Marcus & Millichap, Inc.

Greetings and welcome to Marcus and Millichap's second quarter 2024 earnings conference call. As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Jack Corneille. Thank you. You may begin.

Thank you, Operator. Good morning. Welcome to Marcus and Millichap's second quarter 2024 earnings conference call. With us today are President and Chief Executive Officer, Assam 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, 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, 2024. 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 Marcus Millichap team, good morning and welcome to our second quarter earnings call. As anticipated, the company faced a challenging quarter due to the lingering impact of the higher-for-longer stance on interest rates by the Federal Reserve. Revenue for the second quarter came in at $158 million, with adjusted EBITDA of $1.4 million and net loss of $5.5 million. This primarily reflects the ongoing headwinds of bid-ask spreads and constrained financing. Marketing and closing timelines continued to be longer than usual, while an elevated portion of our deals had to be recalibrated multiple times before closing. Notwithstanding the impact of these macro conditions on our team's productivity, a number of positive indicators emerged in the quarter. Internally, these include measurable growth in our new inventory and price adjustments that are more reflective of the current market. We also saw a 23% sequential revenue gain over the first quarter compared to just 5% sequential growth achieved in Q2 2023. Year-over-year revenue decline of less than 3% was also our lowest such comparison since the start of the market downturn in the third quarter of 2022. Externally, the passage of time has finally brought more realistic pricing and a growing sentiment that valuations are at or near bottom for most property types. We saw capital reentering the market gain momentum throughout the quarter, driven by price adjustments from peak and in comparison to replacement costs. Many investors are recognizing attractive entry points for assets, given the incredible difficulty many markets are showing and the higher cost of buildings. In many cases, investors are paying all cash or relying on short-term financing to secure well-priced opportunities with the goal of adding long-term financing when rates come in. Situational distress, particularly driven by aggressively underwritten deals in the last five years with short-term debt that is now maturing, is also creating more motivation to transact. This is not to say that the math for all real estate deals is once again broadly working In fact, our team continues to dedicate considerable time working through bid-ask spreads and securing financing, but much progress has been made toward equilibrium. Let me take a moment to recognize the perseverance of our sales force and support personnel during this elongated market disruption and their laser focus on helping our clients get through it. In this challenging environment, we closed over 1,200 brokerage transactions and $7.2 billion in volume. An uptick in middle market and larger sales spurred by major private and institutional investors gradually coming back into the market was a positive trend. This is relative to the severe drop-off in these transactions since 2022. Our private client business remains hampered by the limited ability or desire of local and regional banks to provide financing. The slow pace of price discovery and low motivation to sell, especially in the single-tenant net lease segment, remains a challenge. Bright spots include multi-tenant retail, which continues to be a clear recovering segment, manufactured housing, and self-storage. Financing transactions were down 4% as lenders remained selective and refinancings fell sharply. However, our financing volume increased by 11%, due to a rise in large transactions and loan sales. Our financing division achieved a 25% jump in larger financings valued at $20 million or more, led by our multifamily agency lending practice. The integration of our IPA institutional sales and IPA capital markets is also contributing directly to these results and provides a foundation for us to build on. In this environment, our financing team closed with 146 different lenders in the quarter and 340 over the past 12 months. This is a direct result of proprietary technology investments that enable real-time deal and active