It was hardly a stellar performance, but at least the greater Valley has another public company. The initial public offering of Marcus & Millichap Inc. raised just $72 million, far less than the $104 million the commercial real estate brokerage had hoped to raise when it first filed a prospectus in September. But the Calabasas company and its underwriters got this much right: they nailed the stock’s pricing. Going to market at $12 a share on Oct. 31, the stock jumped almost 12 percent on its first day of trading, but has leveled off since. Shares closed Nov. 6 at $13.92 on the New York Stock Exchange. But just one week before the offering, Marcus & Millichap had expected to price the stock at $14 to $16 a share, which could have raised up to $96 million. Now, the company only expects net proceeds of about $34.6 million from the offering, which it plans to use to expand its business, currently dominated by sales transactions of less than $10 million. So what went wrong? “Clearly what must have happened during the Marcus & Millichap road show is the underwriters must have seen weaker demand than they expected,” said Tim Keating, chief executive of Keating Capital Inc., a Greenwood Village, Colo. business development firm that focuses on pre-IPO financing. “It is a disappointment that they priced below the range they quoted. That’s a miss. But the stock has traded up, so it suggests the deal was priced very well.” Still, the offering pales in comparison to how some other companies have fared. Last month 33 companies raised more than $12 billion – the best month for U.S. IPOs since 2007, before the financial crisis. Overall, there have been about 180 offerings this year with share prices up an average 13 percent. Among the possible investor turn offs for Marcus & Millichap was both the level of insider selling – and, ironically, the small public float. About 45 percent of the shares offered were from the co-founders and executives. William Millichap – who co-founded the firm in 1971 with George Marcus – sold 99 percent of his stake as part of the IPO. Marcus retains about 73 percent control of the company, but has lockup agreements that will allow him to exit the company over the next two years in four stages if he so desires. Favorable conditions Keating said that with both men hovering around 70 years old, it would be normal to expect them to cash out. But with other management only selling a fraction of their stake, including Chief Executive John Kerin, insiders retain almost 80 percent of the company. “Until the ownership goes below 50 percent, the stock won’t be very liquid,” said Alex Cappello, chief executive of Santa Monica boutique investment bank Cappello Capital Corp. “It will keep them from attracting large institutional investors and a lot of brokers may stay away too.” The real estate industry in particular has seen several hot IPOs this year, though they have involved companies in home sales. Marcus & Millichap is strong in the residential market too, but as a broker of multifamily properties. Re/Max Holdings Inc., a Denver franchiser of real estate brokerages, had a successful $220 million offering last month, pricing above its originally quoted range and seeing a 23 percent pop on day one. The stock has flattened since, resting at about 20 percent above its IPO price. “In terms of the sector and market conditions, everything was favorable,” said Keating. Also on the upswing, shares of Seattle-based online real estate directory Zillow have almost quadrupled since its 2011 IPO, and residential listing website Trulia Inc. of San Francisco has more than doubled since its September 2012 offering. American Homes 4 Rent, an Agoura Hills based single-family home landlord, raised $887 million in its July IPO, though it has since struggled as the recovering residential real estate market has driven up home acquisition costs. The company reportedly laid off about 15 percent of its workforce and lost $14 million in its first quarterly earnings report since going public. The share price as of Nov. 6 was about 1.5 percent below its IPO price. On the commercial side, earnings results have been mixed lately, which could have contributed to Marcus & Millichap’s lackluster IPO. Jones Lang LaSalle Inc., based in Chicago, reported better-than-expected revenue growth in its third quarter earnings last month, but CBRE Group Inc. of Los Angeles reported less-than-stellar third quarter earnings, mostly due to its commercial mortgage business. Industry position Lloyd Greif, chief executive at boutique investment bank Greif & Co. in downtown Los Angeles, noted that there is trend for companies to cut back on office space as more employees work remotely and those in the office are put in collaborative work stations. “There’s always a lot of risk in real estate. And there’s a trend out there right now that companies are working on efficiency of their real estate space,” said. “That’s a long-term negative for brokerages.” Marcus & Millichap is a leader in closing deals worth less than $10 million involving private, non-institutional owners. In fact, about 90 percent of the company’s sales fall into that “private client segment.” The firm closed 6,149 sales and financings worth about $22 billion last year. It does not handle leases. The brokerage plans to use the proceeds from the IPO to expand its footprint and move into larger deals, which had accounted for just 7 percent of its transactions. The firm has more than 1,000 brokers in about 75 offices. Financially it is in a strong position to expand. It went to market with no long-term debt and reported its profits rose last year 105 percent to $27.9 million, while revenue was up 40 percent to $386 million. Cappello, the investment banker, called the result of the IPO “too bad,” but sees it as just the first step. “They should have had twice as much money come in,” he said. “I’d be shocked if they didn’t do another offering soon.” But the niche of focusing on small market deals may actually be a plus for Marcus & Millichap, Greif said. “The middle market historically is more resilient than the larger market. It certainly is less susceptible to the trends and economic swings,” he said. “Yes, they had to scale back, but it was the right thing to do. Now the management team has to perform and make this a good stock for the investors.”
