MMI - NYSE

If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jacques Cornet with Ice. Thank you. You may begin.

Thank you, Operator. Good morning, and welcome to Marcus and Millichap's third quarter 2024 earnings conference call. With us today are President and Chief Executive Officer, Hessam Nadji, and Chief Financial Officer, Steve DeGennaro. Before I turn the call over to management, please remember that our prepared remarks and 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 those implied by such forward-looking statements due to a variety of factors, including but not limited to general economic conditions, commercial real estate market conditions, the company's ability to retain and attract transaction 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 Investor Relations section of the company's website at www.marcusmillichap.com, represents a reconciliation to the appropriate GAAP measures and explains why the company believes such non-GAAP measures are useful to investors.

The 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.

Thank you, Jacques. On behalf of the entire Marcus and Millichap team, good morning and welcome to our third quarter earnings call. MMI's results showed modest improvement in the third quarter, setting the stage for a measured but sustainable recovery in the transaction and financing markets. We believe that the underpinnings of a recovery cycle include the return of capital to the market as prices adjust, the Federal Reserve's shift towards lowering interest rates, MMI's record exclusive listing inventory, and notable improvement in our pipeline. Revenue for the third quarter was $169 million, up 4% compared to last year, with adjusted EBITDA at breakeven and a net loss of $5.4 million. In addition to another sequential improvement, this is the first quarter with year-over-year revenue growth since the onset of the market disruption two years ago. Our EPS remains challenged by costs related to investments in talent, technology, and business development. We believe these initiatives and our strategy to remain on offense during the downturn will provide leverage in the recovery and strengthen our long-term competitiveness. The expensing of capital deployed for talent retention and acquisition is particularly important as revenue production among the leading producers we have added and retained has been greatly hampered in the downturn. We expect these top professionals to contribute significantly to the company's revenue growth in the recovery, enhanced leverage, and support market share gains. The third quarter brought more conviction that capital is moving off the sidelines, driven by four key catalysts. First, price adjustments across various property types have made current valuations more attractive relative to replacement cost and the market peak in March 2022. It appears that investors' psychology is finally shifting toward missing out on buying opportunities while more sellers are coming to terms with realistic pricing. The momentum of institutional capital returning to the market, which we noted last quarter, continued to build during the third quarter. At the same time, private investors still grapple with tight lending requirements by banks and credit unions. Our results for the quarter correlate with this trend as private client revenue declined 4.3% year-over-year, while middle market and larger transaction revenue increased 4% and 23.5% respectively.

