Marcus & Millichap, Inc.

Greetings, and welcome to Marcus and Millichap's fourth quarter and year-end 2024 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 fourth quarter and year-end 2024 earnings conference call. With us today, the 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, 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 GATT measures and explains why the company believes such non-GATT 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, Hossam Najee.

Thank you, Jacques. On behalf of the entire Marcus and Millichap team, good morning, everyone, and welcome to our fourth quarter and year-end earnings call. I'm pleased to report that we ended 2024 with our highest quarterly revenue in two years. Revenue for the fourth quarter was $240 million, up 44% compared to last year, with adjusted EBITDA of $18 million and net income of $8.5 million. For the year, revenue grew 8% to approximately $700 million, an adjusted EBITDA of $9.4 million, and net loss of $12 million. While we're pleased to have narrowed the net loss from 2023's market shock, returning to profitability is paramount and continues to drive key initiatives. During the quarter, brokerage revenue increased 40%, with transaction count up 23% and volume growth of 41%. Our results reflected a definitive outperformance relative to the market increase of 6% in transaction count and 32% in volume, as reported by RCA. Financing revenue nearly doubled in the fourth quarter, and volume was up 139%, due to our team's further penetration into larger transactions and the expansion of our IPA capital markets group. To illustrate our progress, consider that our previous quarterly record prior to the 2022 market disruption was just over $36 million. In the fourth quarter of 2024, we achieved $31 million of revenue, despite a still challenging lending environment. Another contributing factor was our originators' access to lenders. MMCC closed with 177 separate lenders in the quarter and 367 for calendar 2024, which was a key catalyst for these improved results. Three key factors drove our higher than expected results during the fourth quarter. The first was the dramatic drop in the 10-year treasury yield to a low of 3.6% in September, following the Fed's decisive 50 basis point interest rate reduction. This window of lower interest rates coincided with price adjustments since the market peak of 2022 and record capital looking to get off the sideline and come back into the marketplace. Internally, our year-long effort to increase client contact and expand our exclusive inventory enabled us to grow our pipeline of deals under contract going into the fourth quarter as these factors converged. This included a marked increase in larger transactions coming to market as the return of institutional capital continued to build momentum. Perhaps the most important trend to share is the urgency to close, which started to propel revenue growth late in the fourth quarter. Recall that by mid-November, the 10-year Treasury had shot right back up to 4.4% in reaction to the election outcome, market perception of inflationary policy proposals, and the Fed's ongoing struggle to achieve the last phase of inflation taming. This elevated the motivation to close deals that had locked in lower interest rates in anticipation of the market entering a higher or even longer interest rate period in 2025. Therefore, our odd-sized results in the fourth quarter came from a much higher closing ratio of deals under contract than historical averages, as well as some degree of pull forward in transactions. Revenue for middle market and larger transactions accelerated 56% and 88% respectively, while our private client revenue registered a 27% increase, even as bank and credit union financing for smaller deals remained constrained. For the year, the company closed 7,800 transactions and $43.6 billion in volume, reflecting gains of 4% and 14%, respectively, over 2023. This translates to 31 transactions per business day and four per business hour, keeping MMI ranked as the leading investment brokerage firm by transaction count, according to various third-party sources. Let me take a moment to acknowledge the hard work and dedication that our team brings to each and every one of our clients, one transaction at a time. Looking forward, the Fed's efforts to break through the last phase of inflation taming to their target level is definitely proving to be more difficult than expected, as the labor market remains strong and threats of tariffs create additional uncertainty. As a result, many clients who were preparing to bring inventory to market in the first