lender information sharing among our network of originators. It is also indicative of the growing degree of collaboration between our sales and financing teams. At the macro level, decelerating inflation readings and much slower job growth during the quarter finally shifted the Fed back toward plans to start the interest rate easing cycle. Even before the Fed moves, the 10-year Treasury yield has dropped nearly a full percentage point since the start of the quarter and sits at the lowest level since about May of 2023. Mixed corporate earnings and softer-than-expected July employment data could raise fresh concerns over hard landing for the economy and a corresponding flight to safety. Ironically, the latest employment and inflation data is exactly what the Fed has been waiting for, and strong economic underpinnings still point to a modest growth cycle ahead as opposed to major layoffs or a significant consumer retreat. If anything, there is now even a case for a 50 basis point interest rate reduction by the Fed in September, which would further boost the soft landing scenario and help bolster real estate transactions. While we expect the positive momentum in transactions to continue during the second half, economic concerns and a new round of geopolitical tensions point to a measured market recovery in the near term. However, we believe the cycle heading into 2025 will be more favorable as the market gets a lift from lower interest rates, recalibrated real estate values, a slower yet still healthy economy, and the conclusion of the election cycle. Our strategy to increase inventory, maintain elevated client outreach programs, and continue to incorporate best-in-class brokerage technology remains on track. During the quarter, we saw further traction in our auction business, loan sales, and synergies with strategic investment partners. Equity Multiple, who's actively helping our clients access debt and equity capital, and efficiencies from our investment in data analytics firm, Archer, are helping us enhance internal and external services. We're excited to consider additional partnership investments on a parallel path of further developing and implementing the next round of proprietary technology that help facilitate transactions. As an example, MyMMI, our client application that provides custom searches for our inventory, now boasts 116,000 users and enables real-time connectivity between buyers and sellers. Expenses related to investments made in our Salesforce, both in retention and acquisition, were once again dragged on earnings in the near term, as revenue production is below historical trends and below potential. However, we remain confident that the seniority and market leadership of our talent pool will be a key advantage in the market recovery, as we've seen in past cycles. We continue to successfully add experienced professionals and teams, which is offsetting the ongoing challenges our newer cadre of agents and originators face. The market volatility of the past several years and current headwinds are keeping our net hiring of new agents well below a normal market. The company's expanded channels for attracting and training new talent include a much larger internship program and deployment of regional recruiters. These steps will help replenish the company's organic growth engine, especially as the employment market cools. From a capital allocation perspective, we made favorable investments in experienced individuals and teams during the quarter, and we continued discussions with selective acquisition and investment targets. While the bid-ask spread on valuation and terms has improved to some degree, The near-term performance risk of target groups relative to valuations and guaranteed proceeds remain challenges. Our ongoing investments in business development, client engagement, branding, and industry events underscore our commitment to stay on offense during this prolonged downturn. We're highly disciplined in how we invest in our business and our talented team while creating shareholder value. We're proud to have returned a significant amount of capital in the last two years since expanding our capital strategy to include dividends and share repurchases. Our investments and platform enhancements give us confidence that we will emerge from this cycle well-positioned and stronger than ever. With that, I will turn the call over to Steve for additional insights into the quarter.

