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, 2021

9.	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, 2021								December 31, 2020
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
Assets held in rabbi trust	$	11,508	$	—	$	11,508	$	—	$	10,295	$	—	$	10,295	$	—

Cash equivalents (1) :
Commercial paper	$	8,948	$	—	$	8,948	$	—	$	9,399	$	—	$	9,399	$	—
Money market funds		210,985		210,985		—		—		158,271		158,271		—		—

	$	219,933	$	210,985	$	8,948	$	—	$	167,670	$	158,271	$	9,399	$	—

Marketable debt securities, available-for-sale:
Short-term investments:
U.S. treasuries	$	35,733	$	35,733	$	—	$	—	$	75,970	$	75,970	$	—	$	—
U.S. government sponsored entities		—		—		—		—		32,447		—		32,447		—
Corporate debt		148,135		—		148,135		—		49,841		—		49,841		—

	$	183,868	$	35,733	$	148,135	$	—	$	158,258	$	75,970	$	82,288	$	—

Long-term investments:
U.S. treasuries	$	70,767	$	70,767	$	—	$	—	$	3,641	$	3,641	$	—	$	—
U.S. government sponsored entities		745		—		745		—		1,152		—		1,152		—
Corporate debt		34,013		—		34,013		—		36,287		—		36,287		—
ABS and other		7,085		—		7,085		—		6,693		—		6,693		—

	$	112,610	$	70,767	$	41,843	$	—	$	47,773	$	3,641	$	44,132	$	—

Liabilities:
Contingent consideration	$	9,312	$	—	$	—	$	9,312	$	5,572	$	—	$	—	$	5,572

Deferred consideration	$	9,801	$	—	$	9,801	$	—	$	15,248	$	—	$	15,248	$	—

Deferred compensation liability	$	8,001	$	8,001	$	—	$	—	$	8,287	$	8,287	$	—	$	—

(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, 2021.

During the year ended December 31, 2021, the Company considered 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, 2021 and 2020, contingent and deferred consideration had a maximum undiscounted payment to be settled in cash or stock of $28.6 million and $33.2 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 five-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,
	2021			2020
Beginning balance	$	5,572		$	3,387
Contingent consideration in connection with acquisitions (1)		(100	)		2,918
Change in fair value of contingent consideration		4,659			101
Payments of contingent consideration		(819	)		(834	)

Ending balance	$	9,312		$	5,572

(1)	Contingent consideration in connection with acquisitions represents a noncash investing activity. The amount recorded during the year ended December 31, 2021 relates to a measurement period adjustment. See Note 6 – “Acquisitions, Goodwill and Other Intangible Assets” for additional information.

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, 2021		Valuation Technique		Unobservable inputs		Range (Weighted Average) (1)
Contingent consideration	$	9,312		Discounted cash flow		Expected life of cash flows		1.4-5.8 years	(3.4 years	)
						Discount rate		2.2%-3.5%	(2.9%	)
						Probability of achievement		29.0%-100.0%	(95.2%	)

	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%	)

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

Nonrecurring Fair Value Measurements

MSRs are initially recorded at fair value and subsequently carried at the lower of amortized cost or fair value. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. Management uses assumptions in the determination of fair value for MSRs after considering 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 on the economic impact of the

COVID-19

pandemic. The fair value of the MSRs approximated the carrying value at December 31, 2021 and 2020 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, 2021		Valuation Technique		Unobservable inputs		Range (Weighted Average) (1)
MSRs	$	2,332		Discounted cash flow		Constant prepayment rates		0.0%-20.0%	(10.0 %	)
						Constant default rate		0.3%-4.9%	(1.2 %	)
						Loss severity		26.2%-31.4%	(28.0 %	)
						Discount rate		10.0%-10.0%	(10.0 %	)

	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 %	)

(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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