Second, the Fed's fifty basis point rate cut decisively signaled the beginning of an easing cycle, followed by yesterday's quarter-point reduction. The Fed will likely move more gradually on further rate cuts due to a still strong economy and expectations that the election outcome may bring more inflationary policy. Third, the supply-demand dynamics are generally healthy across most property types, with few exceptions due to overbuilding. Construction starts are expected to decline significantly in 2025 and 2026, which will reduce new supply. This will be particularly positive for multifamily and industrial properties, which have seen the most construction in recent years. Lastly, a combination of pent-up demand for postponed transactions after two years of a dysfunctional market and increasing distress situations are driving more transactions. During the quarter, the company closed over 1,300 brokerage transactions totaling $8.5 billion in volume. Shopping centers, industrial, self-storage, and institutional apartments serviced by our IPA division saw the most improvement. Single-tenant retail and smaller apartment sales remained hampered due to restrictive lending and persistent bid-ask spreads. Financing revenue was up 19.3%, and transactions increased by 15%, with total financing volume up 12% for the quarter. We closed over 300 financing transactions and secured capital for our clients through 150 separate lenders in one quarter. These numbers highlight improved financing capacity by non-bank lenders and the impact of our strategic initiatives. Middle market and larger transactions not only enhanced our brokerage revenue but also boosted our financing revenue. In addition, our loan sales division continued to gain momentum, driven by increasing trade activity on both performing and distressed loans. Over the past five years, we have positioned our MMCC and IPA capital markets originators as leading finance intermediaries across all investor categories and deal sizes. The experienced talent, infrastructure expansion, and lender relationships we have added contributed to the improvements in the quarter and will drive future growth in our financing. Moreover, this strategy is creating value for our sales professionals as they increasingly team up with our originators to win business. We continue to add experienced professionals across the firm, which helps mitigate the challenges we still face in growing the newer agent cadre. Market volatility of the past several years has kept our new agent fallout rate elevated, spurring expanded channels for attracting and training new talent to reverse this trend. This includes a significantly larger internship program and the deployment of regional recruiters focused on increasing our candidate pool. We remain dedicated to a dual strategy of experienced talent acquisition and development, as well as organic hiring and training, as both are pivotal to the company's future. Looking forward, perhaps the biggest challenge we face is the volatility in long-term interest rates, which have the most impact on commercial real estate trading and finance volumes. Since the Fed's rate reductions began, the ten-year treasury yield has moved seventy basis points to 4.3% currently. Interest rate volatility over the last two and a half years severely impacted our Salesforce's productivity due to the frequent repricing of listings and transactions under contract. We anticipate a productivity improvement when rates settle as the Fed's easing cycle unfolds. At the macro level, inflation has decelerated toward the Fed's target, while job growth and retail sales have moderated but are still positive. This supports a soft landing scenario for the US economy, pointing to a solidly positive picture for commercial real estate demand across the board. The election outcome is generally viewed as positive for business taxes and the economy, although much remains to be seen related to actual policy implementation over time. Regardless of the policy dynamics, commercial real estate is poised to attract more capital, maintain, if not improve, fundamentals, and begin a new cycle driven by more realistic pricing and compelling yields. Real estate values have come a long way in recalibrating to higher interest rates, but the path to increased sales and financing availability will face speed bumps along the way. Our strategy to continually enhance our platform, help our existing sales force maximize productivity, and further attract top talent positions us very well for solid growth and increased market share. On the capital allocation front, we have the benefit of a strong balance sheet and maintained a dual approach of returning capital to shareholders while driving business growth at the same time. We continue to strategically deploy capital by investing in proprietary technology and client services, such as our auction division and loan sales division, both of which are picking up nicely, while pursuing strategic acquisition targets. Our ongoing investments in business development, direct client engagement, industry event participation, branding, and all the other activities we undertake every quarter to market the firm underscore our commitment to staying on offense and positioning the company for dominance in the market recovery. With that, I will turn the call over to Steve for additional insights into the quarter.