quarter have returned to a wait-and-see stance. Our team continues to battle interest rate volatility as the most disruptive factor in bringing in buyers, sellers, and lenders together and closing deals. As a case in point, the 10-year Treasury yield has moved by at least 50 basis points in either direction 15 times since March 2022 when the Fed started the market disruptions. Each of these moves impacts real estate pricing, investor sentiment, and loan value ratios by lenders, among many other nuances of marketing and closing deals. The frequency of listing price adjustments, expirations, and transactions falling out of contract remains elevated, distracting our sales force from new business development. Notwithstanding these headwinds, there are several reasons for cautious optimism for incremental growth in transactions this year after a slow start. First, we're seeing a growing number of situational distress where maturing loans and or operational issues, such as the cost and availability of insurance, will push more listings and sales. Second, higher interest rates and a Fed with no urgency to become more accommodative anytime soon are pressuring prices further. As the hopes for a Fed miracle fade and the need to sell rises, realistic pricing should become more common. We continue to see well-priced assets move as multiple buyers are at the table in most cases. Overall, today's pricing for most property types is compelling against replacement costs, which is driving opportunistic private investors and many institutional investors to seek opportunities. Third, construction starts are pulling back rapidly and significantly going into 2025 and anticipated for 2026. This is most meaningful for apartments, industrial, hotels, and self-storage, where pockets of overbuilding have created local softness in some markets. Retail remains a highly desired asset class due to little new supply and repositioning over the past decade. This strength is mainly showing up in our multi-tenant shopping center business. The office sector remains the tale of two markets, with older urban products hurting the most and newer suburban offices performing well. Last but not least, dry powder capital is ample, and there is no shortage of interested buyers for well-priced assets. On the buyer side of the equation, hopes for larger-scale distress acquisitions at significant discounts have also faded as lenders have made a major push to extend maturing loans in most cases. For us at MMI, the main strategy is to further increase our investor outreach and client contact and provide helpful content for decision-making. Internally, we're laser-focused on individual producer productivity and business plans to increase client outreach with more efficiency. A steady stream of technology advances, including an expanded use of AI throughout our various underwriting and support processes, as well as the expansion of our centralized underwriting and back-office services are a few examples. Our investments in industry events, Research content, expansive media coverage, talent acquisition and retention are fully aligned with the overall objective to further penetrate the market by property type and market area. We are building on the success of our auction and loan sales divisions, both of which are proving to be effective value-added services for our clients and highly complementary to our sales force. We continue to pursue strategic acquisitions in our core business and adjacent business lines that can extend these synergies. As I have shared, the acquisition bid-ask spread and near-term performance risk relative to guaranteed value expectations have prevented a number of acquisitions we have pursued. At the same time, the recruiting of experienced individuals and teams remains a bright spot as we continue to add talent with a book of business to the MMI platform. This is also helping to offset the elevated turnover of trainees and newer agents due to market conditions. The strategy is also enabling us to expand market coverage with little overlap with our existing teams. We're also very proud to have built a fortress balance sheet over the years with no debt and an expanded capital allocation plan that has returned $170 million to our shareholders in the form of dividends, and share repurchases since 2022 amid one of the most difficult real estate market disruptions in history. Most importantly, we're confident that we have the experience, capital, and client support to grow and maximize shareholder returns over the long term. With that, I will turn the call over to Steve for more details on our results. Steve?

