, 2015.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes virtually all of the current revenue recognition guidance under U.S. GAAP, and requires entities to recognize revenue for transfer to customer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU No. 2016-08, Revenue from Contacts with Customers: Principal Versus Agent Considerations, ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. The additional ASU’s clarified certain provisions of ASU 2014-09 in response to recommendations from the Transition Resources Group established by the FASB and extended the required adoption of ASU 2014-09 which is now effective for reporting periods beginning after December 15, 2017 and early adoption is permitted as of the original effective date.

ASU 2014-09 permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. For the Company, the new standard will be effective January 1, 2018. The Company does not have multiple-element arrangements, variable consideration, licenses and long-term contracts with customers. Accordingly, the Company does not expect this standard to have a significant effect in the manner or timing of its revenue recognition. The Company is in the process of completing the evaluation of the impact of this new standard and will select a transition method when the effect is determined.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). Currently, there is no guidance under U.S. GAAP regarding management’s responsibility to assess whether there is substantial doubt about an entity’s ability to continue as a going concern. Under ASU 2014-15, the Company will be required to assess its ability to continue as a going concern each interim and annual reporting period and provide certain disclosures if there is substantial doubt about the entity’s ability to continue as a going concern, including management’s plan to alleviate the substantial doubt. ASU 2014-15 is effective for reporting periods ending after December 15, 2016 and early adoption is permitted. For the Company, the new standard will be effective December 31, 2016. The Company does not anticipate that the adoption will have an impact on the Company’s condensed consolidated financial position or results of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases, to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company is still evaluating the impact of the new standard. The Company will be required to adopt the new standard in 2019 and the Company’s condensed consolidated balance sheets will be impacted by the recording of a lease liability and right of use asset for virtually all of its current operating leases, the amount of which and potential impact on the condensed consolidated statements of net and comprehensive income and condensed consolidated statements of cash flows has yet to be determined. As of September 30, 2016, the Company has remaining contractual obligations for operating leases (autos and office), which aggregate approximately $77.1 million. Accordingly, we anticipate that the adoption of the new standard will have a material impact on the Company’s condensed consolidated balance sheet.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The ASU changes the accounting for share-based payment awards issued to employees in the following areas:

Accounting for income taxes upon vesting or settlement of awards

Presentation of excess tax benefits on the statement of cash flows

Accounting for forfeitures

Minimum statutory withholding requirements

Presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet minimum statutory withholding requirements

Private company practical expedients

ASU 2016-09 is effective for reporting periods beginning after December 15, 2016 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2017. The Company is finalizing its evaluation of the impact of ASU 2016-09. The Company intends to adopt the provisions of ASU 2016-09 as of January 1, 2017. Since the Company issues stock-based awards to its employees and independent contractors and has recognized windfall tax benefits in additional paid in capital, it is anticipated that the ASU, when adopted, will impact (i) the Company’s provision for income taxes, and therefore net and comprehensive income and related earnings per share amounts, (ii) amounts presented in the condensed consolidated statement of stockholders’ equity and condensed consolidated statements of cash flows and (iii) to a lesser extent the timing of our stock-based compensation expense. In accordance with the provision of ASU 2016-09, the Company intends to change its accounting for forfeitures from awards that are not expected to vest to when forfeitures occur. The Company anticipates adopting the majority of the provision of ASU 2016-09 on a prospective basis except for the change in the accounting for forfeitures, where the Company anticipates adopting the provision on a modified retrospective basis with a cumulative-effect adjustment as of January 1, 2017. Since the impact of the adoption of ASU 2016-09 is dependent on the future share price of the Company’s stock, the Company cannot determine what the future impact will be for the forfeitures; however, based on the closing stock price on September 30, 2016, the cumulative-effect adjustment as of January 1, 2017 is not expected to be material. See Note 9 – “Stock-Based Compensation Plans” for additional information.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective January 1, 2020. Under ASU 2016-13, the Company will be required to use an expected-loss model for its marketable securities, available-for sale, which requires that credit losses be presented as an allowance rather than as a write-down. Reversals of credit losses (in situations in which the estimate of credit losses declines) is permitted in the reporting period the change occurs. Current U.S. GAAP prohibits reflecting reversals of credit losses in current period earnings. The Company is currently evaluating the impact of this new standard.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), to reduce diversity in practice in the classification of cash activity related to eight specific areas. ASU 2016-15 is effective for reporting periods beginning after December 15, 2017 and interim periods within those years and early adoption is permitted. The Company adopted ASU 2016-15 during the nine months ended September 30, 2016. The Company evaluated the impact of this new standard and determined its historical classifications, where applicable, were in accordance with ASU 2016-15. Accordingly, the adoption did not have an impact on the Company’s condensed consolidated financial position or results of operations.

2.	Property and Equipment

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


	September 30, 2016			December 31, 2015
Computer software and hardware equipment	$	13,502		$	10,973
Furniture, fixtures, and equipment		19,252			17,047
Less: accumulated depreciation and amortization		(17,169	)		(16,441	)

	$	15,585		$	11,579

During the nine months ended September 30, 2016 and 2015, the Company wrote off approximately $2.7 million and $2.6 million, respectively, of fully depreciated computer software and hardware and furniture, fixtures and equipment.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company leases all of its facilities under operating lease agreements. Lease agreements may contain periods of free rent or reduced rent or contain predetermined fixed increases in the minimum rent. The Company recognizes the minimum lease payments as rent expense on a straight-line basis over the noncancellable term of the lease. The Company records the difference between the amount charged to rent expense and the rent paid as a deferred rent obligation. The Company typically leases general purpose built-out office space, which reverts to the lessor upon termination of the lease. Any payments for improvements, net of incentives received, are recorded as prepaid rent. Prepaid rent is amortized using the straight-line method over the expected lease term as a charge to rent expense.

3.	Selected Balance Sheet Data

Other Assets

Other assets consisted of the following (in thousands):


	Current				Non-Current
	September 30,		December 31,		September 30,		December 31,
	2016		2015		2016		2015
Due from independent contractors, net ^(1) (2)	$	1,783	$	2,545	$	7,678	$	7,358
Security deposits		—		—		1,054		1,425
Employee notes receivable ⁽³⁾		434		224		112		158
Customer trust accounts and other		1,609		2,367		212		175

	$	3,826	$	5,136	$	9,056	$	9,116

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

⁽²⁾

Includes allowance for doubtful accounts related to current receivables of $303 and $359 as of September 30, 2016 and December 31, 2015, respectively. The Company recorded a provision for bad debt expense of $12 and $48 and wrote off $6 and $24 of these receivables for the three months ended September 30, 2016 and 2015, respectively. The Company recorded a provision for bad debt expense of $15 and $127 and wrote off $71 and $59 of these receivables for the nine months ended September 30, 2016 and 2015, respectively.

⁽³⁾	See Note 6 – “Related-Party Transactions” for additional information.

Deferred Compensation and Commissions

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


	Current				Non-Current
	September 30,		December 31,		September 30,		December 31,
	2016		2015		2016		2015
SARs liability ⁽¹⁾	$	1,366	$	—	$	20,719	$	21,399
Commissions payable to investment sales and financing professionals		28,140		34,091		12,755		17,015
Deferred compensation liability ⁽¹⁾		138		—		6,804		5,264

	$	29,644	$	34,091	$	40,278	$	43,678

⁽¹⁾

The SARs and deferred compensation liability become subject to payout as a result of a participant no longer being considered as an employee service provider. As a result of the retirement of certain participants, estimated amounts to be paid to the participants within the next 12 months has been classified as current.

SARs Liability

Prior to the IPO, certain employees of the Company were granted stock appreciation rights (“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 at 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. 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, 2016 and 2015 were 4.273% and 4.173%, respectively. MMI recorded interest expense related to this liability of $229,000 and $214,000, for the three months ended September 30, 2016 and 2015, respectively and $686,000 and $642,000 for the nine months ended September 30, 2016 and 2015, respectively.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Commissions Payable

Certain investment sales professionals have the ability to earn additional commissions after meeting certain annual revenue thresholds. These commissions are recognized as cost of services in the period in which they are earned. 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 a Deferred Compensation Plan. The plan is a 409A plan and permits the participant to defer compensation up to limits as determined by the 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, as defined in the Deferred Compensation Plan, in which case the trust assets are subject to the claims of MMI’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 have been classified as current.

