8.	Stock-Based Compensation Plans

Prior to the IPO

Restricted Common Stock and SARs

Prior to the IPO, MMREIS granted options and SARs under a stock-based compensation award program (the “Program”). The options were exercisable into shares of unvested restricted common stock. The Program was administered by the board of directors. The board determined the terms of an award, including the amount, number of rights or shares, and vesting period, among others. Options issued generally had terms of one year or less and the restricted common stock issued upon exercise of the options generally vested over three to five years. The exercise price of the options was based upon a formula equivalent to the net book value of common stock as of the end of the fiscal year immediately preceding the date of issuance. MMREIS had not formally reserved any shares of its common stock for future stock awards under the Program.

During the years ended December 31, 2013, 2012 and 2011 employees of MMREIS exercised stock options through the issuance of notes receivable. Cash payments on notes receivable were presented as an increase in consolidated stockholders’ equity. Such notes bore interest at a rate of 5% or 6% per annum and were due in defined installments on various remaining dates through April 15, 2016, which was consistent with the vesting periods of the restricted common stock.

There were no redemptions or cancelations of stock options during the years ended December 31, 2013 or 2012.

The following is a summary of MMREIS’s stock option activity:

 

		Year Ended December 31,
		2013								2012								2011
		Shares Under Options				Weighted- Average Exercise Price				Shares Under Options				Weighted- Average Exercise Price				Shares Under Options				Weighted- Average Exercise Price
Options outstanding at beginning of year:			750			$	28.86				3,500			$	25.67				3,025			$	25.25
Granted			—				—				750				28.86				6,937				25.47
Exercised			(750	)			28.86				(3,500	)			25.67				(6,462	)			25.27
Options outstanding at end of year			—			$	—				750			$	28.86				3,500			$	25.67

 

The following is a summary of MMREIS’s restricted common stock activity:

 

		Year Ended December 31,
		2013								2012								2011
		Restricted Stock				Weighted- Average Grant Date Fair Value				Restricted Stock				Weighted- Average Grant Date Fair Value				Restricted Stock				Weighted- Average Grant Date Fair Value
Restricted common stock outstanding at beginning of year:			27,999			$	23.67				24,499			$	23.36				28,447			$	20.95
Issued upon exercise of stock options			750				28.86				3,500				25.87				6,462				25.28
Canceled			—				—				—				—				(1,866	)			23.07
Repurchased			—				—				—				—				(8,544	)			15.40
Exchange of common stock			(28,749	)			—				—				—				—				—
Restricted common stock outstanding at end of year			—			$	—				27,999			$	23.67				24,499			$	23.36
Restricted common stock vested at end of year			28,749								22,682								18,960
Restricted common stock unvested at end of year			—								5,317								5,539

Refer to Note 7 – “Stockholders’ Equity” for additional information on the exchange of common stock.

The following is a summary of MMREIS’s SARs activity:

 

		Year Ended December 31,
		2013				2012				2011
SARs outstanding at beginning of period:			28,733				27,983				31,456
Granted			—				750				6,937
Canceled			—				—				(1,866	)
Repurchased			—				—				(8,544	)
SARs outstanding at end of period			—				28,733				27,983
SARs vested at end of period			28,733				22,666				18,944

Stock-based Compensation Expense and Deemed Capital Contribution (Distribution) From MMC

Historically, MMC assumed MMREIS’s obligation with respect to any appreciation in the value of the underlying vested awards and SARs in excess of the employees’ exercise price. MMC was deemed to make a capital contribution to MMREIS’s additional paid-in capital equal to the amount of compensation expense recorded, net of the applicable taxes. Based on the tax-sharing agreement between MMREIS and MMC, the tax deduction on the compensation expense recorded by MMREIS was allocated to MMC. MMC recorded the liability related to the appreciation in the value of the underlying stock and SARs in its consolidated financial statements. To the extent of any depreciation in the value of the underlying vested awards and SARs (limited to the amount of any appreciation previously recorded from the employees’ original exercise price), compensation expense was reduced and MMC was deemed to receive a capital distribution.

The total compensation cost related to unvested stock and SARs was generally recognized over approximately four years. Restricted common stock issued upon exercise of stock options was generally vested over three to five years and stock options typically were exercised immediately for a note receivable.

 

The total formula-settlement value and total compensation cost related to non-vested stock and SARs are as follows (in thousands):

 

		Year Ended December 31,
		2013				2012				2011
Restricted common stock		$	—			$	447			$	615
Rights under SARs		$	—			$	371			$	458

In conjunction with the IPO, the vesting of all unvested restricted stock and all unvested SARs was accelerated.