Thank you, Hassam. As mentioned, revenue for the fourth quarter was $240 million, up 44% compared to last year's $166 million. For the full year, total revenue was $696 million, up 8% compared to $646 million last year. The significant year-over-year and sequential revenue growth in the fourth quarter was driven by low rates when the Fed initially began to make cuts in September and buyers' incentive to close in the quarter before rate locks expired. Revenue from real estate brokerage commissions for the fourth quarter was $203 million compared to $145 million last year, an increase of 40%. For the quarter, sales volume was $12.3 billion across 1,742 transactions, up 41% and 23%, respectively. For the full year 2024, revenue from real estate brokerage commissions was $590 million compared to $560 million last year, an increase of 5%. Full year sales volume was $33.6 billion across 5,447 transactions, up 9% and essentially flat, respectively. Average transaction size during the fourth quarter was approximately $7 million, compared to $6.2 million a year ago. For the year, average transaction size was $6.2 million, compared to $5.6 million in the prior year. Increases in average transaction size for both the quarter and full year are due to a greater mix of revenue coming from middle market and larger transactions as institutional investors re-enter the market starting in the third quarter. Within brokerage, for the quarter, our core private client business contributed 59% of brokerage revenue, or $120 million, versus 66%, or $95 million, last year. For the full year, the private client business contributed 62% of brokerage revenue or $366 million versus 67% or $373 million last year. Middle market and larger transactions together accounted for 38% of brokerage revenue or $77 million during the fourth quarter compared to 31% last year. For the full year, Middle market and larger transactions represented 34% of brokerage revenue, or $203 million, compared to 30% last year. Revenue in our financing business, including MMCC, was $31 million in the fourth quarter compared to $16 million last year, a 97% increase. Financing revenue for the full year increased 26% to $85 million compared to $67 million last year. Fees from refinancing accounted for 33% of loan originations in the quarter compared to 44% last year. And for the full year, refinancing fees were 38% of loan originations compared to 49% last year. Other revenue comprised primarily of leasing, consulting, and advisory fees was $6 million in the fourth quarter and $22 million for the full year, compared to $6 million and $19 million, respectively, last year. Turning to expenses, total operating expense for the fourth quarter was $233 million, 27% higher than last year. For the full year, total operating expense was $729 million, or 3% higher compared to the prior year. Higher absolute expenses were primarily due to an increase in variable costs directly attributable to higher revenue. However, as a percentage of revenue, total operating expenses decreased year over year in both the fourth quarter and the full year. Drilling down into expenses further, cost of services was $152 million, or 63.2% of total revenue for the quarter, modestly lower than 63.4% in the prior year. For the full year, cost of services was $431 million, or 62% of total revenue, an improvement of 100 basis points compared to last year. The decrease in cost of services as a percentage of revenue reflects a slower ramp-up of revenue in the first nine months of the year, resulting in senior producers hitting higher thresholds later in the year. SG&A in the fourth quarter was $76 million, or 31.8% of revenue, an improvement of more than 13 percentage points compared to the prior year. For the full year, SG&A was $281 million, or 40.4% of revenue, compared to 44.1% last year. The improved expense ratios were attributable to a higher revenue base, along with ongoing cost reductions, partially offset by expenses related to talent acquisition and retention. In the fourth quarter, we returned to profitability and generated net income of $8.5 million, or 22 cents earnings per share, compared with a net loss of $10.2 million, or 27 cents per share, in the prior year. For the full year, net loss was $12.4 million, or 32 cents per share, a significant improvement compared to a net loss of $34 million, or 88 cents per share, last year. Our near-term financial results are negatively impacted by expenses related to investments made in talent acquisition, technology, and brokerage support at a time of hampered revenue production. We continue to believe these investments will be accretive in the eventual market recovery. For the quarter, adjusted EBITDA was $18 million compared to negative $4.5 million in the prior year. For the full year, adjusted EBITDA was $9.4 million compared to negative $19.6 million in the prior year. The effective tax rate for the quarter was 26%, and for the full year was 5%. Moving on to the balance sheet, we remain well capitalized with no debt and $394 million in cash, cash equivalents, and marketable securities, an increase of $14 million in the quarter, after paying a $10 million dividend and funding new investments during the quarter. And last week, we announced that our Board declared a semiannual dividend of 25 cents per share, or approximately $10 million, payable on April 4, 2025, to shareholders of record on March 12, 2025. As Assam mentioned, Since initiating our dividend and share repurchase programs nearly three years ago, we have returned more than $170 million in capital to shareholders. Looking ahead to 2025, volatility in interest rates and the Fed's wait-and-see approach to further rate cuts given the strong economy and inflation concerns continue to pose challenges. We do see improving conditions overall, as Hassam summarized, but weighted to the latter half of the year. First quarter revenue is expected to follow the usual seasonality trend and be sequentially lower than Q4. However, the strong performance in Q4 has impacted the normal flow of Q1 activity, so that sequential decline is likely to be a little bit more pronounced. Cost of services for the first quarter should follow the seasonal reset and be in the range of 59% to 61% of revenue. SG&A for the first quarter should reflect an increase year-over-year in absolute dollars consistent with higher agent support tied to improved revenue performance in 2024 and continued investments in central services to support sales producers. As we've discussed in the past, our tax rate is dependent on the relationship between expenses that are non-deductible for tax purposes to projected pre-tax book income for the full year and therefore can fluctuate greatly. We remain committed to helping clients navigate the external market environment, while internally, we continue to drive operational efficiency through best practices across the organization. We are confident that the investments we are making in the platform positioned us well for long-term growth. With that, operator, we can now open the call for Q&A.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 from your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star 2 if you'd like to withdraw your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we poll for questions. And once again, it is star 1. Thank you. Thank you. Our first question is from the line of Jason Belcher at Wells Fargo. Please proceed with your questions.