The net change in the carrying value of the assets held in the rabbi trust and the net change in the carrying value of the deferred compensation liability, each exclusive of additional contributions, distributions and trust expenses consisted of the following (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016		2015
Increase (decrease) in the carrying value of the assets held in the rabbi trust ⁽¹⁾	$	229	$	(351	)	$	413	$	(340	)

Increase (decrease) in the carrying value of the deferred compensation obligation ⁽²⁾	$	209	$	(307	)	$	397	$	(248	)

⁽¹⁾	Recorded in other income (expense), net in the condensed consolidated statements of net and comprehensive income.

⁽²⁾	Recorded in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4.	Investments in Marketable Securities

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


	September 30, 2016									December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
U.S. treasuries	$	24,864	$	15	$	(1	)	$	24,878	$	62,343	$	—	$	(71	)	$	62,272
U.S. government sponsored entities		11,508		5		—			11,513		17,571		—		(12	)		17,559
Corporate debt securities		11,982		4		—			11,986		—		—		—			—
Asset-backed securities and other		—		—		—			—		29		—		—			29

	$	48,354	$	24	$	(1	)	$	48,377	$	79,943	$	—	$	(83	)	$	79,860

Long-term investments:
U.S. treasuries	$	50,535	$	172	$	(9	)	$	50,698	$	15,283	$	—	$	(112	)	$	15,171
U.S. government sponsored entities		15,989		25		—			16,014		12,107		—		(85	)		12,022
Corporate debt securities		18,261		529		(21	)		18,769		17,219		5		(519	)		16,705
Asset-backed securities and other		8,729		118		(49	)		8,798		10,649		—		(152	)		10,497

	$	93,514	$	844	$	(79	)	$	94,279	$	55,258	$	5	$	(868	)	$	54,395

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


	September 30, 2016					December 31, 2015
	Unrealized Loss			Fair Value		Unrealized Loss			Fair Value
Less than 12 months	$	(33	)	$	39,367	$	(951	)	$	129,117

12 months or longer	$	(47	)	$	2,747	$	—		$	—

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
Gross realized gain ⁽¹⁾	$	16	$	—	$	36		$	133

Gross realized loss ⁽¹⁾	$	—	$	—	$	(155	)	$	(3	)

⁽¹⁾	Recorded in other income (expense), net in the condensed consolidated statements of net and comprehensive income. The cost basis of securities sold were determined on the specific identification method.

The Company may sell certain of its marketable securities, available-for-sale prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration, duration management and when a security no longer meets the criteria of the Company’s investment policy. During the nine months ended September 30, 2016, the Company sold one security, which no longer met the requirements of its investment policy for a loss of $152,000.

As of September 30, 2016, the Company considers the declines in market value of its marketable securities, available-for-sale to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s cost basis.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	September 30, 2016				December 31, 2015
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	48,354	$	48,377	$	79,943	$	79,860
Due after one year through five years		70,627		70,758		28,634		28,465
Due after five years through ten years		14,998		15,537		18,020		17,466
Due after ten years		7,889		7,984		8,604		8,464

	$	141,868	$	142,656	$	135,201	$	134,255


Weighted average contractual maturity		3.2 years				3.3 years

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

5.	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 these former stockholders (“the Notes”), which 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 and a final principal payment due during the second quarter of 2020. During each of the nine months ended September 30, 2016 and 2015, the Company made total payments on the Notes of $1.5 million.

Accrued interest pertaining to the Notes consisted of the following (in thousands):


	September 30, 2016		December 31, 2015
Accrued interest ⁽¹⁾	$	216	$	367

⁽¹⁾	Recorded in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Interest expense	$	122	$	133	$	381	$	414

6.	Related-Party Transactions

Shared and Transition Services

Prior to October 2013, the Company operated under a shared services arrangement with MMC whereby the Company was charged for actual costs specifically incurred on behalf of the Company or allocated to the Company on a pro rata basis. Beginning in October 2013, certain services are provided to the Company under a Transition Services Agreement (“TSA”) between MMC and the Company, which replaced the pre-IPO shared services arrangement. The TSA is intended to provide certain services until the Company acquires the services separately. During the three months ended September 30, 2016 and 2015, the Company incurred $61,000 and $56,000 under the TSA. During the nine months ended September 30, 2016 and 2015, the Company incurred $185,000 and $165,000 under the TSA. These amounts are included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accounts Payable and Accrued Expenses with MMC

As of September 30, 2016 and December 31, 2015, $661,000 and $96,000, respectively, remains unpaid and is included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets.

Brokerage and Financing Services with the Subsidiaries of MMC

MMC has wholly or majority owned subsidiaries that buy and sell commercial real estate properties. The Company performs certain brokerage and financing services related to transactions of the subsidiaries of MMC. For the three months ended September 30, 2016 and 2015, the Company generated real estate brokerage commissions and financing fees of $1.1 million and $305,000, respectively, from subsidiaries of MMC. The Company incurred cost of services of $674,000 and $173,000, respectively, related to these revenues. For the nine months ended September 30, 2016 and 2015, the Company generated real estate brokerage commissions and financing fees of $3.5 million and $1.6 million, respectively, from subsidiaries of MMCs. The Company incurred cost of services of $2.1 million and $943,000, respectively, related to these revenues.

Operating Lease with MMC

The Company has an operating lease with MMC for a single story office building located in Palo Alto, California, which was amended in 2016 to extend the expiration date to May 31, 2022. Rent expense for this lease aggregated $253,000 and $219,000 for the three months ended September 30, 2016 and 2015, respectively. Rent expense for this lease aggregated $759,000 and $474,500 for the nine months ended September 30, 2016 and 2015, respectively. Rent expense is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.

Other

The Company makes advances to non-executive employees from time-to-time. At September 30, 2016 and December 31, 2015, the aggregate principal amount for employee loans outstanding was $546,000 and $382,000, respectively, which is included in other assets, net current and other assets non-current captions in the accompanying condensed consolidated balance sheets.

As of September 30, 2016, George M. Marcus, the Company’s founder and Co-Chairman, beneficially owned 55.2% of the Company’s issued and outstanding common stock, including shares owned by Phoenix Investments Holdings, LLC (“Phoenix”) and the George and Judy Marcus Family Foundation.

7.	Fair Value Measurements

U.S. GAAP defines the fair value of a financial instrument as the amount that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of the value of the investment carried and fair value and the supporting methodologies and assumptions. The Company uses various pricing sources to validate the values utilized.

The degree of judgment used in measuring the fair value of financial instruments is generally inversely correlates with the level of observable valuation inputs. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment.

Assets recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of the three “levels” based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

Level 3: Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recurring Fair Value Measurements

The Company values its investments including assets held in rabbi trust, money market funds and investments in marketable securities, available-for-sale at fair value on a recurring basis.

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


	September 30, 2016								December 31, 2015
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets held in rabbi trust	$	7,309	$	—	$	7,309	$	—	$	5,661	$	—	$	5,661	$	—

Money market funds ⁽¹⁾	$	60,513	$	60,513	$	—	$	—	$	5,987	$	5,987	$	—	$	—

Marketable securities, available-for-sale:
Short-term investments:
U.S. Treasuries	$	24,878	$	24,878	$	—	$	—	$	62,272	$	62,272	$	—	$	—
U.S. Government Sponsored Entities		11,513		—		11,513		—		17,559		—		17,559		—
Corporate debt securities		11,986		—		11,986		—		—		—		—		—
Asset-backed securities and other		—		—		—		—		29		—		29		—

	$	48,377	$	24,878	$	23,499	$	—	$	79,860	$	62,272	$	17,588	$	—

Long-term investments:
U.S. Treasuries	$	50,698	$	50,698	$	—	$	—	$	15,171	$	15,171	$	—	$	—
U.S. Government Sponsored Entities		16,014		—		16,014		—		12,022		—		12,022		—
Corporate debt securities		18,769		—		18,769		—		16,705		—		16,705		—
Asset-backed securities and other		8,798		—		8,798		—		10,497		—		10,497		—

	$	94,279	$	50,698	$	43,581	$	—	$	54,395	$	15,171	$	39,224	$	—

⁽¹⁾	Included in cash and cash equivalents.

There were no transfers in or out of Level 1 and Level 2 during the three and nine months ended September 30, 2016.