Steve? Thank you, Hassam. As mentioned, total revenue for the quarter was $158 million compared to $163 million in the prior year quarter. For the six-month period, revenue was $287 million compared with $318 million last year. Revenue from real estate brokerage commission for the second quarter was $135 million and accounted for 86% of total revenue compared to $140 million last year. a decline of 3% year-over-year. Brokerage revenue was generated on total sales volume of $7.2 billion across 1,272 transactions, down 5% and 11% respectively compared to last year. Year-to-date, revenue from real estate brokerage commission was $245 million and accounted for 85% of total revenue compared to $275 million last year. a decline of 11% year-over-year. Total sales volume year-to-date was $12.8 billion across 2,347 transactions, down 13% and 12% respectively, and mostly reflecting a more challenging first quarter this year. Average transaction size during the second quarter was approximately $5.6 million, up 6% from $5.3 million a year ago. reflective of an increase in our revenue mix from middle market and larger transactions. Within brokerage for the quarter, a private client contributed 63% of brokerage revenue, or $85 million. This compares to 69% and $96 million last year. Transactions in this segment were down 19% in dollar volume and 14% in transaction count compared to last year. Year-to-date, private client contributed 65% of brokerage revenue, or $158 million, versus 68% and $187 million last year. Our middle market and larger transaction segments together accounted for 33% of brokerage revenue, or $45 million during the second quarter, compared to 28% and $39 million last year. These segments combined were up 8% in dollar volume and flat in number of transactions. Year to date, the middle market and larger transaction segments represented 31% of brokerage revenue, or $77 million, compared to 29% and $79 million last year. Revenue in our financing segment, including MMCC, was $18 million during the second quarter, similar to last year. We closed 272 financing transactions totaling $1.8 billion in volume compared to 284 transactions for $1.6 billion in volume in the prior year. Financing revenue for the six months was $33 million compared to $34 million last year. We closed 506 financing transactions year-to-date totaling $3.5 billion in volume compared to 563 transactions for $3.4 billion in volume last year. Fees from refinancing accounted for 32% of loan originations in the quarter compared to 61% last year. Year-to-date, refinancing fees were 40% of loan originations compared to 54% last year. The first half of the year showed lower than average refinancing activity given the difficulty investors are facing upon loan maturity. Loan extensions and workouts by lenders are other factors lowering refinancings in the near term. Other revenue, comprised primarily of leasing, consulting, and advisory fees, was $4.6 million during the second quarter, flat compared to last year. Year-to-date, other revenue was $9.9 million this year compared to $8.5 million last year. Shifting to expenses, total operating expenses for the second quarter were $166 million, 4% lower than last year, while on a year-to-date basis, total operating expenses of $316 million were 8% lower compared to the same period a year ago. The improvement in expenses is principally the result of lower variable expenses directly attributable to revenue and cost containment efforts. Breaking down the expense components further, cost of services was $98 million, or 61.9% of total revenue, compared to 62.1% in the second quarter last year. Year-to-date, cost of services was $175 million, or 60.9% of total revenue, an improvement of 100 basis points over the same period last year. SG&A during the quarter was $65 million, lower by 6% year-over-year. On a year-to-date basis, SG&A was $134 million, 5% lower compared to last year. The changes are primarily due to a reduction in marketing support tied to prior year revenue and continued balancing of key investments with prudent expense reductions. For the second quarter, we reported a net loss of $5.5 million, or 14 cents per share, compared to a net loss of $8.7 million, or 23 cents per share last year. For the six-month period, the net loss was $15.5 million or 40 cents per share compared to a net loss of $14.6 million or 37 cents per share in the same period last year. For the quarter, adjusted EBITDA increased to a positive $1.4 million compared to a loss of $1.1 million in the prior year. For the six-month period, adjusted EBITDA was negative $8.6 million essentially flat compared to the prior year. The effect of tax rate for the quarter reflects the change necessary to bring the year-to-date rate into alignment with the rate we expect for the full year. As we've discussed on prior calls, the tax rate can fluctuate quarter-to-quarter depending on the relationship between expenses that are non-deductible for tax purposes to projected pre-tax income for the full year. Our expected tax rates should settle into a range of 15% to 17% for the remainder of the year. Moving over to the balance sheet, we continue to be well capitalized with no debt and $336 million in cash, cash equivalents, and marketable securities. That's a modest change from the prior quarter's balance of $346 million and includes returning $10 million in capital to shareholders through a dividend we paid in April. Continuing on that theme, last week, our board declared the next semiannual dividend of $0.25 per share payable on October 4th to shareholders of record as of September 16th. In total, we have returned more than $160 million in capital to shareholders since initiating our dividend and share repurchase programs a little more than two years ago. We remain committed to a balanced long-term capital allocation strategy. This includes a combination of investing in technology, recruiting and retaining top producers, strategic acquisitions, and returning capital to shareholders. Looking forward, as Assam touched on, an expected rate cut from the Fed may serve as a near-term catalyst to reinvigorate real estate dealmaking and provide much-needed clarity for price discovery and stabilization. That said, the recovery of transactional activity will take time to positively benefit our results. Given these dynamics, our near-term outlook is cautiously optimistic as we anticipate a shift in Fed policy. As the remainder of the year unfolds, we remain disciplined in our investments and expense management. Cost of services as a percentage of revenue for the third quarter should follow the usual pattern as revenue builds through the year and moves sequentially higher than the second quarter. SG&A is expected to increase in Q3 over Q2 due to seasonal, internal, and client-related events. As I touched on earlier, our tax rate is expected to be in the range of 15% to 17% for the remainder of the year. While there is no doubt that the Fed's higher-for-longer interest rate policy has extended this market disruption, our focus on clients and improving our platform has been unwavering. We remain committed to client engagement, industry leadership, technological advances and investments in talent, systems, and market coverage. These investments over the past two years will benefit our ability to drive results as the market recovers. With that, operator, we can now open up the call for Q&A.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from the line of Blaine Heck with Wells Fargo. Please go ahead. Great. Thanks.

