MARCUS & MILLICHAP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

Unless the context requires otherwise, the words "Marcus & Millichap," "MMI,"
"we," the "Company," "us" and "our" refer to Marcus & Millichap, Inc., and its
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,
including but not limited to any continuing impact of the
COVID-19
pandemic, further interest rate changes and rising inflation. The results of
operations for the six months ended June 30, 2022 are not necessarily indicative
of the results that may be expected for the full year ending December 31, 2022,
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, 2021 filed with the SEC on March 1, 2022,
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 for more than 15 years. As of June 30, 2022,
we had 1,901 investment sales and financing professionals that are primarily
exclusive independent contractors operating in 82 offices, who provide real
estate brokerage and financing services to sellers and buyers of commercial real
estate assets. During the three and six months ended June 30, 2022, we closed
3,636 and 6,540 investment sales, financing and other transactions with total
sales volume of approximately $26.4 billion and $47.4 billion, respectively.
During the year ended December 31, 2021, we closed 13,255 investment sales,
financing and other transactions with total sales volume of approximately
$84.4 billion.

We generate revenues by collecting real estate brokerage commissions upon the
sale, and fees upon the financing, of commercial properties, and by providing
equity advisory services, loan sales, loan guarantees and 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. During the three months ended June 30, 2022, and the year ended
December 31, 2021, approximately 90% of our revenues were generated from real
estate brokerage commissions, 9% from financing fees and 1% from other real
estate related services.

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

  •   Properties priced less than $1 million;


• Private client market: properties priced from $1 million to up to but

          less than $10 million;


• Middle market: properties priced from $10 million to up to but less than

          $20 million; and


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



We are the industry leader in serving private clients in the
$1-$10 million
private client market segment, which contributed approximately 59% and 63% of
our real estate brokerage commissions during the three months ended June 30,
2022 and 2021, respectively, and approximately 58% and 63% of our real estate
brokerage commissions during the six months ended June 30, 2022 and 2021,
respectively. The following table sets forth the number of transactions, sales
volume and revenues by commercial real estate market segment for real estate
brokerage:

                                                                                                     Three Months Ended June 30,
                                                                                      2022                                                 2021                                                 Change
Real Estate Brokerage                                           Number          Volume              Revenues         Number          Volume              Revenues          Number           Volume              Revenues
                                                                             (in millions)       (in thousands)                   (in millions)       (in thousands)                     (in millions)       (in thousands)
<$1 million                                                         279     $           168     $          6,672         297     $           200     $ 

7,618 (18 ) $ (32) $ (946) Private Client Market ($1 – <$10 million)

                         2,021               7,348              209,868       1,767               5,675              158,136          254                1,673               51,732
Middle Market ($10 - <$20 million)                                  209               2,819               56,456         156               2,134               41,745           53                  685               14,711
Larger Transaction Market (?$20 million)                            176               9,533               81,689         110               5,551               45,404           66                3,982               36,285

                                                                  2,685     $        19,868     $        354,685       2,330     $        13,560     $        252,903          355      $         6,308     $        101,782




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                                                                                                      Six Months Ended June 30,
                                                                                      2022                                                 2021                                                 Change
Real Estate Brokerage                                           Number          Volume              Revenues         Number          Volume              Revenues          Number           Volume              Revenues
                                                                             (in millions)       (in thousands)                   (in millions)       (in thousands)                     (in millions)       (in thousands)
<$1 million                                                         485     $           296     $         12,459         524     $           349     $ 

13,756 (39 ) $ (53) $ (1,297)
Private Client Market ($1 – <$10 million)

                         3,627              13,044              370,899       2,967               9,343              263,559          660                3,701              107,340
Middle Market ($10 - <$20 million)                                  393               5,322              103,216         234               3,201               62,346          159                2,121               40,870
Larger Transaction Market (?$20 million)                            317              18,411              155,020         193               9,531               76,038          124                8,880               78,982

                                                                  4,822     $        37,073     $        641,594       3,918     $        22,424     $        415,699          904      $        14,649     $        225,895


Factors Affecting Our Business


Our business and our operating results, financial condition and liquidity are
significantly affected by the number and size of commercial real estate
investment sales and financing transactions that we close in any period. The
number and size of these transactions are affected by our ability to recruit and
retain investment sales and financing professionals, identify and contract
properties for sale, and identify those that need financing and refinancing. We
principally monitor the commercial real estate market through four factors,
which generally drive our business. The factors are the economy, commercial real
estate supply and demand, capital markets, and investor sentiment and investment
activity.