Assets and Liabilities not Measured at Fair Value

The Company’s cash and cash equivalents, commissions receivable, amounts due from employees (included in other assets, net current and other assets non-current captions) and investment sales and financing professionals (included in other assets, net current caption), accounts payable and accrued expenses and commissions payable are carried at cost, which approximates fair value based on their immediate or short-term maturities and terms which approximate current market rates and are considered to be in the Level 1 classification.

As the Company’s obligations under notes payable to former stockholders bear fixed interest rates that approximate current interest rates for debt instruments with similar terms and maturities, the Company has determined that the carrying value on these instruments approximates fair value. As the Company’s obligations under SARs liability (included in deferred compensation and commission’s caption) bear interest at a variable rate based on U.S. Treasuries, the Company has determined that the carrying value approximates the fair value. These are considered to be in the Level 2 classification.

8.	Stockholders’ Equity

Common Stock

As of September 30, 2016 and December 31, 2015, there were 37,616,243 and 37,396,456 shares of common stock, $0.0001 par value, issued and outstanding, which includes unvested restricted stock awards issued to non-employee directors, respectively. See Note 11 – “Earnings per Share” for additional information.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company currently does not intend to pay a regular dividend. The Company will evaluate its dividend policy in the future. Any declaration and payment of future dividends to holders of the Company’s common stock will be at the discretion of the board of directors and will depend on many factors, including the Company’s financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that the board of directors deems relevant.

Preferred Stock

The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At September 30, 2016 and December 31, 2015, there were no preferred shares issued or outstanding.

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income as of September 30, 2016, by component, net of income taxes consisted of the following (in thousands):


	Unrealized gains and (losses) of available-for- sale securities			Foreign currency translation ⁽²⁾		Total
Beginning balance, December 31, 2015	$	(568	)	$	1,025	$	457
Other comprehensive income before reclassifications		1,152			32		1,184
Amounts reclassified from accumulated other comprehensive income ⁽¹⁾		(102	)		—		(102	)

Net current-period other comprehensive income		1,050			32		1,082

Ending balance, September 30, 2016	$	482		$	1,057	$	1,539

⁽¹⁾	Included as a component of other income (expense), net in the condensed consolidated statements of net and comprehensive income. The reclassifications were determined on a specific identification basis.

⁽²⁾	The Company has not provided for U.S. taxes on unremitted earnings of its foreign subsidiary as it is operating at a loss and has no earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative foreign currency translation adjustments.

9.	Stock-Based Compensation Plans

2013 Omnibus Equity Incentive Plan

In October 2013, the board of directors adopted the 2013 Plan, which became effective upon the Company’s IPO. The 2013 Plan, in general, authorizes for the granting of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), performance units and performance shares to the Company’s and subsidiary corporations’ employees, independent contractors, directors and consultants. Grants are made from time to time by the Company’s board of directors at its discretion subject to certain restrictions as to the number and value of shares that may be granted to any individual.

Upon adoption of the 2013 Plan, 5,500,000 shares of common stock were reserved for the issuance of awards under the 2013 Plan. Pursuant to the automatic increase provided for in the 2013 Plan, the board of directors have approved share reserve increases aggregating 2,200,000. At September 30, 2016, there were 4,352,735 shares available for future grants under the Plan.

Awards Granted in Connection with the IPO

In November 2013, MMI issued the following equity awards under the 2013 Plan: (i) Deferred stock units (“DSUs”) for an aggregate of 2,192,413 shares granted as replacement awards related to the prior SARs program to the MMREIS managing directors and (ii) DSUs for 83,334 shares granted to the Company’s Co-chairman of the board of directors, William A. Millichap. The DSU’s are fully vested and shares will be issued ratably over 5 years (see “Amendments to Restricted Stock and SARs” section below). In addition, 30,000 shares, in the form of RSAs, were granted to the Company’s non-employee directors. The shares vest ratably over 3 years. All the above awards were granted based on the IPO price of $12.00.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Awards Granted and Settled Subsequent to the IPO

Under the 2013 Plan, the Company has issued RSA’s to non-employee directors and RSU’s to employees and independent contractors. All RSAs vest in equal annual installments over a three year period from the date of grant. All RSUs vest in equal annual installments over a five year period from the date of grant. Any unvested awards are canceled upon termination of service. Awards accelerate upon death subject to approval by the compensation committee.

During the nine months ended September 30, 2016, 239,396 shares of stock-based awards vested and 41,293 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 amount remitted to the tax authorities for the employees’ tax obligation was reflected in the taxes paid related to net share settlement of stock-based awards caption in the financing section of the condensed consolidated statements of cash flows. 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 nine months ended September 30, 2016, the Company recorded windfall tax benefits, net in the amount of $157,000 resulting from settlement of stock-based award activity. Such windfall tax benefits, net are excluded from the provision for income taxes, and included as a component of additional paid-in capital in the accompanying condensed consolidated balance sheets and in cash flows provided by (used in) financing activities in the accompanying condensed consolidated statement of cash flows.

Outstanding Awards

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


	RSA Grants to Non-employee Directors			RSU Grants to Employees			RSU Grants to Independent Contractors			Total			Weighted- Average Grant Date Fair Value Per Share
Nonvested shares at December 31, 2015		35,364			468,969			521,780			1,026,113		$	21.17

Granted
February 2016		—			172,496			8,856			181,352
March 2016		—			30,000			—			30,000
May 2016		14,742			11,051			8,188			33,981
August 2016		—			12,781			49,608			62,389

Total Granted		14,742			226,328			66,652			307,722			23.79
Vested		(10,998	)		(103,428	)		(124,970	)		(239,396	)		20.03
Forfeited/canceled		—			(37,299	)		(4,135	)		(41,434	)		21.64

Nonvested shares at September 30, 2016 ⁽¹⁾		39,108			554,570			459,327			1,053,005		$	22.18


Unrecognized stock-based compensation expense as of September 30, 2016 ⁽²⁾	$	584		$	10,836		$	9,183		$	20,603


Weighted average remaining vesting period (years) as of September 30, 2016		1.97			3.60			2.86			3.22

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

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

As of September 30, 2016, 1,365,445 fully vested DSUs remained outstanding.

Employee Stock Purchase Plan

In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“ESPP Plan”). The ESPP Plan qualifies under Section 423 of the IRS 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. The first offering period began on May 15, 2014. Qualifying employees may purchase shares of the Company’s stock at a 10% discount based on the lower of the market price at the beginning or end of the offering period, subject to IRS limitations. The Company determined that the ESPP Plan was a compensatory plan and is required to expense the fair value of the awards over each 6-month offering period.

The ESPP Plan has 366,667 shares of common stock reserved and 289,244 shares of common stock available for issuance as of September 30, 2016. The ESPP Plan provides for annual increases in the number of shares available for issuance under the ESPP. Pursuant to the provisions of the ESPP Plan, the board of directors determined a share reserve increase was not needed in 2015. At September 30, 2016, total unrecognized compensation cost related to the ESPP Plan was $27,000 and is expected to be recognized over a weighted average period of 0.13 years.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amendments to Restricted Stock and SARs

Restricted Stock

In connection with the IPO, the formula settlement value of all outstanding shares of stock held by the plan participants was removed, and all such shares of stock are subject to sales restrictions that lapse at a rate of 20% per year for five years if the participant remains employed by the Company. In the event of death or termination of employment after reaching the age of 67, 100% of the shares of stock will be released from the resale restriction. 100% of the shares of stock will be released from the resale restriction upon the consummation of a change of control of the Company.

SARs

Prior to the IPO, certain employees were granted SARs. As of March 31, 2013, the outstanding SARs were frozen at the liability amount, and will be paid out to each participant in installments upon retirement or departure under the terms of the revised SARs agreements. To replace beneficial ownership in the SARs, the difference between the book value liability and the fair value of the awards was granted to plan participants in the form of DSUs, which were fully vested upon receipt and will be settled in actual stock at a rate of 20% per year if the participant remains 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). In the event of death or termination of service after reaching the age of 67, 100% of the DSUs will be settled.