Thank you, Hessam. As mentioned, total revenue for the quarter was $169 million, up 4% compared to $162 million in the prior year quarter. For the nine-month period, revenue was $456 million compared to $480 million last year. Revenue from real estate brokerage commissions for the third quarter was $142 million, accounting for 84% of total revenue, compared to $140 million last year, an increase of 2% year-over-year. Brokerage revenue was generated from total sales volume of $8.5 billion across 1,331 transactions, up 15% and down 2% respectively compared to last year. Year-to-date, revenue from real estate brokerage commission was $387 million, accounting for 85% of total revenue, compared to $415 million last year, which was 87% of total revenue. Year-to-date, total sales volume was $21.4 billion across 3,705 transactions, down 3% and 9% respectively. The year-to-date results reflect a more challenging first half of the year followed by an improved Q3. The average transaction size during the third quarter was approximately $6.4 million, up 17% from $5.5 million a year ago, resulting from a sizable increase in middle market and larger transactions. Within brokerage, private client contributed 62% of brokerage revenue, or $87.5 million for the quarter. This compares to 65% and $91.5 million last year. Transactions in this segment decreased 9% in dollar volume and 6% in transaction count compared to last year. Year-to-date, private client contributed 63% of brokerage versus 67% and $278 million last year. Our middle market and larger transaction segments together accounted for 35% of brokerage revenue, or $49 million during the third quarter. This is an increase from 31% and $43 million last year. These segments saw a combined increase of 36% in dollar volume and 23% in the number of transactions. Year-to-date, the middle market and larger transaction segments represented 33% of brokerage revenue, or $126 million, compared to 29% and $122 million last year. Revenue in our financing segment, including MMCC, grew 19% to $21 million during the third quarter compared to $17 million last year. We closed 318 financing transactions totaling $2.1 billion in volume, compared to 276 transactions for $1.9 billion in volume in the prior year. Financing revenue for the nine months was $53 million compared to $51 million last year. We closed 824 transactions year-to-date, totaling $5.6 billion in volume, compared to 839 transactions for $5.3 billion in volume last year. Fees from refinancing accounted for 42% of loan originations in the quarter, compared to 44% last year, while year-to-date, refinancing fees were 41% of loan originations compared to 51% last year. Other revenue, comprised primarily of leasing, consulting, and advisory fees, was $6 million during the third quarter, up 20% compared to $5 million last year. Year-to-date, other revenue was $15.8 million this year, up 17% compared to $13.5 million last year. Turning to expenses, total operating expenses for the third quarter were $180 million, 1% higher than last year, while on a year-to-date basis, total operating expenses of $496 million were 5% lower compared to the same period a year ago. The year-to-date reduction in expenses was principally driven by lower variable expenses directly attributable to revenue and cost containment efforts. Breaking down the expense components further, the cost of services was $105 million, or 62.2% of total revenue, compared to 64.6% in the third quarter last year, an improvement of 240 basis points. Year-to-date, the cost of services was $280 million, or 61.3% of total revenue, an improvement of 150 basis points over the same period last year. Decreases as a percentage of revenue for both the quarter and year-to-date periods are primarily due to a slower ramp-up of revenue in the first half of the year, resulting in our senior professionals hitting higher thresholds later in the year. SG&A during the quarter was $71 million, up 2% year-over-year. On a year-to-date basis, SG&A was $205 million, 3% lower compared to last year. The year-to-date 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 third quarter, we reported a net loss of $5.4 million, or $0.14 per share, compared to a net loss of $9.2 million, or $0.24 per share last year. For the nine-month period, the net loss was $20.9 million, or $0.54 per share, compared to a net loss of $23.8 million, or $0.61 per share in the same period of the prior year. For the quarter, adjusted EBITDA improved to breakeven compared to a loss of $6.6 million in the prior year. For the nine-month period, adjusted EBITDA was negative $8.7 million compared to negative $15.1 million in the prior year. The year-over-year improvement is an encouraging sign that we have moved past the market point. The effective tax rate for the quarter was 15%. Our current expectation of the rate for the full year is 13% to 16%. Turning to the balance sheet, we continue to be well-capitalized with no debt and $349 million in cash, cash equivalents, and marketable securities, which is an increase of $13 million over the prior quarter. Subsequent to quarter-end, we returned $10 million in capital to shareholders through a dividend. Since initiating our dividend and share repurchase, we have returned more than $170 million in capital to shareholders. During the quarter, we evaluated a number of acquisition investment opportunities and remain active in pursuing external growth channels. As Hessam mentioned, we are dedicated to maintaining a balanced long-term capital allocation strategy. This encompasses investing in technology, attracting and retaining top sales talent, prudently pursuing strategic acquisitions, and returning capital to shareholders.

Looking ahead, we clearly have seen the start of a market recovery. However, interest rate volatility and restrictive lending continue to pose challenges. Given these dynamics, our outlook remains cautiously optimistic, including sequential revenue growth in Q4. The cost of services as a percentage of revenue for the fourth quarter should follow the usual pattern of increasing sequentially. SG&A for the quarter should be relatively consistent with Q3 in absolute dollar terms and a favorable improvement over Q4 of last year. As I mentioned, the full-year tax rate is currently expected to be in the 13% to 16% range. With that, Operator, we can now open the call for Q&A.

Thank you. You may press star two if you would like to remove your question from the queue. And for a participant using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Blaine Heck with Wells Fargo. Please proceed.

Great. Thanks. Good morning. Can you talk a little bit more about the financing environment for commercial real estate deals, especially for the private client markets? I guess, have you seen any increase in the availability of debt capital at reasonable rates from regional banks or credit unions that would suggest that transaction volume could pick up in that segment? And then maybe also just provide some color on how that compares with what you are seeing in the middle market and larger segments?

