Marcus & Millichap, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Fair Value Measurements

Fair Value Measurements

12 Months Ended

Dec. 31, 2020

10.	Fair Value Measurements

Recurring Fair Value Measurements

Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):


	December 31, 2020								December 31, 2019
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
Assets held in rabbi trust	$	10,295	$	—	$	10,295	$	—	$	9,452	$	—	$	9,452	$	—

Cash equivalents (1) :
Commercial paper	$	9,399	$	—	$	9,399	$	—	$	5,087	$	—	$	5,087	$	—
Money market funds		158,271		158,271		—		—		185,513		185,513		—		—

	$	167,670	$	158,271	$	9,399	$	—	$	190,600	$	185,513	$	5,087	$	—

Marketable debt securities, available-for-sale:
Short-term investments:
U.S. treasuries	$	75,970	$	75,970	$	—	$	—	$	124,580	$	124,580	$	—	$	—
U.S. government sponsored entities		32,447		—		32,447		—		—		—		—		—
Corporate debt		49,841		—		49,841		—		26,172		—		26,172		—

	$	158,258	$	75,970	$	82,288	$	—	$	150,752	$	121,580	$	26,172	$	—

Long-term investments:
U.S. treasuries	$	3,641	$	3,641	$	—	$	—	$	24,423	$	24,423	$	—	$	—
U.S. government sponsored entities		1,152		—		1,152		—		1,355		—		1,355		—
Corporate debt		36,287		—		36,287		—		26,471		—		26,471		—
ABS and other		6,693		—		6,693		—		8,560		—		8,560		—

	$	47,773	$	3,641	$	44,132	$	—	$	60,809	$	24,423	$	36,386	$	—

Liabilities:
Contingent consideration	$	5,572	$	—	$	—	$	5,572	$	3,387	$	—	$	—	$	3,387

Deferred consideration	$	15,248	$	—	$	15,248	$	—	$	1,390	$	—	$	1,390	$	—

Deferred compensation liability	$	8,287	$	8,287	$	—	$	—	$	8,241	$	8,241	$	—	$	—

(1)	Included in cash and cash equivalents on the accompanying consolidated balance sheets.

There were no transfers in or out of Level 3 during the year ended December 31, 2020.

During the year ended December 31, 2020, the Company considered the economic impact of COVID-19 on the probability of achieving EBITDA and other performance targets, and current and future interest rates in its determination of fair value for the contingent consideration. The Company is uncertain as to the extent of the volatility in the unobservable inputs in the foreseeable future. Deferred consideration in connection with acquisitions is carried at fair value and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time.

As of December 31, 2020 and 2019, contingent and deferred consideration has a maximum remaining undiscounted payment of $33.2 million and $7.3 million, respectively. Assuming the achievement of the applicable performance criteria and/or service and time requirements, the Company anticipates these payments will be made over the next one to seven-year period. Changes in fair value are included in selling, general and administrative expense in the consolidated statements of net and comprehensive income.

A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):


	December 31,
	2020			2019
Beginning balance (1)	$	3,387		$	1,474
Contingent consideration in connection with acquisitions (2)		2,918			2,382
Change in fair value of contingent consideration		101			202
Payments of contingent consideration		(834	)		(671	)

Ending balance	$	5,572		$	3,387

(1)	Beginning balance for 2020 reflects the reclassification of $1,401 from contingent consideration related to deferred consideration. See Note 7 – “Selected Balance Sheet Data – Other Liabilities” for additional information.

(2)	Contingent consideration in connections with acquisitions represents a noncash investing activity.

Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial liabilities measured at fair value on a recurring basis consisted of the following (dollars in thousands):


	Fair Value at December 31, 2020		Valuation Technique		Unobservable inputs		Range (Weighted Average) (1)
Contingent consideration	$	5,572		Discounted cash flow		Expected life of cash flows		2.4-6.8 years	(4.4 years	)
						Discount rate		2.6%-4.3%	(3.4%	)
						Probability of achievement		50.0%-100.0%	(86.1%	)

	Fair Value at December 31, 2019		Valuation Technique		Unobservable inputs		Range (Weighted Average) (1)
Contingent consideration	$	3,387		Discounted cash flow		Expected life of cash flows		0.4-5.8 years	(2.4 years	)
						Discount rate		3.6%-4.9%	(4.1%	)
						Probability of achievement		33.0%-100.0%	(74.3%	)

(1)	Unobservable inputs were weighted by the relative fair value of the instruments.

Nonrecurring Fair Value Measurements

Management made revisions to the assumptions used in the determination of fair value for MSRs after considering the economic impact of the

COVID-19

pandemic on default, severity, prepayment and discount rates related to the specific types and underlying collateral of the various serviced loans, interest rates, refinance rates, and current government and private sector responses to the pandemic. MSRs are carried at the lower of amortized cost or fair value. The fair value of the MSRs approximated the carrying value at December 31, 2020 and 2019 after consideration of the revisions to the various assumptions. See Note 7 – “Selected Balance Sheet Data – Other Assets – MSRs” for additional information.

Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial assets measured at fair value on a nonrecurring basis consisted of the following (dollars in thousands):


	Fair Value at December 31, 2020		Valuation Technique	Unobservable inputs	Range (Weighted Average) (1)
MSRs	$	2,135	Discounted cash flow	Constant prepayment rates	0.0%-20.0% (10.0%)
				Constant default rate	0.3%-4.1% (1.1%)
				Loss severity	26.2%-31.4% (28.0%)
				Discount rate	10.0%-10.0% (10.0%)

	Fair Value at December 31, 2019		Valuation Technique	Unobservable inputs	Range (Weighted Average) (1)
MSRs	$	2,204	Discounted cash flow	Constant prepayment rates	0.0%-20.0% (10.0%)
				Constant default rate	2.0%-2.0% (2.0%)
				Loss severity	40.0%-40.0% (40.0%)
				Discount rate	9.5%-9.7% (9.7%)

(1)	Weighted average is based on the 10% constant prepayment rate scenario which the Company uses as the reported fair value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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