Summary of Stock-Based Compensation

Components of stock-based compensation included in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income consisted of the following (in thousands, except common stock price):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015
Employee stock purchase plan	$	54	$	56		$	162		$	184
RSAs – non-employee directors		121		91			319			228
RSUs – employees		734		547			2,210			1,626
RSUs – independent contractors ⁽¹⁾		924		1,474			2,242			4,712

	$	1,833	$	2,168		$	4,933		$	6,750

Common stock price at beginning of period	$	25.41	$	46.14		$	29.14		$	33.25
Common stock price at end of period	$	26.15	$	45.99		$	26.15		$	45.99
Increase (decrease) in stock price	$	0.74	$	(0.15	)	$	(2.99	)	$	12.74

⁽¹⁾

The Company grants RSUs to independent contractors (i.e. investment sales and financing professionals), who are considered non-employees under ASC 718. Accordingly, such awards are required to be measured at fair value at the end of each reporting period until settlement. Stock-based compensation expense is therefore impacted by the changes in the Company’s common stock price during each reporting period.

10.

Income Taxes

The Company’s effective tax rate for the three and nine months ended September 30, 2016 was 40.0% and 39.9%, compared to 42.9% and 41.6% for the three and nine months ended September 30, 2015. 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 difference between the statutory tax rate and the Company’s effective tax rate is largely attributable to state income taxes and a full valuation allowance with respect to the deferred tax assets of the Company’s Canadian operations.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

11.

Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015, respectively (in thousands, except per share data):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Numerator (Basic and Diluted):
Net income	$	15,144		$	15,176		$	47,483		$	46,401

Denominator:
Basic
Weighted average common shares issued and outstanding		37,613			37,114			37,588			37,091
Deduct: Unvested RSAs ⁽¹⁾		(39	)		(45	)		(37	)		(44	)
Add: Fully vested DSUs ⁽²⁾		1,365			1,821			1,365			1,821

Weighted Average Common Shares Outstanding		38,939			38,890			38,916			38,868


Basic earnings per common share	$	0.39		$	0.39		$	1.22		$	1.19

Diluted
Weighted Average Common Shares Outstanding from above		38,939			38,890			38,916			38,868
Add: Dilutive effect of RSUs, RSAs & ESPP		183			270			118			183

Weighted Average Common Shares Outstanding		39,122			39,160			39,034			39,051


Diluted earnings per common share	$	0.39		$	0.39		$	1.22		$	1.19


Antidilutive shares excluded from diluted earnings per common share ⁽³⁾		94			31			489			77

⁽¹⁾	RSAs were issued and outstanding to the non-employee directors and have a three year vesting term subject to service requirements. See Note 9 – “Stock-Based Compensation Plans” for additional information.

⁽²⁾	Shares are included in weighted average common shares outstanding as the shares are fully vested but have not yet been delivered. See Note 8 – “Stockholders’ Equity” for additional information.

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

12.

Commitments and Contingencies

Credit Agreement

On June 18, 2014, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (“Bank”), dated as of June 1, 2014 (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, matures on June 1, 2019. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full.

Borrowings under the Credit Agreement are available for general corporate purposes and working capital. The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit of which $533,000 was utilized at September 30, 2016. Borrowings under the Credit Facility will bear interest, at the Company’s option, at either the (i) Base Rate (defined as the highest of (a) the Bank’s prime rate, (b) the Federal Funds Rate plus 1.5% and (c) one-month LIBOR plus 1.5%), or (ii) at a variable rate between 0.875% and 1.125% above LIBOR, based upon the total funded debt to EBITDA ratio. In connection with executing the Credit Agreement, as amended the Company paid bank fees and other expenses, which are being amortized over the remaining term of the Credit Agreement. The Company pays a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility. The amortization and commitment fee is included in interest expense in the accompanying condensed consolidated statements of net and comprehensive income and was $29,000 and $32,000 during the three months ended September 30, 2016 and 2015, respectively and $88,000 and $100,000 during the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there were no amounts outstanding under the Credit Agreement.

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 and (ii) total funded debt to EBITDA not greater than 2.0:1.0 as of each quarter end both on a rolling 4-quarter basis. 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). As of September 30, 2016, the Company was in compliance with all financial and non-financial covenants.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Litigation

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

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

Unless the context requires otherwise, the words “Marcus & Millichap,” “Marcus & Millichap Real Estate Investment Services,” “MMREIS,” “we,” the “Company,” “us” and “our” refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other consolidated subsidiaries.

Forward-Looking Statements

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2016, 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, 2015 filed with the SEC on March 15, 2016, including the “Risk Factors” section and the consolidated financial statements and notes included therein.

Overview

We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions over the last 10 years.

As of September 30, 2016, we had 1,671 investment sales and financing professionals that are primarily exclusive independent contractors operating in 81 offices who provide real estate brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. During the three and nine months ended September 30, 2016, we closed 2,391 and 6,686 sales, financing and other transactions with total volume of approximately $11.1 billion and $31.4 billion, respectively. During the year ended December 31, 2015, we closed 8,715 sales, financing and other transactions with total volume of approximately $37.8 billion.

We generate revenues by collecting real estate brokerage commissions upon the sale, and fees upon the financing, of commercial properties and by providing consulting and advisory services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. For the three months ended September 30, 2016, approximately 92% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 2% from other revenues. For the nine months ended September 30, 2016, approximately 93% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 1% from other revenues. During the year ended December 31, 2015, approximately 92% of our revenues were generated from real estate brokerage commissions, 6% from financing fees and 2% from other revenues, including consulting and advisory services.

We divide commercial real estate into four major market segments, characterized by price:

•

Properties with prices less than $1 million;

•

Private client market: properties priced from $1 million up to $10 million;

•

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

•

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

Our strength is in serving private clients in the $1-$10 million private client market segment, which contributed approximately 68% and 70% of our real estate brokerage commissions during the three months ended September 30, 2016 and 2015, respectively and approximately 67% and 69% of our real estate brokerage commissions during the nine months ended September 30, 2016 and 2015, respectively.

The following tables set forth the number of transactions, sales volume and revenue by commercial real estate market segment for real estate brokerage:


	Three Months Ended September 30,
	2016						2015						Change
Real Estate Brokerage	Number		Volume		Revenues		Number		Volume		Revenues		Number			Volume			Revenues
Real Estate Brokerage			(in millions)		(in thousands)				(in millions)		(in thousands)					(in millions)			(in thousands)
<$1 million		277	$	177	$	7,921		306	$	188	$	7,897		(29	)	$	(11	)	$	24
Private Client Market ($1 - $10 million)		1,198		3,880		113,438		1,162		3,601		106,576		36			279			6,862
Middle Market (³$10 - $20 million)		104		1,418		24,989		87		1,199		22,020		17			219			2,969
Larger Transaction Market (³$20 million)		52		2,130		19,347		41		1,410		15,449		11			720			3,898

		1,631	$	7,605	$	165,695		1,596	$	6,398	$	151,942		35		$	1,207		$	13,753


	Nine Months Ended September 30,
	2016						2015						Change
Real Estate Brokerage	Number		Volume		Revenues		Number		Volume		Revenues		Number			Volume			Revenues
Real Estate Brokerage			(in millions)		(in thousands)				(in millions)		(in thousands)					(in millions)			(in thousands)
<$1 million		814	$	518	$	22,446		876	$	531	$	22,342		(62	)	$	(13	)	$	104
Private Client Market ($1 - $10 million)		3,526		11,224		330,485		3,263		10,563		309,866		263			661			20,619
Middle Market (³$10 - $20 million)		278		3,784		64,782		245		3,324		62,573		33			460			2,209
Larger Transaction Market (³$20 million)		187		8,144		71,764		138		5,457		51,575		49			2,687			20,189

		4,805	$	23,670	$	489,477		4,522	$	19,875	$	446,356		283		$	3,795		$	43,121

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 landscape opportunities where we believe the markets will benefit from our business model. The following charts set forth the percentage of transactions by region for real estate brokerage.


Three Months Ended September 30,		Nine Months Ended September 30,
2016	2015	2016	2015

LOGO

⁽¹⁾	Includes our Canadian operations, which represented less than 1.0% of our total revenues in each period presented.

Execution of Our Growth Strategy

We continue to see consistent increases in the number of brokerage transactions (8.1%) and volumes (6.3%) in the private client market segment during the first nine months of 2016, compared to the same period in the prior year. Our focused and targeted office expansion and an increase in the number of our specialized investment sales professionals, continues to expand our position in this significant market segment.

