Marcus & Millichap, Inc.

Greetings and welcome to Marcus and Millichap's fourth quarter and year-end 2022 earnings conference call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cornet. Thank you. You may begin.

Thank you. Good morning and welcome to Marcus and Millichap's fourth quarter and year-end 2022 earnings conference call. With us today are President and Chief Executive Officer, Hossam Nagy, and Chief Financial Officer, Steve DiGennaro. Before I turn the call over to management, please remember that our prepared remarks and the responses to questions may contain forward-looking statements. Words such as may, will, expect, believe, estimate, anticipate, goal, and variations of these words And similar expressions are intended to identify forward-looking statements. Actual results can differ materially from those implied by such forward-looking statements due to a variety of factors, including but not limited to general economic conditions and commercial real estate market conditions, the company's ability to retain and attract transactional professionals, the company's ability to retain its business philosophy and partnership culture amid competitive pressures, company's ability to integrate new agents and sustain its growth and other factors discussed in the company's public filings, including its annual report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2022. Although the company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can make no assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. In addition, certain financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was issued this morning and is available on the company's website, represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors. This conference is being webcast. The webcast link is available on the investor relations section of our website at www.marcusmillichap.com, along with the slide presentation you may reference during the prepared remarks. With that, it is my pleasure to turn the call over to CEO, Hassam Najee.