Good morning. Hassam, can you talk a little bit more about the relative kind of resiliency and transaction volume in the different size segments, especially in the private market segment, which saw transaction revenue down 12% year over year, while the middle and larger market revenues grew pretty significantly? I think You know, I think you mentioned difficulty in obtaining financing, but that seems to be affecting all of the science groups. So just a little bit more on how that's playing out and also how you think the trajectory of the recovery could differ there from the larger segments, if at all.

Good morning, Blaine. Happy to address that. As I've shared in the past, this particular market disruption has been especially difficult for the smaller transactions and the private client segment for two reasons. One, it has to do with the fact that we did have a banking crisis in spring of 2023, and that further pressured banks and credit unions to pull out of the market or price themselves out of the market, which is really the bread and butter of financing sources for micro-cap transactions. That affected both the market and our business more than usual. And the second is price discovery in that the degree of uncertainty that the market has been facing since the beginning of this disruption has been so severe and the underwriting And the moving target of valuation has been such a hurdle for deal making that we saw a much larger portion of our typical private client trading clients go on the sideline and wait for more clarity. That continues to play out. And there has been a resistance to selling at a discount. certainly for the first 12 months of this disruption, and even in the last six months or so. And that's slowly starting to change as the values reset. And usually we see a little bit more rapid response to realism in most downturns. This one has been particularly slow. Those are the reasons the private client segment has been more challenged than what we've seen in previous cycles. On the middle market and the larger transactions, of course, they were impacted severely as well. What we're seeing is more assets come to market that are larger at more reasonable prices and, therefore, a bigger discount from where we've been. And because of some of the catalysts that I talked about on my formal remarks earlier, bringing more product to market, bringing more of those sellers to market, we saw an uptick in those segments for the quarter. I anticipate that to continue. And for the private client portion of the business, they have to catch up as all the effects of lower interest rates, the price resetting, work their way through the market. One last commentary, Blaine, and analyzing all this all the time within the company's information and for the market, the single tenant net lease segment in particular has been hit hard with the price dislocation. And of course, financing, as I mentioned, through banks and credit unions. And that as a large component of our business, smaller apartments have become more stable in valuations after this painful period of the price adjustment, and we're starting to see that segment move a little quicker.

Blaine, this is Steve. One additional point there. In addition to those larger assets coming to market at more reasonable prices, the institutional buyers have got stockpiles of cash and don't necessarily need financing or if they do, they've got cash to put down in the near term and potentially refinancing in the future.

Great. Very helpful color. And it seems as though you have more optimism that the transaction market is on the road to improving in the near future than you have in past calls. Can you talk about maybe whether distressed transactions are part of that potential surge? Or are we kind of past the breaking point for some of those potentially distressed sellers and maybe less distressed than was expected is actually going to occur? Sure.