We achieved an overall increase in the number of transactions (8.9%) and volume (13.6%) in our specialty property types in the first nine months of 2016, compared to the same period in the prior year due to the work of our specialty directors in partnership with our regional managers supporting our sales force and driving growth of activities in these property types. The brokerage, financing and other activities in the middle market and larger transaction market segments continued to show growth in the number of transactions (8.0% and 35.2%, respectively) and volume (9.0% and 43.7%, respectively) during the first nine months of 2016 as a result of deployment of our proprietary marketing tools and development of strong credentials of our Institutional Property Advisors (IPA) division.

Continued expansion and integration of our financing services at the office level has provided our clients with a broad range of financing opportunities. This strategy has produced growth both in the number of transactions (6.6%) and volume (10.1%) of financings during the first nine months of 2016, compared to the same period in the prior year.

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 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 those that need financing and refinancing. We monitor the commercial real estate market through the four factors, which generally drive our business. They include the economy, real estate supply and demand, capital markets and investment activity.

The Economy

Our business is dependent on economic conditions within the markets in which we operate. Changes in the economy on a global, national, regional or local basis can have a positive or a negative impact on our business. Economic indicators and projections related to job growth, unemployment, interest rates and construction and vacancies can have a positive or a negative impact on our business. Overall market conditions can have an effect on investor sentiment and ultimately the demand for our services from investors in real estate. Our national footprint allows us to support our clients in balancing the opportunities and risks of changing regional economic conditions. We believe the economy once again showed durability in the face of international growth concerns, including the Brexit vote. The U.S. saw a continued moderate growth in jobs and GDP during 2016.

Real Estate Supply and Demand

Our business is dependent on the willingness of investors to invest in or sell commercial real estate which is affected by factors beyond our control. These factors include the supply of commercial real estate coupled with user demand for those properties and the performance of real estate assets when compared with the performance of other investments alternatives, such as stocks and bonds. Despite the economic recovery over the past eight years, we believe the investment in real estate continues to be a compelling investment for investors as real estate fundamentals remain strong. Vacancies remain tight for most property types. Construction is modest relative to the current stage of expansion. These factors continue to support market demand and; therefore, demand for our brokerage and financing service offerings.

Capital Markets

Credit and liquidity issues in the financial markets have a direct impact on the flow of capital to the commercial real estate market. Real estate purchases are often financed with debt and, as a result, impact transaction activity and prices. Changes in interest rates, as well as steady and protracted movements of interest rates in one direction (increases or decreases), could adversely or positively affect the operations and income potential of commercial real estate properties. These changes also have an influence on the demand from investors for commercial real estate investments. Mixed indications from the U.S. Federal Reserve, global concerns about economic growth and the continued downward trend of long-term interest rates globally have created uncertainty about the future of interest rates. We continue to see disciplined underwriting from lenders as well as ample liquidity in the market. However, we have seen transactions taking longer to close in late 2015 and in 2016. We believe the additional due diligence will result in a more stable environment for investors with capital continuing to be available for properties with good economic fundamentals over the long-term but will continue to limit transaction velocity in the short-term.

Investment Activity

We rely on investors to buy and sell properties in order 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. We believe stock market and commodity price volatility and interest rate policy along with the Brexit vote during the first nine months of 2016, have created heightened uncertainty in the domestic and the global markets. In addition, a maturing real estate cycle and buyers and lenders exercising heightened underwriting caution are contributing to a flattening trend in market sales. We believe an attractive investment backdrop continues in the commercial real estate market despite these events; however, with lower growth rates than experienced in the past.

Seasonality

Our real estate brokerage commissions and financing fees have tended to be seasonal and, combined with other factors, can affect an investor’s ability to compare our financial condition and results of operations on a quarter-by-quarter basis. Historically, this seasonality has 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 industrywide focus of clients to complete transactions towards the end of the calendar year. This historical trend can be disrupted both positively and negatively by major economic or political events impacting investor sentiment for a particular property type or location, volatility in financial markets, 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 accelerate or delay transactions due to personal or business related reasons unrelated to economic events. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior investment sales and financing professionals. These senior investment sales and financing professionals are on a graduated commission schedule that resets annually in which higher commissions are paid for higher sales volumes. Our historical pattern of seasonality may or may not continue to the same degree experienced in prior years.

Operating Segments

Management has determined that each of the Company’s offices represent individual operating segments with similar economic characteristics that meet the criteria for aggregation into a single reportable segment for financial statement purposes. The Company’s financing operations do not meet the thresholds to be presented as a separate reportable segment.

Key Financial Measures and Indicators

Revenues

Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other revenues, which are primarily comprised of consulting and advisory fees.

Our business is transaction oriented and, as such, we rely on investment sales and financing professionals to continually develop leads, identify properties to sell, market those properties and close the sale timely to generate a consistent flow of revenue. While our sales volume is impacted by the seasonality factors discussed above, 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 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 different 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 upon the closing of a transaction or a breakage fee. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee we would have received had the transaction closed.

Real estate brokerage commissions

We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenues from real estate brokerage commissions are typically recognized at the close of escrow.

Financing fees

We earn financing fees by securing financing on purchase transactions or by securing refinancing of our clients’ existing mortgage debt. We recognize financing fee revenues at the time the loan closes and we have no remaining significant obligations for performance in connection with the transaction. To a lesser extent, we also earn ancillary fees associated with financing activities.

Other revenues

Other revenues include fees generated from consulting and advisory services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed.

Operating Expenses

Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization. The significant components of our expenses are further described below.

Cost of services

The majority of our cost of services expense is commission expense. 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, there are some who are initially paid a salary and certain of our financing professionals are employees and, as such, costs of services also include employee-related compensation, employer taxes and benefits for those employees. The commission rates we pay to our investment sales and financing professionals vary based on individual contracts negotiated and are generally higher for the more experienced professionals. Some of our most senior investment sales and financing professionals also have the ability to earn additional commissions after meeting certain annual revenue thresholds. These additional commissions are recognized as cost of services in the period in which they are earned. Payment of a portion of these additional commissions are generally deferred for a period of three years, at the Company’s election and paid at the beginning of the fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers where the Company is 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 & 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 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 2013 Omnibus Equity Incentive Plan (“2013 Plan”) and the 2013 Employee Stock Purchase Plan (“2013 ESPP Plan”).

Depreciation and amortization expense

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

Other Income (Expense), Net

Other income (expense), net primarily consists of net gains or losses on our deferred compensation plan assets, interest income and realized gains and losses on our marketable securities, available-for-sale, foreign currency gains and losses and other non-operating gains and losses.

Interest Expense

Interest expense primarily consists of interest expense associated with the 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. Our provision for income taxes excludes the windfall benefits from shares issued in connection with our 2013 Plan and 2013 ESPP Plan.

Key Metrics

Transaction Activity by Property Type

We have a long history and significant expertise in our core property types of multifamily, retail, office and industrial. We have expanded our expertise in the specialty property types by hiring and assigning specialty directors to coordinate our national presence in these property types and expand our market share. The following tables set forth the number and sales volume (dollars in billions) of investment sales, financing and other transactions for the three and nine months ended September 30, 2016 compared to the same periods in 2015 by property type:


	Three Months Ended September 30,
	2016				2015				Change
	Number		Volume		Number		Volume		Number			Volume
Core Property Types:
Multifamily		929	$	5.6		876	$	4.2		53		$	1.4
Retail		914		3.1		842		2.5		72			0.6
Office		154		0.6		122		0.5		32			0.1
Industrial		62		0.2		47		0.2		15			—

Total Core Property Types		2,059	$	9.5		1,887	$	7.4		172		$	2.1

Specialty Property Types:
Seniors Housing		34	$	0.4		24	$	0.2		10			0.2
Self-Storage		58		0.3		47		0.2		11			0.1
Land		81		0.2		81		0.2		—			—
Hospitality		48		0.2		54		0.8		(6	)		(0.6	)
Manufactured Housing		29		0.1		20		0.1		9			—
Mixed - Use / Other		82		0.4		99		0.5		(17	)		(0.1	)

Total Specialty Property Types		332	$	1.6		325	$	2.0		7		$	(0.4	)