The total fair value of restricted stock and SARs that vested during the years ended December 31 was as follows (in thousands):

 

		Year Ended December 31,
		2013				2012				2011
Restricted common stock		$	470			$	961			$	471
Rights under SARs		$	405			$	818			$	358

Amendments to Restricted Stock and SARs

The SARs were frozen at the liability amount, calculated as of March 31, 2013, which will be paid out to each participant in installments upon retirement or departure under the terms of the existing program. The Company will begin to accrue interest starting on January 1, 2014 based on the frozen SAR account balances. 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 deferred stock units, or DSUs, which was 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 (or otherwise all unsettled shares of stock upon termination of employment will be settled five years from the termination date). In addition, the formula settlement value of all outstanding shares of stock held by the plan participants was removed, and all such shares of stock will be subject to sales restrictions that lapse at a rate of 20% per year for five years if the participant remains employed by the Company. Additionally, in the event of death or termination of employment after reaching the age of 67, 100% of the DSUs will be settled and 100% of the shares of stock will be released from the resale restriction. Further, 100% of the shares of stock will be released from the resale restriction upon the consummation of a change of control of the Company.

The modification was accounted for as a probable-to-probable modification in accordance with ASC 718. Total compensation cost recognized at the time of the modification was equal to (i) the unrecognized portion of compensation cost associated with the original awards, and (ii) the incremental cost resulting from the modification. The incremental compensation cost from the modification was the excess of (a) the fair value of the modified awards based upon the initial public offering price of the stock, and (b) the calculated value of the awards prior to the modification based upon the formula settlement value. The fair value of the DSUs was based upon the Company’s IPO price, discounted for the sales restrictions in accordance with ASC 718. The value of the discount was determined using an independent third-party valuation. In addition, as a result of the removal of the formula settlement value, the modification of the unvested restricted stock resulted in the awards being classified as equity awards. The modification, grant of replacement awards and acceleration of vesting of restricted stock and SARs and grants of other stock-based compensation awards in conjunction with the IPO pursuant to the 2013 Omnibus Equity Incentive Plan, or the 2013 Plan, resulted in non-cash stock-based compensation charges of $30.9 million during the three months ended December 31, 2013, which are included in stock-based and other compensation in connection with the IPO on the consolidated statements of income. Following the IPO, grant of replacement awards and future equity award issuances are recorded by the Company and no longer result in a deemed capital contribution (distribution) to MMC.

 

Subsequent to the IPO

2013 Omnibus Equity Incentive Plan

In October 2013, the board of directors adopted the 2013 Omnibus Equity Incentive Plan (the “2013 Plan”), which became effective upon the Company’s IPO. The 2013 Plan, in general authorizes for the granting of incentive stock options, to employees and any subsidiary corporations’ employees, and for the granting of nonstatutory stock options, stock appreciation rights, restricted stock, restricted stock units, performance units and performance shares to the Company’s employees, independent contractors, directors and consultants and subsidiary corporations’ employees and consultants as selected from time to time by the Company’s board of directors at its discretion.

In connection with the approval of the 2013 Plan, the Company reserved 5,500,000 shares of common stock for the issuance of awards under the 2013 Plan. At December 31, 2013, there were 5,500,000 aggregate shares reserved for issuance and 2,310,338 shares available for grant under the Plan. The number of shares available for issuance under the 2013 Plan will increase annually on the first day of each of the years beginning with the 2015 fiscal year, by an amount equal to the least of: (i) 5,500,000 shares of the Company’s common stock; (ii) 3% of the outstanding shares of the Company’s common stock as of the last day of the immediately preceding fiscal year; and (iii) such other amount as the Company’s board of directors may determine.

In connection with the IPO, MMI issued the following equity awards under the 2013 Plan: (i) DSUs for an aggregate of 2,192,413 shares granted as replacement awards to the MMREIS managing directors, (ii) DSUs for 83,334 shares to be granted to the Company’s Co-chairman of board of directors (Mr. Millichap) and (iii) 30,000 shares of restricted stock to the Company’s non-employee directors, in each case, based on the IPO price of $12.00. Restricted stock awards granted to non-employee directors vest 33-1/3% per year on the first, second and third anniversary of the date of grant.

In November 2013, the Company granted an aggregate of 883,915 restricted stock units to certain employees and independent contractors. The awards vest 20% per year on the first, second, third, fourth and fifth anniversary beginning on January 2, 2015. The awards are canceled upon termination of employment.