The Economy

Our business is dependent on economic conditions within the markets in which we
operate. Changes in the economy on a global, national, regional or local basis
can have a positive or negative impact on our business. Economic indicators and
projections related to job growth, unemployment, interest rates, retail spending
and confidence trends can have a positive or negative impact on our business.
Overall market conditions, including global trade, interest rate changes,
inflation, and job creation, can affect investor sentiment and, ultimately, the
demand for our services from investors in real estate.

Following last year's 5.7% increase in GDP, the U.S. economy has displayed a
variety of mixed signals in the first half of 2022. Underlying inflation drivers
including supply chain disruptions, oil and gas price surges and rapidly
shifting inventory levels have aligned with financial market turbulence and
weakening consumer confidence to weigh on investor sentiment. At the same time,
positive economic indicators including the addition of more than 2.7 million
jobs in the first six months of the year,
near-record-low
unemployment and underemployment rates and a 5.5% gain in core retail sales
through just the first half of the year all suggest the economy remains sound.
These mixed messages will likely empower the Federal Reserve to continue the
inflation-battling monetary policies they initiated in late 2021. The Federal
Reserve has signaled an acceleration of their quantitative tightening program is
forthcoming as they double the pace of their balance sheet drawdown. They have
also signaled steady increases of the Federal Funds rate through the remainder
of 2022, which many believe will lift the overnight rate by a total of 300 to
400 basis points in 2022. The Federal Reserve's actions are placing upward
pressure on the cost of debt financing, adding to the complexity of investor
underwriting and acquisition strategies. The unique blend of economic
crosscurrents in 2022 has created additional choppiness in the commercial real
estate market, causing each property type and geographic region to operate in a
unique micro-climate significantly influenced by both national and local
economic forces.

Commercial Real Estate Supply and Demand


Our business is dependent on the willingness of investors to invest in or sell
commercial real estate, which is affected by many factors beyond our control.
These factors include the supply of commercial real estate, coupled with user
demand for these properties, and the performance of real estate assets, when
compared with other investment alternatives, such as stocks and bonds.

The economic choppiness translated to mixed results for commercial real estate
space demand. Occupied multifamily housing units tapered, giving back some of
the first quarter gains that had driven the national vacancy rate to a record
low. Office space demand remained positive for a fifth consecutive quarter, but
absorption fell short of construction completions resulting in a modest vacancy
gain. Retail space demand sustained momentum, delivering a seventh consecutive
quarter of positive absorption and a quarterly vacancy rate decline. Industrial
vacancy rates also declined, pushing deeper into record territory with a 3.6%
vacancy rate. The hotel sector also achieved growth, with occupancy rates
surpassing 70% in June, nearly back to 2019 levels, supporting record-high
average daily rates. These performance metrics reiterate the highly localized,
property-specific trends in the commercial real estate sector that are
challenging real estate investors to closely assess each market and each asset.
Financial market turbulence, economic crosscurrents and rising interest rates
have the potential to create additional hurdles for investors in the second half
of 2022.

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Capital Markets


Credit and liquidity issues in the financial markets have a direct impact on the
flow of capital to the commercial real estate market. Real estate purchases are
often financed with debt, and as a result, credit and liquidity impact
transaction activity and prices. Changes in interest rates, as well as steady
and protracted movements of interest rates in one direction, whether increasing
or decreasing, could adversely or positively affect the operations and income
potential of commercial real estate properties, as well as lender and equity
underwriting for real estate investments. These changes generally influence
investor demand for commercial real estate investments.