		2,391	$	11.1		2,212	$	9.4		179		$	1.7


	Nine Months Ended September 30,
	2016				2015				Change
	Number		Volume		Number		Volume		Number			Volume
Core Property Types:
Multifamily		2,491	$	15.2		2,501	$	12.6		(10	)	$	2.6
Retail		2,660		8.8		2,357		7.5		303			1.3
Office		432		1.7		389		1.6		43			0.1
Industrial		184		0.7		164		0.8		20			(0.1	)

Total Core Property Types		5,767	$	26.4		5,411	$	22.5		356		$	3.9

Specialty Property Types:
Seniors Housing		65	$	1.3		59	$	0.6		6			0.7
Hospitality		173		0.9		158		1.2		15			(0.3	)
Self-Storage		151		0.8		150		0.7		1			0.1
Land		203		0.6		206		0.5		(3	)		0.1
Manufactured Housing		91		0.4		65		0.3		26			0.1
Mixed - Use / Other		236		1.0		206		1.1		30			(0.1	)

Total Specialty Property Types		919	$	5.0		844	$	4.4		75		$	0.6

		6,686	$	31.4		6,255	$	26.9		431		$	4.5

Operating Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. During the three months ended September 30, 2016 and 2015, we closed more than 2,300 and 2,200 sales, financing and other transactions with total volume of approximately $11.1 billion and $9.4 billion, respectively. During the nine months ended September 30, 2016 and 2015, we closed more than 6,600 and 6,200 sales, financing and other transactions with total volume of approximately $31.4 billion and $26.9 billion, respectively. Such key metrics for real estate brokerage and financing activities are as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
Real Estate Brokerage	2016			2015			2016			2015
Average Number of Investment Sales Professionals		1,540			1,415			1,504			1,416
Average Number of Transactions per Investment Sales Professional		1.06			1.13			3.19			3.19
Average Commission per Transaction	$	101,591		$	95,202		$	101,868		$	98,708
Average Commission Rate		2.18	%		2.37	%		2.07	%		2.25	%
Average Transaction Size (in thousands)	$	4,663		$	4,009		$	4,926		$	4,395
Total Number of Transactions		1,631			1,596			4,805			4,522
Total Sales Volume (in millions)	$	7,605		$	6,398		$	23,670		$	19,875

	Three Months Ended September 30,						Nine Months Ended September 30,
Specialty Property Types:	2016			2015			2016			2015
Average Number of Financing Professionals		99			84			98			83
Average Number of Transactions per Financing Professional		4.39			4.87			12.35			13.67
Average Fee per Transaction	$	26,023		$	26,565		$	25,437		$	26,472
Average Fee Rate		0.86	%		0.88	%		0.83	%		0.89	%
Average Transaction Size (in thousands)	$	3,009		$	3,029		$	3,064		$	2,966
Total Number of Transactions		435			409			1,210			1,135
Total Dollar Volume (in millions)	$	1,309		$	1,239		$	3,708		$	3,366

Results of Operations

Following is a discussion of our results of operations for the three and nine months ended September 30, 2016 and 2015. 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.

Comparison of Three Months Ended September 30, 2016 and 2015

Below are key operating results for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 (dollar and share amounts in thousands, except per share amounts):


	Three Months Ended September 30,			Percentage of			Three Months Ended September 30,			Percentage of			Change
	2016			Revenue			2015			Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	165,695			91.7	%	$	151,942			91.6	%	$	13,753			9.1	%
Financing fees		11,320			6.3			10,865			6.6			455			4.2
Other revenues		3,619			2.0			3,069			1.8			550			17.9

Total revenues		180,634			100.0			165,876			100.0			14,758			8.9

Operating expenses:
Cost of services		113,852			63.0			102,010			61.5			11,842			11.6
Selling, general, and administrative expense		40,728			22.6			35,646			21.5			5,082			14.3
Depreciation and amortization expense		1,149			0.6			802			0.5			347			43.3

Total operating expenses		155,729			86.2			138,458			83.5			17,271			12.5

Operating income		24,905			13.8			27,418			16.5			(2,513	)		(9.2	)
Other income (expense), net		719			0.4			(464	)		(0.3	)		1,183			(255.0	)
Interest expense		(380	)		(0.2	)		(380	)		(0.2	)		—			—

Income before provision for income taxes		25,244			14.0			26,574			16.0			(1,330	)		(5.0	)
Provision for income taxes		10,100			5.6			11,398			6.9			(1,298	)		(11.4	)

Net income	$	15,144			8.4	%	$	15,176			9.1	%	$	(32	)		(0.2	)%

Adjusted EBITDA ⁽¹⁾	$	28,092			15.6	%	$	29,601			17.8	%	$	(1,509	)		(5.1	)%

Earnings per share:
Basic	$	0.39					$	0.39
Diluted	$	0.39					$	0.39
Weighted average common shares outstanding:
Basic		38,939						38,890
Diluted		39,122						39,160

⁽¹⁾

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

Revenues

Our total revenues were $180.6 million for the three months ended September 30, 2016 compared to $165.9 million for the same period in 2015, an increase of $14.8 million, or 8.9%. Total revenues increased primarily as a result of increases in real estate brokerage commissions, which contributed substantially all of the total increase. An increase in financing fees and an increase in other revenues contributed the remaining change in total revenues.

Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $165.7 million for the three months ended September 30, 2016 from $151.9 million for the same period in 2015, an increase of $13.8 million, or 9.1%. The increase was driven by growth in the average transaction size (16.3%) and to a lesser extent, number of investment sales transactions (2.2%), partially offset by a decrease in average commission rates (19 basis points) due to a larger proportion of our transactions that closed in the >$20 million larger transaction market segment, which generate lower commission rates.

Financing fees. Revenues from financing fees increased to $11.3 million for the three months ended September 30, 2016 from $10.9 million for the same period in 2015, an increase of $0.5 million or 4.2%. The increase was driven by an increase in the number of loan transactions (6.4%) due to an increase in the average number of financing professionals (17.9%), partially offset by a decrease in average commission rate per transaction (2 basis points) due in part to fees from certain larger loan transactions during the three months ended September 30, 2016 as compared to the same period in 2015. Larger loan transactions generally earn a lower fee percentage.

Other revenues. Other revenues increased to $3.6 million for the three months ended September 30, 2016 from $3.1 million for the same period in 2015, an increase of $0.6 million or 17.9%.

Total operating expenses

Our total operating expenses were $155.7 million for the three months ended September 30, 2016 compared to $138.5 million for the same period in 2015, an increase of $17.3 million, or 12.5%. Expenses increased primarily due to an increase in cost of services, which is predominantly variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Selling, general and administrative costs and to a lesser extent depreciation and amortization increased as well, as described below.

Cost of services. Cost of services for the three months ended September 30, 2016 increased $11.8 million, or 11.6% to $113.9 million from $102.0 million for the same period in 2015. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above. Cost of services as a percent of total revenues increased to 63.0% for the three months ended September 30, 2016 compared to 61.5% for the same period in 2015 primarily due to an increase in proportion of transactions closed by our more senior investment sales professionals who are compensated generally at higher commissions rates, partially offset by a reduction in referral fees.

Selling, general and administrative expense. Selling, general and administrative expense for the three months ended September 30, 2016 increased $5.1 million, or 14.3%, to $40.7 million from $35.7 million for the same period in 2015. Increases in our selling, general and administrative expense have been driven by our growth and investments in technology, sales and marketing tools and marketing and expansion of our services supporting our investment sales and financing professionals. These initiatives have primarily driven (i) a $1.9 million increase in salaries and related benefits as a result of increases in headcount in corporate and sales office support in connection with our growth and expansion of services supporting our investment sales and financing professionals; (ii) a $1.9 million increase in facilities expenses due to expansion of existing offices; (iii) a $1.2 million increase in sales and promotional marketing expenses to support increased sales activity; and (iv) a $1.1 million increase in other expense categories, net, primarily driven by our expansion and growth. In addition, selling, general and administrative expense increased $1.2 million due to legal costs and accruals, primarily driven by a settlement of outstanding litigation during the three months ended September 30, 2015, which reduced legal costs in that period; and decreased by (i) a $1.9 million decrease in management performance related compensation driven by reduced bonus accruals due to management exceeding performance criteria during three months ended September 30, 2015 and (ii) a $0.3 million decrease in stock-based compensation expense due to a decline in the Company’s stock price partially offset by incremental stock-based awards granted since the third quarter of 2015.