Hi. Good morning. Hassam, just wondering if you can talk a little more about the different transaction size buckets for commission revenue, maybe touch on any notable changes in the types of buyers and sellers you're seeing or any specific changes in transaction terms you might have seen since the election or maybe even since the start of the new year?

Happy to, Jason. Good morning. Well, the biggest trend that should be highlighted is the continuation of capital coming into the larger transactions. We saw that start the middle of last year and it's built further momentum. That's the combination of institutional capital actively looking for acquisition opportunities, looking at replacement costs and price versus the 2022 peak. as the two main catalysts for why they are much more engaged in the marketplace today. The second reason behind that is a lot of entrepreneurial private investors that are also back in the market looking at some higher risk, higher return types of acquisitions. We're seeing some of that in the office sector. We're certainly seeing some of that in the shopping center sector. And even some multifamily, older vintage multifamily that a lot of institutions would stay away from but private entrepreneurial investors would actually embrace that need either rescue capital or capital for deferred maintenance and so on within the older vintage workforce housing type of class B and C assets. Other trends to note is that we're seeing new capital formation. There are new groups in just about every major metro. that are actively now looking for acquisition opportunities, as well as a lot of our existing clients that we've done business with over the years being far more motivated by the fear of missing out, frankly, than being concerned about the fear of ongoing uncertainties. So the investor sentiment has definitely shifted. I would say that the election outcome helped that investor sentiment. But then in the last 30, 45 days, we've seen a little bit more of a pullback. Just wait and see how the new administration's policies start to roll out and what really happens on the inflation front. Of course, we didn't get a friendly tape just a couple days ago, and that's the kind of concern that's keeping some investors on the sideline. Mostly on the seller side of the equation, As I mentioned in my comments, a number of our clients that were planning to bring product out to market have decided to hold off for just a bit. Having said all that, we're seeing incredible demand on the buy side and just a more cumulative need to sell or desire to sell now that we pretty much know that the baseline threshold for interest rates is going to be in that 4.25% to 4.75% range, much more so than 3.5% to 4%, at least in the foreseeable future.

That's very helpful. Thank you for all that color. Shifting gears a little bit, I was wondering if you could talk a little bit about your exposure to the greater LA market and what kind of impact you've seen from the recent fires there, especially as it relates to multifamily transactions. Do you have any sense how much multifamily rents have increased or are expected to increase in the greater LA area?

Well, the wildfires were tragic in the way that the community was affected. Of course, we directly know countless displaced friends, associates, and related people to our business. that really have required a lot of support and we're glad to do our part to make that happen. From a market impact point of view, there are multiple ripple effects. The first and foremost, at a more macro level, is insurance, of course. We continue to have a lot of pressure on operating costs. Not only is insurance becoming a lot more expensive, it's just very hard to get policies issued, written. And that has become a major obstacle in the local market. California is a big market for us. Southern California is a significant market for us. And part of the reason that the Q1 kind of pipeline is a little bit slower than it would have been has to do with some inventory being pulled from the market and more clients hesitating to bring product to market to see what happens. At a macro level, of course, that has an impact on the company, but not to any measurable way that would be of any concern. From a rebuilding perspective, There is where there's some direct correlation between market sentiment and some of the discussions around tariffs, materials costs, labor costs, and frankly, concerns around the local government's ability to organize a rebuilding effort, which is obviously going to be fraught with all kinds of obstacles and issues. It is creating a lot of pressure on rents. I'm not so convinced that that is sustainable and it's going to reset the benchmark for rank growth in Southern California. It's definitely near-term increase, but questionable as to where those increases are going to be sustainable beyond the near-term, the reaction to the tragedies. At the same time, I have to say California in general, and Southern California in particular, is being viewed by the investment community as a bit of a diamond in the rough because these metros are hugely supply constrained, and the tragedies make that even more acute. At the same time, they've lagged in the recovery compared to many other metros, and we're just getting the momentum on job creation, rent growth, and that has made the apples-to-apples comparison of a lot of California investments including Northern California, by the way, much more attractive on a risk-adjusted basis prior to the tragedy. I don't think that that's going to be affected much. The macro view is still very favorable toward how pricing has reacted and why there's some attractive opportunities as an entry point throughout California.