Award Limitations

The following limits apply to any awards granted under the 2013 Plan:

 

•

Options and stock appreciation rights – no employee or independent contractor shall be granted within any fiscal year one or more options or stock appreciation rights, which in the aggregate cover more than 500,000 shares; provided, however, that in connection with an employee or independent contractor’s initial service as an employee or independent contractor, an employee or independent contractor’s aggregate limit may be increased by 1,000,000 shares;

 

•

Restricted stock and restricted stock units – no employee or independent contractor shall be granted within any fiscal year one or more awards of restricted stock or restricted stock units, which in the aggregate cover more than 500,000 shares; provided, however, that in connection with an employee or independent contractor’s initial service as an employee or independent contractor, an employee or independent contractor’s aggregate limit may be increased by 1,000,000 shares; and

 

•

Performance units and performance shares – no employee or independent contractor shall receive performance units or performance shares having a grant date value (assuming maximum payout) greater than $2 million dollars or covering more than 500,000 shares, whichever is greater; provided, however, that in connection with an employee or independent contractor’s initial service as an employee or independent contractor, an employee or independent contractor may receive performance units or performance shares having a grant date value (assuming maximum payout) of up to an additional amount equal to $5 million dollars or covering up to 1,000,000 shares, whichever is greater. An individual may only have one award of performance units or performance shares for a performance period.

As of December 31, 2013, there were no issued or outstanding options, stock appreciation rights, performance units or performance shares awards.

Restricted Stock Units (RSUs)/Restricted Stock Awards (RSA’s)

The following table summarizes the Company’s vested and nonvested RSU and RSA activity under the 2013 Plan for the year ended December 31, 2013:

 

		RSA Grants to Non- employee Directors				RSU Grants to Employee				RSU Grants to Independent Contractors				Total				Weighted- Average Grant Date Fair Value Per Share
Nonvested shares at December 31, 2012			—				—				—				—			$	—
Granted			30,000				313,155				570,760				913,915				14.46
Vested			—				—				—				—				—
Forfeited/canceled			—				—				—				—				—
Nonvested shares at December 31, 2013			30,000				313,155				570,760				913,915			$	—
Weighted average grant date fair value per share for shares granted during the period		$	12.00			$	14.54			$	14.54

RSUs to independent contractors pertain to grants made to the Company’s agents, which are treated as liability awards requiring remeasurement of fair value at the end of each reporting period until settlement. See Note 2 – “Accounting Policies” for additional information.

At December 31, 2013, nonvested and expected to vest RSU’s totaled 0.9 million with an intrinsic value totaling $13.6 million ($0.4 million, $8.5 million and $4.7 million attributable to RSA grants to non-employee directors, RSU grants to agents and RSU grants to employees, respectively). The RSU vesting will be settled through the issuance of new shares of common stock.

The weighted average remaining period of the nonvested restricted stock units is 4.78 years as of December 31, 2013.

 

Stock-Based Compensation

The following table summarizes the components of share-based compensation included in the consolidated statements of income (in thousands):

 

		Year Ended December 31,
		2013				2012				2011
Restricted stock and SARs (prior to IPO)		$	4,679			$	7,448			$	2,851
Non-cash stock based compensation charge (prior to IPO)			30,886				—				—
RSAs – non-employee directors			20				—				—
RSUs – employee			88				—				—
RSUs – independent contractors			168				—				—
		$	35,841			$	7,448			$	2,851

As of December 31, 2013, there was $12.2 million of unrecognized stock-based compensation expense of which $7.7 million is related to RSUs to agents, $4.2 million is related to RSUs to employees, and $0.3 million is related to RSAs to non-employee directors. This unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 4.78 years.

Employee Stock Purchase Plans

In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“2013 ESPP Plan”). The 2013 ESPP Plan had 366,667 shares of common stock reserved and available for issuance at December 31, 2013. In addition, the ESPP Plan will provide for annual increases in the number of shares available for issuance under the ESPP on the first day of each fiscal year beginning with the 2015 fiscal year, equal to the least of (i) 366,667 Shares, (ii) 1% of the outstanding Shares on such date, or (iii) an amount determined by the Board.

The ESPP Plan qualifies under Section 423 of the IRS Code and provides for consecutive, nonoverlapping 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 is expected to begin on May 15, 2014.

Under the 2013 ESPP Plan, each eligible employee may authorize payroll deductions of up to 15% of his or her compensation to purchase shares of the Company’s common stock. A participant may purchase a maximum of 1,250 shares of common stock during each purchase period.