Thank you, Jacques. On behalf of the entire Marcus Millichap team, good morning, everyone, and welcome to our fourth quarter and year-end 2022 earnings call. The industry and our business experienced a dramatic shift in market conditions between the first half of 2022 and the latter part of the year. The Fed's missed opportunity in 2021 to begin normalizing financial conditions became the most aggressive financial tightening in 2022 to fight runaway inflation, in 40 years. The resulting 450 basis point interest rate increase and $500 billion of bond sales in a matter of months shifted the market tailwind in the first half of the year to a market disruption by September. With that backdrop, MMI still delivered record revenue of $1.3 billion, adjusted EBITDA of $166 million, and earnings per share of $2.59, both of which were the second best in our history. We closed over 12,000 total transactions for a volume of $86 billion and outperformed the market. Total U.S. commercial property sales, as reported by RCA, declined 25% last year, while our brokerage transactions were off by 6%. I'm also proud to reflect on the many advancements to the Marcus & Millichap platform in this past year. These range from new technologies such as our client application called MyMMI to the successful launch of our auction division and ongoing expansion of financing capabilities, especially in the agency lending arena. We saw many of our tenured sales and financing professionals reach new milestones and acquired numerous top-level groups, teams, and experienced individual producers last year. The ongoing elevation of the Marcus Millichap brand was on pace once again with marquee client webcasts, industry-leading research content, and commanding presence in the media as well as at industry conferences. These achievements were reached despite a very difficult fourth quarter stemming from the escalation of deal cancellations, and further widening of the bid-ask spread in the market. The growing number of lenders that either exited the market or significantly tightened underwriting criteria also became an obstacle in closing deals in the final quarter of the year. Overall, sales in the market dropped by an estimated 57% during the fourth quarter, according to RCA, making it the lowest fourth quarter sales volume in the marketplace since the fourth quarter of 2011. We continue to demonstrate the relative strength of the Marcus & Millichap platform as our team closed nearly 2,700 transactions and $16.4 billion in volume during the quarter. These numbers enabled MMI to outperform the market in the fourth quarter with a 38% decline in brokerage transactions. For the quarter, we delivered revenue of $262 million, adjusted EBITDA of $14 million, and earnings of 20 cents per share. The magnitude of the market disruption is reflected in the lack of investor urgency. In a normal market, the fourth quarter typically has the most deal volume as investors rush to transact and deploy capital by year end. However, 2022 was anything but typical as fourth quarter volume and revenue was the lowest for the year. Let me highlight a few additional factors to put the fourth quarter results into perspective. Keeping deals together required extraordinary efforts in troubleshooting, creativity, and finding alternative lenders, which caused a major distraction to our team in developing new business. The need to reprice listings became a challenge given the heightened degree of valuation uncertainty. This created a significant rise in canceled listings and disruption to listings going under contract and into our pipeline, and so on, moving through the usual deal continuum. Our most experienced professionals, who possess the skills to navigate and close deals in a tough market, accounted for a larger than usual portion of revenue. These senior producers qualify for our highest commission levels, leading to a higher than normal cost of services for the fourth quarter. Due to the broad nature of the market disruption, all market segments had lower year-over-year revenue for the quarter. Our private client revenue was off 41%, while middle market and larger transaction revenue were down 47% and 63%, respectively. Larger transactions, which have been a significant part of revenue growth over the past few years, were highly impacted by institutional investors rapidly going to the sidelines, as we've seen in previous downturns. Our finance division, MMCC, saw revenue fall 37% as the spike in rates made both transaction financing and refinancing much more difficult. Costs related to investments made over the past few years for talent acquisition, technology, infrastructure, marketing, and business development put outsized pressure on earnings as revenue production was hindered in the quarter. These ongoing investments have fundamental advantages over the long term and have proven to be creative in a normal operating environment. Our more experienced sales force and the addition of numerous market leaders in recent years were major contributors to our record performance in 2021 and the first half of 2022. We are confident they will once again have the same positive effect when we recover from the current market disruption. The reversal of expense leveraging we gained in 2021 is further pressuring our margins in the near term. Steve will elaborate more on that. Furthermore, we implemented expense reduction measures in the fourth quarter, resulting in one-time charges which caused additional drag on fourth quarter earnings. Let me now shift to our strategy and outlook. Effectively navigating the near-term challenges and protecting the company's financial performance is extremely important to our management team. At the same time, we strongly believe in sustaining our long-term mindset, building competitive advantages, and not changing course because of a cyclical market disruption. Therefore, our top priorities are as follows. First, we're focused on helping investors and our clients solve problems, find solutions to their specific circumstances, and source opportunities. This approach during the pandemic and throughout our history has led to outsized growth upon recovery because we never have left the market and instead have leaned into the crisis by increasing our client contact. This is exactly what we're doing now. Second, we're helping our sales force leverage a tough market environment to sharpen their skills, utilize our proprietary tools to maximize productivity, and partner with our financing professionals. To highlight some of their accomplishments, MMCC closed over 400 financing transactions during the fourth quarter alone and closed with over 450 separate lenders last year. This is a major advantage to our sales force and our clients as our financing professionals can access a wide network of capital sources and turn every stone to source debt for clients in this market environment. We're strategically deploying capital to maintain our presence at key industry events and conferences, and to provide sufficient production support to our sales force through the downturn. Although transaction counts may be down significantly, investors need for opinions of value, market analysis, exploring various financing options for recapitalization, and dealing with maturing loans have increased dramatically. We've tightened our belt while maintaining the capacity to service these critical needs as an investment in long-term growth, client relationships, and eventual recovery. Last but certainly not least, we are seeing more acquisition opportunities and have engaged in several explorations largely prompted by the display of MMI strength at a time of uncertainty. We have the balance sheet to be prudently offensive during the market dislocation and are encouraged by our current dialogue with targets. Strategic acquisitions remain our top capital allocation strategy while we continue our dividend policy and share repurchase plan. In terms of returning to organic growth, our commitment to renewing the company's cycle of sourcing, hiring, and training new professionals is steadfast. As we have reported since the pandemic, this process has been disrupted by the volatility in the market, impact of virtual employment choices now offered by many companies and an unusually tight labor market. Various strategies to boost local recruiting from key universities, the introduction of the William A. Millichap Fellowship, which attracts highly qualified new professionals, and our numerous internship programs remain on course. The return to in-person training throughout our offices should also help gradually reverse the trend of the past three years. The majority of the 5% headcount reduction over the past year remains concentrated in the one to three year cadre, which is experiencing higher than usual turnover rate. From a production perspective, our success in attracting experienced talent is offsetting the revenue impact. However, fundamentally returning to organic growth is a priority for the firm. Turning now to the outlook, The current market headwinds are likely to persist in the near term. However, we expect three factors to emerge and bring clarity and enable a transaction market recovery. First is the end of the Fed tightening cycle. We believe inflation is gradually coming down, especially as the lagging effect of the cost of shelter begins to show up in the CPI. This process will be bumpy from month to month, as we saw earlier this week. The overall trend points to a limited number of additional rate hikes, followed by an expected Fed pause. It is unlikely that the Fed will pivot to lowering interest rates anytime soon, in our opinion, given the continued strength in the labor market. We believe that simply ending the tightening cycle will bring clarity to the market. Second is further evidence of a sustainable, albeit slower, job market and the impact of any potential job losses on occupancies and rents. Third is price alignment. In our view, price adjustments always take time during a market transition, but expectations will eventually realign according to economic realities. In the near term, we're leaning into the downturn by amplifying the company's numerous competitive advantages. This includes our market leadership in the private client segment. sourcing more 1031 exchange buyers than any other firm. Our ability to get difficult deals done in this environment, our growing suite of proprietary technology, cutting-edge research, and hands-on management on the ground. We are positioning Marcus Milichap to lead into the eventual recovery, gain market share, and continue to build long-term shareholder value by investing in the future. With that, I will turn the call over to Steve for more details on the quarter. Steve?