Thank you. Thank you for all of that. I guess you guys have referenced exploring some external growth opportunities as well as other strategic initiatives on technology or talent recruiting and development. Any discussions on the external growth front or strategic initiatives internally that you could share more on specifically?

Yeah, it's a bit frustrating in that there are groups out there we've been actively talking to and have made offers to that would have been great strategic fits for us, and we would have been a great growth platform for them. And the near-term concerns around performance, obviously profitability is very important to us, and being able to acquire entities that are creative and value-added pretty much from the get-go is an important factor. consideration for us evaluation has been a little bit of the obstacle as has been the terms of what the sellers have been expecting in guaranteed value versus our comfort zone but those discussions are still ongoing in a couple of cases and in retrospect some of the deals that we passed on turned out to be really good decisions to be direct about it because of the market uncertainty outweighing our desire to just grow and bring entities into the into the mli platform and looking forward we are not giving up on those kinds of targeting and approaches of actual companies and platforms in the meantime we continue to have a lot of success in attracting experienced individuals and teams that are joining the firm at a pretty steady flow. We are adding resources to continue to build on that momentum. And another channel of investment and diversification for us has been partnering with other firms and investing in some other firms that we believe are very complementary to our platform and to our clients. Examples that I've highlighted before are Equity Multiple, which is essentially a very well-established tech-heavy platform for raising equity and investment management, which has become a really good source of solutions for many of our clients, and we have introduced them to many of our agents. They're a good partner in that arena for us and growing in that channel. Archer is another example of a really an AI-oriented startup that is a data consolidator and basically a platform for modeling net operating incomes and property profiles and sub-market profiles that can make our underwriting broker opinions of value and client, basically, probability assessment much, much more efficient. So not only are we going after core business investment opportunities and acquisitions, adjacent business line acquisition opportunities, but also in terms of investments in technology-oriented outfits that can be complementary to the business. Organically, we've grown the auction business from scratch in the last two and a half years, coming up on three years. Very successfully, our acquisition and integration of Mission Capital, which brought a A very well-respected brand within the loan sale and loan advisory business has been very successful, especially as the cycle turns to where a lot of lenders and investors are selling loan pools and need our advice on valuing those. So there's just a variety of examples of how we've already added complementary functions to the firm and are using our strong balance sheet to continue to pursue them.

Thanks for that update, Hassam. Maybe just one for Steve as well, switching gears to capital allocation. It looks like Q4 was kind of a quieter quarter on the share repurchase front. Maybe you could talk a little about how you think about balancing the different capital allocation buckets going forward in terms of share repurchase versus dividend growth versus other investment opportunities.

Yeah, Jason, happy to take that. And you touched on the fact that our strategy, as you would imagine, is multi-pronged. It's not only investments for long-term growth in technology, M&A, dividends, and share repurchases. We were a little bit quiet on the repurchase side, although continued to distribute dividends. We continued our pattern of semiannual dividend declarations, paid that in October. The board just earlier in the week announced dividend coming up here for the for the first quarter as we look at how we make those allocation decisions we dial them up dial dial up and down opportunistically specifically as it relates to repurchases I think we said this you know last quarter at a time when we're not generating as much cash flow as We'll be a little bit more opportunistic in how we engage in repurchasing shares. And, you know, although we did generate quite a bit of operating capital this quarter. So we'll revisit that. And, of course, the dividends will. I would expect that pattern to continue, although that's up to the board to decide on a periodic basis. But importantly, we continue to invest very, very heavily internally in technology. I think Hassam mentioned investments in our central support functions, which is a way to generate efficiencies across underwriting and proposal preparation and marketing for our agents, pulling that back into a central function. So heavy investment there over the last two years, and we're really starting to see the fruits of those investments.

Great. Thanks very much for taking my questions.

Thanks, Jason. Thanks, Jason. Thank you. There are no further questions at this time. I would like to turn the floor back to management for closing remarks.

Thank you, Operator, and thank you, everyone, for joining our call. We look forward to seeing many of you on the road and to have you back on our next quarterly update. The call is adjourned. Thank you.

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.