Marcus & Millichap, Inc.

Greetings and welcome to Marcus and Millichap's third 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 Cornet. Thank you. You may begin.

Thank you, operator. Good morning and welcome to Marcus and Millichap's third quarter 2023 earnings conference call. With us today, our president and chief executive officer, Hassam 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, variations of these words and similar expressions are intended to identify forward-looking statements. Actual results can differ materially from what 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 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 call 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 is my pleasure to turn the call over to CEO Hassam Najee.

Thank you, Jacques. On behalf of the entire MarketSmallChat team, good morning and welcome to our third quarter 2023 earnings call. The market challenges we've been facing this year continued on in the third quarter. The 10-year Treasury yield briefly touched the psychologically key level of 5%, and the Federal Reserve sent a clear signal of higher for longer in its interest rate outlook, citing that inflation is proving to be more persistent than expected. Rate volatility, a restrictive lending environment, and the cumulative effect of the sharp increase in the cost of debt over the past 18 months weighed heavily on sales and financing volumes. Revenue for the quarter came in at $162 million, down 50% over last year, with an adjusted EBITDA loss of $6.6 million. Revenue production remains hampered by the widened bid-ask spread, constrained financing, and interest rate volatility disrupting deal closings. Transaction timelines extended significantly beyond historical norms, and many deals fell out of contract multiple times, creating a drag on our team's productivity. The result was a 39% decline in the number of brokerage sales transactions and a 59% decline in volume during the quarter. Given the macro nature and scope of the capital markets disruption, all product types and price segments showed major declines. our traditional advantage as a market leader in the private client segment remains intact. As Steve will cover in his remarks, the private client market has declined the least of all segments, as smaller deals are more driven by personal circumstances and easier to finance. As history has also shown time and again, the private investor will also likely lead in the recovery. On the other side of the spectrum, the severe drop-off in larger transactions is having an outsized impact on MMI's revenue trends, especially considering that this part of our business outpaced the market in the past few years. We firmly believe that our expanded coverage in larger transactions and penetration into the institutional client segment through our IPA division are critical to our long-term competitiveness. MMI is uniquely qualified to bridge the vast private capital world with institutional assets and create value for all client segments. Notwithstanding expense reductions and various cost containment strategies we've employed, the loss in the quarter is largely due to expenses related to investments made over the past several years, including the acquisition and retention of top producers and teams. It also reflects our strategy to remain on the offensive side despite revenue headwinds by further growing the experienced cadre of our sales force, investing in key industry conferences, client outreach programs, and providing resources for analytical and market research support. Although transaction activity is down significantly market-wide, our clients' need for market information, asset evaluation, and opinions of value are at a high, given the degree of uncertainty in the marketplace. We view the costs associated with providing personalized client support as an investment in long-term relationships that will manifest in future business. We remain steadfast in our belief that these investments will help us lead in the recovery, which is a matter of when, not if, based on our experience through multiple cycles over the company's 52-year history. Speaking of recovery, we believe several underlying forces will eventually converge to drive higher transaction volumes. These include a still-strong labor market, which is more likely to slow than fall off a cliff, and resistant consumers who may also come off of recent spending highs but sustain a solid financial profile. These economic pillars support strong property fundamentals across all property types with the exception of older office assets. Another encouraging factor is that we appear to be very close, if not at, the end of the most aggressive Fed tightening cycle in 40 years. This milestone, even without a Fed pivot, to lowering interest rates anytime soon should bring some stability and direction to the market and help price discovery. Perhaps more critical than any quantitative factor is time. With time, sellers are adjusting to more realistic price expectations, and record capital on the sideline is starting to re-enter the market. The difficulty in obtaining financing and significantly lower loan-to-values is not keeping astute investors from acquiring desired assets if the price is right. Although wholesale distressed sales by lenders are unlikely to become a major wave, individual situations arising from maturing loans, operating issues, and or personal drivers are creating investment opportunities and recapitalization across all property types. For example, even within multifamily, which generally has the strongest fundamentals in the business, speculative transactions made at the peak pricing levels on short-term financing are having issues with maturing loans that are now far more costly and difficult to replace. One of the most important advantages of the MMI platform is the market coverage in countless relationships that our sales force harnesses through our collaborative culture and internal communication. We're in constant motion and making connections that lead to unique problem-solving and opportunity creation for buyers, sellers, and lenders. Our financing division has matured and grown through the addition of numerous experienced originators, teams, and boutique financing acquisitions who are now actively partnering with our sales teams to help investors find financing solutions. MMCC's access to and relationships with over 400 lenders that our originators have closed deals with in the past 12 months alone are of great value in the current market where we face financing scarcity and very tight scrutiny. All these advantages demonstrate MMI's leading position in investment brokerage despite the market headwinds with over 4,000 sales transactions closed year-to-date and 800 financed. This is a direct result of our client commitment and the hard work, persistence, and skill of our sales force and support personnel. To expand our market position, we have supplemented our core business with industry-leading research, auction services in recent years, and our loan sales division to foster new client relationships and help existing clients execute in this difficult market environment. In the same spirit, I'm excited to announce the strategic investment in a technology-driven platform for equity raising and private debt placement called Equity Multiple. Their platform specializes in helping sponsors access a vast network of investors to raise project-specific equity and debt and provide asset management services to many of its sponsor clients. Equity Multiple's proprietary technology enables rapid execution which is especially valuable in the current market environment. We see multiple opportunities for client synergies and mutual referrals facilitated by both companies, heavy emphasis on technological advancement. We also made a strategic investment in a venture-backed company called Archer, which specializes in services that will increase our property underwriting productivity and ability to generate sales and financing leads. These services include property-level performance metrics across the U.S., Through consolidating multiple data sources with proprietary technology, as well as analytics, we expect we'll make our client targeting more efficient. Looking forward, we expect the market disruption to take more time and the recovery to be pushed out, given all the factors that I've summarized. As I stated on prior calls, we are committed to our organic hiring system and continue to execute expanded candidate outreach initiatives enhanced training and development, and are increasing our recruiting resources to return to positive net hiring. This remains a top priority for the management team. In the meantime, we continue to build on our success in attracting experienced professionals, teams, and independent boutiques to the firm in a complementary fashion to our existing coverage. In closing, let me emphasize the strength of our balance sheet, leading market position and brand, as they enable us to continually improve the MMI platform and pursue strategic acquisitions and investments. The passage of time appears to have surfaced interesting acquisition opportunities that we're evaluating, even as some of our previous explorations did not close, primarily due to evaluation expectation gaps. Our expanded capital allocation strategy reflects these offensive strategies and return of significant capital to shareholders over the past 18 months. We look forward to continuing on the path of long-term value creation as we position NMI to lead in the recovery. With that, I will turn the call over to Steve for additional insights on our results. Steve? Thank you, Hassam.