In their effort to battle inflation, the Federal Reserve has aggressively
increased the overnight rate, placing upward pressure on the broader interest
rate climate. However, it appears some of these efforts have been offset by
financial market volatility as an increasing amount of capital has moved toward
safer investments including long-term bonds. As a result, short-term interest
rates have risen faster than long-term rates, keeping debt financing
comparatively stable. Long-term rates may begin to rise in September when the
Federal Reserve is scheduled to accelerate its quantitative tightening program.
Both equity and debt capital remain very liquid, supporting an active commercial
real estate transaction market. However, we believe that if interest rates
increase significantly in a short period of time, they could restrain
transaction activity as the higher cost of capital widens the expectation gap
between buyers and sellers. Lenders have remained active in both the placement
and pricing of capital, but caution has risen over the last quarter. Based on
Federal Reserve Chairman Powell comments, many believe the Federal Reserve's
overnight rate could be lifted by a total of 300 to 400 basis points in 2022.
While many investors believe the Federal Reserve rate increases will translate
to higher commercial real estate mortgage costs, other factors could come into
play. Federal Reserve action and long-term interest rates tend to not have a
one-to-one
movement relationship and can even move contrary to each other on occasion.
Should there be a significant financial market or geopolitical disruption, an
investor flight to safety could act as a meaningful counterbalance to upward
pressure from the benchmark rate.

Investor Sentiment and Investment Activity


We rely on investors to buy and sell properties in order to generate
commissions. Investors' desires to engage in real estate transactions are
dependent on many factors that are beyond our control. The economy, supply and
demand for properly positioned properties, available credit and market events
impact investor sentiment and, therefore, transaction velocity. In addition, our
private clients, who make up the largest source of revenue, are often motivated
to buy, sell and/or refinance properties due to personal circumstances, such as
death, divorce, partnership breakups and estate planning.

Commercial real estate sales dollar volume set a record high in 2021, and the
momentum largely carried into the first half of 2022. However, rising interest
rates have begun to modestly restrain transaction flow moving the market back
toward traditional levels. Assets trading at historically high prices in the
most sought-after markets have in many cases generated fewer bids than last year
while properties offering higher yields in slower growth metros have largely
sustained momentum thus far. The rising cost of debt capital, perceptions of
rising recession risk and the tempering of occupancy gains and rent growth
relative to 2021 have led investors to more carefully calibrate their
underwriting assumptions. In some cases, this has widened the buyer/seller
expectation gap, in turn moderating investment activity. Industrial and
apartment properties have remained in high demand, with hotels, self-storage and
necessity-based retail centers also attracting investor attention. Interest in
office properties and seniors housing has remained softer by historical
standards as investors continue to consider the impact of
COVID-19
and work-from-home business models. Looking forward, elevated inflation and
stock market volatility could bolster interest in commercial real estate
investments as many believe the sector offers increased inflation resistance and
stability. This may at least partially offset the headwind posed by rising
interest rates.

Key Financial Measures and Indicators

revenue


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.

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Because our business is transaction oriented, we rely on investment sales and
financing professionals to continually develop leads, identify properties to
sell and finance, market those properties and close the sale timely to generate
a consistent flow of revenue. While our sales volume is impacted by seasonality
factors, the timing of closings is also dependent on many market and personal
factors unique to a particular client or transaction, particularly clients
transacting in the
$1-$10 million
private client market segment. These factors can cause transactions to be
accelerated or delayed beyond our control. Further, commission rates earned are
generally inversely related to the value of the property sold. As a result of
our expansion into the middle and larger transaction market segments, we have
seen our overall commission rates fluctuate from
period-to-period
as a result of changes in the relative mix of the number and volume of
investment sales transactions closed in the middle and larger transaction market
segments as compared to the
$1-$10 million
private client market segment. These factors may result in
period-to-period
variations in our revenues that differ from historical patterns.

A small percentage of our transactions include retainer fees and/or breakage
fees. Retainer fees are credited against a success-based fee paid upon the
closing of a transaction or a breakage fee. Transactions that are terminated
before completion will sometimes generate breakage fees, which are usually
calculated as a set amount or a percentage of the fee 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 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 in connection with the transaction.


To a lesser extent, we also earn fees on loan performance, equity advisory
services, loan sales, loan guarantees and ancillary services associated with
financing activities. We recognize guarantee fees over the term of the guarantee
and other fees when we have no further obligations, generally upon the closing
of a transaction. We previously generated mortgage servicing fees through the
provision of collection, remittance, recordkeeping, reporting and other related
mortgage servicing functions, activities and services. We recognized mortgage
servicing revenues upon the acquisition of a servicing obligation.