Happy to address, Blaine. We definitely see more distress situations come to market. We expect more of that will occur looking forward. But the real needle mover is not going to be distress in large volume. What we're seeing is more client-driven, asset-driven distress that is becoming more and more common across the country and across different property types, particularly office, of course, multifamily, because a large portion of the market had been very aggressively underwritten with short-term debt. And to some extent, older shopping centers are still having some issues, even though the multi-tenant retail segment is clearly on recovery, as I mentioned in my formal remarks. Therefore, the real needle mover going forward on transaction activity is going to be lower interest rates and the resetting of values, which on a more broad scale, we believe will bring more product to market and more realistic pricing along with that product coming to market. What's really important to keep in mind, though, is that the domino effect of lower interest rates, the price reset, and more realistic kind of timelines by a lot of our clients bringing product to market take time to ripple through the process for our business. We do have a multi-month process for marketing assets, selecting the right buyer, securing the financing, and closing. So it's not an immediate effect. There's a ripple effect. And the domino effect process that we had hoped would start by April, May, June of this year with the Fed starting to ease clearly got delayed. And therefore, the second half of the year projections that the industry had, and we certainly shared with a lot of optimism that the Fed would act much sooner, it just simply got delayed.

Okay, great. That's helpful. Just shifting gears, you know, can you give us a little bit more color on any additional external growth opportunities you guys might be exploring, how far along any of those discussions might be, and really how you think about that recent performance that you mentioned, you know, these groups are having, which may be depressed versus, you know, the optimism it seems you have for increased transactions going forward. I guess You know, it's the issue just that they are asking for valuation based on normalized operations, even though there's kind of a risk to that forecast. Maybe just explain that a little bit more.

Sure, happy to. We have seen more reasonable valuation expectations. There has definitely been movement on that. Where we have been very challenged in several conversations is the mix between the guaranteed portion evaluation, and the uncertainty related to near-term forecasts. Looking back at some of these conversations a year ago and the fact that we were uncomfortable moving forward with what appeared to be a best and final with some of the groups who we're talking to, turned out to be the right decision for the firm in that had we bought into some of their optimism and some of their forecasting, based on pipelines, by the way, verified pipelines, the near-term impact on the company would have been negative. Of course, we're thinking long-term. We're thinking about one plus one equals three and how cultures fit and what the synergies are and so on and so forth. But nonetheless, in this highly uncertain environment, we've really been the guardians of the company's capital and our shareholders' capital in a way that just didn't get to a point of comfort with the near-term risk and the guaranteed portion of those valuations. And that's where we're still, to some extent, stuck. But what's encouraging is the interest some of these targets continue to have in being a part of our organization. And a lot of relationships have been developed through these multiple dialogues over the past 12 to 18 months that we're still very much keeping alive. There will come a time where these expectations on our side and their side should come into alignment. Unfortunately, we just haven't gotten to that point yet to where we can announce some deals. But the effort is clearly there, I can tell you that.

Great. So I guess lastly, that begs the question, you know, how do you feel about share repurchases? You didn't do any during the quarter. Was that more a function of just trying to keep liquidity for other potential transactions or more of a pricing issue? I guess any color there would be helpful.

Yeah, Blaine, this is Steve. Of course, share repurchases along with... dividends are a significant part of our capital allocation strategy, along with technology investments and other investments in the platform. And I guess I would say that How we allocate the capital is constantly evolving. In times like this, when we're not generating as much cash as we would in normal times, we dial those elements up and down. Share repurchases, perfect example. We're a little bit more opportunistic there, and we've just chosen to be of the market at the moment as we direct our investments to our dollars to other investments internally of course we did just we continue to pay dividend we paid a dividend in in April the board just declared another dividend payable in in October so it's really moving the levers and the and the dials and and as it specifically relates to repurchases, being opportunistic.

All right, great. Very helpful. Thanks, guys.

Thank you. Thank you, Blayne. As there are no further questions, I would now hand the conference over to Hesam Nachi, President and Chief Executive Officer, for closing comments.

Thank you, operator, and thank you, everybody, for joining our call. We look forward to seeing many of you on the road and to have you back on our next earnings call. This session is adjourned.

Thank you. The conference of Marcus and Millie Chapp has now concluded. Thank you for your participation. You may now disconnect your lines.