Depreciation and amortization expense. Depreciation and amortization expense increased to $1.1 million for the three months ended September 30, 2016 from $0.8 million for the same period in 2015, an increase of $0.3 million, or 43.3%. The increase is primarily driven by our expansion and growth.

Other income (expense), net

Other income (expense), net increased to $0.7 million for the three months ended September 30, 2016 from $(0.5) million for the same period in 2015. The increase was primarily driven by an increase in the value of our deferred compensation plan assets held in the rabbi trust, interest income on our investments in marketable securities, available-for-sale and foreign currency gains related to our Canadian operations.

Interest expense

Interest expense was $0.4 million for each of the three months ended September 30, 2016 and 2015.

Provision for income taxes

The provision for income taxes was $10.1 million for the three months ended September 30, 2016 as compared to $11.4 million in the same period in 2015, a decrease of $1.3 million or 11.4%. The effective income tax rate for the three months ended September 30, 2016 was 40.0%, compared with 42.9% for the same period in 2015. The decrease in the effective tax rate was due to a decrease in the effective state tax rate primarily as a result of changes in the Company’s state apportionment and the associated discrete tax expense recognized in 2015.

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

The provisions for income taxes excludes the difference in book and tax deductions associated with the settlement of shares under the Company’s 2013 Plan and disqualifying dispositions of shares issued from our 2013 ESPP Plan. Such tax benefits were recorded directly to additional paid-in capital.

Comparison of Nine Months Ended September 30, 2016 and 2015

Below are key operating results for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 (dollar and share amounts in thousands, except per share amounts):


	Nine Months Ended September 30,			Percentage of			Nine Months Ended September 30,			Percentage of			Change
	2016			Revenue			2015			Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	489,477			92.7	%	$	446,356			91.9	%	$	43,121			9.7	%
Financing fees		30,779			5.8			30,046			6.2			733			2.4
Other revenues		8,037			1.5			9,497			1.9			(1,460	)		(15.4	)

Total revenues		528,293			100.0			485,899			100.0			42,394			8.7

Operating expenses:
Cost of services		323,131			61.2			293,725			60.4			29,406			10.0
Selling, general, and administrative expense		123,403			23.3			109,064			22.5			14,339			13.1
Depreciation and amortization expense		3,164			0.6			2,389			0.5			775			32.4

Total operating expenses		449,698			85.1			405,178			83.4			44,520			11.0

Operating income		78,595			14.9			80,721			16.6			(2,126	)		(2.6	)
Other income (expense), net		1,567			0.3			23			—			1,544			na
Interest expense		(1,155	)		(0.2	)		(1,349	)		(0.3	)		194			(14.4	)

Income before provision for income taxes		79,007			15.0			79,395			16.3			(388	)		(0.5	)
Provision for income taxes		31,524			6.0			32,994			6.8			(1,470	)		(4.5	)

Net income	$	47,483			9.0	%	$	46,401			9.5	%	$	1,082			2.3	%

Adjusted EBITDA ⁽¹⁾	$	87,014			16.5	%	$	88,886			18.3	%	$	(1,872	)		(2.1	)%

Earnings per share:
Basic	$	1.22					$	1.19
Diluted	$	1.22					$	1.19
Weighted average common shares outstanding:
Basic		38,916						38,868
Diluted		39,034						39,051

⁽¹⁾

Revenues

Our total revenues were $528.3 million for the nine months ended September 30, 2016 compared to $485.9 million for the same period in 2015, an increase of $42.4 million, or 8.7%. Total revenues increased primarily as a result of increases in real estate brokerage commissions, which contributed substantially all of the total increase. A slight increase in financing fees, partially offset by a decrease in other revenues contributed the remaining change in total revenues.

Real estate brokerage commissions. Revenues from real estate brokerage commissions increased to $489.5 million for the nine months ended September 30, 2016 from $446.4 million for the same period in 2015, an increase of $43.1 million, or 9.7%. The increase was driven by a combination of the growth in the number of investment sales transactions (6.3%) and average transaction size (12.1%), partially offset by a decrease in average commission rates (18 basis points) due to a larger proportion of our transactions that closed in the >$20 million larger transaction market segment, which generate lower commission rates.

Financing fees. Revenues from financing fees increased to $30.8 million for the nine months ended September 30, 2016 from $30.0 million for the same period in 2015, an increase of $0.7 million or 2.4%. The increase was driven by an increase in the number of loan transactions (6.6%) due to an increase in the average number of financing professionals (18.1%), partially offset by a decrease in average fee rates (6 basis points) due in part to fees from certain larger loan transactions during the nine months ended September 30, 2016 as compared to the same period in 2015. Larger loan transactions generally earn a lower fee percentage.

Other revenues. Other revenues decreased to $8.0 million for the nine months ended September 30, 2016 from $9.5 million for the same period in 2015, a decrease of $1.5 million or 15.4%. The decrease was primarily driven by a decrease in consulting and advisory services during the nine months ended September 30, 2016 as compared to the same period in 2015.

Total operating expenses

Our total operating expenses were $449.7 million for the nine months ended September 30, 2016 compared to $405.2 million for the same period in 2015, an increase of $44.5 million, or 11.0%. Expenses increased primarily due to an increase in cost of services, which is predominantly variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Selling, general and administrative costs and to a lesser extent depreciation and amortization increased as well, as described below.

Cost of services. Cost of services for the nine months ended September 30, 2016 increased $29.4 million, or 10.0% to $323.1 million from $293.7 million for the same period in 2015. 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 61.2% for the nine months ended September 30, 2016 compared to 60.4% for the same period in 2015 primarily due to an increase in proportion of transactions closed by our more senior investment sales professionals who are compensated generally at higher commissions rates, partially offset by a reduction in referral fees.

Selling, general and administrative expense. Selling, general and administrative expense for the nine months ended September 30, 2016 increased $14.3 million, or 13.1%, to $123.4 million from $109.1 million for the same period in 2015. Increases in our selling, general and administrative expense have been driven by our growth and investments in technology, sales and marketing tools and marketing and expansion of our services supporting our investment sales and financing professionals. These initiatives have primarily driven (i) a $5.7 million increase in salaries and related benefits as a result of increases in headcount in corporate and sales office support in connection with our growth and expansion of services supporting our investment sales and financing professionals; (ii) a $5.1 million increase in facilities expenses due to expansion of existing offices; (iii) a $4.5 million increase in sales and promotional marketing expenses to support increased sales activity and our annual sales recognition event; and (iv) a $2.4 million increase in other expense categories, net, primarily driven by our expansion and growth. In addition, selling, general and administrative expense increased $1.7 million due to legal costs and accruals, partly driven by settlement of outstanding litigation and recoveries from a settlement with an insurance carrier during the nine months ended September 30, 2015, which reduced legal costs in that period; and decreased by (i) a $3.3 million in management performance related compensation driven by reduced bonus accruals due to management exceeding performance criteria during the nine months ended September 30, 2015 and (ii) a $1.8 million in stock-based compensation expense due to a decline in the Company’s stock price partially offset by incremental stock-based awards granted since the third quarter of 2015.

Depreciation and amortization expense. Depreciation and amortization expense increased to $3.1 million for the nine months ended September 30, 2016 from $2.4 million for the same period in 2015, an increase of $0.8 million, or 32.4%. The increase is primarily driven by our expansion and growth and investment in technology to improve the sales and marketing tools.

Other income (expense), net

Other income (expense), net increased to $1.6 million for the nine months ended September 30, 2016 from $23,000 for the same period in 2015. The increase was primarily driven by an increase in the value of our deferred compensation plan assets held in the rabbi trust, foreign currency gains related to our Canadian operations and interest income on our investments in marketable securities, available-for-sale. The increase was partially offset by realized losses on our investments in marketable securities, available-for-sale, due to a security sold during the nine months ended September 30, 2016, which no longer met criteria our investment policy.

Interest expense

Interest expense decreased to $1.2 million for the nine months ended September 30, 2016 from $1.3 million for the same period in 2015, a decrease of $0.2 million, or 14.4%.