Other Revenues


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

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 variable commissions paid to our
investment sales professionals and compensation-related costs related to our
financing activities. Commission expenses are directly attributable to providing
services to our clients for investment sales and financing services. Most of our
investment sales and financing professionals are independent contractors and are
paid commissions; however, because there are some who are initially paid a
salary and certain of our financing professionals are employees, costs of
services also include employee-related compensation, employer taxes and benefits
for those employees. The commission rates we pay to our investment sales and
financing professionals vary based on individual contracts negotiated and are
generally higher for the more experienced professionals. Some of our most senior
investment sales and financing professionals can also earn additional
commissions after meeting certain annual financial 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 one to three years, at our election, and paid at the
beginning of the second, third or fourth calendar year. Cost of services also
includes referral fees paid to other real estate brokers where we are the
principal service provider. Cost of services, therefore, can vary based on the
commission structure of the independent contractors that closed transactions in
any particular period.

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Selling, General and Administrative Expenses


The largest expense component within selling, general and administrative
expenses is personnel expenses for our management team and sales and support
staff. In addition, these costs include facilities costs (excluding depreciation
and amortization), staff related expenses, sales, marketing, legal,
telecommunication, network, data sources, transaction costs related to
acquisitions, changes in fair value for contingent and deferred consideration
and other administrative expenses. Also included in selling, general and
administrative are expenses for stock-based compensation to
non-employee
directors, employees and independent contractors (i.e. investment sales and
financing professionals) under the Amended and Restated 2013 Omnibus Equity
Incentive Plan ("2013 Plan") and the 2013 Employee Stock Purchase Plan ("ESPP").

Depreciation and Amortization Expense


Depreciation expense consists of depreciation recorded on our computer software
and hardware and furniture, fixture and equipment. Depreciation is provided over
estimated useful lives ranging from three to seven years for assets.
Amortization expense consists of (i) amortization recorded on our mortgage
servicing rights ("MSRs") using the interest method over the period that
servicing income is expected to be received and (ii) amortization recorded on
intangible assets amortized on a straight-line basis using a useful life between
one and seven years.

Other (Expense) Income, Net

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

Interest Expense

Interest expense primarily consists of interest expense associated with the stock appreciation rights (“SARs”) liability, 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 in which we operate due to differing tax rates
in those jurisdictions and the impact of permanent items, including compensation
charges, qualified transportation fringe benefits, uncertain tax positions,
meals and entertainment and
tax-exempt
deferred compensation plan assets. Our provision for income taxes includes the
windfall tax benefits and shortfall expenses, net, from shares issued in
connection with our 2013 Plan and ESPP.

We record deferred taxes, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes.

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Results of Operations


Following is a discussion of our results of operations for the three and six
months ended June 30, 2022 and 2021. 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.

Key Operating Metrics


We regularly review a number of key metrics to evaluate our business, measure
our performance, identify trends affecting our business, formulate financial
projections and make strategic decisions. We also believe these metrics are
relevant to investors' and others' assessment of our financial condition and
results of operations. During the three months ended June 30, 2022 and 2021, we
closed more than 3,600 and 3,200 investment sales, financing and other
transactions, respectively, with total sales volume of approximately
$26.4 billion and $17.4 billion, respectively. During the six months ended
June 30, 2022 and 2021, we closed more than 6,500 and 5,600 investment sales,
financing and other transactions, respectively, with total sales volume of
approximately $47.4 billion and $29.4 billion, respectively. Such key metrics
for real estate brokerage and financing activities (excluding other
transactions) are as follows:

                                               Three Months Ended               Six Months Ended
                                                    June 30,                        June 30,
Real Estate Brokerage                         2022            2021            2022            2021
Average Number of Investment Sales
Professionals                                   1,822           1,934           1,839           1,946
Average Number of Transactions per
Investment Sales Professional                    1.47            1.20            2.62            2.01

Average Commission per Transaction $132,099 $108,542 $133,056 $106,100
Average Commission Rate

                          1.79 %          1.87 %          1.73 %          1.85 %
Average Transaction Size (in thousands)     $   7,399       $   5,820       $   7,688       $   5,723
Total Number of Transactions                    2,685           2,330           4,822           3,918
Total Sales Volume (in millions)            $  19,868       $  13,560       $  37,073       $  22,424