Sure. Good morning, Blaine. The answer to your question is yes, gradually. We are seeing a little bit of easing by banks and credit unions coming back into the market. The hindrance is more about the fact that the normal cycle of sales and refinancing or financings that would traditionally free up more lending capacity just has not been operating as normal. Therefore, they just have less capacity to lend in addition to being more conservative, obviously, having adjusted underwriting criteria, and really moving forward with a lot more caution than in a normal market environment. Those are the things that really make obtaining financing for smaller transactions more challenging. It is not to say that there is not financing. There certainly is. I mean, we did 150 finance transactions with 150 separate lenders just in the quarter. It just takes a lot longer to shop for a loan. It takes a lot longer to get the lender, buyer, and seller aligned on all the different metrics, valuations, loan-to-values, and moving forward. More important than the timing of that is the question of what is going to be the catalyst for more transactions to occur. For us, we are seeing much better alignment on the bid-ask spread and more motivation by sellers that really have not been desperate to bring properties to market starting to shift. That is probably even more important than the restrictive finance environment. But as far as what has kept the private client market, I would say, in the third quarter or even in the second quarter, the combination of restrictive lending and the bid-ask spread. On those middle market and larger transactions, the catalyst is really the fact that the type of investors that are executing larger transactions are less reliant on bank and credit union financing. They are more driven by the replacement cost question and the pricing adjustment from the peak in 2022. Particularly institutional investors, who were out of the market for eighteen to twenty-four months, are now aggressively looking to put capital back in the market. They are seeing enough of a price adjustment to care less about the financing component because they have the purchase power of all cash or very low leverage types of transactions. A number of our institutional clients that I personally talked with over the past quarter will literally tell me that they are looking to buy the right assets at the right prices, not too worried about financing because they plan to put financing on projects later if they have to. They see this window of opportunity to act on the price adjustments as more important than figuring out the finance component. I hope that answers your question.

Yeah. Absolutely. That is great color. Related to that, and I know this is a very difficult question to answer, but you noted that trading and financing volumes will likely take time to reach long-term averages. I guess, can you just expand on that a little bit? I guess, given what you are seeing in the market today, do you think we can get back to a long-term average run rate sometime in 2025, or do you see the choppiness in the market as likely to push that normalization into 2026 or beyond that?

Sure. By our analysis and estimation, the market in 2024 is somewhere between 35% to 40% below the five to ten-year previous averages, which is probably the closest proxy for a "normal" transaction marketplace. The market has room to run up to its long-term average for sure, and I do believe very confidently that we will get there. The market will get there. There is no reason that it would not. In fact, if anything, commercial real estate today is in much better shape than it has been in previous cycles because, as an industry at a macro level, we have not really overbuilt the product type or, I should say, the investment class. We have all the different intrinsic economic benefits of a solid US economy to indicate that demand for various property types is going to be very strong going into the next couple of years. But I do believe it will be very different than the 2021 recovery from the pandemic year, and that is the most recent recovery reference that most people ask me about. Mainly because the conditions coming out of the pandemic and going into 2021 and 2022 were very different than they are today. We were really benefiting from record stimulus and almost free money in a way that made the issue of underwriting really getting the bid-ask spread equation removed as an obstacle, functioning in a very different way than those things are currently. We are already looking at a higher interest rate environment even after a few more reductions by the Fed, just because of the fact that the economy is in much better shape. We are not in the kind of environment we were that was stimulus-driven as much as it was in 2021. So there is the reason why I believe it will be more of a gradual recovery. Yet a solid recovery may not all happen in 2025. It is unlikely that we catch up to long-term averages in one year, but we have been surprised before. There is a lot of pent-up demand with a lot of our clients who were not comfortable transacting over the last few years, that have become more comfortable. There is more distress at the local level on a situational basis. The kind of institutional distress of massive discounted portfolio sales is not happening because lenders are not in a position to discount huge portfolios, mark to market, and take those losses. Therefore, they have been much more willing to work with lenders to work out maturing loans that were underwater and buy them more time. We could see some bursts. At the end of the day, I think there is going to be some choppiness to the recovery curve, but we will definitely regain those averages at some point.

Great. That is helpful. And I guess just following up on that with respect to that run rate level, just to clarify, as you mentioned, you guys had very strong years in 2021 and 2022 with EBITDA in the $150 to $200 million range, but it sounds like the average kind of normalized level that you are expecting from this recovery might be a little lower given the different circumstances. Is that fair?

