Marcus & Millichap, Inc.

Greetings, and welcome to Marcus and Millichap's second quarter 2023 earnings conference call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jacques Cournet. Thank you. You may begin.

Thank you. Good morning, and welcome to Marcus and Millichap's second quarter 2023 earnings conference call. With us today are President and Chief Executive Officer, Issam Najee, 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, companies' ability to retain and attract transactional professionals, companies' ability to retain its business philosophy and partnership culture amid competitive pressures, the 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 February 28, 2023. 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 the company's website at www.marcusmillichap.com, along with the slide presentation you may reference during the prepared remarks. With that, it's my pleasure to turn the call over to CEO, Hassam Najee.

Thank you, Jacques. On behalf of the entire Marcus Millichap team, good morning and welcome to our second quarter 2023 earnings call. The widened BIDASC spread and restrictive lending environment severely hindered commercial real estate trading and financing volumes in the second quarter. MMI's results for the quarter reflected this challenging market, which was marked by elevated transaction and listing cancellations and frequent asset repricing due to the interest rate shock and economic uncertainty. MMI also faced an exceptionally tough comparison to the second quarter of 2022, which had outsized revenue growth of 39% and was the second highest revenue quarter in our history. Revenue for the second quarter of 2023 came in at $163 million, which was lower by 59% year over year. Adjusted EBITDA loss of $1.1 million was due to expenses related to investments made over the past several years in our sales force, acquisitions, proprietary technology development, and expanded infrastructure. Notwithstanding previous cost reductions and ongoing expense management, we believe playing offense during this prolonged market disruption will create a competitive advantage for the company in the recovery and beyond. Our strategy includes doubling down on client outreach, supporting and retaining our sales force, adding experienced professionals, and pursuing strategic acquisitions. I'm proud to report that we made progress on all fronts during the second quarter while elevating internal communication, best practices sharing, and skills development. These are hallmarks of Marcus Millichap's collaborative culture and have been extremely effective in previous downturns. In addition to investments made in expanding the platform, we believe several developments will add value in the long term. For example, the collaboration between our sales and financing professionals has increased markedly as the difficult financing market is accentuating the knowledge and lender relationships of our loan originators. Our auction division, created just 18 months ago by adding industry-leading specialists, is becoming more integrated with our sales force. Auctions provide an alternative channel for rapid marketing of certain assets and aging inventory. Our financing and sales professionals are actively partnering with our loan sales division to advise lenders, special servicers, and government agencies on valuation and disposition of loan portfolios and assets. Our ever-expanding research content and media coverage is reaching a record number of investors and helping clients develop strategies and pursue opportunities. Last but not least, our technology advances are expanding how we connect with our clients on specific listings and leads. These initiatives are fundamentally enhancing our leverage and execution, which will pay dividends far beyond the current disruption and recovery. From a market standpoint, the Fed's continued hawkish stance has intensified the disruption and price discovery. Valuations for the lowest cap rate assets, particularly apartments, have been the most impacted by the interest rate shock, leading to a major drop in trading volumes. Bank failures in the first quarter and exposure to distressed real estate has pushed many active lenders out of the market. Sellers' price expectations have been misaligned with buyers still struggling with uncertainty and lower loan-to-values on top of the doubling of interest rates in the past year. These converging forces manifested in a 54% drop in transactions and a 63% drop in sales volume in the overall marketplace, according to RCA. This marks the fourth consecutive quarter of a pronounced industry-wide decline in activity reflecting the current dislocation's broad nature. MMI outperformed the broader market in brokerage transactions, which declined 47% in the quarter. The company's brokerage sales volume decline of 62% was in line with the market, but as mentioned earlier, this is on a 47% year-over-year increase in our sales volume in the second quarter of 2022, and that should be kept into perspective. Private client revenue for the quarter fell 54%. The private client segment is still driven by many personal motivations to trade and has more available financing options. Nonetheless, a wide bid-ask spread is also lowering volumes in smaller deals, but to a much lesser extent. Revenue from middle market and larger transaction sales declined 69% and 73%, respectively, as major private investors and institutions remained on the sideline. Given extremely tight credit conditions, revenue from financing fees was off 51%. Yet, we transacted with 141 separate lenders in the quarter, illustrating the skill, tenacity, and access our financing team brings to investors and our own sales force, regardless of market conditions. I want to highlight that despite all of these challenging factors, the company closed over 1,400 brokerage transactions, and nearly 300 financings during the second quarter. For the first half of the year, we've closed 2,700 brokerage transactions and over 550 financings. MMI continues to rank as the top brokerage company by transaction count. This is the result of our client commitment and the hard work, persistence, and skill of our Salesforce and support teams. On another positive note, there is no shortage of capital or demand for appropriately priced commercial real estate assets. In these cases, we're generating multiple offers for our clients from buyers using more equity and, in some cases, paying all cash to be in the right markets and fetch the right assets that fit their long-term strategies. We're also seeing short-term financing solutions and structures to secure well-priced assets with buyers leaving themselves flexibility for future refinancing. Office properties remain the outlier in price discovery, while improving fundamentals in retail over the past several years has fostered more buyer demand and, ironically, makes retail a highly desired asset class. Looking forward, the notion of a Fed pivot to lowering interest rates in the near term has been taken off the table. Despite major progress in reining in inflation, there is still a long way to go to reach the Fed's 2% target. This means recalibrating real estate values in light of higher interest rates will simply take more time to work through the marketplace. Healthy property fundamentals, with the exception of office and a shift in sentiment from recession concerns to an expectation of an economic soft landing, bode well for sustained buyer interest. Although some distressed sales are expected, the Fed and the FDIC have specifically encouraged lenders to extend maturing loans as much as possible to avoid write-downs. As buyers come to realize that a widespread price correction is unlikely and sellers become more realistic on pricing, a realignment in the marketplace will trigger a reversal in trading volume trend. The clarity that will come when the Fed declares the end of the tightening cycle should also foster more activity. We cannot predict or control the timeline for the shift. However, we are laser focused on executing our own strategy in the meantime. For MMI, this prolonged market disruption is an opportunity to help more investors assess portfolios and solve problems, benefit from our market making and value added services, and leverage opportunities we can uncover for them. By partnering with us, our clients will navigate this environment and we will gain more of their confidence, mind share, and eventually market share. One of the key challenges exacerbated by the market downturn is net hiring of new professionals. The unusually strong job market and rising wages are greater factors today than in previous cycles in attracting recent college graduates and newer professionals from other sales industries. At the same time, A challenging market is making it harder for our new trainees to break into the business. As I've mentioned on past calls, we're committed to our organic hiring system and continue to push various candidate outreach initiatives, enhance training and development, and are adding corporate recruiters to return to positive net hiring. In the meantime, for many experienced professionals, MMI is proving to be the ideal platform to enhance their careers. We have demonstrated this through many such additions since the pandemic with positive mutual results and continue to build on this momentum. I'm happy to announce the most recent addition of a market-leading finance team in New York that will further elevate our capital markets capabilities. We're also in active discussions with potential acquisition targets that we believe would bring strategic and market coverage advantages to MMI. Our strong balance sheet that forces the foundation to remain offensive while continuing to return capital to shareholders through dividends and share repurchases. We will continue to assess the highest and best use of capital as market conditions shift with an eye to increasing our acquisition target pipeline further as valuation expectations become more reasonable. And with that, I will turn the call over to Steve for additional insights on our results. Steve?