                                               Three Months Ended               Six Months Ended
                                                    June 30,                        June 30,
Financing
(1)                                           2022            2021            2022            2021
Average Number of Financing
Professionals                                      87              85              86              86
Average Number of Transactions per
Financing Professional                           8.01            8.05           14.15           13.70
Average Fee per Transaction                 $  44,985       $  34,783       $  44,198       $  32,972
Average Fee Rate                                 0.70 %          0.82 %          0.75 %          0.86 %
Average Transaction Size (in thousands)     $   6,453       $   4,228       $   5,882       $   3,824
Total Number of Transactions                      697             684           1,217           1,178

Total Financing Volume (in millions) $4,498 $2,892 $7,158 $4,504

(1) Operating metrics exclude certain financing fees not directly associated to

    transactions.



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Comparison of Three Months Ended June 30, 2022 and 2021

Below are key operating results for the three months ended June 30, 2022
compared to the three months ended June 30, 2021 (dollars in thousands):


                                            Three Months         Percentage        Three Months         Percentage                 Change
                                                Ended                of                Ended                of
                                            June 30, 2022         Revenue  

June 30, 2021 Revenue Dollar Percentage Revenues: Real estate brokerage commissions $354,685

89.6 %    $       252,903              88.8 %    $ 101,782              40.2 %
Financing fees                                      36,811               9.3               28,214               9.9          8,597              30.5 %
Other revenues                                       4,461               1.1                3,829               1.3            632              16.5 %

Total revenues                                     395,957             100.0              284,946             100.0        111,011              39.0 %

Operating expenses:
Cost of services                                   256,042              64.7              178,585              62.7         77,457              43.4 %
Selling, general and administrative                 79,841              20.2               61,797              21.7         18,044              29.2 %
Depreciation and amortization                        3,332               0.8                2,959               1.0            373              12.6 %

Total operating expenses                           339,215              85.7              243,341              85.4         95,874              39.4 %

Operating income                                    56,742              14.3               41,605              14.6         15,137              36.4 %
Other (expense) income, net                           (461 )            (0.1 )              1,370               0.5         (1,831 )          (133.6 )%
Interest expense                                      (158 )             0.0                 (146 )             0.0            (12 )             8.2 %

Income before provision for income taxes            56,123              14.2               42,829              15.1         13,294              31.0 %
Provision for income taxes                          13,955               3.5               11,297               4.0          2,658              23.5 %

Net income                                 $        42,168              10.6 %    $        31,532              11.1 %    $  10,636              33.7 %

Adjusted EBITDA
(1)                                        $        62,909              15.9 %    $        48,110              16.9 %    $  14,799              30.8 %



(1) Adjusted EBITDA is not a measurement of our financial performance under US

generally accepted accounting principles (“US GAAP”) and should not be

considered as an alternative to net income, operating income or any other

measures derived in accordance with US 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 $396.0 million for the three months ended June 30, 2022
compared to $284.9 million for the same period in 2021, an increase of
$111.0 million, or 39%. Total revenues increased as a result of increases in
real estate brokerage commissions, financing fees and other revenues, as
described below.

Real estate brokerage commissions.
Revenues from real estate brokerage commissions increased to $354.7 million for
the three months ended June 30, 2022 from $252.9 million for the same period in
2021, an increase of $101.8 million, or 40.2%. The increase was primarily driven
by a 46.5% increase in overall sales volume generated by a 15.2% increase in the
number of investment sales transactions and a 27.1% increase in average
transaction size. The revenue from the combined Middle Market and Larger
Transaction Market increased 58.5% in the second quarter of 2022 as compared to
the same period last year and represented 38.9% of the brokerage revenue in the
second quarter of 2022 versus 34.5% of the brokerage revenue in the second
quarter of 2021. The average commission rates in the second quarter of 2022
decreased by 8 basis points compared to the same period last year primarily as a
result of the increase in average transaction size as larger transactions
typically earn lower commission rates.

Financing fees
. Revenues from financing fees increased to $36.8 million for the three months
ended June 30, 2022 from $28.2 million for the same period in 2021, an increase
of $8.6 million, or 30.5%, resulting primarily from the 52.6% increase in
average transaction size as the number of financing transactions remained
relatively flat. The average fee rate declined by 12 basis points due to the
larger size of financing transactions as larger transactions typically earn
lower commission rates.