From a pure market factor perspective, yes. From the perspective of our strategy, with having many more experienced professionals added to our company with a number of boutique firms that we have acquired and brought into our culture very successfully, from the standpoint of our ongoing evolution of training and development for our Salesforce, there are many things above and beyond the market factor that we are aggressively pursuing both internally and through external growth that you were really falling to the controllable aspect of our business plan. That should not be underestimated either.

Absolutely. Really helpful. And then just on the election and potential impacts, are there any potential changes to laws or regulations specific to commercial real estate that you are keeping a close eye on that you think could impact the sector positively or negatively?

Well, through every cycle, we hear about questions around the 1031 exchange tactics, that deferred tax provision. There have not been too many cycles where that has not come up or carried interest. There are a lot of questions around the expiration of the provisions that were part of the 2017 tax reduction and jobs act. All those questions led to a lot of uncertainty over the past few months as I traveled around the country, and obviously, the outcome of the election at least reduces some of that uncertainty. It is more leaning toward the extension of those provisions, if not maybe improving some of them if some of the campaign promises are to be delivered on. But it is so hard to predict, Blaine, as you well know, what will actually come to fruition versus what is intended or what is, I mean, that is very, very hard to predict. Overall, though, the sentiment that I am certainly picking up and we are picking up throughout my travels prior to the election was that this outcome would be more favorable towards real estate and economic growth. It happened as many of our forecasters had predicted it would. In California, as you well know, and we have spoken about before, Prop 33, which was a proposal for taking the current rent control laws to an extreme, did not pass by a wide margin. It is the third time in several years that a group had intended to really disrupt the multifamily market in California. It is just one example, a regional example of some of the other local legislative concerns around rent control that have been popping up, and it did not pass. The industry did a lot to educate the market around the fact that rent control actually exaggerates the problem of supply shortage and affordability, it does not help it because it chokes off investment and new supply. So that is another positive factor on that front that is noteworthy.

Great color. And lastly, just shifting gears. Can you give an update on the opportunity set that you guys see in front of you with respect to M&A? Maybe just some color on the types of business you are looking at, whether it be on the financing or transaction side, any specific areas of the business that you think would be beneficial to add or expand, and thoughts on whether we should continue to expect smaller one-off deals or if there might be any larger transactions you would consider.

Sure. In this particular quarter, most of our discussions were around teams and boutiques that would be a nice fit into our brokerage operation in markets where we have certain product types that are low on coverage or have no coverage. But in general, as we have discussed before, we have a strong appetite for complementary businesses such as appraisal, valuation, and consultation. We have had some conversations with some entities of scale around that. We have had a couple of explorations around investment management, and both of those verticals would be very complementary to different parts of our business. It is the synergies with the existing business, it is the expanded service capabilities for the same client base, particularly the private client, obviously, given that it makes up the vast majority of our business. That drives what we look for and the conversations that we have started. There are some other interesting synergistic ideas that we are working on, but in the quarter, the particular period was more around individual agents, teams, and boutique firms on the brokerage side. Steve, anything to add to that?

I would just reiterate the fact that we continue to be very selective and opportunistic in this area. We have expressed over the last several quarters, I guess, some level of frustration with the degree of bid-ask spread. Those numbers have come in a little bit. We will still remain disciplined in how we look at and evaluate these firms. But there seems to be some movement there. And again, I would reiterate that we have been active on the team front, the boutique firm front, filling out in particular geographies and particular property types.

Blaine, just kind of a reminder of conversations we have had. Around the market or the available pool being very fragmented because if we are driven by synergies with a private client, driven by synergies with our existing brokerage sales force, that fundamentally points to a pretty fragmented market. Therefore, the companies, the service providers, that we could bring in, tuck in, are also not huge in size. So our reality has been multiple smaller targets in that part of the business. On other complementary potential ideas around larger deals or our IPA strategy, obviously, investment management fits that part of the business a little tighter, just because of property size and price point correlation to IPA's larger deal profile and the kinds of clients that IPA targets.

Very helpful answers. Thanks so much, Hessam.

Great to have you on the call.

No further questions in the queue. I would like to hand the call back over to management for closing remarks.

Thank you, Operator, and many thanks to everybody who joined this. We look forward to keeping in touch with you, seeing you on the road, and our next earnings call. This call is adjourned.