Provision for income taxes

The provision for income taxes was $31.5 million for the nine months ended September 30, 2016 as compared to $33.0 million in the same period in 2015, a decrease of $1.5 million or 4.5%. The effective income tax rate for the nine months ended September 30, 2016 was 39.9%, compared with 41.6% for the same period in 2015. The decrease in the effective tax rate was due to a decrease in the effective state tax rate primarily as a result of changes in the Company’s state apportionment and the associated discrete tax expense recognized in 2015.

The provisions for income taxes excludes the difference in book and tax deductions associated with the settlement of shares under the Company’s 2013 Plan and disqualifying dispositions of shares issued from our 2013 ESPP Plan. Such tax benefits, which aggregated $157,000 and $534,000 during the nine months ended September 30, 2016 and 2015, respectively, were recorded directly to additional paid-in capital.

Non-GAAP Financial Measure

In this quarterly report on Form 10-Q, we include a non-GAAP financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization and stock-based compensation, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income/expense, (ii) net realized gains on marketable securities, available-for-sale, (iii) income tax expense, (iv) depreciation and amortization and (v) stock-based compensation expense. We use Adjusted EBITDA in our business operations to, among other things, evaluate the performance of our business, develop budgets and measure our performance against those budgets. We also believe that analysts and investors use Adjusted EBITDA as supplemental measures to evaluate our overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. generally accepted accounting principles (“U.S. GAAP”). We find Adjusted EBITDA as a useful tool to assist in evaluating performance because it eliminates items related to capital structure and taxes and non-cash stock-based compensation charges. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures calculated in accordance with U.S. GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.

A reconciliation of the most directly comparable U.S. GAAP financial measure, net income, to Adjusted EBITDA is as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income	$	15,144		$	15,176		$	47,483		$	46,401
Adjustments:
Interest income and other ⁽¹⁾		(514	)		(323	)		(1,245	)		(997	)
Interest expense		380			380			1,155			1,349
Provision for income taxes		10,100			11,398			31,524			32,994
Depreciation and amortization		1,149			802			3,164			2,389
Stock-based compensation		1,833			2,168			4,933			6,750

Adjusted EBITDA ⁽²⁾	$	28,092		$	29,601		$	87,014		$	88,886

⁽¹⁾

Other for the three months ended September 30, 2016 and 2015 includes $16 and $0, respectively, of net realized gains on marketable securities, available-for-sale. Other for the nine months ended September 30, 2016 and 2015 includes $(119) and $130, respectively, of net realized (losses) gains on marketable securities, available-for-sale.

⁽²⁾	The decrease in Adjusted EBITDA for the three and nine months ended September 30, 2016, compared to the same period in the prior year is primarily due to lower stock-based compensation expense and a higher proportion of operating expenses compared to revenues.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, marketable securities, available-for-sale and, if necessary, borrowings under our credit agreement. In order to enhance yield to us, we have invested a portion of our cash in money market funds and in fixed and variable income debt securities, in accordance with our investment policy approved by the board of directors. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations, cash and cash equivalents, proceeds from the sale of marketable securities, available-for-sale or availability under our credit agreement.

The Company invests excess cash in money market funds. In October 2016, new regulations issued by the SEC in July 2014 went into effect. As a result, certain of the investments in money market funds in which the Company invests may no longer maintain a stable NAV and may impose fees on redemptions and/or gate fees. The Company has evaluated all its investments in money market funds and determined based on current facts and circumstances that they continue to meet the criteria to be classified as cash and cash equivalents.

Cash held in our Canadian operations aggregated $526,000 and $763,000 at September 30, 2016 and December 31, 2015, respectively.

Cash Flows

Our total cash and cash equivalents balance increased by $25.8 million to $122.0 million at September 30, 2016, compared to $96.2 million at December 31, 2015. The following table sets forth our summary cash flows for the nine months ended September 30, 2016 and 2015 (in thousands):


	Nine Months Ended September 30,
	2016			2015
Net cash provided by operating activities	$	41,518		$	38,582
Net cash used in investing activities		(14,237	)		(123,805	)
Net cash (used in) provided by financing activities		(1,513	)		3,696

Net increase (decrease) in cash and cash equivalents		25,768			(81,527	)
Cash and cash equivalents at beginning of period	$	96,185			149,159
Cash and cash equivalents at end of period	$	121,953		$	67,632

Operating Activities

Cash flows provided by operating activities were $41.5 million for the nine months ended September 30, 2016, as compared to $38.6 million for the same period in 2015. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in operating assets and liabilities. The $2.9 million increase in cash flows provided by operating activities for the nine months ended September 30, 2016 compared to the same period in 2015 was primarily due to the net effect of our growth of business, differences in timing of payments and receipts, a reduction in the deferral of certain discretionary commissions and lower bonus accruals.

Investing Activities

Cash flows used in investing activities were $14.2 million for the nine months ended September 30, 2016, as compared to $123.8 million for the same period in 2015. The decrease in cash flows used in investing activities for the nine months ended September 30, 2016, as compared to the same period in 2015 was primarily due to $6.8 million in net purchases of marketable securities, available-for-sale for the nine months ended September 30, 2016 compared to $119.9 million for the same period in 2015.

Financing Activities

Cash flows used in financing activities were $1.5 million for the nine months ended September 30, 2016, as compared to cash flows provided by financing activities of $3.7 million for the same period in 2015. The change in cash flows provided by financing activities for the nine months ended September 30, 2016 compared to the same period in 2015, was primarily impacted by net changes in stock-based award activity, including excess tax benefit from stock-based award activity. See Note 9 – “Stock-Based Compensation Plans” of our Notes to Condensed Consolidated Financial Statements for additional information.

Liquidity

We believe that our existing balances of cash and cash equivalents, cash flows expected to be generated from our operations, proceeds from the sale of marketable securities, available-for-sale and borrowings available under the credit agreement will be sufficient to satisfy our operating requirements for at least the next twelve months. If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could prevent us from, among other factors, to fund acquisitions or to otherwise finance our growth or operations. In addition, our notes payable to former stockholders and SARs liability have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our liquidity.

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, 2015 other than an acceleration of payments of the SARs liability and Deferred Compensation Plan liability due to the retirement of certain participants. Anticipated payments increased $3.8 million (1-3 years) and $3.6 million (3-5 years) and decreased $7.3 million (more than 5 years) and $3.6 million (other) from those reported as of December 31, 2015.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Inflation

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

Critical Accounting Policies; Use of Estimates

We prepare our financial statements in accordance with U.S. GAAP. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. There were no material changes in our critical accounting policies, as disclosed in in our Annual Report on Form 10-K for the year ended December 31, 2015.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 1 – “Description of business, basis of presentation and recent accounting pronouncements” of our Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We maintain a portfolio of investments in a variety of fixed and variable rate securities, including U.S. government and federal agency securities, corporate debt securities and asset backed securities. As of September 30, 2016, the fair value of investments in marketable securities, available-for-sale was $142.7 million. The primary objective of our investment activity is to maintain the safety of principal, 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 maturity, we may choose to sell any of the securities based on market opportunities to enhance our overall yield or maintain compliance with 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, with a weighted average rating (exclusive of cash and cash equivalents) of AA+ as of September 30, 2016. Maturities are maintained consistent with our short, medium and long-term liquidity objectives.

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


Change in Interest Rates	Approximate Change in Fair Value of Investments
2% Decrease	$	3,903
1% Decrease	$	2,465
1% Increase	$	(2,749	)
2% Increase	$	(5,501	)

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2016, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, our disclosure controls and procedures were effective in ensuring that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

For information on our legal proceedings, see Note 12 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements.

Item 1A. Risk Factors

There have been no material changes from the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2015.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The documents listed in the Exhibit Index of this quarterly report on Form 10-Q are incorporated by reference or are filed with this quarterly report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

SIGNATURES

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


			Marcus & Millichap, Inc.

Date:	November 7, 2016	By:	/s/ Hessam Nadji
			Hessam Nadji President and Chief Executive Officer (Principal Executive Officer)

Date:	November 7, 2016	By:	/s/ Martin E. Louie
			Martin E. Louie Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX


Exhibit No.		Description

10.23*		Second Amendment to Credit Agreement and Amended and Restated Revolving Line of Credit Note, between the Company and Wells Fargo Bank, National Association dated as of August 10, 2016

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*		XBRL Instance Document

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Document

101.LAB*		XBRL Taxonomy Label Linkbase Document

101.PRE*		XBRL Taxonomy Presentation Linkbase Document

*	Filed herewith.