Other revenues
. Other revenues increased to $4.5 million for the three months ended June 30,
2022 from $3.8 million for the same period in 2021, an increase of $0.6 million,
or 16.5%. The increase was primarily driven by increases in consulting and
advisory services during the three months ended June 30, 2022, compared to the
same period in 2021.

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Total Operating Expenses


Our total operating expenses were $339.2 million for the three months ended
June 30, 2022 compared to $243.3 million for the same period in 2021, an
increase of $95.9 million, or 39.4%. The increase was due to increases in cost
of services, which are variable commissions paid to our investment sales
professionals and compensation-related costs in connection with our financing
activities, selling, general and administrative costs and depreciation and
amortization expense, as described below.

Cost of services.
Cost of services increased to $256.0 million for the three months ended June 30,
2022 from $178.6 million for the same period in 2021, an increase of
$77.5 million, or 43.4%. 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 64.7% compared to 62.7% for the same
period in 2021 primarily due to our senior investment sales and financing
professionals who earn additional commissions after meeting certain annual
financial thresholds, reaching their thresholds earlier due to the increase in
sales volume.

Selling, general, and administrative expense.
Selling, general and administrative expense for the second quarter of 2022
increased to $79.8 million, from $61.8 million compared to the same period in
the prior year, an increase of $18.0 million or 29.2%. The change was primarily
due to increases in (i) compensation related costs, primarily driven by
increases in management performance compensation due to significant
year-over-year growth in operating results; (ii) business development, marketing
and other support related to the long-term retention of our sales and financing
professionals; and (iii) return to
in-person
agent and client business events, conferences, and meetings.

Depreciation and amortization expense.
Depreciation and amortization expense increased to $3.3 million for the three
months ended June 30, 2022, from $3.0 million for the same period in 2021, an
increase of $0.4 million, or 12.6%, principally related to additional
amortization of intangible assets related to recent acquisitions and additional
amortization of mortgage servicing rights due to the cancellation notices
received on certain servicing contracts.

Other (Expense) Income, Net


Other (expense) income, net decreased to a net expense of $0.5 million for the
three months ended June 30, 2022 from income of $1.4 million for the same period
in 2021. The decrease was primarily driven by an unfavorable change in the value
of our deferred compensation plan assets that are held in a rabbi trust and due
to the $0.3 million loss on sale of the remaining mortgage servicing rights.

Interest Expense

Interest expense was comparable for the three months ended June 30, 2022 and 2021, and primarily relates to interest expense on the Company’s stock appreciation rights liability.

Provision for Income Taxes


The provision for income taxes was $14.0 million for the three months ended
June 30, 2022, compared to $11.3 million for the same period in 2021, an
increase of $2.7 million. The effective income tax rate for the three months
ended June 30, 2022, was 24.9% compared to 26.4% for the same period in 2021.
The effective income tax rate decreased primarily due to an increase in windfall
tax benefits, net related to the settlement of stock-based awards, partially
offset by an increase in permanent items that are not tax deductible.

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Comparison of Six Months Ended June 30, 2022 and 2021

Below are key operating results for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 (dollars in thousands):


                                             Six Months          Percentage         Six Months          Percentage                 Change
                                                Ended                of                Ended                of
                                            June 30, 2022         Revenue  

June 30, 2021 Revenue Dollar Percentage Revenues: Real estate brokerage commissions $641,594

89.7 %    $       415,699              88.7 %    $ 225,895              54.3 %
Financing fees                                      63,264               8.8               46,057               9.8         17,207              37.4 %
Other revenues                                      10,563               1.5                7,167               1.5          3,396              47.4 %

Total revenues                                     715,421             100.0              468,923             100.0        246,498              52.6 %

Operating expenses:
Cost of services                                   452,810              63.3              287,688              61.4        165,122              57.4 %
Selling, general and administrative                154,376              21.6              113,474              24.2         40,902              36.0 %
Depreciation and amortization                        7,243               1.0                5,956               1.3          1,287              21.6 %

Total operating expenses                           614,429              85.9              407,118              86.9        207,311              50.9 %

Operating income                                   100,992              14.1               61,805              13.1         39,187              63.4 %
Other (expense) income, net                            (11 )             0.0                2,414               0.5         (2,425 )          (100.5 )%
Interest expense                                      (318 )             0.0                 (292 )             0.0            (26 )             8.9 %

Income before provision for income taxes           100,663              14.1               63,927              13.6         36,736              57.5 %
Provision for income taxes                          25,712               3.6               17,383               3.7          8,329              47.9 %

Net income                                 $        74,951              10.5 %    $        46,544               9.9 %    $  28,407              61.0 %

Adjusted EBITDA                            $       114,761              16.0 %    $        73,805              15.7 %    $  40,956              55.5 %



Revenues

Our total revenues were $715.4 million for the six months ended June 30, 2022
compared to $468.9 million for the same period in 2021, an increase of
$246.5 million, or 52.6%. Total revenues increased as a result of increases in
real estate brokerage commissions, financing fees and other revenues, as
described below.

Real estate brokerage commissions.
Revenues from real estate brokerage commissions increased to $641.6 million for
the six months ended June 30, 2022 from $415.7 million for the same period in
2021, an increase of $225.9 million, or 54.3%. The increase was primarily driven
by a 65.3% increase in overall sales volume generated by a 23.1% increase in the
number of investment sales transactions and a 34.3% increase in average
transaction size. The revenue from the combined Middle Market and Larger
Transaction Market increased 86.6% for the six months ended June 30, 2022 as
compared to the same period last year and represented 40.2% of the brokerage
revenue for the six months ended June 30, 2022, versus 33.3% of the brokerage
revenue for the six months ended June 30, 2021. The average commission rates in
the six months ended June 30, 2022 decreased by 12 basis points compared to the
same period last year, primarily as a result of the increase in average
transaction size as larger transactions typically earn lower commission rates.

Financing fees
. Revenues from financing fees increased to $63.3 million for the six months
ended June 30, 2022 from $46.1 million for the same period in 2021, an increase
of $17.2 million, or 37.4%, resulting primarily from the 53.8% increase in
average transaction size, and to a lesser extent, a 3.3% increase in the number
of financing transactions. The average fee rate declined by 11 basis points as
larger transactions typically earn lower commission rates.

Other revenues
. Other revenues increased to $10.6 million for the six months ended June 30,
2022 from $7.2 million for the same period in 2021, an increase of $3.4 million,
or 47.4%. The increase was primarily driven by increases in consulting and
advisory services during the six months ended June 30, 2022, compared to the
same period in 2021.

Total Operating Expenses

Our total operating expenses were $614.4 million for the six months ended
June 30, 2022 compared to $407.1 million for the same period in 2021, an
increase of $207.3 million, or 50.9%. The increase was due to increases in cost
of services, which are variable commissions paid to our investment sales
professionals and compensation-related costs in connection with our financing
activities, selling, general and administrative costs and depreciation and
amortization expense, as described below.

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Cost of services.
Cost of services increased to $452.8 million for the six months ended June 30,
2022 from $287.7 million for the same period in 2021, an increase of
$165.1 million, or 57.4%. 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 63.3% compared to 61.4% for the same
period in 2021 primarily due to our senior investment sales and financing
professionals who earn additional commissions after meeting certain annual
financial thresholds, reaching their thresholds earlier due to the increase in
sales volume.

Selling, general, and administrative expense.
Selling, general and administrative expense for six months ended June 30, 2022
increased to $154.4 million from $113.5 million compared to the same period in
2021, an increase of $40.9 million, or 36.0%. The change was primarily due to
increases in (i) compensation related costs, primarily driven by increases in
management performance compensation due to significant year-over-year growth in
operating results; (ii) business development, marketing and other support
related to the long-term retention of our sales and financing professionals; and
(iii) return to
in-person
agent and client business events, conferences, and meetings.

Depreciation and amortization expense.
Depreciation and amortization expense increased to $7.2 million for the six
months ended June 30, 2022 from $6.0 million for the same period in 2021, an
increase of $1.3 million, or 21.6%, principally related to additional
amortization of intangible assets related to recent acquisitions and additional
amortization of mortgage servicing rights due to the cancellation notices
received on certain servicing contracts.

Other (Expense) Income, Net


Other (expense) income, net decreased to a net expense of $11,000 for the six
months ended June 30, 2022 from $2.4 million of income for the same period in
2021. The decrease was primarily driven by an unfavorable change in the value of
our deferred compensation plan assets that are held in a rabbi trust and due to
the $0.3 million loss on sale of the remaining mortgage servicing rights.

Interest Expense


Interest expense was comparable for the six months ended June 30, 2022 and 2021,
and primarily relates to interest expense on the Company's stock appreciation
rights liability.

Provision for Income Taxes

The provision for income taxes was $25.7 million for the six months ended
June 30, 2022, compared to $17.4 million for the same period in 2021, an
increase of $8.3 million. The effective income tax rate for the six months ended
June 30, 2022, was 25.5% compared to 27.2% for the same period in 2021. The
effective income tax rate decreased primarily due to an increase in windfall tax
benefits, net related to the settlement of stock-based awards, partially offset
by an increase in permanent items that are not tax deductible.

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, stock-based compensation and other
non-cash
items, or Adjusted EBITDA. We define Adjusted EBITDA as net income before
(i) interest income and other, including net realized gains (losses) on
marketable debt securities,
available-for-sale
and cash and cash equivalents, (ii) interest expense, (iii) provision for income
taxes, (iv) depreciation and amortization, (v) stock-based compensation, and
(vi) non-cash
Mortgage Servicing Rights ("MSR") activity. We use Adjusted EBITDA in our
business operations to evaluate the performance of our business, develop budgets
and measure our performance against those budgets, among other things. We also
believe that analysts and investors use Adjusted EBITDA as a supplemental
measure to evaluate our overall operating performance. However, Adjusted EBITDA
has material limitations as a supplemental metric and should not be considered
in isolation, or as a substitute for analysis of our results as reported under
U.S. GAAP. We find Adjusted EBITDA to be a useful management metric to assist in
evaluating performance, because Adjusted EBITDA eliminates items related to
capital structure, taxes and
non-cash
items. In light of the foregoing limitations, we do not rely solely on Adjusted
EBITDA as a performance measure and also consider our U.S. GAAP results.
Adjusted EBITDA is not a measurement of our financial performance under U.S.
GAAP and should not be considered as an alternative to net income, operating
income or any other measures calculated in accordance with U.S. GAAP. Because
Adjusted EBITDA is not calculated in the same manner by all companies, it may
not be comparable to other similarly titled measures used by other companies. A
reconciliation of the most directly comparable U.S. GAAP financial measure, net
income, to Adjusted EBITDA is as follows (in thousands):

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                                  Three Months Ended            Six Months Ended
                                       June 30,                     June 30,
                                  2022           2021          2022           2021
Net income                      $  42,168      $ 31,532      $  74,951      $ 46,544
Adjustments:
Interest income and other
(1)                                  (979 )        (436 )       (1,594 )        (967 )
Interest expense                      158           146            318           292
Provision for income taxes         13,955        11,297         25,712        17,383
Depreciation and amortization       3,332         2,959          7,243         5,956
Stock-based compensation            4,275         2,662          8,131         4,950
Non-cash
MSR activity
(2)                                    -            (50 )           -           (353 )

Adjusted EBITDA                 $  62,909      $ 48,110      $ 114,761      $ 73,805



(1) Other includes net realized gains (losses) on marketable debt securities

    available-for-sale.


(2) Non-cash

MSR activity includes the assumption of servicing obligations.

Liquidity and Capital Resources


Our primary sources of liquidity are cash and cash equivalents, cash flows from
operations, marketable debt securities,
available-for-sale
and, if necessary, borrowings under our Credit Agreement. In order to enhance
yield to us, we have invested a portion of our cash in money market funds and
fixed and variable income debt securities, in accordance with our investment
policy approved by the board of directors. Certain of our investments in money
market funds may not maintain a stable net asset value and may impose fees on
redemptions and/or gating fees. To date, the Company has not experienced any
restrictions or gating fees on its ability to redeem funds from money market
funds. Although we have historically funded our operations through operating
cash flows, there can be no assurance that we can continue to meet our cash
requirements entirely through our operations, cash and cash equivalents,
proceeds from the sale of marketable debt securities,
available-for-sale
or availability under our Credit Agreement.

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